## _cr12260 ## Source details **Canonical URL:** [_cr12260](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12260.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12260.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12260.pdf.json) --- ### I. Recent developments and outlook - 2011 performance - Tourism sector grew by 7 percent in 2011, driving economic growth at an estimated 4.9 percent. - Exchange rate and external sector - Depreciation of the rupee in the last quarter of 2011; since then it has stabilized. - In March 2012, the real effective exchange rate was about 11 percent lower than a year ago. - The import content of large FDI flows (notably in tourism) explains the bulk of the high external current account deficit. - Inflation - Consumer price inflation rose from almost zero in 2010 to 5.8 percent at end-March 2012. - Inflation drivers: partial pass-through of higher international food and fuel prices and recent rupee depreciation. - Monetary policy and interest rates - Central Bank tightened policy, starting with a raise in minimum reserve requirements in April 2011. - Average treasury bill rates: 1.5 percent in early 2011; 5.8 percent in December 2011; 6.8 percent in early May 2012. - 2012 outlook and projections - Tourist arrivals growth conservatively projected at 3.5 percent for 2012. - Economic growth projected to decline to 2.8 percent in 2012. - Inflation expected to peak at around 8½ percent in mid-2012, then decline to 6½ at end-2012. - Lower growth should improve the external current account balance beginning in the second half of 2012. - Tighter monetary policy expected to alleviate pressures for further exchange rate depreciation. ### II. Fifth review: performance under the extended arrangement - Program implementation through end-December 2011 - Policy implementation through end-December 2011 has been in line with the program. - All quantitative performance criteria (PCs) at end-December 2011 were met. - Substantial over-performance on primary fiscal surplus and international net reserves largely due to one-off government revenues from a legal settlement with a non-resident at end-2011. - Indicative targets for end-March 2012 were met; end-June 2012 PCs appear within reach. - Price adjustments and public enterprises - Most fuel and utility prices adjusted to reflect higher energy costs and to ensure positive cash flow projections for 2012 for state petroleum and public utility companies. - April 2012: SEYPEC increased gasoline and heavy fuel prices by 15 percent. - Mid-May 2012: 15 percent across-the-board increase in electricity, water and sewage tariffs; doubling of LPG price for commercial clients. - LPG prices for household consumption and public transportation fares remain below costs for social reasons. - 2012 budget incorporated a substantial increase in transfers targeting the most vulnerable households. - Structural benchmarks and external debt restructuring - All structural benchmarks through end-March 2012 were met. - Study on optimal tariff structure for utilities underway; preparations for VAT introduction in July 2012 proceeding. - External debt restructuring close to completion: agreements reached in 2011 with remaining two non-Paris Club official creditors (India and Abu Dhabi) expected to be signed shortly; signature of another agreement with remaining commercial creditor also imminent. ### III. Policies in the period ahead - Fiscal stance and adjustments in 2012 - Fiscal policy stance to be relaxed slightly in second half of 2012, but limited fiscal room in medium term to meet 2018 debt objective. - End-year primary fiscal balance revised downward by 0.2 percent of GDP. - Revenue effects: depreciating rupee expected to increase import-related taxes by 0.5 percent of GDP; higher dividends from other SOEs to compensate omitted dividends from SEYPEC. - Expenditure increases: partial accommodation of foreign-currency-denominated expenditure (0.2 percent of GDP) and higher current transfers related to Air Seychelles restructuring (0.4 percentage point). - Government debt and medium-term projections - Debt taken over from Air Seychelles: 2.3 percent of GDP, 0.3 percentage points of which is external. - Impact of rupee depreciation on foreign-currency-denominated debt expected to bring end-2012 debt-to-GDP ratio to 82 percent (5 percentage points higher than projected at last review). - Medium-term projection: with annual GDP growth averaging some 4 percent, bringing government debt below 50 percent of GDP by 2018 will require sustained primary fiscal surpluses at about the 2013 projected level of 4.5 percent of GDP. - Monetary policy tightening - Risks of second-round inflation pressures and larger dollarization require further tightening of monetary policy through remainder of 2012. - CBS taking proactive stance by bringing key interest rates to positive real levels: implies reducing nominal reserve money targets for end-June and beyond below nominal GDP growth and keeping average daily reserve money balances closer to quarterly targets via market-based liquidity sterilization. - Increased bank competition and reduced liquidity expected to speed up monetary transmission. - Monetary operations and sterilization - Monetary operations strengthened by increased issuance of treasury bills for monetary purposes. - Rising costs of sterilization threaten CBS balance sheet. - Ministry of Finance started to issue treasury bills in addition to financing needs; proceeds held in special account with CBS. - Up to 6 percent of GDP of treasury bills could be issued for monetary purposes in 2012. - An amendment to existing legislation will be submitted to the National Assembly by end-May 2012 to exclude issuing treasury bills for monetary purposes from the authorized annual debt ceiling. - Structural reforms and SOE oversight - VAT implementation in July 2012 is a structural benchmark and critical to completing tax reform cycle. - Customs reforms underway to increase tax collection and compliance. - Three-year public finance management (PFM) action plan being implemented with IMF, World Bank, and EU technical support to modernize budgeting, execution, and auditing. - Study to reform utility tariff structure and pricing mechanism (end-September structural benchmark). - Ministry of Finance strengthening SOE legal disclosure requirements and monitoring capacity. - Newly established committee to review large parastatal investment projects. - Private sector, financial sector, and AML - Reforms to remove obstacles to private sector development being accelerated with World Bank support to address Doing Business weaknesses. - Financial sector reforms: refocusing Development Bank of Seychelles on SMEs (end-March structural benchmark), rationalizing government housing finance to increase private sector involvement, preparations to launch Stock Exchange to sell government participations in non-strategic parastatals. - Amendment of Anti-Money Laundering Act to increase tax compliance and transparency of offshore financial sector. ### Box — Air Seychelles' restructuring and fiscal impact (key facts) - Background and losses - Air Seychelles historically carried majority of tourists; direct flights from France, UK, Italy, Germany. - Losses began accumulating from 2010 due to management shortcomings, underinvestment, unfavorable exchange rate, rising fuel prices, and unfavorable code-sharing/charter agreements. - Losses covered initially by loans from Nouvobanq for equivalent of 2.5 percent of GDP, and from 2011 by budget transfers. - Total losses in 2011 amounted to 2.5 percent of GDP, of which two-thirds were borne by the central government. - Strategic partnership with Etihad (January 2012) - Etihad injected US$20 million for a 40 percent stake and five-year management contract; committed up to $25 million in shareholder’s loan. - Partnership allows code-sharing with Etihad to the Gulf and new routes to Asia; business plan adopted March 2012 includes modernized fleet. - Government support and fiscal costs - Government agreed on capital injections and assumption of liabilities totaling $50 million (5 percent of GDP), of which $10.0 million injected upfront. - Government liable to cover severance and downsizing costs, raising 2012 transfers to about 1.5 percent of GDP (from 1.1 percent initially budgeted). - Government assumed outstanding debts to Nouvobanq totaling 2.4 percent of GDP. - In 2013 government scheduled to make another capital injection and cover fees for early lease termination totaling $13.5 million (around 1.3 percent of GDP). - Projected airline profitability return in 2014. - Breakdown of Air Seychelles costs and liabilities taken by GoS (Million US$) - Capital injection I: $10.0 - Downsizing: $4.4 - Capital injection II: $10.0 - Early lease termination: $3.5 - Foreign commercial debt: $3.2 - Domestic commercial debt: $4.8 - Domestic debt, GoS guaranteed: $14.1 - Factors reducing fiscal risk - (i) international managerial expertise from Etihad, (ii) strongly aligned incentives for international partner, (iii) shareholder loan usable for short-term liquidity. ### IV. Program monitoring and risks - End-June 2012 program targets - Modifications proposed for two end-June 2012 performance criteria: downward adjustment of reserve money PC (and end-September and end-December 2012 indicative targets) to reflect monetary tightening; net international reserves PC adjusted slightly upwards reflecting performance to date. - Downside risks and extreme scenario - Most important risks stem from deterioration of economic conditions in Europe; increased piracy threats could also lower tourist inflows. - Extreme downside scenario: a 10 percent decrease in tourism arrivals in 2012 (13.5 percentage points lower than baseline) would: - Reduce GDP growth to close to zero percent. - Worsen overall balance of payments by 1.8 percent of GDP. - Reduce primary fiscal surplus by 1.3 percent of GDP. - Probability of such an extreme scenario judged small; tourism flows have shown strong resilience over past two years and during 2008 global crisis. ### Homegrown risks to the program (summary) - Main risks - Additional losses to key public enterprises could jeopardize the government's debt reduction objectives. - Corrective measures expected - Restructuring of the national airline. - Stricter monitoring of public enterprises. - Increases in public utility tariffs to cost recovery levels. - Staff appraisal and recommendations - Seychelles continues to perform well under the EFF-supported program. - Staff supports monetary tightening to prevent second-round inflation and higher interest rates. - Staff welcomes sharing sterilization costs with the Treasury to reduce impact on CBS balance sheet. - Staff recommends early action to avert public enterprise losses, including prompt restructuring of SEYPEC’s unprofitable tanker activities. - Staff encourages timely implementation of structural-benchmark measures, including VAT introduction and utility tariff reform, to boost private-sector-led growth and meet debt reduction objectives. ### Staff recommendation (completion of review) - Staff supports the modification of two quantitative performance criteria for end-June 2012. - Staff recommends the completion of the fifth review under the Extended Arrangement and the financing assurances review. ### Key macro projections and selected indicators (selected series as presented) - National income, prices, and growth projections (selected) - Nominal GDP (millions of Seychelles rupees): 11,450; 11,621; 12,470; 12,558; 13,508; 13,564; 14,624; 15,707. - Real GDP (percentage change): 0.5; 6.7; 5.0; 4.9; 4.0; 2.8; 3.7; 4.1. - CPI (annual average): 31.7; -2.4; 2.5; 2.6; 4.8; 7.3; 4.2; 3.1. - CPI (end-of-period): -2.6; 0.4; 5.4; 5.5; 3.5; 6.5; 3.1; 3.1. - GDP deflator average: 25.2; -4.9; 2.2; 3.0; 4.2; 5.1; 4.0; 3.2. - External sector and reserves (selected) - Current account balance including official transfers (percent of GDP): -9.8; -20.1; -22.3; -21.6; -20.9; -21.2; -18.4; -13.5. - Current account (Millions of U.S. dollars): -83; -193; -225; -219; -217; -202; -184; -142. - Gross official reserves (end of year, millions of U.S. dollars): 196; 254; 263; 277; 283; 301; 328; 354. - Months of imports, c.i.f.: 2.0; 2.4; 2.3; 2.6; 2.5; 2.8; 3.1; 3.3. - Total public external debt outstanding (millions of U.S. dollars): 761; 478; 503; 490; 528; 515; 521; 521. - Total public external debt (percent of GDP): 90.5; 49.7; 49.8; 48.3; 51.1; 54.0; 52.2; 49.6. - Balance of payments detail (selected items, Millions of U.S. dollars) - Exports of goods: 432; 400; 505; 478; 516; 516; 522; 526. - Oil re-exports: 184; 158; 210; 194; 207; 215; 212; 207. - Tuna exports: 165; 210; 246; 242; 256; 249; 257; 265. - Imports of goods: -733; -733; -877; -878; -902; -880; -875; -859. - Oil imports: -209; -218; -268; -255; -315; -323; -335; -326. - FDI-related imports: -126; -164; -156; -140; -133; -132; -112; -95. - Exports of services: 600; 592; 618; 614; 657; 586; 605; 641. - Tourism earnings: 256; 274; 298; 291; 318; 304; 318; 338. - Imports of services: -383; -430; -437; -418; -452; -396; -410; -426. - Income, net: -47; -47; -42; -51; -42; -43; -41; -39. - Interest due (of which): -33; -24; -17; -17; -20; -18; -17; -18. - Capital and financial account (Millions of U.S. dollars): 144; 494; 226; 202; 228; 221; 218; 172. - Financial account (Millions of U.S. dollars): 92; 219; 177; 155; 202; 193; 200; 157. - Direct investment, net: 163; 213; 201; 181; 168; 170; 143; 121. - Overall balance (Millions of U.S. dollars): 101; 267; 110; 111; 93; 43; 30. - Change in gross official reserves (increase: –) (Millions of U.S. dollars): -123; -58; -11; -23; -20; -25; -26; -26. - Government budget and fiscal indicators (selected) - Total revenue, excluding grants (percent of GDP): 33.1; 34.5; 37.0; 37.4; 35.9; 36.6; 35.2; 35.1. - Expenditure and net lending (percent of GDP): 32.0; 32.8; 39.0; 37.3; 37.2; 39.7; 36.9; 34.9. - Current expenditure (percent of GDP): 29.1; 27.5; 29.2; 28.8; 28.8; 30.4; 29.6; 27.4. - Capital expenditure and net lending (percent of GDP): 2.9; 5.3; 9.9; 8.5; 8.4; 9.3; 7.3; 7.5. - Overall balance, including grants (percent of GDP): 5.2; 2.5; 1.6; 2.6; 1.9; 0.8; 1.0; 2.3. - Primary balance (percent of GDP): 14.3; 8.7; 4.6; 5.6; 4.7; 4.5; 4.6; 5.2. - Total public debt (percent of GDP): 124.4; 82.5; 78.5; 77.6; 76.9; 81.7; 77.0; 71.4. - Domestic (percent of GDP): 33.9; 32.8; 28.7; 29.3; 25.8; 27.7; 24.8; 21.8. - External (percent of GDP): 90.5; 49.7; 49.8; 48.3; 51.1; 54.0; 52.2; 49.6. - Monetary sector and central bank (selected) - Net foreign assets (Monetary survey, SR millions): 2,897; 3,644; 3,984; 4,340; 4,051; 4,131; 4,450; 4,311; 4,929; 4,463; 4,978; 4,598; 4,981; 4,876; 5,155. - Broad money (SR millions): 6,401; 7,266; 7,411; 7,526; 7,376; 7,466; 7,596; 7,655; 7,815; 7,783; 7,732; 7,906; 7,732; 8,079; 7,928. - Reserve money (SR millions): 1,296; 1,746; 1,772; 1,728; 1,727; 1,765; 1,699; 1,810; 1,750; 1,840; 1,800; 1,869; 1,800; 1,910; 1,850. - Broad money growth (12–month percent change): 7.0; 13.5; 13.0; 15.3; 7.6; 2.6; 4.5; 3.2; 5.4; 3.3; 2.7; 7.1; 4.8; 8.2; 4.4. - Credit to the economy (12–month percent change): -11.4; 21.4; 22.9; 18.0; 15.8; 10.1; 6.2; 4.9; 0.1; 9.4; -11.8; 11.0; -14.7; 10.4; 6.7. - Money multiplier (broad money/reserve money): 4.9; 4.2; 4.2; 4.4; 4.3; 4.2; 4.5; 4.2; 4.5; 4.2; 4.3; 4.2; 4.3; 4.2; 4.3. - Gross international reserves (US$ millions, memorandum): 196; 254; 262; 283; 267; 263; 277; 269; 292; 274; 295; 274; 291; 283; 301. - Banking sector soundness (selected indicators) - Regulatory capital to risk weighted assets (percent): 18.4; 17.6; 17.9; 19.4; 13.6; 17.8; 22.0; 21.7; 21.4; 22.1; 21.7; 21.5; 23.3; 24.8; 26.3; 24.2. - Nonperforming loans to gross loans (percent): 2.0; 2.1; 2.0; 2.0; 2.3; 4.3; 4.2; 3.8; 4.1; 6.9; 6.4; 5.5; 5.4; 5.6; 5.3; 8.1. - Return on assets (annualized, percent): 4.3; 3.4; 2.8; 16.1; 5.3; 3.0; -0.2; 3.2; 3.4; 5.0; 3.0; 3.7; 3.9; 3.1; 3.6; 5.6. - Core liquid assets to total assets (percent): 30.8; 34.6; 36.4; 36.4; 37.8; 36.0; 35.0; 37.7; 43.2; 43.5; 44.7; 44.7; 47.1; 47.1; 47.7; 49.9. ### IMF financing, reviews, and relations with the Fund - Extended Arrangement timeline and conditional disbursements (SDR, Millions) - December 22, 2009 approval: 0.88 (8.1 percent of quota). - March 15, 2010: 2.20 (20.2 percent of quota). - June 15, 2010 (First review): 2.20 (20.2 percent of quota). - September 15, 2010: 2.20 (20.2 percent of quota). - December 15, 2010 (Second review): 1.76 (16.1 percent of quota). - March 31, 2011 (Third review): 3.52 (32.3 percent of quota). - September 30, 2011 (Fourth review): 3.08 (28.3 percent of quota). - March 31, 2012 (Fifth review): 2.64 (24.2 percent of quota). - September 30, 2012 (Sixth review): 1.32 (12.1 percent of quota). - Total under the schedule: 19.8 (181.7 percent of quota). - Stock of existing Fund credit and projections (selected, in millions SDR) - Stock of existing Fund credit (end of period): 6.2; 11.9; 20.2; 23.8; 23.4; 17.9; 15.5; 13.7; 11.3; 8.7. - Projected EFF disbursements: 4.0 (Millions SDR). - Stock of existing and prospective Fund credit (end of period): 6.2; 11.9; 20.2; 23.8; 27.4; 21.9; 19.5; 17.6; 15.0; 11.7. - In percent of quota: 70.0; 135.0; 230.0; 218.0; 251.3; 200.8; 178.6; 161.8; 137.9; 107.6. - In percent of GDP: 1.0; 2.2; 3.2; 3.7; 4.4; 3.4; 2.9; 2.5; 2.0; 1.5. - ANNEX I — Relations with the Fund (As of April 30, 2012) — selected - Joined: 6/30/1977. - Article VIII member since: 01/03/1978. - Quota: 10.90 SDR Million (100.0 percent of quota). - Fund holdings of currency: 36.44 SDR Million (334.34 percent of quota). - Reserve Position in Fund: 0.53 SDR Million (4.85 percent of quota). - EFF: Arrangement approved Dec 23, 2009; Expiration Dec. 22, 2012; Amount Approved 19.80; Amount Drawn 15.84. - Projected Obligations to the Fund (SDR Million) — 2012: Principal 2.64; Charges/interest 0.22; Total 2.86; 2013: Principal 5.50; Charges/interest 0.25; Total 5.75; 2014: Principal 2.42; Charges/interest 0.20; Total 2.62; 2015: Principal 1.83; Charges/interest 0.18; Total 2.01; 2016: Principal 2.38; Charges/interest 0.15; Total 2.54. - Mid rate as of April 30, 2012: US$ 1 = SR 14.06. ### Key program implementation notes and policy commitments - Program implementation and outcomes - All quantitative performance criteria as of end-December 2011 were met; on track for end-June targets. - Fiscal target exceeded by 1.1 percent of GDP. - Revenue 1.1 percent of GDP higher than forecast, largely reflecting a one-off recovery of revenues worth approximately 0.7 percent of GDP. - Policies for 2012 and beyond — fiscal and tax - Commitment to reducing public debt to 50 percent of GDP by 2018. - Primary surplus target for 2012 revised downward to 4.5 percent of GDP from 4.7 percent. - VAT implementation on track for 1 July 2012; Cabinet approved amendments in May. - Net FDI inflows projected at 18 percent of GDP in 2012. - Public Financial Management and structural reforms - 2012-14 PFM action plan to be launched in June. - Public Finance Management Bill submission to National Assembly expected in June. - New Chart of Accounts and Program Based Budgeting to be deployed for 2013 budget. - Agency for Social Protection budget increased 20 percent from 2011; Social Security Fund assets approx. 2.6 percent of GDP. - Financial sector reforms and infrastructure - FIA amended December 2011 to introduce a single licensing regime for banks. - SSA expected to go live by July 2012. - Implementation milestones include Electronic Clearing House (Q3 2012) and Electronic Funds Transfer (Q2 2013). - Launch of the stock exchange planned for the second half of 2012. - Public enterprise monitoring and privatization - Amendments to Public Enterprise Monitoring Law; stronger reporting requirements and focus on seven largest public entities. - Privatization via Seychelles Stock Exchange planned in third quarter of 2012 for several entities. - Petroleum and resource readiness - Drilling planned for late 2013 on two surveyed fields. - High-level oil coordination unit established in May 2012. - Data and statistical improvements - Objective to achieve SDDS compliance; plan to publish quarterly GDP within one quarter by September 2013. - Household budget survey launched in 2012 to revise CPI basket; pilot in May and launch in July. *International Monetary Fund — Seychelles: Selected Economic and Financial Indicators, 2009–14 (content unit)_cr12260* ### 1. Selected Economic and Financial Indicators, 2009–14_______________________________________________ 12 ### _cr12260 - 1. Selected Economic and Financial Indicators, 2009–14_______________________________________________ 12 ### I. Recent developments and outlook - 2011 performance: tourism sector grew by 7 percent in 2011, driving economic growth at an estimated 4.9 percent. - Exchange rate and external sector: - Depreciation of the rupee in the last quarter of 2011; since then it has stabilized. - In March 2012, the real effective exchange rate was about 11 percent lower than a year ago. - The import content of large FDI flows (notably in tourism) explains the bulk of the high external current account deficit. - Inflation: - Consumer price inflation rose from almost zero in 2010 to 5.8 percent at end-March 2012. - Inflation drivers: partial pass-through of higher international food and fuel prices and recent rupee depreciation. - Monetary policy and interest rates: - Central Bank tightened policy, starting with a raise in minimum reserve requirements in April 2011. - Average treasury bill rates: 1.5 percent in early 2011; 5.8 percent in December 2011; 6.8 percent in early May 2012. - 2012 outlook and projections: - Tourist arrivals growth conservatively projected at 3.5 percent for 2012. - Economic growth projected to decline to 2.8 percent in 2012. - Inflation expected to peak at around 8½ percent in mid-2012, then decline to 6½ at end-2012. - Lower growth should improve the external current account balance beginning in the second half of 2012. - Tighter monetary policy expected to alleviate pressures for further exchange rate depreciation. ### II. Fifth review: performance under the extended arrangement - Program implementation through end-December 2011: - Policy implementation through end-December 2011 has been in line with the program. - All quantitative performance criteria (PCs) at end-December 2011 were met. - Substantial over-performance on primary fiscal surplus and international net reserves largely due to one-off government revenues from a legal settlement with a non-resident at end-2011. - Indicative targets for end-March 2012 were met; end-June 2012 PCs appear within reach. - Price adjustments and public enterprises: - Most fuel and utility prices adjusted to reflect higher energy costs and to ensure positive cash flow projections for 2012 for state petroleum and public utility companies. - April 2012: SEYPEC increased gasoline and heavy fuel prices by 15 percent. - Mid-May 2012: 15 percent across-the-board increase in electricity, water and sewage tariffs; doubling of LPG price for commercial clients. - LPG prices for household consumption and public transportation fares remain below costs for social reasons. - 2012 budget incorporated a substantial increase in transfers targeting the most vulnerable households. - Structural benchmarks and external debt restructuring: - All structural benchmarks through end-March 2012 were met. - Study on optimal tariff structure for utilities underway; preparations for VAT introduction in July 2012 proceeding. - External debt restructuring close to completion: agreements reached in 2011 with remaining two non-Paris Club official creditors (India and Abu Dhabi) expected to be signed shortly; signature of another agreement with remaining commercial creditor also imminent. ### III. Policies in the period ahead - Fiscal stance and adjustments in 2012: - Fiscal policy stance to be relaxed slightly in second half of 2012, but limited fiscal room in medium term to meet 2018 debt objective. - End-year primary fiscal balance revised downward by 0.2 percent of GDP. - Revenue effects: depreciating rupee expected to increase import-related taxes by 0.5 percent of GDP; higher dividends from other SOEs to compensate omitted dividends from SEYPEC. - Expenditure increases: partial accommodation of foreign-currency-denominated expenditure (0.2 percent of GDP) and higher current transfers related to Air Seychelles restructuring (0.4 percentage point). - Government debt and medium-term projections: - Debt taken over from Air Seychelles: 2.3 percent of GDP, 0.3 percentage points of which is external. - Impact of rupee depreciation on foreign-currency-denominated debt expected to bring end-2012 debt-to-GDP ratio to 82 percent (5 percentage points higher than projected at last review). - Medium-term projection: with annual GDP growth averaging some 4 percent, bringing government debt below 50 percent of GDP by 2018 will require sustained primary fiscal surpluses at about the 2013 projected level of 4.5 percent of GDP. - Monetary policy tightening: - Risks of second-round inflation pressures and larger dollarization require further tightening of monetary policy through remainder of 2012. - CBS taking proactive stance by bringing key interest rates to positive real levels: implies reducing nominal reserve money targets for end-June and beyond below nominal GDP growth and keeping average daily reserve money balances closer to quarterly targets via market-based liquidity sterilization. - Increased bank competition and reduced liquidity expected to speed up monetary transmission. - Monetary operations and sterilization: - Monetary operations strengthened by increased issuance of treasury bills for monetary purposes. - Rising costs of sterilization threaten CBS balance sheet. - Ministry of Finance started to issue treasury bills in addition to financing needs; proceeds held in special account with CBS. - Up to 6 percent of GDP of treasury bills could be issued for monetary purposes in 2012. - An amendment to existing legislation will be submitted to the National Assembly by end-May 2012 to exclude issuing treasury bills for monetary purposes from the authorized annual debt ceiling. - Structural reforms and SOE oversight: - VAT implementation in July 2012 is a structural benchmark and critical to completing tax reform cycle. - Customs reforms underway to increase tax collection and compliance. - Three-year public finance management (PFM) action plan being implemented with IMF, World Bank, and EU technical support to modernize budgeting, execution, and auditing. - Study to reform utility tariff structure and pricing mechanism (end-September structural benchmark). - Ministry of Finance strengthening SOE legal disclosure requirements and monitoring capacity. - Newly established committee to review large parastatal investment projects. - Private sector, financial sector, and AML: - Reforms to remove obstacles to private sector development being accelerated with World Bank support to address Doing Business weaknesses. - Financial sector reforms: refocusing Development Bank of Seychelles on SMEs (end-March structural benchmark), rationalizing government housing finance to increase private sector involvement, preparations to launch Stock Exchange to sell government participations in non-strategic parastatals. - Amendment of Anti-Money Laundering Act to increase tax compliance and transparency of offshore financial sector. ### Box: Air Seychelles' restructuring and fiscal impact (key facts) - Background: Air Seychelles historically carried majority of tourists; direct flights from France, UK, Italy, Germany. - Losses and financing: - Losses began accumulating from 2010 due to management shortcomings, underinvestment, unfavorable exchange rate, rising fuel prices, and unfavorable code-sharing/charter agreements. - Losses covered initially by loans from Nouvobanq for equivalent of 2.5 percent of GDP, and from 2011 by budget transfers. - Total losses in 2011 amounted to 2.5 percent of GDP, of which two-thirds were borne by the central government. - Strategic partnership with Etihad (January 2012): - Etihad injected US$20 million for a 40 percent stake and five-year management contract; committed up to $25 million in shareholder’s loan. - Partnership allows code-sharing with Etihad to the Gulf and new routes to Asia; business plan adopted March 2012 includes modernized fleet. - Government support and fiscal costs: - Government agreed on capital injections and assumption of liabilities totaling $50 million (5 percent of GDP), of which $10.0 million injected upfront. - Government liable to cover severance and downsizing costs, raising 2012 transfers to about 1.5 percent of GDP (from 1.1 percent initially budgeted). - Government assumed outstanding debts to Nouvobanq totaling 2.4 percent of GDP. - In 2013 government scheduled to make another capital injection and cover fees for early lease termination totaling $13.5 million (around 1.3 percent of GDP). - Projected airline profitability return in 2014. - Breakdown of Air Seychelles costs and liabilities taken by GoS (Million US$): - Capital injection I: $10.0 - Downsizing: $4.4 - Capital injection II: $10.0 - Early lease termination: $3.5 - Foreign commercial debt: $3.2 - Domestic commercial debt: $4.8 - Domestic debt, GoS guaranteed: $14.1 - Factors reducing fiscal risk: (i) international managerial expertise from Etihad, (ii) strongly aligned incentives