## 1sycea2022001 ## Source details **Canonical URL:** [1sycea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1sycea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1sycea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1sycea2022001.pdf.json) --- ### EXECUTIVE SUMMARY — Macroeconomic developments and outlook - Recovery is V-shaped and driven by tourism (MEFP ¶1-13). - Real GDP growth: projected to reach 6.1 percent in 2021. - Tourist arrivals for 2021: projected to reach 70 percent of the 2019 level. - COVID-19 epidemiology: with widespread vaccine coverage, the 7-day average of new COVID cases is below 100 per 100,000 from September 2021. - Outlook: positive but subject to uncertainty in the global evolution of the COVID-19 pandemic. - Staff recommendation: completion of the first review given authorities’ actions to meet program targets and commitments. ### External position, reserves, and external financing - Gross international reserves (GIR): increased from USD 529 million at end-March 2021 to USD 651 million as of end-November 2021. - Reserves expected: USD675 million as of end-2021 or 4.6 months of prospective imports. - Current account deficit: projected to narrow to 20 percent of GDP in 2021 from 25 percent of GDP in 2020. - Exchange rate and REER: nominal exchange rate recovered to pre-COVID level; REER appreciated by 47 percent from March 2021 to September 2021, mainly driven by a 50 percent NEER appreciation. - Foreign currency deposits in banking system: increased by USD280 million during January-September 2021. - External financing shortfalls in 2021: reduction relative to original EFF of USD 79 million (USD 68 million bilateral partners and USD 11 million World Bank); fiscal adjustment larger than envisaged by USD 42 million in 2021; remaining financing need USD 37 million met by domestic financing (MEFP ¶32). - SDR allocation: Seychelles received SDR 21.9 million in August 2021 as part of the Fund’s general SDR allocation. ### Inflation, monetary policy, money, and credit - Annual average inflation: expected to reach 10 percent in 2021, up from 1.2 percent in 2020. - CPI (annual average): 10.0 (2021); CPI (end-of-period): 8.6 (2021). - Inflation dynamics: peaked in May 2021 and receding since, reflecting pass-through from the April 2021 exchange rate appreciation. - Monetary policy: rates on hold since July 2021; Monetary Policy Rate (MPR) at beginning of 2021: 3.0% then revised to 2.0% in third quarter of 2021. - Broad money growth (12–month percent change): 29.2 (2020). - Private sector credit growth: decelerated by 7.9 percent (y-o-y at end-September 2021); without exchange rate appreciation, private sector credit would have declined only by 1.5 percent. - Lending rates: sticky despite accommodative policy and abundant liquidity; effective savings rate 1.69% (as at October 2021); average lending rate 9.13% (as at October 2021). - Aggregate reserves held at the central bank in excess of the reserve requirement: swollen to 8 percent of GDP as of October 28, 2021. ### Fiscal policy, public debt, and liability management - Program implementation: all quantitative program targets (QPCs) at end-July 2021 and ITs at end-September 2021 met; progress on structural benchmarks appropriate. - Expenditure: authorities kept expenditures below program, mostly due to lower capital expenditures from reduced expected external financing. - Primary deficit developments: - 2021 primary deficit: expected to decrease to 6.6 percent of GDP (outperforming the 9.1 percent of GDP expected during program approval). - Draft 2022 budget: primary deficit target of 0.8 percent of GDP in 2022 (compared to 4.7 percent of GDP at EFF approval). - Authorities aim to return to a primary surplus of 2.9 percent as early as 2023 (compared to a deficit of 0.4 percent at EFF approval). - Revenue measures: tax revenue as percent of GDP projected to increase from 26.7 percent of GDP in 2021 to 28.2 percent in 2022 based on recovery and revenue administration measures (structural benchmark for end-September 2023). - Business tax reform: some revenue losses in 2022 but expected to be more than offset in 2023 and beyond by taxation of securities dealers, digital economy taxation, and an increase in profit tax to 3 percent. - Liability Management Operation (LMO, July 2021): - Switched SR 1.2 billion of Treasury bills into bonds with tenors of 3, 5, and 7 years; resulting average maturity 4.8 years. - Cut by 5% of GDP the stock of Treasury bills outstanding. - One-year Treasury bill interest rates declined by more than 450 basis points since LMO implementation (also cited as 461 basis points during July-October 2021). - Bond yields in exchange lower by 91 – 157 bps for different tenors compared to early February 2021. - Public debt trajectory: - Debt-to-GDP ratio expected to decline from 92.2 of GDP at end-2020 to around 81 percent of GDP by end-2021 and to around 54 percent by end-2026. - Total government and government-guaranteed debt (percent of GDP): 92.2 (2020); 82.7 (2021); 80.7 (2022); 69.7 (2026); 53.9 (2032). - Gross financing needs (GFNs): rose to 47 percent of GDP in 2020, projected to decline to 41 percent in 2021, and further to 11 percent by 2026 (compared with 12 percent by 2026 envisaged last July). - 2021 bond issuance: bonds amounting to 1.6 percent of GDP (SCR 400 million) in November 2021 completed the bond issuance program for 2021. - 2022 planned financing: utilize SDR allocation (1.6 percent of GDP) and tap domestic market; CBS to propose amendments to CBS Act to on-lend proceeds from SDR utilization (MEFP ¶32). - Sovereign rating: Fitch upgraded Seychelles’ sovereign ratings from B to B+ on November 19, 2021. ### Program performance, monitoring, and structural reforms - All QPCs end-July 2021 and ITs end-September 2021 were met; some targets were met by wide margins. - Structural reforms and governance: - Cabinet approved necessary legislation for EU and OECD international tax frameworks; Seychelles removed from EU list of non-cooperative jurisdictions. - Beneficial Ownership Act and Regulations in force August 2020; centralized beneficial ownership database operational July 2021; as of October 2021, 82 percent of more than 53,000 international business companies in good standing had submitted information; full compliance expected by January 2022; FSA and FIU to assess accuracy by June 2022. - Air Seychelles: went into administration; administrators appointed in early October 2021; contingent liability risks reduced; government allocated $5 million for Etihad Airways debt repayment and $1.4 million for 2015 liability in 2022 budget. - Structural benchmark for Policy Paper on the Financial Stability Act not met due to capacity constraints; revised for March 2022 with IMF peer review assistance requested. - Program monitoring: - Semi-annual reviews, quantitative performance criteria and indicative targets, continuous performance criteria, and structural benchmarks. - Second review set for June 2022 (based on end-December 2021 targets); third review set for December 2022 (based on end-June 2022 targets). - Technical Memorandum of Understanding (TMU) defines criteria, adjustors, and reporting requirements. ### Financial sector stability, supervision, and COVID-19 support unwind - Banking soundness: - Regulatory capital ratio: increased to 22 percent as of September 2021, from 17.1 percent at end-2020 (selected series show varying quarter values). - Average NPL ratio increased from 3.3 percent in December 2020 to 4.9 percent in September 2021 (other series: Non-performing loans to gross loans 3.5 (2021)). - Banks remain well capitalized and highly liquid; deposit levels stable; new loan extensions low due to limited bank risk appetite. - COVID-19 support measures: - CBS to start unwinding temporary COVID-mitigating measures in 2022; full exit and recognition of COVID-impacted loans could increase overdue loans and NPL ratios. - Private Sector Credit Relief Facility: at end-September, accounted for 4.5 percent of total bank credit. - PSRCLF utilization as of November 30, 2021: 23.28% used (R116,394,565.61 out of R500 million). - PSLERCLF utilization as of November 30, 2021: 37.21% used (R279,046,183.00 out of R750 million). - CBS assessing impact using granular bank-level data and will present unwinding plan to CBS Board by end-2021 (MEFP ¶63). - Supervisory and resolution measures: - CBS committed to early intervention measures where necessary, including suspension of dividend payments for undercapitalized banks and requiring capital plans for viable but undercapitalized banks. - Staff urged enhanced supervisory monitoring, correct loan classification, and adequate provisioning. - CBS committed to encouraging loan restructuring for viable firms with temporary liquidity shortages. - Financial stability institutional reforms: - CBS prepared draft policy paper on Financial Stability Act (April 2021); revised structural benchmark: submit Policy Paper to Cabinet by March 2022. - Planned reforms: revise Capital Adequacy Regulation for Basel III capital definition (Cabinet approval end-May 2022), Bank Resolution Bill policy paper to Cabinet by end-June 2022, draft Bank Resolution Bill approved by Cabinet by end-June 2023. ### Risks (RAM and other risk assessments) - Main downside risks: - Renewed COVID-19 outbreak in Seychelles or partner countries that could slow tourism growth. - Tightening of monetary policy and financial conditions in the United States and Europe that could limit external financing ability. - Higher NPLs in banking sector from COVID-19 impact. - Climate change vulnerability and natural disasters. - Shortfall of external financing: identified as Medium High likelihood / Short to Medium term in RAM; recommended contingency plans include further fiscal consolidation and reliance on concessional financing. - RAM likelihood definitions: "low" = below 10 percent; "medium" = between 10 and 30 percent; "high" = between 30 and 50 percent. - Mitigation commitments: authorities committed to identify non-priority spending and investment projects to protect education, health, and social spending should downside risks materialize. ### Debt-exchange, LMOs, and policy lessons - GFNs and LMO effects: - GFNs: 47 percent of GDP in 2020; 41 percent in 2021; 11 percent by 2026. - LMO mitigated rollover risks and contributed to lower yields and improved debt sustainability. - Banking sector and market effects: - Banks’ exposure to government securities remained 16 percent of assets between end-June 2021 and end-September 2021; share of bonds increased by 4.2 percent of total assets between those dates. - Core liquidity: declined from 19 percent of total assets at end-June 2021 to 18 percent at end-September 2021. - Banking system liquidity: 8 percent of GDP at end of October 2021. - Policy recommendations and trade-offs: - LMOs can mitigate refinancing risks but involve trade-offs between liquidity and solvency; pricing must be carefully analyzed. - Feasibility depends on investor risk perception, macro prospects, depth of debt market, and financial stability considerations. - Timing and market communications are integral to success. ### Medium-term fiscal framework, public investment, and efficiency - MTFF and capacity building: - IMF TA (September 2021) delivered training on fiscal sustainability and public debt dynamics. - For FY23, additional support scheduled to strengthen MTFF credibility, costing methodologies, and estimation of binding expenditure ceilings. - Public Investment Management: - PIMA planned for FY23 to identify efficiency gains and procurement scope for PPPs (MEFP ¶44). - Expenditure efficiency: - Commitment to rationalize wage bill, contain goods and services, and review transfers for better targeting and financial sustainability. - Forecasted savings: SR 500.0 million equivalent to 1.8 percent of GDP. - Government to allocate SR 63.2 million under wages and salaries (0.2 percent of GDP) for increase of employers’ pension fund contribution from 3% to 5% in January 2022. - IFMIS and PFM modernization: - New IFMIS platform to be installed by January 2024. - ASYCUDA enhancements at customs and other digitalization projects expected completion: June 2023 (modules deployed as ready). ### Social protection, climate adaptation, diversification, and digitalization - Social protection reforms: - World Bank PforR budget support US$ 9 million in 2021 to reform social protection; objectives include improving efficiency of five largest cash transfer programs. - 2022 focus: enact law increasing retirement age to 65 years old beginning January 1, 2023; ASP reforms and caregiver training targets. - Climate adaptation and blue economy: - Authorities intend to mainstream climate adaptation in post-pandemic recovery plan (MEFP ¶17,18,25). - NDC targets: economy wide absolute GHG emissions reduced by 293.8 ktCO2e in 2030 (26.4%) compared to BAU. - Energy sector targets: 30% of gasoline private vehicles electric by 2030; Energy Efficiency improvement level of 15% by 2030. - Diversification and digital agenda: - Tourism diversification, fisheries expansion (SWIOFISH 3), aquaculture launch, cold storage and fish-processing developments. - Digital initiatives: Digital Economy Diagnostic Report and Seychelles Fintech Strategy; key platforms (digital ID, online business registration, online license application) to come online in first half of 2022; Health Information System by end 2022. - Submarine cables: PEACE operational by April 2022; third cable mid-year 2023. ### Data, statistics, and reporting - IMF TA supported NBS to rebase annual GDP estimates and improve quarterly GDP estimates. - IMF TA to CBS to improve external sector statistics and tourism earnings estimation (MEFP ¶58). - Program reporting schedule: CBS weekly and monthly reporting requirements; Ministry of Finance monthly and quarterly reporting obligations detailed in TMU. ### Program financing, Fund exposure, and repayment capacity - Program financing: remains fully financed with firm commitments for next 12 months and good prospects thereafter. - Steeper than planned fiscal consolidation: savings of USD 71 million from the primary balance in 2022 to partly offset reduction in bilateral financing. - Fund credit-to-GDP ratio: will peak at 8.6 percent in 2021. - Fund credit to GIR ratio: projected to peak at 19.5 percent in 2022. - Obligations to the Fund relative to exports of goods and services: will peak at 1.1 percent in 2024. - Seychelles’ capacity to repay the Fund: adequate but subject to high risks; return of tourists expected to generate significant repayment capacity. *Source: International Monetary Fund staff summary extracted from the Seychelles EFF first review supporting documentation (1sycea2022001).