## _cr10204

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### Executive summary — recent developments and program performance
- Macroeconomic performance under the program has been good.
- Real GDP:
  - Grew by 0.7 percent in 2009.
  - Projected to recover to 4 percent in 2010.
- Inflation and exchange rate:
  - In May 2010 consumer prices were 3.6 percent below their level a year ago.
  - The rupee recovered strongly in 2009; since October 2009 the nominal effective exchange rate has roughly stabilized.
- Reserves:
  - Gross reserves increased to USD 183 million, or 1.9 months of prospective imports in May 2010.
- Program performance:
  - All quantitative performance criteria at end-March 2010 were met.
- Fiscal performance:
  - Primary surplus for Q1 2010 exceeded the program target by 0.3 percentage points of GDP.
  - Revenue projections for 2010 revised upward by SR 124 million (1.1 percent of GDP).
  - Primary balance target for 2010 raised by SR 62 million to 7.4 percent of GDP.
  - Domestic interest payments larger than anticipated due to upfront cost of converting 20-year government bonds into treasury bills.
- Monetary and banking sector:
  - Reserve money and net international reserves targets for March 2010 met with margins.
  - Interest rates on three-month government securities declined to 2.4 percent in May 2010.
  - Banks hold significant excess reserves despite increased central bank sterilization.
  - Banking system well capitalized and profitable; minimum capital requirement doubled from SR 10 million to SR 20 million with a three-year compliance period (decision dated December 29, 2009).
- Structural reforms and public enterprises:
  - Structural reform benchmarks implemented with some delays (e.g., Customs Management Act submission moved to end-September 2010).
  - Quasi-fiscal risks from public enterprises currently contained; actions include an optimal tariff policy study, independent operational audit of the public utility (PUC), strategic assessment of the national airline, and enhanced transparency/governance with parliamentary oversight.
- External debt restructuring:
  - Private debt exchange offer closed in February 2010; agreements cover around 85 percent of debt eligible for restructuring.
  - External debt stock declined from 92 percent of GDP in 2009 to 54 percent in March 2010.
- Fund staff recommendation:
  - Staff recommends completion of the first EFF arrangement program and financing assurances reviews based on strong performance through end-April 2010, compliance with performance criteria, consistency with the Fund’s Lending into Arrears policy, and satisfactory progress with the update safeguards assessment.

### Program outlook and policies for the rest of 2010
- Macroeconomic outlook:
  - Real GDP growth projected: 4 percent for 2010; 5 percent for 2011 and 2012.
  - End-year inflation expected to be contained to low single digits.
  - Current account deficit projected to widen to 39 percent of GDP in 2010.
  - Official external reserves projected to reach 2.2 months of imports at end-2010.
- Fiscal policy and 2010 budget update:
  - Revenue revisions and primary balance:
    - Total revenue and grants: 3,723 (Prog.) → 3,866 (Proj.), Diff. 143, 1.3% of GDP.
    - Total revenue: 3,390 → 3,514, Diff. 124, 1.1% of GDP.
    - Tax: 3,067 → 3,090, Diff. 23, 0.2% of GDP.
    - Non tax: 323 → 424, Diff. 101, 0.9% of GDP.
    - External grants: 333 → 352, Diff. 19, 0.2% of GDP.
    - Primary expenditure and net lending: 2,952 → 3,033, Diff. 81, 0.7% of GDP.
    - Primary current expenditure: 2,415 → 2,489, Diff. 74, 0.7% of GDP.
    - Capital expenditure (includes release of the contingency): 867 → 893, Diff. 26, 0.2% of GDP.
    - Net lending: -330 → -349, Diff. -19, -0.2% of GDP.
    - Primary balance: 771 → 833, Diff. 62, 0.6% of GDP.
    - Nominal GDP: 11,057 → 11,206.
  - Uses of additional funds:
    - Phased release of contingency to finance additional capital expenditure on infrastructure.
    - Additional appropriations to cover higher-than-anticipated new wage grid and scheme of service costs for health and education and termination fees for outsourced noncore workers.
    - Faster reimbursement of government loans by two public enterprises will generate savings.
  - Contingency releases tied to performance:
    - SR 35 million release contingent on primary balance through June 2010.
    - Remaining SR 25 million release contingent on primary balance through end-September 2010.
- Tax reforms and timetable:
  - Revised Business Tax legislation enacted January 2010: reduced rates and broadened base; maximum rate reduced by 7 percentage points to 33 percent (MEFP).
  - GST base expanded; cascading effects eliminated; concessional rates being phased out.
  - Withholding-based Personal Income Tax (PIT) introduction on track for July 1, 2010; PIT rates harmonized at 15 percent effective January 1, 2011 (MEFP).
  - Replacement of multiple-rate GST with VAT targeted for January 1, 2012; EU to finance technical assistance (€1 million set aside for 2010).
- Public financial management:
  - Treasury Single Account set up in late 2009.
  - New chart of accounts planned for 2011.
  - 2011 budget cycle to reinforce budget processes and prepare comprehensive documentation.
  - Comprehensive financial and management assessments of Social Security and Pension Funds with World Bank assistance.
- Monetary, exchange rate, and financial sector policy:
  - Reserve money targeting remains key anchor.
  - CBS will rely on repurchase agreements and deposit and credit auctions to guide short-term rates.
  - Banks’ excess reserves average 7 percent of rupee deposits over the last six months, and 3 percent of GDP.
  - T-bill auction calendar to be announced weekly for the next four weeks; volumes disclosed three days before each auction; CBS to improve liquidity forecasting.
  - Authorities intend to maintain a flexible exchange rate regime; will not intervene except to smooth excessive volatility.
  - Direct securitized injection of T-bills amounting to 1.7 percent of GDP in three equal quarterly installments will replenish CBS capital to statutory levels in 2010.
  - CBS reforms with Fund technical assistance: risk-based banking supervision; implement integrated (core) banking; strengthen reserve management capabilities with World Bank and BIS assistance; develop business continuity and crisis preparedness plans.
- Publicly owned financial institutions:
  - Authorities assessing timing/modalities of divestiture of Nouvobanq, Development Bank of Seychelles, and Housing Finance Corporation with World Bank Group assistance and IFC/FIRST involvement.
  - Comprehensive financial audits tendered in April 2010; institutions remain under CBS regulatory oversight.
- Public enterprise sector:
  - Comprehensive monitoring to address quasi-fiscal risks; measures include strategic assessment of Air Seychelles, a study of optimal tariff policy, independent operational audit of PUC, and submission of financial audits to the Public Accounts Committee.

### Program financing, external debt restructuring, and risks
- Program financing status:
  - The program for 2010 is financed.
  - Commercial debt exchange and recent bilateral agreements with commercial banks and one bilateral creditor significantly reduced program financing needs.
  - Residual financing gap for 2010 expected to be closed by restructuring the rest of public external debt.
  - Staff encourages completion of external debt restructuring with strict comparability of treatment among creditors.
- Debt restructuring outcomes:
  - Restructuring agreements covering approximately US$575 million, or around 85 percent of debt eligible for restructuring.
  - Aggregate cancellations approximately US$310 million in principal, accrued interest, and other charges.
  - Commercial debt exchange (February 2010): 50 percent debt cancellation; claims with face value of US$320 million were eligible; after exchange, 84 percent of Eurobond face value tendered and 100 percent of Amortizing Notes and two bank loans; transaction cancelled approximately US$225 million in principal, accrued interest, and other charges.
  - Remaining balances largely rescheduled over periods exceeding 17 years at low interest rates.
  - Agreements reached with Libya and Malaysia; government expects to sign remaining Paris Club bilateral agreements ahead of the second tranche of Paris Club debt cancellation on 1 July 2010.
- Risks:
  - Monetary transmission challenged by banks’ excess reserves, weakening interest rate pass-through and interbank market development.
  - Short-term uncertainties in T-bill auction scheduling created liquidity management difficulties for banks.
  - Quasi-fiscal risks from public enterprises require ongoing monitoring.
  - External risks: protracted slowdown in Europe, further depreciation of the euro, piracy in the Indian Ocean, political opposition around the 2011 presidential elections that could slow tax reforms and public enterprise restructuring.

### Staff recommendation and program decision
- Staff recommends completion of the first EFF arrangement program and of financing assurances reviews, based on:
  - strong performance through end-April 2010,
  - compliance with performance criteria,
  - consistency with the Fund’s Lending into Arrears policy,
  - satisfactory update safeguards assessment.
- Staff supports modification of the quantitative performance criterion on the fiscal primary balance for end-June, end-September, and end-December 2010.

