## cr17162

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---

### EXECUTIVE SUMMARY — Overview and General Preparedness
- Seychelles has placed climate change at the center of its sustainable development strategy, with an NDC outlining a balanced mitigation and adaptation strategy accompanied by costed investment plans.
- This assessment reviews Seychelles’ climate plans from a macroeconomic perspective and suggests macro-relevant reforms to strengthen implementation and outcomes.
- Findings:
  - High public awareness and existing sustainable development planning give Seychelles an advantage in preparedness.
  - Disaster preparedness is relatively strong, but significant unfinished work remains (warning systems, resilience-building, contingency financing).
  - Integration of climate change planning with the forthcoming National Development Plan is a next step, including identifying costed priority projects for the Plan and budget documents.
- Priority actions:
  - Maintain the NDC up-to-date as a high-profile summary strategy.
  - Finalize the National Economic Development Plan and sectoral plans with focus on costing and resource mobilization.
  - Reduce vulnerability by strengthening land use planning and sector development; reviewing and enforcing building codes; developing Disaster Risk Financing and Insurance Strategy; developing sector- and area-specific contingency plans; strengthening hydro-meteorological network; enhancing early warning systems and emergency response; implementing coastal protection; increasing urban resilience of Victoria; capacity-building and public awareness; and enhancing technological capacity for climate research and monitoring.

### MITIGATION — Findings, Costs, and Policy Recommendations
- Findings:
  - Seychelles plans to meet emission reduction targets mainly by switching to renewable energy, improving energy efficiency, and introducing electric cars—yielding energy security and lower import bills but with technological and implementation uncertainty.
  - Declining fuel tax revenue could arise from successful emission containment.
- NDC emissions pledges:
  - Reduce greenhouse gases (GHGs) by 122.5 kilotons (kt) of carbon dioxide equivalent (CO2e) in 2025, or 21.4 percent below ‘business as usual’ (BAU) levels.
  - Reduce GHGs by 188 kt CO2e in 2030, or 29.0 percent below BAU levels in 2030.
  - Long-term goal: achieve zero emissions by 2050.
- Main mitigation strategy and costing:
  - Shift to solar energy sufficient to supply most public electricity.
  - Switch 30 percent of private vehicles to electricity.
  - Capture landfill methane.
  - Costing of priority mitigation options — Total: US$309 million
    - Land transport: 29.8 (US$mn)
      - 15.8 MW of solar PV for meeting the energy demand of electric vehicles
      - 30% of private in-use vehicles are electric by 2030 66.7
    - Public electricity: 191.7 (US$mn)
      - 90 MW of solar PV (capital expenditure and operation and maintenance cost over 20 year lifetime)
    - Waste management: 20.8 (US$mn)
      - Retrofitting landfill (Providence 1) methane capture and flaring equipment
  - Costing and technical assumptions:
    - Assumed capital costs for solar PV are $1.75 million per MW and operations/maintenance costs are $19,000 per MW per year.
    - Electric cars are assumed to cost $10,000 more than their traditional fuel equivalent (and a projected 6,667 of them are needed by 2030).
- Carbon-pricing findings and current fuel-tax data (2015):
  - Carbon-emitting sources (2015): Power generation 50 percent; Diesel 35 percent; Motor gasoline 13 percent.
  - Fuel tax table (selected rows; revenue defined prior to rebates):
    - Gasoline: Consumption, liters 25.2; Gross revenue, Rs million 201.3; Effective excise, Rs/liter 8.0
    - Diesel: Consumption, liters 53.9; Gross revenue, Rs million 308.5; Effective excise, Rs/liter 5.7
    - Power (fuel oil for power generation): Consumption, liters 9.6; Gross revenue, Rs million 8.6; Effective excise, Rs/liter 0.5
    - Total/average: Consumption, liters 137.6; Gross revenue, Rs million 573.4; Effective excise, Rs/liter 4.2
  - Additional distortions:
    - LPG lightly taxed; public transport fares capped below cost; fuel for fisheries rebated; vehicles taxed by engine size; generous hybrid and electric vehicle relief has spurred car imports.
- Recommended carbon-pricing transition and fiscal implications:
  - Gradually introduce a carbon tax to achieve a carbon price of 360 rupees per ton by 2020, and 1,260 rupees per ton by 2030, applied across the whole carbon tax base (power generation as well as road fuels).
  - Illustrative fuel-tax impacts:
    - Tax increase on products would be around 1 rupee per liter by 2020.
    - By 2030, increases between 3.0 and 3.7 rupees per liter for different petroleum products compared with pre-budget 2017.
  - Fiscal revenue effects:
    - Without mitigation policies, fuel taxes could decline by 2 percent of GDP by 2030.
    - Success of NDC mitigation policies would imply another 1 percent of GDP loss of revenue unless replaced by new taxes.
    - A carbon tax at the recommended rate would stabilize revenue and, by 2030, somewhat increase it by around 1.6 percent of GDP.
  - Other mitigation recommendations:
    - Raise electricity tariffs to cover marginal costs.
    - Change vehicle taxation to an ad valorem rate plus a ‘feebate’ system.
    - Consider price incentives to reduce waste (e.g., ‘pay-per-bag’ trash schemes and deposit refunds for hazardous waste).
    - Explore congestion fees or tolls to keep traffic sustainable.
  - Emissions trading system (ETS) deemed not feasible domestically given market size.

### ADAPTATION — Plans, Public Investment Needs, and Recommendations
- General assessment:
  - Adaptation plans in the NDC are less fully articulated than mitigation; the Blue Economy appears under-represented relative to its importance.
  - Completion of sectoral plans is expected to expand priority investments in fisheries and agriculture, water, critical infrastructure, health, and tourism.
  - Land-use planning needs updating for climate-proofing.
  - The role of the financial sector in financing and disaster-preparedness should be considered.
- NDC adaptation investment outline and totals:
  - Total cost of identified adaptation investments estimated at US$295 million (no timeline specified).
  - NDC identifies key vulnerable areas: critical infrastructure, tourism and coastal management, food security, biodiversity, water security, health and the blue economy.
  - Sectoral specifics and funding gaps:
    - Fisheries & Agriculture:
      - Seychelles National Agriculture Investment Plan (SNAIP, 2015-2020) totals $128 million over six years; $86 million covered; financing gap $42 million for 2015-2020.
      - Estimated roughly 50 percent of SNAIP ($64 million) fits adaptation—nearly twice the NDC provision of $35 million for ‘Food Security’.
    - Blue economy:
      - NDC lists $15 million for a marine resource management institution.
      - Innovative mechanisms: a debt-for-adaptation restructuring and a US$15 million Blue Bond (World Bank support; GEF Non-Grant Instrument Pilot with an IBRD guarantee).
      - Pledge to protect 420,000 km2; using minimum literature values, protecting 420,000 km2 would translate into a minimum annual cost of US$ 1.7 million.
    - Water:
      - Largest share of NDC adaptation budget at $85 million (29 percent). Main investments include increasing capacity of La Gogue dam (approximately $20 million), extending sewerage network, and building water infrastructure in agriculture.
    - Critical infrastructure:
      - NDC allocates $70 million for critical-infrastructure adaptation; climate-proofing costs could be several orders of magnitude greater and require precise assessment.
    - Health:
      - NDC lists $30 million for health adaptation investments but is vague on specifics.
    - Tourism:
      - NDC addresses tourism mainly under coastal management and disaster risk management; tourism-specific adaptation investments not listed.
- Regulatory and non-investment measures:
  - Land use planning: Town and Country Planning Act and the 2015 Seychelles Strategic Land Use Plan exist but considered insufficiently protective regarding sea-level rise and storm surges.
  - Moratorium on building big new hotels to protect sustainability.
  - Financial sector preparedness: limited involvement and low awareness; safeguarding credit access and resilient mobile banking could aid recovery.
- Adaptation recommendations:
  - Clarify details (projects and timing) of adaptation proposals in the NDC.
  - Use completed sectoral strategies (e.g., SNAIP, Roadmap for the Blue Economy) to identify additional adaptation needs and include them in the NDC update.
  - Produce clearer investment plans to identify financing gaps in frontline areas (water, critical infrastructure, health, tourism).
  - Update the Seychelles Strategic Land Use Plan to address sea-level rise and storm surges.
  - Undertake precise assessments of critical-infrastructure adaptation costs using historical events, climate modeling, and cost-benefit analysis.
  - Engage the financial sector to mobilize innovative financing and improve disaster preparedness capacities.

