## 1sycea2019002

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### Main recommendations and recent achievements
- Successive Fund programs since the 2008 crisis achieved:
  - Significant primary fiscal surpluses since 2009.
  - Reduction of public-debt-to-GDP ratio by two thirds since end-2008.
  - GIR prospective import coverage improved to about 4 months by 2015 from less than 1 month at end-2008.
- Seychelles is a high-income micro-state (population less than 200,000).
- Authorities requested a Policy Coordination Instrument (PCI) in mid-2017 after the EFF expired; Seychelles was the first member to do so.
- Seychelles announced a climate change mitigation and adaptation strategy in 2015 and was the first pilot country for a Climate Change Policy Assessment (CCPA) for small states.
- Authorities agreed with staff on outlook and risks; emphasized timely Air Seychelles restructuring to safeguard fiscal sustainability.

### Macroeconomic developments and outlook
- Recent indicators:
  - Tourist receipts grew by 16¾ percent in 2018 (CBS survey).
  - Real GDP growth: 4.1 percent in 2018.
  - Private sector credit growth: 13.6 percent at end-March 2019.
  - NPLs to gross loans: 3.5 percent in December 2018 (down from 7.1 percent in December 2017).
  - Headline year-on-year CPI inflation: 2 percent in March 2019 (down from over 4½ percent earlier in 2018).
  - CBS raised interest rate corridor bounds by 50 basis points in January 2019.
  - GIR’s ARA metric projected to stay around about 125 percent in the medium term.
  - Public service 5 percent salary table increase implemented on April 1, 2019.
- Outlook:
  - Growth expected to moderate to around 3½ percent during 2019‒20 (around potential).
  - Drivers: tightening monetary policy, moderating tourism and fishery performance, moratorium on large hotel construction projects until end-2020.
  - External current account deficit expected to be mostly financed by FDI.
  - GIR projected to remain around current level (ARA metric about 125 percent).
  - Risks to the outlook are tilted to the downside.

### Fiscal policy, 2019 budget, and 2020 planning
- 2019 budget targets:
  - Primary surplus: 2½ percent of GDP (supported by permanent measures under 2nd PCI review).
- Permanent revenue measures (2019):
  - Sugar tax (starting April 2019): SCR 39; 0.17 percent of GDP.
  - 10 percent tobacco excise increase: SCR 15; 0.06 percent of GDP.
  - Increase duties on poultry and pork imports: SCR 5; 0.02 percent of GDP.
  - Introduction of property tax: SCR 40; 0.17 percent of GDP.
  - Increase in various fees and charges: SCR 40; 0.17 percent of GDP.
  - Phasing out fuel tax exemptions for fishing and tourism sector (permanent measure).
  - Total estimated additional permanent revenue: SCR 145; 0.62 percent of GDP.
- One-off receipts:
  - One-off stamp duty receipt of almost 1 percent of GDP from sale in 2016–17 of a major telecom company.
- Expenditure measures:
  - Contain nominal growth of goods and services via procurement reforms and removing duplication.
- 2020 budget planning and medium-term strategy:
  - Staff advice: include permanent measures in 2020 to shore up medium-term debt reduction goal.
  - Staff DSA: a primary surplus of 2½ percent of GDP from 2020 onward would bring public debt below 50 percent by end-2021 and steady reduction thereafter.
  - Fiscal gap to replace one-offs: need savings of almost 1 percent of GDP in 2020.
  - Government intended measures for 2020 (authorities' preliminary estimates):
    - Contain nominal current expenditure growth in goods and services to almost zero in 2020 (about 0.5 percent of GDP saving).
    - Contain wage bill via new staffing and recruitment plan.
    - Better targeting of social welfare (Home Care program costed at 1 percent of GDP in 2019; preliminary saving estimate about 0.3 percent of GDP in 2020).
  - Social mitigation: vouchers for electricity to households below threshold starting mid-2019.

### Climate change, public investment, and Annex I scenarios
- PSIP and identified climate projects:
  - Climate change related projects incorporated in PSIP total $60.8 million.
  - Authorities identified financing of about $60 million of climate change projects in PSIP.
- Financing gap and project scale:
  - Other climate change and major investment projects announced in 2018 SONA: total cost of projects with financing yet to be identified estimated at over 40 percent of 2018 GDP over their lifespan.
- Annex I project cost totals and execution:
  - Grand Anse Dam: $80 million — 5.1 percent of 2018 GDP — execution: 2020-2023 (baseline/rapid).
  - Conversion to LNG: $216 million — 13.6 percent of 2018 GDP — execution: 2022-2027 (baseline) / 2020-2023 (rapid).
  - Other unidentified climate projects: $252 million — 15.9 percent of 2018 GDP — execution: 2020-2033 (baseline) / 2020-2029 (rapid).
  - Subtotal (climate): $548 million — 34.6 percent of 2018 GDP.
  - Cascade to Grand Anse Tunnel: $65 million — 4.1 percent of 2018 GDP.
  - Reclaiming of land: $80 million — 5.1 percent of 2018 GDP.
  - Grand total: $693 million — 43.8 percent of 2018 GDP.
- Baseline (phased) scenario projections:
  - Primary surplus: stay at 2½ percent of GDP until 2024, then gradually decline to a balance in 2033.
  - Public debt to GDP: below 50 percent by end-2021; around 25 percent at end-2033.
  - GIR import coverage: around 3¼‒3½ months; ARA metric: 120‒130 percent.
  - NIIP: worsen from -107 percent of GDP in 2019 to -118 percent of GDP in 2024 (due to external project financing).
- Rapid execution Scenario 1 (front-loaded, same financing mix):
  - Primary surplus: fall to around 1‒1½ percent of GDP during 2020‒23.
  - Public debt below 50 percent only by end-2023 (two years later).
  - Current account deficit: increase to over 20 percent of GDP during 2020‒23.
  - Gross financing needs: about 20–32 percent through 2019–2024.
  - GIR import coverage decline to 2¼ months; ARA metric around 90 percent; NIIP worsen to around 134 percent of GDP by 2024.
- Rapid execution Scenario 2 (greater domestic borrowing):
  - Additional US$136 million domestic borrowing relative to baseline.
  - Gross financing needs: around 30 percent of GDP for next several years.
  - Public debt below 50 percent only by 2025 (four years later).
  - GIR ARA metric decline to around 65 percent; NIIP worsen to around 140 percent of GDP by 2024.
- Policy implication:
  - Phase projects in line with absorptive capacity; prioritize concessional external grants; cautious use of PPPs and build capacity; phased baseline compatible with fiscal and external stability.

### Fiscal risks, public debt, and SOEs (including Air Seychelles)
- Public debt and interest cost:
  - Public-debt-to-GDP reduced by more than two thirds since end-2008 but remains high.
  - Seychelles spent about 8 percent of its expenditure outlays (about 10 percent of tax revenue) on interest payments in 2018.
- Gross financing needs and domestic debt structure:
  - High gross financing needs due to high debt level and short maturity of domestic debt (most domestic debt maturity < one year).
- SOE footprint:
  - 22 SOEs whose revenues reach almost 70 percent of GDP.
  - Non-guaranteed SOE debt estimated around 13 percent of GDP (sizable contingent liability).
- Air Seychelles specifics:
  - Significant loss during 2017–18.
  - Government planned financial support in medium-term projections: $42.5 million over next five years.
  - Planned assistance: $12.5 million guarantees to working capital starting 2019; $6 million transfers in 2019 financed by grants; $6 million guarantees each year during 2020–23.
  - “Project box bond” of $71.5 million owed to Etihad could pose rollover risks in 2020 and 2021.
  - PEMC to conduct governance and operational assessment on Air Seychelles by end-December 2019.
  - Staff urged implementation of restructuring plan to avoid additional budget impact beyond medium-term assumptions.
- Risk-reduction measures:
  - Plans to issue 3-, 5-, and 7-year bonds in second half of 2019 to extend domestic maturities.
  - Liability management exercise to swap US$130 million of US dollar obligations into Euros to better align repayment currency with earnings.
  - Staff advised re-examining SOE role, consider privatizations, and draft new government dividend policy for SOEs.
  - Amendments to PEMC Act to be submitted to Cabinet by September 2019 to give PEMC more enforcement powers.

### Monetary policy, exchange rate, and reserves
- CBS objectives and framework:
  - Primary objective: price stability; committed to a floating exchange rate policy.
  - Mid-2017: replaced reserve money targeting with interest rate corridor; mid-point serves as policy rate.
  - MPR introduced as key policy rate (expected at center of corridor).
- Recent actions and stance:
  - Policy rate raised by 50 basis points in January 2019; kept unchanged in March 2019.
  - MPR initially set at 5.5 percent (see monetary framework details).
  - Staff found January 2019 tightening appropriate given faster credit growth and public wage increases.
- Inflation and risks:
  - Inflation falling since early 2018; 2018 annual average: 3.7 percent.
  - Staff cautioned inflationary pressures from higher public wages, sustained credit growth, and rising international fuel prices.
  - Staff supports CBS vigilance and decision to keep policy rate unchanged.
- Exchange rate and reserves:
  - Staff assessment: REER modest overvaluation; external position moderately weaker than fundamentals (Annex II).
  - GIR: around 125 percent of the ARA metric; GIR at end-2018: US$ 548 million; 3.6 months of prospective imports.
  - Policy recommendation: maintain flexible exchange rate; limit FX purchases to preserve reserve coverage around current level to avoid excess liquidity or further monetary debt issuance.
- Framework strengthening and macroprudential:
  - CBS operationalized interest rate corridor in July 2017 and announced a policy rate in December 2018.
  - Staff recommended accelerating amendment of the Financial Stability Act to enable macroprudential measures.
  - Staff encouraged coordination between Ministry of Finance and CBS on unwinding monetary debt.
  - Staff viewed formal inflation targeting framework as premature; suggested announcing a medium-term inflation objective to anchor expectations and formalizing survey of inflation expectations.

### Financial sector, credit, and correspondent banking
- Private sector credit and composition:
  - Credit-to-GDP ratio: edged up from 30 percent at end-2017 to 31 percent of GDP at end-2018.
  - Mortgage loans and loans to private households and NPIs: 37 percent of total loans at end-2018 (up from 34 percent end-2017).
  - Building & construction and wholesale & retail trade share increased from 16.5 percent in 2017 to 19 percent in 2018.
  - Tourism and manufacturing shares in total loans declined from 22 percent in 2017 to 19 percent in 2018.
- Risks and policy responses:
  - Rising consumer credit and mortgage NPLs observed; staff analysis links loose financial conditions to future rises in NPLs.
  - Finalizing Financial Stability Act amendment would enable CBS macroprudential action to address consumer credit risks.
- Correspondent Banking Relationships (CBRs):
  - Seychelles among 50 countries with largest cumulative decline in number of CBRs between 2012 and 2017.
  - Four out of 24 correspondent banks comprised approximately 70 percent of total transaction value between 2016Q1 and 2018Q3.
  - Staff priorities: strengthen AML/CFT enforcement and supervision, improve due diligence and information sharing, seek backup CBRs and intermediary banks.
- Regulatory and supervisory reforms:
  - Transition to Basel II and adoption of Basel III capital definition underway.
  - Policy framework to strengthen crisis management, bank resolution, and safety net approved by Cabinet; draft legislation submission delayed to end-March 2020.
  - IFRS9 guidance issued April 2018; reporting requirements being finalized.

### AML/CFT, offshore sector, and transparency
- Progress and concerns:
  - Tax legislation amended to meet OECD BEPS initiatives.
  - 2018 ESAAMLG FATF mutual evaluation report recommended capacity enhancements.
  - National AML/CFT Committee appointed.
  - Staff concerns about new provisions in IBC Act limiting disclosure of directors of Seychelles IBCs.
- Staff urgings:
  - Articulate new offshore sector strategy focused on transparent business model compliant with international best practices.
  - Accelerate risk-based approach to AML/CFT supervision consistent with MER recommendations.
  - Continue regional/international engagement to address CBR challenges.
- Authorities’ timelines and requests:
  - Policy paper to repeal existing AML Bill and replace with new legislation submitted to Cabinet (absent entity transparency measures initially).
  - Drafting new AML legislation with international consultant; requested TA from World Bank and Fund.
  - Authorities committed to move away from current IBC model and finalize new offshore sector strategy in second half of 2019.

### External sector, competitiveness, and REER assessments
- Key external metrics:
  - Current account deficit (including official transfers): -17.1 percent of GDP in 2018; expected around -17 percent in 2019 and average 17‒18 percent over medium term.
  - Total external debt: 110 percent of GDP at end-2018.
  - NIIP excluding offshore: -108 percent of GDP at end-2018 (worsened from -104 percent in 2017).
  - Tourism receipts: 37 percent of total exports and 36 percent of GDP.
- EBA-lite and model results (discrepant):
  - CA-Gap: -18.5 percent of GDP.
  - CA-Actual: -17.1 percent.
  - Implied REER Gap (CA model): 23 percent (overvaluation).
  - IREER model REER Gap: -46.2 percent (under-valuation).
  - ES approach suggested 16 percent REER overvaluation (staff anchor).
  - Staff overall assessment: REER moderately overvalued relative to medium-term fundamentals and desired policies; continued appreciation could pose competitiveness risks.
- Reserve adequacy:
  - GIR end-2018: 3.6 months of prospective imports; US$ 548 million.
  - GIR projected to remain between 30 and 35 percent of GDP; import coverage 3¼‒3½ months medium-term.
  - Level of international reserves at end-2018: about 125 percent of ARA metric.