### Selected macroeconomic and fiscal indicators (as presented)
- Nominal GDP (millions of Seychelles rupees): 8,710 10,402 10,726 11,057 11,206 12,091 13,059
- Real GDP (percent change): -1.3 -7.6 0.7 4.0 4.0 5.0 5.0
- CPI (annual average): 37.0 32.9 31.8 2.3 -2.4 2.5 3.1
- CPI (end-of-period): 63.3 1.9 -2.5 2.2 1.1 2.9 3.0
- GDP deflator average: 29.3 28.5 22.3 2.2 0.4 2.8 2.9
- External savings (percent of GDP): 51.8 22.6 35.0 32.7 39.5 35.5 30.2
- Gross national savings (percent of GDP): -11.7 6.8 -5.8 -0.9 6.0 11.9 13.3
- Government savings (percent of GDP): 7.9 2.8 7.8 2.7 5.6 9.2 9.3
- Gross investment (percent of GDP): 40.1 29.4 29.3 31.8 45.4 47.3 43.5
- Total public debt (percent of GDP): 136.7 140.1 128.2 109.5 82.4 76.7 65.4
  - Domestic (percent of GDP): 53.9 41.6 36.0 37.4 28.8 23.6 19.0
  - External (percent of GDP): 82.8 98.5 92.2 72.2 53.6 53.1 46.4
- Gross official reserves (months of imports, c.i.f.): 0.6 1.5 1.7 1.9 2.3 2.7 3.0
- Total stock of arrears (millions of U.S. dollars): 317 239 244 231 86 86 86

### MEFP highlights — policy commitments and structural reform agenda
- Objectives: consolidate macroeconomic stability, complete debt restructuring and achieve external sustainability, improve economic efficiency and durably raise growth through structural reforms.
- Tax reforms:
  - Business Tax Act (from January 1, 2010): broaden base; step-wise rate reductions; maximum rate reduced to 33 percent.
  - Withholding-based PIT (from July 1, 2010 on wages): replaces social security contributions; PIT rates harmonized at 15 percent from January 1, 2011.
  - VAT (from January 1, 2012): replace multiple-rate GST; 10 percent GST in tourism to be raised to 12 percent in November 2010, then aligned with general GST rate of 15 percent by November 2011.
  - EU-financed technical assistance for VAT preparation: €1 million set aside for 2010.
- Public financial management and budget process:
  - TSA introduced late 2009.
  - Move to medium-term budgeting framework starting with the 2011 Budget.
  - New chart of accounts for 2011; monitoring committee for audit recommendations.
  - Ministry of Finance to establish a dedicated macroeconomic and revenue forecasting branch (now fully operational).
- Utilities and infrastructure:
  - Preliminary investment need estimated at over SR 2 billion over the next three years.
  - Action: commission comprehensive tariff, cost, and service quality study with recommendations by July 2011; include social impact statement.
  - Capital expenditure contingency largely directed to urgent utilities investment in 2010.
- Social safety net:
  - Targeted income support, expanded training programs, collaboration with World Bank on targeting and link to minimum wage.
- Social Security Fund (SSF):
  - Ministry of Finance to conduct financial audit; strengthen budgetary oversight and rationalize cash management.
  - World Bank assisting on merging SSF and Social Welfare Agency and on asset/liability transfer; actuarial audit to be initiated.
- Monetary and financial sector reforms:
  - Reserve money targeting with indirect instruments (repos, auctions).
  - CBS to formalize memorandum of understanding with Ministry of Finance on use of government securities by end-June 2010.
  - Integrated (core) banking system scheduled for completion Q4 2010.
  - One-time CBS recapitalization in 2010 to boost capitalization to 10 percent of monetary liabilities by end-2010.
  - Implement risk-based supervision by mid-2011; Banking Supervision Application software fully operational beginning 2011.
  - Minimum capital for banks doubled with three-year transition.
  - Business continuity plan (BCP) to be completed by end-2010.
- Public enterprise reforms:
  - Public Enterprise Monitoring and Control Act approved (parliamentary approval on September 28, 2009).
  - PEMD work plan approved; strategic assessments and audits underway.
  - Privatization to be pursued when market conditions permit; Nouvobanq and others assessed for options with IFC/FIRST involvement.
- National statistics:
  - New National Statistics Act to be presented to Cabinet in June 2010.
  - Aim to implement SDDS and BPM6 by 2011.
- Program monitoring:
  - Quarterly quantitative performance criteria and semi-annual reviews.
  - Technical Memorandum of Understanding defines QPCs, indicative targets and adjusters.
  - Quarterly financing assurance reviews to continue while public debt arrears remain outstanding.

### Fund financing, disbursements and program calibration
- EFF: Dec 23, 2009–Dec 22, 2012; Amount Approved 19.80 (SDR million); Amount Drawn 3.08.
- Disbursement schedule (selected):
  - December 22, 2009: 0.88 (10 percent of quota).
  - March 15, 2010: 2.20 (25 percent of quota).
  - First review (June 15, 2010): 2.20 (25 percent of quota) — completion made available.
  - Total under the program: 19.8 (225 percent of quota).
- Projected obligations to the Fund (SDR Million, forthcoming):
  - 2010 Principal: 3.41; Charges/interest: 0.13.
  - 2011 Principal: 5.50; Charges/interest: 0.18.
  - 2012 Principal: 2.42; Charges/interest: 0.17.
  - (Full schedule as presented in the document.)

*Source: _cr10204 - Executive Summary*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Recent Developments and Performance Under the Program
- Macroeconomic performance under the program has been good.
- Real GDP:
  - Grew by 0.7 percent in 2009.
  - Projected to recover to 4 percent in 2010.
- Inflation and exchange rate:
  - Low inflation, a stable exchange rate, and a steady rise in reserves have boosted domestic confidence.
  - In May 2010 consumer prices were 3.6 percent below their level a year ago.
  - The rupee recovered strongly in 2009 from its overshooting following the 2008 float; since October 2009 the nominal effective exchange rate has roughly stabilized.
- Reserves:
  - Gross reserves increased to USD 183 million, or 1.9 months of prospective imports in May 2010.
- Program performance:
  - All quantitative performance criteria at end-March 2010 were met.
- Fiscal performance:
  - The primary surplus for the first quarter of 2010 exceeded the program target by 0.3 percentage points of GDP.
  - Revenue projections for 2010 were revised upwards by SR 124 million or 1.1 percent of GDP.
  - The primary balance target for 2010 was raised by SR 62 million to 7.4 percent of GDP.
  - Domestic interest payments were larger than anticipated due to the unforeseen upfront cost of converting 20-year government bonds into treasury bills.
- Monetary and banking sector:
  - Targets for reserve money and net international reserves for March 2010 were met with margins.
  - Interest rates on three-month government securities declined to 2.4 percent in May 2010.
  - Commercial banks hold significant excess reserves despite increased central bank sterilization.
  - The banking system is well capitalized and profitable; banks have three years to comply with the doubling of the minimum capital requirement from SR 10 million to SR 20 million (decision dated December 29, 2009).
- Structural reforms and public enterprises:
  - Structural reforms have progressed well; program benchmarks were implemented as scheduled with some delays (e.g., submission of the new Customs Management Act delayed to end-September 2010).
  - Quasi-fiscal risks from public enterprises are currently contained.
  - Actions taken: commissioned study of optimal tariff policy, independent operational audit of the public utility, engagement of an international consulting firm for strategic assessment of the national airline, and enhanced transparency/governance with parliamentary oversight of audits.
- External debt restructuring:
  - The private debt exchange offer was successfully closed in February 2010.
  - Agreements with external creditors cover around 85 percent of the debt eligible for restructuring.
  - External debt stock declined from 92 percent of GDP in 2009 to 54 percent in March 2010.
- Fund staff recommendation:
  - In light of strong performance through end-April 2010, compliance with performance criteria, consistency with the Fund’s Lending into Arrears policy, and satisfactory progress with the update safeguards assessment, staff recommends completion of the first EFF arrangement program and financing assurances reviews.

