## 1. The 2008 Crisis and Macroeconomic Stabilization ## Source details **Canonical URL:** [1. The 2008 Crisis and Macroeconomic Stabilization](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13202.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13202.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13202.pdf.json) --- ### Context and conjuncture - Seychelles is a middle-income country—the smallest in sub-Saharan Africa—and is recovering strongly from a debt crisis in 2008. - Economic and social indicators are well above those of other microstates and comparable to the most advanced small island economies. - Macroeconomic stability re-established; authorities committed to reform with significant structural reforms supported by donor technical assistance, including the Fund. - Private-sector led investment growth; currently 20 companies with state participation. - 2009 civil service downsizing; 2011–12 administered prices of goods provided by parastatals began to be adjusted toward cost recovery levels. - Social protection system strengthened and means testing increased; some working poor supplement income through welfare. ### Recent developments and outlook — growth, inflation, external position, financial system - Tourism and sector performance - Traditional European arrivals weakened; high growth in non-traditional markets (Germany, Russia, the Middle East, China). - Traditional markets rebounded in the first ten weeks of 2013 with arrivals up 19 percent over the same period of 2012. - Telecom sector boosted by deployment of new fiber-optic cable. - Construction activity moderated following a 2006–11 surge in FDI. - Inflation and exchange rate - Inflation spiked mid-2012 but monetary tightening brought inflation below 6 percent by end-2012. - Modest tick up in January/February 2013 after VAT rollout. - Strong tourism receipts and lower imports of investment-related goods pushed the exchange rate to levels last seen in 2010, supporting disinflation. - External position and reserves - Preliminary 2012 current account deficit around 22 percent of GDP. - Current account deficit fully financed by FDI and external borrowing; modest rise in reserves—reserve coverage ticked up to 2.6 months of imports. - Reserve coverage slightly above the level suggested by the reserve adequacy metric for small states with floating exchange rates; staff note additional reserve coverage may be warranted given high vulnerability and data weaknesses on private sector external debt obligations. - Debt restructuring begun in 2009 nearly complete; only one loan agreement awaiting signature. - Domestic debt continued downward; external debt ticked up as government assumed liabilities of Air Seychelles (about 2 percent of GDP in 2012). - Competitiveness and REER - Despite intra-year nominal exchange rate volatility, REER estimated broadly in line with fundamentals. - Underlying current account broadly in line with equilibrium current account—the deficit about 17 percent in 2012, one percent wider than the current account norm. - Financial system - Banking sector well-capitalized, profitable and liquid. - Non-performing loans ticked up at end-2011 and remained stable at a somewhat higher level. - Stress tests indicate resilience to exchange rate risk but vulnerability to credit risk and interest-rate risk from maturity mismatches. - Medium-term outlook and risks - Baseline projections: growth projected to average 3½ percent and inflation to come down to 3 percent, with intra-period volatility as administered prices are liberalized. - Large current account deficit expected to decline over time but remain in double digits. - Major vulnerabilities: exposure to Europe and commodity prices; parastatals pose fiscal risk (fiscal costs over 5 percent of GDP in 2012). - Upside risks: future oil and mineral exploration. ### Program performance (EFF-supported program) - Overall: program on track. - Quantitative performance at end-December 2012 - All end-December 2012 and continuous quantitative performance criteria were met, most by a comfortable margin. - Primary fiscal surplus exceeded target by 0.3 percent of GDP. - Strong business tax collection and receipts from unanticipated out-of-court settlements offset weakness in taxes and excises on imports; lower current spending, including delayed hiring, contributed. - Monetary policy loosened as expected; December 2012 reserve money target met by a comfortable margin. - Net international reserves (NIR) overperformed because of stronger than anticipated balance of payments and windfall revenues; authorities requested modification of end-June 2013 NIR performance criterion to adjust it upward by the full amount of the end-December overperformance, and to adjust end-September and end-December 2013 NIR indicative targets. - Structural benchmarks - Met: Cabinet approved the public sector investment program (September); Electronic Clearing House System activated ahead of time (August). - VAT rolled out on January 1 as planned. - Cabinet approved action plan to rebalance utility tariffs (end-March benchmark). - Progress on drafting Financial Instructions and Accounting Manuals related to the PFM Act (end-June), though manuals may not be ready for Cabinet approval in June due to delays in TA delivery. ### Report on discussions — cementing macroeconomic stability - Objectives: (i) firmly cement macro stability through fiscal sustainability and improving the monetary framework; (ii) policies to support growth and employment to raise inclusiveness. - Ensuring fiscal sustainability — findings and recommendations - Fiscal targets and parastatal risks - Government targets a primary fiscal surplus of around 5 percent of GDP per year over the medium term to reach statutory goal of reducing public debt to 50 percent of GDP by 2018. - Parastatals are key fiscal risks: - Cost of restructuring Air Seychelles about 6 percent of GDP in 2011–12. - Indirect subsidies on domestic fuel estimated at 0.7 percent of GDP. - After receiving $15 million in government resources in 2012, Air Seychelles posted a $1 million profit in 2012; a planned $10 million capital injection scheduled for 2013 has been delayed. - SEYPEC losses about $1 million per month on its tanker business. - PUC posted a small operating surplus after 2012 tariff adjustments but cannot cover sizable capital budget and has management weaknesses. - Policy recommendations and actions - Continue utility price indexation (March 2013) and raise fuel and utility prices to cost recovery levels. - Improve monitoring and oversight of parastatals to limit contingent fiscal liabilities. - Establish Public Enterprise Monitoring Commission (PEMC); staff cautioned against proliferation of oversight entities (SSI operates in parallel to PEMC). - Strengthen PFM implementation: PFM Act, new chart of accounts, move toward program-based budgeting; effectiveness hinges on rigorous implementation. - Authorities’ response - Strengthening PEMC capacity to produce consolidated public sector fiscal reports and improve parastatals’ compliance with reporting. - Progress on publication of financial instructions and accounting manuals. - Central government data compiled using new chart of accounts; piloting program performance based budgeting for ministries of education and natural resources in 2014. - New Public Sector Investment Program (PSIP) will feed into a medium-term budget framework. - Authorities value donor TA and remain committed despite staffing constraints. - Strengthening the monetary framework — findings and recommendations - Reserve money target challenges and excess liquidity - Repayment of domestic debt, preference for foreign financing, and shallow domestic financial markets resulted in significant structural rupee liquidity in the banking system. - High sterilization costs deter CBS from issuing monetary instruments, leading to massive build ups of excess liquidity (21 percent of the money base at end February). - Excess liquidity undermines monetary anchor and retards monetary transmission; banks prefer waiting until end-quarter CBS issuance of risk-free instruments. - Credit to the private sector grew by only 0.9 percent in 2012; interest rates became very volatile. - Market participants look to the exchange rate to guide inflation expectations in absence of a clear monetary anchor. - Reserve adequacy and buffers - Import coverage of reserves hovers just below three months despite steady increase in official reserves since end-2008. - Sterilization costs related to excess liquidity estimated at 0.7–1.4 percent of GDP, implying potential central bank losses and need to go to parliament to request recapitalization. - Staff argued for strengthening buffers, including increasing reserve coverage; reserves build-up should be pursued through opportunistic purchases of forex when central bank interaction is unlikely to affect the exchange rate. - Monetary policy recommendations - Durably remove excess liquidity to strengthen monetary transmission. - Require a transparent and credible mechanism to cover fiscal cost of sterilization. - Improve liquidity forecasting and develop a forward-looking inflation forecasting model. - Exchange market intervention should aim at smoothing market disruptions; FX purchases for reserve accumulation should be clearly communicated. ### Monetary framework reforms and immediate steps (authorities’ plans) - Coordinate with Ministry of Finance to durably tie up a portion of liquidity overhang, including exploring feasibility of issuing longer dated T-bonds; such issuance could take place only after June to incorporate findings of a TA mission on debt management scheduled for May. - Plan to open space to establish a money market interest rate, supported by short-term CBS instruments. - Improve forecasting tools to strengthen liquidity control and role of policy interest rate; develop forward-looking inflation forecasting model. - Expected results: more efficient monetary framework to ease access to and lower costs of bank credit to the private sector. - Note: staff cautioned that changes may not be sufficient alone to generate higher growth in credit; other factors constrain access to credit. ### Credit, banking sector constraints, and measures to increase lending - Banking sector constraints limiting credit expansion - High interest rates and interest rate spreads. - Lack of economies of scale. - Maturity mismatch from lack of medium- and long-term bank funding. - Low capacity of firms, especially SMEs, to develop business plans; few bankable projects given short-term nature of lending. - Authorities’ measures to address bottlenecks - Increasing onlending to the Development Bank of Seychelles (DBS): onlending in 2013–14 projected to amount to $10.2 million, financed by loans from the European Investment Bank and India. - Collaboration with AfDB and World Bank on housing finance development. - New law regulating financial leasing activities to broaden credit availability to small businesses. - Transition towards forward-looking risk-based supervision to help reduce cost of credit. - Establishment of credit information bureau to raise access. - Staff note: substantial increase in longer-term credit provision would require capital market development beyond current bank-intermediation model; stronger monetary policy framework will facilitate mobilization and allocation of financial resources. ### Growth, employment, and inclusion — constraints and priorities - Growth drivers and opportunities - Tourism main driver (around 30 percent of GDP); diversification toward non-traditional markets offset stalling European arrivals. - Tourism-related services and MSME linkages offer growth potential. - Financial services have upside potential following underwater fiber optic cable. - Stock market established late 2012; plans and discussions underway with potential listers. - Offshore sector developing steadily; need to advance transparency of legal persons and arrangements in line with AML/CFT and tax cooperation standards. - Infrastructure and public investment - Gaps significant in water and electricity distribution; main-island road network overburdened. - Passage of PSIP welcomed; Infrastructure Plan being developed with AfDB planned for mid-2013. - Infrastructure Plan should be comprehensive, identify priorities, ensure development financed viably, supported by strong PFM. - Labor market and social inclusion - Unemployment low (3–5 percent) and structural, reflecting skills mismatch. - Foreign labor increased from around one-tenth to a quarter of the labor force (one-third of private sector employment). - Authorities adjusted work permit regulations; staff stressed importance of regulatory certainty for hiring expatriate workers. - Capacity building: University of Seychelles opened in 2009; transfer of Seychelles Tourism Academy management to Seychelles Tourism Board; Skills Acquisition Program and Skills Development Program; medium-term education strategy financed by EU; National Human Resources Development Strategy for 2015 supported by AfDB. - Target: reach 50 percent of middle management positions held by Seychellois (currently 20 percent). - Social protection - Strengthened in 2009; steps to encourage welfare recipients to return to work, increase means testing for home health care providers, and strengthen data management and tracking through linking ministry/agency databases. - Authorities reviewing Employment Act with ILO assistance to increase labor market flexibility and clarify legal terms. ### Staff appraisal — macro stability, fiscal stance, and data priorities - Macroeconomic recovery and outlook - Economy recovered strongly from 2008 crisis; outlook benign with moderate growth driven by tourism and fishing. - Risk of middle income trap for microstates noted. - Fiscal and external buffers - Authorities should continue to build buffers given unsettled global environment and high vulnerability. - Authorities intend to sustain a primary surplus over the medium term; appropriate for achieving 2018 debt objective while providing space for needed investment. - Debt restructuring nearly complete; exercise caution when contracting new debt, including for onlending purposes. - Foreign exchange reserves increased and slightly above levels implied by reserve adequacy metrics for small states; efforts should be made to increase