## 1sycea2021001 ## Source details **Canonical URL:** [1sycea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1sycea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1sycea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1sycea2021001.pdf.json) --- ### Executive summary: context, shock, and program objectives - COVID-19 shock: - Tourism and related sectors account for about two-thirds of Seychelles’ GDP. - Real GDP contraction in 2020: "-12.9 percent in 2020". - Current account deficit rose to "30 percent of GDP in 2020". - Nominal exchange rate depreciated by "35 percent (yoy)" (text elsewhere: annual average depreciation "26 percent" and end-year "53 percent" noted). - Expenditures rose to "57.1 percent of GDP". - Primary balance in 2020: deficit of "16.3 percent of GDP". - Public and publicly guaranteed debt: increased from "62 percent of GDP in 2019" to "100 percent in 2020" (end-2020 nominal gross public debt: "100.8 percent of GDP"). - Gross financing needs (GFNs) increased from "29 percent of GDP in 2019" to "50 percent of GDP in 2020" (DSA notes "50.8 percent of GDP"). - IMF support and program: - RFI in May 2020: "SDR 22.9 million". - Authorities requested a 32-month EFF arrangement with access of "SDR 74 million (323 percent of quota; around USD 107 million)". - Program objective: restore macroeconomic stability and debt sustainability while strengthening post COVID-19 recovery. - Program pillars: frontloaded fiscal adjustment, a liability management operation (LMO), and external support. - LMO completed immediately after program discussions. ### Recent developments, outlook, and risks - Vaccination and tourism: - Seychelles led the world in early vaccination coverage; first country to vaccinate more than "60 percent" of its population. - Tourist arrivals bounced back starting in April 2021; staff expect 2019 real GDP level to be regained in 2022. - Tourist arrivals projected to rebound by "40 percent in 2021" and "50 percent in 2022". - Expenditure per visitor expected to increase post COVID-19. - Market sentiment and banking: - Currency appreciated by "26 percent against the U.S. dollar since March 25" (from about "21.5 rupees per dollar" to almost "16 by end-June 2021"). - Demand for T-bills recovered; one-year T-bill yield fell by "42 bps during March-June 2021" and compressed further by "115 bps" after June 30, 2021; 365-day yield at "4.9 percent" auction on July 2, 2021 (from "6.0 percent" on June 25, 2021). - NPL ratio rose from "3.3 percent at end-December 2020" to "5.1 percent as of May 2021". - Banking sector capital adequacy ratio stood at "19.9 percent" by end-May 2021 (prudential limit "12 percent"). - Downside risks: - Resurgence of COVID-19 domestically or in partner countries; vaccines less effective than expected. - Natural disasters and climate risks. - Higher NPLs if recovery falls short. ### Key program fiscal policies and consolidation - Overall fiscal adjustment: - Cumulative fiscal adjustment envisaged: "15.8 percentage points of GDP during 2021-23" (text also states "15.8 percent during 2020-23"). - Program aims to return to a primary surplus of "2.8 percent in 2024" and a primary surplus of "3.2 percent of GDP in 2026". - Composition of the adjustment (15.8 percent total): - Unwinding COVID-related measures: "5.8 percent". - New structural fiscal measures: "5.2 percent". - Recovery in revenues/decline in transfers: "4.8 percent". - Near-term fiscal measures: - Supplementary 2021 budget to be passed before end-September 2021; draft assumes primary deficit of "9.7 percent of GDP". - Revised 2021 revenue target: "30.7 percent of GDP". - Tax revenue projected to fall from "31.8 percent in 2020" to "28 percent in 2021" due to deferred business tax losses, abolishment of CSR tax, and an amnesty program. - COVID-19 related expenditures declined from "6.7 percent of GDP in 2020" to "0.9 percent of GDP in 2021". - Specific 2021 budget savings (estimates): - New recruitments limited: savings of "SCR 38.3 million (about 0.2 percent of GDP)". - Public service reform (capping salaries and allowances): savings of "SCR 279.1 million (1.2 percent of GDP)". - Rental/office accommodation reductions (25%): savings of "SCR 36 million (about 0.2 percent of GDP)". - Optimizing virtual meetings: savings of "SCR 34.2 million (about 0.2 percent of GDP)". - Medium-term fiscal credibility: - Adopt a Medium-Term Fiscal Framework (MTFF) by end of program (MEFP ¶. 37). - Technical assistance from IMF and AFRITAC SOUTH to strengthen forecasting, reporting, and fiscal risk analysis. ### Revenue reforms and tax administration - Priority: return to pre-crisis collection levels and modernize tax administration. - Measures and timelines: - Limitation of tax exemptions (structural benchmarks: end-November 2021 and end-September 2022). - Unified profit taxation and anti-base erosion measures (structural benchmark for end-September 2021). - Strengthen revenue administration (structural benchmark for end-September 2023). - Implement ASYCUDA World for customs automation (structural benchmark for end-September 2023). - New structural fiscal measures (SR'million % of GDP): - Tax Reform; Amnesty Program July to Dec 2021: "20.0" "0.09%" - Abolishment of CSR Tax from April 2021: "-58.6" "-0.25%" - Sub-Total: "-38.6" "-0.16%" - Public Sector Reforms (Expenditure Side): "279.1" "1.19%" - Abolishment of the FA4JR Scheme from 1st April 2021: "1082.0" "4.62%" - Abolishment of the SETS program from 1st March 202: "17.0" "0.03%" - Abolishment of the Unemployment Relief Scheme from 1st April 2021: "29.6" "0.13%" - Sub-Total: "1397.7" "5.97%" - Source: IMF staff estimates. - Fiscal projections (Percent of GDP, 2020–2026): - Total revenue, excluding grants: "35.7 30.7 33.1 34.3 36.2 36.8 37.2" - Tax: "31.8 28.0 29.3 30.3 32.2 33.8 34.2" - Excise tax: "6.3 5.6 5.9 6.2 6.4 6.7 6.7" - VAT: "10.6 11.1 11.3 11.7 11.7 11.7 11.7" - Business tax: "6.0 4.2 4.5 4.8 5.3 6.0 6.1" - Nontax: "3.9 2.8 3.8 4.0 4.0 3.0 3.1" - Expenditure and net lending: "57.1 48.4 43.6 39.2 38.1 38.0 37.9" - Primary balance: "-16.3 -9.7 -5.0 -0.4 2.8 3.0 3.2" ### Expenditure efficiency, public investment management, and social protection - Expenditure efficiency actions: - Improve public procurement with World Bank assistance; PIMA planned for FY22. - Upgrade public financial management with Fund TA (MEFP ¶ 41 and 42); IFMIS mission planned for FY22. - Savings via better targeting of social welfare, streamlining goods and services, and capping nominal growth in wages and salaries. - Social protection reforms: - World Bank support requested to reform social protection system for sustainability and labor-force participation. - Key reform: increase minimum retirement age to "65 in 2023" (MEFP ¶ 39). - Results-based management and measures to improve targeting, quality, and fiscal sustainability. ### Liability management operation (LMO) and debt management - LMO design and outcomes: - LMO announced July 6, 2021: voluntary exchange of up to "SCR 1.5 billion" of outstanding T-bills ("6.4 percent of GDP") for 3-, 5-, and 7-year bonds in equal proportion. - LMO closed July 14, 2021; switched "SCR 1.2 billion (5.2 percent of GDP)" of T-Bills into bonds. - Allocation shares: "3-year 38 percent, 5-year 33 percent, 7-year 29 percent". - Extended average maturity of participating debt portfolio by "4.8 years (from less than 1 year)". - Weighted average yields on LMO bonds lower by "125-150 bps" compared to previously issued rates. - Resulting GFNs decline from "44 percent of GDP in 2021" to "24 percent in 2022" (LMO dynamics). - Debt targets and projections: - Authorities' target: bring public debt below "65 percent of GDP by end-2026" (DSA baseline: "64.5 percent of GDP by 2026"). - Projected decline in GFNs: from "50 percent of GDP in 2020" to below "15 percent by 2024" and to "12.7 percent" by 2026. - T-bills outstanding projected: "28 percent of GDP in 2020" and stabilize around "6 percent during 2022-26". - Average annual bond issuance during 2022-26 projected at "5 percent of GDP" (actual issuance in 2020 was "7 percent of GDP"). - Gross financing needs and financing sources (percent of GDP, 2020–2026): - Gross financing needs: "43.6% 23.4% 15.7% 13.3% 12.7% 12.7%" - Fiscal deficit: "13.4% 9.0% 4.3% 1.2% 0.7% 0.5%" - Amortization: "30.6% 14.8% 11.9% 12.1% 12.0% 12.2%" - Financing sources: - Domestic ST: "13.1% 6.9% 4.9% 5.1% 5.9% 5.6%" - Domestic MLT: "11.2% 4.6% 1.7% 6.7% 5.4% 5.7%" - Foreign: "19.3% 11.9% 9.0% 1.7% 1.4% 1.2%" - T-bills outstanding: "28.1% 13.1% 6.9% 4.9% 5.1% 5.9% 5.6%" - Outstanding (in billions of SCR): "5.6 3.1 1.8 1.4 1.6 2.0 2.0" - Source: Authorities and IMF staff estimates. - Debt management capacity building and structural benchmarks: - Publish MTDS and Annual Borrowing Plan (structural benchmarks: end-March 2022). - Improve cash flow forecasting (structural benchmark: end-March 2022). - Publish quarterly debt reports on Ministry of Finance website (structural benchmark: end-September 2021). ### Financial sector policies, supervision, and AML/CFT - Banking sector condition and supervisory actions: - Reported NPLs rose from "3.3 percent" to "5.1 percent" (Dec-2020 to May-2021); regulatory forbearance masks larger deterioration (about "22 percent of total loan portfolio" granted regulatory accommodation). - Authorities committed to ensure correct loan classification, gradual withdrawal of temporary COVID-19 measures, and time-bound, targeted borrower-support policies (MEFP ¶. 60, ¶ 63). - Support for temporary restrictions on dividend distributions; viable but undercapitalized banks to submit capital plans; nonviable banks to be resolved. - Crisis management and macroprudential framework: - Strengthen legal basis of Financial Stability Committee (structural benchmark: end-November 2021). - Enhance bank resolution and safety net framework (structural benchmark: end-June 2023). - AML/CFT and beneficial ownership: - New AML/CFT Act and Regulations in force August 2020; FIU, FSA, and CBS assigned supervisory responsibilities. - Beneficial Ownership Act and Regulations came into force in August 2020; centralized database launched July 2021; domestic and foreign entities to submit information before year-end; Act being amended in 2021 (MEFP ¶ 73). - Staff highlight need to operationalize database and enhance AML/CFT effectiveness. ### Monetary and exchange rate policy, liquidity, and inflation - Monetary policy stance and measures: - CBS accommodative stance appropriate; policy rate reductions: "100 bps in Q2 2021" and a further "100 bps in Q3 2021" noted in MEFP; MPR moved to "2.0 percent" in Q3 2021 in one passage. - Structural downward shift of the short-term interest rate corridor: width narrowed from "5 percent to 3 percent". - Minimum Reserve Requirement on local currency deposits reduced from "13 percent to 10 percent" effective July 14, 2021. - Possibility to reduce MRR by "3 percentage points" if liquidity warrants. - Spread between 365-day and 91-day T-Bills narrowed to "151 bps on July 2, 2021" from "242 bps" previous week. - Exchange rate and reserves: - Use of exchange rate as shock absorber remains appropriate (market determination with interventions limited to disorderly conditions) (MEFP ¶54). - Gross international reserves target: maintain around "4 months of import cover"; NIR floors in TMU: "359.0, 374.0, 394.0, 407.0, 410.0, 420.0" (millions of US dollars). - Inflation dynamics: - CPI inflation rose by "3.8 percent in 2020" (vs "1.7 percent in 2019"); May 2021 year-on-year inflation at "11.4 percent"; 12-month average rate at "5.0 percent". - Staff encouraged CBS to expand inflation expectations survey; AFRITAC South TA on inflation forecasting to continue. - Monetary framework reforms: - CBS switched from reserve money targeting to interest rate targeting; develop interbank market, repurchase operations, Master Repurchase Agreement, and horizontal repo operations with Fund TA. ### Air Seychelles and SOE-related contingent liabilities - Pre-crisis and pandemic impact: - Air Seychelles was loss-making pre-crisis; flights grounded during pandemic. - Etihad relinquished its 40 percent shareholding to Government in March 2021. - Government took over "US$11.4 million" of unsecured debt repayable until 2024. - Outstanding Air Seychelles box bond: "US$71.5 million" still under negotiation. - Government options and World Bank advice: - World Bank identified liquidation of Air Seychelles as the least costly scenario. - Government assessing legal implications of liquidation and measures to protect employees (structural benchmark for end-September 2021). - Contingent liability magnitude: - Government assumed Air Seychelles liabilities in 2012 amounting to "around 5 percent of GDP". - Air Seychelles project box bond to Etihad: "$71.5 million (around 6 percent of GDP)" — rollover risk in 2021. ### Debt Sustainability Analysis (DSA): baseline and stress tests - Recent debt deterioration: - End-2020 nominal gross public debt: "100.8 percent of GDP" (pre-COVID projection "57.3 percent"). - Public debt increased by "around 40 percentage points (compared to pre-COVID projections)". - Baseline projections under Fund program: - Real GDP growth: "6.9 percent in 2021" and "remain at around 6 percent over the medium term"; staff expect 2019 real GDP level in 2022. - Public debt-to-GDP projected to decline to "64.5 percent of GDP by 2026". - Gross financing needs to GDP ratio decline to "12.7 percent" by 2026. - Stress test outcomes: - Real exchange rate shock (real depreciation "around 16 percent" after 2020): debt-to-GDP peak "around 97 percent in 2022" and fall to "around 71 percent in 2026". - One-time real GDP growth shock (lower by "2 percent during 2021‒22"): debt-to-GDP peak "around 99 percent in 2023" and fall to "around 80 percent in 2026". - Combined macro-fiscal shock: debt-to-GDP reach "113 percent of GDP in 2026". - External DSA: a "30 percent" depreciation would push external debt-to-GDP to "around 396 percent in 2022" and about "300 percent" by end of projection, versus baseline "about 214 percent". - Policy implications: - Steadfast fiscal consolidation, greater reliance on low-cost external financing, and extension of domestic debt maturities are essential to reduce vulnerabilities. ### Program modalities, financing, monitoring, and safeguards - EFF terms and access: - Arrangement duration: "thirty-two months". - Total access: "SDR 74 million" (subject to TMU and conditions). - Frontloaded disbursements: "SDR 48 million" (about "$70 million") in first six months of program; later disbursements evenly distributed. - Purchases schedule (access without further review): up to "SDR 24 million until December 1, 2021"; up to "SDR 48 million until June 1, 2022"; up to "SDR 54.5 million until December 1, 2022"; up to "SDR 61 million until June 1, 2023"; up to "SDR 67.5 million until December 1, 2023". - Financing gap and external support (selected figures): - Current account balance (levels): "‑331.3 (2021), ‑385.6 (2022), ‑384.0 (2023)" (in millions). - Current account (percent of GDP): "‑21.1% (2021), ‑22.0% (2022), ‑19.7% (2023)". - Financing gap (levels): "‑204.0 (2021), ‑148.1 (2022), ‑111.6 (2023)". - Financing gap (percent of GDP): "‑13.0% (2021), ‑8.4% (2022), ‑5.7% (2023)". - Expected budget support (levels): "140.5 (2021), 134.5 (2022), 105.0 (2023)". - Expected contributions: World Bank "53.0 (2021), 17.0 (2022), 25.0 (2023)"; African Development Bank "20.0 (2021), 30.0 (2022), 30.0 (2023)"; Bilateral Budget Support "67.5 (2021), 72.5 (2022), 35.0 (2023)". - Residual financing gap (1-2): "‑63.5 (2021), ‑13.6 (2022), ‑6.6 (2023)". - Change in liabilities to IMF, net: "63.5 (2021), 13.6 (2022), 6.6 (2023)". - EFF purchases: "69.4 (2021), 18.9 (2022), 19.0 (2023)" (in levels); (percent of GDP): "4.4% (2021), 1.1% (2022), 1.0% (2023)". - Program monitoring: - Semi-annual reviews: first review December 2021 (based on end‑July 2021 targets); second review June 2022 (based on end‑December 2021 targets). - Quantitative performance criteria (PCs): primary fiscal balance; net domestic financing of government; total revenue; net international reserves of CBS; non-accumulation of new external and domestic payment arrears. - Structural benchmarks (selected and timing): - Cabinet approval of legislation to be removed from EU non-cooperative jurisdictions: end-September 2021. - Publish quarterly debt bulletin on Ministry of Finance website: end-September 2021 and quarterly thereafter. - Cabinet approval of revisions to business tax laws: end-November 2021. - Publish MTDS and Annual Borrowing Plan: end-March 2022. - Completing customs automation project: end-September 2023. - Safeguards and CBS: - Updated safeguards assessment (June 2021) noted robust external audit arrangements and broadly adequate financial reporting, but recommended further oversight and legal amendments to strengthen CBS autonomy (MEFP ¶. 