## _cr1003 ## Source details **Canonical URL:** [_cr1003](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1003.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1003.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1003.pdf.json) --- ### Executive Summary — Key Findings - Macroeconomic performance through September 2009 continued to be encouraging. - Drivers of stabilization: liberalization of the exchange regime, a strong fiscal adjustment, and prudent monetary policies. - Monthly inflation has been near zero since March 2009. - The exchange rate has appreciated steadily from lows in early 2009. - Short-term interest rates on government securities declined from about 30 percent in January to below 5 percent in October 2009. - Real GDP is now expected to decline by 7.5 percent in 2009. - Structural reform progress: end-September structural benchmarks were met; end-December benchmarks are expected to be met. - Public external debt restructuring: a formal exchange offer to commercial bondholders is expected to be launched by mid-December (2009); the exchange offer has support from the African Development Bank in the form of a Policy-based Guarantee Operation. - Recommendation: a three-year EFF arrangement is the most appropriate instrument to support the ambitious structural transformation and to lend credibility to efforts to reestablish fiscal and public debt sustainability. ### Macroeconomic developments (through 2009) - Inflation and interest rates: - Monthly inflation near zero since March 2009. - Short-term interest rates on government securities: about 30 percent in January 2009, below 5 percent in October 2009. - Exchange rate and reserves: - Exchange rate appreciated steadily from lows in early 2009. - Official external reserves rebuilt to US$134 million (1.3 months of imports) at end-September 2009. - The SDR allocation was fully added to reserves. - Output: - Real GDP expected to decline by 7.5 percent in 2009. - Fiscal: - Primary surplus reached 13.4 percent of GDP over the first nine months of 2009. - Fiscal over-performance provided space for a supplementary appropriation of about 2 percent of GDP for emergency and strategic expenditures. - Fiscal performance, falling interest rates, and increased external financial assistance will reduce domestic debt by 5½ percent of GDP in 2009. - Monetary and financial sector: - Rapid disinflation allowed measured easing of monetary policy. - Local asset requirement progressively reduced and abolished in August 2009. - Treasury single account introduced. - CBS adopted foreign reserve management guidelines. - New Central Bank and Financial Institutions Acts enacted. - External financial audits of the seven largest public enterprises completed; management audits advanced. - Management of the public utilities company sacked in August 2009 and a management and technical assistance contract signed. ### Policies for the remainder of 2009 - Macroeconomic outlook: - Inflation expected to remain in the low single digits. - External current account deficit expected to narrow. - Gross reserves expected to rise to US$153 million by end-2009 (1.5 months of imports). - Exports of tourism services projected to increase as the global economy recovers and additional hotel accommodation comes on line. - Fiscal policy: - The 2009 primary surplus projected to reach 13.4 percent of GDP, in line with the adjusted performance target for end-December 2009. - Supplementary appropriation of about 2 percent of GDP for emergency and strategic expenditures (components: Air Seychelles 0.3 percent; departure payments for outsourced workers 0.3 percent; tourism marketing 0.2 percent; rehabilitation of PUC 0.4 percent; targeted voluntary departure scheme 0.1 percent; strengthening SRC capacity 0.1 percent). - Monetary policy: - Focus on consolidating low inflation while providing room for private sector credit. - Reserve money and reserves targets for December 2009 moderately raised to provide space for credit and facilitate financial deepening. ### Medium-term macroeconomic policy and reform (2010–12) - Strategic objectives: - Secure macroeconomic stability and improve economic performance via “second generation” reforms. - Core reform priorities: - Strengthen public financial management (PFM). - Institutionalize higher governance standards. - Rationalize the public sector. - Reform taxation. - Bolster the financial system. - Improve the business environment. - Structural benchmarks (selected; measure — target date — status): - Introduce a treasury single account — End-September 2009 — Met. - Adopt foreign reserves management investment guidelines — End-September 2009 — Met (CBS Board adopted guidelines on September 25, 2009). - Adopt Public Enterprise Monitoring and Control Act — End-September 2009 — Met (Parliamentary approval on September 28, 2009). - Complete CBS procedures manual — End-December 2009 — In progress. - CBS to publish commercial bank supervision report — End-December 2009 — In progress. - Amend the Business Tax Act in line with tax reform strategy — End-December 2009 — In progress. - Cabinet approval of customs reform strategy and implementation plan — End-March 2010. - Publish general government fiscal statistics — End-April 2010. - Introduce Personal Income Tax (MEFP, ¶22) — July 1, 2010. - Adopt a new chart of account for the 2011 budget — End-November 2010. - Submit bill creating national clearing house and settlement system — End-December 2010. ### Fiscal strategy and tax reform (2010–12) - Fiscal targets and stance: - Primary surpluses targeted at 7 percent of GDP in 2010, declining to about 4½ percent by 2012 (assuming full external debt restructuring). - 2010 budget: easing to a 7 percent primary surplus; capital expenditure to increase to 7.7 percent of GDP in 2010 (including contingency). - Expenditure contingency of about 1 percent of GDP in 2010 for investment projects conditional on primary balance remaining on track. - Tax reform pillars and timing: - Broadening the business tax base; Business Tax Act to take effect January 1, 2010. - Introduce withholding-based Personal Income Tax (PIT) — July 1, 2010, replacing social security contribution for wages. - Introduce a single rate VAT — January 1, 2012, replacing multiple rate GST. - Business tax rate change: business tax rate being lowered from 40% to 33/25% (banks and other corporates) in 2010 with intention to lower further over time. - Tax reform expected broadly revenue neutral over the medium term; in 2010 net impact estimated positive 0.3 percent of GDP (largely from clawbacks of exemptions). - A large reduction in tax-to-GDP ratio in 2010 expected reflecting one-off positive factors in 2009 and nominal appreciation of the rupee (about 22 percent through late November), totaling about 4½–5 percent of GDP. ### Monetary, exchange rate, and financial sector policies - Monetary policy framework: - Aim to keep inflation in the low single digits. - Reserve money targeting continues with greater flexibility; repurchase operations (repos) and credit auction arrangements (CAA) to be main tools; Standing Deposit Facility operational starting in 2010. - Interest rates to remain positive in real terms; CBS to react to inflationary pressures. - CBS capitalization and operations: - CBS requires capital injection; government will replenish CBS capital through a direct securitized injection by mid-2010 following audited 2009 results, with intention to reach full recapitalization estimated to amount to 2 percent of GDP. - Issuance of treasury securities in exchange for an increase in government equity in the central bank recorded in financing; interest on securities is expenditure. - Exchange rate and interbank market: - Continue floating regime with interventions to smooth fluctuations subject to reserve money and external reserves targets. - Establishment of foreign exchange interbank market; CBS to work with banks and seek IMF technical assistance. - Banking sector supervision and reforms: - Implement 18-month action plan for risk-based supervision; increase minimum capital requirements; promote net tangible capital ratio. - Supervision of nonbank financial institutions to transfer to CBS from end-2009. - Introduce primary dealer system for T-bills once secondary market infrastructure in place. - Financial infrastructure: - Introduce Electronic Clearing House, National Payment System, National Clearing and Settlement System Bill; implement real time gross settlement system in 2010–11. - Introduce core banking system at CBS by September 2010; adopt IFRS for 2009 CBS accounts — March 2010. ### Public enterprise reform and PFM - Public Enterprise Monitoring and Control Act enacted; PEMD to implement strategic assessments and monitoring. - Actions and timing (selected): - Cabinet approval of public enterprise reform strategy and work plan — December 2009. - Tender for advisors for privatization of Nouvobanq and Seychelles Savings Bank — December 2009. - Prepare strategic assessment and reform action plan for each major public enterprise — 2010–11. - Formalize all government loans to public entities — January 2010. - Public financial management reforms: - Strengthen treasury function; introduce Treasury Single Account and new chart of accounts for 2011 Budget. - Move to medium-term budgeting framework starting with the 2011 Budget. - Introduce budget submission protocols — End-July 2010. - Adopt a new chart of accounts for the 2011 budget — End-November 2010. - Introduce a new Public Finance Law — September 2011. ### Public external debt restructuring and Debt Sustainability Analysis (DSA) - Restructuring progress and assumptions: - Agreement with Paris Club creditors in April 2009; one non-Paris Club bilateral agreement signed (Malaysia); others close. - Exchange offer to commercial bondholders launched early December 2009; AfDB supported the offer with a US$10 million Policy-based Guarantee Operation. - Program financing conditioned on achieving public external debt restructuring consistent with Seychelles’ payment capacity. - DSA main findings: - Public external debt remains unsustainable without additional relief beyond Paris Club creditors. - Baseline scenario (incorporating agreements to date): public external debt (Percent of GDP) 83.3 (2008), 151.3 (2009), 130.9 (2010), 403.6 (2019). - Baseline gross external financing need (in percent of GDP): 65.2 (2008), 40.3 (2009), 57.4 (2010), 225.1 (2019). - Alternative scenario (assuming comparability of treatment for all creditors): external debt (Percent of GDP) 83.3 (2008), 92.9 (2009), 60.2 (2010), 44.4 (2019); public sector debt (Percent of GDP) 135.6 (2008), 134.2 (2009), 97.6 (2010), 59.3 (2019). - Even under alternative scenario, bound tests show Seychelles remains vulnerable to shocks. - Key DSA data and debt stock: - Public external debt estimated at US$733 million or 95.7 percent of GDP at end-September 2009. - About 67 percent of the debt owed to commercial creditors; Paris Club countries account for about 16 percent. - At end-September 2009 some 33 percent of the debt stock was in arrears (US$239.2 million). - Stock of public external debt expected to rise to US$755 million (99 percent of GDP) by end 2009 reflecting multilateral disbursements (about $24 million). ### Program financing, EFF design, and monitoring - Proposed EFF: - Duration: three years. - Access: 225 percent of quota (SDR 19.8 million), with 10 percent of quota (SDR 0.88 million) disbursed upon approval. - Phasing: first year to mirror SBA access (85 percent of quota); annual access declining to 80 and 60 percent in the second and third years, respectively. - Disbursement timetable (selected): - December 22, 2009 — Board approval — Amount: 0.88 (10 percent of quota). - March 15, 2010 — Compliance with end-December 2009 QPCs and completion of financing assurances review (if needed) — Amount: 2.20 (25 percent of quota). - June 15, 2010 — Completion of first program review and financing assurances review (if needed) and compliance with end-March 2010 QPCs — Amount: 2.20 (25 percent of quota). - Total proposed EFF amount: 19.8 (225 percent of quota). - Program monitoring: - Quarterly quantitative performance criteria on net international reserves (NIR), reserve money, and fiscal primary balances. - Semi-annual program reviews with quarterly disbursements. - First program review under the EFF based on end-March 2010 performance. - Quarterly structural benchmarks to mark progress on structural reform agenda. - Financing assurances reviews needed until arrears to private creditors are cleared. - Technical Memorandum of Understanding (TMU) defines variable definitions, adjusters, and reporting requirements; audits and timelines specified for NIR and reserve money through end-December 2009 and thereafter. ### Key macroeconomic projections and selected indicators (preserve source figures) - Nominal GDP (millions of Seychelles rupees): 6,877; 8,756; 10,280; 10,402; 11,057; 11,891; 12,872. - Real GDP (annual percent change): 9.7; -0.9; -10.7; -7.6; 4.0; 5.0; 5.0. - CPI (annual average): 5.3; 37.0; 35.1; 32.9; 2.3; 2.5; 3.2. - CPI (end-of-period): 16.8; 63.3; 5.4; 1.9; 2.2; 3.0; 3.0. - GDP deflator average: 11.4; 28.4; 31.4; 28.5; 2.2; 2.4; 3.1. - Broad money (M3(p)) 12–month growth (selected): -7.6; 27.2; 5.6; -0.7; 25.6. - External savings (percent of