for international partner, (iii) shareholder loan usable for short-term liquidity. ### IV. Program monitoring and risks - End-June 2012 program targets: - Modifications proposed for two end-June 2012 performance criteria: downward adjustment of reserve money PC (and end-September and end-December 2012 indicative targets) to reflect monetary tightening; net international reserves PC adjusted slightly upwards reflecting performance to date. - Downside risks and extreme scenario: - Most important risks stem from deterioration of economic conditions in Europe; increased piracy threats could also lower tourist inflows. - Extreme downside scenario: a 10 percent decrease in tourism arrivals in 2012 (13.5 percentage points lower than baseline) would: - Reduce GDP growth to close to zero percent. - Worsen overall balance of payments by 1.8 percent of GDP. - Reduce primary fiscal surplus by 1.3 percent of GDP. - Probability of such an extreme scenario judged small; tourism flows have shown strong resilience over past two years and during 2008 global crisis. *International Monetary Fund — Seychelles: Selected Economic and Financial Indicators, 2009–14 (content unit)_cr12260* ### 18. Homegrown risks to the program ### 18. Homegrown risks to the program ### Main risks and corrective measures - Homegrown risks include additional losses to key public enterprises that could jeopardize the government's debt reduction objectives. - Corrective measures expected to mitigate this risk: - Restructuring of the national airline. - Stricter monitoring of public enterprises. - Increases in public utility tariffs to cost recovery levels. ### Staff appraisal — macroeconomic performance and outlook - Seychelles continues to perform remarkably well under the EFF-supported program. - 2011 was another year of strong growth, with further progress toward debt sustainability and international reserves accumulation despite several adverse developments. - Although the external economic environment is more challenging in 2012, the country is set for reasonable, if somewhat lower, growth in 2012, supported by a resilient tourism sector. - Properly addressed, inflation pressures from higher energy prices and a weaker exchange rate should subside later this year. ### Policy mix and monetary stance - The macroeconomic policy mix remains appropriate and consistent with declining public debt over the medium term. - Agreement with a major Gulf carrier on a rescue plan for Air Seychelles required a substantial government effort and a temporary relaxation of the fiscal stance, but it bodes well for the restoration of the company’s financial viability and for the economy as a whole over the medium term. - Within the flexible exchange rate regime, the depreciation of the real exchange rate has helped mitigate the worsening terms of trade and other external shocks. - Staff supports the authorities' approach to prevent second-round inflationary effects by monetary tightening and higher interest rates. - The sharing of the sterilization costs with the Treasury will reduce the negative impact on the central bank’s balance sheet. - The proposed path of moderate, but continuous foreign-exchange accumulation will extend further the CBS’ reserve coverage while avoiding excessive pressure on the exchange rate. ### Public sector financial vulnerability - The government should be vigilant about the financial health of the public sector. - Losses incurred by public enterprises pose serious threats to the budget and the economy, as illustrated by the large restructuring costs of the national airline. - Staff welcomes the envisaged steps to strengthen the oversight of public enterprises and recommends early action to avert these losses, including by a prompt restructuring of SEYPEC’s unprofitable tanker activities. ### Structural reforms and medium-term growth - The structural reforms agenda should be timely implemented to improve conditions for private-sector led growth. - A better business climate will contribute to: - Boosting the country’s growth potential (a key condition for consolidation of stabilization efforts). - Meeting debt reduction objectives. - Building necessary policy buffers. - Financing badly-needed infrastructure. - Timely implementation of structural-benchmark measures in the financial sector should improve access to credit and the monetary transmission mechanism. - Staff encourages the authorities to move ahead as planned with the introduction of the VAT, which will be an important step toward a modernized tax system that encourages compliance and avoids tax distortions. - Implementation of the upcoming recommendations for rationalizing the tariff system for utilities will enhance efficiency of the system and avoid the costs of belated price adjustments. *Source: _cr12260 - 18. Homegrown risks to the program* ### 23. Staff supports the modification of two ### 23. Staff supports the modification of two quantitative performance criteria for end-June 2012 and recommends the completion of the fifth review under the Extended Arrangement and the financing assurances review. ### Key staff recommendation - Staff supports the modification of two quantitative performance criteria for end-June 2012. - Staff recommends the completion of the fifth review under the Extended Arrangement and the financing assurances review. ### National income, prices, and growth projections (selected) - Nominal GDP (millions of Seychelles rupees): 11,450; 11,621; 12,470; 12,558; 13,508; 13,564; 14,624; 15,707. - Real GDP (percentage change): 0.5; 6.7; 5.0; 4.9; 4.0; 2.8; 3.7; 4.1. - CPI (annual average): 31.7; -2.4; 2.5; 2.6; 4.8; 7.3; 4.2; 3.1. - CPI (end-of-period): -2.6; 0.4; 5.4; 5.5; 3.5; 6.5; 3.1; 3.1. - GDP deflator average: 25.2; -4.9; 2.2; 3.0; 4.2; 5.1; 4.0; 3.2. ### External sector and reserves - Current account balance including official transfers (percent of GDP): -9.8; -20.1; -22.3; -21.6; -20.9; -21.2; -18.4; -13.5. - Current account (Millions of U.S. dollars): -83; -193; -225; -219; -217; -202; -184; -142. - Gross official reserves (end of year, millions of U.S. dollars): 196; 254; 263; 277; 283; 301; 328; 354. - Months of imports, c.i.f.: 2.0; 2.4; 2.3; 2.6; 2.5; 2.8; 3.1; 3.3. - Total public external debt outstanding (millions of U.S. dollars): 761; 478; 503; 490; 528; 515; 521; 521. - Total public external debt (percent of GDP): 90.5; 49.7; 49.8; 48.3; 51.1; 54.0; 52.2; 49.6. - Total stock of arrears (millions of U.S. dollars): 25; 130.3; ...; 9.0; ............ ### Balance of payments detail (selected items, Millions of U.S. dollars) - Exports of goods: 432; 400; 505; 478; 516; 516; 522; 526. - Oil re-exports: 184; 158; 210; 194; 207; 215; 212; 207. - Tuna exports: 165; 210; 246; 242; 256; 249; 257; 265. - Imports of goods: -733; -733; -877; -878; -902; -880; -875; -859. - Oil imports: -209; -218; -268; -255; -315; -323; -335; -326. - FDI-related imports: -126; -164; -156; -140; -133; -132; -112; -95. - Exports of services: 600; 592; 618; 614; 657; 586; 605; 641. - Tourism earnings: 256; 274; 298; 291; 318; 304; 318; 338. - Imports of services: -383; -430; -437; -418; -452; -396; -410; -426. - Income, net: -47; -47; -42; -51; -42; -43; -41; -39. - Interest due (of which): -33; -24; -17; -17; -20; -18; -17; -18. - Capital and financial account (Millions of U.S. dollars): 144; 494; 226; 202; 228; 221; 218; 172. - Financial account (Millions of U.S. dollars): 92; 219; 177; 155; 202; 193; 200; 157. - Direct investment, net: 163; 213; 201; 181; 168; 170; 143; 121. - Overall balance (Millions of U.S. dollars): 101; 267; 110; 111; 93; 43; 30. - Change in gross official reserves (increase: –) (Millions of U.S. dollars): -123; -58; -11; -23; -20; -25; -26; -26. ### Government budget and fiscal indicators (selected) - Total revenue, excluding grants (percent of GDP): 33.1; 34.5; 37.0; 37.4; 35.9; 36.6; 35.2; 35.1. - Expenditure and net lending (percent of GDP): 32.0; 32.8; 39.0; 37.3; 37.2; 39.7; 36.9; 34.9. - Current expenditure (percent of GDP): 29.1; 27.5; 29.2; 28.8; 28.8; 30.4; 29.6; 27.4. - Capital expenditure and net lending (percent of GDP): 2.9; 5.3; 9.9; 8.5; 8.4; 9.3; 7.3; 7.5. - Overall balance, including grants (percent of GDP): 5.2; 2.5; 1.6; 2.6; 1.9; 0.8; 1.0; 2.3. - Primary balance (percent of GDP): 14.3; 8.7; 4.6; 5.6; 4.7; 4.5; 4.6; 5.2. - Total public debt (percent of GDP): 124.4; 82.5; 78.5; 77.6; 76.9; 81.7; 77.0; 71.4. - Domestic (percent of GDP): 33.9; 32.8; 28.7; 29.3; 25.8; 27.7; 24.8; 21.8. - External (percent of GDP): 90.5; 49.7; 49.8; 48.3; 51.1; 54.0; 52.2; 49.6. ### Consolidated government operations (selected cumulative flows, Millions of Seychelles rupees) - Total revenue and grants: 4,262; 4,108; 5,069; 5,014; 1,165; 1,260; 2,348; 2,518; 3,683; 3,900; 5,282; 5,490; 5,536; 5,852. - Total revenue: 3,793; 4,008; 4,610; 4,695; 1,047; 1,178; 2,174; 2,342; 3,429; 3,632; 4,843; 4,970; 5,154; 5,507. - Tax revenue: 3,318; 3,533; 4,093; 4,165; 928; 982; 1,899; 2,035; 3,024; 3,176; 4,272; 4,390; 4,538; 4,846. - Total expenditure and net lending: 3,666; 3,815; 4,866; 4,689; 1,115; 1,165; 2,221; 2,465; 3,487; 3,894; 5,020; 5,381; 5,397; 5,486. - Interest due (Millions SR): 1,044; 712; 374; 384; 125; 133; 182; 261; 315; 425; 375; 501; 527; 457. - Primary balance (Millions SR): 1,640; 1,006; 577; 709; 175; 227; 309; 314; 512; 431; 637; 610; 666; 824. - Overall balance, cash basis (after grants) (Millions SR): 694; 291; 512; 450; 94; 127; 319; 762; 611; 109; 139; 366. - Financing: -694; -291; -5; -124; -50; -94; -127; -53; -197; -6; -261; -109; -139; -366. - Domestic financing, net (Millions SR): -784; -701; -237; -177; -54; -150; -141; -130; -237; -182; -484; -373; -126; -210. ### Monetary sector and central bank (selected) - Net foreign assets (Monetary survey, SR millions): 2,897; 3,644; 3,984; 4,340; 4,051; 4,131; 4,450; 4,311; 4,929; 4,463; 