## 1sycea2020001

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### Executive summary — context, request, and staff view
- Context and shock:
  - Recent years: economic growth robust; inflation low; external and fiscal positions improved.
  - COVID-19 pandemic risks eroding gains; Seychelles heavily dependent on tourism.
  - GDP likely to drop by over 10 percent in 2020.
- Authorities’ request:
  - Request financial assistance under the Rapid Financing Instrument (RFI) of SDR 22.9 million, equivalent to 100 percent of quota.
  - Proposed use: direct budget support to the Ministry of Finance.
- Staff views:
  - Staff supports the authorities’ request.
  - Debt projected to be sustainable although risks have increased substantially.
  - Seychelles’ capacity to repay the Fund is adequate but subject to downside risks.
  - RFI resources will cover about a quarter of the estimated BOP financing needs and help catalyze further international support.
- Date: May 4, 2020.

### Economic developments pre-COVID-19
- Key outcomes at end-2019:
  - Tourism receipts increased by 5½ percent.
  - Real GDP growth in 2019: 3.9 percent.
  - Primary fiscal surplus in 2019: 2.7 percent of GDP (authorities’ target: 2½ percent of GDP).
  - Financial sector: sound; banks adequately capitalized and liquid.
  - Inflation: subdued.
  - Gross international reserves (GIR) outperformed staff projections at the time of the 4th review under the PCI.
- Performance under the PCI:
  - All end-December 2019 quantitative targets met (preliminary information).
  - 12-month average inflation at end-2019 within inner bound of monetary policy consultation clause.
  - Structural reforms progressed broadly in line with targets until early 2020.

### Impact of COVID-19; outlook and risks
- Immediate impact and baseline projection:
  - COVID-19 cases limited as of April 22, 2020: 11 cases.
  - Tourism and related sectors account for about one third of GDP.
  - Tourist arrivals expected to fall by about half in 2020 (compared with pre-pandemic projection of 7 percent growth).
  - Real GDP tentatively projected to decline by almost 11 percent in 2020 (pre-crisis projection: 3½ percent expansion).
- External position and financing gap:
  - Current account deficit expected to reach 29.2 percent of GDP in 2020 (pre-pandemic projection: 17½ percent of GDP).
  - Without exceptional financing, GIR estimated to decline to around $240 million by end-2020:
    - Equivalent to 1.8 months of prospective imports.
    - Equivalent to 66 percent of the Fund’s standard reserve adequacy (ARA) metric.
  - Estimated financing gap in 2020: $126 million (10 percent of 2020 GDP).
  - RFI envisaged to provide $31 million; other sources include $55 million from World Bank and African Development Bank, and an unidentified budget support of $40 million — raising GIR with external support to $368 million (100 percent of ARA metric) as per staff estimates.
- Fiscal impact (selected figures before / after the shock, 2020):
  - Nominal GDP (millions of Seychelles Rupee): 24,447 / 21,538
  - Real GDP: 3.5 / -10.8
  - CPI (annual average): 2.1 / 4.5
  - Credit to the private sector: 10.1 / -1.0
  - Total government and government-guaranteed debt: 57.3 / 85.8 (percent of GDP)
  - Tourism earnings: 625 / 311 (millions of US dollars)
  - FDI into Seychelles: 268 / 80 (millions of US dollars)
- Balance of payments highlights:
  - Current account balance (millions of US dollars): -275.4 (2019); -305.6 (Pre-COVID); -366.1 (Latest without external support)
  - Exports of services: 1,136.0 (2019); 1,053.9 (Pre-COVID); 618.4 (Latest without external support)
  - GIR without external support: 242 (2020); In percent of ARA metric: 66
  - Financing Gap: 125.7 (millions); In percent of GDP: 10.0
- Medium-term outlook:
  - Staff assumes global tourism demand rebounds strongly starting in 2021 (April 2020 WEO global projections).
  - Tourist arrivals return to 2019 level by 2025.
  - Real GDP growth expected to reach 6.5 percent in 2021 and gradually moderate to around 4 percent over the medium term.
  - Inflation projected to moderate to around 3 percent over the medium term.
- Risks:
  - Main external risk: prolonged COVID-19 outbreak suppressing international growth, tourism, and FDI.
  - Domestic risks: local outbreak overwhelming health system, increased health spending, adverse climate events.
  - Under an adverse scenario: lower growth, larger fiscal and external financing needs, potential need for greater domestic policy actions and support from development partners.

### Fiscal policy — measures, financing, and debt outlook
- Authorities’ stance:
  - Plan to temporarily loosen macroeconomic and financial policies in 2020 to absorb the shock.
  - Committed to measures to maintain public debt and external sustainability once shock abates.
- Revised 2020 budget and emergency measures:
  - Revised budget presented to National Assembly (April 7).
  - Wage subsidy: 3-month wage subsidy estimated to cost up to SCR 1.1 billion (5.1 percent of GDP); Cap: SCR 30,000 per month per employee.
  - Additional health-related contingency spending: about SCR 110 million (0.5 percent of GDP).
  - Social protection spending for vulnerable group: about SCR 50 million (¼ percent of GDP).
  - Suspension of hiring of non-essential staff and other current spending (estimated savings: around 1 percent of GDP in 2020).
  - Monthly public reporting of emergency spending; independent audit of emergency spending and procurement processes to be conducted and published.
  - Re-examination of public investment program at end-Q2 2020 to ensure consistency with financing availability and debt sustainability.
- Financing plans and contingencies:
  - Identified IFI budget support loans: about $55 million (World Bank and AfDB).
  - RFI purchase: about $31 million.
  - Government seeks an additional $40 million of external budget support (unidentified).
  - Domestic financing: CBS advances of SCR 250 million (half of maximum in CBS Act); issuances of government securities to commercial banks and private sector (about 2¼ percent of GDP).
  - If external budget support does not increase as planned, greater domestic policy actions would need to be considered.
- Debt outlook and staff analysis:
  - Public debt-to-GDP ratio expected to rise from 59 percent at end-2019 to about 85¾ percent by end-2020.
  - Gross financing needs expected to rise from 24 percent in 2019 to 39¼ percent in 2020.
  - Government committed to fiscal savings to return debt ratio to a downward path:
    - Improve primary balance from 2021 onward to reach a surplus of 2½ percent of GDP by 2025.
    - Continue to seek external budget support after 2021.
  - Staff’s DSA indicates debt-to-GDP ratio and gross financing needs decline to 55½ percent and 23½ percent of GDP by 2025, respectively.
  - Risks to debt sustainability remain substantial given the sharp increase in debt ratio, very high gross financing needs, uncertain growth outlook, and uncovered financing gaps.
  - Staff recommends stepping up efforts to identify financing for covering these gaps and, if needed, adjusting policies.

### Monetary and financial sector policies and guidance
- Measures implemented:
  - Monetary policy rate reduced by 100 basis points on March 23.
  - A credit facility of SCR 500 million set up to assist commercial banks with emergency relief measures for businesses.
  - A moratorium of six months on repayment of principal and interest on loans for impacted sectors announced.
  - National Assembly authorized the Central Bank to provide limited credit to government up to SCR 500 million and extend maturity of credit to commercial banks to 3 years.
  - Central Bank sold $10 million of FX on April 9 to meet unmet FX demand.
- Staff guidance:
  - Maintain a flexible exchange rate policy and limit foreign exchange interventions to the extent needed to address disorderly market conditions, while allowing exchange rate adjustment.
  - Monitor inflation, expected to remain moderate.
  - Prudential guidance: ensure borrowers already highly unlikely to repay before the Covid-19 crisis do not unduly benefit from wide-ranging repayment holidays; ensure borrowers facing temporary difficulties are not disincentivized to resume repayment after moratoria.
  - Banks and supervisors should collect information about the scope of moratoria, identify precisely borrowers and exposures subject to these measures, and improve disclosure.
- Banking sector resilience:
  - Banking sector is well capitalized and liquid and should be able to absorb some credit losses and liquidity squeeze if the crisis is short lived.
  - If banks absorb their capital and liquidity buffers, the CBS should agree with them on a plan to restore capital and liquidity above required minima.