### FINANCING — Needs, PSIP, Blue Bond, and Fiscal Consistency
- Key statistics:
  - The cost of the investment projects identified in the NDC is 40 percent of 2016 GDP (US$604 million).
  - Memo: GDP 2017 (US$, million) 1,516 100%
  - Seychelles NDC 2015 — Costed Climate Change Projects (Table 4, key figures):
    - Total cost: 604 40%
    - Mitigation total: 309 20%
      - 90 MW of solar PV: 191.7 13%
      - Retrofitting landfill for gas capture and flaring: 20.8 1%
      - 30% private vehicles electric by 2030: 66.7 4%
      - 15.8 MW solar PV for electric vehicles: 29.8 2%
    - Adaptation total: 295 19%
      - Critical Infrastructure: 70 5%
      - Tourism/Coastal Management: 45 3%
      - Food Security: 35 2%
      - Biodiversity: 15 1%
      - Water Security: 85 6%
      - Health: 30 2%
      - Blue Economy: 15 1%
  - Financing in PSIP:
    - Around 3½ percent of GDP in climate-related projects has been reflected in the Public Sector Investment Program for 2017-19 (PSIP)—meaning financing has been identified and the project authorized.
    - Climate-related projects identified in the PSIP (total: 3.4 percent of 2017 GDP; govt 1.9, foreign 1.5)
      - La Gogue Dam: 1.8 (govt 1.5, foreign 0.4)
      - PUC total: 1.8 (govt 1.4, foreign 0.4)
      - Solar PV: 0.9 (govt 0.3, foreign 0.6)
      - MEECC climate budget: 0.6 (govt 0.1, foreign 0.5 GEF grant)
    - Memo: GDP 2017 (rupees million)         20,013
- Financing strategy and Blue Bond:
  - If NDC costs spread over 2017–2030 (13 years), implies around 3 percent of GDP a year.
  - Normal budget capital spending is 6-7 percent of GDP; NDC scaling-up is substantial but not extreme.
  - Private investment expected for mitigation; adaptation likely requires official financing.
  - Blue bond:
    - US$15 million bond will be a sovereign obligation of the Government of Seychelles.
    - The bond amounts to 1 percent of GDP and the total project to 1.6 percent of GDP (US$25 million).
    - The bond combines a sovereign liability with a World Bank guarantee and a substantial GEF grant.
  - SWIOFish3 financing highlights:
    - Component 3 budget: US$16.0 million.
    - Project financing package: US$5 million IBRD loan; US$5.3 million GEF grant; proceeds of first Blue Bond (estimated issuance: US$15 million).
    - Use of GEF Non-Grant Instrument Pilot: loan with 40-year maturity; 10-year grace period; 0.25 percent interest rate.
    - Allocation of Blue Bond proceeds:
      - Track 1 — Blue Grants Fund: notionally US$3 million to SeyCCAT.
      - Track 2 — Blue Investment Fund: notionally US$12 million to Development Bank of the Seychelles (DBS).
- Consistency with fiscal and external debt sustainability:
  - Implementing planned investments would delay achievement of authorities’ medium-term public debt reduction goal but public debt remains on a sustainable declining path under certain financing assumptions.
  - Scenario (gradual implementation, net increase of 1-2 percent of GDP annually; financed equally by external project grants, concessional external project loans, and domestic loans):
    - Public debt declines each year and falls below 50 percent by 2022 (two years later than authorities’ target).
    - Real GDP growth assumed to be 1 percent of GDP higher from 2025 on due to energy efficiency and resilience gains.
    - Debt projected to reach around 26 percent of GDP by 2036 (versus 15 percent in the baseline without investment scaling-up).
  - Variant scenario (all climate-related investments financed domestically):
    - Debt to GDP ratio declines at a much slower pace, reaching around 37 percent in 2036.
- Financing recommendations:
  - Develop a comprehensive picture of financing needs, including contingency financing.
  - Rely as much as possible on private sector and concessional financing to execute the NDC to ensure continued fiscal and debt sustainability.
  - Prioritize success with the clean energy strategy to strengthen the balance of payments.
  - Offset revenue loss from fuel and vehicle taxation—carbon tax would be valuable for this.
  - Plan investment execution to avoid overheating/inflation given near-to-full employment.
  - Seek to economize on the costs of accessing climate finance and ensure innovative financing offers value-for-money.

### RISK MANAGEMENT — Buffers, Insurance, and Contingency Planning
- Findings:
  - Some key elements of a risk management strategy exist, but financial buffers are small and insurance is currently limited.
  - The budget contingency line is small (“one government building”).
  - The central bank holds four months in gross reserves, amounting to about 175 percent of the IMF reserve metric for floating exchange rate regimes.
  - Seychelles pioneered a CatDDO with the World Bank: a US$7 million contingent line of credit (term 2014-2017), with interest in renewal and expansion to $12 million.
- Recent disaster history (EM-DAT):
  - 1997: Flood — 1,237 people affected; estimated economic damage 0.5 percent of GDP.
  - 2004: Tsunami — 4,830 people affected; estimated economic damage 3.6 percent of GDP.
  - 2013: Tropical storm — 3,000 people affected; estimated economic damage 0.7 percent of GDP.
- Disaster scenarios and debt resilience:
  - Storm causing damage of 10 percent of GDP:
    - Seychelles could withstand a natural disaster costing up to 10 percent of GDP without losing debt sustainability.
    - Under this scenario (shock in 2017), public debt ratio would spike to around 85 percent of GDP in 2017 (from slightly over 70 percent in 2016), gradually declining to around 50 percent by 2036.
    - Assumptions: public reconstruction investment covers half the costs (5 percent of GDP implemented over five years) financed by a balanced mix of domestic and external concessional and non-concessional funds.
  - Storm causing damage of 30 percent of GDP:
    - A storm causing economic damage of 30 percent of GDP in 2017 would push up public debt to around 120 percent of GDP in the long run.
    - Under similar assumptions with reconstruction investments costing 15 percent of GDP, GDP growth would be depressed for two years after the storm, with sharper inflation and exchange rate depreciation.
    - Public debt would spike to 115 percent of GDP in the year of the storm; even with concessional international help, debt would decline for several years to around 90 percent, then start rising unsustainably.
- Risk-layered guidance and contingency fund operational guidance:
  - Use a mix of self-insurance, contingent arrangements/insurance, and reliance on international community for largest disasters.
  - Contingency fund operational guidance:
    - Fund balances should be placed in a separate liquid government account at the central bank and not be treated as a source of budget financing.
    - Law should stipulate fund assets may only be used to finance specific post-disaster recovery and rehabilitation spending, not recurrent expenditure.
    - Implementing agencies execute post-disaster spending under existing financial procedures; the fund should be on-budget.
- Risk management recommendations (numbered in source):
  1. Develop costing of tail events, and use this to guide contingency budgeting.
  2. Re-establish the contingency fund gradually by saving the annual budget contingency allocation every year it is not drawn down.
  3. Consider making insurance mandatory for buildings in flood-risk areas.
  4. Over the medium term, explore the cost-effectiveness of insurance as a supplementary buffer, for instance, to insure key government buildings.

### NATIONAL PROCESSES, INSTITUTIONAL CAPACITY, AND PUBLIC INVESTMENT MANAGEMENT
- Institutional findings:
  - Institutional processes have been upgraded steadily but capacity constraints typical of small states persist.
  - Planning and PIM/PFM systems are in principle good: sectoral plans feed the National Development Plan, which prioritizes projects for the PSIP and budget, but procedures need updating, consistency, and full costing in practice.
  - Capacity in MFTEP and other ministries needs strengthening; some legislation needs updating (e.g., Energy Act); PPP Act to be passed.
- PIMA diagnostics (selected responses):
  - Fiscal framework: No fiscal rule, but a binding debt target.
  - Public investment planning and appraisal: national/sectoral strategies yes; costing underway; multiyear ceilings and 3-year PSIP present.
  - Implementation and controls: cash release timely; procurement open; monitoring on-site; ex post audits/reviews not routinely undertaken.
  - Asset management: asset audit being undertaken; nonfinancial asset values not recorded in balance sheets.
  - PPPs: PPP policy exists; Act submitted to Cabinet; PPP liabilities not systematically recorded.
- Recommendations for institutional strengthening:
  - Ensure climate change objectives and activities are systematically identified throughout the budget and investment projects explicitly linked to these.
  - Review and update legislation for consistency with sectoral strategies.
  - Pass the PPP Act.
  - Build capacity for effective public investment appraisal and monitoring in MFTEP and other ministries.
  - Amend the PFM Act to ensure all loans and grants go through the MFTEP, and develop a policy for managing donor funding.
  - Set up a GoS/UNDP/GEF coordination unit to mobilize climate finance and implement donor projects; seek to economize on the costs of accessing climate finance.

### PRIORITY NEEDS (Box 1) — Financing and Capacity-Building
- Government financing or external support (selected items and indicative magnitudes):
  - Completion of the disaster-preparedness strategy
  - Quasi-public goods to support renewable energy strategy: strengthening the electricity grid; charging stations for electric vehicles
  - Critical infrastructure (US$70 million ++)
  - Tourism/coastal management (US$45 million ++)
  - Blue economy: (US$15 million ++)
  - Water security (US$85 million +)
  - Food security (US$35 million +)
  - Health (US$30 million +)
  - Biodiversity (US$15 million +)
  - Land use to address sea-level rise and storm surges (not yet costed)
- Private investment (selected items):
  - Solar PV for public electricity, including for electric vehicles (US$222 million)
  - Electric vehicles (US$67 million)
  - Waste management (US$21 million)
  - Complements to public investment where a business case can be made: critical infrastructure; tourism/coastal management; food security; biodiversity; water security; health; Blue economy
- Capacity-building priorities:
  - Completion of the disaster-preparedness strategy
  - Integration of climate-related activities into costed sectoral plans
  - Carbon taxation (to rationalize pricing of power and subsidies to fisheries, and possibly vehicle taxation and congestion pricing)
  - Waste management
  - Further development of public investment management skills
  - Further strengthening of public financial management skills

*Source: IMF—EXECUTIVE SUMMARY and selected excerpts from CR17162 (cr17162).*

### EXECUTIVE SUMMARY ___________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Overview
- Seychelles has placed climate change at the center of its sustainable development strategy, with an NDC outlining a balanced mitigation and adaptation strategy accompanied by costed investment plans.
- This assessment reviews Seychelles’ climate plans from a macroeconomic perspective and suggests macro-relevant reforms to strengthen implementation and outcomes.

