## cr17160 - 2017. The program aims to bolster the foundations for sustained and

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### CONTEXT
- Progress and background
  - Seychelles designated as a high-income economy.
  - Since the 2008 balance of payments and debt crisis:
    - Role of the state in the economy was reduced.
    - Significant reforms restored fiscal and monetary credibility, supported by external support and Paris Club restructuring.
    - Public-debt-to-GDP ratio reduced by almost two thirds by end-2015.
    - Prospective import coverage improved to over 4 months from less than 1 month at end-2008.
  - Household Budget Survey (HBS) December 2015: 39 percent of the population living below the authorities’ poverty line.
  - 2016 State of the Nation address (SONA) commitments entailed permanent costs of 3 percent of GDP annually, putting the EFF-supported program off track and delaying the fourth review.
  - Fourth and fifth EFF reviews concluded by the Board in mid-January 2017; this sixth review is the final review under the current EFF.
  - Authorities’ medium-term anchor: bring the public debt to GDP ratio below 50 percent by 2020.
  - Political change: opposition won National Assembly majority in September 2016; President Michel stepped down mid-October 2016.
- Policy alignment and structural reforms
  - Primary surplus target revised down to 3 percent of GDP from 2016 onwards (from 3¾ percent envisaged at 2015 Article IV).
  - Monetary policy: stance aimed at achieving inflation targets and curbing private sector credit growth; flexible exchange rate allowed reserve buildup; CBS progressing to a more forward-looking framework.
  - Structural: new PFM and SOE action plans; progress on macroprudential surveillance and offshore transparency.
  - Remaining needs: strengthen financial regulatory framework (including AML/CFT and offshore sector) and enforcement to rebuild correspondent banking relations (CBR) confidence.
- Seychelles selected as pilot country for Climate Change Policy Assessment (CCPA) for small states; Article IV mission discussed macro-critical aspects following joint FAD and World Bank TA in early March.

### RECENT DEVELOPMENTS, OUTLOOK AND RISKS
- Economic developments
  - Tourist arrivals grew by 9¾ percent in 2016.
  - Real GDP growth estimated at around 4½ percent in 2016.
  - Nominal receipts tempered by euro depreciation versus US dollar.
  - Nominal exchange rate stable recently; GIR in line with projections at time of 4th and 5th reviews.
  - Year-on-year CPI inflation negative for past 14 months.
  - Private sector credit growth moderate; banks adequately capitalized and liquid per financial soundness indicators.
- Near- and medium-term outlook
  - Potential recovery in international commodity prices could push up inflation and affect external balance in 2017.
  - Rising international fuel prices since late 2016 plus expansionary fiscal initiatives from 2016 SONA could pressure inflation and external current account in 2017.
  - Strong growth momentum expected to carry into 2017 before easing to potential rate of around 3‒3½ percent after 2018, assuming prudent policies.
  - Tourism, supported by new flights, main medium-term growth driver.
- Key risks (RAM summary)
  - Overall: Risks broadly balanced.
  - Short/medium-term key risks:
    - External shocks (euro weakness vs. US dollar) could harm tourism receipts.
    - Structurally weak growth in advanced and emerging economies could dampen tourism.
    - Withdrawal of correspondent banking relationships could affect financial stability.
    - Fiscal slippage beyond 2018 could have serious macroeconomic consequences.
    - Natural disasters and climate change: a disaster causing economic damage of 10 percent of GDP could put public debt on an unsustainable path.
  - Upside: tourism growth could exceed projections due to new flights; lower-than-projected international energy prices would strengthen external position, suppress inflation, and enhance growth.
- Authorities’ view
  - Broad agreement with staff assessment and risks.
  - Highlighted faster-than-expected fuel price increases as a major risk that could worsen SOE performance (Air Seychelles and Seychelles Petroleum Company (SEYPEC)), potentially triggering fiscal contingent liabilities.

### PROGRAM PERFORMANCE
- End-December 2016 quantitative performance criteria
  - All criteria met except the reserve money ceiling, which was missed by a very small margin.
  - End-2016 primary fiscal surplus exceeded target by 0.4 percent of GDP.
    - Overperformance in VAT and business tax; non-tax revenue and grants underperformed by about 2 percent of GDP.
    - Capital spending under-executed by 2½ percent of GDP; current spending broadly in line with projection.
  - Net international reserves (NIR) at end-2016 exceeded the target by US$14 million.
  - Reserve money target (daily average during Q4 2016) missed narrowly due to higher-than-expected growth in foreign currency deposits.
  - Board granted waiver for non-observance of reserve money ceiling for end-2016.

### Implementation status and technical delays
- PFM action plan submitted to Cabinet for approval in mid-April.
- SOE Action Plan submitted to Cabinet for approval in mid-April.
- CBS strategy to improve financial literacy delayed to June 2017 (original end-March).
- Cabinet approval of AML/CFT strategy delayed to end-June 2017 because National Risk Assessment likely delayed to May 2017.

### Policy discussions: fiscal and external sustainability vs. inclusive growth
- Public debt-to-GDP declined slowly after 2013 due to issuance of monetary debt to mop up excess liquidity from 2009–10 foreign exchange purchases.
- Need to run strong fiscal surpluses to meet medium-term debt reduction target; implement permanent fiscal measures in 2018 and create fiscal space for priority investments (including climate resilience).
- Maintain flexible exchange rate while preserving reserve buffer to limit monetary debt buildup.
- Modernize monetary policy framework; leverage central bank assets to facilitate public debt reduction.
- Promote inclusive growth by improving business environment, strengthening SOEs, and strengthening offshore regulation.

### A. Buttressing the Medium-term Debt Reduction Goal — findings and scenarios
- 2017 budget approved late February consistent with EFF but relies mostly on one-off measures.
- Primary surplus estimated to reach 3 percent of GDP in 2017 under the 2017 budget.
- Staff scenario: if primary surplus remains 3 percent of GDP from 2018 onwards, public debt-to-GDP would decline to below 50 percent by 2020 (authorities’ revised goal).
- If no additional measures in 2018:
  - Primary surplus will drop to around 1½ percent of GDP in 2018 and thereafter.
  - Public debt-to-GDP would be about 6 percent of GDP higher than authorities’ 50 percent target at end-2020 and would fall below 50 percent in 2023.
  - Fiscal slippage would pressure exchange rate and/or GIR and risk stability and external viability.
- Fiscal indicators after 2018 under two scenarios (all in percent of GDP):
  - 2018: Fiscal primary surplus — Staff proposed 3.0 ; No policy actions 1.5 ; Total public debt — Staff proposed 62.6 ; No policy actions 64.1
  - 2019: Fiscal primary surplus — Staff proposed 3.0 ; No policy actions 1.5 ; Total public debt — Staff proposed 55.9 ; No policy actions 60.0
  - 2020: Fiscal primary surplus — Staff proposed 3.0 ; No policy actions 1.4 ; Total public debt — Staff proposed 49.7 ; No policy actions 56.2
  - 2021: Fiscal primary surplus — Staff proposed 3.0 ; No policy actions 1.4 ; Total public debt — Staff proposed 45.6 ; No policy actions 53.7
  - Source: Staff estimates

### Revenue mobilization and tax structure
- Seychelles’ tax-to-GDP ratio relatively high versus peer tourism-dependent islands.
- Business taxes to GDP hovered around 4¼‒5½ percent since peaking at 7.1 percent in 2011.
- Tourism-related companies’ share in business tax collection around 7¾‒10¼ percent; share in personal income tax and VAT 25‒34 percent.
- Tourism-related companies subject to 15 percent business tax rate versus 30‒33 percent for other companies.
- Tourism Investment Act provides concessions (accelerated/additional depreciation).
- Estimated revenue loss from preferential business tax for tourism companies could reach over ½ percent of GDP.
- Empirical research indicates tax incentives may attract FDI but economic benefit may be limited.

### Expenditure composition and need for reprioritization
- Government expenditure skewed toward current spending; wage bill at 10½ percent of GDP, higher than most peers.
- Social welfare spending not well targeted per World Bank Social Protection Policy Note, June 2016.
- Priority investments: infrastructure, electricity, climate change mitigation and adaptation — implying capital spending share should increase.
- Essential to constrain current spending growth to create space for priority investment while preserving fiscal sustainability.

### Staff policy recommendations for the 2018 budget
- Articulate permanent measures for 2018 budget to shore up medium-term debt reduction goal.
- Revenue-side: re-examine potential measures (some recommended in FAD TA) that could yield additional revenue of almost 1½ percent of GDP in total. Potential revenue measures (in percent of GDP):
  - Increase fuel excises in line with FAD TA recommendations: 0.5
  - Impose 10 percent tax on sugary drinks and confectionary: 0.1
  - Eliminate preferential business tax rate and treatment for tourism-related companies: 0.6
  - Increase various fees and charges, including passenger air duty: 0.2
  - Introduce a property tax: Not available
  - Total: 1.4
  - Source: Ministry of Finance and staff estimates
- Staff cautions property tax design should be non-discriminatory and minimize distortions.
- Expenditure-side (from 2018):
  - Contain wage bill growth significantly below nominal GDP growth.
  - Better target social welfare spending per World Bank recommendations, including review/adjustment of means test and benefit levels for home care and social welfare assistance.

### Authorities’ view on fiscal stance
- Authorities prefer a slightly lower primary surplus from 2018 onwards to scale up infrastructure.
- Maintain medium-term debt reduction goal of below 50 percent by 2020 but prefer primary surplus target of 2‒2½ percent of GDP from 2018 onwards.
- If primary surplus around 2‒2½ percent from 2018 onwards, debt-to-GDP falls below 50 percent in 2021 (one year later than authorities’ medium-term goal).
- On 2018 revenue measures:
  - Considering introduction of a sugar tax.
  - Seeking World Bank TA on property tax design.
  - Not ready for further fuel excise increases in line with recent FAD TA.
- On expenditure containment:
  - Challenges in containing wage bill due to recruiting qualified staff.
  - Willing to consider measures to contain wage bill and goods and services and better target social welfare.
- 2018 budget to be submitted to National Assembly in November.