reserve coverage when FX market conditions permit. - Program status and recommendations - Continuous progress under the EFF-supported program; program on track. - All end-December quantitative performance criteria and structural benchmarks were met. - Staff recommends completion of the seventh review under the Extended Arrangement and associated purchase in an amount equivalent to SDR 3.30 million. - Staff recommends approval of authorities’ request for modification of the end-June 2013 performance criterion on net international reserves. - Policy priorities - Cement macro stability by ensuring fiscal sustainability and improving monetary framework. - Improve financial performance of broader public sector; strict parastatal reporting compliance required. - Ensure effectiveness of the PFM Act through rigorous implementation. - Prioritize and finance PSIP in a viable way; bring tariffs and prices of select parastatals (in particular PUC) to full cost recovery in a useful timeframe. - Continue structural reforms to deepen markets and facilitate sustained growth: modernize Companies Act, insolvency framework, simplify business registration, and address infrastructure and credit bottlenecks. - Data priorities: complete compilation of quarterly GDP statistics; produce consolidated public sector accounts; strengthen external sector statistics by improving coverage; compile international investment position. - Staffing and capacity constraints - Under-staffing relative to reform load at key agencies (e.g., Attorney General’s office) has led to delays in enacting certain legislation. ### Box 2 — Reserve Adequacy and the Debt Ceiling (summary findings) - Reserve Adequacy metric (risk-weighted for flexible currency regimes) - Components: 40 percent of short-term debt on remaining maturity basis; 10 percent exports of goods and services; 30 percent of broad money. - Reserves evolution - Increased from 0.7 months of prospective imports in 2008 to 2.6 months in 2012. - Projected to remain modestly above the metric over the medium term. - Staff assessment - Panel estimates suggest broadly appropriate coverage. - Given Seychelles‘ high vulnerability and data weaknesses regarding private sector external debt obligations, additional reserve coverage may be warranted. - Debt ceiling analysis and findings - Approaches: cross-country debt ratios; debt intolerance; intertemporal solvency under various assumptions following IMF (2003); sovereign ratings. - Main quantitative findings: - Reasonable and feasible long-term public debt ceiling could be in the order of 35–50 percent. - Cross-country comparison suggests average public debt was 52 percent in 1995-2011 for small states with floating regimes. - Public debt thresholds of debt intolerance for Seychelles range from 30-75 percent. - Staff sensitivity analysis reveals that 49 percent of GDP can be sustained under reasonable assumptions about Seychelles‘ long-run primary balance and discount factor. - Median country with Fitch sovereign rating of B has debt-to-GDP ratio of 30 percent; Seychelles has substantially higher debt-to-GDP ratio relative to peers. - Policy implication: While authorities’ 2018 debt objective aligns with standard models, higher-than-peer debt-to-GDP ratio suggests case for lower debt ceiling to warrant higher rating or remain in current grade. ### Box 3 — Risk Assessment Matrix (selected risks and policy responses) - Domestic risks - Financial distress at a major parastatal (Likelihood: M; Severity: M). Impact: plummeting fiscal balance, spike in public debt, squeeze on priority expenditure. Response: audit largest parastatals and ensure bailouts address root causes. - Erratic monetary policy (Likelihood: L-M; Severity: M-H). Impact: undermine central bank credibility, further dollarization, inflation, loss of reserves. Response: adopt clear and predictable monetary policy framework. - Over-borrowing for development projects (Likelihood: L; Severity: M-H). Impact: rapid increase in external debt by parastatals could nullify fiscal consolidation. Response: audit capital investment projects, especially foreign-financed. - External risks - Protracted slow European growth (Likelihood: M; Severity: H). Impact: drop in tourism receipts, deteriorated balance of payments, reserve depletion if defending exchange rate. Response: accelerate tourism diversification, ensure exchange rate adapts while curbing second-round inflation. - Oil price shock (Likelihood: L; Severity: M). Impact: affect current account, inflation, exchange rate, increase implicit fiscal liabilities if PUC tariffs not adjusted. Response: maintain full pass-through onto domestic prices; protect poor via means-tested subsidies. - Natural disaster (Likelihood: L; Severity: M-H). Impact: damage to tourism/fishing and infrastructure. Response: build policy buffers and explore natural-disaster insurance. - Legend: "L" – Low; "M" – Medium; "H" – High. ### Appendix I — Supplemental Letter of Intent (highlights) - Request for completion of the seventh review under the Extended Arrangement and availability for purchase of SDR 3.30 million (30.3 percent of quota). - Statement that all end-December quantitative performance criteria were met; 2012 performance described as "highly satisfactory." - Macroeconomic near-term outlook - Real GDP growth in 2012 estimated at 2.9 percent (projection was 2.7 percent). - Projected real growth target for 2013: 3.3 percent. - Damage and losses from late January tropical cyclone estimated at $8 mil-lion by the World Bank; some Budget expenditure anticipated. - Commitment to achieving a primary surplus in excess of 5 percent of GDP for the year. - Fiscal and monetary commitments - NIR target raised; request for modification of end-June 2013 performance criterion. - Central Bank will accumulate reserves opportunistically such that Bank presence does not influence exchange rate level. - Target for gross official reserves: reach at least three months import cover by end-2013. - Monetary policy to continue under reserve money targeting framework, with intention to broaden indicators for macroeconomic conditions to improve transmission and flexibility. - Selected quantitative program table excerpts (as presented) - Net international reserves of the CBS, millions of U.S. dollars (floor): 223224234235227236234241 - Reserve money (ceiling): 1,920...1,816...1,9501,9802,0102,040 - Primary balance of the consolidated government (cumulative floor): 837...877...136412684785 - Contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 40...36...25405555 - Memorandum items (selected): Net external non-project financing (millions of U.S. dollars; cumulative): -13.1...-12.3...-2.0-15.3-17.4-12.2 - Program accounting exchange rates (end-of-quarter): SR/US$: 13.02...13.0213.0013.0212.8012.8012.80; US$/Euro: 1.29...1.291.321.291.361.361.36 - Technical Memorandum of Understanding (TMU) key monitoring definitions and reporting timetables on NIR, reserve money, primary balance, public external debt, arrears, and data reporting (weekly, monthly, quarterly reporting specifics included). ### Annex 1 — Structural reforms in train or planned (selected) - Business climate reforms - One-stop shop for starting a business: reduced estimated days to start a business to 3 days (from 39 days). Operational since August 2012; online version planned for 2013/2014. - Modernization of the 1972 Companies Act: outline approved by Cabinet; draft Bill to be submitted to Parliament in May 2013. - E-payment for government services: planned May 2013. - Commercial division within Supreme Court effective April 1, 2012. - Reform insolvency law: Cabinet memorandum approved; submit to Parliament May 2013. - Public Financial Management (PFM) - Program Based Budgeting: new Chart of Accounts adopted for 2013 budget; 2014 pilot in Ministry of Education and Ministry of Natural Resources; 2015 full roll out. - Implementation of new PFM Act: accounting staff placed on MoF payroll from January 2013; Government Audit Committee created (status: November 2012). - Strengthen oversight of public enterprises: SSI responsible for strategic direction; draft PEMC amendments submitted to Cabinet January 2013 and with Attorney General‘s office; submit to Parliament in 2013. - Raise utility tariffs to cost recovery and adopt automatic price adjustment mechanism: action plan for rebalancing scheduled for Cabinet approval end-March 2013; first step implementation planned July 1, 2013 (7-year plan). - Social protection and housing reforms (selected) - Housing finance reform: HFC functions split; government considering TA recommendations on improved targeting; submit suggestions to Cabinet in May 2013. - Title registration automation: targeted May 2014. - Implement Integrated MIS for means testing: MoUs signed in 2012; 2013 rollout steps. - Ensure fiscal sustainability of pension system: 1 percent increase in contributory rate from 2014; improved benefit formula in 2015. ### Annex — Social protection key aggregates and program specifics (2012) - Total cost of social programs including investment budget for housing construction and infrastructure exceeds 7½ percent of GDP. - As of January 2013 approximately 14,000 people (16 percent of the population) receiving benefits under the SSF; about half are retirees. - Key aggregates (2012) - Central Government budget: 980.9 SR million, 6.9 percent of GDP - Agency for Social Protection: 427.8 SR million, 3.0 percent of GDP - Statutory benefits: 348.2 SR million, 2.5 percent of GDP - Means-tested benefits: 79.5 SR million, 0.6 percent of GDP - Social housing construction: 333.0 SR million, 2.4 percent of GDP - Grand total: 1,075.3 SR million, 7.6 percent of GDP - Selected SSF program specifics (2012) - Retirement Benefits: 211.3 SR million (1.5% of GDP); recipients 6,900; flat rate pension of SR2,550 up to 2,750 in 2013 per month. - Contribution rate raised to 3.0 per-cent in 2012 (1.5 percent each for employer and employee). Replacement rate for average wage earner estimated 39 percent for vested retirees. - Social Welfare Assistance total: 86.7 SR million (0.6% of GDP); Safety Net recipients 1,647; Bursary recipients 1,719. - Seychelles Pension Fund programs total: 91.8 SR million (0.7% of GDP); Normal Retirement Benefit: 76.60 SR million (0.5% of GDP); end-2011 assets about 7 percent of GDP. ### Annex 3 — External stability and competitiveness (selected findings) - CGER-based methodologies indicate REER broadly in line with fundamentals, with sizable variation across methodologies. - MB approach: measured REER overvaluation less than 6 percent in 2012–13; underlying current account deficit has tracked equilibrium. - ES approach: Seychelles’ large current account deficits consistent with highly negative NFA position around 270 percent of GDP; measured exchange rate misalignment modest and within confidence interval. - ERER approach: estimated undervaluation around 20 percent for 2012 and 2013 (within confidence interval); methodology has shortcomings for microstates. - Comparative analysis - External vulnerability declining but remains high. - Reserves expected to gradually increase to 3 months of prospective imports in 2017. - Export receipts grew by about 7½ percent per year since 2005; tourism earnings averaged about 10 percent growth; oil re-exports averaged about 9 percent growth. - Seychelles outperformed competitor markets in tourism and diversified toward non-traditional arrivals. - Doing Business ranking: Seychelles climbed to 74th (of 185) in 2013. - Travel and Tourism Competitiveness Index 2013: Seychelles ranked 38 (of 140) overall and top among Sub-Saharan African countries. ### Annex 6 — Tourism competitiveness (selected findings) - Tourism accounts for around 30 percent of GDP. - Seychelles receives around 3.7 times more tourists than predicted by a gravity-type model for a typical small island with its characteristics; only Maldives outperforms Seychelles among small islands in the computed competitiveness index. - Elasticities and price sensitivity - Global elasticity of tourist-arrivals to GDP in origin countries about 1.3; for small islands elasticity around 0.9. - A 1 percent appreciation in the bilateral real exchange rate reduces arrivals by 0.11 percent and average nights-stay by 0.27 percent, for a combined effect of 0.36 on total nights stayed. - Policy implication: Short-term reductions in European arrivals can be offset by market diversification; protracted shocks may require re-branding and steep discounting which could undermine high-end reputation. ### Labor market overview and key statistics (selected) - Measured youth unemployment low, but 2010 Census: over 40 percent of self-declared job seekers are aged 15–24. - Youth neither in education nor employment (aged 15–24): 14 percent (2010 census). - Share of expatriates in total employment rose from 6 percent to 26 percent between 2003 and 2011. - Number of expatriate workers: 13,800. - Expatriate demographics: Male 75 percent; age 20–40: 75 percent; from India: 50 percent (among Asia/Southeast Asia origin). - Policy measures: Skills Acquisition Program (SAP) and Skills Development Program (SDP); recommendations to strengthen secondary education in math and science and transfer vocational training to private sector. ### Statistical issues and data priorities - Data broadly adequate for surveillance but with shortcomings. - Participation in GDDS since December 2006; invited to DFID-sponsored SDDS Workshop May 6–8, 2013. - National accounts: considerable delays in compiling and disseminating volume measures; NSB developing quarterly national accounts for 2006–12 but estimates suffer from data source weaknesses and will not be disseminated for at least remainder of 2013. - Government finance statistics: reports in GFSM 2001; recommendations include establishing GFS task force and strategic plan to augment accrual measures and stock data on nonfinancial assets. - External sector statistics: substantial progress adopting BPM5; remaining priority to improve coverage and compile international investment position. - Table of common indicators required for surveillance — selected timeliness entries preserved (ex: Exchange rate latest observation 03/26/13; International reserve assets 03/22/13; GDP 2011 received Nov. 2012). ### Executive Board statement and authorities’ remarks (summary) - Board assessment: commended strong policy implementation, restoration of macro stability, resilient growth; noted vulnerability to uncertain global environment and domestic risks. - Fiscal guidance: target primary fiscal surplus around 5 percent of GDP medium term; strengthen parastatal oversight; progress in PFM; caution when contracting new external debt. - Monetary guidance: durably remove excess liquidity to strengthen monetary transmission; increase international reserves as market conditions permit. - Structural guidance: deepen markets, broaden access to credit, improve infrastructure and data, address skills mismatches. - Authorities’ remarks: 2012 real GDP growth 2.9 percent; forecast real GDP growth 3.3 percent in 2013 and 3.9 percent in 2014; aim to reach at least three months import cover by end-2013; program on track with authorities seeking continuation of collaboration with the Fund. *Source: SEYCHELLES — INTERNATIONAL MONETARY FUND (Content unit: 1. The 2008 Crisis and Macroeconomic Stabilization; IMF staff report excerpts, Annexes, Boxes, and Appendix I).* ### 1. The 2008 Crisis and Macroeconomic Stabilization _____________________________________________ 15 ### 1. The 2008 Crisis and Macroeconomic Stabilization _____________________________________________ 15 ### Context and conjuncture - Seychelles is a middle-income country—the smallest in sub-Saharan Africa—and is recovering strongly from a debt crisis in 2008. - Economic and social indicators are well above those of other microstates and comparable to the most advanced small island economies. - Macroeconomic stability has been re-established and the authorities have demonstrated a high level of commitment to reform, with significant structural reforms supported by extensive technical assistance from donors, including the Fund. - In recent years the economy has shifted toward private-sector led investment; there are currently 20 companies with state participation. - 2009 civil service downsizing; 2011–12 administered prices of goods provided by parastatals began to be adjusted toward cost recovery levels. - Social protection system was strengthened and use of means testing increased; some working poor have supplemented income through welfare. ### Recent developments and outlook - Growth and sector performance - Tourism: traditional European arrivals weakened but high growth in non-traditional markets (Germany, Russia, the Middle East, China); traditional markets rebounded in the first ten weeks of 2013 with arrivals up 19 percent over the same period of 2012. - Telecom sector boosted by deployment of new fiber-optic cable. - Construction activity moderated following a 2006–11 surge in FDI. - Inflation and exchange rate - Inflation spiked mid-2012 but monetary tightening brought inflation below 6 percent by end-2012; modest tick up in January/February 2013 after VAT rollout. - Strong tourism receipts and lower imports of investment-related goods pushed the exchange rate to levels last seen in 2010, supporting disinflation. - External position and reserves - Preliminary 2012 current account deficit around 22 percent of GDP (slight reduction). - Current account deficit was fully financed by FDI and external borrowing; modest rise in reserves—reserve coverage ticked up to 2.6 months of imports. - Reserve coverage slightly above the level suggested by the reserve adequacy metric for small states with floating exchange rates; additional reserve coverage may be warranted given high vulnerability and data weaknesses regarding private sector external debt obligations. - Debt restructuring begun in 2009 nearly complete; only one loan agreement awaiting signature. - Domestic debt continued downward; external debt ticked up as government assumed liabilities of Air Seychelles (about 2 percent of GDP in 2012). - Competitiveness and REER - Despite intra-year nominal exchange rate volatility, REER estimated broadly in line with fundamentals (Annex 3). - Underlying current account broadly in line with equilibrium current account—the deficit about 17 percent in 2012, one percent wider than the current account norm. - Financial system - Banking sector well-capitalized, profitable and liquid (Table 5). - Non-performing loans ticked up at end-2011 and remained stable at a somewhat higher level. - Stress tests indicate resilience to exchange rate risk but less so to credit risk and interest-rate risk from maturity mismatches. - Medium-term outlook and risks - Baseline projections: growth projected to average 3½ percent and inflation to come down to 3 percent, with intra-period volatility as administered prices are liberalized. - Large current account deficit expected to decline over time but remain in double digits. - Major vulnerabilities: exposure to Europe and commodity prices; parastatals pose fiscal risk (fiscal costs over 5 percent of GDP in 2012). - Upside risks: future oil and mineral exploration. ### Program performance - Overall: program on track. - Quantitative performance at end-December 2012 - All end-December 2012 and continuous quantitative PCs were met, most by a comfortable margin. - Primary fiscal surplus exceeded target by 0.3 percent of GDP. - Strong business tax collection and receipts from unanticipated out-of-court settlements offset weakness in taxes and excises on imports; contributions from lower current spending, including delayed hiring. - Monetary policy loosened as expected; December 2012 reserve money target met by a comfortable margin. - Net international reserves (NIR) overperformed because of stronger than anticipated balance of payments and windfall revenues; authorities request modification of end-June 2013 NIR performance criterion to adjust it upward by the full amount of the end-December overperformance, and to adjust end-September and end-December 2013 NIR indicative targets. - Structural benchmarks - Met: Cabinet approved the public sector investment program (September); Electronic Clearing House System activated ahead of time (August). - VAT rolled out on January 1 as planned. - Cabinet approved action plan to rebalance utility tariffs (end-March benchmark). - Progress on drafting Financial Instructions and Accounting Manuals related to the PFM Act (end-June), though manuals may not be ready for Cabinet approval in June due to delays in TA delivery. ### Report on discussions — cementing macroeconomic stability - Objectives: (i) firmly cement macrostability through fiscal sustainability and improving the monetary framework; (ii) policies to support growth and employment to raise inclusiveness. - Ensuring fiscal sustainability - Fiscal progress since 2008 noted; government targets a primary fiscal surplus of around 5 percent of GDP per year over the medium term to reach statutory goal of reducing public debt to 50 percent of GDP by 2018. - Parastatals are key risk: - Cost of restructuring Air Seychelles about 6 percent of GDP in 2011–12. - SEYPEC burdened by heavy losses on its oil tanker business and indirect subsidies in domestic fuel distribution. - PUC posted a small operating surplus after 2012 tariff adjustments but cannot cover sizable capital budget and has management weaknesses. - Indirect subsidies on domestic fuel estimated at 0.7 percent of GDP. - After receiving $15 million in government resources in 2012, Air Seychelles posted a $1 million profit in 2012; a planned $10 million capital injection scheduled for 2013 has been delayed. - SEYPEC losses about $1 million per month on its tanker business. - Recommendations and actions: - Continue utility price indexation (March 2013) and raise fuel and utility prices to cost recovery levels. - Improve monitoring and oversight of parastatals to limit contingent fiscal liabilities. - Establishment of Public Enterprising Monitoring Commission (PEMC); staff cautioned against proliferation of oversight entities (SSI operates in parallel to PEMC). - Strengthen PFM implementation: PFM Act, new chart of accounts, move toward program-based budgeting; effectiveness hinges on rigorous implementation. - Authorities’ response: - Strengthening PEMC capacity to produce consolidated public sector fiscal reports and improve parastatals’ compliance with reporting. - Progress on publication of financial instructions and accounting manuals. - Central government data compiled using new chart of accounts; piloting program performance based budgeting for ministries of education and natural resources in 2014. - New Public Sector Investment Program (PSIP) will feed into a medium-term budget framework. - Authorities value donor TA and remain committed despite staffing constraints. - Strengthening the monetary framework - Reserve money target challenges: - Repayment of domestic debt, preference for foreign financing, and shallow domestic financial markets resulted in significant structural rupee liquidity in the banking system. - High sterilization costs deter CBS from issuing monetary instruments, leading to massive build ups of excess liquidity (21 percent of the money base at end February). - Excess liquidity undermines the monetary anchor and retards monetary transmission; banks prefer to wait until end-quarter CBS issuance of risk-free instruments. - Credit to the private sector grew by only 0.9 percent in 2012; interest rates became very volatile. - Market participants look to the exchange rate to guide inflation expectations in absence of a clear monetary anchor. - Reserve adequacy and buffers - Import coverage of reserves hovers just below three months despite steady increase in official reserves since end-2008. - Official debt service set to rise following the debt restructuring. - Given balance of payments vulnerabilities and exposure to external shocks, staff argued for strengthening buffers, including increasing reserve coverage. - Reserves build-up should be pursued through opportunistic purchases of forex when central bank interaction is unlikely to affect the exchange rate. - Cost implications - Sterilization costs related to excess liquidity estimated at 0.7–1.4 percent of GDP, implying potential central bank losses and need to go to parliament to request recapitalization. *Source: SEYCHELLES — INTERNATIONAL MONETARY FUND (Content unit: 1. The 2008 Crisis and Macroeconomic Stabilization)* ### 17. The authorities are beginning to take steps to strengthen the monetary framework ### 17. The authorities are beginning to take steps to strengthen the monetary framework ### Monetary framework reforms and immediate steps - Authorities will coordinate closely with the Ministry of Finance to durably tie up a portion of the liquidity overhang, including by exploring the feasibility of issuing longer dated T-bonds. - Such issuance could take place only after June in order to incorporate the findings of a TA mission on debt management scheduled for May. - The plan is to open space to establish a money market interest rate, supported by short-term CBS instruments. - Better forecasting tools will strengthen liquidity control and the role of the policy interest rate, allowing the CBS to develop a forward-looking inflation forecasting model. - A more efficient monetary framework is expected to contribute to easing access to and lowering costs of bank credit to the private sector. - Staff noted that the changes in train alone may not be sufficient to generate higher growth in credit to the economy; other factors are also contributing to low access to credit. ### Liquidity management and monetary transmission - Durably removing excess liquidity is identified as the first step toward strengthening the monetary transmission mechanism. - This will require a transparent and credible mechanism to cover the fiscal cost of sterilization. - Steps should be taken to improve liquidity forecasting and develop a forward-looking inflation forecasting model. - Exchange market intervention guidance: - Floating exchange rate has facilitated macroeconomic adjustment. - Exchange market intervention should aim at smoothing market disruptions. - Foreign exchange purchases aimed at reserve accumulation should be clearly communicated to the market. ### Credit, banking sector constraints, and measures to increase lending - Banking sector characteristics limiting credit expansion: - High interest rates and interest rate spreads. - Lack of economies of scale. - Maturity mismatch stemming from a lack of medium- and long-term bank funding. - Low capacity of firms, especially SMEs, to develop a business plan. - Given the short-term nature of lending, few bankable projects. - Authorities’ measures to address credit bottlenecks: - Increasing onlending to the Development Bank of Seychelles (DBS). - Onlending in 2013–14 is projected to amount to $10.2 million, financed by loans from the European Investment Bank and India. - Collaboration with AfDB and the World Bank on financial sector issues such as housing finance development. - New law regulating financial leasing activities will broaden the availability of credit to small businesses. - Transition towards forward-looking risk-based supervision to help reduce the cost of credit. - Establishment of the credit information bureau to raise access. - Staff note: A substantial increase in the provision of longer-term credit would require capital market development beyond the current model narrowly centered on bank intermediation; improved guidance of market expectations through a stronger monetary policy framework will facilitate the banking system’s capacity to mobilize and allocate financial resources. ### Growth, employment, and inclusion — constraints and policy priorities - Growth drivers: - Tourism has been the main driver of growth; diversification toward non-traditional markets has more than offset stalling European arrivals. - Tourism-related services and sector linkages with SMEs offer growth potential. - Financial services have upside potential following improved connectivity via the underwater cable. - Stock market established late 2012; plans and discussions underway with potential listers. - Off-shore sector developing steadily; need to advance transparency of legal persons and arrangements in line with international standards on AML/CFT and tax cooperation. - Infrastructure and public investment: - Gaps are significant in water and electricity distribution; road network on the main island is overburdened. - Passage of the PSIP welcomed; should be complemented by the Infrastructure