### RFI support, safeguards, and use of resources
- RFI request and rationale:
  - Authorities requested a purchase under the RFI equivalent to 100 percent of quota (SDR 22.9 million, $31.1 million).
  - Qualification criteria for RFI met due to urgent balance-of-payments needs.
  - Debt assessed as sustainable despite temporary spike in debt ratio and gross financing needs, although risks are substantial.
  - Proposed purchase under the RFI would contribute towards closing a quarter of the external financing gap and play a catalytic role for further international support.
- Other external assistance and remaining needs:
  - World Bank and AfDB plan to provide emergency assistance of about $55 million.
  - Remaining needs of $40 million are expected to be filled by other international partners and/or further policy adjustment.
  - In the BOP table, $40 million of unidentified external budget support loan in 2020 is assumed.
- Memorandum of Understanding and safeguards:
  - MoU provisions to be agreed between CBS and Ministry of Finance: maintain funds received from the IMF in a government account at the CBS pending use; require government to hold foreign exchange balances only with the CBS; clarify responsibilities for repaying Fund resources.
  - CBS committed to update the safeguards assessment before approval of any new subsequent arrangement by the IMF Executive Board.
  - Latest CBS safeguards assessment completed in February 2018.
  - Draft amendments to the CBS Act to enhance governance arrangements remain an outstanding recommendation.

### Capacity to repay, projections, and program tables (selected numeric highlights)
- Macroeconomic projections (selected):
  - Real GDP (annual percent change): 2019: 3.9; 2020 (Prel.): -10.8; 2021 (Proj.): 6.5; 2022 (Proj.): 5.4; 2023 (Proj.): 4.6; 2024 (Proj.): 4.1; 2025 (Proj.): 4.0
  - CPI (annual average): 2019: 1.8; 2020 (Prel.): 4.5; 2021–2025 (Proj.): 3.1, 3.1, 3.0, 3.0, 3.0
  - Gross official reserves (end of year, millions of U.S. dollars): 2019: 580; 2020 (Prel.): 368; 2021 (Proj.): 398; 2025 (Proj.): 602
  - Gross official reserves as percent of ARA metric: 2019: 129.4; 2020 (Prel.): 100.3; 2025 (Proj.): 125.1
- External sector and debt:
  - Current account balance (percent of GDP): 2019: -16.7; 2020 (Prel.): -29.2; 2021–2025 (Proj.): -25.8, -24.1, -21.9, -19.6, -18.6
  - Total external debt (percent of GDP): 2019: 113.6; 2020 (Prel.): 150.3; 2025 (Proj.): 109.3
- Fiscal position (percent of GDP):
  - Total revenue, excluding grants: 2019: 36.0; 2020 (Prel.): 31.6; 2025 (Proj.): 33.7
  - Expenditure and net lending: 2019: 36.1; 2020 (Prel.): 48.5; 2025 (Proj.): 35.0
  - Overall balance, including grants: 2019: -0.8; 2020 (Prel.): -13.6; 2025 (Proj.): -0.1
  - Program primary balance: 2019: 2.7; 2020 (Prel.): -9.7; 2025 (Proj.): 2.5
  - Total government and government-guaranteed debt: 2019: 59.1; 2020 (Prel.): 85.8; 2025 (Proj.): 55.4
- Fund repayment metrics:
  - Fund repayment ratio to exports of goods and services will peak at 13½ percent in 2024.
  - Fund repayment-to-GIR ratio will peak at 3.6 percent in 2024.
- Fund credit stock (Millions of SDR):
  - Existing Fund credit stock (end-of-period): 2019: 19.9; 2020 (Prel.): 14.7
  - Prospective disbursement in 2020: 22.9 (Millions of SDR)
  - Stock of existing and prospective Fund credit (end-of-period, Millions of SDR): 2020: 37.6; 2021: 33.6; 2025: 1.2
  - Stock of existing and prospective Fund credit in percent of quota: 2020: 164.3; 2025: 5.4
  - Stock of existing and prospective Fund credit in percent of GDP: 2020: 4.3; 2025: 0.1

### Structural reforms, SOE risks, and public finance management
- Air Seychelles:
  - Operational restructuring began late 2018; loss declined to $4.6 million in 2019 from 41.5 million in 2018.
  - COVID-19 will likely have a dire impact on the company’s financial health.
  - Revised 2020 budget: additional transfer of SCR109 million (½ percent of GDP) to Air Seychelles, on top of support already in medium-term debt projections:
    - guarantees to working capital of $12.5 million and to the other shareholder’s preference shares of $30 million starting in 2019,
    - and $6 million of transfers to the company each year financed by grants during 2019‒23.
  - Government will shortly discuss the future of the company with the other shareholder.
  - Staff advised close monitoring of Air Seychelles’ performance and to examine scope for further privatization of some SOEs, including Air Seychelles.
- Public finance management:
  - Government encouraged to set up transparent mechanisms for tracking, accounting, and reporting of COVID-19 related emergency spending.

### Debt Sustainability Analysis — key findings and scenarios (Annex I)
- Baseline and key findings:
  - Public debt level expected to increase by 24½ percentage points (compared with pre-COVID projections) to 85¾ percent of GDP in 2020.
  - Gross financing needs would reach 39¼ percent of GDP in 2020.
  - Under a strong debt reduction strategy (primary surplus of 2½ percent of GDP by 2025) public debt and gross financing needs are expected to steadily decline; public debt ratio projected to decline to 55.4 percent of GDP by 2025 under baseline.
  - Seychelles remains vulnerable to macroeconomic shocks, particularly interest and exchange rate shocks.
- Shock scenarios:
  - Real exchange rate shock (real depreciation by around 16 percent after 2020): debt-to-GDP would peak at around 82½ percent in 2020 and fall to 61 percent of GDP in 2025.
  - One-time real GDP growth shock (lower by 2 percent during 2021‒22): similar path to exchange rate shock.
  - Real interest rate shock and primary balance shock: debt-to-GDP would decline more slowly from the 2020 peak.
  - Combined macro-fiscal shock: debt-to-GDP would remain elevated and reach around 85 percent of GDP in 2025; debt-to-revenue ratio would hover around 250 percent in the medium term; gross financing needs would increase to around 44 percent of GDP in the medium term.
- SOE contingent-liability scenario:
  - If SOEs’ external debts of 5 percent of GDP are assumed by the government in 2020, public debt-to-GDP at end-2025 would reach 62.8 percent (vs. baseline 55.4 percent).
  - Air Seychelles’ project box bond of $71.5 million (around 5 percent of GDP) owed to Etihad could pose rollover risks in 2020 and 2021.
- Policy priorities from the DSA:
  - Steadfast fiscal consolidation to reduce public debt vulnerability.
  - Extend maturities of domestic debt where possible to mitigate rollover risk.
  - Examine scope for further privatization of some SOEs, including Air Seychelles.

### Stress tests — external debt sensitivity (selected outcomes)
- Real depreciation stress:
  - A 30 percent depreciation of the domestic currency would lead to external debt-to-GDP spiking to around 227 percent in 2021 and declining to around 187 percent by the end of the projection period (baseline about 109 percent).
- Permanent 1/4 standard deviation shocks:
  - Growth shock or current account (excluding interest payments) shock individually would lead to external debt-to-GDP of around 140 percent by the end of the projection period.
- Combined shock:
  - External debt-to-GDP under combined shock rises to around 186.7 percent.

### Staff appraisal and policy recommendations — summary
- Immediate priorities:
  - Temporary loosening of macroeconomic and financial policies and expeditious external support to address the crisis.
  - Budget support by IFIs is the best way to reduce the financing gap in the balance of payments and soften the hit on the budget.
  - Monetary response by the CBS (policy rate cut; emergency credit facility) is appropriate.
- Medium-term strategy:
  - Embed 2020 fiscal deterioration in a medium-term fiscal plan with primary fiscal position improving significantly each year after the shock abates to bring public debt-to-GDP back on a declining path.
  - Continue to seek external budget support after 2021.
  - Improve public finance management and transparency for emergency spending.
  - Monitor and mitigate SOE contingent liabilities, including Air Seychelles; consider privatization where appropriate.
  - Maintain flexible exchange rate policy and limit FX interventions to address disorderly conditions; be vigilant for market stress and financial sector risks.

*Source: IMF Staff Report text (excerpt provided).*

### EXECUTIVE SUMMARY

### 1sycea2020001 - EXECUTIVE SUMMARY

### Context, Request for Fund Support, and Staff Views
- Context:
  - Recent years: economic growth robust; inflation low; external and fiscal positions improved.
  - Gains supported by three successive Fund financial programs and the Policy Coordination Instrument (PCI) approved in 2017.
  - COVID-19 pandemic risks eroding these gains; Seychelles heavily dependent on tourism.
  - Authorities took decisive containment and mitigation measures; GDP likely to drop by over 10 percent in 2020.
- Request for Fund support:
  - Authorities request financial assistance under the Rapid Financing Instrument (RFI) of SDR 22.9 million, equivalent to 100 percent of quota.
  - Proposed use: direct budget support to the Ministry of Finance.
- Staff’s views:
  - Staff supports the authorities’ request.
  - Debt projected to be sustainable although risks have increased substantially.
  - Seychelles’ capacity to repay the Fund is adequate but subject to downside risks.
  - RFI resources will cover about a quarter of the estimated BOP financing needs and help catalyze further international support.
- Date: May 4, 2020.

### Economic Developments Pre-COVID-19
- Key outcomes at end-2019:
  - Tourism receipts increased by 5½ percent.
  - Real GDP growth in 2019: 3.9 percent.
  - Primary fiscal surplus in 2019: 2.7 percent of GDP (authorities’ target: 2½ percent of GDP).
  - Financial sector: sound; banks adequately capitalized and liquid.
  - Inflation: subdued.
  - Gross international reserves (GIR) outperformed staff projections at the time of the 4th review under the PCI.
- Performance under the PCI:
  - All end-December 2019 quantitative targets met (preliminary information).
  - 12-month average inflation at end-2019 within inner bound of monetary policy consultation clause.
  - Structural reforms progressed broadly in line with targets until early 2020.
  - Fifth PCI review delayed due to pandemic; completion planned before end-July.

### Impact of the COVID-19 Pandemic, Outlook, and Risks
- Immediate impact and baseline projection:
  - COVID-19 cases limited as of April 22, 2020: 11 cases.
  - Tourism and related sectors account for about one third of GDP.
  - Tourist arrivals expected to fall by about half in 2020 (compared with pre-pandemic projection of 7 percent growth).
  - Real GDP tentatively projected to decline by almost 11 percent in 2020 (pre-crisis projection: 3½ percent expansion).
- External position:
  - Current account deficit expected to reach 29.2 percent of GDP in 2020 (pre-pandemic projection: 17½ percent of GDP).
  - Most expected FDI likely to be postponed to at least 2021.
  - Without exceptional financing, GIR estimated to decline to around $240 million by end-2020:
    - Equivalent to 1.8 months of prospective imports.
    - Equivalent to 66 percent of the Fund’s standard reserve adequacy (ARA) metric.
  - Estimated financing gap in 2020: $126 million (10 percent of 2020 GDP).
  - RFI envisaged to provide $31 million; other sources include $55 million from World Bank and African Development Bank, and an unidentified budget support of $40 million — raising GIR with external support to $368 million (100 percent of ARA metric) as per staff estimates.
- Fiscal impact:
  - Primary balance expected to reach a deficit of 9.7 percent of GDP in 2020 (pre-pandemic 2020 budget targeted a surplus of 2.5 percent of GDP).
  - Total revenue (excluding grants) projected at 31.6 percent of GDP in 2020 (pre-pandemic: 37.7 percent).
  - Expenditure and net lending projected at 48.5 percent of GDP in 2020 (pre-pandemic: 40.2 percent).
  - Key fiscal numbers for 2020 (Before the shock / After the shock):
    - Nominal GDP (millions of Seychelles Rupee): 24,447 / 21,538
    - Real GDP: 3.5 / -10.8
    - CPI (annual average): 2.1 / 4.5
    - Credit to the private sector: 10.1 / -1.0
    - Total government and government-guaranteed debt: 57.3 / 85.8 (percent of GDP)
    - Tourism earnings: 625 / 311 (millions of US dollars)
    - FDI into Seychelles: 268 / 80 (millions of US dollars)
  - Balance of payments highlights (2019, Pre-COVID, Latest without external support):
    - Current account balance (millions of US dollars): -275.4 (2019); -305.6 (Pre-COVID); -366.1 (Latest without external support)
    - Exports of services: 1,136.0 (2019); 1,053.9 (Pre-COVID); 618.4 (Latest without external support)
    - GIR without external support: 242 (2020); In percent of ARA metric: 66
    - Financing Gap: 125.7 (millions); In percent of GDP: 10.0
- Medium-term outlook:
  - Staff assumes global tourism demand rebounds strongly starting in 2021 (April 2020 WEO global projections).
  - Tourist arrivals return to 2019 level by 2025.
  - Real GDP growth expected to reach 6.5 percent in 2021 and gradually moderate to around 4 percent over the medium term.
  - Inflation projected to moderate to around 3 percent over the medium term.
- Risks:
  - Main external risk: prolonged COVID-19 outbreak suppressing international growth, tourism, and FDI, widening external financing gap.
  - Domestic risks: local outbreak overwhelming health system, increased health spending, adverse climate events.
  - Under an adverse scenario: lower growth, larger fiscal and external financing needs, potential need for greater domestic policy actions and support from development partners.

