## _cr11134

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### Executive Summary — IMF Arrangement and Program Status
- Three-year Extended Fund Facility (EFF) for 225 percent of quota (SDR 19.8 million) approved December 18, 2009.
- Disbursements and availability:
  - SDR 9.24 million has been disbursed.
  - SDR 3.52 million will be available upon completion of the third review.
- Program performance and conditionality:
  - Program on track.
  - All quantitative performance criteria at end-December 2010 were met.
  - End-December 2010 structural benchmark (VAT bill) met: VAT bill adopted on December 21, 2010.
  - End-April benchmark on Financial Institutions Act amendments delayed by two months (moved to June).
- Staff recommendation: completion of the third review and modification of performance criteria.

### Recent economic developments and 2011 outlook
- 2010 outcomes:
  - Real GDP: increased by more than 6 percent in 2010.
  - Recovery drivers: exceptionally high FDI flows and rebound in tourism; pick-up in construction, telecommunications, manufacturing and professional services.
  - Current account: widened to about 50 percent of GDP in 2010, reflecting high FDI-related imports and terms of trade deterioration.
  - International reserves: central bank rebuilt reserves to 2.2 months of imports (up from 1.6 months a year before).
  - CPI inflation: remained low in 2010; real effective exchange rate appreciated by about 8 percent y-o-y in 2010 but remained about 20 percent below the mid-2008 level.
  - Fiscal: primary fiscal surplus reached 9.1 percent of GDP, exceeding original budget objective by 2.1 percentage points of GDP.
  - Revenues: total revenues outperformed the budget by 4 percent (of revenues).
  - Public debt: total public debt declined from 128.6 percent of GDP in 2009 to 82.3 percent in 2010.
  - Monetary: reserve money grew in line with program projections; 90-day government securities rates fell to below 0.5 percent; credit to the economy increased by about 14 percent, reaching 27 percent of GDP.
- 2011 projections and risks:
  - Real GDP growth projected to slow to about 4 percent in 2011 due to projected sharp decline in FDI and higher oil prices.
  - Current account in 2011 expected to be five percentage points of GDP wider than previously projected but will narrow considerably from 2010 as import demand declines with FDI.
  - Official external reserves projected to reach 2.4 months of imports at end-2011.
  - Year-to-date CPI inflation picked up to 0.7 percent in Q1 2011; end-year CPI projected to increase by 5.5 percent after first-round pass-through of commodity price increases.

### Macroeconomic and financial performance in 2010 (highlights)
- Tourist arrivals: increased by 11 percent.
- Public finances and debt:
  - Government revenue performance larger-than-anticipated by 4 percentage points of GDP.
  - Fiscal primary balance exceeded initial budget by 1.6 percent of GDP.
  - Fiscal surplus was 2.8 percentage points of GDP.
  - Public debt declined to 82 percent of GDP at year-end, from 128.6 percent a year earlier.
- Monetary and financial indicators:
  - Broad money expansion: 13.7 percent y-o-y.
  - Reserve money growth: in line with program targets.
  - 3-month T-bill rates: below ½ percent.
  - Private sector credit: recovery began after prior contraction.

### Shocks, policy adjustments, and macroeconomic management
- External shocks and new challenges:
  - Global commodities’ price shock and financial difficulties at Air Seychelles.
  - Rising food and oil prices expected to push inflation up and exert pressure on external and fiscal balances.
- Exchange rate and reserves policy:
  - Flexible (floating) exchange regime maintained; interventions limited to smoothing excessive fluctuations.
  - Objective: accumulate equivalent of three months of imports in medium term; reserves accumulation path lowered to allow reserves to absorb part of external shocks while maintaining an upward trend.
- Monetary policy tightening:
  - Reserve requirements on domestic currency deposits raised by three percentage points to 13 percent effective April 1.
  - Reserve requirements on foreign currency deposits to be gradually raised to 13 percent by end-June.
  - Government transferring Social Security Fund deposits with commercial banks to the central bank to drain excess liquidity.
  - Market instruments: repurchase agreements, deposit auctions, foreign exchange swaps.
  - Result: 3 months Treasury bill rates rose to 4.5 percent in early May.
- Fiscal policy and targeted support:
  - Stabilization Fund (SF) established to provide short-term loans to some parastatals to smooth price adjustments for cooking gas, utilities and public transportation.
  - SF design: temporary, not to be converted into permanent price subsidies; loans expected to be repaid once pass-through is realized.
  - SF resources and limits:
    - SR 120 million (one percent of GDP) set aside in the SF.
    - SR 50 million (0.4 percent of GDP) budgeted in 2011; no spending effected so far.
    - Disbursements in 2011 capped and closely monitored.
  - Staff advice: promptly adjust prices and strengthen a targeted social assistance scheme to protect vulnerable households.

### Air Seychelles: issues and restructuring
- Financial deterioration in 2010 due to higher fuel costs and inadequate management.
- To cover losses and pay suppliers through end-March 2011, airline borrowed SR 225 million (about 2 percent of GDP) from state-owned Nouvobanq under a State guarantee.
- Without measures, losses projected at 0.2 percent of annual GDP per month.
- Authorities view Air Seychelles as critical for tourism (transports more than half of visitors).
- Restructuring plan agreed: revising airfares, renegotiating agreements, eliminating non-profitable routes, downsizing the fleet.
- Restructuring projected to reduce losses in remainder of year to SR 83 million.
- Projected transfer from restructuring: about 0.7 percent of GDP.
- Any residual budget support agreed to be temporary and consistent with fiscal consolidation and debt sustainability; company financial statements to be monitored quarterly.

### Fiscal consolidation adjustments for 2011
- Combination of spending cuts and fiscal easing in second half of 2011 to accommodate SF and airline bailout.
- Additional revenues of 0.2 percent of GDP from delayed dividend payments by the tuna cannery.
- Freeze in non-priority domestically financed capital spending of 0.4 percent of GDP.
- 2011 primary surplus target revised down by 0.5 percent of GDP to 4.5 percent.
- Net disbursements of the Stabilization Fund capped at SR 50 million (0.4 percent of GDP) in 2011.
- Budget funds of up to SR 83 million (0.7 percent of GDP) to be provided to Air Seychelles in 2011.

### Financial sector and structural reforms
- Financial sector measures:
  - Strengthen transparency, remove obstacles to financial intermediation and develop capital markets.
  - Introduce higher disclosure standards; reduce/eliminate statutory costs related to collateral registration and loan refinancing; streamline litigation and dispute resolution.
  - Amend Financial Institutions Act (Cabinet approval by June 2011) to establish legal basis for new financial products and creation of credit bureaus.
  - Move toward risk-based supervision and development of a stock exchange.
- Restructuring state-owned banks:
  - Authorities support IFC‘s proposed equity participation and leading role in privatization of Nouvobanq; IFC advisory for Seychelles Savings Bank (SSB).
  - Authorities decided to offer 40 percent of SSB shares to bank employees and account holders; potential further sales to public.
- Non-bank state financial institutions:
  - Concerns about expansion of credit by Development Bank of Seychelles (DBS) at below-market rates and recourse to government-guaranteed bonds.
  - DBS mandate to be redefined to focus on start-up businesses and SMEs; implementation of FIRST initiative recommendations accelerated.
  - Housing Finance Company (HFC) under review; action plan being developed.

### Tax policy, tax administration, and public financial management
- VAT introduction and tax reforms:
  - VAT legislation passed in December 2010; planned VAT introduction mid-2012 (preparations target July 2012; Cabinet to approve VAT regulations by end-June 2011).
  - IMF resident TA advisor hired for 18 months to assist VAT implementation.
  - Policy decisions: petroleum exempt from VAT but subject to excise taxes; registration threshold set to obtain approximately 1,000 registered taxpayers first year; capital goods VAT credit treatment; rental income moved under Business Tax Act.
  - Ongoing SRC reforms with technical assistance; customs management act expected to be passed in June and effective February 2012.
- Public finance management reforms:
  - New Public Finance Act preparation; revision of Financial Instructions; new chart of accounts.
  - Medium-term policy-based budgeting pilot for 2012 in education and health.
  - Ministry of Finance monitoring line ministries‘ creditor lists monthly; verification of utility consumption and settlement within 30 days.
  - PEFA assessment noted weaknesses; action plan being implemented.
- Social security reforms:
  - Strategic plan for SSF and SPF; amendment to Social Security Act by April 2011 to formalize that no SSF funds may be used for government expenditure.
  - By end-September 2011 submit SSF investment strategic plan; part of SSF deposits at commercial banks to be transferred to central bank.

### Central Bank (CBS) operations, liquidity management, and governance
- Monetary framework and instruments:
  - CBS relies on reserve money targeting; repos remain main instrument; Deposit Auction Arrangement (DAA) and Credit Auction Arrangement (CAA) for fine-tuning.
  - New instruments: foreign exchange SWAPs approved; increased use of repurchase agreements, deposit auctions, FX swaps.
- Liquidity management:
  - Weekly Treasury bill issuance calendar communicated four weeks in advance.
  - Reintroduction of longer-term government bonds planned to establish a benchmark yield curve.
  - Request for IMF TA to develop domestic securities markets and primary dealership system.
- CBS IT and payment system modernization:
  - First phase of integrated core banking system went live on December 01, 2010; second phase integrating payroll, HR and inventory started.
  - National payment system steps: new clearing house rules, National Clearing and Settlement system Act, straight-through-processing, Electronic Clearing House, local Switching System; RTGS planned by end-2012.
- Governance and legal reforms:
  - Amendments to CBS Act 2004 to be submitted by end-June 2011; measures include lending limits, prohibition on outside instructions, explicit Governor and Deputy Governor terms of six years, due process for dismissals.
  - Board approved risk policy and established Risk Implementation Committee; internal audit elevated to full division.
- Reserve management:
  - Gross external reserve target: 3-month import coverage.
  - At end-2010: 2.2 months of import cover; reserve accumulation objectives for 2011 slightly adjusted down.
  - CBS to limit use of external reserve managers to World Bank (RAMP) and BIS given capacity constraints; Investment and Risk Implementation Committee to finalize arrangements in Q2 2011.
- Financial sector supervision and crisis preparedness:
  - Address competition/credit impediments; reduce switching costs; establish credit reference bureau.
  - Implement Bank Supervision Application by Dec-11; require banks to submit business plans by Dec-11.
  - On-site examinations: DBS (final report expected end-May 2011); HFC on-site examination expected Aug-2011.
  - Crisis binder draft completed; submit to Toronto Centre Apr-11.
  - AML/CFT: FIU staffing increased; FIU applied to join Egmont Group.
  - Legislative changes to improve offshore transparency and tax information exchange underway.