### General preparedness
- Findings:
  - High public awareness and existing sustainable development planning give Seychelles an advantage in preparedness.
  - Disaster preparedness is relatively strong, but significant unfinished work remains (warning systems, resilience-building, contingency financing).
  - Integration of climate change planning with the forthcoming National Development Plan is a next step, including identifying costed priority projects for the Plan and budget documents.
- Priority actions (from recommendations):
  - Maintain the NDC up-to-date as a high-profile summary strategy.
  - Finalize the National Economic Development Plan and sectoral plans with focus on costing and resource mobilization.
  - Reduce vulnerability by strengthening land use planning and sector development; reviewing and enforcing building codes; developing Disaster Risk Financing and Insurance Strategy; developing sector- and area-specific contingency plans; strengthening hydro-meteorological network; enhancing early warning systems and emergency response; implementing coastal protection; increasing urban resilience of Victoria; capacity-building and public awareness; and enhancing technological capacity for climate research and monitoring.

### Mitigation
- Findings:
  - Seychelles plans to meet emission reduction targets mainly by switching to renewable energy, improving energy efficiency, and introducing electric cars—yielding energy security and lower import bills but with technological and implementation uncertainty.
  - Declining fuel tax revenue could arise from successful emission containment.
- Key policy recommendations:
  - Gradually introduce a carbon tax to achieve a carbon price of 360 rupees per ton by 2020, and 1,260 rupees/ton by 2030, applied across the whole carbon tax base (power generation as well as road fuels).
  - Raise electricity tariffs to cover marginal costs.
  - Change vehicle taxation to an ad valorem rate plus a ‘feebate’ system.
  - Consider price incentives to reduce waste (e.g., ‘pay-per-bag’ trash schemes and deposit refunds for hazardous waste).
  - Explore congestion fees or tolls to keep traffic sustainable.

### Adaptation
- Findings:
  - Adaptation plans in the NDC are less fully articulated than mitigation; the Blue Economy appears under-represented relative to its importance.
  - Completion of sectoral plans is expected to expand priority investments in fisheries and agriculture, water, critical infrastructure, health, and tourism.
  - Land-use planning needs updating for climate-proofing.
  - The role of the financial sector in financing and disaster-preparedness should be considered.
- Key policy recommendations:
  - Clarify details (projects and timing) of adaptation proposals in the NDC.
  - Use completed sectoral strategies (e.g., SNAIP, Roadmap for the Blue Economy) to identify additional adaptation needs and include them in the NDC update.
  - Produce clearer investment plans to identify financing gaps in frontline areas (water, critical infrastructure, health, tourism).
  - Update the Seychelles Strategic Land Use Plan to address sea-level rise and storm surges.

### Financing
- Findings and key statistics:
  - The cost of the investment projects identified in the NDC is 40 percent of 2016 GDP (US$604 million).
  - Currently, around 3½ percent of GDP in climate-related projects has been reflected in the Public Sector Investment Program for 2017-19 (PSIP)—meaning financing has been identified and the project authorized.
  - Some adaptation measures require public financing or external support; private investment is more likely for mitigation than adaptation.
  - Critical infrastructure and sectoral priorities will require substantial public or concessional financing; mobilizing private investment and concessional financing is important to maintain fiscal sustainability.
- Policy recommendations:
  - Develop a comprehensive picture of financing needs, including contingency financing.
  - To ensure continued fiscal and debt sustainability, rely as much as possible on private sector and concessional financing to execute the NDC.
  - Prioritize success with the clean energy strategy to strengthen the balance of payments.
  - Offset revenue loss from fuel and vehicle taxation—carbon tax would be valuable for this.
  - Plan investment execution to avoid overheating/inflation given near-to-full employment.
  - Seek to economize on the costs of accessing climate finance as experience develops.
  - Ensure innovative financing packages offer value-for-money.

### Risk management
- Findings:
  - Some key elements of a risk management strategy exist, but financial buffers are small and insurance is currently limited.
  - The budget contingency line is small (“one government building”).
- Policy recommendations:
  - Develop costing of tail events and use this to guide contingency budgeting (e.g., provisioning for a moderate disaster).
  - Re-establish the contingency fund gradually by saving the annual budget contingency allocation every year it is not drawn down.
  - Consider making insurance mandatory for buildings in flood-risk areas; over the medium term, explore cost-effectiveness of insurance to insure key government buildings as a supplementary buffer.

### National processes and institutional capacity
- Findings:
  - Institutional processes have been upgraded steadily but capacity constraints typical of small states persist.
  - In principle, the planning and public investment system is good (sectoral plans feed the National Development Plan, which prioritizes projects for the PSIP and budget) but procedures need updating, consistency, and full costing in practice.
  - Capacity in MFTEP and other ministries needs strengthening to execute PIM and PFM procedures effectively; some legislation needs updating.
- Policy recommendations:
  - Ensure climate change objectives and activities are systematically identified throughout the budget and investment projects explicitly linked to these.
  - Review and update legislation for consistency with sectoral strategies (e.g., the Energy Act).
  - Pass the PPP Act.
  - Build capacity for effective public investment appraisal and monitoring in MFTEP and other ministries.
  - Amend the PFM Act to ensure all loans and grants go through the MFTEP, and develop a policy for managing donor funding.

### Priority needs to be met (Box 1)
- Government financing or external support:
  - Completion of the disaster-preparedness strategy
  - Quasi-public goods to support renewable energy strategy:
    - Strengthening the electricity grid
    - Charging stations for electric vehicles
  - Critical infrastructure (US$70 million ++)
  - Tourism/coastal management (US$45 million ++)
  - Blue economy: (US$15 million ++)
  - Water security (US$85 million +)
  - Food security (US$35 million +)
  - Health (US$30 million +)
  - Biodiversity (US$15 million +)
  - Land use to address sea-level rise and storm surges (not yet costed)
- Private investment:
  - Solar PV for public electricity, including for electric vehicles (US$222 million)
  - Electric vehicles (US$67 million)
  - Waste management (US$21 million)
  - Complements to public investment where a business case can be made: critical infrastructure; tourism/coastal management; food security; biodiversity; water security; health; Blue economy
- Capacity-building:
  - Completion of the disaster-preparedness strategy
  - Integration of climate-related activities into costed sectoral plans
  - Carbon taxation (to rationalize pricing of power and subsidies to fisheries, and possibly vehicle taxation and congestion pricing)
  - Waste management
  - Further development of public investment management skills
  - Further strengthening of public financial management skills

*Source: IMF—EXECUTIVE SUMMARY (cr17162).*

### INTRODUCTION

### INTRODUCTION

### Purpose and scope
- This report is the first pilot Climate Change Policy Assessment (CCPA) for Small States, developed by IMF and World Bank staff in collaboration with the Government of Seychelles.
- Objective: integrate climate change impact and needed policy responses into a holistic macro framework to assist small states in understanding and managing expected climate-change impacts while safeguarding long-run fiscal and external sustainability.
- IMF authorized staff on December 1, 2016 to develop the CCPA for small states and requested it be carried out jointly with the World Bank.

### Rationale for choosing Seychelles
- Seychelles is a key advocate for small states in international climate negotiations and is recognized for innovations in climate change financing.
- Seychelles’ submission to the Paris Agreement provides a roadmap for its climate response and serves as the pilot case with lessons expected to be helpful to other small states.

### Report structure
- The report broadly follows the structure of the NDC: general preparedness, mitigation commitment and strategy, adaptation needs and strategy, national processes, and financing.
- Primary focus: macroeconomic challenges posed by climate change and policy recommendations to respond adequately.

### Table of recent and expected climatic developments (highlights)
- Temperatures:
  - Seychelles had an average warming of 0.25°C over the 1972-1997 period.
  - The number of very warm days and nights is increasing dramatically; in 1998 extremes led to a loss of 90 percent of coral reefs (only partly reversed).
- Precipitation and flooding:
  - Annual rainfall anomaly trends on Mahé are upward by 13.7 mm per year (1972-2006), indicating a wetter climate.
  - Extreme rainfall has caused significant crop losses in the last decade.
  - Heavy rainfall during 1997-98 El Nino and 1998-00 La Nina caused widespread flooding with significant losses; fisheries accounted for 45% of El Nino/La Nina losses, agriculture 28%, followed by tourism.
  - Increases in rainfall intensity may increase surface runoff and reduce water capture and could pose health risks.
- Droughts:
  - In 2010 Seychelles suffered its worst drought in decades, followed by severe flooding, notably affecting farmers' productivity.
  - Projection: climate likely to be characterized by extreme dry (i.e., prolonged dry spells) and hot episodes.
- Sea level rise:
  - Sea level rise is already affecting Seychelles; May 2007 very high tides resulted in flooding up to 50m inland causing damage to roads and public infrastructure.
  - Expected impacts: coastal erosion affecting tourism and roads; increased salination of soil and aquifers impacting food and water supply.
- Landslides:
  - Short, intense rain events trigger landslides; Jan 2013 Pointe Au Sel reported 184mm of rain in 24 hours.
  - Landslides and rock falls damage transport infrastructure and houses and are expected to worsen.