Plan being developed with AfDB planned for mid-2013. - Infrastructure Plan should be comprehensive, identify priorities, and ensure development financed in a viable way, supported by strong PFM. - Labor market and inclusiveness: - Labor market characteristics: - Unemployment is low (3–5 percent) and structural in nature, reflecting a skills mismatch. - Local labor supply broadly unchanged as economy has grown; foreign labor increased from around one-tenth to a quarter of the labor force (one-third of private sector employment), mostly in high-growth sectors. - Authorities have adjusted regulations regarding issuance of work permits in response to concerns about expatriate labor increases. - Staff stressed the importance of regulatory certainty regarding the ability of businesses to hire expatriate workers. - Capacity building measures: - University of Seychelles opened in 2009. - Management of the Seychelles Tourism Academy transferred to the Seychelles Tourism Board. - Continued government-sponsored training programs (Skills Acquisition Program and Skills Development Program). - Medium-term strategy for education being developed (financed by EU budget support). - National Human Resources Development Strategy for 2015 supported by AfDB. - Target: reach 50 percent of middle management positions held by Seychellois (currently 20 percent). - Social protection: - Social protection strengthened in 2009 to mitigate impacts of economic transformation on the vulnerable. - Government taking steps to encourage welfare recipients to return to work, increasing use of means testing for home health care providers, and strengthening data management and tracking through linking ministry/agency databases. - Authorities reviewing the Employment Act with ILO assistance to increase labor market flexibility and clarify legal terms (e.g., “equal pay”, “harassment”, “non-discrimination”). ### Staff appraisal — macroeconomic stability, fiscal stance, and data priorities - Macroeconomic recovery and outlook: - Economy recovered strongly from the 2008 debt and currency crisis. - Outlook described as benign with moderate growth driven by tourism and fishing. - Seychelles potentially faces a middle income trap common to other microstates. - Fiscal and external buffers: - Authorities should continue to build buffers given unsettled global environment and high vulnerability. - Authorities intend to sustain a primary surplus over the medium term; appropriate for achieving their 2018 debt objective while providing space for needed investment expenditure. - Debt restructuring nearly complete; exercise caution when contracting new debt, including for onlending purposes. - Foreign exchange reserves have increased and are slightly above levels implied by reserve adequacy metrics for small states; efforts should be made to increase reserve coverage when foreign exchange market conditions permit. - Program status: - Continuous progress under the EFF-supported program; program is on track. - All end-December quantitative performance criteria and structural benchmarks were met. - Staff recommends completion of the seventh review under the Extended Arrangement and the associated purchase in an amount equivalent to SDR 3.30 million. - Staff recommends approval of the authorities’ request for modification of the end-June 2013 performance criterion on net international reserves. - Policy recommendations and priorities: - Cement macroeconomic stability by ensuring fiscal sustainability and improving the monetary framework. - Improve financial performance of the broader public sector; strict compliance by parastatals with reporting requirements required. - Ensure effectiveness of the PFM Act through rigorous implementation of recently adopted measures. - Prioritize and finance the public sector investment plan in a viable way; bring tariffs and prices of select parastatals (in particular the Public Utility Corporation) to full cost recovery in a useful timeframe. - Continue structural reforms to deepen markets and facilitate sustained growth: modernize Companies Act, insolvency framework, simplify business registration, and address infrastructure and credit bottlenecks. - Data priorities: complete compilation of quarterly GDP statistics; produce consolidated public sector accounts; strengthen external sector statistics by improving coverage; compile the international investment position. - Staffing and capacity constraints: - Under-staffing relative to reform load at key agencies (e.g., Attorney General’s office) has led to delays in enacting certain pieces of legislation. *Source: IMF staff report excerpt — "The authorities are beginning to take steps to strengthen the monetary framework."* ### Box 2. Policy Buffers—Reserve Adequacy and the Debt Ceiling ### Box 2. Policy Buffers—Reserve Adequacy and the Debt Ceiling ### Reserve Adequacy - The risk-weighted reserve metric for flexible currency regimes comprises: - 40 percent of short-term debt on remaining maturity basis - 10 percent exports of goods and services - 30 percent of broad money - Reserves evolution and projection: - Increased from 0.7 months of prospective imports in 2008 during the debt crisis to 2.6 months in 2012 - Projected to remain modestly above the metric over the medium term - Staff assessment: - Panel estimates suggest broadly appropriate coverage - Given Seychelles‘ high vulnerability and data weaknesses regarding private sector external debt obligations, additional reserve coverage may be warranted to ensure adequate policy buffers ### The Authorities’ Debt Ceiling - Approaches used in staff analysis (as presented): - (i) a cross country comparison of debt ratios - (ii) an examination of debt intolerance - (iii) the maximum debt level consistent with intertemporal solvency under various assumptions for the primary balance, real growth and interest rate following IMF (2003) - (iv) sovereign ratings - Main quantitative findings: - A reasonable and feasible public debt ceiling for Seychelles over the longer-term could be in the order of 35–50 percent - Cross country comparison of small states with floating exchange rate regimes suggests that the average public debt was 52 percent in 1995-2011 - Public debt thresholds of debt intolerance for Seychelles range from 30-75 percent - Staff sensitivity analysis reveals that 49 percent of GDP can be sustained under reasonable assumptions about Seychelles‘ long-run primary balance and discount factor - In comparison to other countries sharing Seychelles‘ B rating, Seychelles has a substantially higher debt-to-GDP ratio (i.e., the median country with a Fitch sovereign rating of B has debt-to-GDP ratio of 30 percent) - Policy implication: - While the authorities’ 2018 debt objective is in line with standard models of debt intolerance and the first three analytical approaches support the current target, the higher-than-peer debt-to-GDP ratio suggests a case for a lower debt ceiling to warrant a higher rating or to remain in the current grade *Source: Box 2. Policy Buffers—Reserve Adequacy and the Debt Ceiling (IMF staff text).* ### Box 3. Risk Assessment Matrix ### Box 3. Risk Assessment Matrix ### Domestic risks - Financial distress at a major parastatals - Likelihood: M - Severity: M - Impact: Plummeting fiscal balance, a spike in public debt and/or a squeezing of priority expenditure areas as the government bails out the parastatal. - Policy response: Prevent by actively auditing largest parastatals. Ensure bailout accompanied by addressing the root cause of the problems (tariff structure, mismanagement, etc.) - Erratic monetary policy - Likelihood: L-M - Severity: M-H - Impact: Unwarranted large policy swings may undermine Central Bank‘s credibility and result in further dollarization, accompanied by inflation and/or loss of reserves. - Policy response: Minimize policy swings by adopting a clear and predictable monetary policy framework. - Over-borrowing for development projects - Likelihood: L - Severity: M-H - Impact: A rapid increase in external debt contracted by parastatals could nullify the fiscal consolidation efforts of the central government. Accumulation of implicit claims against the stock of reserves could trigger a run on the currency and an inflationary spike. - Policy response: Prevent by auditing all capital investment project, especially foreign-financed. ### External risks - Protracted period of slow European growth - Likelihood: M - Severity: H - Impact: A drop in tourism receipts from Europe would depress growth, deteriorate the balance of payments. An attempt to defend the exchange rate could deplete CBS‘s modest international reserves. - Policy response: Accelerate tourism diversification by negotiating air links with growth markets. Ensure exchange rate adapts to deteriorated external conditions, while curbing second-round inflationary effects. - Oil price shock - Likelihood: L - Severity: M - Impact: Significant impact on current account deficit, inflation, exchange rate and – if PUC tariffs are not fully adjusted – an increase in implicit fiscal liabilities. - Policy response: Maintain full pass-through onto domestic prices to contain fiscal impact and parastatal losses, while minimizing impact on the poor through means-tested subsidies. - Natural disaster - Likelihood: L - Severity: M-H - Impact: A strong cyclone or tsunami could inflict widespread damage to the fishing and tourism industries and damage key public infrastructure (deep sea port, airport). - Policy response: Continue to build policy buffers for emergency response by increasing international reserves coverage. Explore options for contracting natural-disaster insurance. ### Legend and note - "L" – Low; "M" – Medium; "H" – High. - The matrix shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks is the staff’s subjective assessment of the risks surrounding the baseline. *Source: Box 3. Risk Assessment Matrix (SEYCHELLES).* ### APPENDIX I. SUPPLEMENTAL LETTER OF INTENT ### APPENDIX I. SUPPLEMENTAL LETTER OF INTENT ### Request and program status - Request for completion of the seventh and penultimate review under the Extended Arrangement and the availability for purchase of the tenth tranche of SDR 3.30 million (30.3 percent of quota). - Statement that all end-December quantitative performance criteria under the program were met. - Economic performance during 2012 described as "highly satisfactory," with most key indicators exceeding expectations. ### Macroeconomic performance and near-term outlook - Real GDP growth in 2012 is estimated at 2.9 percent (projection was 2.7 percent). - Early 2013 indicators: tourism sector performing strongly with a 19 percent growth in visitor arrivals for the first ten weeks of the year compared to the same period last year. - Projected real growth target for 2013: 3.3 percent (author expresses being in a good position to exceed this target). - Damage and losses from the late January tropical cyclone estimated at $8 mil-lion by the World Bank (fundraising not expected to cover total costs; some Budget expenditure anticipated). - Tax performance for the last two months of 2012 was less favorable than forecast at time of preparing the 2013 budget; base for 2013 projections revised downwards. - Risk noted from a strong rupee potentially negatively impacting revenues. - Commitment to achieving a primary surplus in excess of 5 percent of GDP for the year. ### Fiscal and monetary policy commitments - Strong commitment to maintain fiscal discipline to attain long-term debt sustainability. - Net international reserves (NIR) target raised because of strong export sector performance underpinned by tourism inflows; request for modification of the end-June 2013 performance criterion. - Central Bank will accumulate reserves by opportunistically buying foreign currency such that the Bank‘s presence in the market does not influence the exchange rate level. - Target for gross official reserves: reach at least three months import cover by end-2013. - Monetary policy to continue under the reserve money targeting framework, with an intention to broaden indicators for macroeconomic conditions in the short term to improve transmission and make the framework more flexible. - Authorities will consult with the Fund on adoption of any further measures and in advance of revisions to the MEFP and the LOI. ### Structural reforms and benchmarks (selected) - Introduction of a Value Added Tax implemented on January 1, 2013; transition described as satisfactory aside from a few teething problems. - Public Finance Management reforms on track; Ministry of Finance on schedule to introduce new accounting manuals and procedures towards the middle of the year. - March Cabinet approvals: policy for indexation of utility tariffs and a roadmap for re-balancing tariffs; implementation of rebalancing exercise to begin on July 1 this year. - Request to publish this letter, the attached TMU, and the staff report for the seventh review and Article IV consultation, with simultaneous publication in Seychelles. ### Quantitative performance criteria — Table highlights (Attachment 1) - Net international reserves of the CBS, millions of U.S. dollars (floor): - 2012/2013 table entries as presented: 223224234235227236234241 - Reserve money (ceiling): - 1,920...1,816...1,9501,9802,0102,040 - Primary balance of the consolidated government (cumulative floor): - 837...877...136412684785 - Contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): - 40...36...25405555 - Contracting or guaranteeing of new short-term external debt by the public sector (millions of U.S. dollars; cumulative ceiling): - 0.0...0.0...0.00.00.00.0 - Accumulation of external payments arrears by the public sector (ceiling): - 0.0...0.0...0.00.00.00.0 - Accumulation of domestic payment arrears by the government (ceiling): - 0.0...0.0...0.00.00.00.0 - Memorandum items: - Net external non-project financing (millions of U.S. dollars; cumulative): - -13.1...-12.3...