## Seychelles — IMF staff report (cr17401)

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**Canonical URL:** [Seychelles — IMF staff report (cr17401)](https://www.imf.org/-/media/files/publications/cr/2017/cr17401.pdf)

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### Progress since the 2008 crisis
- Policy actions and outcomes since 2008:
  - Total amount drawn under the three successive Fund arrangements: SDR 48.85 million, 213 percent of the country’s quota.
  - Substantial primary fiscal surpluses and strong economic growth since 2009.
  - Public-debt-to-GDP ratio reduced by almost two thirds since end-2008 through a significant debt restructuring followed by primary surpluses.
  - Gross international reserves (GIR) import coverage improved to around 4 months from less than one month at end-2008.
- Political and structural vulnerabilities:
  - Opposition party won a majority in September 2016 for first time in 40 years, potentially complicating fiscal discipline.
  - Very small open economy dependent on tourism; vulnerable to negative external shocks.

### Recent developments, outlook, and risks
- Key developments (2017):
  - Tourist arrivals grew by 19¾ percent for the first nine months of 2017.
  - Nominal exchange rate stable; GIR has overperformed staff projections for the 2017 Article IV consultation.
  - Primary surplus for first eight months of 2017 larger than expected.
  - Headline yoy CPI inflation: 3.2 percent in September 2017 (from -0.2 percent in December 2016); methodological changes estimated to have increased headline yoy inflation by about 2 percentage points starting January 2017.
  - Private sector credit growth: 14¼ percent in August 2017 from 10¼ percent at end-2016.
  - Financial soundness indicators: banks adequately capitalized and profitable.
- Outlook (conditional on prudent policies):
  - Growth: expected 4¼ percent in 2017; around 3‒3½ percent during 2018‒20.
  - Growth and FDI to pick up after lifting moratorium on large hotel construction projects at end-2020.
  - Current account deficit expected to decline gradually, then edge up after 2021 with FDI pick-up.
  - GIR import coverage expected to stay around current level as current account deficit mostly financed by FDI.
  - Inflation pressures expected benign given stagnant global commodity prices.
- Downside risks:
  - External shocks (security dislocations) could dent tourist arrivals.
  - Potential withdrawal of correspondent bank relationships (CBRs).
  - Domestic fiscal slippages from infrastructure and climate investments amid split government-legislature control.
  - Monetary risk: faster-than-assumed reduction of monetary debt could cause inflationary pressures.
  - Structural risk: natural disasters and climate change vulnerability.
- Debt sustainability caution:
  - Staff’s DSA: gross public and external financing needs remain very high; large foreign currency-denominated debt a key source of risk.

### Policy objectives and agreed package
- Agreed policy objectives over next three years:
  - (i) strengthen medium-term fiscal sustainability;
  - (ii) lock in price and external stability;
  - (iii) buttress financial stability;
  - (iv) reduce fiscal risks;
  - (v) enhance inclusive growth.
- Balancing act: reconcile infrastructure and climate investments with preserving medium-term fiscal sustainability.

### A. Strengthening fiscal sustainability — targets and measures
- Authorities’ target:
  - Primary surplus target of 2½ percent of GDP from 2018 onwards (down from prior 3 percent of GDP under earlier EFF reviews).
- Staff DSA implications:
  - Revised primary surplus leads to steady decline in public debt-to-GDP ratio to below 50 percent by 2021, one-year later than prior target, assuming unwinding of SCR 200‒250 million each year of government debt issued for monetary policy purposes.
  - Staff estimate monetary debt unwinding would not put significant pressures on inflation (see Annex III referenced in source).
- Fiscal stance and measures (2017–2020) — key quantified items (authorities’ Program Statement and staff estimates):
  - Primary surplus (percent of GDP): 2017: 3.0; 2018: 2.5; 2019: 2.5; 2020: 2.5.
  - Permanent measures (percent of GDP): 2017: 0.6; 2018: 0.9; 2019: 0.3; 2020: 0.0.
  - One-off measures (percent of GDP): 2017: 1.6; 2018: 0.3; 2019: 0.0; 2020: 0.0.
  - Primary surplus excluding one-off measures (percent of GDP): 2017: 1.4; 2018: 2.2; 2019: 2.5; 2020: 2.5.
- 2018 budget permanent fiscal measures (estimated savings: SCR 185 million, 0.85 percent of GDP):
  - Revenue measures:
    - Property tax: SCR 40 million, 0.18 percent of GDP; property tax on foreign-owned properties at rate 0.25 percent scheduled 2018.
    - Alignment of vessel registration tax: SCR 30 million, 0.14 percent of GDP.
  - Expenditure measures:
    - Containment of wage bill and goods and services: SCR 85 million, 0.39 percent of GDP (including cancellation of opening of District Councils SCR 15 million, streamlining fuel incentives SCR 5 million, stricter official travel control SCR 5 million).
    - Better targeting of social welfare: SCR 30 million, 0.14 percent of GDP.
  - Additional measures and timing:
    - Postponement of progressive personal income tax (PIT) by six months to July 1, 2018 — half-year delay estimated one-off saving ~0.3 percent of GDP in 2018.
    - Progressive PIT full-year impact expected to reduce revenue by around ½ percent of GDP; authorities plan to begin eliminating preferential business tax treatment for tourism companies in 2019 to offset revenue loss.
- Climate investments and financing:
  - Authorities’ priority climate investments estimated to cost ¼‒1¼ percent of GDP each year over next 15‒20 years.
  - Of climate projects costing around $600 million, about $35 million listed in Public Sector Investment Plan and reflected in staff’s baseline.
  - Financing mostly unidentified; staff encourage concessional external financing and exploring PPPs.

### B. Locking in monetary and external stability
- CBS monetary policy framework changes:
  - New framework introduced late June 2017: move towards an interest rate corridor while maintaining concurrent determination of quarterly reserve money.
  - CBS slightly loosened policy; average T-Bill rate declined by 60bp.
  - Intended to monitor reserve money closely during transition.
- Interest rate corridor mechanics:
  - Standing deposit facility (SDF) = floor; standing credit facility (SCF) = ceiling.
  - Aim to reduce short-term interest rate volatility and enhance monetary transmission.
  - SDF and SCF rates to be reviewed and published quarterly; repo rate discussed as candidate single policy rate.
- Monetary aggregates (selected):
  - Reserve money growth accelerated from 13.5 to 18.9 percent between June 2017 and October 2017 (partly due to loosened stance and banks’ higher holding of FX excess reserves).

### Institutional engagement and instruments
- Policy Coordination Instrument (PCI):
  - Seychelles is first member country to request a PCI.
  - Rationale: maintain close policy dialogue, signal to markets, safeguard policy discipline amid political challenges.
  - Cabinet endorsed PCI request and a wide-ranging structural reform agenda to be supported by the PCI.
  - Baseline does not require Fund financing; an on-track PCI could expedite access to Fund financing if a BOP need materializes.

### Inflation, coordination, and reserve policy
- Inflation and monetary vigilance:
  - Staff estimate more than half of inflation pickup since end-2016 attributable to methodological CPI changes.
  - CBS intends to stay vigilant for demand-pull inflation or second-round effects of electricity tariff adjustment (electricity tariff for households raised by about 20 percent effective November 1, 2017).
  - Ministry of Finance and CBS to closely coordinate on unwinding monetary debt to balance debt reduction, liquidity management, and inflation objectives.
  - Staff support continued use of reserve money target until new framework functions effectively; CBS plans to resume reverse repurchase agreements.
- Exchange rate and reserves:
  - Allowing exchange rate flexibility and preserving reserves coverage around current level key to external stability.
  - Seychellois Rupee broadly in line with fundamentals.
  - GIR currently around 170 percent of the relevant ARA metric; staff view as adequate.
  - Staff will discuss remedial actions if reserves import coverage falls below 3.8 months; reserves import coverage expected to decline marginally from slightly over 4 months at end-2016 to 3¾ months by end-2018.

### Buttressing financial stability and AML/CFT
- Offshore sector governance progress; authorities to formulate new offshore sector strategy by end-2017 focusing on transparency.
- Banks face pressures preserving CBRs; loss limited so far.
- AML/CFT:
  - National Risk Assessment completed; Cabinet approval of national AML/CFT strategy targeted by mid-2018.
  - Mutual evaluation by Eastern and Southern Africa Anti-Money Laundering Group ongoing; authorities to review and amend AML/CFT legal and institutional framework by June 2018.
  - Implement risk-based bank supervision consistent with FATF by end-2018.
  - Authorities requested Fund TA to strengthen AML/CFT framework.
- Macroprudential and supervisory reforms:
  - CBS intends full transition to Basel II and adopt Basel III capital definition by end-2018.
  - Amend legal framework for crisis management, bank resolution and safety net by end-2018.

### Reducing fiscal risks and SOE governance
- Fiscal and SOE risks:
  - Government spends about 8 percent of total outlays on interest payments.
  - Revenues of 22 SOEs reach almost 70 percent of GDP.
  - SOEs’ non-guaranteed debt estimated around 13 percent of GDP.
  - Risks: higher-than-projected fuel prices could make some SOEs loss-making (e.g., Air Seychelles); Development Bank of Seychelles (DBS) balance sheet could worsen if project loans do not perform.
- Government plans:
  - Liability management exercise to swap US$ obligations into Euros size US$154 million.
  - Plans to lengthen maturity of domestic debt to reduce rollover risks.
  - Issue Blue Bond of US$15 million early next year, guaranteed by World Bank; ~US$12 million to DBS, remainder to SeyCCAT; transfers in tranches during 2018‒23.
  - Staff urged DBS prudence in project loan selections.

- SOE governance and fiscal transparency reforms:
  - Cabinet approved SOE Action Plan in April.
  - Staff encouraged:
    - Preparation of a Fiscal Risks Statement by end-2018 for 2019 budget.
    - Quantification of cost of social obligations absorbed by SOEs by end-2018.
    - Submission of a new Code of Governance in line with OECD Guidelines to Cabinet by September 2018.

### Enhancing inclusive growth, public investment, and PPPs
- Constraints to diversification and inclusive growth:
  - Electricity ranks unfavorably in doing business; high electricity costs partly due to cross-subsidies.
  - Access to financing and infrastructure concerns; skills shortages.
- Major public investment priorities: electricity, water, marine resource management and fishery upscaling.
  - Feasibility studies indicate Mahe (about 80 percent of population) would face electricity and water shortages over medium term.
  - Victoria Port rehabilitation and expansion scheduled as PPPs; expected positive net economic cashflows over next 20 years.
- Public investment management:
  - Cabinet approved PFM Action Plan focusing on public investment management improvements (cost–benefit analyses of major public investments, reform target June 2018).
  - Electricity tariff rebalancing scheduled annually over next 8‒10 years; household tariff raised ~20 percent effective November 1, 2017.
- Government identified pipeline of bankable PPP projects; staff encouraged strengthening capacity to manage potential fiscal risks from PPPs.

### Major public investment projects (2017‒23, percent of GDP)
- PUC: Electricity Network in South Mahe Island — 2017: 0.26; 2018: 0.22; 2019: 0.30; 2020: 0.29; 2021: 0.96; 2022: 0.00; 2023: 0.00
- PUC: La Gouge Dam — 2017: 0.06; 2018: 0.26; 2019: 0.42; 2020: 0.50; 2021: 0.00; 2022: 0.00; 2023: 0.00
- PUC: Water distribution and management — 2017: 0.47; 2018: 0.27; 2019: 0.42; 2020: 0.61; 2021: 0.00; 2022: 0.00; 2023: 0.00
- Port Victoria — 2017: 0.00; 2018: 0.00; 2019: 0.00; 2020: 0.57; 2021: 0.54; 2022: 0.00; 2023: 0.00
- SWIOFISH3 — 2017: 0.06; 2018: 0.12; 2019: 0.26; 2020: 0.30; 2021: 0.29; 2022: 0.31; 2023: 0.08
- Total (major projects) — 2017: 0.85; 2018: 0.87; 2019: 1.40; 2020: 2.27; 2021: 1.78; 2022: 0.31; 2023: 0.08

### Financial inclusion and consumer protection
- National Financial Inclusion Strategy to be adopted by 2019 focusing on SMEs’ access to finance and competition.
- Financial education strategy to be finalized by end-2017.
- Financial Consumer Protection Act expected to be submitted to National Assembly by March 2018.

### Program modalities, conditionality, and monitoring
- Program Statement details policy commitments under PCI.
- Seychelles does not need Fund financial assistance under baseline; program is fully financed.
- Quantitative targets include: primary fiscal surplus; net international reserves; average reserve money (RM); continuous target on non-accumulation of external arrears.
- Program initially includes quantitative target on RM as safeguard; could shift to Monetary Policy Conditionality Clause following transition.
- Ceiling on nominal public debt set as memorandum item; reform targets build on prior EFF structural reforms.
- Downside risks to PCI assessed as moderate given track record; remaining Fund obligation small and capacity to repay strong.
- CBS plans voluntary update safeguards assessment by First Review to facilitate quick access to Fund resources if needed.

### Macroeconomic projections (selected series)
- Real GDP growth (percent): 2014: 4.5; 2015: 5.0; 2016: 4.5; 2017 (Est.): 4.2; 2018 (Est.): 3.3; 2019 (Est.): 3.3; 2020 (Proj.): 3.3; 2021 (Proj.): 4.1; 2022 (Proj.): 4.0
- CPI (annual average): 2017: 1.4; 2018: 4.0; 2019: -1.0; 2020: 3.2; 2021: 3.4; 2022: 3.3
- Current account balance (percent of GDP): 2014: -23.1; 2015: -18.6; 2016: -18.3; 2017 (Est.): -15.8; 2018 (Est.): -13.9; 2019 (Est.): -13.5; 2020 (Proj.): -13.4; 2021 (Proj.): -12.8; 2022 (Proj.): -14.0
- Total external debt outstanding (US$ millions and percent of GDP): 2014: 1,588 (118.2 percent of GDP); 2015: 1,372 (99.6 percent); 2016: 1,404 (98.2 percent); 2017 (Est.): 1,462 (98.4 percent); projections 2018: 1,516 (96.7 percent) … 2022: 1,713 (88.3 percent)
- Gross official reserves (end year, US$ millions): 2014: 462.9; 2015: 536.8; 2016: 522.6; 2017 (Est.): 526; projections: 2018: 505; 2019: 522; 2020: 558; 2021: 600; 2022: 657
- Months of imports, c.i.f. (end year): 2014: 3.9; 2015: 4.3; 2016: 4.1; 2017 (Est.): 4.0; projected steady 3.8 for 2018–2022
- Total government and government-guaranteed debt (percent of GDP): 2014: 74.6; 2015: 69.7; 2016: 72.6; 2017 (Est.): 66.9; projections: 2018: 62.7; 2019: 58.3; 2020: 53.6; 2021: 49.4; 2022: 45.4
- Program primary balance (percent of GDP): 2014: 4.9; 2015: 4.3; 2016: 3.4; 2017 (Est.): 3.0; 2018 (Est.): 2.5; 2019 (Est.): 2.5; 2020 (Proj.): 2.5; 2021 (Proj.): 2.5; 2022 (Proj.): 2.5

### Debt sustainability, shocks, and stress tests
- DSA outlook:
  - Public debt projected to fall below 50 percent of GDP by 2021 under baseline (with primary surplus of 2½ percent of GDP from 2018).
  - Gross public and external financing needs remain very high; large foreign currency-denominated debt a key risk.
- Stress-test results and scenarios:
  - Combined macro-fiscal shock: debt-to-GDP ratio would peak at around 120 percent before falling very gradually; debt-to-revenue ratio would increase to almost 300 percent.
  - Under baseline, gross financing needs fall but remain elevated (over 20 percent in 2022).
  - Real exchange rate shock: debt-to-GDP would peak around 80 percent in 2018 and remain about 16 percentage points above 50 percent target for 2021.
  - A 30 percent real depreciation would raise external debt-to-GDP to about 160 percent in 2018 and nearly 168 percent by 2022 (vs. about 88 percent under baseline).
- SOE contingent liabilities:
  - Preliminary analysis suggests additional SOE liabilities total around 13 percent of GDP, mostly SEYPEC and Air Seychelles.
  - If external debts of similar magnitude assumed by government in 2020, debt-reduction below 50 percent would be delayed by one year.
- Policy implications:
  - Steadfast fiscal consolidation and extending maturity of domestic issuance recommended to reduce rollover and currency risks.
  - Monitor SOE debts to mitigate risk of obligations migrating to government balance sheet.
  - Liability management: planned swap of US$154 million obligation into Euros (not included in baseline) and planned Blue Bond issuance US$15 million.

### Unwinding monetary debt — macro-fiscal implications and operational options
- Monetary debt status and plan:
  - Monetary debt stock at 16.2 percent of GDP at end-2016 (issuance to mop up excess liquidity).
  - Staff recommended retiring about 1.3 billion rupees of monetary debt over 2018‒2022 (about 45 percent of existing stock).
  - Such unwinding with primary surplus of 2.5 percent of GDP would:
    - increase broad money by about 6 percent on average over this period;
    - lead to reaching debt target below 50 percent of GDP by 2021.
  - Assuming constant velocity, unwinding would result in a 1 percentage points increase in inflation.
- Operational options to cushion impacts:
  - Use reverse repo operations: CBS to use stock of government securities at CBS in reverse repo to mop up liquidity; Master Repurchase Agreement pending but operations possible.
  - Estimated cost to CBS: about 10 million rupees per year.
  - Minimize FX interventions; allow exchange rate flexibility to reduce sterilization needs and monetary debt accumulation.

### Financial sector modernization and payment system reforms
- Ongoing reforms:
  - National payment switch to clear local rupee transactions domestically.
  - Plans for Central Securities Depository and Real Time Gross Settlement system.
  - Credit Information System redesign and new Credit Reporting Act expected before end-2018.
  - Internal audit transformation and external Quality Assurance review scheduled.
- FSDIP deliverables include legal/regulatory strengthening, financial infrastructure and consumer protection improvements.

### Program monitoring, targets, and timelines
- PCI review schedule and test dates:
  - Board discussion: December 13, 2017.
  - First Review: Test Date December 31, 2017; Review Date April 30, 2018.
  - Subsequent reviews through Sixth Review: Test Date June 30, 2020; Review Date October 31, 2020.
- Quantitative targets (selected test-date values):
  - Net international reserves (floor, US$ millions): 391 (Dec 2017); 406 (Mar); 393 (Jun); 389 (Sep); 375 (Dec).
  - Reserve money target (ceiling, daily average): 3,766 (Dec 2017); 3,635 (Mar); 3,643 (Jun); 3,885 (Sep); 4,030 (Dec).
  - Primary balance (cumulative floor, SCR millions): 615 (Dec 2017); 115 (Mar); 284 (Jun); 571 (Sep); 538 (Dec).
  - Memorandum: Nominal public debt (millions SCR): 13,536 (Dec 2017); 13,740 (Mar); 13,692 (Jun); 13,595 (Sep); 13,534 (Dec).
- Continuous targets: no restrictions on payments and transfers for current international transactions; no multiple currency practices; no inconsistent bilateral payments arrangements; no import restrictions for BOP reasons.
- Technical Memorandum of Understanding: definitions, monitoring, reporting schedules and program exchange rates specified (SCR13.6735 per US$1 for 2017 and 2018; US$/Euro 1.19; US$/UK pound 1.29; US$/AUD 0.79; US$/CAD 0.80; US$/CNY 0.15; US$/SDR 1.41).

### Lessons learned and program assessment
- Ex post assessment of longer-term program engagement (2008–17):
  - Three consecutive Fund-supported programs (2008‒09 SBA; 2009‒13 EFF; 2014‒17 EFF) restored macroeconomic stability and supported structural reforms.
  - Structural reforms reduced public debt by around 40 percentage points (post-2009), strengthened public finance management, and modernized financial system.
  - Average real GDP growth 2009‒16: 4¼ percent; average primary surplus 2009‒16: 6½ percent.
  - Program conditionality largely met; some fiscal slippage in 2016 prompted flexibility.
- Key lessons:
  - Strong ownership critical to program success.
  - Balancing social needs and macroeconomic stability important; staff should exercise flexibility when social objectives create program slippages.
  - Structural agenda should emphasize inclusive growth.
  - Continued Fund engagement could help safeguard stability and promote reforms.

*Source: IMF staff report (cr17401).*

### 1.  Seychelles has made considerable progress toward macroeconomic stability and

### 1.  Seychelles has made considerable progress toward macroeconomic stability and 

### Progress since the 2008 crisis
- Since the 2008 balance of payments (BOP) and debt crisis, the authorities implemented prudent macroeconomic policies and comprehensive structural reforms supported by three Fund arrangements.
- Outcomes and key figures:
  - Total amount drawn under the three successive Fund arrangements: SDR 48.85 million, 213 percent of the country’s quota.
  - Substantial primary fiscal surpluses and strong economic growth since 2009.
  - Public-debt-to-GDP ratio reduced by almost two thirds since end-2008 through a significant debt restructuring followed by primary surpluses.
  - Gross international reserves (GIR) import coverage improved to around 4 months from less than one month at end-2008.
- Political context and vulnerabilities:
  - The opposition party won a majority for the first time in 40 years in September 2016, weakening the President’s party and potentially complicating fiscal discipline.
  - Seychelles is a very small open economy dependent on tourism and remains vulnerable to negative external shocks.

### Recent developments, outlook, and risks
- Recent performance (figures and developments):
  - Tourist arrivals grew by 19¾ percent for the first nine months of 2017, with strong growth from major European markets and the United Arab Emirates (UAE).
  - Nominal exchange rate stable; GIR has overperformed staff projections for the 2017 Article IV consultation.
  - Primary surplus for the first eight months of 2017 larger than expected due to strong business tax revenues and lower current and capital expenditure.
  - Headline year-on-year (yoy) CPI inflation: 3.2 percent in September 2017, up from -0.2 percent in December 2016.
    - Methodological changes to CPI statistics introduced in May were applied retroactively starting January 2017; these changes are estimated to have increased the headline yoy inflation rate by about 2 percentage points starting January 2017.
  - Private sector credit growth: 14¼ percent in August 2017 from 10¼ percent at end-2016.
  - Financial soundness indicators: banks are adequately capitalized and profitable.
- Outlook and projections (conditional on maintaining prudent policies):
  - Growth expected to reach 4¼ percent in 2017 before easing to the potential rate of around 3‒3½ percent during 2018‒20.
  - Growth and FDI should pick up after lifting of the moratorium on large hotel construction projects at end-2020.
  - Current account deficit expected to decline gradually for the next few years, then edge up after 2021 due to expected pick up in FDI.
  - GIR import coverage expected to stay around the current level as the current account deficit continues to be mostly financed by FDI.
  - Inflation pressures in coming months expected to be benign given stagnant global commodity prices.
- Risks:
  - Downside: external shocks (security dislocation in parts of the Middle East, Africa, and Europe) that could dent tourist arrivals; potential withdrawal of correspondent bank relationships (CBRs); domestic fiscal slippages from infrastructure and climate investments amid split government-legislature control.
  - Monetary risk: a faster-than-assumed reduction of monetary debt could cause inflationary pressures.
  - Structural risk: vulnerability to natural disasters and climate change as a small archipelago.
  - Debt sustainability note: staff’s DSA indicates gross public and external financing needs remain very high; large foreign currency-denominated debt is a key source of risk.

### Policy discussions — objectives and agreed package
- Mission and authorities agreed on policies over the next three years to:
  - (i) strengthen medium-term fiscal sustainability;
  - (ii) lock in price and external stability;
  - (iii) buttress financial stability;
  - (iv) reduce fiscal risks; and
  - (v) enhance inclusive growth.
- Balancing act: policy design seeks to reconcile authorities’ emphasis on infrastructure building and climate change investments with preserving medium-term fiscal sustainability, drawing lessons from previous Fund programs.

### A. Strengthening Fiscal Sustainability
- Authorities’ target:
  - Primary surplus target of 2½ percent of GDP from 2018 onwards.
  - This target is slightly lower than the 3 percent of GDP target committed at the time of the 4th and 5th reviews under the previous EFF to create space for scaled-up infrastructure investments.
- Staff DSA implications:
  - The revised primary surplus would lead to a steady decline in the public debt-to-GDP ratio to below 50 percent by 2021, one-year later than the authorities’ prior target, assuming an unwinding of SCR 200‒250 million each year of government debt issued for monetary policy purposes.
  - Staff estimate that the monetary debt unwinding assumed under the baseline would not put significant pressures on inflation (see Annex III referenced in source).
- Fiscal stance and measures (2017–2020) — key quantified items (from authorities’ Program Statement and staff estimates):
  - Primary surplus (in percent of GDP): 2017: 3.0; 2018: 2.5; 2019: 2.5; 2020: 2.5.
  - Permanent measures (in percent of GDP): 2017: 0.6; 2018: 0.9; 2019: 0.3; 2020: 0.0.
  - One-off measures (in percent of GDP): 2017: 1.6; 2018: 0.3; 2019: 0.0; 2020: 0.0.
  - Primary surplus excluding one-off measures (in percent of GDP): 2017: 1.4; 2018: 2.2; 2019: 2.5; 2020: 2.5.
- 2018 budget and permanent fiscal measures (estimated savings):
  - Total estimated saving: SCR 185 million, 0.85 percent of GDP.
  - Revenue measures:
    - Introduction of a property tax: SCR 40 million, 0.18 percent of GDP.
      - A property tax on foreign-owned properties with a rate of 0.25 percent is scheduled to enter effect in 2018.
      - Staff recommended the tax be non-discriminatory (i.e., also applied to residents); authorities designed it to target nonresidents to help fill the 2018 fiscal gap; discussions to continue in first review.
    - Alignment of vessel registration tax with international standards: SCR 30 million, 0.14 percent of GDP.
  - Expenditure measures:
    - Containment of growth in wage bill and goods and services: SCR 85 million, 0.39 percent of GDP.
      - Of which: Cancellation of opening of District Councils SCR 15 million, 0.07 percent of GDP; Streamlining of fuel incentives for fishery industry SCR 5 million, 0.02 percent of GDP; Stricter control on official travel SCR 5 million, 0.02 percent of GDP.
    - Better targeting of social welfare: SCR 30 million, 0.14 percent of GDP.
  - Additional measures and timing:
    - Postponement of the introduction of a progressive personal income tax (PIT) by six months to July 1, 2018 — the half-year delay is estimated to produce one-off saving of around 0.3 percent of GDP in 2018.
    - Authorities plan to begin eliminating preferential business tax treatment for tourism companies in 2019 to offset revenue loss from the progressive PIT on a full-year basis (the introduction of a progressive PIT will reduce revenue by around ½ percent of GDP on a full-year basis; preferential treatments expire at end-2018).
    - Containment of nominal growth in the wage bill and goods and services to continue after 2019 through removing duplication, new staffing/recruitment plan, reducing tourism offices/embassies, and procurement reforms.
- Climate change and investment financing:
  - Authorities’ priority climate change mitigation and adaptation investments estimated to cost ¼‒1¼ percent of GDP each year over the next 15‒20 years.
  - Out of climate projects costing around $600 million, projects amounting to about $35 million are listed in the authorities’ Public Sector Investment Plan and reflected in staff’s baseline.
  - Financing for most of these investments is yet to be identified; staff encouraged seeking concessional external financing and exploring PPPs to reduce fiscal burden.