### Recent major disasters (EM-DAT)
- 1997: Flood — 1,237 people affected; estimated economic damage 0.5 percent of GDP.
- 2004: Tsunami — 4,830 people affected; estimated economic damage 3.6 percent of GDP.
- 2013: Tropical storm — 3,000 people affected; estimated economic damage 0.7 percent of GDP.

---

### Seychelles’ climate change risks and expected macroeconomic impacts

- Primary exposure:
  - Main economic concerns: rises in sea level and temperature affecting tourism and fishing.
  - Other risks: extreme rainfall, coastal erosion, salinization, landslides, flooding, strong winds, tsunamis, storm surge, rockslides, forest fires.
- Vulnerability assessment:
  - Seychelles has been hit once in recent years by a major natural disaster imposing economic damage of over 3 percent of GDP.
  - Ranks 26th among 33 small states worldwide in vulnerability to natural disasters (2 percent of GDP is the average annual cost of natural disasters for small states).
- Two disaster scenarios examined for fiscal resilience:
  - Storm causing damage of 10 percent of GDP (plausible-but-still-extreme).
    - Seychelles could withstand a natural disaster costing up to 10 percent of GDP without losing debt sustainability.
    - Under this scenario (shock in 2017), public debt ratio would spike to around 85 percent of GDP in 2017 (from slightly over 70 percent in 2016), gradually declining to around 50 percent by 2036.
    - Assumptions: public reconstruction investment covers half the costs (i.e., 5 percent of GDP implemented over five years) financed by a balanced mix of domestic and external concessional and non-concessional funds.
  - Storm causing damage of 30 percent of GDP (tail-risk catastrophic scenario).
    - A storm causing economic damage of 30 percent of GDP in 2017 would push up public debt to around 120 percent of GDP in the long run.
    - Under similar assumptions but with reconstruction investments costing 15 percent of GDP, GDP growth would be depressed for two years after the storm, with much sharper inflation and exchange rate depreciation.
    - Public debt would spike to 115 percent of GDP in the year of the storm; even with concessional international help, debt would decline for several years to around 90 percent, then start rising unsustainably given principal repayments and heavier interest burden.

- Modelling caveat:
  - In these scenarios, Seychelles’ growth rate reflects the continuation of existing environmental pressures—not additional worsening due to climate change beyond the disaster impact. Thus, the impact of climate change is measured only by the economic cost of the disaster.

---

### General preparedness for climate change

- National strategy coherence:
  - Seychelles’ NDC presents a clearly-articulated national strategy for responding to climate change, including mitigation commitment, quantified mitigation strategy, adaptation plans, and costing of identified projects.
  - The NDC is comprehensive compared with many other NDCs and is considered a model for other small states; authorities intend to expand coverage of the Blue Economy when updating the NDC.
  - The NDC is broadly consistent with Seychelles’ Sustainable Development Strategy 2012-2020 (SSDS); the SSDS is being updated and expanded into a comprehensive National Economic Development Plan expected by end-2017.
  - Supporting documents being prepared: Roadmap for Renewables (Ministry of Environment and Energy) and Roadmap for the Blue Economy (Vice-Presidency).
- Disaster planning and contingency financing:
  - Disaster planning is relatively strong; Seychelles subscribed to the Hyogo Framework and developed a National Disaster Risk Policy (updated in 2014).
  - Division of Risk and Disaster Management (DRDM) under the Ministry of Environment, Energy and Climate Change (MEECC) coordinates disaster risk reduction and emergency response and has established a National Emergency Operations Center.
  - Seychelles negotiated a CatDDO with the World Bank (contingency credit line with drawdown in an emergency); expected to be renewed for another three years and expanded.
  - Seychelles has a small budget contingency line.
- Remaining gaps:
  - Legal framework requires updating to clarify DRDM’s mandate.
  - Need for improved land-use planning to reduce flood vulnerability.
  - Gaps in financial and staff resources and in technical and operational capacity persist.
  - Further investments needed to complete preparedness agenda.

### Recommendations for general preparedness
- Maintain the NDC up-to-date, in line with the Paris process, as a high-profile summary strategy of Seychelles’ climate-change-related effort.
- Finalize the National Economic Development Plan and supporting operational sectoral plans, with focus on costing and resource mobilization.
- Reduce vulnerability to natural disasters and climate change by:
  - Further strengthening risk-informed land use planning and sector development;
  - Reviewing building codes for residential and commercial buildings and public assets (incl. buildings, drainage, transport infrastructure, utilities) and enhancing their enforcement;
  - Further developing a Disaster Risk Financing and Insurance Strategy for the public sector and promoting increased insurance penetration for the private sector;
  - Developing sector-specific and area-specific contingency plans;
  - Further strengthening the hydro-meteorological network, and its monitoring and forecasting capacities;
  - Enhancing early warning systems and emergency response;
  - Further implementing coastal protection and other measures to mitigate coastal erosion;
  - Increasing the urban resilience of Victoria;
  - Capacity building, education and awareness among the population;
  - Enhancing the technological capacity to undertake effective research on climate change modeling and risks, monitoring of climate change impacts and implementation of resilience-building measures.

---

### Contribution to mitigation

- NDC emissions pledges:
  - Reduce greenhouse gases (GHGs) by 122.5 kilotons (kt) of carbon dioxide equivalent (CO2e) in 2025, or 21.4 percent below ‘business as usual’ (BAU) levels.
  - Reduce GHGs by 188 kt CO2e in 2030, or 29.0 percent below BAU levels in 2030.
  - Long-term goal: achieve zero emissions by 2050.

- Main mitigation strategy:
  - Shift to solar energy sufficient to supply most public electricity.
  - Switch 30 percent of private vehicles to electricity.
  - Capture landfill methane.

- Costing of priority mitigation options (Table 2 totals)
  - Total: US$309 million
  - Land transport: 29.8 (US$mn)
    - 15.8 MW of solar PV for meeting the energy demand of electric vehicles
    - 30% of private in-use vehicles are electric by 203066.7
  - Public electricity: 191.7 (US$mn)
    - 90 MW of solar PV (capital expenditure and operation and maintenance cost over 20 year lifetime)
  - Waste management: 20.8 (US$mn)
    - Retrofitting landfill (Providence 1) methane capture and flaring equipment

- Costing and technical assumptions (as stated)
  - Assumed capital costs for solar PV are $1.75 million per MW and operations/maintenance costs are $19,000 per MW per year.
  - Electric cars are assumed to cost $10,000 more than their traditional fuel equivalent (and a projected 6,667 of them are needed by 2030).

- Implementation considerations and constraints:
  - Initial steps underway: solar installations with GEF support; electric cars receive substantial tax relief.
  - Challenges:
    - Ambitious scale of planned solar rollout relative to current starting point.
    - Need for large investments to stabilize the electricity grid before pervasive solar penetration; concerns about adequacy of current energy storage technology.
    - Enabling investments likely to require government financing despite private sector interest.
    - Technical debate about suitability of electric cars for Seychelles’ mountain gradients and stop-start traffic.

*Source: cr17162 - INTRODUCTION*

### 14.      There would be many side-benefits to meeting the targets; notably, they would give

### 14.      There would be many side-benefits to meeting the targets; notably, they would give

### Feasibility and overarching assessment
- Conclusion: the clean energy strategy in the NDC is worthwhile, but the goals are ambitious and the outcome uncertain.
- Side-benefits: improved energy security and significant reduction in imported fuel bill for Seychelles.