### Program implementation, monitoring, and targets
- PCI implementation:
  - 1st and 2nd reviews concluded as scheduled; primary fiscal surplus and NIR floors for end-2018 met by comfortable margins.
  - 12-month average inflation for end-2018 was within inner bound of MPCC.
  - Most end-2018 structural reform targets implemented, with some delays (cost-benefit analysis completed March 2019; Code of Governance for SOEs completed February 2019).
- Staff proposals for 2019:
  - Revise down end-June and end-December 2019 inflation projections for MPCC.
  - Slight downward revision of end-June 2019 primary fiscal balance target (end-year target unchanged).
  - Introduce automatic adjuster for NIR targets for 2019 with respect to telecom sale receipts.
  - Reset three 4th review RTs due to capacity constraints (AML/CFT risk-based approach; legal framework for crisis management; Financial Stability Act) and add RT on Air Seychelles operation and governance review.
- Review timetable:
  - Fourth review by October 31, 2019.
  - Fifth review by April 30, 2020.
  - Sixth review by October 31, 2020.
- Quantitative program highlights (selected projections and historical figures preserved):
  - Nominal GDP (2017): US$1,498 million.
  - Per capita GDP (2017): US$15,735.
  - Real GDP (annual percent change): 2015: 4.9; 2016: 4.5; 2017: 4.3; 2018: 4.1; 2019: 3.5; 2020: 3.3; 2021: 4.1; 2022: 4.0; 2023: 3.8; 2024: 3.6.
  - CPI (annual average): 2015: 4.0; 2016: -1.0; 2017: 2.9; 2018: 3.7; 2019: 2.6; 2020–2024: 3.0 each year.
  - Program primary balance (percent of GDP): 2015: 4.3; 2016: 3.4; 2017: 3.0; 2018: 2.9; 2019–2024: 2.5 each year (program table entries preserved).
  - Total government and government-guaranteed debt (percent of GDP): 2015: 69.2; 2016: 72.7; 2017: 66.8; 2018: 60.1; 2019: 57.7; 2020: 53.2; 2021: 48.9; 2022: 44.9; 2023: 41.7; 2024: 39.2.
  - Current account balance (percent of GDP): 2015: -18.6; 2016: -20.1; 2017: -20.4; 2018: -17.1; 2019: -17.0; 2020: -17.4; 2021: -18.3; 2022: -18.1; 2023: -17.5; 2024: -17.4.
  - Total external debt outstanding (US$ millions): 2015: 1,392; 2016: 1,505; 2017: 1,639; 2018: 1,748; 2019: 1,772; 2020: 1,789; 2021: 1,817; 2022: 1,839; 2023: 1,877; 2024: 1,970.
- Data and safeguards:
  - Safeguard assessment: voluntary update in February 2018; CBS implementing recommendations.
  - Macroeconomic data broadly adequate; staff encouraged improved BOP statistics and GDP rebasing with Fund TA.

### Capacity development (Annex III) and structural reform priorities
- CD priorities (2019–20):
  - Public finance management: fiscal risk analysis (SOEs), medium-term budgeting, public investment management.
  - Monetary policy operations: inflation forecasting, liquidity management, policy communication.
  - AML/CFT framework strengthening.
  - Quality of statistics: price, GDP, external sector statistics.
- Institution-specific objectives:
  - Ministry of Finance: fiscal risk analysis and PIM strengthening.
  - CBS: AML/CFT supervision capacity, monetary policy capacity, deepening money market, monetary communication.
  - SRC: revenue administration and customs strengthening.
  - NBS: improve CPI, GDP, and external sector statistics.
- Risks and mitigation:
  - Capacity constraints due to very small technical staff; mitigation includes using PCI reviews, high-level commitment, and coordination between AFR and TA departments.
- Structural reform priorities emphasized:
  - Maintain fiscal discipline and phased public investment execution.
  - Strengthen AML/CFT to preserve CBRs.
  - Deepen and diversify tourism and upgrade fisheries under Blue Economy initiatives.
  - Reduce electricity cross-subsidization and enhance business climate and digitalization.
  - Accelerate vocational education and financial inclusion initiatives.

*Source: IMF staff report excerpts from content unit 1sycea2019002.*

### 1. Main Recommendations of the 2017 Article IV Consultation ______________________________________ 6

### 1. Main Recommendations of the 2017 Article IV Consultation ______________________________________ 6

### Context and recent achievements
- Seychelles implemented successive Fund programs since the 2008 crisis, achieving:
  - Significant primary fiscal surpluses since 2009.
  - Reduction of public-debt-to-GDP ratio by two thirds since end-2008.
  - Gross international reserves (GIR) prospective import coverage improved to about 4 months by 2015 from less than 1 month at end-2008.
- Seychelles is the only high-income country in Sub-Saharan Africa and a micro-state (population less than 200,000).
- The authorities requested a Policy Coordination Instrument (PCI) in mid-2017 after the EFF expired; Seychelles was the first member to do so.
- Seychelles announced an ambitious climate change mitigation and adaptation strategy in 2015 and was the first pilot country for a Climate Change Policy Assessment (CCPA) for small states.

### Main macroeconomic developments and indicators
- Tourist receipts grew by 16¾ percent in 2018 (CBS survey).
- Real GDP growth was 4.1 percent in 2018.
- Private sector credit growth decelerated since March 2018 but remained high at 13.6 percent at end-March 2019.
- Non-performing loans (NPLs) to gross loans declined to 3.5 percent in December 2018 from 7.1 percent in December 2017 (following the resolution of a large legacy NPL).
- Headline year-on-year CPI inflation declined to 2 percent in March 2019, down from over 4½ percent earlier in 2018.
- The Central Bank of Seychelles (CBS) raised the lower and upper bounds of the interest rate corridor by 50 basis points in January 2019 (also referenced as late December 2018 in the source).
- GIR’s ARA metric projected to stay around the current level of about 125 percent in the medium term.
- The 5 percent increase on the salary table for public services was implemented on April 1, 2019.

### Outlook
- Growth is expected to moderate to around 3½ percent during 2019‒20, around the potential rate, driven by:
  - Tightening of monetary policy.
  - Moderating performance in tourism and fishery sectors.
  - A moratorium on large hotel construction projects until 2020 (large hotel moratorium introduced in late 2015 prohibits construction of new large hotels until end-2020).
- External current account deficit expected to be mostly financed by FDI.
- GIR projected to remain around current level (ARA metric about 125 percent).
- Risks to the outlook are tilted to the downside.

### Authorities’ views
- Authorities agreed with staff’s assessment of the outlook and risks.
- They emphasized that delay in Air Seychelles’ operational restructuring would jeopardize debt reduction and fiscal sustainability; committed to implementing the restructuring plan and strengthening monitoring of cash flows and operations.

### Policy discussions
- Emphasis on shoring up economic stability while enhancing inclusive growth.
- Major public investment projects (announced in 2018 SONA) should be implemented within PCI fiscal parameters to secure debt reduction and fiscal/external sustainability.
- Need to implement permanent fiscal measures in 2020 and create further fiscal space beyond the medium-term debt reduction target.
- Maintain flexible exchange rate policy and current reserve buffer to lock in price and external stability.
- Structural agenda: maintain financial stability, minimize fiscal risks, enhance inclusive growth prospects.

### Key risks (summary from Risk Assessment Matrix, 2019)
- Domestic risks:
  - Relaxation of fiscal discipline (Likelihood: M; Severity: M): could feed into balance of payments and threaten debt reduction and reserves adequacy.
    - Policy response: Ensure primary surplus target continues to be met from 2019 onwards; implement infrastructure and climate projects in a phased way within PCI fiscal parameters.
  - Slippage in Air Seychelles restructuring (Likelihood: M; Severity: H): could threaten debt reduction and external position.
    - Policy response: Steadfastly implement the restructuring plan.
  - Natural disaster and climate change (Likelihood: L; Severity: H): catastrophic weather event could lead to exploding public debt dynamics; rising sea level long-run devastating impacts.
    - Policy response: Create further fiscal space beyond medium-term debt target for key public investments; ensure adequate natural disaster insurance coverage.
- External risks:
  - Structurally weak growth in key advanced and emerging economies (Likelihood: M-H; Severity: M): would lower tourism receipts and growth.
    - Policy response: Ensure exchange rate flexibility; encourage diversification of tourism markets.
  - Large swings in international fuel prices (Likelihood: M; Severity: M): higher-than-projected prices would harm external balance, inflation, and some SOEs’ financial positions.
    - Policy response: Ensure exchange rate flexibility; progress toward less fuel-dependent energy mix over medium to long term.
  - Intensification of global security risks (Likelihood: H; Severity: M): could adversely affect tourist arrivals.
    - Policy response: Support open, competitive air transport policy to diversify tourist sources and connections.
  - Reduced financial services by correspondent banks (Likelihood: M; Severity: M): loss of CBRs would disrupt trade and financial flows.
    - Policy response: Step up efforts to align AML/CFT legal and regulatory framework with international standards and enhance enforcement capacity.

### Fiscal and structural priorities from the 2017 Article IV recommendations (Box 1: Recommendations and Status)
- Fiscal policy and public financial management:
  1. Target primary surplus of 3 percent of GDP from 2018 onwards to buttress medium-term debt reduction (bring public-debt-to-GDP below 50 percent by 2020).
     - Status: Authorities revised down primary surplus target to 2.5 percent of GDP from 2018 onwards; medium-term public debt below 50 percent postponed by one year to 2021.
  2. Create further fiscal space to accommodate climate resilience investments.
     - Status: Authorities sought financing for climate projects (external grants and PPPs); introduced measures to limit nominal growth of current spending, including procurement reforms and removing duplication of services.
  3. Continue progress to strengthen the SOE sector.
     - Status: Significant progress under the PCI, including publishing fiscal risks from SOEs and amending Code of Governance for SOEs in line with OECD Guideline.
- Monetary and foreign exchange policy:
  4. Maintain an appropriately tight monetary policy stance.
     - Status: CBS kept an appropriately tight stance, contributing to low inflation.
  5. Continue progress toward a stronger monetary policy framework where interest rates play a prominent role.
     - Status: CBS operationalized an interest rate corridor in July 2017 and announced a policy rate in December 2018.
  6. Maintain the flexible exchange rate policy.
     - Status: CBS maintained flexible exchange rate while keeping international reserves buffer adequate.
- Financial sector policy and structural reform:
  7. Continue efforts to address risks of potential loss of correspondent banking relationships (CBRs).
     - Status: Significant progress to protect CBRs, including AML/CFT amendments under the PCI and improved CBR compliance by local banks.
  8. Improve the business environment, including reducing cross-subsidization in electricity prices.
     - Status: Progress limited; electricity tariff adjustments resumed starting September 2018.
  9. Deepen, diversify and upgrade tourism and fisheries industries.
     - Status: Some diversification and local content gains (guesthouses); more effort needed to value upgrade fisheries.

*Source: IMF Staff*

### 11.  The 2019 budget approved by the National Assembly is in line with the program. The

### 11.  The 2019 budget approved by the National Assembly is in line with the program. The

### 2019 budget: main fiscal stance and revenue/expenditure measures
- The approved budget targets a primary surplus of 2½ percent of GDP, supported by permanent measures in line with the understandings under the 2nd PCI review.
- Revenue measures (permanent):
  - Introduction of a sugar tax (starting in April 2019): SCR 39; 0.17 percent of GDP.
  - 10 percent increase in tobacco excise: SCR 15; 0.06 percent of GDP.
  - Increase in duties on poultry and pork product imports: SCR 5; 0.02 percent of GDP.
  - Introduction of a property tax: SCR 40; 0.17 percent of GDP.
  - Increase in various fees and charges: SCR 40; 0.17 percent of GDP.
  - Phasing out of fuel tax exemptions for the fishing and tourism industry (estimated impact shown in table; discussed as a permanent measure).
  - Total estimated additional permanent revenue from these measures: SCR 145; 0.62 percent of GDP.
- The accelerated investment deduction and marketing cost deduction for tourism-related companies were terminated at end-2018, but will not produce additional revenues for the next several years due to loss carryovers.
- These revenue measures offset the full-year revenue loss arising from the introduction of the progressive personal income tax (PIT) in June 2018 (PS¶7).
- One-off receipts:
  - A one-off stamp duty receipt of almost 1 percent of GDP from the sale in 2016–17 of a major telecom company to a new operator supplements permanent measures.
- Expenditure-side measures:
  - Measures to contain nominal growth of goods and services (procurement reforms, elimination of government services duplication).
  - The 2019 budget includes various containment measures to limit nominal growth in goods and services.

### 2020 budget planning and medium-term fiscal strategy
- Staff advice:
  - Include permanent measures in the 2020 budget to shore up the medium-term debt reduction goal.
  - Staff’s DSA indicates that a primary surplus of 2½ percent of GDP from 2020 onwards would lead to public debt below 50 percent of GDP by end-2021 and continued steady reduction thereafter.
- Fiscal gap to replace one-offs:
  - Given the one-off stamp duty receipt expires in 2019, the authorities need to create savings of almost 1 percent of GDP in 2020.
- Government-intended measures to be articulated in the 2020 budget (PS¶9):
  - Contain nominal growth of current expenditures in goods and services to almost zero in 2020 through continued procurement reform, utility tariff rebalancing, and removing duplication of services across agencies (authorities’ preliminary estimate: about 0.5 percent of GDP saving in 2020).
  - Contain wage bill growth by implementing a new staffing and recruitment plan.
  - Better targeting of social welfare spending, including review and adjustment of means-test and benefit levels of the home care program (the saving impact in 2020 is preliminarily estimated by the authorities at about 0.3 percent of GDP). The Home Care program is budgeted to cost 1 percent of GDP in 2019.
- Social mitigation:
  - Staff encouraged delineation of measures to mitigate the impact of utility tariff rebalancing and the sugar tax on the most vulnerable; authorities noted households below a threshold will receive vouchers for electricity starting mid-2019.
  - Staff argued for removing discriminatory features in the property tax introduced in the 2019 budget.

### Climate change and public investment projects
- Identified and included in PSIP:
  - The authorities identified financing of about $60 million of climate change mitigation and adaptation projects and included them in their Public-Sector Investment Program (PSIP, text table). The climate change related projects incorporated in the PSIP total $60.8 million (detailed project-level financing available in PSIP table).
- Financing gap and execution sequencing:
  - A medium-term financing strategy is needed for other climate change and major investment projects announced in the 2018 SONA.
  - The total cost of projects whose financing is yet to be identified is estimated at over 40 percent of 2018 GDP over their lifespan.
  - Staff analysis: a phased execution approach would be consistent with long-term fiscal sustainability and external stability; rapid execution concentrated over the next several years would put external stability at risk (Annex I).
- Financing advice:
  - Seek concessional external financing to the extent possible and explore additional measures (including gradual introduction of a carbon tax as part of comprehensive tax reform).
  - Use PPPs cautiously; staff encouraged enhancing capacity to minimize fiscal risks from PPPs and to raise efficiency of public investments.
  - Government actions: draft PPP bill to provide institutional framework and procedures; request for technical assistance in designing major PPP projects; plan to undertake the Fund’s public investment management assessment (PIMA) in 2019.

### Minimizing fiscal risks, public debt, and SOE-related risks
- Public debt context and interest cost:
  - Seychelles reduced public-debt-to-GDP by more than two thirds since end-2008, but debt burden remains high.
  - The country spent about 8 percent of its expenditure outlays (or about 10 percent of its tax revenue) on interest payments in 2018.
- Gross financing needs and domestic debt structure:
  - Risks to public debt sustainability center around high gross needs arising from the high level of debt and the short maturity of domestic debt (most domestic debt has a maturity of less than one year).
- SOE footprint and contingent liabilities:
  - There are 22 SOEs whose revenues reach almost 70 percent of GDP in Seychelles.
  - Non-guaranteed SOE debt is estimated at around 13 percent of GDP, implying a sizable contingent liability.
- Air Seychelles:
  - Air Seychelles experienced a significant loss during 2017–18.
  - Government’s planned financial support reflected in medium-term projections is expected to amount to $42.5 million in the next five years.
  - Specific planned assistance: guarantees to working capital of $12.5 million starting 2019; $6 million of transfers to the company in 2019 financed by grants; and $6 million of guarantees to the company each year during 2020–23.
  - A “project box bond” of $71.5 million is owed to Etihad and could pose rollover risks to the company in 2020 and 2021.
  - Public Enterprise Monitoring Committee (PEMC) will conduct a governance and operational assessment on Air Seychelles by end-December 2019 (PS¶25, 5th review RT).
  - Staff urged implementation of Air Seychelles’ restructuring plan and corrective actions to ensure no additional budget impact beyond what is assumed in medium-term projections.
- Risk-reduction measures:
  - Plans to issue 3-, 5-, and 7-year bonds in second half of 2019 to extend domestic maturities and reduce rollover risk.
  - Liability management exercise to swap US$130 million of US dollar obligations into Euros to better align repayment currency with foreign earnings (mostly in Euros).
  - Staff advised re-examining the role of SOEs over the medium term (including possible privatizations) and drafting a new government dividend policy for SOEs to reduce uncertainty in budgeting of non-tax revenue.
  - Amendments in the PEMC Act to be submitted to Cabinet by September 2019 (4th review RT) to give PEMC more enforcement powers.

### Monetary policy, price stability, and external stability
- CBS objectives and framework:
  - CBS primary monetary policy objective is price stability; committed to a floating exchange rate policy.
  - Mid-2017: CBS replaced reserve money targeting with an interest rate corridor framework; the mid-point of the corridor serves as the policy rate.
  - The Monetary Policy Rate (MPR) will serve as the key policy rate, expected to lie at the center of the interest rate corridor.
- Recent policy actions:
  - CBS raised the policy rate by 50 basis points in January 2019 and kept it unchanged in March 2019.
  - Staff found the January 2019 tightening appropriate given faster credit growth at the time and the increase in public wages announced in the 2019 budget.
- Inflation and risks:
  - Inflation has been falling since early 2018, helped by decline in international fuel prices in late 2018 and early 2019 and a tight monetary stance.
  - Staff cautioned that inflationary pressures could arise from increased private consumption due to higher public wages, sustained credit growth, and rising international fuel prices.
  - Staff supports CBS vigilance and the decision to keep the policy rate unchanged.
- Macroprudential and coordination advice:
  - Staff recommended accelerating the amendment of the Financial Stability Act to enable macroprudential measures to address consumer credit risks.
  - Staff encouraged close coordination between the Ministry of Finance and the CBS on unwinding monetary debt so that debt reduction and inflation objectives are balanced.
- Framework strengthening:
  - Considerable progress made in inflation forecasting and liquidity management, including implementing the CBS 6-phase plan (PS¶35).
  - Staff encouraged continued adaption of communication policy and development of the interbank market with Fund TA.
  - Staff viewed adopting a formal inflation targeting framework as premature but suggested announcing a medium-term inflation objective could anchor expectations.
  - Staff encouraged formalizing and expanding the survey of inflation expectations.

### Private sector credit and financial stability (Box 3)
- Credit-to-GDP:
  - Credit-to-GDP ratio edged up from 30 percent at end-2017 to 31 percent of GDP at end-2018.
  - The credit-to-GDP ratio in Seychelles is lower than in comparable small states cited: Cabo Verde (60 percent), Mauritius (78 percent), The Bahamas (49 percent).
  - The credit-to-GDP gap appears to be closing.
- Composition and drivers of credit:
  - Mortgage loans and loans to private households and NPIs reached 37 percent of total loans at end-2018, up from 34 percent at end-2017.
  - Building and construction and wholesale and retail trade increased their share in total loans from 16.5 percent in 2017 to 19 percent in 2018.
  - Tourism and manufacturing shares in total loans declined from 22 percent in 2017 to 19 percent in 2018.
  - Discussions suggest increases in salaries (across-the-board 13th month salary and increase in minimum wage) contributed to the rise in loans to private households.
- Risks and policy response:
  - Credit booms and busts could amplify economic fluctuations and lead to adverse outcomes.
  - Staff analysis suggests periods of loose financial conditions are typically followed by expansion in credit, rise in NPLs, and declines in return on equity.
  - Sectoral NPL data over 2017M1–2018M12 show rising NPLs in mortgages and other loans to private households.
  - Finalizing the amendment of the Financial Stability Act would enable the CBS to adopt macroprudential measures to address risks from a build-up in consumer credit.

*Source: IMF staff report text provided in content unit 1sycea2019002.*

### 24.  The flexible exchange rate policy has served Seychelles well and reserve coverage is at

### 1sycea2019002 - 24.  The flexible exchange rate policy has served Seychelles well and reserve coverage is at

### Exchange rate policy and reserve coverage
- Staff assessment: modest level of overvaluation of the real effective exchange rate and an external position moderately weaker than implied by fundamentals (Annex II).
- Gross international reserves (GIR) currently stand at around 125 percent of the ARA metric.
- Staff view: given Seychelles’ perennial vulnerability to external shocks as a tourism-dependent small island economy, the current level of reserve coverage is adequate.
- Policy recommendation:
  - Maintain the flexible exchange rate policy.
  - Limit foreign exchange purchases to the extent necessary to preserve reserve coverage ratios at around the current level.
  - Rationale: large foreign exchange purchases would increase excess liquidity or require further issuance of monetary debt, which would be detrimental to both inflation and the debt reduction objectives.

### Authorities’ views on exchange rate and monetary framework
- Authorities concurred with staff’s assessment and policy recommendations.
- Appreciation for Fund TA supporting the transition to the new monetary policy framework.
- Financial Stability Act:
  - CBS recognizes importance of promptly drafting the Financial Stability Act; drafting of amendments had already started.
  - Noted involvement of other agencies and capacity constraints are slowing the process.
  - Requested to delay submission of the new Financial Stability Act to the Cabinet to end-September 2020 (PS¶36, 6th review RT) from end-May 2019 pledged at the time of the 2nd PCI review.

### Progress on financial stability and offshore sector reforms
- Tax legislation amended to meet OECD BEPS initiatives (PS¶16).
- 2018 ESAAMLG FATF mutual evaluation report recommended measures to enhance effectiveness of the AML/CFT system, including capacity enhancement.
- Authorities appointed a National AML/CFT Committee to improve coordination and implement MER recommendations (PS¶40).
- Staff concerns: new provisions in recent amendments to the International Business Corporations (IBC) Act that would prohibit disclosure or availability of the list of directors of Seychelles IBCs (except under specific circumstances).
- Staff urged:
  - Articulate a new offshore sector strategy focusing on a more transparent business model in compliance with international best practices.
  - Accelerate implementation of a risk-based approach to supervising AML/CFT risks of banks and trusts and company service providers in line with MER recommendations.
  - Continue efforts regionally/internationally to address challenges to maintaining CBRs.

### Correspondent banking trends (Box 4)
- November 2018 update of the Financial Stability Board Correspondent Banking Data Report: Seychelles among the 50 countries with the largest cumulative decline in the number of CBRs between 2012 and 2017.
- Evolution and current status:
  - Number of CBRs steadied at a lower level since the third quarter of 2017, when two small banks lost all their CBRs.
  - Four out of 24 correspondent banks comprised approximately 70 percent of the total transaction value between 2016Q1 and 2018Q3.
  - Total value of correspondent banking transactions stabilized after peaking in the second quarter of 2016; the volume of transactions has fallen more recently in 2018.
- Global banks’ reasons for CBR withdrawals: high risk perception, low profitability, reputational concerns, unclear regulatory environments.
- Staff priorities to reduce CBR loss risk:
  - Strengthened enforcement of domestic financial sector supervision and compliance with international standards.
  - Conduct due diligence on respondent banks’ customers and improve information sharing between respondent and correspondent banks and supervisory authorities.
  - Provision of backup CBRs and use of intermediary banks to help Seychellois banks obtain and maintain CBRs.

### Regulatory, supervisory, and crisis management reforms
- Progress:
  - Move toward full transition to Basel II and adoption of Basel III capital definition is in line with the original plan (PS¶39, 5th review RT).
  - Cabinet approved the policy framework to strengthen crisis management, bank resolution, and the safety net (PS¶36).
- Timing and delays:
  - Submission of draft legislation to strengthen legal framework for crisis management, bank resolution, and safety net delayed to end-March 2020 (5th review RT) from end-June 2019 envisaged at the time of the 2nd PCI review, due to staffing constraints outside the CBS (including the Attorney General’s office).

### Authorities’ views on AML/CFT and offshore reforms
- Authorities agreed with staff advice but indicated longer implementation timelines.
- Actions under way:
  - Policy paper to repeal existing AML Bill and replace with new legislation submitted to Cabinet (absent measures to strengthen entity transparency, particularly on IBCs).
  - Drafting new AML legislation with assistance of an international consultant.
  - Established a National AML/CFT Committee with senior officials from sectoral authorities to ensure coordination and international cooperation.
  - Adopted a sectoral approach to AML/CFT supervision.
- Constraints and requests:
  - Capacity building of relevant institutions needs progress to implement a risk-based supervisory approach; some legal amendments necessary.
  - Proposed delay of amendments to the legal framework relative to implementation of risk-based AML/CFT supervision consistent with FATF standard to March 2020 (PS¶38, 5th review RT).
  - Requested technical assistance from the World Bank and Fund to facilitate implementation.
  - Committed to move away from current IBC model to a more transparent model; will conduct thorough stakeholder consultations to develop a new offshore sector strategy to be finalized during the second half of 2019 (PS¶42).

### Inclusive growth, Blue Economy, tourism and fisheries diversification
- Economic diversification strategy centered on Seychelles’ comparative advantage; marine resources are the backbone of the economy.
- Key facts:
  - Tourism-related sectors directly contribute about one-third of GDP.
  - Tourism receipts and canned tuna exports represent over half of the exports of goods and services.
- Authorities’ initiatives:
  - “Blue Economy” initiatives to diversify and upgrade tourism and fishery industries.
  - Finalized National Development Strategy, which includes updated diversification strategy in tourism and fisheries (PS¶26–27).
- Staff support and recommendations:
  - Deepen and diversify tourism and upgrade fisheries value chain under Blue Economy initiatives (Box 5).
  - Augment domestic component of tourism through increased consumption of local agricultural products by the hotel industry and promotion of local guest houses and SME-provided tourism services.
  - Accelerate activation of the Tourism Satellite Account (TSA).
  - Step up investment in vocational education to enhance productivity, reduce labor market mismatch, and increase local labor content in tourism and fisheries sectors.
  - High-level steering complemented by the Blue Bond and The Third South West Indian Ocean Fisheries Governance and Shared Growth (SWIOFish 3) projects is key to fisheries development.
- SWIOFish 3 consultant recommendations (summary):
  - Manage infrastructure development around Victoria port, develop stronger R&D ecosystem, fill regulatory gaps, provide complementary infrastructure such as freezing and airport facilities.
  - Build Industrial Ultra-Low Temperature (ULT) freezing facilities and revamp airport freezing facility usage for ULT.
  - Strategic planning on talent and skill development to reduce reliance on foreign labor.
  - Diversify species offering beyond yellowfin tuna; develop comprehensive aquaculture plan.

Box 5 highlights and metrics:
- Tourism Master Plan (2012–20) progress mixed; diversification beyond beach model limited.
- Share of European tourists in total arrivals fell from 75 percent to 65 percent between 2010 and 2018; offset by increase in Asian tourists.
- Growth in local guest houses and self-catering establishments; Seychelles Tourism Academy created but placements into industry lower than envisaged.
- Fisheries recommendations emphasize infrastructure, skills, species diversification, and aquaculture planning.

