Public Information Notices
Seychelles and the IMF
IMF Concludes Article IV Consultation with Seychelles
On November 3, 2000, the Executive Board concluded the Article IV consultation with Seychelles.1
Seychelles has achieved one of the highest standards of living in Africa. In recent years, however, the sustainability of these achievements has been threatened by growing macroeconomic imbalances and structural problems that have made the economy less efficient and competitive. Real GDP has stagnated in the past two years, inflation is rising, and serious balance of payments problems have emerged, causing a near depletion of net international reserves to less than two weeks of imports, and the accumulation of some US$50 - US$60 million in external payments arrears.
Executive Directors expressed concern that the economic conditions in Seychelles have steadily deteriorated since the last Article IV consultation in July, 1998, because of growing macroeconomic imbalances and persistent structural problems. Real GDP has declined, the public debt has continued to grow at an unsustainable rate, inflation has picked up, and official foreign exchange reserves have declined.
Directors agreed that economic efficiency could be considerably improved by reforming the tax system. They called on the authorities to reduce the tax burden on businesses, especially the high and progressive social security tax rates, and to broaden the tax base by curtailing the use of ad hoc and statutory tax exemptions and concessions. Directors also encouraged the authorities to reform the indirect tax system through the introduction of a sales tax and a liberalized and simplified tariff structure.
Directors were concerned that the official exchange rate of the Seychelles rupee was out of line with current economic fundamentals and stressed the need to correct the misalignment by unifying the official and parallel-market exchange rates. While some Directors saw an urgent need to move to a market-based exchange rate without delay, others felt that a more gradual but determined approach might be appropriate to restore equilibrium. In setting the course to correct the exchange rate misalignment, which would need to take account of the special circumstances in the tourist industry, Directors encouraged the authorities to consider not only the steps that needed to be taken in the period immediately ahead, but also the choice of an appropriate exchange rate regime for the medium term. The correction of the exchange rate misalignment would facilitate a phased removal of existing foreign trade and exchange restrictions, the normalization of relations with creditors, and the rebuilding of reserves.
In any event, Directors emphasized the need for sufficiently tight financial policies to pave the way for, and support action on, the exchange rate. In addition to fiscal restraint, these measures would include raising nominal interest rates and placing limits on the overall expansion of banking system credit. Directors were of the view that, after some time, the authorities should move progressively toward a more market-based approach to monetary management.
On structural reforms, Directors urged the authorities to push forward with the policy of economic liberalization aimed at stimulating private sector activity and improving economic efficiency. They stressed that crucial steps were needed to promote greater competition in domestic production and marketing and to pave the way for removing the controls on prices and profit margins, eliminating the administrative allocation of foreign exchange, and privatizing the major state enterprises.
The authorities have undertaken a number of initiatives to strengthen the operations and regulation of the offshore financial sector. Directors welcomed the recent repeal of the Economic Development Act, and noted the subsequent endorsement given to the country by the Financial Action Task Force.
Directors expressed concern that deficiencies in the national income accounts and price statistics limited their usefulness for Fund surveillance, economic analysis, and policy formulation. Discrepancies between the fiscal and monetary accounts also needed to be reconciled. While supporting the authorities' request for further Fund technical assistance to improve the quality of national accounts and price statistics, Directors, however, urged the authorities to step up efforts in strengthening the staffing and administrative capacity of Seychelles's statistics office in line with the recommendations of recent Fund technical assistance missions.
|Seychelles: Selected Economic Indicators|
|Retail price index (period averages)||1.1||0.7||2.6||6.2||6.7|
|(In millions of U.S. dollars, unless otherwise indicated)|
|Current account balance||-65.9||-63.3||-101.6||-104.8||-61.5|
|(In percent of GDP)||-12.1||-10.7||-17.0||-17.1||-9.8|
|Capital and financial account balance||45.6||62.8||82.4||99.6||33.2|
|Official reserves (end of period)||18.1||23.6||21.4||29.7||15.7|
|(In weeks of prospective imports)||2.6||2.9||2.4||3.5||1.9|
|(In percent of exports of goods and nonfactor service|
|Change in real effective exchange rate (in percent) 2/||-3.1||-1.1||-0.7||8.6||-3.0|
|(In percent of GDP, unless otherwise indicated)|
|Total revenues and grants||43.1||43.9||45.8||48.3||41.5|
|Total expenditure and net lending||52.4||52.9||69.6||61.0||57.3|
|Overall deficit, cash basis||-9.2||-9.0||-23.7||-12.7||-15.7|
|Change in broad money (in percent)||12.7||29.3||16.4||19.1||12.0|
|Interest rate (six-month deposits; weighted average)||9.2||9.1||8.3||6.4||...|
Sources: Seychelles authorities; and IMF staff estimates.
|2/ A negative sign signifies a depreciation.|
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. 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. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT