## _cr1230 - 3.08 million will be available upon completion of the fourth review.

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---

### Mission and Program Implementation
- Mission held in Victoria October 6–20, 2011; staff met with President James Michel, Vice President and Minister of Finance Danny Faure, Governor Pierre Laporte (Central Bank of Seychelles), other government officials, and private sector representatives; mission also participated in a government meeting with development partners.
- Staff composition: Jean Le Dem (head), Nikoloz Gigineishvili, Alexander Culiuc (all AFR), and Douglas Hostland (SPR).
- Program implementation:
  - All end-June 2011 performance criteria have been met.
  - Staff supports the request for waiver of applicability for end-December 2011 performance criteria.
  - Staff recommends completion of the fourth EA and financing assurances reviews.
  - Staff proposes to establish performance criteria for end-June 2012.
- Specific operational note: "3.08 million will be available upon completion of the fourth review."

### Executive Summary — Key Findings and Projections
- Growth and output:
  - Real GDP increased by 6.7 percent in 2010.
  - Real GDP is expected to gain 5 percent in 2011.
  - Real GDP growth in 2012 is projected to slow to 4 percent.
- Inflation and external:
  - Twelve-month inflation picked up from near zero in 2010 to 5.1 percent in November 2011.
  - Inflation projected to increase to 5.4 percent at year-end 2011.
  - Annual inflation expected to decline to about 3.5 percent in 2012.
  - External current account deficit expected to remain around 22 percent of GDP in 2011.
- Fiscal stance and public finances:
  - 2012 primary fiscal surplus projected at 4.7 percent of GDP.
  - Envisaged fiscal stance for 2012 aims at maintaining a steady course toward debt reduction.
- Monetary policy:
  - Focus on containing second-round inflationary effects of global commodities’ prices and external pressures.
  - Issuance of T-bills for monetary purposes to help the central bank manage commercial banks’ liquidity.
- Structural reform priorities for 2012:
  - Launching of a value-added tax.
  - Enhanced budget procedures.
  - Restructuring of Air Seychelles and two state-owned financial institutions.
  - Introduction of a credit information system.
- Staff recommendation:
  - Support for waiver of applicability of performance criteria and recommendation to complete the fourth EA and financing assurances reviews.

### Recent Developments and Outlook (selected details)
- Growth dynamics:
  - Revised national accounts: real GDP rebounded by some 6.7 percent in 2010.
  - 2011 growth projected at 5 percent, 1 percentage point above projection at third review.
- Inflation and reserves:
  - Twelve-month consumer price inflation: 3.8 percent in October 2011.
  - Inflation expected to peak at around 5.4 percent by year-end 2011.
  - Import cover (official international reserves): 2.4 months at end-September 2011.
- Fiscal performance H1 2011:
  - Fiscal revenues at end-June exceeded target by the equivalent of 1.4 percentage point of GDP (primarily excise and business taxes).
  - Higher transfers to Air Seychelles; delays in domestically financed capital budget execution.
- Monetary conditions and credit:
  - Reserve requirements raised from 10 to 13 percent earlier in 2011.
  - Ninety-day treasury bill rates increased from 0.5 percent in the first quarter to about 5 percent in the third quarter of 2011.
  - Private credit growth projected to moderate to 10 percent in 2011, from 21 percent in 2010.
- Public enterprises and contingent fiscal risks:
  - Air Seychelles incurred mounting losses cumulating at about 2.2 percent of GDP for the first nine months of 2011.
  - Public Utility Corporation’s cash flow turned negative in 2011 due to rising fuel costs and drought-related expenditures.
- External debt restructuring:
  - Agreement signed with Abu Dhabi in June 2011.
  - Agreements reached with remaining official bilateral creditors (India and South Africa) and one remaining commercial creditor; signature expected shortly.

### Tourism Industry: Recent Developments, Policy and Prospects
- Market dependence and risks:
  - Tourism heavily dependent on European markets (in decreasing order: France, Italy, Germany, United Kingdom); ongoing turmoil in Europe poses significant risk.
- Resilience and policy response:
  - In 2009, tourist arrivals registered a much smaller drop than in other small tourism-dependent islands.
  - Cushioning factors: resilience of French tourism, boom in Italian arrivals, large increase in non-European tourists, Affordable Seychelles campaign (deeper hotel discounts).
  - Seychelles intensified promotion toward new markets, including China.
  - Share of top four European markets decreased from three-quarters in early 2000s to two-thirds in 2010.
- Short-term projections:
  - Tourism growth expected to moderate: real growth of tourism projected to slow from 6 percent in 2011 to 5 percent in 2012.
  - 2012 GDP growth projections revised from 4.7 percent at the third review to 4 percent.

### Macroeconomic Policies for the Remainder of the Extended Arrangement
- Policy framework consensus:
  - Authorities’ objective: bring public debt below 50 percent of GDP by 2018 — little scope to relax fiscal consolidation.
  - Phasing out subsidies essential to maintain public investment in key infrastructure.
  - Monetary policy stance should remain cautious to contain second-round inflationary pressures.
  - Buildup of international reserves should continue, albeit at a slower pace.
- Fiscal policy specifics:
  - Primary balance target for 2011 of 4.5 percent of GDP is within reach; domestic revenues projected to exceed target by 2.2 percent of GDP.
  - Margin by which primary balance is projected to exceed the quantitative PC limited to SR 30 million (0.2 percentage point of the revised GDP) due to unforeseen expenditures.
  - Electricity and cooking gas tariffs to be raised to cost recovery levels; Stabilization Fund to be closed in 2012.
  - Targeted transfers to low-income households to increase to protect vulnerable groups.
  - Air Seychelles restructuring:
    - Discontinuation of some loss-making flights in November 2011; termination of remaining unprofitable long-haul routes from mid-January 2012; restructured company expected to break even in 2012.
    - Budget support to Air Seychelles in 2012 expected to be 1.2 percent of GDP, mostly to cover one-off costs (accumulated losses, staff severance, penalties for early termination of airplane leasing).
  - Contingency fund of 0.6 percent of GDP included in the 2012 budget for emergencies (natural disasters, piracy, international commodities’ price shocks).
  - Authorities committed to full price pass-through; social protection to be addressed via targeted social assistance.
- Monetary policy specifics:
  - Tight monetary stance to guard against second-round inflationary pressures from global food and fuel price increases.
  - T-bill issuance to manage liquidity and absorb excess bank reserves.

### Public debt and fiscal projections
- Public debt is projected to fall to 76 percent of GDP at end-2012.
- With medium-term primary surpluses projected at around 4 percent of GDP, public debt should decline to 58 percent of GDP at end-2016.
- On track for achieving the 50 percent target for 2018.

### Monetary policy: Guarding against second-round inflationary pressures
- Additional pass-through from international food and oil prices expected through end-2011; main challenge is to contain possible second-round effects.
- Agreed approach:
  - Accommodate the direct one-off impact of utility tariffs on CPI.
  - Maintain existing monetary targets for end-2011.
  - Set a broad money growth target for 2012 roughly in line with nominal GDP.
- CBS actions and instruments:
  - CBS reaffirmed readiness to tighten policy stance at first signs of higher-than-targeted inflation.
  - Continue to rely on reverse repurchase agreements, deposit auctions, and foreign exchange swaps.
  - To ease sterilization burden, treasury bills will be issued for monetary policy purposes to help absorb part of liquidity, as needed.
- Reserve target:
  - Official external reserves are projected to reach 2.5 months of imports at end-2012.
  - Medium-term target of three months of prospective import coverage reiterated.

### Structural reforms
- Objectives: sustain private-sector led growth while improving economic and financial governance.
- Privatization and private-sector participation:
  - Authorities will offer minority shares in three companies (MEFP, ¶50).
  - Planned reform of public utilities’ tariff opens electricity sector to private operators.
  - Special committee chaired by the Minister of Finance will oversee large investments by public enterprises (MEFP, ¶59).
- Financial sector measures:
  - Strengthened guidelines on banks’ disclosure requirements.
  - Legal/regulatory basis and IT infrastructure for a credit information system; system expected to become operational by end-March 2012 (MEFP, ¶46).
  - Establishment of a commercial court to facilitate speedy resolution of financial disputes (MEFP, ¶47).
  - Progress on national payments system, risk-based banking supervision, and AML/CFT framework.
- Reforms to state-owned financial institutions:
  - Roles and operations of Development Bank of Seychelles (DBS) and Housing Finance Company (HFC) redefined.
  - New DBS mandate to focus on small and medium-size enterprises too risky for commercial banks (MEFP, ¶54).
  - New house financing policy to promote commercial banks’ mortgage instruments and limit government role to providing limited socially-targeted subsidies (MEFP, ¶55).
  - Interim HFC modernization to introduce clear accounting and operational separation between mortgage lending, real estate development, and property management.

### Program monitoring, financing and risks
- Monitoring:
  - Program monitored on a semi-annual basis.
  - Staff supports request for a waiver of applicability for the end-December PCs due to unavailable relevant data, strong program performance, and no evidence PCs have not been met.
  - MEFP proposes establishment of quantitative PCs for end-June 2012 and structural benchmarks.
- Financing:
  - Program for 2011–12 is financed.
  - (Minor) residual financing gaps will be closed when the two remaining external debt restructuring agreements are signed, which is expected to take place over the next few months.
- Main risks:
  - Deepening of European sovereign debt crisis could weaken tourism receipts significantly.
  - Ongoing downsizing of Air Seychelles could lead to short-term disruptions in tourist flows and additional budgetary support related to one-off costs.
  - Renewed piracy threats in the Indian Ocean could pose risks to tourism and fishing sectors.
  - Risks appear manageable because of strong program ownership and Seychelles’ track record of effective policy adjustments since 2008.

### Staff recommendation and Executive Board action
- Staff supports the request for waiver of applicability of performance criteria for the end-December PCs and recommends completion of the fourth review under the Extended Arrangement and the financing assurances review.
- Executive Board completed the fourth program review and financing assurances review under Seychelles’ EFF on January 11, 2012.
  - Completion allows immediate disbursement of SDR 3.08 million (about US$4.7 million).
  - Board approved the authorities’ request for waiver of applicability for end-December 2011 performance criteria where data are not yet available.

### Key macroeconomic and sectoral indicators (selected, preserved from source)
- Real GDP growth (Table 1 sequence): -1.0; 0.5; 6.7; 4.0; 5.0; 4.0; 4.5.
- Nominal GDP (millions of Seychelles rupees): 9,101; 11,450; 11,621; 12,016; 12,470; 13,508; 14,531.
- CPI (end-of-period): 63.3; -2.5; 0.4; 5.5; 5.4; 3.5; 2.6.
- Current account balance including official transfers (percent of GDP): -20.3; -9.8; -22.7; -32.7; -22.3; -20.9; -16.4.
- Total public debt (percent of GDP): 131.1; 124.1; 83.0; 76.2; 78.5; 76.9; 71.1.
- Gross official reserves (end of year, millions of U.S. dollars): 73; 196; 254; 262; 261; 282; 309.
- Months of imports, c.i.f.: 0.8; 2.0; 2.3; 2.6; 2.3; 2.5; 2.7.
- Broad money (levels): 5,983; 6,401; 7,275; 7,420; 7,581; 7,534; 7,625; 7,385; 7,678; 7,466; 7,655; 7,783; 7,906; 8,079.
- Credit to the economy (12–month percent change): 48.6; -11.4; 21.4; 22.9; 22.6; 18.0; 19.6; 15.8; 11.9; 10.1; 4.9; 9.4; 11.0; 10.4.
- Regulatory capital to risk weighted assets (percent end of period, Table 5 highlights): 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; 23.3; 24.8.

### Fund disbursements under the Extended Arrangement (selected, Table 6)
- Board approval of the Extended Arrangement, December 22, 2009: 0.88 (Millions of SDR); 8.1 (Percent of quota).
- Third Review, March 31, 2011: 3.52; 32.3.
- Fourth Review, September 30, 2011: 3.08; 28.3.
- Fifth Review, March 31, 2012 (planned): 2.64; 24.2.
- Sixth Review, September 30, 2012 (planned): 1.32; 19.8; 12.1.
- Total under the program: 181.7 (Millions of SDR).

### Data reporting and safeguards
- CBS weekly reporting (within one week): reserve money; foreign exchange reserves position; summary table on foreign exchange market transactions; results of liquidity deposit auctions and Treasury bill auctions.
- Ministry of Finance monthly reporting (within two weeks): consolidated government operations on commitment and cash basis; detailed revenues and expenditures; public debt report; statements of Stabilization Fund operations; consolidated creditors schedule on domestic expenditure arrears.
- Safeguards assessment:
  - 2008 assessment found high risks; July 2010 update found most recommended measures implemented.
  - Draft amendments to the CBS Act approved by Cabinet in April 2011 to strengthen legal framework and independence.

### Contingency and social protection measures
- 0.6 percent of GDP included in the 2012 budget to cover costs associated with piracy, natural disasters, and further sharp increases in international food and fuel prices.
- Contingency appropriation in 2012 budget set at SR 75 million, about 1.5 percent of total budget appropriations for 2012 and 0.6 percent of GDP.
- Targeted social transfers to increase in 2012; additional cost of targeted support estimated at 0.2 percent of GDP.
- Social Security and pension measures:
  - Seychelles Pension Fund contribution rate to increase to 3 percent of salary in 2012 (from 2 percent in 2011) noted in MEFP.
  - SPF contribution rate increase described elsewhere as both employer and employee contribution rates will be raised from 1 percent to 1.5 percent (public finance management section).

### Trade, external debt, and petroleum prospects
- Trade and regional integration:
  - More than 94 percent of all tariff lines set at zero.
  - Emphasis on joining the SADC Free Trade Area by the end of 2012.
- External public debt and financing:
  - External debt restructuring close to completion; remaining claims account for less than US$9 million.
  - Intend to limit contracting or guaranteeing of new external loans to the equivalent of US$40 million in 2012.
- Petroleum exploration:
  - Initial seismic tests indicate potential presence of oil.
  - Test drilling expected to begin in late-2012; if successful, oil could flow as early as 2014.
  - High-level oil coordination unit established; IMF scheduling mission to assist with management of potential oil revenues.

*Source: IMF staff report and MEFP contained in the document titled "_cr1230 - 3.08 million will be available upon completion of the fourth review."*

### 3.08 million will be available upon completion of the fourth review.

### _cr1230 - 3.08 million will be available upon completion of the fourth review.

### Mission and Program Implementation
- Mission discussions held in Victoria October 6–20, 2011; staff met with President James Michel, Vice President and Minister of Finance Danny Faure, Governor Pierre Laporte (Central Bank of Seychelles), other government officials, and private sector representatives; mission also participated in a government meeting with development partners.
- Staff composition: Jean Le Dem (head), Nikoloz Gigineishvili, Alexander Culiuc (all AFR), and Douglas Hostland (SPR).
- Program implementation:
  - All end-June 2011 performance criteria have been met.
  - Staff supports the request for waiver of applicability for end-December 2011 performance criteria.
  - Staff recommends completion of the fourth EA and financing assurances reviews.
  - Staff proposes to establish performance criteria for end-June 2012.
- Specific operational note: "3.08 million will be available upon completion of the fourth review."

### Executive Summary — Key Findings and Projections
- Growth and output:
  - Real GDP increased by 6.7 percent in 2010.
  - Real GDP is expected to gain 5 percent in 2011.
  - Real GDP growth in 2012 is projected to slow to 4 percent.
- Inflation and external:
  - Twelve-month inflation picked up from near zero in 2010 to 5.1 percent in November 2011.
  - Inflation projected to increase to 5.4 percent at year-end 2011.
  - Annual inflation expected to decline to about 3.5 percent in 2012.
  - External current account deficit expected to remain around 22 percent of GDP in 2011.
- Fiscal stance and public finances:
  - The envisaged fiscal stance for 2012 aims at maintaining a steady course toward debt reduction.
  - The 2012 primary fiscal surplus is projected at 4.7 percent of GDP.
  - Program on track: All quantitative performance criteria at end-June 2011 were met; quantitative targets for end-2011 unchanged.
- Monetary policy:
  - Monetary policy will continue to focus on containing second-round inflationary effects of global commodities’ prices and external pressures.
  - Issuance of T-bills for monetary purposes will help the central bank manage commercial banks’ liquidity.
- Structural reform priorities for 2012:
  - Launching of a value-added tax.
  - Enhanced budget procedures.
  - Restructuring of Air Seychelles and two state-owned financial institutions.
  - Introduction of a credit information system.
- Staff recommendation:
  - Support for the waiver of applicability of performance criteria and recommendation to complete the fourth EA and financing assurances reviews.

### Recent Developments and Outlook (selected details)
- Growth dynamics:
  - Revised national accounts: real GDP rebounded by some 6.7 percent in 2010.
  - 2011 growth projected at 5 percent, 1 percentage point above projection at third review.
- Inflation and reserves:
  - Twelve-month consumer price inflation: 3.8 percent in October 2011.
  - Inflation expected to peak at around 5.4 percent by year-end 2011.
  - Import cover (official international reserves): 2.4 months at end-September 2011.
- Fiscal performance H1 2011:
  - Fiscal revenues at end-June exceeded target by the equivalent of 1.4 percentage point of GDP (primarily excise and business taxes).
  - Higher transfers to Air Seychelles; delays in domestically financed capital budget execution.
- Monetary conditions and credit:
  - Reserve requirements raised from 10 to 13 percent earlier in 2011.
  - Ninety-day treasury bill rates increased from 0.5 percent in the first quarter to about 5 percent in the third quarter of 2011.
  - Private credit growth projected to moderate to 10 percent in 2011, from 21 percent in 2010.
- Program status and structural reforms:
  - All quantitative performance criteria at end-June 2011 and indicative targets for end-September met; some structural benchmarks postponed or delayed.
- Public enterprises and contingent fiscal risks:
  - Air Seychelles incurred mounting losses cumulating at about 2.2 percent of GDP for the first nine months of 2011.
  - Public Utility Corporation’s cash flow turned negative in 2011 due to rising fuel costs and drought-related expenditures.
- External debt restructuring:
  - Continued good faith negotiations; agreement signed with Abu Dhabi in June 2011.
  - Agreements reached with remaining official bilateral creditors (India and South Africa) and one remaining commercial creditor; signature expected shortly.

### Tourism Industry: Recent Developments, Policy and Prospects (summary)
- Market dependence and risks:
  - Tourism heavily dependent on European markets (in decreasing order: France, Italy, Germany, United Kingdom); ongoing turmoil in Europe poses significant risk.
- Resilience and policy response:
  - In 2009, tourist arrivals registered a much smaller drop than in other small tourism-dependent islands.
  - Factors cushioning impact: resilience of French tourism, boom in Italian arrivals, large increase in non-European tourists, Affordable Seychelles campaign (deeper hotel discounts).
  - Seychelles intensified promotion toward new markets, including China.
  - Share of top four European markets decreased from three-quarters in early 2000s to two-thirds in 2010.
- Short-term projections:
  - Tourism growth expected to moderate: real growth of tourism projected to slow from 6 percent in 2011 to 5 percent in 2012.
  - 2012 GDP growth projections revised from 4.7 percent at the third review to 4 percent.