### Business climate, digitalization, and financial inclusion
- Business survey constraints: infrastructure concerns (particularly high electricity costs) and access to financing.
- High electricity costs partly result from cross-subsidies.
- Staff urged:
  - Implement rebalancing tariff adjustments to reduce cross-subsidies over the medium term.
  - Explore ways to lower production costs.
  - Further digitalize government services (tax filing, property and company registration).
  - Modernize the national payment system to allow wider choice of digital channels (PS¶43).
  - Formulate a National Fintech Strategy by end-2019 (PS¶48).
  - Continue amending Companies and Insolvency Act to speed up insolvency resolution.
- Financial inclusion and SME finance:
  - National Financial Inclusion Strategy being formulated, focusing on enhancing SMEs’ access to finance.
  - Staff advice: SME financing schemes should be targeted, transparent, and not impede monetary policy.
  - Recommend comprehensive review of effectiveness of existing SME schemes.
  - Implement financial education plan to increase the currently low private savings rate.
  - Progress toward improving the Credit Information System (PS¶45) and promulgating a Financial Consumer Protection Law (PS¶48) is underway.

### Authorities’ concluding views on reforms and inclusiveness
- Authorities agreed with staff on need to maintain momentum in structural reforms to enhance inclusive growth.
- Noted an independent committee conducting a comprehensive utility tariff review aimed at better targeting utility subsidies to households and possibly lowering utility costs to business and government.

*International Monetary Fund staff report excerpts.*

### 35.  Program implementation to date. The PCI-supported program has been on track. Both the 1

### 1sycea2019002 - 35.  Program implementation to date. The PCI-supported program has been on track. Both the 1

### Program implementation and targets
- Both the 1st and 2nd reviews under the PCI were concluded as scheduled.
- For the 3rd review:
  - The floor on the primary fiscal surplus for end-2018 was met by comfortable margins.
  - The floor on end-2018 net international reserves (NIR) was met by comfortable margins.
  - The 12-month average inflation rate for end-2018 was well within the inner bound of the monetary policy consultation clause (MPCC, PS Table 1).
  - All end-2018 structural reform targets (RTs) were implemented in line with expectation at the time of the 2nd PCI review, other than:
    - cost-benefit analysis of public investment projects (completed in March 2019), and
    - new Code of Governance for the SOEs (completed in February 2019) (PS¶5).

### Forward-looking adjustments proposed by staff
- Given lower-than-projected CPI inflation in recent months and the precautionary monetary stance tightening at end-2018, staff propose:
  - Revise down the end-June and end-December 2019 inflation projections for the MPCC from those presented at the time of the 2nd review.
  - Slight downward revision of the end-June quantitative target on primary fiscal balance because of seasonality in the fiscal outturn; the end-of-year target remains unchanged.
  - Introduce an automatic adjuster for the NIR targets for 2019 with respect to receipts from the sales of the telecom company (Technical Memorandum Understanding (TMU) ¶5).
  - Reset three 4th review RTs, considering institutional capacity constraints:
    - risk-based approach to the AML/CFT supervision;
    - legal framework for crisis management, bank resolution, and safety nets;
    - Financial Stability Act (PS Table 2).
  - Add a RT on Air Seychelles operation and governance review due to the macro critical nature of timely implementation of the company’s operational restructuring.
- The review schedule is set out in Table 6.

### Risks, safeguards, and data issues
- Downside risks to the PCI:
  - Characterized as modest/moderate overall given Seychelles’ strong track record and continued commitment to prudent policies.
  - Risks stem predominantly from external factors (¶7), risks to implementation of envisaged permanent fiscal measures in an election year (¶7), and restructuring of Air Seychelles (¶17).
  - Seychelles’ remaining obligations to the Fund is small and its capacity to repay the Fund is adequate (Table 7).
  - Seychelles does not need the Fund’s financial assistance under the baseline and is not seeking financial assistance from the Fund as the program is fully financed.
- Safeguard assessment:
  - The CBS continues to implement recommendations of the voluntary update safeguards assessment in February 2018.
  - Steady progress made on vulnerabilities, including internal audit and aspects of internal controls.
  - Amendments to the CBS legal framework are now planned for December 2019 (PS¶50).
- Data adequacy:
  - Macroeconomic data are broadly adequate for surveillance, despite some weaknesses in external sector statistics.
  - Staff encouraged close collaboration between NBS, Seychelles Revenue Commission, and the CBS to enhance the quality of BOP statistics, particularly tourism receipts.24
  - It is essential to ensure adequate staffing for surveys and raw data collection needed to maintain high quality BOP statistics, including the International Investment Position (IIP).
  - Staff encouraged NBS to continue efforts to improve the quality of national accounts statistics and implement the rebasing of GDP with the help of Fund TA.
  - Footnote: 24 Tourism receipts are likely to be under estimated significantly (Annex II).

### Capacity development support
- Capacity development by the Fund and other international institutions is supporting PCI implementation (Annex III).
- Authorities’ top priority: enhance capacity relevant to strengthening the AML/CFT framework to reduce risks of a loss of correspondent banking relationships (CBRs) (¶26).
- Other capacity development focus areas:
  - Public finance management (PFM): fiscal risk analysis (particularly from the SOE sector), medium-term budgeting, public investment management.
  - Monetary policy operations and quality of statistics: Fund TA to assist transition to the new monetary policy strategy.
- Authorities expressed appreciation for Fund TA in these priority areas.

### Staff appraisal — recent progress and remaining vulnerabilities
- Achievements:
  - Seychelles has made remarkable progress in consolidating economic stability and sustainability under successive Fund programs.
  - Anchored by prudent policies and structural reforms, strong economic growth and adequate reserve buffers have been achieved.
  - Seychelles was the first country in sub-Saharan Africa designated a high-income country by the World Bank in 2016.
  - Public-debt-to-GDP ratio has declined by two thirds since the 2008 crisis.
- Remaining vulnerabilities and challenges:
  - As a very small island open economy dependent on tourism, economy is highly susceptible to external developments (weak growth in advanced and emerging market economies, intensification of security risks worldwide).
  - Slippages in implementation of permanent measures in the 2020 budget and Air Seychelles’ operational restructuring could put the authorities’ debt reduction goal at risk.
  - Institutional capacity constraints led to delays in RTs on financial stability.
  - Progress on economic diversification and business environment has been limited.
  - Long-term vulnerability to climate change.
- Policy priorities emphasized:
  - Continued fiscal discipline, prudent macroeconomic and financial sector policies, and steadfast implementation of structural reforms are central to managing risks.

### Policy recommendations and priorities
- Fiscal strategy and public investment:
  - Buttress debt reduction goal and take a phased approach executing ambitious infrastructure and climate change projects to preserve medium-term fiscal and external sustainability.
  - Implement permanent measures, including better targeting of social welfare spending and keep a tight rein on other current spending in the 2020 budget to shore up goal to bring public-debt-to GDP ratio below 50 percent by end-2021.
  - Phase in major public investment projects announced in the 2018 SONA and other climate change related projects within the fiscal envelope under the PCI, as the President assured the mission.
  - Create further fiscal space over the medium term beyond that required to secure the debt reduction target to accommodate priority investments.
  - Explore the possibility of additional measures discussed at the time of the 2017 CCPA over the medium term.
  - Continue efforts to raise efficiency of capital expenditure and enhance capacity to minimize potential risks from PPPs.
- Air Seychelles:
  - Step up efforts to reduce fiscal risks potentially arising from Air Seychelles; closely monitor operations and progress in operational restructuring and take corrective actions if needed to ensure no fiscal impact beyond that already assumed in the medium-term baseline.
- Monetary and reserve policy:
  - CBS should maintain its monetary policy stance and preserve international reserve coverage at around the current level.
  - Staff supports CBS decision to keep monetary policy rate unchanged and stay vigilant to inflationary pressures.
  - Maintain flexible exchange rate policy with minimal intervention to keep current reserve coverage ratio at around the current level.
  - Staff welcomes progress toward strengthening the new monetary policy framework.
- AML/CFT and CBRs:
  - Continue intensified efforts to address risks of potential loss of CBRs; make prompt progress in capacity enhancement in institutions relevant to the AML/CFT framework.
  - Articulate a new offshore sector strategy and continue regional/international engagement to make the case for maintaining CBRs by global banks.
- Structural reforms for inclusive growth:
  - Accelerate efforts to deepen and diversify tourism and upgrade the fishery industry under “Blue Economy” initiatives to share growth more widely.
  - Improve business environment to support economic diversification.
  - Reduce cross-subsidization in electricity prices in a steadfast way to improve private sector competitiveness.
  - Increase financial sector’s contribution to inclusive growth.
  - Accelerate investments in vocational education to raise productivity and address skills mismatch in the labor market.
- Data and statistics:
  - Step up efforts to improve quality of BOP data; ensure adequate staffing for surveys and raw data collection needed to maintain quality statistics.

*IMF staff appraisal and program monitoring details as provided in the source document.*

### 49.  Considering the authorities’ continued strong program implementation and

### 1sycea2019002 - 49.  Considering the authorities’ continued strong program implementation and 

### Program review and authorities’ requests
- Staff supports the authorities’ request for the completion of the third review under the PCI.
- Staff supports the authorities’ request to:
  - modify the end-June 2019 quantitative target on primary fiscal balance;
  - modify end-June and end-December 2019 inflation projections for MPCC;
  - introduce an additional adjuster for the end-June and end-December 2019 floors on NIR;
  - reset RTs.
- It is proposed that the next Article IV consultation with Seychelles take place within 24 months in accordance with the Decision on Article IV Consultation Cycles (Decision No. 14747‒(10/96)).

### Key macroeconomic indicators and projections (selected)
- Nominal GDP (2017): US$1,498 million
- Per capita GDP (2017): US$15,735
- Population, end-year (2016): 94,677
- Literacy rate (2015): 95.3 percent
- Main products and exports: Tourism, Canned Tuna
- Real GDP (annual percent change, selected entries shown as in source):
  - 2015: 4.9
  - 2016: 4.5
  - 2017: 4.3
  - 2018: 4.1
  - 2019: 3.5
  - 2020: 3.3
  - 2021: 4.1
  - 2022: 4.0
  - 2023: 3.8
  - 2024: 3.6
- CPI (annual average, selected entries as in source):
  - 2015: 4.0
  - 2016: -1.0
  - 2017: 2.9
  - 2018: 3.7
  - 2019: 2.6
  - 2020: 3.0
  - 2021: 3.0
  - 2022: 3.0
  - 2023: 3.0
  - 2024: 3.0
- Program primary balance (percent of GDP, selected entries as in source):
  - 2015: 4.3
  - 2016: 3.4
  - 2017: 3.0
  - 2018: 2.9
  - 2019: 2.5
  - 2020: 2.5
  - 2021: 2.5
  - 2022: 2.5
  - 2023: 2.5
  - 2024: 2.5
- Total government and government-guaranteed debt (percent of GDP, selected entries as in source):
  - 2015: 69.2
  - 2016: 72.7
  - 2017: 66.8
  - 2018: 60.1
  - 2019: 57.7
  - 2020: 53.2
  - 2021: 48.9
  - 2022: 44.9
  - 2023: 41.7
  - 2024: 39.2

### External sector and balance of payments (selected)
- Current account balance (percent of GDP, including official transfers, selected entries as in source):
  - 2015: -18.6
  - 2016: -20.1
  - 2017: -20.4
  - 2018: -17.1
  - 2019: -17.0
  - 2020: -17.4
  - 2021: -18.3
  - 2022: -18.1
  - 2023: -17.5
  - 2024: -17.4
- Total external debt outstanding (millions of U.S. dollars, selected entries as in source):
  - 2015: 1,392
  - 2016: 1,505
  - 2017: 1,639
  - 2018: 1,748
  - 2019: 1,772
  - 2020: 1,789
  - 2021: 1,817
  - 2022: 1,839
  - 2023: 1,877
  - 2024: 1,970
- Total exports of goods (selected entries as in source):
  - 2015: 449
  - 2016: 459
  - 2017: 536
  - 2018: 562
  - 2019: 569
  - 2020: 614
  - 2021: 664
  - 2022: 678
  - 2023: 707
  - 2024: 750
- Tourism earnings (exports of services; selected entries as in source):
  - 2015: 392
  - 2016: 414
  - 2017: 483
  - 2018: 564
  - 2019: 594
  - 2020: 627
  - 2021: 662
  - 2022: 695
  - 2023: 733
  - 2024: 769
- Gross official reserves (stock, e.o.p., memorandum, as in source): 537523546548551570586601613630
- Months of imports of goods & services (mem.): 4.3 3.7 3.7 3.6 3.5 3.3 3.3 3.3 3.2 3.2
- Percentage of IMF reserve adequacy metric (mem.): 138131129125125127127126123128

### Fiscal accounts (selected, consolidated government)
- Total revenue (percent of GDP, selected entries as in source):
  - 2015: 33.4
  - 2016: 36.6
  - 2017: 35.5
  - 2018: 36.3
  - 2019: 37.8
  - 2020: 9.3 (quarteral/annual mix in table preserved as presented)
- Total expenditure and net lending (percent of GDP, selected entries as in source):
  - 2015: 32.8
  - 2016: 38.1
  - 2017: 37.0
  - 2018: 38.4
  - 2019: 38.6
- Primary balance (percent of GDP, selected entries as in source):
  - 2015: 4.3
  - 2016: 3.4
  - 2017: 3.0
  - 2018: 2.9
  - 2019: 0.5 (quarteral/projection detail preserved)
- External debt service due (mem.): 367 781 636 567 172 174 228 144 718 876 969

