IMF Executive Board Concludes 2010 Article IV Consultation with the SeychellesPublic Information Notice (PIN) No. 10/162
December 22, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On December 20, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the 2010 Article IV consultation with the Seychelles.1
The economic outlook is favorable. Developments in 2010 confirm a quick progress toward stabilization and have freed up some margins for more expansionary policies. The exchange rate has stabilized, price stability has been restored and reserves rebuilt. The medium-term outlook is favorable as growth is projected to gradually reach 5 percent, but the timid global recovery and large external vulnerabilities plead in favor of rebuilding policy buffers and diversifying the economy.
The 2010 Article IV discussions focused on the medium-term challenges that confront Seychelles, including recovering from a severe external debt crisis, reducing the small island state’s vulnerability to external shocks, and promoting private-sector led growth. Several interrelated issues were discussed: the use of the fiscal margins that have emerged from the economic recovery, external stability issues, the management of the growing banking liquidity, and the sound development of the financial sector.
The program is on track. All performance criteria through end-September 2010 were met and the end-year targets are within reach. Although most of the structural reform agenda is progressing as scheduled, capacity bottlenecks have delayed two measures that were structural benchmarks for end-September and end-November 2010 respectively.
The program targets for 2011 reflect further efforts to consolidate economic stabilization gains and secure Seychelles’s medium-term growth objective. The program accommodates an easing of the fiscal stance consistent with debt sustainability and external stability. After two years of fiscal over-performance, the authorities target a primary surplus of 5 percent of GDP for the 2011 budget, 1 percentage point of GDP less than initially planned. This will provide fiscal space for the financing of infrastructure, addressing the main growth bottleneck in the medium term, while maintaining public debt on the initial declining path. Further steps are taken to rationalize the tax system, including preparations for the launching of a value-added tax (VAT) in mid-2012. Monetary policy will aim toward maintaining inflation below 3 percent.
Executive Board Assessment
Directors commended the authorities’ stabilization efforts that helped Seychelles overcome the 2008 balance of payments and debt crisis and the recent global recession. Directors noted a remarkable turnaround of economic policies, including foreign exchange market liberalization and floating of the rupee, exceptional fiscal adjustment, and enhanced management of public finances and the central bank. They also noted the important role played by international assistance, which facilitated successful restructuring of external debt and the return of investor confidence.
Directors agreed that, with improved economic fundamentals, the medium-term outlook is positive, but risks remain. They observed that upbeat growth projections, a benign inflationary environment, and the strong revenue performance in 2010 offer room for more expansionary fiscal policies in 2011 in support of the country’s development needs, including priority recruitment in the public sector and infrastructure investment. At the same time, uncertainty about the global economy and large external vulnerabilities favor the rebuilding of policy buffers. Directors welcomed further steps to rationalize the tax system, including the launch of a value-added tax in mid-2012, enhanced transparency and accountability of public finances, and the planned reform of the social security system.
Directors took note of the staff’s assessment that the exchange rate is broadly in line with fundamentals, and welcomed the authorities’ intention to maintain a flexible exchange regime, which has played an important role on the recovery path. However, vigilance is needed against the inflation and exchange rate risks stemming from excess liquidity in banks, which is emerging from the quick reduction of domestic public debt. In this context, Directors welcomed the authorities’ commitment to mop-up liquidity, including by issuing treasury bills for monetary policy purposes, and to maintain inflation in the low single digits.
Directors noted the soundness of the banking system and welcomed improvements in financial regulations. At the same time, they thought that greater competition among banks would facilitate credit growth and intermediation. They encouraged the authorities to reduce state intervention in the financial system, and enhance disclosure requirements and consumer protection.
Directors commended the authorities for successful implementation and strong ownership of the reform program, and were encouraged by their commitment to sustain the reform momentum. They stressed the need to address capacity bottlenecks, which have delayed two structural benchmarks.
Directors emphasized the need to maintain an ambitious path toward debt sustainability. They welcomed the measures aimed at enhancing efficiency of public enterprises, underscoring the importance of ensuring financial sustainability of the national airline and Public Utilities Company.