### B. Reducing vulnerability to climate change — costs and financing implications
- Authorities’ NDC 2015 estimates total cost of mitigation and adaptation actions at US$604 million, which is 42.3 percent of 2016 GDP.
- NDC 2015 breakdown (In US$ million; In percent of GDP in 2016):
  - Mitigation subtotal: 309 ; 21.6 percent
    - Public Electricity: 90 MW of solar PV — 192 ; 13.4 percent
    - Waste Management: retrofitting landfill for gas capture and flaring — 21 ; 1.5 percent
    - Land Transport: 30 percent of private vehicles electric by 2030 — 67 ; 4.7 percent
    - 15.8 MW solar PV for electric vehicles — 30 ; 2.1 percent
  - Adaptation subtotal: 295 ; 20.6 percent
    - Critical Infrastructure — 70 ; 4.9 percent
    - Tourism/Coastal management — 45 ; 3.1 percent
    - Food Security — 35 ; 2.4 percent
    - Biodiversity — 15 ; 1.0 percent
    - Water Security — 85 ; 5.9 percent
    - Health — 30 ; 2.1 percent
    - Blue Economy — 15 ; 1.0 percent
  - Total: 604 ; 42.3 percent
  - Source: Authorities' estimates
- Financing status
  - Except for the $15 million Blue Bond project (2017–21) and other projects totaling about US$10 million, financing for mitigation and adaptation investments not identified.
- Medium-term fiscal implications
  - Adding climate projects to projected public expenditure under staff’s proposed scenario (EFF baseline) delays public debt decline:
    - Public debt falls below 50 percent by 2022, two years later than EFF baseline.
  - Projections and assumptions:
    - Assuming two-thirds of projects financed by external grants and concessional loans, public debt to GDP at end-2036 estimated around 26 percent (higher than EFF baseline of around 16 percent).
    - If all climate investments financed domestically, debt-to-GDP projected around 36 percent in 2036.
- Policy implications and staff recommendations
  - Enhance revenue further beyond securing primary surplus of 3 percent from 2018 onwards, including gradually introducing a carbon tax in line with recent FAD TA.
  - Shift spending composition from current to capital expenditure over the medium term.
  - Seek concessional external financing for climate actions where possible.
  - Incorporate climate-related risks into PFM and explore risk transfer avenues (e.g., insurance).

### Authorities’ view on climate finance measures
- Authorities broadly concur with staff advice but indicate implementation of FAD recommendations on carbon tax via fuel excise adjustments will take some years.
- World Bank to support Seychelles’ Blue Bond project using Global Environment Fund (GEF) grants to reduce interest burden.

### C. Minimizing fiscal risks and enhancing public sector efficiency
- Public indebtedness remains high; country spends about 10 percent of expenditure outlays on interest payments.
- There are 22 SOEs whose revenues reach almost 70 percent of GDP.
- Aggregate SOE profitability low compared with international benchmarks; non-guaranteed SOE debt estimated around 13 percent of GDP constitutes sizable contingent liability and fiscal risk.
- Government initiatives to reduce debt-related risks:
  - Considering liability management to swap a US dollar obligation into Euros to save interest and align repayment currency with foreign exchange earnings.
  - Medium term: as CBS monetary framework strengthens, unwind some monetary debt (issued for sterilization) to reduce domestic debt stock.
  - Gross financing needs will remain very high; extend domestic maturities to reduce rollover risks.
  - Proposed issuance of a 7-year bond to replace maturing instruments; seize opportunities to lengthen domestic debt maturities.

### Public Financial Management and SOEs
- PFM Action Plan submitted to Cabinet addressing PEFA-identified weaknesses, including strengthening capital project selection, costing, and monitoring.
- SOE Action Plan submitted specifying measures:
  - full fiscal risk analysis of SOE sector;
  - quantification of social costs incurred by SOEs;
  - enhancement of financial reporting and SOE governance code;
  - review each SOE's role to improve economic efficiency.
- Footnote: SOE financial statements for 2016 under audit and expected late May; preliminary data indicate majority recorded net profit in 2016 as in 2015.
- Authorities agreed with staff advice; intend to re-examine roles of SOEs and may seek Fund TA on PIM implementation.

### Preserving Price and External Stability — monetary policy operations
- CBS primary objective: price stability; operations anchored by reserve money targeting.
- Operational challenges:
  - No policy rate or active interbank money market causing high short-term interest rate volatility.
  - CBS committed to floating exchange rate; interventions confined to limiting excessive volatility.
- Structural excess liquidity and sterilization:
  - Large 2009‒10 foreign exchange purchases rebuilt reserves but caused structural excess liquidity.
  - Sterilization via Treasury bonds since 2014 increased government debt issued for monetary policy purposes to around 16 percent of GDP as of end-2016.
- Monetary policy transmission weak due to excess liquidity, absence of policy rate, underdeveloped money markets.
- Inflation, reserves, and policy stance
  - CPI inflation around or below 3 percent since end-2013.
  - GIR import coverage improved to 4 months from less than 1 month at end-2008.
  - Upside inflation risks: international fuel prices recovery; 2016 SONA initiatives; excise and tariff adjustments in 2017 budget.
  - Recommendation: CBS stand ready to tighten monetary policy if inflationary pressures emerge.
  - CBS board kept monetary stance unchanged at end-March meeting.
- Modernizing framework
  - CBS intends to reintroduce an interest rate corridor around a policy rate starting Q3 2017.
  - Expected benefits: guide short-term rates, reduce volatility, develop interbank market, strengthen transmission, facilitate unwinding monetary debt.

### External sector assessment
- Staff view: external position broadly consistent with fundamentals and policies.
- GIR currently around 170 percent of the relevant ARA metric.
- Staff advises maintaining flexible exchange rate and preserving reserve coverage ratios.
- EBA-lite results inconclusive:
  - Current account model: 22.1 (REER misalignment)
  - Real Effective Exchange Rate index model: -17.0
  - Discrepancy due to EBA-lite limitations for small tourism-dependent economies (tourism ~30 percent of GDP).
- Tourism sector: share in arrivals rising since early 2000s; share in receipts stagnant partly due to euro depreciation versus US dollar.
- Continued REER appreciation since end-2014 could pose competitiveness risks.

### Supporting financial stability
- Financial Stability Committee operational since March 2016; quarterly meetings with CBS, Ministry of Finance, FSA, FIU.
- Offshore sector and CBRs
  - New IBC Act effective late 2016; FIU drafted a National Risk Assessment for AML/CFT; mutual evaluation starting in June.
  - Banks face pressures maintaining CBRs; loss limited so far but unsecured lending rise is a concern.
- Macroprudential and legal reforms
  - Proposed CBS Act revisions to enforce micro- and macro-prudential ratios (loan-to-value, debt-to-income, debt service-to-income).
  - Transition to Basel II to provide additional tools.
  - MCM-LEG TA recommended comprehensive legal reform for crisis management and bank resolution.
- Action plan to reduce financial sector risks and CBR loss focuses on: aligning AML/CFT, improving offshore entity transparency, enhancing cooperation with jurisdictions, regional information sharing, and strengthening respondent banks’ capacity.
- Staff encouraged regional/international advocacy to preserve CBRs.
- Authorities concerned about further CBR loss and requested Fund/World Bank advocacy.

### Enhancing inclusive growth and diversification
- Economic structure
  - Tourism-related sectors directly contribute about one-third of GDP.
  - Tourism receipts and canned tuna exports represent over half of exports of goods and services.
  - Ceiling on yellow fin tuna catches regionally could limit fisheries expansion.
- Diversification strategy
  - Deepen and diversify tourism, upgrade fishery industry under “Blue Economy”.
  - Promote guesthouses and tourism services by local SMEs to distribute benefits.
  - Improve education spending efficiency to enhance productivity and reduce labor market mismatch.
  - Major infrastructure: port development in Victoria and marine resource management via Blue Bond.
- Business climate and constraints
  - Doing Business ranking fell from 80th to 93rd over past three years.
  - Electricity cost high partly due to cross-subsidies; tariff rebalancing adjustments planned but not implemented in 2015‒16.
  - Staff urged resumption of rebalancing adjustments to reduce cross-subsidies.
  - CBS strategy to improve financial literacy to be implemented by end-2017.
  - PPP: draft PPP law approved by Cabinet; PPP manual drafted; Development Committee identified pipeline (port, transport, housing).
  - Recommendation: strengthen capacity to manage PPP fiscal risks.
- Authorities concurred on need to maintain momentum in structural reforms for inclusive growth.

### Other issues and macro data
- Capacity to repay the Fund remains strong with ample reserve buffers; obligations to the Fund small relative to exports and reserves.
- Downside risks: external shocks and fiscal slippage beyond 2018; without additional 2018 measures, fiscal and external sustainability at risk.
- Data and statistical capacity
  - Data broadly adequate but weaknesses exist in quarterly national accounts and CPI quality.
  - Staff encouraged closer collaboration among NBS, SRC, and CBS and adequate staffing for surveys.
- CBS governance
  - 2014 safeguards assessment update confirmed strengthened governance and control.
  - CBS under independent oversight (Audit and Risk committee); revising CBS Act and addressing internal audit capacity with external consultant assistance.

### Staff appraisal — summary findings
- Authorities achieved economic stability and external sustainability under successive Fund arrangements.
- Fiscal discipline led to significant public debt reduction.
- Prudent policies anchored strong growth and reserve buffers.
- Seychelles recently designated high-income country by the World Bank, first in Sub-Saharan Africa region.
- External position broadly consistent with fundamentals; adequate reserves boost resilience.

### Program financing, data, and institutional details (selected)
- IMF Extended Arrangement under EFF approved June 4, 2014: SDR 11.445 million (50 percent of quota).
- Authorities requested completion of sixth review and disbursement of last drawing; interest in successor program.
- 2016 performance highlights:
  - Real growth rate: 4.5 percent.
  - Primary budget surplus: 3.4 percent of GDP.
  - Gross reserves: equivalent to 3.8 months of imports of goods and services.
  - Program-average growth 2014-16: 5.4 percent on average.
- Public debt developments:
  - Public external debt: 39.6 percent of GDP at end-2013 to 31 percent at end-2016.
  - Domestic debt excluding monetary policy debt: 26 percent to 24 percent.
  - Debt issued for monetary purposes rose from 5 percent of GDP at end-2013 to 16 percent at end-2016.
  - Total public and publicly guaranteed debt stable at about 70 percent of GDP.
  - Initial target to reach 50 percent by end-2018 pushed to end-2020.
- Quantitative performance criteria (selected program figures)
  - Net international reserves of the CBS, millions of U.S. dollars (floor) — selected values: 417, 417, 409, 423, 429, 435, 412, 423, 418, 433, 401, 415
  - Reserve money target (ceiling on daily average during the quarter) — selected values: 2,552; 2,520; 2,781; 2,708; 2,818; 2,758; 2,858; 2,815; 2,897; 2,870; 2,961; 2,990
  - Program accounting exchange rates (end-of-quarter) SR/US$: 13.74; 13.74; 13.01; 13.01; 13.01; 13.28; 13.01; 13.28; 13.01; 13.34; 13.01; 13.34
- Structural benchmarks (selected)
  - Cabinet approved PFM action plan and SOE governance strategy in late April 2017 (implemented slightly after original end-March targets).
  - Development of CBS financial literacy strategy and Cabinet approval of AML/CFT strategy delayed to end-June 2017.

### Technical and statistical capacity
- Data generally adequate for surveillance but shortcomings exist; participation in GDDS since December 2006 and SDDS since May 1, 2015.
- National accounts base year: 2006; rebase to 2013 underway.
- New CPI introduced January 2015 based on 2013 household budget survey; concerns about monthly collection of sub-components.
- Monetary and financial statistics reported regularly; integrated monetary database operational using SRF.
- External sector statistics: adopted BPM6; quarterly BOP compiled since 2009; international investment position compilation began in 2015.
- No ROSC performed.