GDP): 20.8; 44.7; 29.7; 22.6; 32.7; 30.1; 28.8. - Gross national savings (percent of GDP): 8.0; -12.7; -1.8; 6.8; -0.9; 2.5; 4.7. - Gross investment (percent of GDP): 28.8; 32.1; 27.9; 29.4; 31.8; 32.6; 33.6. - Current account balance including official transfers (millions of U.S. dollars): -20.8; -44.7; -29.7; -22.6; -32.7; -30.1; -28.8. - Total stock of arrears (millions of U.S. dollars): 160.4; 321.7; 195.1; 239.2. - Total external debt outstanding (millions of U.S. dollars): 710.2; 767.1; 732.6; 754.7; 708.1. - Total external debt (percent of GDP): 69.2; 83.3; 108.0; 98.5; 72.2. - Gross official reserves (end of year, millions of US dollars): 105; 110; 815; 320; 225; 230; 2. - In months of imports, c.i.f.: 0.1; 0.6; 1.3; 1.5; 1.9; 2.2; 2.5. - Exchange rate (Seychelles rupees per US$1, end of period): 8.0; 16.6; ...; 10.6; .... - Fiscal indicators (selected, percent of GDP): - Total revenue, excluding grants: 32.0; 32.8; 35.1; 35.6; 30.7; 31.5; 31.3. - Expenditure and net lending: 40.9; 39.8; 35.6; 35.1; 32.8; 33.4; 32.1. - Current expenditure: 36.3; 28.6; 34.2; 34.2; 28.0; 25.9; 23.5. - Capital expenditure and net lending: 4.6; 11.2; 0.5; 2.3; 4.9; 7.4; 8.6. - Overall balance, including grants: -8.7; -3.3; 0.0; 2.8; 0.9; 0.4; 1.4. - Primary balance: -2.0; 3.8; 11.4; 13.4; 7.0; 6.0; 4.7. - Total public debt: 129.8; 135.6; 149.7; 140.1; 109.5; ..... - Domestic public debt: 65.8; 52.3; 41.8; 41.6; 37.4; ..... - External public debt: 63.9; 83.3; 108.0; 98.5; 72.2; ..... - Selected monetary/financial indicators (selected): - M3 (end period, Seychelles rupees millions): 4,681; 5,952; 5,570; 5,412; 5,419; 5,249; 5,902; 5,411; 6,288; 5,910; 6,224; 6,561; 7,023; 7,421. - Reserve money (end period): 1,113; 1,120; 1,146; 1,051; 1,266; 1,119; 1,311; 1,169; 1,351; 1,480; 1,537; 1,592; 1,676; 1,753. - M2 growth (12–month percent change, selected): -14.9; 3.2; 6.8; -6.5; -8.4; -10.5; -1.1; -5.9; 7.4; 5.4; 24.5; 29.6; 30.2; 25.3. - Credit to the economy (12–month percent change, selected): 32.7; 58.4; 17.1; 41.9; 47.0; 29.5; 52.5; 18.0; 24.3; -12.1; -2.7; 10.1; 19.4; 27.3. ### Program risks, mitigating factors, and staff recommendations - Main risks: - Uncertainty about depth and duration of the global recession. - Piracy in the Indian Ocean affecting tourism and FDI. - Possible significant delays in public external debt restructuring. - Capacity constraints on reform implementation. - Resistance to reform by vested interests. - Mitigating factors: - Good progress in creditor discussions and imminent launching of a debt exchange offer to commercial bondholders. - Authorities’ strong ownership of the program, broad public and political support for reforms, and track record under the SBA. - Staff appraisal and recommendation: - Staff commends authorities for remarkable progress: inflation stopped, macro stability established, exemplary program implementation despite global recession. - Staff believes policies in place are sufficient to achieve program objectives, assuming public debt restructuring consistent with payments capacity is achieved. - Staff recommends approval of authorities’ request for a three-year EFF to implement medium-term reform agenda. - Program implementation conditions: compliance with quarterly quantitative performance criteria and completion of financing assurances reviews (if needed) tied to EFF disbursements and reviews. *Source: _cr1003 - Executive Summary; IMF staff & Seychelles authorities (IMF staff report excerpts, MEFP, TMU, and Appendix II).* ### Executive Summary ...................................................................................................... ### _cr1003 - Executive Summary ### Executive Summary — Key Findings - Macroeconomic performance through September 2009 continued to be encouraging. - Drivers of stabilization: liberalization of the exchange regime, a strong fiscal adjustment, and prudent monetary policies. - Monthly inflation has been near zero since March 2009. - The exchange rate has appreciated steadily from lows in early 2009. - Short-term interest rates on government securities declined from about 30 percent in January to below 5 percent in October 2009. - Real GDP is now expected to decline by 7.5 percent in 2009. - Structural reform progress: end-September structural benchmarks were met; end-December benchmarks are expected to be met. - Public external debt restructuring: a formal exchange offer to commercial bondholders is expected to be launched by mid-December (2009); the exchange offer has support from the African Development Bank in the form of a Policy-based Guarantee Operation. - Recommendation: a three-year EFF arrangement is the most appropriate instrument to support the ambitious structural transformation and to lend credibility to efforts to reestablish fiscal and public debt sustainability. ### I. Macroeconomic Developments and Performance Under the SBA - Macroeconomic performance through September 2009: - Monthly inflation near zero since March 2009. - Exchange rate appreciated steadily from lows in early 2009. - Short-term interest rates on government securities: about 30 percent in January 2009, below 5 percent in October 2009. - Fiscal policy over-performed: primary surplus reached 13.4 percent of GDP over the first nine months of 2009. - External outlook and reserves: - Real GDP is expected to decline by 7.5 percent in 2009. - Official external reserves rebuilt to US$134 million (1.3 months of imports) at end-September 2009. - The SDR allocation was fully added to reserves. - All quantitative PCs at end-September 2009 were met with margins. - Monetary developments: - Rapid disinflation provided room for measured easing of monetary policy. - Following the float, the rupee has overshot but then appreciated. - Short-term real interest rates moved into positive territory due to deflation and fiscal tightening. - The local asset requirement was progressively reduced and abolished in August 2009. - Structural reforms and public enterprise actions: - Treasury single account introduced. - CBS adopted foreign reserve management guidelines. - Public Enterprise Monitoring and Control Act passed by National Assembly. - External financial audits of the seven largest public enterprises completed; management audits advanced. - Management of the public utilities company was sacked in August 2009 and a management and technical assistance contract signed. - Financial reporting obligations to the Finance Ministry established; corporate governance guidelines issued. - Public sector action plan adopted with World Bank support based on PERs of health and education sectors. - Public external debt restructuring progress: - Agreement with Paris Club creditors in April 2009. - One non-Paris Club bilateral agreement signed (Malaysia); others close. - Agreements on some commercial bank loans reached. - Exchange offer to commercial bondholders expected mid-December 2009; AfDB guarantees the offer via a Policy-based Guarantee Operation (approved December 2, 2009). - Authorities’ debt strategy is consistent with the Fund’s LIA policy. ### II. Policies for the Remainder of 2009 - Macroeconomic outlook remainder of 2009: - Inflation expected to remain in the low single digits. - External current account deficit expected to narrow. - Exports of tourism services projected to increase as the global economy recovers and additional hotel accommodation comes on line. - Gross reserves expected to rise to US$153 million by end-2009 (1.5 months of imports). - Fiscal policy: - The 2009 primary surplus projected to reach 13.4 percent of GDP, in line with the adjusted performance target for end-December 2009. - Over-performance provided space for a supplementary appropriation of about 2 percent of GDP for emergency and strategic expenditures. - Fiscal performance, falling interest rates, and increased external financial assistance will reduce domestic debt by 5½ percent of GDP in 2009. - Treasury management capacity is being strengthened with CBS collaboration. - Monetary policy: - Focus on consolidating low inflation while providing room for private sector credit. - Reserve money and reserves targets for December 2009 were moderately raised to provide increasing space for credit and facilitate financial deepening. ### III. Medium-Term Macroeconomic Policy and Reform Efforts - Strategic imperative: - The reform successes of 2009 set the stage for a coherent medium-term effort to extend gains for growth and stability. - The November 2008 Stand-By Arrangement addressed foreign exchange distortions, implemented fiscal adjustment, and stabilized the macroeconomic environment. - The next phase (“second generation” reforms) aims to secure macroeconomic stability and improve economic performance. - Core medium-term reform objectives: - Strengthen public financial management (PFM). - Institutionalize higher governance standards. - Rationalize the public sector. - Reform taxation. - Bolster the financial system. - Improve the business environment. - Structural Benchmarks for 2009–10 (measure — target date — rationale — status): - Introduce a treasury single account — End-September 2009 — To strengthen public finances, key to sustainability efforts — Met. The TSA is leveraging progress on PFM. - Adopt foreign reserves management investment guidelines — End-September 2009 — To ensure management of foreign reserves in line with best international practice — Met. The CBS Board adopted guidelines on September 25, 2009. - Adopt Public Enterprise Monitoring and Control act — End-September 2009 — To improve oversight over public enterprises and reduce quasi-fiscal risks — Met. Parliamentary approval secured on September 28, 2009. - Complete CBS procedures manual (MEFP, ¶46) — End-December 2009 — To support improved efficiency and transparency in monetary policy — In progress. - CBS to publish commercial bank supervision report (MEFP, ¶46) — End-December 2009 — To promote competition and transparency in the banking system — In progress. - Amend the Business Tax Act in line with the tax reform strategy (MEFP, ¶22) — End-December 2009 — To broaden the tax base, modernize tax policy, and remove distortions — In progress. - Cabinet approval of customs reform strategy and implementation plan (MEFP, ¶23) — End-March 2010 — To transform customs into a modern and efficient entity. - Publish general government fiscal statistics (MEFP, ¶29) — End-April 2010 — To enhance transparency and coverage of public finance. - Submit to National Assembly a new customs management act (MEFP, ¶23) — End-June 2010 — To institutionalize best international practice and a better business climate. - Introduce Personal Income Tax (MEFP, ¶22) — July 1, 2010 — To broaden the tax base and provide for more equitable taxation. - Introduce budget submissions protocols and procedures (MEFP, ¶28) — End-July 2010 — To strengthen budget preparation. - Adopt a new chart of account for the 2011 budget (MEFP, ¶29) — End-November 2010 — To ensure proper classification and increase efficiency of the budget as a policy tool. - Submit to National Assembly a bill creating a national clearing house and settlement system (MEFP, ¶44) — End-December 2010 — To introduce necessary financial infrastructure for improved efficiency and reduced risks. - Fund engagement: - A three-year EFF arrangement is identified as the most appropriate instrument to support the ambitious structural transformation and to bolster credibility during public debt restructuring negotiations. *Source: _cr1003 - Executive Summary (IMF staff & Seychelles authorities).