### B. Locking in Monetary and External Stability
- Central Bank of Seychelles (CBS) policy framework changes:
  - CBS introduced a new monetary policy framework in late June 2017, moving towards an interest rate corridor while maintaining concurrent determination of quarterly reserve money.
  - The CBS slightly loosened monetary policy; average T-Bill rate declined by 60bp.
  - In the transition, the CBS intends to closely monitor reserve money.
- Interest rate corridor mechanics and aims:
  - Formalization of a standing deposit facility (SDF) and standing credit facility (SCF) to form the basis of an interest rate corridor (SDF is the floor; SCF is the ceiling).
  - The corridor aims to reduce short-term interest rate volatility and enhance monetary transmission.
  - The SDF and SCF rates will be reviewed and published quarterly.
  - The framework does not yet embody a single policy rate; discussions suggested the repo rate as a candidate.
- Performance and technical assistance:
  - The reintroduction of the corridor appears relatively more effective than a prior 2014 attempt; short-term interest rates have been inside the corridor.
  - The CBS has been receiving technical assistance from the Fund to support the transition.
- Monetary aggregates:
  - Reserve money growth accelerated from 13.5 to 18.9 percent between June 2017 and October 2017, reflecting partly the cautious loosening stance and largely banks’ higher holding of FX excess reserves in response to exchange rate depreciation.

### Institutional engagement and instruments
- Authorities requested a Policy Coordination Instrument (PCI):
  - Seychelles is the first member country to request a PCI.
  - Rationale: maintain close policy dialogue with the Fund, provide a positive signal to markets, and safeguard policy discipline amid political challenges.
  - The Cabinet endorsed a PCI request and a wide-ranging structural reform agenda to be supported by the PCI.
  - Good PCI performance would signal commitment to strong policies and help reduce external financing costs; while the baseline does not require Fund financing, an on-track PCI could expedite access to Fund financing in the event of a BOP need.

_International Monetary Fund — Country Report content as provided in the supplied source unit._

### 14.  The CBS should stay vigilant to any sign of inflationary pressures and closely coordinate

### 14.  The CBS should stay vigilant to any sign of inflationary pressures and closely coordinate with the Ministry of Finance on monetary debt

### Inflation, monetary policy framework, and coordination
- Headline yoy inflation rate has picked up since end-2016; staff estimate that more than half of the increase is attributable to methodological changes (see ¶5).
- Staff agreed with the CBS that near-term inflation pressures would be benign (see ¶6).
- The CBS intends to stay vigilant to any sign of demand-pull inflationary pressures or second-round effects of electricity tariff adjustment which took place in early November (PS ¶20).
  - Electricity tariff for households was raised by about 20 percent effective of November 1, 2017.
- The Ministry of Finance and the CBS will closely coordinate on the unwinding of the monetary debt so that the government’s debt reduction and the CBS’ liquidity management and inflation objectives would be balanced (PS ¶26).
- Staff supported the CBS’ continued use of the reserve money target until the new monetary policy framework functions effectively.
  - The CBS plans to resume the use of reverse repurchase agreements as additional tools to remove excess liquidity from the system (Annex III).
  - Transitioning to the new framework would require enhancing capacity for inflation forecasting, liquidity management, policy communication, and interbank market infrastructure.

### Exchange rate policy and reserve adequacy
- Allowing exchange rate flexibility and preserving reserves coverage at around the current level are key to reducing vulnerability and ensuring external stability over the medium term.
- Latest assessment: Seychellois Rupee broadly in line with fundamentals (broadly unchanged from the 2017 Article IV) (Annex IV).
- GIR currently stands at around 170 percent of the relevant ARA metric, which staff view as adequate given vulnerability to external shocks and natural disasters.
- Staff encouraged the CBS to allow greater exchange rate flexibility by limiting foreign exchange purchases only to the extent needed to preserve the reserves coverage ratio at around the current level.
- Staff will discuss remedial actions with the authorities should the reserves’ import coverage ratio fall below 3.8 months on the back of higher than projected imports.
  - While the reserves’ import coverage is expected to decline marginally from slightly over 4 months at end-2016 to 3¾ months by end-2018, staff view this level as still adequate.

### Buttressing financial stability
- Significant progress is being made to improve governance in the offshore sector (see Country Report No. 17/160).
- Banks continue to face pressures in preserving correspondent banking relationships (CBRs); loss of CBRs has been limited so far.
- Authorities completed the AML/CFT National Risk Assessment; Cabinet approval of a national AML/CFT strategy targeted by mid-2018 (PS ¶31).
- A mutual evaluation by the Eastern and Southern Africa Anti-Money Laundering Group is ongoing; following this evaluation, authorities will review and amend the AML/CFT legal and institutional framework in line with international standards and best practices by June 2018 (PS ¶31, reform target).
- Authorities will start implementing a risk-based approach to bank supervision consistent with the Financial Action Task Force (FATF) framework by end-2018 (reform target).
- Authorities undertook outreach to maintain CBRs, including meetings with global banks and regulators and participation in a peer-learning conference on CBRs in Sub-Saharan Africa (October 2017 IMF Annual Meetings).
- Authorities intend to formulate a new strategy for the offshore sector by end-2017, focusing on shifting to a more transparent business model (PS ¶30).
- Authorities have requested TA from the Fund to strengthen the AML/CFT framework.

### Macroprudential and supervisory reforms
- The CBS intends to complete a full transition to Basel II and adopt the Basel III capital definition by end-2018 (PS ¶33).
- Completing these reforms would support financial stability and reduce the risk of further loss of CBRs via international capital adequacy assessment processes and a more risk-based supervisory approach.
- To address weaknesses in the legal framework for crisis management, bank resolution and safety net identified by the MCM/AFRITAC South TA mission in late 2016, the CBS intends to amend the relevant regulatory framework by end-2018 (PS ¶32, reform target).

### Reducing fiscal risks and debt management
- Government spends about 8 percent of its total outlays on interest payments.
- Revenues of 22 SOEs reach almost 70 percent of GDP in Seychelles.
- SOEs’ non-guaranteed debt is estimated at around 13 percent of GDP, implying sizable contingent liabilities.
- Risks highlighted:
  - Significantly higher than projected international fuel prices could make some SOEs (such as Air Seychelles) loss-making again.
  - The balance sheet of the Development Bank of Seychelles (DBS) could worsen if project loans to marine resource projects do not perform.
- Government plans and actions:
  - Liability management exercise to swap current US dollar obligations into Euros in coming months; the size of this liability management exercise would be US$154 million (PS¶16).
  - Plans to lengthen the maturity of domestic debt to reduce rollover risks (PS¶17).
  - Issuance of a Blue Bond of US$15 million early next year, guaranteed by the World Bank to lower interest cost.
    - About $12 million of the bond proceeds will be transferred to the DBS to make loans to eligible fisheries and marine resource management projects.
    - The rest will be transferred to the Seychelles Conservation and Climate Adaptation Trust (SeyCCAT).
    - Transfers of Blue Bond proceeds to the DBS and SeyCCAT will be done in tranches during 2018‒23.
  - Staff urged the DBS to be prudent in project loan selections given its prominent role in the SWIOFish3 project.

### SOE governance and fiscal transparency reforms
- Cabinet approved the SOE Action Plan in April to address weaknesses identified by AFRITAC South and the World Bank in 2016.
- Staff encouraged implementation of key components as envisaged in the PS, including:
  - Preparation of a Fiscal Risks Statement by end-2018 to be included in the 2019 budget (reform target).
  - Quantification of the cost of social obligations being absorbed by SOEs by end-2018 (reform target).
  - Submission of a new Code of Governance in line with the OECD Guidelines to the Cabinet by September 2018 (reform target).
- These measures aim to improve fiscal transparency, risk management, and SOE efficiency over the medium term.

### Enhancing inclusive growth, public investment, and PPPs
- Economic diversification is necessary to enhance inclusive growth; constraints include business climate issues.
  - Electricity ranks unfavorably in the World Bank’s doing business indicators; businesses report high electricity costs partly due to cross-subsidies.
  - Access to financing and infrastructure concerns are among the most problematic factors in the World Economic Forum business survey.
- Major public investment priorities: electricity, water, and marine resource management and fishery upscaling (Box 2).
  - Feasibility studies indicate Mahe Island (about 80 percent of population) would face significant electricity and water supply shortages over the medium term.
  - Victoria Port rehabilitation and expansion project scheduled as PPPs; expected to yield significantly positive net economic cashflows over the next 20-year horizon.
- Government intends to shift spending composition from current to capital outlays over the next several years.
- Enhancing efficiency of public investments is critical for infrastructure gap, growth potential, and fiscal sustainability.
  - Cabinet approved the PFM Action Plan in April focusing on public investment management improvements identified in the PEFA assessment (late 2016).
  - Key elements include strengthening capital project selection, conducting cost-benefit analyses of major public investments (reform target, June 2018), and monitoring (PS¶10‒11).
- Electricity tariff rebalancing:
  - Rebalancing scheduled annually over the next 8‒10 years.
  - Electricity tariff for households was raised by about 20 percent effective of November 1, 2017.
- The government has identified a pipeline of bankable PPP projects; staff encouraged strengthening capacity to manage potential fiscal risks arising from PPPs.

### Specific public investment figures (2017‒23, in percent of GDP) — Major public investment projects
- PUC: Electricity Network in South Mahe Island — 2017: 0.26; 2018: 0.22; 2019: 0.30; 2020: 0.29; 2021: 0.96; 2022: 0.00; 2023: 0.00
- PUC: La Gouge Dam — 2017: 0.06; 2018: 0.26; 2019: 0.42; 2020: 0.50; 2021: 0.00; 2022: 0.00; 2023: 0.00
- PUC: Water distribution and management — 2017: 0.47; 2018: 0.27; 2019: 0.42; 2020: 0.61; 2021: 0.00; 2022: 0.00; 2023: 0.00
- Port Victoria — 2017: 0.00; 2018: 0.00; 2019: 0.00; 2020: 0.57; 2021: 0.54; 2022: 0.00; 2023: 0.00
- SWIOFISH3 — 2017: 0.06; 2018: 0.12; 2019: 0.26; 2020: 0.30; 2021: 0.29; 2022: 0.31; 2023: 0.08
- Total (major projects) — 2017: 0.85; 2018: 0.87; 2019: 1.40; 2020: 2.27; 2021: 1.78; 2022: 0.31; 2023: 0.08
  - Source: Ministry of Finance and staff estimates (Major public investment projects, 2017‒23, in percent of GDP).

### Financial inclusion and consumer protection
- Authorities plan to adopt a National Financial Inclusion Strategy by 2019 focusing on enhancing SMEs’ access to finance and competition in the financial sector (PS ¶35-37).
- Strategy for financial education to be finalized by end-2017 to increase financial capability.
- Legal framework for financial consumer protection: Financial Consumer Protection Act expected to be submitted to the National Assembly by March 2018.

### Program modalities, conditionality, and risks
- The attached Program Statement (PS) details policy commitments under the new PCI.
- Seychelles does not need the Fund’s financial assistance under the baseline and is not seeking Fund financial assistance as the program is fully financed.
- Reviews are set out in Table 6 with quantitative targets for key macro variables monitored under previous EFF: primary fiscal surplus; net international reserves; average reserve money (RM); continuous target on non-accumulation of external arrears (PS Table 1a).
- Standard continuous targets on trade and exchange restrictions, bilateral payments arrangements and multiple currency practices apply throughout the PCI (PS Table 1b).
- Program initially includes a quantitative target on RM as a safeguard; following successful transition to the new policy framework, the program could shift to a Monetary Policy Conditionality Clause (MPCC).
- Given that public debt reduction is an anchor, a ceiling on the nominal level of public debt is set as a memorandum item.
- Authorities’ reform targets for the next 12 months build on prior EFF structural reforms (proposed in PS Table 2).
- Downside risks to a PCI are assessed as moderate given Seychelles’ track record under successive Fund arrangements over the past eight years.
- Seychelles’ remaining obligation to the Fund is relatively small and its capacity to repay the Fund is strong.
- Proposed program addresses vulnerability to external shocks, DSA heatmap concerns, and potential fiscal slippage risks including those from the SOE sector.
- Although a safeguards assessment is not required under a PCI, the CBS plans to complete a voluntary update safeguards assessment by the time of the First Review to facilitate quick access to Fund resources if a BOP need materializes.