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Macroeconomic developments and outlook - The expected macroeconomic recovery has materialized; recovery is V-shaped and driven by tourism (MEFP ¶1-13). - Real GDP growth is projected to reach 6.1 percent in 2021. - Tourist arrivals for 2021 as a whole are projected to reach 70 percent of the 2019 level. - Given widespread vaccine coverage, the 7-day average of new COVID cases is below 100 per 100,000 from September 2021. - The economic outlook remains positive but subject to uncertainty in the global evolution of the COVID-19 pandemic. - Staff recommends completion of the first review, given the authorities’ robust actions to meet program targets and commitments. ### External position and reserves - Gross international reserves (GIR) increased from USD 529 million at end-March 2021 to USD 651 million as of end-November 2021. - Reserves are expected to reach USD675 million as of end-2021 or 4.6 months of prospective imports. - The current account deficit is projected to narrow to 20 percent of GDP in 2021 from 25 percent of GDP in 2020. - The nominal exchange rate between the Seychelles rupee and the US dollar has recovered to its pre-COVID level. - The REER appreciated by 47 percent from March 2021 to September 2021, mainly driven by a 50 percent NEER appreciation. - Foreign currency deposits in the banking system increased by USD280 million during January-September 2021. ### Inflation, monetary policy, and credit - Annual average inflation is expected to reach 10 percent in 2021, up from 1.2 percent in 2020. - Inflation peaked in May 2021 and has been receding since, reflecting pass-through from the April 2021 exchange rate appreciation. - Private sector credit growth decelerated by 7.9 percent (y-o-y at end-September 2021), mostly due to currency appreciation. - Without exchange rate appreciation, private sector credit would have declined only by 1.5 percent. - Monetary policy rates have been on hold since July 2021. - Supportive monetary policy caused aggregate reserves held at the central bank in excess of the reserve requirement to swell to 8 percent of GDP as of October 28, 2021. - Lending rates have remained sticky despite accommodative policy and abundant liquidity (Annex II). ### Fiscal policy, public debt, and liability management - Program implementation has been strong: all quantitative program targets (QPCs) at end-July 2021 and ITs at end-September 2021 were met; progress toward structural benchmarks was appropriate. - The authorities kept expenditures below program, reflecting mostly lower capital expenditures due to reduced expected external financing. - Primary deficit developments: - The 2021 primary deficit is expected to decrease to 6.6 percent of GDP (outperforming the 9.1 percent of GDP expected during program approval). - The draft 2022 budget targets a primary deficit of 0.8 percent of GDP in 2022 (compared to 4.7 percent of GDP at EFF approval). - The authorities aim to return to a primary surplus of 2.9 percent as early as 2023 (compared to a deficit of 0.4 percent at EFF approval). - Fiscal consolidation measures and revenue measures: - Tax revenue as a percent of GDP would increase from 26.7 percent of GDP in 2021 to 28.2 percent in 2022 based on recovery and revenue administration measures (structural benchmark for end-September 2023). - Business tax rate reform will generate some revenue losses in 2022 but is expected to be more than offset in 2023 and beyond by reforms including taxation of securities dealers, digital economy taxation, and an increase in profit tax to 3 percent. - Liability Management Operation (LMO): - In early July 2021, authorities exchanged treasury bills for longer-term bonds, extending the average maturity of treasury-bill debt by several years. - Yields on government securities have fallen markedly; one-year Treasury bill interest rates declined by more than 450 basis points since LMO implementation in July 2021. - The combined effects of the LMO and deeper fiscal consolidation have substantially reduced rollover risks. - Public debt trajectory: - Debt-to-GDP ratio is expected to decline from 92.2 of GDP at end-2020 to around 81 percent of GDP by end-2021 and to around 54 percent by end-2026. - Seychelles’ debt remains sustainable albeit with significant risks; capacity to repay the Fund remains adequate. - Sovereign rating: Fitch upgraded Seychelles’ sovereign ratings from B to B+ on November 19, 2021. ### Program performance and governance reforms - All QPCs end-July 2021 and ITs end-September 2021 were met; some targets (such as the primary deficit) were met by wide margins. - Structural reform progress: - Cabinet approved necessary legislation to ensure full compliance with EU and OECD international tax frameworks; Seychelles was removed from the EU list of non-cooperative jurisdictions. - Air Seychelles: remaining debts managed through administration; two administrators appointed in early October 2021; contingent liability risks to government reduced. - More than 80 percent of international business companies had submitted beneficial ownership information to the centralized FIU database as of October 2021; full compliance expected by January 2022; FSA and FIU to assess accuracy by June 2022. - The structural benchmark for submitting the Policy Paper on the Financial Stability Act was not met due to capacity constraints and was revised for March 2022 with IMF peer review assistance requested. - Capacity constraints and technical assistance: authorities requested IMF assistance to peer review the Financial Stability Act policy paper. ### Financial sector stability - Banks remain well capitalized and highly liquid. - Regulatory capital ratio increased to 22 percent as of September 2021, from 17.1 percent at end-2020. - Average NPL ratio increased from 3.3 percent in December 2020 to 4.9 percent in September 2021. - Deposit levels are stable; new loan extensions are low due to limited bank risk appetite. - CBS is expected to start unwinding temporary COVID-mitigating measures in 2022; full exit and recognition of COVID-impacted loans could increase overdue loans and NPL ratios. - Domestic banking system is not exposed to Air Seychelles. ### Risks - Downside risks include: - A renewed COVID-19 outbreak in Seychelles or partner countries that could slow tourism growth. - Tightening of monetary policy and financial conditions in the United States and Europe that could limit external financing ability. - Higher NPLs in the banking sector from COVID-19 impact. - Climate change vulnerability. - Authorities committed to identify non-priority spending and investment projects to protect education, health, and social spending should downside risks materialize. *Source: EXECUTIVE SUMMARY (1sycea2022001).* ### 14. Risks to debt sustainability from Air Seychelles have been reduced now that Air ### 14. Risks to debt sustainability from Air Seychelles have been reduced now that Air ### Debt risks from Air Seychelles - Air Seychelles has gone into administration; administrators will consider optimal restructuring and debt settlement. - For the 2022 budget, the government allocated $5 million previously agreed for repayment of the Etihad Airways debt that Government purchased at a discount, and $1.4 million for a liability from 2015. - Contingent liability risks to the government have been reduced as remaining debts of Air Seychelles will be managed through administration and are expected to be paid from Air Seychelles’ assets (structural benchmark for end-September 2021; MEFP ¶50). ### Medium-Term Fiscal Framework (MTFF) and fiscal institutions - Progress on MTFF implementation: IMF TA mission (September 2021) delivered hands-on training on principles of fiscal sustainability and public debt dynamics to strengthen debt management. - For FY23, additional support scheduled to strengthen MTFF credibility through improving costing methodologies, including the estimation of binding expenditure ceilings. - Authorities have started technical discussions with IMF staff on strengthening fiscal forecasting, reporting, budget institutions, fiscal risk analysis, and enforcement of budget ceilings. ### Efficiency of government spending and public investment - Improving spending efficiency is key for fiscal sustainability and medium-term growth prospects. - A Public Investment Management Assessment (PIMA) planned for FY23 will identify opportunities to increase efficiency of public investment, including scope for procurement system to support PPPs (MEFP ¶44). - To ensure transparency of COVID-related spending, the government is carrying out an audit including information on awarded companies (MEFP ¶44). ### Climate adaptation, digitalization, and social safety net reforms - Authorities implementing projects for climate-change adaptation, digitalization, and reform of social safety net. - Climate change adaptation investments remain critical; authorities intend to mainstream climate adaptation in Seychelles’ post-pandemic recovery plan (MEFP ¶17,18,25). - IMF staff working closely with the World Bank and AfDB and will continue to support necessary social protection reforms (MEFP ¶24, 41, 42). ### External financing shortfalls and compensating measures - Reductions in external financing in 2021: budget support from two key bilateral partners expected not to materialize in 2021; planned World Bank health and nutrition project not yet approved by its Board. - Reduction in external financing relative to original EFF is expected to be USD 79 million (USD 68 million from the bilateral partners and USD 11 million from the World Bank). - Fiscal adjustment larger than envisaged by USD 42 million in 2021. - Remaining financing need of USD 37 million being met by domestic financing, helped by favorable domestic financial conditions (MEFP ¶32). ### Monetary and exchange rate policy - CBS stands ready to act if inflationary pressures persist; lagged impact of rupee appreciation and lower electricity tariffs expected to reduce inflationary pressures starting early-2022. - If inflation remains at double-digit levels, CBS will act swiftly to keep expectations anchored; authorities intend to expand survey of inflation expectations. - Planned AFRITAC South TA on updating the Producer Price Index will help improve inflation forecasting (MEFP ¶53, 54). - Ongoing reforms to monetary policy framework include development of an interbank market and fine-tuning communications policy. - Lending rates have been sticky; interest rate transmission channel needs strengthening amid rising NPLs and banking sector risk aversion (MEFP ¶53). - Greater recourse to net external financing vis-a-vis domestic financing during 2021-22 will require sterilization by the CBS; resumption of repo operations based on a Master Repurchase Agreement will strengthen CBS liquidity management. - IMF TA planned in the fourth quarter of 2021 to strengthen monetary policy implementation. ### Exchange rate management and FX risks - CBS intends to continue allowing market determination of exchange rate, with interventions only to limit disorderly conditions and build external buffers (MEFP ¶55). - Banking regulations lack sufficient guidance on extending foreign currency credit to entities with no foreign exchange earnings. - Greater exposure to foreign currency liabilities from foreign currency deposits would warrant better banking sector risk management capabilities. ### Debt reduction strategy and financing profile - Liability management operation (LMO) mitigated heightened refinancing risks from reliance on short-term domestic financing and contributed to easing sovereign yields. - Gross financing needs (GFNs): rose to 47 percent of GDP in 2020, projected to decline to 41 percent in 2021, and further to 11 percent by 2026 (compared with 12 percent by 2026 envisaged last July), mainly because of the successful LMO and strong fiscal consolidation. - One-year T-bill yields declined by 461 basis points during July-October 2021. - Authorities plan to tap domestic market and use recently allocated SDRs to offset reduction in external financing for 2021 and 2022. - In August 2021, Seychelles received SDR 21.9 million as part of the Fund’s general SDR allocation. - 2021 bond issuance: bonds amounting to 1.6 percent of GDP (SCR 400 million) in November 2021 completed the bond issuance program for 2021. - 2022 financing gap planned to be met through utilization of SDR allocation (1.6 percent of GDP) (MEFP ¶32). - CBS will propose amendments to the CBS Act to on-lend proceeds from SDR utilization to the government (MEFP ¶32). - Footnote details: Bond issuance for 2021 will remain at around 11 percent of GDP as estimated during EFF approval, including bond issuance for remaining part of 2021 amounting to 1 percent of GDP. At end-2021, overall exposure of banking sector to government securities projected to remain unchanged at 16 percent of bank total assets compared to previous year, but the shares of T-bills will fall and that of bonds will rise to be roughly even. Annual bond issuance during 2022-2026 projected to decline from 2021 level and average at around 6.0 percent of GDP (compared to 4.6 percent during EFF approval). Reduction in T-Bills (annual average of 2.4 percent of GDP) during same period, partly supported by external financing, would provide room to absorb bond issuance and accommodate possible future pickup in bank credit. ### Debt management transparency and benchmarks - Structural benchmark met for first review (end-September 2021): publishing a debt bulletin on Ministry of Finance