### Program relationships and commitments
- Proposed ADB financing amount: 28.7  million  (USD  39  million) including an energy project and a 3-year Policy Based Operation.
- Projected obligations to the Fund (SDR Million):
  - 2017: Principal 2.95; Charges/interest 0.32; Total 3.27
  - 2018: Principal 4.54; Charges/interest 0.39; Total 4.93
  - 2019: Principal 5.08; Charges/interest 0.32; Total 5.41
  - 2020: Principal 5.16; Charges/interest 0.25; Total 5.41
  - 2021: Principal 3.93; Charges/interest 0.19; Total 4.12

### Executive Director Statement (June 2, 2017) — authorities’ key points
- Seychelles undergone remarkable transformation since 2008.
- Authorities’ target: reduce debt below 50 percent of GDP by 2020.
- Growth drivers: low inflation, strong tourism, construction, water/electricity, telecommunications, financial services.
- Risks: euro weakening, weaker growth in major markets, oil price increases, natural disasters and climate change.
- FY2017 Budget target: primary surplus of 3 percent (in line with EFF); FY2018 expected similar but declining to between 2 and 2.5 percent thereafter to allow capital investment.
- Authorities intend to remain actively engaged with the IMF, including request for a precautionary Stand-By Arrangement after EFF expiry on June 3, 2017.

*International Monetary Fund staff report (cr17160 - 2017).*

### 2017. The program aims to bolster the foundations for sustained and

### cr17160 - 2017. The program aims to bolster the foundations for sustained and

### CONTEXT
- Seychelles has made considerable progress toward economic stability under successive Fund arrangements, and it was recently designated as a high-income economy.
- Since the 2008 balance of payments and debt crisis:
  - Authorities enacted an extensive set of reforms that quickly restored fiscal and monetary credibility, with external support and Paris Club debt restructuring.
  - The role of the state in the economy was reduced.
  - Underpinned by prudent macroeconomic policies, the country enjoyed strong economic growth while running significant primary fiscal surpluses since 2009.
  - Public-debt-to-GDP ratio was reduced by almost two thirds by end-2015.
  - Prospective import coverage improved significantly to over 4 months from less than 1 month at end-2008.
- Social concerns and political context:
  - The Household Budget Survey (HBS) published in December 2015 implied that 39 percent of the population were living below the authorities’ poverty line.
  - In response to social concerns, then-President Michel announced fiscal commitments entailing permanent costs of 3 percent of GDP on an annual basis in his 2016 State of the Nation address (SONA), which put the EFF-supported program off track and delayed completion of the fourth review.
  - After submission of the 2017 budget in line with staff agreement, the fourth and fifth reviews under the EFF were concluded by the Board in mid-January 2017. This sixth review is the final review under the current EFF.
  - Authorities’ medium-term anchor: bring the public debt to GDP ratio below 50 percent by 2020.
  - Political change: in September 2016 the opposition alliance won a majority in the National Assembly; President Michel stepped down in mid-October 2016, handing over executive power to then-Vice President Faure.
- Policy alignment and structural reforms:
  - Authorities’ policies largely aligned with the 2015 Article IV consultation recommendations, with a slight loosening of fiscal stance (see Box 1 summary below).
  - The primary surplus target was revised down to 3 percent of GDP from 2016 onwards (from 3¾ percent of GDP envisaged at the time of the 2015 Article IV consultation), which staff estimates will lead to a steady reduction of public-debt-to-GDP ratio to below 50 percent by 2020, two years later than originally targeted.
  - Monetary policy: appropriate stance to achieve inflation targets and curb private sector credit growth; flexible exchange rate allowed build-up of foreign reserves; CBS progressed toward a more forward-looking monetary policy framework.
  - Structural reforms: improvements in public financial management (PFM) and SOE performance with new PFM and SOE action plans; significant progress in macroprudential surveillance and offshore transparency.
  - Remaining needs: step up efforts to strengthen financial regulatory framework (including AML/CFT and offshore sector) and effective enforcement to build correspondent banking relations (CBR) confidence.
- Seychelles is a pilot country for Climate Change Policy Assessment (CCPA) for small states; Article IV mission discussed macro-critical aspects of CCPA following joint FAD and World Bank TA in early March.

Box 1. Seychelles: Main Recommendations of the 2015 Article IV Consultation (summary of recommendations and status)
- Fiscal Policy and Public Financial Management
  - Recommendation: Target primary surplus of 3¾ percent of GDP from 2016 onwards to buttress the medium-term debt reduction target of bringing public-debt-to-GDP ratio below 50 percent by 2018.
    - Status: Authorities revised down the primary surplus target to 3 percent of GDP in 2016; medium-term target postponed by two years to 2020.
  - Recommendation: Improve execution and efficiency of planned investment spending.
    - Status: Significant progress including articulating public investment manual (PIM); PEFA identified remaining weaknesses in public investment management; PFM Action Plan submitted to Cabinet specifies measures to address weaknesses.
  - Recommendation: Continue progress to strengthen the SOE sector.
    - Status: Financial performance of SOEs improved; SOE Action Plan submitted to Cabinet specifying measures to address weaknesses identified by TA from AFRITAC and the World Bank.
- Monetary and foreign exchange policy
  - Recommendation: Maintain appropriately tight monetary policy stance.
    - Status: CBS maintained appropriately tight stance, contributing to low inflation.
  - Recommendation: Progress toward stronger monetary policy framework where interest rate plays prominent role.
    - Status: CBS made significant progress with Fund TA; intends to reintroduce an interest rate corridor around an appropriate policy rate starting in the third quarter of 2017.
  - Recommendation: Maintain flexible exchange rate policy.
    - Status: CBS maintained flexible exchange rate and adequate international reserves buffer.
- Financial sector policy and structural reform
  - Recommendation: Continue efforts to upgrade macroprudential policies and strengthen regulations on offshore sector.
    - Status: Significant progress, but efforts need to be stepped up given global CBR withdrawal trends.
  - Recommendation: Improve business environment, including reducing cross-subsidization in electricity prices.
    - Status: Progress limited; electricity tariff adjustments to reduce cross-subsidization not implemented.

### RECENT DEVELOPMENTS, OUTLOOK AND RISKS
Findings (economic developments)
- Tourism and growth:
  - Tourist arrivals grew by 9¾ percent in 2016 with strong growth from major European markets and the UAE.
  - Nominal receipts did not grow as fast because the euro, in which most receipts are denominated, depreciated against the US dollar during the period.
  - Strong investment and tourism led to real GDP growth estimated at around 4½ percent in 2016.
- Prices, reserves, and banking:
  - Nominal exchange rate stable in recent months; gross international reserves (GIR) in line with staff projections at time of 4th and 5th reviews.
  - Year-on-year CPI inflation has been negative for the past 14 months, supported by tight monetary policy and low international fuel prices.
  - Private sector credit growth moderate; financial soundness indicators suggest banks are adequately capitalized and liquid.
- Near- and medium-term outlook:
  - Potential recovery in international commodity prices could push up inflation and adversely affect the external balance in 2017.
  - Rising trend in international fuel prices since late 2016, combined with expansionary fiscal initiatives in 2016 SONA, would put pressure on inflation in 2017 and on the external current account balance.
  - Strong growth momentum expected to carry into 2017 before easing to potential rate of around 3‒3½ percent after 2018, assuming prudent macroeconomic policies are maintained.
  - Tourism, supported by new flights, will continue to be main driver of medium-term growth.
Risk assessment (Box 2, RAM summary)
- Overall: Risks broadly balanced.
- Key short- and medium-term risks:
  - External shocks (euro weakness vs. US dollar) could negatively affect tourism receipts and the external balance.
  - Structurally weak growth in advanced and emerging economies could dampen tourism performance.
  - Withdrawal of correspondent banking relationships could affect financial sector stability.
  - Fiscal slippage beyond 2018 in absence of additional permanent measures could have serious macroeconomic consequences.
  - Natural disasters and climate change pose long-run vulnerability; a severe natural disaster could push public debt to an unsustainable path (a natural disaster causing economic damage of 10 percent of GDP could put the public debt to an unsustainable path).
- Upside: Tourism sector growth could exceed projections due to new flights; lower-than-projected international energy prices would strengthen external position, suppress inflation, and enhance growth.
- RAM entries (selected) with staff-assessed likelihood and impact:
  - Relaxation of fiscal discipline — Likelihood: M; Severity: H. Impact: could quickly feed through to balance of payments and threaten debt reduction and reserves adequacy. Policy response: Ensure the primary surplus target; articulate permanent fiscal saving measures to be implemented in 2018 to buttress the medium-term debt reduction target.
  - Natural disaster and climate change — Likelihood: L-M; Severity: H. Impact: catastrophic weather event could lead to exploding public debt dynamics and jeopardize financial stability; rising sea level long-run impacts. Policy response: Create further fiscal space beyond ensuring medium-term debt target for key public investments to address vulnerability to climate change; seek natural disaster insurance and promote insurance market development.
  - Structurally weak growth in key advanced and emerging economies — Likelihood: M-H; Severity: M. Policy response: Ensure exchange rate flexibility; encourage diversification of tourism markets.
  - Significant further strengthening of the US dollar — Likelihood: H; Severity: M. Policy response: Avoid ad-hoc support measures that could undermine long-term revenue potential.
  - Reduced financial services by correspondent banks — Likelihood: H; Severity: H. Policy response: Align legal and regulatory AML/CFT framework with international standards; enhance offshore sector transparency; strengthen cooperation with relevant jurisdictions.
Authorities’ view
- Authorities broadly agreed with staff’s assessment of outlook and risks.
- They highlighted that an increase in international fuel prices significantly faster than expected would be a major risk for inflation and external position, and could worsen SOE financial performance (Air Seychelles and Seychelles Petroleum Company (SEYPEC)), potentially triggering fiscal contingent liabilities.

### PROGRAM PERFORMANCE
- End-December 2016 quantitative performance criteria (test data for sixth and final EFF review):
  - All criteria met except the reserve money ceiling, which was missed by a very small margin (LOI Table 1).
  - End-2016 primary fiscal surplus exceeded target by 0.4 percent of GDP.
    - Fiscal balance benefited from overperformance in VAT and business tax due to strong growth.
    - Non-tax revenue and grants underperformed by about 2 percent of GDP.
    - Capital spending under-executed by 2½ percent of GDP; current spending broadly in line with projection.
  - Net international reserves (NIR) at end-2016 exceeded the target by US$14 million, supported by low international fuel and food prices up to Q3 2016.
  - Reserve money target on daily average during Q4 2016 missed narrowly due to higher-than-expected growth in foreign currency deposits.
  - The Board granted a waiver for non-observance of the reserve money ceiling for end-2016 at the time of the Board meeting for the fourth and fifth review as the end-2016 outturn became available prior to the Board meeting.

