Seychelles: 2017 Article IV Consultation and Sixth Review Under the Extended Arrangement
The Seychelles economy has undergone a remarkable transformation since 2008. A comprehensive reform program has had strong ownership and political commitment, and has been supported by successive EFF arrangements. The authorities are committed to consolidating and safeguarding the hard-earned gains. Their target is to reduce debt to below 50 percent of GDP by 2020 while promoting sustainable growth, addressing concerns about poverty, infrastructure gap and implementing sound climate policies. They have made substantial use of technical assistance, principally from the IMF and World Bank. Both parties in parliament support ongoing reforms, continued fiscal discipline, and accountability and transparency in public finances. However, Seychelles is a small and open economy, reliant on tourism, and remains highly exposed to external shocks. The current EFF will expire in early June and the authorities are very grateful for the mission teams and their constructive discussions, analysis and advice. Recognizing the productive relationship with the Fund that started almost a decade ago, the authorities have notified IMF management of their desire to remain actively engaged with the Fund through a precautionary arrangement.
Growth has continued to be robust. The economy grew by an average of 4.7 percent over 2014–2016, due to low inflation, strong tourism performance, construction, the water and electricity sectors, telecommunications and financial services. The outlook is positive, but risks are significant. These are namely further weakening of the euro against the US dollar, weaker growth in major tourism markets and higher-than-expected oil price increases. Seychelles is also exposed to natural disasters and climate change risks. On the upside, new hotels will open in the next two years and major airlines have expressed an intention to add new flights into the islands, which would address current peak-season accommodation pressures.
Fiscal and Structural Policies
Under successive programs, Seychelles has strengthened its public financial management and fiscal discipline, and reduced public debt. The FY2017 Budget targets a primary surplus of 3 percent, in line with the EFF framework. A similar primary surplus is also expected for FY2018, but declining to between 2 and 2.5 percent thereafter. This is despite measures announced last year to address issues around poverty and inequality. The smaller surpluses in the out-years create room for growth-friendly capital investments. The authorities believe there is potential for further improvement in revenue administration and will consider recommendations on tax measures from IMF. The past two years has seen strong revenue collections from the major taxes and dividends from SOEs.
The Medium-Term Fiscal Framework is now anchoring Seychelles’ fiscal strategy, and helping improve cash, asset and capital project management. A recent Public Expenditure and Financial Accountability (PEFA) assessment was completed in 2016. Five Government departments are operating their 2016 budgets using Program Performance Based Budgeting and the remaining departments will have joined the project in the 2018 and 2019 budget. A regulatory and operational framework for strengthening the framework for public-private partnerships, developed with TA from the African Development Bank, was recently approved by Cabinet.
The authorities continue their focus on structural reforms to raise public sector efficiency and minimize the fiscal risks from SOEs. They are mindful of the need for accountability, monitoring and control so that SOEs do not present undue risks to public finances. In particular, the authorities are placing new emphasis on applying best practices to SOEs through management and governance audits, to further enhance transparency and efficiency. A new Public Financial Management (PFM) action plan was recently approved by Cabinet. Its adoption ensures the implementation of recommendations from the recent PEFA assessment, including: strengthening capital project selection, costing and monitoring; quantification of the social costs incurred by the SOEs; and enhancement of financial reporting and the governance code.
The authorities are seeking to enhance medium-term growth prospects and make growth more inclusive, including through the innovative “blue economy initiative.” They are also mindful, however, that diversification in a small, resource-deficient and import-dependent economy is a challenge. The government is promoting diversification in the two largest sectors (tourism and fisheries) with concessionary financing arrangement through the Development Bank and Commercial Banks, aiming at attracting local SMEs to these sectors. Improvement to the business environment continue to receive increased priorities and closer relationships have been established with key stakeholders and industry associations to encourage private sector participation in business activities. Progress is being made with streamlining of licenses, procurement regulations, tax and customs improvement.
Monetary Policy and the Financial Sector
The Central Bank of Seychelles continued its tight monetary policy stance over 2016, which is an appropriate safeguard against possible inflationary and exchange rate pressures. The floating exchange rate regime has served the economy well and market interventions are limited to addressing excessive volatility. Planning is underway to move towards a more forward-looking monetary policy framework, with a policy rate around which an interest rate corridor will be established.
Strengthening of the regulatory framework continues to be priority to safeguard the financial sector, including bringing financial regulation in line with international standards. Core elements of Basel II and III standards are being implemented in banking and payment areas. Pressures on correspondent banking relationships are persisting, with the offshore sector portrayed as a major source of risks. Thus, significant steps have been taken to improve transparency and governance. A National Risk Assessment is being conducted by the World Bank and will form part of the basis for a comprehensive strategy to address AML/CFT issues and risks from the offshore sector in Seychelles.
Climate change risks are a major concern and efforts continue to mainstream those risks into the macro-fiscal framework and development strategies. Seychelles is a leading advocate for small states in international climate change discussions and negotiations and was one of the first to sign on to the UN Framework Convention on Climate Change. The country was recently host to a pilot study Climate Change Policy Assessment (CCPA) for small states, conducted jointly by the IMF and the World Bank. The authorities highly value this exercise for its potential to influence the directions of future policy development. The authorities encourage countries in similar circumstances to consider such an assessment in the future. Over the next two decades, the authorities have indicated a total investment of over US$600 million (40 percent of GDP in 2016) for mitigation and adaptation. In that regard, the authorities also recognize the need to build strong fiscal buffers to establish greater resilience.
The authorities are highly appreciative to the Fund for the support they have received throughout program period, which started almost a decade ago. They are thankful to Article IV team, led by Wendell Samuel, for their constructive discussions, analysis and advice that have also helped for timely and successful conclusion of the Extended Fund Facility (EFF) arrangement, which expires on June 3, 2017. Recognizing the productive close engagement with the Fund, the authorities have formally notified the Fund’s management of their intention to request a Stand-By Arrangement, on a precautionary basis. The authorities believe that continuing engagement after the EFF expires would support the further strengthening of macroeconomic stability and entrench growth in the medium term.