### II. Program for the Rest of 2010
- Macroeconomic outlook:
  - Projected real GDP growth rates: 4 percent for 2010 and 5 percent for 2011 and 2012.
  - End-year inflation expected to be contained to low single digits.
  - Current account deficit projected to widen to 39 percent of GDP in 2010.
  - Official external reserves projected to reach 2.2 months of imports at end-2010.
- Fiscal policy and public finances:
  - Revenue revisions and primary balance:
    - Revenue projections for 2010 revised upwards by SR 124 million (1.1 percent of GDP).
    - About half the additional revenue is to be saved; primary balance target increased by SR 62 million to 7.4 percent of GDP.
  - Uses of additional funds:
    - Phased release of contingency to finance additional capital expenditure on infrastructure.
    - Additional appropriations to cover higher-than-anticipated costs related to new wage grid and scheme of service for health and education and termination fees for outsourced noncore workers in budget-dependent agencies.
    - Faster reimbursement of government loans by two public enterprises will generate savings.
  - Fiscal table highlights (2010 revisions):
    - Total revenue and grants: 3,723 (Prog.) → 3,866 (Proj.), Diff. 143, 1.3% of GDP.
    - Total revenue: 3,390 → 3,514, Diff. 124, 1.1% of GDP.
    - Tax: 3,067 → 3,090, Diff. 23, 0.2% of GDP.
    - Non tax: 323 → 424, Diff. 101, 0.9% of GDP.
    - External grants: 333 → 352, Diff. 19, 0.2% of GDP.
    - Primary expenditure and net lending: 2,952 → 3,033, Diff. 81, 0.7% of GDP.
    - Primary current expenditure: 2,415 → 2,489, Diff. 74, 0.7% of GDP.
    - Capital expenditure (includes release of the contingency): 867 → 893, Diff. 26, 0.2% of GDP.
    - Net lending: -330 → -349, Diff. -19, -0.2% of GDP.
    - Primary balance: 771 → 833, Diff. 62, 0.6% of GDP.
    - Nominal GDP: 11,057 → 11,206.
- Tax reforms:
  - Revised business tax legislation enacted January 2010: reduced rates and broadened the tax base.
  - Goods and Services Tax (GST) base expanded; cascading effects eliminated; concessional rates are being phased out.
  - Withholding-based personal income tax introduction on track for July 2010.
  - Replacement of multiple-rate GST with VAT targeted for January 2012; external expert hired and EU to finance technical assistance during implementation.
- Public financial management improvements:
  - Treasury Single Account set up in late 2009 to facilitate expenditure monitoring.
  - Tightening of internal controls and new chart of accounts planned for 2011.
  - From the 2011 cycle, government reinforcing budget processes and preparing comprehensive budget documentation.
  - Comprehensive financial and management assessments of the Social Security and Pension Funds to be undertaken with World Bank assistance.
- Monetary, exchange rate, and financial sector policies:
  - Monetary policy framework:
    - Reserve money targeting remains key to anchoring inflation expectations.
    - CBS will rely on repurchase agreements and deposit and credit auctions to guide short-term rates.
  - Liquidity management:
    - Banks’ excess reserves average 7 percent of rupee deposits over the last six months, and 3 percent of GDP.
    - To reduce uncertainty, the T-bill auction calendar will be announced weekly for the next four weeks, with volumes disclosed three days before each auction.
    - CBS will improve liquidity forecasting.
  - Exchange rate policy:
    - Authorities intend to maintain a flexible exchange rate regime; will not intervene except to smooth excessive volatility.
  - Central bank capital and operations:
    - Direct securitized injection of T-bills amounting to 1.7 percent of GDP in three equal quarterly installments will replenish the CBS’ capital to statutory levels in 2010.
    - CBS reforms underway with Fund technical assistance: adopt risk-based banking supervision, implement integrated (core) banking, strengthen reserve management capabilities (with World Bank and Bank for International Settlements assistance), and develop business continuity and crisis preparedness plans.
  - Publicly-owned financial institutions:
    - Authorities assessing timing and modalities of divestiture of Nouvobanq, Development Bank of Seychelles, and Housing Finance Corporation with World Bank Group assistance and IFC/FIRST involvement.
    - Comprehensive financial audits tendered in April 2010; institutions remain under CBS regulatory oversight.
- Public enterprise sector reforms:
  - Comprehensive monitoring of the public enterprise sector to address quasi-fiscal risks.
  - Specific measures:
    - Strategic assessment of Air Seychelles by an international consulting firm.
    - Study of optimal tariff policy to be commissioned.
    - Independent operational audit of the Public Utilities Company (PUC).
    - Financial audits of several public enterprises submitted to the Public Accounts Committee of the National Assembly.

### III. Program Financing, Design, and Risks
- Program financing status:
  - The program is financed for 2010.
- Debt restructuring progress and implications:
  - Private debt exchange offer closed in February 2010.
  - Continued good faith negotiations with remaining non-Paris Club bilateral and other creditors.
  - Agreements reached cover around 85 percent of eligible debt; external debt stock reduced from 92 percent of GDP in 2009 to 54 percent of GDP in March 2010.
- Risks highlighted:
  - Monetary transmission remains challenged by banks’ excess reserves, which may weaken interest rate pass-through and interbank market development.
  - Short-term uncertainties in T-bill auction volume scheduling previously created liquidity management difficulties for banks.
  - Quasi-fiscal risks from public enterprises require ongoing monitoring despite containment to date.

*Source: _cr10204 - Executive Summary*

### 19.       The program for 2010 is financed. The commercial debt exchange and recent

### _cr10204 - 19.       The program for 2010 is financed. The commercial debt exchange and recent

### Program financing and external debt restructuring
- The program for 2010 is financed.
- The commercial debt exchange and recent bilateral agreements with commercial banks and one bilateral creditor have significantly reduced program financing needs.
- The residual financing gap for 2010 is expected to be closed by restructuring the rest of public external debt.
- Staff encourages the authorities to complete the discussions on the restructuring of its external debt while ensuring strict comparability of treatment among creditors.
- The strong track record of policy implementation has convinced most external creditors to bring back external debt to sustainable levels, including through successful debt exchange with private creditors.

### Fiscal targets, revenue, and budgetary policy
- Primary surplus targets (quantitative performance criteria) for June, September and December 2010 have been revised upwards to reflect updated revenue projections.
- The new targets lock in half the additional revenue.
- The authorities’ decision to save half the upward revision in government revenue projected in 2010 is commended; these savings will secure the targeted government debt reduction and contribute to strengthening the external position despite an adverse global environment.

### Central Bank of Seychelles (CBS) safeguards and central bank reforms
- The CBS was subject to an update safeguards assessment in the context of the new arrangement; the assessment, which is substantially complete, has found continued improvement in the safeguards framework of the central bank.
- The bank’s 2009 financial statements were prepared and audited in accordance with international standards and have been published, and governance oversight has been strengthened.
- Remaining vulnerabilities concern internal audit and controls, and the legal framework, which the authorities are committed to addressing.
- The recommendations in the draft assessment report do not require action in the context of the first review and will be closely monitored going forward.
- Seychelles has made excellent use of Fund technical assistance, particularly in the modernization of central bank operations.
- Progress in ensuring an independent monetary policy, strengthening supervision, and implementing the Fund’s safeguard assessment recommendations is commendable.
- Further coordination with the treasury on the issuance of T-bills is needed to improve liquidity management and provide a more predictable environment for banks, facilitating the transmission of monetary policy signals.

### Macroeconomic outcomes and outlook
- Seychelles has made a good start on its second stage of reforms under an EFF-supported program, despite a difficult international environment, showing strong resilience to the double crisis it confronted.
- Less than two years into a spectacular turnaround in its economic policies to address an external debt crisis and a global crisis, the country appears to have emerged from the recession earlier than initially expected.
- The continuation of prudent fiscal and monetary policies has granted credibility to the currency float introduced in November 2008; inflation has virtually disappeared; international reserves are being rebuilt, and key policy interest rates have been reduced.

### Risks to the program and outlook
- The main risks stem from the volatile external environment and the run-up to the 2011 presidential elections.
- A protracted slowdown in Europe —the main source market for tourism—and further depreciation of the euro would undermine export proceeds and economic activity.
- Piracy in the Indian Ocean could impinge upon tourism and fishing.
- Political opposition and vested interests could slow tax reforms and public enterprise restructuring.
- These risks appear manageable in view of the strong program ownership and track record of policy adjustment to external shocks under the previous arrangement, ongoing international anti-piracy efforts, and broad political support for the reforms.

### Tax, public finance management, and public enterprise reforms
- Progress on the ambitious program of tax and public finance management reforms is encouraging, but important steps still lie ahead.
- The imminent replacement of the social security contribution by the PIT is an opportunity to eliminate concessional rates, broaden the tax base, and reduce tax rates.
- The introduction of VAT in 2012 will further eliminate cascading effects of the existing sales tax and set the proper incentives for exporters.
- The modernization of customs is an important step toward establishing a business-friendly environment.
- Authorities are encouraged to further improve the budget preparation and execution cycle.
- Restructuring the public enterprise sector is an essential condition to achieving high medium-term growth, driven by the development of a competitive private sector.
- The recommendations of the ongoing financial and management audits for all key public enterprises should be implemented timely.
- Privatization should be actively pursued when market conditions permit, including for state-owned financial institutions.
- Staff welcomes the launch of preparatory work to put the public utilities company on a sound footing (including through proper tariff policies), to reform the social security institutions, and to establish an actuarially sound pension system.

*cr10204 - 19.       The program for 2010 is financed. The commercial debt exchange and recent*

### 30.      In light of strong performance through end-April 2010, compliance with the

### _cr10204 - 30.      In light of strong performance through end-April 2010, compliance with the

### Staff recommendation and program decision
- Staff recommends completion of the first EFF arrangement program and of financing assurances reviews, based on:
  - strong performance through end-April 2010,
  - compliance with the performance criteria,
  - consistency with the Fund’s Lending into Arrears policy,
  - satisfactory update safeguards assessment.
- Staff supports the modification of the quantitative performance criterion on the fiscal primary balance for end-June, end-September, and end-December 2010.

### National income and prices (selected figures)
- Nominal GDP (millions of Seychelles rupees): 8,710 10,402 10,726 11,057 11,206 12,091 13,059
- Real GDP (percent change): -1.3 -7.6 0.7 4.0 4.0 5.0 5.0
- CPI (annual average): 37.0 32.9 31.8 2.3 -2.4 2.5 3.1
- CPI (end-of-period): 63.3 1.9 -2.5 2.2 1.1 2.9 3.0
- GDP deflator average: 29.3 28.5 22.3 2.2 0.4 2.8 2.9

### Money and credit (selected figures)
- Net claims on private sector: 48.6 -12.1 -11.4 27.3 22.2 ......
- Broad money (12‑month growth): 27.2 -0.7 7.5 25.6 19.1 ......
- Reserve money (12‑month growth): 0.6 32.2 15.7 18.4 35.3 ......
- Money multiplier (broad money/reserve money): 5.3 4.0 4.9 4.2 4.3 ......