### Policy Discussions — Fiscal Policy
- Authorities’ stance:
  - Plan to temporarily loosen macroeconomic and financial policies in 2020 to absorb the shock.
  - Committed to measures to maintain public debt and external sustainability once shock abates.
- Revised 2020 budget and emergency measures:
  - Revised budget presented to National Assembly (April 7).
  - Wage subsidy: 3-month wage subsidy estimated to cost up to SCR 1.1 billion (5.1 percent of GDP).
    - Cap: SCR 30,000 per month per employee.
    - Strict eligibility criteria, including submission of cash flow information.
    - Government committed to limiting wage subsidy spending to no more than SCR 1.1 billion (5.1 percent of GDP).
  - Additional health-related contingency spending: about SCR 110 million (0.5 percent of GDP).
  - Social protection spending for vulnerable group: about SCR 50 million (¼ percent of GDP).
  - Suspension of hiring of non-essential staff and other current spending (estimated savings: around 1 percent of GDP in 2020).
  - Government will submit monthly reports of emergency spending to the Finance and Public Accounts Committee and make them public within three months; independent audit of emergency spending and procurement processes will be conducted and published.
  - Re-examination of public investment program at end-Q2 2020 to ensure consistency with financing availability and debt sustainability.
- Financing plans and contingencies:
  - Government plans to increase external borrowing in 2020 to finance financing gap:
    - Identified IFI budget support loans: about $55 million.
    - RFI purchase: about $31 million.
    - Government seeks an additional $40 million of external budget support (unidentified).
  - Domestic financing: CBS advances of SCR 250 million (half of maximum in CBS Act); issuances of government securities to commercial banks and private sector (about 2¼ percent of GDP).
  - If external budget support does not increase as planned, greater domestic policy actions would need to be considered.
- Debt outlook and staff analysis:
  - Public debt-to-GDP ratio expected to rise from 59 percent at end-2019 to about 85¾ percent by end-2020.
  - Gross financing needs expected to rise from 24 percent in 2019 to 39¼ percent in 2020.
  - Government committed to fiscal savings to return debt ratio to a downward path:
    - Improve primary balance from 2021 onward to reach a surplus of 2½ percent of GDP by 2025.
    - Continue to seek external budget support after 2021.
  - Staff’s DSA indicates debt-to-GDP ratio and gross financing needs decline to 55½ percent and 23½ percent of GDP by 2025, respectively (Annex I).
  - Risks to debt sustainability remain substantial given the sharp increase in debt ratio, very high gross financing needs, uncertain growth outlook, and uncovered financing gaps.
  - Staff recommends stepping up efforts to identify financing for covering these gaps and, if needed, adjusting policies.
- Policy measures table highlights (selected):
  - Containment measures: entry bans starting February 17 (cruise ships; China, Hong Kong, Macau, Italy, Iran, Korea), entry ban from all countries starting March 23, travel ban to all countries starting March 23, closure of schools and social distancing from March 23, mandatory work from home for non-essential workers starting April 9.
  - Fiscal measures (revised budget): wage grants to affected companies (3 months; capped at SCR 30,000 per month per employee; 5.1 percent of GDP), additional health spending (½ percent of GDP), additional social protection (¼ percent of GDP), suspension of hiring and other current spending.
  - Transparency: monthly reporting and independent audit of emergency spending.

### Policy Discussions — Monetary and Financial Sector Policies
- Measures taken:
  - Monetary policy rate reduced by 100 basis points on March 23.
  - A credit facility of SCR 500 million set up to assist commercial banks with emergency relief measures for businesses.
  - A moratorium of six months on repayment of principal and interest on loans for impacted sectors announced.
  - National Assembly authorized the Central Bank to:
    - Provide limited credit to government up to SCR 500 million.
    - Extend maturity of credit to commercial banks to 3 years.
  - Central Bank sold $10 million of FX on April 9 to meet unmet FX demand.

### Fund Support under the Rapid Financing Instrument and Staff Appraisal
- Fund support request:
  - RFI of SDR 22.9 million (100 percent of quota) requested; proposed use as direct budget support.
- Staff appraisal summary:
  - Staff supports the RFI request.
  - RFI resources expected to cover about a quarter of estimated BOP financing needs and help catalyze further international support.
  - Seychelles’ capacity to repay the Fund is adequate but exposed to downside risks.
  - Staff recommends authorities pursue fiscal consolidation once the shock abates and continue to seek external budget support to address financing gaps.

*Prepared by IMF staff; Approved By David Owen (AFR) and Martin Sommer (SPR).*

### 10.      While short-term actions are focused on COVID-19 mitigation, structural reforms

### 10. While short-term actions are focused on COVID-19 mitigation, structural reforms should continue

### Structural reforms, SOE risks, and public finance management
- Authorities intend to continue intensified efforts to minimize fiscal risks from SOEs, particularly Air Seychelles.
- Air Seychelles actions and performance:
  - Began comprehensive operational restructuring in late 2018, including staff redundancy and the closure of loss-making international routes.
  - Financial performance improved significantly in 2019 thanks to operational restructuring.
  - The loss of the company declined to $4.6 million in 2019 from 41.5 million in 2018.
  - The collapse of tourism activities triggered by the COVID-19 pandemic will likely have a dire impact on the company’s already weak financial health.
  - In the revised 2020 budget, an additional transfer of SCR109 million (½ percent of GDP) to Air Seychelles is allocated, on top of the financial support already incorporated in the authorities’ medium-term debt projections:
    - guarantees to working capital of $12.5 million and to the other shareholder’s preference shares of $30 million starting in 2019,
    - and $6 million of transfers to the company each year financed by grants during 2019‒23.
- Policy advice and intentions:
  - Government will shortly discuss the future of the company with the other shareholder.
  - Staff underlined that the government should closely monitor the company’s financial performance and progress in its restructuring and take corrective actions, if needed, to ensure that no budget impact would materialize beyond that assumed in the latest medium-term expenditure and debt projections.
  - Staff advised the government to examine the possible scope for further privatization of some SOEs, including Air Seychelles, to reduce fiscal risks and improve economic efficiency over the medium term.
  - The government is encouraged to pursue efforts to improve public finance management (PFM) and notably set up transparent mechanisms for tracking, accounting, and reporting of COVID-19 related emergency spending.

### Monetary and financial sector policies and measures
- Central Bank of Seychelles (CBS) policy actions and facilities:
  - In late March, the CBS decided to loosen its policy stance by reducing the policy rate by 100 basis points and increasing liquidity in the banking system.
  - The CBS set up a long-term lending instrument of SCR 500 million for commercial banks to assist businesses struggling with the financial impact of the pandemic with emergency relief measures.
  - The CBS called on commercial banks to grant a moratorium of six months on the repayment of principal and interest on loans to assist businesses in impacted sectors.
- Staff advice on monetary and exchange rate policy:
  - Maintain a flexible exchange rate policy and limit foreign exchange interventions to the extent needed to address disorderly market conditions, while allowing exchange rate adjustment.
  - Monitor inflation, which is expected to remain moderate.
- Financial sector prudential guidance:
  - Ensure that: (i) borrowers already highly unlikely to repay before the Covid-19 crisis do not unduly benefit from wide-ranging repayment holidays; and (ii) borrowers facing temporary difficulties are not disincentivized to resume loan repayment at the end of the moratorium.
  - Banks should carefully assess the credit quality of exposures subject to these measures and identify situations in which borrowers are unlikely to pay.
  - Banks and supervisors should collect information about the scope of moratoria, identify precisely borrowers and exposures subject to these measures, and improve the quality of disclosure.
- Banking sector resilience:
  - Since the banking sector is well capitalized and liquid, it should be able to absorb some credit losses and liquidity squeeze if the crisis is short lived.
  - If banks absorb their capital and liquidity buffers, the CBS should agree with them on a plan to bring capital and liquidity to above the required minima, while taking into account the length of the crisis.

