## 1sycea2022003

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### EXECUTIVE SUMMARY — Context and recent developments
- Seychelles’ economic recovery in 2021 "vastly outperformed projections," driven by a faster-than-expected rebound of the tourism sector.
- Real GDP growth in 2021 reached 7.9 percent, "nearly 2 percentage points more than projected at the time of the 1st EFF review."
- Real GDP growth is projected at 7.1 percent in 2022 as the tourism sector shows resilience to COVID-19 waves and geopolitical tensions.
- Tourism sector indicators:
  - Tourist arrivals bounced back in 2021; in March–April 2022 arrivals from traditional markets more than offset a reduction in arrivals from Russia and Ukraine.
  - Tourism earnings in Q1 2022 reached pre-pandemic levels.
- Fiscal outturns in 2021:
  - Primary deficit fell from 14.7 percent of GDP in 2020 to 3 percent of GDP in 2021 (less than half the size of the 6.6 percent target set at the time of the first review).
  - Expenditure retrenchment amounted to 14.3 percent of GDP (compared with 11.1 percent envisaged during the first review).
  - Total revenue and grants reached 33.8 percent of GDP against 32.4 percent initially foreseen.
- Public debt and financing:
  - Debt-to-GDP ratio fell from 89 percent of GDP in 2020 to around 76 percent in 2021, "5 percentage points below the first review projections."
  - Gross financing needs (GFNs) declined from 32 percent of GDP in 2021 to 20 percent in 2022 ("6 percentage points less than initially projected").
  - Rupee appreciation: 32 percent against the U.S. dollar, 53 percent in NEER and 61 percent in REER terms respectively (offsetting the 2020 depreciation).
  - Yield-at-issuance on average maturity of 5-year domestic bonds declined from 8.6 percent in February 2021 to 4.5 percent in May 2022; 1-year T-bill yields declined from 6.1 percent in May 2021 to 1.2 percent in May 2022.
  - Spreads on the Eurobond maturing in 2026 declined from 2,272 basis points at end-May 2020 to 494 bps on May 18, 2022 (against the 5-year US Treasury).
- Inflation and external position:
  - Average inflation rose to 9.8 percent in 2021 from 1.2 percent in 2020.
  - Headline inflation fell from 7.9 percent (year-on-year) in December 2021 to 2.2 percent in March 2022.
  - Cumulative increase in prices in 2021 and 2022 in Seychelles is "over 14 percent."
  - Gross international reserves (GIR) increased by USD 144 million to USD 702 million in 2021 (including the SDR allocation of about USD 32 million). As of June 7, GIR stood at USD 668 million.
- Financial sector:
  - Regulatory capital improved to 23.61 percent of risk-weighted assets in March 2022, up from 20.2 percent in April 2021.
  - Non-performing loans (NPLs) rose to 7.3 percent of total loans from 5.4 percent a year earlier (March 2022). The rise mainly reflected loans to real estate (49 percent of the total increase), tourism (28 percent), and manufacturing (18 percent).

### OUTLOOK AND RISKS
- Growth and inflation projections:
  - Real GDP growth in 2022 is expected to remain robust at 7 percent.
  - Over the medium term, growth expected to return to nearly 4 percent, with continued reliance on tourism and fisheries.
  - Annual inflation in 2022 expected to reach 4.1 percent, reflecting rising global energy and food prices due to spillovers from the war in Ukraine.
  - Current account deficit expected to widen by 2.3 percentage points to 22.4 percent of GDP in 2022.
- Key downside risks (selected):
  - Unanticipated spillovers of the war in Ukraine — further surge of commodity prices and fewer tourist arrivals.
  - Higher NPLs as COVID-support and forbearance measures are withdrawn.
  - Continued vulnerability to climate change.
- Authorities’ view: positive performance acknowledged; concerns about global fuel and food price increases and elevated uncertainty.

### PROGRAM PERFORMANCE AND MONITORING
- As of end-December 2021, all quantitative performance criteria (QPCs) and indicative targets (ITs) met, except the IT on priority social expenditures.
- All end-March ITs were met and appropriate progress made toward structural benchmarks.
- Authorities requested modification of the June 2022 QPCs and the September 2022 ITs to allow more gradual fiscal consolidation and increased social spending; QPCs and ITs will be set until June 2023.
- Program monitoring:
  - Third review set for December 2022 (end-June 2022 quantitative targets).
  - Fourth review set for June 2023 (end-December 2022 quantitative targets).
  - Reporting requirements: monthly with lag no more than four weeks for key fiscal indicators per TMU.

### FISCAL RECALIBRATION AND 2022–2023 BUDGET OUTCOMES
- 2022 fiscal revisions and outcomes:
  - Primary deficit expected to reach 1.4 percent of GDP in 2022, compared with the 2022 budget goal of 0.8 percent of GDP (MEFP para 22).
  - Higher-than-initially-planned current expenditures by about 1.4 percent of GDP reflecting:
    - additional security expenditure for the police and anti-corruption commission;
    - higher targeted temporary transfers to offset surging commodity prices for vulnerable households (MEFP para 24, 35-36).
  - External grants projected to fall short by 1.8 percent of GDP compared to the first review.
  - Tax revenue to remain stable (just over 28 percent of GDP); non-tax revenue expected slightly above first review target (MEFP para 23).
  - Authorities plan to partly offset grant shortfall by curtailing capital expenditure.
  - Authorities now target a primary surplus of 1.7 percent of GDP in 2023 instead of 2.9 percent projected during the first review.
- Social safety net and targeted support:
  - Review of SSN programs underway to improve benefits and coverage.
  - Short-term mitigation: targeted temporary cash transfers; SCR 82 million, or 0.3 percent of GDP, added to 2022 budget for a six-month plan to assist the most vulnerable (MEFP para 22).

### DEBT SUSTAINABILITY, PUBLIC DEBT INDICATORS, AND VULNERABILITIES
- Public debt trajectory projections:
  - Debt-to-GDP ratio projected to decline to 50 percent by 2026 — 3.8 percentage points below the first review projections.
  - Gross financing needs (GFN) projected to decline to 9.6 percent by 2026 — 1.5 percentage points below the first review projections.
- Stress-test highlights:
  - A 30 percent depreciation of the domestic currency would spike external debt-to-GDP ratio to around 515 percent in 2023, decreasing to around 415 percent by the end of the projection period, versus about 272 percent under the baseline.
  - Combined shock produces external debt outcome around 414.5 (percent of GDP) by 2027.
- Public DSA baseline nominal gross public debt (percent of GDP): 2020 69.6; 2021 88.7; 2022 76.2; 2023 73.3; 2024 67.0; 2025 61.3; 2026 55.5; 2027 50.1.
- Debt dynamics remain sensitive to currency depreciation shocks.

### FISCAL RISKS FROM SOEs AND AIR SEYCHELLES
- Air Seychelles restructuring:
  - Agreement with bondholders for a 66.7 percent haircut on the company’s debts; settlement in May 2022 with no fiscal cost to the government.
  - Government committed to provide no further funds to Air Seychelles (MEFP para 42 and 43) and has pre-paid obligations to Etihad Airways.
  - Structural benchmark: ringfence ground-handling operations into a separate legal entity by end-December 2022.
- Other public enterprises largely profit-making and pose substantially lower fiscal risks.
- Ongoing work to improve public enterprise transparency via PEMC.

### REVENUE MOBILIZATION, TAX POLICY, AND ADMINISTRATION
- Business tax reform effective January 1, 2022:
  - Unify profit tax rates at 25 percent (previously tourism, fishery, agriculture at 15 percent).
  - Reduce accelerated depreciation provisions for tourism, agriculture, and fishery.
  - Revise taxation of security dealers.
  - Expected additional revenue: 0.7 percent of GDP in 2023.
- Customs and tax administration modernization:
  - Upgrade of ASYCUDA at customs; move to online services and Single Window integration; project expected by June 2023 (modules deployed as ready).
  - SRC Tax Management System redevelopment to increase functionality; core modules expected live by May 2023 and non-core by December 2024.
  - Digitalization initiatives, stronger compliance monitoring, and use of third-party and AEoI data to improve compliance.

### MONETARY POLICY, CREDIT, AND EXCHANGE RATE
- Monetary policy expected to remain accommodative; CBS ready to act if inflationary pressures persist.
- Private sector credit:
  - Contracted by 12 percent (year-on-year) in 2021 across all sectors (except mortgage loans).
  - Early signs of revival with private credit projected to increase by 5 percent in 2022.
- Recommended reforms to monetary policy framework:
  - Deploy tools for mopping up excess reserves, develop interbank market, resume repo operations, fine-tune CBS communications, and review CBS access to government securities for OMO.
- Exchange rate policy:
  - Regime classified as floating; interventions aimed at disorderly market conditions and maintaining adequate reserves.
  - REER appreciated by 61 percent year-on-year in December 2021; NEER appreciated by 53 percent year-on-year in December 2021.
  - Staff assess external position as significantly weaker than implied by fundamentals in some models; recommend removing discriminatory property tax measure on non-residents (Immovable Property tax rate of 0.25 percent introduced in 2020) as a capital flow management measure under the IMF Institutional View.

### FINANCIAL SECTOR CONDITION, SUPERVISION, AND RESOLUTION
- Financial sector condition and immediate risks:
  - No significant COVID-19 impact yet materialized on loan portfolios; downside risks from forbearance unwind.
  - Unwinding of COVID-19 support measures announced February 2022 includes reversing liquidity support, advances to central government, private sector credit facility, dividend payments by banks, and forbearance policies.
- Asset-quality monitoring and NPLs:
  - CBS to undertake asset-quality assessment considering withdrawal of forbearance, expand bank reporting on forborne and restructured loans (MEFP para 56; structural benchmark for September 2022).
  - If NPLs rise excessively, authorities should develop internal NPL management plans and set operational targets for reducing NPL levels or write-offs.
- Regulatory and supervisory reforms:
  - Adoption of a risk-based supervision (RBS) framework integrating Basel II Pillar 2; policy paper to adopt Basel III capital definition presented to Cabinet and approved in May 2022.
  - Policy paper on Financial Stability submitted to Cabinet and approved in May 2022 (implemented with delay).
  - CBS to strengthen crisis management and bank resolution framework; draft Bank Resolution Bill expected to be approved by Cabinet by end-June 2023 (structural benchmark).
- AML/CFT, beneficial ownership, and transparency:
  - Centralized BO database operational July 2021.
    - As of end-April 2022, 90 percent of roughly 59,000 foreign legal persons and legal arrangements complied; domestic compliance 23 percent of 7,781 active entities.
  - FSA and FIU to publish BO assessment report by July, 2022 and propose legal amendments to address shortcomings.
  - ESAAMLG re-ratings: 9 re-ratings approved out of 20 recommendations in September 2021; another re-rating request in October 2022 planned.

### EXTERNAL SECTOR, RESERVES, AND FINANCING STRATEGY
- Gross international reserves (GIR):
  - GIR rose to $702 million in 2021, equivalent to 4.7 months of prospective imports or about 120 percent of the ARA metric.
  - GIR at end-2021 were US$ 143 million above end-2020; GIR projected to maintain import coverage in the range of 3-4 months over the medium term.
- Financing composition and debt management:
  - MTDS and ABP publication delayed; reset structural benchmark for end-September 2022.
  - Move to electronic bond auction mechanism planned.
  - Despite steady bond issuance at around SCR 1 billion during 2022-27:
    - Net domestic financing at 0.6 percent of GDP in 2022 expected to turn negative at an annual average of 0.7 percent of GDP during 2023-26.
    - External multilateral financing expected to decline from annual average 5.1 percent of GDP during 2022-23 to 0.8 percent during 2023-27.
  - Staff encouraged diversification of financing options including Eurobonds and sovereign ESG bonds; utilize existing Blue Bonds via bankable projects to save on carry cost.
- External assessment and reserve adequacy:
  - CA model implies a CA gap of -8.7 percent of GDP and an over-valuation of the exchange rate by almost 12.0 percent while the IREER model shows a 20 percent under-valuation.
  - Staff recommend continued exchange rate flexibility to guard against exogenous shocks while mindful of balance-sheet effects.

### STRUCTURAL REFORM AGENDA, DIVERSIFICATION, CLIMATE, AND DIGITALIZATION
- Structural priorities to continue focusing on:
  - Revenue administration and tax policy (including business tax reform and Excise Tax bill submission).
  - Public financial management, procurement, and public investment efficiency (PIMA planned for FY23; interest in combined PIMA and PIMA Climate Change).
  - Governance, digitalization, and SOE reform (PEMC oversight, PEMC Act amendments, publication of COVID audit).
  - Climate change adaptation and mitigation (NDC target: reduce economy-wide absolute GHG emissions by 293.8 ktCO2e in 2030, or 26.4 percent compared to BAU).
  - Energy targets: 30 percent of gasoline private vehicles to be electric by 2030; Energy Efficiency improvement level of 15 percent by 2030.
  - Fisheries and aquaculture development: cold storage facilities completed mid-2021; Aquaculture Regulations promulgated; Aquaculture Regulatory Committee established.
  - Digitalization: digital ID, online business registration, online license application, and full implementation of Health Information System expected by end 2022; new Communications Bill and submarine cable developments noted.
- Public investment and infrastructure priorities:
  - Investments needed in electricity generation, water systems, sewerage, roads, renewable energy, and climate response.
  - Public Investment Management Assessment (PIMA) planned; Seychelles Infrastructure Agency established January 2022.

### POLICY RECOMMENDATIONS AND PRIORITIES
- Near-term priorities:
  - Adjust domestic fuel prices.
  - Strengthen revenue collection efforts.
  - Provide additional social spending to protect the most vulnerable households.
  - Adopt smoother path of fiscal deficit while keeping debt-to-GDP ratio below program envisaged level.
- Financial sector and monetary policy:
  - Modernize monetary and financial system; bolster financial stability (Policy Paper on Financial Stability and Basel III adoption).
  - CBS to reactivate bi-annual Survey on Consumer Confidence and Expectations with NBS.
- Debt management:
  - Publish and implement the Annual Borrowing Plan and new domestic debt management strategy (publication scheduled for end-September 2022).
- Social policy:
  - Review social safety net reform to assess coverage after streamlining beneficiaries in 2021.

### STAFF VIEW, ENDORSEMENT, AND CAPACITY TO REPAY
- Staff recommendation:
  - Considering authorities’ strong program implementation and commitments, staff recommends completion of the second EFF review and supports authorities’ requests for modification of performance criteria.
- Program financing and reserves:
  - Program remains fully financed with firm financing commitments for next 12 months.
  - International reserves projected to reach around 4.5 months of prospective imports by end-2022; expected equivalent to 4 months of imports over medium term.
- Capacity to repay the Fund:
  - Fund credit-to-GDP ratio will peak at 7.6 percent in 2023.
  - Fund credit to GIR ratio projected to peak at 22 percent in 2023.
  - Key risks to repayment capacity arise from uncertainty about adverse impact of the war in Ukraine on tourism and commodity prices.