### Savings‑Investment balance and public savings
- External savings (percent of GDP): 51.8 22.6 35.0 32.7 39.5 35.5 30.2
- Gross national savings (percent of GDP): -11.7 6.8 -5.8 -0.9 6.0 11.9 13.3
- Government savings (percent of GDP): 7.9 2.8 7.8 2.7 5.6 9.2 9.3
- Gross investment (percent of GDP): 40.1 29.4 29.3 31.8 45.4 47.3 43.5
- Government investment (percent of GDP): 2.1 5.3 5.7 6.8 8.0 7.3 8.5

### Government budget (selected fiscal aggregates)
- Total revenue, excluding grants (percent of GDP): 32.9 35.6 35.4 30.7 31.4 31.2 31.0
- Expenditure and net lending (percent of GDP): 40.0 35.1 33.8 32.8 33.8 31.3 32.3
- Current expenditure (percent of GDP): 28.7 32.8 31.0 28.0 28.9 24.2 23.8
- Capital expenditure and net lending (percent of GDP): 11.2 2.3 2.7 4.9 4.9 7.1 8.5 (note: in 2010 includes contingency spending)
- Overall balance, including grants (percent of GDP): -3.4 2.8 5.0 0.9 0.7 2.1 0.8
- Primary balance (percent of GDP): 3.9 13.3 14.8 7.0 7.4 6.0 4.7
- Total public debt (percent of GDP): 136.7 140.1 128.2 109.5 82.4 76.7 65.4
  - Domestic (percent of GDP): 53.9 41.6 36.0 37.4 28.8 23.6 19.0
  - External (percent of GDP): 82.8 98.5 92.2 72.2 53.6 53.1 46.4
- Total stock of arrears (millions of U.S. dollars): 317 239 244 231 86 86 86

### External sector and reserves
- Current account balance including official transfers (percent of GDP): -51.8 -22.6 -35.0 -32.7 -39.5 -35.5 -30.2
- Total public external debt outstanding (millions of U.S. dollars): 759 755 729 708 492 516 551
- (Percent of GDP) for public external debt: 82.8 92.2 53.6 52.9 53.4 (as reported in table)
- Gross official reserves (end of year, millions of U.S. dollars): 511 531 692 022 242 743 24
- Gross official reserves (months of imports, c.i.f.): 0.6 1.5 1.7 1.9 2.3 2.7 3.0
- Seychelles rupees per US$1 (end of period): 16.6 10.6 11.3 ............
- Seychelles rupees per US$1 (period average): 9.5 14.1 13.6 ............

### Balance of Payments (selected flows, millions of U.S. dollars)
- Current account (levels shown quarterly and annually): -475 -277 -56 -21 -51 -85 -40 -116 -173 -156 -321 -362 -346 -312
  - (Percent of GDP): -52 -35 -6 -2 -5 -9 -4 -13 -18 -17 -33 -39 -35 -30
- Trade balance (levels): -412 -228 -52 -27 -31 -58 -27 -94 -152 -137 -263 -301 -278 -252
- Exports of goods (levels): 50 24 27 12 9 13 9 11 3 9 10 54 0 46 0 45 5 46 6 (table format; see full table for quarterly detail)
- Imports of goods (levels): -1,009 -748 -213 -190 -178 -177 -190 -222 -297 -237 -878 -826 -845 -867
  - of which: Oil imports: -364 -203 -88 -66 -78 -50 -83 -63 -84 -70 -333 -249 -252 -275
  - of which: FDI-related imports: -288 -176 -41 -24 -45 -38 -49 -57 -68 -57 -204 -177 -182 -147
- Exports of services (levels): 486 398 112 107 109 93 120 108 121 102 462 410 446 497
  - tourism earnings (levels): 270 205 61 65 56 47 64 56 94 72 502 152 502 290
- Imports of services (levels): -391 -305 -81 -84 -81 -81 -106 -95 -120 -102 -387 -346 -333 -349
- Income, net (levels): -120 -91 -18 -2 -30 -28 -25 -22 -33 -21 -106 -74 -72 -63
  - transfers of profits and dividends: -51 -47 -15 -8 -15 -7 -20 -13 -17 -9 -67 -37 -42 -34
  - interest payments due: -70 -48 -2 -3 -14 -21 -2 -7 -15 -7 -32 -41 -38 -38
- Current transfers, net (levels): 574 115 91 0 112 0 122 48 124 124 4
- Capital and financial account (levels): 366 121 587 0 30 455 71 171 44 153 29 138 537 4355
- Change in arrears (increase: +): 174 -74 0 -159 0 0 0 0 -159 0 0 0

### Consolidated government operations (selected levels, Seychelles rupees, cumulative from start of year)
- Total revenue and grants (millions of Seychelles rupees): 3,190 4,165 835 848 1,679 1,796 2,685 2,829 3,723 3,866 4,039 4,330
- Total revenue (millions): 2,868 3,793 776 822 1,559 1,694 2,444 2,576 3,390 3,514 3,778 4,048
- Tax revenue (millions): 2,456 3,318 712 747 1,425 1,513 2,222 2,265 3,067 3,090 3,376 3,622
- Goods and services tax (GST) (millions): 951 1,349 284 258 603 565 922 832 1,282 1,160 1,290 1,410
- Expenditure and net lending (millions): 3,483 3,625 670 767 1,571 1,849 2,449 2,826 3,628 3,788 3,781 4,220
- Current expenditure (millions): 2,503 3,329 655 690 1,494 1,679 2,191 2,502 3,091 3,244 2,922 3,113
- Interest payments due (millions): 629 1,046 100 217 333 513 430 671 676 755 465 501
- Capital expenditure (millions): 183 608 104 78 241 293 478 552 747 838 881 1,107
- Contingency (millions): 300 250 70 35 120 60 0 0
- Primary balance (millions): 336 1,586 265 298 441 460 667 675 771 833 723 611
- Overall balance, commitment basis (millions): -293 540 165 81 108 -532 374 957 825 811 0 110
- Change in arrears (millions): 319 6 -25 -8 -50 -38 -75 -69 -100 -100 0 0
- Overall balance, cash basis (after grants) (millions): -262 637 140 73 58 -92 162 -66 -5 -222 58 110

### Fiscal aggregates as percent of GDP (selected)
- Total revenue and grants (percent of GDP): 36.6 38.8 7.6 7.7 15.2 16.0 24.3 25.2 33.7 34.5 33.4 33.2
- Total revenue (percent of GDP): 32.9 35.4 7.0 7.4 14.1 15.1 22.1 23.0 30.7 31.4 31.2 31.0
- Primary balance (percent of GDP): 3.9 14.8 2.4 2.7 4.0 4.1 6.0 6.0 7.0 7.4 6.0 4.7
- Overall balance, commitment (percent of GDP): -3.4 5.0 1.5 0.7 1.0 -0.5 2.1 0.0 0.9 0.7 2.1 0.8
- Domestic debt (percent of revised GDP): 53.9 36.0 .................. 37.4 28.8 23.6 19.0

### Monetary survey and central bank accounts (selected levels, Seychelles rupees millions)
- Net foreign assets (monetary survey): 2,105 2,363 2,897 2,388 3,345 2,373 3,079 2,563 3,244 2,956 3,408
- Broad money (levels): 5,952 5,910 6,401 6,222 6,568 6,555 6,763 7,015 7,197 7,421 7,623
- Credit to the economy (levels): 2,867 2,688 2,540 2,811 2,695 2,954 2,813 3,135 2,936 3,421 3,105
- Reserve money (levels): 1,120 1,480 1,296 1,536 1,424 1,591 1,591 1,674 1,674 1,753 1,753
- Gross international reserves (US$ millions, memorandum): 511 531 691 582 101 561 192 1,742 072 02224

### Financial soundness indicators for the banking sector (percent, end of period)
- Regulatory capital to risk weighted assets: 20.4 21.0 18.2 18.2 18.4 17.6 17.9 19.4 13.6 17.8 22.0 21.7 21.4
- Regulatory tier 1 capital to risk weighted assets: 14.8 16.1 14.8 12.9 12.9 14.0 13.4 10.4 12.9 17.1 21.3 21.0 20.7
- Nonperforming loans to gross loans (percent): 3.7 2.9 2.5 2.3 2.0 2.1 2.0 2.0 2.3 4.3 4.2 3.8 4.1
- Provisions as percentage of nonperforming loans: 38.2 44.1 45.6 45.9 51.2 50.3 59.6 58.3 56.8 35.2 32.6 33.8 41.7
- Return on assets (annualized): 3.9 3.4 5.0 6.6 4.3 3.4 2.8 16.1 5.3 3.0 -0.2 3.2 3.4

### Fund disbursements and timing of reviews under the Proposed Three-Year EFF, 2009–12 (millions of SDR; 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)
- First review (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)
- Second review (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)
- Third review (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)
- Fourth review (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)
- Fifth review (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)
- Final availability (September 15, 2012): Compliance with end-June 2012 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 1.32
- Total under the program: 19.8 (225 percent of quota)