4,978; 4,598; 4,981; 4,876; 5,155. - Broad money (SR millions): 6,401; 7,266; 7,411; 7,526; 7,376; 7,466; 7,596; 7,655; 7,815; 7,783; 7,732; 7,906; 7,732; 8,079; 7,928. - Reserve money (SR millions): 1,296; 1,746; 1,772; 1,728; 1,727; 1,765; 1,699; 1,810; 1,750; 1,840; 1,800; 1,869; 1,800; 1,910; 1,850. - Broad money growth (12–month percent change): 7.0; 13.5; 13.0; 15.3; 7.6; 2.6; 4.5; 3.2; 5.4; 3.3; 2.7; 7.1; 4.8; 8.2; 4.4. - Credit to the economy (12–month percent change): -11.4; 21.4; 22.9; 18.0; 15.8; 10.1; 6.2; 4.9; 0.1; 9.4; -11.8; 11.0; -14.7; 10.4; 6.7. - Money multiplier (broad money/reserve money): 4.9; 4.2; 4.2; 4.4; 4.3; 4.2; 4.5; 4.2; 4.5; 4.2; 4.3; 4.2; 4.3; 4.2; 4.3. - Gross international reserves (US$ millions, memorandum): 196; 254; 262; 283; 267; 263; 277; 269; 292; 274; 295; 274; 291; 283; 301. ### Banking sector soundness (selected indicators) - Regulatory capital to risk weighted assets (percent): 18.4; 17.6; 17.9; 19.4; 13.6; 17.8; 22.0; 21.7; 21.4; 22.1; 21.7; 21.5; 23.3; 24.8; 26.3; 24.2. - Nonperforming loans to gross loans (percent): 2.0; 2.1; 2.0; 2.0; 2.3; 4.3; 4.2; 3.8; 4.1; 6.9; 6.4; 5.5; 5.4; 5.6; 5.3; 8.1. - Return on assets (annualized, percent): 4.3; 3.4; 2.8; 16.1; 5.3; 3.0; -0.2; 3.2; 3.4; 5.0; 3.0; 3.7; 3.9; 3.1; 3.6; 5.6. - Core liquid assets to total assets (percent): 30.8; 34.6; 36.4; 36.4; 37.8; 36.0; 35.0; 37.7; 43.2; 43.5; 44.7; 44.7; 47.1; 47.1; 47.7; 49.9. - Liquid assets (broad) to short term liabilities (percent): 59.3; 61.6; 87.1; 56.5; 53.2; 56.2; 62.1; 62.7; 65.0; 63.4; 62.1; 62.9; 60.0; 58.8; 60.9; 63.0. ### IMF financing and reviews under the Extended Arrangement - Extended Arrangement total resources available (SDR, Millions): December 22, 2009 approval: 0.88 (8.1 percent of quota). - Subsequent availability and conditional disbursements: - March 15, 2010: 2.20 (20.2 percent of quota) conditional on end-December 2009 quantitative performance criteria and financing assurances review. - June 15, 2010 (First review): 2.20 (20.2 percent of quota) conditional on completion of first program review and financing assurances review and compliance with end-March 2010 quantitative performance criteria. - September 15, 2010: 2.20 (20.2 percent of quota) conditional on compliance with end-June 2010 quantitative performance criteria and completion of financing assurances review. - December 15, 2010 (Second review): 1.76 (16.1 percent of quota) conditional on completion of second program review and financing assurances review and compliance with end-September 2010 quantitative performance criteria. - March 31, 2011 (Third review): 3.52 (32.3 percent of quota) conditional on compliance with end-December 2010 quantitative performance criteria and completion of financing assurances review. - September 30, 2011 (Fourth review): 3.08 (28.3 percent of quota) conditional on compliance with end-June 2011 quantitative performance criteria and completion of financing assurances review. - March 31, 2012 (Fifth review): 2.64 (24.2 percent of quota) conditional on compliance with end-December 2011 quantitative performance criteria and completion of financing assurances review. - September 30, 2012 (Sixth review): 1.32 (12.1 percent of quota) conditional on compliance with end-June 2012 quantitative performance criteria and completion of financing assurances review. - Total under the schedule: 19.8 (181.7 percent of quota). ### IMF credit and obligations (selected, in millions SDR) - Stock of existing Fund credit (end of period): 6.2; 11.9; 20.2; 23.8; 23.4; 17.9; 15.5; 13.7; 11.3; 8.7. - Projected EFF disbursements: 4.0 (Millions SDR). - Stock of existing and prospective Fund credit (end of period): 6.2; 11.9; 20.2; 23.8; 27.4; 21.9; 19.5; 17.6; 15.0; 11.7. - In percent of quota: 70.0; 135.0; 230.0; 218.0; 251.3; 200.8; 178.6; 161.8; 137.9; 107.6. - In percent of GDP: 1.0; 2.2; 3.2; 3.7; 4.4; 3.4; 2.9; 2.5; 2.0; 1.5. *Source: Central Bank of Seychelles; Ministry of Finance; and IMF staff estimates and projections.* ### ANNEX I. SEYCHELLES: RELATIONS WITH THE FUND ### ANNEX I. SEYCHELLES: RELATIONS WITH THE FUND (As of April 30, 2012) ### Membership and Quotas - Joined: 6/30/1977. - Article VIII member since: 01/03/1978. - Quota: 10.90 SDR Million (100.0 percent of quota). - Fund holdings of currency: 36.44 SDR Million (334.34 percent of quota). - Reserve Position in Fund: 0.53 SDR Million (4.85 percent of quota). ### SDR Department - Net cumulative allocation: 8.28 SDR Million (100.0 percent of allocations). - Holdings: 6.69 SDR Million (80.75 percent of allocations). ### Outstanding Purchases and Loans - Stand-by Arrangement: 10.23 SDR Million (93.85 percent of quota). - Extended Arrangement: 15.84 SDR Million (145.32 percent of quota). ### Financial Arrangements (SDR Million) - EFF: Arrangement approved Dec 23, 2009; Expiration Dec. 22, 2012; Amount Approved 19.80; Amount Drawn 15.84. - Stand-By: Arrangement approved Nov 14, 2008; Expiration Dec. 22, 2009; Amount Approved 17.60; Amount Drawn 11.00. ### Projected Obligations to the Fund (SDR Million) - Forthcoming principal and charges/interest by year: - 2012: Principal 2.64; Charges/interest 0.22; Total 2.86. - 2013: Principal 5.50; Charges/interest 0.25; Total 5.75. - 2014: Principal 2.42; Charges/interest 0.20; Total 2.62. - 2015: Principal 1.83; Charges/interest 0.18; Total 2.01. - 2016: Principal 2.38; Charges/interest 0.15; Total 2.54. ### HIPC Initiative - Implementation: Not applicable. ### Safeguards Assessments - A safeguards assessment in 2008 for the Stand-By Arrangement found high risks in all areas of the CBS safeguards framework; several measures were included in the program. - An update assessment for the Extended Fund Facility completed in July 2010 found that authorities had implemented most recommended measures. - Improvements noted: - Governance oversight exercised by the Board and management committees. - Transparency improved through application of International Financial Reporting Standards and publication of audited financial statements. - Draft amendments to the CBS Act approved by Cabinet in April 2011 to strengthen legal framework and independence. - Ongoing strengthening of internal audit and control mechanisms. ### Exchange Rate Arrangement - The exchange market was liberalized in November 2008, eliminating all restrictions on payments and transfers for current international transactions subject to Fund approval under Article VIII Sections 2, 3, and 4. - Exchange rate policy: floating. - Mid rate as of April 30, 2012: US$ 1 = SR 14.06. ### Article IV Consultations - Consultation cycle: 24 month. ### Technical Assistance (2008–April 2012) - Multiple IMF missions across departments (STA, MCM, FAD, LEG, FIN, AFS) provided technical assistance on topics including GDDS dissemination, Consumer price index, Banking supervision, National payment systems, Strengthening expenditure rationalization and budget management, Exchange Rate and Exchange Regimes, Safeguards assessment, Tax Policy reform, Central Bank capacity building, Government Finance Statistics, Payments Systems, Public Financial Management, Fiscal Law, Tax Administration, National Accounts Statistics, Accounting, BoP Statistics, Central Bank accounting and audit, VAT policy, Quarterly National Accounts, External Sector Statistics, Central Bank financial reporting and risk management, Tax Reform, Producer Price/Industrial Production Indices, PFM Legal Framework, and PFM Regulatory Framework. - Selected mission dates include: April 2008; May/June 2008; July 2008; September 2008; October 2008; January/February 2009; April 2009–March 2012 (multiple missions listed through March 2012). ### Resident Representative - None. ### Letter of Intent (May 22, 2012) — Key Requests and Statements - Request completion of the fifth review under the Extended Arrangement and release of the eighth tranche of SDR 2.64 million (24 percent of quota). - Statement that all quantitative performance criteria at end-December 2011 and indicative targets for end-March 2012 were met with margins. - Request modification of performance criteria for end-June 2012: - Increase of the NIR target to reflect better-than-expected outcomes in December 2011 and March 2012 and intent to continue moderate reserves accumulation. - Reduction of the reserve money target to signal tightening monetary policies to fend off inflationary pressures. - Expectation that the sixth and final review will be completed by end-September 2012. - Financing assurance reviews to continue while public debt arrears to external private creditors remain outstanding. - Request for IMF publication of the letter, the MEFP, the TMU, and the staff report; Seychelles will simultaneously publish these documents. ### Supplementary Memorandum of Economic and Financial Policies — Key Findings (2011) and Outlook (2012+) - 2011 outcomes: - Real GDP growth: 4.9 percent. - Inflation: 5.5 percent. - Current account deficit at end-December: 22 percent of GDP. - Tourism arrivals: 11 percent above 2010; tourism sector estimated to have grown by approximately 7 percent in real terms. - 2012 outlook and projections: - Growth expected to slow to less than 3 percent (down from 4 percent forecast in December). - Tourism numbers buoyant: 9 percent up year on year for first quarter. - Inflationary pressures due to a weakened rupee and pass-through of international food, fuel and commodity prices; rupee depreciation noted from 12 SR/USD to 14 SR/USD over the past three months. - Through tight monetary policy, target to limit inflation to less than seven percent by end-2012. - Current account deficit expected to stay at 22 percent of GDP in 2012 and improve over the medium term. - Net FDI inflows projected at 18 percent of GDP in 2012, financing the current account deficit and allowing steady reduction of the external debt burden. - External