## _cr1105

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### I. Staff appraisal and summary
- Two years of stabilization and international assistance moved Seychelles away from the 2008 balance of payments and debt crises.
- Key policy actions: foreign exchange market liberalization and floating of the rupee; exceptional fiscal adjustment; enhanced management of public finances and central bank.
- International assistance: restructuring of most external debt on favorable terms and fresh financing from official creditors.
- 2010 outcomes and near-term objectives:
  - Growth expected to reach at least 6 percent in 2010.
  - Fiscal adjustment projected to exceed original budget targets by at least 2 percentage points of GDP.
  - Monetary objectives: stabilization of the exchange rate, return to price stability, rebuilding of reserves.
- Medium-term outlook and risks:
  - Growth projected to gradually reach 5 percent over 2011-13.
  - Risks include a timid global recovery and large external vulnerabilities (including the threat of piracy).
  - Policy trade-off: less restrictive fiscal stance to rebuild infrastructure versus pursuing a more ambitious path toward debt sustainability.
- 2011 program targets and priorities:
  - Primary balance target: 5 percent of GDP.
  - VAT preparations: launch expected in mid-2012.
  - Monetary policy aim: maintain inflation below 3 percent.
  - Structural agenda: enhance public financial and central bank management; strengthen competition and risk management; reduce state role in financial system; address financial risks of Public Utility Company and Air Seychelles; initiate social security reform.
- Staff recommendation: completion of the second Extended Arrangement program and financing assurances reviews; move to a semiannual program review and disbursement schedule with new test dates end-December and end-June.

### II. Crisis, policy turnaround, and reforms (2008–09)
- Crisis indicators (2007–08):
  - Overall fiscal deficit: 9.8 percent of GDP by 2007.
  - Total public debt: 146 percent of GDP by 2007.
  - Gross official reserves: US$9.8 million, covering 0.1 months of imports.
  - External arrears: US$160 million and projected to double the following year.
  - Parallel market premium: 55 percent over the official pegged rate.
- Policy turnaround since November 2008:
  - Removal of exchange restrictions and float of the rupee; liberalization of interest rates; modern monetary framework focused on liquidity management; increased reserve requirements.
  - Post-float movements: nominal effective exchange rate (NEER) depreciated about 40 percent in late 2008; REER depreciation about 16 percent by end-September 2010.
  - Inflation: peaked at 63 percent in December 2008; returned to negative by end-2009; positive again in September 2010.
- Fiscal adjustment and PFM reforms:
  - Primary fiscal balance improved by more than 10 percentage points of GDP in 2009.
  - Measures: deep cuts in public sector employment, stability in nominal wages, removal of all indirect product subsidies, targeted social safety net.
  - Tax/expenditure management: removal of several tax exemptions; mid-year formal expenditure reviews; new procurement and transparent tendering processes; macroeconomic and revenue forecasting unit established.
- External adjustment and output:
  - Sharp drop in real GDP in 2008 but no extension beyond 2008.
  - Tourism contracted in 2009 in dollar terms; import compression drove external adjustment.
  - Repatriation of capital from residents' accounts abroad helped rebuild reserves.

### III. 2010 recovery: activity, prices, liquidity, fiscal outturn
- Activity and external flows:
  - Tourist arrivals: 10.8 percent higher year-to-date in September 2010.
  - Real GDP growth projected to exceed 6 percent in 2010.
  - Large increase in FDI-related imports projected to widen the external current account deficit in 2010.
- Exchange rate and inflation:
  - Rupee depreciated about 11 percent against the U.S. dollar in the first nine months of 2010; stabilized thereafter.
  - Inflation returned to positive territory in September 2010.
- Monetary conditions and banking liquidity:
  - Broad money increased by 26 percent year-on-year through September 2010.
  - Private credit increased by 8 percent (through September 2010).
  - Loan-to-deposit ratio: about 45 percent.
  - Ample liquidity pushed 3-month government security yields to 1.5 percent in September 2010 from about 10 percent a year earlier.
  - Note: credit increase excludes reclassification of about SR 200 million in July 2010 from foreign assets to loans.
- Fiscal developments in 2010:
  - Revenues expected to exceed original budget projections by more than 4 percentage points of GDP.
  - October supplementary budget: additional current expenditures 0.7 percent of GDP and capital expenditures 1 percent of GDP.
  - Personal income tax rate reduced from 18.75 percent to 15 percent effective October 1, three months ahead of schedule.
- Debt-restructuring progress:
  - Bilateral Paris Club agreement: 45 percent nominal debt write-off (Paris Club); commercial creditor debt exchange: 50 percent haircut.
  - External debt expected to decline to 45 percent of GDP at year-end 2010.

### IV. Policy discussions: outlook, risks, and recommended policy mix
- Growth and external projections:
  - Growth expected to slow to 4.3 percent in 2011 due to projected reduction of FDI inflows.
  - Medium-term growth could reach 5 percent.
  - Current account projected to narrow to 24 percent of GDP in 2011, declining gradually to 10 percent of GDP by 2015 on account of lower FDI-related imports and growth in tourism and tuna exports.
- External risks and vulnerabilities:
  - Continued piracy threat: may disrupt tourism, increase insurance premiums, and raise shipping costs.
  - Export concentration remains high (Herfindahl-Hirschmann index referenced).
  - Authorities coordinate regional counter-piracy efforts and pursue offshore oil exploration.
- Policy priorities and staff recommendations:
  - Use fiscal margins from recovery to sustain domestic demand and address infrastructure bottlenecks (energy, water, sewage, roads, telecommunications).
  - Rebuild policy buffers given external vulnerabilities and piracy threats.
  - Maintain low inflation and continue structural reforms to enhance public finances and financial intermediation.
  - Staff recommends rebuilding economic policy buffers faster and using part of fiscal room to rebuild neglected public infrastructure.
- Authorities’ medium-term plan:
  - Maintain programmed medium-term reduction in primary surpluses consistent with bringing public debt-to-GDP below 50 percent by 2018.
  - Start reversing decline in real government wages.
  - Rely on external project finance where consistent with external stability.

### V. Monetary policy, liquidity overhang, and instruments
- Liquidity overhang:
  - Fiscal overperformance in 2009-2010 allowed retirement of large domestic debt, leaving banks with unremunerated excess reserves of about 4 percent of GDP.
  - Risks if unaddressed: disorderly depreciation, resurgence of high inflation, potential capital outflows.
  - Inflation expected to face additional pressure in 2011 with resumption of growth and recovery in domestic demand.
- Interest rate pass-through:
  - Interest rate pass-through weak compared to peers; causes include persistent liquidity overhang and inadequate bank competition.
- Staff proposals to mop up excess liquidity:
  - Adopt a tighter monetary stance in 2011 and mop up excess reserves.
  - Issue treasury bills for monetary policy purposes; estimated annual fiscal cost of 0.1 percent of GDP in additional interest payments.
  - Prefer government issuance of T-bills to CBS issuing paper to avoid fragmenting a shallow money market and weakening CBS balance sheet.
  - Government could lengthen domestic debt maturity by issuing 2- to 3-year bonds to develop the yield curve.
  - Raise minimum reserve requirements to absorb part of structural excess liquidity.
  - Move large deposits (about three quarters of banks‘ excess reserves) of the Social Security Fund from commercial banks to the central bank.
- Authorities’ stance:
  - Share assessment of liquidity risks and agree with proposed issuance of T-bills for monetary purposes.
  - View liquidity overhang as temporary and partially reabsorbed with expected credit growth and lending rate reduction.
  - Committed to tightening monetary stance if required; reluctant to raise reserve requirements after lowering them in 2009.
  - A gradual reduction in liquidity built into the 2011 monetary program.

### VI. Financial sector: health, competition, and stress tests
- Banking sector health:
  - Banks adequately capitalized and profitable (Regulatory capital to risk-weighted assets: values shown across years).
  - Credit quality deteriorated in 2010 with increase in nonperforming loans; aggregate provisioning against classified assets unchanged.
  - Private sector credit at 25 percent of GDP remains low and growing slowly despite ample liquidity.
- Stress test highlights (end-August/September 2010 data):
  - Current Tier 1 capitalization (in percent): 7.3.
  - New net capitalization with new provisioning: 7.0; with collateral discounted to zero: 6.7; with 40% increase in NPLs treated as loss: 4.8.
  - Percentage of pass loans needing reclassification as loss to cause first failure: 22.0.
  - Liquidity stress: a 30 percent drop in deposits funded by reduction in liquid assets would reduce industry liquidity ratio to 28.3 percent; one bank would exhaust liquidity and two banks fall below 10 percent under test assumptions.
  - Exchange rate stress: depreciation from SR/US$12.1 to SR/US$16 would improve Tier 1 capitalization to 7.8 percent; appreciation to SR/US$8 would lower it to 6.5 percent; neither would cause bank failures in tested scenarios.
- Financial sector policy recommendations:
  - Promote competition by removing information asymmetries, enhancing public disclosure and financial literacy.
  - Reduce high loan prepayment and refinancing fees.
  - Establish credit rating systems and remove legal barriers to pledging/foreclosing collateral.
  - Reduce excessive role of state-owned financial institutions (HFC) in mortgage lending.
  - Monitor offshore financial sector closely to comply with AML/CFT standards given concentration in IBC registrations.
- Authorities’ planned actions:
  - Promote bank competition, develop credit markets and mortgage lending via transparency and information dissemination.
  - Improve disclosure practices and legal protection of borrowers and lenders.
  - Launch public awareness campaign with Seychelles Bankers‘ Association and Fair Trading Commission.
  - Consider privatization of state-owned banks; develop housing finance policy to be submitted by June 2011, including possible divestiture of HFC.
  - Tighten AML/CFT framework and improve transparency of offshore sector.

### VII. Debt restructuring, financing, and debt sustainability
- Debt restructuring outcomes:
  - Paris Club creditors: 45 percent nominal debt write-off applied in two tranches (July 2009 and July 2010).
  - Commercial creditor bond exchange: closed on US$320 million of private sector debt with 100 percent participation; face value of eligible debt about US$283 million exchanged for about US$169 million of discount bonds on February 11, 2010; about 50 percent of debt canceled.
  - Agreements in principle or signed with non-Paris Club official creditors (Algeria, Libya, Malaysia); South Africa signed umbrella Paris Club agreement but bilateral not yet signed.
  - By end-November 2010: restructuring agreements covering approximately US$631 million, or around 91 percent of eligible debt, with aggregate cancellations ~US$310 million.
- Post-restructuring debt profile:
  - External public debt estimated at US$460 million (about 49.2 percent of GDP) at end-November 2010.
  - About 53 percent owed to commercial creditors; Paris Club about 17 percent.
  - Arrears with non-Paris Club official and private creditors: about US$33 million (7.2 percent of total).
- Financing status and program financing:
  - Program for remainder of 2010 and for 2011 is financed.
  - Authorities plan to complete restructuring via bilateral agreements with remaining creditors; minor residual financing gaps expected to be closed by these restructurings.
  - Debt limits revised upward to accommodate expected financing for infrastructure; PUC to contract loans for electricity and water with government guarantee; government to provide US$8 million guarantee for submarine cable PPP.
  - Public external debt expected to rise to 49.2 percent of GDP in 2011, projected to decline to 34.2 percent of GDP in 2015 as growth effects materialize.
- Debt Sustainability Analysis (DSA) findings:
  - Restructuring and strong fiscal adjustment produce a long-run downward public debt path, but Seychelles remains vulnerable to shocks.
  - Baseline external debt (percent of GDP): 2008: 82.8; 2009: 92.6; 2010: 45.3; 2011: 49.2; 2012: 46.0; 2013: 40.3; 2014: 36.4; 2015: 33.7.
  - Public sector debt-to-GDP ratio (selected): 2008: 135.4; 2009: 128.6; 2010: 76.1; 2011: 71.7; 2012: 64.6; 2013: 57.2; 2014: 50.8; 2015: 46.4.
  - Sensitivity tests: a one-half standard deviation shock to the non-interest current account each year 2011-15 would raise external debt to 69 percent of GDP in 2015; a shock returning key macro variables to historical averages would raise external debt to 86 percent of GDP in 2015.
- DSA macro assumptions (selected):
  - Real GDP growth: stabilize at 5 percent over the medium term.
  - Inflation: around 3 percent over the medium term.
  - Net FDI flows: slow to about 11 percent of GDP in 2015.

### VIII. Program implementation, monitoring, and EFF schedule
- Program status and monitoring:
  - Program on track: all quantitative performance criteria through end-September 2010 met; two structural benchmarks delayed due to capacity constraints (new Customs Management Act submission delayed; new Chart of Accounts adoption delayed).
  - Staff proposes simplified monitoring: semiannual reviews with test dates end-December and end-June synchronized with budget cycle.
- Quantitative performance criteria and disbursement schedule (selected):
  - Board approval of EFF: December 22, 2009: 0.88 (millions of SDR) (10 percent of quota).
  - March 15, 2010: 2.20 (25 percent of quota).
  - June 15, 2010: 2.20 (25 percent of quota).
  - September 15, 2010: 2.20 (25 percent of quota).
  - December 15, 2010: 1.76 (20 percent of quota).
  - March 31, 2011: 3.52 (40 percent of quota).
  - September 30, 2011: 3.08 (35 percent of quota).
  - March 31, 2012: 2.64 (30 percent of quota).
  - Total under the schedule: 19.8 (millions of SDR) (225 percent of quota shown elsewhere).

### IX. VAT, tax administration, and public financial management (PFM)
- VAT introduction:
  - Aim: improve integration in the economy, broaden the base, eliminate cascading, increase efficiency and fairness.
  - Legislative timetable: present the bill to the National Assembly by end-December 2010; planned lead time of 18 months for education, recruitment, infrastructure, and SRC capacity building.
  - VAT regulations (rates, thresholds, exemptions) to be submitted to Cabinet by end-June 2011; VAT effective target date: July 1, 2012.
- Tax administration and PFM reforms:
  - Large Taxpayer Unit (LTU) creation complete.
  - Revised Budget Classification policy to be fully implemented by end-2010.
  - PEFA assessment planned in early 2011 with EU assistance.
  - Chart of Accounts plan of action to be submitted by end-April 2011; new Chart of Accounts targeted for 2012 Budget.
  - Review Accounting Standards to ensure IPSAS consistency by September 2011.
  - Public Finance Bill amendments to strengthen transparency, accountability and National Assembly oversight of capital expenditures targeted for end-September 2011.
- Pension and social security:
  - Contribution reform: fixed percentage of employee salary from January 1, 2011: 1.0 percent for 2011 and 1.5 percent from January 2012.
  - Social Security Act passed; Board of Trustees appointed; policy on investment objectives of assets to be formulated by September 2011.