### Structural benchmarks, 2009–10 (status highlights)
- Introduce a treasury single account. Target date: End-September 2009. Rationale: To strengthen public finances, key to sustainability efforts. Status: Met. The TSA is leveraging progress on PFM.
- Adopt foreign reserves management investment guidelines. Target date: End-September 2009. Rationale: To ensure management of foreign reserves in line with best international practice. Status: Met. The CBS Board adopted guidelines on September 25, 2009.
- Adopt Public Enterprise Monitoring and Control act. Target date: End-September 2009. Rationale: To improve oversight over public enterprises and reduce quasi-fiscal risks. Status: Met. Parliamentary approval secured on September 28, 2009.
- Complete CBS procedures manual (MEFP, ¶46). Target date: End-December 2009. Rationale: To support improved efficiency and transparency in monetary policy. Status: Met. The manual was approved on December 29, 2009.
- CBS to publish commercial bank supervision report (MEFP, ¶46). Target date: End-December 2009. Rationale: To promote competition and transparency in the banking system. Status: Met. Published on the CBS website on December 29, 2009.
- Amend the Business Tax Act in line with the tax reform strategy (MEFP, ¶22). Target date: End-December 2009. Rationale: To broaden the tax base, modernize tax policy, and remove distortions. Status: Met.
- Cabinet approval of customs reform strategy and implementation plan (MEFP, ¶23). Target date: End-March 2010. Rationale: To transform customs into a modern and efficient entity. Status: Met. The approval was secured on March 17, 2010.
- Publish general government fiscal statistics (MEFP, ¶29). Target date: End-April 2010. Rationale: To enhance transparency and coverage of public finance. Status: Met. Fiscal statistics were published on April 23, 2010.
- Submit to National Assembly a new customs management act (MEFP, ¶23). Target date: End-June 2010. Rationale: To institutionalize best international practice and a better business climate. Status: Moved to end-September 2010, to address regional harmonization issues.
- Introduce Personal Income Tax (MEFP, ¶22). Target date: July 1, 2010. Rationale: To broaden the tax base and provide for more equitable taxation. (Status not reported in table.)
- Introduce budget submissions protocols and procedures (MEFP, ¶28). Target date: End-July 2010. Rationale: To strengthen budget preparation. (Status not reported in table.)
- Adopt a new chart of account for the 2011 budget (MEFP, ¶29). Target date: End-November 2010. Rationale: To ensure proper classification and increase efficiency of the budget as a policy tool. (Status not reported in table.)
- Submit to National Assembly a bill creating a national clearing house and settlement system (MEFP, ¶44). Target date: End-December 2010. Rationale: To introduce necessary financial infrastructure for improved efficiency and reduced risks. (Status not reported in table.)

*Source: Central Bank of Seychelles; Ministry of Finance; and IMF staff estimates and projections.*

### 1.      The attached Supplementary Memorandum of Economic and Financial Policies

### _cr10204 - 1.      The attached Supplementary Memorandum of Economic and Financial Policies

### I. Introduction
- Reviews macroeconomic and financial performance under the Extended Fund Facility (EFF) arrangement through end-April 2010.
- Updates the MEFP of December 3, 2009, detailing policy commitments through the remainder of 2010 and for the period 2010–2012 under the EFF arrangement.

### II. Macroeconomic and Financial Context
- Recent developments generally exceeded expectations; economic activity was flat in 2009 rather than contracting.
- Tourism supported the recovery in late 2009 and continued into Q1 2010, sustained through deep discounting that contributed to a significant decline in the terms of trade.
- Exchange rate and inflation:
  - Since December 2009 the nominal effective exchange rate stabilized; the rupee depreciated against the US dollar and appreciated against the Euro in similar proportions.
  - Year-on-year inflation rate fell to -5.1 percent in April.
- Interest rates and liquidity:
  - T-Bill rates declined to around 3 percent (91 day).
  - Credit growth remained modest, with banks’ lending adjusting only gradually.
- External reserves:
  - Gross international reserves reconstituted to $US190 million (2 months of imports) at end April 2010.
- Banking sector performance (first quarter 2010 data):
  - Capitalization: 21.5 percent (Basel 1 standard); 10.4 percent (net tangible capitalization).
  - Total assets increased by 1 percent from December 2009 to March 2010.
  - Total credit grew by 3 percent.
  - Nonperforming loans remained at 4 percent of total loans.
- Interest rate structure (quarter):
  - Average weighted interest rate on savings deposits: around 1.85 percent.
  - Prime lending rate reduced by 1.9 percentage points to 10.9 percent in March.
  - Average lending rate fell by 43 basis points.
  - Margin between average lending and savings rates: 11.2 percent.
- Outlook and risks:
  - Projected real GDP growth: 4 percent in 2010, driven by a projected 8 percent rise in tourism arrivals.
  - Risks include economic developments in Europe, volcanic disruption to air services, and escalation of piracy in the Indian Ocean affecting fishing and tourism.

### III. Program Implementation and 2010 Program Update
- Major program objectives:
  - Consolidate macroeconomic stability.
  - Complete debt restructuring and achieve external sustainability.
  - Improve economic efficiency and durably raise growth through a second generation of structural reforms.
- Structural reform pillars under EFF: public enterprise restructuring, tax reform, and strengthened public financial management.
- External debt and ratings:
  - External debt stock declined from 92 percent of GDP in 2009 to 54 percent of GDP in March 2010.
  - Fitch Ratings assigned a single-B rating with a positive outlook to external debt and considered the Seychelles default to be cured.
- Program review and financing:
  - Request completion of the first review under the EFF and release of the third tranche of SDR 2.2 million (25 percent of quota).
  - All quantitative performance criteria (PCs) at end-March 2009 were met; two structural benchmarks for end-March and end-April 2010 were observed.
  - Request modification of the quantitative performance criterion on the fiscal primary balance.
  - Completion of the second review will be based on meeting the quantitative PCs at end-September 2010 and is scheduled to be completed by end-December 2010.
  - Quarterly financing assurance reviews to continue as long as public debt arrears remain outstanding.

### IV. Fiscal Policy
- Overarching goal: place public finances on a sustainable path while creating fiscal space for public investment and a targeted social safety net.
- Primary fiscal surplus outcomes and targets:
  - Primary fiscal surplus in 2009: 14.9 percent of GDP (a fiscal contraction of some 11 percentage points of GDP compared to 2008).
  - Primary surplus for the first quarter: 2.7 percent of GDP, exceeding the EFF commencement target by 0.3 percentage points.
  - Originally targeted primary surpluses: 13.4 of GDP in 2009, 7 percent of GDP in 2010, declining to about 4½ percent by 2012.
- Drivers of fiscal outperformance: lower expenditures, higher revenue collection, stronger-than-anticipated economic activity in 2009, and recent depreciation of the rupee boosting GST on imports.

### V. 2010 Budget (Update)
- Revenue and spending projections:
  - Projected higher government revenue by the equivalent of 1 percent of GDP based on the first four months; half of this will be saved.
  - Additional current spending includes:
    - Termination benefits associated with outsourcing noncore functions to all budget-dependent agencies.
    - Higher-than-budgeted cost of the new wage grid and scheme of service for teachers and health professionals.
    - Urgent but unforeseen spending on goods and services.
  - Fiscal margin from accelerated repayment to the government of loans to public entities and partial release of capital expenditure contingency will fund additional infrastructure and some investment cost overruns.
- Contingency releases tied to primary balance performance:
  - SR 35 million will be released from the contingency provided the primary balance through June 2010 remains on track.
  - The remaining 25 million will be released provided the primary balance through end-September 2010 remains on track.

### VI. Tax Reform
- Objective: create a simple, fair, and equitable system to promote growth, improve self compliance, and level the playing field for investors.
- Three pillars:
  a. Business Tax Act (from January 1, 2010):
     - Broadened tax base; step-wise reduction in rates.
     - Maximum rate reduced by 7 percentage points, to 33 percent.
     - Tax-free threshold abolished for companies and reduced for sole traders and partnerships.
  b. Withholding-based Personal Income Tax (PIT) (from July 1, 2010 on wages):
     - Replaces social security contributions.
     - Expands labor income tax base to resident expatriates and eliminates sectoral concessions.
     - Government policy: broaden PIT to other domestic-sourced income (e.g., dividends and interest on savings) after assessment.
     - PIT rates harmonized at 15 percent for all categories of workers, effective January 1, 2011.
     - PIT legislation approved by Cabinet and to be introduced in the National Assembly in June 2010.
  c. Value Added Tax (VAT) (from January 1, 2012):
     - Replaces current multiple rate GST to broaden indirect tax base and improve efficiency and external competitiveness.
     - 2010 Budget steps: expand GST base to a broader range of services; reduce cascading effects by allowing GST on either imports or sales.
     - Concessional 10 percent GST rate in tourism to be raised to 12 percent in November 2010, then aligned with general GST rate of 15 percent by November 2011 in preparation for VAT.
     - EU-financed technical assistance for VAT preparation: €1 million set aside for 2010.
- Revenue neutrality and administration:
  - Reforms expected to be broadly revenue neutral over the medium-term.
  - Efforts to modernize and reinforce revenue administration; no provision of new tax incentives and progress toward phasing out existing ones.
  - SRC governance improvements: Cabinet approval of new organizational structure in December 2009; passing of the Revenue Administration Act and the Business Number Act.
  - Acceleration of SRC restructuring with an audit group for large taxpayers; new structure expected fully operational by July 2010.
  - Customs reform strategy and implementation plan approved by Cabinet in March; new Customs Management Act to be submitted to National Assembly by end-September 2010.