### Macroeconomic Policies for the Remainder of the Extended Arrangement
- Policy framework consensus:
  - Authorities’ objective: bring public debt below 50 percent of GDP by 2018 — little scope to relax fiscal consolidation.
  - Phasing out subsidies essential to maintain public investment in key infrastructure.
  - Monetary policy stance should remain cautious to contain second-round inflationary pressures.
  - Buildup of international reserves should continue, albeit at a slower pace.
- Fiscal policy specifics:
  - Primary balance target for 2011 of 4.5 percent of GDP is within reach; domestic revenues projected to exceed target by 2.2 percent of GDP.
  - Margin by which primary balance is projected to exceed the quantitative PC limited to SR 30 million (0.2 percentage point of the revised GDP) due to unforeseen expenditures.
  - Decisions to phase out universal subsidies and downsize the airline expected to allow for a broadly unchanged fiscal stance and a primary surplus of 4.7 percent of GDP in 2012.
  - Electricity and cooking gas tariffs to be raised to cost recovery levels; Stabilization Fund to be closed in 2012.
  - Targeted transfers to low-income households to increase to protect vulnerable groups.
  - Air Seychelles restructuring: discontinuation of some loss-making flights in November 2011; termination of remaining unprofitable long-haul routes from mid-January 2012; restructured company expected to break even in 2012.
  - Budget support to Air Seychelles in 2012 expected to be 1.2 percent of GDP, mostly to cover one-off costs (accumulated losses, staff severance, penalties for early termination of airplane leasing).
  - Contingency fund of 0.6 percent of GDP included in the 2012 budget for emergencies (natural disasters, piracy, international commodities’ price shocks).
  - Authorities committed to full price pass-through; social protection to be addressed via targeted social assistance.
- Monetary policy specifics:
  - Tight monetary stance to guard against second-round inflationary pressures from global food and fuel price increases.
  - T-bill issuance to manage liquidity and absorb excess bank reserves.

*Source: IMF staff report (mission October 6–20, 2011) contained in the document titled "_cr1230 - 3.08 million will be available upon completion of the fourth review."*

### 13.      Public debt is on a sustainable path. It is projected to fall to 76 percent of GDP at

### 13.      Public debt is on a sustainable path. It is projected to fall to 76 percent of GDP at

### Public debt and fiscal projections
- Public debt is projected to fall to 76 percent of GDP at end-2012.
- With medium-term primary surpluses projected at around 4 percent of GDP, public debt should decline to 58 percent of GDP at end-2016.
- On track for achieving the 50 percent target for 2018.

### Monetary policy: Guarding against second round inflationary pressures
- Additional pass-through from international food and oil prices expected through end-2011; main challenge is to contain possible second-round effects.
- Authorities initially considered moderate monetary easing given projected disinflation; mission noted private sector credit is growing at a healthy rate and a monetary stimulus could:
  - Exacerbate recently observed foreign exchange pressures.
  - Undermine accumulation of reserves toward three months of import coverage—the minimum level considered adequate for cushioning external shocks to which Seychelles is susceptible.
- Possible secondary effects of higher utility tariffs and planned increases in minimum legal and public sector wages could add to inflationary risks.
- Agreed approach:
  - Accommodate the direct one-off impact of utility tariffs on CPI.
  - Maintain existing monetary targets for end-2011.
  - Set a broad money growth target for 2012 roughly in line with nominal GDP.
- Given sizeable overall fiscal surplus and projected net repayments of domestic debt, framework should leave room for private sector credit expansion.
- Central Bank of Seychelles (CBS) reaffirmed readiness to tighten policy stance at first signs of higher-than-targeted inflation.
- CBS will continue to rely on market-based policy instruments: reverse repurchase agreements, deposit auctions, and foreign exchange swaps.
- Increased interest costs from earlier tightening have strained the central bank’s balance sheet.
  - To ease sterilization burden and avoid further recapitalization, treasury bills will be issued for monetary policy purposes to help absorb part of liquidity, as needed.
- Floating exchange regime upheld as critical to macroeconomic policy framework:
  - Exchange rate of the rupee will continue to be market-determined.
  - Official external reserves are projected to reach 2.5 months of imports at end-2012.

### Structural reforms
- Reforms aimed at sustaining private-sector led growth while improving economic and financial governance; included public sector restructuring, state-owned financial institutions, and tax and public finance management reforms.
- Privatization and private-sector participation:
  - Authorities will offer minority shares in three companies (MEFP, ¶50).
  - Planned reform of public utilities’ tariff opens electricity sector to private operators.
  - Special committee chaired by the Minister of Finance will oversee large investments by public enterprises (MEFP, ¶59).
- Financial sector measures:
  - Strengthened guidelines on banks’ disclosure requirements to improve competition.
  - Legal/regulatory basis and IT infrastructure for a credit information system; system expected to become operational by end-March 2012 (MEFP, ¶46).
  - Establishment of a commercial court to facilitate speedy resolution of financial disputes (MEFP, ¶47).
  - Progress on developing a national payments system, moving toward risk-based banking supervision, and addressing deficiencies in the AML/CFT framework.
- Reform of state-owned financial institutions:
  - Roles and operations of Development Bank of Seychelles (DBS) and Housing Finance Company (HFC) redefined.
  - New DBS mandate to focus on small and medium-size enterprises too risky for commercial banks (MEFP, ¶54).
  - New house financing policy to promote commercial banks’ mortgage instruments and limit government role to providing limited socially-targeted subsidies (MEFP, ¶55).
  - Interim HFC modernization to introduce clear accounting and operational separation between mortgage lending, real estate development, and property management.
  - Reforms to address governance, risk management, and operations shortcomings.
  - On-site examinations by CBS indicate both institutions are well capitalized and fiscal risks from potential contingent liabilities are negligible.
- Tax policy and administration:
  - Planned introduction of VAT in mid-2012 is well on track (MEFP, ¶26).
  - New Customs Management Act will become effective in April 2012, following revision of supporting regulations and procedures, and staff training.
  - Seychelles Revenue Commission introducing a single tax identification number, linking customs database with domestic tax system and strengthening capacity in tax auditing (MEFP, ¶20–25).
- Public finance management reforms:
  - Guided by PEFA report and IMF technical assistance.
  - Starting with the 2013 budget: capital expenditure subject to parliamentary approval, new chart of accounts, strengthened compliance with International Public Sector Accounting Standards, and program budgeting for education and health expenditure (to be extended to all expenditure by 2015).
- Pension and social protection reforms:
  - Seychelles Pension Fund (SPF) undergoing independent actuarial audit to determine funding needs and formulate recommendations (MEFP ¶33–34).
  - Contribution rate will increase to 3 percent of salary in 2012 (from 2 percent in 2011).
  - Social Security Fund (SSF)’s financial assets, frozen in 2010, will be partly transferred to the SPF.
  - SSF is being merged with the Social Welfare Agency to centralize administration of statutory and means-tested benefits.

### Program monitoring, financing and risks
- Program monitored on a semi-annual basis.
- Staff supports request for a waiver of applicability for the end-December PCs due to unavailable relevant data, strong program performance, and no evidence PCs have not been met.
- MEFP proposes establishment of quantitative PCs for end-June 2012 (Table 2) and structural benchmarks (Table 3).
- Program for 2011–12 is financed.
  - (Minor) residual financing gaps will be closed when the two remaining external debt restructuring agreements are signed, which is expected to take place over the next few months.
- Main risks:
  - Major uncertainties surrounding growth prospects in Western Europe; deepening of European sovereign debt crisis and further depreciation of the euro against the dollar could weaken tourism receipts significantly, leading to balance of payments and fiscal pressures.
  - Ongoing downsizing of Air Seychelles could lead to short-term disruptions in tourist flows and additional budgetary support related to one-off costs of terminating early airplane lease contracts.
  - Renewed piracy threats in the Indian Ocean could pose risks to tourism and fishing sectors.
  - These risks appear manageable because of strong program ownership, Seychelles’ track record of effective policy adjustments to external shocks since 2008, and ongoing international antipiracy efforts.

### Staff appraisal
- Seychelles continues a strong recovery under the EFF-supported program despite global headwinds.
  - Activity set for another solid expansion in 2011 amid restored macroeconomic stability.
  - Country attracting growing inflows of tourists despite slowdown in Europe and benefiting from substantial foreign direct investments.
  - Inflation remains low despite global commodity price hikes earlier in the year.
- Economic policies consistent with further fiscal consolidation and low and stable inflation.
  - Projected primary surpluses sufficient to keep public debt on a declining path and ease external pressures.
  - Staff welcomes phasing out of the Stabilization Fund and move from universal to targeted subsidies.
  - Preventive monetary tightening earlier in the year absorbed banks’ excess liquidity and stemmed risk of second-round inflationary pressures.
  - Flexible exchange rate regime absorbed terms-of-trade deterioration through a modest depreciation in real effective terms in recent months.
  - Staff encourages further buildup of foreign reserves and supports issuance of T-bills for monetary purposes to share sterilization costs and strengthen central bank independence.
- Structural reform outlook and implementation needs:
  - Further tax and public finance reforms will foster continuous private-sector led growth in the medium term.
  - Cabinet has approved VAT regulations, a strengthened public finance management draft law and other pending measures that were structural benchmarks for the program.
  - Next steps include implementing these reforms, completing legal review processes, and bringing them to the new national assembly for adoption.
  - Government decisions to improve capacity include additional budget appropriations for the Attorney General’s Office.
  - Progress needed on design of a more business friendly tariff policy for public utilities and other measures to enhance business attractiveness.
- Air Seychelles restructuring:
  - Planned discontinuation of loss-making long-haul routes and related downsizing of the fleet and personnel should eliminate need for budget support in 2013.
  - Advanced notice allows other airlines to step in on discontinued routes, limiting risk of disruptions to tourism flows.
- Financial sector reforms should be accelerated:
  - Support for legislative and regulatory measures for development of financial intermediation, including setting up a credit information system.
  - Staff supports steps to reduce role of public financial institutions such as limiting mandates of DBS and HFC to cover small enterprises and low-income households respectively, despite potential complications from global financial crisis affecting privatization of Nouvobanq.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1230.pdf*

### 32.       Staff supports the request for waiver of applicability of performance criteria for

### _cr1230 - 32.       Staff supports the request for waiver of applicability of performance criteria for

### Staff recommendation
- Staff supports the request for waiver of applicability of performance criteria for the end-December PCs and recommends the completion of the fourth review under the Extended Arrangement and the financing assurances review.