### X. Public enterprise reform, utilities, and privatization
- Utilities and tariffs:
  - Tariff study for Public Utilities Company (PUC) planned for first half of 2011; study to be completed by end-July 2011.
  - PUC to reinstate indexation of electricity tariffs to fuel costs; aim for recommendations by end-2011 consistent with full cost recovery.
  - Contingency line of about 0.5 percent of GDP in capital budget to protect primary balance target in first half of 2011.
- Privatization and governance:
  - Privatization plan for non-strategic public enterprises to be developed by end-September 2011.
  - PEFA and PEMD activities to strengthen oversight and recommend board selection criteria in Q1 2011.
  - Housing Finance Corporation audit completed; action plan on house financing policy limiting public sector role to be submitted by June 2011.
  - Privatization strategy for Nouvobanq expected by end-June 2011.

### XI. Offshore finance, AML/CFT, and transparency
- Offshore sector profile:
  - OFC strategy (2007) aimed at diversification; several supporting laws enacted.
  - Annual turnover of OFC activity estimated about US$25 million.
  - Rapid growth in IBC registrations; Seychelles ranked second worldwide in IBC registrations.
  - BIS statistics include US$1.3 billion in Seychelles residents' bank deposits, probably reflecting IBC deposits.
  - IBCs not subject to taxation (except US$100 registration fee) and limited ownership disclosure requirements.
- Risks and policy direction:
  - Authorities revisited OFC strategy considering AML/CFT issues; emphasize high-quality legitimate business to avoid reputational risk.
  - Strengthened AML/CFT measures: participation in ESAAMLG peer review; creation/strengthening of FIU; police reorganization; national drugs enforcement agency; criminal justice review; capacity building for FIU, police, attorney general‘s office and offshore practitioners; engagement with Egmont Group.
- Supervision and transparency commitments:
  - Strengthen CBS supervision in coordination with Seychelles International Business Authority and FIU.
  - Commit to ensuring legal framework supports transparency and exchange of information per Global Forum review.

### XII. Selected macroeconomic and financial indicators (selected series and exact values)
- National income and prices (selected, 2007–13 as presented):
  - Nominal GDP (millions of Seychelles rupees): 6,828 8,710 10,402 10,726 11,206 11,303 12,000 12,881 13,920
  - Real GDP (percent change): 9.6 -1.3 -7.6 0.7 4.0 6.2 4.3 4.8 5.0
  - CPI (annual average): 5.3 37.0 32.9 31.9 -2.4 -2.2 2.5 3.0 2.9
  - CPI (end-of-period): 16.8 63.3 1.9 -2.5 1.1 1.2 3.0 2.6 3.0
- Government budget (percent of GDP; selected):
  - Total revenue, excluding grants: 32.0 32.9 35.6 35.4 31.4 35.5 36.5 36.5 35.7
  - Expenditure and net lending: 40.9 40.0 35.1 33.8 33.8 34.3 37.8 36.2 35.0
  - Primary balance: -2.0 3.9 13.3 14.8 7.4 9.4 5.0 4.7 4.0
  - Total public debt (percent of GDP): 129.8 136.7 140.1 128.6 82.4 76.1 71.7 64.3 57.0
- External sector (selected):
  - Current account balance including official transfers (percent of GDP): -20.8 -48.9 -22.6 -36.3 -39.5 -47.1 -27.3 -20.0 -17.3
  - Total public external debt outstanding (millions of U.S. dollars): 710 759 755 732 492 425 448 451 439
    - (in percent of GDP): 69.8 82.8 92.8 92.6 53.6 45.3 46.2 43.9 40.1
  - Gross official reserves (end of year, millions of U.S. dollars): 105 115 316 922 421 825 328 631 1,311
  - Reserves in months of imports, c.i.f.: 0.1 0.6 1.5 1.7 2.3 2.3 2.7 3.0 3.1
- Balance of payments (selected USD series and projections):
  - Current account (millions of U.S. dollars): -213 -448 -287 -362 -441 -265 -205 -190 -179 -125
    - (Percent of GDP): -21 -49 -36 -39 -47 -27 -20 -17 -15 -10
  - Exports of goods (millions): 392 502 427 460 412 488 516 545 575 609
    - Tuna exports (millions): 184 216 221 181 213 252 264 277 291 309
  - Imports of goods (millions): -734 -1,009 -748 -826 -848 -812 -779 -809 -834 -864
    - FDI-related imports (millions): -153 -288 -176 -177 -263 -165 -138 -129 -117 -105
  - Exports of services (millions): 481 486 398 410 413 437 454 483 514 548
    - Tourism earnings (millions): 284 270 205 215 219 231 239 256 275 295
- Monetary and banking (selected):
  - Broad money (level, SR millions examples): 5,952 6,401 6,222 6,568 6,763 6,537 7,197 6,864 7,623 7,199 7,406 7,643 7,857 8,000
  - Broad money growth (12–month percent change): 27.2 7.5 15.0 21.4 33.5 24.6 33.0 26.9 19.1 12.5 12.8 16.9 14.5 11.1
  - Credit to the economy (12–month percent change): 48.6 -11.4 -2.7 2.9 14.3 11.7 19.1 15.4 22.2 21.5 16.6 18.5 18.0 11.3
  - Regulatory capital to risk-weighted assets (percent, selected): 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 22.1 21.7
  - Nonperforming loans to gross loans (percent, selected): 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 6.9 6.4

*Italic: IMF staff report excerpt contained in the supplied content unit.*

### 1. Selected Economic and Financial Indicators, 2007-13 ............................................... 18

### 1. Selected Economic and Financial Indicators, 2007-13

### I. Staff appraisal and summary
- Two years of stabilization and international assistance moved Seychelles away from the 2008 balance of payments and debt crises.
- Key policy actions: foreign exchange market liberalization and floating of the rupee; exceptional fiscal adjustment; enhanced management of public finances and central bank.
- International assistance included restructuring of most external debt on favorable terms and fresh financing from official creditors.
- 2010 developments:
  - Growth is expected to reach at least 6 percent.
  - Fiscal adjustment is projected to exceed original budget targets by at least 2 percentage points of GDP.
  - Monetary objectives: stabilization of the exchange rate, return to price stability, rebuilding of reserves.
- Medium-term outlook and risks:
  - Growth projected to gradually reach 5 percent over 2011-13.
  - Risks: timid global recovery, large external vulnerabilities (including the threat of piracy).
  - Policy trade-off: less restrictive fiscal stance to rebuild infrastructure versus pursuing a more ambitious path toward debt sustainability.
- Monetary and financial sector issues:
  - Exchange rate broadly in line with fundamentals.
  - Risks from large banking excess liquidity due to quick reduction of domestic public debt and slow recovery of private sector credit.
  - Authorities agreed on the need to issue treasury bills for monetary operation purposes and to lengthen maturities.
  - Banking sector: appears healthy; priorities include enhanced competition, reduced state intervention, better disclosure requirements, and consumer protection.
- Program implementation:
  - All performance criteria through end-September 2010 were met; year-end targets within reach.
  - Two structural benchmarks delayed due to capacity bottlenecks.
  - New customs management act expected to be submitted to the National Assembly in early December, 2010.
- 2011 program targets:
  - Primary balance target: 5 percent of GDP.
  - VAT preparations: launch expected in mid-2012.
  - Monetary policy aim: maintain inflation below 3 percent.
- Structural reform agenda: enhance public financial and central bank management; strengthen competition and risk management; reduce role of state in financial system; address financial risks of state-owned companies (Public Utility Company and Air Seychelles); initiate social security reform.
- Staff recommendation: completion of the second Extended Arrangement program and financing assurances reviews; move to a new program review and disbursement schedule with new test dates end-December and end-June.

### II. Two years of economic stabilization and reforms
- Crisis context (2008):
  - Overall fiscal deficit reached 9.8 percent of GDP by 2007.
  - Total public debt stood at 146 percent of GDP by 2007 and was projected to increase by another 20 percent of GDP in the following two years.
  - Gross official reserves: US$9.8 million, covering 0.1 months of imports.
  - External arrears: US$160 million and projected to double the following year.
  - Parallel market premium over the official pegged rate reached 55 percent.
- Policy turnaround since November 2008:
  - Removal of exchange restrictions and float of the currency.
  - Liberalization of interest rates; modern monetary framework focused on liquidity management with market-based instruments; increased reserve requirements.
  - Since November 2008 float: exchange rate overshot with a 50 percent depreciation and significant volatility through Q1 2009.
  - Inflation peaked at 63 percent in December 2008; subsequent appreciation led to negative inflation from end-2009.
- Fiscal adjustment:
  - Heavily frontloaded tightening led to an improvement of more than 10 percentage points of GDP in the primary fiscal balance in 2009.
  - Measures: deep cuts in public sector employment, stability in nominal wages, removal of all indirect product subsidies.
  - Targeted, modernized social safety net implemented.
- Tax and expenditure management reforms:
  - Removal of several tax exemptions that had compensated foreign investors for the overvalued currency.
  - Ministry of Finance strengthened budget processes: mid-year formal expenditure reviews, adoption of new procurement and transparent tendering processes, establishment of a macroeconomic and revenue forecasting unit.
- External adjustment and output:
  - Drop in real GDP was sharp but did not extend beyond 2008.
  - Tourism declined in 2009 in dollar terms due to global crisis, exchange rate movements, and price discounting.
  - Most external adjustment from sharp decline in imports reflecting drop in real incomes.
  - Repatriation of capital from residents' accounts abroad helped rebuild official reserves.
- Export concentration:
  - Seychelles exports remain undiversified compared to region and small island economies (Herfindahl-Hirschmann index normalized 0–1; chart referenced).
- Debt restructuring:
  - Paris Club creditors: 45 percent nominal debt write-off.
  - Commercial creditor debt exchange: 50 percent haircut (successful despite fragmented private creditor base and Lehman Brothers bankruptcy).

### III. A strengthening recovery in 2010
- Activity rebound driven by tourism, construction, telecommunications, and an exceptionally large increase in FDI.
  - Tourist arrivals: 10.8 percent higher year-to-date in September 2010.
  - Real GDP growth projected to exceed 6 percent in 2010.
  - Large increase in FDI-related imports projected to substantially widen the external current account deficit in 2010.
- Exchange rate and inflation:
  - Real effective exchange rate depreciation corrected the 2008 overvaluation (Appendix I).
  - Rupee depreciated by about 11 percent against the U.S. dollar in the first nine months of the year; stabilized thereafter.
  - Inflation returned to positive territory in September 2010.
- Monetary conditions and banking liquidity:
  - Through September 2010, broad money increased by 26 percent year-on-year.
  - Private credit increased by only 8 percent.
  - Loan-to-deposit ratio remained at about 45 percent.
  - Ample liquidity pushed interest rates on 3-month government securities to 1.5 percent in September 2010 from about 10 percent a year ago.
  - Note: credit increase excludes reclassification of about SR 200 million in July 2010 from foreign assets to loans.
- Fiscal developments in 2010:
  - Revenues expected to exceed original budget projections by more than 4 percentage points of GDP.
  - October supplementary budget covered additional current expenditures (0.7 percent of GDP) and capital expenditures (1 percent of GDP).
  - Personal income tax rate reduced from 18.75 percent to 15 percent effective October 1, three months ahead of schedule.
- Debt-restructuring progress:
  - Bilateral debt agreements signed with most Paris Club creditors, several non-Paris Club creditors, and all commercial banks.
  - External debt expected to decline to 45 percent of GDP at year-end, reflecting Paris Club second-tranche stock reduction in July and restructuring with commercial banks.

### IV. Policy discussions: outlook and risks
- Short- and medium-term projections:
  - Growth expected to slow to 4.3 percent in 2011 due to projected reduction of FDI inflows.
  - Medium-term growth could reach 5 percent.
- External and fiscal outlook:
  - Current account projected to narrow to 24 percent of GDP in 2011, declining gradually to 10 percent of GDP by 2015 on account of lower FDI-related imports and growth in tourism and tuna exports.
- Policy priorities highlighted:
  - Use of fiscal margins emerging from recovery to sustain domestic demand and address infrastructure bottlenecks.
  - Rebuilding policy buffers given external vulnerabilities and piracy threats.
  - Maintain low inflation.
  - Continue structural reforms to enhance public finances, financial intermediation, and reduce state-related financial risks.

*Source: IMF staff report excerpt contained in the supplied content unit.*

### 25.      Significant risks continue to stem from the volatility of the external environment. In

### _cr1105 - 25.      Significant risks continue to stem from the volatility of the external environment. In

### External risks and vulnerabilities
- Continued threat of piracy may:
  - disrupt tourism activity,
  - push up insurance premiums,
  - increase shipping costs on external trade.
- Small island vulnerabilities drive authorities to prioritize export diversification and tourism market expansion (notably toward Asia).
- Authorities are coordinating international counter-piracy efforts in the region of the Indian Ocean.
- Authorities view the offshore financial sector as a marginal activity but are actively pursuing offshore oil exploration in Seychelles‘ exclusive economic zone.
- Change of ownership of the tuna canning factory expected to develop exports and draw additional benefits.

### Authorities’ medium-term growth objectives and policies
- Authorities concur with staff that a medium-term growth of 4 to 5 percent is within reach.
- Priority policies to achieve this goal:
  - pursuit of sound macroeconomic policies,
  - promotion of private sector-led growth,
  - removal of infrastructure bottlenecks in energy and water supply, sewage, roads and telecommunications.

### Fiscal policy margins and public debt strategy
- Seychelles’s stabilization success offers perspectives for a less painful path toward fiscal sustainability, but caution is needed to maintain external stability and growth prospects.
- Fiscal context:
  - Stronger-than-anticipated fiscal adjustment in 2009-10, coupled with higher growth and a slightly more favorable outturn of debt rescheduling, provides space for:
    - a less restrictive fiscal policy stance, and
    - a more rapid path toward public debt reduction.
- Staff recommendation:
  - Rebuild faster economic policy buffers to mitigate external shocks.
  - Use part of fiscal room to rebuild public infrastructure neglected in the last decade to remove growth bottlenecks.
- Authorities’ plan:
  - Maintain programmed medium-term reduction in primary surpluses consistent with bringing the public debt-to-GDP ratio below 50 percent by 2018.
  - Start reversing the decline in real government wages.
  - Rely on external project finance where consistent with external stability.
  - Most envisaged debt reduction will stem from rapid repayment in domestic liabilities, noting associated liquidity management complications.

### External stability and exchange rate assessment
- Updated exchange rate assessment indicates the exchange rate is in line with fundamentals (Appendix I).
- At the 2008 Article IV Consultation, the exchange rate was estimated to be overvalued by 11 to 33 percent.
- Floating of the rupee led to a 16 percent depreciation in real effective terms.
- As of end-September 2010, the exchange rate does not appear overvalued in the three Fund standard approaches if adjustment is made for large FDI-related imports and other exceptional factors expected to temporarily bring the external current account deficit to record levels in 2010.
- Authorities note significant uncertainties in the exchange rate assessment and keep an open mind about regime changes if fundamentals justify them.