75). ### Staff appraisal — priorities and recommendations - Core priorities: - Maintain recovery momentum while reducing debt-sustainability risks through ambitious fiscal consolidation and liability management that preserves financial stability. - Strengthen governance, transparency, and SOE management; improve revenue administration; modernize public financial management. - Preserve and better target social spending, limit transfers to SOEs, and reform civil service. - Monetary accommodation appropriate given large negative output gap; CBS should be ready to act if inflationary pressures persist. - Specific recommendations: - Implement LMO and extend maturities of domestic debt; substitute with concessional external financing where feasible. - Strengthen AML/CFT operational effectiveness, operationalize beneficial ownership database, and complete remaining FATF-related actions. - Prioritize PFM and tax administration reforms (ASYCUDA, CMS upgrade, IFMIS, MTFF). - Finalize least-cost option for Air Seychelles and limit contingent liabilities. *Source: IMF Executive Summary and staff report excerpts (1sycea2021001), July 20, 2021.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and shock - Seychelles was hit hard by the COVID-19 crisis; the government locked down the economy, keeping infection and fatality rates low, but travel restrictions and the global downturn triggered an unprecedented economic contraction. - The Fund provided support through the Rapid Financing Instrument (RFI) in May 2020 amounting to SDR 22.9 million. - Tourism and related sectors account for about two-thirds of Seychelles’ GDP. - Key 2020 macroeconomic outcomes: - Current account deficit rose to 30 percent of GDP in 2020. - Nominal exchange rate depreciated by 35 percent (yoy). - Expenditures rose to 57.1 percent of GDP. - Primary balance turned into a deficit estimated at 16.3 percent of GDP. - Public and publicly guaranteed debt increased from 62 percent of GDP in 2019 to 100 percent in 2020. - Of this increase: fiscal deterioration contributed 15.2 percentage points, GDP contraction 15.2 percentage points, and exchange rate depreciation 7.6 percentage points. - Gross financing needs (GFNs) increased from 29 percent of GDP in 2019 to 50 percent of GDP in 2020. ### Program modalities and financing need - The authorities (new government took office in late October 2020) requested an Extended Fund Facility (EFF) arrangement to address structural balance of payments needs worsened by the COVID-19 shock. - A 32-month EFF arrangement with access of SDR 74 million (323 percent of quota; around USD 107 million) is proposed to close the financing gap over 2021-23. - The program’s key objective is to restore macroeconomic stability and debt sustainability while strengthening the post COVID-19 recovery. - Program pillars: frontloaded adjustment comprising fiscal consolidation, a liability management operation (LMO), and external support. - The authorities successfully completed the LMO immediately after program discussions to reduce rollover risks. ### Recent developments, outlook, and risks - Seychelles led the world in early vaccination coverage and reopened borders; it was the first country to vaccinate more than 60 percent of its population. - Tourist arrivals bounced back starting in April 2021 as borders reopened, pointing to a V-shaped recovery. - New tourist source markets (Russia, Israel, UAE) have emerged, offsetting interruptions from Europe. - Market sentiment improved: - Currency appreciated by 26 percent against the U.S. dollar since March 25, from about 21.5 rupees per dollar to almost 16 by end-June 2021. - Demand for T-bills recovered and average yields for the one-year tenor fell by 42 bps during March-June 2021. - Following a policy announcement on June 30, 2021, the one-year yield on T-Bills compressed further by 115 bps as of July 2, 2021; the 365-day tenor yield declined to 4.9 percent for the auction on July 2, 2021 (from 6.0 percent on June 25, 2021). - Banking sector indicators: - Nonperforming loan (NPL) ratio rose from 3.3 percent at end-December 2020 to 5.1 percent as of May 2021. - Reported capital adequacy ratios increased from January 2021 to April 2021, primarily due to a reduction in risk-adjusted assets after currency appreciation in April 2021. - Banks remain highly liquid due to stable deposit levels and reduced demand for credit. - Outlook and projections: - Staff expect the 2019 real GDP level to be regained in 2022. - Tourist arrivals projected to rebound by 40 percent in 2021 and 50 percent in 2022 (including tourists from both traditional and new markets). - Expenditure per visitor is expected to increase post COVID-19. - Vaccines are expected to be widely available in Seychelles’ major markets by mid-summer 2021, supporting global demand. - Downside risks: - Resurgence of COVID-19 domestically or in partner countries; vaccines less effective than expected. - Natural disasters. - Higher NPLs if the economic recovery falls short of expectations. ### Key program policies supported - The authorities’ reform agenda (Letter of Intent and MEFP) aims to support the recovery and reduce debt-sustainability risks by addressing structural fiscal weaknesses, weak debt and SOE management, and by conducting an LMO to reduce rollover risks while preserving financial stability. A. Fiscal policy and consolidation - Program fiscal stance: - A cumulative fiscal adjustment of 15.8 percentage points of GDP is envisaged during 2021-23 (text also states a total adjustment of 15.8 percent during 2020-23). - The adjustment is expected to be achieved primarily through: - Unwinding COVID-related measures: 5.8 percent. - New structural fiscal measures: 5.2 percent. - Recovery in revenues/decline in transfers due to the economic rebound: 4.8 percent. - The program aims to return to a primary surplus of 2.8 percent in 2024 (equivalent to the 2019 level). - The adjustment will protect vulnerable groups through strengthened social safety nets. - Near-term measures: - Authorities intend to pass a supplementary budget to reflect the revised outlook and fiscal framework before end-September 2021. - The draft supplementary 2021 budget is in line with the program target of a primary deficit of 9.7 percent of GDP and assumes: - A pick-up in growth in H2 2021. - Withdrawal of the COVID-19 fiscal support package. - Reduction in transfers to SOEs, including Air Seychelles. - Revised 2021 budget sets a revenue target of 30.7 percent of GDP. - Tax revenue as percent of GDP projected to fall from 31.8 percent in 2020 to 28 percent in 2021 due to deferred business tax losses, abolishment of Corporate Social Responsibility (CSR) tax, and an amnesty program. - Revenue measures and administration strengthening include: - Limitation of tax exemptions (structural benchmarks for end-November 2021 and end-September 2022). - Unified profit taxation and measures to prevent corporate tax base erosion through international profit shifting (structural benchmark for end-September 2021). - Strengthening revenue administration (structural benchmark for end-September 2023). - COVID-19 related expenditures declined from 6.7 percent of GDP in 2020 to 0.9 percent of GDP in 2021. - Expenditure savings and reforms in the 2021 budget (estimates): - New recruitments limited to key positions: savings of SCR 38.3 million (about 0.2 percent of GDP). - Public service reform (capping salaries and allowances): savings of SCR 279.1 million (1.2 percent of GDP). - Negotiated reductions on rental and office accommodation costs of 25 percent: savings of SCR 36 million (about 0.2 percent of GDP). - Optimize virtual meetings to reduce travel costs: savings of SCR 34.2 million (about 0.2 percent of GDP). - Capital expenditures will be moderated; public investment may be deprioritized until the immediate crisis is overcome. - If downside risks materialize, the authorities commit to additional spending cuts by identifying non-priority spending and investment projects while protecting education, health, and social protection spending; further discussion of such cuts is planned during the first review. - Medium-term fiscal credibility measures: - Authorities will adopt a Medium-Term Fiscal Framework (MTFF) by the end of the program (MEFP ¶. 37). - Work will start immediately with IMF staff and AFRITAC SOUTH expert support to strengthen fiscal forecasting, reporting, budget institutions, fiscal risk analysis, and enforcement of budget ceilings. B. Liability management and external support - The program foresees a liability management operation (LMO) to significantly reduce rollover risks while preserving financial sector stability; the authorities completed the LMO immediately after program discussions. C. Structural and governance commitments - Authorities committed to governance, transparency, and structural reforms, including better debt and SOE management and measures to bolster revenue administration. ### Staff views and program risks - The authorities’ policies and ownership are set out in the Letter of Intent and Memorandum of Economic and Financial Policies. - The environment remains highly uncertain; program risks include: - Resurgence of the COVID-19 pandemic domestically and in overseas markets. - Climate disasters. - Other sources of shock. - Program design incorporates contingency measures to safeguard objectives should risks materialize. *Source: IMF Executive Summary (1sycea2021001), July 20, 2021.* ### 18. On the revenue side, the priority is the return to pre-crisis collection levels and further ### 1sycea2021001 - 18. On the revenue side, the priority is the return to pre-crisis collection levels and further ### Revenue reforms and fiscal consolidation - Priority: return to pre-crisis collection levels and modernize tax administration. - Proposed measures: - Improve effectiveness of the Value Added Tax (VAT) and Goods and Services Tax (GST). - Eliminate numerous tax exemptions (table 6). - Scale down the concessional business tax regime. - Implement ASYCUDA World to strengthen internal controls in customs (structural benchmark for end-September 2023). - New structural fiscal measures shown (SR'million % of GDP): - Tax Reform; Amnesty Program July to Dec 2021: 20.0 0.09% - Abolishment of CSR Tax from April 2021: -58.6 -0.25% - Sub-Total: -38.6 -0.16% - Public Sector Reforms (Expenditure Side): 279.1 1.19% - Abolishment of the FA4JR Scheme from 1st April 2021: 1082.0 4.62% - Abolishment of the SETS program from 1st March 202: 17.0 0.03% - Abolishment of the Unemployment Relief Scheme from 1st April 2021: 29.6 0.13% - Sub-Total: 1397.7 5.97% - Source: IMF staff estimates. - Fiscal projections (in Percent of GDP, 2020–2026): - Total revenue, excluding grants: 35.7 30.7 33.1 34.3 36.2 36.8 37.2 - Tax: 31.8 28.0 29.3 30.3 32.2 33.8 34.2 - Excise tax: 6.3 5.6 5.9 6.2 6.4 6.7 6.7 - VAT: 10.6 11.1 11.3 11.7 11.7 11.7 11.7 - Business tax: 6.0 4.2 4.5 4.8 5.3 6.0 6.1 - Nontax: 3.9 2.8 3.8 4.0 4.0 3.0 3.1 - Expenditure and net lending: 57.1 48.4 43.6 39.2 38.1 38.0 37.9 - Primary current expenditure: 46.9 35.0 32.7 30.6 29.9 29.3 29.4 - Wages and salaries: 14.2 12.6 12.0 10.9 11.0 11.0 11.0 - Goods and services: 14.6 13.3 12.5 11.6 11.3 10.9 10.9 - Transfers: 18.0 8.9 8.1 7.9 7.2 7.0 7.1 - Wage subsidies: 6.3 0.8 ............... - Seychelles Employee Transition Scheme: 0.1 0.1 ............... - PMC and HFC Housing Loan Repayment Scheme: 0.1 0.1 ............... - Covid-19 Micro and Small Business Support Fund: 0.1 .................. - Air Seychelles: 1.2 0.6 ...... - Capital expenditure: 5.2 7.6 7.4 6.0 5.5 5.3 5.0 - Others: 5.1 5.8 3.5 2.7 2.7 3.4 3.5 - Primary balance: -16.3 -9.7 -5.0 -0.4 2.8 3.0 3.2 - Fiscal adjustment: 6.6 4.7 4.5 3.2 0.2 0.2 - Additional detailed fiscal lines shown: 4.8 0.9 ----; 1.0 1.6 2.6 1.2 0.1 0.1; 0.7 2.2 1.9 2.0 0.1 0.1 - Sources: IMF staff estimates. ### Expenditure efficiency and public investment management - Key actions: - Improve public procurement with World Bank assistance. - Conduct a Public Investment Management Assessment (PIMA) planned for FY22 to identify efficiency gains and expand procurement to support PPPs. - Upgrade public financial management with Fund technical assistance (MEFP ¶ 41 and 42). - PIMA and IFMIS missions planned for FY22 included in AFS/FAD work plan. - Savings measures: better targeting of social welfare programs, streamlining goods and services spending, and capping nominal growth in wages and salaries. - Commitments to transparency for COVID emergency spending: audit underway and publication of information on awarded companies. ### Climate-change adaptation and digitalization projects - Government committed to implement medium-term projects for climate-change adaptation and digitalization. - Priority climate adaptation areas: critical infrastructure, tourism and coastal management, food security, biodiversity, water security, and the blue economy (MEFP ¶29). - Digitalization priority: government service delivery and financial services (MEFP ¶ 28, 68, and 69). ### Social protection and vulnerable groups - Strengthen social safety nets; World Bank support requested to reform the social protection system to ensure sustainability and enable working-age beneficiaries to participate in the labor force. - Reform objectives: improve efficiency and effectiveness through better targeting, improve quality of service delivery, and expand beneficiaries at lower costs. - Key reform: increase minimum retirement age to 65 in 2023 (MEFP ¶ 39). ### Monetary and exchange rate policy - CBS accommodative stance deemed appropriate given weak credit growth and need to realign domestic market rates. - Bank credit to private sector started weakening in April 2021. - Policy rate changes: - Reduction of the policy rate by 100 bps in the second quarter of 2021, and a further reduction by an equivalent amount in the third quarter. - Structural downward shift of the short-term interest rate corridor: width narrowed from 5 percent to 3 percent. - Minimum Reserve Requirement on local currency deposits: possibility to reduce by 3 percentage points if liquidity warrants. - Result: spread between 365-day and 91-day T-Bills narrowed to 151 bps on July 2, 2021, from 242 bps in the previous week. - Inflation dynamics: - Second-round effects of 2020 exchange rate depreciation and CPI basket recalculation contributed to recent inflationary pressure. - Sharp currency appreciation in April expected to partially reverse this effect with a lag. - Staff encouraged CBS to expand survey of inflation expectations; AFRITAC South TA on improving inflation forecasting will continue. - Monetary framework: - CBS switched from reserve money targeting to interest rate targeting. - Ongoing efforts: develop interbank market, fine-tune communications, resume repurchase operations with Fund TA, introduce Master Repurchase Agreement, initiate horizontal repo operations. - Exchange rate policy: - Use of exchange rate as shock absorber remains appropriate; market determination with interventions limited to disorderly conditions and buffer building (MEFP ¶54). - Recommendations: enhance monitoring of banks’ open positions and FX exposures; consider differentiated capital requirements by currency denomination and hedged positions; introduce FX swaps and forward products in consultation with Seychelles Banking Association; broaden central bank toolkit to include FX swaps for intervention purposes. ### Debt reduction strategy and debt management - Staff assessment: debt sustainable but with significant risks; successful mitigation depends on fiscal consolidation, strong growth rebound, low-cost financing, and extension of domestic debt maturities. - Authorities’ target: bring public debt down to below 65 percent of GDP by end-2026 through achieving a primary surplus of 3.2 percent of GDP in 2026, growth recovery, and optimized debt management. - Debt management objectives: - Lengthen debt maturity and reduce cost (MEFP ¶46). - Increase recourse to cheaper external debt with longer maturities to replace expensive short-term domestic debt. - Liability management operation (LMO) conducted in July and issuance strategy to balance T-bill and bond issuances. - Projected decline in GFNs: from 50 percent of GDP in 2020 to below 15 percent by 2024. - Stock of T-Bills estimated to decline from 28 percent of GDP in 2020 and stabilize around 6 percent during 2022-26. - Average annual bond issuance during 2022-26 projected at 5 percent of GDP compared to actual issuance in 2020 of 7 percent of GDP. - Substitution of T-bills with external finance amounting to an annual average of 2.3 percent of GDP during 2021-23 would require sterilization measures from the CBS that incur costs and reduce net savings. - LMO outcomes: - LMO announced July 6, 2021; voluntary exchange of up to SCR 1.5 billion of outstanding T-bills (6.4 percent of GDP) for 3-, 5-, and 7-year bonds in equal proportion. - LMO closed July 14, 2021; switched SCR 1.2 billion (5.2 percent of GDP) of T-Bills into bonds. - Allocation shares: 3-year 38 percent, 5-year 33 percent, 7-year 29 percent. - Extended average maturity of participating debt portfolio by 4.8 years (from less than 1 year). - Resulting dynamics: GFNs decline from 44 percent of GDP in 2021 to 24 percent in 2022. - Weighted average yields on LMO bonds lower by 125-150 bps compared to previously issued rates. - Gross financing needs and financing sources (in percent of GDP, 2020–2026): - Gross financing needs: 43.6% 23.4% 15.7% 13.3% 12.7% 12.7% - Fiscal deficit: 13.4% 9.0% 4.3% 1.2% 0.7% 0.5% - Amortization: 30.6% 14.8% 11.9% 12.1% 12.0% 12.2% - Privatization (+=inflow): 0.4% 0.4% 0.4% 0.0% 0.0% 0.0% - Financing sources: - Domestic ST: 13.1% 6.9% 4.9% 5.1% 5.9% 5.6% - Domestic MLT: 11.2% 4.6% 1.7% 6.7% 5.4% 5.7% - Foreign: 19.3% 11.9% 9.0% 1.7% 1.4% 1.2% - Residual: 0.0% 0.0% 0.1% -0.1% 0.0% 0.2% - T-bills outstanding: 28.1% 13.1% 6.9% 4.9% 5.1% 5.9% 5.6% - Reduction in T-bills: 10.7% 4.9% 1.4% -0.6% -1.2% -0.1% - Outstanding (in billions of SCR): 5.6 3.1 1.8 1.4 1.6 2.0 2.0 - Source: Authorities and IMF staff estimates. - Debt management capacity strengthening (structural benchmarks and TA): - Establish Medium-Term Debt Management Strategy (MTDS) and Annual Borrowing Plan (ABP) (MEFP ¶. 46: structural benchmarks for end-March 2022). - Improve government cash flow forecasting capacity (structural benchmark for end-March 2022). - Set up market-determined auction mechanism for long-term securities and initiate trading platforms. - Enhance transparency via quarterly reporting by Ministry of Finance on its website (structural benchmark for end-September 2021). ### Financial sector policies and supervision - Banking sector condition and risks: - Pre-pandemic: high reported capital and profits, low NPLs. - Reported NPLs increased from 3.3 percent of total loans in December 2020 to 5.1 percent in May 2021. - Regulatory forbearance (relaxed credit classification) likely masks larger deterioration; around 22 percent of total loan portfolio currently granted regulatory accommodation in asset classification. - Reported increase in capital adequacy ratios from January 2021 to April 2021 mainly due to reduction in risk adjusted assets following rupee appreciation in April 2021. - Recognition of higher NPLs and loan-loss coverage ratios likely when forbearance measures are withdrawn. - Policy and supervisory actions: - Authorities committed to ensure banks’ loan classification correctly reflects asset quality; temporary COVID-19 measures to be prudently withdrawn over time (MEFP ¶. 60). - Support for temporary restrictions on dividend distributions to preserve capital. - CBS requirements: differentiate nonviable borrowers from viable ones with temporary liquidity shortages; ensure loan classification reflects asset quality; unwind borrower support measures gradually; target and time-bound remaining measures. - Loan quality to be assessed based on applicable accounting and prudential standards with timely provisioning. - CBS to provide guidance on prudential treatment of moratoria and NPL management strategies, and develop reporting templates for restructured/rescheduled loans and monitoring impact of COVID-19 measures (MEFP ¶ 63). - Crisis management, resolution, and macroprudential framework: - Authorities intend to strengthen legal basis of the Financial Stability Committee and enhance macroprudential tools (MEFP ¶. 64; structural benchmark for end-November 2021). - Plan to enhance legal framework for crisis management, bank resolution, and safety net to align with international best practices and tailor to Seychelles (MEFP ¶ 65; structural benchmark for end-June 2023). - CBS ready to take early intervention/enforcement actions, including further suspension of dividend payments (MEFP ¶ 60). - Viable but undercapitalized banks to submit capital plans; nonviable banks to be resolved. - AML/CFT: - New AML/CFT Act and Regulations came into force in August 2020 (revised Act aims to improve effectiveness of supervisory authorities, MEFP ¶ 71). - CBS assumed responsibility for AML/CFT supervision for institutions under its purview and assists with national AML/CFT strategy approved August 2020. - With World Bank consultation, developing risk-based supervision framework, sectoral supervisory strategies, and supervision manual. *Source: IMF staff estimates and IMF staff analysis as presented in the provided chapter content.* ### 36. In August 2020, the new Beneficial Ownership Act and Regulations came into force. ### 1sycea2021001 - 36. In August 2020, the new Beneficial Ownership Act and Regulations came into force. ### Beneficial ownership framework and implementation - In August 2020, the new Beneficial Ownership Act and Regulations came into force. - The Act provides for: - identification and verification of beneficial ownership of legal persons and legal arrangements; - the requirement to establish and maintain an up-to-date register of beneficial owners by resident agents. - The centralized database was launched in July 2021. - Domestic and foreign entities will have to submit their information before year-end. - The Beneficial Ownership Act and Regulations are being amended in 2021 to further facilitate communication (MEFP ¶ 73). - Staff highlight that faster progress in enhancing the effectiveness of the AML/CFT framework—including through the operationalization of the database of beneficial owners—would be important. ### Financial sector modernization, inclusion, and consumer protection - Authorities’ planned and ongoing reforms: - Enhance the legislative framework for National Payment Systems. - Adopt innovative financial services and promote digital financial literacy. - Enhance financial consumer protection, including drafting a Financial Consumer Protection law. - Review effectiveness of existing SME schemes and make progress on a National Fintech Strategy (MEFP ¶68). - Central Bank of Seychelles (CBS) commitments and staff advice: - CBS committed to implementing an enhanced credit information system and supporting legal framework to extend coverage of credit information. - Given an intense reform agenda and capacity constraints, staff advised prioritizing actions to modernize the financial system and deepen the financial sector while preserving efforts on financial stability (e.g., draft legislation for crisis management and bank resolution and the financial stability act). - Financial stability observations and guidance: - Banking system appeared well capitalized and liquid at end-2020, but regulatory forbearance may have masked some asset quality deterioration. - Close monitoring of restructured loans should continue; prudential and accounting requirements should be strictly adhered to. - Any new loan restructuring extension should be temporary and targeted. - Modernizing and revamping bank resolution and emergency liquidity assistance frameworks would help safeguard financial stability. - Central bank advances to the government and involvement in COVID-19-related lending to banks and other financial institutions need to be revisited to safeguard the CBS’ financial autonomy. ### Structural reforms to enhance inclusive growth - Planned reforms and initiatives: - Submission of a policy paper on draft amendments to the Companies Act to the Cabinet by end-November 2022. - Improve financial inclusion, fintech, and consumer protection through SME scheme reviews and National Fintech Strategy development. - Drafting of a Financial Consumer Protection law. - Fisheries sector: - Upgrade and diversify the fisheries industry, including further developing the Iles du port area and building new handling facilities (MEFP ¶20). - Staff encouraged follow-up on the SWIOfish 3 project (see 2019 Article IV Staff Report). - Climate-change adaptation: - Priority investments identified for critical infrastructure, tourism and coastal management, food security, biodiversity, water security, and the blue economy (MEFP ¶23). - Projects include setting up/completing an early warning system and boosting coastal resilience. - Government plans to mainstream climate adaptation in Seychelles’ post-pandemic recovery plan and is undertaking careful cost-benefit analysis of climate change-related projects. ### Data issues and capacity development - Data inadequacies hamper understanding of key macroeconomic aggregates. - Fund technical assistance supports the National Bureau of Statistics (NBS) to: - revise annual GDP estimates at current and constant prices; - develop quarterly GDP estimates; - address large inconsistencies in historical GDP series. - Staff emphasize ensuring adequate NBS resources and increasing staff for national accounts compilation. - Authorities committed to improving government financial statistics, debt data, and external sector statistics (MEFP ¶ 58). ### Program modalities, financing, and numeric highlights - Program monitoring: - Semi-annual reviews through quantitative performance criteria (PCs), indicative targets (ITs), and structural benchmarks (SBs). - PCs set on: (i) primary fiscal balance; (ii) net domestic financing of the government; (iii) total revenue; (iv) net international reserves of the CBS; and (v) non-accumulation of new external and domestic payment arrears. - Program financing and access: - Access from the Fund is proposed at SDR 74 million (about $107 million; 323 percent of quota). - Disbursements frontloaded in the first six months of the program totaling SDR 48 million or about $70 million in 2021. - Subsequent disbursements would be evenly distributed. - Fund support would help catalyze international assistance and help CBS maintain reserves at around 4 months of import cover. - Financing gap and sources (selected figures from Text Table): - Current account balance: -331.3 (2021), -385.6 (2022), -384.0 (2023) - (In percent of GDP): -21.1% (2021), -22.0% (2022), -19.7% (2023) - Balance of goods and services: -262.2 (2021), -313.5 (2022), -276.5 (2023) - Balance on primary income: -67.6 (2021), -77.2 (2022), -104.1 (2023) - Balance on secondary income: -1.4 (2021), 5.1 (2022), -3.4 (2023) - Capital and Financial account balance: 236.8 (2021), 1310.6 (2022), 343.8 (2023) - Overall balance: -94.5 (2021), -75.0 (2022), -40.3 (2023) - Change in gross official reserves (increase: –): -109.5 (2021), -73.1 (2022), -71.4 (2023) - Financing gap (1): -204.0 (2021), -148.1 (2022), -111.6 (2023) - (In percent of GDP): -13.0% (2021), -8.4% (2022), -5.7% (2023) - Expected budget support (2): 140.5 (2021), 134.5 (2022), 105.0 (2023) - World Bank: 53.0 (2021), 17.0 (2022), 25.0 (2023) - African Development Bank: 20.0 (2021), 30.0 (2022), 30.0 (2023) - Bilateral Budget Support: 67.5 (2021), 72.5 (2022), 35.0 (2023) - Other Budget Support: 0.0 (2021), 15.0 (2022), 15.0 (2023) - Residual Financing gap (1-2): -63.5 (2021), -13.6 (2022), -6.6 (2023) - Change in liabilities to IMF, net: 63.5 (2021), 13.6 (2022), 6.6 (2023) - EFF Purchases: 69.4 (2021), 18.9 (2022), 19.0 (2023) - (In percent of GDP): 4.4% (2021), 1.1% (2022), 1.0% (2023) - Repurchases: 5.9 (2021), 5.4 (2022), 12.4 (2023) - Additional financing notes: - Financing needs during 2022 and 2023 expected to be met by IMF, other multilateral/bilateral donors, and external commercial sources. - Fund resources expected to be on-lent by the CBS to the Ministry of Finance for budget support under an MoU. - Capacity development priorities aligned with program reform priorities: revenue mobilization, public financial management, and debt management. - SDR allocation context: - Proposed global SDR allocation of US$650 billion, if approved, is estimated to lead to a US$30 million allocation for Seychelles. The allocation would primarily be used to increase reserves and is captured under the program through an adjustor on the NIR target. ### Repayment capacity, risks, and safeguards - Fund credit and repayment metrics: - Fund credit-to-GDP will peak at 9 percent in 2021. - Fund credit to GIR ratio is projected to peak at 18 percent in 2022. - Obligations to the Fund relative to exports of goods and services will peak at 1.1 percent in 2024. - Risk mitigation factors: - Significant fiscal consolidation. - Increase in repayment capacity with the return of tourists. - Authorities’ commitment to the program and strong track record servicing IMF and other creditors. - Specific risks: - Air Seychelles poses a significant risk to debt sustainability and the program. - Safeguards assessment (updated June 2021): - External audit arrangements remain robust and financial reporting practices broadly adhere to international standards. - Further efforts and enhanced oversight are needed to ensure adequate capacity and internal audit coverage. - CBS’ legal framework should be amended to strengthen oversight and autonomy (MEFP ¶. 