### Fund support under the Rapid Financing Instrument (RFI) and balance of payments financing
- RFI request and rationale:
  - Authorities requested a purchase under the Rapid Financing Instrument (RFI) in an amount equivalent to 100 percent of quota (SDR22.9 million, $31.1 million).
  - Qualification criteria for RFI met due to urgent balance-of-payments needs that, if unaddressed, would result in immediate economic disruption.
  - Debt is assessed as sustainable despite the temporary spike in debt ratio and gross financing needs, although risks are substantial (Annex I).
  - The proposed purchase under the RFI would contribute towards closing a quarter of the external financing gap and play a catalytic role for further international support.
- Other external assistance and remaining needs:
  - The World Bank and the AfDB also plan to provide emergency assistance of about $55 million.
  - Remaining needs of $40 million are expected to be filled by other international partners and/or further policy adjustment.
  - In the BOP table in this Staff Report, $40 million of unidentified external budget support loan in 2020 is assumed.
- Use of RFI resources and safeguards:
  - Authorities request RFI resources be made available as direct budget support.
  - Memorandum of Understanding (MoU) provisions to be agreed between CBS and Ministry of Finance:
    - Commit government to maintaining funds received from the IMF in a government account at the CBS, pending their use.
    - Require the government to hold foreign exchange balances only with the CBS.
    - Clarify responsibilities for repaying Fund resources.
  - In line with IMF safeguards policy, the CBS is committed to undertake an update of the safeguards assessment before approval of any new subsequent arrangement by the IMF Executive Board.
  - Latest CBS safeguards assessment completed in February 2018.
  - Draft amendments to the CBS Act, including provisions to enhance governance arrangements, have yet to be presented to the National Assembly and remain an outstanding recommendation.
- Financing table highlights (as presented in the Staff Report Text Table 5):
  - Financing Gap: 125.7 (2020), 50.0 (2021), 30.0 (2022), 30.0 (2023), 30.0 (2024), 30.0 (2025) — Proj. (In millions of US dollars)
  - Identified budget support (2020): 85.7, comprising World Bank 45.6, AfDB 9.0, IMF RFI disbursement 31.1.
  - Unidentified budget support (2020): 40.0, and 30.0 in each year 2021–2025.
- Capacity to repay:
  - Fund repayment ratio to exports of goods and services will peak at 13½ percent in 2024.
  - Fund repayment-to-GIR ratio will peak at 3.6 percent in 2024.

### Staff appraisal, macroeconomic impact, and policy recommendations
- Macroeconomic impact and projections:
  - The Covid-19 pandemic is expected to have a severe impact on Seychelles.
  - Global tourism demand has come to a standstill.
  - Real GDP is expected to contract by almost 11 percent in 2020 with a recovery projected in 2021.
  - The fiscal position is expected to deteriorate drastically in 2020 due to significant revenue losses and additional spending needs to mitigate the negative economic impact and to prevent a potential outbreak in Seychelles (almost 6 percent of GDP).
  - As a result, a balance of payments financing gap of $126 million (about 10 percent of GDP) is estimated to open in 2020.
- Policy recommendations and strategy:
  - Temporary loosening of macroeconomic and financial policies and expeditious external support are needed to address the crisis.
  - A temporary widening of the budget deficit due to revenue loss and necessary crisis-related spending is appropriate.
  - Budget support by IFIs is the best way to reduce the financing gap in the balance of payments and soften the hit on the budget.
  - The 2020 fiscal deterioration should be embedded in a medium-term fiscal plan, in which the primary fiscal position should improve significantly each year after the shock abates and confidence returns, bringing the public debt-to-GDP ratio back on a steadily declining path.
  - The CBS’ prompt response by reducing the monetary policy rate and setting up an emergency credit facility is appropriate.
  - The CBS is advised to maintain its flexible exchange rate policy and to limit foreign exchange interventions to the extent needed to address disorderly market conditions.
  - The CBS should stay vigilant for potential market stress and any emerging risks to the financial sector.

*Source: IMF Staff Report text (excerpt provided).*

### 18.      Staff supports the authorities’ request for purchase under the RFI. Seychelles’

### 1sycea2020001 - 18. Staff supports the authorities’ request for purchase under the RFI. Seychelles

### IMF decision and rationale
- Staff supports the authorities’ request for purchase under the RFI.
- Support is based on:
  - the urgent balance of payments need arising from the severe impact of the pandemic;
  - the authorities’ existing and prospective policies to address this external shock;
  - the authorities’ strong track record which will mitigate risks for the Fund.
- Capacity to repay the Fund is described as adequate but subject to downside risks.

### Macroeconomic outlook and projections (selected)
- Nominal GDP (2017): US$1,498 million
- Per capita GDP (2017): US$15,735
- Population, end-year (2016): 94,677
- Real GDP (annual percent change) — actual and projections:
  - 2016: 4.6
  - 2017: 4.4
  - 2018: 3.8
  - 2019: 3.9
  - 2020 (Prel.): -10.8
  - 2021 (Proj.): 6.5
  - 2022 (Proj.): 5.4
  - 2023 (Proj.): 4.6
  - 2024 (Proj.): 4.1
  - 2025 (Proj.): 4.0
- CPI (annual average):
  - 2016: -1.0
  - 2017: 2.9
  - 2018: 3.7
  - 2019: 1.8
  - 2020 (Prel.): 4.5
  - 2021–2025 (Proj.): 3.1, 3.1, 3.0, 3.0, 3.0
- Gross official reserves (end of year, millions of U.S. dollars):
  - 2016: 522.6
  - 2017: 546
  - 2018: 548
  - 2019: 580
  - 2020 (Prel.): 368
  - 2021 (Proj.): 398
  - 2022 (Proj.): 436
  - 2023 (Proj.): 496
  - 2024 (Proj.): 540
  - 2025 (Proj.): 602
- Months of imports, c.i.f.:
  - 2016: 3.7
  - 2017: 3.5
  - 2018: 3.6
  - 2019: 5.4
  - 2020 (Prel.): 2.8
  - 2021–2025 (Proj.): 2.8, 2.8, 2.9, 2.9, 3.1
- Gross official reserves as percent of Assessing Reserve Adequacy (ARA) metric:
  - 2016: 131.0
  - 2017: 129.3
  - 2018: 122.9
  - 2019: 129.4
  - 2020 (Prel.): 100.3
  - 2021–2025 (Proj.): 101.2, 104.2, 109.8, 118.9, 125.1

### External sector and balance of payments
- Current account balance (percent of GDP) — actual and projections:
  - 2016: -20.6
  - 2017: -20.1
  - 2018: -17.9
  - 2019: -16.7
  - 2020 (Prel.): -29.2
  - 2021–2025 (Proj.): -25.8, -24.1, -21.9, -19.6, -18.6
- Total external debt outstanding (millions of U.S. dollars):
  - 2016: 1,505
  - 2017: 1,639
  - 2018: 1,762
  - 2019: 1,875
  - 2020 (Prel.): 1,882
  - 2021–2025 (Proj.): 1,971, 2,060, 2,150, 2,222, 2,249
- Total external debt (percent of GDP):
  - 2016: 105.5
  - 2017: 107.5
  - 2018: 111.6
  - 2019: 113.6
  - 2020 (Prel.): 150.3
  - 2021–2025 (Proj.): 142.2, 132.8, 123.3, 115.6, 109.3
- Exports of goods and services (percent of GDP) and imports of goods and services (percent of GDP) — illustrative:
  - Exports G&S, percent of GDP: 2016: 94.8; 2017: 101; 2018: 110; 2019: 100; 2020 (Prel.): 81; 2021–2025 (Proj.): 94, 95, 97, 98
  - Imports G&S, percent of GDP: 2016: 105; 2017: 112; 2018: 118; 2019: 111; 2020 (Prel.): 103; 2021–2025 (Proj.): 113, 111, 109, 107, 107