### Monetary and financial sector (selected)
- Broad money (end-of-period, selected levels shown as in source, millions of Seychelles rupees):
  - 2016 Mar: 13,648
  - 2016 Jun: 15,888
  - 2016 Sep: 17,115
  - 2016 Dec: 17,361
  - 2017 Mar: 17,477
  - 2017 Jun: 17,642
  - 2017 Sep: 18,067
  - 2017 Dec: 18,393
  - 2018 Mar: 18,539
  - 2018 Jun: 18,800
  - 2018 Sep: 19,351
- Broad money growth (12–month percent change, memorandum): 12.1 16.4 7.7 6.7 6.4 6.8 5.6 5.9 6.1 6.6 7.1
- Credit to the private sector (12–month percent change, memorandum): 10.3 17.8 11.5 11.3 11.1 10.9 10.7 10.5 10.3 10.2 10.1
- Reserve money (end-of-period; 12–month percent change, memorandum): 14.5 18.9 4.5 3.9 16.4 4.5 8.3 4.4 7.2 8.5 9.7
- Money multiplier (broad money/reserve money): 4.6 4.5 4.6 4.4 4.5 4.5 4.5 4.5 4.4 4.4 4.4

### Financial soundness indicators (banking sector, selected)
- Non-performing loans to gross loans (percent, end-of-period):
  - 2012 Q4: 9.3
  - 2013 Q4: 9.4
  - 2014 Q4: 8.2
  - 2015 Q4: 7.6
  - 2016 Q4: 6.8
  - 2017 Q4: 7.1
  - 2018 Q1: 6.5
  - 2018 Q2: 5.9
  - 2018 Q3: 5.8
  - 2018 Q4: 3.5
- Provision as percentage of non-performing loans (selected): 29.5 39.2 43.9 41.1 37.4 31.9 35.8 40.1 38.6 19.2
- Regulatory capital to risk weighted assets (percent, end-of-period): 26.7 26.7 21.7 25.5 26.6 23.5 23.5 21.1 20.5 20.5
- Return on assets (annualized, percent): 3.1 1.9 3.3 3.8 3.8 3.9 1.1 2.9 2.9 3.7
- Core liquid assets to total assets (percent): 39.6 41.6 40.8 33.0 28.6 38.2 42.0 41.5 41.4 45.2

### Fund credit and financing (selected)
- Existing Fund credit, stock (Millions of SDR, end-of-period): 28.0 27.9 24.8 19.9 14.7 10.7 7.0 4.2 2.5
- Prospective Fund credit, stock (Millions of SDR, end-of-period): 13.1 14.8 14.8 14.8 14.8 14.8 14.8 14.8 14.8
- Stock of existing and prospective Fund credit (Millions of SDR, end-of-period): 28.0 29.5 24.8 19.9 14.7 10.7 7.0 4.2 2.5
- In percent of quota (selected): 122.2 128.8 108.2 86.9 64.3 46.6 30.4 18.4 10.7
- In percent of GDP (selected): 2.8 2.8 2.2 1.7 1.2 0.9 0.5 0.3 0.2

*Source: IMF staff report and Seychelles authorities as presented in the source content.*

### Annex I. Implication of Climate Change and Major

### Annex I. Implication of Climate Change and Major Infrastructure Projects on External Viability and Fiscal Sustainability

### Background and projected investment envelope
- Identified financing of over $50 million for climate change related projects already incorporated in PSIPs.
- “Other unidentified climate change related projects” estimated to cost around 16 percent of 2018 GDP over the next 15 years.
- Total cost of the unidentified climate change and the 2018 SONA projects is estimated to reach around 44 percent of 2018 GDP over their life span.
- Major project cost breakdown (in US$ and in percent of 2018 GDP):
  - Grand Anse Dam: $80 million — 5.1 percent of 2018 GDP — execution period: 2020-2023 (baseline) / 2020-2023 (rapid)
  - Conversion of electricity generation to LNG: $216 million — 13.6 percent of 2018 GDP — execution period: 2022-2027 (baseline) / 2020-2023 (rapid)
  - Other unidentified climate change related projects: $252 million — 15.9 percent of 2018 GDP — execution period: 2020-2033 (baseline, back-loaded) / 2020-2029 (rapid, front-loaded)
  - Subtotal (climate change related projects): $548 million — 34.6 percent of 2018 GDP
  - Major projects not related to climate change:
    - Cascade to Grand Anse Tunnel: $65 million — 4.1 percent of 2018 GDP — execution period: 2024-2028 (baseline) / 2020-2023 (rapid)
    - Reclaiming of land: $80 million — 5.1 percent of 2018 GDP — execution period: 2025-2027 (baseline) / 2024-2026 (rapid)
  - Grand total: $693 million — 43.8 percent of 2018 GDP
- Source of project cost and schedule assumptions: Seychelles authorities and IMF staff estimates.

### Baseline (staff proposed) scenario: phasing and financing assumptions
- Project phasing: major projects phased over next 15 years so GDP ratio of projects is broadly constant each year for the next 15 years.
- Financing assumptions:
  - Grand Anse Dam: half by external grants, half by external project loans.
  - Conversion of electricity generation to LNG: entirely by PPP.
  - Cascade to Grand Anse Tunnel: half by external grants, half by external project loans.
  - Other unidentified climate change related investments: one-quarter by external grants, one-quarter by external project loans, one-quarter by PPP, and the rest by domestic borrowing.
  - Reclaiming of land: mostly by sale of land by the government.
- Growth and inflation assumptions:
  - GDP growth would notch up and reach 4½ percent by 2033.
  - CPI inflation would stay at around 3 percent.
- Projected fiscal and external outcomes under baseline:
  - Primary surplus: stay at 2½ percent of GDP until 2024, then gradually decline to a balance in 2033.
  - Public debt to GDP ratio: below 50 percent by end-2021; projected around 25 percent at end-2033.
  - Current account deficit: would decline marginally each year from 2021 onwards.
  - GIR import coverage: stay around 3¼‒3½ months.
  - ARA metric: hover in the range of 120‒130 percent.
  - NIIP: worsen from -107 percent of GDP in 2019 to -118 percent of GDP in 2024 due to large external project financing.
  - Authorities’ commitment under the Paris agreement likely to be fulfilled around 2030, in line with their Nationally Determined Contribution (NDC) 2015.

### Rapid project execution — Scenario 1 (front-loaded execution, same financing mix)
- Execution assumptions:
  - All three large projects executed during 2020‒23; other projects front-loaded during 2020‒29.
  - Same project financing mix as baseline.
- Additional modeling assumptions:
  - Primary balance changes each year compared with the baseline by the amount of the difference in execution of investments (per note).
  - Investment multiplier on GDP = 0.1 (GDP change = 0.1 × difference in execution of investments each year).
  - Inflation same as baseline.
  - Saving of replacement cost of existing electricity generators = 0.1 percent of GDP each year during 2020‒23 compared with baseline due to earlier LNG conversion.
- Fiscal and external consequences:
  - Primary surplus: fall to around 1‒1½ percent of GDP during 2020‒23.
  - Public debt to GDP ratio: falls below 50 percent only by end-2023 (two years later than baseline).
  - Current account deficit: increase to over 20 percent of GDP during 2020‒23 due to increased investment imports.
  - Gross financing needs: remain elevated, staying above 20 percent of GDP for the next several years (text chart shows gross financing needs of about 20–32 percent through 2019–2024 for rapid execution).
  - External buffers and investor confidence: GIR import coverage decline to 2¼ months; ARA metric worsen to around 90 percent; NIIP worsen to around 134 percent of GDP by 2024.
  - Risk of negative effects on private portfolio and FDI inflows due to concerns on fiscal sustainability and absorptive capacity.

### Rapid project execution — Scenario 2 (front-loaded execution with greater domestic borrowing)
- Financing shift:
  - Authorities borrow domestically the grant-financed part of Grand Anse Dam, Cascade to Anse Tunnel, and other unidentified climate change related projects — an additional US$136 million domestic borrowing over the projection period compared with baseline/Scenario 1.
- Projected impacts:
  - Gross financing needs: notch up to around 30 percent of GDP for the next several years.
  - Public debt to GDP ratio: fall below 50 percent only by 2025 (four years later than baseline).
  - External buffers: GIR’s ARA metric decline to around 65 percent.
  - NIIP: worsen to around 140 percent of GDP by 2024.
  - External position would become highly vulnerable due to depleted external buffers and reduced external grants.

### Key policy implications and recommendations
- Phase projects in line with the country’s absorptive capacity to preserve economic stability.
- A phased-in approach (baseline) is compatible with long-term fiscal sustainability and external stability and helps achieve the 2015 NDC.
- Rapid execution significantly worsens public debt and external buffer dynamics even if financed mostly externally.
- If rapid execution relies more on domestic borrowing without grants (Scenario 2), external stability is at risk.
- Prioritize obtaining concessional external sources (grants) to finance investments; rapid execution would make obtaining concessional financing harder.
- If relying on PPPs, build government capacity to reduce potential PPP-related risks; a phased approach provides time for capacity building.

### External stability and competitiveness assessment (Annex II summary)
- External balance sheet and reserves:
  - NIIP (excluding the offshore sector): deteriorated to -108 percent of GDP at end-2018 from -104 percent of GDP in 2017.
  - Direct investment: about 8 percent of gross assets and 61 percent of gross liabilities as at end-2018.
  - Portfolio investment: about 7 percent of gross liabilities as at end-2018.
  - Total external debt: 110 percent of GDP at end-2018.
  - FDI-related borrowing: constitutes 43 percent of non-equity liabilities.
  - Gross official reserves: stayed around 35 percent of GDP in 2018.
  - External Sustainability approach suggested a 16% real effective exchange rate depreciation to maintain NIIP at its current level.
- Current account:
  - Current account deficit: shrank from 20.4 percent of GDP in 2017 to 17.1 percent of GDP in 2018.
  - Drivers in 2018: lower services imports, higher tuna exports, and tourism receipts growth of 16 percent in 2018.
  - Expected path: current account deficit expected to remain at around 17 percent of GDP in the current year and average around 17‒18 percent of GDP over the medium term.
  - Note: Seychelles’ current account deficit is likely over-estimated by about 5 to 8 percent of GDP because of likely under-estimation of tourism receipts.
- Competitiveness indicators and tourism dependence:
  - Tourism receipts: 37 percent of total exports and 36 percent of GDP — well above special-case thresholds (15 percent of GDP and 25 percent of total exports).
  - FDI and investment imports: tourism-based FDI has significant import content (around 80‒90 percent).
  - EBA-lite CA model: persistently poor fit given the nature of tourism-driven FDI.
  - Indicators-based analysis: Seychelles’ external position at end-2018 was moderately weaker than implied by medium-term fundamentals and desirable policy settings; indicators point to modest recent exchange rate overvaluation.
  - Tourism performance: tourist arrivals stronger than comparator-group average; “Week-at-the-Beach” index indicates tourism costs rose faster than comparator group since September 2017 but trend reversed in final months of 2018.
  - Net FDI to Seychelles has been much stronger than the peer average over the past five years.

*Source: Seychelles authorities and IMF staff estimates, as presented in Annex I and Annex II of the provided content.*

### 7. Assessment based on EBA-Lite Models: The EBA-lite methodology does not provide

### 7. Assessment based on EBA-Lite Models: The EBA-lite methodology does not provide conclusive results

### EBA-lite model findings and staff judgment
- CA model (EBA-lite) results:
  - CA-Gap: -18.5 percent of GDP.
  - CA-Actual: -17.1 percent.
  - Cyclical contributions (from model): 0.2 percent.
  - Cyclically adjusted CA: -17.3 percent.
  - Cyclically adjusted CA Norm: 0.7 percent.
  - Multilaterally Consistent Cyclically adjusted CA Norm: 1.2 percent.
  - of/which Policy gap: 0.66 percent.
  - Elasticity: -0.80.
  - Implied REER Gap (from CA model): 23 percent (overvaluation).
  - Staff note: The CA deficit in Seychelles is likely to be over-estimated (see footnote in source).
  - Interpretation: CA model implies a sizable CA gap of 18.5 percent of GDP and an REER overvaluation of about 23 percent. Seychelles’ policy stance, assessed at end-2018, contributes to a national policy gap of only 0.7 percent of GDP. The total gap is driven largely by the residual, reflecting factors not captured by the model.

- IREER model (EBA-lite) results:
  - Ln(REER) Actual: 4.71
  - Ln(REER) Fitted: 5.167
  - Ln(REER) Norm: 5.172
  - REER Gap: -46.2% (under-valuation).
  - Policy Gap: -0.5%.
  - Interpretation: The IREER model suggests the REER is widely undervalued by 46.2 percent, driven by the difference between fitted and actual REER values.

- External Sustainability (ES) Approach and staff anchor:
  - ES approach suggested a 16% overvaluation of the REER, based on the NIIP position excluding the offshore sector.
  - Staff anchored their assessment on the ES approach and complemented it with indicator-based analysis.
  - Reconciliation: Discrepancies across models are largely explained by country-specific circumstances.

- Staff overall assessment:
  - Based on the ES approach complemented by competitiveness indicators, the REER is assessed as moderately overvalued relative to medium-term fundamentals and desired policies.
  - Continued appreciation of the REER could pose risks to competitiveness given the already large external current account deficit.
  - Any symptoms of a highly overvalued exchange rate are not present: no signs of domestic overheating; export growth including tourism has been strong; government has been running consistent fiscal surpluses.

### Key statistics from exchange rate and balance assessments
- CA-Gap: -18.5 percent of GDP.
- REER Gap (IREER model): -46.2 percent.
- REER implied overvaluation (CA model): 23 percent.
- ES approach REER overvaluation: 16 percent.
- Policy gap (CA model): 0.7 percent of GDP.
- Policy gap (IREER model): -0.5 percent.

---

### Real Exchange Rate (REER) developments and assessment
- Background appreciation/depreciation:
  - REER appreciated by 2.1 percent year-on-year (yoy) in 2018.
  - NEER appreciated by 2.3 percent yoy in 2018.
  - Cumulative appreciations between 2014 and 2017: REER by 12.2 percent and NEER by 10.8 percent.
  - Pace of appreciation slowed since March 2016 reflecting lower domestic inflation.