75). ### Staff appraisal — key conclusions and recommendations - Economic effects of COVID-19: - COVID-19 severely disrupted economic activity; tourism receipts plummeted causing unprecedented economic contraction and a sharp increase in public debt. - Outlook and risks: - Outlook is positive with tourist arrivals bouncing back since April 2021; authorities and staff expect a V-shaped recovery. - Risks include weaker-than-expected external demand recovery, resurgence of lockdown measures, delayed reform implementation, and climate challenges. - Policy priorities supported by the proposed EFF arrangement: - Maintain recovery momentum while reducing risks to debt sustainability through ambitious fiscal adjustment and liability management operations that preserve financial sector stability. - Strengthen governance framework and promote financial sector development and inclusion to support high, sustainable, and inclusive growth. - Fiscal and debt recommendations: - Strong fiscal adjustment is essential and feasible to reduce public debt risks. - Preserve and better target social spending, limit transfers to SOEs, and reform the civil service. - Strengthen debt management, extend maturities (e.g., through LMO), and use regular bond issuance supported by fiscal consolidation. - Monetary policy stance: - Monetary policy accommodation remains appropriate given a still large negative output gap, but the central bank should be ready to act if inflationary pressures do not subside. - Use of the exchange rate as a shock absorber should continue; FX interventions should be limited to smoothing disorderly fluctuations. - Governance and inclusion: - Advance governance reforms and financial sector inclusion to boost private sector development. - Publication of information on the use of COVID-19 funds based on an independent audit is important. *Source: IMF staff report excerpts (1sycea2021001).* ### Box 1. Air Seychelles ### Box 1. Air Seychelles ### Impact of the COVID-19 pandemic and pre-crisis financial position - Flights were grounded, and passenger traffic evaporated as a result of the COVID-19 pandemic. - Air Seychelles was a loss-making enterprise even before the crisis, necessitating regular transfers from the government and accumulating debt. ### Ownership and liabilities - Air Seychelles was part-owned by the Government of Seychelles (60 percent) and Etihad (40 percent) through EAG Investment Holding Company. - Etihad relinquished its 40 percent shareholding to the Government of Seychelles in March 2021. - The government has taken over US$11.4 million of the unsecured debt to be repaid until 2024. - An outstanding Air Seychelles box bond of US$ 71.5 million is still under negotiation with the bondholders. ### Government actions, options under consideration, and timelines - The Government of Seychelles (GOS) is actively searching for a viable solution that would limit the cost of Air Seychelles to the government budget. - The GOS has worked with the World Bank and identified that the least costly scenario would be the liquidation of Air Seychelles. - Discussions between the authorities and bondholders are taking place. - The legal implications of liquidation and avenues for employee protection are currently being assessed by the Government (structural benchmark for end-September 2021). *Source: Box 1. Air Seychelles (excerpt).* ### Annex I. Debt Sustainability Analysis ### Annex I. Debt Sustainability Analysis ### Overview and recent developments - After years of steady improvement, Seychelles’ public debt "significantly worsened due to the economic fallout of the COVID-19 pandemic." - End-2020 nominal gross public debt: "100.8 percent of GDP" (compared with pre-COVID projection of "57.3 percent of GDP"). - Public debt increased by "around 40 percentage points (compared to pre-COVID projections)". - Staff assesses debt to be "sustainable but with significant risks." ### Drivers of 2020 deterioration - Real GDP: contraction of "-12.9 percent in 2020" (versus previously projected growth of "3.5 percent"). - Primary balance: deficit of "16.3 percent of GDP in 2020" (pre-COVID projection: surplus of "2.5 percent of GDP"). - Gross financing needs (GFNs) in 2020: "50.8 percent of GDP" (text elsewhere notes GFNs rose from "29.3 per-cent in 2019 to 50.3 percent in 2020"). - High GFNs driven mainly by higher level of domestic debt with higher interest rates and shorter maturities. ### Debt composition (as of end-2020, in percent of total debt) - Domestic: "44.8" - Central Bank: "6.2" - Domestic commercial banks: "26.8" - Other creditors: "11.8" - External: "55.2" - Multilateral: "27.4" - Bilateral: "11.6" - Paris Club: "6.6" - Non‐Paris Club: "5.0" - Commercial Banks: "2.2" - Private: "12.8" - By currency: - USD: "34.8" - EUR: "14.3" - CNY: "2.0" - SAR: "1.6" - AED: "1.3" - GBP: "0.6" - JPY: "0.5" ### Baseline projections under Fund program - Assumptions include steadfast implementation of fiscal consolidation to reach a primary surplus of "3.2 percent of GDP in 2026", greater reliance on low-cost external financing, and no further major negative shocks. - Real GDP growth: "6.9 percent in 2021" and "remain at around 6 percent over the medium term"; staff expect 2019 real GDP level will be reached in 2022. - Inflation (GDP deflator): "3.8 percent" in 2020 (estimated), versus "4.2 percent" in previous DSA. - Public debt-to-GDP path under the program: decline to "64.5 percent of GDP by 2026". - Gross financing needs to GDP ratio: decline to "12.7 percent" by 2026. - Projection example from table (selected datapoints): - Nominal gross public debt: "74.5" (2019), "61.8" (2020), "100.8" (2021?), "87.7" (2022), ... "64.5" (2026). - Public gross financing needs: "26.1" (2019), "29.3" (2020), "50.8" (2021?), then declining to "12.7" (2026). - Real GDP growth series: "4.6" (2019), "1.9" (2020), "-12.9" (2021?), "6.9" (2022), "7.7", "6.8", "5.0", "5.0", "4.8" (through 2026). - Effective interest rate series: "5.1", "4.4", "5.0", "4.5", "5.5", "5.1", "5.4", "5.5", "5.9" (annual values shown). ### Stress tests and shock scenarios - Real exchange rate shock (real depreciation by around "16 percent" after 2020): debt-to-GDP would peak "around 97 percent in 2022" and fall to "around 71 percent in 2026". - One-time real GDP growth shock (lower than baseline by "2 percent during 2021‒22"): debt-to-GDP would peak "around 99 percent in 2023" and fall to "around 80 percent in 2026". - Primary balance shock: debt-to-GDP would reach "68 percent in 2026" (decline at a slower pace). - Combined macro-fiscal shock (aggregation of shocks to real growth, interest rate, primary balance, and exchange rate): debt-to-GDP would reach "113 percent of GDP in 2026" (above critical value of "70 percent"). - Gross financing needs rise notably under combined macro-fiscal shock and real interest rate shock. - External DSA stress: a "30 percent" depreciation would push external debt-to-GDP to "around 396 percent in 2022" and about "300 percent" by end of projection, versus baseline "about 214 percent". - Permanent 1/4 standard deviation shock to growth or current account would raise external debt-to-GDP to "around 300 percent" by end of projection. ### External debt and external financing environment - Total external debt-to-GDP remains elevated "in the range of 282.1‒214.1 percent of GDP throughout the projection period." - Tourism receipts declined by "63 percent in 2020"; tourism accounts for "about 50 percent of exports of services and 35 percent of exports of goods and services". - Current account deficit reached "29.6 percent of GDP" in 2020. - As of end-2020, about "12 percent" of external debt is medium to long-term government borrowing, largely from official sources and at favorable rates and maturities. ### Air Seychelles and contingent liabilities / SOE risks - Government assumed liabilities and obligations of Air Seychelles in 2012 amounting to "around 5 percent of GDP". - Air Seychelles’ project box bond to Etihad: "$71.5 million (around 6 percent of GDP)" — potential rollover risks in 2021. - Scenario where SOEs’ external debts of "6 percent of GDP" are assumed by the government in 2021: public debt-to-GDP at end-2026 would reach "66.4 percent" (versus baseline "64.5 percent"). - Discussions and developments: - Agreements could allow reduction in government guarantees in 2020 "from $42.5 million to $5 million" but increase transfers to Air Seychelles in 2020 "from $6 million to $41.7 million"; not finally implemented in 2020. - World Bank identified liquidation of Air Seychelles as "the least costly scenario"; authorities in discussions with bondholders; government lawyers assessing legal implications. ### Policy recommendations and debt-management priorities - Steadfastly implement fiscal consolidation to reduce public debt vulnerability and achieve primary surplus target "3.2 percent of GDP in 2026". - Rely more on low-cost external financing and extend maturities of domestic public debt to reduce GFNs and rollover risks. - Undertake Liability Management Operation (LMO) intended to lengthen domestic debt maturities. - Examine scope for further privatization of some SOEs, including Air Seychelles, to reduce fiscal risks and improve economic efficiency over the medium term. - Further measures to extend average maturity of domestic issuance and reliance on external low-cost financing would reduce rollover risks. ### IMF financing assumptions for hypothetical program scenario - Proposed 32-month EFF arrangement access: "323 percent of quota" (equivalent stated as "$ USD 107 million": "USD 69 million to be disbursed in 2021; USD 19 million in 2022; and USD 19 million in 2023"). - Assumed catalytic external budget support loans: World Bank ("$85 million in 2021-23"), AFDB ("$80 million"), UAE ("USD 75 million") and Qatar ("USD 100 million"). - Under this hypothetical program scenario, public debt-to-GDP projected to decline from "about 87.7 percent at end-2021 to about 64.5 percent by end-2026". - GFN-to-GDP ratio under baseline scenario expected to decline to "around 12.7 percent" by 2026, aided by LMO and lower-cost external financing. *Source: IMF staff.* ### Annex II. Seychelles: Risk Assessment Matrix ### Annex II. Seychelles: Risk Assessment Matrix ### External Risks - Protracted delay in tourism recovery-from traditional markets. - Relative Likelihood/Time Horizon: Medium High; Short to Medium term - Expected Impact if Realized: A protracted delay in tourism arrivals from the main European countries could hamper the planned tourism and economic recovery during the first half of 2021. - Recommended Policy Response: Develop a contingency plan that would lower the impact of a delayed economic recovery: Authorities could consider further fiscal consolidation and reliance on low cost financing in case such risk materialize. - Protracted delay in tourism recovery-from new markets. - Relative Likelihood/Time Horizon: Medium High; Short to Medium Term - Expected Impact if Realized: An unexpected drop in tourism arrivals from new markets (Israel, Russia) could hamper the planned tourism and economic recovery during the first half of 2021. - Recommended Policy Response: Develop a contingency plan that would lower the impact of a delayed economic recovery: Authorities could consider further fiscal consolidation and reliance on low cost financing in case such risk materialize. - Shortfall of external financing. - Relative Likelihood/Time Horizon: Medium High; Short Term to Medium Term - Expected Impact if Realized: A shortfall of external financing could imply high GFNs for several years. - Recommended Policy Response: Develop a contingency plan that would lower the impact of a shortfall in external financing: Authorities could consider further fiscal consolidation and debt restructuring. ### Domestic Risks - Vaccines could prove less effective than expected. - Relative Likelihood/Time Horizon: Low Medium; Short to Medium Term - Expected Impact if Realized: Low effectiveness in vaccines could further disrupt domestic activity and tourism recovery. - Recommended Policy Response: Rely predominantly on low cost financing; optimize debt portfolio; adjust public investment level to reduce borrowing needs, if necessary. - Natural disasters related to climate change could happen. - Relative Likelihood/Time Horizon: Low; Short to Medium Term - Expected Impact if Realized: Medium — The materialization of risks related to natural disasters could trigger further public expenditures and alter the planned reduction of public debt. - Recommended Policy Response: Prioritize the implementation of projects related to climate change. - Higher NPA levels in the banking sector. - Relative Likelihood/Time Horizon: Medium Medium; Short to Medium Term - Expected Impact if Realized: Higher NPA levels in the banking sector which is currently not recognized due to the regulatory forbearance could escalate further in case the economic recovery falls short of expectations. - Recommended Policy Response: Encourage and facilitate prudent restructuring of loans and enhance management and monitoring of NPLs: Authorities should provide guidance on prudential treatment of moratoria and NPL management strategies, assess their implementation, and monitor the relevant reclassification of loans. Authorities should further develop detailed reporting templates for restructured and rescheduled loans and for monitoring the impact of COVID-19 measures on the asset quality of banks. - Materialization of contingent liabilities from Air Seychelles. - Relative Likelihood/Time Horizon: Medium Medium; Short to Medium Term - Expected Impact if Realized: The materialization of contingent liabilities from Air Seychelles could alter the planned reduction of public debt. - Recommended Policy Response: Finalize discussions with shareholders and continue the collaboration with the World Bank to identify and implement the least costly scenario. *Source: Annex II. Seychelles: Risk Assessment Matrix* ### 5. Implication of the Long-term Pass-through Elasticity. Given C(1) is the correlation ### 5. Implication of the Long-term Pass-through Elasticity. Given C(1) is the correlation ### Long-term pass-through elasticity - Given C(1) is the correlation between CPI and its lag 1 in log terms, the long-term convergence can be expressed as: - LOG_CPIିLOG_CPIሺି୬ሻ / LOG_CPI = ଵି஼ሺଵሻ೙஼ሺଵሻ೙ (expression preserved as in source) - LOG_CPI (-n) is the lag n term of LOG_CPI. - If ଵି஼ሺଵሻ೙஼ሺଵሻ೙ = 0.5, then n = 8 months. - If ଵି஼ሺଵሻ೙஼ሺଵሻ೙ = 0.8, then n = 12 months. - Therefore: - 50 percent of the long-term convergence will take around 8 months. - 80 percent of the adjustment will take about 12 months. ### Extended Fund Facility (EFF) arrangement — key terms and access - Arrangement duration: thirty-two months from the date of approval. - Total access right: equivalent to SDR 74 million, subject to paragraphs 2, 3, 4, and 5. - Access tranches without further review (paragraph 2(a)): - up to the equivalent of SDR 24 million until December 1, 2021, - up to the equivalent of SDR 48 million until June 1, 2022, - up to the equivalent of SDR 54.5 million until December 1, 2022, - up to the equivalent of SDR 61 million until June 1, 2023, - up to the equivalent of SDR 67.5 million until December 1, 2023. - Paragraph 2(b): Until the end of the second year of this arrangement, purchases shall not, without the consent of the Fund, exceed the equivalent of SDR 67.5 million. ### Purchase exclusions, suspension, and resumption conditions - Seychelles will not make purchases under this extended arrangement if, during any period in which the data at the end of the preceding period indicate that (paragraph 3(a)): - (i) the net domestic financing of the government is not observed; or - (ii) the primary balance of the consolidated government is not observed; or - (iii) the total revenue is not observed; or - (iv) the net international reserves of the Central Bank of Seychelles, as set out in Table 1 of the MEFP and specified in the TMU, is not observed. - Or if at any time during the period (paragraph 3(b)): - (i) the ceiling on the accumulation of new external payment arrears is not observed; or - (ii) the ceiling on the accumulation of new domestic payment arrears is not observed. - Additional purchase suspensions (paragraph 3(c)-(d)): - after November 30, 2021, May 31, 2022, November 30, 2022, May 31, 2023, and November 