### Fiscal position (selected)
- Total revenue, excluding grants (percent of GDP):
  - 2016: 36.7
  - 2017: 35.1
  - 2018: 36.2
  - 2019: 36.0
  - 2020 (Prel.): 31.6
  - 2021–2025 (Proj.): 32.8, 32.9, 33.8, 33.8, 33.7
- Expenditure and net lending (percent of GDP):
  - 2016: 38.1
  - 2017: 36.5
  - 2018: 37.8
  - 2019: 36.1
  - 2020 (Prel.): 48.5
  - 2021–2025 (Proj.): 42.0, 38.7, 37.7, 36.4, 35.0
- Overall balance, including grants (percent of GDP):
  - 2016: -1.4
  - 2017: 0.1
  - 2018: 0.7
  - 2019: -0.8
  - 2020 (Prel.): -13.6
  - 2021–2025 (Proj.): -4.9, -3.8, -2.2, -1.3, -0.1
- Program primary balance (percent of GDP):
  - 2016: 3.4
  - 2017: 3.1
  - 2018: 2.9
  - 2019: 2.7
  - 2020 (Prel.): -9.7
  - 2021–2025 (Proj.): -1.8, -1.0, 0.3, 1.6, 2.5
- Total government and government-guaranteed debt (percent of GDP):
  - 2016: 72.7
  - 2017: 65.8
  - 2018: 60.9
  - 2019: 59.1
  - 2020 (Prel.): 85.8
  - 2021–2025 (Proj.): 80.0, 74.5, 67.7, 61.8, 55.4
- External government debt (percent of GDP):
  - 2016: 32.2
  - 2017: 29.7
  - 2018: 28.5
  - 2019: 27.0
  - 2020 (Prel.): 46.5
  - 2021–2025 (Proj.): 44.4, 41.9, 38.4, 36.3, 35.3

### Public finances — detailed figures (millions of Seychelles rupees, select years)
- Total revenue and grants:
  - 2017 (Act.): 7,205
  - 2018 (Act.): 7,475
  - 2019 (Act.): 8,274
  - 2020 (Prel.): 8,435
  - 2021–2025 (Proj.): 7,511; 8,769; 8,934; 9,779; 10,360; 11,048
- Total revenue (millions of Seychelles rupees):
  - 2017 (Act.): 6,965
  - 2018 (Act.): 7,302
  - 2019 (Act.): 7,997
  - 2020 (Prel.): 8,341
  - 2021–2025 (Proj.): 6,803; 7,748; 8,436; 9,316; 9,998; 10,682
- Total expenditure and net lending (millions of Seychelles rupees):
  - 2017 (Act.): 7,277
  - 2018 (Act.): 7,455
  - 2019 (Act.): 8,318
  - 2020 (Prel.): 8,379
  - 2021–2025 (Proj.): 10,437; 9,936; 9,911; 10,389; 10,751; 11,093
- Capital expenditure (millions of Seychelles rupees):
  - 2017 (Act.): 909
  - 2018 (Act.): 747
  - 2019 (Act.): 954
  - 2020 (Prel.): 671
  - 2021–2025 (Proj.): 629; 1,338; 1,240; 1,225; 1,247; 1,396

### Financing, external support, and debt service
- Financial account and external financing elements (selected):
  - RFI listed as a source under program loans in Table 2 financing lines.
  - Project loans, program loans, World Bank, African Development Bank, and unidentified budget support are included in disbursements details.
- External debt service due (memorandum):
  - 2016: 781 (millions of Seychelles rupees)
  - 2017: 636
  - 2018: 567
  - 2019: 634
  - 2020 (Prel.): 1,001
  - 2021–2025 (Proj.): 1,089; 1,210; 1,178; 1,267; 1,273

### Banking sector and financial soundness (selected indicators)
- Regulatory capital to risk weighted assets (percent, end-of-period):
  - 2012 Q4: 26.7
  - 2013 Q4: 26.7
  - 2014 Q4: 21.7
  - 2015 Q4: 25.5
  - 2016 Q4: 26.6
  - 2017 Q4: 23.5
  - 2018 Q4: 20.5
  - 2019 Q4: 21.0
  - 2020 Q1–Q3: 20.2, 19.7
- Non-performing loans to gross loans (percent):
  - 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 Q4: 3.5
  - 2019 Q4: 3.5
  - 2020 Q1–Q3: 3.5, 2.8
- Return on assets (annualized):
  - 2012 Q4: 3.1
  - 2013 Q4: 1.9
  - 2014 Q4: 3.3
  - 2015 Q4: 3.8
  - 2016 Q4: 3.8
  - 2017 Q4: 3.9
  - 2018 Q4: 3.7
  - 2019 Q4: 2.8
  - 2020 Q1–Q3: 3.0, 3.1

### Capacity to repay the Fund (selected figures, Millions of SDR)
- Existing Fund credit stock (end-of-period):
  - 2016: 28.0
  - 2017: 29.5
  - 2018: 24.8
  - 2019: 19.9
  - 2020 (Prel.): 14.7
  - 2021: 10.7
  - 2022: 7.0
  - 2023: 4.2
  - 2024: 2.5
  - 2025: 1.2
- Prospective Fund credit (disbursement and stock, Prel./Proj.):
  - Disbursement in 2020 (Prospective): 22.9 (Millions of SDR)
  - Stock (end-of-period) with prospective credit:
    - 2020: 22.9
    - 2021: 22.9
    - 2022: 22.9
    - 2023: 17.2
    - 2024: 5.7
    - 2025: 0.0
- Stock of existing and prospective Fund credit (end-of-period, Millions of SDR):
  - 2016: 28.0
  - 2017: 29.5
  - 2018: 24.8
  - 2019: 19.9
  - 2020: 37.6
  - 2021: 33.6
  - 2022: 29.9
  - 2023: 21.4
  - 2024: 8.2
  - 2025: 1.2
- Stock of existing and prospective Fund credit in percent of quota:
  - 2016: 122.2
  - 2017: 128.8
  - 2018: 108.2
  - 2019: 86.9
  - 2020: 164.3
  - 2021: 146.6
  - 2022: 130.4
  - 2023: 93.4
  - 2024: 35.7
  - 2025: 5.4
- Stock of existing and prospective Fund credit in percent of GDP:
  - 2016: 2.8
  - 2017: 2.7
  - 2018: 2.2
  - 2019: 1.7
  - 2020: 4.3
  - 2021: 4.1
  - 2022: 3.8
  - 2023: 2.8
  - 2024: 1.1
  - 2025: 0.1

*Source: IMF staff estimates and projections as presented in the document.*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Overview and key findings
- After years of steady improvement, Seychelles’ public debt will significantly worsen and risks to sustainability have increased substantially due to the economic fallout of the COVID-19 pandemic.
- Public debt level is expected to increase by 24½ percentage points (compared with pre-COVID projections) to 85¾ percent of GDP in 2020.
- Gross financing needs would reach 39¼ percent of GDP in 2020.
- Assuming a strong debt reduction strategy leading to a primary surplus of 2½ percent of GDP by 2025 and no further major negative shocks, public debt and gross financing needs are expected to steadily decline over the medium term.
- Seychelles remains vulnerable to macroeconomic shocks, particularly interest and exchange rate shocks; continued debt reduction and extending maturities of domestic public debt are warranted.

### Historical context and baseline trajectory
- Prior to the COVID-19 pandemic:
  - Public debt declined from 60.9 percent in 2018 to 59.1 percent in 2019.
- COVID-19 impact on 2020 projections:
  - End-2020 nominal gross public debt stock projected at 85.8 percent of GDP versus previously projected 57.3 percent of GDP.
  - Change driven mostly by a severe recession: GDP projected to contract by about 11 percent instead of growing by 3.5 percent.
- Baseline medium-term path:
  - Public debt ratio projected to decline to 55.4 percent of GDP by 2025 under baseline.
  - Pre-pandemic projected debt-to-GDP ratio was 40.3 percent in 2024.
  - Gross financing needs: 24 percent in 2019 → 39.3 percent in 2020 → 23.4 percent by 2025.