### Carbon taxation and fuel subsidy policies — findings
- Rationale:
  - Pricing carbon at a level high enough to encourage firms and households to reduce use of carbon-intensive fuels is recommended.
  - The IMF’s international advice favors efficient, cost-effective price-based instruments for emissions reduction.
- Current status and distortions:
  - Current fuel taxes fall short of delivering appropriate carbon pricing; some subsidies create additional distortions.
  - The Government of Seychelles announced a 50-cent increase in fuel tax in the 2017 budget speech (not yet passed at time of writing).
- Carbon-emitting sources (2015):
  - Power generation (fuel oil, mainly used by PUC): 50 percent of emissions.
  - Diesel (used by PUC, hotels, and some vehicles): 35 percent of emissions.
  - Motor gasoline: 13 percent of emissions.
- Current carbon-related taxes (Table 3, Fuel Tax Rates and Revenues, 2015; revenue defined prior to rebates):
  - Gasoline: Consumption, liters 25.2; Gross revenue, Rs million 201.3; Effective excise, Rs/liter 8.0
  - Diesel: Consumption, liters 53.9; Gross revenue, Rs million 308.5; Effective excise, Rs/liter 5.7
  - Power (fuel oil for power generation): Consumption, liters 9.6; Gross revenue, Rs million 8.6; Effective excise, Rs/liter 0.5
  - Hotels (diesel for hotel generators): Consumption, liters 13.2; Gross revenue, Rs million 105.2; Effective excise, Rs/liter 4.0
  - Vehicles (diesel/gasoline for vehicles row): Consumption, liters 31.1; Gross revenue, Rs million 189.1; Effective excise, Rs/liter 8.0
  - Fuel oil (total): Consumption, liters 75.4; Gross revenue, Rs million 36.0; Effective excise, Rs/liter 0.5
    - power (subset): Consumption, liters 71.7; Gross revenue, Rs million 34.2; Effective excise, Rs/liter 0.5
    - other (brewery): Consumption, liters 3.8; Gross revenue, Rs million 1.8; Effective excise, Rs/liter 0.5
  - Jet fuel: Consumption, liters 2.9; Gross revenue, Rs million 23.2; Effective excise, Rs/liter 8.0
  - Avgas: Consumption, liters 0.0; Gross revenue, Rs million 0.1; Effective excise, Rs/liter 2.0
  - Kerosene (maritime and aviation): Consumption, liters 0.1; Gross revenue, Rs million 0.6; Effective excise, Rs/liter 8.0
  - LPG (cooking): Consumption, liters 4.5; Gross revenue, Rs million 2.2; Effective excise, Rs/liter 0.5
  - Lubricants: Consumption, liters 0.8; Gross revenue, Rs million 1.5; Effective excise, Rs/liter 1.9
  - Total/average: Consumption, liters 137.6; Gross revenue, Rs million 573.4; Effective excise, Rs/liter 4.2
- Additional system features and distortions:
  - LPG lightly taxed (used by the poor for cooking) but high per unit distribution cost makes it one of the most expensive fuels.
  - Public transport fares are capped below cost with government transfer to compensate SPTC.
  - Fuel for fisheries is rebated.
  - Vehicles taxed by engine size (a poor proxy for emissions); hybrids pay substantially less and electric vehicles receive larger tax relief. Generous hybrid treatment spurred a sharp jump in car imports, partly offsetting emissions savings.

### Recommended carbon-pricing transition and fiscal implications
- Proposed carbon-pricing path:
  - Reach a carbon price of 360 rupees per ton by 2020, and 1,260 rupees per ton by 2030 (recommendation 1).
  - Operational implementation: raise taxes on main carbon-emitting tax bases, with complementary reforms to reduce subsidies; apply carbon pricing across the whole carbon tax base (power generation as well as road fuels).
- Illustrative fuel-tax impacts (summary of Figure 1 narrative):
  - Tax increase on products would be around 1 rupee per liter by 2020.
  - By 2030, increases between 3.0 and 3.7 rupees per liter for different petroleum products compared with pre-budget 2017.
  - The proposed 50c increase in road fuel taxes would put Seychelles well on the way to meeting the 2020 milestone.
  - Mission strongly recommends extending the tax to fuels for power generation (majority of emissions).
  - The proposed increases still keep fuel oil and power-diesel cheaper relative to other fuels, consistent with authorities’ preference to keep electricity prices down.
  - The mission recommends increasing electricity tariffs at least to cover marginal generating costs (not shown in Figure 1).
- Fiscal revenue effects and adjustments:
  - Without mitigation policies, fuel taxes could decline by 2 percent of GDP by 2030 given likely energy-efficiency improvements and vehicle stock growth lagging GDP.
  - Success of NDC mitigation policies would imply another 1 percent of GDP loss of revenue unless replaced by new taxes (e.g., taxes on solar energy and electric cars).
  - A carbon tax at the recommended rate would stabilize revenue and, by 2030, somewhat increase it by around 1.6 percent of GDP.
  - Note: the carbon tax itself would shrink as mitigation efforts progress successfully, but its broad base and gradual rate-raising would compensate.
- Vehicle taxation reform:
  - Current vehicle-tax revenue faces erosion if environmental gains succeed.
  - Recommend shifting to an ad valorem tax combined with ‘feebates’ (uniform ad valorem rate for fiscal needs; sliding scale of surcharges/rebates for above/below average emissions), as adopted in Denmark, France, Mauritius, Netherlands and Norway.

### Other carbon-pricing strategies and mitigation-relevant policies
- Emissions trading system (ETS):
  - ETS is not feasible domestically due to inadequate size of trading markets—could be possible only if Seychelles found other partners.
- Solid waste and landfill:
  - Landfill responsible for 5 percent of Seychelles’ emissions.
  - Waste generation: about 65,000 tons per year by 93,000 inhabitants and 300,000 tourists, on an upward trend.
  - NDC identifies a flaring project budgeted at $21 million (financing not yet identified).
  - Price-based policies to contain waste recommended: ‘pay-per-bag’ trash schemes and deposit refunds for hazardous waste.
- Transport congestion and revenue:
  - Electronic congestion fee in Victoria could manage road congestion.
  - Nationwide mileage tolls are promising longer-term options to stabilize transportation revenues and manage road-network pressure.

### Mitigation policy recommendations (explicit list)
- Gradually introduce a carbon tax to achieve:
  - 360 rupees per ton by 2020.
  - 1,260 rupees per ton by 2030.
  - Apply across the whole carbon tax base (power generation and road fuels).
- Raise electricity tariffs to cover marginal costs.
- Change vehicle taxation to an ad valorem rate plus ‘feebate’ system.
- Consider price incentives to reduce waste (e.g., ‘pay-per-bag’ and deposit-refund schemes).
- Explore congestion fees or tolls to keep traffic sustainable and support revenue.

### Adaptation plans — overview and public investment needs
- General assessment:
  - Adaptation plans are work-in-progress; additional reforms likely needed.
  - All adaptation activities in the NDC will probably require public funding.
- NDC adaptation investment outline:
  - NDC identifies key vulnerable areas: critical infrastructure, tourism and coastal management, food security, biodiversity, water security, health and the blue economy.
  - Total cost of identified adaptation investments estimated at US$295 million (no timeline specified).
  - Most adaptation investments have a public-good component; private investor interest is less likely.
  - NDC emphasizes uncertainty of climate impacts and need for further research and monitoring.
- Sectoral specifics and gaps:
  - Fisheries & Agriculture:
    - Seychelles National Agriculture Investment Plan (SNAIP, 2015-2020) totals $128 million over six years; $86 million covered by government and external partners; financing gap $42 million for 2015-2020.
    - Estimated that roughly 50 percent of SNAIP ($64 million) fits adaptation to climate change—nearly twice the NDC provision of $35 million for ‘Food Security’.
  - Blue economy:
    - NDC underestimates the strategic role of the blue economy; lists only $15 million to set up a marine resource management institution.
    - Seychelles plans a broader blue-economy adaptation strategy, using internal/external financing and two innovative mechanisms:
      - A debt-for-adaptation restructuring (supported by The Nature Conservancy in 2016).
      - A US$15 million Blue Bond (World Bank support; GEF Non-Grant Instrument Pilot with an IBRD guarantee to lower cost, ideally down to the 3 percent range).
    - These mechanisms expect to cover fisheries management financing until 2023 while paying only a fraction of costs related to expansion of protected areas network.
    - Access to approximately $500,000 per year until 2023 to finance expansion of protected areas network; assessment of related budgetary needs is underway.
    - Seychelles pledged to protect 420,000 km2; literature estimates annual running cost of marine protected area networks ranges from US$4 to nearly $30 million per km2 (median, US$2,698 per km2). Using the minimum value, protecting 420,000 km2 would translate into a minimum annual cost of US$ 1.7 million.
  - Water:
    - Largest share of NDC adaptation budget at $85 million (29 percent). Main investments include increasing capacity of La Gogue dam (approximately $20 million), extending sewerage network, and building water infrastructure in agriculture. Significant parts are underway or financed but difficult to identify in the PSIP.
  - Critical infrastructure:
    - NDC allocates $70 million for critical-infrastructure adaptation. Given most infrastructure is coastal (main roads, cities, airport, ports, power and sewerage plants, hospitals, schools), climate-proofing costs could be several orders of magnitude greater. A precise assessment using past events, climate modeling, and cost-benefit analysis is needed.
  - Health:
    - NDC lists $30 million for health adaptation investments but is vague on specifics. The Ministry is finalizing a sectoral strategy mainstreaming climate change in health.
  - Tourism:
    - NDC addresses tourism mainly under coastal management and disaster risk management; does not list tourism-specific adaptation investments. Next NDC version should include a detailed discussion given tourism’s importance.
- Regulatory and non-investment measures:
  - Land use planning:
    - Town and Country Planning Act and the 2015 Seychelles Strategic Land Use Plan (steer land use until 2040) exist, but government considers the Plan insufficiently protective regarding sea-level rise and storm surges.
    - Current moratorium on building big new hotels aims to protect sustainability against coastal erosion and pressure on energy, food, and water.
  - Financial sector preparedness:
    - Financial sector involvement in climate strategy is limited; awareness relatively low.
    - Safeguarding access to credit for households and businesses and promoting a resilient mobile banking platform could facilitate recovery after natural disasters.

### Adaptation recommendations (implicit from analysis)
- Complete sectoral strategies that mainstream climate change to refine investment needs and identify financing gaps.
- Undertake more precise assessments of critical-infrastructure adaptation costs using historical events, climate modeling, and cost-benefit analysis.
- Incorporate blue-economy priorities and financing mechanisms (debt-for-adaptation, Blue Bond) into updated NDC and investment plans.
- Strengthen land-use planning to account explicitly for sea-level rise and storm surges.
- Engage the financial sector to mobilize innovative financing and improve disaster preparedness capacities.