*Source: IMF staff report (cr17401).*

### 28.  Despite the impressive progress made since the 2008 crisis under the three successive

### Despite the impressive progress made since the 2008 crisis under the three successive Fund arrangements, Seychelles continues to face challenges.

### Macroeconomic progress and vulnerabilities
- Public debt to GDP ratio has been reduced by almost two thirds during the period.
- International reserves coverage has improved to around four months of prospective imports from less than one month at end-2008.
- Despite gains, Seychelles remains vulnerable to external shocks and faces challenges to maintain fiscal discipline over the next few years.

### Fund engagement and financing status
- The last EFF expired in early June and the country no longer needs Fund financial assistance.
- The authorities recently requested a PCI.
- The request is supported by strong domestic ownership, as with the previous three Fund arrangements.

### Fiscal policy stance and medium-term path
- Authorities target a primary surplus of 2½ percent of GDP from 2018 onwards.
- The 2018 budget incorporates permanent revenue enhancing and expenditure saving measures of almost 1 percent of GDP to achieve the primary surplus target.
- The authorities have expressed commitment to keep a tight rein on current expenditures after 2019 to shore up the primary surplus target.
- The primary surplus of 2½ percent of GDP is estimated to be sufficient to keep the public debt to GDP ratio on a firm declining track and reduce it below 50 percent by 2021.
- Authorities’ proposed fiscal path is described as credible and balances preserving economic stability, fiscal sustainability, and addressing investment needs.

### Additional fiscal space and climate resilience
- Further fiscal space will be needed over the medium term beyond that required to secure the debt target to accommodate investments aimed at enhancing resilience to climate change.
- Authorities intend to shift spending from current to capital outlays over the medium term by rationalizing social welfare spending and containing growth in wage bills and goods and services.
- Authorities are exploring the possibility of additional revenue measures discussed at the time of the 2017 Article IV consultation.

### Monetary policy, exchange rate, and reserves
- Staff support the CBS’ intention to stay watchful for demand-pull inflationary pressures or second-round effects of the recent electricity tariff adjustment.
- The exchange rate appears broadly in line with fundamentals and the level of the reserves buffer is estimated to be adequate.
- CBS is advised to allow greater exchange rate flexibility with minimal intervention to preserve reserves import coverage ratios at around the current level.
- Staff welcome the introduction of a new monetary policy framework in which interest rates play a prominent role; this framework would enhance monetary transmission in the medium term.
- CBS is encouraged to improve capacity for inflation forecasting, liquidity management, communication of policy intentions, and to further develop interbank market infrastructure.

### Financial integrity and correspondence banking risks
- Authorities should continue efforts to address risks of further potential loss of correspondent banking relationships (CBRs).
- Urged actions include aligning the AML/CFT framework with international standards and best practices and enhancing entity transparency in the offshore sector.
- Authorities are encouraged to continue efforts at the regional/international level to make the case for maintaining CBRs by global banks.

### Structural reforms and public investment management
- Authorities are committed to implementing the SOE Action Plan to address remaining weaknesses in the SOE sector.
- Given emphasis on scaling up infrastructure, better management of public investment is key to address the infrastructure gap, boost inclusive growth prospects, and shore up fiscal sustainability.
- Authorities are encouraged to steadfastly implement the PFM Action Plan to address remaining issues in public investment management.
- Continued efforts to deepen and diversify tourism and upgrade the fishery industry under the “Blue Economy” initiatives could help ensure that the fruits of economic growth are shared more widely throughout the economy.

### Program risks and assessment
- Risks to the program appear to be contained given Seychelles’ impressive track record under the successive Fund arrangements.
- The proposed program effectively addresses Seychelles’ perennial vulnerability to external shocks, areas of concern raised in the DSA heatmap, and potential fiscal slippage risks.

*Source: IMF country report text.*

### 37. Staff recommend approval of the PCI.

### 37. Staff recommend approval of the PCI

### Macroeconomic outlook and growth projections
- Real GDP growth:
  - 2014: 4.5
  - 2015: 5.0
  - 2016: 4.5
  - 2017 (Est.): 4.2
  - 2018 (Est.): 3.3
  - 2019 (Est.): 3.3
  - 2020 (Proj.): 3.3
  - 2021 (Proj.): 4.1
  - 2022 (Proj.): 4.0
- Inflation (CPI, annual average and end-of-period):
  - CPI (annual average): 2017: 1.4; 2018: 4.0; 2019: -1.0; 2020: 3.2; 2021: 3.4; 2022: 3.3
  - CPI (end-of-period): 2017: 0.5; 2018: 3.2; 2019: -0.2; 2020: 4.4; 2021: 3.4; 2022: 3.3
- GDP deflator average: 2017: 2.3; 2018: 2.0; 2019: -0.7; 2020: 2.2; 2021: 3.8; 2022: 3.0
- Nominal GDP (2014 baseline in US$): US$1,349 million (nominal GDP 2014). Nominal GDP in Seychelles rupees (millions): 17,119 (2017), 18,336 (2018), 19,033 (2019), 20,281 (2020), 21,747 (2021), 23,144 (2022).

### External sector and reserves
- Current account balance (percent of GDP):
  - 2014: -23.1
  - 2015: -18.6
  - 2016: -18.3
  - 2017 (Est.): -15.8
  - 2018 (Est.): -13.9
  - 2019 (Est.): -13.5
  - 2020 (Proj.): -13.4
  - 2021 (Proj.): -12.8
  - 2022 (Proj.): -14.0
- Total external debt outstanding (millions of U.S. dollars) and percent of GDP:
  - 2014: 1,588 (118.2 percent of GDP)
  - 2015: 1,372 (99.6 percent of GDP)
  - 2016: 1,404 (98.2 percent of GDP)
  - 2017 (Est.): 1,462 (98.4 percent of GDP)
  - Projections: 2018: 1,516 (96.7 percent); 2019: 1,551 (93.5 percent); 2020: 1,592 (91.1 percent); 2021: 1,648 (89.3 percent); 2022: 1,713 (88.3 percent)
- Gross official reserves (end of year, millions of U.S. dollars):
  - 2014: 462.9
  - 2015: 536.8
  - 2016: 522.6
  - 2017 (Est.): 526
  - Projections: 2018: 505; 2019: 522; 2020: 558; 2021: 600; 2022: 657
- Months of imports, c.i.f. (end of year): 2014: 3.9; 2015: 4.3; 2016: 4.1; 2017 (Est.): 4.0; projected steady 3.8 for 2018–2022
- Percentage of IMF reserve adequacy metric: 2014: 142; 2015: 182; 2016: 181; 2017 (Est.): 177; projections: 2018: 167; 2019: 171; 2020: 180; 2021: 188; 2022: 202

### Fiscal performance and public debt
- Government budget aggregates (percent of GDP unless indicated):
  - Total revenue, excluding grants: 2014: 34.3; 2015: 33.4; 2016: 36.6; 2017 (Est.): 38.1; 2018 (Est.): 37.0; 2019 (Est.): 36.3; 2020 (Proj.): 36.2; 2021 (Proj.): 36.2; 2022 (Proj.): 36.2
  - Expenditure and net lending: 2014: 34.6; 2015: 32.8; 2016: 38.1; 2017 (Est.): 40.3; 2018 (Est.): 39.5; 2019 (Est.): 38.2; 2020 (Proj.): 37.3; 2021 (Proj.): 37.1; 2022 (Proj.): 36.9
  - Current expenditure: 2014: 28.0; 2015: 28.0; 2016: 33.1; 2017 (Est.): 33.8; 2018 (Est.): 32.6; 2019 (Est.): 31.3; 2020 (Proj.): 29.7; 2021 (Proj.): 29.4; 2022 (Proj.): 28.8
  - Capital expenditure (percent of GDP): 2014: 6.7; 2015: 4.8; 2016: 5.0; 2017 (Est.): 6.5; 2018 (Est.): 6.9; 2019 (Est.): 6.9; 2020 (Proj.): 7.6; 2021 (Proj.): 7.7; 2022 (Proj.): 8.2
  - Overall balance, including grants: 2014: 2.1; 2015: 0.9; 2016: -1.4; 2017 (Est.): 0.8; 2018 (Est.): -0.7; 2019 (Est.): -0.5; 2020 (Proj.): -0.3; 2021 (Proj.): -0.2; 2022 (Proj.): 0.0
  - Program primary balance (percent of GDP): 2014: 4.9; 2015: 4.3; 2016: 3.4; 2017 (Est.): 3.0; 2018 (Est.): 2.5; 2019 (Est.): 2.5; 2020 (Proj.): 2.5; 2021 (Proj.): 2.5; 2022 (Proj.): 2.5
- Total government and government-guaranteed debt (percent of GDP):
  - 2014: 74.6
  - 2015: 69.7
  - 2016: 72.6
  - 2017 (Est.): 66.9
  - Projections: 2018: 62.7; 2019: 58.3; 2020: 53.6; 2021: 49.4; 2022: 45.4
- Debt composition (percent of GDP):
  - Domestic (including debt issued for monetary purposes): 2014: 33.5; 2015: 34.8; 2016: 40.4; 2017 (Est.): 37.0; 2018 (Est.): 34.4; 2019 (Est.): 32.1; 2020 (Proj.): 29.0; 2021 (Proj.): 26.5; 2022 (Proj.): 24.0
  - External: 2014: 41.1; 2015: 34.9; 2016: 32.2; 2017 (Est.): 29.9; 2018 (Est.): 28.3; 2019 (Est.): 26.2; 2020 (Proj.): 24.7; 2021 (Proj.): 22.9; 2022 (Proj.): 21.4
- Notable fiscal details from consolidated government operations (millions of Seychelles rupees, 2017 actual, 2018 act./prel./proj. series):
  - Total revenue and grants (2017 act.): 6,413; 2018 act.: 6,276; 2019 act./prel.: 7,205/8,134; 2019–2020 (quarterly totals listed)
  - Total revenue (2017): 5,870; total expenditure and net lending (2017): 5,981
  - Interest due (2017): 404; interest due (2019 Prel.): 714
  - Capital expenditure (2017): 1,011; capital expenditure (2019 Prel.): 909; capital expenditure (2020 Proj.): 1,155

### Monetary sector and liquidity
- Broad money (12–month percent change):
  - 2014: 26.6
  - 2015: 2.9
  - 2016: 12.1
  - 2017 (projected series, quarterly values): 14.3; 8.1 (2018 projection)
- Reserve money (end-of-period; 12–month percent change):
  - 2014: 13.9
  - 2015: 9.5
  - 2016: 14.5
  - 2017 (quarterly): 18.7; projected 7.0 (2018)
- Money multiplier (broad money/reserve money): 2014: 5.0; 2015: 4.7; 2016: 4.6; 2017 quarters range: 4.4–4.9; projected 4.4 (2018)
- Credit to the private sector (12–month percent change): 2014: 26.2; 2015: 7.8; 2016: 10.3; 2017 (quarterly range): 15.7; projected 9.1 (2018)
- Central Bank net foreign assets (millions SR): 2014: 5,906; 2016 Dec.: 6,953; 2017 (quarterly range): 6,655–6,941; projected 6,447
- Gross official reserves (memorandum, millions of U.S. dollars): see External sector section above (e.g., 2017 Est.: 526)

### Financial sector soundness
- Banking sector capital and asset quality (selected indicators, percent, end-of-period):
  - Regulatory capital to risk weighted assets: Q4 2012: 26.7; Q4 2013: 26.7; Q4 2014: 21.7; 2015 Q4: 23.3; 2016 Q4: 26.6; 2017 Q2: 23.4
  - Regulatory tier 1 capital to risk weighted assets: range reported, e.g., 19.3 (2012 Q4) to 19.7 (2017 Q2)
  - Capital to assets (net worth): 2012 Q4: 10.3; 2016 Q4: 11.8; 2017 Q2: 10.8
  - Non-performing loans to gross loans: 2012 Q4: 9.3; 2013 Q4: 9.4; 2014 Q4: 8.2; 2015 Q4: 7.1; 2016 Q4: 6.8; 2017 Q2: 6.9
  - Provisions as percentage of non-performing loans: 2012 Q4: 29.5; 2013 Q4: 39.2; 2014 Q4: 43.9; 2015 Q4: 46.0; 2016 Q4: 37.4; 2017 Q2: 35.6
  - Return on assets (annualized): 2012 Q4: 3.1; 2013 Q4: 1.9; 2014 Q4: 3.3; 2015 Q4: 3.5; 2016 Q4: 3.8; 2017 Q2: 4.0
  - Return on equity (annualized): 2012 Q4: 29.8; 2013 Q4: 19.6; 2014 Q4: 38.2; 2015 Q4: 37.5; 2016 Q4: 34.8; 2017 Q2: 36.8
- Liquidity indicators:
  - Core liquid assets to total assets: Q4 2012: 39.6; Q4 2013: 41.6; Q4 2016: 28.6; 2017 Q2: 40.2
  - Broad liquid assets to total assets: Q4 2012: 52.0; Q4 2013: 54.7; Q4 2016: 47.2; 2017 Q2: 57.2