### Monetary policy, liquidity overhang, and recommended instruments
- Key challenge for the central bank: preserve price and market stability amid persistent liquidity overhang.
- Fiscal overperformance in 2009-2010 allowed retirement of large domestic debt, leaving banks with unremunerated excess reserves of about 4 percent of GDP.
- Risks if unaddressed:
  - disorderly depreciation,
  - resurgence of high inflation,
  - potential capital outflows due to search for returns given low money market rates.
- Inflation expected to face additional pressure in 2011 with resumption of growth and recovery in domestic demand.
- Interest rate pass-through weak compared to peers (Appendix III); causes include persistent liquidity overhang and inadequate bank competition.
- Staff proposals to mitigate liquidity overhang:
  - Adopt a tighter monetary stance in 2011 than in 2010 and mop up excess reserves.
  - Consider issuance of treasury bills for monetary policy purposes; estimated annual fiscal cost of 0.1 percent of GDP in additional interest payments.
    - Rationale: provide CBS with additional tradable securities for open market operations.
    - Alternative of CBS issuing paper less preferable because it would fragment a shallow money market and weaken CBS balance sheet.
  - Government could gradually lengthen maturity of domestic debt by issuing 2- to 3-year bonds to develop the yield curve and minimize rollover risk.
  - Raise minimum reserve requirements to absorb part of structural excess liquidity.
  - Move large deposits (about three quarters of banks‘ excess reserves) of the Social Security Fund from commercial banks to the central bank.
- Authorities’ views on liquidity:
  - Share assessment of risks and agree with proposed issuance of T-bills for monetary purposes (MEFP ¶ 30).
  - View liquidity overhang as temporary, to be partially reabsorbed with expected credit growth and reduction in lending rates.
  - Committed to tightening monetary stance if required, but reluctant to raise reserve requirements after having lowered them in 2009.
  - A gradual reduction in liquidity has been built into the monetary program for 2011.

### Financial sector development, competition, and stability
- Banking sector health and performance:
  - Banks are in good financial health and adequately capitalized (Table 5).
  - Credit quality deteriorated significantly in 2010 (increase in nonperforming loans), largely due to reclassification of pre-crisis loans.
  - Aggregate provisioning against classified assets remained unchanged.
  - Bank earnings were strong and net interest margins high, but declining from 2009 due to lower interest rates on government securities.
  - Private sector credit at 25 percent of GDP remains low compared to peers and is growing slowly despite ample bank liquidity.
- Stress test findings:
  - Banks most vulnerable to credit risks from increased default rates in response to extreme interest rate shocks (Appendix IV).
  - Likelihood of such events limited; banks remain well positioned to withstand fairly severe shocks.
- Competition concerns:
  - High returns on assets and equity cannot be fully explained by foreign-owned banks’ risk premia.
  - Disconnect between money market and retail lending rates suggests lack of competition.
  - Lending rates slow to react; interest margins widened despite liquidity pressures and sharp drop in short-term T-bill rates since start of stabilization program.
- Staff recommendations to promote financial sector development:
  - Remove obstacles to competition stemming from information asymmetry (enhance public disclosure of banking products and financial literacy).
  - Reduce high loan prepayment and refinancing fees.
  - Establish credit rating systems and eliminate legal barriers related to pledging and foreclosing collateral.
  - Reflect on the excessive role of state-owned financial institutions, particularly in mortgage lending dominated by subsidized loans of the state-owned Housing Finance Corporation (HFC).
  - Continue close monitoring of offshore financial sector to comply with AML/CFT international standards given concentration in registration of international business companies (IBCs).
- Authorities’ planned actions:
  - Promote bank competition and develop credit markets and mortgage lending through improved transparency and information dissemination (MEFP ¶45).
  - Improve disclosure practices and strengthen legal protection of borrowers and lenders through legislative and/or regulatory changes.
  - Launch public awareness campaign with Seychelles Bankers‘ Association and the Fair Trading Commission.
  - Consider privatization of state-owned banks as a precondition for long-term goals.
  - Develop a housing finance policy to be submitted to cabinet by June 2011, including possible divestiture of HFC (MEFP ¶27).
  - Tighten the AML/CFT framework and improve transparency of the offshore financial sector (MEFP ¶40).

### Program review — performance under the Extended Arrangement
- Program status:
  - Program is on track: all quantitative performance criteria were met with margins although capacity constraints delayed two structural benchmarks.
  - All end-September 2010 quantitative performance criteria were met.
  - Structural benchmarks:
    - Budget submission protocols and procedures introduced by end-July 2010 as planned.
    - New Customs Management Act submitted to the National Assembly with two months‘ delay.
  - A plan of action will be submitted to Cabinet by end-April 2011 to introduce new Chart of Accounts in the 2012 Budget.
  - Preliminary evidence indicates all quantitative performance criteria for end-December 2010 are within reach.

### Program for 2011 — fiscal, tax, monetary, and structural priorities
- Fiscal stance and targets:
  - Program accommodates easing of fiscal stance consistent with progress toward debt sustainability and external stability.
  - Authorities target a primary surplus of 5 percent of GDP for the 2011 budget, 1 percentage point of GDP less than initially planned.
  - Excluding one-off net repayments of 3.4 percent of GDP to the government in 2010, the primary balance will decline from 6 percent of GDP to 5 percent in 2011.
  - Fiscal space intended to finance infrastructure to address medium-term growth bottlenecks while keeping public debt on a declining path.
- Tax reforms:
  - 10 percent personal income tax (PIT) for expatriates introduced in July 2010 will be aligned with domestic residents‘ rate of 15 percent in January 2011.
  - Preferential GST rates for tourism are being phased out.
  - Preparatory work underway to replace GST with a VAT in 2012.
  - Tax administration reforms to support VAT introduction, including strengthening the Large Taxpayer Unit (LTU) of the Seychelles Revenue Commission and coordination with Customs.
- Revenue and grants outlook:
  - Net budgetary impact of policy changes to PIT and GST estimated at 0.4 percent of GDP (positive).
  - Abstracting from policy changes and budget presentation changes, revenue projected to decline by 1.5 percent of GDP in 2011, mainly due to normalization of business tax receipts after exceptionally high corporate profits in 2010 (MEFP ¶11).
  - Dividends from state-owned banks and tuna cannery projected at half their 2010 amounts; partly compensated by projected dividends from the national oil company.
  - Grants projected to increase from 1.5 to 4 percent of GDP as disbursements delayed in 2010 are carried forward.
- Expenditures and wage reforms:
  - Overall wage increase of 1.5 percentage points of GDP reflects inclusion in the 2011 budget of pension and social security contributions of the government as an employer (MEFP, page 53).
  - Increase also reflects modernization of civil servant wage grid and strengthened resources for administrative functions, including the Seychelles Revenue Commission.
  - Consolidation of budget-dependent entities contributes to a 1.6 percent of GDP increase in goods, services and transfers.
  - Entities benefiting include Seychelles Tourism Board, National Sports Council and Land Transport Agency.
- Capital expenditure priorities:
  - Enhance output capacity of the Public Utility Company (PUC).
  - Rehabilitate the main hospital in Victoria.
  - Upgrade educational facilities.
  - Contingency line of about 0.5 percent of GDP established in the capital budget to protect the primary balance target against low revenue performance in the first half of 2011 (MEFP, ¶14).
- Monetary policy objective for 2011:
  - Aim to maintain inflation below 3 percent.
  - CBS will retain reserve money targeting under a flexible exchange rate regime as operational framework.
  - CBS will rely mainly on market-based policy instruments and continue to build analytical and operational capacity.
- Public financial management (PFM) and structural reforms:
  - New PEFA assessment to be undertaken in early 2011 with EU assistance.
  - New chart of accounts to be introduced for 2012 budget.
  - Amendments to the Public Finance Act to introduce principles of transparency, accountability, medium-term stability and budget performance; extend coverage to budget formulation and execution; extend National Assembly oversight to capital expenditures.
  - Structural measures to improve governance and financial management of Air Seychelles and PUC (MEFP, ¶25).
  - PUC to reinstate indexation of electricity tariffs to fuel costs and hire a consultant for a tariff study in first half of 2011; aim for recommendations by end-2011 consistent with full cost recovery.
  - Government developing policy to outline investment objectives of social security fund‘s assets by September 2011 (MEFP, ¶24).

### Structural benchmarks, 2010–2011 (measure — target date — macroeconomic rationale)
- Submit VAT bill to National Assembly, to become effective July 1, 2012 (MEFP ¶16) — End-December 2010 — To modernize the tax system and remove tax distortions
- Cabinet approval of the amendments to Financial Institutions Act as described in MEFP ¶45 — End-April 2011 — To strengthen competition in the banking sector and improve risk management
- Adopt an action plan for house financing policy that limits the role of the public sector (MEFP ¶27) — End-June 2011 — To reduce fiscal risks, strengthen competition and promote development of the banking system
- Launch a strategic plan for the reform of the social security system (MEFP ¶24) — End-June 2011 — To establish well-targeted and sustainable social security system
- Cabinet approval of VAT regulations, including rates, exemptions and thresholds (MEFP ¶16) — End-June 2011 — To modernize the tax system and remove tax distortions
- Commission and complete a study on optimal tariffs for utilities (MEFP ¶25) — End-July 2011 — To ensure cost recovery and long-term sustainability of utilities
- Develop a privatization plan for non-strategic public enterprises, which do not serve public policy goals (MEFP ¶26) — End-September 2011 — To reduce the role of the state in the economy, improve corporate governance and minimize fiscal risks
- Cabinet approval of a new Public Finance Bill extending the National Assembly‘s oversight on capital expenditure budget. (MEFP ¶23) — End-September 2011 — To strengthen public finance management
- Reinstate the electricity tariff adjustment for fuel price variation (MEFP ¶25) — End-September 2011 — To reduce losses of the public utility company

*Source: _cr1105 - 25.      Significant risks continue to stem from the volatility of the external environment. In*

### 52.      The program for the remainder of 2010 and for 2011 is financed. The authorities plan

### The program for the remainder of 2010 and for 2011 is financed.

### Financing status and completion plans
- The program for the remainder of 2010 and for 2011 is financed.
- The authorities plan to complete the restructuring of Seychelles‘ external debt through the signature of bilateral agreements with a few remaining creditors (MEFP ¶47-49).
- The minor financing residual gaps for 2010 and 2011 are expected to be closed by these restructurings.

### Program modalities and monitoring framework
- Staff proposes a simplified program monitoring framework.
- Current approach: semi-annual reviews, with quarterly quantitative performance criteria (PCs), financing assurances reviews, and disbursements.
- Proposed change: carry out program monitoring on a semiannual basis, including financing assurances reviews, PCs, and disbursements (Table 9).
- Test dates for the semiannual reviews are set for end-December and end-June for better synchronization with the budget cycle.
- Rationale: good track record of program implementation under the previous SBA and the current EFF, and an almost-completed rescheduling of external debt.

### Debt limits, expected financing, and debt path
- The debt limits have been revised upward to accommodate expected financing in support of large infrastructural needs.
- In 2011 PUC plans to contract loans for electricity and water projects with a government guarantee, both from multilateral sources at concessional rates.
- The government will provide a US$8 million guarantee to support a strategic private-public partnership for a submarine cable project that will supply high speed internet connections.
- Public external debt is expected to rise to 49.2 percent of GDP in 2011.
- Projected medium-term path: public external debt is expected to decline to 34.2 percent of GDP in 2015 as the growth effects of the financing filter through.

### Debt sustainability and vulnerabilities
- Although the profile of Seychelles debt is sustainable, it remains vulnerable to shocks, particularly those from export-related shocks (See Appendix II).

*IMF staff report excerpt.*

### 55.      The next Article IV consultation with Seychelles will take place within 24 months subject

### _cr1105 - 55.      The next Article IV consultation with Seychelles will take place within 24 months subject

### Article IV consultation timing
- The next Article IV consultation with Seychelles will take place within 24 months subject to the provisions of the decision on consultation cycles in program countries.

### National income and prices (selected indicators, 2007–13; as presented)
- Nominal GDP (millions of Seychelles rupees): 6,828 8,710 10,402 10,726 11,206 11,303 12,000 12,881 13,920
- Real GDP (percent change): 9.6 -1.3 -7.6 0.7 4.0 6.2 4.3 4.8 5.0
- CPI (annual average): 5.3 37.0 32.9 31.9 -2.4 -2.2 2.5 3.0 2.9
- CPI (end-of-period): 16.8 63.3 1.9 -2.5 1.1 1.2 3.0 2.6 3.0
- GDP deflator average: 11.4 29.3 28.5 22.3 0.4 -0.8 1.8 2.5 2.9

### Money and credit (selected)
- Net claims on private sector (percent change): 9.3 48.6 -12.1 -11.4 22.2 21.5 11.3 ...
- Broad money (percent change): -7.6 27.2 -0.7 7.5 19.1 12.5 11.1 ...
- Reserve money (percent change): -23.1 0.6 32.2 15.7 35.3 35.3 5.1 ...
- Velocity (GDP/broad money): 1.5 1.5 1.8 1.7 1.5 1.6 1.5 ...
- Money multiplier (broad money/reserve money): 4.2 5.3 4.0 4.9 4.3 4.1 4.3 ...

### Savings–Investment balance (percent of GDP unless indicated)
- External savings: 20.8 48.9 22.6 36.3 39.5 47.1 27.3 20.0 17.3
- Gross national savings: 8.0 -8.8 6.8 -7.1 6.0 6.3 10.1 11.5 11.6
- Government savings: -4.4 7.9 2.8 7.8 5.6 7.6 13.1 10.7 9.3
- Gross investment: 28.8 40.1 29.4 29.3 45.4 53.4 37.4 31.5 28.9
- Government investment: 5.5 2.1 5.3 5.7 8.0 8.4 10.4 8.5 7.8

### Government budget (percent of GDP; selected)
- Total revenue, excluding grants: 32.0 32.9 35.6 35.4 31.4 35.5 36.5 36.5 35.7
- Expenditure and net lending: 40.9 40.0 35.1 33.8 33.8 34.3 37.8 36.2 35.0
- Current expenditure: 36.3 28.7 32.8 31.0 28.9 29.3 27.4 27.6 27.2
- Capital expenditure and net lending: 4.6 11.2 2.3 2.7 4.9 5.0 10.5 8.6 7.9
- Overall balance, including grants: -8.7 -3.4 2.8 5.0 0.7 2.7 2.7 2.1 1.5
- Primary balance: -2.0 3.9 13.3 14.8 7.4 9.4 5.0 4.7 4.0
- Total public debt (percent of GDP): 129.8 136.7 140.1 128.6 82.4 76.1 71.7 64.3 57.0
  - Note: Includes the central bank.