### Key macroeconomic and sectoral indicators (summarized)
- Real GDP growth: -1.0; 0.5; 6.7; 4.0; 5.0; 4.0; 4.5 (years shown in Table 1 sequence).
- Nominal GDP (millions of Seychelles rupees): 9,101; 11,450; 11,621; 12,016; 12,470; 13,508; 14,531.
- CPI (annual average): 37.0; 31.9; -2.4; 3.1; 2.5; 4.8; 3.3.
- CPI (end-of-period): 63.3; -2.5; 0.4; 5.5; 5.4; 3.5; 2.6.
- GDP deflator average: 32.0; 25.2; -4.9; 2.3; 2.2; 4.2; 2.9.
- Current account balance including official transfers (percent of GDP): -20.3; -9.8; -22.7; -32.7; -22.3; -20.9; -16.4.
- Gross national savings (percent of GDP): 6.6; 17.5; 14.0; 4.5; 14.5; 14.6; 14.8.
- Gross investment (percent of GDP): 26.9; 27.3; 36.7; 37.2; 36.8; 35.5; 31.2.
- Total public debt (percent of GDP): 131.1; 124.1; 83.0; 76.2; 78.5; 76.9; 71.1.
  - Domestic (percent of GDP): 47.7; 33.9; 32.8; 27.4; 28.7; 25.8; 21.5.
  - External (percent of GDP): 83.3; 90.2; 50.2; 48.8; 49.8; 51.1; 49.6.
- Gross official reserves (end of year, millions of U.S. dollars): 73; 196; 254; 262; 261; 282; 309.
- Months of imports, c.i.f.: 0.8; 2.0; 2.3; 2.6; 2.3; 2.5; 2.7.
- Seychelles rupees per US$1 (end of period): 16.6; 11.2; 12.2; ...; 12.4; ...; ...
- Exports of goods and services (percent of GDP): 109; 122; 103; 111; 113; 113; 113.
- Imports of goods and services (percent of GDP): 126; 132; 121; 130; 131; 127; 122.

### Growth drivers and price pass-through (from figures and notes)
- Growth has been driven by tourism. (Figure caption)
- International oil and food prices have not yet fully passed through to domestic CPI. (Figure caption)
- Despite external shocks, the current account balance improves as FDI declines. (Figure caption)
- The exchange rate has depreciated slightly in response to external shocks. (Figure caption)

### Fiscal and monetary performance highlights (Figure 2 and Tables)
- Fiscal balances (percent of GDP): Revenues, primary expenditures, and primary surplus show prudent fiscal management with large surpluses (Figure caption).
- Government debt profile shows declining government debt with projections (Figure caption).
- Excess liquidity (percent of GDP): liquidity has been absorbed to prevent resurgence of inflation (Figure caption).
- Inflation and interest rates: liquidity absorption has led to positive real interest rates on government securities (Figure caption).

### Consolidated government operations (Table 3 highlights, millions of Seychelles rupees; cumulative from start of year)
- Total revenue and grants (selected entries): 4,262; 4,108; 1,188; 2,339; 2,356; 3,636; 3,437; 4,881; 5,133; 1,190; 2,396; 3,756; 5,379; 5,462.
- Total revenue (selected entries): 3,793; 4,007; 1,117; 2,076; 2,251; 3,251; 3,305; 4,405; 4,674; 1,072; 2,222; 3,502; 4,941; 5,117.
- Tax revenue (selected entries): 3,318; 3,533; 987; 1,856; 2,011; 2,853; 2,980; 3,905; 4,156; 952; 1,948; 3,097; 4,370; 4,560.
- Total expenditure and net lending (selected entries): 3,666; 3,815; 874; 2,244; 1,872; 3,432; 3,180; 4,667; 4,941; 1,136; 2,264; 3,555; 5,112; 5,161.
- Current expenditure (selected): 3,328; 3,194; 709; 1,618; 1,467; 2,505; 2,527; 3,455; 3,712.
- Capital expenditure (selected): 608; 1,009; 158; 625; 391; 926; 628; 1,211; 1,216.
- Primary balance (millions SR): 1,640; 1,006; 416; 260; 643; 462; 578; 536; 566; 179; 314; 516; 642; 686.
- Overall balance, commitment basis (selected): 596; 293; 314; 954; 832; 042; 572; 141; 915; 413; 220; 126; 730; 1.

### Balance of payments (Table 2 highlights, millions of U.S. dollars)
- Current account (levels): -194; -83; -218; -225; -217; -178; -139; -100.
  - (percent of GDP): -20.3; -9.8; -22.7; -22.3; -20.9; -16.4; -12.2; -8.3.
- Balance of goods and services: -159; -84; -177; -191; -181; -148; -113; -76.
- Exports of goods (selected): 438; 432; 400; 505; 516; 531; 544; 561.
  - Of which oil re-exports: 200; 184; 158; 210; 207; 210; 209; 211.
  - Of which tuna exports: 215; 165; 210; 246; 256; 267; 278; 291.
- Imports of goods (selected): -843; -733; -737; -877; -902; -907; -909; -914.
  - Of which oil imports: -278; -209; -218; -268; -315; -322; -324; -329.
  - FDI-related imports: -134; -126; -171; -156; -133; -113; -96; -81.
- Exports of services (selected): 610; 600; 592; 618; 657; 698; 742; 790.
  - Of which tourism earnings: 309; 256; 274; 298; 318; 340; 364; 389.
- Imports of services (selected): -364; -383; -432; -437; -452; -470; -490; -513.
- Income, net: -68; -47; -67; -42; -42; -37; -33; -30.
  - Of which interest payments due: -45; -33; -42; -17; -20; -17; -18; -19.
- Capital and financial account (selected): -129; 145; 51; 422; 62; 228; 211; 169; 129.
- Direct investment, net (selected): 166; 163; 221; 201; 168; 141; 119; 99.
- Overall balance (selected): -325; 102; 264; 111; 332; 928.

### Monetary survey and central bank accounts (Table 4 highlights, figures in millions or indices)
- Broad money (levels): 5,983; 6,401; 7,275; 7,420; 7,581; 7,534; 7,625; 7,385; 7,678; 7,466; 7,655; 7,783; 7,906; 8,079.
- Reserve money (levels): 1,120; 1,296; 1,746; 1,772; 1,755; 1,728; 1,757; 1,727; 1,765; 1,765; 1,810; 1,840; 1,869; 1,910.
- Net foreign assets (central bank): 1,050; 1,998; 2,709; 2,788; 2,781; 2,952; 2,821; 2,860; 2,786; 2,891; 2,936; 2,978; 3,002; 3,147.
- Credit to the economy (12–month percent change): 48.6; -11.4; 21.4; 22.9; 22.6; 18.0; 19.6; 15.8; 11.9; 10.1; 4.9; 9.4; 11.0; 10.4.
- Broad money growth (12–month percent change): 29.0; 7.0; 13.7; 13.0; 16.0; 15.3; 11.1; 7.6; 5.5; 2.6; 3.2; 3.3; 7.1; 8.2.

### Financial soundness indicators for the banking sector (Table 5 highlights, 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; 23.3; 24.8.
- Nonperforming loans to gross loans: 3.7; 2.9; 2.5; 2.3; 2.0; 2.1; 2.0; 2.0; 2.3; 4.3; 4.2; 3.8; 4.1; 6.9; 6.4; 5.5; 5.4; 5.6.
- 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; 4.1; 3.5.
- Core liquid assets to total assets: 19.2; 18.6; 11.4; 10.0; 30.8; 34.6; 36.4; 37.8; 36.0; 35.0; 37.7; 43.2; 43.5; 44.7; 44.7; 46.9; 47.0; 46.9.

### Fund disbursements and timing under the Extended Arrangement (Table 6)
- December 22, 2009 — Board approval of the Extended Arrangement: 0.88 (Millions of SDR); 8.1 (Percent of quota).
- March 15, 2010 — Compliance with end-December 2009 quantitative performance criteria and completion of a financing assurances review (if needed): 2.20; 20.2.
- 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: 2.20; 20.2.
- September 15, 2010 — Compliance with end-June 2010 quantitative performance criteria and completion of a financing assurances review (if needed): 2.20; 20.2.
- 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: 1.76; 16.1.
- Third Review, March 31, 2011 — Compliance with end-December 2010 quantitative performance criteria and completion of a financing assurances review (if needed): 3.52; 32.3.
- Fourth Review, September 30, 2011 — Compliance with end-June 2011 quantitative performance criteria and completion of a financing assurances review (if needed): 3.08; 28.3.
- Fifth Review, March 31, 2012 — Compliance with end-December 2011 quantitative performance criteria and completion of a financing assurances review (if needed): 2.64; 24.2.
- Sixth Review, September 30, 2012 — Compliance with end-June 2012 quantitative performance criteria and completion of a financing assurances review (if needed): 1.32; 19.8; 12.1.
- Total under the program: 181.7 (Millions of SDR).

### Indicators of Fund credit (Table 7 highlights, in millions of SDR)
- Existing Fund credit — stock (end of period sequence): 6.2; 11.9; 20.2; 23.8; 20.4; 14.9; 12.4; 10.6.
- Disbursements (selected): 6.2; 5.7; 8.4; 3.5.
- Projected EFF disbursements: 0.0; 0.0; 0.0; 0.0; 7.0.
- Stock of existing and prospective Fund credit (end of period sequence): 6.2; 11.9; 20.2; 23.8; 27.4; 21.9; 19.5; 17.6.
- In percent of quota (end of period sequence): 70.0; 135.0; 230.0; 218.0; 251.3; 200.8; 178.6; 161.8.
- In percent of GDP (end of period sequence): 1.0; 2.2; 3.2; 3.7; 4.2; 3.2; 2.7; 2.3.

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

### 1.      The attached Memorandum of Economic and Financial Policies (MEFP) describes

### SUPPLEMENTARY MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES FOR 2011 AND 2012

### Introduction
- Tracks progress after almost two years of macroeconomic and financial structural reforms under the three-year program supported by an Extended Arrangement under the Extended Fund Facility (EFF).
- Updates the MEFP of May the 18th, 2011 and details policies for the remainder of 2011 and 2012 to support completion of the fourth review.
- Objective: cement gains in public financial management and taxation reform while accelerating reforms where progress has been slower (notably public enterprises).