*International Monetary Fund staff report (cr17160 - 2017).*

### 11.  Implementation of the structural agenda is generally proceeding as planned, despite

### 11.  Implementation of the structural agenda is generally proceeding as planned, despite

### Implementation status and technical delays
- A new public financial management plan (PFM) was submitted to Cabinet for approval in mid-April.
- The Ministry of Finance and the Public Enterprise Monitoring Commission (PEMC) submitted a SOE Action Plan to Cabinet for approval in mid-April.
- Development of a CBS strategy to improve financial literacy delayed to June 2017 (original end-March deadline in the fourth and fifth reviews) due to longer-than-expected consultant hiring.
- Cabinet approval of a strategy to tackle AML/CFT risks delayed to end-June 2017 (original end-March deadline) because the National Risk Assessment on AML/CFT issues is likely to be delayed to May 2017.

### Policy discussions: fiscal and external sustainability vs. inclusive growth
- Despite an impressive primary surplus performance for the past three years, public debt to GDP ratio has declined only slowly after 2013 due to issuance of monetary debt to mop up excess liquidity from large foreign exchange purchases during 2009–10.
- Authorities need to keep running strong fiscal surpluses to secure medium-term debt reduction target; this requires implementing permanent fiscal measures in 2018 and creating further fiscal space to accommodate priority public investments (including climate change resilience).
- Maintain a flexible exchange rate policy while preserving current reserve buffer to limit buildup in monetary debt.
- Modernizing the monetary policy framework would improve the efficiency of monetary policy.
- Leveraging assets on the central bank’s balance sheet would help facilitate public debt reduction.
- Promoting inclusive growth requires improving the business environment, strengthening the SOE sector, and strengthening regulation of the offshore financial sector.

### A. Buttressing the Medium-term Debt Reduction Goal — findings and scenarios
- The 2017 budget (approved by the National Assembly in late February) is consistent with the EFF but relies mostly on one-off measures.
- Primary surplus estimated to reach 3 percent of GDP in 2017 under the 2017 budget (in line with the 4th and 5th reviews).
- Staff scenario: if primary surplus remains 3 percent of GDP from 2018 onwards, public debt-to-GDP ratio would steadily decline to below 50 percent by 2020—the authorities’ revised medium-term goal.
- The 2017 fiscal outturn would be supported by large one-off revenue from the foreign acquisition of a local telecom company and a delay in implementation of the progressive income tax until January 1, 2018.
- If no additional measures are taken in 2018:
  - Primary surplus will drop to around 1½ percent of GDP in 2018 and thereafter.
  - Public debt to GDP ratio would be about 6 percent of GDP higher than the authorities’ target of 50 percent at end-2020—it would fall below 50 percent in 2023.
  - Fiscal policy slippage would put significant pressure on the exchange rate and/or GIR and risk Seychelles’ economic stability and external viability.

- Fiscal indicators after 2018 under two scenarios (all in percent of GDP):
  - 2018: Fiscal primary surplus — Staff proposed 3.0 ; No policy actions 1.5 ; Total public debt — Staff proposed 62.6 ; No policy actions 64.1
  - 2019: Fiscal primary surplus — Staff proposed 3.0 ; No policy actions 1.5 ; Total public debt — Staff proposed 55.9 ; No policy actions 60.0
  - 2020: Fiscal primary surplus — Staff proposed 3.0 ; No policy actions 1.4 ; Total public debt — Staff proposed 49.7 ; No policy actions 56.2
  - 2021: Fiscal primary surplus — Staff proposed 3.0 ; No policy actions 1.4 ; Total public debt — Staff proposed 45.6 ; No policy actions 53.7
  - Source: Staff estimates

### Revenue mobilization and tax structure
- Seychelles’ tax to GDP ratio is relatively high; Seychelles collected more tax revenues in percent of GDP compared with other tourism-dependent island countries.
- Business taxes to GDP ratio hovered around 4¼‒5½ percent since peaking at 7.1 percent in 2011.
- Tourism-related companies’ share in business tax collection around 7¾‒10¼ percent for the past several years, compared with their share of 25‒34 percent in personal income tax and VAT.
- Tourism-related companies are subject to a business tax rate of 15 percent, versus 30‒33 percent applied to other companies.
- The Tourism Investment Act provides business tax concessions such as accelerated and additional depreciation for investments.
- Estimated revenue loss from preferential business tax treatment for tourism companies could reach over ½ percent of GDP.
- Recent empirical research indicates tax incentives may attract FDI but their ultimate economic benefit may be limited.

### Expenditure composition and need for reprioritization
- Government expenditure composition skewed toward current spending relative to Caribbean tourism-dependent small island economies.
- Seychelles spends 10½ percent of GDP on the wage bill, higher than most peer countries.
- Social welfare spending is not well targeted: the system supports households that are not needy while many needy households do not receive sufficient assistance (World Bank Social Protection Policy Note, June 2016).
- Authorities’ priority investment needs: infrastructure, electricity, climate change mitigation and adaptation — implying capital spending share should increase in the medium to long term.
- Keeping current spending growth constrained is essential to create space for priority investment while preserving fiscal sustainability.

### Staff policy recommendations for the 2018 budget
- Articulate permanent measures to be included in the 2018 budget to shore up the medium-term debt reduction goal.
- Revenue side: re-examine potential measures (some recommended in FAD TA) that could yield additional revenue of almost 1½ percent of GDP in total.
  - Potential revenue measures (in percent of GDP):
    - Increase fuel excises in line with FAD TA recommendations: 0.5
    - Impose 10 percent tax on sugary drinks and confectionary: 0.1
    - Eliminate preferential business tax rate and treatment for tourism-related companies: 0.6
    - Increase various fees and charges, including passenger air duty: 0.2
    - Introduce a property tax: Not available
    - Total: 1.4
  - Source: Ministry of Finance and staff estimates
- Staff welcomes potential progressivity of the property tax under consideration, cautions it should be non-discriminatory and minimize distortions.
- Expenditure side recommendations to be implemented starting in 2018:
  - Contain wage bill growth significantly below nominal GDP growth.
  - Better target social welfare spending by implementing World Bank recommendations, including review and adjustment of means test and benefit levels of the home care program and social welfare assistance.

### Authorities’ view on fiscal stance
- Authorities aware of importance of continued fiscal consolidation but prefer to target a slightly lower primary surplus from 2018 onwards.
- Authorities maintain medium-term debt reduction goal of public debt to GDP ratio below 50 percent by 2020 but prefer a primary surplus target of 2‒2½ percent of GDP in 2018 and thereafter to create space for scaling up infrastructure investment.
- If primary surplus is around 2‒2½ percent of GDP from 2018 onwards, debt-to-GDP ratio will fall below 50 percent in 2021 (one year later than the authorities’ medium-term goal).
- On possible 2018 revenue measures:
  - Authorities considering introduction of a sugar tax.
  - Seeking World Bank TA on design of a property tax.
  - Not ready for a further increase in fuel excises in line with recent FAD TA recommendations.
- On expenditure containment:
  - Authorities cite challenges in containing the wage bill due to recruiting qualified staff (including for the Seychelles Revenue Commission).
  - Indicated willingness to consider measures aimed at containing growth in the wage bill and goods and services, and better targeting social welfare spending.
- The 2018 budget will be submitted to the National Assembly for debate in November.

### B. Reducing vulnerability to climate change — costs and financing implications
- Authorities’ NDC 2015 estimates total cost of mitigation and adaptation actions at US$604 million, which is 42.3 percent of 2016 GDP.
- NDC 2015 breakdown (In US$ million; In percent of GDP in 2016):
  - Mitigation subtotal: 309 ; 21.6 percent
    - Public Electricity: 90 MW of solar PV — 192 ; 13.4 percent
    - Waste Management: Retrofitting landfill for gas capture and flaring — 21 ; 1.5 percent
    - Land Transport: 30 percent of private vehicles electric by 2030 — 67 ; 4.7 percent
    - 15.8 MW solar PV for electric vehicles — 30 ; 2.1 percent
  - Adaptation subtotal: 295 ; 20.6 percent
    - Critical Infrastructure — 70 ; 4.9 percent
    - Tourism/Coastal management — 45 ; 3.1 percent
    - Food Security — 35 ; 2.4 percent
    - Biodiversity — 15 ; 1.0 percent
    - Water Security — 85 ; 5.9 percent
    - Health — 30 ; 2.1 percent
    - Blue Economy — 15 ; 1.0 percent
  - Total: 604 ; 42.3 percent
  - Source: Authorities' estimates
- Except for the $15 million Blue Bond project (2017–21) and other projects totaling about US$10 million, financing of mitigation and adaptation investments is yet to be identified.
- Medium-term fiscal implications:
  - Implementation of climate plans is expected to delay achievement of public debt reduction goals.
  - Adding mitigation and adaptation projects to projected public expenditure under the staff’s proposed scenario (EFF baseline) still results in public debt declining each year, but:
    - Public debt falls below 50 percent by 2022, two years later than EFF baseline.
  - Assumptions and projections:
    - Assuming two-thirds of projects financed by external grants and concessional loans, public debt to GDP at end-2036 is estimated at around 26 percent (higher than EFF baseline of around 16 percent).
    - If all climate change related investments are financed domestically, debt to GDP projected around 36 percent in 2036.
- Policy implications and staff recommendations:
  - Need to enhance revenue further beyond securing primary surplus target of 3 percent of GDP from 2018 onwards, including gradually introducing a carbon tax in line with recent FAD TA recommendations.
  - Shift spending composition from current to capital expenditure over the medium term.
  - Seek concessional external financing for climate actions to the extent possible.
  - Incorporate climate change related risks into public financial management and explore avenues for risk transfer over the medium term.

### Authorities’ view on climate finance measures
- Authorities broadly concur with staff advice but indicate it will take some years to start implementing FAD recommendations on introduction of a carbon tax through fuel excise adjustments.
- World Bank plans to support Seychelles’ Blue Bond project using grants from the Global Environment Fund (GEF) to reduce interest burden.

### C. Minimizing fiscal risks and enhancing public sector efficiency
- Seychelles’ public indebtedness remains high; country spends about 10 percent of expenditure outlays on interest payments.
- There are 22 SOEs whose revenues reach almost 70 percent of GDP.
- Aggregate SOE profitability appears low compared with international benchmarks (AFRITAC TA); while most SOEs are currently profitable, their non-guaranteed debt estimated at around 13 percent of GDP constitutes a sizable contingent liability and potential fiscal risk.
- Given government expenditure close to 40 percent of GDP, strong public financial management (PFM) is essential.

- Government initiatives to reduce debt-related risks:
  - Considering a liability management exercise to swap current US dollar obligation into Euros to save interest costs and better align repayment currency with Seychelles’ foreign exchange earnings.
  - Over the medium term, as CBS’ monetary policy framework strengthens, some unwinding of the monetary debt (issued for sterilization) would be feasible and help reduce domestic debt stock.
  - Gross financing needs will remain very high, requiring extension of domestic maturities to reduce rollover risks.
  - Proposed issuance of a 7-year bond to replace maturing instruments is a positive step; authorities should seize opportunities to lengthen maturity of domestic debt where possible.

