IMF Executive Board Completes Third Review Under the Policy Coordination Instrument for Seychelles and Concludes 2019 Article IV Consultation

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

On June 14, 2019, the Executive Board of the International Monetary Fund (IMF) completed the third review under the Policy Coordination Instrument (PCI) for Seychelles.1 In completing the review, the Executive Board also approved the modification of targets.

The PCI was approved on December 13, 2017 (see Press Release No. 17/492). Seychelles is the first IMF member country to request a PCI.

The Board also concluded the 2019 Article IV Consultation with Seychelles.

Macroeconomic performance continued to be strong in 2018. Economic growth reached 4.1 percent, reflecting increased tourist earnings and stronger output in the fishing industry. Helped by prudent monetary policy and a stable exchange rate, inflation was contained throughout early 2019. The external current account deficit narrowed to 17.1 percent of GDP, while net international reserves at end-2018 exceeded the program target by US$31 million.

Supported by lower than budgeted capital outlays and strong tax revenue growth, the 2018 primary fiscal surplus reached 2.9 percent of GDP, comfortably exceeding the program target. The end-2018 inflation target (annual average) was met by a comfortable margin, due to prudent monetary policy and declining international fuel prices in late 2018.

Economic outlook for 2019 remains positive. While some of the fiscal measures in the 2019 budget could put pressures on inflation and the balance of payments, the tight monetary policy stance should help contain such negative impacts. International reserves are expected to remain at an adequate level, anchored by prudent macroeconomic policies. Downside risks to the outlook stem largely from the external sector.

At the conclusion of the Executive Board meeting, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, made the following statement:

“Seychelles has made commendable progress in consolidating economic stability and sustainability through prudent policies and bold structural reforms since the crisis in 2008. While the economic outlook remains positive, the country continues to be vulnerable to external shocks. It will also face the challenge of reconciling the goal of reducing its infrastructure gap and enhancing resilience to climate change with the need to bolster medium-term external and fiscal sustainability.

“To preserve medium-term sustainability, the authorities should maintain their debt reduction goal and take a phased approach in executing their ambitious infrastructure and climate-investment projects. Implementing permanent saving measures in the 2020 budget and stepping up efforts to reduce fiscal risks arising from Air Seychelles will be important. The large public investment projects planned in coming years should be implemented within the envelope of the program’s fiscal targets. The authorities would need to create further fiscal space over the medium term beyond that required to secure the debt reduction goal to accommodate these priority investments.

“The prudent monetary policy implemented by the Central Bank of Seychelles (CBS) has helped contain inflationary pressures. The CBS should stay vigilant to any sign of inflationary pressures and maintain the flexible exchange rate policy. The significant progress made toward strengthening the new monetary policy framework is welcome. “Structural reforms should focus on strengthening the AML/CFT framework in line with international standards and best practices, and improving public investment efficiency and the business climate.”

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for making considerable progress toward macroeconomic stability under successive Fund-supported programs. They noted that, while the economic outlook is favorable, the economy remains vulnerable to external shocks. In addition, meeting the budgetary costs of Seychelles’ infrastructure and climate-resilience gaps could pose a challenge. Against this background, Directors called for sustained commitment to sound policies and reforms to reinforce the hard-won economic stability and sustainability.

Directors encouraged the authorities to continue fiscal consolidation to achieve their debt reduction goals, while protecting the most vulnerable. They highlighted that the 2020 budget would need to include permanent saving measures, including better targeting of social welfare programs and keeping tight rein on other current spending, to shore up the authorities’ debt reduction target. They urged the authorities to closely monitor Air Seychelles’ operations and make progress in implementing its restructuring plan, and to take corrective actions promptly if needed.

Directors agreed that the envisaged large infrastructure and climate change related projects should be phased in and implemented within the fiscal targets under the program. They encouraged the authorities to take steps to create additional fiscal space over the medium term, beyond their debt reduction goal, to reconcile these priority investment projects with long-term external and fiscal sustainability. In this context, they welcomed the authorities’ continued efforts to raise the efficiency of capital expenditure and minimize the potential risks arising from public-private partnerships. They also recommended seeking concessional financing where possible.

Directors commended the Central Bank of Seychelles for its prudent monetary policy. They encouraged the central bank to remain vigilant to inflationary pressures and maintain a flexible exchange rate policy with minimal intervention only to preserve international reserve buffers around the current level. They welcomed the progress made toward ensuring a successful transition to the new monetary policy framework.

Directors encouraged the authorities to step up efforts to address the risks of further potential loss of correspondent banking relationships. They stressed the need to implement reforms to strengthen the AML/CFT framework and called for prompt progress in capacity enhancement in relevant institutions. Directors also encouraged the prompt formulation of a new offshore financial sector strategy.

Directors highlighted that further structural reforms would be essential to enhance prospects for inclusive growth. They encouraged the authorities to intensify efforts to improve the business environment to help accelerate progress in economic diversification.

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.

1

The PCI is available to all IMF members that do not need Fund financial resources at the time of approval. It is designed for countries seeking to demonstrate commitment to a reform agenda or to unlock and coordinate financing from other official creditors or private investors. (see https://www.imf.org/en/About/Factsheets/Sheets/2017/07/25/policy-coordination-instrument).

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.