Seychelles: Staff Report for the 2019 Article IV Consultation and Third Review Under the Policy Coordination Instrument and Request for Modification of Targets and Monetary Consultation Clause—Press Release; Staff Report; and Statement by the Executive Director for Seychelles

Staff Report for the 2019 Article IV Consultation and Third Review Under the Policy Coordination Instrument and Request for Modification of Targets and Monetary Consultation Clause-Press Release; Staff Report; and Statement by the Executive Director for Seychelles

Abstract

Staff Report for the 2019 Article IV Consultation and Third Review Under the Policy Coordination Instrument and Request for Modification of Targets and Monetary Consultation Clause-Press Release; Staff Report; and Statement by the Executive Director for Seychelles

Context

1. Seychelles has made considerable progress in strengthening economic stability and sustainability under successive Fund programs since the 2008 crisis. Underpinned by the authorities’ prudent macroeconomic policies and bold structural reforms, the country enjoyed strong economic growth while running significant primary fiscal surpluses since 2009 and reducing its public-debt-to-GDP ratio by two thirds since end-2008. A strong fiscal position, prudent monetary policy, and significant Fund financial assistance led to a build-up of external buffers: prospective import coverage of the gross international reserves (GIR) improved to about 4 months by 2015 from less than 1 month at end-2008. Strong ownership by the authorities played a key role in successful programs.

uA01fig01

Fiscal balances and growth, 2008–18

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 194; 10.5089/9781498323208.002.A001

uA01fig02

Gross International Reserves and Public Debt, 2008–18

Citation: IMF Staff Country Reports 2019, 194; 10.5089/9781498323208.002.A001

2. Seychelles is the only high-income country in Sub-Saharan Africa and its economic and social indicators are among the highest among small states.1 As the country did not need Fund financial assistance anymore, in mid-2017 the authorities requested a Policy Coordination Instrument (PCI)—the first member country to do so—to maintain a close policy dialogue with the Fund after its Extended Arrangement (EFF) expired. Seychelles announced an ambitious strategy for climate change mitigation and adaptation in 2015 and was the first pilot country for a Climate Change Policy Assessment (CCPA) for small states.

Selected Indicators in Small States

(2017 or latest available)

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

3. Despite this impressive progress, additional efforts are needed to lock in medium-term sustainability. The government intends to reduce the country’s infrastructure gap and achieve ambitious climate change mitigation and adaptation goals over the medium term. In this context, it is necessary to ensure efficient management of public investment and maintain fiscal discipline to shore up the authorities’ medium-term debt reduction target and fiscal sustainability. The political situation could pose challenges for the current administration to keep fiscal discipline as the next presidential elections are scheduled to be held by December 2020.2 Furthermore, as a very small open economy dependent on tourism and tuna, Seychelles remains vulnerable to negative external shocks.

4. The authorities’ policies have been largely aligned with the advice from the previous Article IV consultation, albeit with a marginal loosening of fiscal stance (Box 1). With a view to creating space for priority public investments, the authorities revised down the primary surplus target by ½ percent of GDP to 2½ percent of GDP from 2018 onwards compared with the 2017 Article IV recommendation. The revised primary surplus would lead to a steady reduction of public-debt-to-GDP ratio to below 50 percent by 2021, one year later than the authorities’ previous medium-term debt reduction goal. This revised goal, in the view of Staff and the authorities, strikes an adequate balance between addressing investment needs and preserving economic stability. The monetary policy stance has been appropriate to achieve inflation objectives. The flexible exchange rate has allowed for a build-up of foreign reserves, and the Central Bank of Seychelles (CBS) has made progress to strengthen the new monetary policy framework where interest rates play a prominent role. Structural reforms have also been implemented broadly in line with staff’s advice to strengthen the state-owned enterprises (SOEs) and address risks of potential further withdrawal of correspondent banking relations (CBRs). As a result, the PCI program has been on track (see ¶34). Progress in improving the business environment and diversifying tourism and fishery industries have been mixed.

Recent Developments, Outlook and Risks

5. Economic conditions continue to be favorable (Tables 15, Figures 1 and 2). Tourist receipts grew by 16¾ percent in 2018 with strong growth from the major European markets, according to the CBS survey. The robust performance of the tourism sector coupled with strong canned tuna production resulted in a real GDP growth of 4.1 percent in 2018. The nominal exchange rate has been stable in recent months while gross international reserves (GIR), supported by strong tourism, have outperformed staff’s projection at the time of the 2nd review under the PCI. Private sector credit growth decelerated since March 2018 but remained high at 13.6 percent at end-March 2019. Financial soundness indicators indicate that the ratio of non-performing loans (NPLs) to gross loans declined to 3.5 percent in December 2018 from 7.1 percent in December 2017 (following the resolution of a large legacy NPL) and that banks are adequately capitalized and liquid. The CBS raised the lower and upper bounds of the interest rate corridor by 50 basis points in January 2019, citing concerns over potential demand pressures arising from public-sector wage adjustments in the 2019 budget and the still brisk pace of private credit growth. Headline year-on-year CPI inflation rate declined to 2 percent in March 2019, down from over 4½ percent earlier in 2018 due to declining international fuel prices in the later months of 2018 and a tight monetary policy stance since April 2018. Staff’s newly constructed financial conditions index indicates a general improvement in financial conditions relative to 2016, prior to the start of the strong credit growth cycle 4.

Table 1.

Seychelles: Selected Economic and Financial Indicators, 2015–24

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

Includes onlending to the parastatals for investment purposes.

Includes debt issued by the Ministry of Finance for monetary purposes.

Includes private external debt.

Table 2.

Seychelles: Balance of Payments, 2015–24

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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

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

Table 3a.

Seychelles: Consolidated Government Operations, 2015–211

(Millions of Seychelles rupees)

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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 3b.

Seychelles: Consolidated Government Operations, 2015–211

(in percent of GDP)

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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.

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.

Includes debt issued by the Ministry of Finance for monetary purposes, excludes guarantees.