### Macroeconomic and fiscal assumptions underpinning the DSA
- The DSA uses the baseline scenario of the Staff Report reflecting the COVID-19 shock.
- Real GDP growth:
  - Projected at around -10.8 percent in 2020.
  - Rebounds strongly during 2021‒22.
  - Moderates to around 4 percent in the medium term.
- Inflation:
  - 2020 projection revised up to 4.5 percent (previously 1.8 percent).
- Effective interest rate:
  - Revised up relative to previous DSA due to higher inflation projection for 2020 and expected increase in borrowings.
- Primary fiscal balance:
  - Expected to reach a surplus target of 2½ percent of GDP by 2025.
- Note: Program primary balance includes net lending to SOEs.

### Shock scenarios and debt vulnerability
- Overall:
  - Debt path remains above the high-risk benchmark under all shock scenarios.
- Real exchange rate shock (real depreciation by around 16 percent after 2020):
  - Debt-to-GDP ratio would peak at around 82½ percent in 2020 and fall thereafter.
  - Debt-to-GDP would be 61 percent of GDP in 2025 (below the 70 percent high-risk benchmark).
- One-time real GDP growth shock (lower than baseline by 2 percent during 2021‒22):
  - Similar path to real exchange rate shock: peak around 82½ percent in 2020 and fall thereafter; remain at around 9 percent below 70 percent high-risk benchmark in 2025.
- Real interest rate shock and primary balance shock:
  - Debt-to-GDP ratio would decline more slowly from the 2020 peak.
- Combined macro-fiscal shock (aggregation of shocks to real growth, interest rate, primary balance, and exchange rate):
  - Debt-to-GDP ratio would remain elevated and reach around 85 percent of GDP in 2025.
  - Debt-to-revenue ratio would hover around 250 percent in the medium term.
  - Gross financing needs would increase to around 44 percent of GDP in the medium term.
- Gross financing needs:
  - Increase under various shocks, especially the combined macro-fiscal shock and the real interest rate shock.
  - Extending average maturity of domestic issuance would reduce rollover risks.

### Air Seychelles and SOE contingent liabilities
- Air Seychelles has posed significant fiscal risks historically:
  - In 2012 the government assumed liabilities and obligations of Air Seychelles amounting to around 5 percent of GDP.
  - Air Seychelles’ project box bond of $71.5 million (around 5 percent of GDP) owed to Etihad could pose rollover risks in 2020 and 2021.
- SOE contingent-liability scenario:
  - DSA provides a scenario where SOEs’ external debts of 5 percent of GDP are assumed by the government in 2020.
  - Under this scenario, public debt-to-GDP at end-2025 would reach 62.8 percent (vs. baseline 55.4 percent).
  - Highlights need to mitigate risks arising from Air Seychelles; government will discuss the company’s future with the other shareholder.
  - Should additional government support beyond that assumed in the medium-term baseline be needed, corrective actions should be required to offset fiscal impact.

### Policy recommendations and mitigation priorities
- Authorities are urged to steadfastly implement fiscal consolidation to reduce public debt vulnerability.
- Key vulnerabilities arise from large gross financing needs due to high public debt and short maturity of domestic debt.
- Beyond fiscal consolidation:
  - Extend maturities of domestic debt where possible to mitigate high gross financing needs and rollover risk.
  - Examine scope for further privatization of some SOEs, including Air Seychelles, to reduce fiscal risks and improve economic efficiency over the medium term.

### External DSA results and external sector implications
- Total external debt increased significantly after the pandemic shock; external debt-to-GDP remains elevated in the range of 109‒150 percent of GDP throughout the projection period.
- Tourism:
  - Tourism receipts account for about 50 percent of exports of services and 35 percent of exports of goods and services.
  - Projected to decline by 50 percent in 2020 (versus a pre-pandemic growth rate of 7 percent).
- Current account:
  - Expected to reach a deficit of 29.2 percent of GDP in 2020.
- Financing:
  - Most expected FDIs (major source of current account financing) will be postponed to 2021 and beyond.
- Mitigating factors:
  - Maturity profile of external debt remains a mitigating factor.
  - As of end-2019, about one quarter of external debt is medium to long-term government borrowing, largely from official sources at favorable interest rates and maturities.

*Annex I. Debt Sustainability Analysis — Seychelles*

### 9.      Standardized stress tests confirm that the country’s external debt is particularly

### 9.      Standardized stress tests confirm that the country’s external debt is particularly sensitive to currency depreciation shocks

### Key findings from stress tests
- A 30 percent depreciation of the domestic currency would lead to a spike in external debt-to-GDP ratio to around 227 percent in 2021, however such a ratio would decrease steadily and would equal around 187 percent by the end of the projection period, compared to about 109 percent under the baseline scenario.
- A permanent ¼ standard deviation shock to either growth or the current account (excluding interest payments) would lead to a gradual increase in the external debt-to-GDP ratio to around 140 percent by the end of the projection period.
- The interest rate, growth and current account shocks have a more muted, yet significant effect on the country’s external debt profile compared with the exchange rate shock.

### Public debt baseline projections and composition (selected figures)
- Nominal gross public debt: 2018: 79.5; 2019: 60.9; 2020: 59.1; 2021: 85.8; 2022: 80.0; 2023: 74.5; 2024: 67.7; 2025: 61.8 (in percent of GDP as reported).
- Net public debt: 2018: 51.6; 2019: 50.5; 2020: 77.9; 2021: 74.1; 2022: 70.2; 2023: 64.8; 2024: 60.1; 2025: 54.5 (in percent of GDP).
- Public gross financing needs: 2018: 24.2; 2019: 27.9; 2020: 24.1; 2021: 39.3; 2022: 37.5; 2023: 33.5; 2024: 28.7; 2025: 26.0 (in percent of GDP).
- Real GDP growth (in percent): 2018: 4.3; 2019: 3.8; 2020: 3.9; 2021: -10.8; 2022: 6.5; 2023: 5.4; 2024: 4.6; 2025: 4.1.
- Inflation (GDP deflator, in percent): 2018: 5.4; 2019: 2.2; 2020: 1.2; 2021: 4.2; 2022: 3.0; 2023: 2.8; 2024: 3.0; 2025: 3.0.
- Effective interest rate (in percent): 2018: 5.1; 2019: 5.3; 2020: 4.4; 2021: 6.7; 2022: 5.5; 2023: 5.2; 2024: 4.9; 2025: 4.8.

### Stress-test scenarios and outcomes (selected scenarios)
- Real depreciation shock (one-time real depreciation of 30 percent occurs in 2020):
  - External debt-to-GDP: spikes to around 227 percent in 2021, then declines to around 187 percent by end of projection period; baseline external debt-to-GDP is about 109 percent.
- Combined shock (permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance):
  - External debt-to-GDP under combined shock rises to around 186.7 percent (figure label).
- Permanent 1/4 standard deviation shocks:
  - Growth shock and current account (non-interest) shock each lead to external debt-to-GDP of around 140 percent by end of projection period.
- Interest rate shock, real interest rate shock, and current account shocks produce significant but smaller deviations from baseline relative to the exchange rate shock.