website; two quarterly debt bulletins published in 2021. - IMF TA on updating and publishing a debt management strategy, an annual borrowing plan (ABP), and an auction calendar (structural benchmark for end-March 2022) scheduled for early 2022. - New structural benchmark for end-March 2022: active involvement of National Public Debt Management Committee to approve quarterly borrowing plan on recurring basis. - Given limitations of core banking system that cannot handle bond auctions, authorities are developing process to adopt auction mechanism instead of tap issuances. - New structural benchmark for end-December 2022: develop government securities trading framework approved by government in consultation with CBS to initiate trading in government securities. - Staff urged legal reforms to make domestic bond issuance a regular operation without issuance-specific legal approval (MEFP ¶51,52). ### Financial stability and banking sector health - Banking system appears well capitalized and highly liquid, limited COVID-19 impact on loan portfolios, supported by recovery and remaining support measures. - Banks experienced reduction in interest income in 2021 due to payment holidays, local currency appreciation impact on FX loan portfolios, and reduction in prime lending rates. - Loan-loss provisions lower in 2021 compared to 2020 due to recovery, positive adjustment of macro variables in IFRS 9 models, and reversal in provisions. - With recovery, firms under moratoria started repaying loans and supply for new loans increased, reflecting improved but still low risk appetite for lending (MEFP ¶60). ### Unwinding COVID-19 support measures - By end-2021, CBS will submit to its Board a plan for unwinding COVID-19 support measures including withdrawal of private sector credit relief scheme, provisions for central bank advances to government, and payment holiday for bank customers. - Private Sector Credit Relief Facility: aimed to provide working capital loans with partial government guarantee on capital and subsidized interest rates by 400 bps. At end-September, it accounted for 4.5 percent of total bank credit. Government has not availed fresh advances from the CBS in 2021. - CBS should urge banks to differentiate viable borrowers with liquidity shortages from non-viable ones to support credit growth and asset quality (MEFP ¶62). - CBS assessing impact of all COVID-19 related borrower support measures using granular, bank-level data; does not expect significant negative impact on banks’ asset quality based on preliminary assessments. - Proposal for unwinding some measures entirely while replacing others with more targeted versions to be submitted to CBS Board by end-2021 (MEFP ¶63). ### Supervisory and resolution measures - CBS committed to ensuring stable, well-capitalized banking system and ready to take early intervention measures where necessary, including suspension of dividend payments for undercapitalized banks. - Staff urged CBS to enhance supervisory framework effectiveness via regular monitoring with more granular information and ensuring loan classification correctly reflects asset quality and loans adequately provisioned. - CBS committed to monitoring classification of loans and providing guidance on prudential treatment of moratoria and NPL management strategies. - CBS will encourage banks to engage in loan restructuring for viable firms with temporary liquidity shortages (MEFP ¶64). ### Financial stability institutional reforms - CBS prepared draft policy paper in April 2021 outlining considerations for drafting a Financial Stability Act; after requesting IMF TA, CBS will submit Policy Paper to Cabinet for approval by March 2022 (revised structural benchmark for March 2022; MEFP ¶65). - Authorities pursuing enhancements to legislative framework for National Payment System, adopting innovative financial services per national Fintech strategy, promoting digital financial literacy, and enhancing financial consumer protection. - CBS committed to implementing enhanced credit information system and supporting legal framework to extend credit information coverage. - Staff advised authorities to prioritize actions given intense reform agenda and capacity constraints, to remain on track with timing for structural benchmarks (MEFP ¶66–71). Staff to assess progress in Article IV mission. ### Governance, transparency, and beneficial ownership - Authorities implementing transparency and accountability measures related to COVID-19 spending. - Commitments under RFI met except audit of emergency spending; audit delayed due to staffing shortages, scheduled to be sent to Ministry of Finance in November 2021 and made public in December 2021 (MEFP ¶44). - Beneficial Ownership Act and Regulations came into force in August 2020, requiring identification and verification of beneficial ownership and maintenance of up-to-date register by resident agents and a centralized database by FIU. - Centralized beneficial ownership database became operational in July 2021. - As of October 2021, 82 percent of more than 53,000 international business companies in good standing had submitted information to the beneficial ownership database; full compliance expected by January 2022. - FSA and FIU will, by June 2022, publish an assessment report on accuracy of beneficial ownership information of international business companies in database (MEFP ¶74). ### Data issues - IMF TA supported NBS to rebase annual GDP estimates at current and constant prices and improve quarterly GDP estimates while addressing large inconsistencies in GDP series. - IMF TA provided to CBS to improve external sector statistics, including estimation of tourism earnings (MEFP ¶58). - Mission underlined sustainable capacity improvements require adequate resources at NBS and CBS. ### Program modalities, financing, and repayment capacity - Program remains fully financed with firm commitments for financing for next 12 months and good prospects for remainder of program period. - Steeper than planned fiscal consolidation (savings of USD 71 million from the primary balance in 2022) will partly offset reduction in bilateral financing. - Reductions in external financing in 2021 and 2022 will require more domestic financing (at a moderate pace due to significant fiscal savings) and use of SDR allocation. - GIR both in percent of ARA metric and months of imports are projected to remain at an appropriate level. - Seychelles’ capacity to repay the Fund remains adequate but subject to high risks. - Return of tourists expected to generate significant repayment capacity; authorities embarked on successful vaccination campaign and re-opened border to tourists as of end-March 2021. - Fund credit-to-GDP ratio will peak at 8.6 percent in 2021. - Fund credit to GIR ratio projected to peak at 19.5 percent in 2022. - Obligations to the Fund relative to exports of goods and services will peak at 1.1 percent in 2024. - Program risks include uncertainties around tourism and extensive structural reform agenda. *Source: Authorities and IMF staff calculations (selected excerpts).* ### 36. The CBS remains committed to implementing the safeguards assessment ### 1sycea2022001 - 36. The CBS remains committed to implementing the safeguards assessment ### Safeguards implementation - The CBS remains committed to implementing the safeguards assessment recommendations. - While slightly delayed, the CBS, in consultation with the IMF, will submit amendments to the CBS Act to the Cabinet in March 2022 which would strengthen governance and oversight, enhance institutional and personal autonomy, and safeguard financial autonomy. - The CBS is expected to start unwinding the temporary COVID-mitigating measures in 2022 (MEF¶64). ### Economic outlook and growth - The economy has rebounded strongly from the severe 2020 pandemic-related contraction, and the outlook is favorable. - Growth is driven by a swift recovery of the tourism sector and expected to reach about 6 percent of GDP. - Market sentiment has improved, fiscal deficits have narrowed, and debt ratios have been put on a decisively downward trajectory. - Recovery aided by authorities’ strides in restoring macroeconomic stability and structural reforms under the ongoing EFF-supported program. ### Inflation and monetary stance - Price rises accelerated in early 2021 but inflation is expected to ease in 2022. - Seychelles, as a small open economy, fully felt pandemic-related cost-push factors combined with the lagged second-round effects of the steep 2020 currency depreciation. - Inflation has been receding since its peak in May 2021 as the exchange rate recovered to its pre-pandemic level and is expected to continue to ease in 2022. - The CBS is monitoring inflation expectations and stands ready to act if inflationary pressures persist. ### Fiscal performance, primary balance, and debt vulnerabilities - The authorities are committed to reducing debt vulnerabilities and fiscal risks by frontloading the fiscal adjustment. - 2021 primary balance and deficit: - The 2021 primary balance is projected to outperform the projection at the time of the EFF by 2.5 percent of GDP. - The primary deficit in 2021 is expected to reach 6.6 percent of GDP compared to 9.1 percent envisaged at the time of the EFF approval. - Revenues outperformed the EFF projections and the unwinding of COVID-related support measures reduced related expenditures from 6 percent of GDP in 2020 to 0.9 percent in 2021. - 2022 budget: - The 2022 budget sets a more ambitious primary deficit target than previously envisioned of 0.8 percent of GDP. - Tax revenues are expected to rise on the back of the economic recovery, tax reforms, and measures to strengthen revenue administration. - The government has identified structural reforms to allow a substantial reduction in current expenditures as a share of GDP while increasing capital expenditures. ### Public debt management and domestic financing - Authorities addressed heightened refinancing risks associated with heavy reliance on short-term domestic financing during the COVID period. - The successful implementation of the liability management operation (LMO) has significantly mitigated rollover risks and laid the foundation for further easing of domestic financial conditions. ### Banking system and unwind of support measures - The banking system weathered the crisis well, highlighting the importance of a well-designed strategy for unwinding COVID-19 related support and forbearance measures. - The CBS is appropriately assessing the impact of all COVID-19 related borrower support measures. - The CBS intends to undertake a prudent bank-level analysis of the impact of these measures on banks’ asset quality, which will strengthen the unwinding strategy. ### Governance, anti-corruption, and public financial management - Staff welcomes the authorities’ continued efforts to improve governance and stresses the need to strengthen implementation and enforcement going forward. - Authorities have taken important steps to strengthen the legal and institutional framework to fight corruption. - The beneficial ownership database is a welcome tool to enhance transparency of international business companies. - Ensuring accuracy of and appropriate access to the ownership information, including the assessment report expected in June 2022, will be critical moving forward. - Consolidating improvements in the PFM system’s integrity and transparency are important to the authorities’ efforts. ### Risks and mitigation - Main risks to the outlook and the EFF-supported program arise from COVID-related risks due to high dependence on tourism. - Authorities would need to be prepared to reallocate budgetary resources to cover priority needs while protecting the public finances. - Seychelles is vulnerable to climate related risks. - Risk mitigation would include sound fiscal policies and policies to diversify Seychelles’ economy as a medium-term priority. *Source: IMF staff appraisal and related sections in the provided content.* ### 44. Staff supports the authorities’ request for completion of the first review under the ### Staff supports the authorities’ request for completion of the first review under the Extended Arrangement ### Program support, capacity to repay, and risks - Staff supports the authorities’ request for completion of the first review under the Extended Arrangement. - The attached Letter of Intent and Memorandum of Economic and Financial Policies set out appropriate policies to pursue the program’s objectives. - The capacity to repay the Fund is adequate but subject to high risks, and risks to program implementation are manageable. ### Macroeconomic developments and projections - Real GDP growth (annual percent change): 4.5 (2019); -9.9 (2020); 6.9 (2021); 6.1 (2022); 7.7 (2023); 7.2 (2024); 6.8 (2025); 6.8 (2026); 5.0 (2027); 5.0 (2028); 5.0 (2029); 4.5 (2030); 4.8 (2031); 4.5 (2032). - CPI (annual average): 1.8 (2019); 1.2 (2020); 10.0 (2021); 10.0 (2022); 3.7 (2023); 3.7 (2024); 3.2 (2025); 3.2 (2026); 3.0 (2027–2032). - CPI (end-of-period): 1.7 (2019); 3.8 (2020); 8.6 (2021); 8.6 (2022); 3.9 (2023); 3.9 (2024); 3.5 (2025); 3.5 (2026); 3.2 (2027); 3.2 (2028); 3.0 (2029–2032). - GDP deflator average: -0.3 (2019); 1.8 (2020); 10.2 (2021); 8.9 (2022); 3.2 (2023); 3.7 (2024); 3.2 (2025); 2.9 (2026); 3.0 (2027–2032). - Broad money growth (12–month percent change): 13.9 (2019); 29.2 (2020). Velocity (GDP/broad money): 1.2 (2019); 1.2 (2020). Money multiplier (broad money/reserve money): 4.3 (2019); 3.9 (2020). - Credit to the private sector (percent change): 22.3 (2019); 20.2 (2020); 9.1 (2021); -11.9 (2022); 16.6 (2023); 16.0 (2024); 17.7 (2025); 16.2 (2026); 18.7 (2027); 15.9 (2028); 16.5 (2029); 15.5 (2030); 15.6 (2031); 15.0 (2032). ### Fiscal consolidation and public debt dynamics - Nominal GDP (2017): US$1,498 million. Per capita GDP (2017): US$15,735. Population, end-year (2016): 94,677. Literacy rate (2015): 95.3 percent. - Total revenue, excluding grants (percent of GDP): 35.3 (2019); 33.0 (2020); 29.0 (2021); 30.0 (2022); 31.2 (2023); 32.1 (2024); 32.4 (2025); 32.5 (2026); 34.2 (2027); 33.5 (2028); 34.9 (2029); 34.4 (2030); 35.4 (2031); 35.2 (2032). - Expenditure and net lending (percent of GDP): 36.7 (2019); 52.8 (2020); 45.6 (2021); 41.7 (2022); 41.1 (2023); 38.1 (2024); 37.0 (2025); 33.9 (2026); 36.0 (2027); 34.6 (2028); 36.0 (2029); 35.1 (2030); 36.0 (2031); 35.4 (2032). - Current expenditure (percent of GDP): 31.8 (2019); 46.3 (2020); 36.6 (2021); 35.5 (2022); 33.3 (2023); 31.5 (2024); 31.2 (2025); 28.5 (2026); 31.2 (2027); 28.6 (2028); 30.4 (2029); 28.6 (2030); 30.4 (2031); 28.8 (2032). - Capital expenditure (percent of GDP): 1 (2019); 4.9 (2020); 4.8 (2021); 7.2 (2022); 4.9 (2023); 7.0 (2024); 6.4 (2025); 5.9 (2026); 5.3 (2027); 5.2 (2028); 5.5 (2029); 5.3 (2030); 5.2 (2031); 4.7 (2032). - Overall balance, including grants (percent of GDP): -0.8 (2019); -18.0 (2020); -12.8 (2021); -9.3 (2022); -7.3 (2023); -3.4 (2024); -2.7 (2025); 0.6 (2026); -0.4 (2027); 1.1 (2028); 0.2 (2029); 1.4 (2030); 0.6 (2031); 1.7 (2032). - Primary balance (percent of GDP): 2.6 (2019); -15.0 (2020); -9.1 (2021); -6.6 (2022); -4.7 (2023); -0.8 (2024); -0.4 (2025); 2.9 (2026); 2.6 (2027); 3.0 (2028); 2.8 (2029); 3.1 (2030); 3.0 (2031); 3.2 (2032). - Total government and government-guaranteed debt (percent of GDP): 58.1 (2019); 92.2 (2020); 82.7 (2021); 80.7 (2022); 82.8 (2023); 75.9 (2024); 79.2 (2025); 69.7 (2026); 73.3 (2027); 64.3 (2028); 68.1 (2029); 59.5 (2030); 62.1 (2031); 53.9 (2032). ### External sector, reserves, and external debt - Current account balance including official transfers (percent of GDP): -15.2 (2019); -25.4 (2020); -21.1 (2021); -20.0 (2022); -22.0 (2023); -20.9 (2024); -19.7 (2025); -18.8 (2026); -17.7 (2027); -16.6 (2028); -16.8 (2029); -15.5 (2030); -15.3 (2031); -15.0 (2032). - Total external debt outstanding (millions of U.S. dollars): 4,885 (2019); 5,048 (2020); 5,446 (2021); 5,494 (2022); 5,816 (2023); 5,769 (2024); 6,131 (2025); 6,056 (2026); 6,330 (2027); 6,236 (2028); 6,547 (2029); 6,427 (2030); 6,802 (2031); 6,635 (2032). - Total external debt outstanding (percent of GDP): 290.7 (2019); 410.1 (2020); 386.2 (2021); 401.8 (2022); 330.7 (2023); 310.2 (2024); 316.4 (2025); 294.3 (2026); 302.1 (2027); 277.1 (2028); 288.9 (2029); 262.0 (2030); 389.8 (2031); 246.8 (2032). - Terms of trade (-=deterioration): 6.6 (2019); 10.2 (2020); -3.6 (2021); -4.5 (2022); -4.1 (2023); -0.8 (2024); -0.4 (2025); 4.0 (2026); 0.9 (2027); 1.3 (2028); 0.9 (2029); 1.3 (2030); 0.0 (2031); 0.0 (2032). - Gross official reserves (end of year, millions of U.S. dollars): 581 (2019); 559 (2020); 672 (2021); 675 (2022); 743 (2023); 673 (2024); 815 (2025); 720 (2026); 816 (2027); 720 (2028); 824 (2029); 751 (2030); 848 (2031); 778 (2032). - Months of imports, c.i.f.: 5.2 (2019); 4.6 (2020); 4.6 (2021); 4.6 (2022); 4.4 (2023); 4.1 (2024); 4.4 (2025); 3.9 (2026); 4.0 (2027); 3.6 (2028); 3.8 (2029); 3.5 (2030); 3.9 (2031); 3.6 (2032). - Gross official reserves as percent of Assessing Reserve Adequacy (ARA) metric: 111.6 (2019); 109.9 (2020); 114.5 (2021); 113.4 (2022); 115.9 (2023); 108.0 (2024); 117.4 (2025); 108.5 (2026); 111.1 (2027); 104.2 (2028); 107.0 (2029); 104.6 (2030); 104.6 (2031); 104.2 (2032). - Exchange rate: Seychelles rupees per US$1 (end-of-period): 14.1 (2019); 21.6 (2020). Seychelles rupees per US$1 (period average): 14.0 (2019); 17.6 (2020). As to 2020, exchange rate measured as of July 14, 2020. ### Balance of payments and external flows (selected figures) - Current account balance (millions of US$): -255 (2019); -313 (2020); -331 (2021); -273 (2022); -386 (2023); -388 (2024); -384 (2025); -386 (2026); -378 (2027); -375 (2028); -393 (2029); -381 (2030); -397 (2031); -404 (2032). - Exports of goods (millions of US$): 483 (2019); 420 (2020); 479 (2021); 447 (2022); 506 (2023); 479 (2024); 565 (2025); 503 (2026); 600 (2027); 520 (2028); 651 (2029); 558 (2030); 706 (2031); 591 (2032). - Exports of services (millions of US$): 1,126 (2019); 683 (2020); 743 (2021); 789 (2022); 937 (2023); 975 (2024); 1,168 (2025); 1,203 (2026); 1,353 (2027); 1,394 (2028); 1,506 (2029); 1,552 (2030); 1,653 (2031); 1,705 (2032). - Tourism earnings (millions of US$): 590 (2019); 221 (2020); 247 (2021); 275 (2022); 378 (2023); 390 (2024); 525 (2025); 532 (2026); 610 (2027); 618 (2028); 696 (2029); 705 (2030); 787 (2031); 797 (2032). - Balance on primary income (millions of US$): -59 (2019); -66 (2020); -68 (2021); -63 (2022); -77 (2023); -88 (2024); -104 (2025); -94 (2026); -126 (2027); -99 (2028); -135 (2029); -108 (2030); -147 (2031); -120 (2032). ### Government operations (consolidated) - Total revenue and grants (millions of Seychelles Rupees): 8,435 (2019); 7,543 (2020); 8,209 (2021); 8,120 (2022); 9,422 (2023); 9,663 (2024); 10,506 (2025); 10,578 (2026); 11,779 (2027); 11,835 (2028); 12,901 (2029); 12,992 (2030); 14,048 (2031); 14,202 (2032). - Tax revenue (millions of Seychelles Rupees): 7,425 (2019); 6,369 (2020); 6,601 (2021); 6,692 (2022); 7,688 (2023); 7,863 (2024); 8,739 (2025); 8,908 (2026); 10,070 (2027); 9,999 (2028); 11,419 (2029); 11,329 (2030); 12,466 (2031); 12,493 (2032). - Wages and salaries (millions of Seychelles Rupees): 2,507 (2019); 2,845 (2020); 2,962 (2021); 2,930 (2022); 3,137 (2023); 3,097 (2024); 3,158 (2025); 3,100 (2026); 3,442 (2027); 3,359 (2028); 3,717 (2029); 3,628 (2030); 4,015 (2031); 3,918 (2032). - Interest due (millions of Seychelles Rupees): 559 (2019); 640 (2020); 912 (2021); 665 (2022); 715 (2023); 711 (2024); 698 (2025); 696 (2026); 998 (2027); 620 (2028); 935 (2029); 612 (2030); 930 (2031); 590 (2032). - Foreign interest: 237 (2019); 292 (2020); 355 (2021); 228 (2022); 309 (2023); 199 (2024); 340 (2025); 184 (2026); 589 (2027); 157 (2028); 567 (2029); 142 (2030); 544 (2031); 126 (2032). - Domestic interest: 322 (2019); 348 (2020); 557 (2021); 438 (2022); 406 (2023); 512 (2024); 359 (2025); 512 (2026); 409 (2027); 462 (2028); 367 (2029); 470 (2030); 386 (2031); 463 (2032). - Capital expenditure (millions of Seychelles Rupees): 671 (2019); 1,032 (2020); 1,797 (2021); 1,238 (2022); 1,946 (2023); 1,696 (2024); 1,719 (2025); 1,613 (2026); 1,724 (2027); 1,754 (2028); 1,790 (2029); 1,869 (2030); 1,813 (2031); 1,973 (2032). - Overall balance, cash basis (after grants) (millions of Seychelles Rupees): -196 (2019); -4,086 (2020); -3,201 (2021); -2,323 (2022); -2,019 (2023); -943 (2024); -827 (2025); 198 (2026); -132 (2027); 376 (2028); 77 (2029); 494 (2030); 238 (2031); 638 (2032). - Financing (millions of Seychelles Rupees): 196 (2019); 4,086 (2020); 3,201 (2021); 2,323 (2022); 2,019 (2023); 943 (2024); 827 (2025); -198 (2026); 132 (2027); -376 (2028); -77 (2029); -494 (2030); -238 (2031); -638 (2032). - External financing disbursements (millions of Seychelles Rupees): 352 (2019); 1,176 (2020); 4,546 (2021); 2,132 (2022); 3,125 (2023); 1,566 (2024); 2,596 (2025); 1,938 (2026); 519 (2027); 465 (2028); 459 (2029); 279 (2030); 441 (2031); 274 (2032). - Scheduled amortization (millions of Seychelles Rupees): -397 (2019); -523 (2020); -878 (2021); -597 (2022); -873 (2023); -862 (2024); -964 (2025); -952 (2026); -1,114 (2027); -1,100 (2028); -981 (2029); -966 (2030); -993 (2031); -976 (2032). - Memorandum item: External debt service due (millions of Seychelles Rupees): 634 (2019); 816 (2020); 1,233 (2021); 825 (2022); 1,182 (2023); 1,061 (2024); 1,304 (2025); 1,136 (2026); 1,702 (2027); 1,258 (2028); 1,549 (2029); 1,108 (2030); 1,537 (2031); 1,103 (2032). ### Monetary and financial sector indicators - Depository corporations: Broad money (millions of Seychelles rupees): 13,648 (2017); 15,888 (2018); 17,115 (2019); 19,494 (2020); 25,179 (2021); 24,206 (2021); 25,127 (2021). - Gross official reserves (millions of U.S. dollars) (memorandum): 523 (2017); 546 (2018); 548 (2019); 580 (2020); 559 (2021); 588 (2021); 617 (2021). - Credit to the private sector (12–month percent change) (memorandum): 10.3 (2017); 17.8 (2018); 11.5 (2019); 22.3 (2020); 20.2 (2021). - Reserve money (end-of-period; 12–month percent change) (memorandum): 14.5 (2017); 18.9 (2018); 4.5 (2019); 22.7 (2020); 40.4 (2021). ### Banking sector soundness indicators (selected) - Regulatory capital to risk weighted assets: 26.6 (2019); 23.5 (2020); 20.5 (2021); 19.5 (2021 Q1); 17.1 (2021 Q2); 18.8 (2021 Mar); 19.7 (2021 Jun). - Non-performing loans to gross loans: 6.8 (2019); 7.1 (2020); 3.5 (2021); 2.7 (2021 Q1); 3.3 (2021 Q2); 4.4 (2021 Mar); 5.0 (2021 Jun). - Return on assets (annualized): 3.8 (2019); 3.9 (2020); 3.7 (2021); 2.5 (2021 Q1); 1.0 (2021 Q2); 1.9 (2021 Mar); 1.5 (2021 Jun). - Liquid assets (broad) to short term liabilities: 55.0 (2019); 62.4 (2020); 63.7 (2021); 60.6 (2021 Q1); 62.3 (2021 Q2); 58.0 (2021 Mar); 64.4 (2021 Jun). ### Fund credit, obligations, and prospective disbursements - Existing Fund credit (stock, end-of-period, Millions of SDR): 28.0 (2016); 29.3 (2017); 24.8 (2018); 19.7 (2019); 37.6 (2020); 33.6 (2021); 29.9 (2022); 21.4 (2023); 8.2 (2024); 1.2 (2025); 0.4 (2026); 0.0 (2027–2032). - Prospective Fund credit disbursements (Millions of SDR): 48.0 (2021); 13.0 (2022); 13.0 (2023). - Stock of existing and prospective Fund credit (Millions of SDR): 28.0 (2016); 29.3 (2017); 24.8 (2018); 19.7 (2019); 37.6 (2020); 81.6 (2021); 90.9 (2022); 95.4 (2023); 82.2 (2024); 75.2 (2025); 65.9 (2026); 54.8 (2027); 42.4 (2028); 30.1 (2029); 17.8 (2030); 5.4 (2031); 1.6 (2032). - Stock of existing and prospective Fund credit (in percent of quota): 122.2 (2016); 128.0 (2017); 108.2 (2018); 86.0 (2019); 164.3 (2020); 356.2 (2021); 396.8 (2022); 416.6 (2023); 358.9 (2024); 328.5 (2025); 287.6 (2026); 239.1 (2027); 185.2 (2028); 131.4 (2029); 77.6 (2030); 23.7 (2031); 7.2 (2032). - Obligations to the Fund from existing and prospective Fund arrangements (Millions of SDR): obligations and repayment schedules are presented in Table 7 with principal and charges details. ### Decomposition of public debt by creditor (selected) - Total public debt (US$ million): 924.5 (2020); 1,007.5 (2021); 358.7 (2022) [table shows values and percent composition by creditor categories]. - External debt (US$ million): 489.2 (2020); 52.9 (2021); 39.7 (2022) [table provides breakdown across Multilateral, Bilateral, Bonds, Commercial creditors]. - Domestic debt (US$ million): 435.4 (2020); 47.1 percent of total debt (2020); detailed composition includes T-Bills, Bonds, Loans. _International Monetary Fund staff summary extracted from the Seychelles EFF first review supporting documentation (figures, tables, and projections as provided in the source)._ ### Annex I. Risk Assessment Matrix (RAM) ### Annex I. Risk Assessment Matrix (RAM) ### Overview - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - Relative likelihood definitions: "low" = probability below 10 percent; "medium" = probability between 10 and 30 percent; "high" = probability between 30 and 50 percent. - "Short term (ST)" indicates the risk could materialize within 1 year; "medium term (MT)" indicates within 3 years. - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. ### 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 concessional 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 concessional 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 / 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 concessional 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: 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 / 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: Low / 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: Implement the least costly scenario identified by the World Bank, which is the liquidation of Air Seychelles through the judicial process, which is ongoing. *Source: Annex I. Risk Assessment Matrix (RAM).* ### 16. The successful implementation of the debt exchange significantly mitigated rollover ### 16. The successful implementation of the debt exchange significantly mitigated rollover ### Effects on GFNs and debt sustainability - GFNs are projected to drop from 47 percent of GDP in 2020 to 41 percent in 2021 and further to 11 percent by 2026. - The reduction in GFNs is higher than expected at the time of program approval (12 percent in 2026). - The exchange operation laid the foundation for lower long-term borrowing costs, thereby preserving debt sustainability. ### Impact on borrowing costs and yields - Bond yields issued in the exchange were lower by 91 – 157 bps for the different tenors compared to the rates issued in early February 2021. - Yields on T-bills dipped by more than 340 bps up to end-October 2021 for the 182-day and 365-day tenors since the LMO was undertaken. - The decline in yields also reflected a reduced supply of T-bills offered to the market due to the impact of the LMO and the unwinding of COVID-related spending measures, resulting in smaller fiscal deficits than anticipated at program approval. - The LMO supported a reduction in the sovereign risk premium and contributed to easing domestic financing conditions. ### Banking sector balance sheets and liquidity - Banks’ exposure to government securities remained unchanged at 16 percent of its assets between end-June 2021 and end-September 2021. - The composition of government securities shifted: the share of bonds increased by 4.2 percent of total assets between end-June 2021 and end-September 2021 at the expense of T-Bills. - Higher exposure to bonds had a marginal impact on banks’ core liquidity, declining from 19 percent of total assets at end-June 2021 to 18 percent at end-September 2021. - Banking system liquidity remained abundant at the end of October 2021 (8 percent of GDP), mainly due to monetary accommodation and a recent decline in private sector credit. ### LMOs on domestic debt under stressed conditions — risks, trade-offs, and feasibility - Public debt sustainability risks include both solvency and liquidity risks; sovereign stress can manifest in high/rising borrowing spreads, loss of market access, and default. - The IMF’s DSA framework includes an upper threshold on rollover risks, for which Gross Financing Needs (GFN) is used as a measure. - Footnote: thresholds on GFN are set at 14 percent, 15 percent, and 20 percent of GDP for LICs, EMs and AEs; respectively. - An LMO under debt distress conditions with elevated yields (and depressed market prices) keeps the net present value (NPV) of