*Source: IMF staff report (text as provided).*

### 24.  The authorities have made significant progress in improving PFM to contain fiscal risks

### 24.  The authorities have made significant progress in improving PFM to contain fiscal risks

### Public Financial Management and SOEs
- A new PFM action plan was submitted to Cabinet for approval to address areas identified in the Public Expenditure and Financial Accountability (PEFA) assessment conducted in late 2016, including:
  - strengthening capital project selection, costing, and monitoring.
- An SOE Action Plan was submitted to Cabinet for approval specifying measures in response to TA from AFRITAC and the World Bank, including:
  - implementation of full fiscal risk analysis of the SOE sector;
  - quantification of the social costs incurred by the SOEs;
  - enhancement of the financial reporting and the governance code of the SOEs;
  - reviewing of each SOE’s role in the economy with a view to improving economic efficiency.
- Footnote: The financial statements of the SOEs for 2016 are currently under audit and will be available in late May. Preliminary data indicate that majority of the SOEs recorded net profit in 2016, similarly to 2015.

### Authorities’ view on PFM and SOEs
- Authorities agreed with staff’s policy advice.
- Viewpoints expressed:
  - SOEs play an important role in a small island country like Seychelles.
  - Authorities intend to re-examine the role of each SOE which may lead to some streamlining to enhance economic efficiency.
  - Public Investment Manual (PIM) has been adopted but full compliance is challenging; authorities may request TA from the Fund on PIM implementation.

### Preserving Price and External Stability — monetary policy operations
- CBS primary objective: price stability; operations anchored by reserve money targeting.
- Operational challenges:
  - No policy rate or actively functioning interbank and money market, leading to high volatility in short-term interest rates and uncertainty in bidding for open market instruments.
  - CBS committed to a floating exchange rate policy; foreign exchange interventions mostly confined to limiting excessive volatility after reserves built up by 2014.
- Structural excess liquidity and sterilization:
  - Large foreign exchange purchases by the CBS during 2009‒10 rebuilt reserves but resulted in structural excess liquidity.
  - Starting in 2014, a sterilization program by issuing Treasury bonds mopped up excess liquidity, resulting in a rapid increase in government debt issued for monetary policy purposes.
  - Government debt for monetary policy purposes stands at around 16 percent of GDP as of end-2016.
- Monetary policy transmission: Remaining excess liquidity, absence of policy rate, and underdeveloped money markets likely explain weak monetary policy transmission mechanisms.

### Inflation, risks, and policy stance
- CPI inflation: around or below 3 percent for most of the time since end-2013.
- GIR import coverage improved to 4 months now from less than 1 month at end-2008.
- Upside inflation risks noted:
  - International fuel prices recovering since late 2016.
  - Implementation of 2016 SONA initiatives could reemerge pressures on inflation and credit growth.
  - Recently implemented increases in several excises in the 2017 budget and scheduled tariff adjustments could push up inflation later this year.
- Policy recommendation:
  - CBS should stand ready to tighten monetary policy to combat demand-pull inflationary pressures or second-round effects.
- Recent decision:
  - CBS board decision to keep monetary stance unchanged at its end-March meeting judged appropriate.

### Modernizing the monetary policy framework
- TA received from the Fund on monetary policy instruments, inflation and liquidity forecasting, and policy communication.
- CBS intends to reintroduce an interest rate corridor around an appropriate policy rate starting in the third quarter of 2017.
  - Expected benefits: provide guidance for other short-term interest rates, reduce volatility, enhance development of interbank and money markets, and strengthen monetary policy transmission.
  - Greater use of central bank securities and a stronger framework would help unwind monetary debt in the medium term and facilitate reduction of government domestic debt without exacerbating banking system liquidity issues.

### External sector assessment
- Staff view: Seychelles’ external position is broadly consistent with fundamentals and desirable policies.
- GIR currently stands at around 170 percent of the relevant ARA metric.
- Given vulnerability to external shocks and natural disasters, staff views current reserve coverage as adequate and advises CBS to:
  - maintain the flexible exchange rate policy;
  - purchase foreign exchange as necessary to preserve reserve coverage ratios at around the current level.
- Box 4 findings:
  - Immediate risks to external stability appear contained.
  - GIRs cover four months of prospective imports and exceed external public and private short-term debt.
  - EBA-lite approach results inconclusive: Current account model implies a sizable overvaluation; REER index model indicates a large undervaluation.
    - Box Table. Estimated REER Misalignment:
      - Current account model: 22.1
      - Real Effective exchange rate index model: -17.0
    - Discrepancy attributed to limitations of EBA-lite for small, tourism-dependent countries (tourism-related sectors account for about 30 percent of GDP).
  - Tourism sector: Seychelles’ share in tourist arrivals among small island tourism-dependent economies has been increasing strongly since early 2000s; share in tourism receipts stagnant in recent years, partly due to depreciation of the euro against the US dollar.
  - REER has been appreciating since end-2014 following a sharp depreciation; continued REER appreciation could pose competitiveness risks.
- Authorities’ view:
  - Authorities concurred with staff’s assessment and policy recommendations.
  - They view market-determined exchange rates as a key tool.
  - Recognized need to enhance liquidity management and communications for transition to new operational framework; appreciated Fund’s TA.

### Supporting financial stability
- Institutional developments:
  - Financial Stability Committee (FSC) operational since March 2016; meets quarterly; members from CBS, Ministry of Finance, Financial Services Authorities (FSA), Financial Intelligence Unit (FIU).
- Offshore sector and CBRs:
  - Significant steps to improve governance in offshore sector: new International Business Corporations (IBC) Act took effect in late 2016; FIU drafted a National Risks Assessment to underpin AML/CFT strategy and ESAAMLG mutual evaluation starting in June.
  - Seychelles’ banks face pressures in maintaining correspondent banking relationships (CBRs); loss of CBRs limited so far but rise in unsecured lending is a concern.
- Macroprudential framework and legal reforms:
  - Forthcoming revisions to the CBS Act would allow enforcement of micro and macro-prudential ratios including loan to value, debt to income, and debt service to income ratios.
  - Transition to Basel II would provide additional macro-prudential tools.
  - MCM-LEG TA in late 2016 recommended comprehensive reform of legal framework for crisis management, bank resolution, and safety nets.
- Transparency and action plan:
  - Authorities working on an action plan to reduce financial sector risks and further loss of CBRs, focusing on:
    - aligning banks’ AML/CFT risk management with international standards;
    - improving entity transparency in the offshore sector;
    - enhancing cooperation with relevant jurisdictions;
    - measures to enhance regional information sharing and strengthen respondent banks’ capacity to comply with requests from global banks.
  - Staff encouraged regional/international advocacy to make the case for maintaining CBRs.
- Authorities’ view:
  - Authorities concerned about potential further loss of CBRs and the severe economic risks it could pose.
  - Noted substantial progress on AML/CFT but argued Seychelles cannot prevent further CBR loss alone; requested Fund/World Bank advocacy and organized a stakeholders conference for small states.

### Enhancing inclusive growth and diversification
- Economic structure:
  - Tourism-related sectors directly contribute about one-third of GDP.
  - Tourism receipts and canned tuna exports represent over half of exports of goods and services.
  - A ceiling on yellow fin tuna catches regionally imposed could stymie expansion of fisheries’ contribution.
- Diversification strategy:
  - Authorities’ plan centers on deepening and diversifying tourism and upgrading the fishery industry under the “Blue Economy” initiatives.
  - Plans toaugment domestic component of tourism (promoting guesthouses and tourism services by local SMEs) to distribute growth benefits more widely.
  - Scope to improve efficiency of education spending to enhance productivity and reduce labor market mismatch.
  - Major infrastructure development around the port in Victoria and marine resource management project financed by the Blue Bond to upgrade industrial fishing sustainably.
- Business climate and constraints:
  - Progress lagging: Seychelles fell from 80th to 93rd in World Bank doing business rankings over past three years.
  - Electricity ranks unfavorably due to high cost partly from cross-subsidies.
  - Government previously intended to reduce cross-subsidies over 8‒10 years by annual electricity tariff rebalancing adjustments; such adjustments did not take place during 2015‒16.
  - Staff urged resumption of rebalancing adjustments to reduce cross-subsidies over the medium term.
  - CBS strategy to improve financial literacy to be implemented by the end of 2017.
  - Public-private partnerships (PPP): draft PPP law approved by cabinet; PPP implementation manual drafted; Development Committee identified a pipeline of bankable PPP projects (port development, transport, housing).
  - Recommendation: strengthen capacity to manage fiscal risks arising from PPPs as they move toward implementation.
- Authorities’ view:
  - Authorities agreed with staff on need to maintain momentum in structural reforms to enhance inclusive growth.

### Other issues and macro data
- Capacity to repay the Fund:
  - Seychelles’ capacity to repay the Fund remains strong with ample international reserve buffers and prudent policies; obligations to the Fund remain small relative to exports and reserves.
  - Downside risks: perennial vulnerability to external shocks and potential fiscal slippage beyond 2018; without additional measures in the 2018 budget, fiscal and external sustainability would be at risk.
  - Political context: President’s party weakened by loss of legislature control, but both opposition and ruling party representatives indicated support for program goals and willingness to support fiscal discipline.
- Macroeconomic data quality:
  - Data broadly adequate despite weaknesses.
  - Challenges in production of quarterly national accounts and concerns about quality of CPI statistics.
  - Staff encouraged closer collaboration among NBS, SRC, and CBS and adequate staffing for surveys and raw data collection.
- CBS governance:
  - 2014 safeguards assessment update confirmed CBS has strengthened governance and control framework.
  - CBS subject to independent oversight and accountability by the Audit and Risk committee.
  - CBS working on revising the CBS Act and addressing capacity constraints in internal audit with external consultant assistance.

### Staff appraisal — summary findings
- Authorities have achieved economic stability and external sustainability under successive Fund arrangements.
- Several years of fiscal discipline led to a significant reduction in public debt.
- Anchored by prudent policies, Seychelles has enjoyed strong economic growth and built up reserve buffers to an adequate level.
- Seychelles was recently designated a high-income country by the World Bank, the first in the Sub-Saharan Africa region.
- External position broadly consistent with fundamentals and desirable policies.
- Accumulation and maintenance of adequate reserves provide an effective cushion against shocks and boost resilience.

*Source: cr17160 - 24.  The authorities have made significant progress in improving PFM to contain fiscal risks*

### 44.  Nevertheless, as a very small open economy dependent on tourism, Seychelles

### cr17160 - 44.  Nevertheless, as a very small open economy dependent on tourism, Seychelles

### External vulnerabilities and outlook for tourism
- Seychelles is a very small open economy dependent on tourism and "remains vulnerable to external developments."
- Tourist arrivals outlook is "highly susceptible to external developments, such as weak growth in advanced and emerging market economies, weakness in the Euro, and geopolitical tensions disrupting the Middle East, Africa, and Europe."
- The country is vulnerable to natural disasters and climate change over the long term.
- Authorities are actively:
  - developing multiple markets to diversify the tourism product;
  - articulating a strategy to enhance resilience to climate change;
  - focused on building macroeconomic buffers — "in terms of robust debt dynamics and reserves" — to manage the impact of shocks.
- These vulnerabilities underscore the central importance of:
  - continued macroeconomic discipline;
  - sustained debt reduction;
  - a resilient financial sector;
  - preservation of adequate reserve coverage.