*International Monetary Fund — selected excerpts from CR17162 chapter*

### 29.      While the central bank was consulted on the debt swap and the blue bond, the

### cr17162 - 29.      While the central bank was consulted on the debt swap and the blue bond, the

### Central bank, financial sector participation, and disaster preparedness
- Banking system does not generally participate in innovative financing; some commercial banks may have infrastructure in their loan portfolio but there is not much awareness of this type of lending opportunity.
- Nonbanks do not participate in big-project financing in Seychelles.
- The central bank is not included in DRDM’s emergency planning, but:
  - The central bank and FSA share a business resumption site.
  - Both banks and nonbanks are required to have business resumption plans.
- Central bank financial buffers:
  - The central bank holds four months in gross reserves.
  - These reserves amount to about 175 percent of the metric for reserve adequacy for floating exchange rate regimes (IMF reserve metric) and are deemed to be more-than-adequate (for normal circumstances) and broadly adequate given the smallness of the economy.
  - The central bank can give within-year advances to government, providing an additional short-term disaster financing buffer.

### Recommendations for adaptation (as listed)
- Clarify the details (projects and timing) of the adaptation proposals in the NDC.
- Use completed sectoral strategies to identify additional adaptation needs (for instance, in the SNAIP or the Roadmap for the Blue Economy)—and include these in the NDC update.
- Clearer investment plans would help Seychelles identify financing gaps, especially in frontline areas: water, critical infrastructure, health, and tourism.
- Update the Seychelles Strategic Land Use Plan to adequately address sea-level rise and storm surges.

### Seychelles NDC 2015 — Costed Climate Change Projects (key figures from Table 4)
- Total cost (memo: GDP 2017 (US$, million) 1,516 100%): 604 40%
- Mitigation total: 309 20%
  - 90 MW of solar PV: 191.7 13%
  - Retrofitting landfill for gas capture and flaring: 20.8 1%
  - 30% private vehicles electric by 2030: 66.7 4%
  - 15.8 MW solar PV for electric vehicles: 29.8 2%
- Adaptation total: 295 19%
  - Critical Infrastructure (adaptation mainstreamed...): 70 5%
  - Tourism/Coastal Management: 45 3%
  - Food Security: 35 2%
  - Biodiversity: 15 1%
  - Water Security (including increase storage by building dam): 85 6%
  - Health: 30 2%
  - Blue Economy (set up marine resource management institution): 15 1%

### Financing strategy for mitigation and adaptation programs — current state and needs
- Financing needs identified in the NDC amount to 40 percent of 2017 GDP (see Table 4).
- If spread over 13 years between 2017 and 2030, this implies investment and funding needs of around 3 percent of GDP a year.
- Normal budget capital spending is 6-7 percent of GDP; the NDC scaling-up is a substantial but not extreme addition.
- At the time of the 2017 budget, climate change projects amounting to 3½ percent of GDP had been included in the 2017-19 PSIP (funding identified and project authorized or underway).
- Funding for PSIP projects is slightly more than half domestic and slightly less than half foreign (almost all concessional).
- Private investment is expected for mitigation; adaptation projects are less likely to attract private investment and will likely require official financing.
- Blue bond:
  - US$15 million bond will be a sovereign obligation of the Government of Seychelles.
  - The bond amounts to 1 percent of GDP and the total project to 1.6 percent of GDP (US$25 million).
  - The bond combines a sovereign liability with a World Bank guarantee and a substantial GEF grant to attract private investors while keeping it affordable.

### Climate-related projects identified in the PSIP (Table 5 key numbers; total cost multi-year, in % 2017 GDP)
- Total: 3.4 (govt 1.9, foreign 1.5)
- La Gogue Dam: 1.8 (govt 1.5, foreign 0.4)
- Dept. Infrastructure: 0.1 (govt 0.1)
- Land Transport Authority: 0.02 (govt 0.02)
- PUC total: 1.8 (govt 1.4, foreign 0.4)
- SWIOFISH3: 0.1 (foreign 0.1 WB)
- MEECC climate budget: 0.6 (govt 0.1, foreign 0.5 GEF grant)
- Solar PV: 0.9 (govt 0.3, foreign 0.6)
- MEECC: 0.1 (govt 0.0, foreign 0.0)
- SEC: 0.2 (foreign 0.2 India)
- PUC (Romainville): 0.6 (govt 0.2, foreign 0.4)
- Memo: GDP 2017 (rupees million)         20,013

### Consistency with fiscal and external debt sustainability — scenarios and projections
- Implementing planned mitigation and adaptation investments would delay achievement of the authorities’ medium-term public debt reduction goal but public debt remains on a sustainable declining path under certain financing assumptions.
- Scenario (gradual implementation, net increase of 1-2 percent of GDP annually; financed equally by external project grants, concessional external project loans, and domestic loans):
  - Public debt declines each year and falls below 50 percent by 2022 (two years later than authorities’ target).
  - Real GDP growth assumed to be 1 percent of GDP higher from 2025 on due to energy efficiency and resilience gains.
  - Debt projected to reach around 26 percent of GDP by 2036 (versus 15 percent in the baseline without investment scaling-up).
- Variant scenario (all climate-related investments financed domestically):
  - Debt to GDP ratio declines at a much slower pace, reaching around 37 percent in 2036.
- Public Private Partnerships (PPPs) and availability of concessional external financing materially affect debt dynamics; strengthening capacity to manage public investments and PPPs is likely necessary to realize efficiencies.

### Other macro-considerations (spillovers and risks)
- Balance of payments:
  - Net oil import bill at current low oil prices is slightly less than 2½ percent of GDP; during the height of the oil price boom it came to more than 5 percent of GDP.
  - Success with mitigation (renewable energy) would substantially reduce the import bill and economize on foreign exchange.
- Revenue:
  - Under current fuel and vehicle taxation, success with mitigation would likely imply a loss of 3 percent of GDP in revenue.
  - This is an additional reason for implementing a carbon tax and reforming the vehicle tax to maintain more stable revenue.
- Growth:
  - Empirical work referenced suggests energy investment that improves energy efficiency can materially improve GDP p.c. in small states (see footnotes).
- Possible overheating:
  - Seychelles has near-full employment; rapid investment scaling-up could risk inflation and overheating, requiring authorities to smooth investment pacing and take offsetting fiscal or monetary action as needed.

### Institutional issues and capacity for financing
- Government actions to strengthen financing capacity:
  - Set up a GoS/UNDP/GEF coordination unit dedicated to mobilizing climate change funding and implementing donor projects; unit builds expertise in writing project proposals and preparing multiple requests.
  - Engagement on innovative financing: World Bank blue bond; previous debt-for-nature swaps with Nature Conservancy and Paris Club.
- Cost-effectiveness concerns:
  - Current system of requiring implementing agencies to prepare climate fund projects reportedly costs countries 9.5 percent in fees.
  - Innovative financing must be value-for-money; avoid replacing an old liability with a new set of obligations that carry high costs.

### Recommendations for financing (as listed)
- Develop a comprehensive picture of financing needs, including contingency financing.
- To ensure continued fiscal and debt sustainability, rely as much as possible on private sector and concessional financing to execute the NDC.
- Make success with the clean energy strategy a high priority to strengthen Seychelles’ balance of payments.
- Offset any revenue loss from fuel and vehicle taxation—one reason a carbon tax would be valuable.
- Plan execution of investments to be consistent with avoiding overheating/inflation, given Seychelles’ near-to-full employment.
- As experience with mobilizing climate finance develops, seek to economize on the costs of accessing funds.
- Ensure that innovative financing packages offer value-for-money.

### Risk management strategy — assessment, buffers, and insurance
- World Bank risk-layered framework guidance: countries should mix instruments to finance contingent liabilities at lowest economic cost—self-insure small disasters, use contingent arrangements/insurance for moderate disasters, leave largest disasters to international community.
- Risk assessment procedures:
  - Seychelles includes a short fiscal risk statement in Budget Speech documentation (‘Risks to the Budget’), but risks are not quantified and natural disasters are mentioned only in general terms.
  - Recommendation: develop costing of tail events and use this to guide contingency budgeting.
- Self-insurance and fiscal buffers:
  - The budget includes an explicit annual contingency allocation of 25 million rupees (0.3% of total government spending and 0.12 percent of GDP).
  - The contingency line is transparent and well-understood but small compared with catastrophic needs (officials describe it as “the size of one government building”).
  - Officials rely on supplementary allocations for higher crisis needs and note short-term central bank financing of the budget is possible in exceptional cases.
  - Example of strain: authorities were still struggling to provide funds for build-back three years after tropical storm Feeleng despite international assistance.
  - Recommendation: re-establish a contingency fund and build it gradually by saving the contingency allocation each year it is not drawn down.
- Risk transfer:
  - Further development of insurance and pooling arrangements is suggested in the broader risk-layered approach.