### Request and Program Status
- Requested completion of the fourth review under the Extended Arrangement and release of the seventh tranche of SDR 3.08 million (28 percent of quota).
- All quantitative performance criteria (PCs) at end-June 2011 and indicative targets for end-September 2011 were met with margins.
- Two structural benchmarks for this review were not implemented due to capacity constraints:
  - End-June 2011 benchmark: optimal tariff study postponed due to administrative hurdles in securing donor financing and finding a qualified expert; plan to complete the tariff study by July 2012 and implement a new tariff structure by end-September 2012.
  - End-September structural benchmark: instead of reinstating electricity tariff adjustment to fuel prices, electricity tariffs were raised significantly to fully cover cost and ensure financial viability of public utilities.
- Requested a waiver of applicability for all end-December 2011 and relevant performance criteria; relevant information not yet available but authorities believe criteria will be observed.
- Requested establishment of performance criteria for end-June 2012.
- Expected review schedule:
  - Fifth review to be completed by end-March 2012.
  - Sixth and final review to be completed by end-September 2012.
- Financing assurance reviews to continue as long as public debt arrears to external private creditors remain outstanding.
- Request to publish the letter, the MEFP, the technical memorandum of understanding (TMU), and the staff report; simultaneous publication in Seychelles.

### Macroeconomic Performance and Outlook for the Remainder of 2011
- Real GDP growth in 2011 projected at 5 percent, up from 4 percent projected at the time of the third review (June 2011), bolstered by tourism and canned tuna sectors.
- CPI inflation increased from close to zero at end-December 2010 (year-on-year) to 3.3 percent as of end-September 2011, largely due to higher fuel and electricity prices; expected to peak at 5.4 percent at the end of the year.
- Nominal effective exchange rate roughly stable; depreciation of the rupee against the dollar largely offset by appreciation against the euro; exchange rate movements between the euro and the dollar negatively impacted terms of trade.
- Gross international reserves rebuilt to 2.4 months of prospective imports of goods and services.
- Current account deficit projected at around 22 percent of GDP in 2011, largely financed by non-debt incurring capital inflows; net FDI inflows projected at 20 percent of GDP in 2011.
- Recent balance of payments revisions (based on a 2010 comprehensive survey with IMF Statistics Department assistance) indicate a smaller current account deficit than previously reported due to upward revisions to exports of services.

### Program Implementation in 2011
- All quantitative performance criteria as of end-June and all indicative targets as of end-September 2011 were met; end-December targets appear achievable.
- Fiscal outcomes:
  - Fiscal stance in 2011 expected to be slightly above objective set at last review, with revenue and expenditure larger than projected.
  - The surplus in the primary balance should be around 4.7 percent of the GDP projected at the beginning of the year. (Footnote: Significant revisions in nominal GDP for the 2008–10 period have led to a 4 percent increase in nominal GDP projection. As a result, the primary balance expressed in percentage points of the revised GDP is 4.5 percent.)
  - Based on tax revenue collection through end-September, authorities project to exceed government revenue objective in 2011 by about 2 percent of GDP.
  - Two supplementary budget laws in June and October included appropriations mainly for: temporary stabilization of a few sensitive prices (0.4 percent of GDP), emergency support for the national airline (1 percent of GDP), an early parliamentary election (0.2 percent of GDP), and unforeseen costs for the Indian Ocean Island Games.
  - Plan to save about 0.2 percent of GDP of the extra revenue to accelerate debt reduction.
- Monetary policy:
  - Tightened since beginning of 2011 to absorb excess liquidity and prevent second-round domestic inflation.
  - Hikes in reserve requirements and sterilization operations led to a marked rise in market rates: three month T-bill rates rose from 0.5 percent in Q1 to 5 percent since June.
  - Private sector credit growth over the twelve months ending in September reached 16 percent.
  - Plan to maintain monetary policy stance through end-2011.
- Structural reforms and public utilities:
  - Some delays in structural benchmarks due to two elections and a severe drought; catching up in recent weeks.
  - Tariff study for the public utility company pending; consultant recruitment assisted by the World Bank; study expected by end-June 2012 to prepare comprehensive electricity and water tariff reform by end-September 2012.
  - Electricity tariff adjusted twice in August and November 2011; authorities stand ready to adjust further pending comprehensive reform.
- Air Seychelles restructuring:
  - New CEO appointed; stopped flights to four loss-making destinations; retired four planes; renegotiated slightly more favourable terms for a code-sharing agreement.
  - Losses not yet reduced in part due to loss of a profitable charter contract and entry of two international carriers from November 2011; further downsizing required.

### Macroeconomic Outlook for 2012 and Beyond
- Growth expected to decline to 4 percent in 2012, with downside risks.
- Authorities’ strategy: aggressive global pricing and marketing, diversified tourist markets, and open sky policy to attract carriers to offset Eurozone slowdown.
- Medium-term prospects:
  - Installation of Seychelles’ first submarine cable expected to improve communications and support growth and diversification.
  - Traders and fishing operators adapting to piracy risks; activity picking up to pre-2008 levels.
  - Assistance from partner countries to combat piracy.
  - Increase in flights and hotel construction expected to support tourism growth.
  - External current account deficit projected to contract in the medium term.
  - Planned reduction of public debt expected to boost investor confidence and maintain substantial inflows of foreign capital, mainly in tourism.

### Policies for 2012 and Beyond — Fiscal Policy
- Commitment to maintain sustainable fiscal policy and bring public debt below 50 percent of GDP by 2018.
- Primary surplus target for 2012 raised to 4.7 percent of the revised GDP (against 4.5 percent in 2011) to accelerate debt retirement, assuming continued strong revenue performance and fewer one-off expenditures.
- Revenue projections and VAT:
  - Revenue collection in 2012 projected to slightly decrease in percentage of GDP due to expected reduction in business tax arrears.
  - Positive revenue factors: GST rate increase for tourism sector from 12 to 15 percent in November 2011 and strengthened tax and customs administrations.
  - Introduction of a single-rate VAT in July 2012 to replace GST; expected to be revenue-neutral in the medium term.
  - Two-month delay in processing VAT refunds expected to improve tax collections slightly in 2012.
  - Medium-term plan to stabilize revenue-to-GDP ratio at around 35 percent.
- Current expenditures tightly contained in 2012 to maintain high capital expenditures:
  - Wage bill projected to decline slightly in percentage of GDP; nominal increase to reflect hiring qualified staff, mid-year pay scale changes, and modest wage increases targeted to lower pay scale.
  - Targeted social transfers through the Social Welfare Agency to increase in 2012; additional cost of targeted support estimated at 0.2 percent of GDP.
  - Capital expenditures to focus on tourism infrastructure expansion and priority social needs.
- Support for Air Seychelles in 2012:
  - Further drastic steps to streamline loss-making activities, limit budget assistance in 2012, and break-even by 2013.
  - Company to eliminate loss-making long-haul flights and focus on local and regional destinations starting April 2012.
  - Budgeted support equivalent to 1.2 percent of GDP to help cover debt servicing for loans taken in 2010 and 2011, operational losses, and one-off downsizing costs (penalties for early lease cessation) during early 2012.
- Contingency appropriation in 2012 budget:
  - Contingency appropriation replaces the contingency fund and the Stabilization Fund.
  - Set at SR 75 million, about 1.5 percent of total budget appropriations for 2012 and 0.6 percent of GDP.
  - To be activated only for unforeseen expenses (piracy, natural disasters, sharp international food and fuel price increases).
  - If no unforeseen expenses in first half of 2012 and revenue remains on track through end-June, authorities plan to progressively release this reserve for capital investment projects starting in July 2012.

### Policies for 2012 and Beyond — Tax and Customs Reform
- Continue modernization of the Seychelles Revenue Commission (SRC), notably customs administration, with IMF and EU technical assistance for VAT implementation.
- Customs Management Act:
  - Revised Bill approved by newly elected National Assembly in December 2011.
  - Act to become operational in June 2012 to allow development of regulations, staff training, and outreach.
- Introduction of a single tax identification number (TIN) by October 2011; SRC to repeal the Seychelles Business Number Act by October 2011 and amend the Revenue Administration Act and Seychelles Revenue Commission Act accordingly.
- Customs-ICT integration:
  - Customs’ automated data system to be linked with the domestic tax system by December 2011 to facilitate information exchange.
  - Customs to upgrade to ASYCUDA World in 2012 with COMESA support; work carried out by Customs reform team appointed in April 2011 with Government’s Department of ICT.
- Customs priorities:
  - Risk Management and Post Clearance Audit (PCA) identified as key priorities.
  - PCA unit formally established in July 2011; capacity building ongoing with regional assistance.
  - Technical assistance on risk management strategy provided by AFRITAC South in October 2011.
  - SOPs to be updated in line with Customs Management Act and WCO Revised Kyoto Convention; priorities include Warehouse Management, Export Procedure, and Temporary Importation.
  - WCO technical assistance planned in January 2012 to develop an integrity/ethics framework for SRC by 2013.
- Revenue administration actions:
  - Continued focus on improving revenues through audits of top taxpayers, including in tourism.
  - Review of potential transfer pricing sources completed; enhancements to capacity underway.
  - Government review of guidance on revenue booking practices and expense deduction within the hotel industry.
- VAT implementation:
  - Target launch date: July 1, 2012 to replace existing GST.
  - Published applicable VAT rate: 15 percent and threshold for mandatory registration.
  - Rates based on Ministry of Finance projections consistent with IMF VAT mission advice (February 2011) and revenue neutrality.
  - Resident IMF expert funded by an EU grant for 18 months assisting SRC with skills, procedures, and manuals.
  - Preparatory actions include:
    - Ongoing public and private entity meetings to raise VAT awareness.
    - Employment of new staff to facilitate VAT implementation (8 so far), with further recruitment planned in 2012.
    - Amending the Revenue Administration Act to ensure consistency of business size definitions with the VAT Act.