30, 2023 until the respective reviews contemplated in paragraph 76 of the MEFP are completed. - if Seychelles at any time during the period: - i. imposes or intensifies restrictions on the making of payments and transfers for current international transactions, or - ii. introduces or modifies multiple currency practices, or - iii. concludes bilateral payments agreements inconsistent with Article VIII, or - iv. imposes or intensifies import restrictions for balance of payments reasons. - Purchases will be resumed only after consultation between the Fund and Seychelles and understandings are reached regarding the circumstances for resumption. - Paragraph 4 exclusions: - No purchases during any period in which Seychelles: (i) has an overdue financial obligation to the Fund or is failing to meet a repurchase expectation in respect of a noncomplying purchase pursuant to Decision No. 7842-(84/165), or (ii) is failing to meet a repayment obligation to the PRG Trust established by Decision No. 8759-(87/176) PRGT, as amended, or a repayment expectation to that Trust pursuant to Appendix I to the PRG Trust Instrument. - Paragraph 5: Seychelles’ right to engage in transactions can be suspended only with respect to requests received after (a) a formal ineligibility, or (b) a decision of the Executive Board to suspend transactions. Purchases resume only after consultation and understandings. ### Operational and financial provisions - Purchases shall be made in currencies of other members selected in accordance with Fund policies and procedures, unless Seychelles requests SDRs at the time of purchase (paragraph 6). - Seychelles shall pay a charge for this extended arrangement in accordance with Fund decisions (paragraph 7). - Repurchase obligations: - Seychelles shall repurchase the amount of its currency that results from a purchase under this arrangement in accordance with the Articles of Agreement and Fund decisions, including those relating to repurchase as Seychelles’ balance of payments and reserve position improves (paragraph 8(a)). - Any reductions in Seychelles’ currency held by the Fund shall reduce the amounts subject to repurchase under (a) in accordance with Fund principles at the time of the reduction (paragraph 8(b)). - Consultation and reporting commitments: - Seychelles shall remain in close consultation with the Fund, including correspondence and visits, and shall provide the Fund with information at intervals or dates requested (paragraph 9). - Seychelles will consult with the Fund on adoption of any measures as specified in the penultimate paragraph of the attached Letter and when the Managing Director requests consultation (paragraph 10). After the arrangement period and while purchases remain outstanding, the government will consult with the Fund from time to time concerning Seychelles’ balance of payments policies. ### Letter of Intent — Program objectives (Letter dated July 20, 2021) - Stated impacts and context: - Economy largely dependent on tourism; government responded with livelihood-sustaining measures at large fiscal cost while tax revenue plummeted. - Government debt surged and was further exacerbated by a strong depreciation of the exchange rate in the last months of 2020. - Vaccination campaign launched in January; international airport reopened in March 2021. - Tourist arrivals in the April-June period were 40 percent of the 2019 level. - Appreciation of the exchange rate in April contributed to containing inflationary pressures and lowered the government debt-GDP ratio by about 12 percent of GDP. - Program objectives: - (1) Contain the fiscal deficit with revenue and expenditure measures so as to attain a significant primary surplus by 2024 and assure debt sustainability. - (2) Improve the structure of government debt by lengthening maturities and reducing rollover risk. - (3) Improve the efficiency of government spending, reform the public service, and rationalize the tax structure, with elimination of exemptions and special treatments for certain sectors. - (4) Restructure the airline company now under full government control. - (5) Strengthen financial stability and enhance compliance with international financial standards. - Request: - Request for a 32-month arrangement under the EFF in the amount of SDR 74 million, corresponding to 323 percent of Seychelles’ quota at the Fund. - Program to be monitored through quantitative performance criteria, indicative targets, and structural benchmarks as set out in Tables 1-2 of the MEFP and described in the TMU. - Authorization for publication of the Letter of Intent, the MEFP, the TMU, and the forthcoming staff report for the EFF request. ### Background and recent economic developments (selected findings and key statistics) - Long-run performance (2010-2019): - Average annual real GDP growth of 4.3 percent since 2010. - Government debt reduced from 82 percent of GDP in 2010 to 62 percent in 2019. - Gross official reserves rose to 5.2 months of imports cover at end-2019 from 2.2 months at end-2009. - COVID-19 impact: - Real GDP estimated to have dropped by 12.9 percent in 2020. - Overall government balance shifted to a deficit of 19.5 percent of GDP in 2020, compared with a deficit of 0.9 percent in 2019. - Tax and nontax revenue fell by 2.2 percent of GDP, to 33.8 percent. - Inflation and exchange rate: - Consumer price inflation rose by 3.8 percent in 2020 compared to 1.7 percent in 2019. - Exchange rate depreciation in 2020: by 26 percent against the USD on an annual average and by 53 percent on an end-of-year basis. - In May 2021, year-on-year inflation stood at 11.4 percent; the 12-month average rate was at 5.0 percent. - Monetary policy settings and liquidity measures: - Monetary Policy Rate (MPR) stood at 5.0 percent in Q1 2020; reduced by 1 percentage point in Q2 and by a further 1 percentage point in Q3 2020. - Standing Deposit Facility (SDF) and Standing Credit Facility (SCF) rates lowered to 1.0 percent and 6.0 percent, respectively, as of Q3 2020 and maintained during H1 2021. - In the third quarter of 2021, MPR reduced to 2.0 percent; SCF lowered to 3.5 percent from 6.0 percent; SDF lowered to 0.5 percent from 1.0 percent. - Width of official interest rate corridor narrowed from 5.0 to 3.0 percentage points. - Effective July 14, 2021, Minimum Reserve Requirement (MRR) on rupee deposits lowered from 13 percent to 10 percent. - Fiscal and support measures for households and businesses: - Job retention financial assistance scheme cost SCR 1. 2 billion for the year, or 6 percent of GDP (scheme initially April-June 2020, extended to end-2020; scaled down and terminated for most sectors by end-January 2021). - Additional March 2020 allocations: SCR 110 million (0.5 percent of GDP) for health contingency and about SCR 50 million for social protection for vulnerable groups. - Central bank liquidity facilities for lending to businesses: - Two funds established in March 2020: - Fund for small businesses: 500 million SCR to on-lend at 1.5 percent interest. - Fund for larger businesses: 750 million SCR to on-lend at 4.5 percent interest. - Deadline for banks to request advances extended to December 2021 (originally December 2020). - Coverage period for support revised from 6 months to 12 months. - Drawdowns as of June 8, 2021: - 18.95 percent drawdown for the first fund. - 30.42 percent drawdown for the second fund. - Banking sector performance and soundness indicators: - Nonperforming loan (NPL) ratio increased from 3.3 percent at end-December 2020 to 5.1 percent as of May 2021. - Capital adequacy ratios increased from January to April 2021 due to reduction in risk adjusted assets following appreciation of the domestic currency in April 2021. - By the end of May 2021, the banking sector’s capital adequacy ratio stood at 19.9 percent, above the prudential limit of 12 percent. - Additional fiscal detail (partial): - Current expenditure rose (further detail appears beyond supplied excerpt). *Source: 1sycea2021001 - 5. Implication of the Long-term Pass-through Elasticity. Given C(1) is the correlation* ### 33.8 percent of GDP in 2019 to 50.1 percent in 2020, reflecting the job retention financial assistance ### 1sycea2021001 - 33.8 percent of GDP in 2019 to 50.1 percent in 2020, reflecting the job retention financial assistance ### Fiscal outcomes and composition (2019–2020) - Total expenditure rose from 33.8 percent of GDP in 2019 to 50.1 percent of GDP in 2020, reflecting the job retention financial assistance scheme. - Major expenditure increases: - Goods and services: 7.8 percent increase (additional COVID-related cost amounted to 0.6 percent of GDP) to cover higher costs of imported drugs and treatment abroad due to rupee depreciation. - Wages and salaries: 18 percent increase, mainly in education, defense and police sectors. - Transfers to public enterprise rose by 1.5 percent of GDP (support to Air Seychelles to pay salaries). - Significant increase in capital expenditure attributable to ongoing land development and housing projects, and construction of new and improved health centers. ### Deficit financing and public debt - Domestic financing: - Issuance of long-term bonds in June: 1,500 million SR Solidarity bonds at 3, 5, and 7-years maturities (equivalent to 7 percent of GDP). - Increase in stock of Treasury bills: 600 million SCR (3 percent of GDP). - External financing: - IMF Rapid Financing Instrument: equivalent to 2.8 percent of GDP. - World Bank and African Development Bank support: 3 percent of GDP (in addition to project loans). - Exchange rate depreciation raised external government debt sharply in local currency terms. - End-year government debt, including guaranteed debt: 100.8 percent of GDP (up from 61.8 percent at end-2019). - Domestic debt: 47 percent of GDP (up from 33.7 percent). ### External sector: current account, financial account, and reserves - Current account balance deteriorated from a deficit of 16.4 percent of GDP in 2019 to a deficit of 27.4 percent in 2020, mainly reflecting a 63 percent decline in tourism earnings. - Deterioration of the service balance was partly offset by lower imports. - Financial account improvement offset most of the current account deterioration through government loans from IMF, World Bank, and African Development Bank and commercial bank repatriation of balances. - Gross international reserves: - Loss of US$21 million from a total stock of US$580 million at end-2019. - Reserves fell to US$559 million by end-2020. ### 2021 budget, revenues, and expenditure measures - 2021 budget (presented end-January 2021) aimed to bring down overall deficit to 15.3 percent of GDP. - Total tax and non-tax revenue projected at 31.6 percent of GDP (a 2.3 percentage point decline from 2020). - Business tax revenue expected to fall by 1 percent of GDP. - VAT revenue expected to fall by 0.5 percent of GDP. - Income tax expected to fall by 0.7 percent of GDP. - Corporate responsibility tax (equal to 0.5 percent of turnover) eliminated with a revenue loss of 0.4 percentage points of GDP. - Subsequent revenue revision: up by 0.3 percent of GDP to 31.9 percent of GDP, mainly from VAT reflecting higher tourism arrivals forecast. - Grants receipts forecast to increase from 1.9 percent of GDP in 2020 to 4.1 percent of GDP in 2021 (from the equivalent of US$15 million to US$52 million), reflecting faster project execution. - Expenditure-side constraints: - Wage bill held stable; promotion and hiring frozen. - Transfers to private sector cut sharply with termination of the job retention scheme. - Goods and services outlays to increase by only 2 percent, reflecting higher import costs. - Capital expenditure strictly prioritized but foreign-financed project outlays to increase as share of GDP. - Budget measures to be implemented include streamlining government agencies, rationalizing social protection, procurement reforms, and stimulating renewable energy development. ### Air Seychelles and SOE support - Etihad relinquished its 40 percent shareholding to the government in March 2021. - Government took over US$11.4 million of unsecured debt to be repaid until 2024. - Air Seychelles box bond of US$71.5 million still under negotiation with bondholders. - Planned Cabinet approvals (structural benchmark for end-September 2021): - Least cost structure for Air Seychelles as part of the 2022 budget process. - Long-term strategy laying out long-term options for Air Seychelles, in consultation with IMF/WB staff. ### Macroeconomic outlook and forecasts - Baseline growth outlook for 2021: close to 7 percent (based on first 6 months of 2021 and continuation of favorable tourist arrivals observed in April–June). - Real GDP growth expected at 5.9 percent on average in 2023 and 2024, with continued tourism growth. - Inflation outlook: - Consumer price inflation projected to decline from 10 percent projected at end-2021 to 3.7 percent at end-2022. - Current account deficit projected to remain broadly stable at 25.7 percent of GDP in 2021, despite revival in tourist activity. - Pickup in foreign direct investment linked to tourism expected to improve overall balance. ### Program aim and public debt targets - Key aim: reduce fiscal deficit and bring government debt-to-GDP ratio below 70 percent of GDP by 2026, and reduce roll-over risk by extending debt maturity (three-fourths of government debt presently in treasury bills with maturities less than one year). - Policy of fiscal consolidation, economic recovery, and prudent debt management expected to reduce public and publicly guaranteed debt from 100 percent of GDP in 2020 to 64 percent in 2026. ### Real sector reforms and development priorities - Diversification priorities: - Diversify tourism services and enhance capacity of fishery sector through value chain diversification and new operators (aligned with World Bank supported SWIOFISH 3). - Tourism sector: - Updated Tourism Master Plan to tackle island-by-island bottlenecks and widen service offerings with objectives of economic empowerment, environmental preservation, and socio-cultural integration. - Actions to attract skilled local labor, increase supply of local agricultural products, and support small businesses (based on Tourism Value Chain Analysis). - Fishery sector: - Completion expected in mid-2021 of cold storage facilities in Iles du Port industrial zone. - Entry into operation of new fish processing units with medium size factories to expand exports and local employment. - Energy transition: - Target: renewable energy (RE) providing 15 percent of Seychelles’ energy consumption by 2030. - Investments in distribution networks and energy storage systems; increase households and public infrastructures using alternate or RE sources. - Updated NDC: emissions to be reduced by 293,8 ktCO2e by 2030 instead of by 188 ktCO2e (NDC 2015). - Energy policy to be presented for government approval in July 2021 with targets of 15.5 percent energy efficiency and 15 percent renewables by 2030. - Current RE: 5 percent; required scale-up of 10 percent in 10 years. - Foreseen RE technologies: solar photovoltaic and wind energy for electricity production. - Greenhouse gas reduction on target of 124 kt CO2e by 2030. - Digital economy and entrepreneurship: - Key actions: maximize impact of digital infrastructure investments; boost digital skills; expand digital platforms and services; develop digital financial services; develop digital entrepreneurship and enabling environment for a digital marketplace. - Climate adaptation: - Priority investments in critical infrastructure, tourism and coastal management, food security, biodiversity, water security, and blue economy. - Planned disaster risk reduction projects (early warning systems, improved coastal resilience); mainstream climate adaptation in recovery plan with cost-benefit analysis guiding prioritization. - AfCFTA: - Government prepared for implementation with private sector consultations on services. - National Assembly approved ratification of AfCFTA on June 25, 2021. ### Fiscal consolidation strategy and targets (2021–2026) - Overall objective: large, upfront fiscal adjustment to attain sustainable fiscal surpluses over the medium term and reduce public debt sustainability risks. - Debt reduction path: public and publicly guaranteed debt from 100 percent of GDP in 2020 to 64 percent in 2026. - Primary surplus targets: - Achieve a primary surplus of 2.8 percent of GDP by 2024 (similar to 2019). - Achieve a primary surplus of 3.2 percent of GDP by 2026. - These compare with a deficit of 16.3 percent of GDP in 2020. - Measures to achieve adjustment (2022–26): 1. Assess current VAT structure including the exemption list, amend business tax laws to streamline exemptions (with IMF technical assistance), and other revenue measures to generate savings of about 3.6 percent of GDP over the medium term (2022-26). 