### Program monitoring, financing, and EFF disbursements
- Program financing:
  - Program for 2011 is financed; residual financing gap for 2011 expected to be closed by restructuring the rest of public external debt.
- EFF disbursement schedule (selected entries preserved exactly):
  - December 22, 2009: Board approval. Amount 0.88 (millions of SDR) (10 percent of quota)
  - March 15, 2010: Amount 2.20 (25 percent)
  - First review: June 15, 2010: Amount 2.20 (25 percent)
  - September 15, 2010: Amount 2.20 (25 percent)
  - Second review: December 15, 2010: Amount 1.76 (20 percent)
  - Third review: March 31, 2011: Amount 3.52 (40 percent)
  - Fourth review: September 30, 2011: Amount 3.08 (35 percent)
  - Fifth review: March 31, 2012: Amount 2.64 (30 percent)
  - Sixth review: September 30, 2012: Amount 1.32
  - Total under proposed Three-Year EFF: 19.8 (millions of SDR); 225 percent of quota
- Indicators of Fund credit (selected entries preserved):
  - Stock of existing Fund credit (end of period): 6.2 11.9 20.2 20.2 16.8 11.3 8.9 7.4
  - 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 4.4 4.2 3.2 2.6 2.2

### Program monitoring, quantitative performance criteria, and TMU
- All quantitative PCs at end-December 2010 and indicative targets for end-March were met with margins.
- Structural benchmark: VAT bill submission and adoption satisfied end-December 2010 structural benchmark.
- End-April 2011 benchmark on Financial Institutions Act amendments delayed to June due to Attorney General’s backlog.
- Domestic arrears:
  - Outstanding stock of government domestic payment arrears at end-2008 (about 3 percentage points of GDP) gradually eliminated in 2009–2010.
  - New minor payment delays to PUC emerged late 2010 in one ministry; verifications under way.
  - No net accumulation of domestic arrears so far.
  - Domestic arrears to be monitored monthly; non-accumulation from beginning of year to be a quantitative performance criterion.
- TMU clarifications:
  - NIR floor, reserve money ceiling, primary balance definition, public external debt ceiling, external and domestic arrears definitions and reporting timelines specified (reporting frequencies for CBS and Ministry of Finance preserved as provided).

### Public debt management, external debt restructuring, and statistics modernization
- Public debt strategy: gradual reduction to 50 percentage points of GDP by 2018.
- Projection: total public debt projected to decline to 76.2 percent at end-2011, from 82.3 percent at end-2010.
- External debt restructuring:
  - “Our external debt restructuring is close to completion.”
  - Ongoing discussions with two bilateral non-Paris Club creditors (Abu Dhabi and India).
  - Agreements with last two remaining commercial creditors expected shortly once minor technical issues settled.
- Statistics and data modernization:
  - Strategic plan adopted to achieve compliance with SDDS and BPM6.
  - Publication plans: commence publication of quarterly and annual GDP statistics under SDDS in September 2011.
  - Compile production index quarterly by December 2012; redevelop data sources in 2012 in response to VAT introduction.
  - New chart of accounts to facilitate GFSM 2001 reporting.

### Indicators, tables, and selected quantitative highlights (figures preserved exactly)
- Table 1 (Selected Economic and Financial Indicators, 2008–13) (selected series shown exactly):
  - Nominal GDP (millions of Seychelles rupees): 8,709 10,725 11,303 11,294 12,000 12,016 12,953 14,064
  - Real GDP (annual percent change): -1.3 0.7 6.2 6.2 4.3 4.0 4.7 5.0
  - CPI (annual average): 37.0 31.9 -2.2 -2.4 2.5 3.1 4.3 3.3
  - Current account balance including official transfers (percent of GDP): -48.9 -40.0 -47.1 -50.7 -27.3 -32.7 -18.6 -12.6
  - Total public debt (percent of GDP): 135.1 128.6 76.1 82.3 71.7 76.2 69.2 61.6
  - Total stock of arrears (millions of U.S. dollars): 317 251 133.3 30.3 ...
  - Gross official reserves (end of year, millions of U.S. dollars): 5 11 6 92 182 382 532 402 502 72
- Table 2 (Balance of Payments, 2008–13, Millions of U.S. dollars) (selected entries):
  - Current account levels: -448 -316 -441 -474 -265 -316 -187 -136
  - Tourism earnings: 270 208 219 231 231 257 278 298
  - FDI (incl. loans), USD million: 350 223 411 372 230 202 148 148
  - Gross international reserves (stock, e.o.p.): 511 692 182 382 532 402 502 72
  - GDP (millions of U.S. dollars): 916 790 937 936 971 965 1,008 1,074
- Table 3 (Consolidated Government Operations, 2008–13, millions of Seychelles rupees; cumulative) (selected entries preserved):
  - Total revenue and grants (levels): 3,190 4,262 3,866 4,178 4,119 ...
  - Tax revenue (levels): 2,456 3,318 3,090 3,527 3,544 ...
  - Primary balance (levels): 336 1,683 833 1,059 1,031 ...
- Table 4 (Monetary Survey and Central Bank Accounts, 2008–11):
  - Net foreign assets (levels): 2,105 2,897 2,388 3,345 3,079 3,256 3,244 3,641 4,002 3,644 4,183 3,984 4,413 3,941 4,796 4,075 4,954 4,098
  - Broad money (levels): 5,983 6,401 6,222 6,568 6,763 6,537 7,197 6,864 7,199 7,275 7,406 7,420 7,643 7,581 7,857 7,625 8,000 7,678
- Table 5 (Financial Soundness Indicators, 2007–10, percent, end of period) (selected entries):
  - 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 21.5
  - Nonperforming loans to gross loans: 3.7 2.9 2.5 2.3 2.0 2.1 2.0 2.3 4.3 4.2 3.8 4.1 6.9 6.4 5.5
  - 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 3.7

### Annex I — Assessing adequacy of Seychelles’s gross international reserves
- Summary finding:
  - Despite significant buildup, Seychelles reserves remain slightly below adequacy suggested by various approaches.
  - Estimates imply average adequate reserves over medium term of about 2.9-3.4 months of prospective imports.
  - Projected reserves: from 2.2 months at end-2010 to 2.5 months in 2012 and 3.4 months in 2015 — broadly in line with adequacy findings.
  - Seychelles reserves are low relative to other small tourism-island economies.
- Methodologies and quantitative results (figures preserved exactly as reported):
  - Traditional adequacy metrics: 1: 0.8                -3.0
  - Combination rules: 2: 2.4                -13.7
  - Shock scenarios: 4.5                -4.9
  - Cross-country revealed preferences: 2.0                -2.0
  - Optimality models: 2.6                -3.6
  - Average (excl. extremes): 2.9                -3.4
- Caveats:
  - Assessment prepared by Nkunde Mwase.
  - Does not cover the metrics developed by IMF (2011, “Assessing Reserve Adequacy”) because of lack of data on portfolio liabilities.
  - Focuses on precautionary motives; reserves may also be held for intergenerational savings or export-promotion.

### Main risks to program and staff appraisal
- Main risks:
  - Fragility of Air Seychelles and volatility of the external environment.
  - Potential longer-than-planned airline restructuring could create quasi-fiscal losses undermining debt reduction.
  - Continued increases in international food and fuel prices could pressure external and fiscal accounts.
  - Delayed recovery in Europe and depreciation of the euro could undermine exports and activity.
  - Piracy in the Indian Ocean could weaken tourism and fishing.
- Staff appraisal and recommendations:
  - Program progress: growth recovery, steady reserve rebuilding, structural reform agenda on track.
  - Policy stance: limited fiscal easing appropriate; maintain flexible exchange rate; tighten monetary policy and absorb banks‘ excess liquidity.
  - Ensure measures to limit volatility of sensitive prices and support for national airline are time-bound and do not jeopardize program objectives.
  - Commend pass-through of international petroleum price increases on car fuels; smoothing of cooking gas, electricity and public bus rates should be temporary.
  - Government to mandate new management of Air Seychelles to restore profitability by year-end; seek private participation and limit government cash infusion.
  - Support tax system modernization and public financial management reforms; meet structural reform deadlines.
  - Speed up financial sector reforms: increase transparency and competition, develop long-term instruments and yield curve, privatize two state-owned banks with IFC assistance, rescale Development Bank for SME financing.
  - Further steps: reform housing policy and the social security system.

### Conclusion and program actions
- Second phase of program to set the stage for high sustainable growth is well engaged provided critical structural reforms are timely implemented.
- Staff supports:
  - Modification of several quantitative performance criteria for end-June and end-December 2011.
  - Completion of the third EFF program and financing assurance reviews.