### Balance of payments highlights (2014–22 series)
- Current account (US$ millions):
  - 2014: -310 (percent of GDP: -23.1)
  - 2015: -256 (-18.6)
  - 2016: -261 (-18.3)
  - 2017 (Est.): -235 (-15.8)
  - 2018 (Est.): -218 (-13.9)
  - 2019 (Est.): -224 (-13.5)
  - 2020 (Proj.): -235 (-13.4)
  - 2021 (Proj.): -236 (-12.8)
  - 2022 (Proj.): -272 (-14.0)
- Exports of goods (US$ millions): 2014: 539; 2015: 449; 2016: 459; 2017 (Est.): 493; projections up to 2022 (e.g., 2022: 682)
  - Of which: tuna exports: 2014: 318; 2015: 239; 2016: 270; 2017: 273; projection 2022: 362
- Exports of services (US$ millions): 2014: 834; 2015: 848; 2016: 894; 2017 (Est.): 943; projections to 2022 (e.g., 2022: 1,118)
  - Of which: tourism earnings (US$ millions): 2014: 398; 2015: 393; 2016: 414; 2017 (Est.): 437; 2022 projection: 538

### Program design and monitoring
- Staff recommendation: approval of the Policy Coordination Instrument (PCI).
- Schedule of reviews under the PCI, 2017–20:
  - Board discussion of a PCI request: December 13, 2017
  - First Review: Test Date December 31, 2017; Review Date April 30, 2018
  - Second Review: Test Date June 30, 2018; Review Date October 31, 2018
  - Third Review: Test Date December 31, 2018; Review Date April 30, 2019
  - Fourth Review: Test Date June 30, 2019; Review Date October 31, 2019
  - Fifth Review: Test Date December 31, 2019; Review Date April 30, 2020
  - Sixth Review: Test Date June 30, 2020; Review Date October 31, 2020

*Source: cr17401 - 37. Staff recommend approval of the PCI.*

### Annex I. Ex Post Assessment of Longer-Term Program

### Annex I. Ex Post Assessment of Longer-Term Program Engagement

### Background
- Seychelles’ decades long pursuit of unsustainable policies and rising structural distortions led to the economic and financial crisis in 2008: by late 2008, gross international reserves’ prospective import coverage dropped to ½ month while the public debt to GDP ratio reached almost 200 percent.  
- The medium-term nature of balance of payments problems and an ambitious structural reform agenda resulted in three consecutive Fund-supported programs:
  - The 2008‒09 Stand-By Arrangement (SBA) addressed foreign exchange distortions, acute balance of payments needs, implemented a fiscal adjustment, and stabilized the macroeconomic environment.
  - The 2009‒13 Extended Arrangement (EFF) supported the public debt restructuring aimed at reestablishing external sustainability and the second-generation structural reforms aimed at securing macroeconomic stability and raising growth performance.
  - The 2014‒17 EFF addressed continuing balance of payments needs from increasing debt services and helped entrench structural reforms to maintain growth and bolster economic resilience.

### Performance Under the Programs
- Macroeconomic and structural outcomes:
  - Structural reforms under the 2008‒09 SBA restored fiscal and monetary policy credibility and paved the way for the public debt restructuring.
  - External public debt restructuring under the 2009‒13 EFF reduced the public debt to GDP ratio by around 40 percentage points.
  - Second-generation structural reforms under the two EFFs strengthened public finance management, reduced the role of the state in the economy, and bolstered the financial system.
  - Seychelles ran a large primary fiscal surplus every year since 2009 and enjoyed strong economic growth.
  - As a result, the public debt to GDP ratio dropped to below 70 percent and reserves’ prospective import coverage exceeded 4 months by end-2015.
  - Average real GDP growth was 4¼ percent while the average primary surplus to GDP ratio reached 6½ percent during 2009‒16.
- Program conditionality and implementation:
  - Quantitative performance criteria: all performance criteria were consistently met under both the 2008-09 SBA and the 2009-13 EFF. Under the 2013-17 EFF, most performance criteria were met, with only one review (fourth review) not concluded on time due to fiscal slippages.
  - Structural benchmarks: all structural benchmarks were met under the 2008-09 SBA; more than 90 percent of the benchmarks were met or met with delay under both EFF programs.
  - All approved access to Fund resources was withdrawn.
  - Fiscal policy slippage in 2016 led to a delayed fourth review under the 2014‒17 EFF; the fiscal target was loosened to reconcile social objectives with the program’s anchor of medium-term public debt sustainability.
  - Deadlines for some structural measures—particularly measures to strengthen the offshore sector during the 2014‒17 EFF—faced technical and administrative hurdles and could have benefited from more feasible timelines.
- Authorities’ stance:
  - The authorities concurred with staff’s assessment.

### Lessons Learned
- Strong ownership by the authorities was a key factor in the success of the programs: authorities proactively set macroeconomic targets and designed an ambitious structural reform agenda, supporting steadfast implementation.
- Balancing social needs and macroeconomic stability is important: social concerns over economic inequality led to a temporary program slippage in 2016. Staff are advised to exercise flexibility when authorities face difficulties achieving macroeconomic targets due to social concerns, helping reconcile economic stability and social goals (as illustrated by the 4th and 5th review discussions under the 2014‒17 EFF).
- The structural reform agenda should place more emphasis on measures to enhance inclusive growth.
- Continued program engagement with the Fund could help safeguard macroeconomic stability and promote structural reforms for sustainable economic growth.

### Debt Sustainability Analysis (Annex II excerpt)
- General outlook:
  - Despite a slight delay in debt reduction compared with the previous DSA, the public debt trajectory is projected to remain on a steadily downward path given the authorities’ commitment to primary surpluses of 2½ percent of GDP as envisaged in the PS.
  - Public debt is expected to fall below 50 percent of GDP by 2021 and decline further thereafter.
  - The heat map indicates substantial vulnerability, but authorities’ public debt management and a steadfast decline in public debt would improve the heat map significantly over the medium term.
  - External private debt remains elevated, largely reflecting foreign investment in tourism; foreign currency earnings of the sector mitigate risks.
  - As a small island economy, Seychelles remains vulnerable: gross public and external financing needs remain very high for the foreseeable future, and large foreign currency-denominated debt is a key source of risk.
  - Further progress in reducing the public debt stock and extending maturities of domestic public debt is warranted.
- Evolution since previous DSA:
  - The DSA is broadly in line with the previous DSA for the 4th and 5th reviews. Public debt stock is slightly higher than previously projected due to: a downward revision of the primary surplus after 2018 to 2‒2½ percent of GDP from 3 percent of GDP in the previous DSA; and marginally larger-than-projected domestically-guaranteed public borrowing during 2016.
- Macroeconomic and fiscal assumptions:
  - Assumptions follow the Staff Report baseline: real GDP growth projected at around 4¼ percent in 2017, falling to estimated potential growth of around 3 to 3½ percent in the medium term.
  - Inflation projected at around 3 percent over the medium term.
  - Program primary fiscal surplus expected to be 2½ percent of GDP from 2018 onwards, in line with the authorities’ revised target.
  - The program primary surplus includes net lending to SOEs, reflecting that the PUC’s tariff structure is insufficient to cover its capital costs.
- Definition and treatment of public debt:
  - Public debt includes (i) central government debt as reported by the authorities; (ii) government guarantees for loans to SOEs; and (iii) obligations to the IMF.
  - Debt issued by the central government for monetary purposes is included in public debt in this analysis; there is an offsetting unremunerated deposit in the central bank, but the debt imposes interest cost and rollover needs.
  - “Net public debt” figures in tables are gross debt less government deposits held at the central bank as counterpart to sterilization operations.
- Risk and shock analysis:
  - The DSA framework suggests public debt (including government guarantees) is currently around the high-risk benchmark but falling rapidly if fiscal consolidation to be envisaged under the forthcoming PCI is implemented.
  - Debt was around 72 percent of GDP at end-2016 (around the indicative threshold for high risk in the DSA heat map).
  - Under baseline and absent major negative shocks, debt is projected to fall below 50 percent by 2021, or by 2019 if domestic debt issued for monetary purposes is excluded.
  - Authorities are urged to implement fiscal consolidation steadfastly and extend maturities of domestic debt to mitigate high gross financing needs.
  - Forecast errors for real GDP growth over 2006‒14 were broadly centered around the median, suggesting staff projections have been fairly unbiased historically.
  - Shock scenarios:
    - Under a real exchange rate shock, the debt-to-GDP ratio would peak at around 80 percent in 2018 and fall thereafter, but would remain around 16 percentage points above the 50 percent target for 2021.
    - One-time shocks to the primary balance and the real interest rate would moderate the pace of debt reduction and could delay attainment of the debt target by several years.
    - A persistently looser fiscal position would keep debt at an elevated level and could prevent attainment of the authorities’ debt target in the foreseeable future.

*Annex I. Ex Post Assessment of Longer-Term Program Engagement (IMF staff report excerpt).*

### 7.      A combined macro-fiscal shock would send the debt-to-GDP ratio well above the

### 7.      A combined macro-fiscal shock would send the debt-to-GDP ratio well above the 

### Combined macro-fiscal shock: projected debt paths and vulnerabilities
- The combined macro-fiscal shock aggregates shocks to real growth, the interest rate, the primary balance and the exchange rate.
- Under the combined-macro fiscal scenario, the debt-to-GDP ratio would peak at around 120 percent before falling very gradually thereafter.
- Under this scenario, the debt-to-revenue ratio would increase to almost 300 percent.
- The combined shock projections are materially worse than the baseline and keep debt indicators well above commonly used benchmarks (see baseline vs. shocks discussion).

### Baseline scenario and gross financing needs
- Under the baseline, gross financing needs fall over the projection period but remain elevated at over 20 percent in 2022, reflecting the short tenor of the large majority of domestic debt.
- Gross financing needs increase significantly under various shocks, especially under the combined macro-fiscal shock or the real GDP growth shock, and remain above the indicative threshold even under the baseline.
- Policy implication: steadfast implementation of fiscal consolidation will help reduce gross financing needs; further measures to extend the average maturity of domestic issuance would reduce rollover risks (see ¶20 of the Staff Report).

### State-owned enterprise (SOE) contingent liabilities and scenarios
- Preliminary analysis suggests additional debt liabilities of SOEs total around 13 percent of GDP, most of which is owed by SEYPEC and Air Seychelles.
- These debts do not benefit from an explicit government guarantee, but in the past such obligations have at times been assumed by the government. Example: in 2012, the government assumed liabilities and obligations of Air Seychelles amounting to around 5 percent of GDP.
- Scenario included where external debts of a similar magnitude are assumed by the government in 2020. Under this scenario, the government’s goal of reducing the debt below 50 percent of GDP would be delayed by one year.
- Policy implication: monitor SOE debts carefully to mitigate risk of obligations migrating to the government balance sheet.

### External DSA: levels, composition, and sensitivity to shocks
- Updated external DSA: external debt remains elevated at around 98 percent of GDP.
- Composition and maturity profile mitigate some risks:
  - About one third of the country’s external debt is medium to longer-term government borrowing, largely from official sources and at favorable interest rates and maturities.
  - A further third is FDI-related borrowing, largely to the hotel sector.
  - Less than 20 percent of the debt is short-term, largely trade credits and other lines of credit (as of end-2016).
- Currency sensitivity:
  - A 30 percent real depreciation of the domestic currency would lead to a spike in external debt-to-GDP ratio to about 160 percent in 2018 and nearly 168 percent by 2022, compared to about 88 percent under the baseline.
  - A permanent ½ standard deviation shock to real interest rate, growth, and the current account (excluding interest payments) would lead to a gradual increase in the external debt-to-GDP ratio to nearly 140 percent by the end of the projection period.

### Stress tests and alternative scenarios (high-level results)
- Stress tests performed include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and Combined Macro-Fiscal Shock.
- Example stress-test inputs and outcomes (selected):
  - Real GDP growth, baseline path: 4.2 (2017), 3.3 (2018–2020), 4.1 (2021), 4.0 (2022).
  - Under Real GDP Growth Shock: 2018 real GDP growth falls to -0.2 and 2019 to -0.3 with primary balance falling accordingly in those years.
  - Under Real Exchange Rate Shock: effective interest rates increase in projection years (stress-test scenarios show elevated interest-rate paths).
  - Combined Shock stress-test shows depressed growth in early years, lower primary balances in 2018–2019, and higher effective interest rates in the stressed years.
- Stress test outcomes indicate gross nominal public debt and gross financing needs can rise sharply under shocks (charts show debt in percent of GDP and percent of revenue rising substantially under shocks).