### External debt dynamics and flows (highlights from External Debt Sustainability Framework)
- Baseline: External debt (in percent of GDP) by year includes: 2014: 100.2; 2015: 100.8; 2016: 105.5; 2017: 107.5; 2018: 111.6; 2019: 113.6; 2020: 150.3; 2021: 142.2; 2022: 132.8; 2023: 123.3; 2024: 115.6; 2025: 109.3.
- Change in external debt (yearly): 2019→2020: 36.7; 2020→2021: -8.1; 2021→2022: -9.4; 2022→2023: -9.5; 2023→2024: -7.7; 2024→2025: -6.3.
- Identified external debt-creating flows (in percent of GDP): 2020: 38.2; 2021: 0.9; 2022: 1.0; 2023: 1.4; 2024: 2.5; 2025: 0.7.
- Current account deficit, excluding interest payments (in percent of GDP): 2020: -27.6; 2021: -24.3; 2022: -22.7; 2023: -20.5; 2024: -17.7; 2025: -16.8.
- Net non-debt creating capital inflows (negative, in percent of GDP): 2020: -7.3; 2021: -16.1; 2022: -16.3; 2023: -15.1; 2024: -12.5; 2025: -13.5.
- Automatic debt dynamics (in percent of GDP): 2020: 17.8; 2021: -7.3; 2022: -5.4; 2023: -4.0; 2024: -2.6; 2025: -2.6.
- External debt-to-exports ratio (in percent): 2020: 186.4; 2021: 151.6; 2022: 140.6; 2023: 129.2; 2024: 119.5; 2025: 112.0.
- Gross external financing need (in billions of US dollars): 2020: 841.2; 2021: 575.9; 2022: 598.5; 2023: 598.7; 2024: 597.7; 2025: 601.2.
- Gross external financing need (in percent of GDP): 2020: 51.2; 2021: 41.6; 2022: 38.6; 2023: 34.3; 2024: 31.1; 2025: 29.2.

### Projections realism and historical context (selected diagnostics)
- Seychelles had a positive output gap for 3 consecutive years, 2017-2019 (with t corresponding to 2020).
- Forecast track record (2009-2017) metrics cited:
  - Real GDP growth forecast error median: 0.74 (Seychelles), percentile rank: 92%.
  - Primary balance forecast error median: 0.13 (Seychelles), percentile rank: 76%.
  - Inflation (deflator) forecast error median: -0.32 (Seychelles).
- Seychelles 3-Year Adjustment in Cyclically-Adjusted Primary Balance (CAPB) percentile: 3-year CAPB adjustment greater than 3 percent of GDP in approx. top quartile; has a percentile rank of 58% for 3-year average CAPB level.

### Policy context and recent developments
- Supported by successive IMF programs since the 2008 crisis, Seychelles reduced public debt, improved import coverage of gross international reserves (GIRs), and completed four reviews under the Policy Coordination Instrument (PCI) approved in late 2017.
- Due to the severe economic consequences of the COVID-19 pandemic, a large part of these gains is being reversed (Appendix I, Letter of Intent, Victoria, May 2, 2020).

*Source: IMF staff (Seychelles Public DSA and External Debt Sustainability Framework as presented in the supplied content).*

### 2.      The short-term economic fallout of the COVID-19 pandemic is expected to be

### 1sycea2020001 - 2.      The short-term economic fallout of the COVID-19 pandemic is expected to be

### Short-term economic impact
- Tourism sector accounts for "more than one third of our economy" and "has come to a standstill."
- Collapse in tourism exports and foreign direct investment (FDI) expected; most investment projects postponed to 2021 at the earliest.
- Anticipated major slowdown in growth and deterioration in the external position and public finances.
- Balance of payments to be notably affected by the collapse in tourism exports and FDI.

### Fiscal measures, costs, and projections
- Government emergency allocations in 2020:
  - "around SCR110 million" to additional health spending.
  - "about SCR 50 million" to additional social protection for the vulnerable group.
- Wage subsidies to all companies affected by the COVID-19 pandemic for "3 months" to protect employment and household income; fiscal cost limited to no more than "SCR1.1 billion."
- To create fiscal space: suspension of non-essential hiring and current spending in 2020; midyear review and adjustment of capital expenditures according to financing availabilities.
- Revised 2020 budget incorporating measures and revised revenue projections approved by the National Assembly.
- Projected fall in total revenue to GDP ratio from "37.7 to 31.6 percent in 2020."
- Primary fiscal deficit could reach "almost 10 percent of GDP in 2020."
- Government commitment: phased fiscal adjustment to bring the primary balance to a surplus of "2½ percent of GDP by 2025."
- Government intends to avoid excessive debt accumulation; plans limited resort to Central Bank of Seychelles (CBS) advances to finance a small part of the deficit in 2020 as a temporary and limited measure.
- Transparency and oversight commitments:
  - Monthly reports of emergency spending on wage subsidies, health, and social spending to Finance Public Accounts Committee (FPAC) of the National Assembly; reports to be made public within "three months."
  - Independent audit of emergency spending and related procurement processes and publication of results.

### Monetary policy and central bank actions
- CBS cut the policy rate by "100 basis points" as a preemptive measure.
- CBS intends to maintain flexible exchange rate policy and limit foreign exchange interventions to address disorderly market conditions.
- CBS initiated FX sales in the week of "April 6, 2020" to support the market.
- CBS objective: ensure well-functioning FX market and sufficient availability of FX for current international transactions to guarantee supply of food, fuel and medical goods.
- CBS set up a facility to provide liquidity support to commercial banks and assist businesses.
- CBS will closely monitor inflationary developments as the significant decline in international fuels prices partly offsets the depreciation of the rupee.
- CBS will continue to monitor potential market stress and emerging risks to the financial sector and the economy.

### External financing request and conditionality
- Government requests financial support from the IMF for an amount of "100 percent of quota (SDR 22.9 million)" under the Rapid Financing Instrument (RFI) to help mitigate adverse impact and urgent balance of payments financing gap.
- IMF support expected to ease pressure on fiscal position and provide fiscal space to fight the pandemic.
- Authorities in extensive discussions with the World Bank and the African Development Bank regarding possible budget support loans.
- If external budget support does not increase as planned, "greater domestic policy actions would be considered."
- Authorities commit not to impose new exchange and trade restrictions and other measures that would compound difficulties.

### Macroeconomic outlook, risks, and debt
- WEO projections: Seychelles projected to shrink by "10.8 percent" this year, with a recovery next year.
- Authorities expect tourism sector recovery to be slower than staff projections.
- Tourism sector impacts:
  - Directly accounts for "24 percent" of the Seychelles economy.
  - Indirectly accounts for "an estimated 75 percent."
  - Accounts for "76 percent of foreign exchange receipts."
- Current account balance expected to widen to "close to 30 percent of GDP" as tourism receipts and FDI inflows have dried up.
- Fiscal projections and debt:
  - Primary fiscal deficit projected to reach "9.7 percent of GDP" this year (staff statement).
  - Gross financing needs are approaching "almost 60 percent of GDP."
  - Key PCI target was to reduce the debt-to-GDP ratio to "50 percent by 2021."
  - Debt-to-GDP ratio at end-2020 is now estimated to be "85.7 percent" instead of "52 percent" as had been projected in the 2020 budget.
  - Authorities honored debt repayments of "USD18.2 million" due in the first quarter of 2020; another "USD32.9 million" will become payable at the end of the year.
- Authorities remain committed to honor debt service obligations and mindful of debt sustainability risks.

### Institutional safeguards and transparency measures
- Memorandum of Understanding to be signed between the CBS and the government to ensure responsibilities for servicing IMF financial obligations are clearly established.
- CBS committed to update the safeguards assessment before approval of any new subsequent arrangement by the IMF Executive Board, provide IMF staff with access to its most recently completed external audit reports, and authorize CBS’ external auditors to hold discussions with IMF staff.
- Authorities authorize the IMF to publish the Letter of Intent and the staff report for the request of purchase under the RFI.

*Source: Seychelles authorities’ Letter of Intent and accompanying staff statement, May 8, 2020.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1sycea2020001.pdf_