2. Rationalize the wage bill and goods and services expenses. 3. Contain transfers through reviewing programs for better targeting and financial sustainability. 4. Undertake comprehensive review of procurement environment to inform procurement reforms. - Structural fiscal adjustment target: 5.2 percent of GDP over the course of the program. - Structural benchmark: Cabinet approval of legislative amendments to streamline VAT exemptions in consultation with IMF staff (end-September 2022). ### 2021 budget assumptions and short-term fiscal changes - 2021 budget assumes recovery in growth, withdrawal of COVID-19 fiscal support package, and smaller transfers to SOEs (including Air Seychelles). - COVID-19 related expenditures represented a significant part of transfers in 2020; reduction began in 2021. - Transfers projected to halve from 18 percent of GDP in 2020 to around 9 percent in 2021 (compared with pre-pandemic levels of 7.3 percent of GDP). - Public debt burden indicators peaked in 2020 but have since improved largely due to recent currency appreciation. ### Revenue measures and tax policy reforms - Objective: eliminate numerous tax exemptions and scale down concessional business tax regime to improve revenue, efficiency, and equity. - Eighth Schedule to the Business Tax Act features generous incentives: 0 percent business tax on first SCR 250,000 of profits and 15 percent on the balance for firms under the schedule. - Current accelerated depreciation allowance: sums up to 145 percent in five years for tourism-related businesses as well as agriculture and fisheries. - Reforms planned: - Revise and better target tax incentives, including business tax exemption under International Trade Zone regime and generous tax depreciation allowances. - Prevent erosion of corporate tax base through international profit shifting. - Introduce unified business tax rate schedule: - Profits below SCR 1 million taxed at 15 percent. - Profits above SCR 1 million taxed at 25 percent. - High-end sectors to remain at 33 percent. - Expected outcomes: - Critical review of provisions can raise revenue substantially without materially impacting private investment. - Cabinet approval of revisions to business tax laws to streamline exemptions in consultation with IMF staff (structural benchmark for end-November 2021). - Arrears collection plan expected to generate savings amounted to 0.7 percent of over the medium-term. - Cabinet approval of all necessary legislation to ensure Seychelles is fully compliant to be removed from the EU list of non-cooperative jurisdictions (structural benchmark for end-September 2021). *International Monetary Fund — excerpt from the Seychelles country report content unit 1sycea2021001.* ### 35. Our priorities over the medium term will be to modernize the Seychelles Revenue ### Our priorities over the medium term will be to modernize the Seychelles Revenue Commission (SRC) ### Modernization of SRC and tax administration - Upgrade the ASYCUDA system to move to online service and reduce paper transactions; enable electronic declarations for imports and exports to reduce cost and time to discharge merchandise at ports and airport; introduce a cargo tracking system to identify risks associated with specific cargo from points of origin. - Completion target: customs automation project (structural benchmark for end-September 2023). - Increase number of services offered online, including business registrations and submission of returns and other forms required of International Business Companies (IBCs). - Change SRC management of tax returns to improve tax collection and ensure businesses honour obligations by: - improving self-assessment through rigorous taxpayer education and simplifying filing and payment; - following up on late-filers and payers; - enforcing filing and payment compliance. - Utilize information from financial institutions reporting under the ‘Global Forum’s Automatic Exchange of Information’ (information received since 2017). Current situation and planned actions: - No system currently in place to manage this information. - SRC has completed selection of a service provider for a new system to use this information to audit and identify businesses that make financial deposits abroad but do not submit tax returns on these revenues to Seychelles authorities. - SRC needs to strengthen capacity for managing international taxation risk. - Increase functionalities of the current Client Management System (CMS) to close gaps: - CMS is not in web-form and has not been upgraded with latest IT language. - Several procedures are not fully integrated and are implemented as manual steps. - CMS is not integrated with E-Services. - CMS does not include functions like case management, debt management, business intelligence, and data warehousing. - Financing provided by the EU under an agreement signed in April 2019. - Cabinet of Ministers approved development of a new taxation management system from core source codes of the current CMS with aim to complete project in 2023. - UNDP will finance an expert through Tax Inspectors Without Borders to assist SRC by providing practical real time support for audits with focus on: - preventing cross border tax avoidance; - developing risk assessment; - obtaining information from third parties; - identifying transfer pricing transactions; - applying treaty provisions. ### Expenditure measures (2021 budget and medium term) - New recruitments limited to key positions in certain ministries and departments (savings of SCR 38.3 million). - No salary increase for public service employees (savings of SCR 7.9 million). - No increase in the long service allowance (savings of SCR 8.5 million). - No new scheme of service (SCR 22.1 million). - Measures expected to be maintained in the medium term. - Reviewing outsourced services to identify savings. - Negotiations with landlords to reduce rental and office accommodation costs by 25 percent. - Greater emphasis on virtual meetings to reduce travel costs. ### Medium-Term Fiscal / Budget Framework and external support - Commitment to adopt a Medium-Term Fiscal or Budget Framework to bolster credibility of planned post-program fiscal targets; initial discussions with IMF team and an AFRITAC SOUTH (AFS) expert; further discussion planned with AFS expert to define scope and timing of mission to identify areas needing development; next step to define contours of multi-year budget implementation. - Government requested World Bank budget support of US$ 30 million in the form of a “Program for Results” (PforR) targeting reforms across the social protection system. ### World Bank Program for Results — social protection reforms - Program targets five largest cash transfer programs managed by the Agency for Social Protection (ASP): Retirement Pension (RP), Homecare Program (HCP), Invalidity Benefit (IB), Disability Benefit (DB), and Social Welfare Assistance (SWA). - Program development objectives: - Efficiency objectives: - improve fiscal sustainability of RP benefits by increasing retirement age to 65, adopting additional measures, and launching public information campaigns about the new measures; - make state-provided home care available to those with greatest physical and financial need (physical needs measured by internationally recognized standards; financial need measured by a single unified standard across programs); - provide invalidity and disability benefits to those with physical needs as defined by internationally recognized standards; - provide social welfare assistance to those with socioeconomic needs. - Effectiveness objectives: - provide access to services to social protection beneficiaries by establishing an Inter-ministerial Committee for Social Protection to enable cross-sectoral coordination and establishing a social registry to enable referrals between the Agency for Social Protection and other ministries, departments, and agencies; - increase quality of home care services by increasing training provided to caregivers; - allocate adequate budgets to social protection programs to cover emergency responses. ### Increasing efficiency of public spending and PFM reforms - July 2019 FAD-AFS mission recommended comprehensive review of public procurement legal framework; suggested World Bank could lead reform. - Public Investment Management Assessment (PIMA) planned for FY22 to identify opportunities to increase efficiency of public investment and procurement support for PPPs. - Commitment to implement RFI commitments to transparency of COVID emergency-related spending, including conducting an audit and publishing awarded companies’ information. - An independent audit of emergency spending and related procurement is ongoing; results to be made public in September 2021. - Complete a streamlined PEFA assessment by December 2023 to take stock on implementation of previous recommendations. - Work with the Fund for first Public Investment Management Framework assessment before end of September 2022. - AFS fielded a remote TA mission in early 2021 on developing a strategy to improve PFM capacity through integrated financial management information systems (IFMIS); decision that a new IFMIS platform should be installed and linked to emerging national payments platform prepared by the central bank. - Budget for new IFMIS to be included in the 2022 budget. ### Results-Based Management (RBM) - RBM adopted in 2013 as second generation of reforms to strengthen results-focus across government to enhance efficiency, effectiveness, transparency, and accountability to support growth, economic diversification, and social inclusion. - RBM four pillars across public sector policy cycle: - Strategic planning (SP), led by the Economic Planning Department. - Program-Performance Based Budgeting (PPBB), led by the Finance Department. - Performance Monitoring & Evaluation (PM&E), led by the Department of Public Administration (DPA). - Performance Management System (PMS), led by DPA. - Whole rollout of RBM planned, with preparatory work beginning immediately and ready for the 2023 budget process. ### Minimizing risks of State-Owned Enterprises (SOEs) - Reform of SOEs will be key to rationalize public spending and restore public debt sustainability. - Following adoption of the ‘Good Governance Code’, GOS will place more emphasis on governance of public enterprises. - Public Enterprise Monitoring Commission (PEMC) to become sole authority to oversee public enterprises; PEMC will: - establish targets for enterprises to ensure revenue generation for government and people of Seychelles; - ensure appropriate oversight and accountability to Government; - align public enterprise decisions with national plans and hold boards responsible for implementing government vision. - Support and authority to be provided to PEMC to ensure government mandate implementation. - Submission target: amendments on the Public Enterprise Monitoring Committee (PEMC) Act to Cabinet to strengthen enforcement power of PEMC (structural benchmark for end-November 2021). ### Air Seychelles and SOE-specific risks - Air Seychelles poses significant risks to debt sustainability. - GOS working to identify viable solution to limit cost to government budget. - World Bank analysis identified liquidation of Air Seychelles as least costly scenario. - Discussions ongoing between authorities and bondholders. - Government lawyers assessing legal implications of unwinding the company and ways to protect employees and maintain ground handling operations. ### Public Debt Management Strategy and targets - Multi-pronged strategy to reduce refinancing risks from high stock of Treasury Bills (T-Bills) by extending maturity of debt portfolio, substitution with concessional external loans, and a “one-off” market-based liability management operation (LMO) in domestic market. - Combination of strategies expected to reduce gross financing needs (GFN) from 50 percent of GDP in 2020 to 12.6 percent by 2026. - Reduction in T-Bills stock will not affect adequacy of T-Bills for banking sector liquidity needs and monetary policy operations. - Plan to assess options to refinance other debt by extending maturity and possibly reducing interest costs. - Publish a medium-term debt management strategy (MTDS; structural benchmark for end-March 2022) with IMF technical support to guide borrowing decisions considering cost-risk tradeoffs. - Publish an Annual Borrowing Plan (structural benchmark for end-March 2022) along with an auction calendar to help market participants plan liquidity management and reduce uncertainty. - Ministry of Finance to publish quarterly reports on debt management operations and outstanding debt position as published in the debt bulletin on its website (structural benchmark for end-September 2021). - LMO executed that switched SCR 1.2 bn of T-bills into bonds with 3, 5 and 7-year tenors, resulting in average maturity of 4.8 years. - Allocation in auction by tenor: 3-year 38 percent, 5-year 33 percent, 7-year 29 percent. - Weighted average yields on LMO bonds are lower by 125-150 bps compared to previously issued rates. - Plan to adopt regular and predictable issuance of bonds through auction mechanism; support liquidity via repo operations and trading reforms in government securities. - Continue to maintain treasury single account system introduced as part of the 2009 PFM reform for better cash flow and debt issuance management. - Obtain Ministerial Approval of a Circular to reduce deviation between forecast and outcome in monthly cashflow plan consistent with the 2022 budget, in consultation with IMF staff (structural benchmark for end-June 2022). ### Monetary and exchange rate policy - Monetary policy accommodative since second quarter of 2020; stance expected to be maintained short-term. - Monetary Policy Rate (MPR), midpoint of the interest rate corridor, remains key policy signal. - As of third quarter of 2021, interest rate corridor shifted downwards to align interest rate structure with prevailing macroeconomic fundamentals, reducing cost of credit in short to medium term to support recovery. - Central Bank committed to a floating exchange rate and will intervene only to facilitate orderly market functioning. - In 2020, exchange rate adjusted to reflect significant drop in supply of foreign exchange due to tourism contraction; Central Bank provided foreign exchange assistance in 2020 via: - Foreign Exchange Auctions (FEAs); and - direct sales to Seychelles Petroleum Company (SEYPEC) for fuel purchases and to the Seychelles Trading Company (STC) for importation of essential goods. - Since start of 2021, foreign exchange supply stronger than demand resulting in appreciation of local currency; market-clearing