### External sector and reserves
- Current account balance including official transfers (percent of GDP): -20.8 -48.9 -22.6 -36.3 -39.5 -47.1 -27.3 -20.0 -17.3
- Total stock of arrears (millions of U.S. dollars): 160 317 239 251 ... 33.3 .........
- Total public external debt outstanding (millions of U.S. dollars): 710 759 755 732 492 425 448 451 439
  - (in percent of GDP): 69.8 82.8 92.8 92.6 53.6 45.3 46.2 43.9 40.1
- Gross official reserves (end of year, millions of U.S. dollars): 105 115 316 922 421 825 328 631 1,311
- Reserves in months of imports, c.i.f.: 0.1 0.6 1.5 1.7 2.3 2.3 2.7 3.0 3.1
- Exchange rate (Seychelles rupees per US$1, end of period): 8.0 16.6 10.6 11.3 ...............
- Exchange rate (period average): 6.7 9.5 14.1 13.6 ...............

### Balance of Payments (2007–15, selected USD figures and projections)
- Current account (millions of U.S. dollars): -213 -448 -287 -362 -441 -265 -205 -190 -179 -125
  - (Percent of GDP): -21 -49 -36 -39 -47 -27 -20 -17 -15 -10
- Trade balance (millions): -175 -412 -228 -301 -370 -222 -156 -136 -121 -61
- Exports of goods (millions): 392 502 427 460 412 488 516 545 575 609
  - Oil re-exports: 152 200 148 206 141 146 158 170 180 191
  - Tuna exports: 184 216 221 181 213 252 264 277 291 309
- Imports of goods (millions): -734 -1,009 -748 -826 -848 -812 -779 -809 -834 -864
  - Oil imports: -199 -278 -176 -249 -204 -204 -224 -242 -257 -274
  - FDI-related imports: -153 -288 -176 -177 -263 -165 -138 -129 -117 -105
- Exports of services (millions): 481 486 398 410 413 437 454 483 514 548
  - Tourism earnings: 284 270 205 215 219 231 239 256 275 295
- Imports of services (millions): -313 -391 -305 -346 -348 -336 -347 -355 -376 -354
- Net income: -68 -94 -101 -74 -81 -43 -46 -51 -55 -61
  - Interest payments due (component): -65 -70 -48 -41 -50 -26 -32 -38 -44 -52
- Current transfers, net (millions): 305 741 121 100 -3 -3 -3 -3
- Capital and financial account (millions): 255 366 393 853 692 862 342 222 204 145
- Gross international reserves (stock, e.o.p., USD millions): 225 511 692 242 182 532 863 1,133 1,351
- Months of prospective imports of goods and services: 9.8 0.6 1.7 2.3 2.3 2.7 3.0 3.1 3.3 3.4
- Public external debt (millions USD): 710 759 732 492 425 448 451 439 427 419
  - (percent of GDP): 69.8 82.8 92.8 92.6 53.6 45.3 46.2 43.9 40.1 36.6

### Consolidated Government Operations (cumulative, millions of Seychelles rupees; 2007–13; quarterly detail shown)
- Total revenue and grants (examples): 2,214 3,190 4,165 835 848 1,796 1,907 2,829 2,973 3,866 4,178 1,091 2,219 3,560 4,856 4,937 5,082
- Total revenue (examples): 2,197 2,868 3,793 776 822 1,694 1,876 2,576 2,937 3,514 4,008 990 1,981 3,189 4,381 4,704 4,971
- Tax revenue (examples): 1,896 2,456 3,318 712 747 1,513 1,638 2,265 2,557 3,090 3,527 918 1,786 2,815 3,905 4,213 4,440
- External grants (examples): 173 213 735 926 101 312 533 735 217 010 123 837 147 523 311 1
- Expenditure and net lending (examples): 2,810 3,483 3,625 670 767 1,849 1,700 2,826 2,582 3,788 3,878 1,050 2,135 3,273 4,538 4,669 4,879
- Current expenditure (examples): 2,497 2,503 3,329 655 690 1,679 1,564 2,502 2,349 3,244 3,315 742 1,530 2,344 3,283 3,561 3,783
- Interest payments due (examples): 456 629 1,046 100 217 513 500 671 672 755 759 101 156 228 284 335 351
- Capital expenditure (examples): 376 183 608 104 782 931 825 524 148 339 483 076 049 031 1,253 1,095 1,087
- Overall balance, cash basis (after grants) (examples): -537 -262 637 140 73 -92 161 -66 381 -222 594 185 287 318 269 203
- Financing gap (memorandum): 0 0 0 -420 177 029 805 104 438 387 575 444 43

### Monetary survey and Central Bank accounts (selected end-period levels and growth rates)
- Net foreign assets (Seychelles rupees millions, selected): 2,105 2,897 2,388 3,345 3,079 3,256 3,244 3,641 3,408 4,002 4,183 4,413 4,796 4,954
- Broad money (level): 5,952 6,401 6,222 6,568 6,763 6,537 7,197 6,864 7,623 7,199 7,406 7,643 7,857 8,000
- Broad money growth (12–month percent change): 27.2 7.5 15.0 21.4 33.5 24.6 33.0 26.9 19.1 12.5 12.8 16.9 14.5 11.1
- Credit to the economy (12–month percent change): 48.6 -11.4 -2.7 2.9 14.3 11.7 19.1 15.4 22.2 21.5 16.6 18.5 18.0 11.3
- Reserve money (12–month percent change): 0.6 15.7 46.2 35.5 42.2 38.0 43.1 36.4 35.3 35.5 25.5 17.0 14.6 5.1
- Money multiplier (broad money/reserve money): 5.3 4.9 4.1 4.6 4.3 4.2 4.3 4.3 4.3 4.1 4.1 4.2 4.3 4.3
- Gross international reserves (USD millions, memorandum): 511 691 582 1,019 218 220 722 242 182 212 252 352 53

### Financial soundness indicators for the banking sector (selected, 2007–10, percent)
- 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 22.1 21.7
- Nonperforming loans to gross loans: 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 6.9 6.4
- 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 5.0 3.0
- Liquid assets (broad) to short term liabilities: 57.3 57.5 46.7 40.8 59.3 61.6 87.1 56.8 32.5 62.2 62.1 62.7 50.6 30.6 62.1
- Net open foreign exchange position to capital: 2.6 14.1 28.3 28.5 24.9 4.9 31.3 21.3 21.9 33.1 22.4 12.2 14.7 29.2

### Quantitative performance criteria under the Extended Arrangement (selected)
- Net international reserves of the CBS, millions of U.S. dollars (floor): 153 133 146 192 128 122 167 142 125 174 168
- Reserve money (ceiling) (SR millions): 1,296 1,537 ... 1,424 1,592 ... 1,544 1,676 ... 1,595 1,753
- Primary balance of the consolidated government (cumulative floor) (SR millions): 1,586 261 ... 298 455 ... 707 668 ... 1,063 823
- The contracting or guaranteeing of new external debt by the public sector (cumulative ceiling, USD millions): 302 ... 03 ... 013 ... 037
- The accumulation of external payments arrears by the public sector (ceiling): 0.0 0.0 ... 0.0 0.0 ... 0.0 0.0 ... 0.0 0.0
- Memorandum item: Program financing support (millions USD examples): 11.2 0.0 ... 8.7 0.0 ... 8.7 0.0 ... 8.7 19.6

### Structural benchmarks (2009–10) — measures, target dates, rationale, status
- Introduce a treasury single account. Target: 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: 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: 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: 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: 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: 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: 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: 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: End-September 2010. Rationale: To institutionalize best international practice and a better business climate. Status: Not met. "Expected to be implemented in early December, 2010."
- Introduce Personal Income Tax (MEFP, ¶22). Target: July 1, 2010. Rationale: To broaden the tax base and provide for more equitable taxation. Status: Met.
- Introduce budget submissions protocols and procedures (MEFP, ¶28). Target: End-July 2010. Rationale: To strengthen budget preparation. Status: Met.
- Adopt a new chart of account for the 2011 budget (MEFP, ¶29). Target: End-November 2010. Rationale: To ensure proper classification and increase efficiency of the budget as a policy tool. Status: Not met. "Expected to be introduced in the 2012 Budget."
- Submit to National Assembly a bill creating a national clearing house and settlement system (MEFP, ¶44). Target: End-December 2010. Rationale: To introduce necessary financial infrastructure for improved efficiency and reduced risks. Status: Met. "The bill was submitted to and approved by the National Assembly in July 2010."

### Fund disbursements and timing of reviews under the Extended Arrangement (2009–12)
- December 22, 2009: Board approval of the EFF arrangement. Amount: 0.88 (millions of SDR) (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 (First Review): 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 (Second Review): 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 31, 2011: Compliance with end-December 2010 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 3.52 (40 percent of quota).
- September 30, 2011: Compliance with end-June 2011 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 3.08 (35 percent of quota).
- March 31, 2012: Compliance with end-December 2011 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 2.64 (30 percent of quota).
- September 30, 2012: Compliance with end-June 2012 quantitative performance criteria and completion of a financing assurances review (if needed). Amount: 1.32 (percent of quota not specified here).
- Total under the schedule: 19.8 (millions of SDR) (225 percent of quota shown elsewhere as summary).

### Indicators of Fund credit (2008–15, millions of SDR; projections)
- Existing Fund credit stock (end of period): 6.2 11.9 18.5 18.5 15.1 9.6 7.2 5.9
- Prospective EFF disbursements (selected): 0.0 1.8 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 19.5 17.6
- In percent of quota: 70.0 135.0 230.0 305.0 311.3 248.8 221.3 200.4
- In percent of GDP: 1.0 2.4 3.3 4.2 4.1 3.0 2.5 2.2
- In percent of exports of goods and services: 0.9 2.3 3.7 4.4 4.3 3.2 2.7 2.3
- In percent of gross reserves: 18.4 11.1 14.1 16.1 14.6 10.7 9.0 7.7

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

### Appendix I. Real Exchange Rate Assessment

### Appendix I. Real Exchange Rate Assessment

### Background and context
- Following a severe balance of payment crisis and a depletion of the official reserves, Seychelles fully liberalized its foreign exchange market and moved from a fixed exchange rate to a floating exchange rate in November 2008.
- Before the float, the parallel exchange rate flourished with a premium of more than 50 percent.
- At the 2008 Article IV consultation, indicators pointed to an overvaluation of the real effective exchange rate of 11 to 33 percent.
- Large external imbalances were related to unsustainable fiscal policies, which drove imports.
- Since 2005, growth in tourism (Seychelles‘ main export product) appeared to be in line with its main competitors in the Indian Ocean.

### Nominal and real exchange rate developments
- In the last two months of 2008 that followed the float the nominal effective exchange rate (NEER) depreciated by about 40 percent.
- It then appreciated during 2009 and has since stabilized.
- NEER was about 23 percent below the pre-float level at end-September 2010.
- REER depreciation is about 16 percent by end-September 2010.
- The strong policy performance has created a virtuous cycle of:
  - falling budget financing costs,
  - rebuilding of official external reserves,
  - emerging confidence in the rupee.
- Tourism shares held up well during the crisis.

### Formal REER assessments (CGER-based methodologies)
- Staff estimates suggest that as of end-September 2010 the real exchange rate of the rupee was broadly in line with both current and medium-term (2015) fundamentals, with sizable differences across methodologies.
- Three approaches and main findings:
  - Macroeconomic balance approach:
    - Uses an equilibrium current account ("norm") based on fundamentals and an underlying current account adjusted for large one-off FDI-related imports and debt service payments.
    - In 2010, a significant depreciation would be required to close the gap between the underlying current account and the norm.
    - Based on balance of payments projections presented in this report, this overvaluation almost disappears in 2015.
  - External sustainability approach:
    - Calculates the current account that stabilizes the net foreign assets (NFA)-to-GDP ratio.
    - As of 2010, Seychelles is estimated to have net foreign liabilities of about 170 percent of GDP (excluding large resident deposits in foreign banks reported in BIS statistics).
    - Stabilization of the NFA within a range 25 percent around the 2010 ratio would require a modest range of depreciation.
    - This overvaluation is projected to disappear in 2015.
  - CGER panel-based reduced-form (FEER) approach:
    - Estimates equilibrium REER based on a set of fundamental factors.
    - Contrary to the first two approaches, results suggest a significant undervaluation in 2010 and, to a lesser extent, in 2015.

### Selected quantitative assessment indicators (as presented)
- Actual current account: -47.1 (backward), -10.3 (forward)
- Minus temporary factors: -33.9 (backward), 0.0 (forward)
- Underlying current account (A): -13.2 (backward), -10.3 (forward)
- Trade elasticity (D): -0.6 (backward), -0.6 (forward)
- Current account norm (B): -7.1 (backward), -9.9 (forward)
- Current account gap (C = A-B): -6.1 (backward), -0.4 (forward)
- REER gap (C/D): 10.6 (backward), 0.7 (forward)
- External sustainability current account norm (E): [-7.9 to 13.1] (backward), [-7.9 to -13.1] (forward)
- External sustainability current account gap (F = A-E): [-5.3 to -0.1] (backward), [-2.3 to 3] (forward)
- REER gap (F/D): [0.1 to 9.3] (backward), [-5.2 to 4] (forward)
- Reduced-form approach (FEER) REER (E): 64.1 (backward), 66.9 (forward)
- CGER panel-based EREER (F): 71.3 (backward), 71.3 (forward)
- REER gap (G): -10.6 (backward), -6.4 (forward)

Notes from table:
- Detrended, excludes large ad hoc flows such as: large commercial debt restructuring related payments, grants, one-off FDI-related imports and tanker-related imports.
- "+" overvaluation; "-" undervaluation.
- Change in the REER (100* difference in logarithms, an approximation of percentage) needed to close the gap.
- Net external point estimate updated from Lane and Milesi-Ferretti (2006) using Seychelles data from 2002; range of estimates for the NFA benchmark assumes reserves, direct investment and debt liabilities and assets would be different by a margin of 25 percent.
- "Backward": Estimates for 2010 based on September REER; "Forward": medium term (2015) based on baseline balance of payments projections presented in the debt sustainability appendix.
- Values are in percent of GDP unless otherwise indicated.

*Prepared by Nkunde Mwase.*

---

### Appendix II. Debt Sustainability Analysis — Overview and Findings

### I. Overview of External Debt Restructuring
- In 2008 Seychelles experienced a balance of payments and debt crisis, culminating in:
  - surge in the current account deficit to 49 percent (from the 2003-07 average of 12 percent),
  - sovereign rating reduced from B to junk grade in late 2008,
  - external debt stock about US$760 million, or about 83 percent of GDP at the end of 2008,
  - about 42 percent of external debt in arrears.
- Creditor composition at end-2008:
  - Commercial creditors: about 62 percent of external debt.
  - Paris Club debt: about 18 percent of total debt.
- Authorities restructured about 91 percent of eligible debt.