*Source: Excerpt from IMF staff report (1sycea2022003).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and recent developments
- Seychelles’ economic recovery in 2021 "vastly outperformed projections," driven by a faster-than-expected rebound of the tourism sector.
- Real GDP growth in 2021 reached 7.9 percent, "nearly 2 percentage points more than projected at the time of the 1st EFF review."
- Real GDP growth is projected at 7.1 percent in 2022 as the tourism sector shows resilience to COVID-19 waves and geopolitical tensions.
- Tourism sector indicators:
  - Tourist arrivals bounced back in 2021 and in March–April 2022 arrivals from traditional markets more than offset a reduction in arrivals from Russia and Ukraine.
  - Tourism earnings in Q1 2022 reached pre-pandemic levels.
- Fiscal outturns in 2021:
  - Primary deficit fell from 14.7 percent of GDP in 2020 to 3 percent of GDP in 2021 (less than half the size of the 6.6 percent target set at the time of the first review).
  - Expenditure retrenchment amounted to 14.3 percent of GDP (compared with 11.1 percent envisaged during the first review).
  - Total revenue and grants reached 33.8 percent of GDP against 32.4 percent initially foreseen.
- Public debt and financing:
  - Debt-to-GDP ratio fell from 89 percent of GDP in 2020 to around 76 percent in 2021, "5 percentage points below the first review projections."
  - Gross financing needs (GFNs) declined from 32 percent of GDP in 2021 to 20 percent in 2022 ("6 percentage points less than initially projected").
  - The rupee appreciated by 32 percent against the U.S. dollar, 53 percent in NEER and 61 percent in REER terms respectively (offsetting the 2020 depreciation).
  - Yield-at-issuance on an average maturity of 5-year domestic bonds declined from 8.6 percent in February 2021 to 4.5 percent in May 2022; yields on 1-year T-bills declined from 6.1 percent in May 2021 to 1.2 percent in May 2022.
  - Spreads on the Eurobond maturing in 2026 (against the 5-year US Treasury) declined from 2,272 basis points at end-May 2020 to 494 bps on May 18, 2022.
- Inflation and external position:
  - Average inflation rose to 9.8 percent in 2021 from 1.2 percent in 2020.
  - Headline inflation fell from 7.9 percent (year-on-year) in December 2021 to 2.2 percent in March 2022.
  - Cumulative increase in prices in 2021 and 2022 in Seychelles is "over 14 percent."
  - Gross international reserves (GIR) increased by USD 144 million to USD 702 million in 2021 (including the SDR allocation of about USD 32 million). As of June 7, GIR stood at USD 668 million.
- Financial sector:
  - Regulatory capital improved to 23.61 percent of risk-weighted assets in March 2022, up from 20.2 percent in April 2021.
  - Non-performing loans (NPLs) rose to 7.3 percent of total loans from 5.4 percent a year earlier (March 2022). The rise in NPLs mainly reflected loans to real estate (49 percent of the total increase), tourism (28 percent), and manufacturing (18 percent).

### Outlook and risks
- Growth and inflation projections:
  - Real GDP growth in 2022 is expected to remain robust at 7 percent.
  - Over the medium term, growth is expected to return to its long-term trend of nearly 4 percent, with continued reliance on tourism and fisheries.
  - Annual inflation in 2022 is expected to reach 4.1 percent, reflecting rising global energy and food prices due to spillovers from the war in Ukraine.
  - With higher import prices, the current account deficit is expected to widen by 2.3 percentage points to 22.4 percent of GDP in 2022.
- Key downside risks:
  - Unanticipated spillovers of the war in Ukraine, including a further surge of commodity prices and fewer tourist arrivals resulting from an erosion of real incomes in advanced economies.
  - Higher NPLs as COVID-support and forbearance measures are withdrawn.
  - Continued vulnerability to climate change.
- Authorities’ view: Authorities agreed on the positive performance and outlook but expressed concerns that global fuel and food price increases have hit the population hard and emphasized large uncertainty surrounding the outlook.

### Program performance
- Overall implementation:
  - As of end-December 2021, all quantitative performance criteria (QPCs) and indicative targets (ITs) were met, except the IT on priority social expenditures.
  - All end-March ITs were met and appropriate progress made toward structural benchmarks.
- Modifications requested:
  - Authorities requested modification of the June 2022 QPCs and the September 2022 ITs to allow a more gradual fiscal consolidation reflecting past fiscal overperformance and increased social spending to attenuate the impact of surging commodity prices.
  - QPCs and ITs will be set until June 2023.
- Cross-country perspective:
  - Seychelles reduced its debt-to-GDP ratio by 13 percentage points of GDP from 2020 to 2021.
  - Over the program period, the cyclically adjusted primary balance (CAPB) for Seychelles is expected to fall by 14 percentage points of GDP, which would place Seychelles in the top 1 percent of a sample of fiscal adjustment episodes of all advanced and emerging economies with debt greater than 60 percent of GDP from 1990–2011.
- Structural reforms and benchmarks:
  - Contingent liabilities from Air Seychelles have been reduced as Air Seychelles achieved haircuts on its debt in 2022 and began implementing a new operational strategy since May 2022.
  - Structural benchmarks for publication of the Annual Borrowing Plan and new domestic debt management strategy (originally end-March 2022) were not met and are delayed; publication is scheduled for end-September 2022 following the mid-year budget revision.
  - The authorities started publishing an issuance calendar for government bonds for Q2 2022 and met the structural benchmark related to approval of a quarterly borrowing plan in February 2022.
  - The Policy Paper on Financial Stability (structural benchmark for March 2022) was implemented with delay and was submitted to the Cabinet and approved in May 2022.
  - The policy paper for the amendment of the Financial Institutions (Capital Adequacy) Regulations to adopt the Basel III capital definition was presented to Cabinet and approved in May 2022.
  - Authorities committed to publish the audit of COVID-related expenditures prior to completion of the second review.
  - Authorities are making appropriate progress on efforts to ensure the accuracy of beneficial ownership databases.

### Policy recommendations and priorities
- Near-term priorities (support post-pandemic recovery and address war in Ukraine repercussions while reducing debt vulnerabilities and creating fiscal space):
  - Adjust domestic fuel prices.
  - Strengthen revenue collection efforts.
  - Provide additional social spending to protect the most vulnerable households.
  - Adopt a smoother path of fiscal deficit than initially envisaged while keeping the debt-to-GDP ratio below the level originally envisaged in the program.
- Structural reform agenda to continue focusing on:
  - Revenue administration.
  - Public financial management.
  - Governance, including digitalization and state-owned enterprise reform.
  - Climate change adaptation and mitigation policies.
- Financial sector and monetary policy:
  - Modernize the monetary and financial system and bolster financial stability (including measures reflected in the Policy Paper on Financial Stability and Basel III capital definition adoption).
- Debt management:
  - Publish and implement the Annual Borrowing Plan and a new domestic debt management strategy (publication now scheduled for end-September 2022).
- Social policy:
  - Review of the social safety net reform is underway to assess coverage following streamlining of beneficiaries in 2021.

### Staff’s view and program endorsement
- Staff recommendation:
  - Considering the authorities’ strong program implementation and policy commitments going forward, staff recommends completion of the second EFF review and supports the authorities’ requests for modification of performance criteria.

*EXECUTIVE SUMMARY — 1sycea2022003 (June 14, 2022).*

### 15. Staff and the authorities agreed that the fiscal overperformance in 2021 allowed to

### 1sycea2022003 - 15. Staff and the authorities agreed that the fiscal overperformance in 2021 allowed to

### Fiscal recalibration and 2022–2023 budget outcomes
- Primary deficit expected to reach 1.4 percent of GDP in 2022, compared with the 2022 budget goal of 0.8 percent of GDP (MEFP para 22).
- Higher-than-initially-planned current expenditures by about 1.4 percent of GDP reflect:
  - additional security expenditure for the police and anti-corruption commission;
  - higher targeted temporary transfers to offset surging commodity prices for vulnerable households (MEFP para 24, 35-36).
- External grants projected to fall short by 1.8 percent of GDP compared to the first review.
- Tax revenue would remain stable (just over 28 percent of GDP); non-tax revenue expected to be slightly above the first review target (MEFP para 23).
- Authorities plan to partly offset the grants shortfall by curtailing capital expenditure, consistent with project implementation capacity constraints.
- Authorities now target a primary surplus of 1.7 percent of GDP in 2023 instead of 2.9 percent projected during the first review.

### Social safety net (SSN) and targeted support
- Government recognized need to strengthen the SSN; review of SSN programs has begun to identify shortcomings and improve benefits and coverage for low-income and vulnerable households.
- Short-term mitigation: targeted and temporary cash transfers to offset rising food and fuel prices.
- SCR 82 million, or 0.3 percent of GDP, has been added to the 2022 budget for a six-month plan to assist the most vulnerable (MEFP para 22).

### Debt sustainability, public debt indicators, and vulnerabilities
- Public debt trajectory:
  - Debt-to-GDP ratio projected to continue declining to 50 percent by 2026 3.8percentage points below the first review projections.
  - Gross financing needs (GFN) projected to decline to 9.6 percent by 2026 1.5 percentage points below the first review projections.
- Recent increase in long-term domestic bond issuance has extended the maturity of domestic debt.
- Public debt sustainability remains vulnerable to macroeconomic shocks and is particularly sensitive to currency depreciation shocks.

### Fiscal risks from state-owned enterprises and Air Seychelles
- Air Seychelles completed debt restructuring in May 2022:
  - Agreement with bondholders for a 66.7 percent haircut on the company’s debts.
  - Settlement in May 2022 with no fiscal cost to the government and without disrupting critical ground operations.
  - Government committed to provide no further funds to Air Seychelles (MEFP para 42 and 43) and has pre-paid its own obligations to Etihad Airways.
  - Structural benchmark: ringfence ground-handling operations into a separate legal entity by end-December 2022.
- Other public enterprises are profit-making and pose substantially lower fiscal risks.
- Work ongoing to improve transparency of public enterprise information via the Public Enterprises Management Committee (PEMC).

### Medium-term fiscal priorities and public investment
- Execution of capital expenditures needs improvement; under-execution has contributed to fiscal consolidation due to external financing shortfalls and absorption capacity issues.
- Investments needed in electricity generation, water systems, sewerage, roads, renewable energy, and climate change response.
- Expenditure targets for 2023 increased to allow postponement of some 2022 capital spending.
- A Public Investment Management Assessment (PIMA) planned for FY23 to identify opportunities to increase public investment efficiency and scope for procurement to support PPPs; authorities expressed interest in Fund TA combining PIMA and PIMA Climate Change.
- Cash flow unit integrated into the Treasury; progress toward reducing deviation between forecast and outcome in the monthly cash flow plan (end-March/June structural benchmark, MEFP para 38).

### Revenue mobilization and tax policy reforms
- Authorities committed to improving revenue performance; planned tax administration reforms focus on:
  - digitalization initiatives (MEFP para 27);
  - stronger compliance monitoring (MEFP para 28, 30, and 31);
  - upgrade in ASYCUDA system at customs (MEFP para 26).
- January 2022 business tax reform adopted to:
  - unify profit tax rates for different productive sectors at 25 percent (currently tourism, fishery, and agriculture benefit from a lower 15 percent tax rate) (MEFP para 32);
  - reduce accelerated depreciation provisions for tourism, agriculture, and fishery;
  - revise taxation of security dealers.
- A revised Excise Tax bill submitted to the National Assembly (MEFP para 32).
- These reform measures are expected to generate additional 0.7 percent of GDP in 2023.

### Strengthening fiscal framework, forecasting, and TA
- Additional IMF TA scheduled for FY23 on:
  - strengthening fiscal forecasting (costing methodologies, estimation of binding expenditure ceilings);
  - fiscal reporting;
  - budget institutions;
  - fiscal risk analysis;
  - enforcement of budget ceilings (MEFP para 33 and 34).
- Authorities requested IMF TA on VAT exemption and expressed determination to improve absorption capacity and investment via improvements to the Public Sector Investment Plan (PSIP) and the recently created Infrastructure Agency (MEFP para 31-34).

### Monetary policy, credit, and exchange rate
- Monetary policy expected to remain accommodative.
- Private sector credit:
  - contracted by 12 percent (year-on-year) in 2021 across all sectors (except mortgage loans);
  - early signs of revival with private credit projected to increase by 5 percent in 2022.
- CBS stands ready to act if inflationary pressures persist; staff urged CBS to reactivate its bi-annual Survey on Consumer Confidence and Expectations with the National Bureau of Statistics (NBS).
- Recommended reforms to monetary policy operating framework include deployment of tools for mopping up excess reserves, development of an interbank market, resumption of repo operations, fine-tuning CBS communications, and reviewing policy for CBS access to government securities for open market operations.
- Authorities agreed to participate in a pilot IMF central bank transparency assessment.

### External sector assessment and exchange rate policy
- Staff assessment: external position appears significantly weaker than implied by fundamentals and desirable policies (Annex II); risks mitigated by favorable debt composition and a large share of FDI.
- Key external indicators:
  - Gross international reserves (GIR) rose to $702 million in 2021, equivalent to 4.7 months of prospective imports of goods and services or about 120 percent of the ARA metric.
  - Current account (CA) model implies a CA gap of -8.7 percent of GDP and an over-valuation of the exchange rate by almost 12.0 percent while the real effective exchange rate index (IREER) model shows a 20 percent under-valuation of the exchange rate.
- Staff recommend removing the discriminatory property tax measure applied to non-residents (Immovable Property tax rate of 0.25 percent on property value introduced in 2020), assessed as a capital flow management measure under the IMF Institutional View.

### Debt management strategy and financing composition
- Medium-term debt management strategy (MTDS) and annual borrowing plan (ABP) publication delayed; reset structural benchmark for end-September 2022 due to uncertainty from the war in Ukraine.
- Move to an electronic bond auction mechanism from the current manual process planned to improve auction efficiency.
- Despite steady bond issuance at around SCR 1 billion during 2022-27:
  - net domestic financing at 0.6 percent of GDP in 2022 is expected to turn negative at an annual average of 0.7 percent of GDP during 2023-26, mostly due to expected budgetary surplus from 2024 onwards.
  - In 2023 net external financing remains higher than net negative domestic financing; sterilization needs might arise, warranting coordination between debt management and monetary policies.
- External multilateral financing expected to decline from an annual average of 5.1 percent of GDP during 2022-23 to 0.8 percent during 2023-27 in line with projected fiscal surplus.
- Staff encouraged diversifying financing options, including Eurobonds and sovereign ESG bonds; utilization of existing Blue Bonds through bankable projects remains a priority to save on carry cost.