* ### 11. After the shocks of 2008, the objective is to secure the macroeconomic ### _cr1003 - 11. After the shocks of 2008, the objective is to secure the macroeconomic ### Macroeconomic outlook and growth projections - Tourism and related services are beginning to recover from a sharp decline; FDI is expected to rebound in 2010 with several large projects in the wings. - Real GDP growth projections: - 2010: recover to 4 percent - 2011–12: 5 percent - Inflation is expected to remain in the low single digits. - Investment rebound would be supported by a successful public external debt restructuring in early 2010 that would reduce country credit risk. ### External position, debt sustainability, and financing - Program objective: reach a sustainable medium-term external path from 2010 onwards (MEFP, ¶33–35). - Under program macroeconomic policies: - External current account deficit expected to widen in 2010 (due to higher growth and FDI) but narrow over the medium term as tourism earnings recover (Table 5). - Financing: - Financing is secured for 2009. - Moderate residual gaps remain for 2010–11 after assumed debt restructuring, which could be largely covered by access under the proposed EFF. - Debt sustainability: - Updated DSA indicates public external debt remains unsustainable without additional relief beyond Paris Club creditors (Appendix II). - Alternative scenario: if all other creditors agree to restructure Seychelles’ public external debt on terms comparable to those granted by the Paris Club, external financing gaps would be closed (with proposed additional Fund access) and the public external debt stock would be set on a sustainable path. - Second tranche of Paris Club debt relief is conditioned on completion of the first EFF review and a comparability of treatment test. - Bound tests show that, even after restructuring, Seychelles remains vulnerable to shocks. ### Fiscal policy: objectives, 2010 budget, and tax reform - Overarching goal: place public finances on a firmly sustainable footing (MEFP, ¶19–21) via: - Major reinforcement of fiscal monitoring and control. - Improved expenditure efficiency. - Strong rise in public investment (primary spending to rise by about 1 percent of GDP). - Targeting significant primary surpluses through the medium term (lower than 2009 outturn) to reduce domestic debt and provide space for private sector growth. - 2010–12 programmed lower primary surplus made possible by rapid macrostabilization and reductions in the interest bill. - Revenue and tax base: - Tax reform targeted to be broadly revenue neutral over the medium term; in 2010 the net impact is an estimated positive 0.3 percent of GDP (largely from clawbacks of exemptions). - A large reduction in tax-to-GDP ratio in 2010 is expected, reflecting one-off positive factors in 2009 and the nominal appreciation of the rupee (about 22 percent through late November), totaling about 4½–5 percent of GDP. - Contingency and saving rules: - 2010 budget includes a back loaded expenditure contingency of about 1 percent of GDP comprising identified investment spending, to be used as long as the primary balance remains on track. - If overall revenue exceeds projections in 2010, a portion of the over performance will be saved; the savings/spending balance would be determined at the first program review under the EFF. - Medium-term tax policy reform (MEFP, ¶22–23): - Harmonize and lower rates, remove distortions, improve compliance. - Introduce a flat rate personal income tax on salaries, interest and dividend income mid-year and extend, at a lower rate, to previously untaxed non residents and expatriate workers. - Business tax rate to be significantly lowered, offset in part by eliminating the corporate profit threshold, incorporating previously concessionary sectors into the tax base, and introduction of an excise tax regime. - With Fund technical assistance, authorities are reinforcing tax and customs administration; additional technical assistance sought to support VAT introduction in 2012. - Specific business tax change: the business tax rate is being lowered from 40% to 33/25% (banks and other corporates) in 2010 with the intention to lower it further over time. - Public financial management (PFM) and civil service reforms: - 2010 budget to include fuller policy discussion, presentation of general government fiscal operations, and an annual borrowing plan backed by a medium-term debt strategy (MEFP, ¶24–29). - Strengthening of PFM and expenditure rationalization is under way; further downsizing of government noncore employment via outsourcing and targeted voluntary departure scheme. - Introduction of a new wage grid with the 2010 budget. ### Monetary, exchange rate, and financial sector policies - Monetary policy: - Aim: maintain inflation in the low single digits (MEFP, ¶37–47). - Operational framework: reserve money targeting continues, with greater flexibility from new indirect instruments. - Repurchase operations gradually becoming the main policy tool; credit auction arrangement introduced; starting in 2010 a standing deposit facility will become operational. - Interest rates should remain positive in real terms; CBS should react quickly to emerging inflationary pressures. - Central Bank of Seychelles (CBS) capitalization: - CBS requires a capital injection to preserve policy implementation ability; significant valuation losses from rupee appreciation have eroded capital. - Government will replenish CBS capital through a direct securitized injection by mid-2010, following the audited results of 2009, with intention of reaching full recapitalization estimated to amount to 2 percent of GDP (MEFP, ¶47). - The issuance of treasury securities in exchange for an increase in the government’s equity in the central bank is recorded in financing; interest on the securities is in expenditure. - Exchange regime: - Continue floating regime with interventions to smooth fluctuations and ensure orderly market operation, subject to reserve money and external reserves targets. - Banking sector and supervision: - Strengthening essential to underpin long-term stability; system remains adequately capitalized but private credit growth increases need for prudential supervision (Table 6). - CBS to implement an 18-month action plan for strengthening risk-based supervision, increase minimum capital requirements for banks, and promote the net tangible capital ratio as an added capital adequacy measure. - From end-2009 supervision of nonbank financial institutions will transfer to the CBS. - Money market and liquidity management: - Primary market for T-bills is shallow with virtually no secondary trading due to underdeveloped infrastructure and liquidity management weaknesses. - Authorities intend to introduce a primary dealer system to facilitate market making. - Consolidation and divestment of publicly owned financial institutions: - Government wholly owns the Savings Bank and majority of Nouvobanq; a contract to prepare them for privatization to be tendered internationally by end-2009. - Objective: attract strategic banking investors to bring capital, expertise, and stimulate competition. - Three nondeposit taking institutions (Development Bank of Seychelles, Housing Finance Corporation, Concessional Credit Agency) will be assessed for exit strategies including consolidation and possible privatization, with help of FIRST initiative. ### Structural reform agenda - Major objective of the EFF: launch second generation reforms and address long standing structural imbalances (MEFP, ¶30–32; 36). - Key reforms already initiated under the SBA: public enterprise restructuring, tax reform, PFM; need for sustained efforts going forward. - Medium-term reform strategy intended to provide comprehensive policy framework and coordinate donors/stakeholders; public sector strategic assessment and action plan to be finalized with World Bank staff. - Sectoral reforms needed (MEFP, ¶26–27) to raise performance and mitigate macro risks: - Promote better business climate. - More flexible and efficient labor laws. - Environmental policies. - Sectoral policies for air access, tourism, and fishing. - Pension reform (funding inadequate); tied to labor law reform to improve incentives to work. - Greater transparency in publication of fishing licenses and agreements. - Reinforce national statistics and reform trade regime to comply with COMESA commitments and reactivate WTO application. ### Program financing, design, monitoring, and access - Program financing gaps for 2010–12 expected to be closed by restructuring of public external debt and disbursement under the proposed EFF arrangement (Table 7, MEFP, ¶49). - Program design and monitoring: - Quarterly quantitative performance criteria on net international reserves (NIR), reserve money, and fiscal primary balances (MEFP, ¶50–52). - Semi-annual program reviews with quarterly disbursements. - First program review under the EFF based on end-March 2010 performance. - Financing assurances reviews needed until arrears to private creditors are cleared. - Quarterly structural benchmarks to mark progress on structural reform agenda (PFM and public/financial sector reform). - Access under the three-year EFF: - Proposed at 225 percent of quota (SDR 19.8 million), with 10 percent of quota disbursed upon approval of the arrangement (Table 8). - Phasing: first year to mirror SBA access (85 percent of quota); annual access declining to 80 and 60 percent in the second and third years, respectively. - Under proposed access levels, Seychelles should not have difficulty meeting Fund obligations as indicators of outstanding credits and servicing ratios remain moderate (Table 9). ### Risks to the program - Main risks: - Uncertainty about depth and duration of the global recession. - Piracy in the Indian Ocean affecting tourism and FDI. - Possible significant delays in public external debt restructuring. - Capacity constraints on reform implementation. - Resistance to reform by vested interests. - Mitigating factors: - Good progress in creditor discussions and imminent launching of a debt exchange offer to commercial bondholders. - Authorities’ strong ownership of the program, broad public and political support for reforms, and track record under the SBA make risks manageable. ### Staff appraisal and recommendations - Staff commends authorities for remarkable progress over past 12 months: inflation stopped, macro stability established, and exemplary program implementation despite global recession. - Fiscal performance: - Very strong fiscal adjustment in 2009 key to stabilization. - Progress on PFM welcomed; 2010 budget is another major step to improve transparency and performance of central government. - Introduction of a treasury single account has strengthened control over public finance. - Monetary and financial sector: - New market-based monetary policy is working well; further efforts should expand instruments, modernize financial infrastructure, and strengthen the financial sector. - Managed floating exchange regime remains appropriate. - Program recommendations: - Complete the third Stand-By Arrangement program and financing assurances reviews given strong performance through end-September and compliance with LIA policy. - Support authorities’ request for a three-year EFF to implement medium-term reform agenda focused on consolidating macro stability, removing constraints to growth, and improving public sector performance. - Reinforce financial discipline and accountability in the parastatal sector; consider privatization, closings, liquidation, and consolidations. - Continue to reinforce debt management capacity and pursue public external debt restructuring negotiations; continued Fund involvement is crucial. *Source: _cr1003 - 11. After the shocks of 2008, the objective is to secure the macroeconomic* ### 37. Staff believes that the policies in place are sufficient to achieve the program’s ### _cr1003 - 37. Staff believes that the policies in place are sufficient to achieve the program’s ### Program assessment and recommendation - Staff believes that the policies in place are sufficient to achieve the program’s objectives. - The program is financed, assuming a public debt restructuring consistent with Seychelles’ payments capacity is achieved. - The good progress made in debt restructuring discussions is described as reassuring. - The risks to the program appear manageable, especially given the authorities’ evident commitment to, and broad public support for, the reforms. - Staff recommends approval of the authorities’ request for a three year arrangement under the EFF in replacement of the remainder of the SBA. ### Key macroeconomic projections and indicators (selected) - Nominal GDP (millions of Seychelles rupees): 6,877; 8,756; 10,280; 10,402; 11,057; 11,891; 12,872. - Real GDP (annual percent change): 9.7; -0.9; -10.7; -7.6; 4.0; 5.0; 5.0. - CPI (annual average): 5.3; 37.0; 35.1; 32.9; 2.3; 2.5; 3.2. - CPI (end-of-period): 16.8; 63.3; 5.4; 1.9; 2.2; 3.0; 3.0. - GDP deflator average: 11.4; 28.4; 31.4; 28.5; 2.2; 2.4; 3.1. - Broad money (M3(p)) 12–month growth (selected): -7.6; 27.2; 5.6; -0.7; 25.6. - External savings (percent of GDP): 20.8; 44.7; 29.7; 22.6; 32.7; 30.1; 28.8. - Gross national savings (percent of GDP): 8.0; -12.7; -1.8; 6.8; -0.9; 2.5; 4.7. - Gross investment (percent of GDP): 28.8; 32.1; 27.9; 29.4; 31.8; 32.6; 33.6. - Current account balance including official transfers (millions of U.S. dollars): -20.8; -44.7; -29.7; -22.6; -32.7; -30.1; -28.8. - Total stock of arrears (millions of U.S. dollars): 160.4; 321.7; 195.1; 239.2. - Total external debt outstanding (millions of U.S. dollars): 710.2; 767.1; 732.6; 754.7; 708.1. - Total external debt (percent of GDP): 69.2; 83.3; 108.0; 98.5; 72.2. - Gross official reserves (end of year, millions of US dollars): 105; 110; 815; 320; 225; 230; 2. - In months of imports, c.i.f.: 0.1; 0.6; 1.3; 1.5; 1.9; 2.2; 2.5. - Exchange rate (Seychelles rupees per US$1, end of period): 8.0; 16.6; ...; 10.6; .... - Memorandum: Historic GDP data have been revised upwards in April 2009. ### Fiscal outlook and government operations (selected figures) - Total revenue, excluding grants (percent of GDP): 32.0; 32.8; 35.1; 35.6; 30.7; 31.5; 31.3. - Expenditure and net lending (percent of GDP): 40.9; 39.8; 35.6; 35.1; 32.8; 33.4; 32.1. - Current expenditure (percent of GDP): 36.3; 28.6; 34.2; 34.2; 28.0; 25.9; 23.5. - Capital expenditure and net lending (percent of GDP): 4.6; 11.2; 0.5; 2.3; 4.9; 7.4; 8.6. - Overall balance, including grants (percent of GDP): -8.7; -3.3; 0.0; 2.8; 0.9; 0.4; 1.4. - Primary balance (percent of GDP): -2.0; 3.8; 11.4; 13.4; 7.0; 6.0; 4.7. - Total public debt (percent of GDP): 129.8; 135.6; 149.7; 140.1; 109.5; ..... - Domestic public debt (percent of GDP): 65.8; 52.3; 41.8; 41.6; 37.4; ..... - External public debt (percent of GDP): 63.9; 83.3; 108.0; 98.5; 72.2; ..... Selected quarterly/annual fiscal flows (millions of Seychelles rupees, selected) - Total revenue and grants (year): 3,190; 3,657; 3,938; 3,723; 4,008; 4,307. - Total revenue (year): 2,868; 3,611; 3,704; 3,390; 3,747; 