### Macroeconomic stance, debt dynamics, and risks
- The authorities should "buttress the medium-term debt reduction target" to safeguard stability and external viability achieved since the 2008 crisis.
- Without additional measures in the 2018 budget:
  - "the primary surplus will be halved to 1½ percent of GDP in 2018 and thereafter."
  - The authorities’ target of bringing public debt-to-GDP ratio below "50 percent" would be "delayed by three years."
  - "The exchange rate and GIR would be under significant pressure."
- Staff recommendation: authorities should "articulate permanent measures to be included in a 2018 budget to bring the primary surplus to 3 percent of GDP, with a view to shoring up the medium-term debt reduction goal."
- The list of possible revenue enhancing and expenditure streamlining measures discussed with staff should be re-examined in the context of the 2018 budget.

### Fiscal policy trade-offs and public sector reforms
- Authorities prefer to target "a primary surplus slightly lower than 3 percent of GDP from 2018 onwards, to facilitate infrastructure investment."
- They should "explore ways to create further space to accommodate infrastructure building while preserving their debt reduction target."
- Staff welcomes progress made to improve Public Financial Management (PFM) and strengthen the State-Owned Enterprise (SOE) sector.
- Authorities are encouraged to "keep momentum on this front to minimize fiscal risks and enhance public sector efficiency."

*Source: cr17160 - 44.  Nevertheless, as a very small open economy dependent on tourism, Seychelles (PDF).*

### 46.  The authorities would need to create further fiscal space over the medium term

### 46.  The authorities would need to create further fiscal space over the medium term

### Fiscal space and climate resilience investments
- The authorities’ priority climate change mitigation and adaptation investments are estimated to cost over 40 percent of the 2016 GDP over the next 15‒20 years.
- For the most part, financing of those investments is yet to be identified.
- Policy implications and recommended actions:
  - Enhance revenue further, beyond securing the primary surplus target of 3 percent of GDP from 2018 onwards.
  - Shift spending composition from current to capital expenditure over the medium term to accommodate climate-related investments.

### Monetary policy stance and international reserves
- The CBS should maintain its monetary policy stance and preserve international reserve coverage at around the current level.
- Rationale:
  - Inflation and credit growth remain constrained but could reemerge due to the recovering of international fuel prices and implementation of the 2016 SONA measures.
- Recommended actions:
  - Stand ready to tighten policy stance if needed.
  - Maintain the flexible exchange rate policy with minimal intervention to preserve reserve coverage ratios at around the current level.
  - Continue progress toward a stronger monetary policy framework in which interest rate plays a prominent role.

### Financial sector risks and CBRs (Correspondent Banking Relationships)
- Seychelles banking sector lost some CBRs in recent years, reflecting a global trend toward withdrawal of CBRs and intense global scrutiny on AML/CFT issues.
- Recommended actions:
  - Finalize plans to reduce financial sector risks and avoid further loss of CBRs.
  - Effectively implement the AML/CFT framework in line with international standards.
  - Enhance entity transparency in the offshore sector.
  - Enhance efforts at the regional/international level to make the case for maintaining CBRs by global banks.

### Structural reforms and diversification
- Sustained and inclusive growth requires further structural reforms to diversify the economy.
- Authorities’ planned initiatives:
  - Deepen and diversify tourism and upgrade the fishery industry under the “Blue Economy” initiatives to promote broader sharing of growth.
- Recommended reforms and measures:
  - Improve the business environment.
  - Reduce cross-subsidization in electricity prices in a steadfast way to enable greater private-sector competitiveness and foster growth.
  - Use PPPs efficiently to upgrade infrastructure, improve the business climate, and create fiscal space for priority climate investments.
  - Accelerate investments in education to raise productivity and address skills mismatch in the labor market, promoting shared prosperity.

### Data and statistical capacity
- Data are broadly adequate for surveillance but the authorities need to step up efforts to improve the quality of national account and price data, where the country has some long-standing weaknesses.
- Recommended actions:
  - Ensure an adequate level of staffing for conducting the surveys and raw data collection needed to maintain quality statistics.

### Program review and Article IV timing
- In light of the authorities’ continued strong program implementation and determined policy response to safeguard macroeconomic stability, staff supports the authorities’ request for the completion of the sixth and final review under the Extended Arrangement.
- Proposal:
  - Next Article IV consultation with Seychelles to take place within 24 months in accordance with the Decision on Article IV Consultation Cycles.

*Source: IMF staff report excerpt (Content unit: "46.  The authorities would need to create further fiscal space over the medium term").*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Program background and request
- IMF Executive Board approved a 3-year arrangement under the Extended Fund Facility (EFF) for an amount of SDR 11.445 million (50 percent of quota) on June 4, 2014.
- The fourth and fifth review under the arrangement were completed by the Executive Board on January 11, 2017.
- The authorities request completion of the sixth review and the disbursement of the last drawing under the EFF arrangement and indicate interest in a successor program.

### Macroeconomic performance and outlook
- 2016 performance:
  - Real growth rate: 4.5 percent.
  - Inflation: negative (attributed to low commodity prices and a stable exchange rate).
  - External current account: unchanged.
  - Net international reserves exceeded the end-2016 target by US$ 14 million.
  - Gross reserves: equivalent to 3.8 months of imports of goods and services.
  - Primary budget surplus: 3.4 percent of GDP (exceeded program target of 3 percent).
  - End-2016 reserve money target: exceeded by a narrow margin (owing to strong growth of foreign currency deposits).
- 2017 outlook:
  - Real GDP growth projected at about 4.1 percent.
  - Inflation expected to remain subdued.
  - Primary budget expected to achieve targeted surplus of 3 percent of GDP, aided in part by large one-off revenue related to a private sector enterprise sale.
- Program-average growth achieved:
  - Sustained rate of growth of 5.4 percent on average in 2014-16.

### Fiscal performance, revenue measures, and debt dynamics
- Fiscal outcomes:
  - Large primary budgetary surpluses in 2014-16: 4.5 percent on average in 2014-15 and 3.4 percent in 2016.
  - Revenues in 2016 increased by 3 percent of GDP (higher business taxes, VAT, excise tax revenue, and dividends receipts).
  - Current expenditure in 2016 were boosted by 5 percent of GDP due to policy decisions to raise the minimum wage and increase benefits for unemployed, disabled and the elderly.
  - Introduction of an income exemption under the personal income tax effective July 1, 2016; a progressive income tax with a generalized income exemption will enter into effect in 2018 and is not revenue neutral.
  - One-off revenue expected to allow attainment of primary surplus of 3 percent of GDP in 20017; primary surplus likely to fall in 2018.
- Public debt developments:
  - Public external debt: declined from 39.6 percent of GDP at end-2013 to 31 percent at end-2016.
  - Domestic debt excluding debt issued for monetary purposes: declined from 26 percent of GDP to 24 percent.
  - Debt issued for monetary purposes rose from 5 percent of GDP at end-2013 to 16 percent at end-2016.
  - Total public and publicly guaranteed debt remained stable at about 70 percent of GDP.
  - Initial program target to curtail public debt to 50 percent by end-2018 was pushed forward to end-2020.
- Policy emphasis:
  - Authorities acknowledge need to take offsetting measures to achieve the target of bringing the public debt-to-GDP ratio to 50 percent by end-2020.

### Structural reforms and institutional measures
- Public financial management and governance:
  - Cabinet approved a public financial management action plan and a strategy to strengthen governance of state owned enterprises in late April (2017).
  - Adopted a medium term fiscal framework.
  - Introduced performance program-based budgeting in some ministries, to be extended to all.
  - Strengthened tax administration, in particular in customs.
  - Conducted governance audits and operational assessments of the six major public enterprises with World Bank assistance; a number of recommendations will be put into practice.
- Financial sector modernization and regulation:
  - Established a new Financial Service Authority (FSA) in 2014 to supervise the nonbank financial sector, including global business corporations.
  - Adopted a new international business corporation act to align offshore sector practices with international best practices.
  - Preparing regulations on investment banking and collective investment schemes.
  - Adopted core elements of Basel II and III.
  - Developing the national payments system with studies to establish a central securities depository and a real time gross settlement system.
  - Preparing legislation on financial consumer protection.
  - Preparing to review monetary policy implementation under the current reserve money targeting framework to place more emphasis on short term interest rate.
- AML/CFT and tax transparency:
  - Launched a new assessment of AML-CFT regulations, with a national risk assessment to be completed in mid-2017 and a mutual evaluation to be carried out in the last quarter of 2017 by the regional body associated with the Financial Action Task Force (FATF).
  - In August 2015, the OECD Global Forum on transparency and the exchange of information for tax purposes found that the Seychelles is largely compliant.

### Structural benchmarks and implementation status (Q1 2017)
- Achievements:
  - Cabinet approved a public financial management action plan.
  - Cabinet approved a strategy to strengthen governance of state owned enterprises (late April 2017).
- Delays:
  - Cabinet approval of a strategy to reduce AML/CFT risk delayed to end-June 2017.
  - Development of a strategy to improve financial literacy by the CBS delayed to end-June 2017.

### Risks and policy implications
- External and environmental risks:
  - Seychelles economy exposed to considerable risks from climate change and natural disasters.
  - Fiscal space needs to be increased to provide room for appropriate mitigation actions.
- Policy stance:
  - Calls for prudent fiscal policies aimed at reducing the debt-to-GDP ratio at least to the 50 percent target for 2020.
  - Authorities intend to remain in close contact with the IMF and to use its expertise in designing appropriate macroeconomic policies.

*Appendix I. Letter of Intent*

### 9. In line with our commitment to transparency, we request that the IMF publish this letter, and the

### cr17160 - 9. In line with our commitment to transparency, we request that the IMF publish this letter, and the staff report.

### Publication request
- The authorities request that the IMF publish this letter, and the staff report. The authorities will simultaneously publish these documents in Seychelles.