- Staff assessment:
  - REER is moderately overvalued relative to medium-term fundamentals and desired policies (staff anchor on ES approach).
  - Continued appreciation could pose competitiveness risks given large external CA deficit.

---

### Capital and Financial Flows
- Background:
  - Seychelles has an open capital account.
  - International capital flows remained resilient in 2018, with strong contributions from FDI and other investment.
  - Overall capital and financial account remained at around 17 percent of GDP at end-2018.

- Assessment and outlook:
  - Capital and financial account likely to remain in surplus if FDI remains strong.
  - Moratorium on large hotel investments scheduled to be lifted in 2020; FDI should increase in the medium term.

---

### Reserve Adequacy
- Background:
  - Exchange rate regime classified as floating; FX interventions aim to maintain current level of international reserves following Fund advice.
  - Gross international reserves (GIR) at end-2018:
    - 3.6 months of prospective imports of goods and services.
    - US$ 548 million.
  - GIR projected to remain between 35 and 30 percent of GDP over the medium-term.
  - Import coverage projected to stay in the range of 3¼‒3½ months over the medium-term.

- Assessment:
  - Per the standard reserve adequacy metric, international reserves at end-2018 were within the advisable range.
  - Level of international reserves at end-2018 stood at about 125 percent of the ARA metric.
  - Conclusion: Reserves are within the advisable range of international reserves.

---

### Indicator snapshots (selected)
- Current account balance developments: current account deficit shrank in 2018.
- Reserves: remained stable in absolute terms in 2018 (see GIR values above).
- Effective exchange rates: both real and nominal effective exchange rates appreciated slightly in 2018 (see REER and NEER yoy changes above).
- Key export sectors: Tourism and tuna remain key export sectors; offshore services becoming more important.
- Investment position: negative and growing (IIP excluding offshore sector noted in ES approach).

---

### Annex III. Capacity Development Strategy for 2019‒20

### Overall strategy and CD priorities
- Focus areas:
  - Public finance management (PFM, including fiscal risk analysis, medium-term budgeting, and public investment management).
  - Monetary policy operation (inflation forecasting modeling, liquidity management, and policy communication).
  - AML/CFT framework.
  - Quality of statistics.

- Rationale:
  - Authorities have made significant progress in PFM, AML/CFT regulatory framework, and inflation and liquidity forecast/management for monetary policy.
  - Limited human resources (very small country) have slowed CD progress in some areas.

- CD Priorities and objectives (by institution):
  - Ministry of Finance, Trade, Investment, and Economic Planning
    - PFM—Fiscal risk analysis: Enhance capacity to address fiscal risks potentially arising from the SOE sector, including by enhancing quality of fiscal reports.
    - PFM—Medium-term budgeting and public investment management: Strengthen credibility of budget planning and enhance efficiency of public investment to boost growth potential and long-term fiscal sustainability.
  - Central Bank of Seychelles (CBS)
    - AML/CFT framework: Strengthen AML/CFT supervision/regulatory framework to minimize risks of further loss of CBRs.
    - Capacity for conduct of monetary policy: Strengthen CBS staff capacity for inflation forecasting and liquidity management to ensure successful transition to new monetary policy framework where interest rates play a prominent role.
    - Monetary policy communication: Review communication strategy/policy to ensure enhanced transparency.
    - Deepening of the money market: Improve transmission mechanism of monetary policy.
  - Seychelles Revenue Commission (SRC)
    - Enhancing revenue administration: Strengthen revenue collection capacity, particularly customs administration.
  - National Bureau of Statistics (NBS)
    - Enhancing quality of key economic statistics: Improve quality of price, GDP, and external sector statistics for successful implementation of new monetary policy framework.

### Risks and mitigation
- Risks:
  - Capacity constraints due to very small number of technical staff.
  - Lack of understanding of new monetary policy framework by commercial banks could challenge smooth transition.

- Mitigation:
  - Use PCI reviews for detailed discussions on reform priorities and realistic timelines.
  - Ensure authorities’ high-level commitment to priority reforms supported by capacity development.
  - Closer coordination between AFR and TA departments in areas of monetary policy operation and AML/CFT to align CD priorities with program objectives and timelines.

### Authorities’ views
- Authorities concurred with staff CD priorities.
- CBS requested continued close coordination with MCM to ensure TA advice is consistent with program recommendations.
- Authorities noted RT timeline in AML/CFT could be better aligned with TA absorptive capacity.

---

### Appendix I. Program Statement (selected macroeconomic performance and outlook)

### Macroeconomic performance in 2018 and outlook for 2019
- 2018 performance:
  - Real GDP growth rate estimated at 4.1%.
  - Tourism arrivals up for the year by 3.4% compared with 2017.
  - Consumer price inflation in 2018: 3.7% on average (previously expected 4.4%).
  - External current account deficit declined in 2018.
  - Gross international reserves increased modestly, reflecting issuance of the Blue Bond (US$ 15 million) in the last quarter of 2018 and strong tourism earnings growth.

- 2019 outlook:
  - Real GDP growth rate expected to reach 3.5%.
  - Tourism arrivals expected to increase by about 4%.
  - CPI expected to rise by 2.6% on an annual average basis.
  - External current account expected to be broadly stable as a ratio to GDP between 2018 and 2019.

### Performance under the PCI for 2018
- Program status: On track; QTs for end-December were all met.
- Primary surplus and net international reserves (NIR) for end-December 2018 met by a comfortable margin.
- Inflation lower than envisaged under the consultation clause.
- Structural Reform Targets (RTs): Mixed timing—some delays (e.g., cost-benefit analyses of public investment projects > SCR 10 million submitted to Cabinet in March 2019; new Code of Governance for SOEs submitted in February 2019). Amendments to AML/CFT legal and institutional framework submitted to Cabinet in December 2018, but measures on entity transparency/beneficial ownership of IBCs in offshore sector were absent.
- Other RTs (fiscal risk report and quantification of social obligation of SOEs) implemented on time.

### Budgetary performance in 2018 and medium-term framework
- Primary surplus in 2018: 2.9% of GDP (target was 2.5% of GDP).
  - Tax revenue exceeded the budget by 1% of GDP (higher-than-budgeted personal income tax and VAT receipts).
  - Capital expenditure under-executed, mainly due to slower investment plan execution by public utility company, requiring less net lending by government.

*Source: IMF staff report excerpt (1sycea2019002 - 7. Assessment based on EBA-Lite Models: The EBA-lite methodology does not provide).*

### 7.  In 2019, the budget target of a primary surplus equivalent to 2.5% of GDP remains

### 1sycea2019002 - 7.  In 2019, the budget target of a primary surplus equivalent to 2.5% of GDP remains

### Fiscal target and near-term outlook
- Budget target: primary surplus equivalent to 2.5% of GDP in 2019.
- Permanent revenue measures expected to yield the equivalent of 0.6 % of GDP in 2019.
- One-off revenue: receipt of the stamp duty on the sale of a major telecom company to a new operator (sale took place in 2016-17).

### Revenue measures (permanent and one-off)
- Permanent measures to boost tax revenue:
  - Reduction in the fuel tax exemptions for the fishing and the tourism sector.
  - Introduction of a sugar tax on beverages including alcohol.
  - Introduction of a property tax on real estate owned by non-residents.
  - Increase in excise rates on some products and in certain fees and charges.
- One-off measure:
  - Stamp duty receipt from the sale of a major telecom company (2016-17).

### Expenditure developments and wage measures
- Primary current expenditure to GDP ratio expected to rise by 1% of GDP from the 2018 outcome.
- Capital expenditure to GDP ratio expected to be about the same as in 2018 outcome.
- Revised wage grid: entry into force in April 2019 with a 5 % wage increase.
- Introduction of long service allowance in July 2019.
- Continued effort to rationalize functions and programs across agencies to increase efficiency and remove duplicating services.

### Medium-term fiscal measures and 2020 budget preparations
- Permanent saving measures to be introduced in the 2020 budget to shore up the medium-term debt reduction goal.
- Comprehensive review of social protection mechanisms (particularly care of old age persons) under preparation with World Bank assistance; documents expected for submission to the World Bank board in October 2019.
- Continued implementation of procurement reform and utility tariff rebalancing expected to help contain nominal goods growth to almost zero in 2020 compared with the 2019 budget.

### Public investment projects and financing strategy
- Government reviewing large public investment projects announced in the 2018 State of the Nation Address to minimize costs and obtain favorable financing (including grants) to avoid jeopardizing medium-term target to reduce public debt – GDP ratio below 50% by 2021.
- Financing approaches by project:
  - Liquefied Natural Gas (LNG) project: to be implemented as a PPP project with technical assistance of IFC.
  - Grand Anse Dam and tunnel: financed by a mixture of grants and concessional loans.
  - Land reclamation: project finance with funding coming from the sale of land.
- Various phasing combinations planned to ensure smooth implementation and no negative impact on macroeconomic position.

### Capital expenditure efficiency and PIMA
- Construction of a “Government house” funded by a grant from the Government of India will lead to savings in rental costs as of 2022 for an estimated Scr 35 million.
- Government committed to undertake a PIMA assessment by end of December 2019 to ensure efficiency of public investment.

### Budget baseline costing and technical assistance
- Government requested technical assistance from IMF-AFRITAC to work on a baseline costing procedure, methodologies and tools for formulating sector-specific and economic item medium-term budget estimates.
- Current practice uses the approved budget of the previous year as a base for the following 3 years budget forecast; this baseline method can incorporate one-off item expenditures into the baseline, creating unrealistic spending space.
- Planned pilot of technical reform in 2020 with five MDAs for preparation of their 2021 budget, followed by full roll out with all MDAs with the 2022 budget.
  - Pilot MDAs: Ministry of Education and Human Resource Development, Health Care Agency, Ministry of Habitat, Infrastructure & Land Transport, Department of Police and Department of Defense.

### Renewable energy, climate and waste initiatives
- Renewable energy projects under execution:
  - 2 solar farms on Romainville built by PUC.
  - 5 MW solar farm financed by IRENA and the Abu Dhabi Development Fund.
  - 1 MW solar plants on Praslin and La Digue.
  - Smart energy in public spaces program financed by the government of India.
- Climate change mitigation and adaptation actions:
  - Restriction on single use plastics since 2017; additional measures in 2019 to restrict sales and distribution of other single use plastic straws; encouragement of biodegradable alternatives.
  - Waste to Energy: launching an Expression of Interest for a waste to energy project to reduce volume of waste and produce energy to partly substitute fossil fuel for electricity.
  - Glass bottles recycling scheme: new scheme to start in 2019; levy of 2 rupees imposed since October 2018 on all Glass bottles containing alcoholic beverage entering the country.
  - Seychelles National Waste Policy 2018-2023 approved in December 2018 to minimize landfill waste via the 3Rs (reduce, reuse, recycle).
  - Waste Master Plan: collaboration with the European Union; plan being developed by a European consultancy firm presently drafting the Solid Waste Master Plan in Seychelles.

### Revenue administration and BEPS compliance
- Seychelles Revenue Commission (SRC) reform progress:
  - Audit program with externally recruited auditors scheduled to start in the coming months.
  - Debt recovery centralized in a specialized department.
  - Deputy commissioner for customs appointed.
  - Cargo targeting software system introduced in March 2019 to permit targeted inspections.
- Legislative reforms enacted in December 2018:
  - Amendments to the Business Tax Act, the International Business Companies Act and the Companies Special Licenses Act effective end-December 2018 to be consistent with the territorial tax system, subjecting Seychelles sourced income to the prevailing business tax, in line with BEPS obligations.
  - Modifications to the Securities Act of 2007 and the Mutual Fund and Hedge Act to ensure concessions under the Business Tax Act apply only if the substantial activity requirements are met.
- January 2019: Inclusive Framework on BEPS approved the Seychelles Progress Report on its assessment of harmful tax practices (Seychelles meets requirements of Action 5).
- Engagement with Tax Inspectors Without Borders (TIWB) for audit support to focus on revenue recovery and improving local audit capacity.
- AFRITAC SOUTH technical assistance (late 2018) to develop user specifications for an integrated tax administration system; current Client Management System (CMS) stability and functional deficiencies require urgent attention. MFTIEP, SRC and DICT working on options to upgrade current CMS or purchase an off the shelf tax system.

### Public financial management, PPPs and SOE oversight
- Government to continue consolidating public sector efficiency through Strategic Planning, Programme Performance Based Budgeting, Performance Monitoring and Evaluation, and Personnel Management Systems.
- PPP framework:
  - PPP Bill to be submitted for approval by National Assembly in the second quarter of 2019; bill near-final with Attorney General Office comments.
  - External technical experts to be engaged for PPP projects; assistance received from African Legal Facility and IFC approached.
- Review of Public Finance Management Act 2012 and Regulations 2014 in process to integrate developments and facilitate accounting manual implementation.
- Public Debt Management Act to be revised in 2019.
- Ownership policy and dividend policy for SOEs being prepared to improve financial oversight and professionalize SOE boards.
- Amendment to the Public enterprise monitoring committee act (PEMC Act) to strengthen enforcement powers scheduled to be submitted to Cabinet by end September 2019.