### VII. Public Financial Management and Expenditure Reform
- Key reforms and institutional strengthening:
  - Introduction of a Treasury Single Account (TSA) in late 2009 to monitor and control public expenditure and manage government cash balances.
  - New chart of accounts to be introduced in the 2011 Budget with IMF technical assistance.
  - Monitoring committee established to follow up recommendations from statutory and internal audits on internal controls and procedures.
- Budget process enhancements:
  - Move to a medium-term budgeting framework starting with the 2011 Budget (three-year horizon).
  - 2011 budget process to commence in June 2010 with Cabinet’s discussion of a budget strategy document.
  - Standard templates for ministries and budget-dependent entities to submit recurrent and capital expenditure proposals.
  - Ministry of Finance capacity to scrutinize expenditure proposals to be enhanced via increased resources, formal expenditure review procedures, and detailed reconciliation of budget estimates with outcomes.
  - Establishment of a dedicated branch within the Ministry of Finance for macroeconomic and revenue forecasting; branch now fully operational.
- Budget transparency and consolidation:
  - 2010 Budget document more detailed than previous years, including full presentation of revenues, expenditure and financing, an annual borrowing plan and a medium-term debt strategy.
  - 2011 Budget will present a more comprehensive analysis and incorporate the Pension Fund into the general government accounts.
  - Ongoing review of operations of all public sector agencies by type of economic activity to compile consolidated general government accounts consistent with international standards.
  - Anticipated commercialization of some public sector agencies as part of reducing the role of the state.

### VIII. Utilities and Infrastructure Investment
- Commitment to improve public infrastructure and address urgent utilities needs:
  - Preliminary government estimate of investment need: over SR 2 billion over the next three years.
  - PUC limited capacity to finance investment internally; existing tariff structure includes a substantial subsidy for household electricity consumption insufficient for cost recovery.
  - Government objective: improve service quality and require PUC to implement tariff policy consistent with full cost recovery and meeting investment needs over the medium-term.
  - Action: commission a comprehensive study of tariff structure, production costs and quality of service in the utilities sector with recommendations to government on optimal tariff policy in July 2011; study to include a social impact statement.
  - Most of the capital expenditure contingency directed to urgent utilities investment in 2010.
  - Develop a memorandum of understanding between government and Public Utilities Company (PUC) to strengthen collaboration on investment plans and tariff schedules; enhance financial oversight of PUC through the Public Enterprise Monitoring Division (PEMD) in the Ministry of Finance.

### IX. Social Safety Net
- Targeted income support:
  - Social safety net delivering targeted income support without undermining work incentives.
  - Number of income support recipients decreased over the last year and expected to decline further as the economy recovers.
  - Expanded training programs for the unemployed and those exiting the public service via the voluntary departure scheme to ensure unemployment spells are transitory.
  - Collaboration with the World Bank to fine-tune targeting of the social safety net, including establishing a relationship to the minimum wage that preserves work incentives over time.

*Source: Seychelles — Supplementary Memorandum of Economic, Financial and Structural Reform Policies for 2010–12 (MEFP) — attached to letter requesting first EFF review and third tranche release.*

### 21.      We will strengthen the Ministry of Finance’s budgetary oversight of the Social

### _cr10204 - 21.      We will strengthen the Ministry of Finance’s budgetary oversight of the Social

### Social Security Fund (SSF): oversight, audits, and asset management
- Strengthen the Ministry of Finance’s budgetary oversight of the Social Security Fund (SSF), improve management of its assets, and initiate a medium-term strategy to put social security institutions (including the Pension Fund) on an actuarially sound basis.
- Current situation:
  - The SSF has substantial financial assets, including sizeable cash balances with commercial banks.
  - The SSF’s financial operations will change when the current social security contribution is replaced with the personal income tax.
- Actions and commitments:
  - The Ministry of Finance will conduct a financial audit of the SSF.
  - The Ministry will strengthen budgetary oversight of the SSF’s financial operations and help the SSF to rationalize its cash management.
  - The World Bank is providing technical assistance on institutional arrangements for merging the Social Security Fund and the Social Welfare Agency, reviewing SSF functions and advising on the transfer of its assets and liabilities.
  - Initiate an actuarial audit of the SSF as part of the medium-term reform program.
  - Work on a comprehensive asset management strategy for the general government sector that aligns with the government’s debt management strategy and takes into account accruing liabilities.

### Fishing licenses, transparency, and resource management
- Ongoing efforts to improve transparency and institutional capacity in fishing license administration.
- Observed development:
  - Marked decline in the number of licensed fishing vessels operating in Seychelles waters since 2008 due to increased piracy in the Indian Ocean.
- Continued work:
  - Disclosure of fishing license agreements.
  - Construction of an economic and financial model to support informed fishing licensing and natural resource management policies (see ¶27 of previous MEFP).

### Monetary and exchange rate policies (A)
- Policy framework:
  - Monetary policy will continue to be based on reserve money targeting through the use of indirect instruments.
  - Continued use of repos to guide short-term interest rates.
  - Lengthening the maturity structure of the Deposit Auction Arrangement (DAA) to provide more flexibility in open market operations.
- Coordination and market development:
  - Enhanced coordination between monetary and fiscal policy for sound liquidity management and financial sector deepening.
  - Continued extensive use of the liquidity forecasting and reserve money programming framework.
  - CBS and the Ministry of Finance to work closely on the T-bill issuance profile to promote market functioning and yield curve development.
  - Communicate the calendar of T-bill issuance weekly for the following four week period and inform the market of the quantity of paper to be issued three days ahead of the auction.
  - 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 by end-June 2010.
- Exchange rate regime:
  - Commitment to a floating exchange rate regime.
  - CBS will intervene in the foreign exchange market only to smooth excessive volatility and ensure orderly market conditions.
  - CBS to work with banks and use IMF technical assistance to improve efficiency of the inter-bank foreign exchange market.
  - Development of a code of conduct to guide participants in the foreign exchange and money market.

### CBS governance and capitalization (B)
- Integrated banking system:
  - Implementation of an integrated (core) banking system on course for completion by the fourth quarter of 2010 to improve efficiency, modernize services, and minimize IT risks.
  - Implementation and license agreements signed; detailed project plan agreed; gap analysis underway with external auditors’ assistance.
- Capitalization and recapitalization:
  - CBS was undercapitalized; significant valuation losses in 2009 due to rupee appreciation affected distributable profits (R40.0 million).
  - With 2009 results, 50 percent of distributable profit equivalent to R20.0 million was retained to build up CBS capital which currently stands at 2.68 percent of monetary liabilities.
  - Government will implement a one-time recapitalization in 2010, boosting CBS capitalization to 10 percent of monetary liabilities by the end of the year.
- Reserve management and technical assistance:
  - Given internal capacity constraints, commercially-managed reserve mandates are considered premature.
  - Use World Bank’s Reserve Advisory and Management Program (RAMP) and Asset Management services of the Bank for International Settlements (BIS).
  - World Bank and BIS approached to conduct a peer review of CBS reserve management activities and provide capacity building, training, and investment support.
- Risk assessment and business continuity:
  - A reputable international audit firm is conducting a thorough risk assessment of the central bank to improve internal controls and provide training.
  - CBS plans to complete a business continuity plan (BCP) by end-2010; a contract will be tendered by mid-June to assist; the first BCP will cover priority services and later expand to all services.

### Financial sector reforms (C)
- Supervision and regulatory strengthening:
  - Implement a risk-based approach to supervision, in line with Fund technical assistance, expected fully operational by mid 2011.
  - Frequent onsite examinations conducted per manuals developed with IMF technical assistance.
  - Minimum capital for banks has been doubled, with a three year transition period for existing banks.
  - CBS to implement the Banking Supervision Application software to strengthen the supervisory process, especially offsite supervision, expected fully operational beginning 2011.
- Crisis preparedness and transparency:
  - Toronto Centre to provide training on crisis preparedness, tentatively in August, to draft main sections of the crisis preparedness plan.
  - Continue promoting transparency in the offshore financial sector through strengthened supervision in coordination with the Seychelles International Business Authority and the Financial Intelligence Unit.
  - A two phase review by the Global Forum on Transparency and Exchange of Information for Tax Purposes expected to be completed by September 2010.
- Insurance sector:
  - CBS submitted a project proposal to First Initiative for technical assistance to strengthen insurance supervision, including regulatory review and preparation of examination manuals.
- National payment system modernization:
  - Steps taken in 2009 and Q1 2010: requirements and standards document for electronic funds transfers; new cheque standard documents in July 2009; new clearing house rules in April 2010; introduction of the National Clearing and Settlement system bill in June 2010.
  - Facilitate introduction of the Electronic clearing house system.
  - CBS to continue promoting electronic funds transfer, plastic card use, and implement a real time gross settlement system in 2011/2012.