### Financial sector and market functioning (highlights)
- Weaknesses in liquidity management, absence of benchmark rates, and lack of collateralized intra-day lending facility constrain interest rate transmission.
- Auction operational issues noted: bids amounting to 35 percent of total offered bonds in March 2022 could not be processed due to late submission and manual errors; auction was undersubscribed by 45 percent.
- Authorities emphasize balancing domestic and external financing and utilizing bilateral financing where available.

*Source: Excerpt from IMF staff report (1sycea2022003).*

### 36. The financial sector  has weathered  the crisis well, but risks remain. No significant

### 36. The financial sector  has weathered  the crisis well, but risks remain. No significant

### Financial sector condition and immediate risks
- No significant COVID-19 impact on loan portfolios has yet materialized, but downside risks arise from forbearance measures, making active monitoring of asset quality imperative.
- The unwinding of COVID-19 support measures announced in February 2022 includes reversing liquidity support; advances to central government; private sector credit facility; dividend payments by banks; and forbearance policies relating to asset classification and provisioning, including for restructured and moratoria loans.
- As forbearance measures have now been unwound, obtaining reliable information on NPLs, potential losses, and capital shortfalls is crucial to formulate appropriate policy responses.

### Non-performing loans (NPLs) and asset-quality monitoring
- The CBS will undertake an assessment of asset quality that considers the impact of withdrawal of forbearance measures, including asset classification through expanded bank reporting on forborne and restructured loans (MEFP para 56 and new structural benchmark for September 2022).
- If NPL levels rise excessively following withdrawal of forbearance measures:
  - Authorities should closely monitor and develop internal NPL management plans for banks with high NPLs.
  - Operational targets should be set for reducing the NPL level or write-off problem loans.
  - The Fund can provide guidance to strengthen insolvency and debt enforcement framework capacity.

### Regulatory and supervisory reforms
- CBS is strengthening its regulatory and supervisory framework to enhance financial stability:
  - Adoption of a risk-based supervision (RBS) framework integrating Basel II Pillar 2 requirements; work is being finalized to calibrate bank risk scores.
  - A policy paper for adoption of Basel II Pillar 1 and a set of disclosure guidelines based on Basel II Pillar 3 is being finalized by December 2022.
  - The policy paper to amend the Financial Institutions (Capital Adequacy) Regulations, 2010 to adopt the Basel III capital definition was presented to Cabinet and approved in May 2022 (MEFP para 54 and 55; structural benchmark for end-May 2022).
  - Policy paper of a financial stability bill submitted to Cabinet and approved in May 2022 (MEFP para 57 and revised structural benchmark delayed from March 2022).
- Staff encouraged CBS to integrate management of systemic risks from FX loans through macroprudential policies; explicitly, 40 percent of the loans are in foreign currency.

### Crisis management and bank resolution
- CBS remains committed to strengthening crisis management and bank resolution framework:
  - Drafting a policy paper on a Bank Resolution Bill to enhance powers of resolution authorities on co-ordination, co-operation mechanisms, and instruments to deal with evolving types of crises.
  - Updated policy paper to be submitted to Cabinet by end-July 2022 (MEFP para 58 and structural benchmark delayed from end-June 2022).
  - Draft Bank Resolution Bill expected to be approved by Cabinet by the end of June 2023 (MEFP para 58 and structural benchmark for end-June 2023).
- CBS will use relevant early intervention measures, including suspension of dividend payments, for undercapitalized banks; viable but undercapitalized banks required to submit capital plans; nonviable institutions to be resolved using appropriate resolution tools (MEFP para 53 and 58).

### Correspondent banking, AML/CFT, and transparency
- Correspondent banking relationship pressures have abated following ESAAMLG actions in September 2021: ESAAMLG approved 9 re-ratings for Seychelles out of 20 recommendations with deficiencies. Seychelles will submit another re-rating request in October 2022 for upgrades to a further set of 9 recommendations (MEFP para 64).
- Progress on AML/CFT and transparency initiatives continues.
- Beneficial ownership (BO) compliance and accuracy:
  - The centralized BO database with the Financial Intelligence Unit (FIU) became operational in July 2021.
  - As of end-April 2022, 90 percent of the roughly 59,000 foreign legal persons and legal arrangements have complied with their obligation to submit information to the database. The FIU is working with resident agents to reach 100 percent compliance by end-June 2022.
  - For domestic legal persons and legal arrangements, current compliance rate is 23 percent of the 7,781 active entities; FIU is conducting outreach to increase awareness.
  - FSA submitted a risk-based action plan for resident agents in January 2022 and intends to publish a summary of findings by end-December 2022.
  - FSA and FIU will publish by July, 2022 an assessment report on the accuracy of the BO register and propose legal amendments to address shortcomings.
  - From end-July, the FIU will submit periodic strategic analysis reports on the BO database to the National AML/CFT Committee, including compliance statistics and red flags.

### Authorities’ stated priorities and views
- Authorities committed to enhance regulatory and supervisory framework, focusing on legal reforms.
- CBS noted mitigation of systemic risks from FX loans through macroprudential tools will require further amendments to CBS legislation.
- Authorities consider digitalization of the banking sector crucial to support effective supervision.

### Governance, transparency, and audits
- Authorities building on governance in fiscal transparency, beneficial ownership transparency, anti-corruption measures, and audits (MEFP para 29, 64, 65, and 66).
- Authorities committed to publish the audit of COVID-related expenditure prior to completion of second EFF review; publication scheduled for June 2022 (prior action for second review).

### Program financing, reserves, and repayment capacity
- Program implementation:
  - As of end-December 2021, all quantitative performance criteria (QPCs) and indicative targets (ITs) were met, except the IT on priority social expenditures. All end-March ITs were met. All continuous PCs have been met.
- Financing:
  - Program remains fully financed with firm financing commitments for the next 12 months and good prospects for the remainder of the program period.
  - Relative to the previous review, in 2022 additional domestic financing will offset a USD 10 million reduction in bilateral budget support.
  - International reserves are projected to reach around 4.5 months of prospective imports by end-2022.
  - Reserves are expected to be equivalent to 4 months of imports over the medium term.
- Repayment capacity:
  - Fund credit-to-GDP ratio will peak at 7.6 percent in 2023.
  - Fund credit to GIR ratio is projected to peak at 22 percent in 2023.
  - Key risks to repayment capacity arise from uncertainty about the adverse impact of the war in Ukraine on tourism and commodity prices.

### Macro and sector outlook (staff assessment)
- Growth and tourism:
  - Real GDP grew to an estimated 8 percent in 2021, driven by a swift rebound of the tourism sector.
  - GDP growth is expected to reach 7 percent in 2022.
  - Tourism earnings in March 2022 surpassed the 2019 level.
- Inflation and vulnerable households:
  - Headline inflation is declining but the surge in commodity prices will affect low-income households; rising food and fuel prices expected to disproportionately affect the vulnerable population.
- Fiscal position and debt:
  - Stronger fiscal performance in 2021 increased fiscal space and reduced public debt-to-GDP from 93 percent in 2020 to around 76 percent in 2021.
  - Staff welcomes targeted, temporary, means-tested support to vulnerable populations consistent with medium-term fiscal sustainability.
- Other staff recommendations:
  - CBS should undertake a bank-level analysis of the impact of unwound forbearance measures on banks’ asset quality to strengthen the unwinding strategy.
  - Maintain buildup of buffers and prudent macroeconomic policies; prioritize investments related to climate change.

### Structural, diversification, climate, and digitalization issues
- Diversification and Blue Economy:
  - Authorities plan to deepen and diversify tourism and upgrade fisheries value chain under Blue Economy initiatives (MEFP para 12 and 13).
  - 2019 World Bank SWIOFish 3 consultant report highlighted importance of infrastructure, skill development, and species diversification for fisheries.
- Climate finance and targets:
  - 2017 Climate Policy Assessment Report estimated financing needs for climate-change related capital projects amounted to 40 percent of 2016 GDP.
  - Economy-wide absolute GHG emissions aimed to be reduced by 293.8 ktCO2e in 2030 (26.4 percent) compared to BAU scenario.
  - Energy sector targets: 30 percent of gasoline private vehicles to be electric by 2030, and Energy Efficiency improvement level of 15 percent by 2030.
- Digitalization:
  - Further digitalization is needed to support tax collection, economic diversification, and pandemic resilience.
  - Plans to digitize taxes: new taxation management system to be developed and completed by 2023.
  - Full implementation of the Health Information System expected by end 2022.

*Source: 1sycea2022003 - SEYCHELLES (INTERNATIONAL MONETARY FUND).*

### 60. Staff welcomes the authorities’ continued efforts to improve governance and stresses

### 60. Staff welcomes the authorities’ continued efforts to improve governance and stresses

### Governance reforms and anti-corruption framework
- Staff welcomes the authorities’ continued efforts to improve governance.
- The 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.
- The number of submissions to the database has been strong.
- The authorities are pursuing efforts to ensure accuracy and availability of the collected information.
- Ensuring accuracy of and appropriate access to the ownership information, including the assessment report expected in June 2022, will be critical moving forward.

### Public financial management (PFM) and transparency
- Consolidating improvements in the PFM system’s integrity and transparency are also important to the authorities’ efforts.

*Source: IMF staff assessment excerpt*

### 61. Staff supports the authorities’ request for completion of the second review and

### 1sycea2022003 - 61. Staff supports the authorities’ request for completion of the second review and

### Staff decision and program assessment
- Staff supports the authorities’ request for completion of the second review and modification of end-June PCs and ITs, and end-September ITs under the EFF arrangement.
- Rationale: excellent performance under the arrangement and the authorities’ commitment to meeting program objectives.
- The attached Letter of Intent and Memorandum of Economic and Financial Policies set out appropriate policies to pursue the program’s objectives.
- Staff considers risks to program implementation as manageable.
- The capacity to repay the Fund is adequate but subject to risks.
- It is expected that the next Article IV consultation will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

### Real economy and macroeconomic indicators (high-level observations from figures and tables)
- Real GDP growth (selected projected path shown in Figure 5): charted annually for 2018–2027 (percent).
- Public debt (In Percent of GDP): charted annually for 2018–2027.
- Current account deficit (In Percent of GDP): charted annually for 2018–2027.
- Overall fiscal balance (In Percent of GDP): charted annually for 2018–2027.
- Macroeconomic note highlights:
  - "The economy experienced a V-shape recovery but faces yet another shock..."
  - "Interest rates remain globally stable ..."
  - "Private sector credit reflects the impact of currency movements..."
  - "External deficit is affected by the war in Ukraine ..."
- Real effective exchange rate and exchange rate indices presented in Figure 7 (daily exchange rates index, Jan'13–Mar'22; December 31, 2011 = 100).

### Key quantitative projections and indicators (Table 1: Selected Economic and Financial Indicators, 2020–27)
- Nominal GDP (2017): US$1,498 million
- Per capita GDP (2017): US$15,735
- Population, end-year (2016): 94,677
- Literacy rate (2015): 95.3 percent
- Main products and exports: Tourism, Canned Tuna
- Nominal GDP (millions of Seychelles rupees): 2020 Act. 22,211; 2021 Act. 24,611; 2022 27,482; 2023 29,786; 2024 32,171; 2025 34,592; 2026 36,958; 2027 39,321
- Real GDP (millions of Seychelles rupees): 2020 Act. 20,196; 2021 Act. 21,794; 2022 23,334; 2023 24,536; 2024 25,714; 2025 26,853; 2026 27,895; 2027 28,971
- Real GDP growth (annual percent change): 2020 -7.7; 2021 7.9; 2022 7.1; 2023 5.2; 2024 4.8; 2025 4.4; 2026 3.9; 2027 3.9
- CPI (annual average): 2020 1.2; 2021 9.8; 2022 4.1; 2023 3.3; 2024 1.5; 2025 2.5; 2026 3.0; 2027 3.0
- Credit to the private sector (percent change): 2020 20.2; 2021 -11.9; 2022 8.8; 2023 10.0; 2024 11.7; 2025 12.2; 2026 13.7; 2027 13.9
- External savings (percent of GDP): 2020 21.9; 2021 20.1; 2022 22.4; 2023 19.3; 2024 17.4; 2025 15.6; 2026 14.9; 2027 14.2
- Gross national savings (percent of GDP): 2020 0.2; 2021 5.5; 2022 2.9; 2023 7.9; 2024 9.2; 2025 10.5; 2026 11.3; 2027 12.0
- Government savings (percent of GDP): 2020 -13.0; 2021 -3.0; 2022 1.0; 2023 5.3; 2024 7.7; 2025 9.1; 2026 10.4; 2027 10.8
- Gross investment (percent of GDP): 2020 22.1; 2021 25.6; 2022 25.3; 2023 27.2; 2024 26.7; 2025 26.2; 2026 26.2; 2027 26.2
- Private consumption (percent of GDP): 2020 48.4; 2021 54.8; 2022 60.8; 2023 58.5; 2024 58.8; 2025 58.7; 2026 58.9; 2027 58.7
- Total revenue, excluding grants (percent of GDP): 2020 32.2; 2021 31.2; 2022 32.6; 2023 33.7; 2024 34.5; 2025 34.3; 2026 34.2; 2027 34.2
- Expenditure and net lending (percent of GDP): 2020 51.5; 2021 40.0; 2022 37.3; 2023 37.0; 2024 35.4; 2025 34.1; 2026 33.5; 2027 33.1
- Current expenditure (percent of GDP): 2020 45.2; 2021 34.5; 2022 31.5; 2023 29.7; 2024 27.8; 2025 26.8; 2026 26.3; 2027 26.2
- Overall balance, including grants (percent of GDP): 2020 -18.4; 2021 -5.6; 2022 -3.8; 2023 -0.8; 2024 1.1; 2025 1.8; 2026 2.3; 2027 2.6
- Primary balance (percent of GDP): 2020 -14.7; 2021 -3.0; 2022 -1.4; 2023 1.7; 2024 3.0; 2025 3.3; 2026 3.4; 2027 3.4
- Total government and government-guaranteed debt (percent of GDP): 2020 89.5; 2021 76.8; 2022 75.2; 2023 69.7; 2024 63.7; 2025 57.7; 2026 52.2; 2027 47.1
- Current account balance including official transfers (percent of GDP): 2020 -21.9; 2021 -20.1; 2022 -22.4; 2023 -19.3; 2024 -17.4; 2025 -15.6; 2026 -14.9; 2027 -14.2
- Total external debt outstanding (millions of U.S. dollars): 2020 5,049; 2021 5,331; 2022 5,589; 2023 5,819; 2024 5,941; 2025 6,061; 2026 6,187; 2027 6,329
- Total external debt (percent of GDP): 2020 400.1; 2021 365.8; 2022 303.4; 2023 294.4; 2024 272.3; 2025 258.1; 2026 246.4; 2027 239.0
- Gross official reserves (end of year, millions of U.S. dollars): 2020 559; 2021 702; 2022 697; 2023 729; 2024 707; 2025 713; 2026 726; 2027 764
- Months of imports, c.i.f. (reserves): 2020 4.6; 2021 4.7; 2022 4.5; 2023 4.4; 2024 4.1; 2025 3.9; 2026 3.8; 2027 3.9
- In percent of Assessing Reserve Adequacy (ARA) metric: 2020 110.4; 2021 120.0; 2022 114.0; 2023 112.6; 2024 105.9; 2025 104.0; 2026 103.4; 2027 105.7
- Exchange rate: Seychelles rupees per US$1 (end-of-period): 2020 21.0; 2021 14.7

