Completion of the fourth review was delayed after the government announced in early 2016 expenditure and revenue initiatives with estimated annual fiscal costs of 3 percent of GDP. After the opposition won a majority in parliament in September, the President announced his resignation and the Vice President took over. With low commodity prices and strong tourist arrivals, the economic developments since the third review have been favorable and economic outlook for 2016?17 remains positive.
The Seychellois economy has undergone a remarkable turnaround since 2008, supported by successive IMF programs. Ambitious and wide-ranging reforms have been implemented, including floating the exchange rate, removing exchange controls and ongoing fiscal restraint. As a result, growth has lifted, inflation has moderated, the exchange rate has stabilized, public debt has declined sharply and international reserves have been steadily accumulated. However, the country is very small (population 90,000), relies heavily on tourism and imports, and remains exposed to external shocks, including from natural disasters. The Government has set a target of reducing debt to 50 percent of GDP by 2020—pushed out recently from 2018. Seychelles has a strong track record of performance under its various programs, which is a credit to the ongoing commitment of the authorities and to public acceptance of the need for change.
Reduction of poverty, together with a desire to share more equally the benefits of economic growth, has become a focus in Seychelles over the last year. At the same time, the political situation has become more uncertain, with the Government now having a minority in the legislature, the National Assembly. There appears to be bi-partisan support, however, for continued fiscal restraint and structural reforms. The Government has presented a Budget to the Assembly which will deliver a 3 percent primary surplus in 2017, equal to that expected in 2016. The Budget includes a number of revenue-raising measures—including an increase in fuel, alcohol and tobacco excises, and air passenger fees—which help to meet the cost of previously-announced initiatives, particularly tax cuts for low-to-middle income earners. Increased scrutiny is also being applied to government spending through the Budget process. For possible inclusion in future Budgets, the Government is working on a sugar tax, a carbon tax and a property tax on land owned by foreigners.
The authorities agree with the outlook presented in the staff report. Tourist arrivals have been strong and an increase in tuna canning is expected to continue. Growth in the economy exceeded 5 percent in 2015 and is expected to be 4.5 percent in 2016. Inflation has been negative but is expected to be around 1.5 percent by the end of 2016. Public debt is currently around 70 percent and is expected to fall over the coming years, in line with the authorities’ target.
The authorities remain firmly committed to the current EFF and request the completion of the fourth and fifth reviews, together with the modification of a performance criterion for end-December 2016 (recognizing the 3 percent primary surplus) and the waiver of applicability. All quantitative performance criteria for end-December 2015 and end-June 2016 were met and solid progress has been made on structural benchmarks. The authorities are confident that the economic and financial policies set out in the MEFP will ensure the objectives of the program continue to be met. They stand ready to take any further measures that may prove necessary and appreciate the continued close engagement with the IMF. They wish to thank the mission team, led by Mr. Wendell Samuel, for its constructive discussions, analysis and advice. In addition, they continue to value very highly the technical assistance received from the Fund.
Fiscal and Structural Policies
The authorities are working to achieve best practice in public financial management. The Medium-Term Fiscal Framework is now anchoring Seychelles’ fiscal strategy, and helping improve cash, asset and capital project management. The Public Expenditure Accountability Framework was also introduced in 2016. Five Government departments are operating their 2016 budgets using Program Performance Based Budgeting and the remaining departments will have joined the project by 2019. A regulatory and operational framework for public-private partnerships is also being designed with technical assistance from the African Development Bank. Tax administration has been improved and made more effective, including improving business tax compliance. Tax audits of large businesses are progressing well. A new collection enforcement strategy was introduced in 2016 to improve enforcement, reduce the current stock of arrears and limit debt accumulation.
Oversight of SOEs is being strengthened to reduce the risk to public finances. In such a small state, a lack of competition and need for scale in some sectors means a larger role for government than might be expected in other countries. The authorities are mindful of the need for accountability and monitoring of SOEs. They are undertaking management and governance audits to further enhance transparency and efficiency in the delivery of public services. The Public Enterprise Monitoring Commission is developing a code of governance based on the OECD’s model, is reviewing its governing legislation to ensure best practice in governance of public enterprises, and is preparing a Fiscal Risk Management Statement. Together these actions will help to show the impact of SOE performance on the Government’s budget, including the cost of those social obligations currently being absorbed by several SOEs.
Monetary Policy and the Financial Sector
The Central Bank of Seychelles (CBS) is continuing its tight monetary policy stance to guard against possible inflationary and exchange rate pressures. Inflation is low but the CBS remains concerned about risks to price stability, including from increased liquidity, and is maintaining its issuance of short-term government securities for monetary policy purposes. In the coming years, it is envisaged that the monetary policy framework will shift to incorporate a policy rate to guide movements in short-term interest rates. Accumulation of reserves remains an important objective. As at September 2016, reserves were above target and were the equivalent of four months of imports. The CBS is upgrading banking regulations for the implementation of Basel II and III standards. In addition, a Financial Stability Committee became operational in March 2016, comprising members from the Financial Services Agency, the Financial Intelligence Unit, Ministry of Finance and CBS. The authorities agree on the need for a strong macro-prudential policy framework to help safeguard the financial sector.
Given emerging risks from the offshore sector in Seychelles, the authorities are bringing regulatory frameworks into line with international standards. The OECD’s Global Forum on Transparency and the Exchange of Information for Tax Purposes has now rated Seychelles as largely compliant. New legislation ensures that the beneficial ownership of International Business Companies is held in Seychelles and provides for the filing of information about directors. A new Trusts Act will soon be enacted and the International Corporate Trustee and Foundation Services Act is close to being finalized. The banking sector is facing a degree of pressure in maintaining its correspondent banking relationships, with risks coming largely from the offshore sector. The authorities are currently working on a draft action plan to reduce financial sector risks and protect the banking sector from possible withdrawals of CBRs. In addition, a National Risk Assessment is being conducted by the World Bank and will form part of the basis for a comprehensive strategy to tackle AML/CFT risks in Seychelles.