Paris Club Agreement:
- On April 16, 2009, Government of Seychelles reached an exceptional agreement on approximately US$160 million in bilateral debt.
- Agreement provided for overall nominal debt cancellation of 45 percent applied to stocks in two tranches (July 2009 and July 2010).
- Remaining debt repaid over 18 years with a five-year grace period; average life of debt portfolio extended from 6 months to 13 years.
- Paris Club‘s treatment obliged Seychelles to seek comparable treatment from other bilateral and private creditors.

Private sector debt restructuring:
- Government focused on capital market debt via a one-off exchange offer requiring 75 percent creditor support.
- In December 2009, received a US$10 million guarantee from the African Development Bank partially covering interest obligations under the bond exchange offer.
- February 2010: bond exchange offer closed on US$320 million of private sector debt with 100 percent participation — first modern sovereign bond restructuring with no residual holdout creditor problem.
  - Amortizing notes and commercial loans tendered in their entirety; 84 percent of the Eurobond debt was tendered, triggering the collective action clause.
  - Face value of entire eligible debt (about US$283 million, not including arrears and penalties) exchanged for about US$169 million of discount bonds on February 11, 2010.
  - About 50 percent of the debt was canceled.
  - Remaining debt to be repaid over 16 years with a step-up interest rate structure and six-year grace period on principal repayments.
- Agreements in principle with commercial banks on approximately US$110 million of debt; new loan agreements signed with all domestic banks.
- Most commercial bank loans converted to local currency loans.

Non-Paris Club official debt:
- Most creditors agreed in principle to negotiate restructuring on terms broadly comparable with the Paris Club.
- Agreements signed with Algeria, Libya and Malaysia.
- South Africa signed umbrella Paris Club agreement but not yet the bilateral agreement.
- Negotiations advanced with remaining creditors (Abu Dhabi, China, India and Kuwait).

Post-restructuring debt profile:
- External public debt estimated at US$460 million (or about 49.2 percent of GDP) at end-November 2010.
  - About 53 percent owed to commercial creditors.
  - Paris Club countries account for about 17 percent of total.
  - No arrears with multilateral creditors.
  - About US$33 million (or 7.2 percent of total debt) in arrears with non-Paris Club official and private creditors pending restructuring.
- External debt service projected to peak in 2018 before leveling off for the next seven years; the peak remains manageable as a share of GDP and forecast revenues.

*Prepared by Nkunde Mwase with Marie-Therese Trasino and Rainer Koehler.*

### II. Debt Sustainability Analysis — Key findings and macro assumptions
- Updated DSA indicates that as a result of restructuring of most external debt (including substantial reduction in NPV terms) and strong fiscal adjustment under the program, public debt appears to have a long-run downward path toward sustainability.
- Bound tests indicate Seychelles remains vulnerable to shocks.

Macroeconomic assumptions used in DSA:
- Output growth projected to rise gradually, stabilizing at 5 percent over the medium term supported by tourism.
- Inflation expected to remain at around 3 percent over the medium term in line with major trading partners‘ inflation.
- Medium-term current account outlook points to a sharp narrowing of the deficit driven largely by tourism and tuna export earnings and lower FDI (hence FDI-related) imports.
- Net FDI flows expected to gradually slow down to about 11 percent of GDP in 2015 with completion of several large hotel and residential projects.

### External debt — Baseline scenario (selected projection)
- Public external debt:
  - From 92.2 percent of GDP at end 2009,
  - projected to decline to 45.3 percent at end-2010 as a result of the debt restructuring.

*Prepared by Nkunde Mwase.*

### 34.2 percent of GDP in 2015, reflecting mainly the restrictive although gradually loosening fiscal

### _cr1105 - 34.2 percent of GDP in 2015, reflecting mainly the restrictive although gradually loosening fiscal

### External debt dynamics and sensitivity analysis
- External debt is projected to rise in 2011 reflecting expected borrowing by a parastatal for priority infrastructure spending and a central government guarantee for an important cable project.
- The external debt dynamics are particularly sensitive to historically-based assumptions due to major changes in Seychelles over the last five years.
- A one-half standard deviation shock to the non-interest current account applied each year during 2011-15 would increase external debt to 69 percent of GDP in 2015.
- A shock returning key macroeconomic variables (including real GDP, nominal interest rates and non-interest current account) to historical averages would increase external debt to 86 percent of GDP in 2015.
- The latter shock largely implies a return to the failed policies of the past, characterized as unlikely given authorities’ commitment to prudent fiscal and monetary policies.

### External debt projections and key figures (Table II.2 highlights)
- Baseline: External debt (percent of GDP) path: 2008: 82.8; 2009: 92.6; 2010: 45.3; 2011: 49.2; 2012: 46.0; 2013: 40.3; 2014: 36.4; 2015: 33.7.
- Change in external debt: 2008: 13.0; 2009: 9.8; 2010: -47.2; 2011: 3.8; 2012: -3.2; 2013: -5.7; 2014: -3.8; 2015: -2.7.
- Identified external debt-creating flows: 2008: 32.3; 2009: 30.7; 2010: -26.4; 2011: 0.5; 2012: -3.0; 2013: -5.2; 2014: -4.8; 2015: -3.9.
- Current account deficit, excluding interest payments (percent of GDP): 2008: -46.7; 2009: -31.1; 2010: -43.1; 2011: -25.9; 2012: -18.4; 2013: -15.7; 2014: -13.8; 2015: -8.2.
- Exports (index or percent basis reported): 2008: 107.8; 2009: 104.4; 2010: 88.1; 2011: 95.3; 2012: 94.5; 2013: 93.8; 2014: 93.4; 2015: 93.5.
- Imports (index or percent basis reported): 2008: 152.8; 2009: 133.2; 2010: 127.6; 2011: 118.2; 2012: 109.7; 2013: 106.2; 2014: 103.8; 2015: 98.4.
- Net non-debt creating capital inflows (negative values reported): 2008: -24.3; 2009: -18.9; 2010: -68.7; 2011: -25.0; 2012: -20.8; 2013: -20.3; 2014: -18.3; 2015: -12.3.
- Automatic debt dynamics (percent contribution): 2008: 10.0; 2009: 18.4; 2010: -0.8; 2011: -0.4; 2012: -0.7; 2013: -0.6; 2014: -0.3; 2015: 0.2.
- Contribution from nominal interest rate (percent): 2008: 2.2; 2009: 5.2; 2010: 4.0; 2011: 1.5; 2012: 1.6; 2013: 1.6; 2014: 1.6; 2015: 1.9.
- Contribution from real GDP growth (percent): 2008: 1.0; 2009: -0.7; 2010: -4.8; 2011: -1.9; 2012: -2.2; 2013: -2.2; 2014: -1.9; 2015: -1.7.
- Residual, including change in gross foreign assets: 2008: -19.3; 2009: -20.9; 2010: -20.8; 2011: 3.4; 2012: -0.2; 2013: -0.5; 2014: 1.0; 2015: 1.2.
- External debt-to-exports ratio (in percent): 2008: 76.8; 2009: 88.8; 2010: 51.5; 2011: 51.6; 2012: 48.6; 2013: 42.9; 2014: 39.0; 2015: 36.0.
- Gross external financing need (in billions of US dollars): 2008: 0.6; 2009: 0.4; 2010: 0.5; 2011: 0.3; 2012: 0.2; 2013: 0.2; 2014: 0.2; 2015: 0.1.
- Gross external financing need (in percent of GDP): 2008: 69.5; 2009: 46.4; 2010: 52.1; 2011: 28.5; 2012: 20.8; 2013: 18.3; 2014: 16.3; 2015: 11.0.
- Scenario with key variables at their historical averages (external debt in percent of GDP): 2008: 45.3; 2009: 54.3; 2010: 60.8; 2011: 67.7; 2012: 76.7; 2013: 86.6; 2014: -2.7 (as reported).

- Key macroeconomic assumptions underlying baseline:
  - Real GDP growth (in percent): 2008: -1.3; 2009: 0.7; 2010: 6.2; 2011: 4.3; 2012: 4.8; 2013: 5.0; 2014: 5.0; 2015: 5.0.
  - GDP deflator in US dollars (change in percent): 2008: -8.8; 2009: -14.3; 2010: 11.6; 2011: -0.6; 2012: 1.0; 2013: 1.7; 2014: 1.3; 2015: 1.1.
  - Nominal external interest rate (in percent): 2008: 2.9; 2009: 5.4; 2010: 5.2; 2011: 3.3; 2012: 3.3; 2013: 3.7; 2014: 4.3; 2015: 5.5.
  - Growth of exports (US dollar terms, in percent): 2008: 13.2; 2009: -16.5; 2010: 0.0; 2011: 12.2; 2012: 4.8; 2013: 6.0; 2014: 5.9; 2015: 6.3.
  - Growth of imports (US dollar terms, in percent): 2008: 33.7; 2009: -24.8; 2010: 13.6; 2011: -4.0; 2012: -1.9; 2013: 3.3; 2014: 4.0; 2015: 0.7.
  - Current account balance, excluding interest payments (percent of GDP): see above.
  - Net non-debt creating capital inflows: 2008: 24.3; 2009: 18.9; 2010: 68.7; 2011: 25.0; 2012: 20.8; 2013: 20.3; 2014: 18.3; 2015: 12.3.

- Bound tests (external debt): selected scenarios show external debt (percent of GDP) under shocks:
  - B1 (Nominal interest rate at historical average plus one standard deviation): 45.3, 49.7, 47.0, 41.8, 38.4, 36.0, -12.1 (as listed across periods).
  - B2 (Real GDP growth at historical average minus one standard deviation): 45.3, 50.0, 47.0, 40.7, 35.7, 32.2, -13.7.
  - B3 (Current account at historical average minus one standard deviation): 45.3, 53.3, 54.1, 52.2, 52.2, 53.5, -12.6.
  - B4 (Combination of B1-B3 using 1/2 standard deviation shocks): 45.3, 51.9, 51.1, 47.4, 45.3, 44.6, -12.7.
  - B5 (One time 30 percent real depreciation in 2011): 45.3, 70.2, 65.6, 57.4, 51.9, 48.0, -17.9.

### Public debt dynamics and stress tests (Table II.3 highlights)
- Total public sector debt-to-GDP ratio: 2008: 135.4; 2009: 128.6; 2010: 76.1; 2011: 71.7; 2012: 64.6; 2013: 57.2; 2014: 50.8; 2015: 46.4.
- Foreign-currency denominated public debt (percent of GDP): 2008: 82.8; 2009: 92.6; 2010: 45.3; 2011: 46.2; 2012: 44.3; 2013: 40.6; 2014: 37.3; 2015: 34.4.
- Change in public sector debt (percent of GDP): 2008: 4.6; 2009: -6.8; 2010: -52.5; 2011: -4.4; 2012: -7.1; 2013: -7.4; 2014: -6.4; 2015: -4.4.
- Identified debt-creating flows (percent of GDP): 2008: 29.6; 2009: -52.5; 2010: -0.7; 2011: -6.5; 2012: -5.8; 2013: -5.8; 2014: -5.1; 2015: -4.4.
- Primary deficit (percent of GDP): 2008: -3.9; 2009: -14.8; 2010: -9.4; 2011: -5.0; 2012: -4.7; 2013: -4.0; 2014: -3.9; 2015: -3.8.
- Revenue and grants (percent of GDP): 2008: 36.6; 2009: 38.8; 2010: 38.0; 2011: 40.6; 2012: 38.8; 2013: 36.9; 2014: 36.7; 2015: 36.6.
- Primary (noninterest) expenditure (percent of GDP): 2008: 32.8; 2009: 24.0; 2010: 27.6; 2011: 35.6; 2012: 34.1; 2013: 32.9; 2014: 32.8; 2015: 32.8.
- Automatic debt dynamics (percent): 2008: 33.5; 2009: -37.7; 2010: 8.6; 2011: -1.5; 2012: -1.1; 2013: -1.8; 2014: -1.3; 2015: -0.7.
- Contribution from interest rate/growth differential (percent): 2008: -21.1; 2009: -15.7; 2010: 0.1; 2011: -2.1; 2012: -2.3; 2013: -2.3; 2014: -1.8; 2015: -1.2.
  - Contribution from real interest rate: 2008: -22.4; 2009: -15.0; 2010: 7.7; 2011: 1.0; 2012: 0.9; 2013: 0.7; 2014: 0.9; 2015: 1.2.
  - Contribution from real GDP growth: 2008: 1.3; 2009: -0.7; 2010: -7.6; 2011: -3.1; 2012: -3.2; 2013: -3.0; 2014: -2.6; 2015: -2.4.
- Contribution from exchange rate depreciation (percent): 2008: 54.6; 2009: -22.0; 2010: 8.5; 2011: 0.5; 2012: 1.2; 2013: 0.5; 2014: 0.5; 2015: 0.5.
- Residual, including asset changes (percent): 2008: -25.0; 2009: 45.7; 2010: -51.7; 2011: 2.1; 2012: -1.3; 2013: -1.5; 2014: -1.3; 2015: 0.0.
- Public sector debt-to-revenue ratio (percent): 2008: 369.8; 2009: 331.2; 2010: 206.0; 2011: 176.6; 2012: 166.7; 2013: 154.9; 2014: 138.6; 2015: 126.9.
- Gross financing need (percent of GDP): 2008: 14.3; 2009: 10.1; 2010: 23.1; 2011: 20.5; 2012: 19.7; 2013: 18.8; 2014: 15.9; 2015: 14.6.
- Gross financing need (in billions of U.S. dollars): 2008: 0.1; 2009: 0.1; 2010: 0.2; 2011: 0.2; 2012: 0.2; 2013: 0.2; 2014: 0.2; 2015: 0.2.

- Key macroeconomic and fiscal assumptions:
  - Real GDP growth (in percent): see external debt assumptions above.
  - Average nominal interest rate on public debt (in percent): 2008: 7.0; 2009: 8.9; 2010: 5.5; 2011: 3.3; 2012: 3.9; 2013: 4.3; 2014: 4.7; 2015: 5.6.
  - Average real interest rate (percent): 2008: -22.2; 2009: -13.4; 2010: 6.3; 2011: 1.5; 2012: 1.4; 2013: 1.3; 2014: 1.8; 2015: 2.6.
  - Inflation rate (GDP deflator, in percent): 2008: 29.3; 2009: 22.3; 2010: -0.8; 2011: 1.8; 2012: 2.5; 2013: 2.9; 2014: 2.9; 2015: 2.9.
  - Growth of real primary spending (deflated by GDP deflator, in percent): 2008: -6.2; 2009: -26.1; 2010: 21.9; 2011: 34.5; 2012: 0.3; 2013: 1.5; 2014: 4.7; 2015: 5.0.
  - Primary deficit (percent of GDP): see above.