-2.0-15.3-17.4-12.2 - External budget loans: - 7.0...7.0...0.00.00.017.0 - Cash payments on foreign debt service: - 25.1...23.6...2.015.317.432.1 - External budget grants: - 5.0...4.2...0.00.00.02.9 - Program accounting exchange rates (end-of-quarter): - SR/US$: 13.02...13.0213.0013.0212.8012.8012.80 - US$/Euro: 1.29...1.291.321.291.361.361.36 - US$/UK pound: 1.62...1.621.621.621.591.591.59 - US$/AUD: 1.04...1.041.041.041.041.041.04 - US$/SDR: 1.54...1.541.541.541.541.541.54 ### Structural benchmarks — status summary (Attachment 2) - Commission and complete a study on optimal tariffs for utilities (End-June 2012): Met. Final version received October 2012. - Cabinet approval of the Public Sector Investment Program for 2013 budget planning (End-September 2012): Met. - Implementation of Electronic Clearing House system (End-September 2012): Met. - Introduce VAT (January 1, 2013): Met. - Cabinet approval of the action plan to rebalance utility tariffs (End-March 2013): Met. - Cabinet approval of Financial Instructions and Accounting Manuals in line with new PFM Act and IPSAS standards (End-June 2013): target. - Approval of Leasing Bill by National Assembly (End-June 2013): target. - Implement the first step of the utilities tariffs rebalancing (July 1, 2013): target. ### Technical Memorandum of Understanding — definitions and monitoring (Attachment 3) - Purpose: presents definitions of variables in the quantitative performance criteria and indicative targets, key assumptions, and reporting requirements. - Net international reserves (NIR) definition: - NIR = reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF). - Reserve assets include holdings of SDRs, holdings of foreign exchange, demand and short-term deposits at foreign banks abroad, fixed-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities. Excludes project balances and blocked or escrow accounts, and bank reserves in foreign currency maintained for reserve requirements. - Reserve liabilities include liabilities to nonresidents contracted by the CBS and any net off-balance-sheet positions (futures, forwards, swaps, or options), including those to the IMF. - NIR calculation method: - For program monitoring, reserve assets and liabilities at each test date must be converted into U.S. dollars using the end of period exchange rates assumed in the program. - NIR monitoring and reporting: - Quarterly NIR data submitted by the CBS to the IMF will be audited by the CBS' internal audit division in accordance with International Standards on Auditing. Reports submitted no later than two months after each test date. - NIR adjusters: - The NIR floor will be adjusted upward (downward) by the amount by which external non-project loans and non-project cash grants exceed (fall short of) program assumptions. Floors will also be adjusted by the amount that external debt service payments fall short (exceed) program assumptions. - Reserve money definition and monitoring: - Reserve money = currency issued and deposits held by financial institutions at the central bank (bank reserves), including those denominated in foreign currencies. - Performance evaluated at the program accounting exchange rate. - Quarterly reserve money data audited by the CBS' internal audit division and submitted no later than two months after each test date. - Primary balance of the consolidated government (cumulative floor): - Defined as total consolidated government and social security fund revenues (excluding privatization and long-term lease income receipts) less all noninterest (primary) expenditures of the government and social security fund, on a commitment basis. - Public external debt (ceiling): - Ceiling applies to contracting or guaranteeing new external liabilities by the public sector (central government, CBS, public agencies and parastatals for noncommercial operations). - Exclusions: use of Fund resources, external debt restructuring operations, normal import-related credits, purchases of treasury securities by nonresidents, and borrowing by parastatals in normal commercial operations. - Debt defined according to Executive Board Decision No.6230-(79/140) as amended; includes loans, suppliers credits, leases, and arrears, penalties, and judicially awarded damages that constitute debt. - A zero sub-ceiling applies to contracting or guaranteeing short-term external debt with original maturity up to and including one year. - External arrears: - Nonaccumulation of arrears to external creditors is a continuous performance criterion. - External payments arrears defined as external debt service due and not paid within contractually agreed period, subject to any grace period; excludes arrears covered by a clearance framework or rescheduling agreement. - Domestic arrears: - Nonaccumulation of budget expenditure arrears is a performance criterion measured on a net basis from the beginning of the calendar year. - Budget expenditure arrears defined as sum of: (1) invoices received and verified but unpaid beyond contractually agreed period (or 30 days absent a grace period); (2) unpaid wages, pensions, or transfers pending longer than 30 days; and (3) domestic government or guaranteed debt service payments not made within the contractually agreed period. - Data and reporting requirements (selected): - CBS will report weekly (within one week): Reserve money; Foreign exchange reserves position; Summary table on foreign exchange market transactions; Results of liquidity deposit auctions, primary Treasury bill auctions, and secondary auctions. - CBS monthly (within four weeks): Monetary survey in standardized report form; Foreign exchange cash flow, actual and updated; Financial soundness indicators; Stock of government securities in circulation by holder and maturity and the debt service profile report. - Ministry of Finance monthly (within two weeks): Consolidated government operations on a commitment basis and cash basis in the IMF-supported program format; Detailed revenues and expenditures of the central government and social security fund; Accounts of public nonbank financial institutions; Import and export data from customs; Public debt report; Statements of Stabilization Fund operations; Consolidated creditors schedule on domestic expenditure arrears of the government. - Quarterly (within a month): Financial statements of Air Seychelles. - Consultation clause: - Government and CBS will consult with Fund staff on all economic and financial measures that would impact program implementation and will provide additional information as requested. *APPENDIX I. SUPPLEMENTAL LETTER OF INTENT, April 19, 2013.* ### Annex 1. Structural Reforms in Train or Planned ### Annex 1. Structural Reforms in Train or Planned ### Business Climate — reforms, objectives, and status - One-stop shop for starting a business - Objective/description: At the Office of Registrar General. Provides a single point of entry which has resulted in a reduction in the estimated number of days to start a business to 3 days (from 39 days). At registration, a unique business registration number and tax identification number is issued. Outdated legal framework and manual processes preclude online registration; this will be resolved through modernization of the Companies Act (below). There are plans to extend the window to cover processes throughout the lifespan of a business entity. - Status: Operational since August 2012. Online version planned for 2013. 2014. - Elimination of requirement to use a notary or lawyer - Objective/description: Speed up the registration process and reduce cost. Part of reform of Companies Act. - Status: On-line permit application for import/export (listed under status column). - Modernization of the 1972 Companies Act - Objective/description: Revisions to 20 sections/provisions of the current Act. Aims to modernize in line with international best practices and support online registration and other e-government services. - Status: Outline approved by Cabinet; drafting team is preparing the draft Bill. Submit to Parliament in May 2013. - E-payment for government services - Objective/description: Introduce electronic payment facilities for all government services, including tax payments. Objectives: Increase transparency; ensure fair treatment across firms and reduce opportunities for corruption; increase access to information; ensure payment security; reduce time and cost for the client; reduce staffing of government offices. - Status: May 2013. - Commercial division within the Supreme Court and establishment of a mediation framework - Objective/description: Speed up the process by creating a separate docket. Commercial division has started operations. A new judge with the requisite experience will be appointed over the medium term (currently headed by the Chief Justice). Next steps include reforming insolvency laws and establishing alternative dispute resolution mechanisms for commercial cases, including mediation. - Status: Effective April 1, 2012. - Reform insolvency law - Objective/description: Introduce a modern insolvency law to replace the fragmented and outdated framework; facilitate business rescue and bankruptcy. - Status: Cabinet memorandum for unified insolvency legislation approved. Submit to Parliament May 2013. - On-line permit application for import/export - Objective/description: Facilitate international trade. - Status: Listed alongside other business climate measures. ### Public Financial Management (PFM) - Program Based Budgeting - Objective/description: Align resource allocation with policy priorities and increase efficiency of public service delivery. A new Chart of Accounts has been adopted for the 2013 budget featuring a functional classification of expenditure (in line with GFSM 2001). Other processes in the expenditure train have been automated (commitment control, recording and reporting of payables, cash planning). - Status: 2014 pilot in Ministry of Education and Ministry of Natural Resources. 2015 full roll out. - Implementation of new PFM Act - Objective/description: From January 2013, all accounting staffs in government are placed on MoF payroll and report to Comptroller General; they are posted to different ministries and departments. Government Audit Committee created to advise Minister of Finance on governance and inefficiencies. - Status: November 2012. - Strengthen oversight of public enterprises - Objective/description: Committee established to review investments by public enterprises. - Status: Appointed in May 2012, but yet to be operational. State participation in 10 main public enterprises transferred to the Societe Seychelloise D‘Investissement (SSI), responsible for strategic direction, objective setting and performance oversight of the publicly owned enterprises. January 2013. Draft amendments to the Public Enterprise Monitoring Commission (PEMC). Revisions include the requirement to adopt International Accounting Standards within three years (applicable to all government departments and ministries), and mandatory reporting to PEMC (annual report and audited accounts). - Status: Submitted to Cabinet in January 2013 and currently with Attorney General‘s office. Submit to Parliament in 2013. - Raise utility tariffs to cost recovery, adopt an automatic price adjustment mechanism and begin tariff rebalancing - Objective/description: Improve financial viability of Public Utility Company (PUC) and improve allocative efficiency. In October 2012, the government received the consultant‘s Tariff Reform Strategy. The authorities are developing an action plan to rebalance tariffs which is scheduled for Cabinet approval by end-March 2013; implementation of the first steps of the tariff rebalancing planned for July 1, 2013 (structural benchmark under the EFF). - Status: Implement automatic price adjustment mechanism April 2013. Begin rebalancing starting in July 2013 (planned for 7 years). ### Social Protection and Housing — reforms, objectives, and status - Reform of housing finance and the Housing Finance Company (HFC) - Objective/description: Split HFC functions: HFC restricted to lending; management of government housing passed to Property Management Company. - Status: Completed. Government is considering the recommendations in the TA report on improved targeting (Smart Subsidy). Focus on low income households and first-time buyers. - Status action: Submit suggestions to Cabinet in May 2013. - Title registration - Objective/description: Automate title registration to reduce the time needed to get a title which deters banks from providing housing finance. Objective: increase share of mortgages held by the private sector from 25 percent to 50 percent by 2015. - Status: May 2014. - Implement Integrated MIS - Objective/description: Use means testing for all programs managed by the Agency for Social Protection (ASP). Integrate other benefits into the system to improve overall efficiency of the social assistance program and strengthen monitoring. - Status: MoUs between ASP and five other Govt agencies signed in 2012. Perform automated cross-checks on beneficiary‘s declarations. 2013. - Improve targeting - Objective/description: Change computation formula for total household income to include retirement pension and other social benefits used to assess social welfare eligibility. Consolidate the Family Support and Home Carers programs into one means tested program. - Status: ASP Act of 2012. Proposal will be submitted to Cabinet in April 2013. Strengthen monitoring of the sickness benefit, and analyze options for discouraging abuse of sickness benefit. - Eliminate discretion in the administration of social assistance - Objective/description: Eliminate management discretion to determine eligibility if the income test is not met. Establish a Review Panel, with clear guidelines to assess appeals to ensure objectivity and transparency in the review process. - Status: ASP Act 2012. Operational. 