### Liability management and monetary debt unwinding (policy measures)
- To reduce currency risks on public debt, the government will conduct a liability management exercise to swap current US dollar obligation into euros in coming months (see ¶20 of the Staff Report).
  - Note: The liability management exercise, which will reduce the currency risks and could save interest costs but will not change the level of public debt, is not included in the baseline.
- Annex III — Unwinding of Monetary Debt:
  - Seychelles’ stock of monetary debt stood at 16.2 percent of GDP at end-2016, resulting from issuance of government securities needed to mop up excess liquidity.
  - The CBS and Ministry of Finance agreed that the Ministry of Finance issues T-Bills and T-Bonds to mop up excess liquidity from unsterilized CBS interventions; the monetary debt is fully backed by blocked deposits at the CBS.
  - Macroeconomic trade-offs:
    - Unwinding monetary debt could reinject liquidity into the banking system, creating inflationary pressures and imposing liquidity management costs on the CBS.
    - Slowing the pace of unwinding monetary debt would require more fiscal effort.
  - Policy measure: In line with modernization of the monetary policy framework, the CBS will resume the use of reverse repurchase operations to support unwinding of monetary debt without threatening its income position.

*Source: IMF staff (Seychelles Public Sector Debt Sustainability Analysis, as presented in the provided content).*

### 2. Unwinding the stock of monetary debt has macro-fiscal implications. The authorities

### 2. Unwinding the stock of monetary debt has macro-fiscal implications. The authorities

### Macro-fiscal effects of unwinding monetary debt
- Authorities intend to progressively reduce the stock of monetary debt by not rolling over part of the existing government securities issued for monetary policy purposes.
- Staff recommended that the authorities retire about 1.3 billion rupees of monetary debt over 2018-2022 (about 45 percent of the existing stock).
- Such an unwinding together with a primary surplus of 2.5 percent of GDP would:
  - result in an increase in broad money by about 6 percent on average over this period;
  - lead to reaching the debt target, below 50 percent of GDP, by 2021.
- Assuming a constant velocity, the unwinding would result in a 1 percentage points increase in inflation.
- The proposed retirement would not incur any cost to the CBS, but would inject liquidity back into the banking system, potentially creating more inflation.

### Balance sheet and accounting details relevant to unwinding
- By accounting convention, government deposits are not shown in the Monetary Survey and Central Bank Accounts.
- The value of government deposits at December 2016 stood at 3.2 billion rupees.
- The value of government securities held by the CBS amounted to 1.2 billion rupees, resulting in net credit to government of -2.0 billion rupees.

### Operational options to cushion adverse macro-fiscal impacts
- Reverse Repo operations:
  - The CBS will use the existing stock of Government securities at the CBS in Reverse Repo operations to mop up liquidity by selling the government securities it owns to commercial banks with an agreement to repurchase the same securities at a specified price at a specific time in the future.
  - The reverse repurchase operations would be possible even though the Master Repurchase Agreement is still pending.
  - The cost to the CBS will be the repo rate which will depend on the difference between the lending and repurchasing prices, and the CBS will continue to earn investment income from its stock of Government securities.
  - Staff estimate the cost to be about 10 million rupees per year.

### Foreign exchange intervention and reserve management
- Minimize interventions in the foreign exchange market, only to the extent needed to preserve reserve coverage at around the current level, to avoid further sterilization needs and monetary debt accumulation.
- Excess liquidity arises in large part from unsterilized purchases of foreign currencies by the CBS.
- Allowing exchange rate flexibility would reduce the need for the CBS to intervene and sterilize interventions.
- If more reserves buffer is needed, the CBS could clearly communicate its plan to purchase foreign currencies at a market rate, and for reserve buildup only, thereby not affecting the exchange rate.

### External sector assessment — key findings
- Staff’s external sector assessment suggests Seychelles’ external position is broadly consistent with fundamentals and desirable policies.
- Model-based estimates give inconclusive or mixed exchange rate assessments; other indicators point to a relatively strong external sector.
- Immediate risks to external stability appear contained:
  - The level of reserves stood at around 180 percent of the ARA-EM metrics at end-2016 and is projected to remain above adequate level.
  - GIRs currently cover around four months of prospective imports and exceed the amount of external public and private short-term debt.
- Updated exchange rate assessment based on the EBA-lite approach gives mixed results:
  - Current Account Model: 26.6
  - Real Effective Exchange Rate Index Model: -23.3
  - Note: 1 In percent. Overvaluation (+), undervaluation (-).
- Limitations of EBA-lite are noted for small, tourism-dependent countries like Seychelles, where tourism accounts for about 30 percent of GDP and large FDI import content and small size distort model fit.

### Tourism sector findings and constraints
- Foreign-exchange receipts from tourism increased only about 6 percent as of early 2017 despite a surge in tourist arrivals (third quarter of 2017 up by 20 percent compared to the same period of 2016).
- Key constraints lowering tourism yields and receipts:
  - Increase in budget-conscious tourists.
  - Lack of local content and other structural bottlenecks.
  - Affordable package tours and expensive marketing strategies.
  - Uncaptured foreign exchange transactions associated with SMEs and guesthouses.
- Low repeat visit rate: around 12 percent for Seychelles versus 28 percent for the Maldives, 37 percent for Mauritius, and around 50 percent for Aruba (World Bank SCD Report 2017).
- Market concentration and vulnerability:
  - Europe accounted for 60.1 % of total arrivals during the third quarter of 2017, leaving Seychelles vulnerable to regional economic fluctuations and exchange rate risk.
- Human capital and market efficiency issues:
  - Limited human resources, skills mismatch, and reluctance of young Seychellois to join the industry have resulted in predominance of expatriate labor and foreign exchange leakages.
  - Authorities intend to reform the existing hotel school and increase private sector participation.
- Data adequacy shortcomings hamper surveillance and policy design.
- SME sector challenges: undifferentiated small businesses, low insurance uptake, limited access to digital trends.

### Tourism policy framework and value-chain recommendations
- Tourism Master Plan (2012-2020) objectives include sustainable and responsible tourism, economic empowerment, environment preservation, and socio-cultural integration.
- Master Plan reforms include:
  - Determine Seychelles’ carrying capacity on an island-by-island basis considering shortages of local labor, water, energy, waste and sewage capacity, traffic density, coastal erosion and biodiversity degradation.
  - Qualify and quantify constraints associated with the tourism supply chain.
  - Engage stakeholders to formulate actionable, policy-relevant recommendations.
  - Coordinate and align marketing and promotion strategies with the Tourism Master Plan and value chain analysis to promote local content and unlock markets.
- Commonwealth Secretariat Tourism Value Chain Analysis recommended interventions on:
  - Increasing the supply of local agricultural produce to the tourism sector.
  - Engineering related training for mature students.
  - Additional support to micro and small businesses in tourism.
- These recommendations are yet to be implemented under the Tourism Master Plan.

### Fisheries sector and SWIOFish3 project
- SWIOFish3 project, recently approved by the World Bank, aims to:
  - Improve the management of marine areas and fisheries in targeted zones.
  - Strengthen fisheries value chains in the Seychelles.
  - Support upgrading the industrial fishing sector sustainably, alongside major infrastructure development around the port in Victoria.
- Policy measures to promote sustainable fisheries growth include:
  - Increase diversity of fish species targeted by the local fishing fleet.
  - Improve fishing methods.
  - Develop capacity of the local fishing fleet through institutional assistance.
  - Conduct a comprehensive evaluation of the Indian Ocean Tuna Commission’s quota on the yellowfin tuna catch and its economic impact.
  - Explore additional markets for Seychelles’ fisheries products.
  - Develop an effective communications strategy to enhance community awareness and ownership of the fisheries sector.

### Program context and recent macroeconomic developments
- The Government of Seychelles has pursued a comprehensive economic and financial program since 2008 to restore macroeconomic stability, ensure debt sustainability, and promote inclusive growth and diversification.
- Outcomes through end-2016:
  - Gross international reserves rose from 2.2 months of imports at end-2009 to 4 months of imports at end-2016.
  - Public debt curtailed from 106% of GDP at end-2009 to 72% at end-2016 (including debt issued for monetary control purposes), and to 56 % excluding such debt.
- Under the 2014-17 program:
  - Real growth averaged 4.7%.
  - Consumer price inflation was negative in 2016 and rose to about 3% in 2017.
  - Government recorded a large primary surplus (4.5% on average in 2014-15 and 3.2% in 2016-17).
  - Balance of payments developments allowed reserves to increase to above 4 months of imports in 2015; they declined modestly in 2016 and 2017.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 3. The 2014-17 program aimed at strengthening the reform program with measures to

### 3. The 2014-17 program aimed at strengthening the reform program with measures to 

### 2014–17 reform measures and financial system modernization
- Reinforced public financial management, combatting tax evasion, improving governance of public enterprises, and modernizing the financial system.
- Key measures:
  - Adoption of a medium term fiscal framework.
  - Introduction of performance program based budgeting in some ministries.
  - Strengthening of tax administration, in particular at customs.
  - Governance audits and operational assessment of the six major public enterprises carried out in 2016-2017 with World Bank assistance.
  - Establishment in 2014 of a new Financial Service Authority (FSA) to supervise the non-bank financial sector, including global business corporations.
  - Preparation in 2016 of a new international business corporation act to align offshore practices with international best practices.
  - Adoption in progress of core elements of Basel II and III in banking and payments.
  - Modernization steps for the national payments system, including studies for a central securities depository and a real time gross settlement system.
  - Preparation of legislation on financial consumer protection.

### Program objectives for 2017–20 (PCI-supported program)
- Four key objectives to be achieved through performance targets:
  - Addressing medium term fiscal sustainability
  - Enhancing public investment efficiency and the quality of public services
  - Minimizing the fiscal risk of State Owned Enterprises (SOEs)
  - Modernizing the financial system and ensuring financial sector stability

### Macroeconomic objectives and projections
- Fiscal targets:
  - Annual budget primary surplus target during the program period of 2.5% of GDP.
  - Reduce the public debt–GDP ratio to 50 % by2020.
  - Excluding the public debt issued for monetary purpose, the debt ratio will fall to close to 41%.
- Growth and inflation:
  - Real GDP growth targeted in the range of 3 to 3.5 percent.
  - Rate of consumer price inflation projected at close to 3 percent.
- External sector and reserves:
  - External current account deficit expected to remain broadly stable with continuing strong tourism growth.
  - Gross international reserves expected to remain at a comfortable level above 3½ months of imports.
- Sectoral focus:
  - Growth sustained by tourism, the blue economy, water and electricity, telecommunication and financial services.
  - Development of the blue economy supported by the World Bank and issuance of an international blue bond.

### National development strategy and planning
- National development strategy for 2018-22 under preparation; ministries and agencies requested to prepare strategic plans by October 2017.
- Strategy will align sectoral programs/projects with new/modified sector policies and the medium term fiscal framework.

### 2018 Budget priorities and specific fiscal measures
- Budget aligned with primary surplus target of 2.5% of GDP.
- Support to revenue-collecting institutions and regulators:
  - Seychelles Revenue Commission, Registrar General, Seychelles Maritime Safety administration (SMSA), Public Enterprises Monitoring Commission and Financial Services Agency (FSA).
  - Ministries, Departments, Agencies (MDA’s) that facilitate ease of doing business and protect consumers: Seychelles Bureau of Standards, Fair Trading Commission, Seychelles Licensing Authority, Public Health Commission and Department of Information, Communication and Technology.
- Cost savings and consolidation:
  - Consolidation of overlapping functions to reduce CEO and support staff posts and free technical staff for Government.
- Fisheries support and subsidy adjustments:
  - Fuel Subsidy reduced by SR 5 million from the 2018 budget to eliminate wastage and target beneficiaries more efficiently.
  - Ice subsidy to be revisited—recognition of continued need for ice supply for domestic fishing industry; aim to encourage private provision while avoiding price regulation.
- Social welfare rationalization:
  - Agency for Social Protection paying around SR 1 billion per year for benefits and programs; move to a more targeted approach needed.
  - Universal retirement pension of SR 5,050 will apply to retirees at age 63 from 1st of January 2018 instead of age 60; fiscal savings annually will be around SR 30 million.
- Institutional reviews and travel rules:
  - Review of District Councils to achieve SR 15 million fiscal savings.
  - Stricter rule on official travels in 2018 to bring about a savings of SR 5million.
- Climate change and renewable energy initiatives:
  - Commitments to implement Paris Climate Change Agreement.
  - Energy initiatives:
    - ‘Smart Energy in Public Spaces’ (SEIPS): target to install 10,000 LED street lamps across Mahé, Praslin and La Digue by 2020 and 800 solar lamps across the country; allocation of SR1 million for Seychelles Energy Commission to develop a comprehensive energy efficiency programme.
    - ‘SMART Energy in Homes and Businesses’ (SEIHB): PUC to allocate contracts to build the first two solar farms on the reclaimed island of Romainville—a 5MW PV solar farm financed by IRENA and the Abu Dhabi Fund; PUC to award a 1MW solar PV Democratisation farm financed by the Indian government to the tune of US $3.4 million to provide free energy to 300 Seychellois families currently reliant on social welfares.
- Fiscal space for climate spending:
  - Rationalization of social welfare spending, procurement reforms, and streamlining public agencies to create room for climate-related spending; government to seek concessional external financing where possible.