adjustment was delayed and Central Bank conducted FEAs to remove excess supply. - In May 2021, Bank sold USD 4.0 million to commercial banks to address delays in meeting demand; subsequent orderly market functioning. - Commitment to effectively monitor foreign exchange positions of banks and enhance monitoring of foreign exchange exposures, focusing on changes in repayment capacity of borrowers against exchange rate fluctuations. - Gross International Reserves (GIR) fell in 2020 (first contraction in four years); a further decline expected in 2021 mainly due to anticipated lower receipts and decreased income from investments due to lower international interest rates. - If required, international reserves will be used to support the market while ensuring such action does not compromise the floating exchange rate regime. - Advisory and Asset Management agreement (signed January 2019) between IBRD and CBS remains operational. - US$100 million worth of assets is being managed by the Reserves Advisory and Management Partnership (RAMP). - Agreement provides capacity building of CBS staff in reserves management. *Source: IMF — Country Report content provided* ### 57. The CBS is determined to continue its long-lasting work on the continuous improvement ### 1sycea2021001 - 57. The CBS is determined to continue its long-lasting work on the continuous improvement ### International reserves management - CBS will continue long-lasting work on continuous improvement of its international reserves’ management framework. - For the year 2021, major milestones expected in risk management within the international reserves functions: - Implementation of role specific operational and credit risk management frameworks. - Strategic policy parameters reviews: - Usual reviews expected with enhanced frequency to ensure relevance with dynamic local and international economic fundamentals. - Transparency and disclosure: - Early adoption of the IMF Central Bank Transparency Code. - CBS intends to further enhance disclosure of information on the management of the international reserves. ### Efforts to improve external statistics - Continued implementation of plans to improve external sector statistics, particularly: - Estimate of tourism receipts. - Offshore sector. - CBS view: - Current estimates of current inflows do not fully capture the total value of the country’s foreign exchange receipts and therefore result in over-estimation of the current account deficit. - Data shocks and timing: - Given the shock in the data series experienced in 2020, plan to incorporate new estimates in compiled BOP statistics has been delayed. - Technical assistance: - TA from the IMF Statistics Department is expected to help better compile external sector statistics by identifying offshore data, which remains a major challenge. ### Modernizing the financial system and ensuring financial stability — overall objectives - Financial Sector Development Plan focus: - Modernizing the financial system. - Enhancing the regulatory and supervisory framework to deepen the financial sector and support inclusive and sustainable growth while preserving financial stability. - Covid-19 response: - Authorities responded from a monetary, prudential, and fiscal standpoint, including reprioritization of projects. ### Banking system stability, supervision, and borrower support - Commitment to ensure a stable and well-capitalized banking system that can support the recovery through effective monitoring and supervision. - Enforcement and intervention: - Stand ready to take relevant and timely enforcement actions where necessary. - If any bank becomes undercapitalized, CBS will use relevant early intervention measures, including further suspension of dividend payments. - Viable but undercapitalized banks required to submit capital plans; nonviable financial institutions to be resolved using appropriate resolution tools. - Borrower support measures: - Should be gradually unwound, with remaining ones targeted and time bound. - Ensure banks’ loan classification correctly reflects asset quality and regulatory forbearance measures will be withdrawn. - Monitoring and restructuring guidance: - Develop templates for restructured and rescheduled loans and for monitoring impact of COVID-19 measures. - Encourage banks to engage in restructuring of loans for viable firms with temporary liquidity shortages. - Monitor relevant reclassification of loans and provide guidance on prudential treatment of moratoria and NPL management strategies. ### Risk-based supervision and Basel implementation - Risk-Based Supervision (RBS) project: - Initiated in 2018 to adopt RBS framework integrating Basel II Pillar 2 requirements. - In 2020 completed second phase: design and development of RBS framework and associated data models, guidelines/circulars, manuals, policies, and capacity building. - Initial roll out of RBS framework started in 2021 covering the first supervisory cycle. - Basel II and Basel III steps and timelines: - Policy paper for adoption of Basel II Pillar 1: - Endorsed by the Cabinet of Ministers in late 2020. - Now with the Attorney General’s Office for drafting. - Basel II Pillar 3: - CBS anticipates finalizing its set of disclosure guidelines by May 2022. - Amendment to Financial Institutions Capital Adequacy Regulation, 2010 to adopt Basel III capital definition: - Policy paper will be approved by the Cabinet by May 2022, with assistance of technical advisors (structural benchmark for end-May 2022). ### Crisis management, resolution framework, and Financial Stability Committee (FSC) - FSC legal basis and Financial Stability Bill: - FSC established in March 2016; work ongoing to strengthen legal basis and mandate. - Draft policy paper outlining considerations for Financial Stability Bill prepared in April 2021. - Consultant to review policy paper anticipated to be onboarded by September 2021. - Policy paper for draft Financial Stability Bill to empower authorities and provide legal basis for FSC to be approved by the Cabinet by end November 2021 (structural benchmark for end-November 2021). - Target to finalize draft Financial Stability Bill by May 2022. - Crisis management and bank resolution: - Commitment to enhance macroprudential toolkit and crisis management and bank resolution framework. - Policy paper supporting drafting of an effective resolution framework aligned with BCBS recommendations and FSB Key Attributes was presented and endorsed in December 2018. - Policy paper being reviewed to reflect recent developments (business continuity and operational resilience). - By end June 2022, submit a Policy Paper to the Cabinet of the draft bill on crisis management and bank resolution framework (Bank Resolution Bill) in alignment with international best practices (structural benchmark for end-June 2022). - Draft Bank Resolution Bill will be approved by the Cabinet by end June 2023 (structural benchmark for end-June 2023). ### National Payment System and payments modernization - Legislative review: - Review of the National Payment System Act, 2014 and supporting regulations to address deficiencies and align regulatory framework with international standards and best practices. - Policy proposals for amendments anticipated to be finalized in March 2022. - Oversight framework: - Finalizing oversight framework with technical assistance received from AFS in May-June 2021; expected completion by December 2021. - Modernization objectives: - Establish an environment where payments are convenient, affordable, reliable, efficient, and safe. - Action plan approved in 2020 includes: - Establishment of a payments system body to manage payments infrastructure through a public-private partnership to be finalized in 2023. - Implementation of a new core banking system within the CBS to be finalized in 2023. ### Digital economy, fintech, and financial consumer protection - Fintech and digital economy: - CBS and Ministry responsible for Finance sought TA from the World Bank to undertake a digital economy assessment and formulate a national fintech strategy. - Fintech strategy to be finalized in 2021. - Consumer empowerment and financial literacy: - Comprehensive digital financial literacy roadmap formulated. - Financial Consumer Protection legislation and supporting regulations expected to be enacted by the end of 2021. ### Credit information system - Commitment to implement an enhanced credit information system and supporting legal framework to extend coverage of credit information. - Importance: - System critical for economic recovery, supporting allocation of credits to sectors, including MSMEs, promoting financial stability and economic growth. - Timeline: - With World Bank assistance, project anticipated to be completed by the end of 2022. ### AML/CFT framework, supervision, and remaining actions - New legislation and supervisory allocation: - In August 2020, new AML/CFT Act and Regulations came into force. - Supervisory aspects of ML and TF allocated to three supervisory authorities: FIU, FSA, and CBS. - Tripartite Memorandum of Understanding signed between these authorities in 2020. - CBS internal arrangements: - Under AMLA 2020 mandate, a section within the Financial Surveillance Division of CBS was set up for AML/CFT supervision. - Functions include onsite, offsite, and policy work and assistance with national AML/CFT strategy (approved in August 2020). - With the World Bank, developing a risk-based supervision framework including a risk matrix, sectoral supervisory strategies, and a supervision manual. - Supervisors finalizing an Institutional Risk Assessment template to feed risk profiles for risk-based resource allocation. - Legislative and regulatory amendments: - Several amendments made to the AML/CFT Act and Regulations, Mutual Legal Assistance Act, Extradition Act, Prevention of Terrorism Act, and other undertakings to better meet FATF Recommendations. - Outstanding recommendations to achieve full compliance with FATF Recommendations (three outstanding recommendations plus additional items listed): - Review of the Registration of Association Act. - Review of the licensing structure of the Designated Non-Financial Businesses and Professions, and introducing a licensing secretary regime for the domestic companies. - A new framework for Virtual Asset Service Providers. - A new Asset Management Regime in support of asset recovery efforts. ### Beneficial ownership - Beneficial Ownership Act and Regulations: - Came into force in August 2020. - Provides for identification and verification of beneficial ownership of legal persons and legal arrangements, requirements to establish and maintain up-to-date register of beneficial owners by resident agents, and a centralized database to be kept by FIU. - Centralized database timeline: - Will become operational in July 2021. - Ensure database fully operational by October 2021 for international financial entities and by December 2021 for domestic entities. - Amendments: - Act and Regulations being amended in 2021 to address deficiencies and concerns. ### Safeguards at the CBS - Implementation of safeguards assessment recommendations: - CBS committed to implement recommendations of the June 2021 update safeguards assessment. - Most recommendations of the voluntary safeguards assessment completed in February 2018 have been implemented, except proposed amendments to the CBS Act. - Governance and oversight enhancements: - September 2020: Audit and Risk Committee (ARC) Charter reviewed with revisions approved, including greater focus on operational and strategic risks and ARC role regarding the compliance function (set up April 2019). - Steps taken to improve internal audit function, including strengthening capacity in core central banking operations, continuing to implement external quality assessment recommendations, and appointing a Head of Internal Audit Division in February 2021. - Further efforts and enhanced oversight by the ARC are needed to ensure adequate capacity and internal audit coverage. - Legislative amendments to strengthen governance: - Following the June 2021 safeguards assessment, CBS plans, in consultation with the IMF, to submit amendments to the CBS Act to the Cabinet in October 2021 to: - Strengthen governance and oversight. - Enhance institutional and personal autonomy. - Safeguard financial autonomy. - CBS will strengthen the oversight structure of the risk management and internal audit functions. *Source: Excerpt from the provided IMF chapter/section content.* ### 76. Program Monitoring. Program implementation will be monitored through semi-annual ### 76. Program Monitoring ### Program review schedule and monitoring instruments - Program implementation will be monitored through semi-annual reviews, quantitative performance criteria and indicative targets, continuous performance criteria, and structural benchmarks. - The first review is set for December 2021 based on end-July 2021 quantitative targets and the second review is set for June 2022 based on end-December 2021 quantitative targets. - The quantitative targets and structural benchmarks are set out in Tables 1 and 2 of the MEFP respectively. ### Key quantitative targets and continuous criteria (summary) - Net international reserves of the CBS, millions of US dolloars (floor): 359.0, 374.0, 394.0, 407.0, 410.0, 420.0. - Continuous quantitative performance criteria (ceilings): - Accumulation of new external payments arrears: 0.0 - Accumulation of new domestic payments arrears: 0.0 - Indicative target (IT): - Net change in CG guaranteed domestic and external debt: 502.0, 604.0, 753.0, 990.0, 1600.0, 2036.0 - Priority social expenditure (floor): 475.2, 712.8, 1425.5, 287.0, 574.1, 861.1 - Notes on adjustments in Table 1: - If the amount of disbursed external budgetary assistance net of external debt service obligations falls short of the program forecast, the ceiling on net domestic financing will be adjusted pro-tanto. - If the amount of disbursed external budgetary assistance net of external debt service obligations exceeds the program forecast, the ceiling will be adjusted downward by the excess disbursement unless it is used to reduce domestic payment arrears. - The NDF refers to the central government. - If growth fall short of targets the revenues floor will be adjusted accordingly. - The terms in this table are defined in the Technical Memorandum of Understanding (TMU). - The performance criteria are cumulative from the beginning of the calendar year. ### Structural benchmarks under the EFF, 2021–2023 (selected entries) - Fiscal and Public Financial Management: - Cabinet approval of all the necessary legislation to ensure Seychelles is fully compliant to be removed from the EU list of non-corporative jurisdictions. Timing: End-September 2021. Objective: Ensure Seychelles is fully compliant with EU and OECD international tax framework. - Ministerial Approval of Circular to reduce the deviation between the forecast and the outcome in the monthly cashflow plan consistent with the 2022 budget, in consultation with IMF staff. Timing: End-June 2022. Objective: Strengthen Treasury cash management. - Cabinet approval of legislative amendments to streamline VAT exemptions, in consultation with IMF staff. Timing: End-September 2022. Objective: Strengthen revenue mobilization. - Cabinet approval of revisions to business tax laws to streamline exemptions, in consultation with IMF staff. Timing: End-November 2021. Objective: Strengthen revenue mobilization. - Completing the customs automation project, in consultation with IMF staff. Timing: End-September 2023. Objective: Strengthen revenue mobilization. - Debt Management: - Publish a new domestic debt management strategy document. Timing: End-March 2022. Objective: Mitigate foreign