- Public debt path implies a sustainability profile from 76.1 percent of GDP in 2010 to 64.6 percent in 2012 and just under 50 percent of GDP by 2015, but standardized bound tests show vulnerability to shocks including interest rates, the primary balance and growth.
- The higher sensitivity of public debt to interest rate shocks compared to external debt reflects higher volatility and magnitude in recent years.

### Interest rate pass-through: determinants and policy implications (Appendix III)
- Empirical finding: Retail lending interest rates in Seychelles appear weakly connected to short-term money market rates; market-to-retail pass-through is weak and incomplete.
- Contributing factors identified:
  - Undeveloped financial markets.
  - Excess liquidity in the banking system.
  - Lack of banking competition (high profitability, market power).
  - Market volatility.
- Cross-country results:
  - The long-run pass-through elasticity for Seychelles is lower than the average of any subgroup except Middle Eastern countries.
  - Interest rate pass-through tends to be weaker in less developed countries and small island states.
- Empirical methodology:
  - ARDL specification using logs of lending (iR) and money market (iM) rates with monthly data from Dec. 2005 to March 2010 for 81 countries.
  - Long-term pass-through elasticity calculated from estimated coefficients.
- Main summarized findings:
  - Island economies tend to have weaker pass-through.
  - More-developed countries have stronger pass-through.
  - Market volatility weakens pass-through.
  - Excess liquidity weakens pass-through by distorting money market functioning.
  - High profitability of banking sector weakens pass-through by reflecting inadequate competition.
- Policy implications for Seychelles:
  - Develop financial markets to reduce market volatility.
  - Reduce excess liquidity in the banking system.
  - Strengthen banking competition.

### Financial sector vulnerabilities and stress-testing results (Appendix IV)
- Banking sector overview (based on September 2010 data): adequately capitalized, liquid and profitable, but mismatched in asset/liability maturity.
- Major risk: credit risk is identified as the major risk facing Seychelles banks; second-round effects from higher default rates pose the real danger.
- Collateral and provisioning scenarios:
  - If all collateral were valued at zero, industry capitalization would have been 6.7 percent with two banks less than well capitalized.
  - With the new standard of classification and provisioning adopted in November 2010, the first bank would fail if 22 percent of current loans became a loss and industry unweighted Tier 1 capitalization would be 2.8 percent.
- Credit quality stress tests (end-August 2010 data):
  - Current Tier 1 capitalization (in percent): 7.3.
  - New net capitalization with new bad loan provisioning requirement: 7.0.
  - New net capitalization with collateral discounted to zero: 6.7.
  - New net capitalization with a 40% increase in NPLs all treated as loss: 4.8.
  - New net capitalization with a 260% increase in required provisions owing to an assumed loss: 5.5.
  - Percentage of pass loans needed to be classified as loss to cause first failure: 22.0.
- Alternative credit stress outcomes:
  - A 40 percent increase in NPLs, all treated as total loss, would reduce industry capitalization to 4.8 percent; one bank would fail, three banks would be less than well capitalized.
  - A 260 percent increase in provisioning would be needed to cover bad loans resulting in first failure and industry capitalization of 5.5 percent.
  - It would take 22 percent of pass loans reclassified as loss for the first bank to fail.
- Liquidity stress tests:
  - A 30 percent drop in deposits funded by a corresponding reduction in liquid assets would reduce industry liquidity ratio to 28.3 percent; one bank would exhaust liquidity and two banks would fall below 10 percent.
  - Test assumes banks cannot borrow from each other or the Central Bank of Seychelles (CBS).
- Exchange rate stress tests:
  - Depreciation from SR/US$12.1 to SR/US$16 would improve Tier 1 capitalization from 7.3 percent to 7.8 percent.
  - Appreciation to SR/US$8 would deteriorate Tier 1 capitalization to 6.5 percent.
  - Appreciation or depreciation would not cause any bank failures under tested scenarios.
- After adjusting bank capital for credit risk, changes in interest rates and exchange rate would leave banks with capital coverage of 27 to 34 percent of their loan portfolio; distribution of this risk is fairly even though two banks are slightly more at risk.

*Italic: Source: IMF staff report content provided in the content unit.*

### Appendix V. Offshore Finance

### Appendix V. Offshore Finance

### Offshore development strategy
- The OFC featured prominently in Seychelles‘ long-term strategy, published in 2007, as a means to diversify an economy heavily reliant on tourism.
- Key selling points highlighted: a location that bridges time zones in Europe and the Middle East and low registration costs.
- Several pieces of key legislation were enacted to support the OFC strategy.
- The authorities have revisited their offshore development strategy, taking into account AML/CFT issues.

### OFC activity, scale, and transparency concerns
- Annual turnover of OFC activity in Seychelles is estimated in the area US$25 million.
- OFC activity clusters around international business companies (IBCs), raising transparency concerns.
- Two offshore banks operate in Seychelles: one is a subsidiary of a locally established foreign bank, and a government bank holds equity in the second.
- The brisk growth in registration of IBCs has ranked Seychelles second, worldwide.
- BIS statistics include $1.3 billion in Seychelles residents‘ bank deposits, probably reflecting IBCs‘ deposits.
- IBCs are not subject to taxation (except for a registration fee of US$100).
- IBCs are neither required to divulge information on ownership in their articles of association, nor to the registrar of companies.
- IBCs maintain a share register, but only members can access accounts and records held at the registered office.
- The establishment of Special License Companies (SLCs), Corporate Services Providers (CSPs) and trusts is also noteworthy.
  - SLCs and CSPs differ from IBCs in that the registrar is privy to information on ownership that is outside the public domain.
  - SLCs and CSPs are considered as tax-residents, are covered by provisions of the Business Tax Act and benefit from extensive double taxation agreements.
  - CSPs are required to know and identify their principal clients and owners of client companies and to subject their professional intermediaries to similar due diligence.
  - Trust deed and letter of wishes are not deposited with the competent authority but must be produced if required for regulatory inspection.

### OFC prospects, comparative experience, and risks
- Well established OFCs continue to thrive, but newcomers face less encouraging prospects.
- The success of small island OFCs highlights factors such as partner-country investment and tax laws, which are not easily replicated.
- Example: In Mauritius the Fund estimated the OFC impact on local employment and economic activity to be marginal initially, but representing an increasing share of financial activity over time, with positive effects on telecommunications, professional services and worker retention.
- Newcomer OFCs face a choice:
  - Open doors to second-rate business and experience fast growth but incur reputational risk (it only takes one scandal to unravel a reputation and several years to reverse the damage).
  - Limit to high-quality legitimate business and gain very little or no market share, with high start-up costs and uncertainty in the magnitude and timing of any pay-off.

### AML/CFT focus and institutional responses
- In view of potential exposure to illicit activities, the authorities are focusing on AML/CFT.
- Seychelles participates in several international initiatives, most recently the ESAAMLG peer review.
- ESAAMLG, in reviewing the institutional and legal framework and examining capacity, implementation and effectiveness of all regulatory systems, identified weaknesses which the authorities are addressing.
- Measures and capacity building undertaken or planned:
  - Recently created Financial Intelligence Unit (FIU) conducts frequent on-site examinations and strengthened its operating procedures.
  - Reorganization of the police force.
  - Creation of a national drugs enforcement agency.
  - Review of criminal justice.
  - Capacity building for the FIU, police, attorney general‘s office and offshore practitioners.
  - Regular interaction with peers (as in the Egmont Group).

*Source: Appendix V. Offshore Finance, _cr1105 - Appendix V. Offshore Finance_*

### 16.      The final major tax scheduled for introduction is the Value Added Tax (VAT).  The

### _cr1105 - 16.      The final major tax scheduled for introduction is the Value Added Tax (VAT).  

### Value Added Tax (VAT)
- Introduction aimed at: improving integration in the economy, broadening of the base, elimination of cascading, and increased efficiency and fairness.
- Stakeholder engagement already underway with: the Chamber of Commerce, retailers association and civil society organizations.
- Legislative timetable and implementation preparation:
  - Legislation work is advanced.
  - Aim to present the bill to the National Assembly by end-December 2010.
  - Planned lead time of 18 months to: carry out an extensive education campaign for the population; recruit new staff; install necessary infrastructure; and ensure that the staff of the Seychelles Revenue Commission (SRC) are sufficiently equipped for the introduction of the VAT.
  - VAT regulations including rates, thresholds and exemptions to be submitted for approval by Cabinet by end-June 2011.

### Tax administration reforms
- SRC governance improvements continue; Large Taxpayer Unit creation complete.
  - Large Taxpayer Unit will segregate staff to particular sectors to ensure better understanding of sector-trends and more targeted use of the Audit Team.
- Plans to simplify taxpayer identification systems and increase cooperation between customers and SRC to monitor consistency of compliance with VAT and customs taxation.

### Public Financial Management (PFM)
- Continued progress in strengthening PFM in line with Fund recommendations.
- Budget classification and reporting:
  - Revised Budget Classification policy for public entities to be fully implemented by the end of 2010.
  - Budget-dependent public bodies classified into three groups: (1) providers of specialized services that are core to the running of the country; (2) regulatory authorities; and (3) providers of commercial services essential to the socio-economic development of the country.
  - Most entities in groups 1 and 2 are included in budget documents under the new policy.
- PEFA assessment:
  - New assessment of the government‘s financial operations under the EU‘s PEFA standards planned in early 2011 with EU assistance.
- Chart of Accounts and accounting standards:
  - Cross-agency committee to be established in January 2011 with IMF assistance to identify key needs and reforms.
  - Plan of action to be submitted to Cabinet before end of April 2011 with aim to introduce new Chart of Accounts in the 2012 Budget.
  - Review of Accounting Standards of Financial Statement to ensure consistency with IPSAS by September 2011.
- Capacity building and procedural updates:
  - Budget management training for departmental budget officers ongoing.
  - Revision of the Financial Instructions and Accounting Manual by June 2011.
  - Capacity building within Ministry of Finance to analyze capital expenditure proposals.
- Budget process reforms implemented for 2011 Budget:
  - Moved to a medium-term budgeting framework covering a three-year horizon.
  - 2011 budget process commenced in June 2010 with Cabinet‘s discussion of the Budget Strategy and Outlook (BSO) document.
  - Standard templates used by all ministries and budget-dependent entities to submit recurrent and capital expenditure proposals.
  - Mid-year formal expenditure reviews with detailed reconciliation of budget estimates with quarterly and year-end outcomes.
  - Establishment of a dedicated macroeconomic and revenue forecasting branch within the Ministry of Finance, now fully operational.
- Public Finance Bill amendments:
  - Amendments to reflect transparency, accountability, medium-term stability and budget performance; extend coverage to budget formulation and execution; extend National Assembly oversight to include capital expenditure budget.
  - Public Finance Bill to be submitted to Cabinet for approval by the end of September 2011.

### Pension and Social Security reforms
- Pension Fund contribution reform:
  - Contribution system modified from January 1, 2011: contribution becomes a fixed percentage of the employee‘s salary, payable by both employee and employer.
  - Rate: 1.0 percent for 2011 and move to 1.5 percent from January 2012.
- Social Security Fund:
  - Social Security Act passed in July (year in source context).
  - Government appointed a Board of Trustees under the new Act.
  - Policy on investment objectives of assets to be formulated by September 2011 using World Bank report recommendations.

### Public Enterprise Reform — Non-Financial Institutions
- Utilities and tariff policy work:
  - Negotiations with BADEA to source an expert for tariffs study of the Public Utilities Company (PUC) planned for first half of 2011.
  - Objective: implement a tariff policy consistent with full cost recovery and future investment needs.
  - Study on optimal tariff structure and levels to be completed by end-July 2011.
  - Tariff adjustments to fuel price variations to be implemented after September 2011.
- Governance and privatization actions:
  - Public Enterprise Monitoring and Control Act (late 2009) enabled Public and Financial Accounts Committee monitoring and hearings.
  - Management audit recommendations largely implemented; improved governance standards.
  - Public Enterprise Monitoring Division (PEMD) to present policy paper to Cabinet recommending selection criteria for Board members in Q1 2011.
  - Strategic assessment report of the national airline submitted; airline responded and Cabinet considering response.
  - New Postal Sector Act has established postal service as fully independent commercial entity outside Government budget.
  - Privatization plan for non-strategic public enterprises (those not serving public policy goals) to be developed by end of September 2011.

### Public Enterprise Reform — Financial Institutions
- Housing Finance Corporation:
  - Financial audit completed; recommendations submitted to the CBS.
  - Action plan for house financing policy limiting public sector role to be submitted for Cabinet adoption by June 2011, drawing on FIRST Initiative report.
- State-owned banks and privatization strategy:
  - Policy to privatize Nouvobanq as part of medium-term strategy.
  - IFC scheduled to conduct an evaluation of state-owned banks in December 2010 and make recommendations on privatization feasibility shortly thereafter.
  - Government expected to respond and formulate a privatization strategy by the end of June 2011.
  - Note: In the near-term both Seychelles Savings Bank and Nouvobanq are performing well financially, present limited risk to the government‘s balance sheet, and are promoting financial intermediation and credit creation.

### Monetary and Financial Sector Policies — Monetary and Exchange Rate
- Monetary policy framework:
  - CBS to continue to rely on reserve money targeting.
  - Short- to medium-term instruments: Repos as main instrument; DAA and CAA and foreign exchange Swaps for fine tuning.
  - CBS to expand range of monetary instruments for greater flexibility.
- Liquidity management and T-bill policy:
  - CBS and MOF to enhance liquidity management and work on T-bill issuance profile to promote market functioning and develop a benchmark yield curve.
  - Calendar of weekly T-bill issuance communicated four weeks in advance.
  - Government domestic debt reduction has increased commercial bank liquidity.
  - MoF stands ready to issue up to SR 250 million of T-bills for monetary policy purposes to help CBS absorb excess liquidity and share sterilization costs, should liquidity persist.
- Exchange rate regime:
  - Commitment to a floating exchange rate regime.
  - CBS to intervene only to smooth excessive volatility and ensure orderly market conditions.
  - Work on a code of conduct for foreign exchange and money market participants.
- Operational and capital improvements:
  - Integrated (core) banking system scheduled to go live on December 01, 2010.
  - CBS recapitalization: two rounds of capital injection for R63 million each through treasury bills in June and September 2010, and a final injection of R62 million planned in December, to boost CBS capitalization level to 10 percent of monetary liabilities by the end of the year as required by the CBS Act (as amended in 2009).
  - Reserve management arrangements being pursued with World Bank (RAMP), BIS Asset Management services, and Crown Agent; formal arrangements expected in early 2011.
- Payment systems modernization:
  - Steps taken in 2009 and 2010 include: requirements and standards document for electronic funds transfers; adoption of new cheque standard documents in July 2009; formalization of new clearing house rules in April 2010; and introduction of the National Clearing and Settlement system Act in July 2010.
  - Post-Core Banking System: facilitate Electronic Clearing House and local rupee Switching System for ATM/POS settlements.
  - CBS to promote electronic funds transfer and plastic card use; implement a real time gross settlement system in 2011/2012.
- Risk management and business continuity:
  - Full risk assessment conducted in May 2010 by an international audit firm; draft reports, draft risk policy and tools submitted.
  - Risk implementation committee (RIC) established to drive the risk framework and ongoing risk assessments; Internal Audit Division to monitor risks.
  - Business continuity plan (BCP) completed ahead of end-2010 deadline; action plan submitted to CBS Management.