### Measures from 2019 onwards
- Continue rationalization of current expenditures and better targeting of the welfare system.
- Staffing and recruitment committee mandates:
  - Approve annually the posts to be recruited to, via a Recruitment Plan.
  - Ensure budgeted posts are recruited to and funds not left dormant.
  - Advise on any unused funds for personnel emoluments to be redirected for other priority positions.
- Review of government presence abroad and tourism offices to reduce costs and reallocate skilled individuals domestically.
- Procurement reforms:
  - Target savings of at least 5% in procurement of goods and services.
  - Publish analytics of awarded contracts to increase transparency and identify tendering issues by Ministry.

### Structural reform program — strengthening public finances and investment efficiency
- Program centerpieces:
  - Increase efficiency of public spending via rationalization of current expenditures and better-focused welfare assistance.
  - Better selection, preparation and monitoring of the investment program.
  - Tax reforms for personal and business tax, property taxes, and maritime service taxes.
  - Reorganization of the Seychelles Revenue Commission.
  - Improvement in public debt management.

### Public investment management improvements
- Public Investment Management Unit (PIM Unit) established in 2015 within MFTEP and strengthened.
- Public Investment Management Manual introduced in early 2017 with World Bank technical assistance to guide identification, screening, preparation, approval, budgeting, implementation, monitoring and evaluation of public investment projects.
- Development Committee established in January 2017 within MFTEP to oversee vetting, screening and approval of capital project proposals; submits quarterly reports to Cabinet.
- Cost–benefit report requirement: public investment projects with a cost above SR 10 million now require submission of cost-benefit analyses to Cabinet.

### Program Performance Based Budgeting (PPBB)
- PPBB launched for 5 ministries for the 2017 budget.
- Expansion plan:
  - Widened to three more ministries for the 2018 budget.
  - Planned for all ministries for the 2019 budget with World Bank technical assistance.
- 2018 budget submissions (PPBB statements) require MDA’s to improve quality of performance indicators and put in place processes and systems to record, collect, report and use performance information.

### Tax reforms and revenue measures
- Personal income tax reform (effective July 2018):
  - Zero-rate bracket and three progressive rates of 15%, 20% and 30%.
- Business tax reforms envisaged for the 2018 budget to reduce disparities between productive sectors and arbitrage with personal income tax.
- Property tax:
  - Property tax on foreign owned immovable properties at a rate of 0.25% scheduled to enter into effect in 2018 (revenue impact: SCR 40 million); will supplement stamp duty and sanction duty on property transfers.
- Maritime taxation:
  - Taxation of vessels registered with the Seychelles Maritime Safety Administration (SMSA) to be aligned with international standards as of 2018 (revenue impact SCR 30 million).
- Tourism Investment Act certificates:
  - Tax advantages under existing certificates expire at end of 2018; cessation of accelerated depreciation benefits will produce additional revenue starting 2019.

### Reorganization and capacity building of the Seychelles Revenue Commission (SRC)
- New SRC structure to grant Customs greater autonomy in administrative handling.
- Amend SRC Act to establish a Board of Directors to oversee Revenue Commission.
- Introduce post of Customs Commissioner reporting to the Board.
- Recruitment and systems upgrades:
  - 2017 and 2018 budgets provide for SRC to recruit an additional 70 staff in total.
  - Euro 2.5 million allocated through the 11th EDF for development, installation and operationalization of a new tax system and customs software including capacity building for SRC staff.
  - Euro 1 million allocated from the same program for upgrading ASYCUDA World and creating a Single Window System.
- Compliance and audit measures:
  - Conduct 40 comprehensive business audits in 2018 targeting construction, import/wholesale trade and tourism sectors where noncompliance detected.
  - Customs enhancements in 2018:
    - Upgrade of ASYCUDA World to include an excise module facilitating excise tax calculation on domestic production and accelerating rebates on some exports.
    - Introduction of cargo targeting software to improve risk assessment and permit targeted inspections while speeding legitimate trade.

### Public debt management: Blue Bond and liability management
- Blue Bond:
  - Government issuing a US$ 15 million Blue Bond in the first quarter of 2018 to accelerate implementation of fisheries management plans for the Mahe’ Plateau and support a sustainable blue economy.
  - Bond guaranteed by the World Bank in combination with GEF resources.
  - Proceeds will finance part of the Third South West Indian Ocean Fisheries Governance and Shared Growth Project (SWIOFISH 3).
  - Creation of a Blue Investment Fund administered by the Development Bank of Seychelles for commercial loans consistent with fisheries management plans.
  - Allocation of proceeds:
    - 80% of the bond proceeds will be utilized by the Blue Investment Fund.
    - Remaining 20% of the bond proceeds will be transferred to Seychelles Conservation and Climate Adaptation Trust (SeyCCAT) to establish the Blue Grants Fund for grants on a project proposal basis.
- Debt currency swap:
  - For the existing US$ 154 million bond maturing in 2026, Government decided on a liability management operation involving a straight currency swap of the bond from US$ dollars to Euros.
  - Intended effects: reduce interest costs and reduce foreign exchange risk given Seychelles earns most foreign exchange in Euros.

*International Monetary Fund — Country Report excerpt.*

### 17. Lengthening of maturity profile for domestic debt. The current maturity profile indicates

### 17. Lengthening of maturity profile for domestic debt. The current maturity profile indicates

### Domestic debt maturity profile and strategy
- 93% of the country's domestic debt is short term, made up mostly of Treasury Bills.
- This indicates significant exposure to rollover and refinancing risks.
- Government debt management strategy over the medium term: reduce exposure by lengthening the maturity of the domestic debt.
- The Ministry of Finance, Trade and Economic Planning will work with CBS to improve the debt management strategy to ensure the public debt target of 50% of GDP is achievable by 2020.
- The strategy will be part of the Medium Term Fiscal Framework 2018 to 2022, expected to be submitted to Cabinet of Ministers by the second quarter of 2018.

### D. Minimizing the Fiscal Risk of State Owned Enterprises (SOE’s)
- Governance and operational assessments of six major SOEs were conducted in 2016 with World Bank assistance (SEYPEC, PUC, STC, SPA, SPF, Nouvobanq).
- Objective: identify improvements in operational and financial performance and corporate governance to build resilience and reduce exposure to external risks.
- An implementation plan for governance and operational review of public enterprises 2017 to 2019 (SOE Action Plan) was prepared and approved by Cabinet.
- To improve transparency and risk management:
  - The Commission will prepare a Fiscal Risk Statement to be included in the budget document to show the effect of Public Enterprises’ performance on the 2019 budget (Third Review RT).
  - The Commission will coordinate an exercise to calculate the cost of social obligations being absorbed by Public Enterprises by December 2018. (Third Review RT).
- Corporate governance findings:
  - Strengths and shortfalls are very similar across enterprises.
  - Non-financial enterprises do not fully comply with OECD Guidelines in financial controls, reporting, transparency and disclosure.
  - National legislations are not necessarily aligned with international guidelines, resulting in no obligation for companies to comply.
  - Corporate governance provisions are spread across multiple laws and regulations (Companies Act of 1972, Public Financial Management Act of 2013, Public Enterprise Monitoring Commission Act of 2013, and various enterprise-specific laws) that are not harmonized and allow compliance arbitrage.
- Actions:
  - Comprehensive legal reviews are needed to update laws and regulations for corporate governance of non-financial public enterprises.
  - Government will submit a new Code of Governance for all non-financial SOEs based on OECD guideline to the National Assembly for enactment by September 2018. (Third Review RT).

### Tourism, utilities, and human capital (related SOE and sectoral measures)
- Work with UNWTO to prepare a roadmap to develop a Tourism Satellite Account (TSA) for the country to harmonize and reconcile tourism statistics.
- Electricity tariff rebalancing, put on hold earlier in 2017, will recommence in November 2017 to further ensure the sustainability of the PUC.
- Development of a Human Resource Development Strategy is ongoing; expected launch late December 2017. Strategy covers public and private providers and aims to address HRD challenges with strategic priorities and actions.

### E. Modernizing the Financial System And Ensure Financial Sector Stability
- Financial Sector Development Implementation Plan (FSDIP), approved end-2013, aims to foster private sector investment, deepen financial services, and strengthen regulatory oversight.
- FSDIP project components:
  - (i) strengthening the financial system’s legal and regulatory framework;
  - (ii) financial infrastructure and capital markets development;
  - (iii) consumer protection and financial literacy.
- Technical assistance requested from Investment Climate Facility for Africa (ICF), African Development Bank (AfDB) and World Bank under Reimbursable Advisory Service (RAS).

### Completed and near-complete reforms and legislation
- Consultancy work finalized:
  - Review of the Mutual Fund and Hedge Fund Act 2008;
  - Preparation of a new Trust Act;
  - Amendments to the International Corporate Service Providers Act;
  - Review of Authorization and Post-Authorization Processes & Systems for Collective Investment Schemes and Capital Market business.
- Development of a Risk-Based Supervision Framework for regulation of Pensions and Insurance is almost finalized.
- A Financial Consumer Protection Act is being drafted.

### Transparency, BEPS, and international tax compliance
- OECD’s Global Forum found in August 2015 that the country is largely compliant.
- Financial services industry working on BEPS and adoption of common reporting standards.
- Amendments in late 2016 to the International Business Companies Act require international business companies to keep a register of beneficial owners in Seychelles.
- Reviews ongoing for the International Corporate Service Providers Act and the International Trusts Act.
- Global Corporation Act under preparation was reviewed against BEPS requirements and found inconsistent.
- On 7th of June 2017 in Paris, Seychelles joined other countries in signing the Multilateral Instrument (MLI).
- Government working towards ratification of the MLI to ensure BEPS measures are effectively implemented in tax treaties.

### IV. Monetary Policy and Price Stability
- Monetary policy objective: ensure domestic price stability, consistent with the primary objective of the Central Bank.
- Monetary policy was cautiously loosened in the third quarter of 2017 to boost domestic economic activity given expectation of modest inflationary pressures.
- Inflation:
  - Inflation has picked up in 2017 compared to the previous year to reach 3.2 per cent year-on-year in September 2017.
  - Depreciation of the rupee vis-à-vis the US dollar has been less than initial expectations.
  - Global commodity prices anticipated to remain broadly weak.
  - Inflation pressures in coming months expected to be modest, providing basis to maintain policy stance for remainder of 2017; Central Bank stands ready to adjust stance if needed.
- Monetary policy implementation changes since July 2017:
  - More emphasis on short-term interest rates.
  - CBS Board approved positioning of an interest rate corridor as of third quarter in 2017.
  - Standing credit facility and standing deposit facility form ceiling and floor of corridor to guide short-term money market interest rates consistent with forecasted economic conditions.
  - Focus shifting away from meeting reserve money as operational target.

### Coordination of monetary and fiscal policies
- Central Bank and Ministry responsible for Finance will ensure proper coordination.
- Given system-wide structural excess liquidity and government’s debt target:
  - Ministry will closely coordinate net issuance of government securities for monetary policy purposes as needed in line with monetary policy objectives.
  - Volume of such instruments to be held at the Central Bank until maturity should not compromise government target to reduce public debt to 50 per cent of GDP by 2021.
  - Use of reverse repurchase agreements as additional tools to remove excess liquidity is to resume to provide Central Bank capacity to pursue monetary policy objectives.

### F. External Stability
- Current account balance projected to remain stable in 2017 with a slight improvement projected in 2018.
- Tourism:
  - Tourism sector continues to be main driver for economic growth.
  - Year-to-date statistics up to August 2017 show growth of above 20 per cent in visitor arrivals.
  - Rebound of European economies expected to support visitor arrivals for rest of 2017 and into 2018, enabling country to remain a net exporter of services.
- Trade in goods:
  - Adverse movement in global commodity prices, particularly oil, coupled with projected decline in tuna exports, would worsen terms of trade and trade balance.
- FDI:
  - FDI in tourism sector expected to maintain downward trend until end-2020 when moratorium on large hotel projects will be lifted.
- Gross international reserves forecast to remain at around 4 months of imports, providing an adequate buffer and consistent with IMF calculated metrics on foreign reserves adequacy.
- Central Bank policy: continue purchasing reserves from the market whenever opportunity arises.

### Reserves management capacity
- At start of 2017, CBS completed a comprehensive revision of its Investment Policy and Guidelines for foreign reserves management to reflect new strategic asset allocation approach.
- Under World Bank Reserves Advisory and Management Programme, CBS benefits from Portfolio Analytics Tool (PAT2) enabling straight-through-processing of trades across front, middle and back offices to enforce governance and segregation of duties.