### Balance of payments highlights (Table 2: 2020–27, selected figures)
- Current account balance (in US$ millions): 2020 Act. -277; 2021 Act. -273; 2022 Act. -293; 2023 1st review -388; 2023 2nd review -413; 2024 (1st rev) -386; 2024 (2nd rev) -382; 2025 (1st rev) -375; 2025 (2nd rev) -380; 2026 (1st rev) -381; 2026 (2nd rev) -366; 2027 (2nd rev) -373; 2027 (final) -377
- Current account (percent of GDP): 2020 -21.9; 2021 -20.0; 2022 -20.1; 2023 -20.9; 2023 (2nd review) -22.4; 2024 -18.8; 2024 (2nd review) -19.3; 2025 -16.6; 2025 (2nd review) -17.4; 2026 -15.5; 2026 (2nd review) -15.6; 2027 -15.0; 2027 (2nd review) -14.9; 2027 final -14.2
- Exports of goods (US$ millions): 2020 473; 2021 447; 2022 516; 2023 479; 2024 559; 2025 503; 2026 565; 2027 520 (table shows multiple review variants for each year)
- Tourism earnings (US$ millions): 2020 221; 2021 275; 2022 310; 2023 390; 2024 402; 2025 532; 2026 468; 2027 618 (series includes review variants)
- Imports of goods (US$ millions): 2020 832; 2021 908; 2022 1,022; 2023 1,109; 2024 1,287; 2025 1,218; 2026 1,320; 2027 1,336
- Balance of goods and services (US$ millions): 2020 -198; 2021 -213; 2022 -215; 2023 -309; 2024 -329; 2025 -287; 2026 -283; 2027 -274
- Gross official reserves (stock, e.o.p., US$ millions): 2020 559; 2021 675; 2022 702; 2023 673; 2024 697; 2025 720; 2026 729; 2027 720 (table includes multiple review numbers and later projections up to 2027 showing variation by review)

### Fiscal accounts and public debt composition (selected from Tables 3a/3b and Table 8)
- Total revenue and grants (Millions of Seychelles rupees): 2020 Act. 7,543; 2021 Act. 8,120; 2022 8,367; 2023 9,663; 2024 9,200; 2025 10,578; 2026 10,771; 2027 11,835 (various review vintages included)
- Total revenue (Millions of Seychelles rupees): 2020 7,156; 2021 7,514; 2022 7,667; 2023 8,923; 2024 8,960; 2025 9,953; 2026 10,034; 2027 11,085
- Tax revenues (Millions of Seychelles rupees): 2020 6,369; 2021 6,692; 2022 6,721; 2023 7,863; 2024 7,764; 2025 8,908; 2026 8,960; 2027 9,999
- Wages and salaries (Millions of Seychelles rupees): 2020 2,845; 2021 2,930; 2022 2,760; 2023 3,097; 2024 3,076; 2025 3,100; 2026 3,213; 2027 3,359
- Interest due (Millions of Seychelles rupees): 2020 640; 2021 665; 2022 739; 2023 711; 2024 674; 2025 696; 2026 765; 2027 620
- Overall balance, cash basis (after grants, Millions of Seychelles rupees): 2020 -4,086; 2021 -2,323; 2022 -1,390; 2023 -943; 2024 -1,057; 2025 198; 2026 -250; 2027 376 (table shows multiple review vintages for projections)
- Public debt decomposition (Table 8, selected):
  - Total debt stock (US$ million, end of period) 2021: 1,026.3
  - External debt (US$ million) 2021: 552.5 (53.8 percent of total)
  - Domestic debt (US$ million) 2021: 473.8 (46.2 percent of total)
  - Domestic T-Bills (US$ million) 2021: 171.7
  - Domestic bonds (US$ million) 2021: 229.3
  - Memo: Nominal GDP (US$ million) 2021: 1,262.0

### Financial sector and monetary aggregates (selected)
- Broad money (end-period, millions of Seychelles rupees): 2017 15,888; 2018 17,115; 2019 19,494; 2020 25,160; 2021 26,629
- Broad money growth (12–month percent change): 2018 16.4; 2019 7.7; 2020 13.9; 2021 29.1; 2021 (later) 5.8
- Credit to the private sector (12–month percent change): 2018 17.8; 2019 11.5; 2020 22.3; 2021 20.2; 2021 (later) -11.9
- Gross official reserves (millions of US$): 2017 546; 2018 548; 2019 580; 2020 559; 2021 702 (Table 4 memorandum)
- Selected banking soundness indicators (Table 5, end-of-period percent):
  - Regulatory capital to risk weighted assets: 2018 20.5; 2019 19.5; 2020 17.1; 2021 18.2; 2021 Q4 19.9; 2021 Q1 21.5; Q2 22.4 (table lists multiple quarterly entries)
  - Non-performing loans to gross loans: 2018 3.5; 2019 2.7; 2020 3.3; 2021 3.6; 2021 Q4 5.1; 2021 Q1 4.9; Q2 5.5
  - Return on assets (annualized): 2018 3.7; 2019 2.5; 2020 1.0; 2021 1.8; 2021 quarterly series 1.0–3.5

### Capacity to repay the Fund (Table 7: Indicators of Capacity to Repay the Fund, 2017–2032)
- Existing Fund credit (stock, end-of-period, Millions of SDR): 2017 29.3; 2018 24.8; 2019 19.7; 2020 37.6; 2021 33.6; 2022 29.9; 2023 21.4; 2024 8.2; 2025 1.2; 2026 0.4; 2027 0.0; thereafter 0.0 through 2032
- Prospective Fund credit (disbursement schedule, Millions of SDR): 2022 disbursement 48.0; 2023 disbursement 13.0; 2024 disbursement 13.0
- Stock of existing and prospective Fund credit (Millions of SDR): 2017 29.3; 2018 24.8; 2019 19.7; 2020 37.6; 2021 81.6; 2022 90.9; 2023 95.4; 2024 82.2; 2025 75.2; 2026 65.9; 2027 54.8; 2028 42.4; 2029 30.1; 2030 17.8; 2031 5.4; 2032 1.6
- Stock of existing and prospective Fund credit as percent of quota: 2017 128.0; 2018 108.2; 2019 86.0; 2020 164.3; 2021 356.2; 2022 396.8; 2023 416.6; 2024 358.9; 2025 328.5; 2026 287.6; 2027 239.1; 2028 185.2; 2029 131.4; 2030 77.6; 2031 23.7; 2032 7.2
- Stock as percent of GDP: 2017 2.6; 2018 2.2; 2019 1.7; 2020 4.3; 2021 8.1; 2022 7.1; 2023 7.0; 2024 5.4; 2025 4.6; 2026 3.8; 2027 2.8; 2028 2.0; 2029 1.3; 2030 0.7; 2031 0.2; 2032 0.1
- Obligations to the Fund from existing and prospective Fund arrangements (disbursements and repurchase obligations shown annually through 2032; principal and charges/interest schedules detailed in Table 7)

*Source: IMF staff and Seychelles authorities as presented in the cited chapter.*

### Annex I. Risk Assessment  Matrix

### 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 (staff’s subjective assessment):
  - “low” = probability below 10 percent
  - “medium” = probability between 10 and 30 percent
  - “high” = probability between 30 and 50 percent
- Time horizons:
  - “Short term (ST)” = within 1 year
  - “Medium term (MT)” = within 3 years
- Non-mutually exclusive risks may interact and materialize jointly. The RAM reflects staff views as of the time of discussions with the authorities.

### Conjunctural risks — key risks, likely timing, impacts, and policy responses
- Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions.
  - Relative Likelihood: High
  - Time Horizon: Short to Medium term
  - Impact if Realized: High — Broadened sanctions (including oil, gas, and food), near-complete disconnection of Russia from the global financial system and trading system, Russian countersanctions and secondary sanctions causing even higher commodity prices, refugee migration, tighter financial conditions, and adverse spillovers, particularly affecting LICs and commodity-importing EMs.
  - Policy Response: (General RAM entry; no Seychelles-specific measures listed in this line.)

- Protracted delay in tourism recovery from main European countries affecting Seychelles.
  - Relative Likelihood: High
  - Time Horizon: Short to medium term
  - Impact if Realized: High — Could hamper planned tourism and economic recovery in 2022.
  - Policy Response:
    - Develop a contingency plan to lower the impact of a delayed economic recovery.
    - Consider further fiscal consolidation and reliance on concessional financing if such risk materializes.

- Rising and volatile food and energy prices.
  - Relative Likelihood: High
  - Time Horizon: Short Term
  - Impact if Realized: Medium — Commodity prices trend up amid supply constraints, war in Ukraine, export restrictions, and currency depreciations; leads to short-run disruptions in green transition, price and real sector volatility, food insecurity, social unrest, and acute food and energy crises (especially in EMDEs with lack of fiscal space).
  - Seychelles-specific Impact Notes:
    - Exchange rate-inflation pass-through is slow in Seychelles, but sharper-than-anticipated increases in international energy prices raise the costs of energy imports and other imported goods.
    - Higher food prices and/or supply disruptions would hurt vulnerable consumers (particularly low-income households).
  - Policy Response:
    - CBS to maintain vigilant monitoring and be ready to tighten monetary stance to anchor inflation expectations.
    - Enhance the effectiveness of the government’s planned targeted support for the most vulnerable population to deal with rising prices or a delayed economic recovery.

- Shortfall of external financing for Seychelles.
  - Relative Likelihood: Medium
  - Time Horizon: Short Term to Medium Term
  - Impact if Realized: High — Could imply high GFNs for several years.
  - Policy Response:
    - Develop a contingency plan to lower the impact of a shortfall in external financing.
    - Authorities could consider further fiscal consolidation and debt restructuring.

- Higher NPL levels in the banking sector in Seychelles.
  - Relative Likelihood: Medium
  - Time Horizon: Short Term to Medium Term
  - Impact if Realized: Medium — Higher NPL levels, currently not fully recognized due to regulatory forbearance, could escalate if economic recovery falls short of expectations.
  - 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 reclassification of loans.
    - Further develop detailed reporting templates for restructured and rescheduled loans and for monitoring the impact of COVID-19 measures on banks’ asset quality.

- Outbreaks of lethal and highly contagious Covid-19 variants.
  - Relative Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Impact if Realized: Medium — Low vaccine effectiveness or vaccine-resistant variants could force more social distancing and/or new lockdowns, extending supply chain disruptions, triggering capital outflows, financial tightening, currency depreciations, and debt distress in some EMDEs; for Seychelles specifically, could further disrupt domestic activity and tourism recovery.
  - Policy Response:
    - Rely predominantly on concessional financing.
    - Optimize debt portfolio; adjust public investment level to reduce borrowing needs, if necessary.

### Structural risks — natural disasters and climate-related vulnerabilities
- Natural disasters related to climate change.
  - Relative Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Impact if Realized: Medium — Higher frequency of natural disasters causes severe economic damage to smaller vulnerable economies and accelerates emigration; severe events in large economies reduce global GDP, cause further supply chain disruptions and inflationary pressures, and prompt recalculation of risk and growth prospects. For Seychelles, materialization could trigger further public expenditures and alter planned public debt reduction.
  - Policy Response:
    - Prioritize the implementation of projects related to climate change.

*Source: 1sycea2022003 - Annex I. Risk Assessment Matrix*

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

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

### Stress test results and scenarios
- A 30 percent depreciation of the domestic currency would lead to a spike in the external debt-to-GDP ratio to around 515 percent in 2023, decreasing steadily to around 415 percent by the end of the projection period, compared to about 272 percent under the baseline scenario.
- A permanent ¼ standard deviation shock to growth would lead to a gradual increase in the external debt-to-GDP ratio to around 304 by the end of the projection period.
- A permanent ¼ standard deviation shock to the current account (excluding interest payments) would lead to a gradual increase in the external debt-to-GDP ratio to around 283 by the end of the projection period.
- Interest rate, growth, and current account shocks have more muted but still significant effects on the external debt profile.
- Bound tests and alternative shocks presented include:
  - Real depreciation shock: One-time real depreciation of 30 percent occurs in 2023.
  - Combined shock: produces an external debt outcome around 414.5 (percent of GDP) by the 2027 projection in the stress-test figure.
  - Individual permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance (as documented in figure notes).

### Public DSA — baseline projections and debt dynamics
- Nominal gross public debt (percent of GDP) by year (selected series shown in DSA table):
  - 2020: 69.6
  - 2021: 88.7
  - 2022: 76.2
  - 2023: 73.3
  - 2024: 67.0
  - 2025: 61.3
  - 2026: 55.5
  - 2027: 50.1
  - (continued projection in table includes 45.2 for a later year)
- Net public debt (percent of GDP) by year (selected):
  - 2020: 60.8
  - 2021: 66.2
  - 2022: 74.1
  - 2023: 71.5
  - 2024: 65.4
  - 2025: 59.7
  - 2026: 54.1
  - 2027: 48.8
- Real GDP growth (in percent) projections:
  - 2020: 4.7
  - 2021: -7.7
  - 2022: 7.9
  - 2023: 7.1
  - 2024: 5.2
  - 2025: 4.8
  - 2026: 4.4
  - 2027: 3.9
- Inflation (GDP deflator, in percent) projections:
  - 2020: 3.3
  - 2021: 1.8
  - 2022: 2.7
  - 2023: 4.3
  - 2024: 3.1
  - 2025: 3.1
  - 2026: 3.0
  - 2027: 2.4
- Change in gross public sector debt (cumulative projection through 2027): -30.9 (percent of GDP).
- Identified debt-creating flows (cumulative through 2027): -30.4 (percent of GDP).
- Primary deficit (cumulative through 2027): -14.2 (percent of GDP).
- Automatic debt dynamics contribution (cumulative through 2027): -14.6 (percent of GDP).
- Exchange rate depreciation contribution noted in table: 0.7 in 2020, 14.4 in 2021, -12.8 in 2022 (and then dotted for projections).
- Other identified debt-creating flows and residual contributions are detailed in the DSA table (including privatization proceeds, contingent liabilities, domestic debt issuance for monetary purposes, and residuals).