_Italic: Source — Seychelles authorities, and IMF staff estimates and projections (as presented in the provided content)._

### Executive Summary

### Executive Summary

### IMF Arrangement and Program Status
- A three-year arrangement under the Extended Fund Facility (EFF) for 225 percent of quota (SDR 19.8 million) was approved by the Executive Board on December 18, 2009.
- Disbursements and availability:
  - SDR 9.24 million has been disbursed.
  - SDR 3.52 million will be available upon completion of the third review.
- Program performance:
  - The program is on track.
  - All quantitative performance criteria at end-December 2010 were met.
  - The end-December 2010 structural benchmark relative to the introduction of a value-added tax was met (VAT bill adopted on December 21, 2010).
  - The end-April benchmark on amendments to the Financial Institutions Act is expected to be delayed by two months (being delayed to June).
- Staff recommendation: completion of the third review and modification of performance criteria.

### Recent Economic Developments and Outlook
- 2010 macroeconomic outcomes:
  - Real GDP is estimated to have increased by more than 6 percent in 2010.
  - The recovery was driven by exceptionally high foreign direct investment (FDI) flows and a rebound in tourism; activity also picked up in construction, telecommunications, manufacturing and professional services.
  - Current account: widened to about 50 percent of GDP in 2010, mainly reflecting high FDI-related imports and a terms of trade deterioration.
  - International reserves: central bank rebuilt reserves to 2.2 months of imports (up from 1.6 months a year before).
  - Inflation: CPI inflation remained low in 2010; the real effective exchange rate appreciated by about 8 percent y-o-y in 2010 but remained about 20 percent below the mid-2008 level.
  - Fiscal: primary fiscal surplus reached 9.1 percent of GDP, exceeding the original budget objective by 2.1 percentage points of GDP.
  - Total revenues outperformed the budget by 4 percent (of revenues).
  - Public debt: total public debt declined from 128.6 percent of GDP in 2009 to 82.3 percent in 2010.
  - Monetary: reserve money grew in line with program projections; 90-day government securities rates fell to below 0.5 percent; credit to the economy increased by about 14 percent, reaching 27 percent of GDP.
- 2011 outlook and risks:
  - Real GDP growth projected to slow to about 4 percent in 2011 due to a projected sharp decline in FDI and higher oil prices.
  - Current account in 2011 is expected to be five percentage points of GDP wider than previously projected but will still narrow considerably from 2010 as import demand declines with FDI.
  - Official external reserves projected to reach 2.4 months of imports at end-2011.
  - Year-to-date CPI inflation picked up to 0.7 percent in the first quarter of 2011; end-year CPI projected to increase by 5.5 percent after first-round pass-through of commodity price increases.

### Shocks, Policy Adjustments, and Macroeconomic Management
- External shocks:
  - Global commodities’ price shock and financial difficulties at Air Seychelles present new challenges.
  - Rising food and oil prices expected to push inflation up and exert pressures on external and fiscal balances.
- Exchange rate and reserves policy:
  - Flexible (floating) exchange regime maintained; interventions limited to smoothing excessive fluctuations.
  - Authorities maintain objective of accumulating the equivalent of three months of imports in the medium term, but reserves accumulation path lowered to allow reserves to absorb part of external shocks; an upward trend is still maintained.
- Monetary policy:
  - Monetary policy is being tightened to contain inflation expectations and limit second-round effects.
  - Reserve requirements on domestic currency deposits raised by three percentage points to 13 percent effective April 1; reserve requirements on foreign currency deposits to be gradually raised to the same level by end-June.
  - Government transferring Social Security Fund deposits with commercial banks to the central bank to drain excess liquidity.
  - Market instruments available: repurchase agreements, deposit auctions, foreign exchange swaps.
  - Result: 3 months Treasury bill rates rose to 4.5 percent in early May.
- Fiscal policy and targeted support:
  - A domestic price Stabilization Fund (SF) established to provide short-term loans to some parastatals to smooth price adjustments for cooking gas, utilities and public transportation.
  - SF design: temporary, not to be converted into permanent price subsidies; loans expected to be repaid once pass-through is realized.
  - SF resources and limits:
    - SR 120 million (one percent of GDP) set aside in the SF.
    - SR 50 million (0.4 percent of GDP) budgeted in 2011; no spending effected so far.
    - Disbursements in 2011 capped and closely monitored.
  - Staff advice: promptly adjust prices and strengthen targeted social assistance scheme to protect vulnerable households.
- Air Seychelles:
  - Financial deterioration in 2010 due to higher fuel costs and inadequate management.
  - To cover losses and pay suppliers through end-March 2011, the airline borrowed SR 225 million (about 2 percent of GDP) from state-owned Nouvobanq under a State guarantee.
  - Without measures, losses projected at 0.2 percent of annual GDP per month.
  - Authorities view Air Seychelles as critical for tourism (transports more than half of visitors); restructuring plan agreed including revising airfares, renegotiating agreements, eliminating non-profitable routes, and downsizing the fleet.
  - Restructuring projected to reduce losses in the remainder of the year to SR 83 million.
  - Projected transfer from restructuring: about 0.7 percent of GDP.
  - Any residual budget support agreed to be temporary and consistent with fiscal consolidation and debt sustainability; company financial statements to be monitored quarterly.
- Fiscal consolidation adjustments for 2011:
  - Combination of spending cuts and fiscal easing in second half of 2011 to accommodate SF and airline bailout.
  - Additional revenues of 0.2 percent of GDP from delayed dividend payments by the tuna cannery.
  - Freeze in non-priority domestically financed capital spending of 0.4 percent of GDP.
  - 2011 primary surplus target revised down by 0.5 percent of GDP to 4.5 percent.

### Financial Sector and Structural Reforms
- Financial sector reforms:
  - Authorities implementing legal and supervisory measures to strengthen transparency, remove obstacles to financial intermediation and develop capital markets.
  - Strategic plans being adopted to restructure and/or privatize state-owned financial institutions in line with objective of reducing government's imprint on the economy.
- Other structural reforms:
  - Ongoing modernization of tax policy and of tax and customs administrations.
  - Plans to improve public finance and central bank management.

### Program Monitoring and Debt Restructuring
- Performance criteria and targets:
  - All quantitative PCs at end-December 2010 and indicative targets for end-March were met with margins.
  - The VAT bill submission and adoption satisfied the end-December 2010 structural benchmark.
  - End-April 2011 benchmark on Financial Institutions Act amendments delayed to June due to backlog at Attorney General’s office.
- External debt restructuring:
  - Seychelles continued good faith negotiations with remaining creditors under the Fund’s lending into arrears policy.
  - Ongoing discussions with two bilateral non-Paris Club creditors (Abu Dhabi and India) on restructuring outstanding claims.
  - Agreements with the last two remaining commercial creditors are expected to be concluded shortly once minor technical issues are settled.

*Executive Summary, _cr11134.*

### 21.      Following the completion of several studies and audit reports, the authorities are

### _cr11134 - 21.      Following the completion of several studies and audit reports, the authorities are

### Financial sector reforms and market development
- Authorities adopting a multi-pronged approach to strengthen the financial sector and reduce the role of the state.
- Measures identified (based on a CBS study) to increase transparency and remove obstacles to banking intermediation include:
  - introduction of higher disclosure standards,
  - reduction or elimination of statutory costs related to collateral registration and loan refinancing,
  - streamlining the litigation and dispute resolution processes.
- Amendments to the Financial Institutions Act, to be approved by Cabinet by June 2011, will:
  - establish the legal basis for new financial products,
  - establish the creation of credit bureaus.
- Banking supervision will continue to develop further and move toward a risk-based framework.
- Authorities are exploring the development of a stock exchange to develop capital markets and alternative savings and investment opportunities.

### Restructuring of state-owned banks
- Authorities support IFC‘s proposed equity participation and its leading role in the privatization of Nouvobanq, and IFC‘s advisory function for restructuring Seychelles Savings Bank (SSB).
- Authorities decided to offer 40 percent of SSB shares to bank employees and account holders.
- Depending on the outcome, more shares of SSB may be sold in the future to the public.

### Non-bank state financial institutions
- Concerns noted about uncontrolled expansion of credit by Development Bank of Seychelles (DBS) at below-market rates and parallel recourse to government-guaranteed bonds to finance this expansion.
- Authorities decided to accelerate implementation of recommendations of a recent technical assistance financed by the FIRST initiative.
- DBS mandate to be redefined more narrowly to cover financial needs of start-up businesses and small and medium-sized enterprises.
- Authorities are studying FIRST initiative experts' recommendations regarding the Housing Finance Company (HFC), which:
  - combines subsidized housing finance, real estate development, and social housing rental functions,
  - dominates the mortgage market.
- An action plan for the HFC is being developed in parallel.

### Tax policy and tax administration
- Planned introduction of VAT in mid-2012 is well on track.
- VAT legislation passed in December 2010; authorities finalizing the VAT design and have hired a resident TA advisor to assist implementation over the period of 18 months (MEFP, ¶15-17).
- Reforms at the Seychelles Revenue Commission continue with Fund technical assistance.
- Priority now given to customs: the new customs management act is expected to be passed in June and to become effective February 2012, once relevant regulations and procedures have been revised (MEFP, ¶18-20).

### Public finance management
- Ambitious action plan being implemented to strengthen public finance management.
- Preparation under way for:
  - a new public finance act,
  - the revision of financial instructions,
  - the preparation of a new chart of accounts (MEFP ¶23-24).
- Medium-term policy-based budgeting will be introduced in preparation of the 2012 budget for education and health.
- Ministry of Finance started monitoring line ministries‘ creditor lists on a monthly basis to ensure non-accumulation of domestic payment arrears.
- Ministry of Finance and PUC engaged in extensive exercise to verify utility consumption of line ministries for 2010 and settle any final bills within 30 days of their submission.