4,032. - Tax revenue (year): 2,456; 3,066; 3,190; 3,067; 3,365; 3,632. - Nontax revenue (year): 412; 545; 514; 323; 382; 400. - Expenditure and net lending (year): 3,483; 3,660; 3,651; 3,628; 3,966; 4,128. - Current expenditure (year): 2,503; 3,511; 3,408; 3,091; 3,081; 3,022. - Interest payments due (year): 629; 1,176; 1,098; 676; 676; 421. - Capital expenditure (year): 183; 446; 556; 747; 885; 1,106. - Overall balance, cash basis (after grants) (year): -262; -152; 244; 140; -82; 103; -165; -5; 42; 179 (selected quarters/years shown). ### External sector, payments, and debt restructuring - Program financing is conditioned on a public debt restructuring consistent with Seychelles’ payments capacity. - Debt restructuring progress is characterized as "good progress" and "reassuring." - Debt forgiveness reflects: (i) the first stage of debt reduction (about 22.5) percent in July 2009; (ii) the second stage reduction (about 22.5 percent) in July 2010 on Paris Club debt. Assumes debt reduction comparable to the Paris Club agreement on Malaysian and South African debt. - Projections assume April 2009 Paris Club agreement is implemented; projections do not include the impact of any further restructuring of public external debt. - Total stock of arrears (millions of U.S. dollars): 160.4; 321.7; 195.1; 239.2. - Scheduled public external debt service (millions of U.S. dollars, selected): 221; 184; 91; 81; 82; 82; 81; 14; 11; 13; 16; 29; 15; 27; 86 (table displays detailed quarterly scheduling). ### Financing, Fund support, and EFF disbursement timing - Staff recommends approval of a three year arrangement under the EFF in replacement of the remainder of the SBA. - Table of proposed Fund disbursements and timing under the proposed three-year EFF, 2009–12 (amounts in millions of SDR and percent of quota): - December 22, 2009 — Board approval of the EFF arrangement. Amount: 0.88 (10 percent of quota). - March 15, 2010 — Compliance with end-December 2009 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 2.20 (25 percent of quota). - June 15, 2010 — Completion of first program review and financing assurances review (if needed) and compliance with end-March 2010 quantitative performance criteria. Amount: 2.20 (25 percent of quota). - September 15, 2010 — Compliance with end-June 2010 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 2.20 (25 percent of quota). - December 15, 2010 — Completion of second program review and financing assurances review (if needed) and compliance with end-September 2010 quantitative performance criteria. Amount: 1.76 (20 percent of quota). - March 15, 2011 — Compliance with end-December 2010 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 1.76 (20 percent of quota). - June 15, 2011 — Completion of third program review and a financing assurances review (if needed) and compliance with end-March 2011 quantitative performance criteria. Amount: 1.76 (20 percent of quota). - September 15, 2011 — Compliance with end-June 2011 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 1.76 (20 percent of quota). - December 15, 2011 — Completion of fourth program review and a financing assurances review (if needed) and compliance with end-September 2011 quantitative performance criteria. Amount: 1.32 (15 percent of quota). - March 15, 2012 — Compliance with end-December 2011 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 1.32 (15 percent of quota). - June 15, 2012 — Completion of fifth program review and a financing assurances review (if needed) and compliance with end-March 2012 quantitative performance criteria. Amount: 1.32 (15 percent of quota). - September 15, 2012 — Compliance with end-June 2012 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 1.32 (15 percent of quota). - Total proposed EFF amount: 19.8 (225 percent of quota). - Table 9: Indicators of Fund credit (millions of SDR, selected): - Existing Fund credit stock (end of period): 6.2; 8.8; 8.8; 8.8; 5.4; 1.0; 0.0; 0.0. - Proposed SBA/EFF disbursements (selected): 3.1; 8.4; 6.6; 4.0; 0.0; 0.0; 0.0. - Stock of existing and prospective Fund credit (end of period): 6.2; 11.9; 20.2; 26.8; 27.4; 21.9; 17.9; 17.5. - In percent of quota (selected): 70.0; 135.0; 230.0; 305.0; 311.3; 248.8; 219.2; 198.3. - In percent of GDP (selected): 1.0; 2.4; 3.2; 4.1; 4.0; 3.0; 2.5; 2.1. ### Banking sector and monetary indicators (selected) - M3 (end period, Seychelles rupees millions): 4,681; 5,952; 5,570; 5,412; 5,419; 5,249; 5,902; 5,411; 6,288; 5,910; 6,224; 6,561; 7,023; 7,421. - M2 (end period): 4,041; 4,170; 4,240; 3,713; 3,840; 3,752; 4,209; 4,004; 4,480; 4,396; 4,624; 4,872; 5,213; 5,507. - Net foreign assets (central bank, end period): 323; 1,050; 1,334; 1,446; 1,374; 1,462; 1,688; 1,385; 1,843; 1,777; 1,802; 1,759; 1,942; 2,271. - Reserve money (end period): 1,113; 1,120; 1,146; 1,051; 1,266; 1,119; 1,311; 1,169; 1,351; 1,480; 1,537; 1,592; 1,676; 1,753. - M2 growth (12–month percent change, selected): -14.9; 3.2; 6.8; -6.5; -8.4; -10.5; -1.1; -5.9; 7.4; 5.4; 24.5; 29.6; 30.2; 25.3. - M3 growth (12–month percent change, selected): -7.6; 27.2; 18.1; 14.7; 11.2; 7.7; 22.2; 12.0; 5.6; -0.7; 15.0; 29.5; 29.8; 25.6. - Credit to the economy (12–month percent change, selected): 32.7; 58.4; 17.1; 41.9; 47.0; 29.5; 52.5; 18.0; 24.3; -12.1; -2.7; 10.1; 19.4; 27.3. ### Policy implications and operational conditions (extracted) - The program’s financing and success hinge on achieving a public external debt restructuring consistent with Seychelles’ payment capacity. - Compliance with quantitative performance criteria at end-of-period dates (end-December 2009, end-March 2010, end-June 2010, etc.) and completion of financing assurances reviews (if needed) are specified conditions for EFF disbursements and program reviews. - The staff’s recommendation is to approve a three-year EFF arrangement to replace the remainder of the SBA, given manageable risks and progress on debt restructuring. *Source: IMF staff report text and tables as provided in the content unit.* ### 1. The attached Memorandum of Economic and Financial Policies for 2009–12 (MEFP) ### _cr1003 - 1. The attached Memorandum of Economic and Financial Policies for 2009–12 (MEFP) ### Overview and official requests - Request completion of the third review under the Stand-By Arrangement (SBA) and release of the fourth tranche of SDR 2.2 million (25 percent of quota). - After completion of the third review, request cancellation of the SBA and replacement with a 3-year Extended Fund Facility (EFF) in amount of SDR 19.8 million (225 percent of quota) and disbursement of the first tranche of SDR 0.88 million (10 percent of quota). - All quantitative performance criteria (PCs) at end-September 2009 were met and all three structural benchmarks at end-September were observed. - Commitment to consult with the Fund on additional measures if necessary and to implement recommendations of the Fund’s safeguards assessment of the Central Bank of Seychelles (CBS). - Request that the IMF publish this letter, the MEFP, the technical memorandum of understanding (TMU), and the staff report; Seychelles will simultaneously publish these documents. ### Recent economic developments and performance under the program - Macroeconomic stabilization and first-generation structural reforms achieved following reforms launched in late 2008. - Exchange regime liberalization: rupee stabilized and appreciated from early-year lows; inflation near zero since March 2009. - Monetary indicators: - Nominal interest rates on short-term T-bills declined to under 5 percent at end-October. - Reserve requirements reduced from 13 percent of deposits to 10 percent as of October 1, 2009; local asset ratio abolished. - Benchmark interest rates on government securities fell from 30 percent in January to 5 percent in October. - External reserves and related developments: - Gross international reserves at US$136 million (1.3 months of imports) at end-October, aided by a general SDR allocation (US$10 million). - Gross reserves expected to rise to US$153 million by end-2009 (1.4 months of imports). - Foreign exchange market interventions were limited and partly sterilized; treasury cash surpluses were sharply reduced in early October to stabilize the market. - Output and prices: - Real GDP projected to contract by 7½ percent in 2009 (improvement from the 10.7 percent contraction projected in June). - Inflation expected to remain in the low single digits. - Fiscal performance and public debt: - Primary surplus of 13.4 percent of GDP recorded in the first nine months of 2009. - Government to reduce domestic debt by 5½ percent of GDP in 2009. - Financial sector and governance reforms: - New Public Enterprise Monitoring and Control Act approved in September; treasury single account introduced; external financial audits of seven largest public enterprises completed. - New Central Bank and Financial Institutions Acts enacted. - CBS implemented safeguards assessment recommendations: external audit policy, internal audit charter, segregation of accounting and reserves management, Investment Committee, asset-liability management framework, Operational Risk Committee; adopting IFRS-based financial reporting for 2009 accounts. - CBS strengthened bank capital requirements and adopted a CAMELS-driven prompt-corrective action system; Financial Services Supervision Division reorganized. ### Debt restructuring and external creditor relations - Paris Club debt restructuring successfully negotiated in April 2009; bilateral rescheduling with Malaysia on comparable terms. - Progress with private creditors; near launch of a debt exchange offer for Eurobond and amortizing note holders on terms compatible with limited payments capacity and comparable to Paris Club terms. - Offer supported by a US$10 million policy-based Guarantee Operation from the African Development Bank to reduce the coupon on the exchange bond. - Expectation that the debt exchange with commercial bondholders will be completed by mid-January 2010. - Discussions with commercial banks have proceeded; some loans restructured and some banks may participate in the exchange bond offer. ### Policies for the remainder of 2009 - Commitment to meet structural and quantitative targets for end-December 2009. - Macroeconomic forecasts and targets: - Inflation forecast to remain in the low single digits. - External current account deficit expected to narrow; exports of tourism services expected to increase. - Gross reserves projected to reach US$153 million by end-2009 (1.4 months of imports). - Fiscal particulars: - Meet the 2009 program primary surplus target, adjusted for foreign financing of 13.4 percent of GDP. - Supplementary appropriation of about 2 percent of GDP to meet emergency expenditure needs, with notable components: - Emergency financing for Air Seychelles: 0.3 percent - Departure payments for outsourced workers (2010): 0.3 percent - Enhanced cofinancing of private sector tourism marketing: 0.2 percent - Rehabilitation of PUC: 0.4 percent - Targeted voluntary departure scheme: 0.1 percent - Strengthening SRC capacity for tax reform: 0.1 percent - Monetary policy stance: - CBS will monitor impact of monetary easing; reserve money target for December moderately raised; CBS ready to tighten at first signs of inflation pickup. - Structural benchmarks: - Expectation to meet structural benchmarks set for end-December 2009. - Business tax reforms finalized for introduction from January 1, 2010. - Preparation of more comprehensive budget documentation for 2010. - Medium-term debt strategy and annual borrowing plan prepared to accompany 2010 Budget. ### Medium-term macroeconomic and structural reform policies (EFF framework) - EFF objectives: - Preserve macroeconomic stability. - Achieve external sustainability. - Improve economic efficiency and durably raise growth through second-generation structural reforms. - Growth and macro projections: - Real GDP growth projected to recover to 4 percent in 2010 and to 5 percent in 2011–12. - Inflation expected to remain in the low single digits. - External current account deficit expected to widen in 2010 due to higher growth and FDI, then narrow over the medium term as tourism earnings recover. - Foreign exchange reserves projected to rise gradually to about 2½ months of import coverage by end-2012. - Reform strategy features: - Institutionalize higher governance standards, rationalize the public sector, improve business environment, reduce and refocus the role of the state to facilitator and regulator. - Reinforce monitoring and control over parastatal bodies. - Coordination function for donors and stakeholders; support from AfDB, IBRD, EU, UNDP and others; collaboration with World Bank on business climate and labor law. ### Fiscal policy framework and 2010 budget - Medium-term fiscal targets: - Primary fiscal surpluses targeted at 7 percent of GDP in 2010, declining to about 4½ percent by 2012, assuming full external debt restructuring. - This profile intended to significantly reduce domestic public debt and release resources for private sector development. - 2010 Budget stance: - Easing of fiscal stance to a 7 percent primary surplus targeted for 2010. - First phase of medium-term tax reform to be implemented with the 2010 Budget. - Overall revenue expected to be lower due to significant one-off revenues and exchange