*Source: Letter signed by Danny Faure and Pierre Laporte; attachments: MEFP and TMU.*

### 27. We are committed to further improvements in the management of public

### _cr1230 - 27. We are committed to further improvements in the management of public

### Public finance management reforms and legal framework
- Commitment to further improvements in the management of public finances in 2012, notably in budget preparation, accounting procedures, and budget executions.
- Revised action plan draws from a recent Public Expenditure and Financial Accountability (PEFA) assessment and the report of the recent IMF Fiscal Affairs Department mission.
- Cabinet approved a new Public Finance Bill:
  - When approved by the National Assembly and effective at the time of the 2013 budget presentation, new legal requirements will include:
    - a mid-year execution report as a legal requirement;
    - technical justifications underlying budget preparations as legal requirements;
    - integration of capital expenditures in the budget law and subject to parliamentary approval;
    - integration of the development fund (used to fund capital projects of some public entities involved with public infrastructure) into the Budget document.

### Financial instructions, accounting, and IPSAS transition
- Financial Instructions and Accounting Manual to be revised by September 2012 for coherence with the Public Finance Bill and International Public Sector Accounting Standards (IPSAS).
- Staff training in all ministries and departments to be conducted in 2012 to facilitate transition to the new manual.
- Capacity building for implementation of IPSAS shall commence in the first quarter of 2012.
- Centralized procurement management system will be upgraded to facilitate transition to accrual-based IPSAS.

### Public Sector Investment Program (PSIP) and budget classification
- Introduction of a Public Sector Investment Program (PSIP) with the 2013 budget.
  - Framework mapping capital expenditure projects over five years to be submitted to Cabinet by September 2012.
  - PSIP will help plan borrowing requirements for financing investment whilst keeping public debt at sustainable levels.
  - PSIP will be the basis for the National Development Plan.
- New Chart of Accounts scheduled for introduction for preparation of the 2013 budget; migration time underestimated, preventing implementation before Budget 2012.
  - Ministry of Finance (MoF) will provide extensive training to accounting staff of other ministries and departments.
- Program-based budgeting targeted for the medium term:
  - New Chart of Accounts designed to incorporate program-based budgeting.
  - Health and Education ministries to start migrating in the second half of 2012.
  - Rest of Government to be phased in gradually with Budget 2015 as the target for the first fully program-based Budget.

### Social protection and pension reforms
- Cabinet adopted strategic plan and passed legislation establishing Agency for Social Protection to consolidate administration of statutory and means-tested benefits.
- Social Security Fund (SSF) assets:
  - SSF assets were frozen when SSF contributions were replaced in July 2011 by a personal income tax and the budget took over payment of the fund’s benefits.
  - Remaining assets will be transferred to a new Fund managed by a Board of Trustees as per approved investment policies and guidelines.
  - Income generated by these assets will be used to improve social protection of all Seychellois.
- Legislative amendments to the Social Security Act 2010 and Social Security (Board of Trustees) Regulations 2011 to:
  - eliminate conflicting and discretionary provisions;
  - ensure transparency in management of the Fund;
  - refine the mandate of the new SSF.
- Board of Trustees (BoT) appointed to oversee management of assets; amendments to regulations will provide mandate to submit proposals on investment strategy and use of income in conformity with objectives established by law.
- Seychelles Pension Fund (SPF) sustainability measures:
  - SPF largely underfunded according to the 2008 actuarial audit.
  - New audit released in November 2011 provides guidance on further medium-term measures.
  - First step: both employer and employee contribution rates will be raised from 1 percent to 1.5 percent.

### Monetary and exchange rate policies
- Central Bank will continue reserve money targeting as its monetary policy framework; rely on market-based instruments to maintain price stability objective.
- Broad money projected to grow slightly less than nominal GDP to contain inflation.
- Net claims on government expected to decline on account of large fiscal surpluses, allowing crowding-in effect and healthy private credit growth.
- Issuance of Treasury bills for monetary policy purposes to facilitate CBS liquidity management:
  - Draft memorandum of understanding between the central bank and the Treasury under preparation.
  - Government to park proceeds of T-bill issuance in a blocked account at the central bank and to bear the interest cost on issued T-bills.
- Floating exchange rate regime to be maintained:
  - CBS to intervene only to smooth excessive volatility and ensure orderly market conditions.
  - CBS will aim to build international reserves to reach the equivalent of three months of prospective import coverage.
- Reserve management practices:
  - CBS places bulk of reserves with the Bank for International Settlements (BIS).
  - Discussions initiated with the World Bank to begin using its Reserve Asset Management Program (RAMP).

### Financial sector transparency, supervision, and consumer protection
- Progress on promoting competition and enhancing transparency in the banking sector:
  - Financial literacy campaign underway.
  - CBS issued guidelines in October 2011 on disclosure requirements of banks’ terms and conditions covering minimum information on loans, dormant accounts, and bank statements.
  - Publications, presentations, and a CBS open day organized as part of the literacy program.
- Strengthening supervision:
  - Amendments to the Financial Institutions Act, 2004 approved by Cabinet in June 2011 and to be put before the National Assembly by end-2011.
  - Offsite data will be more systematically validated, analyzed and maintained through a statistical and supervisory application.
  - Onsite inspections: full cycle of onsite examinations of all banks and quasi-bank institutions expected to have been completed from the second half of 2009 to the first quarter of 2012.
- Insurance regulatory framework:
  - Technical assistance financed by the FIRST Initiative started and is expected to address limitations in legal framework and supervisory approaches.
  - Report from first TA mission being reviewed by CBS staff.
- Anti-money laundering and combating financing of terrorism:
  - Amendments to the Anti-Money Laundering Act to enhance independence of the Financial Intelligence Unit (FIU) and establish a time-frame for freezing suspected assets.
  - Amendments should facilitate international coordination, including Seychelles’ entry into the Egmont group.

### CBS operations, governance, and payments infrastructure
- Internal Audit Division (IAD) adopted Institute of Internal Auditors’ (IIA) framework in January 2011:
  - QAIP (Quality Assurance and Improvement Program) required; external Quality Assessment Review (QAR) of the QAIP to be performed at least once every three years.
  - External assessment of the QAIP scheduled for December 2013.
- National Payment System project and CORE Banking System:
  - Implementation to support Electronic Clearing House (scheduled go-live during the fourth quarter of 2012) and Electronic Funds Transfer (scheduled go-live second quarter of 2013).
  - Followed by implementation of local rupee switching system and Real Time Gross Settlement system.
  - CORE Banking System implemented in December 2010; improved payment, clearing and settlement facilities and internal control processes.
- Accounting and financial reporting:
  - CBS adopted International Financial Reporting Standard (IFRS) from financial year 2009.
  - Internal control improvements: segregation of duties between front, middle and back office; back office remains with Banking Services Division; front and middle office functions now under Financial Markets Division.
- Credit Information System (CIS):
  - CIS to be launched in early 2012; initially housed within the central bank with view to extend to privately run credit information bureau.
  - CIS will promote competition, improve risk-pricing, and incentivize good financial relationships.
  - A first draft of regulations governing CIS participants prepared; IT platform setting up under way.
- Commercial court:
  - Discussions begun with the Judiciary to establish a commercial court to handle financial disputes and reduce backlog.
- Stock exchange:
  - International tender launched in July 2011; national committee established to consider applications.
  - Decision on award of license to be made before end 2011 for exchange to be operational in 2012.

### Financial sector action matrix (selected deadlines preserved as in source)
- Issuance of regulations for operation of Credit Information System — December 2011
- Implementation of the Credit Information System — February 2012
- Implementation of Statistical and Supervisory Application — September 2012
- Implementation of the Quality Assurance and Improvement Program for CBS’ Internal Audit Division — September 2012
- Implementation of Electronic Clearing House system — October 2012
- Review of the Insurance Regulatory framework — December 2012
- External review of the Quality Assurance and Improvement Program — December 2013
- Implementation of Electronic Funds Transfer — June 2013

### Reform of public enterprises and private sector development
- Continue reducing and redefining the role of the state, and reform and downsize the public sector.
- Comprehensive review with the World Bank of obstacles to starting and operating a business; measures to be implemented in early 2012 to:
  - speed up procedures to start up and close businesses by reducing number of procedures, time and cost to register a company;
  - make the process of obtaining a construction permit faster and cheaper;
  - speed up procedures for registering a business by allowing more efficient and less costly transfer and registration of property titles;
  - improve access to credit by allowing more flexibility in the use of collateral to secure loans;
  - enhance efficiency in paying taxes by reducing administrative burdens on companies to comply with tax requirements;
  - enhance trading across borders by reducing number of documents and time to trade;
  - strengthen procedures for enforcement of contracts by streamlining time, costs and procedures involved in enforcing a contract.
- Privatizations:
  - Cabinet approved strategic plan for privatizations, starting with companies where the state retains minority shares.
  - In 2012 planned sales of government shares in Land Marine (cargo handling and stevedoring), Naval Services (ship repair), and Sacos Insurance Company Limited (insurance).
  - Prior regulatory changes will be taken where necessary to prevent emergence of private monopolies.

