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IMF Country Report No. 22/374

SEYCHELLES

THIRD REVIEW UNDER THE EXTENDED FUND FACILITY ARRANGEMENT AND REQUEST FOR MODIFICATION OF INDICATIVE TARGETS—PRESS RELEASE; AND STAFF REPORT

December 2022

In the context of the Third Review Under the Extended Fund Facility Arrangement and Request for Modification Of Indicative Targets, the following documents have been released and are included in this package:

• A Press Release.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on a lapse of time basis, following discussions that ended on October 5, 2022, with the officials of Seychelles on economic developments and policies underpinning the IMF arrangement under the Extended Credit Facility. Based on information available at the time of these discussions, the staff re port was completed on November 11, 2022.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2022 International Monetary Fund

Press Release

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IMF Executive Board Completes Third Review Under the Extended Fund Facility for Seychelles

FOR IMMEDIATE RELEASE

• The strong recovery of the Seychelles economy has continued in 2022, led by a rebounding tourism sector. Growth is uneven across other sectors of the economy.

• The government has made significant progress in restoring macroeconomic balances and performance under the EFF program is strong.

• Maintaining the buildup of buffers against shocks, while protecting the most vulnerable people remains critical in the current global environment.

Washington, DC-December 1, 2022: The executive Board of the International Monetary Fund (IMF) completed today the third review of Seychelles’ economic performance under the 32-month Extended Fund Facility (EFF) arrangement that was approved on July 29, 2021. The completion of the review allows the authorities to draw the equivalent of SDR6.5 million (about $8.6 million), bringing total disbursements under the current EFF to SDR 61 million (about $80.6 million). The Executive Board’s decision was taken on a lapse-of-time basis¹.

Seychelles’ economic recovery has remained very strong in 2022, fueled by a faster-than-expected rebound of the tourism sector. At end-September 2022, tourist arrivals were 125 percent higher than the same period in 2021, with stronger than expected demand from Europe and the Middle East. The recovery is mostly concentrated in tourism-related industries. Real GDP growth is expected to reach 10.6 percent in 2022, before moderating to 5.4 percent in 2023. Inflation has been relatively low (3.0 percent year-on-year at end-September 2022), reflecting the effects of currency appreciation in 2021 and earlier this year as well as the base effect of higher inflation in 2021. Average inflation is expected decline to 3.0 percent for2022, before rising to 4.5 percent in 2023, reflecting higher import prices and a fading of the cushion provided by the lagged effect of the rupee appreciation.

The recovery has been accompanied by a significant fiscal consolidation and social support for the most vulnerable. The primary fiscal deficit in 2022 is expected to narrow to 1.1 percent of GDP, reflecting an extraordinary consolidation of 13.6 percentage points over the last two years. Risks to debt sustainability have been significantly reduced with the public debt-to-GDP ratio expected to decline to about 68 percent at end-2022, a 21-percentage-point reduction in two years. In 2023 and over the medium term, the primary balance will shift to a surplus, as revenue measures will more than compensate for the planned increase in capital expenditure. The government has provided social support for the population, including through a program of targeted, temporary cash transfers to protect the most vulnerable from rising food and fuel prices, which is expected to run through early 2023.

Program performance remains strong. All end-June 2022 quantitative performance criteria (QPCs) and indicative targets (ITs) as well as all end-September2022 ITs were met. Good progress was made toward structural benchmarks, although some were implemented with a delay due to capacity constraints.

The economic outlook, while positive, remains subject to risks, including a worsening of economic prospects in many of Seychelles’ key tourist markets (Russia, the European Union, and the United Kingdom), high food and fuel prices and their effect on the most vulnerable, a resurgence of COVID-19, higher-than-expected inflation, and higher non-performing loans from legacy forborne loans. Climate-related shocks remain as medium- and long-term risks.

The authorities’near-term priorities are to support the post-pandemic recovery and maintain debt sustainability as well as address the impacts of rising food and fuel prices on the most vulnerable. Over the medium-term, the authorities’ measures aim to increase revenues and bolster capital expenditure, with a focus on climate-change mitigation and adaptation. In addition, the structural reform agenda prioritizes revenue administration, public financial management, and governance, including digitalization, and state-owned enterprise reform.