300 cases reviewed and 25 approved. - Revise disability assessment criteria - Objective/description: Maximize return to work and promote social inclusion of people with disabilities. Adopt WHO International Classification of Functioning, Disability and Health (ICF). - Status: Study tour in February/March 2013; approval of guidelines May. - Ensure fiscal sustainability of pension system - Objective/description: Increase incentives to contribute to the pension system after the vesting period and improve fiscal sustainability of the contributory pension system by gradually increasing contribution rate and improving benefit formula by tying benefits to years of contributions (accruals). - Status: 1 percent increase in contributory rate from 2014. Improved benefit formula in 2015. - Note on other sectors: Structural reforms are also ongoing in the fishing sector and in the oil sector. In fisheries, activities focus on transparency and governance aiming to raise accountability to the Seychellois people. Regarding oil, exploration activity is at an early stage, but the government is reviewing the legal framework for the petroleum sector, and adopting EITI principles. PetroSeychelles (a new state-owned company) is charged with the supervision, monitoring, and investment in upstream activities. If and when extraction begins, an independent regulatory body will be established. ### Social Protection and Assistance — system overview and key statistics - System design and scope - Seychelles has entitlement programs; discretionary cash and in-kind social assistance; and a cash transfer system to keep households above the ―poverty line‖. The system also includes: (i) a government built housing scheme in which houses are rented to ―low-income‖ households (households with monthly income less than SR10,000 ($770) per month); (ii) a subsidized mortgage scheme which extends credit to ―almost creditworthy‖ households (households with monthly income between SR10,000 and SR15,000); (iii) human capital development programs such as the Skills Acquisition Program and Skills Development Program; (iv) administered prices for 14 ―basic‖ goods purchased through the Seychelles Trading Company; (v) subsidized LPG for residential use and electricity (both are in the process of moving to cost recovery); (vi) subsidized bus fares; and (vii) social programs provided by charitable organizations, including with public funds. - Education: free and compulsory to 16 years of age. Universal free basic health care. - Fiscal scale and coverage - Total cost of social programs including the investment budget for housing construction and infrastructure exceeds 7½ percent of GDP. - As of January 2013 there are approximately 14,000 people (16 percent of the population) receiving benefits under the SSF, about half of which are retirees earning an old age pension. Of the over 2,300 families receiving means-tested welfare payments, most are working poor with children, while unemployed households with no income comprise about 10 percent of welfare families. - Poverty reference - Seychelles does not have a national poverty line. The 2011 Living Conditions Survey conducted by the UNDP estimates the poverty line at about $3 per day per adult (SR 13,554 per year). The poverty rate is estimated at 17 percent of the population. - Administrative strengths - Every citizen is issued a unique personal identification number at birth, all child births are registered, and death registries are up to date. The IT system for the Agency for Social Protection is being upgraded to link databases of various ministries and agencies to cross check income and benefit information. ### Key social program aggregates (2012) - Central Government budget: 980.9 SR million, 6.9 percent of GDP - Agency for Social Protection: 427.8 SR million, 3.0 percent of GDP - Statutory benefits: 348.2 SR million, 2.5 percent of GDP - Means-tested benefits: 79.5 SR million, 0.6 percent of GDP - Other budgetary social programs: 140.6 SR million, 1.0 percent of GDP - Social housing construction: 333.0 SR million, 2.4 percent of GDP - Seychelles Pension Fund: 94.4 SR million, 0.7 percent of GDP - Grand total: 1,075.3 SR million, 7.6 percent of GDP ### Selected program specifics and fiscal figures (2012) - SSF programs total: 340.4 SR million (2.4% of GDP) - Retirement Benefits: 211.3 SR million (1.5% of GDP); recipients 6,900; flat rate pension of SR2,550 up to 2,750 in 2013 per month. - Invalidity Benefits: 33.5 SR million; recipients 1,100; capped at 2,580 in 2013 per month. - Supplementary Benefits: 1.3 SR million; one-off payments not exceeding SR25,000 per household in disaster cases. - Other Post Secondary Students Bursary: 3.9 SR million; recipients 178. - Sickness Benefits: 7.48 SR million; covers up to 60 days continuous leave capped at SR 2,250 for 2013. - Maternity Benefits: 0.78 SR million; 80 percent of the mother‘s basic salary subject to ceiling of SR2,250 per month (2013). - Funeral Benefits: 0.85 SR million; capped at SR1,600 payable against receipts. - Survivors Benefits: 0.093 SR million; flat rate SR 2,250 per month to spouse 45 years or older plus dependents allowance SR 1,070 per child. - Orphans Benefits: 0.88 SR million; recipients 65. - Injury Benefits: 0.67 SR million; recipients 69. - Home Carers Scheme and Family Support Scheme (to be merged): 64.90 SR million; recipients 2,437. - Unemployment Relief Scheme: 0.26 SR million; recipients 13; being phased out. - Youth Training Scheme: 0.05 SR million; recipients 101; being phased out. - Specialized Children Treatment Scheme: 2.97 SR million; recipients 19. - Senior Citizens Support Scheme: 0.799 SR million. - SPTC Travel Concessions: 24.63 SR million (refunds for free/reduced fares). - Dedicated Fund For School: 3.46 SR million. - Social Welfare Assistance total: 86.7 SR million (0.6% of GDP); Safety Net recipients 1,647; Bursary recipients 1,719. - Bursary: temporary, means-tested; household income thresholds: SR1,650 for the first adult; 70 percent for each additional adult and 50 per-cent for each child. Additional allowances: SR300 utilities, SR300 transportation, SR300 daycare per child under 3½ years, housing expenses up to 20 percent of the wage. - Seychelles Pension Fund programs total: 91.8 SR million (0.7% of GDP) - Normal Retirement Benefit: 76.60 SR million (0.5% of GDP); recipients 1,978. Retirement age of 60 (mandatory retirement age 63). End 2011 assets about 7 percent of GDP. - Contribution rate raised to 3.0 per-cent in 2012 (1.5 percent each for the employer and employee). Replacement rate for average wage earner estimated 39 percent for vested retirees. - Permanent Incapacity: 9.21 SR million; recipients 299. - Other SPF programs: 5.98 SR million; recipients 251 (2011). - Selected social and human capital development programs: 140.6 SR million (1.0% of GDP). *Prepared by C. Baker and A. Culiuc with inputs from the World Bank; Annex prepared by A. Culiuc and C. Baker.* ### Annex 3. External Stability and Competitiveness ### Annex 3. External Stability and Competitiveness ### A. Quantitative Analysis of External Stability - CGER-based methodologies indicate the real effective exchange rate (REER) is broadly in line with fundamentals, with sizable variation across methodologies. - Macroeconomic Balances (MB) approach: - Underlying current account deficit has been tracking the equilibrium level (the norm) throughout most of the period and has remained within the confidence interval since 2006. - Seychelles has maintained a large current account deficit (average 16 percent of GDP 2001-12). - Underlying current account strips out temporary surges in FDI and transfers (FDI-financed imports and some large one-off transfers). - Measured REER misalignment (overvaluation) of less than 6 percent in 2012–13 and a slight undervaluation over the medium term. - External Sustainability (ES) approach: - Seychelles’ large current account deficits are consistent with maintaining its highly negative NFA position at around 270 percent of GDP. - Measured exchange rate misalignment is modest and falls well within the confidence interval. - Note: inherent uncertainties in measuring NFA, especially for an offshore financial center. - Equilibrium Real Exchange Rate (ERER) approach: - Estimated equilibrium exchange rate remained fairly constant since 2009 while REER depreciated, producing a widening measured misalignment. - Estimated undervaluation around 20 percent for both 2012 and 2013, with results still within the confidence interval. - Methodology shortcomings: homogeneity assumptions across diverse countries; structural breaks (e.g., move from fixed to floating exchange rate in late 2008); significant nominal exchange rate volatility and quick pass-through to inflation in the microstate. ### B. Comparative Analysis (External vulnerabilities, export performance, non-price indicators) - External vulnerability and policy buffers: - External vulnerability is declining but will remain high. - Large current account deficit expected to narrow sharply over the medium-term as FDI and official grants taper off. - Reserves expected to gradually increase to 3 months of prospective imports in 2017. - Projected current account is broadly in line with the estimated current account norm; reserve coverage reaches the standard reserve metric for small states. - External debt reduced via restructuring and expected to fall below 50 percent of GDP as government policy aims to bring public debt to 50 percent of GDP by 2018 through sustained primary surpluses. - Small and very open economy will remain vulnerable to external shocks. - Export performance and prospects: - Goods and services export receipts grew by about 7½ percent per year (average) since 2005. - Tourism earnings averaged about 10 percent (growth) and oil re-exports averaged about 9 percent (growth). - Export performance expected to remain strong, driven by tourism and tuna exports. - Tourism robustness: - Seychelles outperformed competitor markets despite elimination of direct flights from Europe in early 2012 and its branding as a high-end destination. - Diversification toward non-traditional arrivals (Russia, the Gulf States, China) compensated when traditional markets (France, Italy, Britain) faltered. - Diversification of tourism product (land reclamation, development of villas) increased number of tourism units. - Recent and planned investments supporting export capacity: - FDI and construction in tourism (villas, some new hotels) may increase tourism revenues. - Construction of cold storage facilities in train will support increased capacity and product diversification by the tuna processing company (10 percent of GDP). - Recently-installed fiber optic cable could support growth in the financial services sector. - Structural competitiveness indicators: - World Bank Doing Business ranking: Seychelles climbed to 74th (of 185) in 2013. - Travel and Tourism Competitiveness Index 2013: Seychelles took the top spot among Sub-Saharan African countries and is ranked 38 (of 140) overall (Mauritius 58; Barbados 27). - Ranks favorably in Global Competitiveness and the Corruption Perception Index. - Areas needing improvement (2012/13 Global Competitiveness Report and Doing Business): - Access to finance. - Poor work ethic in national labor force. - Inadequate supply of infrastructure. - Challenges in starting a business, access to credit, and electricity. *Prepared by N. Mwase and A. Culiuc* ### Annex 6. Tourism Competitiveness ### Annex 6. Tourism Competitiveness ### Role of tourism in Seychelles’ economy - Tourism accounts for around 30 percent of GDP and is Seychelles’ major export industry. - Tourism is a key channel through which external shocks affect the domestic economy. ### Overall performance and recent trends - Seychelles has attracted nearly four times more tourists than predicted by a gravity-type model of tourism flows. - Seychelles has been steadily rebuilding its share in global tourist arrivals over the last decade, while most other small islands have seen flat (Oceania) or declining (Caribbean) shares. - Seychelles‘ tourist arrivals grew over 30 percent following the 2008 global crisis, whereas islands in the Caribbean experienced negative or negligible growth over the same period. - Seychelles’ success is linked to rapid diversification away from traditional European markets and relative proximity to emerging sources of luxury destination tourists. ### Gravity-model competitiveness findings - The gravity model controls for trade frictions (GDPs of both countries, population, areas, distances, price levels, geographical characteristics, common culture and history). - The computed competitiveness index is the value of the country dummy in a fixed effects regression with bilateral arrivals as the dependent variable. - Seychelles is highly competitive compared to other islands and is receiving around 3.7 times more tourists than the model predicts for the average small island with Seychelles‘ characteristics. - Among small islands, only the Maldives performs better than Seychelles in the computed competitiveness index. ### Market-specific performance - Residuals from a gravity model regression with fixed origin and destination effects show Seychelles has outperformed predictions in select European markets. - France is Seychelles‘ largest market, and the number of French tourists is precisely in line with the model‘s predictions. - China and India showed large measured underperformance prior to 2009; rapid growth since 2009 reflects catch-up to potential levels. - Tourist arrivals from markets on which Seychelles already overperformed in 2009 (Austria, Czech Republic, Germany, Russia) grew by 40 to 70 percent in the three years since then. ### Exposure to risks, elasticities, and price sensitivity - Using first differences regression, staff estimate the global elasticity of tourist-arrivals to GDP in tourist-originating countries at around 1.3. - The elasticity is significantly lower for small islands: 0.9. - Implication: Seychelles is likely to see tourism demand from key European markets drop nearly one-for-one should their economies contract. - Tourists are price sensitive: - A 1 percent appreciation in the bilateral real exchange rate reduces arrivals by 0.11 percent and average nights-stay by 0.27 percent, for a combined effect of 0.36 on total nights stayed. - Short-term reductions in European arrivals can be offset by market diversification. - If a shock is protracted, maintaining high arrivals may require re-branding, involving steep discounting and lower tourist spending, which may undermine Seychelles‘ high-end reputation in the long term. ### Prepared by - Prepared by A. Culiuc *Source: Annex 6. Tourism Competitiveness, _cr13202 - Annex 6. Tourism Competitiveness* ### 5.5 percent in the 2005 Labor Force Survey). Official estimates, which are based solely on registered ### _cr13202 - 5.5 percent in the 2005 Labor Force Survey). Official estimates, which are based solely on registered ### Labor market overview and composition - Measured youth unemployment is low, however the 2010 Census indicates that over 40 percent of all self-declared job seekers are aged 15–24. - The typical job seeker is thought to be young, female, with primary and secondary education; single