debt restructuring close to completion; outstanding agreements with two non-Paris Club bilateral and one commercial creditor accounting for less than US$9 million of claims are awaiting signatures. ### Program Implementation (Progress and Outcomes) - All quantitative performance criteria as of end-December 2011 were met; on track for end-June targets. - Fiscal performance: - Fiscal target exceeded by 1.1 percent of GDP. - Overall expenditure within 0.4 percent of expectations. - Revenue 1.1 percent of GDP higher than forecast, largely reflecting a one-off recovery of revenues worth approximately 0.7 percent of GDP. - Monetary policy: - Tightened to address inflationary risks; reduced excess liquidity led to higher market interest rates (three month T-bill rates rose from 0.5 percent in the first quarter to 5.0 percent in December). - Treasury bills being issued for monetary policy sterilization purposes. - Air Seychelles restructuring: - Strategic partnership with Etihad from 1 February: Etihad purchased 40 percent of the airline, provided USD 20m capital injection and a USD 25m loan, code-sharing, and management expertise including a new CEO. - Government actions in early 2012: capital injection equivalent to 1 percent of GDP; absorbed existing liabilities of 2.2 percent of GDP; covered restructuring costs of 0.5 percent of GDP. - Government plans for 2013: contribute another capital injection of 1 percent of GDP and cover fees for early termination of an airplane lease of 0.3 percent of GDP. - Company expected to return to profitability in 2014. - Energy tariffs and SEYPEC: - Another tariff adjustment implemented after delays; move towards virtually full pass-through as step to an optimal electricity tariff. - SEYPEC profit shortfalls led to review of cost and pricing structure; tariff adjustment scheduled for January delayed to 15th May to account for PUC cost changes. - Cost of fuel at the pump revised in mid-April; cost of LPG revised to full pass-through for commercial customers from 15th of May. - Structural benchmarks: - Credit information system established (non-performing loans data available from end-March; total loans outstanding available since end-April). - Commercial Court established in March 2012; hearings to commence on new cases from June; Chief Justice assumes responsibility until a second judge is appointed later in 2012. - Cabinet approved new mandate for the Development Bank of Seychelles in March focusing on financing higher-risk small enterprises. ### Policies for 2012 and Beyond — Fiscal Policy - Commitment to achieving debt sustainability: aim to reduce public debt to 50 percent of GDP by 2018. - Primary surplus target for 2012 revised downward to 4.5 percent of GDP from 4.7 percent (mainly due to increased spending on national airline and weaker rupee). - Revenue outlook: - Nominal tax collections expected to be 0.6 percent of GDP higher than budgeted due to revised macro outlook. - Grant receipts gains of 0.3 percent of GDP from weaker rupee. - Introduction of VAT in July 2012 expected to be revenue neutral but to improve tax system efficiency. - Expenditure increases attributed to the weaker rupee (0.3 percent of GDP), increased spending on security, increased foreign-financed capital expenditure, and Air Seychelles transfers. - Social safety net: - 2012 budget of the Agency for Social Protection increased 20 percent from 2011 to offset projected impact of higher utility tariffs. - Eligibility requirements clarified and beneficiaries incentivized to return to employment. ### Tax and Customs Reform - VAT implementation on track for 1 July 2012; Cabinet approved amendments in May following IMF FAD advice. Amendments include: - Exempting farmers and fishermen rather than zero-rating. - Local alcohol producers charged VAT at the applicable rate of 15 percent rather than zero-rated. - SEYPEC exempt rather than zero-rated. - Cooperation with South African Revenue Service (SARS) on transfer pricing in the tourism sector; memorandum of co-operation signed for technical assistance and capacity building. - Customs administration reforms: - Seeking technical assistance on staff integrity and post-clearance audit. - Roadmap for SRC integrity actions to be presented to the Ministry of Finance, Trade and Investment in June 2012. - Risk-management strategy developed and implemented by the Revenue Commission with Fund technical assistance. ### Public Financial Management (PFM) - 2011 PEFA assessment used to prepare a 2012-14 PFM action plan to be launched in June. - Action plan includes: new Public Finance Management Act, new chart of accounts, steps towards Program Based Budgeting, enhanced external scrutiny and audit. - Submission of the Public Finance Management Bill to the National Assembly; expected approval in June will align legislation with international best practices. - Plan to implement the 2013 budget under the new legislation with AFRITAC-South capacity building. - PFM Act provisions include National Assembly oversight on capital expenditure budgets and formalization of the Government Audit Committee to oversee Auditor General recommendations; the Committee will consist of full-time dedicated employees independent of the Ministry of Finance. - Charter of the Government Audit Committee to be submitted to Cabinet by end-June 2012. *Source: ANNEX I. SEYCHELLES: RELATIONS WITH THE FUND (As of April 30, 2012).* ### 23. We are progressing further key reforms to our accounting and budgeting systems ### 23. We are progressing further key reforms to our accounting and budgeting systems ### Financial instructions, accounting manual, and training - Incorporate the revised articles of the new Public Finance Act into the financial instructions and accounting manual to explain regulations and procedures to users. - Training will start during the second half of the year. ### Public Sector Investment Program (PSIP) - A detailed manual has been finalized to help line Ministries prepare investment plans in line with their medium term plans. - Technical assistance is being sought from the World Bank. ### Chart of Accounts - Developing the structure for the Chart of Accounts, using additional recommendations from a recent AFRITAC mission. - The new Chart of Accounts will be reflected in the revised accounting instructions and manual, in line with the new PFM Act. - Measures will be taken to facilitate migration between the old and the new Chart of Accounts. - The new Chart of Accounts will be first deployed in the preparation of the 2013 budget. ### Program Based Budgeting (PBB) - Progress is being made on the move to PBB. - Government is developing a policy paper for Cabinet, Parliament and other public servants on program based budgeting and its implications for the public finance of Seychelles. - Technical assistance from the World Bank is being sought to develop a guideline on Program Based Budgeting and an implementation strategy. ### Social protection and social security reform - The Agency for Social Protection, created in January, is now the only institution administering social benefits following incorporation of statutory benefits previously administered by the Social Security Fund. - The Social Security Fund Board of Trustees oversees assets of the former institution totaling approximately 2.6 percent of GDP and has presented a strategic investment plan to Government. - Income generated by these assets will be used (but not necessarily earmarked) to improve social protection for all Seychellois. - The 2012 returns will be transferred to the government budget. ### Monetary and exchange rate policies - CBS is tightening monetary policy to reverse the current upward inflation trend and will tighten further if needed to contain second round effects of domestic currency depreciation and increases in fuel prices and energy tariffs. - CBS is determined to maintain single-digit inflation throughout the year, aiming to end the year below 7 percent. - The Central Bank will continue to use reserve money targeting as its policy framework. - Government has begun issuing treasury bills to help CBS’ liquidity management; a Memorandum of Understanding between the Central Bank and the MOF, spelling out modalities of issuance of T-bills for monetary purposes, will be signed by end-June 2012. - Proceeds from issuance of these T-bills will be deposited in a blocked account at the CBS and government is to bear the interest cost. - Commitment to a floating exchange rate regime; CBS will intervene only to smooth excessive volatility and ensure orderly market conditions. - CBS will continue to build up international reserves by purchasing foreign currency on the domestic interbank market in the coming months to assist reserve accumulation and deepen the domestic foreign currency market. ### Reserve management - The bulk of reserves are placed with the Bank for International Settlements, which provides reserve management services and training for CBS staff. - CBS plans to diversify its portfolio and discussions with the World Bank to begin using its Reserve Advisory Management Program (RAMP) have progressed, but uncertainties and volatilities in international financial markets have delayed CBS’ use of the program. ### Financial sector reforms: competition, access, and supervision - Financial Institutions Act 2004 (FIA) amended in December 2011 to introduce a single licensing regime for banks to promote competition by allowing offshore banks to operate in the domestic market. - Amendments allow the CBS to intervene where bank fees and charges are detrimental to competition (e.g., penalties for early loan repayments). - Ongoing financial literacy program. - Legislative framework for hire purchase and leasing: - Hire Purchase and Credit Sales Bill submitted to Cabinet in May 2012. - Leasing Bill scheduled