rate appreciation totaling almost 4 percent of GDP. - Conservative revenue forecast assumed; excess revenues in 2010: portion to be saved, remainder for urgent infrastructure spending subject to IMF staff consultation at first EFF review. - Expenditure plans: - Recurrent expenditures will be reduced further as a percentage of GDP in the 2010 Budget. - Capital expenditure increased to 7.7 percent of GDP in 2010 (including the spending contingency), directed primarily at urgent electricity and water infrastructure rehabilitation. - Budget includes an expenditure contingency of about 1 percent of GDP earmarked for investment projects conditional on primary fiscal position remaining on track. ### Tax reform (key measures and timing) - Objectives: simple, fair, equitable system to promote growth, improve self-compliance, and level playing field for investors; broadly revenue neutral over the medium term. - Three pillars: - Broadening the business tax base: - Remove exemptions and sectoral preferences (tourism and fishing). - Eliminate thresholds for corporations and reduce threshold for noncorporate entities. - Address accelerated capital depreciation and introduce thin capitalization norms. - Business tax rates to be lowered in steps from 2010 through to 2012. - Revised Business Tax Act to be introduced with the 2010 Budget and come into effect on January 1, 2010. - Withholding-based personal income tax (PIT): - Introduced with the 2010 Budget, replacing the social security contribution from July 1, 2010. - Broadens income tax base to include domestic-sourced income, dividends, and some fringe benefits; includes rebate for low income earners. - Introduction of a single rate VAT: - From January 1, 2012, replacing the current multiple rate GST, to broaden indirect tax base and improve efficiency and external competitiveness. - 2010 Budget to expand GST base to a broader range of services and reduce cascading effects by levying GST once—on either imports or sales. - Transition and incentives: - Aim to have a level playing field on taxation by January 2012. - Granting of new tax incentives under the Tourism Incentive Act, Agriculture and Fisheries Incentive Act, and the Investment Promotion Act will be strictly limited. - Any new incentives, or extensions to existing ones, granted after October 1, 2009 will lapse on December 31, 2011. - Discussions with established operators under these incentive regimes to bring them into the new tax regime as soon as possible. - Aim to phase out concessions by January 2012, concurrent with VAT introduction. *Source: Seychelles: Memorandum of Economic, Financial and Structural Reform Policies for 2009–12 (MEFP) attached to letter requesting IMF reviews and an EFF, as presented in the provided document.* ### 23. We are also modernizing and reinforcing revenue administration in line with ### _cr1003 - 23. We are also modernizing and reinforcing revenue administration in line with ### Revenue administration — modernizing and reinforcing - Implement an integrated function based structure for domestic tax operations, with an audit group that is specifically focused on large taxpayers. — December 2009 - Create a dedicated project reform office. — December 2009 - Establish corporate-level staff affairs and internal audit units. — December 2009 - Introduce new Revenue Administration and Business Number Acts. — January 2010 Customs Administration - Develop a customs reform strategy and implementation plan. — March 2010 - Migrate to ASYCUDA World. — 2nd half of 2010 - Create two new headquarters-type units in the customs division for program development/planning and enforcement/investigations. — March 2010 - Introduce new Customs Management Act, including HS codes. — June 2010 - Develop trade administration expertise and develop a WCO strategy. — 2010 ### Tax policy — legislative and rate changes (selected actions and timing) Business Tax - Introduce new Business Tax Act — January 2010 - Eliminate retail shops from the International Trade Zone (ITZ) — July 2010 Personal Income Tax (Pay as you go withholding) - Introduce new PIT legislation to replace Social Security contribution. — July 2010 Indirect taxation - Extend full GST to all consultancy and corporate service provider service fees. — January 2010 - Reinstitute phased rise in GST on tourism to 15% with initial rise to 12% — November 2010 - Reduce cascading by eliminating GST on imports for all business that are liable for GST on their sales — January 2010 - Eliminate the retail mark-up to calculate the GST and raise rates to 15% — January 2010 Trade Taxes and Excises - Launch an excise regime to identically tax imported and domestically produced excisable commodities. — July 2010 - Partial conversion of trade taxes on petroleum, cigarettes, and alcohol to excise duties consistent with commitments under the COMESA. — January 2010 - Extend partial excises on petroleum to PUC and on domestic aviation fuel — January 2010 - Reduce by one-half rebates on fuel, except for registered artisanal fishermen. — January 2010 ### Public financial management and expenditure reform - Modernize and strengthen the treasury function; introduce a Treasury Single Account and a new chart of accounts aimed to be introduced with the 2011 Budget. - Implement expenditure rationalization measures recommended in the World Bank’s Public Expenditure Review (PER), starting in 2010. - 2009 government employment reduction: reduced by some 2,500 employees (about 15 per cent of the public sector workforce) through a voluntary departure and early retirement scheme. - Articulate strategic plans for each government sector, initially focusing on health and education, to inform efforts to improve efficiency of government service provision. - Outsourcing of 650 noncore support staff, removal of vacant posts from the government payroll and a targeted voluntary departure scheme for the security forces. - Introduce a new wage grid to consolidate allowances, establish a clearer link between remuneration and performance, realigning incentives and containing growth in the overall public sector wage bill. - Social safety net adjustments: - Merge Social Security Fund administration into the Social Welfare Agency by July 1, 2010 to secure administrative efficiencies and savings. - Fine-tune targeting of the social safety net with World Bank assistance and establish linkages to the minimum wage to preserve the incentive to work. - Expand training programs for the unemployed and those exiting the public service through the voluntary departure scheme. Actions and timing (selected) - Introduce a new public sector wage grid. — January 2010 - Fine-tune targeting of social safety net with World Bank assistance. — 2010 - Complete the merger of the administrations of Social Security Fund into the Social Welfare Agency. — July 2010 - Systematic disclosure of the fishing license fees, details of all fishing agreements and payments, industry related agreements signed by government and fish catch statistics. — March 2010 - Develop an economic and financial model, with World Bank assistance, of the fisheries to support more informed licensing and natural resource management policies — 2010 - Reform the Pension Fund funding formula with the assistance of the World Bank to link with wage levels and provide adequate and sustainable funding. — 2010 ### Budget preparation, presentation and medium-term budgeting framework - Move to a medium-term budgeting framework starting with the 2011 Budget, presenting fiscal and economic projections over a three-year period. - 2011 Budget process to commence in March 2010 with Cabinet’s discussion of a budget strategy document. - Ministries and other budget dependent entities to submit recurrent and capital expenditure proposals using a standard template requiring detailed costings over the three-year budget estimates period. - Increase Ministry of Finance capacity to scrutinize expenditure proposals through increased resourcing, formal expenditure review procedures and detailed reconciliation of budget estimates with quarterly and year-end outcomes. - Transfer the recently created financial analysis unit at the SRC to the Ministry of Finance in 2010 and increase its capacity. Budget actions and timing (selected) - Extend budget coverage for 2010 to full presentation of revenues, expenditure and financing, and include discussion of macroeconomic assumptions and objectives, fiscal targets and objectives, and an annual borrowing plan, supported by a medium-term debt strategy. — December 2009 - Include a full break down of the revenue and expenditures of budget dependent agencies as an annex to the 2010 Budget tables — December 2009 - Determine budget treatment of all budget-dependent agencies for 2011 budget — June 2010 - Build capacity in the Ministry of Finance to analyse expenditure proposals — 2010–11 - Transfer financial analysis unit from SRC to Ministry of Finance — June 2010 - Cabinet approval of 2011 Budget strategy. — June 2010 - The Ministry of Finance to circulate a standard template requiring all ministries and budget dependent bodies to submit an analysis of mid-year expenditure outcomes relative to budget and updated forecasts. — July 2010 - Introduce budget submission protocols and procedures for spending ministries and budget dependent agencies for the 2011 budget — July 2010 - Produce a consolidated fiscal table for general government, incorporating all budget dependent agencies. — June 2010 - Adopt a new chart of accounts for the 2011 budget — November 2010 - Revise the Financial Instructions and Accounting Manual — March 2011 - Introduce a new Public Finance Law — September 2011 ### Public enterprise reform - Adopted a public enterprise reform strategy and detailed work plan for the new Public Enterprise Monitoring Division (PEMD) to reinforce monitoring and control, strengthen governance, reduce dependence on public funding and minimize financial risks to the state. - Legal basis established by the Public Enterprise Monitoring and Control Act requiring strengthened reporting, uniform governance rules, and statements of corporate intent for each public enterprise. - PEMD finalizing strategic assessments for each public entity—drawing on external financial audits and management audits—to evaluate public ownership cases and make recommendations. - Tendered expert services for efficiency review and strategic assessment of the national airline and ancillary services. Public enterprise actions and timing (selected) - Cabinet approval of a public enterprise reform strategy and work plan for the PEMD — December 2009 - Begin establishing performance benchmarks for public enterprises — December 2009 - Engage IFC or launch a tender for an advisor for the privatization of Nouvobanq and Seychelles Savings Bank — December 2009 - Prepare a strategic assessment and reform action plan for each major public enterprise. — 2010–11 - Elaborate strategy to consolidate and/or privatize the Development Bank of Seychelles, Housing Finance Company, and the Concessional Credit Agency. — 2010 - Air Seychelles: - Implement management audit action plan — November 2009 - Launch tender for strategic options assessment and efficiency review — November 2009 - Adopt an action plan to implement the recommendations of the strategic assessment and efficiency review — June 2010 - Complete management audits of additional public entities (STB, SFA, NAC, STC, SCAA, SIBA, Nouvobanq, Seychelles Savings Bank (SSB), Development Bank of Seychelles (DBS)) — 2010 - Formalize all government loans to public entities — January 2010 ### Public debt restructuring and management strategy - Committed to good faith efforts to achieve a comprehensive public external debt restructuring consistent with medium-term payments capacity and the Fund’s lending into arrears policy; ensure information transparency, inter-creditor equity, and dialogue with creditor groups. - Principal objective: place public debt on a sustainable path through prudent fiscal and monetary policies and securing restructuring of public external debt consistent with Seychelles’ limited payments capacity. - Update debt management strategy annually or following major events; implement annual borrowing plan for 2010 as approved with the 2010 Budget. - IMF staff updated debt sustainability analysis (DSA) indicates medium-term fiscal targets and securing public external debt restructuring will place external debt on a path to sustainability, but bound tests show Seychelles will remain highly vulnerable to shocks and the importance of adhering to the fiscal path defined by the macroeconomic framework. ### Foreign trade regime - Intend to implement the COMESA common external tariff within the 5 year period from admission (2013), as per market access offer under the interim EPA signed in August 2009. - Reactivated WTO application and actively pursuing discussions. ### Monetary, exchange rate, and financial sector policies - Price stability remains the primary objective of monetary policy. - Recent success in containing inflation and significant appreciation of the rupee provided scope to loosen monetary policy in Q3 2009 and raise the reserve money target for December 2009. - Monitor credit and price developments closely; stand ready to tighten monetary policy should inflationary pressures