the debt unchanged and involves a trade-off between liquidity and solvency risks. - Exchanging short-term debt into longer maturities will typically increase the nominal value of debt, thereby potentially aggravating solvency risks. - An LMO alone may not restore debt sustainability without supporting macro-fiscal measures to ease solvency problems. - Feasibility of a market-based debt exchange depends on: - the scale of debt distress, - debt portfolio vulnerabilities, - risk perception, - macroeconomic prospects, - debt market structure, - financial stability considerations. - Practical constraints: - Investors may not participate voluntarily where sovereign risk perception is high or macroeconomic adjustments are not credible. - Limited issuance in longer-term tenors constrains prospects for bond issuance in those maturities. - A fragile domestic banking sector may limit bank participation, particularly where domestic banks constitute a sizeable investor base. - A pre-condition for undertaking an LMO is an embryonic secondary market activity for the securities and tenors involved to provide a pricing reference. ### Historical episodes and lessons - Domestic debt exchanges undertaken under debt distress with high refinancing risks include Argentina (2001), Russia (1998), and Turkey (2001). - Common features: executed when sovereigns faced significant rollover risks from domestic debt with rising borrowing costs and external shocks under pegged exchange rates; banking sector vulnerabilities (Russia, Turkey) and real sector shocks (Argentina) exacerbated distress. - Design differences and outcomes: - Countries with banking vulnerabilities exchanged local-currency domestic debt into foreign-currency debt to enable domestic banks to close FX positions (Turkey, Russia). - Argentina maintained exposure to foreign-currency debt in its exchange; high yields on local-currency bonds contributed to issuance of foreign-currency debt. - The LMO in Russia was significantly undersubscribed; high interest rates in Argentina’s swap led to deterioration in solvency and eventual default for both Argentina and Russia. ### Conclusion and policy recommendations - LMOs on domestic debt under sovereign stress can be a useful tool to mitigate refinancing risks, particularly where most refinancing risks emanate from domestic debt. - Pricing of the LMO should be carefully analyzed to ensure trade-offs between liquidity and solvency risks do not aggravate sovereign risk. - Feasibility depends crucially on investor risk perception, macroeconomic prospects, depth of the debt market, and financial stability implications. - The feasibility of the LMO in Seychelles benefited from: - a sharp trajectory for restoration of debt sustainability backed by a V-shaped recovery, - risk aversion of the banking sector to extend credit to the private sector, providing demand for government bonds. - Market communications by authorities about the design and purpose of the LMO are integral to success. - Timing is tactical: implement well before the slide in investor confidence becomes irreversible. ### Key statistics and dated facts (preserved exactly as in source) - GFNs: 47 percent of GDP in 2020; 41 percent in 2021; 11 percent by 2026. - Program approval benchmark: 12 percent in 2026 (expected at time of program approval). - Bond yield reductions in exchange: 91 – 157 bps for different tenors (vs early February 2021). - T-bill yield dip: more than 340 bps up to end-October 2021 for the 182-day and 365-day tenors. - Banks’ exposure to government securities: 16 percent of assets (end-June 2021 and end-September 2021). - Increase in share of bonds: 4.2 percent of total assets (between end-June 2021 and end-September 2021). - Core liquidity: declined from 19 percent of total assets at end-June 2021 to 18 percent at end-September 2021. - Banking system liquidity: 8 percent of GDP at end of October 2021. - DSA GFN thresholds: 14 percent, 15 percent, and 20 percent of GDP for LICs, EMs and AEs; respectively. - Historical cases referenced: Argentina (2001), Russia (1998), Turkey (2001). *Source: 1sycea2022001 - 16. The successful implementation of the debt exchange significantly mitigated rollover (IMF PDF chapter).* ### 9. In July the authorities successfully conducted the planned liability management ### 9. In July the authorities successfully conducted the planned liability management operation ### Liability management and public debt - Switched SR 1.2 billion of Treasury bills into bonds with tenors of 3, 5, and 7 years. - Resulting average maturity: 4.8 years. - Bond yields: about 125-150 bps below the previous issues. - Operation effects: - Reduced refinancing risks considerably. - Cut by 5% of GDP the stock of Treasury bills outstanding, which had reached 20% of GDP at end-2020. - Weekly issues of T bills were modest in August, September and October following the operation. - Interest rates on T bills: - Ranged between 3.7% and 6% in early June in the three tenors (90, 180 and 360 days). - Fell to the range of 0.5% to 1.5% in October. - Decline in rates reflects abundant liquidity in the banking system and weak demand for credit from the private sector. - November-December plan: further decline in weekly Treasury bills issues, accompanied by a Treasury bond issue. - Stock of Treasury bills: - Stood at SR 5.6 billion at end 2020 (26% of GDP) [note: earlier sentence stated 20% of GDP at end-2020—text contains both figures]. - Projected to decline by end–year to SR 3.8 billion (15.2% of GDP). - Total government and government guaranteed debt: - Stood at 92.2% of revised GDP at end 2020. - Forecast to decline to 81.2 percent at end 2021. ### Prices and inflation - Prices remained elevated for most of 2021. - Year-on-year Consumer Price Index (CPI) stood at 10.0 per cent in October 2021. - 12-month average inflation at 8.8 per cent in October 2021. - Drivers of price increases in 2021: - Depreciation observed in 2020. - Higher international commodity prices. - Increased freight costs. - Other supply-side constraints. ### Monetary policy stance - Monetary policy remained accommodative since the second quarter of 2020. - Monetary Policy Rate (MPR): - At beginning of 2021: 3.0%. - Maintained until the third quarter of 2021, when it was revised to 2.0%. - Interest rate corridor adjustments: - Standing Deposit Facility rate: 0.5%. - Standing Credit Facility rate: 3.5%. - Adjustment rationale: realign market interest rates with prevailing macroeconomic fundamentals. - Adjustment was maintained for the fourth quarter of 2021. ### External sector and current account - Current account balance: showing signs of improvement relative to 2020. - Projected deficit of 20 percent of GDP in 2021 compared to 25.4 per cent in 2020. - Exports of goods picked up during 2021, driven by higher demand for canned tuna. - Tourism revenue in 2021: - Expected to amount to US$276 million. - Increase of 25 per cent relative to 2020. - Supported by relaxation of travel restrictions and increasing tourist arrivals. - Imports also rose, mainly due to more expensive commodity prices and higher cost of transportation. - Private sector financial inflows, in particular trade credits, remained an important source of financing in 2021. ### Central bank credit facilities to support private sector - Private Sector Relief Credit Line Facility (PSRCLF): - Established March 2020 for a sum of R 500 million. - Target: micro, small and medium enterprises (MSME) with annual turnover below R25 million. - Participating institutions on-lend at 1.5 per cent to MSMEs. - Private Sector Large Enterprise Credit Line Facility (PSLERCLF): - Established June 2020 worth R750 million. - For larger businesses with annual turnover above R25 million. - Participating institutions on-lend at 4.5 per cent. - Deadlines and terms: - At establishment, banks had until December 2020 to request advances; deadline extended to December 2021. - Support period revised from 6 months to 12 months. - Tenor increased from 3 years to a maximum of 8 years. - Moratorium period increased from 12 months to 18 months. - Utilization as of November 30, 2021: - PSRCLF: 23.28% used (R116,394,565.61 out of R500 million). - PSLERCLF: 37.21% used (R279,046,183.00 out of R750 million). ### Program objectives — Real sector reforms (Diversification, Digitization, Climate Change Adaptation) - Government objective: enhance prospects for sustainable and inclusive medium-term growth via diversification of tourism services and expanded use of fisheries potential, supported by SWIOFISH 3 project. - Tourism sector: - Adoption of an updated Tourism Master Plan to tackle structural bottlenecks island-by-island. - Objectives: widen services, economic empowerment, environmental preservation, socio-cultural integration. - Progress: reaching new markets and better promoting local content. - Continued needs: develop skilled local labor, increase supply of local agricultural products, support small businesses (based on Tourism Value Chain Analysis). - Fisheries sector: - Completion in mid-2021 of cold storage facilities in new industrial zone in Iles du Port. - New fish processing units with medium size factories expected to enter operation soon. - Energy transition and climate objectives: - Long-term commitment to achieve a decarbonized economy by 2050. - Boost electricity generation from renewable energies including marine energy technologies, bio-energies, and environment friendly intermittent energy storage technologies. - Nationally Determined Contribution (NDC) targets: - Economy wide absolute GHG emissions will be reduced by 293.8 ktCO2e in 2030 (26.4%) compared to business as usual (BAU) scenario. - Energy sector targets: - 30% of gasoline private vehicles to be electric by 2030. - Energy Efficiency improvement level of 15% by 2030. - Focus areas: modernize electricity sector, increase renewable generation, improve energy efficiency, shift to electrified transport and individual active mobility, enhanced resource rehabilitation and land mitigation measures. - Governance and planning: - Need to build a national climate governance system centered on inclusive consultations, institutional coherence and scientific excellence. - Energy policy under review; objective for an updated Energy Policy Document with realistic targets for Intermittent and non-intermittent renewable energy sources by last quarter 2022. - Government in discussion with African Development Bank for potential assistance to develop an integrated resource plan (IRP) for the power sector. - Tourism diversification and local participation: - Development of new products such as cultural tourism. - Encourage local participation via established supply chains benefiting fisheries and agriculture. - Aquaculture and agriculture: - Seychelles Aquaculture sector officially launched after years of research and investment. - First Aquaculture Regulations and accompanying standards promulgated. - Establishment of Aquaculture Regulatory Committee with key ministries, departments, agencies, Ceps, and SCCI to coordinate policy and drive sector development. - Agricultural objectives: increase local production to 80% of livestock consumption and 90% of fruits & vegetables consumption; improve adaptation to climate change; build national capacity to improve strategic food reserve for a minimum period of six months. - Digital economy agenda: - Digital Economy Diagnostic Report and Seychelles Fintech Strategy identify pillars: robust regulatory framework, efficient and reliable digital infrastructures, enhanced digital skills and literacy. - Digital action plan medium-term focus: - Improve relevant digital infrastructure: - New Communications Bill expected to come into force during the first half of 2022; regulations on number portability. - Second submarine cable PEACE to become operationalized by April 2022. - Third submarine cable operationalization mid-year 2023. - Enhance digital skills and public service digital platforms: - During the first half of 2022 key platforms will come online: digital ID system, online Business, Company & association registration, online License Application. - Full implementation of the Health Information System expected by end 2022. - Increase financial inclusion through digitalization of payment systems. - Develop digital entrepreneurial ecosystems to diversify and strengthen the economy. - Climate adaptation investments prioritized in critical infrastructure, tourism and coastal management, food security, biodiversity, water security, and the blue economy. - Planned disaster risk reduction projects include establishing early warning systems and improving coastal resilience. - Government plans to mainstream climate adaptation in Seychelles’ recovery post-pandemic plan and to undertake careful cost-benefit analysis of climate-related projects. ### Fiscal policies and fiscal structural reforms — the budget for 2022 and beyond - Keystone policy: large, upfront fiscal adjustment to attain sustainable fiscal surpluses over the medium term and reduce public debt sustainability risks. - Debt outlook: - Strong exchange rate recovery in April 2021 and GDP growth contributed to a strong reduction in the ratio of public debt to GDP in 2021, but significant risks remain. - Policy of fiscal consolidation and prudent debt management, with steady recovery, is expected to reduce public and publicly guaranteed debt from 92 percent of GDP at end-2020 to 51 percent at end 2026. - Government committed to reducing debt to around 50 percent of GDP by 2026. - Primary balance and deficit targets: - Government expects an improvement of the primary balance by 4 percent of GDP in 2022, bringing the expected deficit to 0.8 percent. - This compares with an initial program target of a deficit of 5 percent in 2022. - Target for 2023: a surplus of 3 percent instead of a deficit of 0.4 percent under the initial program. - Revenue and expenditure measures: - Pursue prudent expenditure policy while widening the tax base by revising exemptions under the VAT, rationalizing business tax limiting deductibility provisions, and uniformizing tax rates among sectors. - By 2024 aim to achieve a revenue/GDP