### Central bank management
- Authorities strengthening the legal framework for central banking, addressing recommendations of the 2010 updated safeguards assessment (MEFP ¶38).
- Internal control and audit mechanisms improved (MEFP ¶39).

### Program financing, design, and monitoring
- The program for 2011 is financed.
- Residual financing gap for 2011 expected to be closed by restructuring the rest of public external debt.
- Quantitative performance criteria and indicative targets under the program for 2011 have been revised in line with updated macroeconomic projections; new targets for net international reserves, reserve money and fiscal primary surplus reflect policy adjustments in response to the food and fuel price shocks (MEFP table 1).
- Technical Memorandum of Understanding modified to clarify conditionality on domestic arrears and strengthen monitoring.
- During 2009-2010, outstanding stock of government domestic payment arrears at end-2008 (about 3 percentage points of GDP) has been gradually eliminated.
- New minor payment delays to the Public Utility Company emerged late 2010 in one ministry due to deficient metering and unbudgeted tariff increases; verifications are under way regarding public utility bills in other ministries.
- There has not been any net accumulation of domestic arrears so far.
- Based on an improved definition and strengthened reporting framework, domestic arrears will be monitored on a monthly basis and their non-accumulation from the beginning of the year will be a quantitative performance criterion.

### Main risks to the program and outlook
- Fragility of Air Seychelles and volatility of the external environment are the main risks:
  - Should restructuring of the airline take longer than planned and its financial situation deteriorate further, ensuing quasi-fiscal losses could undermine debt reduction objectives.
  - Macroeconomic outlook could worsen if international prices for food and fuel continue to increase, leading to additional pressures on external and fiscal accounts.
  - Delayed recovery in Europe and further depreciation of the euro could undermine export proceeds and economic activity.
  - Lingering threat of piracy in the Indian Ocean could weaken prospects for tourism and fishing.
- These risks considered manageable given strong program ownership, track record of policy adjustment to external shocks, broad political support for reforms, and ongoing international anti-piracy efforts.

### Staff appraisal and policy recommendations
- Program progress:
  - Growth has recovered from the 2008 debt crisis and the 2009 global recession.
  - International reserves are being steadily rebuilt.
  - Structural reform agenda is on track.
- External shock: new wave of global commodity price increases expected to strain the small island economy, stress external accounts, push up domestic prices from last years‘ stability, and compound national airline difficulties.
- Recommended policy stance and measures:
  - Limited fiscal easing appropriate; flexible exchange rate regime introduced in 2008 will facilitate adjustment.
  - Central bank reversed accommodative monetary policy and absorbed banks‘ excess liquidity to address second-round inflationary pressures.
  - Ensure measures to limit excessive volatility of sensitive prices and support to national airline do not jeopardize program objectives.
  - Commendation for pass-through of international petroleum price increases on car fuels; smoothing of cooking gas prices and electricity and public bus rates should be time-bound to avoid further fiscal drain.
  - Government mandated new management of Air Seychelles to restore profitability by year-end; requires bold measures to limit government cash infusion, including downsizing and elimination of non-profitable routes, and seeking private participation.
  - Support for planned modernization of the tax system and public financial management: passing of VAT law and its preparation for mid-2012 introduction opens way for further tax and customs administration reforms.
  - Need to meet structural reforms‘ deadlines for adoption of legislative and regulatory framework for budget preparation, execution and reporting.
  - Praise for decision to speed-up financial sector reforms: increase transparency and competition in banking, develop new long-term instruments and a yield curve, privatization of two state-owned banks with IFC assistance, and rescaling the Development Bank to meet SME financing needs.
  - Further important steps: reform housing policy and the social security system.

*IMF staff report extract*

### 36.      In conclusion, the second phase of the program to set the stage for high sustainable

### _cr11134 - 36.      In conclusion, the second phase of the program to set the stage for high sustainable

### Conclusion and Program Actions
- The second phase of the program to set the stage for high sustainable growth is well engaged provided several critical structural reforms are timely implemented.
- Staff supports:
  - the modification of several quantitative performance criteria for end-June and end-December 2011;
  - the completion of the third EFF program and financing assurance reviews.

### Indicators of Economic Performance (summarized)
- Sectoral growth (Figure 1): tourism, construction, communication, manufacturing of beverages shown across 2006–2010 (percent).
- Real GDP and FDI (2006–2013):
  - GDP growth series shown (%, left axis) and FDI (% of GDP, right axis).
- Domestic CPI and international prices (index, 2010 = 100): oil, food, and domestic CPI series from Jun-08 to Mar-11.
  - Note in figure caption: "International oil and food prices have not yet passed through to domestic CPI..."
- Current account balance (percent of GDP) shown 2006–2013 with EBS/10/225 current projection; caption: "Despite external shocks, the CA will improve as FDI declines."
- Real and Nominal Effective Exchange Rates (Index, 2005 = 100): REER and NEER series Jan-05 to Jan-11; caption: "while real and nominal exchange rates appreciated somewhat."
- International reserves (months of prospective imports) 2006–2013 with EBS/10/225 projection; caption: "...and international reserves will continue to build-up though at a slower pace."

### Indicators of Fiscal and Monetary Performance (summarized)
- Fiscal balances (percent of GDP, 2006–2013): primary balance and overall balance series; caption: "Prudent fiscal management has led to large surpluses."
- Government debt (percent of GDP, 2006–2016 projection): domestic and external components; caption: "...and declining government debt dropping below 50% of GDP in 2016."
- Excess liquidity (percent of GDP) and measures to absorb liquidity: series June-09 to Dec-11; caption: "To prevent resurgence of inflation, liquidity is being absorbed."
- Inflation and interest rates (percent, May-09 to Feb-11): inflation (y-o-y), lending rate, T-bill rate; caption: "with macroeconomic stabilization interest rates declined."

### Key Quantitative Highlights from Tables (selected figures preserved exactly)
- Table 1 (Selected Economic and Financial Indicators, 2008–13):
  - Nominal GDP (millions of Seychelles rupees): 8,709 10,725 11,303 11,294 12,000 12,016 12,953 14,064
  - Real GDP (annual percent change): -1.3 0.7 6.2 6.2 4.3 4.0 4.7 5.0
  - CPI (annual average): 37.0 31.9 -2.2 -2.4 2.5 3.1 4.3 3.3
  - Current account balance including official transfers (percent of GDP): -48.9 -40.0 -47.1 -50.7 -27.3 -32.7 -18.6 -12.6
  - Gross national savings (percent): -8.8 -10.7 6.3 3.3 10.1 4.5 10.9 11.7
  - Gross investment (percent): 40.1 29.3 53.4 54.0 37.4 37.2 29.4 24.3
  - Total public debt (percent of GDP): 135.1 128.6 76.1 82.3 71.7 76.2 69.2 61.6
  - Total stock of arrears (millions of U.S. dollars): 317 251 133.3 30.3 ...
  - Gross official reserves (end of year, millions of U.S. dollars): 5 11 6 92 182 382 532 402 502 72 (as listed across years)
  - Seychelles rupees per US$1 (end of period): 16.6 11.2 ... 12.2 ... 12.7 ...
- Table 2 (Balance of Payments, 2008–13, Millions of U.S. dollars):
  - Current account levels: -448 -316 -441 -474 -265 -316 -187 -136
  - Exports of goods (annual): 50 24 27 41 24 27 48 85 31 54 0... (table entries preserved as presented)
  - Imports of goods (annual): -1,009 -780 -848 -895 -812 -914 -844 -844
  - Tourism earnings (exports of services component): 270 208 219 231 231 257 278 298
  - FDI (incl. loans), USD million: 350 223 411 372 230 202 148 148
  - Gross international reserves (stock, e.o.p.): 511 692 182 382 532 402 502 72
  - FDI (incl. loans), percent of GDP: 38.2 28.2 43.8 39.8 23.7 20.9 14.7 13.8
  - Public and publicly guaranteed external debt (millions): 759 732 425 456 448 489 509 501
  - GDP (millions of U.S. dollars): 916 790 937 936 971 965 1,008 1,074
- Table 3 (Consolidated Government Operations, 2008–13, Millions of Seychelles rupees; cumulative):
  - Total revenue and grants (levels): 3,190 4,262 3,866 4,178 4,119 1,091 1,134 2,219 2,339 3,560 3,636 4,856 4,881 4,847 5,004
  - Total revenue (levels): 2,868 3,793 3,514 4,008 4,018 990 1,130 1,981 2,076 3,189 3,251 4,381 4,405 4,644 4,879
  - Tax revenue (levels): 2,456 3,318 3,090 3,527 3,544 918 990 1,786 1,856 2,815 2,853 3,905 3,905 4,151 4,344
  - Overall balance, commitment basis and cash basis shown with values (percent of GDP series also provided in table footnotes).
  - Primary balance (levels): 336 1,683 833 1,059 1,031 142 419 240 260 515 462 602 536 642 562
- Table 4 (Monetary Survey and Central Bank Accounts, 2008–11, Seychelles rupees millions):
  - Net foreign assets (levels): 2,105 2,897 2,388 3,345 3,079 3,256 3,244 3,641 4,002 3,644 4,183 3,984 4,413 3,941 4,796 4,075 4,954 4,098
  - Broad money (levels): 5,983 6,401 6,222 6,568 6,763 6,537 7,197 6,864 7,199 7,275 7,406 7,420 7,643 7,581 7,857 7,625 8,000 7,678
  - Gross international reserves (US$ millions, memorandum): 511 691 582 1019 218 220 721 822 072... (series as listed)
  - Broad money growth (12–month percent change): 29.0 7.0 15.0 21.4 33.5 24.6 33.0 26.9 12.5 13.7 12.8 13.0 16.9 16.0 14.5 11.1 11.1 5.5
- Table 5 (Financial Soundness Indicators for the Banking Sector, 2007–10, percent, end of period):
  - Regulatory capital to risk weighted assets: 20.4 21.0 18.2 18.2 18.4 17.6 17.9 19.4 13.6 17.8 22.0 21.7 21.4 22.1 21.7 21.5
  - Nonperforming loans to gross loans: 3.7 2.9 2.5 2.3 2.0 2.1 2.0 2.3 4.3 4.2 3.8 4.1 6.9 6.4 5.5
  - 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 3.7