*Italic: IMF staff summary of CR17162 excerpt.*

### 46.      Seychelles has been innovative in some aspects of risk transfer but has left others

### 46.      Seychelles has been innovative in some aspects of risk transfer but has left others unexplored

### Risk transfer instruments — findings
- Seychelles pioneered the first small-state CatDDO with the World Bank.
- Seychelles has not joined the regional sovereign-level risk pool, the African Risk Capacity (ARC), which offers African countries, including island states, drought and cyclone insurance.
- The CatDDO is a contingency line of credit: Seychelles signed a Development Policy Loan in 2014, with a Catastrophe Deferred Drawdown Option (CatDDO) of US$7 million.
- The CatDDO is designed to provide liquidity for medium-sized (or cumulative) disasters that cannot be funded with Seychelles’ internal reserves and to provide bridge financing while other sources of funding are mobilized in the case of major disasters.
- The Government may draw funds upon declaration of a state of emergency from a natural disaster.
- The CatDDO has a revolving feature allowing amounts repaid prior to the closing date to be available for subsequent drawdown; the drawdown period is three years.
- The CatDDO would have fallen short of covering the cost of 2013 Tropical Cyclone Felleng (US$ 8.4 million).

### Domestic insurance and risk management — findings
- Seychelles’ domestic insurance sector is underdeveloped.
- The government does not buy insurance.
- Hotels have mandatory insurance and bigger businesses have insurance, but there is little offloading of private risk beyond vehicle and mortgage insurance.
- A small scheme for farmers experienced difficulties with an unexpectedly large payout in 2016 after heavy rains, illustrating both the value of such insurance and the need to address design challenges (adverse selection and a small population pool).

### Short- and medium-term policy suggestions (from text)
- Short run: consider making insurance mandatory for buildings in flood-risk areas to provide protection and influence incentives toward safer alternatives.
- Medium term: explore the cost-effectiveness of insurance as a supplementary buffer, for instance, to insure key government buildings.

### Recommendations for risk management (numbered in source)
1. Over time, Seychelles should develop costing of tail events, and use this costing (e.g., the need for part-provisioning for a one-in-fifty-years event) to guide its contingency budgeting.
2. The contingency fund should be re-established. This could be achieved gradually, by saving the annual budget contingency allocation every year it is not drawn down.
3. Consider making insurance mandatory for buildings in flood-risk areas.
4. Over the medium term, explore the cost-effectiveness of insurance as a supplementary buffer, for instance, to insure key government buildings.

### Asset management and operational aspects of a contingency fund (Box 2) — key operational guidance
- Asset management: fund balances should not be treated as a source of budget financing (or consolidated into the government Single Treasury Account) or be encumbered; fund assets should be placed in a separate liquid government account at the central bank.
- Use of assets: law should stipulate that fund assets may only be used to finance specific post-disaster recovery and rehabilitation spending, carried out under the auspices of the national budget; assets should not finance recurrent or ongoing expenditure for disaster prevention or mitigation.
- Spending authority: implementing agencies would decide and execute post-disaster spending; the fund would not have authority to spend unbudgeted expenditures.
- Execution: spending from the fund should follow existing financial procedures for budget release, payment, accounting, reporting, and external auditing.
- Operational capacity: the fund should not develop operating capacity; planning and execution of projects financed by the CDRF should be executed by departments legally responsible for the type of facility being rebuilt.
- On-budget treatment: the fund should be on-budget to enhance allocative efficiency, transparency, and accountability.

*Italic source attribution: Selected excerpts from cr17162 - 46. Seychelles has been innovative in some aspects of risk transfer but has left others unexplored (IMF).*

### 61.      The Government of Seychelles recognized the increasing threat of natural disaster

### The Government of Seychelles recognized the increasing threat of natural disaster

### Institutional setup and mandates
- National Disaster Committee (NDC) established in 1997 as a multisectoral “national platform” for coordination and policy guidance on disaster risk reduction.
- Division of Risk and Disaster Management (DRDM) created in 2006 as the NDC secretariat; initially under the Office of the President, later under the Office of the Vice‑President.
- Since July 1, 2010, DRDM falls under the mandate of the Ministry of Environment, Energy and Climate Change (MEECC).
- DRDM responsibilities:
  - Coordinate disaster risk reduction and emergency response to natural and manmade emergencies.
  - Execute actions, regulations and directives to reduce disaster impacts on human lives, goods and society.
  - Activities include planning, supervision, assessment, scientific research (risk mapping), information dissemination, education, public policy implementation and coordination with national and international organizations.

### Policy frameworks and strategic initiatives
- Seychelles subscribed to the Hyogo Framework for Action (HFA) 2005–2015 in 2005.
- A National Disaster Policy linked to the HFA’s five pillars was developed in 2011 and updated in 2014 with the National Disaster Risk Policy.
- A Master Plan for Disaster Risk Management is under development, building on a multihazard risk assessment and contingency plans and strategies across sectors for implementation from national to community level.
- New National Emergency Operations Center created.

### Disaster risk financing and instruments
- Government strengthened technical capacity for disaster risk management and is developing a disaster risk financing strategy.
- Risk‑financing tools under consideration include: risk sharing, risk pooling, contingent financing, and catastrophe‑related bonds and insurance.
- Two reserve/savings funds established for more frequent disasters with lower magnitude:
  - National Disaster Relief Fund.
  - Budget Contingency Fund (the latter not currently in use; see section VII).
- Seychelles is a member of the Southwest Indian Ocean Risk Assessment and Financing Initiative (SWIO RAFI) and is initiating the process of developing a disaster risk financing strategy.
- In collaboration with the local insurance industry:
  - An agriculture insurance scheme introduced.
  - Plans to set up an emergency assistance scheme for fishermen.
- Development Policy Loan (World Bank) with a deferred drawdown in case of a catastrophe (CAT‑DDO):
  - Provides the government with a $7 million contingent line of credit, triggered by declaration of a state of emergency.
  - Term was 2014-2017; government has expressed interest in renewing for another three years, with an expansion to $12 million.
  - Under the DPL, the DRM framework was strengthened, but progress was deemed only “moderately satisfactory” due to delays at the district level and in the Ministry of Health.

### Progress, gaps, and capacity constraints
- Enhanced preparedness and awareness have reduced vulnerability to disasters.
- Gaps remaining:
  - Legal framework requires updating to provide DRDM mandate and means to coordinate prevention and emergency response; Disaster Risk Management Act of 2013 is currently being updated.
  - Hazard maps developed for cyclones, storm surge, rainfall, floods, forest fires, and climate change issues, but not yet widely applied.
  - Little information available on multi‑hazard risks, vulnerable areas, and historic and future impacts.
  - Gaps in financial and staff resources, and technical and operational capacity of agencies to implement a comprehensive disaster risk management and climate adaptation strategy.

### Policy recommendations to reduce vulnerability to natural hazards and climate change
- Further strengthening risk‑informed land use planning and sector development.
- Reviewing building codes for residential and commercial buildings and public assets (incl. buildings, drainage, transport infrastructure, utilities) and enhancing their enforcement.
- Further developing a Disaster Risk Financing and Insurance Strategy for the public sector and promoting increased insurance penetration for the private sector.
- Developing sector‑specific and area‑specific contingency plans.
- Further strengthening the hydro‑meteorological network, and its monitoring and forecasting capacities.
- Enhancing early warning systems and emergency response.
- Further implementing coastal protection and other measures to mitigate coastal erosion.
- Increasing the urban resilience of Victoria.
- Capacity building, education and awareness among the population.
- Enhancing the technological capacity to undertake effective research on climate change modeling and risks, monitoring of climate change impacts and implementation of adaptation measures.

### Fisheries, blue economy resilience, and links to disaster/climate risk
- Fisheries sector importance:
  - Annual contribution to GDP varies from 8 percent to 20 percent.
  - Employs 17 percent of the total population.
  - Fishing license fees in 2013: SCR 98.9 million and another €7.5 million from the Fisheries Partnership Agreement with the EU.
  - In 2012, value of exports of consumable fish and fish products constituted 93 percent of the total value of domestic exports of goods.
  - Seychellois fish consumption per capita approximately 57 kg per year; fisheries products account for up to 50 percent of total protein consumed.
- Subsector descriptions and key statistics:
  - Artisanal demersal fishery: Mahé Plateau (~41,000 km2 up to 50 m deep), fished by 140 whaler‑ and schooner‑type vessels and at least 400 outboard motor vessels; total annual landed catch > 4,000 tons, valued at around US$12.5 million.
  - Industrial/semi‑industrial pelagic fisheries: In 2014, 44 purse seiners licensed reported total catch of 280,000 tons of tuna, of which 20 percent from the Seychelles EEZ. In 2014, 142 long‑liners licensed to fish within the Seychelles EEZ, of which 36 vessels were Seychelles registered; long‑liner catch in the EEZ was 7,400 tons in 2014 (after a record low of 1,343 tons in 2011).
  - Port Victoria transshipped and landed almost 250,000 tons of purse‑seined tuna in 2014.
- Environmental pressures and risks:
  - Declining catch rates and overfishing in artisanal, recreational, and sport fishing subsectors; increasing environmental footprint of tourism.
  - Fisheries are open‑access, impeding limits on fishing effort and sustainability.
  - Unsustainable use of marine environment threatens income, tourism, seafood industry, nutrition and food security; substitution of fish protein may lead to obesity and diabetes and increased import reliance.
  - Climate change effects remain uncertain and could compound impacts, requiring precautionary stock management.
- Conservation and management strategies:
  - Current protection: 55 percent of land mass and 0.02 percent of EEZ under protection.
  - Pledge to protect 30 percent of EEZ by 2020 via marine spatial planning started in 2015:
    - Identify 15 percent of EEZ as medium biodiversity areas (gazetted as “sustainable‑use marine protected areas” allowing some sustainable activities).
    - Identify 15 percent of EEZ as high biodiversity areas (managed under stricter protection; supported by a parallel GEF/UNDP project).
  - Development of management plans for nearshore fisheries, including the Mahé Plateau fisheries management plan (continuous improvement approach, focus initially on easy‑gain and priority species).
- Financing, capacity, and institutional constraints for marine management:
  - Marine areas will receive a constant and indefinite revenue stream of around US$250,000 per year from an endowment fund created with debt restructuring proceeds—insufficient for effective management.
  - Weak enabling environment: insufficient human capacity, unclear policies and strategies, limited surveillance capacity, deficient knowledge of environmental/social/economic state of fisheries, and insufficient applied fisheries research.
- SWIOFish3 project (Third South West Indian Ocean Fisheries Governance and Shared Growth Project):
  - Total project size: US$25 million to improve management of marine areas and fisheries and strengthen fisheries value chains.
  - Component 1 (US$4.15 million): Expanded sustainable‑use marine protected areas—support creation, management plans, regulations, communication, capacity building, control and surveillance, environmental research and data collection, promotion of sustainable practices, economic diversification, transition to alternative livelihoods; creation of a Blue Grants Fund.
  - Component 2 (US$4.15 million): Improved governance of priority fisheries—support finalization and implementation of Mahé Plateau and Praslin fisheries management plans; prepare/implement other fisheries management plans including sea cucumber and tuna (covering over 90 percent of fisheries in value and volume); review/update fisheries institutional framework; prepare/implement fleet management and development plan; strengthen fishers association participation; consolidate fisheries and environment statistics and monitoring systems; Blue Grants Fund to support fisheries management.