### Financial Sector Reforms and Supervision
- Risk-based supervision framework development with IMF technical assistance:
  - CBS Board fully approved the CAMELS bank rating system; adopted in a recent onsite bank examination.
  - Frequent examinations per procedural manuals on each component of the bank rating system.
  - CBS will require banks to submit business plans on an annual basis by end-2011.
  - Development of CAELS approach to offsite supervision and enhancement of macroprudential supervision underway.
  - Minimum capital for banks has been doubled, with a three year transition period for existing banks that do not meet the new requirement.
- Crisis preparedness:
  - Toronto Centre conducted a four day workshop on crisis preparedness in October 2010 for Central Bank, Ministry of Finance and Seychelles International Business Authority staff.
  - Initiated work on a Seychelles crisis binder containing communication and co-ordination strategies, resolution options and identified challenges.
  - An action plan will address gaps; first draft of crisis binder to be submitted to Toronto Centre for review.

*IMF country report excerpt (content unit _cr1105).*

### 40.      Seychelles will continue its efforts to promote transparency in the offshore financial

### _cr1105 - 40.      Seychelles will continue its efforts to promote transparency in the offshore financial

### Offshore financial sector transparency and supervision
- Seychelles will continue efforts to promote transparency in the offshore financial sector through strengthened supervision by CBS in coordination with the Seychelles International Business Authority, and the Financial Intelligence Unit.
- Following a review by the Global Forum on Transparency and Exchange of Information for Tax Purposes, Seychelles has committed to ascertain that the country's legal framework supports and upholds the principle of transparency and exchange of information.

### Insurance sector supervision
- Commitment to encourage a sound and efficient insurance sector that promotes policyholder confidence.
- The FIRST Initiative will provide technical assistance to CBS to strengthen insurance supervision.
- A mission is slated for December 2010 to review the regulatory framework and prepare manuals for conducting examinations of insurance and insurance-related companies.
- Target: Review regulatory framework of insurance sector, preparation of manuals for insurance supervision — December 2011.

### Banking and non-bank financial supervision
- CBS will continue to strengthen supervision of banks and other non-bank financial institutions under its supervisory ambit.
- New regulations on Capital Adequacy and Credit Classification and Provisioning were formally adopted in November 2010, ensuring conformity with international best practices and certain components of Basel II.
- CBS has begun supervising the Housing Finance Company (HFC) and the Development Bank of Seychelles (DBS) under its new mandate.
  - CBS will use recent special audits by external auditors of HFC and DBS as a basis to begin risk-based supervision, including offsite and onsite examinations.
  - FIRST Initiative strategic assessments of HFC and DBS will inform Government decisions on the future of these institutions.
- CBS will make increasing use of stress testing to evaluate safety and soundness; the recently conducted stress test devised by the MCM expert will be used as benchmark and to guide examiners.

### Banking sector competition and credit development constraints
- The banking system suffers from a lack of competition, hampering credit growth and sector development.
- Identified barriers to credit development:
  - excessive prepayment penalties,
  - long delays in registering guarantees and collateral,
  - excessively long periods for the court system to liquidate collaterals,
  - absence of a credit rating system,
  - limited disclosures by banks under the Financial Institutions Act (FIA).
- CBS is conducting a study to identify uncompetitive practices and barriers and will draw up an action plan based on results.
- Some measures will require an amendment of the FIA, planned for end-April 2011.
- Target: Submit FIA amendments to Cabinet of Ministers — April 2011.
- Target: Require banks to submit business plans — December 2011.

### Consumer protection and competition promotion
- CBS committed to promoting fair competition in the financial sector, consumer protection, and a healthy competitive financial system.
- CBS will liaise with the Fair Trading Commission and the Seychelles Bankers Association.
- Initial steps:
  - Launch a public awareness campaign on different financial products.
  - Review CBS requirements for disclosure of banks' fees and charges to ensure greater transparency toward the public.

### Crisis preparedness, CBS independence, and supervisory actions (selected timeline)
- Devise action plan to address gaps identified in crisis preparedness exercise — December 2010.
- Amend CBS Act to strengthen CBS independence and improve internal control as per safeguard assessment recommendations — March 2011.
- Finalization of Seychelles' crisis binder — March 2011.
- Require banks to submit business plans — December 2011.
- Conduct onsite examinations of DBS and HFC — December 2011.

### Balance of payments — External debt restructuring
- As of end-November, restructuring agreements covering approximately US$631million, or around 91 percent of the debt eligible for restructuring have been reached.
- Aggregate cancellations under these agreements amount to approximately US$310 million in principal, accrued interest, and other charges.
- Remaining balances largely rescheduled over periods exceeding 17 years at low rates of interest; bulk of foreign currency debt owed to local commercial banks converted into rupees.
- Entirety of foreign currency debts owed to locally-based commercial banks has been restructured:
  - Agreements covering nine facilities outstanding to local and local affiliates of foreign banks have been concluded; two facilities were bought back at a steep discount.
  - Almost all remaining claims converted into rupees at market rates and rescheduled often for periods exceeding 30 years, with material grace periods on principal.
  - Floating interest rates agreed in most cases, at modest fixed margins over six-month or one-year treasury bills.
- Government has concluded, or is in process of concluding, eight of the 11 bilateral agreements implementing the April 2009 Paris Club agreement; another is in advanced stages.
- Expect to receive the two remaining draft agreements from creditors shortly.
- Government will persevere to conclude restructuring agreements on comparable terms with remaining commercial bank and non-Paris Club official bilateral creditors; in principle agreements have been reached with all non-Paris Club official bilateral creditors holding unresolved claims and with the two remaining commercial bank creditors (both foreign institutions).

### Trade policy
- Commitment to a liberal foreign trade policy; import tariff regime highly liberal with more than 94% of all tariff lines set at zero.
- Measures underway to modernize trade regime to conform with regional, bilateral and international trade obligations.
- Commitment to WTO accession process as a priority.
- Pursuing trade negotiations with the European Union:
  - Signed in August 2009 an interim European Partnership Agreement (EPA) with Comoros, Madagascar, Mauritius, Zambia and Zimbabwe.
  - EPA ensures exports into the EU are not subject to duties or quota; in exchange, Seychelles will gradually phase out the maximum duty rates applicable to 98 percent of imports from the EU.

### National statistics and data improvements
- Strong commitment to improving quality, periodicity, and timeliness of macroeconomic and financial statistics.
- New National Statistics Act (NSA) approved by the National Assembly in July 2010, creating the National Bureau of Statistics (NBS), reinforcing independence and strengthening mandate to collect data compared to predecessor (NSB).
- Governing Board independent of government and comprises members from public and private organizations affecting or affected by NBS statistics.
- NBS current budget increased to build capacity.
- Addressing deficiencies in key macroeconomic data, especially GDP estimates and external sector statistics.
  - Strategic plan to be adopted by end-February 2011 to map path toward SDDS and IIP6 compliance.
  - IMF mission on quarterly National Accounts in November 2010; IMF mission to assist development of an Industrial Index and Producer Price Index.
  - Aim to submit an advance release calendar for SDDS compliance by mid-2012.
  - Increase coordination across government agencies to improve quality and consistency in FDI statistics.
  - Ministry of Employment to reinforce production of high-frequency labor market data.
  - Requested further technical assistance from the Fund (fiscal and national accounts) and the World Bank (to strengthen NSB management and operations).

### Program monitoring and quantitative framework
- EFF-supported program monitored by semi-annual program reviews, with semi-annual quantitative performance criteria and disbursements.
- Proposed new program review schedule to synchronize with budget cycle: test dates December and June.
- Semi-annual quantitative performance criteria (QPCs) for 2011 shown in Table 2; structural benchmarks for 2011 shown in Table 3.
- Technical Memorandum of Understanding (TMU) defines quantitative performance criteria, indicative targets and adjusters; Seychelles to avoid introducing new exchange restrictions, multiple currency practices, or bilateral payments agreements contradicting Article VIII of the IMF‘s Articles of Agreement; avoid imposing any import restrictions for balance of payments reasons.

### Selected structural benchmarks (Table 1 highlights)
- Submit VAT bill to National Assembly, to become effective July 1, 2012 (MEFP ¶16) — End-December 2010.
- Cabinet approval of the amendments to financial institutions' act as described in MEFP ¶45 — End-April 2011.
- Adopt an action plan for house financing policy that limits the role of the public sector (MEFP ¶27) — End-June 2011.
- Launch a strategic plan for the reform of the social security system (MEFP ¶24) — End-June 2011.
- Cabinet approval of VAT regulations, including rates, exemptions and thresholds (MEFP ¶16) — End-June 2011.
- Commission and complete a study on optimal tariffs for utilities (MEFP ¶25) — End-July 2011.
- Develop a privatization plan for non-strategic public enterprises (MEFP ¶26) — End-September 2011.
- Cabinet approval of a new Public Finance bill extending the National Assembly's oversight on capital expenditure budget (MEFP ¶23) — End-September 2011.
- Reinstate the electricity tariff adjustment for fuel price variation (MEFP ¶25) — End-September 2011.

### Selected quantitative targets and program figures (Table 2 excerpts)
- Net international reserves of the CBS, millions of U.S. dollars (floor): 168 189 192 202 213
- Reserve money (ceiling): 1,753 1,804 1,824 1,844 1,862
- Primary balance of the consolidated government (cumulative floor): 823 142 240 515 602
- The contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 37 43 34 64 47
- The contracting or guaranteeing of new short-term external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 0.0 0.0 0.0 0.0 0.0
- The accumulation of external payments arrears by the public sector (ceiling): 0.0 0.0 0.0 0.0 0.0
- The accumulation of domestic payment arrears by the public sector (ceiling): 0.0 0.0 0.0 0.0 0.0
- Memorandum items:
  - External non project financing (millions of U.S. dollars; cumulative): 31.8 -1.4 0.0 2.1 5.5
  - Program financing support: 19.6 0.0 0.0 0.0 0.0
  - Cash payments on foreign debt service: 9.2 6.5 9.3 11.7 15.8
  - External budget grants: 21.4 5.1 9.3 13.8 21.3
- Program accounting exchange rates (end-of-quarter):
  - SR/US$ : 11.75 12.30 12.30 12.30 12.30
  - US$/Euro : 1.27 1.36 1.36 1.36 1.36
  - US$/UK pound : 1.48 1.57 1.57 1.57 1.57
  - US$/SDR : 1.49 1.56 1.56 1.56 1.56

### TMU: Definitions and monitoring (selected)
- Net International Reserves (NIR) of the CBS (Floor):
  - Defined as reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF).
  - Reserve assets: claims on nonresidents readily available, controlled by the CBS, held for intervening in FX markets; 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, any holdings of investment-grade securities.
  - Reserve liabilities: liabilities to nonresidents contracted by the CBS, any net off-balance-sheet position of the CBS (futures, forwards, swaps, or options) with residents or nonresidents, including those to the IMF.
  - Calculation method: convert reserves assets and liabilities at each test date into U.S. dollars using end of period exchange rates assumed in the program.
  - Monitoring: Quarterly NIR data submitted by CBS to IMF will be audited by CBS external auditors in accordance with International Standards on Auditing; reports due no later than two months after each test date.
  - Adjusters: Floor on CBS NIR adjusted upward (downward) by amount external non-project loans and cash grants exceed (fall short of) amounts assumed in program; also adjusted for external debt service payments deviations.
- Reserve Money (Ceiling):
  - Defined as currency issued and deposits held by financial institutions at the central bank (bank reserves), including foreign currency denominated items.
  - Evaluation done at program accounting exchange rate.
  - Monitoring: Quarterly reserve money data audited by CBS external auditors; reports due no later than two months after each test date.
- Primary Balance of the Consolidated Government (Cumulative Floor):
  - 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, on a commitment basis.
- Public External Debt (Ceiling):
  - Ceiling applies to contracting or guaranteeing of new external liabilities by the public sector (central government, CBS, all public agencies and parastatals for non-commercial operations).
  - Exclusions: use of Fund resources, operations related to external debt restructuring, normal import related credits, purchases of treasury securities by nonresidents, borrowing by parastatals in normal commercial operations.
  - Debt is valued in U.S. dollars at program exchange rates. Zero sub-ceiling on short-term external debt (original maturity up to and including one year) applies continuously.
  - For the purpose of the criterion, "debt" follows Executive Board Guidelines (Decision No. 12274-(00/85)) and includes loans, suppliers credits, leases, arrears, penalties, and judicially awarded damages that constitute debt.

*Source: IMF staff report content as provided in the supplied PDF content unit.*

### 11.      The nonaccumulation of arrears to external creditors will be a continuous performance

### _cr1105 - 11.      The nonaccumulation of arrears to external creditors will be a continuous performance

### External payments arrears — 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 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.

### Budget expenditure arrears — continuous performance criterion
- The nonaccumulation of budget expenditure arrears will be a continuous performance criterion under the program.
- Definition of budget expenditure arrears:
  - 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.

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

- The CBS will report:
  - Weekly (within one week from the end of the period):
    - 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 4 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 2 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 and additional information
- The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation.
- The government and CBS will provide any additional relevant information as requested by Fund staff.

*Source: _cr1105 - 11.      The nonaccumulation of arrears to external creditors will be a continuous performance*

### 2011. Under the MIC Technical Assistance Fund three grants have been approved. A grant to

### _cr1105 - 2011. Under the MIC Technical Assistance Fund three grants have been approved. A grant to

### MIC Technical Assistance Fund — approved grants
- Grant to finance a study amounting to UA 600,000 approved in December 2008 to support human resource development, training and capacity building and the establishment of the Seychelles University Foundation; the study did not take off as planned and is due for cancellation.
- Second grant amounting to US$ 500,000 approved in February 2009 to undertake the feasibility on a Submarine Cable System to link Seychelles to East Africa; this feasibility study has been completed.
- Third grant focusing on the Development of a Mariculture Master Plan amounting to UA 280,000 approved in July 2010.

### Bank guarantee and debt-restructuring support
- 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 in the context of the public debt restructuring effort; the guarantee was instrumental in generating a high participation in the debt exchange offer.