### Program Financing and Fund Support (EFF disbursements and reviews)
- Table 6 (Fund Disbursements and Timing of Reviews under the Proposed Three-Year EFF, 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)
  - First review: June 15, 2010: Completion of first program review and financing assurances review (if needed) and compliance with end-March 2010 quantitative performance criteria. Amount 2.20 (25 percent)
  - 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)
  - Second review: December 15, 2010: Completion of second program review and financing assurances review (if needed) and compliance with end-September 2010 quantitative performance criteria. Amount 1.76 (20 percent)
  - Third review: 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)
  - Fourth review: 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)
  - Fifth review: 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)
  - Sixth review: September 30, 2012: Compliance with end-June 2012 quantitative performance criteria and completion of a financing assurances review (if needed). Amount 1.32
  - Total under proposed Three-Year EFF: 19.8 (millions of SDR); 225 percent of quota

- Table 7 (Indicators of Fund Credit, 2008–15, Millions of SDR):
  - Stock of existing Fund credit (end of period): 6.2 11.9 20.2 20.2 16.8 11.3 8.9 7.4
  - Prospective purchases under the EFF disbursements: 0.00 0.0 6.64 4.00 0.00 0.00 0.00 0.0
  - Stock of existing and prospective Fund credit: 16.2 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 4.4 4.2 3.2 2.6 2.2
  - In percent of exports of goods and services: 0.9 2.3 3.6 4.2 4.1 3.1 2.6 2.2

_Italic: Source — Seychelles authorities, and IMF staff estimates and projections (as presented in the provided content)._

### ANNEX I: ASSESSING THE ADEQUACY OF SEYCHELLES’S GROSS INTERNATIONAL

### ANNEX I: ASSESSING THE ADEQUACY OF SEYCHELLES’S GROSS INTERNATIONAL RESERVES

### Summary finding
- Despite a significant buildup over the past two years, Seychelles reserves remain slightly below the adequate levels suggested by various approaches.
- These estimates imply that on average an adequate level of reserves for Seychelles over the medium term is about 2.9-3.4 months of prospective imports.
- Projected reserves: from 2.2 months of prospective imports at end-2010 to 2.5 months in 2012 and 3.4 months in 2015 — broadly in line with the adequacy findings.
- Seychelles reserves are low relative to other small tourism-island economies.

### Methodologies used to assess adequacy
- Precautionary/reserve-demand focus: adequacy based on a country’s needs to absorb external shocks and avoid disruptive adjustments in domestic demand.
- Approaches applied:
  - Traditional metrics:
    - Reserve coverage ratios in terms of months of imports (3 months), short-term debt (100 percent), and broad money (20 percent).
  - Combination metrics:
    - Full coverage of short-term debt plus the current account deficit.
    - Lipschitz, et al metric: reserve coverage of 20 percent of imports, 100 percent of short-term debt and 10 percent of broad money.
  - Shock Scenarios: stress-test scenarios that take into account country vulnerabilities.
  - Revealed preferences approach: estimates demand for reserves using a sample of 69 emerging market economies.
  - Optimal reserves models: trade-off between opportunity costs and benefits in preventing and mitigating external shocks.

### Quantitative results (as reported)
- Traditional adequacy metrics
  - 1: 0.8                -3.0
    - Note: 0.8 reflects effect of debt rule converted to imports.
- Combination rules
  - 2: 2.4                -13.7
    - Note: The maximum reflects the CA deficit effect.
- Shock scenarios
  - 4.5                -4.9
- Cross-country revealed preferences
  - 2.0                -2.0
- Optimality models
  - 2.6                -3.6
- Average (excl. extremes)
  - 2.9                -3.4

(Note: Figures presented above appear in the original as paired values; the first value corresponds to reserves in months of imports implied by the approach.)

### Comparative indicators and peer context
- Seychelles reserves are on the low end relative to other small tourism-island economies when measured by:
  - Reserves as a Share of Imports, 2010
  - Reserves-to Short-term Debt Ratio, 2010
  - Reserves as a Ratio of Broad Money, 2010
- Time series context: Reserves in percent of short-term debt & CA deficit, 2000-2010 show Seychelles often below the 100 percent line and below the Lipschitz metric and maximum of traditional metrics.

### Shock scenario visualization (as provided)
- Charted results include:
  - Actual reserves in months of imports (including variants such as months of imports excluding FDI and oil reexports; Reserves/CA excl FDI imports).
  - A shocks-scenarios panel labeled “Seychelles: Shocks Scenarios (Reserves in Months of Imports)” showing scenario outcomes against actual reserves.

### Metadata and caveats from the original assessment
- Prepared by Nkunde Mwase. Details and calculations can be made available on request.
- The assessment does not cover the metrics recently developed by the Fund (International Monetary Fund, 2011, “Assessing Reserve Adequacy”) because of lack of data on other portfolio liabilities.
- The analysis focuses on precautionary motives; reserves could also be held for other motives (e.g., intergenerational savings and export-promotion).

*Source: ANNEX I: ASSESSING THE ADEQUACY OF SEYCHELLES’S GROSS INTERNATIONAL RESERVES (IMF staff report content as provided).*

### 1.      This document tracks progress during the first year of our macroeconomic and

### _cr11134 - 1.      This document tracks progress during the first year of our macroeconomic and

### B. Macroeconomic and Financial Performance in 2010
- Tourist arrivals increased by 11 percent.
- Foreign direct investment (including a large private residential complex) boosted activity, in particular in construction, beverage manufacturing, electricity, and transportation and telecommunication services.
- Overall, real GDP growth is estimated to have exceeded 6 percent.
- Inflation was almost nil year-on-year.
- The Seychelles rupee was broadly stable against all currencies, with a slight depreciation against the dollar at the beginning of the year being offset by an appreciation towards the end of the year.
- Gross international reserves reached 2.2 months of prospective imports at year-end.
- Government revenue performance for the year as a whole was larger-than-anticipated by 4 percentage points of GDP and translated into a fiscal primary balance in excess of the initial budget by 1.6 percent of GDP.
- A contingency for capital expenditure of about 1 percent (of GDP) was set aside at the beginning of the year.
- The fiscal surplus was 2.8 percentage points of GDP.
- Public debt declined to 82 percent of GDP at year-end, from 128.6 percent a year earlier.
- Broad money expansion was contained at 13.7 percent year-on year.
- Reserve money growth was in line with program targets.
- Short-term interest rates on 3-month treasury bills went below ½ percent.
- Retail lending and deposit rates edged down.
- Private sector credit (excluding the impact of a loan reclassification) started to recover from a substantial contraction the year before.
- Net credit to the government declined, sustained by rapid domestic debt repayment, resulting in a significant liquidity overhang which pushed interest rates on treasury bills and CBS intervention rates to low levels.

### C. Program Implementation
- The program remains on track and the program of structural reforms is being implemented broadly as scheduled.
- All quantitative performance criteria were met at end-2010.
- The VAT bill was submitted to the National Assembly and adopted on December 21, 2010, ahead of schedule for this structural benchmark.

### D. Macroeconomic Outlook in 2011
- Outlook: continued, albeit slower, recovery in 2011 with increased downside risks.
- Global growth prospects are not significantly different from those prevailing at the 2011 budget preparation.
- European economies (the main markets for our exports) are projected to grow at a modest pace.
- Several large resorts commencing operations imply a projected strong increase in tourism receipts in 2011.
- Prospects for canned tuna (the second largest export) are less encouraging in part due to the worsening impact of piracy on the supply of tuna to the domestic processing factory; no significant growth is expected in this industry over the medium term.
- The economy faces substantial external shocks stemming from international food and fuel prices.
- Projections for 2011:
  - Real GDP growth: 4 percent.
  - Consumer price inflation: about 5½ percent by year-end.
  - Negative impact on the trade balance: about 5 percentage points of GDP compared to last year‘s projections.
  - Current account: 32.7 percentage points of GDP in 2011, down from more than 50 percentage points in 2010.
- Lower FDI-related inflows from the exceptionally high level registered in 2010 will reduce the current account.

### E. Policies for 2011
- First line of defence against global shocks: continue flexible exchange rate regime.
- Monetary policy: tightening to absorb shocks.
- Fiscal policy: offsetting the negative impact of shocks on the budget to mitigate second-round inflation effects, limit balance of payments pressures and stay the course towards debt sustainability.
- Measures to help households adjust to price shocks:
  - State-owned suppliers of fuel and basic commodities have adopted cautious purchase and stock strategies to smooth price increases.
  - Full pass-through implemented for most fuel prices; measures adopted to smooth the price of a few sensitive products.
  - A Stabilization Fund has been set up to help relevant state-owned enterprises absorb associated costs through reimbursable funds.