### External sector assessment — summary findings
- Reserve adequacy: International reserves at end-2021 were within the advisable range of international reserves.
- International Investment Position (IIP):
  - Net IIP increased by 18 percentage points of GDP to -129 percent of GDP at end-2021 from -147 percent of GDP at end-2020.
  - End-2021 gross assets: USD 4.9 billion with debt assets of around USD 2.4 billion.
  - End-2021 gross liabilities: USD 6.8 billion with debt liabilities of USD 5.5 billion.
  - Direct investment: about 36 percent of gross assets and 65 percent of gross liabilities.
  - Portfolio investment: about 18 percent of gross assets and about 3 percent of gross liabilities.
- External debt composition and risks:
  - Gross non-FDI liabilities were 164 percent of GDP at end-2021.
  - Total external debt stood at 365 percent of GDP at end-2021.
  - Risks are mitigated by favorable debt composition and maturity profile: mostly public and tourism sector borrowing at favorable interest rates and long maturities.
- Current account dynamics:
  - Current account deficit narrowed from 21.9 percent of GDP in 2020 to 20.1 percent of GDP in 2021.
  - Tourist arrivals in 2021 were up by 59 percent since the reopening of the border in March 2021.
  - New tourism markets included Russia, the UAE, and Israel.
  - From the savings-investment perspective, strong overperformance in fiscal consolidation mainly contributed to the narrowing of the current account deficit.
  - The current account deficit is expected to widen in 2022 due to adverse impacts from the Russia-Ukraine conflict (lower tourism earnings and higher fuel and food import prices), with higher fuel prices partly offset by re-exports.
  - The current account deficit is projected to narrow over the medium term, mainly due to recovery in the global tourism industry and fiscal consolidation.
- EBA-Lite model assessments and caveats:
  - Seychelles is a special case for external assessment due to strong dependence on tourism and high import content of tourism-related FDI (around 80%).
  - EBA-lite results are mixed and should be interpreted with caution.
  - CA model results:
    - CA-Actual: -20.1 (percent of GDP)
    - COVID-19 adjustor: -9.1
    - Adjusted CA: -11.0
    - CA Norm (from model): -3.3
    - CA Gap: -7.7 (percent of GDP)
    - Relative policy gap: -0.9 (percent of GDP)
    - Elasticity: -0.68
    - REER misalignment implied by CA model: about 11 percent overvaluation.
  - IREER model (REER index) results:
    - REER Gap: -39.1 (percent)
    - Policy gap contributes 7 percent to REER gap in IREER model.
  - ES model suggests REER is substantially weaker than level implied by fundamentals and desired policies.
- Real exchange rate developments:
  - REER appreciated by 61 percent year-on-year in December 2021.
  - NEER appreciated by 53 percent year-on-year in December 2021.
  - The 2021 appreciation mirrored the strong rebound in tourist arrivals.
  - Continued exchange rate flexibility is recommended to guard against exogenous external shocks while being mindful of balance-sheet effects.
- Capital and financial flows:
  - Seychelles has an open capital account.
  - In 2021, net capital and financial inflows exceeded the current account deficit, leading to substantial build-up of gross international reserves (GIR).
  - Net capital and financial inflows increased in 2021 due to increased official flows (including budget support loans from IFIs and the SDR allocation), reversal of portfolio flows into net inflows, and a small increase in FDI.
  - The capital and financial account is expected to strengthen over the medium term as structural reforms and macroeconomic stability stimulated by the EFF-supported program improve competitiveness and the investment climate, supporting FDI and official financial support.

*Source: IMF staff.*

### 16. Background. The exchange rate regime of Seychelles is classified as floating and foreign

### 16. Background. The exchange rate regime of Seychelles is classified as floating and foreign

### Exchange rate regime and foreign exchange interventions
- The exchange rate regime is classified as floating.
- Foreign exchange interventions are aimed at addressing disorderly market conditions and maintaining an adequate level of international reserves.
- Following significant appreciation of the rupee in 2021, the exchange rate was stable in the first quarter of 2022; the rupee marginally appreciated in 2022.

### Gross international reserves (GIR) and projections
- GIR at end-2021: US$ 702 million, equivalent to 4.7 months of prospective imports of goods and services.
- GIR at end-2021 were US$ 143 million above the level at end-2020.
- Authorities accumulated a large amount of FX reserves in 2021, aided by strong recovery in tourism and financial supports from IFIs including the SDR allocation of about USD 32 million.
- GIR are projected to maintain import coverage in the range of 3-4 months over the medium term.
- The accumulation of reserves provides a buffer to absorb shocks such as the worsening external environment due to the war in Ukraine.

### Reserve adequacy assessment
- Per the standard metric, staff estimates that international reserves at end-2021 were within the advisable range of international reserves.
- The level of international reserves at the end of 2021 stood at about 120 percent of the ARA metric.

### Structural competitiveness and diversification priorities
- Structural reforms aimed at improving tourism competitiveness and output diversification are critical to durably improve Seychelles’ external position.
- According to the 2019 travel and tourism competitiveness index, Seychelles:
  - Significantly lags in cultural resources and business travel, price competitiveness, and international openness.
  - Performs well in tourism and infrastructure.
- Seychelles’ tourism demonstrated resilience during the pandemic with steady growth of arrivals.
- Continued efforts to improve the attractiveness of other exporting industries (e.g., canned tuna production) and to foster potential engines such as the aquaculture industry would increase resilience to external shocks and boost economic growth.
- The official launching of the Seychelles Aquaculture Sector in 2021, with promulgation of the first Aquaculture Regulations and accompanying standards, is noted as welcome.

### Key macroeconomic outcomes and projections (selected figures)
- GDP growth in 2021: 7.9 percent (compared with 6.1 percent at the first review).
- Tourist arrivals in 2021: reported as 181,000 persons in one passage and 182,000 persons in another passage (both figures appear in the source).
- Real GDP forecast for 2022: increase by 7.1 percent.
- Tourist arrivals expected in 2022 (full year): 258,000, or 70 percent the level of 2019.
- Value added in fishing and agriculture expected to increase by 3 percent in 2022.
- Inflation indicators:
  - March 2022: 12-month average inflation rate stood at 8.3 percent; year-on-year was 2.2 percent.
  - Forecast for December 2022: year-on-year inflation 5.7 percent and 12-month average rate 4.1 percent.
- Current account:
  - 2021 estimated deficit: 21.8 percent of GDP (compared to 23 percent in 2020).
  - 2022 forecast deficit: 21.0 percent of GDP.
  - Tourism earnings in 2021: US$310 million, a 40 per-cent increase relative to 2020.
- Debt and fiscal outcomes:
  - Debt to GDP ratio: fell from 88 percent in 2020 to 75.3 percent end of 2021.
  - Gross financing needs declined from 47.9 percent to 31.9 percent following the liability management operation.
  - Stock of Treasury bills: SR 5.6 billion at end-2020 (26 percent of GDP) declined to SR 3.8 billion at end-2021 (15.2 percent of GDP).
  - Overall balance in 2021: 6.0 percent of GDP (deficit), against a 9.3 percent deficit expected in the first review.
- Monetary policy settings as of first quarter 2022:
  - Monetary Policy Rate (MPR): 2.0 percent since July 2021.
  - Interest rate on the Standing Deposit Facility (SDF): 0.5 percent.
  - Interest rate on the Standing Credit Facility (SCF): 3.5 percent.
  - Minimum Reserve Requirement (MRR): 10 percent for applicable rupee-denominated deposits; 13 percent for foreign currency deposits of residents.
  - CBS announced MRR on rupee deposits will revert to 13 percent as of mid-July 2022.

### Policy responses, program objectives, and reforms
- Authorities continue to explore ways to ensure that the most vulnerable are provided with necessary assistance amid upsurge in international fuel and commodity prices.
- The government remains committed to the action plan under the 32-month arrangement under the EFF, with objectives including:
  - Resiliency of the economy to external shocks.
  - Debt sustainability.
  - Rationalizing the tax regime.
  - Improving expenditure management.
  - Enhancing financial sector stability and compliance with international financial standards.
- Liability management and Air Seychelles:
  - Risks to debt sustainability from Air Seychelles reduced via restructuring; administrators settled Air Seychelles debts with no fiscal cost to the Government.
  - Agreement reached with bondholders places Air Seychelles on a more sustainable financial pathway.
- COVID-19 related measures and unwind:
  - Private Sector (MSMEs) Relief Scheme and Private Sector (Large Enterprise) Relief Scheme withdrawn effective April 01, 2022.
  - As at end March 2022: R138,104,923.31 used by MSMEs (27.62 percent of R500 million); R297,911,879.00 used by Large Enterprises (39.72 percent of R750 million).
  - Relaxation of provisioning requirements for certain restructured credits removed.
  - CBS reduced short-term temporary advance limit to government from R500 million in 2021 to R250 million in 2022; interest on such advances set equal to prevailing average tender rate for the 91-day Treasury bill plus a margin of 0.5 percent on the date funds are credited.

### Structural reform and sectoral policy priorities
- Real sector reform objectives:
  - Enhance prospects for sustainable and inclusive medium-term growth through tourism diversification, and better use of fisheries potential.
  - Fisheries sector to benefit from diversification of value chains and activity of new operators (linked to World Bank supported SWIOFISH 3 project).
- Tourism Master Plan actions:
  - Tackle structural bottlenecks on an island-by-island basis.
  - Geographically diversify markets (greater emphasis on eastern and central Europe, Israel, Saudi Arabia, USA).
  - Widen the offer of services balancing economic empowerment, environmental preservation, and socio-cultural integration.
  - Develop skilled local labor, increase supply of local agricultural products to the sector, and support small businesses (based on Tourism Value Chain Analysis).
  - Develop products such as “cultural tourism” and expand ocean-based leisure activities.

*Source: IMF staff report excerpts (selected sections on background, reserves, structural competitiveness, macroeconomic outlook, and program policies).*

### 13.      In the fisheries sector  significant progress has been achieved to diversify the value

### 13.      In the fisheries sector  significant progress has been achieved to diversify the value

### Fisheries and aquaculture
- Completion in mid-2021 of the cold storage facilities in the new industrial zone in Iles du Port.
- New fish processing units with medium size factories planned to expand export and local employment.
- Government will invest in additional infrastructure needed to support development of the sector as part of the 2022 and 2023 budget.
- The government has promulgated the first Aquaculture Regulations and accompanying standards based on global best practices to ensure coordinated and regulated sector development with high compliance levels.
- Aquaculture Standards will guide private sector operators to observe best practices.
- Regulations provide for establishment of the Aquaculture Regulatory Committee, consisting of key ministries, departments, agencies, Ceps (Citizens Engagement Platform Seychelles) and SCCI (Seychelles Chamber of Commerce and Industry).
- Committee mandate: coordinate policy, align legislative and institutional structures, drive and track aquaculture development progress, and make recommendations throughout sector development.

### Energy transition and NDC commitments
- Government committed to achieve a decarbonized economy by 2050.
- Renewables to be central to post-COVID recovery strategies; focus areas include marine energy technologies, bio-energies (biomass and waste-to-energy), and environment friendly intermittent energy storage technologies.
- Updated Nationally Determined Contribution (NDC): economy wide absolute GHG emissions will be reduced by 293.8 ktCO2e in 2030 (26.4 percent) compared to business as usual (BAU).
- Energy sector targets:
  - 30 percent of gasoline private vehicles to be electric by 2030.
  - Energy Efficiency improvement level of 15 percent by 2030.
- Key implementation targets: modernize entire electricity sector; increase electricity generation from renewable sources; improve energy efficiency across sectors; shift from fossil fuel-engineered transport to electrified transport and individual active mobility; enhance resource rehabilitation and land mitigation measures.
- Energy policy review delayed; Government in discussion with the World Bank to assist the review with objective to have an updated Energy Policy Document with realistic targets for Intermittent and non-intermittent renewable energy sources by last quarter 2022.
- Government receiving African Development Bank assistance to develop an integrated resource plan (IRP) for the power sector; recruitment of firm underway; IRP expected to be concluded during the third quarter of 2023.

### Agriculture and food security
- Government objective: transform local food and nutrition production toward greater self-sufficiency by increasing local production of livestock and local fruits & vegetables relative to total consumption.
- Emphasis on strengthening local producers' ability to adapt to climate change.
- Build national capacity and capability to improve strategic food reserve for a minimum period of six months.
- A cold storage facility project underway, due for completion in 18 months.
- Financing for a dry storage facility is being sought.

### Digital economy and digital transformation
- COVID-19 reinforced need to embrace the digital economy agenda; Digital Economy Diagnostic Report and Seychelles Fintech Strategy identified key pillars.
- Pillars: robust regulatory framework, efficient and reliable digital infrastructures, enhanced digital skills and literacy.
- Medium-term digital action plan focus:
  - Improve relevant digital infrastructure.
    - New Communications Bill expected to come into force during the second half of 2022; includes regulations on number portability.
    - Second submarine cable PEACE landed in March and expected to be operationalized by July 2022.
    - Operationalization of 3rd submarine cable expected mid-year 2023.
  - Enhance digital skills and inclusion.
    - During first half of 2022 key platforms will come online: digital ID system, online Business, Company & association registration, and 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.
  - Data protection: new legislation to address protection of individuals regarding processing of personal data expected to be enacted by end 2022.

### Climate adaptation and resilience
- Priority climate change adaptation investments identified 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 is undertaking a prioritization exercise for climate change related projects.
- Observed vulnerabilities: severe erosion, waves crashing on coastal roads, inundations during annual rainy seasons; urgent need to address these challenges.