### Fiscal risks and SOE-specific developments
- Fiscal risk statement published with the 2019 budget providing general economic risks, specific fiscal risks related to budget execution and a risk framework for public enterprises; includes information on contingent liabilities and fiscal risks arising from PPPs and SOEs for the 2019 budget.
- Government has calculated social obligations of SOEs and included information in the 2019 budget.
- Focus on non-profitable SOEs: Petro Seychelles, Seychelles Public Transport Corporation and Air Seychelles.
  - Air Seychelles recorded a $43.5 million provisional loss for the year 2018.
  - Air Seychelles requested government assistance: guarantee of $12.5 million for a working capital loan and $6 million transfers to the company in 2019 (to be financed by a grant), and $6 million financial support each year during 2020‒23.
  - Government currently does not have the fiscal space to accommodate the request for 2020‒23; different options considered, such as extension of guarantees to Air Seychelles.
  - Etihad to convert US$ 30 million current liabilities into preference shares with Air Seychelles to start repayment of US$ 5 million per year from 2022.
- Network and operational adjustments at Air Seychelles:
  - Suspension of Abu Dhabi service effective 11 May 2019; services to Paris and Dusseldolf already closed.
  - Addition of a new Sunday service on Mumbai route effective 12 May 2019, increasing frequency to six flights per week.
  - Commencement of daily services to Johannesburg from 3 June 2019 with a new Monday flight.
- Oversight and audits:
  - PEMC to undertake a governance and operational audit of Air Seychelles from the 23rd of April 2019.
  - Air Seychelles to report to PEMC on a segmenting accounting framework on a monthly basis (domestic, international and ground handling).
  - PEMC to conduct operational and governance assessments in 2019 for Air Seychelles (5th review RT), STC and PUC.
  - PEMC to assess Air Seychelles’ project box bond totaling to US$ 71.5 million with Etihad; risk of bond rollover when it matures in September 2020 and June 2021.

### National Development Strategy and economic transformation
- country-VISION 2033 and the National Development Strategy (NDS) finalized to provide strategic direction; NDS supported by six key pillars:
  - Governance
  - People at the Centre of Development
  - Social Cohesion
  - Science Technology and Innovation for Development
  - Economic Transformation
  - Environmental Sustainability & Resilience
- Economic transformation focus: move economic activities and resources from low- to high-productivity activities and strengthen existing comparative advantage.
- Sectoral focus and initiatives:
  - Tourism: Tourism Satellite Account project ongoing to collect high-quality tourism market intelligence and strengthen local component of tourism-related activities; opportunities to strengthen food supply chain linkages to the SME tourism industry.
  - Fisheries: SWIOFish3 project ongoing to support increased value addition in aquaculture, industrial, semi-industrial, and artisanal fishing and processing sectors in a sustainable way; imminent development of aquaculture to add supply volumes and diversify seafood products.
  - Seafood value chains: government investment in seafood processing facilities over the past ten years; existing, complete and pipeline projects (planned for completion by the end of 2020) comprise an estimated 60,000 Mt per annum of combined processing capacity (excluding the IOT tuna canning factory). If successfully operationalized, these facilities could establish Seychelles as a regional processing hub.

*Italic: IMF staff report content as provided in the source document.*

### 28. The NDS further ensures consistency with macro-fiscal programming. In line with the

### 1sycea2019002 - 28. The NDS further ensures consistency with macro-fiscal programming. In line with the

### Monetary and Exchange Rate Policy
- Monetary policy tightened since the second quarter of 2018 amid concerns over potential inflationary pressures from domestic and external sources.
- Inflation metrics:
  - The 12-month average inflation rate stood at 3.7 per cent at the end of 2018.
  - On a year-on-year basis, prices have increased by an average of 3.4 per cent.
- Monetary Policy Rate (MPR):
  - CBS introduced a Monetary Policy Rate (MPR) effective January 2019 to serve as the key policy signal.
  - The focus shifted to guiding short-term interest rates through the MPR and away from indirectly influencing money supply growth.
  - The MPR was initially set at 5.5 per cent.
  - Interest rates on the Bank’s Standing Deposit Facility and Standing Credit Facility were raised to 2.5% and 8.5% respectively.
  - CBS will continue to build internal capacity in modelling and forecasting to improve the effectiveness of the interest-rate based framework.
- Gross international reserves:
  - The level of gross international reserves is expected to remain at a level which adequately buffers the country’s liabilities against external shocks, consistent with IMF-calculated metrics on foreign reserves adequacy.
  - CBS will continue to purchase reserves from the market whenever the opportunity arises.
- Reserves management:
  - CBS signed a new agreement with the World Bank for continued engagement with the Reserves Advisory and Management Programme (RAMP) in January 2019.
  - Under the new mandate there is an asset management service: a total asset of US$100 million is being actively managed by the World Bank versus a US dollar denominated short-term government securities benchmark, with the objective to generate a moderate level of excess return over the benchmark, with a low level of volatility.
- Exchange rate policy:
  - CBS remains committed to a floating exchange rate and will only intervene to smooth out excess volatility.
  - Opportunistic purchases of foreign exchange to enhance reserves will be done in a manner that does not compromise CBS’ primary objective of promoting domestic price stability.
- Policy coordination with Ministry of Finance:
  - CBS will continue close collaboration with the Ministry responsible for Finance on issuance of government securities for monetary policy purposes, aligned with government’s debt reduction strategy.
- Implementation progress under interest-rate based framework:
  - Some tasks of the six-phase action plan for 2018 were completed; most recommendations related to OMOs were implemented in 2018, including a reduction in the number of interventions.
  - The online portal is now expected to be completed by end March 2019.
  - Processing of transactions relating to liquidity injecting operations on the CBS accounting system has been pushed to 2020 because of a planned upgrade of the CBS CORE Banking system.
  - Revisions to the minimum reserve requirement (MRR) framework: in February 2019, the Cabinet of Ministers approved amendments to the CBS Act to allow for prescription of regulations on the MRR penalty.
  - A working group with bank representatives has been established to discuss interbank market recommendations.
  - CBS is setting up a working group with representatives from CBS and the Ministry of Finance to facilitate implementation of recommendations requiring both institutions.

### Financial Sector
- Macro-prudential framework and Financial Stability Act:
  - Banking sector remains profitable and well capitalised.
  - Work ongoing to strengthen macro-prudential framework and formulate a Financial Stability Act with relevant macro-prudential tools.
  - A draft Financial Stability Act will be submitted to the Cabinet by September 2020 (6th review RT), delayed from the original target of end-May 2019.
  - Cabinet approved the policy for crisis management and bank resolution; draft legislation for crisis management, bank resolution, and safety nets will be submitted to Cabinet by March 2020, delayed from the original target of June 2019.
  - CBS is seeking assistance for a legal expert to assist the AG’s office to draft the law.
- Implementation of IFRS9:
  - A circular was issued to banks in April 2018 to provide guidance on IFRS9 implementation, based on Basel Committee principles on credit risks and expected credit losses.
  - An internal working group from Financial Surveillance and Research and Statistics Divisions will monitor and analyse credit risks from IFRS9.
  - A more refined and granular set of reporting requirements and guidelines are being finalised; work on development of tools to assess IFRS9 impact is still in progress.
- Prudential supervision and AML/CFT:
  - Deloitte engaged to prepare a Risk Based Framework for prudential supervision of banks; expected completion by end-June 2020.
  - For AML/CFT supervision, a 2-year program will start implementation by June 2019.
  - A risk-based approach to AML/CFT supervision, consistent with FATF standards, will be implemented by December 2020 in line with the RAS agreed with the World Bank; this is later than the original target of end-March 2019 due to lack of internal capacity.
  - Comprehensive exercise to review the Financial Institutions Act is ongoing; a draft policy paper expected by end of 3rd quarter 2019. IMF peer review assistance is expected once finalised.
  - Amendments to the legal framework to allow implementation of risk-based AML/CFT supervision will be presented to Cabinet by end-March 2020 (5th review RT).
- Adoption of Basel II:
  - Adoption on track for implementation by end-December 2019 (5th review RT).
  - Pillar 1 operational by June 2019.
  - Pillar 2 work with Deloitte ongoing for implementation by December 2019.
  - Pillar 3 work anticipated to be completed by end-December 2019 (5th review RT).
- AML/CFT legislative improvements:
  - In October 2018 Cabinet approved the policy paper for the new AML Act to address legislative deficiencies identified during the MER.
  - A legal expert has been contracted to assist the AG’s office in drafting the Act; Bill expected to be presented to National Assembly by June 2019.
  - A National AML/CFT Committee and a Technical Committee have been appointed to improve coordination and address MER deficiencies.
  - Cabinet approved a Reimbursable Advisory Services agreement with the World Bank for technical assistance in reviewing and drafting legislative amendments, national strategy, and capacity building for AML supervisors, law enforcement, prosecution, and judiciary.
- National payment system oversight:
  - A Principles for Financial Market Infrastructures (PFMI) Assessment was completed in March 2019; CBS committed to address noted deficiencies.
  - Review of the National Payments Systems Act (NPSA) 2014 is underway; amendments to address oversight and enforcement shortcomings expected to be completed in 2019.
- International financial sector legislative framework:
  - Progress Report by the Inclusive Framework on BEPS noted assessment of harmful tax practices across preferential tax regimes (see ¶16).
  - Regimes reviewed include International Business Companies (IBC); Companies (Special Licenses) (CSL); Export Services under the International Trade Zone (ITZ); Offshore banking (Segment 1 banking license); Non-domestic insurance business; Reinsurance business; Securities business under the Securities Act; Fund Administrator.
  - To meet BEPS Action 5 recommendations, fundamental legislative amendments and redefining of the Seychelles tax system were necessary.
  - Seychelles committed to uphold international norms and monitor/supervise new regimes accordingly.
  - Authorities working with industry to ensure international financial sector products align with international framework and Seychelles’ competitive advantage.
  - Seychelles will finalize the Financial Sector Strategy in the second half of 2019.
  - Authorities aim to move away from the current IBC model to a more transparent and internationally acceptable model, including compliance with international standards on access by competent authorities to beneficial ownership information and compliance with BEPS.

### Financial Inclusion and Market Conduct
- National Payment System modernization and digitalisation:
  - CBS committed to modernise the National Payment System and digitalise the economy.
  - Technical assistance from the World Bank solicited to formulate a strategy for technological infrastructure and enabling environment to incentivise use of electronic payment channels, reduce cash use, and mitigate payment risks.
  - The project includes analysis of costs and business case for the most appropriate business model for Seychelles; expected completion by the end of 2022.
- National Financial Inclusion Strategy (NFIS):
  - Formulation of the NFIS postponed to the end of 2020 due to limited resources and other priority projects.
  - NFIS to address innovative financial services, reduction in cash use, efficiency of government payments and remittances, MSME access to finance, and competition in the financial sector.
  - CBS will undertake a comprehensive data and diagnostics exercise covering demand and supply sides to support NFIS content and priorities.
- Credit Information System improvements:
  - CBS, with World Bank and DICT assistance, is improving the Credit Information System and promulgating the Credit Information System Act.
  - Initiative expected to be completed by December 2019 to broaden lenders’ coverage of credit information for better credit worthiness assessment and risk-based pricing.
- Assessment of competition in the financial sector:
  - CBS to conduct a thorough assessment of competition given three main banks hold the majority of financial assets.
  - Objective to evaluate framework and enabling environment to enhance market operations, innovation, competitive pricing, and differentiated products and services.
  - Project expected to be completed by the end of 2020.
- Financial education:
  - Implementation of the National Financial Education Strategy (NFES) launched December 2017 is ongoing, targeting Adults in the formal workplace, MSMEs, Youth, and socially/financially vulnerable groups.
  - Technical assistance required to design a monitoring and evaluation framework; work on this is expected to be initiated during 2019.
- Fintech Strategy:
  - A High-Level Committee chaired by the President approved formulation of a National Financial Technologies (Fintech) Strategy.
  - With World Bank assistance, CBS and FSA are coordinating to promote Fintech introduction, including enabling regulatory framework for onshore and offshore sectors while considering associated risks.
  - Strategy expected to be finalised by the end of 2019.
- Financial Consumer Protection:
  - Plan to have the Financial Consumer Protection law by the end of 2019 remains on track.
  - Regulatory framework aims to give competent authorities mandate over financial services complaints, consumer redress, and equitable and fair treatment of consumers.
  - Competent authorities are also considering Digital Financial Consumer Protection due to digitalisation agenda.

### Safeguards at the CBS
- Implementation of voluntary safeguards assessment recommendations continued (assessment completed February 2018).
- Draft amendments to the CBS Act, including provisions to enhance governance arrangements, expected to be presented to the National Assembly in December 2019.
- CBS strengthened reserves management operations and risk management function and progressed on developing a comprehensive AML/CFT framework for its own banking operations.
- An external quality assessment of the CBS internal audit was performed during September and October 2018; strengths and opportunities were identified and the IAD developed an action plan to address noted gaps.

*International Monetary Fund — Seychelles country report content unit 1sycea2019002*

### 51. The modification of end-June 2019 quantitative target on primary fiscal balance, the

### 51. The modification of end-June 2019 quantitative target on primary fiscal balance, the

### Proposed modifications and review schedule
- The modification of end-June 2019 quantitative target on primary fiscal balance, the end-June 2019 and end-December 2019 quantitative targets on net international reserves, and the end-June 2019 and end-December 2019 monetary consultation clause are being proposed.
- The government, the CBS, and IMF staff agreed on the reform targets shown in Table 2 of the PS.
- Review timetable:
  - Fourth review scheduled to be completed by October 31, 2019.
  - Fifth review scheduled to be completed by April 30, 2020.
  - Sixth review scheduled to be completed by October 31, 2020.