*Prepared by B. Garnaud and the Disaster Risk Management Team of the World Bank.*

### 81.      Component 3: Sustainable development of the blue economy (US$16.0 million).

### cr17162 - 81. Component 3: Sustainable development of the blue economy (US$16.0 million)

### Component design and objectives
- Component 3 budget: US$16.0 million.
- Purpose: finance sustainable development of the Seychelles blue economy and support increased value addition in aquaculture, industrial, semi-industrial, and artisanal fishing and processing sectors.
- Key interventions:
  - Strengthen enabling environment for the seafood industry, especially aquaculture, port development process, and sanitary monitoring.
  - Facilitate expansion of seafood value chains and promote synergies with other value chains (for example, tourism).
  - Create a Blue Investment Fund to finance private and public investments to implement the Mahé Plateau fisheries management plan and transition from open-access to better controlled fisheries.
  - Fund alternative business opportunities for fishers in the seafood value chain, restructuring of fishing capacity, and rebuilding of fish stocks.
- Risk mitigation for resource pressure:
  - A list of acceptable projects has been developed that includes management prerequisites (for example, management plan operational) to avoid investments creating a price signal that increases pressure on fishery resources.

### Project management and coordination
- Component 4 budget: US$1.0 million.
- Purpose: support coordination and implementation through a Project Implementation Unit (PIU) and a Steering Committee.

### Project financing and Blue Bond structure
- Project financing package:
  - US$5 million loan from IBRD.
  - US$5.3 million grant from the GEF.
  - Proceeds of the first Blue Bond issued by the Government of Seychelles (GOS).
- Blue Bond estimated issuance: US$15 million to finance part of SWIOFish3.
- Use of GEF Non-Grant Instrument Pilot and IBRD guarantee intended to lower Blue Bond cost, ideally down to the 3 percent range.
- Terms of Non-Grant Instrument Pilot to the GOS:
  - Loan with 40-year maturity.
  - 10-year grace period.
  - 0.25 percent interest rate.
- Repayment and replicability:
  - Repayment of the Blue Bond is an obligation of the GOS and will not be financially linked to the Blue Investment Fund.
  - The Blue Bond is expected to have strong replicability potential for other borrowers by attracting investors to a new field and creating an affordable financing package.

### Allocation of Blue Bond proceeds (two-track approach)
- Track 1 — Blue Grants Fund:
  - MFTEP to sign a Subsidiary Agreement with SeyCCAT.
  - Notionally US$3 million of Blue Bond proceeds to be transferred to SeyCCAT to establish a Blue Grants Fund.
  - Grants will fund activities related to:
    - Operationalization of sustainable-use marine protected areas.
    - Implementation of the Mahé Plateau fisheries management plan.
    - Transition from open-access to better controlled fisheries.
- Track 2 — Blue Investment Fund:
  - MFTEP to sign a Subsidiary Agreement with the Development Bank of the Seychelles (DBS).
  - Notionally US$12 million of Blue Bond proceeds to be transferred to DBS to establish and manage a Blue Investment Fund.
  - Commercial loans will be made to projects consistent with the Mahé Plateau fisheries management plan, focusing on economic diversification and sustainability.

### Institutional and public investment management diagnostics (selected PIMA interview responses)
- Fiscal framework and targets:
  - No fiscal rule, but a debt target is binding.
  - Debt target exists as a limit for government liabilities.
- Public investment planning and appraisal:
  - National and sectoral strategies for public investment: Yes; being updated.
  - Costing of national/sectoral strategies: This is underway.
  - Sector strategies to include measurable targets when program budgeting reform is complete.
  - Capital spending by ministries forecasted over a multiyear horizon: Yes; 3 years in PSIP.
  - Multiyear ceilings on capital expenditure: Yes; 3 years in PSIP (but allocations are annual).
  - Projections of full cost of major capital projects over life cycles published for 3 years (in PSIP).
  - Capital spending mostly undertaken through the budget: Yes.
  - Externally funded capital projects included in budget documentation: Yes.
  - Capital and recurrent budgets prepared and presented together: Yes.
  - Budget includes appropriations of recurrent costs associated with capital investment projects: Yes.
  - Standardized cost-benefit analyses used for capital projects: Yes, CBAs, but not published.
  - Standard methodology and central support for project appraisal: Yes, PIM manual (being updated).
  - Risks accounted for in project appraisals: Yes (see PIM manual).
  - Central review of major project appraisals: Yes, Development Committee.
  - Pipeline of approved investment projects for inclusion in annual budget: Yes.
- Implementation and controls:
  - Project outlays appropriated by parliament at commencement: No, appropriations are annual, but ongoing projects have priority.
  - In-year virements from capital to current spending prevented: Yes.
  - Carryover of unspent capital appropriations to future years: No, but plan to change this.
  - Cash release for project outlays: Yes, released in a timely manner.
  - Donor financing integrated into cash management and TSA: Mainly; there are some dedicated accounts.
  - Procurement process for major capital projects open and transparent: Yes.
  - Monitoring of major capital projects during implementation: Yes, on-site.
  - Ex post audits of capital projects routinely undertaken: No.
  - Ex post review/evaluation after construction phase: No.
- Asset management:
  - Surveys of stocks, values, and conditions of public assets: Asset audit being undertaken.
  - Nonfinancial asset values recorded in government balance sheets: No.
  - Depreciation of fixed assets captured in government operating statements: No (though depreciation is measured).
- PPPs and infrastructure governance:
  - PPP policy exists; Act submitted to Cabinet.
  - PPPs subject to value for money review by a dedicated PPP unit prior to approval: Yes.
  - Accumulation of explicit and/or contingent PPP liabilities systematically recorded and controlled: No.
  - Regulatory framework intends to support competition in contestable markets.
  - Independent regulators set prices of economic infrastructure services based on objective economic criteria: Yes.
  - Government oversees investment plans of infrastructure SOEs and monitors their financial performance: Yes.

### Climate change and adaptation planning template (CCPA) — thematic checklist
- Climate change risks and macro impacts:
  - Assess vulnerability of the economy to climate change and impact on macro-sustainability.
  - Table of recent and expected climatic developments.
- Preparedness and resilience:
  - Review of the NDC and other national resilience-building strategies.
  - Assessment of disaster planning and contingency readiness.
- Mitigation contribution:
  - Statement of NDC pledge and plans to meet emissions reduction targets.
  - Clean energy plans, carbon taxation, fuel subsidy policies, and other carbon pricing strategies.
  - Consideration of other macro-relevant mitigation policies.
- Adaptation plans:
  - Adequacy of national adaptation strategy and public investment plans.
  - Table of Costed Climate Change Projects (if costing has been done) in US$ million and %GDP, disaggregated into Mitigation and Adaptation.
  - Regulatory and non-investment measures supporting adaptation (e.g., zoning).
  - Financial sector preparedness and contribution.
- Financing strategy:
  - Assessment of current financing for mitigation and adaptation.
  - Consistency of climate spending and financing with fiscal and external debt sustainability.
  - Institutional issues and other macro-considerations.
- Risk management strategy:
  - Risk assessment procedures (e.g., fiscal risk statement).
  - Self-insurance capacity (government buffers, contingency provisions, rainy-day funds, NIR ...).
  - Risk reduction and transfer (insurance, pooling arrangements).
- National processes:
  - Integration of climate change into national planning and public investment management.
  - Adequacy of PFM systems for managing climate financing and outlays (on-budget treatment, multi-year budgeting).
- Priorities:
  - Identification of resources needed to achieve the climate-change strategy.

*Source: cr17162 - 81. Component 3: Sustainable development of the blue economy (US$16.0 million).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17162.pdf_