### External sector policies and debt restructuring (D)
- External debt normalization and restructuring:
  - Restructuring agreements covering approximately US$575 million, or around 85% of debt eligible for restructuring, have been reached.
  - In aggregate, these agreements have cancelled approximately US$310 million in principal, accrued interest, and other charges.
  - Remaining balances largely rescheduled over periods exceeding 17 years at low interest rates.
- Commercial debt exchange (February 2010):
  - Country’s commercial debt exchange offer closed successfully with a 50% debt cancellation.
  - Claims with a face value of US$320 million were eligible to participate, including the US$230 million Eurobond, the €55 million Amortizing Notes and two commercial bank loans held by three banks.
  - After the exchange offer period, 84% of the face value of the Eurobond had been tendered, along with 100% of the Amortizing Notes and the two bank loans.
  - After triggering the collective action clause in the Eurobond, Seychelles achieved 100% participation for the exchange.
  - The transaction cancelled approximately US$225 million in principal, accrued interest, and other charges.
- Ongoing creditor engagement:
  - Continue efforts to conclude restructuring agreements on comparable terms with remaining commercial bank and non-Paris Club official bilateral creditors.
  - Since EFF approval, bilateral restructuring agreements reached with four commercial banks covering eight facilities; three smallest loans were bought back at steep discounts, remainder rescheduled at par long-term at low interest rates.
  - Vast majority of these claims converted into new rupee-denominated loans or bonds.
  - Government has reached comprehensive restructuring agreements with Libya and Malaysia, and is close to agreements with two other non-Paris Club official bilateral creditors.
  - Government expects to sign remaining Paris Club bilateral agreements ahead of the second tranche of Paris Club debt cancellation on 1 July 2010.

### Trade policies
- Commitment to further liberalize foreign trade policies.
- On track to implement the COMESA common external tariff by 2013.
- 2010 budget introduced a common excise tax on petroleum, motor vehicles, alcohol and cigarettes that applies equally to imports and locally-produced items.
- A roadmap established and a chief negotiator appointed to prepare for WTO accession negotiations.

### Public enterprise reforms (E)
- Public enterprise reform strategy aims for greater efficiency, transparency, and accountability.
- Public Enterprise Monitoring Division (PEMD) work plan approved by Cabinet to reinforce monitoring and control of public enterprises, strengthen governance, reduce dependence on public funding and minimize financial risks to the state.
- Legal basis: Public Enterprise Monitoring and Control Act approved by the National Assembly in late 2009, mandating strengthened oversight, reporting arrangements, and uniform governance rules.
- Implementation steps:
  - Financial audits regularly examined by the Public Accounts Committee of the National Assembly.
  - PEMD finalized strategic assessments for largest public entities; entities submitted statements of intent and action plans.
  - Entities established procurement and investment, audit and finance, and remuneration committees in line with audit recommendations.
  - International aviation consultant commissioned to conduct strategic assessment of Air Seychelles and ancillary services, scheduled to report in August 2010.
- State ownership and privatization:
  - Government policy to privatize Nouvobanq in the context of medium-term strategy.
  - Regulatory oversight of the Development Bank of Seychelles (DBS) and the Housing Finance Company (HFC) shifted from the Ministry of Finance to the CBS.
  - First Initiative scheduled to assess strategic options for DBS and HFC in the second half of 2010.
  - Longer-term potential privatization of Seychelles Savings Bank and Nouvobanq noted; both institutions performing well financially and posing limited risk to government balance sheet.
  - IFC mission scheduled for August to explore options for Nouvobanq and further define timing of future sale.

### National statistics (F)
- Commitment to improve quality, periodicity, and timeliness of macroeconomic and financial statistics.
- New National Statistics Act (NSA) to be presented to Cabinet in June 2010 to reinforce NSB independence and strengthen mandate to collect data.
- Address deficiencies in key macroeconomic data, especially GDP estimates and external sector statistics.
- Strategic plan to be adopted by end-January 2011.
- Aim to implement the IMF's Special Data Dissemination Standard (SDDS) and the Balance of Payments and International Investment Position Manual 6 by 2011.
- Ministry of Employment to reinforce production of high-frequency labor market data.
- Requested technical assistance from IMF Statistics Department (fiscal and national accounts) and the World Bank (to strengthen NSB management and operations).

### Program monitoring (G)
- EFF-supported program monitoring:
  - Semi-annual program reviews, with quarterly quantitative performance criteria and disbursements.
  - The completion of the second review under the EFF will be based on meeting the QPCs at end-September 2010; the second program review is scheduled to be completed by end-December 2010.
  - Focus of review: 2011 Budget, progress in implementing tax reform, and strengthening public financial management.
  - Quarterly financing assurance reviews to continue as long as public debt arrears remain outstanding.
- Quantitative and structural framework:
  - A Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria, indicative targets and adjusters under the program.
  - 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 any import restrictions for balance of payments reasons.
  - Authorities stand ready to adopt additional measures, in consultation with IMF staff, as needed to ensure program success.
- Selected numeric program indicators and targets (as presented):
  - Net international reserves of the CBS, millions of U.S. dollars (floor) — sample program values shown include 130, 138, 153, 133, 137, 192, 128, 128, 142, 142, 168, 168.
  - Reserve money (ceiling) — sample program values shown include 1,480; 1,296; 1,537; 1,424; 1,592; 1,592; 1,676; 1,676; 1,753; 1,753.
  - Primary balance of the consolidated government (cumulative floor) — sample program values shown include 1,375; 1,586; 261; 298; 437; 455; 659; 668; 761; 823.
  - The contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling) — sample program values shown include 39; 30; 2; 0; 3; 3; 13; 13; 37; 37.
  - External non project financing (millions of U.S. dollars; cumulative) — sample memorandum items shown include -17.2; -9.3; 1.7; 5.6; 1.8; 1.8; 9.0; 9.0; 31.8; 31.8.
  - Program financing support — sample values include 19.6; 11.2; 0.0; 8.7; 0.0; 0.0; 0.0; 0.0; 19.6; 19.6.
  - Cash payments on foreign debt service — sample values include 48.1; 32.0; 1.8; 3.9; 5.8; 5.8; 6.9; 6.9; 9.2; 9.2.
  - External budget grants — sample values include 11.3; 11.5; 3.5; 0.8; 7.6; 7.6; 15.9; 15.9; 21.4; 21.4.
  - Program accounting exchange rates (end-of-quarter): SR/US$ values shown include 11.00; 11.25; 11.00; 11.00; 11.75; 11.00; 11.75; 11.00; 11.75. US$/Euro values shown include 1.48; 1.43; 1.48; 1.48; 1.27; 1.48; 1.27; 1.48; 1.27. US$/UK pound values shown include 1.65; 1.62; 1.65; 1.65; 1.48; 1.65; 1.48; 1.65; 1.48. US$/SDR values shown include 1.59; 1.57; 1.59; 1.59; 1.49; 1.59; 1.49; 1.59; 1.49.

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

### Introduction of Revenue Administration Act and Business Number Act. December 2009

### Introduction of Revenue Administration Act and Business Number Act. December 2009

### Major Reform Measures and Timelines: Fiscal Policy and Budget Management
- Introduction of Revenue Administration Act and Business Number Act. December 2009
- Introduction of a revised Business Tax Act. December 2009
- Reduction in cascading through levying GST on either imports or sales. December 2009
- Partial conversion of Trade Taxes to Excise Duties (petroleum, cigarettes and alcohol). January2010
- Extend partial excise on petroleum to PUC. January2010
- Introduction of a new public sector wage grid. January2010
- Introduction of a new Budget calendar. March 2010
- Publication of monthly fiscal report on the Ministry of Finance website. March 2010
- Cabinet approval of the Customs Reform Strategy and implementation plan. March 2010

### Fiscal Policy Measures in Progress (May 2010) — Selected Actions and Timing
- Cabinet approval of 2011 Budget Strategy. June 2010
- Introduction of a new Auditor General’s Act. June 2010
- Establish guidelines for government guarantees. June 2010
- Introduce standardized tender bidding document for all public procurement. June 2010
- Half-yearly budget review of expenditure by all government departments. July 2010
- Establish a comprehensive Government Assets Register. August 2010
- Adopt a new chart of accounts for the 2011 Budget. November 2010
- Determine budget treatment of all budget dependent agencies. December 2010
- Budget management training for departmental budget officers. Jan – Dec 2010
- Revise Financial Instructions and Accounting Manual. March 2011
- Introduction of a new Public Finance Law. September 2011
- Review the Accounting Standards of Financial Statement to follow International Public Sector Accounting Standards (IPSAS). September 2011
- Build capacity in the Ministry of Finance to analyze capital expenditure proposals. 2010-11

### Tax Reforms (timing)
- Set up an audit group to focus on large taxpayers. July 2010
- Submit a new Customs Management Act to National Assembly. September 2010
- Increase GST on tourism to 12%. November 2010

### Public Enterprise Reform (selected actions and timing)
- Secure services of aviation consultant for strategic assessment of Air Seychelles. November 2009
- Cabinet approval of a public enterprise reform strategy and work plan for PEMD. December 2009
- Commence establishment of performance benchmarks for public enterprises. December 2009
- Commission external financial audit of DBS and HFC. June 2010
- Engage FIRST Initiative on strategic options assessment of DBS and HFC. July 2010
- Engagement of IFC to advise on the government’s options on Nouvobanq. August 2010
- Implementation plan in response to external strategic assessment of Air Seychelles. October 2010
- Commission a comprehensive study of the tariff structure, production costs, and quality of service provision in the utilities sector. 2010
- Implement completed reform action plans for major public enterprises. 2010–11