ratio excluding grants of 33.8 percent. - Expenditure-side plans: rationalize the wage bill, contain goods and services expenses, and contain transfers by reviewing programs for better targeting and financial sustainability. - Undertake comprehensive review of procurement environment to rationalize procedures and increase spending efficiency. - 2022 budget specifics: - Target deficit of 0.8 percent of GDP to be achieved by: - Raising revenue to 32.2% of GDP, up from 30.0 per cent in 2021. - Mobilizing grants for 2.8 per cent of GDP, up from 2.4 per cent in 2021. - Lowering expenditure as a ratio to GDP. - Wage and salaries and goods and services will be maintained flat in nominal terms. - Transfers will decline given the end of subsidies for wage maintenance in the first 2 months of 2021. - Revenue composition and expectations: - Value added tax receipts expected to rise as a share of GDP by about 1.5 percentage points, reflecting stronger tourism activity. - Business tax receipts to rise modestly as a share of GDP. - A new tax schedule for the business tax to enter into effect in 2022. - Excise receipts and customs revenue to increase in line with GDP. - External grants for capital expenditure expected to rise as a share of GDP by 0.5 percentage points. - Expenditure details: - Wage and salaries outlays to remain close to 2021 level with no salary increase and recruitment limited to priority health and education sector. - Forecasted savings: SR 500.0 million equivalent to 1.8 percent of GDP. - Government to allocate an additional SR 63.2 million under wages and salaries (0.2 percent of GDP) based on increase of employers’ pension fund contribution from 3% to 5% in January 2022. - Rationalization of goods and services to remain flat in nominal terms; rental agreements renegotiated and foreign travel reduced. - Government to invest in construction of offices through public private partnership to use rental vote to pay for buildings with intention to transfer buildings to Government over long term (first PPP for Seychelles Revenue Commission construction starts in 2022). - Outlays on social programs will decline as 2021 reflected subsidies for employment retention by private sector. - Capital expenditure will increase because of new projects financed by grants (drug rehabilitation center, La Digue hospital). - Net lending to PUC for capital projects will remain stable. *SEYCHELLES INTERNATIONAL MONETARY FUND* ### 32. Financing of the budget deficit will rely on external budgetary support from the World ### 32. Financing of the budget deficit will rely on external budgetary support from the World ### Financing and budget balance - External budgetary support committed/expected: - World Bank: US$ 27.5 million - African Development Bank: US$ 20 million - Bilateral loans under negotiations: US$10 million - The SDR allocation is available as a buffer; the authorities are preparing to amend the CBS Act to allow for its use. - The government will confirm the bilateral financing before the Board meeting. - This external financing will exceed the overall deficit, allowing: - a reduction of the stock of short-term domestic government securities, and - a lengthening of average maturity of the debt. ### Revenue measures and tax administration reforms - 2022 reforms will focus on digitalization initiatives, stronger compliance monitoring, and improving performance in terms of international obligations. - ASYCUDA enhancements at customs: - Move to online service and reduce paper transactions. - Creation of data warehouses and a platform for Single Window. - System upgrades to accommodate modules: Excise, Government Warehouse, Bonded Warehouse, and Courier Services. - Integration with an online payment gateway. - Project expected completion: June 2023; modules deployed as ready. - First two modules expected within 6 months: courier services and excise tax management. - Increase online services for business registration, e-payment, submission of returns and forms for registered businesses, including International Business Companies (IBCs). - Project expected completion: June 2023; modules deployed as ready. - E-payment using credit/debit card already implemented. - Payment using SEFT platform expected before the end of 1st quarter 2022. - Tax Division structural reform: - Aim: improve tax collection and ensure businesses meet obligations. - Encourage voluntary compliance through self-assessment by easing filing and payment. - Creation of Examination and Assessment Unit to implement targeted compliance programs, conduct desk audits, and raise default assessments for non-lodgment of tax returns. - Use of automatic exchange of tax information: - Utilize information from reporting jurisdictions under the ‘Global Forum’s Automatic Exchange of Information’ since 2017. - SRC has acquired a system for Automatic Exchange of Information; testing phase completed; work progressing to go live. - System expected to be updated in 2022 to cater for Foreign Account Tax Compliance Act (FATCA) and include a case management function for Exchange of Information upon Request. - Redevelopment of SRC’s Tax Management System: - Cabinet approved new taxation management system to be developed and completed by 2023. - Financing provided by the EU under an agreement signed in April 2019. - Objectives: increase functionalities of current Client Management System (CMS), automate procedures, integrate with E-Services, add case management, debt management, business intelligence, and data warehousing; redevelop interface in web-based form. - Initial business process reengineering started; registration module expected completion: December 2021. - Project expected completion: June 2023; modules deployed as ready. - Capacity building in international taxation risk: - Technical assistance from OECD Tax Inspectors Without Borders (TIWB) launched early October 2021 (one-year programme) to build transfer pricing audit capacity. - Over next 12 months, the Government of India will provide a tax expert to assist SRC in transfer pricing cases in tourism and financial services. - Business tax reform (legislative changes effective January 1, 2022): - Unify tax rate for different productive sectors at 25% (currently tourism, fishery and agriculture benefit from a lower 15% profit tax rate). - Reduce accelerated depreciation provisions for tourism, agriculture and fishery. - Revise taxation of security dealers. - Agricultural sector: 3-year grace period for assessment of best tax structure modalities. - Cabinet approval sought for legislative amendments to streamline VAT exemptions, in consultation with IMF staff (structural benchmark for end-September 2022). ### Expenditure management and efficiency of public spending - Medium-Term Fiscal/Budget Framework: - GOS steps to adopt framework and define contours of multi-year budget implementation. - AFRITAC mission expected early in 2022 to review current processes and advise on structure. - Ministry of Finance improving Public Sector Investment Plan (PSIP) to be consistent with budget framework; MDAs currently plan investments over two years. - Work on result-based management to align government strategies with budget planning. - Public Service Salary Review Committee appointed to analyze salary structure and wage bill with aim to maintain wages and salaries at 11 percent of GDP over the medium term. - Social protection reform (World Bank budget support US$ 9 million in 2021, Program for Results - PforR): - Aim: reform social protection system for sustainability and promote labor force insertion of working-age beneficiaries. - Program covers 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: improve efficiency and effectiveness of social protection programs while remaining above floor on social expenditure established under the program. - 2022 focus: - Improve fiscal sustainability of Retirement Pension through enactment of law increasing retirement age to 65 years old beginning in January 1, 2023. - Improve efficiency and transparency through: - ASP adoption of revised socioeconomic needs assessment based on non-income dimensions of poverty. - Comprehensive review of ASP internal controls and payroll systems. - Trained caregivers within HCA, ASP, and MOH providing home care to at least 60% of new high-need HCP beneficiaries. - Public procurement and investment efficiency: - Comprehensive review of structural, legal, and operational factors of procurement system expected completion by end 2022. - Public Investment Management Assessment (PIMA) scheduled first half of 2023. - World Bank-supported Public Expenditure Reviews (PER) in education and health expected completion: June 2022. - Audit of COVID-19 emergency-related spending scheduled to be sent to Ministry of Finance in November 2021 and made public in December 2021. - IFMIS and PFM: - New IFMIS platform to be installed by January 2024 to strengthen public finance business processes and link to emerging national payments platform. - AFS provided remote TA early 2021; budget for IFMIS included in 2022 budget. ### Results-Based Management (RBM) - Commitment to pursue RBM to strengthen results-focus across government for efficiency, effectiveness, transparency, and accountability, aiming to enhance growth, economic diversification, and social inclusion. - Whole rollout preparatory work to begin immediately and be ready for 2023 budget process. - Integrated RBM calendar to be issued by end 2021 to kick start the process. - Expected outcomes of full RBM rollout: - Improve operational and allocative efficiency and create greater fiscal space for essential public services. - More services in health, education, natural resources management, water and sanitation, energy, infrastructure and other basic services, with more effective fiscal and social impact assessment. - Better services to improve quality of life across large population segments. - Portfolio planning approach: - Portfolio guides departments and public bodies through integrated portfolio-wide strategic planning, budgeting, monitoring and evaluation, and performance management systems. - Ensure accountability to individual Ministers and senior management and produce comprehensive strategic plans and annual performance plans. ### Minimizing risks of State-Owned Enterprises (SOEs) - Public Enterprise Monitoring bill approved by Cabinet; legislature to consider it in 2022. - Passage would make Public Enterprise Monitoring Commission (PEMC) sole authority to oversee public enterprises. - PEMC to establish targets to ensure enterprises generate revenue, are fully accountable, and align decisions with national plans. - Air Seychelles: - Risks to debt sustainability reduced after Air Seychelles went into administration. - Government, with World Bank, identified liquidation as least costly scenario; approved by cabinet in September (SB met). - Administrators appointed in early October 2021 per Insolvency Act to consider restructuring and debt settlement. - EA Partners bondholders presented petition before Supreme Court in August 2021 for winding down Air Seychelles. - 2022 budget allocation for Air Seychelles related liabilities: - $5 million previously agreed for repayment of Etihad Airways debt that Government purchased at a discount - $1.4 million previous liability from 2015 - Contingent liability risks reduced as remaining debts expected to be paid from Air Seychelles’ assets through administration. ### Public debt management strategy - Post-July liability management operation, government assessing options to refinance short-term debt (treasury bills) and lengthen maturity via bonds. - Medium-term debt management strategy (MTDS) to be updated and published with IMF technical support (structural benchmark for end-March 2022). - AFRITAC south TA in August 2021 on asset and liability management and link to macro framework. - Implementation measures and benchmarks: - Publish an Annual Borrowing Plan (structural benchmark for end-March 2022) and an auction calendar for government securities. - Stronger interagency coordination between Ministry of Finance and Central Bank through National Public Debt Management Committee to determine quarterly borrowing plan (new structural benchmark for end-March 2022). - Ministry of Finance began publishing quarterly reports on debt management operations and outstanding debt position on its website (structural benchmark for end-September 2021). - Bond issuance and market development in 2022: - Government intends to regularly issue bonds through auction mechanism. - Support bond liquidity via repo operations and initiate trading reforms in government securities. - Plan for government securities trading framework to be approved by government in consultation with CBS by end-2022 (new structural benchmark for December 2022). - IMF will provide necessary technical assistance. ### Monetary and exchange rate policy - Monetary policy stance: - Expected to remain accommodative in the short term to stimulate credit and economic activity while CBS remains vigilant to inflationary developments. - CBS plans to monitor inflation expectations through a survey with assistance of National Bureau of Statistics. - Monetary Policy Rate (MPR) remains main policy signal complemented by an interest rate corridor as part of interest rate based monetary policy framework. - Interest rate developments: - Downward shift in interest rate corridor effective July 2021 expected to reduce domestic interest rates. - Limited transmission observed so far to banking sector. - As at October 2021: - Effective savings rate: 1.69% (decline of 62 basis points from 2.31% in December 2020) - Average lending rate: 9.13% (fell by 21 basis points from December 2020) - Low interest rates applicable on credit provided to MSMEs and Large Enterprises: 1.5 per cent and 4.5 per cent, respectively. - IMF technical assistance scheduled before end March 2022 to strengthen monetary policy implementation and transmission. - Exchange rate policy: - CBS committed to a floating exchange rate and will intervene only to facilitate orderly market conduct. - With tourism recovering faster-than-anticipated and an optimistic outlook, market-clearing