### Quantitative performance criteria (key figures from Table 1)
- Net international reserves of the CBS, millions of U.S. dollars (floor) — selected program/estimate values:
  - 417, 417, 409, 423, 429, 435, 412, 423, 418, 433, 401, 415
- Net international reserves (adjusted targets) — selected values shown: 417, ..., 405, ..., 406, ..., 393, ..., 404, ..., 402, ...
- Reserve money target (ceiling on daily average during the quarter) — selected values:
  - 2,552; 2,520; 2,781; 2,708; 2,818; 2,758; 2,858; 2,815; 2,897; 2,870; 2,961; 2,990
- Primary balance of the consolidated government (cumulative floor) — selected values:
  - 539; 805; 720; 783; 85; 224; 288; 434; 470; 733; 571; 642
- Contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling from start of 2015) — selected values:
  - 63; 56; 90; 71; 110; 90; 110; 90; 110; 90; 130; 90
- Contracting or guaranteeing of new short-term external debt by the public sector (Millions of U.S. dollars; cumulative ceiling):
  - 0.0 repeated across reporting dates
- Accumulation of external payments arrears by the public sector (ceiling):
  - 0.0 repeated across reporting dates
- Accumulation of domestic payment arrears by the government (ceiling):
  - 0.0 repeated across reporting dates
- Memorandum items — selected figures:
  - Net external non-project financing (millions of U.S. dollars; cumulative): -8.3; -8.3; -22.4; -18.4; 12.3; -11.4; -11.7; -31.0; -14.4; -28.6; -51.5; -51.3
  - External budget loans: 7.0; 7.0; 7.0; 7.0; 15.0; 10.0; 15.0; 15.0; 15.0; 20.0; 20.0; 20.0
  - Cash payments on foreign debt service: 18.3; 18.3; 34.3; 30.3; 2.7; 21.4; 26.7; 46.0; 29.4; 48.6; 71.4; 71.3
  - External budget grants: 3.1; 3.1; 4.9; 4.9; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
- Reserve money (daily average during the quarter) — selected values:
  - 2,520; 2,520; 2,700; 2,708; 2,736; 2,758; 2,775; 2,815; 2,813; 2,870; 2,875; 2,990
- Program accounting exchange rates (end-of-quarter) — selected values:
  - SR/US$ (end-of-quarter): 13.74; 13.74; 13.01; 13.01; 13.01; 13.28; 13.01; 13.28; 13.01; 13.34; 13.01; 13.34
  - US$/Euro (end-of-quarter): 1.12 repeated except 1.09 appears for selected dates
  - US$/UK pound (end-of-quarter): 1.54; 1.54; 1.51; 1.51; 1.51; 1.39; 1.51; 1.39; 1.51; 1.30; 1.51; 1.30
  - US$/AUD (end-of-quarter): 0.78; 0.78; 0.70; 0.70; 0.70; 0.72; 0.70; 0.72; 0.70; 0.77; 0.70; 0.77
  - US$/CAD (end-of-quarter): 0.80; 0.80; 0.75; 0.75; 0.75; 0.74; 0.75; 0.74; 0.75; 0.76; 0.75; 0.76
  - US$/SDR (end-of-quarter): 1.41; 1.41; 1.40; 1.40; 1.40; 1.38; 1.40; 1.38; 1.40; 1.40; 1.40; 1.40

### Structural benchmarks (Table 2) — actions, timing, and status highlights
- Fiscal and Public Financial Management Policy:
  - Prior Action for 4th and 5th reviews: Submission of 2017 budget consistent with program goals, targeting 3.0 percent primary surplus to National Assembly — December 2016 — Met.
  - Cabinet approval of Public Financial Management Action Plan — End-March 2017 — Not met. Implemented in early April 2017.
  - Cabinet approval of new Public Private Partnership Regulation — End-December, 2016 — Met.
  - Update and publish on-line a government asset register, including state land — End December 2015 — Not met. The register was created but not extended to include government land.
- State-Owned Enterprises (SOEs):
  - Conduct governance reviews and operational/business assessments of initial three SOEs — End June, 2016 — Met.
  - Conduct governance reviews and operational/business assessments of a further three SOEs — End December, 2016 — Met.
  - Approval by Cabinet of SOE strategy building on results of governance reviews — End March 2017 — Not met. Implemented in early April 2017.
- Real Sector and Private Sector Development:
  - Approval by cabinet of a revised Micro, Small and Medium Enterprise Policy — End-March, 2016 — Met.
- Financial Sector Development:
  - Approval by the Board of CBS of a framework for macro prudential surveillance — End March, 2016 — Met.
  - Development of a CBS strategy to improve financial literacy — End March, 2017 — Not met. The authorities plan to complete it by end-June 2017.
- International Financial Services Sector:
  - Submission to National Assembly of new legislation on International Business Companies consistent with international standards — End December, 2015 — Not met. Gazetted in January 2016, law approved in July 2016.
  - Submission to National Assembly of new legislation on International Corporate Service Providers and Trusts consistent with international standards — End December, 2015 — Not met. Gazetted in January 2016.
  - Cabinet approval of a strategy to tackle AML/CFT risks, drawing on the National Risk Assessment — End-March, 2017 — Not met. The authorities plan to complete it by end-June 2017.

### Technical Memorandum of Understanding (TMU) — definitions and monitoring
- Net International Reserves of the CBS (NIR) — definition:
  - Reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF).
  - Reserve assets include holdings of SDRs, holdings of foreign exchange, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad liquidable without penalty, and any holdings of investment-grade securities; excludes project balances and blocked or escrow accounts, and bank reserves in foreign currency maintained for reserve requirements.
  - Reserve liabilities comprise liabilities to nonresidents contracted by the CBS, and any net off-balance-sheet positions (futures, forwards, swaps, options) including those to the IMF.
- Calculation and reporting:
  - Reserves assets and liabilities at each test date converted into U.S. dollars using end of period exchange rates assumed in the program.
  - Semiannually at each test date, NIR data submitted by the CBS to the IMF will be audited by the CBS’ internal audit division in accordance with International Standards on Auditing; reports due no later than two months after each test date.
- Adjusters to the NIR floor:
  - The NIR floor will be adjusted upward (downward) by the amount by which external non-project loans and non-project cash grants exceed (fall short of) program assumptions (LOI Table 1).
  - Floors also adjusted upward (downward) by the amount that external debt service payments fall short (exceed) program assumptions.
- Reserve Money and Reserve Money Band:
  - Reserve money = currency issued + deposits held by other depository corporations at the central bank (including foreign currency denominated).
  - Targets are projected daily averages of the quarter preceding the test date, surrounded by a symmetrical band of three percent in both directions; the upper bound serves as the ceiling.
  - Daily reserve money data submitted weekly to the IMF (within one week); cumulative quarterly average monitored and reported weekly; semiannual audits by CBS internal audit division; audit reports due no later than two months after each test date.
- Program Primary Balance of the Consolidated Government (Cumulative Floor):
  - Defined as total consolidated government and social security fund revenues (excluding privatization and long-term lease income receipts) less all noninterest (primary) expenditures and net lending of the government and social security fund.
  - For program purposes the transfer of assets from the Social Security Fund to the Seychelles Pension Fund planned for 2015 will be excluded from expenditures.
- Public External Debt (Ceiling) — scope and definitions:
  - Ceiling applies to contracting or guaranteeing new external liabilities by the public sector (central government, CBS, public agencies and parastatals for noncommercial operations).
  - Excludes use of Fund resources, external debt restructuring operations, normal import-related credits, purchases of treasury securities by nonresidents, and parastatal borrowing for normal commercial operations.
  - Zero sub-ceiling on short-term external debt (original maturity up to and including one year).
  - Debt defined per Point 8 of the “Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements,” Executive Board Decision No. 6230-(79/140), as amended — includes loans, suppliers credits, leases, and arrears, penalties, and judicially awarded damages that constitute debt.
- External and Domestic Arrears:
  - Nonaccumulation of external payments arrears by the public sector is a continuous performance criterion; external arrears defined as external debt service due and not paid within contractually agreed period, subject to applicable grace period, including contractual and late interest; arrears with agreed clearance or rescheduling frameworks excluded.
  - Nonaccumulation of domestic budget expenditure arrears is a performance criterion measured on a net basis from the beginning of a calendar year; budget expenditure arrears defined in three parts including invoices unpaid beyond contractual period or 30 days, unpaid wages/pensions/transfers pending longer than 30 days, and domestic debt service payments not made within contractual period.

### Data and reporting requirements (key schedules)
- The CBS will report:
  - Weekly (within one week from the end of the period): daily reserve money data; foreign exchange reserves position; summary table on foreign exchange market transactions; results of liquidity deposit auctions, primary Treasury bill auctions, and secondary auctions.
  - Monthly (within four weeks from the end of the month): monetary survey in standardized report form; foreign exchange cash flow, actual and updated; financial soundness indicators; stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report.
- The Ministry of Finance will report:
  - Monthly (within two weeks from the end of the month): consolidated government operations on a commitment basis and cash basis in the IMF-supported program format and in GFSM2001 format; detailed revenues and expenditures of the central government and social security fund; import and export data from the customs department; public debt report reconciled with cash operations; consolidated creditors schedule on domestic expenditure arrears.
  - Quarterly (within one month from the end of the quarter): accounts of the public nonbank financial institutions.
- Consultation commitment:
  - The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation, and will provide any additional relevant information as requested by Fund staff.

### Relations with the Fund and financial position (selected items, as of March 31, 2017)
- Membership Status:
  - Joined 6/30/1977. Article VIII member since 01/03/1978.
- Quota and holdings (General Resources Account, SDR Million):
  - Quota 22.90 (100.0 percent)
  - Fund holdings of currency 50.19 (219.18 percent)
  - Reserve Position in Fund 3.53 (15.41 percent)
- SDR Department (SDR Million):
  - Net cumulative allocation 8.28 (100.0 percent)
  - Holdings 5.05 (60.99 percent)
- Outstanding Purchases and Loans:
  - Extended Arrangements 30.82 (134.59 percent)
- Financial Arrangements (SDR Million; amount approved / amount drawn):
  - EFF Jun 04, 2014 Jun 03, 2017: 11.45 approved, 9.81 drawn
  - EFF Dec 23, 2009 Dec. 23, 2013: 26.40 approved, 26.40 drawn
  - Stand-By Nov 14, 2008 Dec. 22, 2009: 17.60 approved, 11.00 drawn
- Projected Obligations to the Fund (SDR Million):
  - Forthcoming principal and charges/interest by year:
    - 2017: Principal 2.95; Charges/interest 0.32; Total 3.27
    - 2018: Principal 4.54; Charges/interest 0.39; Total 4.93
    - 2019: Principal 5.08; Charges/interest 0.32; Total 5.41
    - 2020: Principal 5.16; Charges/interest 0.25; Total 5.41
    - 2021: Principal 3.93; Charges/interest 0.19; Total 4.12

### Safeguards, exchange rate, and technical assistance
- Safeguards Assessment:
  - An update assessment of the Central Bank of Seychelles (CBS) for the successor Extended Fund Facility was completed in September 2014; confirmed progress in governance and control framework; key remaining vulnerability in internal audit which lacks capacity; CBS working with an external consultant to develop the function; certain provisions of the CBS legal framework need strengthening; IMF technical assistance will be needed to draft amendments.
- Exchange Rate Arrangement:
  - Exchange market liberalized in November 2008; de jure and de facto regime classified as floating.
  - On March 31st, 2017 US$1 = SR 13.5817 (mid-rate).
- Technical Assistance (November 2016–April 2017) — mission subjects and timing highlights:
  - MCM, FAD, STA engagements on self-assessment of ISOCO principle; fraud prevention and trade facilitation; strengthen non-bank financial supervision; carbon taxation; inflation forecasting; national accounts; diagnostic mission; tools and procedures for communication and inflation; balance of payment statistics; residential property price index; and other topics between November 2016 and April 2017.
  - Specific assistance and mission dates include: November-December 2016; February 2017; February-March 2017; March 2017; March 2017; March 2017; March 2017; April 2017.