### CBS Governance and Capitalization (key deliverables and timing)
- Completion of the CBS Procedures Manual. December 2009
- Publication of the Commercial Bank Supervision Report. December 2009
- Introduction of new methodology for calculating application and annual license fees for domestic and offshore banks. March 2010
- Adopt IFRS for 2009 CBS Accounts. March 2010
- Present Electronic Clearing and Settlement System Bill to National Assembly. June 2010
- Produce financial survey encompassing bank and nonbank financial institutions. December 2010
- Introduce integrated IT-based accounting framework at CBS (core banking system). December 2010
- Introduce a business continuity plan at CBS. December 2010
- Adopt a crisis preparedness plan for financial system. December 2010
- Progressively raise capitalization of CBS to 10 percent of monetary liabilities. December 2010
- Gradually raise minimum capital requirements for domestic banks. 2010–12
- Implementation of real time gross settlement system. 2011–12

### National Statistics (key actions and timing)
- Publication of the General Government Fiscal Statistics. April 2010
- Adopt a strategic plan to upgrade national statistics. September 2010
- Implement Balance of Payments and International Investment Position Manual 6. 2011
- Implement SDDS. 2011

### Technical Memorandum of Understanding — Quantitative Performance Criteria (definitions and adjustments)
- Net International Reserves (NIR) of the CBS (Floor)
  - Definition: reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF). Reserve assets include SDRs, 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; exclude project balances and blocked or escrow accounts, and bank reserves in foreign currency maintained for reserve requirements.
  - Reserve liabilities comprise 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: 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.
  - 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 (SMEFP 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.
- Reserve Money (Ceiling)
  - Definition: currency issued and deposits held by financial institutions at the central bank (bank reserves), including those denominated in foreign currencies. Evaluation at the program accounting exchange rate.
- Primary Balance of the Consolidated Government (Cumulative Floor)
  - Definition: 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, on a commitment basis, above the line.
- Public External Debt (Ceiling)
  - Coverage: contracting or guaranteeing of new external liabilities by the public sector (central government, CBS, and all public agencies and parastatals for operations not directly linked to commercial activities).
  - Exclusions: 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 normal commercial operations.
  - Short-term external debt: a zero sub-ceiling continuously applies to contracting or guaranteeing short-term external debt with original maturity up to and including one year.
  - External debt definition: foreign currency denominated debt; "debt" per Executive Board’s Guidelines (Decision No. 12274-(00/85)) and includes loans, suppliers credits, leases (present value of lease payments at inception), and arrears, penalties, and judicially awarded damages arising from failure to make payment.
- External Arrears of the Public Sector
  - Performance criterion: nonaccumulation of arrears to external creditors is continuous. External payments arrears defined as external debt service due and not paid within the contractually agreed period, including contractual and late interest. Arrears with an agreed clearance framework or rescheduling are excluded.
- Budget Expenditure Arrears
  - Performance criterion: nonaccumulation of budget expenditure arrears is continuous.
  - Definition: (1) any invoice received by a spending agency for verified goods, services, and capital goods not paid within contractually agreed period or, absent a grace period, within 30 days; (2) unpaid wages, pensions, or transfers pending longer than 30 days to domestic or foreign residents.

### Data and Reporting Requirements (timing and content)
- CBS will report 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.
- CBS will report monthly (within four weeks from the end of the month):
  - The monetary survey in the standardized report form format.
  - The foreign exchange cash flow, actual and updated.
  - Financial soundness indicators.
  - Stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report.
- The Ministry of Finance will report monthly (within two weeks from the end of the month):
  - Consolidated government operations on a commitment basis and cash basis in the IMF-supported program format.
  - 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.
- 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.

### IMF Relations and Financial Arrangements (as of April 30, 2010)
- Membership Status: Joined 6/30/77. Article VIII.
- Quota: 8.80 SDR Million (100.0 percent)
- Fund holdings of currency: 22.88
- Reserve Position in Fund: 0.00 (0.04 percent)
- SDR Department net cumulative allocation: 8.28 (100.0 percent); holdings: 7.80 (94.20 percent)
- Outstanding Purchases and Loans:
  - Stand-by Arrangement: 11.00
  - Extended Arrangement: 3.08 (35.00 percent)
- Financial Arrangements (SDR Million):
  - EFF: Dec 23, 2009–Dec. 22, 2012; Amount Approved 19.80; Amount Drawn 3.08
  - Stand-By: Nov.14, 2008–Dec. 22, 2009; Amount Approved 17.60; Amount Drawn 11.00
- Projected Obligations to the Fund (SDR Million) — Forthcoming:
  - 2010 Principal: 3.41; Charges/interest: 0.13; Total: 0.13
  - 2011 Principal: 5.50; Charges/interest: 0.18; Total: 0.18
  - 2012 Principal: 2.42; Charges/interest: 0.17; Total: 3.58
  - 2013 Charges/interest: 0.11; Total: 5.61
  - 2014 Charges/interest: 0.06; Total: 2.48
- Safeguards assessments: 2008 assessment found high risks; update for the Extended Fund Facility found most recommended measures implemented, including governance oversight by Board and management committees, application of IFRS, and audited financial statements; some vulnerabilities remain with remedial measures proposed.
- Exchange rate arrangement: liberalized in November 2008; floating exchange rate policy. On May 27, 2010, US$ 1 = SR 12.33 (mid rate).
- Article IV Consultations: Seychelles under a three year Extended Arrangement, with semi-annual reviews.

*Source: Introduction of Revenue Administration Act and Business Number Act. December 2009 — IMF technical documents and annexes (as provided).*

### 1. First Review under EFF

### 1. First Review under EFF

### Program overview and disbursement
- The Executive Board completed the first review of the Seychelles’ economic performance under the three-year Extended Fund Facility (EFF).
- Completion of the review makes available a disbursement of SDR 2.2 million (about US$3.3 million), bringing total disbursements under the arrangement to SDR 5.28 million (about US$7.8 million).
- The EFF for Seychelles became effective on December 23, 2009 in the amount of SDR 19.8 million (about US$29.3 million, or 225 percent of Seychelles’ quota in the Fund).
- The Board’s decision was taken on a lapse of time basis.

### Macroeconomic performance and projections
- Real gross domestic product (GDP) grew by 0.7 percent in 2009.
- Growth is projected to recover to 4 percent in 2010.
- Inflation has "virtually disappeared", supporting reductions in key policy interest rates.
- International reserves are being rebuilt.

### Fiscal and monetary policy implementation
- All quantitative performance criteria at end-March 2010 were met.
- Government revenue is exceeding expectations in 2010; part of the revenue overperformance will be saved to strengthen fiscal and external sustainability.
- The currency float introduced in November 2008 has gained credibility due to prudent policies.
- Progress has been made in strengthening public finance and central bank management.

### Structural reforms and tax policy
- Tax reforms undertaken include rationalization of the business tax and the introduction of a personal income tax.
- Next reform challenges identified:
  - Further broaden the tax base.
  - Reduce tax rates.
  - Modernize customs.
  - Introduce a value-added tax in 2012.
- Authorities are starting to address restructuring of several key public enterprises and financial institutions to reduce risks to the government budget and foster private sector-led growth.

### Debt restructuring and external relations
- Restructuring of Seychelles’ external debt is progressing well; strong policy implementation has convinced most external creditors to bring back external debt to sustainable levels, including through completion of a debt exchange with private creditors in February 2010.

### Relations with the African Development Bank Group (as of May 31, 2010)
- The African Development Bank Group commenced operations with the Republic of Seychelles in 1978.
- Cumulative approvals as of May 2010 amounted to UA 84.87 million.
- Approval shares: 73 percent from the African Development Bank (ADB), 14 percent from the Nigeria Trust Fund (NTF), and 13 percent from the African Development Fund (ADF).
- Sectoral distribution of operations: social sector 46 percent; financial sector 16 percent; agricultural sector 15 percent; transportation 13 percent; water supply and sanitation 10 percent; industrial sector 1 percent.
- Before sanctions, about 76.8 percent of total commitments on all approved loans had been disbursed; the balance of 23.2 percent was cancelled after sanctions were applied.
- The country was under sanctions with the African Development Bank Group since February 16, 2000 due to the arrears situation.
- The country cleared all arrears (amounting to US$46.75 million) in November 2006; sanctions were consequently lifted and reengagement discussions started.
- An Interim Strategy Note (ISN) was approved by the Board on April 22, 2009 covering 2009 and 2010, focusing on supporting the Government’s reform program to achieve sustainable growth.
- Lending program under the ISN:
  - A policy-based budget support loan amounting to €15 million, to be disbursed in two equal tranches of €7.5 million in 2009 and 2010; operation approved in July 2009.
  - First tranche disbursed in November 2009; second and final tranche expected to be disbursed in the third quarter of 2010.
- Grant and technical assistance operations:
  - African Water Facility grant €955,000 signed in May 2008 to finance preparation of the Water Development Plan; study expected to be completed by December 2010.
  - MIC Technical Assistance Fund grants:
    - Study amounting to UA 600,000 approved in December 2008 to support human resource development, training and capacity building and establishment of the Seychelles University Foundation.
    - Study amounting to US$500,000 approved in February 2009 to undertake feasibility on a Submarine Cable System to link Seychelles to East Africa; study completed.
    - Another study on Development of a Mariculture Master Plan amounting to UA 280,000 is being processed.
- The Bank approved a policy-based partial guarantee operation for US$10 million on December 12, 2009 in support of an exchange bond offered to external commercial creditors; the guarantee was instrumental in generating high participation in the debt exchange offer.

*Press Release No. 10/269, June 30, 2010; material from _cr10204 - 1. First Review under EFF*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10204.pdf_