### Financial Stability
- Pressures on correspondent banking relationships remain the most significant threat to financial stability.
  - Most banks have only one correspondent banking relationship in major currencies such as the US Dollar.
  - A high-level committee of government ministries/agencies and private sector has been set up to implement cabinet-endorsed recommendations.
- Offshore sector strategy:
  - Authorities committed to reviewing the offshore sector model to move away from current IBC model to a more transparent, internationally acceptable model with access to beneficial ownership information.
  - Ministry of Finance set up a financial services committee to formulate a new offshore sector strategy by end December 2017.

### AML/CFT and supervisory strengthening
- National Risk Assessment against AML/CFT risk completed in October 2017; will inform National AML/CFT strategy expected to be approved by cabinet by June 2018.
- Country undergoing a Mutual Evaluation against FATF recommendations emphasising risk-based supervision and effectiveness.
- Authorities will review and amend AML/CFT legal and institutional framework in line with international standards; ensure competent authorities can timely obtain accurate beneficial ownership information (FATF recommendations 24 to 30) and strengthen AML/CFT institutions (RT Second Review).
- Authorities will have started to implement a risk-based approach to supervision of banks and company service providers consistent with FATF immediate outcome 3, by end-December 2018 (RT Third Review).

### Resolution framework, Basel implementation, and cyber security
- CBS reviewing the Financial Institutions Act, 2004 to strengthen resolution framework; amendments expected in legislature by December 2018.
  - Focus: formulate new resolution framework for banking sector to give resolution authority adequate powers and tools to deal with problematic banks without leading to financial stability issues.
  - IMF TA received; further TA expected. New resolution framework anticipated to come into effect before end December 2018. (RT Third review).
- Basel II and III implementation:
  - Work ongoing to align regulatory framework with international standards.
  - Implementation of Pillar 1 of Basel II anticipated by end December 2017.
  - IMF TA in 2017 focused on Pillar 2; CBS expects a consultant in early 2018 to assist with Pillar 2 framework.
  - CBS has taken position to adopt the definition of capital for Basel III, as relevant.
  - Full framework expected to be in place by end December 2018.
- Cybercrime:
  - CBS recognizes cybercrime as a significant threat to the financial sector.
  - CBS engaging an international firm to formulate a Cyber Security Framework for CBS and guidelines for financial institutions.
  - Guidelines to introduce minimum IT safeguarding standards; both documents intended to be finalised and submitted to CBS before end of 2017.
  - CBS intends to collaborate with stakeholders to formulate a national cyber security framework.

### Financial inclusion and education
- Authorities plan to formally adopt a National Financial Inclusion strategy in 2019 focusing on:
  - SME access to finance;
  - enhancing competition in financial services;
  - access and usage of electronic payment systems;
  - reduction in the use of cash for payments.
- Central Bank aims to work with Ministry of Finance to increase number of Government payments effected through electronic payment channels.
- Regulatory strengthening planned to promote use of innovative payment channels.

### Financial education and consumer protection
- Central Bank and FSA leading implementation of a national financial education strategy.
  - Financial literacy baseline survey completed in 2016.
  - Drafting of a National Financial Education Strategy to be finalized by end of 2017; implementation expected in 2018.
- Financial Consumer Protection Law:
  - Central Bank and FSA to promulgate a specific legal framework for protection of financial consumers by June 2018.
  - Law aims to give CBS and FSA explicit mandate for consumer protection and promote:
    - equitable and fair treatment of consumers;
    - increased transparency;
    - responsible lending;
    - prevention of over-indebtedness;
    - responsible pricing;
    - appropriate products;
    - data privacy;
    - mechanism to resolve financial complaints.
  - After promulgation, Competent Authorities will publish regulations on fair treatment and prohibited practices; complaints handling and dispute resolution procedures; and regulations for protection of users of payment services.

*cr17401 - 17. Lengthening of maturity profile for domestic debt. The current maturity profile indicates*

### 39. Work is ongoing in regards to further modernisation and development of the national

### 39. Work is ongoing in regards to further modernisation and development of the national payment system.

### National payment system modernisation
- Banking community working towards implementation of a national payment switch so that local rupee financial transactions using instruments such as debit cards will be cleared locally instead of being routed through international networks such as VISA, to help reduce transaction costs and improve convenience of such payment channels.
- Plan to introduce a Central Securities Depository to facilitate the holding of securities in dematerialized form and transactions performed in real-time, mitigating the risks currently faced with paper certificates.
- Proposal to establish a Real Time Gross Settlement system to reduce settlement risk by allowing payment transactions to be effected and settled in real time, thereby guaranteeing faster payments.
- Credit Information System is being redesigned to enhance features and expand participation to selected lenders not regulated by the CBS.
- A new Credit Reporting Act is expected to be promulgated before the end of 2018.
- Review and development of the legal framework surrounding the National Payment System and its oversight functions to modernise legislation and align them with the Financial Institutions Act, 2004; expected to be effected by December 2018.
- These initiatives are part of the deliverables of the FSDIP.

### Internal Audit
- An internal audit transformation engagement was provided by an audit firm in March 2017.
- The external Quality Assurance review, initially planned during the second half of 2017, has been rescheduled to September 2018.
- The Audit and Risk Committee advised internal audit staff to use the interim period to implement recommendations.
- Objectives of the external Quality Assurance review:
  - (i) evaluate the quality and practices of the internal audit function and compare results against the IIA Standards;
  - (ii) provide examples of best practice;
  - (iii) check the Internal Audit Division’s overall efficiency and effectiveness.

### Program monitoring — timetable and reviews
- Quantitative targets proposed for end-December 2017, end-June 2018 and end-December 2018 (see Table 1 of the PS).
- Government, the CBS, and IMF staff agreed on reform targets (see Table 2 of the PS).
- Review schedule:
  - First review: completed by April 30, 2018.
  - Second review: completed by October 31, 2018.
  - Third review: completed by April 30, 2019.
  - Fourth review: completed by October 31, 2019.
  - Fifth review: completed by April 30, 2020.
  - Sixth review: completed by October 31, 2020.

### Quantitative targets and key statistics (as presented)
- Net international reserves of the CBS, millions of U.S. dollars (floor): 391 (Dec 2017), 406 (Mar), 393 (Jun), 389 (Sept), 375 (Dec).
- Reserve money target (ceiling on daily average during the quarter): 3,766 (Dec 2017), 3,635 (Mar), 3,643 (Jun), 3,885 (Sept), 4,030 (Dec).
- Primary balance of the consolidated government (cumulative floor): 615 (Dec 2017), 115 (Mar), 284 (Jun), 571 (Sept), 538 (Dec).
- Accumulation of external payments arrears by the public sector (ceiling): 0.0 for all test dates.
- Memorandum items:
  - Nominal public debt (millions of Seychelles Rupees): 13,536 (Dec 2017), 13,740 (Mar), 13,692 (Jun), 13,595 (Sept), 13,534 (Dec).
- Program accounting exchange rates (end-of-quarter):
  - SR/US$ (end-of-quarter): 13.67 for all listed quarters.
  - US$/Euro (end-of-quarter): 1.19 for all listed quarters.
  - US$/UK pound (end-of-quarter): 1.29 for all listed quarters.
  - US$/AUD (end-of-quarter): 0.79 for all listed quarters.
  - US$/CAD (end-of-quarter): 0.80 for all listed quarters.
  - US$/CNY (end-of-quarter): 0.15 for all listed quarters.
  - US$/SDR (end-of-quarter): 1.41 for all listed quarters.

### Continuous targets (policy commitments)
- Not to impose or intensify restrictions on the making of payments and transfers for current international transactions.
- Not to introduce or modify multiple currency practices.
- Not to conclude bilateral payments agreements that are inconsistent with Article VIII.
- Not to impose or intensify import restrictions for balance of payments reasons.

### Reform targets (selected items and timing)
- Fiscal and Public Financial Management:
  - Submit a report on cost-benefit analyses of public investment projects with a cost above 10 million rupees to the Cabinet. Timing: End June 2018. Objective: Enhance public investment efficiency.
- State-Owned Enterprises (SOEs):
  - Publish a report by central government annually that quantifies and consolidates information on all significant contingent liabilities and other fiscal risks of central government for the 2019 budget. Timing: End December 2018. Objective: Minimize fiscal risks arising from SOEs.
  - Calculate the cost of social obligations of SOEs and provide that information in the budget document for the 2019 budget. Timing: End December 2018. Objective: Minimize fiscal risks arising from SOEs. Improve economic efficiency.
  - Submit the new Code of Governance for the SOEs based on OECD Guideline to the National Assembly for enactment. Timing: End September 2018. Objective: Reinforce the monitoring and oversight of SOEs.
- Financial Sector Stability:
  - Review the AML/CFT legal and institutional framework and submit the amended framework to the Cabinet, in line with the FATF standard, particularly regarding entity transparency and AML/CFT institutions. Timing: End June 2018. Objective: Reduce AML risks in financial and off-shore sectors.
  - Implement a risk-based approach to the supervision of banks and trusts and company service providers, consistent with the FATF standard. Timing: End-December 2018. Objective: Reduce AML risks in financial and off-shore sectors.
  - Submit draft legislation to National Assembly to solidify the legal framework for crisis management, bank resolution, and safety nets. Timing: End-December 2018. Objective: Buttress the financial sector stability.

### Technical Memorandum of Understanding — definitions, monitoring, and reporting
- Program exchange rates for 2017 and 2018:
  - SCR13.6735 per US$1 for 2017 and 2018.
  - US$ to other currencies (US$/1 other currency) listed: EUR 1.19, GBP 1.29, SDR 1.41, AUD 0.79, CAD 0.80, ZAR 0.08, CNY 0.15.
- Net international reserves (NIR) definition and monitoring:
  - NIR = reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF).
  - Reserve assets include SDRs, foreign exchange holdings, demand and short-term deposits at foreign banks, fixed-term deposits abroad liquidatable without penalty, and investment-grade securities; exclude project balances and blocked or escrow accounts, and bank reserves in foreign currency maintained for reserve requirements.
  - Reserve liabilities include liabilities to nonresidents contracted by the CBS and net off-balance-sheet positions (futures, forwards, swaps, or options), including those to the IMF.
  - Reserves assets and liabilities must be converted into U.S. dollars using end-of-period exchange rates assumed in the program.
  - Semiannually, 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 and submitted to the IMF no later than two months after each test date.
  - Adjusters: 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; adjusted for external debt service payments falling short (exceeding) program assumptions.
- Reserve money definition, band, and reporting:
  - Reserve money = currency issued + deposits held by other depository corporations at the central bank (bank reserves), including foreign currency-denominated.
  - Reserve money targets are projected daily averages of the quarter preceding the test date, surrounded by a symmetrical band of six percent in both directions; the upper bound serves as program ceiling.
  - Quarterly average reserve money is the arithmetic average of reserve money observed on all days over the quarter.
  - Daily reserve money data will be submitted weekly to the IMF with a time lag no later than one week; cumulative average over the quarter reported weekly.
  - Semiannually, reserve money data submitted will be audited by the CBS’ internal audit division in accordance with International Standards on Auditing and submitted to the IMF no later than two months after each test date.
  - If observed quarterly average reserve money falls outside the lower or upper bands for end-December 2017, end-June 2018 and end-December 2018 test dates, the authorities will consult with IMF staff on monetary stance, reasons for deviations, compensating factors, and proposed remedial actions if necessary.
- Program primary balance (cumulative floor) definition:
  - Consolidated government primary balance from above the line on a commitment basis defined as total consolidated government and social security fund revenues (excluding privatization and longer-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.
- Ceiling on overall stock of public debt (memorandum item):
  - Applies to overall stock of public debt: central government debt; government guarantees for SOE loans; obligations to the IMF.
  - Defined as total outstanding gross debt liabilities, including securities and loans, measured at nominal value; excludes accounts payable.
  - Program exchange rate applies to non-SCR denominated debt. External debt defined on residency basis.
  - For debt definition, references to Guidelines on Public Debt Conditionality: debt understood as a current liability created under contractual arrangement requiring future payments; primary forms listed include (i) loans, (ii) suppliers’ credits, (iii) leases; arrears, penalties, and judicially awarded damages from failure to make contractual payments that constitute debt are included.
- External arrears definition:
  - No accumulation of arrears to external creditors is a continuous target.
  - External payments arrears defined as external debt service due and not paid within the contractually agreed period, subject to any applicable grace period, including contractual and late interest.
  - Arrears for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded.
- Data and reporting schedule (selected items and frequencies)
  - CBS weekly (within one week): 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.
  - CBS monthly (within four weeks): monetary survey in standardized report form; foreign exchange cash flow, actual and updated; financial soundness indicators; stock of government securities in circulation by holder and original maturity and debt service profile report.
  - Ministry of Finance monthly (within four weeks): consolidated government operations on a commitment basis and cash basis in IMF-supported program format and in GFSM2001 format; detailed revenues and expenditures of central government and social security fund; import and export data from customs; public debt report reconciled with cash operations; consolidated creditors schedule on domestic expenditure arrears of the government.
  - Ministry of Finance quarterly (within one month): accounts of the public nonbank financial institutions.
  - Government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation and provide additional relevant information as requested by Fund staff.

*Source: IMF country report excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17401.pdf_