Seychelles: Staff Report for the 2017 Article IV Consultation and Sixth Review under the Extended Arrangement

Seychelles: 2017 Article IV Consultation and Sixth Review Under the Extended Arrangement


Seychelles: 2017 Article IV Consultation and Sixth Review Under the Extended Arrangement


1. Seychelles has made considerable progress toward economic stability under successive Fund arrangements, and it was recently designated as a high-income economy. Since the 2008 balance of payments and debt crisis, the authorities enacted an extensive set of reforms that quickly restored fiscal and monetary credibility, with external support and Paris Club debt restructuring, and reduced the role of the state in the economy. Underpinned by the authorities’ prudent macroeconomic policies, the country enjoyed strong economic growth while running significant primary fiscal surpluses since 2009. As a result, the public-debt-to-GDP ratio was reduced by almost two thirds by end-2015, and prospective import coverage improved significantly to over 4 months from less than 1 month at end-2008. With economic and social indicators among the highest in small states,1 Seychelles was recently designated a high-income economy by the World Bank: it is the only high-income country in Sub-Saharan Africa.


Growth and Fiscal Balance


Citation: IMF Staff Country Reports 2017, 160; 10.5089/9781484304785.002.A001


Gross International Reserves and Public Debt


Citation: IMF Staff Country Reports 2017, 160; 10.5089/9781484304785.002.A001

Sources: Seychelles authorities; and IMF staff estimates.

Selected Indicators in Small States

(2016 or latest available)

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Sources: WED, World Economic Outlook; World Bank, World Development Indicators.

2. Despite this impressive macroeconomic performance, social concerns came to surface in 2016 and temporary fiscal slippage led to a delay in completing the fourth review under the Extended Arrangement (EFF). The Household Budget Survey (HBS) published in December 2015 implied that 39 percent of the population were living below the authorities’ poverty line. Although other broader measures of poverty widely used for international comparison indicate that Seychelles performs significantly better,2 the 2015 HBS led to increasing social concerns about poverty and inequality. Following his narrow victory in the Presidential Elections in December 2015, then-President Michel responded to the social concerns with a series of fiscal commitments, entailing permanent costs of 3 percent of GDP on an annual basis, in his 2016 State of the Nation address (SONA).3 This effectively put the EFF-supported program off track and led to a delay in completing the fourth review. After the authorities submitted the 2017 budget to the National Assembly in line with the agreement with the staff, the fourth and fifth reviews under the EFF were concluded by the Board in mid-January 2017. This sixth review is the final review under the current EFF. The authorities’ policies for the next five years would be anchored by their medium-term debt reduction goal—bringing the public debt to GDP ratio below 50 percent by 2020. Raising potential growth and reducing inequality while building resilience to climate change are also key challenges going forward. The authorities recently expressed their interests in a possible successor arrangement after the EFF expires in early June; this will be discussed further later in the year.

3. The government and the legislature are controlled by different parties. In September 2016, the opposition alliance won a majority in the National Assembly for the first time in 40 years. While the President’s party continues in government, it is weakened by its loss of control of the legislature. President Michel stepped down in mid-October 2016 handing over executive power to the then-Vice President Faure.

4. The authorities’ policies have been largely aligned with the advice from the previous Article IV consultation, albeit with a slight loosening of fiscal stance (Box 1). Following the fiscal commitments announced in the 2016 SONA, the authorities revised down the primary surplus target to 3 percent of GDP from 2016 onwards, compared with 3¾ percent of GDP envisaged at the time of the 2015 Article IV consultation. Staff estimates that this revised primary surplus would lead to a steady reduction of public-debt-to-GDP ratio to below 50 percent by 2020, two years later than the authorities’ original medium-term debt reduction goal. This revised goal, in the view of the staff and the authorities, strikes an adequate balance between attaining social objectives and preserving economic stability. The monetary policy stance has been appropriate to achieve inflation targets and curb private sector credit growth. The flexible exchange rate has allowed for a build-up of foreign reserves, and the Central Bank of Seychelles (CBS) has made progress toward a more forward-looking monetary policy framework. Structural reforms have also been implemented to improve public financial management (PFM) and strengthen the state-owned enterprises (SOEs), resulting in new PFM and SOE action plans (see ¶23). Significant progress has been made in strengthening macroprudential surveillance and advancing transparency of the offshore financial sector. However, considering global trends toward withdrawal of correspondent banking relations (CBRs), the authorities would need to step up efforts to strengthen the financial regulatory framework (including for anti-money laundering and counter financing terrorism (AML/CFT) and the offshore sector), and to build confidence with the effective enforcement of the laws (see ¶32).

Seychelles: Main Recommendations of the 2015 Article IV Consultation

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Source: IMF Staff

5. Seychelles is the first pilot country for Climate Policy Change Assessment (CCPA) for small states. In this context, this Article IV mission discussed macro-critical aspects of CCPA, following on the joint FAD and World Bank TA mission held in early March.

Recent Developments, Outlook and Risks

6. Economic conditions have been favorable recently (Tables 15). Tourist arrivals grew by 9¾ percent in 2016 with strong growth from the major European markets and the UAE, though nominal receipts did not grow as fast because the euro, in which most of the receipts are denominated, depreciated against the US dollar during the period. This, coupled with strong investment, resulted in real GDP growth estimated at around 4½ percent in 2016. The nominal exchange rate has been stable in recent months while gross international reserves (GIR) have been in line with the staff’s projection at the time of the 4th and 5th reviews. Supported by tight monetary policy, as well as by low international fuel prices, year-on-year CPI inflation has been negative for the past 14 months.4 Private sector credit growth has been moderate while financial soundness indicators suggest that banks are adequately capitalized and liquid.

Table 1.

Seychelles: Balance of Payments, 2014–22

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Sources: Central Bank of Seychelles; Ministry of Finance; and IMF staff estimates and projections.

From 2015 onwards the data reflect the findings of the IIP survey, which indicated that the proportion of equity to debt in FDI flows was being significantly overestimated

Includes parastatals for which data are available.

Per STA recommendations, renewals of off-shore licenses are excluded.

Excludes foreign-currency denominated required reserves held by banks and project and blocked accounts at the CBS.

Table 2.

Seychelles: Consolidated Government Operations, 2014–22 1

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Sources: Seychelles authorities; and IMF staff estimates and projections.

Includes the central government and the social security system.

VAT replaced GST in January 2013.

CSR and MTT were subsumed into Business Tax in CR 14/186.

From 2015 onwards, wage and salaries and goods and services (to be) spent by government agencies other than Ministries are reclassified into these items from transfers.

Only interest payments on foreign debt are on a commitment basis. Other expenditures are recorded when checks are issued or transfers initiated.

Table 3.

Seychelles: Monetary Survey and Central Bank Accounts, 2014–17

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Sources: Central Bank of Seychelles and IMF staff estimates and projections.

Reserve requirements on foreign currency deposits were introduced in 2009.

Reserve requirements were lowered from 13% to 10% in 2009, but raised back to 13% in April 2011.

The definition was revised in June 2011 to include foreign-currency denominated required reserves held by banks and project and blocked accounts at the CBS.

Table 4.

Seychelles: Financial Soundness Indicators for the Banking Sector, 2012Q4–2016Q41

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Source: Central Bank of Seychelles.

Data from 2015 onwards include purely offshore banks.

Defined as: equity capital/(assets-interest in suspense-provisions).

Defined as: (Interest income – interest expense)/average assets.

Defined as: (Noninterest income – noninterest expense)/average assets.

Core liquid assets include cash, balances with CBS, and deposits with other banks.

Broad liquid assets include core liquid assets plus investments in government securities.