for end-2012. - Expected to increase households’ and small businesses’ access to credit. - Strengthening supervision: - Require financial institutions that provide credit to submit periodic business plans to CBS to enable a forward looking supervision approach. - Initiative will allow CBS to develop a CAELS rating system based on projected financials. - First submission expected by June 2012 and thereafter by end of first quarter of each year. - A full cycle of onsite examination has been concluded; further examinations will be conducted on an ongoing basis based on institutions’ ratings. - Implementation of the Statistical and Supervisory Application (SSA): - SSA expected to go live by July 2012. - Will automate offsite supervision through online submission of returns and embedded analytical tools and eliminate most manual data validation processes. - Insurance regulatory framework: - FIRST Initiative technical assistance begun in 2011 aims to implement a risk-based solvency regime in line with international best practice. - Proposed regulatory framework expected to be introduced by end-December 2012 following further industry discussions. ### Anti–money laundering, offshore sector, and financial services infrastructure - Amendments to the Anti-Money Laundering (AML) Act to enhance independence of the Financial Intelligence Unit (FIU) and establish a time-frame for freezing suspected assets; FIU recruiting more staff. - Amendments to legislation governing offshore financial sector activities (trusts, funds, taxation) following OECD peer review recommendations; these amendments should facilitate international coordination, including Seychelles’ entry into the Egmont group. - Launch of the stock exchange planned for the second half of 2012: - License granted earlier in the year. - Initially handle local listings including shares of private and public companies, later operate a dual listing system. ### CBS operations and governance, payment systems, and internal audit - Internal audit improvements through the Quality Assurance and Improvement Program (QAIP) with ongoing internal assessment reviews and use of Teammate software. - QAIP Policy and Procedures to be finalized and approved by the Board in Q2 2012. - Internal Audit Quality Assessment Framework developed for internal and external Quality Assurance Reviews (QAR) in compliance with IIA standards. - External QAR of the QAIP will be conducted in December 2013. - Payment system modernization: - CORE Banking System implemented. - Electronic Clearing House project scheduled to go live in Q3 2012. - Electronic Funds Transfer project initiated and expected to go live in Q2 2013. - Followed by implementation of a local rupee switching system and a Real Time Gross Settlement system. ### Financial sector action matrix (selected entries and deadlines) - Issuance of regulations for operation of Credit Information System — March 2012 - Implementation of the Credit Information System — March 2012 - Submit Hire Purchase and Credit Sales Bill to Cabinet — May 2012 - Implementation of Statistical and Supervisory Application — July 2012 - Implementation of the Quality Assurance and Improvement Program for CBS’ Internal Audit Division — September 2012 - Implementation of Electronic Clearing House system — September 2012 - Submit Leasing Bill to Cabinet — December 2012 - Finalization of risk-based solvency regime — December 2012 - Implementation of Electronic Funds Transfer — June 2013 - Implementation of ATM/POS Switch — September 2013 - External review of the Quality Assurance and Improvement Program — December 2013 ### Private sector development and public enterprise reform - Technical working group, working with the World Bank, submitted a report to the High Level Committee on Doing Business in May 2012. - Implemented recommendations include: - Appointment of a new Registrar General and reorganization of the Registrar. - Introduction of a flat fee for company registration. - Revised application forms with standardized requirements. - Development of an online application, linked to all relevant agencies, for construction permits. - Additional actions planned between now and end-2012. - Strengthening monitoring of public enterprises: - Amendments to the Public Enterprise Monitoring Law to strengthen monitoring and analytical capability of the MoF. - Entities required to submit a statement of operations and financial performance to the Finance and Public Accounts Committee of the National Assembly each quarter. - MoF will more rigorously utilize arrangements to seek monthly reports on financial performance and debt. - Particular focus on the seven largest public entities. - Public projects review committee established in May 2012 to review potential public projects greater than SR 25 million and assess macroeconomic and fiscal risks. - Privatization using the Seychelles Stock Exchange (third quarter of 2012): - Sell minority shares in Land Marine, Naval Services, and Sacos Insurance Company Limited. - Complete sale of 40 percent of the Seychelles Commercial Bank (previously Seychelles Savings Bank). - Preparations underway, including selecting consultants for company evaluations. - Regulatory changes will be taken to ensure no private monopolies emerge from sales. - Public Utilities Corporation (PUC): - Tariff increases in November 2011 and May 2012 to ensure the company ends the year with a positive cash balance. - PUC remains exposed to fluctuations in international prices of refined petroleum products and the SR/USD exchange rate. - A study on the optimal tariff structure will be completed by end-June; revised tariff structure to be adopted by end-September. - Objectives of the new tariff regime: (a) limit cross-subsidization across products and customer segments; (b) reduce the public utility company’s need for budget financing; (c) enable tariffs to be adjusted regularly in response to changes in input costs. - Work continues on a new Energy Act to modernize the legal framework, introduce energy standards, and promote renewable energy. - Commissioning of a wind farm in late 2012 (financed by a UAE grant) expected to reduce oil imports. - Financing agreement signed with the European Investment Bank for Euro 26m worth of projects in the water sector. - Development Bank of Seychelles (DBS) reform: - DBS incorporated as a company under the Companies Act in April 2012 with a new mandate focusing on small and medium enterprises. - DBS will limit the size of individual loans to SR 2m, strengthen governance and internal control, and introduce a risk-based lending and pricing framework. - A new financing agency is being set up to facilitate micro businesses’ access to credit and build bookkeeping and marketing skills. - Housing finance reforms: - Strategic plan for housing finance adopted in December 2011; implementation committee set up in May. - HFC will be split before end June 2012 into two entities: one for lending and one for management of government properties. - Aim to have legal arrangements and human capacity in place to implement the new HFC mandate by October 2012. - Preparations begun for adoption of the smart subsidy scheme with World Bank FIRST Initiative assistance to target low-income households while maintaining the envelope for social housing expenditure unchanged as a share of GDP. - SEYPEC: - Financial position weakened by losses on tanker operations since 2008; losses supported by cross-subsidies from more profitable operations (notably bunkering). - SEYPEC negotiating loan rescheduling for the tankers and has split operations: - SEYPEC will focus on oil trading and tanker management. - PetroSeychelles will be responsible for exploitation. ### Petroleum issues - Preparations for potential oil discoveries underway: - Drilling on two surveyed fields planned for late 2013. - Additional blocks being considered for auctioning. - High-level oil coordination unit established in May 2012 to guide authorities and ensure transparency, representing key stakeholders including civil society. - Technical assistance and training sought from IMF, World Bank, Commonwealth, US and Australian governments on institutional framework, oil taxation, oil revenue and wealth management, budgetary implications and environmental issues. ### Statistics and data dissemination - Objective to achieve compliance with the IMF’s Special Data Dissemination Standard (SDDS) by improving external statistics per IMF and external advisors’ recommendations. - Central Bank completed compilation of a partial International Investment Position (IIP) statement covering the public sector and commercial banks; improving coverage of private sector external operations. - Central Bank Act amended to allow the Bank to collect information from all companies. - National accounts and indices: - Plan to publish quarterly GDP within one quarter by September 2013 (an SDDS requirement). - Exploring use of forthcoming VAT returns to produce quarterly GDP. - Plans to introduce a producer price index and the production index when quarterly GDP data are launched; preparation to collect relevant data will begin shortly. - Household budget survey and CPI: - National Bureau of Statistics preparing to launch a household budget survey in 2012 to revise CPI basket composition. - Household budget survey questionnaire finalized in February with World Bank assistance. - Additional field workers and supervisors recruited and trained in April ahead of pilot survey in May and survey launch in July. - Engagement in the Harmonized Consumer Price Index project of COMESA and the International Comparison Program coordinated by the African Development Bank. ### Program monitoring - The last semi-annual review will be based on a set of quantitative performance criteria and structural benchmarks. - The attached