### Fiscal policies, budget framework, and debt targets
- Keystone of reform: attainment of sustainable fiscal surpluses over the medium term to maintain public debt sustainability.
- Ambitious fiscal consolidation combined with sharp exchange rate recovery in April 2021 and robust GDP growth contributed to strong reduction in public debt to GDP ratio in 2021.
- Government committed to pre-COVID objective of reducing debt to around 50 percent of GDP by 2026.
- Government plan to implement targeted and temporary measures in 2022 to offset impact of food and fuel prices will contribute to widen the primary balance from 0.8 percent to 1.4 percent.
- Primary deficit target in 2022 revised from 0.8 percent of GDP to 1.4 percent of GDP, driven by:
  - Increase in current expenditure by 1.4 percent.
  - Decrease in total revenues mainly due to shortfall in external grants by 1.8 percent of GDP.
- Rise in current expenditure components:
  - Transfers increased by 0.8 percent.
  - Goods and services increased by 0.6 percent.
- Capital expenditure shrank by 2.2 percent of GDP due mainly to shortfall in expected external grants.
- Tax revenues remained stable: 28.3 percent versus 28.2 percent.
- Non-tax revenues expected to grow by 0.55 percent.
- Total revenues and grants expected to decline by 1.2 compared to the first review target due to significant shortfall in grants.
- On revenue side:
  - Value added tax and business tax receipts forecast slightly higher than first review targets; both expected to increase by 0.2 percent of GDP compared with first review target.
  - Excise taxes expected to grow by 0.3 percent reflecting stronger tourism activity.
  - New tax schedule for the business tax to enter into effect in 2022 as envisaged in the budget.
  - External grants for capital expenditure expected to fall below budgeted amounts due to donor delays.
- On expenditure side:
  - Outlays on wage and salaries to be maintained around 11 percent of GDP over the medium term.
  - Forecasted savings: SR 423 million equivalent to 1.5 percent of GDP.
  - Government to allocate additional SR 63.2 million under wages and salaries (0.2 percent of GDP) due to increase of employers’ pension fund contribution from 3 percent to 5 percent in April 2022.
  - Government will invest in office construction through public private partnership; first PPP for Seychelles Revenue Commission construction to start in June 2022.
  - Government will provide additional SR 82 million equivalent to 0.3 percent of GDP to assist the most vulnerable for six months to mitigate world commodity price increases.
  - Additional support to the Anti-Corruption Commission planned.
  - Capital expenditure to decrease due to delays in major grant-financed projects; domestic-financed capital projects will increase slightly for 2021 projects implemented in 2022 and additional fisheries infrastructure investment.
- Financing of the budget deficit:
  - External budgetary support from the World Bank and the African Development Bank of US$27 and US$20 million, respectively.
  - External financing will exceed overall deficit, allowing reduction of domestic government securities stock and lengthening average debt maturity.

### Revenue measures, customs reform, compliance, and digitalization
- Tax administration reforms in 2022 to focus on digitalization initiatives, stronger compliance monitoring, and upgrade in the ASYCUDA system at customs.

Customs reforms (ASYCUDA)
- Enhance ASYCUDA to move to online service and reduce paper transactions.
- New developments: creation of data warehouses, Single Window platform, upgrade to accommodate new modules (Excise, Government Warehouse, Bonded Warehouse, Courier Services).
- ASYCUDA to be integrated with an online payment gateway.
- Project expected to be completed by June 2023; modules deployed as ready.
- Digitalization of courier services being tested; new procedures adopted.
- Installation of cargo targeting system completed; piloting to enable identification of risks associated with specific cargo from points of origin to speed offloading.

Compliance and taxpayer services
- Increase number of services offered online (business registration, e-payment, submission of returns and forms for registered businesses including International Business Companies (IBCs)); project expected to be completed by June 2023 with module-by-module deployment.
- E-payment using credit/debit card implemented; discussions ongoing for payment using SEFT platform.
- Change processing of tax returns by SRC to improve tax collection and compliance.
- Amnesty Program results: registration of 52 new businesses, submission of 4,637 outstanding returns, and collection of SR 297.7 million.
- Voluntary compliance to be encouraged via educational outreach, easier filing and payment, enforcement of filing and payment compliance, and follow-up on late filers and payers.
- SRC business process reengineering: registration process completed; returns and revenue processing under way.
- Compliance Improvement Plan being finalized and to be piloted, expected to increase overall tax compliance rate.
- SRC to strengthen capacity for managing international taxation risk; received technical assistance from TIWB for Transfer Pricing.
- World Bank assistance on necessary regulations to be finalized and gazetted by the third quarter of 2022.

Automatic Exchange of Information and third-party data
- Utilize information received from financial institutions reporting to Seychelles under the ‘Global Forum’s Automatic Exchange of Information’ since 2017 to identify non-compliance risks.
- SRC acquired a system for Automatic Exchange of Information to improve efficiency in exchanging information and meeting OECD standards.
- Development stage for CRS and CBCr completed; next step is testing (CRS files first, then CBCr).
- FATCA to be added as a new functionality during 2022.
- An audit tool being developed to automate audit process of information reported by financial institutions.

SRC Tax Management System redevelopment
- Redevelopment to increase functionalities of current Client Management System (CMS) to close gaps: system not web-form, not upgraded with latest IT language, procedures not fully integrated, manual steps remain, not fully integrated with E-Services, lacks case management, debt management, business intelligence, and data warehousing.
- Financing provided by the EU under agreement signed in April 2019.
- Cabinet approved development from core source codes of current CMS; project aim to complete in 2023.
- Registration module expected for testing mid-year and deployment early September 2022.
- Consultants have started To-Be processes for returns and payment processing.
- All core modules expected to go live by May 2023 and non-core modules by December 2024.
- Key deliverables: develop a modern Tax Management System to increase revenue collection, increase use of digital services to lower compliance costs and improve voluntary compliance, increase taxpayer registrations, and provide additional taxpayer education opportunities.

*Source: 1sycea2022003 - 13. In the fisheries sector significant progress has been achieved to diversify the value*

### 31.      The Authorities adopted the reform of business tax effective January 1, 2022. The

### 1sycea2022003 - 31.      The Authorities adopted the reform of business tax effective January 1, 2022. The

### Business tax reform
- Reform unified the tax rate for different productive sectors at 25 percent (currently tourism, fishery and agriculture benefit of a lower 15 percent profit tax rate).
- Reduced the accelerated depreciation provisions for tourism, agriculture and fishery.
- Revised the taxation of security dealers.
- Agriculture sector: grace period of 3 years and during the period an assessment will be done on the best modalities for a tax structure for this sector.
- Expected additional revenue: 0.7 percent of GDP in 2023.
- Cabinet approval of legislative amendments to streamline VAT exemptions planned (structural benchmark for end-September 2022).
- A revised Excise Tax bill to modernize the tax regime has been submitted to the National Assembly.

### Expenditure management and efficiency of public spending
- Government steps to adopt a Medium-Term Fiscal or Budget Framework and integrated financing framework with UNDP.
- AFRITAC South support provided in August 2021 on: (i) assessing fiscal sustainability through a public sector balance sheet (PSBS) approach; and (ii) preparing debt scenarios to monitor the medium-term fiscal strategy and IMF EFF program targets.
- Additional AFRITAC South support to link the Medium-Term Debt Strategy and National Development Strategy for the 2024 budget.
- Ministry of Finance working to improve the Public Sector Investment Plan (PSIP) to be consistent with the budget framework.
- Seychelles Infrastructure Agency set up in January 2022 to improve planning and execution of capital projects.
- Public Service Salary Review Committee appointed to analyze current salary structure and wage bill; new salary structure to be proposed as part of the 2023 budget.
- Target: wages and salaries maintained at 11 percent of GDP over the medium term.

### Social protection program reforms (World Bank PforR)
- 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).
- Development objectives: improve efficiency and effectiveness of social protection programs while remaining above the floor on social expenditure established under the program.
- 2022 focus items:
  - Increase retirement age for the Retirement Pension to 65 years old beginning in January 1, 2023. Cabinet approved proposal in March 2022; legislative amendment process ongoing to present to National Assembly in the second half of 2022.
  - ASP to adopt a revised socioeconomic needs assessment based on non-income dimensions of poverty; revised weights adopted in May for assessing social welfare assistance.
  - Direct cash transfer (means tested) to partly offset food and fuel price increases for the most vulnerable.
  - Comprehensive review of ASP internal controls and payroll systems conducted by PWC.
  - Access to home care widened: trained caregivers within HCA, ASP, and MOH providing home care to at least 60 percent of new high-need HCP beneficiaries.

### Increase efficiency of public spending and procurement reform
- Comprehensive review of the legal framework for public procurement started in 2021; expected completion by June 2022.
- Assessment of existing cleaning and security contracts for efficient outsourcing.
- UNDP-assisted Readiness Assessment and design of an e-Government Procurement Strategy to be incorporated into IFMIS project.
- Proposed amendments of the procurement act to be tabled to the cabinet by end of June 2022.
- Public Investment Management Assessment (Combined PIMA and PIMA climate change) scheduled for second half of 2022.
- Audit to ensure transparency of COVID emergency-related spending was published in May 2022.

### IFMIS and cash flow management
- New IFMIS platform to be installed by January 2024; budget for new IFMIS included in the 2022 budget.
- Assistance from AFS in preparing tender documents.
- Cash flow unit integrated into the Treasury function; plan for Ministry of Finance to issue a Circular to reduce deviation between forecast and outcome in the monthly cash flow plan consistent with the 2022 budget (structural benchmark for June 2022).

### Results-Based Management (RBM)
- Integrated RBM calendar issued in February 2022; preparatory whole-of-government rollout began to inform the 2023 budget process.
- Full RBM rollout expected to:
  - Improve operational and allocative efficiency and create greater fiscal space for essential public services.
  - Provide 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.
  - Improve quality of life across large segments of the population.
- RBM rollout based on portfolio planning approach to ensure integrated portfolio-wide strategic planning, budgeting, monitoring and evaluation, and performance management; enhance accountability to individual Ministers and senior management.

### Minimizing risks of State-Owned Enterprises (SOEs)
- Government adopted the ‘Good Governance Code’ and policies linked to public enterprises; PEMC is sole authority to oversee public enterprises.
- PEMC has established targets for public enterprises; amendments to PEMC Act submitted to Cabinet by end-November 2021 (structural benchmark for end-November 2021); bill to be tabled before National Assembly by end of June 2022.
- PEMC will conduct governance audit and operational assessment of five key public enterprises through an independent audit firm:
  - First phase completed in December 2022 focusing on Public Utilities Corporation (PUC) and Seychelles Petroleum Company (SEYPEC).
  - Second phase to be completed in June 2023 focusing on Air Seychelles, Island Development Company Limited, and Seychelles Trading Company Ltd (STC).

### Air Seychelles fiscal risks and restructuring
- April 2021 agreement with Etihad: 79 percent haircut on the US$ 70.2 million obligations to be paid over 3 years.
- Government opted to pay the US$13 million liabilities in 2022.
- Two administrators appointed in early October 2021 per Insolvency Act; administrators restructured Air Seychelles and settled debts with no fiscal cost to the Government and without disrupting ground handling operation.
- May 2022 agreement with bondholders: 66.7 percent haircut on the US$ 83 million obligations.
- Government commits to provide no further funds to Air Seychelles.
- Operational restructuring to ring-fence ground handling operation as a separate legal entity by end 2022 (Structural benchmark end December 2022).

### Public Debt Management Strategy
- Government continues issuing long-term bonds through auction mechanism.
- Since the beginning of 2022, government issued two Treasury bonds in March and guaranteed issuance of two bonds on behalf of Development Bank of Seychelles (DBS), one in March and the other in April.
- Quarterly issuance calendar for bonds published on the Ministry of Finance website (structural benchmark for end March 2022).
- Issuance of bonds to be supported through repo operations and initiation of trading reforms in government securities; trading framework expected to be approved by government in consultation with CBS by the end of 2022 (structural benchmark for December 2022). IMF to provide technical assistance.
- Quarterly borrowing plan formulated and approved by the National Debt Committee (structural benchmark for end March 2022).
- Publication of the Medium-Term Debt Management Strategy (MTDS) and borrowing plan postponed until the mid-year review due to uncertainties from the war in Ukraine (structural benchmark for March 2022).

### Monetary and exchange rate policy
- Monetary policy expected to remain accommodative for the rest of the year; Central Bank remains vigilant to monitor inflationary developments.
- CBS plans to monitor inflation expectations through a survey with the assistance of National Bureau of Statistics in the second half of 2022.
- Following realignment of the interest rate corridor in Q3 2021, general decline in interest rates; transmission remains weak.
- As at March 2022:
  - Savings rate fell by 63 basis points compared to June 2021.
  - Lending rate dropped by 26 basis points compared to June 2021.
  - Average return on T-bills: 0.48 percent on the 91-day bills, 0.56 percent on the 182-day bills and 1.15 percent on the 365-day bills.
- Average interest rates on the 91-day and 182-day T-bills standing at 0.40 percent and 0.56 percent from November 2021 to February 2022.
- CBS committed to a floating exchange rate and will only intervene to facilitate orderly conduct of the market.

### International reserves and reserve management
- Gross International Reserves (GIR) declined from US$702 million at the end of 2021 to US$691 million as of March 31, 2022.
- One foreign exchange auction (FEA) conducted in February 2022: US$2.45 million purchased.
- Three-year Advisory and Investment Management Agreement (AIMA) with RAMP of the World Bank came to term at the end of January 2022; CBS extended the agreement by another 6 months to undertake work for likely signing of a new three-year agreement.
- Current engagement includes technical advisory and an investment management mandate for US$100 million.

### External statistics and financial system stability
- Alternative tourism earnings estimation framework expected to be implemented starting with the balance of payments for Q1 2022, to be published in June 2022 with necessary backward adjustment.
- Banking industry soundness as at end of March 2022:
  - Industry remained well capitalized and above prudential requirement of 12 percent.
  - Aggregated regulatory capital to risk weighted assets grew by 4.9 percentage points to settle at 23.61 percent (year-on-year comparison).
  - Non-performing loans increased by SCR232 million to settle at SCR702 million on a year-to-year basis.
  - Returns on assets decreased by 0.6 percentage points to settle at 2.2 percent (year-on-year).
  - Return on equity decreased by 9.8 percentage points to settle at 23.7 percent (year-on-year).
  - Industry foreign currency risk exposure: decrease of 8.8 percentage points for long position and decrease of 0.7 percentage points for short position to capital; both ratios within foreign currency exposure limits.
- CBS committed to ensuring a stable and well-capitalized banking system; ready to take enforcement actions where necessary, including suspension of dividend payments, requiring capital plans for viable but undercapitalized banks, and resolution tools for nonviable financial institutions.

*IMF staff report content as provided in the source PDF.*

### 52.      CBS  has made its supervisory framework  more risk-sensitive, objective, forward-

### CBS has made its supervisory framework more risk-sensitive, objective, forward-looking and continuous

### Risk-based supervision and Basel framework adoption
- CBS initiated a project in 2018 for the adoption of a risk-based supervision (RBS) framework integrating Basel II Pillar 2 requirements.
- During 2020, CBS completed the second phase: design and development of the RBS framework and associated data models, guidelines/circulars, manuals, and policies, plus capacity building for supervisors and supervised entities.
- Initial roll out completed; banks have started submitting ICAAP documents as per Pillar 2 requirements.
- Work is being finalized to calibrate the risk scores of the banks.
- Policy paper for adoption of Basel II Pillar 1: endorsed by the Cabinet of Ministers in late 2020 and at the Attorney General’s Office for drafting.
- Basel II Pillar 3: CBS anticipates finalizing its set of disclosure guidelines by December 2022.
- Policy paper for amendment to Financial Institutions (Capital Adequacy) Regulations, 2010 to adopt the Basel III capital definition was approved by the Cabinets of Ministers in May 2022 (structural benchmark for end-May 2022).