currency and rollover risks, optimize issuance decisions, and strengthen benchmark pricing through extension of the yield curve. The debt management strategy will guide future borrowing decisions based on cost-risk trade-offs related to the debt portfolio. - Publish an Annual Borrowing Plan along with an auction calendar. Timing: End-March 2022. Objective: Implement the debt management strategy. - The Ministry of Finance will publish quarterly reports on debt management operations and outstanding debt position as published in the debt bulletin on its website. Timing: End-September 2021 and quarterly thereafter. Objective: Enhance debt management and transparency. - State-Owned Enterprises (SOEs): - Cabinet approval of (1) least cost structure for Air Seychelles, as part of the 2022 budget process; and (2) long-term strategy that lays out long-term options for Air Seychelles, in consultation with IMF/WB staff. Timing: End-September 2021. Objective: Minimize the fiscal impact on the 2022 budget. - Cabinet approval of Amendments on the Public Enterprise Monitoring Committee (PEMC) Act to strengthen the enforcement power of the PEMC, in consultation with IMF staff. Timing: End-November 2021. Objective: Reduce contingent fiscal risks. - Financial Sector Stability: - Cabinet approval for policy paper for the draft Financial Stability Bill for empowering the relevant authorities to use macroprudential tools and providing the legal basis for the Financial Stability Committee. Timing: End-November 2021. Objective: Enhance financial stability powers with the aim of safeguarding the stability of the financial system. - Cabinet approval of the policy paper for the amendment in the Financial Institutions Capital Adequacy Regulations, 2010 for the CBS to adopt the Basel III Capital Definition. Timing: End-May 2022. Objective: Buttress banking sector soundness and financial sector stability. - Submit policy paper for the draft Bank Resolution Bill to the Cabinet. Timing: End-June 2022. Objective: Address shortcomings from previously approved cabinet policy paper for bank resolution and to align with ongoing revisions to the Financial Institutions Act, 2004 as amended and Insolvency Law, as well as cater recent developments stemming from the current crisis. Includes identification of consequential amendments in subsidiary legislations, with the objective of providing the regulators the necessary powers to effectively resolve troubled financial institutions. - Cabinet approval for draft Bank Resolution Bill in alignment with international best practice. Timing: End-June 2023. Objective: Address shortcomings from previously approved cabinet policy paper for bank resolution and to align with ongoing revisions to the Financial Institutions Act, 2004 as amended and Insolvency Law, as well as cater recent developments stemming from the current crisis. Includes identification of consequential amendments in subsidiary legislations, with the objective of providing the regulators the necessary powers to effectively resolve troubled financial institutions. ### Technical Memorandum of Understanding — definitions, adjustors, and reporting - Government definition: - “Government” means the central government of the Republic of Seychelles and does not include any political subdivisions, the central bank, or any other public or government-owned entity with autonomous legal personality not included in the government’s budget. - Consolidated government debt: central government debt plus public guarantees. - External debt: debt denominated in any currency other than the Seychellois rupee (SCR). The performance criterion or indicative target will include all forms of debt. The definition of "debt" is set out in paragraph 8 (a) of the Guidelines on Public Debt Limits in Fund-Supported Programs attached to the Executive Board Decision No. 16919-(20/103), adopted October 28, 2020. - Debt forms explicitly listed: loans; suppliers’ credits; leases (present value at inception of lease payments). - A. Ceiling on Net Domestic Financing of the Government (NDF) - NDF defined as: (i) net bank credit to the government; and (ii) net nonbank financing of the government, including proceeds of sale of government assets, Treasury bills, other securitized obligations in rupees, and any CBS credit to the government, including drawings on the rupees counterpart of the SDR allocation. - Valid data sources: amounts for net bank credit and net amount of Treasury bills and bonds in rupees calculated by CBS; amounts for nonbank financing calculated by the Treasury. - Gross external budgetary assistance defined as grants, loans, and non-earmarked debt relief operations (excluding project-related loans and grants, use of IMF resources, and debt relief under HIPC and MDRI). Net external budgetary assistance = gross external budgetary assistance minus total debt service obligations on all public external debt and all payments of external arrears. - Adjustors: NDF will be adjusted downward (upward) if net external budgetary assistance exceeds (falls short of) the program projections. - Reporting: data provided monthly with a lag of no more than four weeks from the end-of-period. - B. Floor on the Primary Balance - Primary balance = total revenues and grants minus primary expenditure; measured cumulative over the fiscal year and monitored above the line. - Revenues recorded when funds are transferred to government revenue account; tax revenues recorded net of tax refunds; revenues include grants; capital revenues exclude non-financial asset sales from divestments. - Central government primary expenditure recorded on a cash basis; includes recurrent expenditures, capital spending, and transfers to SOEs. Primary expenditures settled with bonds or non-cash liabilities treated as one-off adjustments and recorded above-the-line, financed with debt issuance. - Adjustors: primary balance target adjusted upward (downward) by the surplus (shortfall) in disbursements of grants relative to baseline projection. - Reporting: data provided monthly with a lag of no more than four weeks from the end-of-period. - C. Floor on Total Revenue - Total government revenue includes tax and nontax revenue, excludes external grants, revenue of autonomous agencies, and privatization receipts. - Revenue floor adjusted downward by the amount equivalent to the shortfall in gross domestic product compared to program projections. - Reporting: data provided monthly with a lag of no more than four weeks from the end-of-period. - D. Floor on Net International Reserves (NIR) - NIR of the CBS = reserve assets minus reserve liabilities with maturity of less than one year. - Reserve assets: monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, and the country's reserve position at the Fund; excludes pledged/collateralized assets, claims on residents, claims from derivatives vis-a-vis domestic currency, precious metals other than gold, assets in nonconvertible currencies, and illiquid assets. - Reserve liabilities: (1) all foreign exchange liabilities with maturity of less than one year, including commitments arising from derivatives; and (2) all liabilities outstanding to the IMF (total outstanding use of Fund Credit and loans). - Adjustors: NIR floor adjusted upward (downward) by amounts by which external non-project loans and non-project cash grants exceed (fall short of) program amounts; adjusted by external debt service deviations; adjusted upward by amount of new SDR allocation if IMF makes a new allocation. - Reporting: data reported by CBS on a daily basis, with a lag of no more than one week from the end-of-period. - E. Non-Accumulation of New Domestic and External Arrears (continuous) - Domestic payments arrears: domestic payments due but not paid by government after a 90-day grace period, unless payment arrangements specify a longer period. Ministry of Finance records and updates accumulation and reduction of domestic payments arrears. - Government undertakes not to accumulate any new domestic payments arrears; accumulation will be reported immediately to Fund staff. - Government undertakes not to accumulate any new external public payments arrears, except arrears related to rescheduling. External public payments arrears defined as payments due but not paid by the government as of the due date specified in the contract, taking into account applicable grace periods, including contractual and late interest, on external debt of the government or guaranteed by the government. - Standard continuous performance criteria include prohibitions on: imposition or intensification of restrictions on making payments and transfers for current international transactions; introduction or modification of multiple currency practices; conclusion of bilateral payments agreements inconsistent with Article VIII; and imposition or intensification of import restrictions for balance of payments reasons. - III. Indicative targets - A. Net Change in Consolidated Government Guaranteed Domestic and External Debt: government guaranteed domestic and external debt defined as public debt including central government debt plus domestic and external guarantees provided by the government. - B. Floor on Government Social Spending: applies to expenditures on specified social programs and approved programs of ASP (list includes Invalidity benefits, disability benefits, post-secondary students bursary, sickness benefits, maternity benefits, orphans benefits, injury benefits, semi-orphan benefits, apprenticeship scheme, home careers schemes, vulnerable home repair scheme, SPTC travel concessions, inter island transport etc.). *Source: Attachment II. Technical Memorandum of Understanding (MEFP), Seychelles EFF program documentation.* ### 24. Performance under the program will be monitored from data supplied to the IMF by ### 24. Performance under the program will be monitored from data supplied to the IMF by ### V. DATA AND INFORMATION - The authorities will transmit promptly to IMF staff any data revisions as well as other information necessary to monitor the arrangement under the EFF. - The Seychelles authorities (government and CBS) will provide Fund staff with the following data and information according to the schedule provided. - The CBS will report: - 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 form 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. - The Ministry of Finance will report: - Monthly (within two weeks from the end of the month): - Consolidated government operations on a commitment basis and cash basis in the IMF supported program format and in GFSM2001 format. - 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. - 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. ### Recent developments, COVID-19, Outlook - Timeline and actions: - The first case of COVID-19 was registered in Seychelles in March 2020. - The majority of the population was vaccinated by March 2021 allowing for borders to reopen to foreign visitors. - Since the opening of the borders, tourist arrivals have exceeded expectations. - Outlook: - Growth is projected to reach 6.9 percent this year and around 6 percent over the medium term. - Authorities are hopeful for a V-shaped recovery driven strongly by tourism, supported by opening of new tourist markets and positive progress on global vaccinations. - Past vulnerability and shock: - After the global financial crisis, debt rose to 175 percent of GDP. - Authorities decreased the level of debt to 60 percent of GDP by 2019, while building buffers. - The pandemic caused rapid contraction, large external and fiscal deficits, and rising gross financing needs. ### The program - Objectives and features: - Envisages a broad range of structural reforms, focusing on ensuring debt sustainability while building the basis for long-term inclusive growth. - Highest priorities: ensure macroeconomic stabilization and reduce short-term financing needs. - Authorities executed a liability management operation that lengthened the maturity of government debt by 4.8 years and reduced the interest by 125-150 basis points. - Frontloading of program financing is essential to smooth financing needs throughout the program period. - Program will facilitate additional financing from World Bank, AfDB, and other bilateral partners. ### Fiscal Policy - Planned adjustment: - A total adjustment of 15.8 percent of GDP is planned for 2020-2023. - Measures to achieve consolidation: - Rationalizing and reducing fiscal expenditure, particularly unwinding COVID-19 support measures. - Enhancing revenue mobilization. - Effectively reducing financing costs. - Specific fiscal actions and targets: - Authorities are preparing the supplementary budget as per the Public Financial Management Act in line with the program parameters reducing the budget deficit to 9.8 percent of GDP. - Reprioritizing budget spending towards health and social expenditures and stand ready to further reduce budget expenditures if downside risks materialize. - Revenue-side reforms: - Limiting tax exemptions. - Implementing measures to prevent the erosion of the corporate tax base through international profit shifting. - Expenditure-side reforms: - Freeze salary increases for public servants. - Strengthen public procurement. - Better target and increase the efficiency of the social protection system. - Enhance the competency of public institutions. - Contingent liabilities: - Authorities committed to resolving contingent liability issues arising from Air Seychelles' operation and exploring possible solutions with support from the IMF and WB. ### Monetary and Financial Sector policies - Monetary stance: - Maintain an accommodative monetary stance as appropriate given weakening credit growth and subdued economic activities. - Central Bank of Seychelles will stand ready to intervene if inflationary pressures persist. - Foreign reserves and exchange rate: - Level of foreign reserves decreased for the first time over the last four years in 2020, but reserve levels have since stabilized with the opening of international borders. - Authorities will closely monitor foreign exchange positions of banks and intervene only in the case of disorderly market moves. - Central Bank of Seychelles is committed to a floating exchange rate mechanism and allowing the market to determine the exchange rate. - Safeguards: - Central Bank of Seychelles implemented all the recommendations of safeguards assessment completed in 2018 and have committed to undertake necessary actions arising from the recent safeguard assessment from June 2021. ### The banking sector - Pre-pandemic position: - Entered the pandemic with high profitability, robust liquidity, and low levels of NPLs. - Pandemic impact and current stance: - Economic slowdown and unwinding of supporting measures may negatively impact banks' liquidity positions. - Banks continue to be well-capitalized, and NPLs have only risen slightly. - Central bank has tightened supervision since the pandemic and is closely monitoring banking sector developments and stands ready to take appropriate actions. ### Structural policies - Reform priorities: - Strengthen government institutions, improve the business environment, financial inclusion, development of fintech, and consumer protection. - Diversify the economy, further develop the fisheries industry, and enhance tourism infrastructure to increase revenue per incoming tourist. - Create jobs, support SMEs, and improve the economy's resilience. - Climate resilience: - Climate change is an area where Seychelles is particularly vulnerable; authorities plan reforms to increase resilience to climate issues. *Source: IMF staff report and Seychelles authorities statements, July 26–29, 2021.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1sycea2021001.pdf_