mothers and registration requirements to receive welfare/social benefits may influence this profile. - Jobs on offer exceed the number of people looking for a job in all job categories, indicating that domestic unemployment is mostly structural. - A key factor driving structural unemployment is labor skill mismatch: employment agencies report that job seekers lack qualifications, skills and experience—particularly for managerial and technical openings. - Data suggest that employment of Seychellois has remained stable during the recent growth episode. Between 2003 and 2011, the share of expatriates in total employment increased from 6 percent to 26 percent. - Foreign labor growth is more strongly correlated with GDP growth than domestic employment growth, suggesting the private sector adjusts to demand changes mainly by varying the number of expatriate workers. ### Youth, reservation wages, and labor supply behavior - Other possible factors driving unemployment: - High reservation wage and distaste for shift and factory work. - The social security system may provide a disincentive to enter the workforce and/or raise the reservation wage beyond the wage on offer. - Youth often prefer family support to taking available "undesirable" jobs (construction, fish processing, hotel shift work). - In some cases youth are unemployable due to substance abuse. - In 2010, some 14 percent of youth aged 15–24 was neither in education nor in employment (2010 census). - The labor ministry has identified a phenomenon of "wait to work" where laborers wait for a preferred job rather than take currently available jobs. ### Skills programs and recommendations - Government programs aimed at placing participants in positions to receive on-the-job training and experience: - Skills Acquisition Program (SAP): targeted at 15–20 year olds who have dropped out of secondary school. Under SAP participants receive a monthly allowance paid 60/40 government-employer. - Skills Development Program (SDP): targeted at post-secondary students who have dropped out of tertiary education or older job-career changers. Under SDP participants receive a monthly allowance paid by government. - Policy recommendations and measures noted in the text: - Strengthening secondary education, especially in math and science. - Transferring vocational training to the private sector to help narrow the skills mismatch. ### Expatriate labor: characteristics, costs, and regulation - There are currently 13,800 expatriate workers in Seychelles. - Typical expatriate worker profile: - Male: 75 percent. - Between the age of 20 – 40: 75 percent. - From Asia/Southeast Asia (India 50 percent). - Work mostly in productive sectors (construction, fish processing) and tourism. - Contracts are generally for two years, and extendable up to six years, provided that no Seychellois is qualified, willing and available to take up the position. - Wages and employer costs: - According to the Seychelles Revenue Commission (SRC), the average total salary of expatriate workers is double that of Seychellois. - In addition to base salary, the employer pays all government fees related to expatriate employees, the airline ticket, and provides food and housing (or a supplement to cover these costs). - Even when additional costs are excluded, base wages are reportedly often higher than for Seychellois workers in the same job category (no data available). - Employer preferences and behavior: - Despite higher costs, employers often prefer expatriate employees who are reportedly willing to work longer hours and may demand fewer benefits under the law. - Anecdotal evidence suggests low compliance with labor laws regarding expatriates (who work longer hours and will not raise grievances), perhaps due to more limited understanding by workers of their rights under the law. - Regulatory change and implications: - Starting in 2013, approval of work permits shifted from Immigration to the Ministry of Labor, with heightened vigilance over contracts and working/living conditions of non-Seychellois labor. - The change in regulatory environment has led to uncertainty regarding the validity of the quota system and the ability of the tourism sector to hire needed foreign labor. ### Labor legislation, benefits, and redundancy procedures - Main acts regulating employment and industrial relations: - Employment Act 1995, as amended in 1999, 2006, 2007, 2008, 2009 and 2010. - Conditions of Employment Regulations 1991, as lastly amended in 2006. - Industrial Relations Act. - Ministry responsible: Ministry of Education, Employment and Human Resources (MEEHR) through its Employment Department. - ILO review: In February 2011 the ILO noted that the available version of the Employment Act currently in force contains some, but not all amendments adopted in previous years, making it difficult for workers and employers to know their rights and obligations. - Benefits under the Employment Act (Section 43) and related regulations: - Annual leave, maternity leave, sick leave, leave for civic duties, unpaid leave and maternity leave benefits. - Conditions of Employment Regulations (S.I. 34 of 1991) provide additional benefits, namely compassionate leave and education leave. - Seychellois employees on continuous employment and fixed term contracts are entitled to 21 days paid annual leave (pro-rated if less than a year and for part-time employment). - Casual worker who has worked for the same employer for 5 consecutive days is entitled to half of his day‘s pay in lieu of leave. - Compassionate leave in excess of 4 days in a period of 12 months may either be unpaid or deducted from annual leave at employer discretion. - Workers shall be allowed reasonable time off work, with or without pay at employer discretion, to attend matters that cannot normally be attended except during working hours. - Redundancy procedures (Employment Act Section 51): - Employers must seek approval of MEEHR and go through a negotiation procedure. - For continuous employment contracts, severance pay is calculated at five-sixth of one day‘s wage for each completed month of service (pro-rated for part-time workers); the rate is double in the case of fixed-term contracts. - Workers being made redundant shall be given one-half day leave per week during the notice period to enable them to secure employment. - If a worker does not agree to a change in conditions it is possible to fire the worker—the same severance payment applies. No severance is paid if the worker is fired outright. - Expatriate workers: - The same terms and conditions of employment under the Employment Act apply to expatriate workers. - Expatriate workers may participate in the grievance (mediation) procedure and/or bring cases before the Employment Tribunal. ### Key statistics and figures (as reported) - Youth self-declared job seekers aged 15–24: over 40 percent (2010 Census). - Youth neither in education nor employment (aged 15–24): 14 percent (2010 census). - Share of expatriates in total employment: increased from 6 percent to 26 percent between 2003 and 2011. - Number of expatriate workers: 13,800. - Expatriate worker demographics: - Male: 75 percent. - Age 20–40: 75 percent. - From India: 50 percent (among Asia/Southeast Asia origin). - Employment Act amendments: 1999, 2006, 2007, 2008, 2009 and 2010. - Annual leave entitlement for continuous and fixed-term Seychellois employees: 21 days paid annual leave. *Prepared by C. Baker — excerpt from Staff Report for the 2013 Article IV Consultation, Seventh Review under the Extended Arrangement and Request for Modification of Performance Criterion—Informational Annex* ### 2013. The MTR will review progress made towards attaining the objectives of the CSP, assess ### _cr13202 - 2013. The MTR will review progress made towards attaining the objectives of the CSP, assess ### Statistical issues: overview and needs - Data provision: "has some shortcomings, but it is broadly adequate for surveillance." - Participation: GDDS since December 2006; participates in government finance statistics modules of the Anglophone Africa project (DFID-funded). - Capacity building: "Good progress has been achieved in improving statistical capacity, but sustained technical assistance and additional resources will be required for statistical development over the medium term." - Workshop invitation: Seychelles is invited to a DFID-sponsored SDDS Workshop in Gaborone, Botswana during May 6–8, 2013, targeting GDDS countries that could graduate to SDDS within a three-year period. ### Real sector statistics: status and gaps - National accounts: - Prepared on a calendar-year basis with 2006 as the base year for constant price measures. - NSB published new provisional national accounts estimates for 2011 in November 2012. - "There are considerable delays in compiling and disseminating volume measures of GDP estimates." - NSB developing quarterly national accounts for 2006-12; estimates "suffer from data source weaknesses" and "will continue to be produced, but not disseminated for at least the remainder of 2013." - Once annual GDP 2012 compiled (in the fourth quarter of 2013), annual and quarterly estimates will be reconciled for 2012; "experimental quarterly estimates may be published." - Tourism and production indicators: - Tourism statistics: compiled weekly and monthly; reported to IMF in a timely manner. - Production indicators: compiled quarterly; reported to IMF in a timely manner. - Labor and prices: - Average earnings and employment by sector: collected quarterly; "no data on unit labor costs." - CPI: new CPI introduced from October 2007, using expenditure weights from the 2006–2007 household budget survey; base period is July 2007. ### Government finance statistics: reporting and recommendations - Reporting: Seychelles reports cash flow statements and financial balance sheet data to STA based on GFSM 2001. - Main recommendations from the 2011 GFS mission: - (i) Establish a GFS task force among Treasury, Financial Planning and Control Division (FPC), Debt Management staff, and other relevant agencies to resolve technical and methodological issues. - (ii) Establish a strategic plan to address weaknesses including: - (1) augmenting cash recording of transactions in budget execution with relevant accrual-based measures; - (2) improving data on other economic flows for financial assets and liabilities; - (3) addressing lack of stock data on government holdings of nonfinancial assets, beginning with fixed assets and non-produced assets (lands). ### Monetary and financial statistics - Reporting: Monetary and financial sector data are reported regularly to STA for publication in the IFS. - Compilation framework: Analytical framework "generally sound." - Systems: An integrated monetary database is fully operational using the SRF; SRF-based monetary data published in the IFS Supplement since March 2007 issue. ### External sector statistics: progress and priorities - Methodology: Authorities have made substantial progress adopting BPM5 methodology. - Reporting timeliness: - Annual BOP data: reported nine months after reference period; provisional estimates provided earlier to missions. - Quarterly BOP: compiled since 2009 and now publicly available. - Merchandise trade data: reported quarterly. - Debt statistics: Considerable progress in collecting/updating public sector external debt, debt-service, and external payments arrears. - Remaining priorities: improving coverage of external sector statistics and compiling international investment position. ### Table of common indicators required for surveillance (As of March 27, 2013) — selected entries (dates preserved) - Exchange rate: Date of latest observation 03/26/13; Date Received 03/26/13; Frequency of data Daily; Frequency of reporting Daily; Frequency of publication Daily. - International reserve assets and reserve liabilities of the monetary authorities: 03/22/13; Received 03/26/13; Frequency of data Weekly; Frequency of reporting Weekly; Frequency of publication Monthly. - Reserve money: 03/22/13; Received 03/26/13; Frequency of data Daily; Frequency of reporting Weekly; Frequency of publication Monthly. - Broad money: Dec. 2012; Received 02/15/13; Frequency of data Monthly; Frequency of reporting Monthly; Frequency of publication Monthly. - Consumer price index: Feb. 2013; Received 03/05/13; Frequency of data Monthly; Frequency of reporting Monthly; Frequency of publication Monthly. - Revenue, expenditure, balance and composition of financing of the central government: Jan. 2013; Received 03/25/13; Frequency of data Monthly; Frequency of reporting Monthly; Frequency of publication Monthly. - External current account balance: Dec. 2012; Received 02/27/2013; Frequency of data Quarterly; Frequency of reporting Quarterly; Frequency of publication Quarterly. - GDP: 2011; Date Received Nov. 2012; Frequency of data Annual; Frequency of reporting Annual; Frequency of publication Annual. - Gross external debt: Jan. 2013; Received 03/25/13; Frequency of data Monthly; Frequency of reporting Monthly; Frequency of publication Monthly. - International investment position: ...; Date Received ...; Frequency NA. ### IMF Public Information Notice (PIN) — Article IV Consultation (May 15, 2013) - Board conclusion: On May 8, 2013, IMF Executive Board concluded the Article IV consultation with Seychelles. - Background assessment: - Post-2008 debt crisis: "remarkable strides" restoring macroeconomic stability and creating room for private-sector activity. - 2012 performance: - Growth moderated to 2.9 percent despite robust tourist arrivals as large investment projects were completed. - Inflation spiked in July 2012 to 8.9 percent; abated after monetary tightening. - External position improved modestly; current account deficit remained high "at around 22 percent of GDP" but fully financed by FDI and external borrowing, leading to a modest rise in reserves. - Debt restructuring nearly complete, with only one loan agreement awaiting signature. - Fiscal and monetary developments: - Fiscal: Primary surplus "is projected to have risen to 6.2 percent of GDP" in 2012 partly due to sizable windfall revenues; public debt increased by "over 3 percentage points of GDP" due mostly to currency depreciation and government assuming liabilities of Air Seychelles. - Monetary: Tightened sharply in 2012; by end-2012 inflation had fallen to 5.8 