conditions are expected to prevail. ### Key statistics on international reserves and external support - Gross International Reserves (GIR): - US$ 559 million end of 2020 - US$ 651 million as of November 30, 2021 - Drivers of GIR increase: - Pick-up in tourism sector - IMF first disbursement under the programme: US$34.3 million - SDR allocation: US$31.2 million (in August) *Source: 1sycea2022001 - 32. Financing of the budget deficit will rely on external budgetary support from the World* ### 2021. If required, international reserves will be used to support the market through foreign ### 1sycea2022001 - 2021. If required, international reserves will be used to support the market through foreign ### Reserves management and capacity building - If required, international reserves will be used to support the market through foreign exchange interventions to ensure orderly market conducts without compromising the floating exchange rate regime. - Through the Reserves Advisory Management Partnership (RAMP) of the World Bank (signed January 2019 for a period of three years), the CBS remains committed to enhance capacity building of staff in the areas of reserves management. - The RAMP engagement includes an investment management mandate, whereby RAMP manages US$100 million worth of reserves. ### External statistics and tourism earnings - Work on the alternative tourism earnings estimation framework is progressing and is expected to be implemented as of next year; necessary backward adjustment will be incorporated. - CBS received TA from the IMF Statistics Department to improve external sector statistics by identifying and collecting offshore data; a detailed action plan has been prepared for implementing the mission’s recommendations. ### Modernizing the financial system and supervisory framework - CBS is committed to ensuring a stable and well-capitalized banking system and will take relevant and timely enforcement actions where necessary, including: - Using early intervention measures if any bank becomes undercapitalized, including further suspension of dividend payments. - Requiring viable but undercapitalized banks to submit capital plans; resolving nonviable financial institutions using appropriate resolution tools. - Gradually unwinding borrower support measures; remaining measures will be targeted and time bound. - Ensuring banks’ loan classification reflects asset quality and withdrawing regulatory forbearance measures. - CBS initiated a project in 2018 to adopt a risk-based supervision (RBS) framework integrating Basel II Pillar 2 requirements; the second phase was completed in 2020 and initial roll out started in 2021. - Policy developments and structural benchmarks: - Policy paper for adoption of Basel II Pillar 1 was endorsed by the Cabinet in late 2020 and is with the Attorney General’s Office for drafting. - CBS anticipates finalizing Basel II Pillar 3 disclosure guidelines by May 2022. - Policy paper to amend Financial Institutions (Capital Adequacy) Regulations, 2010 to adopt the Basel III capital definition will be approved by the Cabinet by May 2022 (structural benchmark for end-May 2022). ### COVID-19 measures, data collection, and stress testing - Since September 2021, CBS initiated drafting a paper on unwinding COVID-19 policy measures; progress includes gathering disaggregated data from commercial banks, Development Bank of Seychelles, and Seychelles Credit Union on forbearance measures, moratoria and borrower support measures. - CBS will analyze the data and perform stress tests to assess banking sector resilience and will present results and recommendations to the IMF Board at its meeting set for December 2021. - CBS will enhance monitoring by collecting additional information including for restructured and rescheduled loans and FX placements and exposures. - CBS will encourage banks to restructure loans for firms that are viable but have temporary liquidity shortages, while monitoring reclassification of loans and providing guidance on prudential treatment of moratoria and NPL management strategies. ### Financial Stability Committee, crisis management, and resolution framework - CBS focuses on strengthening the legal basis and mandate of the Financial Stability Committee (FSC); a draft policy paper on a financial stability bill was prepared in April 2021 and CBS requested IMF peer review. CBS will submit the Policy Paper to the Cabinet for approval by March 2022 (revised structural benchmark). - CBS is committed to enhancing macroprudential toolkit and crisis management and bank resolution framework: - A policy paper supporting an effective resolution framework aligned with BCBS recommendations and FSB Key Attributes was presented and endorsed in December 2018; legislative drafting capacity constraints have delayed conversion to a draft bill. - CBS will submit a Policy Paper to the Cabinet on the proposed bank resolution framework by end June 2022 (structural benchmark for end-June 2022). - The draft Bank Resolution Bill will be approved by the Cabinet by end-June 2023 (structural benchmark for end-June 2023). ### National payment system modernization and fintech - Review of the National Payment System Act, 2014 and supporting regulations is underway; policy proposals for amendments are anticipated to be finalized in March 2022. Oversight framework finalization (with AFS technical assistance in May–June 2021) expected to be completed by December 2021. - Policy Paper on Modernization of the National Payment System and National Fintech Strategy were presented to the new Cabinet in September 2021. - Request for Information for Core Banking project was released in October 2021; a new core banking system is deemed critical. - Engagement with VISA to reduce fees on card transactions; interchange modification to be effective as of February 2022. - CBS has sought support from the Alliance for Financial Inclusion to formulate a Regulatory Sandbox; the Regulatory Sandbox is expected to be in place by the end of 2022. ### Financial consumer protection, credit information, and access to finance - Revised policy decisions on the Financial Consumer Protection bill were approved by Cabinet in October 2021; the Bill is expected to be approved by the National Assembly in the first quarter of 2022. - CBS is implementing a comprehensive Credit Information System including credit information from non-financial firms; contract awarded and project tentatively scheduled to be completed by the end of 2022. - Digital financial literacy and cyber security are priorities alongside consumer protection. ### AML/CFT, beneficial ownership, and inspections - Progress on AML/CFT: - ESAAMLG approved 9 re-ratings for Seychelles out of the 20 recommendations with deficiencies as of the 21st Council of Ministers and 42nd ESAAMLG Task Force meetings in September 2021. - Seychelles intends to request another re-rating for another 10 recommendations by the end of January 2022 after enactment of a number of legislations by the end of 2021. - Legislative and institutional changes: - New AML/CFT Act and Regulations came into force in August 2020, allocating supervisory aspects of ML and TF to three supervisory authorities: FIU, FSA and CBS. - A tripartite Memorandum of Understanding among FIU, FSA and CBS was signed in 2020. - Beneficial Ownership (BO) framework: - BO Act and Regulations came into force in August 2020; centralized database became operational in July 2021. - "Eight two per cent" of the international financial services sector legal persons and legal arrangements submitted information to the beneficial ownership database by October 2021. - FIU is working with remaining legal persons and legal arrangements through resident agents to ensure compliance by December 2021; non-compliant entities will be sanctioned per BO Act. - FSA initiated inspections of resident agents as of October 2021 and will submit a risk-based action plan by the start of January 2022 for calendar year 2022 supervisory activities. - FSA and FIU will publish, by June 2022, an assessment report on compliance and data accuracy for registers and the centralized database. - The BO Act and Regulations will be amended to address deficiencies; amendments expected to be gazetteed by End-November 2021. ### Tax regime refinements, Global Forum, and EU list status - Seychelles was removed from Annex I of the EU list of non-cooperative jurisdictions for tax purposes following the Economic and Financial Affairs Council meeting on the 5th October 2021. - Seychelles was moved to Annex II (the “EU grey list”) for criterion 1.2 (tax transparency); removal from Annex II pending a positive outcome of a Global Forum supplementary review. - Refinements to the territorial tax regime (Business Tax amendments published 16th September 2021) include: - Activities performed abroad by a permanent establishment of a Seychelles company will be exempt from tax in the Seychelles; foreign income from activities not sufficient to qualify as a permanent establishment remains taxable. - Foreign income received on Seychelles based intellectual property will be taxable in the Seychelles, with a territorial exemption for income from patents related to R&D undertaken in Seychelles connected to the creation of that patent. - Foreign passive income will be exempt under the territorial regime where the Seychelles company receiving the passive income has adequate economic substance in the Seychelles. - Any foreign income subject to tax in Seychelles (e.g., companies with insufficient economic substance or on non-patent IP) will be taxed in Seychelles with a credit for foreign taxes incurred. - The Act updates “permanent establishment” definition to align with OECD and UN model definitions. - Global Forum supplementary review: - Seychelles’ request for an Exchange of Information on Request supplementary review was presented and approved at PRG meeting on 17th September 2021. - The supplementary review will require an on-site visit (scheduled in 2022). - The remaining step for removal from Annex II is obtaining a Largely Compliant status in the Supplementary Review, thereby satisfying criterion 1.2. *Source: 1sycea2022001 - 2021, IMF Seychelles chapter.* ### 78. Program monitoring. Program implementation will continued to be monitored through ### 78. Program monitoring. Program implementation will continued to be monitored through ### Monitoring framework and review schedule - Program implementation will be monitored through semi-annual reviews, quantitative performance criteria and indicative targets, continuous performance criteria, and structural benchmarks. - The second review is set for June 2022 based on end-December 2021 quantitative targets. - The third review is set for December 2022 based on end-June 2022 quantitative targets. - The quantitative targets and structural benchmarks are set out in Tables 1 and 2 of the MEFP respectively. - Definitions and reporting requirements for all performance criteria are contained in the Technical Memorandum of Understanding (TMU) attached to the memorandum. - During the program period, the government will not: - introduce or intensify restrictions on payments and transfers for current international transactions or introduce or modify any multiple currency practice without the IMF’s prior approval; - conclude bilateral payments agreements incompatible with Article VIII of the IMF’s Articles of Agreement; - introduce or intensify import restrictions for balance of payments reasons. ### Table 1 — Proposed Quantitative Program Targets, 2021-2022 (selected performance criteria and outcomes) - Units: In millions of Seychelles Rupees (table header). - A. Quantitative performance criteria - Net domestic financing of the government (ceiling) - Prog. 2034.0; Actual 1521.7; Status Met - Prog. -109.0; Adjusted targets 1385.0; Actual 917.5; Status Met - Prog. -555.0; Actual 25.0 - Subsequent entries: 100.0; 120.0; 155.0 (table shows series of program/actual/status cells) - Primary balance of the consolidated government (floor) - Prog. -1726.0; Actual -723.4; Status Met - Prog. -2026.0; Actual -696.9; Status Met - Prog. -2289.0; Actual -700.0 - Other listed values: -178.0; -198.0; -232.1 - Total revenue (floor) - Prog. 2217.4; Actual 3969.6; Status Met - Prog. 3626.0; Actual 5242.4; Status Met - Prog. 7252.0; Actual 1735.5 - Additional actuals in sequence: 3470.9; 5206.4; 8923.1 - Net international reserves of the CBS, millions of US dollars (floor) - Prog. 359.0; Actual 396.0; Status Met - Prog. 374.0; Actual 329.0 - Prog. 455.0; Status Met - Other entries: 394.0; 407.0; 410.0; 415.0; 420.0 - B. Continuous quantitative performance criteria (ceilings) - Accumulation of new external payments arrears: 0.0 (Met across reporting points) - Accumulation of new domestic payments arrears: 0.0 (Met across reporting points) - C. Indicative targets (IT) - Net change in CG guaranteed domestic and external debt - Prog. 502.0; Actual -1880.0; Status Met - Prog. 604.0; Actual -2141.0; Status Met - Prog. 753.0; Actual 990.0 - Subsequent actuals: 1226.4; 1532.9; 1839.5 - Priority social expenditure (floor) - Prog. 475.2; Actual 826.9; Status Met - Prog. 712.8; Actual 1058.2; Status Met - Prog. 1425.5; Actual 287.0 - Subsequent actuals: 574.1; 861.1; 1483.6 - Notes and adjustments (as presented in table footnotes) - 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. - If 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 it exceeds the 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 falls short of targets the revenues floor will be adjusted accordingly. - The floor on the CBS’s NIR will be adjusted upward (downward) by the amount by which the external non-project loans and non-project cash grants exceeds (falls short of) the amounts assumed in the program. The floor will also be adjusted upwards (downwards) by the amount that external debt service payments fall short of (exceed) the amounts assumed in the program. The floors will also be adjusted upwards by the amount of the new SDR allocation to Seychelles if the IMF makes a new allocation of SDRs to its membership. ### Table 2 — Actual and Proposed Structural Benchmarks Under the EFF, 2021–2023 (selected actions, timing, objective, status) - Fiscal and Public Financial Management - Cabinet approval of all necessary legislation to ensure Seychelles is fully compliant to be removed from the EU list of non-cooperative jurisdictions. - Timing: End-September 2021 - Objective: Ensure Seychelles is fully compliant with EU and OECD harmful preferential tax regimes (BEPS Action 5). - Status: Met - 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. - Status: Met - 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. - Publish an Annual Borrowing Plan along with an auction calendar. - Timing: End-March 2022 - Objective: Implement the debt management strategy. - The Ministry of Finance to 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. - Status: Met - The Ministry of Finance, in consultation with the CBS, will approve a plan for government securities trading framework. - Timing: End-December 2022 - Objective: Implement the debt management strategy. - The National Public Debt Management Committee will approve a quarterly borrowing plan on a recurring basis. - Timing: End-March 2022 and quarterly thereafter - Objective: Implement the debt management strategy. - State-Owned Enterprises (SOEs) - Cabinet approval of least cost structure for Air Seychelles as part of the 2022 budget process; and long-term strategy for Air Seychelles, in consultation with IMF/WB staff. - Timing: End-September 2021 - Objective: Minimize the fiscal impact on the 2022 budget. - Status: Met - Cabinet approval of Amendments on the Public Enterprise Monitoring Committee (PEMC) Act to strengthen enforcement power of the PEMC, in consultation with IMF staff. - Timing: End-November 2021 - Objective: Reduce contingent fiscal risks. - Status: Met - Financial Sector Stability - Cabinet approval for policy paper for the draft Financial Stability Bill to empower authorities to use macroprudential tools and provide legal basis for the Financial Stability Committee. - Timing: End-November 2021 — Revised deadline March 2022 - Objective: Enhance financial stability powers to safeguard the financial system. - Status: “Not Met – Reset: End-March 2022” - Cabinet approval of the policy paper for the amendment in the Capital Adequacy Regulation 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 align with revisions to the Financial Institutions Act, 2004 as amended and Insolvency Law. - Cabinet approval for draft Bank Resolution Bill in alignment with international best practice. - Timing: End-June 2023 - Objective: Provide regulators necessary powers to effectively resolve troubled financial institutions. ### Attachment II — Technical Memorandum of Understanding (TMU): scope, definitions, and reporting - Scope: The TMU defines performance criteria, quantitative benchmarks, and structural benchmarks for the Republic of Seychelles’ program supported by the Extended Fund Facility (EFF), and specifies frequency and deadlines for data reporting to IMF staff. - Key definitions (selected) - “Government” means the central government of the Republic of Seychelles and does not include political subdivisions, the central bank, or other public entities with autonomous legal personality not included in the government’s budget. - Consolidated government debt = central government 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" follows paragraph 8 (a) of the Guidelines on Public Debt Limits in Fund-Supported Programs (Executive Board Decision No. 16919-(20/103), adopted October 28, 2020). - Debt instruments include loans, suppliers’ credits, and leases (with the debt on leases defined as the present value at inception of lease payments expected during the agreement period, excluding operation/repair/maintenance payments). - Awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - Quantitative performance criteria – definitions and reporting requirements (selected) - A. Ceiling on Net Domestic Financing (NDF) of the government - NDF = (i) net bank credit to the government; and (ii) net nonbank financing of the government, including proceeds of the sale of government assets, Treasury bills, other securitized obligations listed in rupees, and any CBS credit to the government, including drawings on the rupees counterpart of the SDR allocation. - Data deemed valid: amounts for net bank credit and net rupee Treasury bills/bonds calculated by the CBS; amounts for nonbank financing calculated by the Treasury of Seychelles. - Gross external budgetary assistance = 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) program projections. - Reporting frequency: 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 transferred to government revenue account; tax revenues net of tax refunds; grants included; capital revenues exclude non-financial asset sales from divestment. - Central government primary expenditure recorded on a cash basis; includes recurrent and capital spending and transfers to SOEs. Primary expenditures directly settled with bonds or other non-cash liabilities treated as one-off adjustments and recorded above-the-line, financed with debt issuance, affecting the primary balance. - Adjustors: target adjusted upward (downward) by the surplus (shortfall) in grant disbursements relative to baseline. - Reporting frequency: monthly, lag no more than four weeks from 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 frequency: monthly, lag no more than four weeks from end-of-period. - D. Floor on Net International Reserves (NIR) of the CBS - NIR = reserve assets minus reserve liabilities with maturity of less than one year. - Reserve assets include monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, and country’s reserve position at the Fund; excluded: pledged/collateralized assets, claims on residents, claims in foreign exchange arising from derivatives vis-a-vis domestic currency, precious metals other than gold, assets in nonconvertible currencies, illiquid assets. - Reserve liabilities include foreign exchange liabilities with maturity less than one year and liabilities outstanding to the IMF (total outstanding use of Fund Credit and loans included). - Adjustors: floor adjusted by differences in external non-project loans and non-project cash grants versus program assumptions; adjusted by deviations in external debt service payments; adjusted upward by any new SDR allocation to Seychelles. - Reporting frequency: daily reporting by the CBS, lag no more than one week from end-of-period. - E. Non-Accumulation of New Domestic and External Arrears (continuous) - Domestic payments arrears = domestic payments due but not paid by the government after a 90-day grace period unless a longer payment period specified. - The Ministry of Finance records and updates data on accumulation and reduction of domestic payments arrears. *Sources: Seychelles authorities; IMF staff estimates and projections; Attachment II. Technical Memorandum of Understanding (TMU).* ### 18. The government undertakes not to accumulate any new domestic payments arrears. The non- ### 1sycea2022001 - 18. The government undertakes not to accumulate any new domestic payments arrears. The non- ### Continuous performance criteria: arrears and external restrictions - Government undertakes not to accumulate any new domestic payments arrears. - Non-accumulation of new domestic payments arrears will be continuously monitored throughout the program. - The accumulation of any new domestic payments arrears will be reported immediately by the government to Fund staff. - Government undertakes not to accumulate any new external public payments arrears, with the exception of arrears related to debt that is the subject of rescheduling. - External public payments arrears are defined as payments due but not paid by the government as of the due date specified in the contract, taking into account any applicable grace periods, including contractual and late interest, on the external debt of the government or external debt guaranteed by the government. - Performance criterion on the non-accumulation of new external public payments arrears will be continuously monitored throughout the program. - The accumulation of any new external payments arrears will be reported immediately by the government to Fund staff. - Standard continuous performance criteria include: - prohibition on the imposition or intensification of restrictions on making of payments and transfers for current international transactions; - prohibition on the introduction or modification of multiple currency practices; - prohibition on the conclusion of bilateral payments agreements that is inconsistent with Article VIII; - prohibition on the imposition or intensification of import restrictions for balance of payments reasons. ### Indicative targets - Net change in consolidated government guaranteed domestic and external debt: - Government guaranteed domestic and external debt is defined as the public debt and includes the central government debt plus domestic and external guarantees provided by the government. - Floor on government social spending: - Indicative floor applies to expenditures incurred by the government on plans and programs intended to have a positive impact on education, health, social protection, housing and community services and recreational activities. - Covered programs include: Social Programs of Government Benefits and approved programs of ASP (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.) ### Program reporting requirements and data schedules - Performance under the program will be monitored from data supplied to the IMF by the authorities. - 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. 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 auction, 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. 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, outlook, and program performance - Since the approval of the program in July, the economy has continued to recover quickly as most restrictions on tourist movements were lifted and the number of tourist arrivals has steadily increased. - GDP projections and recent performance: - GDP is projected to grow at 6.1 percent in 2021, a big turnaround from a decline of 12.5 percent last year. - Growth of 7.2 percent projected for 2022 and around 5 percent over the medium term. - External and debt developments: - Public debt level relative to GDP is expected to decline by 11.2 percentage points from 92.2 percent at the end of 2020 to around 81 percent by the end of 2021. - Interest rates for one-year Treasury bills have lowered by more than 450 basis points due to the successful implementation of a liability management operation (LMO) in July and improved investor confidence. - COVID-19 and health: - A majority of the population has been fully vaccinated and the number of infected cases is currently low. - Authorities are starting to administer booster shots for the adult population and vaccines for the youth. - Program performance: - All quantitative program targets for the end of July have been met, with the primary budget deficit performance criterion met with a high margin. - All structural targets were met except one: submitting the Policy Paper on the Financial Stability Act to the cabinet (postponed due to capacity constraints); technical assistance requested from the Fund. ### Fiscal policy - Key pillar: frontload fiscal adjustment to reduce debt sustainability risks. - Outcomes and targets: - Primary fiscal deficit in 2021 is expected to reach 6.6 percent of GDP, significantly lower than the projection of 9.1 percent of GDP at program approval. - Authorities aim to reduce public debt to around 50 percent by 2026. - The primary deficit in 2022 is set to 0.8 percent of GDP which is lower by 3.9 percentage points compared to the earlier benchmark. - Policy measures: - Prudent expenditure policy supported by structural reforms to rationalize inflexible outlays including wage and salaries. - Revenue measures: widen the tax base with revisions of the exemptions under the VAT, rationalize business tax, limit deductibility provisions, and uniformize tax rates among sectors. - Improve customs tax collection by moving to online services and reducing paper transactions and costs planned in 2022. - Adoption of a medium-term budget framework and improvement of the Public Sector Investment Plan (PSIP). - Financing: - External bilateral financing planned for 2022 is delayed; authorities working with partners to secure financing. - Financing gap reduced due to positive fiscal outturn; if external financing falls short, authorities will consider using more domestic financing or the proceeds from SDR allocations. ### Monetary and financial sector policies - Monetary policy: - Remained accommodative since the second quarter of 2020 to support domestic economic activity. - Inflation expected at 9.8 percent in 2021, forecast to slow to 3.3 percent by the end of 2022. - Increased economic activity and supply-side constraints related to global disruption in shipments may sustain inflation and negatively affect inflation expectations. - Central Bank of Seychelles (CBS) monitoring inflation dynamics and stands ready to act if inflationary pressures persist. - CBS committed to a flexible exchange rate regime and will intervene only to limit disorderly exchange rate movements. - CBS committed to ensuring a stable and well-capitalized banking system that can support the recovery. ### Structural reforms and medium-term priorities - Reforms to diversify the economy and deepen economic linkages among sectors; support agricultural sector to improve self-sufficiency in food supply. - Plans to strengthen resilience to climate change: - Reduce greenhouse gas emissions. - Increase investment to improve climate change resilience. - Boost power generation from renewable resources. - Long-term vision: achieve a decarbonized economy by 2050. - Improve business environment and governance: - Create an enabling environment for entrepreneurship by digitizing most government services. - Improve the country’s digital capacity and support domestic production to reduce import dependence. *1sycea2022001* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1sycea2022001.pdf_