revised Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria, indicative targets, and adjusters under the program. *Source: _cr12260 - 23. We are progressing further key reforms to our accounting and budgeting systems* ### 51. Seychelles will avoid introducing new exchange restrictions, multiple currency practices, or ### _cr12260 - 51. Seychelles will avoid introducing new exchange restrictions, multiple currency practices, or ### Commitments and program stance - Seychelles commits to avoid introducing new exchange restrictions, multiple currency practices, or bilateral payment agreements in contradiction with Article VIII of the IMF’s Articles of Agreement, and to avoid imposing any import restrictions for balance of payments reasons. - Authorities state they stand ready to adopt any additional measures, in consultation with IMF staff, which may become necessary to ensure program success. ### IMF Executive Board decision and financing - The Executive Board completed the fifth review under the three-year Extended Arrangement (EFF) for the Seychelles. - The completion of the review enables a disbursement of SDR 2.64 million (about US$5.6 million). - The arrangement became effective on December 23, 2009, in the amount of SDR 19.8 million. - The Board's decision was taken on a lapse of time basis. ### Macroeconomic outcomes and near-term outlook - 2011 outcomes: - Recovery continued, supported by tourism and continued high foreign direct investment. - Consumer price inflation increased from near-zero levels at the beginning of 2011 to 5½ percent by year end. - Fiscal performance was stronger than projected despite higher losses from the national airline’s operations. - Public debt remained on a downward trend. - The country continued to rebuild international reserves. - All quantitative performance criteria at end-December 2011 were met. - 2012 outlook and policy stance: - Economic growth is expected to moderate owing to less favorable external conditions. - Inflation is projected to peak in mid-year, once recent adjustments of fuel prices and utility tariffs are fully reflected in the consumer price index. - Monetary policy is appropriately being tightened to alleviate pressures on the exchange rate and bring down inflation during the second half of 2012. - Public finances will need to absorb the one-off costs of restructuring Air Seychelles, but an improved fiscal revenues outlook will ensure that the primary balance target is met. - Upcoming implementation of the value-added tax will improve the efficiency of the tax system. - Public finances should be strengthened by enhanced oversight of public enterprises, the launch of the public sector investment program, and the implementation of further public utility tariff reforms. - Financial infrastructure will be improved by the introduction of a new electronic clearing system. ### Quantitative performance framework (overview) - Key quantitative performance criteria and indicative targets are set out for 2011–12 (see Tables 1 and 2 in the MEFP). - Main monitoring variables include: - Net international reserves (NIR) of the CBS (floor). - Reserve money (ceiling). - Primary balance of the consolidated government (cumulative floor). - Contracting or guaranteeing of new external debt by the public sector (cumulative ceiling, including a zero sub-ceiling on short-term external debt). - Accumulation of external payments arrears by the public sector (ceiling; nonaccumulation is a continuous performance criterion). - Accumulation of domestic payment arrears by the government (ceiling). - Adjusters: - The NIR floor is adjusted upward (downward) by the amount by which external non-project loans and cash grants exceed (fall short of) amounts assumed in the program. - The NIR floor is also adjusted upward (downward) by the amount that external debt service payments fall short (exceed) the amounts assumed in the program. ### Definitions and methodological features (from the Technical Memorandum of Understanding) - NIR definition: - Reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF). - Reserve assets: holdings of SDRs, holdings of foreign exchange, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities; excludes project balances and blocked or escrow accounts, and bank reserves in foreign currency maintained for reserve requirements. - Reserve liabilities: liabilities to nonresidents contracted by the CBS, and any net off-balance-sheet position (futures, forwards, swaps, options) with residents or nonresidents, including those to the IMF. - Reserve money: - Equivalent to currency issued and deposits held by financial institutions at the central bank (bank reserves), including those denominated in foreign currencies. - Evaluated at the program accounting exchange rate. - 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, measured on a commitment basis. - Public external debt ceiling: - Applies to contracting or guaranteeing new external liabilities by the public sector (central government, CBS, all public agencies and parastatals for non-commercial operations). - Excludes the use of Fund resources, operations related to external debt restructuring, normal import-related credits, purchases of treasury securities by nonresidents, and borrowing by parastatals in normal commercial operations. - Definition of debt follows Executive Board Decision No.6230-(79/140), Point 9, as revised on August 31, 2009 (Decision No. 14416-(09/91)); debt includes loans, suppliers credits, leases (valued at present value), and arrears, penalties, and judicially awarded damages constituting debt. - A zero sub-ceiling applies to contracting or guaranteeing of short-term external debt with original maturity up to and including one year. - External arrears: - Nonaccumulation of arrears to external creditors is a continuous performance criterion. - External payments arrears are defined as external debt service due and not paid within the contractually agreed period, including contractual and late interest; arrears under a clearance framework or where a rescheduling agreement is sought are excluded. - Domestic arrears: - Nonaccumulation of budget expenditure arrears is a performance criterion measured on a net basis from the beginning of the calendar year. - Budget expenditure arrears defined as (1) invoices received and verified but unpaid beyond contractual period or beyond 30 days if no grace period; (2) unpaid wages, pensions, or transfers pending longer than 30 days; and (3) domestic debt service payments not made within the contractually agreed period. ### Reporting and audit requirements - CBS reporting frequency and deadlines: - 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. - Results of liquidity deposit auctions, primary Treasury bill auctions, and secondary auctions. - Monthly (within four weeks from the end of the month): - Monetary survey in the standardized report form format. - 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. - For each program test date, quarterly NIR and reserve money data submitted by the CBS to the IMF will be audited by the CBS’ internal audit division in accordance with International Standards on Auditing; reports to be submitted to the IMF no later than two months after each test date. - Ministry of Finance reporting frequency and deadlines: - Monthly (within two weeks from the end of the month): - Consolidated government operations on a commitment basis and cash basis in the IMF-supported program format. - Detailed revenues and expenditures of the central government and social security fund. - Accounts of the public nonbank financial institutions. - Import and export data from the customs department. - Public debt report. - Statements of Stabilization Fund operations. - Consolidated creditors schedule on domestic expenditure arrears of the government. - Quarterly (within a month from the end of the quarter): - Financial statements of Air Seychelles. - Consultation clause: - The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation, and provide any additional relevant information as requested by Fund staff. ### Structural benchmarks and implementation status (selected items and dates) - Cabinet approval of amendments to Financial Institutions Act (End-April 2011): Not met. Implemented in June. - Adopt action plan for house financing policy limiting public sector role (End-June 2011): Not met. Implemented in December 2011. - Launch strategic plan for reform of the social security system (End-June 2011): Not met. Implemented in December 2011. - Cabinet approval of VAT regulations, including rates, exemptions, and thresholds (End-June 2011): Met. - Develop privatization plan for nonstrategic public enterprises (End-September 2011): Met. - Cabinet approval of a new Public Finance Bill extending National Assembly oversight on capital expenditure budget (End-September 2011): Met. - Reinstate electricity tariff adjustment for fuel price variation (End-September 2011): Electricity tariffs increased in multiple steps August through May 2012. - Introduction of the credit information system (End-March 2012): Met. - Creation of the commercial court (End-March 2012): Met. - Cabinet approval of new DBS mandates (End-March 2012): Met. - Commission and complete a study on optimal tariffs for utilities (End-June 2012): Rescheduled from end-July 2011. - Introduce VAT (July 2012). - Cabinet approval of the Public Sector Investment Program for 2013 budget planning (End-September 2012). - Implement reform of utilities tariffs based on optimal tariff study (End-September 2012). - Implementation of Electronic Clearing House system (End-September 2012). *Source: IMF staff report and Technical Memorandum of Understanding, Seychelles Extended Arrangement documents and Press Release No. 12/207 (June 7, 2012).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12260.pdf_