### ISN assessment and lessons for next strategy
- A Completion Report on the ISN is due to be presented to the Board in December 2010; overall finding: the Strategy has been relevant and considerable progress has been made in outputs and outcomes under the single pillar.
- Lessons to incorporate in the next strategy (scheduled in 2011):
  - Maintain a candid dialogue with Government to ensure strategic responsiveness and flexibility.
  - Ensure close cooperation and coordination with other Development Partners.
  - Ensure close supervision and follow-up of all operations (regardless of size) to identify and address weaknesses/delays promptly.

### Operations summary (as at 31 October, 2010)
- Source of Financing — Commitments (UA million) — Percentage Share — Disbursed Amount (UA million) — Percentage Disbursed
  - ADB — 62.197 — 24.1 — 44.127 — 70.9
  - ADF/TAF — 12.700 — 14.1 — 11.298 — 88.9
  - NTF — 12.000 — 14.0 — 10.398 — 86.6
  - Total — 86.891 — 100 — 65.807 — 75.7
- Operations since: 1978
- Total Number of operations 24: 15 Projects, 5 Studies; 3 Lines of Credit, 1 Emergency Operation

### Statistical issues — coverage and capacity
- Participation and frameworks:
  - Country participates in the General Data Dissemination System (GDDS) since December 2006 and in government finance statistics modules of the Anglophone Africa project funded by the U.K. Department for International Development (DFID).
  - Ten out of the seventeen applicable data categories of Special Data Dissemination System (SDDS) meet the coverage, periodicity and timeliness prescriptions of SDDS.
- Real sector statistics:
  - National accounts base year: 2006; new provisional national accounts estimates for 2004-2009 published in May 2010.
  - NSB compiling quarterly national accounts for 2004-2008 (not yet disseminated).
  - Tourism statistics: weekly and monthly; production indicators: quarterly.
  - New CPI introduced October 2007, base period July 2007; CPI meets all SDDS requirements. Producer Price Index not yet compiled.
- Government finance statistics:
  - Recorded on a cash basis broadly consistent with Government Finance Statistics Manual (1986).
  - Authorities participated in a GFS pilot study using GFSM 2001 analytic framework and are participating in a DFID-financed technical assistance project to improve cash-based statistics and lay foundations for accrual-based measures and extended institutional coverage.
  - Since April 2010, fiscal reports presented on a consolidated government basis; 2001 Budget to be presented on a general government basis after reclassification of budget dependent entities.
- Monetary and financial statistics:
  - Meet SDDS requirements and reported regularly to STA for IFS publication.
  - Integrated monetary database operational using standardized report forms (SRF); SRF-based monetary data published in IFS Supplement since March 2007 issue.
- External sector statistics:
  - Substantial progress in adopting BPM5 methodology; annual BOP data reported nine months after reference period; provisional estimates provided earlier; quarterly BOP data compiled including 2009 and publicly available.
  - Merchandise trade data reported quarterly and meet SDDS requirements.
  - Progress in collecting/updating public sector external debt, debt-service and external payments arrears since hiring financial advisors.

### Table of common indicators required for surveillance (As of November 24, 2010) — selected frequencies and dates
- Exchange rate — Date of latest observation: 11/24/10 — Date Received: 11/24/10 — Frequency of data: Daily — Frequency of reporting: Daily — Frequency of publication: Daily
- International reserve assets and reserve liabilities of the monetary authorities — 11/19/10 — 11/24/10 — Weekly — Weekly — Monthly
- Reserve money — 11/24/10 — 11/24/10 — Daily — Daily — Monthly
- Broad money — Sept. 2010 — 10/26/10 — Monthly — Monthly — Monthly
- Consolidated balance sheet of the banking system — Sept. 2010 — 10/26/10 — Monthly — Monthly — Monthly
- Consumer price index — Oct. 2010 — 11/05/10 — Monthly — Monthly — Monthly
- Revenue, expenditure, balance and composition of financing of the central government — Sep. 2010 — 10/14/10 — Monthly — Monthly — Monthly
- External current account balance — Sep. 2010 — 10/20/2010 — Quarterly — Quarterly — Quarterly
- GDP — 2009 — Annual — Annual — Annual
- Gross external debt — Sep. 2010 — 11/11/2010 — Monthly — Monthly — Monthly

*Public Information Notice (PIN) No. 10/162 — FOR IMMEDIATE RELEASE December 22, 2010*

### IMF 2010 Article IV consultation — background and outlook
- Concluded by Executive Board on December 20, 2010.
- Staff view: Economic outlook favorable; developments in 2010 indicate quick progress toward stabilization with margins for more expansionary policies.
- Achievements in 2010: Exchange rate stabilization, price stability restored, reserves rebuilt.
- Medium-term outlook: Growth projected to gradually reach 5 percent; global recovery uncertainties and large external vulnerabilities argue for rebuilding policy buffers and diversifying the economy.
- Key issues discussed: Recovering from severe external debt crisis; reducing vulnerability to external shocks; promoting private-sector led growth; use of fiscal margins; external stability; management of growing banking liquidity; sound development of financial sector.
- Program status: On track; all performance criteria through end-September 2010 were met; end-year targets within reach. Capacity bottlenecks delayed two structural benchmarks for end-September and end-November 2010.

### Executive Board Assessment — main points
- Commended stabilization efforts that helped overcome 2008 balance of payments and debt crisis and the global recession.
- Noted policy turnaround: foreign exchange market liberalization and floating of the rupee, exceptional fiscal adjustment, enhanced public finance and central bank management.
- Welcomed role of international assistance in debt restructuring and investor confidence restoration.
- Directors’ views:
  - Medium-term outlook positive but risks remain.
  - Room for more expansionary fiscal policies in 2011 given growth, benign inflation, and strong 2010 revenue performance, balanced against need to rebuild buffers.
  - Supported tax rationalization and launch of VAT in mid-2012.
  - Exchange rate broadly in line with fundamentals; flexible exchange regime welcome.
  - Vigilance needed on inflation and exchange rate risks from excess bank liquidity due to rapid domestic public debt reduction; welcomed commitment to mop-up liquidity, including issuing treasury bills.
  - Banking system sound; encouraged greater competition among banks, reduced state intervention, and enhanced disclosure and consumer protection.
  - Stressed need to address capacity bottlenecks delaying structural benchmarks.
  - Emphasized maintaining ambitious path toward debt sustainability and ensuring financial sustainability of national airline and Public Utilities Company.

### Selected economic and financial indicators, 2008–13 (selected series and exact values)
- Nominal GDP (millions of Seychelles rupees):
  - 2008: 8,710
  - 2009: 10,402
  - 2010 Prel.: 10,726
  - 2011 Prog.: 11,206
  - 2012 Proj.: 11,303
  - 2013 Projections: 12,000; 12,881; 13,920 (note: multiple 2013 entries appear in table)
- Real GDP (percentage change):
  - 2008: -1.3
  - 2009: -7.6
  - 2010: 0.7
  - 2011: 4.0
  - 2012: 6.2
  - 2013: 4.3; 4.8; 5.0
- CPI (annual average):
  - 2008: 37.0
  - 2009: 32.9
  - 2010: 31.9
  - 2011: -2.4
  - 2012: -2.2
  - 2013: 2.5; 3.0; 2.9
- CPI (end-of-period):
  - 2008: 63.3
  - 2009: 1.9
  - 2010: -2.5
  - 2011: 1.1
  - 2012: 1.2
  - 2013: 3.0; 2.6; 3.0
- Government budget (percent of GDP):
  - Total revenue, excluding grants: 2008: 32.9; 2009: 35.6; 2010: 35.4; 2011: 31.4; 2012: 35.5; 2013: 36.5; 36.5; 35.7
  - Expenditure and net lending: 2008: 40.0; 2009: 35.1; 2010: 33.8; 2011: 33.8; 2012: 34.3; 2013: 37.8; 36.2; 35.0
  - Primary balance: 2008: 3.9; 2009: 13.3; 2010: 14.8; 2011: 7.4; 2012: 9.4; 2013: 5.0; 4.7; 4.0
  - Total public debt (includes central bank):
    - 2008: 136.7
    - 2009: 140.1
    - 2010: 128.6
    - 2011: 82.4
    - 2012: 76.1
    - 2013: 71.7; 64.3; 57.0
- External sector:
  - Current account balance including official transfers (percent of GDP): 2008: -48.9; 2009: -22.6; 2010: -36.3; 2011: -39.5; 2012: -47.1; 2013: -27.3; -20.0; -17.3
  - Total stock of arrears (millions of U.S. dollars): 2008: 317; 2009: 239; 2010: 251; 2011: ...; 2012: 33.3 (2010 figure noted as an estimate as of end-November 2010)
  - Total public external debt outstanding (millions of U.S. dollars) and in percent of GDP:
    - In percent of GDP: 2008: 82.8; 2009: 98.5; 2010: 92.6; 2011: 53.6; 2012: 45.3; 2013: 46.2; 43.9; 40.1
  - Gross official reserves (end of year, millions of U.S. dollars):
    - 2008: 51
    - 2009: 153
    - 2010: 169
    - 2011: 224
    - 2012: 218
    - 2013: 253; 286; 311
  - In months of imports, c.i.f.: 2008: 0.6; 2009: 1.5; 2010: 1.7; 2011: 2.3; 2012: 2.3; 2013: 2.7; 3.0; 3.1
  - Exchange rate — Seychelles rupees per US$1 (end of period): 2008: 16.6; 2009: 10.6; 2010: 11.3

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

### Press Release No. 10/507 — December 21, 2010: EFF second review and disbursement
- Executive Board completed second program review and financing assurances review under Seychelles’ three-year EFF.
- Completion allows immediate disbursement equivalent to SDR 1.76 million (about US$2.7 million), bringing total disbursements under the arrangement to SDR 9.24 million (about US$14.2 million).
- Extended Arrangement effective December 23, 2009 in the amount of SDR 19.8 million (about US$30.3 million, or 225 percent of Seychelles’ quota).

### Statement by IMF Deputy Managing Director (summary of key points)
- Stabilization achievements credited to foreign exchange liberalization, rupee float, exceptional fiscal adjustment, enhanced public finance and central bank management, and near-completion of external debt restructuring.
- Rapid recovery driven by tourism rebound and higher FDI; strong 2010 revenue performance allows fiscal room for priority recruitment and infrastructure in 2011 while maintaining debt sustainability.
- Continued modernization of public finances needed, including VAT launch in mid-2012 and budget transparency/efficiency measures.
- Need to enhance efficiency and financial viability of state-owned enterprises, especially national airline and public utility company.
- Vigilance needed against inflation and exchange rate risks from excess bank liquidity; programmed monetary tightening and mop-up measures are appropriate.
- Promote banking competition, reduce state intervention, and enhance disclosure and consumer protection.

### Statement by Seychelles Executive Director and advisor — program implementation and outlook
- Authorities achieved remarkable turnaround in economy and public finances since 2008 Article IV.
- EFF provides framework to consolidate stability, achieve external debt sustainability and support growth; program on track with growth and budget surplus exceeding 2010 targets.
- Economic developments and outlook:
  - Real GDP forecast revised upwards from 4 percent to more than 6 percent for 2010 driven by tourism, construction and manufacturing.
  - Inflation peaked over 60 percent in 2008 crisis; virtually flat in 2010, allowing monetary easing.
  - Authorities diversifying export markets, participating in anti-piracy efforts, and investing in infrastructure.
- Program implementation:
  - All quantitative targets comfortably met; two structural benchmarks behind schedule due to capacity constraints—one met with submission of new customs management act to National Assembly on December 14; the other (adoption of new chart of accounts) delayed until 2012 Budget context.
- Fiscal policy:
  - Stronger-than-expected 2010 revenues enabled government to exceed primary surplus target by 2.4 percent of GDP while increasing spending on infrastructure, education and health.
  - Capital expenditures planned for 2011 include coast guard facility, landfill, electricity and water distribution improvements, Victoria hospital rehabilitation, education facilities, and a housing project.
  - Government to continue delivering budget surpluses required for medium-term debt sustainability while accommodating pro-growth investment.
- Monetary and exchange rate policies:
  - Central Bank capacity strengthened via capital injections of almost SR 190 million in 2010, integrated core banking system implemented on 1 December 2010, expected introduction of formal risk management framework in 2011.
  - Excess bank reserves rose to about 4 percent of GDP as Government retired debt.
  - Interim measure: transfer SR 200 million of Social Security Fund deposits from commercial banks to the CBS for at least one year while investment strategy reviewed.
  - Ministry of Finance prepared to issue up to SR 250 million of T-bills for monetary policy purposes to help absorb excess liquidity.
  - Authorities committed to floating exchange rate and improvements to inter-bank FX market efficiency (e.g., code of conduct).
- Financial sector policies:
  - Banks well-capitalised and profitable; Fund stress tests indicate resilience.
  - Progress toward modern, risk-based supervisory framework; minimum capital requirements doubled; protocols for managing a financial sector crisis prepared.
  - CBS strengthening supervision per new regulations on capital adequacy and credit adopted in November 2010.
  - Private sector credit grew by 8 per cent over the year to September 2010, below broad money growth.
  - Authorities promoting transparency, information dissemination, and studies to identify uncompetitive practices and barriers.
- Debt restructuring and sustainability:
  - Around US$631 million, or around 91 percent of eligible debt, restructured to date.
  - Around US$310 million in principal, interest and other charges cancelled; remainder rescheduled at concessional rates for periods of 17 years or more.
  - Bilateral debt agreements signed with most Paris Club creditors, several non-Paris Club creditors and all commercial banks; negotiations continue with remaining creditors.
  - External debt expected to decline to 45 percent of GDP by end-2010, down from 92 percent at end-2009.
  - Government on track to limit total public debt (external and domestic) to less than 50 percent of GDP by 2018; 2011 debt limits revised upward to accommodate infrastructure financing, including concessional loans and a guarantee supporting submarine cable installation.
- Key structural reforms to be pursued under remaining EFF period:
  - Taxation: major tax reforms delivered in 2010; VAT introduction planned for July 2012; improved tax administration pursued.
  - Pension Fund and Social Security Fund: increase in pension contributions from 1 January 2011; strategic plan for funding structure by June 2011; policy on investment objectives of Social Security Fund assets by September 2011.
  - Public financial management: amend Public Finance Bill to reflect budget process improvements and extend National Assembly oversight of capital expenditure budget; PEFA assessment scheduled for 2011.
  - State-owned enterprises: develop privatization plan for non-strategic public enterprises by end-September 2011; study utility tariffs to establish cost- and investment‑covering tariff structure.
  - Public financial institutions: privatization strategy for Nouvobank by July 2011; action plan to limit public sector role in housing finance by June 2011 based on FIRST initiative assessments.
  - Trade policy: maintain liberal trade policy (more than 94 percent of tariff lines set at zero), modernize trade regime, pursue EU negotiations, and commit to WTO accession.

*Italic: International Monetary Fund material summarized from the provided content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1105.pdf_