percent and exchange rate strengthened beyond its end-2011 level. - Structural reforms: "Broad-based structural reform over the past five years" improved public sector financial performance and private sector participation; statistical capacity strengthening continues; Seychelles subscribes to GDDS. ### Executive Board assessment (Article IV) - Commendations: Directors commended strong policy implementation, restoration of macroeconomic stability, and resilient growth. - Risks: Economy vulnerable to uncertain global environment and domestic risks; called for continued commitment to sound policies and structural reforms. - Fiscal policy recommendations: - Continue financial discipline at central government level; VAT introduced welcomed. - Strengthen oversight and financial position of parastatals, including through adequate price mechanisms. - Further progress in public financial management key for fiscal sustainability. - Support authorities’ medium-term fiscal stance targeting a primary fiscal surplus and reducing public debt to 50 percent of GDP. - Exercise caution when contracting new external debt. - Monetary policy recommendations: - Continue efforts to improve monetary framework to stabilize inflation expectations and policy interest rates. - Absorb excess liquidity over time to strengthen monetary anchor and transmission mechanism. - Increase international reserves "as market conditions permit" to provide a stronger buffer. - Structural recommendations: - Improve business and investment climate to avoid a potential middle-income trap and support broad-based growth. - Foster private sector-led growth by addressing infrastructure gaps, lowering cost and improving access to credit, correcting data weaknesses, and advancing workforce education and capacity building. ### IMF Press Release — Seventh Review under EFF and disbursement (May 8, 2013) - Review completion: Executive Board completed the seventh review under the EFF for Seychelles and approved immediate disbursement. - Disbursement amounts: - SD R 3.3 million (about US$5.0 million) disbursed immediately, bringing total disbursements under the four-year arrangement to SDR 23.1 million (about US$34.9 million). - Arrangement history: - Three-year EFF approved in December 2009 in an amount equivalent to SDR 19.8 million (then about US$31.1 million). - Arrangement extended by one year in December 2012 with an augmentation of access of SDR 6.6 million (about US$10.0 million). ### Selected economic and financial indicators (Table 1: Seychelles: Selected Economic and Financial Indicators, 2010–14) - Nominal GDP (millions of Seychelles rupees): - 2010: 11,746 - 2011: 13,119 - 2012: 14,145 - 2013 (Proj.): 15,292 - 2014 (Proj.): 16,461 - Real GDP (percentage change): - 2010: 5.6 - 2011: 5.0 - 2012: 2.9 - 2013 (Proj.): 3.3 - 2014 (Proj.): 3.9 - CPI (annual average): - 2010: -2.4 - 2011: 2.6 - 2012: 7.1 - 2013 (Proj.): 4.5 - 2014 (Proj.): 3.4 - CPI (end-of-period): - 2010: 0.4 - 2011: 5.5 - 2012: 5.8 - 2013 (Proj.): 4.3 - 2014 (Proj.): 3.1 - GDP deflator average: - 2010: -3.6 - 2011: 6.4 - 2012: 4.8 - 2013 (Proj.): 4.6 - 2014 (Proj.): 3.6 - Money and credit (percentage change): - Credit to the economy: 2010: 21.4; 2011: 6.2; 2012: 2.5; 2013 (Proj.): 13.0 - Broad money: 2010: 13.5; 2011: 4.5; 2012: -2.3; 2013 (Proj.): 0.1 - Reserve money: 2010: 34.7; 2011: -2.7; 2012: 6.9; 2013 (Proj.): 12.3 - Velocity (GDP/broad money): 2010: 1.6; 2011: 1.7; 2012: 1.9; 2013 (Proj.): 2.1 - Money multiplier (broad money/reserve money): 2010: 4.2; 2011: 4.5; 2012: 4.1; 2013 (Proj.): 3.6 - Savings-Investment balance (percent of GDP): - External savings: 2010: 23.0; 2011: 22.7; 2012: 21.7; 2013 (Proj.): 23.2; 2014 (Proj.): 18.4 - Gross national savings: 2010: 13.6; 2011: 12.4; 2012: 17.3; 2013 (Proj.): 15.1; 2014 (Proj.): 15.5 - Of which government savings: 2010: 7.8; 2011: 10.6; 2012: 14.3; 2013 (Proj.): 12.1; 2014 (Proj.): 11.0 - Gross investment: 2010: 36.6; 2011: 35.1; 2012: 39.0; 2013 (Proj.): 38.2; 2014 (Proj.): 33.8 - Of which government investment: 2010: 8.6; 2011: 8.1; 2012: 12.0; 2013 (Proj.): 9.2; 2014 (Proj.): 7.8 - Government budget (percent of GDP): - Total revenue, excluding grants: 2010: 34.1; 2011: 35.8; 2012: 37.6; 2013 (Proj.): 36.4; 2014 (Proj.): 35.6 - Expenditure and net lending: 2010: 32.5; 2011: 35.7; 2012: 40.2; 2013 (Proj.): 38.5; 2014 (Proj.): 36.0 - Current expenditure: 2010: 27.2; 2011: 27.6; 2012: 28.8; 2013 (Proj.): 28.8; 2014 (Proj.): 27.3 - Capital expenditure and net lending: 2010: 5.3; 2011: 8.1; 2012: 11.4; 2013 (Proj.): 9.8; 2014 (Proj.): 8.7 - Overall balance, including grants: 2010: 2.5; 2011: 2.5; 2012: 2.4; 2013 (Proj.): 1.8; 2014 (Proj.): 2.0 - Primary balance: 2010: 8.6; 2011: 5.4; 2012: 6.2; 2013 (Proj.): 5.1; 2014 (Proj.): 4.4 - Total public debt: 2010: 81.6; 2011: 74.3; 2012: 77.3; 2013 (Proj.): 72.0; 2014 (Proj.): 65.3 - Domestic: 2010: 32.5; 2011: 28.0; 2012: 27.7; 2013 (Proj.): 25.7; 2014 (Proj.): 18.6 - External: 2010: 49.1; 2011: 46.2; 2012: 49.6; 2013 (Proj.): 46.3; 2014 (Proj.): 46.7 - External sector (percent of GDP, unless otherwise indicated): - Current account balance including official transfers: 2010: -23.0; 2011: -22.7; 2012: -21.7; 2013 (Proj.): -23.2; 2014 (Proj.): -18.4 - Total stock of arrears (millions of U.S. dollars): 2010: 30.3; 2011: 9.0; 2012: 2.7 - Total public external debt outstanding (millions of U.S. dollars): 2010: 478; 2011: 490; 2012: 512; 2013 (Proj.): 558; 2014 (Proj.): 597 - (percent of GDP): 2010: 49.1; 2011: 46.2; 2012: 49.6; 2013 (Proj.): 46.3; 2014 (Proj.): 46.7 - Terms of trade (= - deterioration): 2010: -6.7; 2011: -6.4; 2012: -0.4; 2013 (Proj.): 0.6; 2014 (Proj.): 1.2 - Real effective exchange rate (average, percent change): 2010: 4.4; 2011: -7.4 - Gross official reserves (end of year, millions of U.S. dollars): 2010: 254; 2011: 277; 2012: 305; 2013 (Proj.): 317; 2014 (Proj.): 326 - Months of imports, c.i.f.: 2010: 2.3; 2011: 2.5; 2012: 2.6; 2013 (Proj.): 2.7; 2014 (Proj.): 2.7 - Exchange rate (Seychelles rupees per US$1, end-of-period): 2010: 12.1; 2011: 13.7; 2012: 13.0 - Exchange rate (Seychelles rupees per US$1, period average): 2010: 12.1; 2011: 12.4; 2012: 13.7 - Note: Table sources: Central Bank of Seychelles; Ministry of Finance; and IMF staff estimates and projections. - Footnote: "Excludes debt issued in 2012 for monetary purposes (5.4 percent of GDP), as proceeds are kept in a blocked account with the Central Bank." *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13202.pdf* ### 60.6 percent of Seychelles‘ quota. ### _cr13202 - 60.6 percent of Seychelles‘ quota. ### Executive Board statement — summary - The authorities‘ strong commitment to macroeconomic stability helped the economy overcome the 2008 balance of payments and debt crisis, and return to a path of continued growth, low inflation, fiscal surpluses, and declining debt. - The outlook is described as benign but the economy remains vulnerable to an uncertain global environment. - Recommended policy priorities: - Preserve macroeconomic and financial stability. - Raise policy buffers. - Foster stronger and inclusive growth. - Fiscal guidance: - Target a primary fiscal surplus of around 5 percent of GDP in the medium term to reach the goal of reducing public debt to 50 percent of GDP by 2018. - Strengthen oversight and financial position of parastatals and make further progress in public financial management. - Exercise caution when contracting new external debt; the debt restructuring is largely completed. - Monetary guidance: - Durably remove excess liquidity as a first step toward strengthening the monetary transmission mechanism. - Require a transparent and credible mechanism to cover the fiscal cost of sterilization. - Increase reserve coverage to provide a stronger buffer against shocks. - Structural guidance: - Deepen markets and foster inclusive, broad-based growth. - Broaden access to credit, enhance infrastructure, address data weaknesses, and reduce skills mismatches in the labor market. ### Authorities’ statement — economic development and outlook - 2012 performance and near-term prospects: - Real GDP growth of 2.9 percent in 2012. - Signs of pickup in early 2013: fall in inflation and strong recovery in tourism. - Tropical cyclone in January expected to have a small adverse effect on GDP, with reconstruction activity offsetting some of the impact. - Goal of achieving a primary surplus of 5 percent of GDP can still be met in 2013 despite recovery costs to the budget. - Forecasts and medium-term outlook: - Real GDP growth forecast to grow around 3.3 percent in 2013 and 3.9 percent in 2014. - Investment expected to peak over this period. - Unemployment and inflation expected to remain low. - Current account deficit expected to narrow as FDI moderates from strong recent flows. - International reserves forecast to remain above the risk-weighted reserve metric over the medium term, but slightly below three months of import coverage. - Central Bank of Seychelles (CBS) will remain attune to favorable conditions for reserve accumulation to meet the government’s objective of rebuilding buffers. ### Fiscal policy — authorities’ actions and plans - Strong commitment to achieving fiscal surplus cited as important for stability and credibility. - Public debt reduction target: - Bring public debt down to 50 percent of GDP by 2018; the program is described as well on track. - Medium-term fiscal target: - Run a primary surplus of around 5 percent of GDP per year. - Public enterprise oversight: - Establishment of the Public Enterprise Monitoring Commission (PEMC) to strengthen oversight of parastatals and improve reporting compliance. - Improving financial performance of parastatals seen as important for fiscal sustainability. - Public financial management (PFM) reforms: - Preparation of financial instructions and accounting manuals related to the Public Financial Management Act and compilation of data under the new Chart of Accounts. - Adoption of program-based budgeting for the central government, to be developed with technical assistance from donors. ### Monetary policy — developments and reform priorities - Inflation and exchange rate: - Inflation remained elevated in 2012 but on a downward trend over the past 8 months prior to the statement due to central bank intervention, rupee appreciation, and moderation in food and commodity prices. - Introduction of the VAT in January 2013 led to a temporary pick-up in inflation, offset by an appreciation of the rupee, currently at its highest level in more than three years. - Liquidity and operational framework: - Excess liquidity emerged again as a key challenge at the start of 2013. - Government considering issuing longer term instruments to absorb excess liquidity. - Reserve money target has played a stabilizing role since the 2008 float but its effectiveness for guiding inflation expectations is being reviewed. - Framework reforms and technical assistance: - CBS recognizes limitations of current framework and the need for a more flexible regime to achieve domestic price stability. - Strengthen monetary framework and monetary transmission mechanism to improve liquidity management and policy implementation. - MCM provided technical assistance in February to strengthen the monetary policy framework and begin work on establishing an alternative operational target. - Establishing a reference interest rate is recommended as an important first step. - Regular public communication of economic conditions and monetary policy decisions is advised to establish central bank credibility, transparency, and anchor inflation expectations. - Financial sector and credit market: - Steps to improve credit market functioning and banking sector supervision are underway. - CBS monitoring credit and price developments closely and using IMF technical assistance. - Ongoing dialogue between Ministry of Finance and CBS on financial reform. - Authorities to work with commercial banks to strengthen the financial sector and foster SME growth. - Recent establishment of the stock exchange should support private sector development. ### Structural reform agenda - Progress and priorities: - Extensive reforms pursued in recent years produced impressive results, but reforms are not yet complete. - Maintain momentum on reform; continuity and discipline in policymaking emphasized. - Structural reform focus areas: - Strengthening PFM. - Improving financial discipline of the public sector and public enterprises. - Transitioning to a more flexible monetary policy framework. - Completing implementation of utility tariffs rebalancing over seven years. - Lift institutional capacity and strengthen policy implementation capabilities to improve timely delivery. - Labor market and social policy: - Reform labor market to reduce skill mismatch and lower structural unemployment. - As a middle-income microstate with full employment, ongoing inflow of foreign workers will be needed to sustain growth; integration of foreign workers to be balanced with developing skills of Seychelles‘ workforce. - Protect social safety net for the most vulnerable during reforms. - Adjustments to the welfare system planned, with increasing use of means testing to determine eligibility for social welfare. ### Extended Arrangement under the EFF — program performance and next steps - Program performance: - Program performance throughout the life of the EFF described as exemplary. - Authorities comfortably met all end-December quantitative performance criteria and structural benchmarks. - Overperformance in the end-December 2012 Net International Reserves (NIR) target prompted authorities to request modification of the end-June 2013 performance criterion, and the end-September and end-December 2013 indicative targets for NIR. - Ownership and collaboration: - High level of ownership by the authorities cited as a key factor in program success. - Adherence to program targets supported macroeconomic stability and policy discipline, complemented by intensive technical assistance. - With the program due to expire at the end of the year, authorities are keen to maintain strong collaboration with the Fund and look forward to discussions on possible successor arrangements. *International Monetary Fund — Statement excerpts and authorities’ remarks on Seychelles economic program and prospects.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13202.pdf_