### Quantitative targets (selected figures from Table 1a)
- Net international reserves of the CBS, millions of U.S. dollars (floor):
  - 2017 Act.: 424
  - 2018 Status/Act./2nd Review entries include: Met 430 Met 375 407 Met 403 403 412 412
- Reserve money target (ceiling on daily average during the quarter):
  - 3,559 Met 3,632 Not met ... (table shows additional cells omitted)
- Primary balance of the consolidated government (cumulative floor):
  - 622 Met 469 Met 538 646 Met 302 265 589 589
- Accumulation of external payments arrears by the public sector (ceiling):
  - 0.0 Met 0.0 Met 0.0 0.0 Met 0.0 0.0 0.0 0.0
- Monetary Policy Consultation Clause (MPCC) inflation reference points (average of year-on-year headline inflation for the past 12 months):
  - Inflation (mid-point, percent): 3.9 3.7 4.1 2.8 4.4 2.6
  - Inflation (upper bound, percent): 5.9 6.1 4.8 6.4 4.6
  - Inflation (lower bound, percent): 1.9 2.1 0.8 2.4 0.6
  - Inflation (upper inner-bound, percent): 5.4 5.6 4.3 5.9 4.1
  - Inflation (lower inner-bound, percent): 2.4 2.6 1.3 2.9 1.1
- Memorandum items:
  - Nominal public debt (millions of Seychelles Rupees): 13,337 Met 13,653 Met 13,698 12,854 Met 13,728 13,301 13,757 13,342
  - Program accounting exchange rates (end-of-quarter):
    - SR/US$ (end-of-quarter): 13.67 13.84 13.94 14.02 14.02
    - US$/Euro (end-of-quarter): 1.19 1.20 1.16 1.14 1.14
    - US$/UK pound (end-of-quarter): 1.29 1.35 1.30 1.33 1.33
    - US$/AUD (end-of-quarter): 0.79 0.78 0.72 0.71 0.71
    - US$/CAD (end-of-quarter): 0.80 0.80 0.77 0.76 0.76
    - US$/CNY (end-of-quarter): 0.15 0.15 0.15 0.15 0.15
    - US$/SDR (end-of-quarter): 1.41 1.45 1.40 1.40 1.40

### Continuous targets (Table 1b)
- Continuous commitment: Not to impose or intensify restrictions on the making of payments and transfers for current international transactions.
- Continuous commitment: Not to introduce or modify multiple currency practices.
- Continuous commitment: Not to conclude bilateral payments agreements that are inconsistent with Article VIII.
- Continuous commitment: Not to impose or intensify import restrictions for balance of payments reasons.

### Reform targets under the PCI, 2018–20 (selected actions and status from Table 2)
- Fiscal and Public Financial Management Policy:
  - 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. Status: Not met. Implemented with delay in March 2019.
- 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. Status: Met.
  - Calculate the cost of social obligations of SOEs and provide that information in the budget document for the 2019 budget.
    - Timing: End December 2018. Status: Met.
  - Submit the new Code of Governance for the SOEs based on OECD Guideline to the Cabinet for enactment.
    - Timing: End September 2018. Status: Not met. Implemented with delay in February 2019.
  - Submit the amendments on Public Enterprise Monitoring Committee (PEMC) Act to the Cabinet to strengthen enforcement power of PEMC.
    - Timing: End September 2019. Objective: Reinforce the monitoring and oversight of SOEs.
  - Submit operational and governance assessments of Air Seychelles to the Cabinet.
    - Timing: End December 2019. Objective: Reduce the potential fiscal risks arising from Air Seychelles.
- 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. Status: Not met. Partially implemented in December 2018.
  - Implement a risk-based approach to the supervision of banks and trusts and company service providers, consistent with the FATF standard.
    - Timing/Submission: Submit to the Cabinet amendments to legal framework by End-March 2019; End-March 2020. Status: Not met. This reform target is being revised and reset.
  - Submit draft legislation to Cabinet to solidify the legal framework for crisis management, bank resolution, and safety nets.
    - Timing: End-March 2020, reset from end-June 2019. Objective: Buttress financial sector stability.
  - Complete a full transition to Basel II and adopt the Basel III capital definition.
    - Timing: End-December 2019. Objective: Buttress financial sector stability.
  - Submit a draft Financial Stability Act to the Cabinet to assign macro prudential power to relevant institutions.
    - Timing: End-September 2020, reset from end-May 2019. Status: Not met.

### Technical Memorandum of Understanding — key definitions, adjusters, and reporting
- Program exchange rate for 2019:
  - SCR14.02 per US$1.
  - Program US$ rates for other currencies (US$/1 other currency): EUR 1.14; GBP 1.33; SDR 1.40; AUD 0.71; CAD 0.76; ZAR 0.07; CNY 0.15.
- Net International Reserves (NIR) definition (program monitoring):
  - NIR = reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF).
  - Reserve assets include holdings of SDRs, foreign exchange, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities.
  - Excludes project balances and blocked or escrow accounts, and bank reserves in foreign currency maintained for reserve requirements.
  - Reserve liabilities comprise liabilities to nonresidents contracted by the CBS, any net off-balance-sheet position (futures, forwards, swaps, or options) with either residents or nonresidents, including those to the IMF.
- Reporting and audit:
  - Semiannually, at each test date for program quantitative targets, NIR data submitted by the CBS to the IMF will be audited by the CBS’ internal audit division in accordance with International Standards on Auditing.
  - Reports to be submitted to the IMF no later than two months after each test date.
- NIR adjusters:
  - The floor on the CBS’s NIR will be adjusted upward (downward) by the amount by which external non-project loans and non-project cash grants exceed (fall short of) amounts assumed in the program.
  - Floors will be adjusted upward (downward) by the amount that external debt service payments fall short (exceed) amounts assumed in the program.
  - Floors will be adjusted upward (downward) by the amount that receipts from sales of Cable and Wireless Company in Seychelles exceed (fall short of) amounts assumed in the program.
- Projections: June 2019 - December 2019 (millions of US$), cumulative from the beginning of each year:
  - External non-project loan: June 0.0; December 0.0
  - External non-project cash grants: June 0.0; December 0.0
  - External debt service payments: June 25.7; December 50.8
  - Receipts from sales of Cable and Wireless: June 7.0; December 14.0

### Monetary Policy Consultation Clause (MPCC)
- MPCC headline inflation definition:
  - Year-on-year rate of change of the Consumer Price Index (CPI), averaged for the past 12 months, as measured by Seychelles’ National Bureau of Statistics (NBS).
- Consultation triggers:
  - If observed headline inflation falls outside the ±2 percentage point range around the mid-point of projected value for end-December 2018, end-June 2019, and end-December 2019 test dates, the authorities will complete a consultation with the Executive Board focusing on:
    - (i) the stance of monetary policy and whether the Fund-supported program remains on track;
    - (ii) the reasons for program deviation, taking into account compensating factors; and
    - (iii) proposed remedial actions if deemed necessary.
  - If observed headline inflation falls outside the ±1.5 percentage point range around the mid-point of projected value for the same test dates, the authorities will conduct discussions with Fund staff.

### Program primary balance and public debt definitions
- Program consolidated government primary balance (cumulative floor):
  - Defined on a commitment basis as total consolidated government and social security fund revenues (excluding privatization and long-term lease income receipts) less all noninterest (primary) expenditures and net lending of the government and social security fund.
  - Transfer of assets from the Social Security Fund to the Seychelles Pension Fund planned for 2015 is excluded from expenditures for program purposes.
- Ceiling on the overall stock of public debt (memorandum item):
  - Public debt includes (i) central government debt; (ii) government guarantees issued for loans extended to state-owned enterprises; and (iii) obligation to the IMF.
  - Defined as total outstanding gross debt liabilities; includes securities and loans; excludes accounts payable. Debt measured at nominal value. Program exchange rate applies to all non-SCR denominated debt. External debt is defined on a residency basis.
- Debt definition follows Point 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements:
  - Debt means a current contractual liability requiring future payments in assets or services; forms include loans, suppliers’ credits, and leases (present value at inception of lease payments, excluding operation/repair/maintenance payments).
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.

### External arrears of the public sector (continuous target)
- 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.
- Excludes arrears where a clearance framework has been agreed or a rescheduling agreement is sought.

*Source: IMF staff and Seychelles authorities, Technical Memorandum of Understanding and Program Statement tables and text included in the submitted content.*

### 12. The Seychelles authorities (government and CBS) will provide Fund staff with the

### 12. The Seychelles authorities (government and CBS) will provide Fund staff with the

### Data reporting obligations — Central Bank of Seychelles (CBS)
- Weekly (within one week from the end of the period):
  - Daily reserve money data.
  - Foreign exchange reserves position.
  - A summary table on the foreign exchange market transactions.
  - The results of the liquidity deposit auctions, primary Treasury bill auctions, and secondary auctions.
- Monthly (within four weeks from the end of the month):
  - The monetary survey in the standardized report format.
  - The foreign exchange cash flow, actual and updated.
  - Financial soundness indicators.
  - Stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report.

### Data reporting obligations — Ministry of Finance
- Monthly (within four weeks from the end of the month):
  - Consolidated government operations on a commitment basis and cash basis in the IMF-supported program format and in GFSM2001 format.
  - The detailed revenues and expenditures of the central government and social security fund.
  - Import and export data from the customs department.
  - Public debt report reconciled with the cash operations to minimize any statistical discrepancy.
  - Consolidated creditors schedule on domestic expenditure arrears of the government.
- Quarterly (within one month from the end of the quarter):
  - Accounts of the public nonbank financial institutions.
- Consultative requirement:
  - The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation and will provide any additional relevant information as requested by Fund staff.

### Data reporting obligations — National Bureau of Statistics (NBS)
- Monthly (within 10 days from the end of the month):
  - CPI headline inflation, by category.

### Selected institutional and statistical context (key figures and timelines)
- Membership Status: Joined 6/30/1977. Article VIII member since 01/03/1978.
- Quota: 22.90 SDR Million (100.0 percent).
- Fund holdings of currency: 43.72 SDR Million (190.90 percent).
- Reserve Position in Fund: 3.53 SDR Million (15.41 percent).
- SDR Department net cumulative allocation: 8.28 SDR Million (100.0 percent).
- SDR Department holdings: 4.02 SDR Million (48.58 percent).
- Outstanding Purchases and Loans — Extended Arrangements: 24.34 SDR Million (106.30 percent).
- Financial arrangements (SDR Million):
  - EFF Jun 04, 2014–Jun 03, 2017: Amount Approved 11.45; Amount Drawn 9.81.
  - EFF Dec 23, 2009–Dec. 23, 2013: Amount Approved 26.40; Amount Drawn 26.40.
  - Stand-By Nov 14, 2008–Dec. 22, 2009: Amount Approved 17.60; Amount Drawn 11.00.
- Projected Obligations to the Fund (SDR Million: based on existing use of resources and present holdings of SDRs) — forthcoming:
  - 2019 Principal 4.46; Charges/interest 0.41; Total 4.87.
  - 2020 Principal 5.16; Charges/interest 0.45; Total 5.61.
  - 2019 (alternate column) Principal 4.07; Charges/interest 0.35; Total 4.41.
  - 2020 (alternate column) Principal 3.70; Charges/interest 0.26; Total 3.96.
  - 2021 Principal 2.73; Charges/interest 0.18; Total 2.92.
- Exchange rate reference: On April 12, 2019 US$1 = SR 13.9261 (mid-rate).
- Article IV consultations: Seychelles is currently under a 24-month consultation cycle.
- Safeguards assessment: voluntary safeguards assessment completed in February 2018; draft amendments to the CBS Act expected to be presented to the National Assembly in December 2019.
- Technical assistance (November 2016–December 2018): multiple missions listed across MCM, FAD, STA, LEG (topics include ISOCO self-assessment; Basel II; Monetary Policy Implementation; National Accounts; Balance of Payments Statistics; AML/CFT supervision; among others).
- Statistical status and observations:
  - Seychelles subscribed to the SDDS on May 1, 2015.
  - National accounts: base year 2006; rebasing to 2013 planned; quarterly national accounts developed for 2006–14.
  - CPI: new CPI introduced January 2015 based on 2013 household budget survey; some CPI sub-components not collected monthly and are estimated.
  - GFS: reports based on GFSM 2014; further work needed to support a full move to GFSM 2014.
  - Monetary and financial statistics: integrated monetary database operational using standardized report forms (SRF).
  - Financial soundness indicators: all core FSIs and seven encouraged FSIs for deposit takers reported monthly.
  - External sector: methodological adoption of BPM6 and IIP compilation begun in 2015; quarterly BOP and IIP reported since 2015 but with dissemination delays (latest reported BOP and IIP data were for the first quarter of 2018 at the time of this report).
  - Gross external debt statistics compiled quarterly from 2015 and submitted to the World Bank QEDD.
- Table of Common Indicators Required for Surveillance — selected latest observation dates and reporting frequencies:
  - Exchange Rates: Date of latest observation 31/01/19; Date received 07/02/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 21/04/19; Date received 25/04/19; Frequency of Data D; Frequency of Reporting W; Frequency of Publication M.
  - Reserve/Base Money: Date of latest observation 31/12/18; Date received 07/02/19; Frequency of Data D; Frequency of Reporting W; Frequency of Publication M.
  - Broad Money: Date of latest observation 31/12/18; Date received 07/02/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
  - Central Bank Balance Sheet: Date of latest observation 31/12/18; Date received 07/02/19; Frequency of Data D; Frequency of Reporting W; Frequency of Publication M.
  - Consolidated Balance Sheet of the Banking System: Date of latest observation 31/12/18; Date received 07/02/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
  - Interest Rates: Date of latest observation 31/03/19; Date received 08/04/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
  - Consumer Price Index: Date of latest observation 31/03/19; Date received 08/04/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
  - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 31/12/18; Date received 30/01/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
  - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 31/12/18; Date received 12/02/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
  - External Current Account Balance: Date of latest observation 31/12/18; Date received 03/03/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
  - GDP/GNP: Date of latest observation 31/12/18; Date received 31/03/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
  - Gross External Debt: Date of latest observation 31/12/18; Date received 12/02/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
  - International Investment Position: Date of latest observation 31/12/18; Date received 30/04/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.

*Source: 1sycea2019002 - 12. The Seychelles authorities (government and CBS) will provide Fund staff with the (PDF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1sycea2019002.pdf_