### F. Fiscal Policy
- Commitment to sustainable fiscal policy aiming to bring public debt below 50 percent of GDP by 2018.
- Budgetary performance was consistent with forecasts for the first two months of the year.
- Plan to offset the fiscal cost of the Stabilization Fund by reducing non-priority capital spending by an equivalent amount.
- Revenue performance expected to be slightly higher than in the budget, mainly reflecting upward revisions in dividends from public enterprises.
- Support to the national airline requires a relaxation of the primary surplus target by 0.5 percentage points of GDP in 2011, to 4.5 percent.
- Net disbursements of the Stabilization Fund are capped at SR 50 million (the equivalent of 0.4 percentage points of GDP) in 2011.
  - Objective: enable eligible state-owned companies to smooth out price increases for cooking gas, electricity and public transportation tariffs.
  - Any disbursed funds are expected to be reimbursed to government once the pass-through is complete.
  - Use of the Stabilization Fund will be monitored monthly to ensure disbursements are consistent with the 2011 cap.
- Progress on key capital projects:
  - Two new electricity generators being commissioned by PUC.
  - Over 150 housing units delivered on Perseverance Island.
  - Rehabilitation of the Victoria Hospital continues.
- To finance the Stabilization Fund, the capital budget for the year will be reduced by SR 50 million by delaying non-priority projects.
- Maintain capital projects amounting to SR 50 million under contingency upon revenue targets for end-June 2011.
- Air Seychelles:
  - Implementing a strategic action plan to eliminate operational losses by year-end, limiting need for budget support.
  - Budget funds of up to SR83 million (0.7% of GDP) will be provided in 2011 to help cover expected operational losses and debt servicing costs of government-guaranteed emergency loans contracted with Nouvobanq.

### G. Tax and Customs Reform
- Replacing GST by a single rate VAT remains a cornerstone of comprehensive tax policy reform.
- Reform measures completed over the prior year:
  - Introducing a new Revenue Administrations Act (Jan 2010).
  - Eliminating business tax threshold for companies and lowering that of non-companies (January 2010).
  - Introducing the Income and Non-Monetary Benefits Tax (July 2010).
  - Increasing the rate of GST on tourism from 10% to 12% (November 2010); a last increase of the GST rate to 15 % on tourism is scheduled for November 2011.
  - Shifting from administrative assessment of Business Tax to self-assessment.
  - Harmonizing the income tax rate so that all (national and expatriate) employees pay a flat rate of 15 percent (January 2011).
- Preparations for VAT implementation in July 2012:
  - VAT legislation approved in December 2010.
  - Policy decisions:
    i. Petroleum will continue to be subject to the same excise taxes per litre, but will be exempt from VAT. Petroleum taxes yield over a tenth of total tax revenue, with low compliance and administration costs.
    ii. Businesses shall be liable for VAT if their turnover is above a threshold or if they opt for voluntary registration.
    iii. The threshold level will be set with the aim of obtaining approximately 1,000 registered taxpayers in the first year; the threshold will be gradually lowered thereafter.
    iv. VAT-registered businesses will be allowed to offset the VAT liability on imported capital goods against the input VAT credit to which they are entitled when filing the next return.
    v. Rental income currently subject to GST will be brought under the Business Tax Act.
  - Cabinet will approve VAT regulations including rates, exemptions and thresholds by end-June 2011.
- Administrative preparations:
  - A resident IMF VAT expert – funded by an EU grant – will assist the SRC for a period of 18 months starting in June 2011 and covering the first 6 months of VAT implementation.
- Tax and Customs Administration reforms:
  - SRC will merge three sets of identification numbers into one Tax Identification Number; repeal of the Seychelles Business Number Act and amendments in the Revenue Administration Act 2009 and the Seychelles Revenue Commission Act by end-July 2011.
  - Measures to improve tax administration:
    a. Audit Section now consists of two units segmenting the taxpayer population by size and similar characteristics; filing requirements differ by size of business with small business required to file and pay quarterly.
    b. SRC prepares a weekly section in the national daily newspaper explaining a different tax each week; staff attachments to other tax administrations (first to South African Revenue Service in the first half of 2011).
    c. Extra staff recruitment: 10 by July 2011 and an additional 10 in the first quarter of 2012; 21 new Customs staff envisaged (first 9 in 2011 and a further 12 in 2012).
    d. SRC is enhancing its IT department and further developing its Client Management System with fortnightly coordination meetings with the Government‘s IT Department.
- Customs Management Act expected to be approved by the National Assembly by end-June 2011; Act will become operational in February 2012.
- A reform team will be appointed by April 2011 to implement the Customs reform program, including capacity building, risk management and post clearance audit procedures, development of standard operating procedures, and improvements in ASYCUDA effectiveness.

### H. Public Financial Management
- PEFA assessment by the EU in March 2011 noted remaining weaknesses, notably in medium-term budgeting and legislative scrutiny of the budget law; these are being addressed through an action plan.
- Audit Committee (created in April 2010) is following up recommendations of the Auditor-General‘s report for budget year 2009.
- Public Budget Management Section of the Ministry of Finance monitors line ministries‘ creditor lists monthly; the Comptroller General will promptly clear related payments to ensure non-accumulation of domestic payment arrears.
- Ministry of Finance and PUC are verifying utility consumption of line ministries for 2010 and will settle final bills within 30 days of submission.
- New Public Finance Act (PFA) to incorporate reformed budget practices; Bill to be submitted to Cabinet‘s approval by end September 2011.
- Revision of Financial Instructions and the Accounting Manual to be completed by June 2011.
- New PFA will provide basis for revising Accounting Standards of Financial Statements to align with IPSAS; by September 2012 framework in place to ensure accounting practices align with international best practice.
- Plan to introduce a new chart of accounts with functional classification in the 2012 budget; proposal and action plan submitted to Cabinet by a special committee.
- Introduction of medium-term policy-based budgeting:
  - Pilot for 2012 Budget with two largest ministries – health and education.
  - Possible extension to all agencies from 2013, subject to pilot results.
  - Training program for government officials started in late 2010 on asset management and strategic budgeting.
- Treasury management and rationalization of public entities progressing:
  - Budget dependent agencies’ re-classification policy fully implemented, reducing suspense accounts.
  - Strategic assessments of public entities underway to address duplication and plan privatization.
- Social security reforms:
  - Launch strategic plan for a well-targeted and sustainable social security system covering SSF and SPF.
  - Reform SSF investment objectives; by April 2011 submit amendment to the Social Security Act to formalize policy that no SSF funds may be used for government expenditure.
  - By end-September 2011 submit to Cabinet a strategic plan for SSF investment, formulated by the SSF Board of Trustees.
  - Part of SSF deposits at commercial banks will be gradually transferred to the central bank.

### I. Monetary and Exchange Rate Policies
- CBS will continue to rely on reserve money targeting as its monetary policy framework.
- Repos will remain the main instrument to guide short-term interest rates; Deposit Auction Arrangement (DAA) and Credit Auction Arrangement (CAA) used for fine tuning.
- CBS is increasing its range of monetary instruments, including recently approved foreign exchange SWAPs, to achieve greater flexibility in market interventions.
- To absorb excess liquidity and prevent inflationary pressures from global food and fuel price increases, CBS tightened monetary policy by raising minimum reserve requirements (MRR) on commercial banks’ deposits:
  - MRR on domestic currency deposits raised from 10% to 13%, effective April 1.
  - MRR on foreign currency deposits raised from 10% to 13%, effective June 1 (following three monthly steps).
- Liquidity tightening, compounded by the gradual transfer of SSF deposits to the CBS, is expected to lead to an increase in T-bill rates that could limit the risks of capital outflows.

*Document tracks first-year progress under the three-year program supported by an Extended Fund Facility (EFF) arrangement, updating the MEFP of December 3, 2010, and detailing policy commitments through the remainder of 2011 to support completion of the fourth EFF review.*

### 30.       The CBS and the Ministry of Finance are coordinating their efforts to improve

### _cr11134 - 30.       The CBS and the Ministry of Finance are coordinating their efforts to improve

### Liquidity management and domestic securities market
- A calendar of weekly Treasury bill issuances is communicated four weeks in advance to inform the market on the quantity of paper to be issued, improving predictability and banks‘ liquidity management.
- Closer collaboration with the SRC and Ministry of Finance on daily government expenditure and revenue collection has benefited liquidity management.
- Decision to reintroduce longer term government bonds in the domestic market as a first step towards establishing a benchmark yield curve; absence of a yield curve identified as a barrier to financial sector development.
- Request for IMF technical assistance to develop domestic securities markets, including:
  - re-introduction of the secondary market
  - establishment of a primary dealership system

### Exchange rate policy and international reserves
- Commitment to a floating exchange rate regime; CBS will intervene only to smooth excessive volatility, ensure orderly market conditions, and, if needed, build international reserves in line with program objectives.
- CBS to consider additional IMF recommendations to improve the foreign exchange market, in particular the inter-bank market.
- Introduction of a code of conduct for foreign exchange and money market participants in late 2011.
- Gross external reserve target: 3-month import coverage.
  - At end-2010: reached 2.2 months of import cover and remain on track to meet the 3-month target in a reasonably short period.
  - Reserve accumulation objectives for 2011 slightly adjusted down to help absorb global price shocks.
- Reserve management approach:
  - Given internal capacity constraints, CBS will limit use of external reserve managers to the World Bank (RAMP program) and the Bank for International Settlement.
  - CBS Investment and Risk Implementation Committee to finalize proposals and enter formal arrangements with preferred institutions during the second quarter of 2011.
  - These institutions will provide more favorable terms for investing a portion of external reserves and will provide technical assistance on reserve management to the CBS.