### Joint World Bank–IMF Work Program and relations with AfDB (selected items)
- Joint World Bank–IMF Work Program (as of April, 2017) — selected items and timing:
  - SWIOFish3 project and Development Policy Loan with Catastrophe Deferred Drawdown Option (DPL CAT-DDO) — ongoing with mission timing June 2017 and June 2018 for some products.
  - Analytical work and TA on social sectors, financial sector development, efficiency and value for money in health, program performance-based budgeting and performance M&E — ongoing with various expected delivery dates through 2019.
- Relations with the African Development Bank:
  - Bank operations in Seychelles since 1978; cumulative approvals as at April 2017 UA 135.4 million.
  - Major projects referenced: SEAS cable ICT PPP project (USD 39 million total, Bank financed US$12 million, completed 2012); partial credit guarantee of USD 10 million in 2009 to support commercial debt restructuring; Mahe Sustainable Water Augmentation Project (MSWAP) loan US$20.6 million approved 1 April 2015.
  - Current Country Strategy Paper (CSP 2016-20) approved March 2016, two pillars: Pillar 1 – Enhancing energy infrastructure; Pillar 2 – Stimulating private sector activity and economic diversification.

*Source: Seychelles authorities and IMF staff estimates and projections, as presented in the staff report and accompanying Technical Memorandum of Understanding.*

### 28.7  million  (USD  39  million)  and  includes an  energy  project  and  a  3-year  Policy  Based  Operation

### cr17160 - 28.7  million  (USD  39  million)  and  includes an  energy  project  and  a  3-year  Policy  Based  Operation

### Program financing and CSP
- Proposed financing amount: 28.7  million  (USD  39  million).
- Includes an energy project and a 3-year Policy Based Operation under a programmatic approach.
- Financing source: ADB window.
- Complementary resources: Trust Fund resources, climate funds, and resources mobilized through leveraging (parallel and co-financing).
- CSP 2016-20 mid-term review timing: will be prepared in 2018.
  - Purpose of mid-term review: prepare, in close consultation with the Government, the lending and non-lending programs for the remaining CSP period; assess implementation progress; and, if necessary, adjust the strategy’s focus for the remaining CSP period.

### Statistical issues — Assessment of Data Adequacy for Surveillance (As of May 18, 2017)
- General:
  - Data provision has some shortcomings, but it is broadly adequate for surveillance.
  - Participation: General Data Dissemination System (GDDS) since December 2006.
  - Participation in government finance statistics modules of the Anglophone Africa project funded by the U.K. Department for International Development (DFID).
  - Seychelles subscribed to the SDDS on May 1, 2015, after meeting all Special Data Dissemination Standard (SDDS) requirements and review of metadata by the IMF Statistics Department.
  - Continued need: sustained technical assistance and additional resources over the medium term to improve quality of economic statistics.

- National accounts:
  - Base year for constant price measures: 2006.
  - Quarterly national accounts data developed for 2006-14.
  - Ongoing technical assistance to:
    - rebase national accounts to 2013 (reflecting results of the new Household Budget Survey),
    - compile quarterly national accounts using the expenditure approach,
    - produce seasonally-adjusted quarterly GDP figures.
  - Tourism statistics: compiled weekly and monthly.
  - Production indicators: compiled quarterly.
  - Data on average earnings and employment by sector: collected quarterly by the NBS.
  - No data on unit labor costs.

- Price statistics:
  - New consumer price index (CPI) introduced in January 2015 based on expenditure weights from the 2013 household budget survey.
  - Quality concern: some CPI sub-components are not collected every month and are estimated instead.
  - Further technical assistance being provided to improve data quality and collection.

- Government finance statistics (GFS):
  - Reports submitted to STA: cash flow statements and financial balance sheet data based on GFSM 2001.
  - Main 2011 GFS mission recommendations:
    - establish a GFS task force among Treasury, Financial Planning and Control Division (FPC), Debt Management staff, and other relevant agencies;
    - establish a strategic plan to address weaknesses including: (1) augmenting cash recording with accrual-based measures; (2) improving data on other economic flows for financial assets and liabilities; (3) addressing lack of stock data on government holdings of nonfinancial assets (starting with fixed assets and non-produced assets (lands)).
  - Progress: substantial progress made, but further work needed to support a full move to GFSM 2001.

- Monetary and financial statistics:
  - Monetary and financial sector data reported regularly to STA for publication in the IFS.
  - An integrated monetary database developed and fully operational using standardized report forms (SRF) for reporting monetary data to the Fund.
  - SRF-based monetary data published in the IFS Supplement since March 2007 issue.

- Financial sector surveillance:
  - Authorities compile financial soundness indicators and report them to the Fund monthly.
  - Ongoing work to strengthen the macroprudential framework, including revisions to the Central Bank Act and migration towards Basel II.

- External sector statistics:
  - Methodology adopted: sixth edition of the Balance of Payments and International Investment Position Manual.
  - International investment position compilation began in 2015.
  - Annual balance of payments data: reported nine months after the reference period, with provisional estimates provided earlier to missions.
  - Quarterly BOP data: compiled since 2009, publicly available and reported to STA since 2015.
  - Merchandise trade data: reported quarterly.
  - Considerable progress: collecting and updating data on public sector external debt, debt-service and payments of external arrears.
  - Remaining priorities: improve coverage of external sector statistics and compile private sector debt data.

### Data Standards and Quality
- No ROSC has been carried out.

### Table of Common Indicators Required for Surveillance — Selected data frequencies and dates
- Exchange Rates: Date of latest observation 21/04/17; Date received 25/04/17; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 21/04/17; 25/04/17; D; W; M.
- Reserve/Base Money: 21/04/17; 25/04/17; D; W; M.
- Broad Money: 31/03/17; 28/04/17; M; M; M.
- Central Bank Balance Sheet: 21/04/17; 25/04/17; D; W; M.
- Consolidated Balance Sheet of the Banking System: 31/03/17; 28/04/17; M; M; M.
- Interest Rates: 28/02/17; 10/04/17; M; M; M.
- Consumer Price Index: 31/03/17; 24/04/17; M; M; M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: 28/02/17; 24/04/17; M; M; M.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: 28/02/17; 24/04/17; M; M; M.
- Stocks of Central Government and Central Government-Guaranteed Debt: 31/03/17; 25/04/17; M; M; M.
- External Current Account Balance: 31/12/16; 15/03/17; Q; Q; Q.
- Exports and Imports of Goods and Services: 31/12/16; 15/03/17; Q; Q; Q.
- GDP/GNP: 31/12/15; 31/01/17; Q; Q; Q.
- Gross External Debt: 31/12/16; 01/02/17; Q; Q; Q.
- International Investment Position: 30/06/16; 15/09/16; Q; Q; Q.

### Statement by Mr. Choi, Executive Director for Seychelles and Mr. Cafrine, Advisor to the Executive Director (June 2, 2017) — Key points

- Economic transformation and program engagement:
  - The Seychelles economy has undergone a remarkable transformation since 2008.
  - A comprehensive reform program has had strong ownership and political commitment, supported by successive EFF arrangements.
  - Authorities’ target: reduce debt to below 50 percent of GDP by 2020.
  - Authorities notified IMF management of their desire to remain actively engaged with the Fund through a precautionary arrangement.

- Economic outlook:
  - Growth performance: economy grew by an average of 4.7 percent over 2014-2016.
    - Growth drivers: low inflation, strong tourism performance, construction, the water and electricity sectors, telecommunications and financial services.
  - Risks: further weakening of the euro against the US dollar; weaker growth in major tourism markets; higher-than-expected oil price increases; exposure to natural disasters and climate change risks.
  - Upside: new hotels opening in the next two years and major airlines intending to add new flights, which would address peak-season accommodation pressures.

- Fiscal and structural policies:
  - FY2017 Budget target: primary surplus of 3 percent, in line with the EFF framework.
  - FY2018: a similar primary surplus is expected, but declining to between 2 and 2.5 percent thereafter.
  - Rationale: smaller surpluses in out-years create room for growth-friendly capital investments.
  - Revenue and SOE measures:
    - Authorities see potential for further improvement in revenue administration and will consider IMF tax measure recommendations.
    - Past two years: strong revenue collections from major taxes and dividends from SOEs.
    - Focus on structural reforms to raise public sector efficiency and minimize fiscal risks from SOEs.
    - Emphasis on management and governance audits for SOEs to enhance transparency and efficiency.
  - Public Financial Management (PFM):
    - A new PFM action plan was recently approved by Cabinet to implement PEFA recommendations, including strengthening capital project selection, costing and monitoring; quantification of social costs incurred by SOEs; and enhancement of financial reporting and the governance code.
  - Diversification and private sector:
    - Authorities promoting diversification in tourism and fisheries with concessionary financing through the Development Bank and Commercial Banks to attract local SMEs.
    - Continued priorities: improvement of business environment, streamlining of licenses, procurement regulations, tax and customs improvements.

- Monetary policy and financial sector:
  - Central Bank stance: continued tight monetary policy over 2016 as a safeguard against inflationary and exchange rate pressures.
  - Exchange rate regime: floating; market interventions limited to addressing excessive volatility.
  - Planning: move towards a more forward-looking monetary policy framework, with a policy rate around which an interest rate corridor will be established.
  - Regulatory strengthening: bringing financial regulation in line with international standards; core elements of Basel II and III standards being implemented in banking and payment areas.
  - Correspondent banking pressures: persist, with the offshore sector portrayed as a major source of risks.
  - Actions: significant steps to improve transparency and governance; a National Risk Assessment being conducted by the World Bank to form part of a comprehensive strategy to address AML/CFT issues and risks from the offshore sector in Seychelles.

- Climate change:
  - Climate change risks are a major concern; efforts continue to mainstream those risks into the macro-fiscal framework and development strategies.
  - Seychelles hosted a pilot Climate Change Policy Assessment (CCPA) for small states, conducted jointly by the IMF and the World Bank.
  - Authorities indicated a total investment over the next two decades of over US$600 million (40 percent of GDP in 2016) for mitigation and adaptation.
  - Authorities recognize the need to build strong fiscal buffers to establish greater resilience.

- Conclusion:
  - Authorities appreciate Fund support throughout the program period that started almost a decade ago.
  - The Extended Fund Facility (EFF) arrangement expires on June 3, 2017.
  - Authorities have formally notified the Fund’s management of their intention to request a Stand-By Arrangement, on a precautionary basis, to continue engagement and support macroeconomic stability and medium-term growth.

*IMF staff report content as provided in the source PDF.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17160.pdf_