### Specific public enterprise and sectoral measures
- Public Utilities Corporation (PUC):
  - Electricity tariff increased by 5 percent in August, and a further 24 percent implemented in two steps in November 2011 and January 2012.
  - PUC stands ready to revise tariffs further if fuel prices rise above those prevailing to PUC in Oct 2011.
  - New tariff structure preparation by end-September 2012 based on tariff study starting early 2012.
  - Energy commission preparing a new Energy Act to modernize legal framework, allow competition in production of energy, provide consumer protection, support energy efficiency and standards, and promote renewable energy systems.
  - PUC adopted a Water Master Plan to guide investment decisions over the next four years and benefit from external concessional financing.
- Seychelles Savings Bank (SSB):
  - Government sold over 23 percent of its shares in the Seychelles Savings Bank.
  - SSB account holders were offered opportunity to buy 40 percent of shares; following first round approximately 60 percent of the shares on offer were bought.
  - Modalities to sell the remaining shares (i.e. just under 17 percent of SSB) in Phase II are being worked on.
- Nouvobanq:
  - Efforts to sell government’s stake put on hold due to weak appetite for banking assets globally.
  - Progress made to ensure Nouvobanq is sound, profitable, and independently run.
- Development Bank of Seychelles (DBS):
  - DBS disbursed more than SR 120 million through the third quarter of 2011.
  - DBS achieved a positive lending margin after expenses by raising its lending rate and issuing medium–term, government-guaranteed, rupee bonds that match average life of its loans.
  - Government and DBS to submit new mandate to Cabinet by December 2011.
  - DBS to be restructured with clearly defined mandate, strengthened governance and independence, risk-based pricing framework, and limits on loan sizes.
  - Pending new mandate and risk-based framework, DBS to review backlog of approved applications and address CBS’s recent on-site examination report.
- Housing policy and House Financing Cooperation (HFC):
  - Reviewed to increase private sector role and reduce budgetary cost of housing provision.
  - Short term: government institutions, notably HFC, to continue direct role in low-cost housing and mortgages.
  - Long term: limit state intervention to social housing for the most vulnerable; introduce “smart subsidies” combining budget subsidies with market-rate loans from commercial banks.
  - Work with commercial banks to explore special housing loan scheme for channeling subsidies.
  - Tighten eligibility criteria for HFC loans.
  - Modernize HFC and modify mandate to separate property management functions from mortgage lending activities.
  - CBS on-site supervisory examination revealed deficiencies in governance, operations and accounting of HFC to be addressed promptly; plans to strengthen HFC governance and operations to make it financially viable.

*Source: _cr1230 - 27. We are committed to further improvements in the management of public*

### 56. Seychelles will continue to work towards WTO accession with a view to

### Seychelles will continue to work towards WTO accession with a view to achieving membership by 2014

### Trade policy and regional integration
- Objective: increase potential import and export markets and encourage investment (regionally and globally).
- Trade regime: more than 94 percent of all tariff lines set at zero.
- Regional commitments:
  - Emphasis on joining the SADC Free Trade Area by the end of 2012.

### External public debt and financing
- Restructuring status:
  - External debt restructuring is close to completion.
  - Final agreements signed with two bilateral creditors and one commercial creditor since the beginning of this year.
  - Agreements pending signatures on remaining debts in arrears: one export credit extended by India, and another involving South Africa and a private partner. These three claims account for less than US$9 million.
- New borrowing limits and use:
  - Intend to limit contracting or guaranteeing of new external loans to the equivalent of US$40 million in 2012.
  - These loans will be mainly used to finance infrastructure projects.
  - Annual debt strategy update to be presented to the National Assembly together with the 2012 budget.
- Public investment control:
  - From 2012, a committee chaired by the Minister for Finance will review all public projects greater than SR 25 million to assess macro-economic impact and budget risks (including projects that do not necessarily need a government loan or sovereign guarantee). This assessment will inform Cabinet decisions.

### Petroleum exploration and institutional preparedness
- Exploration timeline and potential:
  - Initial seismic tests indicate the potential presence of oil in Seychelles’ economic zone.
  - Test drilling is expected to begin in late-2012.
  - If successful, oil could flow as early as 2014.
- Institutional arrangements and assistance:
  - Established a high-level oil coordination unit to bring together the Ministry for Energy, the Finance Ministry, the Central Bank, and SEYPEC.
  - Unit responsibilities: formulating legislation, oil wealth management principles, and interacting with international oil companies.
  - Government and SEYPEC receiving technical assistance on oil-related issues from bilateral and multilateral donors.
  - IMF is scheduling a mission to assist with the management of any potential oil revenues.

### Statistics and data improvements (SDDS compliance strategy)
- External statistics:
  - Improving external statistics based on IMF and other external advisors’ recommendations.
  - Central Bank plans to complete by end-2011 the compilation of a partial International Investment Position (IIP) statement covering the public sector and commercial banks.
  - Central Bank Act amended to allow the Bank to collect information from all companies to improve coverage of private sector external operations.
- National accounts and frequency:
  - Plan to produce more frequent national account data.
  - Expect to publish quarterly GDP within one quarter (an SDDS requirement) by September 2013.
  - Exploring the use of forthcoming VAT returns to achieve this objective.
- Surveys and indices:
  - Undertaking a labour force survey.
  - Preparing for the launch in 2012 of a household budget survey.
  - Engaged in the Harmonised Consumer Price Index project of COMESA and an International Comparison Program coordinated by the African Development Bank.
- Capacity building:
  - Additional budget resources granted to the National Statistics Bureau in 2012 for human capital and institutional capacity building.
  - A training program will be put in place for new recruits.

### Program monitoring, performance criteria, and TMU highlights
- Monitoring framework:
  - Program will be monitored through semi-annual reviews, with semi-annual quantitative performance criteria and disbursements, in line with the MEFP of May 16, 2010.
  - Quantitative performance criteria for 2011 are shown in Table 2; structural benchmarks are in Table 3.
  - The revised Technical Memorandum of Understanding (TMU) defines quantitative performance criteria, indicative targets, and adjusters.
- Policy commitment:
  - Seychelles will 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 will avoid imposing import restrictions for balance of payments reasons.
  - Authorities stand ready to adopt additional measures, in consultation with IMF staff, necessary to ensure program success.

### Key quantitative targets and program figures (selected from Table 2 and TMU)
- Net international reserves (NIR) of the CBS, millions of U.S. dollars (floor): example quarterly values shown include 204, 219, 203, 197, 205, 199, 202, 204, 204, 213.
- Reserve money (ceiling): example values include 1,755; 1,728; 1,757; 1,727; 1,765; 1,810; 1,840; 1,869; 1,910.
- Primary balance of the consolidated government (cumulative floor): example values include 240; 643; 462; 578; 536; 179; 314; 516; 642.
- Contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): example values include 33; 0; 46; 14; 47; 30; 30; 40; 40.
- Contracting or guaranteeing of new short-term external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 0.0 (continuous zero sub-ceiling).
- Accumulation of external payments arrears by the public sector (ceiling): 0.0 (continuous).
- Accumulation of domestic payment arrears by the government (ceiling): 0.0 (continuous).
- Memorandum item — Net external non-project financing (millions of U.S. dollars; cumulative): -0.6; -1.1; 6.8; 1.0; 1.6; -4.1; -5.5; -9.9; -0.6.
- Program accounting exchange rates (end-of-quarter):
  - SR/US$: 12.15; 12.41
  - US$/Euro: 1.34; 1.35
  - US$/UK pound: 1.56
  - US$/SDR: 1.49; 1.56
  - US$/AUD: 0.97
- TMU monitoring and reporting:
  - NIR 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 that can be liquidated without penalty, and any holdings of investment-grade securities. Reserve liabilities include liabilities to nonresidents contracted by the CBS and net off-balance-sheet positions (futures, forwards, swaps, or options), including those to the IMF.
  - For program monitoring, reserve assets and liabilities must be converted into U.S. dollars using the end of period exchange rates assumed in the program.
  - Quarterly NIR and reserve money data submitted by the CBS to the IMF will be audited by the CBS external auditors in accordance with International Standards on Auditing; reports due no later than two months after each test date.
  - Adjusters: the NIR floor will be adjusted upward (downward) by the amount by which external non-project loans and cash grants exceed (fall short of) the amounts assumed in the program; similarly adjusted for external debt service deviations.
  - Primary balance definition: total consolidated government and social security fund revenues (excluding privatization and long-term lease income receipts) less all noninterest (primary) expenditures of the government and social security fund on a commitment basis.
  - Public external debt ceiling scope: applies to contracting or guaranteeing of new external liabilities by the public sector (central government, CBS, public agencies, parastatals for operations not directly linked to commercial activities); excludes Fund resources, debt restructuring operations, normal import-related credits, purchases of treasury securities by nonresidents, and parastatal commercial borrowing.
  - Debt definition follows Executive Board Decision No.6230-(79/140), revised Decision No. 14416-(09/91) (August 31, 2009), and includes loans, suppliers credits, leases (present value at inception), and arrears, penalties, and judicially awarded damages constituting debt.
  - External arrears of the public sector: nonaccumulation of arrears to external creditors is a continuous performance criterion; arrears defined as external debt service due and not paid within the contractually agreed period, including contractual and late interest (excluding payments for which a clearance/rescheduling is sought).
  - Domestic arrears: nonaccumulation of budget expenditure arrears is a performance criterion, measured net from the beginning of the calendar year; arrears include unpaid verified invoices beyond contractual or 30-day grace periods, unpaid wages/pensions/transfers pending longer than 30 days, and overdue domestic debt service.

*Source: Seychelles authorities and IMF staff estimates and projections as presented in the MEFP, TMU, and associated tables.*

### 13.      The Seychelles authorities (government and CBS) will provide Fund staff with the

### _cr1230 - 13.      The Seychelles authorities (government and CBS) will provide Fund staff with the

### Data reporting obligations — Central Bank of Seychelles (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.
    - The results of the liquidity deposit auctions, primary Treasury bill auctions, and secondary auctions.
  - Monthly (within four weeks from the end of the month):
    - The monetary survey in the standardized report form format.
    - The foreign exchange cash flow, actual and updated.
    - Financial soundness indicators.
    - Stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report.

### Data reporting obligations — Ministry of Finance
- Monthly (within two weeks from the end of the month):
  - Consolidated government operations on a commitment basis and cash basis in the IMF-supported program format.
  - The detailed revenues and expenditures of the central government and social security fund.
  - 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 commitment
- The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation, and will provide any additional relevant information as requested by Fund staff.