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SEYCHELLES

THIRD REVIEW UNDER THE EXTENDED FUND FACILITY ARRANGEMENT AND REQUEST FOR MODIFICATION OF INDICATIVE TARGETS

November 11,2022

EXECUTIVE SUMMARY

Context. Tourism is driving a strong economic recovery in Seychelles. Real GDP growth is expected to accelerate to 10.6 percent in 2022, up from 7.9 percent in 2021. However, the recovery is uneven across sectors of the economy. The authorities have already begun to rebuild policy buffers and have taken measures to protect the poorest as the country transitions from the COVID-19 outbreak. The primary fiscal deficit in 2022 is expected to narrow to 1.1 percent of GDP, reflecting an extraordinary consolidation of 13.6 percentage points over the last two years. Risks to debt sustainability have been significantly reduced with the public debt-to-GDP ratio projected at around 68 percent at end-2022, thereby registering a 21-percentage-point reduction in two years.

Outlook and Risks: Following the large COVID-19-related contraction, and the subsequent strong recovery, growth is expected to slow to 5.4 percent in 2023 and around 4 percent over the medium-term. This outlook is subject to risks, including in the short term a worsening of economic prospects in many of Seychelles’ key tourist markets (Russia, the European Union, and the United Kingdom), high food and fuel prices and their effect on the most vulnerable, a resurgence of COVID-19, higher-than-expected inflation, and higher NPLs from legacy forborne loans. Climate-related shocks remain as medium- and long-term risks.

Program performance: Program performance remains strong. All end-June 2022 quantitative performance criteria (QPCs) and indicative targets (ITs) as well as all end-September 2022 ITs were met. Good progress was made toward structural benchmarks, although some were implemented with a delay due to capacity constraints.

Policy Recommendations. The authorities’ near-term priorities aim at supporting the post-pandemic recovery and addressing the impacts of rising food and fuel prices on the most vulnerable. Over the medium-term, their focus is on increasing revenues and bolstering capital expenditure, with a focus on climate-change mitigation and adaptation.

Staff’s views. Considering the authorities’ strong program implementation and policy commitments going forward, staff recommends completion of the third EFF review.

Approved By

Abebe Selassie (AFR) and Maria Gonzalez (SPR)

Contents

• CONTEXT AND RECENT DEVELOPMENTS

• OUTLOOK AND RISKS

• PROGRAM PERFORMANCE

• POLICY DISCUSSIONS

• A Short-Term Fiscal Policy: Rebuild Fiscal Buffers to Maintain Debt Sustainability, while Protecting the most Vulnerable

• B. Medium-Term Fiscal Priorities: Bolster Revenues and Capital Expenditures

• C. Monetary and Exchange Rate Policy

• D. Debt Management Strategy

• E. Financial Stability

• F. Governance and Transparency

• G. Climate Challenges and Initiatives

• H. Data Issues

• PROGRAM MODALITIES

• STAFF APPRAISAL

• FIGURES

• 1. Tourism Indicators

• 2. Inflation Indicators

• 3. Improved Debt Outlook

• 4. Financial Soundness Indicators

• 5. Indicators of Economic Activity

• 6. Improved Debt Outlook

• 7. Macroeconomic Indicators – 2015–27

• 8. Macroeconomic Developments and Projections

• TABLES

• 1. Selected Economic and Financial Indicators, 2020–27

• 2. Balance of Payments, 2020–27

• 3a. Consolidated Government Operations, 2020–27

• 3b. Consolidated Government Operations, 2020–27 (Percent of GDP)

• 4. Depository Corporations Survey and Central Bank Accounts, 2017–22

• 5. Financial Soundness Indicators for the Banking Sector, 2018–22

• 6. Schedule of Purchases Under the EFF Arrangement

• 7. Indicators of Capacity to Repay the Fund, 2017–32

• 8. Decomposition of Public Debt and Debt Service by Creditor, 2021–23

• ANNEXES

• I. Risk Assessment Matrix

• II. Improving Compilation of Tourism Receipts and Payments in Seychelles’ Balance of Payments

• III. Climate Plans and Initiatives

• APPENDIX

• I. Letter of Intent

  • Attachment I. Memorandum of Economic and Financial Policies

  • Attachment II. Technical Memorandum of Understanding