### Monitoring asset quality, forbearance, and bank interventions
- CBS will enhance banking system monitoring by collecting additional information including for restructured and rescheduled loans.
- CBS will closely monitor and assess asset quality in view of recent unwinding measures including withdrawal of forbearance on asset classification (new structural benchmark for end-September 2022) and take early intervention measures where necessary.
- Banks are restructuring loans for firms that are viable but have temporary liquidity shortages, on a case-by-case basis; CBS will continue to monitor relevant reclassification of loans.

### Financial Stability Committee (FSC) legal basis and CBS Act amendments
- CBS focuses on strengthening the legal basis of the FSC established in March 2016; work ongoing to strengthen legal basis and mandate.
- CBS prepared a policy paper for a financial stability bill with assistance from a US OTA Financial Stability consultant; IMF comments received; proposal presented at stakeholders' consultation workshop on April 28, 2022.
- Policy paper approved by the Cabinet of Ministers in May 2022 (revised structural benchmark delayed from March 2022).
- CBS will, in consultation with IMF staff, submit amendments to the CBS Act to Cabinet by December 2022 to: (i) strengthen governance and oversight; (ii) enhance institutional and personal autonomy; and (iii) safeguard financial autonomy.

### Crisis management and bank resolution framework
- CBS committed to enhancing macroprudential toolkit and crisis management and bank resolution framework.
- A policy paper aligned with BCBS recommendations and FSB Key Attributes was presented and endorsed in December 2018; it is being reviewed to enhance resolution powers, coordination/cooperation mechanisms, and instruments for evolving crises including operational resilience.
- By end July 2022, CBS will submit the updated policy paper to the Cabinet of Ministers for approval (structural benchmark delayed from end-June 2022).
- Draft Bank Resolution Bill expected to be approved by Cabinet by end June 2023 (structural benchmark for end-June 2023).

### National Payment System (NPS) legal and operational modernization
- Review of the National Payment System Act, 2014 and supporting regulations is underway to address deficiencies and align the regulatory framework with international standards and best practices; policy proposals for amendments anticipated to be finalized in June 2022 and thereafter subject to stakeholder consultations.
- Modernization aims: increased efficiency, convenience, affordable innovative payment facilities.
- Ongoing engagement toward establishing an entity to manage payment system platforms.
- Following US OTA technical assistance in April 2022, further upgrades required to address gaps from the PFMI assessment.
- Core Banking System: CBS reviewing vendor submissions to proceed with procurement next steps.
- Interchange modifications effected in February 2022; reduction reflected within the Merchant Service Charge.
- Plan to phase out cheques as a payment instrument starting 2023; stakeholder consultations underway.
- Study to assess affordability and reliability of internet and network connection in Seychelles through procurement of a consultant; study expected to commence in the second half of 2022.

### FinTech, regulatory sandbox, and innovation hub
- Formulation of the Regulatory Sandbox is ongoing; Alliance for Financial Inclusion assisted recruitment of a consultant to commence in June 2022.
- CBS exploring creation of an innovation hub to enable firms to engage with competent authorities on regulatory issues and conformity of innovative financial products and services.

### Financial consumer protection and credit information system
- National Financial Education Strategy and Digital Financial Literacy program ongoing to educate public on benefits, risks, and responsibilities of digital payment products and services.
- Financial Consumer Protection Bill approved by the National Assembly in March 2022 and assented by the President; Act has a transitional period of 6 months as of May 2022.
- Initial regulations to prioritize: improvement of complaint handling process, credit granting and debt recovery, charges and fees, and digital financial services.
- New Credit Information System and Credit Reporting Act implementation progressing; project expected to be completed in December 2022.

### AML/CFT reforms, beneficial ownership, and supervisory actions
- ESAAMLG approved 9 re-ratings for Seychelles out of the 20 recommendations with deficiencies following September 2021 meetings; Seychelles to submit a re-rating request in October 2022 for upgrades to a further set of 9 recommendations.
- New Registration of Associations act assented in May 2022; Office of the Registrar General and FIU conducting a risk assessment on non-profit organizations sector started in April 2022 and expected to complete by September 2022 (financed by the European Union).
- National AML/CFT Committee launched risk assessment of Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs) in February 2022; FSA partnered with a consultant to assist; expected to complete by July 2022.
- Centralized beneficial ownership (BO) database with the FIU became operational in July 2021.
  - For foreign legal persons and legal arrangements (International Business Companies, Trust, Foundations etc.): 90 percent of the 59000 registered entities submitted information to the database as of end April 2022.
  - FIU working to ensure compliance by end-June 2022 of remaining foreign legal persons and legal arrangements; non-compliant entities to be referred to FSA and other competent authorities for enforcement and penalties as per BO Act.
  - Domestic legal persons and legal arrangements: current compliance rate of 23% of the 7,781 active entities; FIU conducting outreach and awareness raising.
- Planned reform measures:
  - Assessment report and legal reform:
    - FSA and FIU will publish, by July 2022, an assessment report including assessment of compliance of legal persons and legal arrangements vis-à-vis BO Act provisions and accuracy/up-to-date status of registers and centralized database.
    - In consultation and agreement with IMF staff the authorities will amend the BO Act and regulations by end-July 2022 to address shortcomings identified in the assessment report.
  - Risk-Based AML/CFT Supervision:
    - There are currently 60 resident agents licensed to establish international business companies, trusts or foundations for foreign and non-resident clients.
    - Based on 2021 inspections, FSA in January 2022 submitted a risk-based action plan and will conduct compliance inspections of 20 percent of all resident agents for the calendar year 2022.
    - FSA will publish a summary of findings for the resident agent sector by end-December 2022, including findings on identification and verification of beneficial ownership and statistics on enforcement actions and penalties for AML/CFT violations.
    - Q1 inspections were conducted jointly with inspections for compliance with accounting records requirement for OECD Global Forum purposes, selected on a risk-based approach targeting higher-risk licensees.
    - FSA committed to increasing sample size of legal persons/legal arrangements for compliance testing as inspections progress.
  - Verification and Access to Beneficial Ownership Information:
    - Beginning end-July, FIU will submit quarterly to the National AML/CFT Committee a strategic analysis report on the BO database for domestic and foreign legal persons and legal arrangements, including statistics on compliance by resident agents, international cooperation/exchange of information, and identified typologies or red flags of abuse.
  - Validation of BO database accuracy:
    - FIU will analyse BO information for strategic risk analysis under section 28 (5) (b) of the AML/CFT Act (identification of ML/TF trends and patterns).
    - A summary of metrics will be periodically submitted to the National AML CFT Committee.
    - Strategic risk analysis will assist FSA in selecting IBCs for inspections during the second half of 2022 and FIU coordination with foreign counterparts may be used to validate database accuracy.

### International tax and transparency developments
- Republic of Seychelles removed from Annex I of the EU’s list of non-cooperative jurisdictions for tax purposes following the Economic and Financial Affairs Council of the EU meeting on the 5th of October 2021.
- Remaining step to be removed from Annex II (EU grey list) for criterion 1.2 (tax transparency) is obtaining a Largely Compliant status in the forthcoming Supplementary Review.
- Onsite visit by the Global Forum is advised by the OECD to be undertaken during the third quarter of 2022.
- Authorities started the inspection program since February 2022 when the grace period elapsed.

*IMF staff summary based on the Seychelles authorities' reporting in the specified content unit.*

### 65.      Program monitoring. Program implementation  will  continue to be monitored through

### 1sycea2022003 - 65.      Program monitoring. Program implementation  will  continue to be monitored through

### Program monitoring framework
- Program implementation will be monitored through semi-annual reviews, quantitative performance criteria and indicative targets, continuous performance criteria, and structural benchmarks.
- The third review is set for December 2022 based on end-June 2022 quantitative targets.
- The fourth review is set for June 2023 based on end-December 2022 quantitative targets.
- Detailed definitions and reporting requirements for all performance criteria are contained in the Technical Memorandum of Understanding (TMU) attached to the memorandum, which also defines the scope and frequency of data to be reported for program monitoring purposes.
- 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 that are incompatible with Article VIII of the IMF’s Articles of Agreement;
  - introduce or intensify import restrictions for balance of payments reasons.

### Timing and reporting
- Semi-annual reviews: third review — December 2022; fourth review — June 2023.
- For monitoring purposes, the authorities will provide data to the IMF:
  - monthly with a lag of no more than four weeks from the end-of-period (for Net Domestic Financing, Primary Balance, Total Revenue);
  - other TMU-specified frequencies and scopes as defined in the TMU.

### Quantitative program targets (high-level)
- Quantitative targets and structural benchmarks are set out in Tables 1 and 2 of the MEFP respectively (as reported in the source tables).
- Selected numeric entries from the program’s Table 1 (In millions of Seychelles Rupees; program vs. actual; status):
  - Net domestic financing of the government (ceiling): program 2034.0; actual 1521.7; Status Met.
  - Primary balance of the consolidated government (floor): program -1726.0; actual -723.4; Status Met.
  - Total revenue (floor): program 2217.4; actual 3969.6; Status Met.
  - Priority social expenditure (floor): program 475.2; actual 826.9; Status Met for some periods; Not Met for the period with program 1425.5 and actual 1414.9.
  - Continuous quantitative ceilings: accumulation of new external payments arrears — program 0.0; actual 0.0; Status Met. Accumulation of new domestic payments arrears — program 0.0; actual 0.0; Status Met.
  - Net change in CG guaranteed domestic and external debt: program 502.0; actual -1880.0; Status Met for the presented period.
  - Net international reserves of the CBS, millions of US dollars (floor): adjustments specified in TMU footnote regarding external non-project loans, non-project cash grants, external debt service, and new SDR allocations.

### Structural benchmarks (high-level summary from Table 2)
- Prior actions and benchmarks cover fiscal and public financial management, debt management, SOE reforms, and financial sector stability.
- Examples of actions, objectives and timing:
  - Publication of the COVID Financial Assistance Audit — Objective: Ensure transparency in COVID 19 related spending — Status: Prior Action (Met).
  - Cabinet approval of legislative amendments to streamline VAT exemptions — Timing: End-September 2022 — Objective: Strengthen revenue mobilization.
  - Cabinet approval of revisions to business tax laws to streamline exemptions — Timing: End-November 2021 — Objective: Strengthen revenue mobilization — Status: Met.
  - Publish a new domestic debt management strategy document — Timing: End-March 2022 (revised to September 2022) — Objective: Mitigate foreign currency and rollover risks — Status: Not met, reset for September 2022.
  - Publish an Annual Borrowing Plan along with an auction calendar — Timing: End-March 2022 (revised to September 2022) — Objective: Implement the debt management strategy — Status: Not met, reset for September 2022.
  - Cabinet approval of least cost structure and long-term strategy for Air Seychelles — Timing: End-September 2021 — Objective: Minimize fiscal impact on the 2022 budget — Status: Met.
  - Cabinet approval of Amendments on the Public Enterprise Monitoring Committee (PEMC) Act — Timing: End-November 2021 — Objective: Reduce contingent fiscal risks — Status: Met.
  - Financial sector actions: Cabinet approval for policy paper for the draft Financial Stability Bill; expanded bank reporting on forborne and restructured loans to assess asset quality — Timing: End-November 2021 (revised deadlines for implementation); some actions Not Met, implemented with delay; other items Met (e.g., Basel III Capital Definition adoption paper — End-May 2022 — Status: Met).

### Technical Memorandum of Understanding (TMU) — key definitions and rules
- “Government” refers to the central government of the Republic of Seychelles and excludes 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 includes all forms of debt as defined by 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 definition (selected forms included):
  - loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements and official swap arrangements);
  - suppliers’ credits;
  - leases (debt is the present value at inception of all lease payments, excluding payments covering operation, repair, or maintenance).
- Awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
- Items not considered debt under this definition (e.g., payment on delivery) do not give rise to debt.

### Quantitative performance criteria — definitions and adjustors
- A. Ceiling on Net Domestic Financing of the Government (NDF):
  - NDF = (i) net bank credit to the government; and (ii) net nonbank financing (including proceeds from sale of government assets, Treasury bills, other securitized obligations in rupees, and any CBS credit to the government, including drawings on the rupees counterpart of the SDR allocation).
  - Data deemed valid: amounts for net bank credit and net Treasury bills/bonds (calculated by CBS), and nonbank financing (calculated by the Treasury).
  - Gross external budgetary assistance = grants, loans, and non-earmarked debt relief operations (excluding project-related loans and grants, use of IMF resources, and HIPC/MDRI debt relief). Net external budgetary assistance = gross external budgetary assistance minus total external debt service obligations and all payments of external arrears.
  - Adjustor: NDF will be adjusted downward (upward) if net external budgetary assistance exceeds (falls short of) program projections.
  - Reporting: monthly with a lag of no more than four weeks from end-of-period.
- B. Floor on the Primary Balance:
  - Primary balance = total revenues and grants minus primary expenditure (non-interest), measured cumulative over the fiscal year and monitored above the line.
  - Revenues recorded when funds are transferred to a government revenue account; tax revenues net of tax refunds; grants included; capital revenues exclude non-financial asset sale proceeds from divestments.
  - Central government primary expenditure recorded on a cash basis; includes recurrent and capital spending and transfers to SOEs; primary expenditures settled with bonds or other non-cash liabilities treated as one-off adjustments recorded as spending above-the-line and financed with debt issuance.
  - Adjustor: primary balance target adjusted upward (downward) by surplus (shortfall) in grant disbursements relative to baseline.
  - Reporting: monthly with a lag of no more than four weeks from end-of-period.
- C. Floor on Total Revenue:
  - Total government revenue includes tax and nontax revenue as shown in the fiscal table, but excludes external grants, revenue of autonomous agencies, and privatization receipts.
  - Adjustor: the government revenue floor will be adjusted downward by the amount equivalent to the shortfall in gross domestic product compared to program projections.
  - Reporting: monthly with a lag of 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 less than one year.
  - Reserve assets include CBS holdings of monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, and the country's reserve position at the Fund.
  - Exclusions from reserve assets: assets pledged, collateralized or otherwise encumbered; claims on residents; claims in foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency; precious metals other than gold; assets in nonconvertible currencies; and illiquid assets.
  - TMU footnote: the floor on the CBS’s NIR will be adjusted upward (downward) by amounts by which external non-project loans and non-project cash grants exceed (fall short of) program assumptions, by amounts that external debt service payments fall short of (exceed) program assumptions, and by the amount of any new SDR allocation to Seychelles if the IMF makes a new allocation.