### Relations with the Fund — membership and facilities (as of November 30, 2011)
- A. Membership Status:
  - Joined 6/30/1977.
  - Article VIII member since 01/03/1978.
- B. General Resources Account (SDR Million):
  - Quota: 10.90 (100.0 percent).
  - Fund holdings of currency: 34.13 (313.1 percent).
  - Reserve Position in Fund: 0.53 (4.85 percent).
- C. SDR Department (SDR Million):
  - Net cumulative allocation: 8.28 (100.0 percent).
  - Holdings: 6.86 (82.84 percent).
- D. Outstanding Purchases and Loans:
  - Stand-by Arrangement: 11.00 (100.92 percent).
  - Extended Arrangement: 12.76 (117.06 percent).
- E. Financial Arrangements (SDR Million):
  - EFF: Dec 23, 2009–Dec. 22, 2012; Amount Approved 19.80; Amount Drawn 12.76.
  - Stand-By: Nov.14, 2008–Dec. 22, 2009; Amount Approved 17.60; Amount Drawn 11.00.
- F. Projected Obligations to the Fund (SDR Million):
  - 2011 Principal: 3.41; Charges/interest: 0.27; Total: 3.68.
  - 2012 Principal: 5.50; Charges/interest: 0.22; Total: 5.72.
  - 2013 Principal: 2.42; Charges/interest: 0.17; Total: 2.59.
  - 2014 Principal: 1.83; Charges/interest: 0.14; Total: 1.98.

### Safeguards assessment and CBS governance
- A safeguards assessment in 2008 found high risks in all areas of the CBS’s safeguards framework and recommended measures.
- An update assessment in July 2010 found that the authorities implemented most recommended measures:
  - 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 restrictions on current international transactions subject to Article VIII Sections 2, 3, and 4.
- Exchange rate policy: floating.
- Exchange rate (September 30, 2011): US$ 1 = SR 12.40 (mid rate).

### Technical assistance (2008–October 2011) — highlights
- Multiple missions across departments (STA, MCM, FAD, LEG, FIN) covering:
  - Dissemination of GDDS National Summary Data Page (April 2008).
  - Consumer price index (April 2008).
  - Banking supervision, payments systems, central bank capacity building, safeguards assessment, tax policy reform, public financial management, government finance statistics, BoP statistics, quarterly national accounts, producer price/industrial production indices, and more (2008–October 2011).
- Resident Representative: None.

### Joint World Bank–IMF work program, 2012 — overview
- Joint activities include:
  - Bank: Country Partnership Strategy; Statistical Capacity Building Project (STATCAP); Public Administration Reform Project (PAR IDF); Public Expenditure Review focusing on capital expenditures and subsidies; advisory services on investment climate; economic diversification work; MTDS/DeMPA; technical assistance on electricity tariff reform; housing financing strategy, among others (provisional timings across 2011–2014).
  - Fund: Program and surveillance work including Fourth, Fifth, and Sixth Reviews under the EFF and Article IV Consultations; technical assistance from MCM, FAD, STA on monetary policy framework, bank supervision, tax and customs reform, external sector statistics, GDP and price statistics (provisional timings across 2011–2012 and ongoing).
- Joint products and missions include a joint mission in the context of the fifth review under the EFF and Debt Sustainability Analysis (March 2012 and June 2012 provisional timing).

### Press Release — IMF completion of Fourth Review and Financing Assurances Review (January 12, 2012)
- The Executive Board completed the fourth program review and financing assurances review under Seychelles’ EFF on January 11, 2012.
- The completion allows immediate disbursement of SDR 3.08 million (about US$4.7 million).
- The Board approved the authorities’ request for waiver of applicability for end-December 2011 performance criteria for which data are not yet available.
- The extended arrangement became effective on December 23, 2009 in the amount of SDR 19.8 million (about US$30.2 million).
- Statements noted:
  - Strong rebound from the 2008–09 crisis aided by sound macroeconomic policies and structural reforms.
  - Medium-term prospects good but downside risks from the crisis in Europe.
  - Inflation picked up recently but remains broadly in check.
  - Safeguarding debt sustainability is critical; restructuring the national airline and increasing utility tariffs to cost-recovery levels will help fiscal position.
  - Need for a well-targeted social safety net to protect vulnerable groups.
  - Central bank should remain vigilant against inflationary pressures; build up foreign reserves and maintain exchange rate flexibility.
  - Structural reforms should focus on improving public financial management and fostering private sector-led growth; in the financial sector, limit the role of state-owned institutions, strengthen competition, enhance governance and transparency, and improve banking intermediation.

### Executive Board statement — economic developments, program implementation, and fiscal policy (January 11, 2012)
- Economic developments and outlook:
  - Real GDP growth for 2011 revised upwards to 5 percent from 4 percent, reflecting buoyant tourism and canned tuna sectors.
  - Inflation rose to 5.4 percent reflecting higher fuel and electricity prices, with little evidence of second-round effects.
  - Outlook: steady medium-term growth at a slower rate than 2011 with large downside risks from the Eurozone slowdown.
  - Diversification efforts in tourism and recovery in the fishing sector are reducing vulnerabilities and supporting inflows of foreign capital.
- Program implementation:
  - Program performance exemplary: all quantitative targets for end-June 2011 met and all but two structural benchmarks delivered.
  - Tariff study for the public utility company delayed until end-June 2012 due to recruitment difficulties.
  - Electricity tariffs increased by almost 30 per cent over August, November and January, bringing tariffs to cost recovery levels; reinstatement of automatic fuel price variation adjustment to be considered after review.
- Fiscal policy:
  - Primary surplus expected for 2011: 4.7 percent of GDP, slightly above the target of 4.5 percent of GDP.
  - Authorities supported Air Seychelles temporarily while restructuring; decision made to eliminate all long-haul flights from January 2012 and transform the airline into a regional carrier, eliminating the need for budget support by the end of 2012.
  - Primary surplus target for 2012 increased to 4.7 percent of GDP, based on slightly lower revenue projections more than offset by the unwinding of one-off expenditure.
  - To manage risks of unforeseen expenses, a contingency was established (text ends here).

*Prepared by the African Department (In consultation with other Departments); December 27, 2011.*

### 0.6 percent of GDP has been included in the budget to cover any costs associated with piracy,

### _cr1230 - 0.6 percent of GDP has been included in the budget to cover any costs associated with piracy,

### Fiscal policy and public expenditure
- 0.6 percent of GDP has been included in the budget to cover any costs associated with piracy, natural disasters, and further sharp increases in international food and fuel prices.
- Current expenditures will be tightly contained to accommodate priority capital investment, with a focus on infrastructure bottlenecks and priority social needs.
- Delivery of reforms (some as structural benchmarks under the EFF) intended to enhance the fiscal policy framework over 2012 and beyond:
  - The introduction of the VAT in July 2012 – described as the last major step of the overhaul of taxation that began in 2008 – will improve the efficiency of the tax system (while being revenue-neutral).
  - Modernizing the Seychelles Revenue Commission, especially customs administration, to enhance compliance, efficiency and competitiveness:
    - A new single tax identification number was introduced in October 2011.
    - The new Customs Management Act becomes operational in June 2012.
  - Wide-ranging public financial management reforms to improve budget preparation, accounting procedures and budget execution:
    - Beginning with the 2013 budget presentation, capital expenditures will be subject to parliamentary approval and project costs will be projected over five years.
    - Program based budgeting will be phased in by 2015, beginning with the two largest ministries - Health and Education - in 2013.
  - Higher mandatory contributions to the Seychelles Pension Fund aimed to contribute to its long-term sustainability; an upcoming independent audit will help identify further areas for improvement.

### Monetary and exchange rate policies
- The Central Bank of Seychelles (CBS) tightened monetary policy over 2011 to absorb excess liquidity and guard against second-round inflationary effects from external fuel price shocks.
- Three month T-bill rates rose from 0.5 percent to 5 percent over the year.
- Annual credit growth reached 16 percent in September (off a relatively low base).
- Broad money is projected to grow slightly slower than nominal GDP in 2012 to contain inflation.
- With the government’s call on private capital markets decreasing, there is sufficient room for private credit growth.
- Authorities are preparing a memorandum of understanding between the CBS and the Treasury to facilitate the issuance of Treasury bills for monetary policy purposes, to assist the CBS in managing liquidity and reduce the costs of sterilization.
- The authorities remain committed to a floating exchange rate.
- The CBS is continuing to accumulate international reserves, with the medium-term target of three moths of prospective import coverage.
- The CBS is strengthening reserve management practices and has initiated discussions with the World Bank to begin using its Reserve Asset Management Program.

### Financial sector policies and institutional reforms
- Seychelles’ banks remain well-capitalised and profitable; the CBS has continued to strengthen its supervisory arrangements.
- By the end of the first quarter of 2012 the CBS will have completed a full cycle of onsite examination of all banks and quasi-bank institutions under its modernised supervisory framework, and is introducing improved mechanisms for offsite data assessment.
- New guidelines were issued in October 2011 on disclosure requirements for banks’ terms and conditions, complementing the CBS’ public financial literacy program.
- Upcoming reforms to enhance financial system development and operation:
  - The launching of a credit information system in early 2012, as a first step towards a (privately run) credit information bureau, to improve transparency and risk-pricing.
  - The establishment of a commercial court to tackle the backlog of commercial disputes.
  - The introduction of a new mandate for the Development Bank of Seychelles to target commercially viable but higher-risk small enterprises and support private lending by eliminating perceived competition from the DBS.
  - The introduction of a new mandate for the House Financing Corporation to focus state interventions on the most vulnerable households and support a larger role for commercial banks in mortgage financing; related governance and operational reforms to improve the corporation’s financial viability and risk management.

### Debt restructuring and sustainability
- External debt restructuring is close to completion, with less than US$9 million (out of eligible debt of around US$700 million) in agreements yet to be signed; agreements have been reached with the three remaining creditors and are expected to be signed shortly.
- Total public debt (domestic and external) is projected to fall to 76 percent of GDP at end 2012, and remains on track against the target of 50 percent of GDP by 2018.
- Policy to ensure progress:
  - New external loans or loan guarantees will be limited to the equivalent of US$40 million in 2012, and will mainly be used for infrastructure projects.
  - Starting in 2012 a committee chaired by the Minister for Finance will review all public projects of a magnitude greater than SR 25 million, with a focus on macroeconomic impact and risks to inform public investment decisions.
  - New budgeting arrangements for capital expenditure (including multi-year project projections and parliamentary approval) will complement these initiatives.

*Source: _cr1230 - 0.6 percent of GDP has been included in the budget to cover any costs associated with piracy,*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1230.pdf_