re-emerge. - Continue to gradually reduce the reserve requirement in line with policy to abolish all direct monetary instruments. Monetary instruments and market development - Monetary policy based on reserve money targeting using indirect instruments; CBS added repurchase agreements (repos) and credit auction arrangements (CAA). - Beginning in 2010, introduce a Standing Deposit Facility (SDF) to complement the current overnight credit facility. - Once SDF in place, CBS will use repos to guide short-term interest rates; foreign exchange swaps and forwards will be put in place to diversify and deepen the foreign exchange market. - Develop money markets: 91-day T-bills established as the benchmark reference rate; primary market shallow and no secondary market. - Direct nonbank participation in Treasury bill auctions to continue until secondary market infrastructure is in place; thereafter introduce a primary dealer system restricting auction participation to banks. Coordination and liquidity management - Continue extensive use of liquidity forecasting and reserve money programming framework. - CBS and Ministry of Finance to work closely on the T-bill issuance profile and subsequent communication to market participants. - CBS to formalize arrangements for its use of government securities as a monetary policy instrument through a memorandum of understanding with the Ministry of Finance. *Source: _cr1003 - 23. We are also modernizing and reinforcing revenue administration in line with* ### 41. We remain committed to a floating exchange rate regime, which has served ### We remain committed to a floating exchange rate regime, which has served ### Exchange rate policy and interbank market - Maintain a floating exchange rate regime; the Central Bank of Seychelles (CBS) will intervene only to smooth out excessive volatility and ensure orderly market conditions. - Establishment of a foreign exchange interbank market to allocate foreign currency among banks more efficiently. - Current impediments: institutional factors and market conditions, notably a surplus of foreign exchange in the system, have held back efficient functioning of the interbank market. - Plan: CBS to work closely with banks and use IMF technical assistance to improve the efficiency of the interbank foreign exchange market. ### Financial sector supervision and development - CBS to strengthen supervision and regulation of the financial sector. - Supervision of state-owned nonbank financial institutions transferred to the CBS in late 2009 for more effective oversight. - Continue implementing an 18-month action plan for strengthening risk-based supervision during 2010. - Policy actions under consideration or planned: - Increase the minimum paid-up capital requirement for holders of a domestic banking license. - Promote the use of the net tangible capital ratio as an added measure of capital adequacy. - Seek IMF technical assistance to refine prudential regulations and build domestic supervisory capacity. - Consider introducing a deposit insurance scheme in 2011/12; study feasibility and optimal operational modalities. - Develop guidelines for a crisis preparedness program for the banking system, extendable to nonbank financial institutions and other financial intermediaries as warranted. - Promote transparency in the offshore financial sector via enhanced coordination among: Seychelles International Business Authority, CBS, and the Financial Intelligence Unit. - Continue cooperation with OECD and FATF; sought IMF technical assistance for a diagnostic assessment of the offshore sector. ### Payment systems modernization - CBS to modernize the national payment system; steps taken in 2009 included establishing requirements and standards for electronic funds transfers to replace the manual settlement system. - Planned implementations: - Introduce an Electronic Clearing House, a National Payment System. - Present a National Clearing and Settlement System Bill. - Promote the use of plastic cards. - Implement a real time gross settlement system in 2010/11. ### CBS governance, audits, and capitalization - Improve internal control and audit systems; an updated safeguards assessment is required for the EFF. CBS will implement recommendations of the updated assessment in 2010–11. - Introduce a core banking system in 2011; a complete needs analysis and requirements definition completed with IMF Monetary and Capital Markets Department and external auditors. - CBS is undercapitalized; original plan under the CBS Act: retain 50 percent of annual profits until capital reaches 10 percent of monetary liabilities (up from 4 percent in 2008). - Significant valuation losses, due to significant appreciation of the rupee, have eroded CBS’s operating profits. - Contingency: If external auditors determine that CBS capital is further impaired after closure of the 2009 annual accounts in early 2010, the government will promptly fully replenish the CBS’ capital base through a direct securitized injection as required by law. ### Action timetable (selected measures and timing) - Complete CBS procedures manual — December 2009 - Publish commercial bank supervision report — December 2009 - Gradually raise minimum capital requirements for domestic banks — 2010–11 - Progressively raise capitalization of CBS to full level of 10 percent of monetary liabilities — 2010–12 - Introduce an integrated IT-based accounting framework at CBS (core banking system) — September 2010 - Adopt IFRS for 2009 CBS accounts — March 2010 - Present a National Electronic Clearing and Settlement System Bill to the National Assembly — June 2010 - Implementation of the real time gross settlement system — 2010–11 - Introduce a business continuity plan at CBS — September 2010 - Adopt a crisis preparedness plan for financial system — December 2010 - Produce a financial survey encompassing both bank and nonbank financial institutions — September 2010 - Introduce a new methodology for calculating application and annual license fees for domestic and offshore banks — March 2010 ### National statistics - Commit to improving quality, periodicity, and timeliness of macroeconomic statistics, addressing deficiencies in GDP estimates and external sector statistics. - Ministry of Employment to reinforce efforts to produce high-frequency labor market data. - Strengthen the National Statistics Bureau (NSB) and implement recommendations of the management audit by end-2009; requested technical assistance from IMF Statistics Department (on fiscal accounts) and from the World Bank (to strengthen the NSB). - Aim to implement IMF's Special Data Dissemination Standard (SDDS) and the Balance of Payments and International Investment Position Manual 6. - Set up a central coordination unit at the NSB to act as a databank and hub for data distribution and to monitor timeliness of submissions. - Timing for statistical measures: - Adopt a strategic plan to upgrade national statistics — April 2010 - Implement Balance of Payments and International Investment Position Manual 6 — 2011 - Publish general government fiscal statistics — April 2010 - Implement SDDS — 2011 ### Program financing (2009–2012) - Remainder of 2009 external nonproject financing to be covered by: - IMF under the SBA (25 percent of quota; SDR 2.2 million) - Prospective EFF (10 percent of quota; SDR 0.88 million) - World Bank and African Development Bank development policy loans (US$19 million) - EU Vulnerability Flex (€8 million) - External debt relief (US$83 million, including on the US$55 million in arrears accumulated in the first three quarters) - For 2010: Financing gap of US$68 million expected to be closed by: - Debt relief under the second tranche of the Paris Club agreement - Restructuring of the remainder of public external debt, notably with commercial creditors and non-Paris Club creditors - Disbursements under the EFF - For 2011–12: Financing gaps to be closed by external debt relief and disbursements under the EFF. - Assumption: Follow-up operation by the World Bank at conclusion of the current Development Policy Loan. ### Program monitoring and performance criteria - EFF-supported program monitored by semi-annual program reviews with quarterly quantitative performance criteria (QPCs) and disbursements. - QPCs for end-2009 and for 2010 are specified (see program tables in the source). - Non-zero ceilings on contracting or guaranteeing external debt permit budgeted public project finance and multilateral program support exclusively. - Completion of first review under the EFF based on meeting QPCs at end-March 2010; first review to be completed by late June 2010. - Second program review based on end-September 2010 QPCs, scheduled to be completed by end-December 2010. - Quarterly financing assurance reviews to continue while public debt arrears remain outstanding. - Technical Memorandum of Understanding (TMU) defines quantitative performance criteria, indicative targets and adjusters under the program. - Policy commitment: Seychelles will avoid introducing new exchange restrictions, multiple currency practices, or bilateral payments agreements contrary to Article VIII of the IMF’s Articles of Agreement and will avoid imposing import restrictions for balance of payments reasons. Authorities stand ready to adopt additional measures, in consultation with IMF staff, to ensure program success. *Source: Seychelles authorities and IMF staff estimates and projections (excerpted from the cited IMF document).* ### 1. This technical memorandum of understanding presents the definitions of variables ### _cr1003 - 1. This technical memorandum of understanding presents the definitions of variables ### Overview - Purpose: Presents definitions of variables included in the quantitative performance criteria and indicative targets set out in the memorandum of economic and financial policies (MEFP), the key assumptions, and the reporting requirements of the Government and the Central Bank of Seychelles (CBS) needed to adequately monitor economic and financial developments. - Quantitative performance criteria and indicative targets, and the benchmarks for 2009-10 are listed in Tables 1 and 3 of the MEFP, respectively. ### I. QUANTITATIVE PERFORMANCE CRITERIA #### A. Net International Reserves of the CBS (Floor) - Definition: - Net international reserves (NIR) of the CBS are defined for program monitoring purposes as reserve assets of the CBS, minus reserve liabilities of the CBS (including liabilities to the IMF). - Reserve assets of the CBS: claims on nonresidents that are readily available (i.e., liquid and marketable assets, free of any pledges or encumberments and excluding project balances and blocked or escrow accounts, and bank reserves in foreign currency maintained for the purpose of meeting the reserve requirements), controlled by the CBS, and held for the purpose of intervening in foreign exchange markets. - Reserve assets include holdings of SDRs, holdings of foreign exchange, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities. - Reserve liabilities of the CBS: liabilities to nonresidents contracted by the CBS, any net off-balance sheet position of the CBS (futures, forwards, swaps, or options) with either residents or nonresidents, including those to the IMF. - Calculation method: - For program monitoring purposes, reserves assets and liabilities at each test date, must be converted into U.S. dollars using the end of period exchange rates assumed in the program. - Monitoring and reporting: - At each program test date (through end-December 2009), the quarterly net international reserves data submitted by the CBS to the IMF will be audited by the CBS external auditors in accordance with International Standards on Auditing, to ensure conformity with the program definition and calculation methods. - Subsequent to end-December 2009, quarterly audits will be conducted by the internal audit division. - Audit reports will be submitted to the CBS, with a copy to the IMF, no later than two months after each test date. - Adjusters: - The floor on the CBS’s NIR will be adjusted upward (downward) by the amount by which the external nonproject loans and cash grants exceeds (falls short of) the amounts assumed in the program (MEFP Table 1). - The floors will also be adjusted upwards (downwards) by the amount that external debt service payments fall short (exceed) the amounts assumed in the program. #### B. Reserve Money (Ceiling) - Definition: - Reserve money is equivalent to currency issued and deposits held by financial institutions at the central bank (bank reserves), including those denominated in foreign currencies. - Evaluation of performance of reserve money with respect to the program ceiling will be done at the program accounting exchange rate. - Monitoring and reporting: - For each program test date (through end-December 2009), the quarterly reserve money data submitted by the CBS to the IMF will be audited by the CBS’ external auditors in accordance with International Standards on Auditing, to ensure conformity with the program definition. - Subsequent to end-December 2009, quarterly audits will be conducted by the internal audit division. - Audit reports will be submitted to the CBS, with a copy to the IMF, no later than two months after each test date. #### C. Primary Balance of the Consolidated Government (Cumulative Floor) - Definition: - The consolidated government primary balance from above the line on a commitment basis is defined as total consolidated government and social security fund revenues (excluding privatization and long-term lease income receipts) less all noninterest (primary) expenditures of the government and social security fund. #### D. Public External Debt (Ceiling) - Coverage and exceptions: - The ceiling applies to the contracting or guaranteeing of new external liabilities by the public sector (including the central government, the CBS, and all public agencies and parastatals for operations that are not directly linked to commercial activities). - The ceiling does not apply to the use of Fund resources, operations related to external debt restructuring; normal import related credits; purchases of treasury securities by nonresidents; or borrowing by parastatals in the conduct of normal commercial operations. - The non zero ceilings on the contracting or guaranteeing of external debt are to allow for normal public project finance and program support from multilateral institutions exclusively. - Valuation and short-term subceiling: - Debt shall be valued in U.S. dollars at program exchange rates. - A zero subceiling on short-term external debt applies continuously to the contracting or guaranteeing of short-term external debt by the public sector, with an original maturity of up to and including one year. - Definition of “debt” for this criterion: - Follows point No. 9 of the Executive Board’s Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85)). - Debt: a current, non contingent liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future points in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. - Forms of debt included: - (i) loans: advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); - (ii) suppliers credits: contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; - (iii) leases: arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the leasor retains title to the property. The debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property; and - (iv) Arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. #### E. External Arrears of the Public Sector - Continuous performance criterion: - The nonaccumulation of arrears to external creditors will be a continuous performance criterion under the program. - Definition for program monitoring: - External payments arrears are defined as the amount of external debt service due and not paid within the contractually agreed period, including contractual and late interest. - Arrears resulting from the nonpayment of debt service for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded from this definition. #### F. Budget Expenditure Arrears - Continuous performance criterion: - The nonaccumulation of budget expenditure arrears will be a continuous performance criterion under the program. - Definition: - Budget expenditure arrears are defined as the sum of: - (1) any invoice that has been received by a spending agency from a supplier of goods, services, and capital goods delivered and verified, and for which payment has not been made within the contractually agreed period, or in the absence of a grace period, within 30 days; - (2) unpaid wages, pensions, or transfers, pending for longer than 30 days to domestic or foreign residents, irrespective of the currency denomination of the debt. ### II. DATA AND INFORMATION - (Section header included; no further text provided in the source extract.) *Source: Technical Memorandum of Understanding: Definitions, calculation methods, monitoring and reporting, and adjusters for program quantitative performance criteria and indicative targets (CBS and Government of Seychelles).* ### 13. The Seychelles authorities (government and CBS) will provide Fund staff with the ### The Seychelles authorities (government and CBS) will provide Fund staff with the following data and information ### Central Bank of Seychelles (CBS) reporting schedule and items - Weekly (within one week from the end of the period): - Reserve money. - Foreign exchange reserves position. - A summary table on the foreign exchange market transactions. - The results of the liquidity deposit auctions, primary treasury bill auctions, and secondary auctions. - Monthly (within four weeks from the end of the month): - The monetary survey in the standardized report form format. - The foreign exchange cash flow, actual and updated. - Financial soundness indicators. - Stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report. - Target for official foreign exchange reserves: build up gradually to about 3.8 months of imports by 2019. ### Ministry of Finance reporting schedule and items - 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. - The detailed revenues and expenditures of the central government and social security fund. - Monthly accounts of the public nonbank financial institutions. - Import and export data from the customs department. - Monthly public debt report. ### Consultation commitment - 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. ### Debt Sustainability Analysis (Appendix II) — overview and key findings - Main conclusion: - Public debt in Seychelles remains unsustainable without a restructuring of the stock of public external debt relief on terms comparable to that agreed with Paris Club creditors in April. - Together with restructuring of remaining public external debt on comparable terms and strong and sustained fiscal adjustment under the program, sustainability is within reach. However, Seychelles remains highly vulnerable to shocks even with such restructuring. - Macroeconomic assumptions (as presented in the staff report): - Real GDP expected to contract by 7.5 percent in 2009. - Growth expected to recover to 4 percent in 2010, stabilize around 5 percent through 2015, then ease to 4–4½ percent in the long term. - Inflation assumed to remain at around 3 percent going forward. - Tourism forecasts for 2009 revised to a 12 percent drop (from an originally projected 22 percent decline); tuna exports expected to decline by 8 percent in 2009; tuna exports expected to revive by 3 percent in 2010 and 2 percent in 2011. - Net FDI inflows expected to decline sharply in 2009 to 25 percent of GDP; recover in 2011 and stabilize at around 25 percent of GDP over the long run. - Official foreign exchange reserves targeted to build to about 3.8 months of imports by 2019. - Evolution of the debt stock in 2009: - Public external debt estimated at US$733 million or 95.7 percent of GDP at end-September 2009. - About 67 percent of the debt owed to commercial creditors; Paris Club countries account for about 16 percent of the total. - Seychelles has no arrears with multilateral creditors. - At end-September 2009 some 33 percent of the debt stock was in arrears (US$239.2 million). - In April 2009, Paris Club creditors granted exceptional treatment under the Evian approach; US$140 million of arrears were normalized. - Restructuring involves flow and stock rescheduling with the debt stock reduced by 45 percent in two tranches (July 2009 and mid-2010) and remaining amounts rescheduled over 18 years including a five-year grace. No repayments in 2009 other than a goodwill payment of US$1 million made in June; moratorium interest partially deferred through 2012. - Restructuring agreement with Malaysia on Paris Club terms signed in October, restructuring about $12 million in overdue claims. - Stock of public external debt expected to rise to US$755 million (99 percent of GDP) by end 2009 reflecting disbursements from multilateral agencies (some $24 million). ### Baseline scenario (incorporating restructuring agreements reached to date) - Assumptions and features: - Incorporates restructuring agreements with Paris Club creditors, South Africa, and Malaysia. - Assumes nonrestructured debt (including arrears) is serviced and financing gaps closed by a flow rescheduling on market terms at LIBOR plus 1300 basis points with a three-year maturity. - Key projections and risks: - External debt levels rise initially at end 2009 to about 151 percent of GDP as arrears are financed, before falling in 2010 as agreements are implemented. - By 2019 public external debt ratio rises steadily to about 404 percent of GDP. - Debt dynamics become quickly unsustainable in the absence of agreements with remaining creditors on the majority of the debt. - Bound tests indicate extreme sensitivity: even moderate shocks trigger dramatic explosive dynamics. - Selected quantitative items from baseline projections (preserving source figures): - Public external debt (Percent of GDP): 83.3 (2008), 151.3 (2009), 130.9 (2010), 403.6 (2019). - Gross external financing need (in percent of GDP): 65.2 (2008), 40.3 (2009), 57.4 (2010), 225.1 (2019). - Key macro assumptions: Nominal GDP (US dollars) series: 0.9 (2008), 0.8 (2009), 1.0 (2010), 1.6 (2018), 1.6 (2019); Real GDP growth: -0.9, -7.6, 4.0, 4.0, 4.0 (selected years as in source). - Public sector debt (Percent of GDP): 135.6 (2008), 193.0 (2009), 168.2 (2010), 418.1 (2019). ### Alternative scenario (assuming comparability of treatment for all creditors) - Scenario description: - Hypothetical scenario assuming public external debt at end-2008 is restructured on comparable cash flow terms with the Paris Club agreement for all creditors (illustrative only). - Key projections: - Public external debt would decline to 60 percent by end 2010 and gradually to about 44 percent of GDP in 2019. - Total public debt would decline to 97 percent in 2010 and ease further to just under 50 percent of GDP by 2019. - Despite improved debt ratios, standardized bound tests show Seychelles remains very vulnerable to a variety of shocks. - Selected quantitative items from alternative scenario (preserving source figures): - External debt (Percent of GDP): 83.3 (2008), 92.9 (2009), 60.2 (2010), 44.4 (2019). - Public sector debt (Percent of GDP): 135.6 (2008), 134.2 (2009), 97.6 (2010), 59.3 (2019). - Gross external financing need (in percent of GDP): 65.2 (2008), 24.0 (2009), 31.6 (2010), 15.8 (2019). - Key macro assumptions: Real GDP growth path identical to baseline assumptions used in projections (e.g., 4.0 percent in 2010, 5.0 percent in 2011–2015 in source tables). ### Stress tests and vulnerabilities - Bound and sensitivity tests show: - Under the baseline, single shocks (higher interest rates, lower growth, worse current account) produce large increases in external and public debt ratios; combined shocks produce the most severe outcomes. - Under the alternative (comparable treatment) scenario, debt ratios are much lower but remain sensitive to shocks in bound tests (including nominal interest rate shocks, real GDP growth shocks, current account shocks, and a one-time 15 percent additional real depreciation). - Illustration of key stress outcomes (figures preserved as presented): - Baseline external debt projection: reaches 404 (percent of GDP) by 2019. - Alternative scenario external debt projection: reaches 44 (percent of GDP) by 2019. - Bound test combined shock (baseline): 476 (percent of GDP) noted in source figure captions. *Source: IMF staff report content (Appendix II: Seychelles — Debt Sustainability Analysis and reporting commitments).* ### 1. Third review under the SBA ### 1. Third review under the SBA ### IMF Approvals and Program Arrangements - Executive Board approved a three-year Extended Fund Facility (EFF) arrangement: SDR 19.8 million (about US$31.1 million) to support Seychelles' program for 2010–12. - EFF approval made available a disbursement of SDR 0.88 million (about US$1.38 million). - Completion of the third and final review under the Stand-By Arrangement (SBA) enabled a disbursement of SDR 2.2 million (about US$3.46 million). - The SBA was approved on November 14, 2008 and was subsequently cancelled following the EFF approval. ### Objectives of the EFF-supported Program - Put public finances on a sustainable footing and durably raise growth. - Support the public debt restructuring process and reestablish external sustainability. - Accompany second generation structural reforms aimed at securing macroeconomic stability and raising growth performance. - Put in place a macroeconomic framework to guide policies through 2012. ### Key Program Targets (2010–12) - Average annual real GDP growth of 4-5 percent. - Single digit annual inflation. - Foreign exchange reserves equivalent to 2.5 months of import coverage by end-2012. - Maintain primary fiscal surpluses of about 4.5-7 percent of GDP in the 2010-12 period. ### Policy Priorities and Reforms - Improve public financial management and transparency and governance standards in the public enterprise sector. - Reinforce fiscal monitoring and control and improve expenditure efficiency while increasing public investment. - Rationalize the size of the public sector. - Implement a fundamental medium-term reform of the tax system (launched with the 2010 budget) to achieve a simple, fair, and equitable system that promotes growth and improves self-compliance. - Strengthen the financial sector: implement CBS action plan for strengthening supervision; increase minimum capital requirements; transfer non-bank supervision to the CBS; consolidate and divest publicly owned financial institutions to attract strategic investors. - Restructure public external debt