*Source: Attachment II and Tables 1–2, Technical Memorandum of Understanding and MEFP program monitoring text (as provided).*

### 14. Reserve liabilities are: (1) all foreign exchange liabilities to residents and nonresidents with

### 1sycea2022003 - 14. Reserve liabilities are: (1) all foreign exchange liabilities to residents and nonresidents with

### Reserve liabilities (definition)
- Reserve liabilities comprise:
  - (1) all foreign exchange liabilities to residents and nonresidents with maturity of less than one year, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, options, et cetera); and
  - (2) all liabilities outstanding to the IMF (only the total outstanding use of Fund Credit and loans is included in reserve liabilities).

### Adjustors to the CBS’s NIR floor
- 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.

### Auditing and monitoring of NIR
- For monitoring, semiannually, at each test date for program quantitative targets, the net international reserves data submitted by the CBS to the IMF will be audited by the CBS’ internal audit division in accordance with International Standards on Auditing, to ensure conformity with the program definition and calculation methods.
- Reports will be submitted to the IMF no later than two months after each test date.

### Non-Accumulation of New Domestic and External Arrears (continuous)
- Domestic payments arrears:
  - Defined as domestic payments due but not paid by the government after a 90-day grace period, unless the payment arrangements specify a longer payment period.
  - The Ministry of Finance records and updates the data on the accumulation and reduction of domestic payments arrears.
  - The government undertakes not to accumulate any new domestic payments arrears. Monitoring is continuous; any accumulation will be reported immediately to Fund staff.
- External public payments arrears:
  - The government undertakes not to accumulate any new external public payments arrears, except 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.
  - The performance criterion on the non-accumulation of new external public payments arrears will be continuously monitored; any accumulation will be reported immediately to Fund staff.

### Standard continuous performance criteria
- 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:
  - The indicative floor on social spending applies to expenditures on plans and programs intended to have a positive impact on education, health, social protection, housing and community services and recreational activities.
  - Social Programs of Government Benefits and approved programs of ASP include: 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
- Performance under the program will be monitored from data supplied to the IMF by the authorities.
- The authorities will transmit promptly to IMF staff any data revisions as well as other information necessary to monitor the arrangement under the EFF.

### Data and information: reporting schedules and items
- The Seychelles authorities (government and CBS) will provide Fund staff with the following data and information according to the schedule provided.

- The CBS will report weekly (within one week from the end of the period):
  - Daily reserve money data.
  - Foreign exchange reserves position.
  - A summary table on the foreign exchange market transactions.
  - The results of the liquidity deposit auction, primary Treasury bill auctions, and secondary auctions.

- The CBS will report monthly (within four weeks from the end of the month):
  - The monetary survey in the standardized report form format.
  - The foreign exchange cash flow, actual and updated.
  - Financial soundness indicators.
  - Stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report.

- The Ministry of Finance will report monthly (within two weeks from the end of the month):
  - Consolidated government operations on a commitment basis and cash basis in the IMF supported program format and in GFSM2001 format.
  - The detailed revenues and expenditures of the central government and social security fund.
  - Import and export data from the customs department.
  - Public debt report reconciled with the cash operations to minimize any statistical discrepancy.
  - Consolidated creditors schedule on domestic expenditure arrears of the government.

- Quarterly (within one month from the end of the quarter):
  - Accounts of the public nonbank financial institutions.

- The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation and will provide any additional relevant information as requested by Fund staff.

### Relations with the Fund (key data and arrangements)
- Membership Status: Joined 6/30/1977. Accepted Article VIII obligations since 01/03/1978.
- General Resources Account (SDR Million; % Quota):
  - Quota: 22.90 100.00
  - Fund holdings of currency: 100.13 437.24
  - Reserve Position in Fund: 3.53 15.41
- SDR Department (SDR Million; % Allocations):
  - Net cumulative allocation: 30.23 100.00
  - Holdings: 23.59 78.03
- Outstanding Purchases and Loans:
  - Emergency Assistance: 22.90 100.00
  - Extended Arrangements: 57.86 252.65

- Latest Financial Arrangements (SDR Million):
  - EFF Jul 29, 2021 Mar 28, 2024 74.00 48.00
  - EFF Jun 04, 2014 Jun 03, 2017 11.45 11.45
  - EFF Dec 23, 2009 Dec 22, 2013 26.40 26.40

- Latest Outright Loans (SDR Million):
  - RFI May 08, 2020 May 12, 2020 22.90 22.90

- Projected Obligations to the Fund (SDR Million: based on existing use of resources and present holdings of SDRs):
  - 2022: Principal 2.90; Charge/interest 1.04; Total 3.94
  - 2023: Principal 8.46; Charge/interest 1.96; Total 10.42
  - 2024: Principal 13.22; Charge/interest 1.55; Total 14.77
  - 2025: Principal 6.95; Charge/interest 1.09; Total 8.04
  - 2026: Principal 8.82; Charge/interest 0.89; Total 9.71

### Safeguards, exchange rate, and institutional notes
- An updated safeguards assessment of the Central Bank of Seychelles (CBS) was finalized in June 2021.
  - The assessment found that the CBS continues to develop its safeguards framework and has implemented all but one recommendation from the 2018 assessment.
  - External audit arrangements remain robust and financial reporting practices adhere to international standards.
  - Further efforts and enhanced oversight are needed to strengthen capacity and coverage of the internal audit function; CBS will need to reinforce the risk management function to ensure adequate capacity.
  - The CBS’ legal framework should be amended to strengthen oversight and autonomy.
  - The assessment recommended that advances to the government and involvement in COVID-19-related lending to banks and other financial institutions should be revisited; the CBS is progressing by reducing the limit on advances, charging market interest rate on credit to the government, unwinding the COVID-19-related lending schemes, and revisiting collateral policy.
- Exchange Rate Arrangement:
  - The exchange market was liberalized in November 2008, eliminating all restrictions on the making of payments and transfers for current international transactions subject to Fund approval under Article VIII Sections 2, 3, and 4.
  - The de jure exchange rate regime is floating, and the de facto exchange rate regime is also classified as floating.
  - On March 28, 2022, US$1 = SR 14.33 (mid-rate).
- Article IV Consultations:
  - Seychelles is currently under a 24-month consultation cycle. The last Article IV Consultation was concluded on June 14, 2019.
- Resident Representative: Aissatou Diallo

### Statistical issues (summary)
- Assessment of Data Adequacy for Surveillance:
  - General: Data provision has some shortcomings, but it is broadly adequate for surveillance.
  - National accounts: NBS rebased national accounts in 2021 updating the base year from 2006 to 2014; quarterly national accounts compiled from 2006 to present; technical assistance provided to backcast 2006–2013 and compile quarterly accounts using expenditure approach and produce seasonally-adjusted quarterly GDP figures.
  - Price statistics: Updated CPI introduced in February 2021 based on 2018/19 household budget survey weights.
  - Government finance statistics: Seychelles disseminates data primarily based on GFSM 2014; further work needed to support a full move to GFSM 2014.
  - Monetary and financial statistics: CBS monetary statistics are consistent with the 2016 MFSMCG; coverage of other financial corporations could be improved; CBS reports FAS indicators including commercial bank branches per 100,000 adults and ATMs per 100,000 adults.
  - Financial sector surveillance: Authorities report FSIs to the Fund (thirteen core and six encouraged FSIs for deposit takers monthly); work ongoing to strengthen macroprudential framework, including revisions to the Central Bank Act and migration towards Basel II.
  - External sector statistics: Authorities adopted the sixth edition of the BPM and began compiling the IIP in 2015; quarterly BOP and IIP data compiled and publicly available since 2015; progress in compiling data for special purpose entities and adopting a new estimation model for travel services.
- Data Standards and Quality:
  - A subscriber to the IMF’s Special Data Dissemination Standard (SDDS), Seychelles met SDDS specifications on May 1, 2015.
  - Seychelles is using a timeliness flexibility option for the producer price index.
  - No data ROSC is available.

*Prepared by The African Department (In consultation with other departments) — June 14, 2022*

### 7.9 percent, compared with 6.1 percent forecasted in November 2021. The strong recovery is expected to

### Seychelles: Recovery, Fiscal Adjustment, and Policy Reforms

### Growth, tourism, inflation, and external sector
- Real GDP growth in 2021 was 7.9 percent, compared with 6.1 percent forecasted in November 2021.
- The strong recovery is expected to continue in 2022 driven by further improvement in tourism as well as a pick-up in construction activity.
- Tourist arrivals during the first four months of 2022 were strong at around 80 percent of those in 2019, an all-time high, and tourism earnings in March 2022 surpassed the 2019 level.
- Real GDP growth for 2022 is forecasted to reach 7.1 percent, which is roughly the same as what was expected in November 2021 (7.2 percent).
- The global growth projection for 2022 was revised down from 4.9 percent in the 2021 October World Economic Outlook (WEO) to 3.5 percent in the 2022 April WEO by 1.4 percentage points.
- Inflationary pressures:
  - Year-on-year inflation rate in May 2022 was 2.1 percent.
  - The annualized monthly inflation registered at 5.2 percent in May 2022.
  - Annual inflation is expected to rise to around 6 percent at the end of the year.
- Current account:
  - Estimated deficit of about 20 percent of GDP in 2021 compared to about 22 percent in 2020.
  - The deficit is projected to widen somewhat to 22 percent in 2022 due to a surge in international fuel and commodity prices.
- Following the significant appreciation of the rupee in 2021, the exchange rate has been stable.

### Fiscal performance, public debt, and public finance management
- Primary balance deficit in 2021 was 3.0 percent of GDP, outperforming the first review target of 6.6 percent and the original program negotiation target of 9.1 percent.
- Drivers of fiscal outperformance: strengthened revenue collection efforts, robust economic recovery, and lower current and capital spending, which partially offset shortfalls in bilateral budget support loans.
- Public debt developments:
  - Public debt fell from 89.5 percent of GDP in 2020 to 76.8 percent in 2021.
  - Public debt is expected to further decline to 75.2 percent in 2022.
  - Public debt is now assessed to be sustainable, albeit with risks (improved from “sustainable, albeit with significant risks”).
- Program fiscal stance and targets:
  - The keystone of the EFF program remains to attain sustainable fiscal surpluses over the medium term to maintain public debt sustainability.
  - The primary deficit target in 2022 has been revised up modestly to 1.4 percent of GDP compared to the forecast at the first review, partly to provide targeted, temporary transfers to the most vulnerable households.
  - Government commitment: return public debt to pre-COVID level, around 50 percent by 2026.
- Public expenditure management and capital projects:
  - Authorities upgraded public expenditure management and improved the efficiency of public spending.
  - Steps to strengthen a medium-term fiscal framework including integration of planning and financing processes.
  - Seychelles Infrastructure Agency created in January 2022 to improve planning and execution of capital projects.
  - A Public Investment Management Assessment (PIMA – climate change) is planned later in 2022.
- Revenue and tax administration reforms:
  - Revisions of exemptions under value added taxes, rationalization of business tax, limitation of deductibility provisions, and uniformization of tax rates among sectors.
  - Reforms to improve customs tax collection by moving to online services and reducing paper transactions and costs.
- State-owned enterprises (SOEs) and Air Seychelles:
  - Public Enterprise Monitoring Commission (PEMC) is now the sole authority to oversee SOEs; will conduct governance audit and operational assessment of key SOEs through an independent audit firm.
  - On Air Seychelles, fiscal risks reduced with debt restructuring.
  - In early October 2021, two administrators were appointed as per the Insolvency Act; administrators restructured Air Seychelles and settled its debts with no fiscal cost to the Government and without disrupting ground handling operation.
  - In May 2022, an agreement was reached with bondholders for 66.7 percent haircut on the company’s debts, placing Air Seychelles on a more sustainable financial footing and enabling subsequent operational restructuring, including ring-fencing of ground handling operation.
- Public debt management improvements:
  - Continued improvement following successful LMO implementation.
  - Publication of the quarterly issuance calendar for bonds has started.
  - Development of a secondary market for government securities is underway in consultation with CBS and other stakeholders.

### Monetary and financial sector policies
- Monetary policy stance:
  - Monetary policy has been accommodative to help the economy surmount pandemic challenges.
  - Central Bank of Seychelles (CBS) remains vigilant to monitoring inflation dynamics and stands ready to act if inflationary pressures persist.
  - CBS is committed to a flexible exchange rate regime and intervenes only to limit disorderly market conditions and to build external buffers.
  - CBS has made continuing efforts to improve its monetary policy operating framework with several IMF Technical Assistances.
- Financial stability and banking system:
  - CBS remains committed to ensuring a stable and well-capitalized banking system by effectively monitoring and supervising the health of the financial system.
  - CBS has started unwinding COVID-19 related support such as private sector relief schemes for enterprises and forbearance measures.
  - CBS is cognizant of potential risks from growing nonperforming loans and will undertake a bank-level assessment of asset quality, including the impact of unwinding forbearance measures.
  - To strengthen the legal basis of its financial stability mandate, CBS submitted the policy paper on the Financial Stability Act to the cabinet for approval in May 2022.
  - CBS continues to pursue its modernization agenda pertaining to the National Payment System to develop efficient, convenient, affordable, and innovative payment facilities.

### Structural reforms, economic transformation, climate resilience, and governance
- Economic diversification and digitalization:
  - Authorities undertake reforms to diversify the economy, deepen economic linkages among sectors and promote digitalization.
  - Continued efforts to diversify the tourism market geographically and to offer a wide range of services while enhancing local value chains with tourism at the center.
  - Priority on improving the business environment and developing a national entrepreneurship framework.
  - Digital economy agenda actions include improving relevant digital infrastructure, digitizing government services (including launching the digital ID system), introducing digital payment systems, and enhancing digital skills and literacy.
- Energy transition and climate resilience:
  - Authorities committed to accelerating energy transition with a long-term goal to achieve a decarbonized economy by 2050.
  - Key implementation targets focus on modernizing the entire electricity sector and boosting electricity generation from renewables.
  - The Government is undertaking an energy policy review with the help of the World Bank.
  - Seychelles remains vulnerable to climate risk such as severe erosion, waves crashing on coastal roads, and inundations during rainy seasons.
  - Authorities have expressed interest in tapping a Resilience and Sustainability Trust, once it is ready.
- Governance, transparency, and AML/CFT:
  - Progress in improving governance and transparency.
  - Centralized database of beneficial ownership (BO) became operational in July 2021.
  - As of April 2022, 90 percent of legal persons and legal arrangements in the international financial services sector submitted information to the BO database.
  - Authorities committed to validate the accuracy of the BO database, including by submitting a periodic strategic analysis report to the National AML/CFT Committee.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1sycea2022003.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1sycea2022003.pdf_