### CBS operations, IT systems, and governance
- Core banking system:
  - First phase of an integrated (core) banking system went live on December 01, 2010.
  - CBS can now provide all banking services on a single IT platform, enhancing efficiency and reducing operational risks.
  - Second phase started to integrate payroll, HR management and inventory management.
- National payment system modernization:
  - Major steps in 2010: formalization of new clearing house rules and adoption of the National Clearing and Settlement system Act.
  - New core banking system provides straight-through-processing of interbank and Government transactions in real time, enabling Electronic Clearing House and a local Switching System for rupee ATM/POS transactions.
  - Promotion of electronic funds transfer and cards will continue.
  - A real time gross settlement system will be introduced by end-2012.
- Capitalization and finances:
  - Recapitalization via t-bill issuance on December 15, 2010 brought capital of the central bank to 10 percent of end-2009 monetary liabilities.
  - A transfer of SR 13.4 million from 2010 distributable profits will bring capitalization of the CBS to 9.21 percent of end-2010 monetary liabilities.
- Legal and governance reforms:
  - Amendments to the CBS Act 2004 to be submitted for Parliament‘s approval by end-June 2011, including provisions that:
    - Clarify terms of lending to Government, with punitive terms for lending above stipulated limit (higher above-market interest rates and shorter repayment periods) except in cases of force majeure.
    - Strict prohibition on receiving or seeking outside instructions for CBS employees and board members.
    - Explicit reference to Governor and Deputy Governor terms of office of six years.
    - Due process in the event of dismissal, including for the Governor, Deputy Governor and Board members.
  - In February 2011, the CBS Board approved a risk policy and framework for risk management and established a Risk Implementation Committee (merged with the Investment Committee).
  - Plans to implement clear segregation of duties for reserve management front, middle and back office functions.
  - Internal audit established as a fully fledged CBS division.

### Financial sector reforms and supervision
- Competition and credit development impediments identified: (i) high switching costs by banks; (ii) inadequate disclosure by financial institutions; (iii) absence of a credit rating system; (iv) excessive costs and lengthy procedures for registration of loan and other bank-related documents; (v) lengthy procedures for resolution of financial disputes.
- Policy actions:
  - Ministry of Finance reduced charges and timeframe for document registration.
  - Ministry to work with the Judiciary to put in place a faster system for resolution of financial disputes.
  - Proposed amendments to the Financial Institutions Act (FIA) to be approved by Cabinet by June 2011 (see below).
  - CBS to introduce measures to minimize switching costs and implement a financial literacy campaign.
- Proposed FIA amendments (to be approved by Cabinet by June 2011) will:
  - Allow introduction of new financial products (e.g., leasing, hire purchase) and Islamic banking (to be licensed and regulated by the CBS).
  - Allow establishment of a Credit Reference Bureau for information sharing between banks.
  - Give CBS extra regulatory powers to: (i) enhance disclosure of banks‘ terms and conditions; (ii) impose fines; (iii) regulate certain categories of fees/charges that inhibit competition.
- Stock exchange:
  - Establishment of a stock exchange to attract offshore business from the Indian Ocean, South Asia, the Middle East and Africa; Government to tender the process and establish a national committee for candidate selection.
- Risk-based supervision:
  - Continued development with IMF technical assistance.
  - Negotiations with IT companies to develop a Bank Supervision Application for offsite supervision under the CAELS approach.
  - On-site supervision to continue in line with the CAMELS banks rating system.
  - CBS will require banks to submit business plans on an annual basis by end-2011.
- Supervision of HFC and DBS:
  - On-site examination of DBS started; final report expected by end of May 2011; offsite supervision underway.
  - On-site examination of HFC expected to start in August 2011; training provided to support prudential reporting.
- Crisis preparedness and offshore sector transparency:
  - First draft of the crisis preparedness binder completed and circulated; draft sent to Toronto Centre for review in April 2011.
  - Work underway to address legal and regulatory weaknesses in exchange of information identified by a peer review of the Global Forum on Transparency and Exchange of Information for Tax Purposes (¶48).
  - CBS to seek to start negotiations for membership within the Offshore Group of Banking Supervisors.
- Legislative changes to improve offshore tax transparency:
  - New Companies Act to unify Companies Act 1972 and International Business Companies Act 1994.
  - Revenue Administration Regulation under the Revenue Administration Act for exchange of information obligations.
  - Additional Tax Information Exchange Agreements being finalized, including with the Netherlands and six Nordic countries.
  - New International Corporate Service Providers law to clarify authorities‘ ability to request documents and information.
  - Financial Services Commission to be legally established to reflect increased responsibility of SIBA.
- AML/CFT and FIU developments:
  - FIU established in 2008 with investigative powers and duties.
  - FIU staffing recently increased; FIU conducts on-site inspections for AML Act and Prevention of Terrorism Act 2004 compliance.
  - FIU has applied to become a member of the Egmont Group and has assisted law enforcement agencies from seventeen countries to date.
- Insurance sector:
  - Capacity building initiatives underway; workshop on insurance supervision held in March 2011.
  - FIRST Initiative to provide TA to strengthen insurance supervision, review regulatory framework and prepare examination manuals.

### Schedule of Actions for 2011 (Table entries preserved)
- Submit first Draft of Crisis Binder to Toronto Centre  Apr-11
- Submit FIA amendments to Cabinet of Ministers  Jun-11
- Start negotiations for membership within the Offshore Group of Banking Supervisors  Jul-11
- Implementation of Bank Supervision Application  Dec-11
- Require banks to submit business plans  Dec-11
- Review regulatory framework of insurance sector, preparation of manuals for insurance supervision  Dec-11
- Conduct onsite examinations of DBS and HFC  Dec-11

### Public enterprises, Air Seychelles, utilities, and public financial institutions
- Public enterprise monitoring:
  - Reinforcement in view of recently increased quasi-fiscal risks.
  - Revised policy to formalize selection criteria of Board members submitted to Cabinet in April 2011; second policy revision expected to be approved by Cabinet in July to align Board remuneration.
  - Privatization plan for non-strategic enterprises on track for September 2011.
- Air Seychelles:
  - Transports more than half of all tourist visitors to the country despite declining market share.
  - Government allowed Gulf-based carriers to increase flight frequencies in 2010 and 2011 to encourage tourist arrivals.
  - Financial deterioration in 2010 due to pricing and contractual issues, greater competition, fuel price increases, one-off maintenance charges and adverse currency movements.
  - Government provided a guarantee on loans of SR 225 million (2% of GDP) in December and January to re-finance the airline‘s debt, repayable over a five-year period.
  - Government replaced management and Board in February 2011 and charged new management with eliminating losses and focusing on core business.
  - Strategic action plan includes eliminating loss-making routes, streamlining and modernizing the fleet, improving Air Seychelles’ code-share arrangement with Air France on the Seychelles-Paris route, and passing on fuel-price increases.
  - Government confident a restructured Air Seychelles can be put on a sound financial footing to minimize recapitalization cost within one year; Ministry of Finance to report to the IMF on a quarterly basis.
- PUC and utilities:
  - BADEA to finance expert to carry out study on PUC tariffs and mapping in consistency with full cost recovery and meeting future investment needs; completion by end-July 2011.
  - Reinstate tariff adjustments to fuel price variations by end-September 2011 to eliminate PUC‘s operational losses and any further recourse to the Stabilization Fund.
- Public banks and privatization:
  - Review of privatization of Nouvobanq and Seychelles Savings Bank (SSB): IFC advisory services engaged to complete review of Government‘s shares in Nouvobanq before end-2011; IFC considering subscribing to a capital augmentation of 20 percent to facilitate privatization.
  - Government offered 40 percent of SSB’s shares to the private sector beginning April 2011; shares will be tradable; initial sale offered to the general public with priority to the bank‘s account holders and employees.
- Development Bank of Seychelles (DBS):
  - Measures to enhance lending capacity and governance underway.
  - DBS offered more affordable rates (8.5 percent) and more flexible terms, increasing loan demand; strain on funds despite issuance of government-guaranteed bonds on the domestic market at 6% (rate provides enough spread to cover operating costs despite lower lending rates).
  - In March 2011, DBS Board stopped refinancing existing loans, limited loan size to SR6 million (with additional lending to be done on a pari passu basis with commercial banks) to curb demand.
  - Second half 2011 actions to include establishing minimum liquidity buffers and enhancing governance procedures.
  - New law governing DBS to reflect new mandate to be introduced in early 2012, emphasizing SMEs in targeted development-oriented sectors; high risk projects may have interest rates that at times exceed those offered by commercial banks.
- Housing Finance Company (HFC):
  - Action plan to be adopted by end-June 2010 for house financing policy; working on strategy to modernize HFC.
  - Strategy to limit public sector role given pent-up housing demand and limited commercial bank financing for lower income applicants; informed by FIRST initiative‘s strategic review and presented to management and HFC Board in April 2011 prior to Government approval.

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

### 62.      Our revised public debt management strategy policy, which was adopted together

### _cr11134 - 62.      Our revised public debt management strategy policy, which was adopted together

### Public debt management strategy and outlook
- Policy: Gradual reduction of total public indebtedness to 50 percentage points of GDP by 2018.
- Recent developments:
  - Issuance of government guarantees related to domestic loans extended to Air Seychelles and bonds issued locally by DBS.
  - Less favorable macroeconomic context noted.
- Projection:
  - Total public debt is projected to decline to 76.2 percent at end-2011, from 82.3 percent at end-2010.
- Commitment:
  - “Unless force majeure, we do not plan to issue additional government guarantees on domestic loans in 2011.”

### External debt restructuring
- Status:
  - “Our external debt restructuring is close to completion.”
- Negotiations and expected conclusions:
  - Ongoing discussions with two official bilateral non-Paris creditors (Abu Dhabi and India) on restructuring outstanding claims.
  - Expectation to conclude bilateral agreements with two remaining commercial creditors shortly.
  - Seeking finalization of the two remaining bilateral agreements with Paris Club creditors.
- Policy commitment:
  - Committed to meet program limits on contracting new government or government-guaranteed external loans as set out during the last program review.