consistent with medium-term payments capacity to secure immediate and sizable cash flow relief and sustained reduction of the debt service burden. - Supporting reforms: promote a better business climate, increase flexibility and efficiency in labor laws, pension reform, improved national statistics, and better sectoral policies for air access, tourism, fishing, and the environment. ### Recent Economic Developments and Outlook - Real GDP contracted by 7.5% in 2009 (projected), an improvement on the 10.7 percent contraction projected in June. - Economic growth expected to rise to 4 percent in 2010. - Inflation has been near zero since March 2009. - Exchange rate has appreciated from lows early in the year. - Official external reserves continue to recover from near depleted levels. - Primary surplus of 13.4 percent of GDP in the first nine months of 2009. - Expenditure tightly controlled; revenue held up well; social assistance outlays rose but remained within budget allocations. - Reform measures adopted: Public Enterprise Monitoring and Control Act (September 2009); introduction of a treasury single account; audits of the seven largest public enterprises; new Central Bank and Financial Institutions Acts. ### Debt Restructuring and External Creditor Engagement - Authorities launched a debt exchange offer on December 7, 2009 for holders of external bonds, notes, and certain commercial bank loans. - If concluded, about 70 percent of the end-2008 stock of external public debt will have been restructured. - Box: Commercial Bond Exchange Offer (covers about US$320 million face value) - Creditors offered discounted bond (50 percent of principal amount tendered) or par value bond. - Offer expires January 14, 2010, with final settlement in mid-February 2010. - Discount bond: final maturity 2026, grace period through 2015, interest fixed at 3 percent with step-ups in 2012, 2015, and 2018 to 5, 7, and 8 percent, respectively. - Par bond option: maturity extended through 2041, grace period through 2037, interest fixed at 2 percent; par bonds issued only if creditor tenders for this option result in at least US$50 million being issued. - Goodwill cash payment to tendering creditors in April 2010 totaling about US$18 million. - Program baseline assumes the exchange offer and related cash payments concluded by end-2009; automatic adjustors to program targets on net international reserves accommodate exact timing expected in February 2010. - Staff updated Debt Sustainability Analysis: public external and overall debt ratios over 2010–19 range between 0.5–3.5 percent of GDP lower than in staff report Appendix II; standardized bounds tests remain materially the same and indicate Seychelles remains very vulnerable to a variety of shocks. ### Technical Assistance and Capacity Building (selected items and timing as reported) - FAD technical assistance mission on tax administration — October 2009 (expected delivery December, 2009). - FAD technical assistance on tax and customs reform — October 2009 (expected delivery December, 2009). - MCM technical assistance mission on payments systems — May 2010 (expected delivery June 2010). - MCM technical assistance on reforming the monetary policy framework (long-term monetary advisor, automation of interbank market, reserve money management), strengthening bank supervision, and CBS governance — October 2010 (expected delivery December 2010). - Additional TA items listed as Ongoing or January 2010 for various components. ### Joint Work Program Inputs and Bank Collaboration (selected) - Medium-term macro-economic and fiscal framework to inform Public Expenditure Reviews — n.a.; Ongoing; Bank request to Fund. - Debt Sustainability Analysis — n.a.; December 2009; Fund request to Bank. - IFC assistance on privatization plans for Nouvobanq and Savings Bank — October 2009; expected delivery December 2009 / 2010 depending on item. - Joint mission to discuss a medium-term structural reform agenda focusing on: social safety net targeting; civil service reform; parastatal reform; and promoting private sector investment — October 2009; expected delivery December 2009. ### Economic and Financial Indicators (selected figures from Table) - Nominal GDP (millions of Seychelles rupees): 2007: 6,877; 2008: 8,756; 2009: 10,280; 2010 (Program): 10,402; 2011 (Projection): 11,057; 2012 (Projection): 11,891; 2012 (Projection later row): 12,872. - Real GDP (percentage change): 2007: 9.7; 2008: -0.9; 2009: -10.7; 2009 (alternate row): -7.6; 2010: 4.0; 2011: 5.0; 2012: 5.0. - CPI (annual average): 2007: 5.3; 2008: 37.0; 2009: 35.1; 2010 Program: 32.9; 2011 Projection: 2.3; 2012 Projection: 2.5; 2012 (later): 3.2. - Gross official reserves (end of year, millions of US dollars): 2007: 105; 2008: 110; 2009: 8; 2010: 15; 2011: 32; 2012: 225; 2012 (later): 230; later entry: 2. - In months of imports, c.i.f.: 2007: 0.1; 2008: 0.6; 2009: 1.3; 2010: 1.5; 2011: 1.9; 2012: 2.2; 2012 (later): 2.5. - Total public debt (percent of GDP): 2007: 129.8; 2008: 135.6; 2009: 149.7; 2010 Program: 140.1; 2011 Projection: 109.5. - Total external debt outstanding (millions of U.S. dollars): 2007: 710.2; 2008: 767.1; 2009: 732.6; 2010: 754.7; 2011: 708.1. - Total stock of arrears (millions of U.S. dollars): 2007: 160.4; 2008: 321.7; 2009: 195.1; 2010: 239.2. *Statement by the IMF Representative; Press Release No. 09/472; Annex: Selected Economic and Financial Indicators, as presented in the source document.* ### 19.8 million (equivalent to 225 percent of quota). The EFF would provide the ### 19.8 million (equivalent to 225 percent of quota). The EFF would provide the ### Macroeconomic framework and program role - The EFF would provide the macroeconomic framework to guide fiscal and financial policies over the next three years, bridging Presidential and Parliamentary elections, underpinning the debt reduction strategy and serving a coordinating function for donors and other stakeholders. - Authorities consider the EFF’s medium-term, structural focus appropriate to underpin the second phase of reform efforts. ### Fiscal Policy - Fiscal policy remained tight throughout 2009, out-performing program targets in each of the first three quarters. - A supplementary budget of around 2 percent of GDP in the fourth quarter financed urgent expenditure priorities while keeping within the annual 2009 primary surplus target of about 13½ percent of GDP (equivalent to a fiscal tightening in the order of 9½ percent of GDP in 2009). - Falling interest rates and the government’s fiscal performance will finance a reduction in domestic debt of 5½ percent of GDP in 2009. - Programmed for 2010: easing of the fiscal stance to a 7 percent primary surplus. - The reduction in the primary balance will mainly reflect a fall in revenues associated with one-off positive factors in 2009. - Recurrent spending will be prudently reduced further as a percentage of GDP in 2010. - Capital expenditure is to increase to 6.8 percent of GDP, directed primarily at urgent rehabilitation of electricity and water infrastructure. - Includes an expenditure contingency of about 1 percent of GDP ear-marked for investment projects that will proceed from the second quarter of the year following confirmation that the fiscal position remains on track. - Medium-term objectives: - Primary fiscal surpluses targeted at 4½-6 percent of GDP in 2011-12, levels consistent with achieving medium-term debt sustainability, assuming full external debt restructuring. ### Monetary Policy and the Exchange Rate - Price stability is the primary objective of monetary policy. - The Central Bank’s early success in containing inflation and significant appreciation of the rupee provided scope to loosen monetary policy in the second half of 2009. - Resulted in a significant reduction in T-bill rates, from over 30 percent at the start of the year to under 5 percent now. - Lending rates of commercial banks have been slow to respond and private sector credit growth remains subdued. - The CBS is monitoring credit and price developments closely and stands ready to tighten monetary policy should inflationary pressures re-emerge. - Exchange rate policy: - Seychelles is committed to a floating exchange rate regime. - CBS interventions in the foreign exchange market are limited to smoothing out excessive volatility and ensuring orderly market conditions. - Establishment of a foreign exchange market has provided a platform for a more efficient allocation of foreign currency among domestic banks; however, institutional factors coupled with market conditions (notably a surplus of foreign exchange in the system) have thus far held back the development of an inter-bank market. - The CBS continues to work closely with banks, and make use of technical assistance from the IMF, to improve the efficiency of the foreign exchange market. ### Financial Sector - The CBS continues to strengthen supervision and regulation of the financial sector. - A modern Financial Institutions Act was recently put in place, strengthening the framework for financial sector regulation and development. - Supervision of state-owned non-bank financial institutions was transferred to the CBS, facilitating more effective oversight. - Ongoing and planned measures: - Implementation of an 18-month action plan to strengthen risk-based supervision. - Plans to increase the minimum paid-up capital requirement for holders of a domestic banking license. - Promotion of the use of the net tangible capital ratio as an added measure of capital adequacy. - Consideration of introducing a deposit insurance scheme towards the end of the program period to enhance public trust in the banking system. - Development of guidelines for a crisis preparedness program. ### Structural Reform Agenda - Focus areas: fundamental reform of the tax system; rationalizing and reinforcing control over public expenditure; reducing the role of the state in the economy; financial sector development; modernizing labor and pension laws; improving the business environment. - Tax reform launched with the 2010 Budget: - Three pillars: - Business tax rates will be reduced and the business tax base will be broadened by eliminating exemptions and sectoral preferences (tourism and fishing) and reducing thresholds (January 2010). - A personal income tax (PIT) will be introduced, broadening the income tax base from withholding on wages to include other domestic-sourced income (July 2010). - A single rate VAT will replace the current GST, broadening the tax base and improving the efficiency of the indirect tax system (January 2012). - The tax reform is projected to be broadly revenue neutral over the medium-term and will be accompanied by efforts to modernize and reinforce revenue administration. - Expenditure rationalization and public sector reform: - Government employment reduced by some 2,500 employees (about 15 percent of the public sector workforce) over the last year through a voluntary departure and early retirement scheme. - Further streamlining: outsourcing of 650 non-core support staff; removal of vacant posts from the government payroll; targeted voluntary departure scheme for the security forces in 2010. - Strategic plans for the health and education sector are being articulated to improve the efficiency of government service provision. - Introduction of a Treasury Single Account has reinforced control over public expenditure. - Public sector wage policy reformed through implementation of a new wage grid to improve transparency and establish a clearer link between remuneration and performance. - Public enterprise reform: - Adoption of a public enterprise reform strategy to make the sector more efficient, transparent and accountable. - National Assembly approved the Public Enterprise Monitoring and Control Act, mandating strengthened reporting arrangements for public enterprises and setting uniform governance rules. - Ministry of Finance preparing strategic assessments for each public entity, drawing on external financial audits and management audits, to evaluate the case for public ownership. - Tenders launched for an expert assessment of options for the future of the national airline. - Requested IFC help on the privatization of the two publicly-owned banks. - Assistance sought from the FIRST initiative to assess strategic options for three publicly-owned non-deposit taking institutions with a view to consolidation and/or privatization. ### Public Debt Negotiations - Continued good faith discussions with creditors on a comprehensive public external debt restructuring consistent with medium-term payments capacity and the Fund’s lending into arrears policy. - Seychelles successfully negotiated a debt restructuring with the Paris Club in April 2009 and has since signed a bilateral rescheduling agreement with Malaysia on comparable terms. - A debt exchange offer to external commercial bondholders was launched in early December, compatible with Seychelles’ limited payments capacity and on terms comparable to those agreed with Paris Club creditors. - The offer is supported by a guarantee operation from the African Development Bank to raise attractiveness for commercial creditors. - Authorities hope to conclude negotiations with commercial creditors early in the new year. *Source: IMF staff report excerpt.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1003.pdf_