### Statistics, data modernization, and compliance
- Strategic plan:
  - Adopted to achieve compliance with SDDS and BPM6 based on IMF and external advisors’ recommendations.
- Publication and compilation timetables:
  - “In September 2011 we will commence publication of quarterly and annual GDP statistics under the SDDS framework, as well as improve labor market statistics.”
  - “By December 2012 we will compile the production index on a quarterly basis using the quarterly GDP indicators.”
  - “In 2012 we will redevelop data sources and estimation methods in response to the introduction of the VAT.”
- Fiscal reporting:
  - “The new chart of accounts will facilitate the reporting of fiscal data in compliance with the Government Finance Statistics Manual 2001 (GFSM 2001).”
- Other initiatives:
  - Participation, for the first time, in the International Comparison Program coordinated by the African Development Bank.
  - Improve data sources using broader taxation and survey data.
  - Enhance institutional capacity through increased staffing, training, and information dissemination, including IMF training courses.

### Program monitoring, quantitative performance criteria, and adjusters
- Monitoring frequency:
  - Program monitored by semi-annual reviews, with semi-annual quantitative performance criteria and disbursements, in line with the MEFP of May 16, 2010.
- Documentation:
  - Quantitative performance criteria for 2011 shown in Table 2; structural benchmarks shown in Table 3.
  - A revised Technical Memorandum of Understanding (TMU) defines quantitative performance criteria, indicative targets, and adjusters.
- Policy safeguards:
  - Seychelles will avoid introducing new exchange restrictions, multiple currency practices, or bilateral payment agreements contradicting Article VIII of the IMF‘s Articles of Agreement and will avoid imposing import restrictions for balance of payments reasons.
  - Authorities stand ready to adopt additional measures, in consultation with IMF staff, as necessary to ensure program success.

### Selected quantitative targets and figures (as presented)
- Net international reserves of the CBS, millions of U.S. dollars (floor): 168148204189191210192204202203213199 (table sequence preserved as presented).
- Reserve money (ceiling): 1,753...1,7461,804...1,7721,8241,7551,8441,7571,8621,765 (table sequence preserved as presented).
- Primary balance of the consolidated government (cumulative floor): 823...1,031142...419240240515462602536 (table sequence preserved as presented).
- The contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 37...74...0333346464747 (table sequence preserved as presented).
- Zero sub-ceiling on contracting new short-term external debt applies continuously: 0.0...0.00.0...0.00.00.00.00.00.00.0 (table sequence preserved as presented).
- The accumulation of external payments arrears by the public sector (ceiling): 0.0...0.00.0...0.00.00.00.00.00.00.0 (table sequence preserved as presented).
- The accumulation of domestic payment arrears by the government (ceiling): 0.0...0.00.0...00.00.00.00.00.00.0 (table sequence preserved as presented).
- Net external non project financing (millions of U.S. dollars; cumulative) data series: 31.8...11.4-1.4...0.70.0-0.62.16.85.51.6 (table sequence preserved as presented).
- Program accounting exchange rates (end-of-quarter): SR/US$ 11.75......11.75......12.30 12.15 12.30 12.15 12.30 12.15 (values preserved as presented).
- US$/Euro (end-of-quarter): 1.27......1.27......1.36 1.34 1.36 1.34 1.36 1.34 (values preserved as presented).
- US$/UK pound (end-of-quarter): 1.48......1.48......1.57 1.56 1.57 1.56 1.57 1.56 (values preserved as presented).
- US$/SDR (end-of-quarter): 1.49......1.49......1.56 1.49 1.56 1.49 1.56 1.49 (values preserved as presented).

### Structural benchmarks, 2010–11 (measure, target date, and rationale; status where noted)
- Cabinet approval of the amendments to Financial Institutions Act (MEFP, ¶41): End-April 2011 — Rationale: strengthen competition in the banking sector and improve risk management. Status: “Not met. Moved to end-June2011.”
- Adopt an action plan for house financing policy limiting public sector role (MEFP, ¶61): End-June 2011 — Rationale: reduce fiscal risks, strengthen competition, promote banking system development.
- Launch a strategic plan for reform of the social security system (MEFP, ¶27): End-June 2011 — Rationale: establish well-targeted and sustainable social security system.
- Cabinet approval of VAT regulations including rates, exemptions, thresholds (MEFP, ¶16): End-June 2011 — Rationale: modernize tax system and remove tax distortions.
- Commission and complete study on optimal tariffs for utilities (MEFP, ¶56): End-July 2011 — Rationale: ensure cost recovery and long-term sustainability of utilities.
- Develop privatization plan for nonstrategic public enterprises (MEFP, ¶50): End-September 2011 — Rationale: reduce role of state, improve corporate governance, minimize fiscal risks.
- Cabinet approval of a new Public Finance Bill extending National Assembly oversight on capital expenditure budget (MEFP, ¶22): End-September 2011 — Rationale: strengthen public finance management.
- Reinstate electricity tariff adjustment for fuel price variation (MEFP, ¶56): End-September 2011 — Rationale: reduce losses of the public utility company.

### Technical Memorandum of Understanding — monitoring definitions and reporting
- Net international reserves (NIR) of the CBS (floor):
  - Definition: Reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF). Reserve assets include holdings of SDRs, foreign exchange, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad liquidatable without penalty, and investment-grade securities. Excludes project balances and blocked or escrow accounts, and bank reserves in foreign currency maintained for reserve requirements.
  - Calculation: Reserves assets and liabilities converted into U.S. dollars using end of period exchange rates assumed in the program.
  - Auditing and reporting: Quarterly NIR data submitted by the CBS to the IMF will be audited by CBS external auditors in accordance with International Standards on Auditing; reports submitted to the CBS, with a copy to the IMF, no later than two months after each test date.
  - Adjusters: The floor on NIR will be adjusted upward (downward) by the amount by which external non-project loans and cash grants exceed (fall short of) program assumptions; also adjusted for external debt service shortfalls (excesses).
- Reserve money (ceiling):
  - Definition: Currency issued and deposits held by financial institutions at the central bank (bank reserves), including those denominated in foreign currencies. Evaluation at program accounting exchange rate.
  - Auditing and reporting: Quarterly reserve money data submitted by the CBS to the 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.
- Primary balance of the consolidated government (cumulative floor):
  - Definition: 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, measured from above the line on a commitment basis.
- Public external debt (ceiling):
  - Coverage: Applies to contracting or guaranteeing of new external liabilities by the public sector (central government, CBS, public agencies, parastatals for noncommercial operations). Excludes Fund resources, operations related to external debt restructuring, normal import-related credits, purchases of treasury securities by nonresidents, and parastatal commercial borrowing.
  - Valuation: Debt 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.
  - Definition of debt: As per Executive Board Decision No.6230-(79/140), revised Decision No. 14416-(09/91): loans, suppliers credits, leases (present value at inception), and arrears, penalties, and judicially awarded damages arising from failure to pay under contractual obligations.
- External arrears (public sector):
  - Continuous performance criterion: Nonaccumulation of arrears to external creditors. Definition: Amount of external debt service due and not paid within the contractually agreed period, including contractual and late interest. Excludes arrears for which a clearance framework has been agreed or rescheduling is sought.
- Domestic arrears (government):
  - Performance criterion: Nonaccumulation of budget expenditure arrears measured on net basis from start of calendar year.
  - Definition includes: (1) invoices received and verified but unpaid beyond contractually agreed period or 30 days; (2) unpaid wages, pensions, transfers pending longer than 30 days; (3) debt service on domestic debt of the government or guaranteed by the government not paid within contractually agreed period.
- Reporting requirements (selected):
  - CBS weekly (within one week): Reserve money; foreign exchange reserves position; summary table on foreign exchange market transactions; results of liquidity deposit auctions, primary Treasury bill auctions, and secondary auctions.
  - CBS monthly (within 4 weeks): Monetary survey; foreign exchange cash flow (actual and updated); financial soundness indicators; stock of government securities in circulation by holder and by original maturity and debt service profile report.
  - Ministry of Finance monthly (within 2 weeks): Consolidated government operations on a commitment and cash basis in IMF-supported program format; detailed revenues and expenditures of central government and social security fund; accounts of public nonbank financial institutions; import and export data from customs; public debt report; statements of Stabilization Fund operations; consolidated creditors schedule on domestic expenditure arrears of the government.
  - Quarterly (within a month): Financial statements of Air Seychelles.
  - Consultation: Government and CBS will consult Fund staff on all economic and financial measures impacting program implementation and provide additional information as requested.

### IMF press release highlights (Press Release No. 11/213, June 3, 2011)
- Review: IMF completed the third review under the three-year Extended Arrangement (EFF) effective December 23, 2009 in the amount of SDR 19.8 million.
- Disbursement: Completion makes available a disbursement of SDR 3.52 million (about US$5.6 million).
- 2010 performance:
  - Recovery from 2008 crisis and global recession driven by exceptionally high foreign direct investment and a rebound in tourism.
  - Inflation remained near zero.
  - Continued rebuilding of international reserves and reduction of public debt.
  - All quantitative performance criteria at end-December 2010 were met.
- 2011 policy adjustments:
  - Policy mix adjusted in response to global commodities price shock and recent financial difficulties of Air Seychelles.
  - Fiscal policy to be slightly looser to accommodate additional priority spending while maintaining targeted progress toward external stability and debt sustainability.
  - Structural reforms to focus on strengthening financial sector through modernization of legal and regulatory framework and restructuring and/or privatization of several state-owned financial institutions.

*Source: Excerpt from IMF document _cr11134 (text provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11134.pdf_