## _cr14186

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---

### Overview and program purpose
- In the five years following the 2008 balance of payments and debt crisis, the authorities:
  - floated the exchange rate, eliminated all exchange restrictions, turned fiscal deficits into surpluses, and cut public debt in half, with the help of a restructuring agreement with external creditors.
- IMF support history:
  - SBA approved in December 2008; succeeded by an EFF arrangement from December 2009 to December 2013.
- Authorities’ request:
  - A successor EFF arrangement to buttress macroeconomic policies and protect reserve coverage over the extended period (including the presidential elections planned for 2016), support wide-ranging structural reforms to foster sustained and inclusive growth, and catalyze significant official financing needed to prevent serious deterioration in reserve coverage.

### Recent economic developments and outlook
- Growth and labor market:
  - Real GDP growth averaged 5 percent during 2010 to 2013.
  - Real GDP growth accelerated to around 3.5 percent in 2013 (up from 2.8 percent in 2012).
  - Unemployment returned to low levels (around 4 percent).
- Tourism and production:
  - Tourist arrivals rose by 11 percent in 2013 (yoy).
  - So far this year, arrivals are up 5 percent (yoy); increases in Russian and Chinese arrivals have more than made up for weak arrivals from Western Europe.
  - Production indicators for canned tuna, electricity, and telecommunications were strong.
- Inflation:
  - Inflation fell to 3.4 percent (yoy) in December 2013.
  - For March 2014, inflation fell further to 2.2 percent.
  - For the full year, inflation is projected to remain roughly stable at around 4 percent.
- External position and reserves:
  - Current account deficit estimated at 16.9 percent of GDP in 2013 compared to 25.2 percent in 2012.
  - FDI flows remained strong in 2013, along with FDI-related imports.
  - Reserve coverage reached an estimated 3.8 months of imports at end-2013, up from 3.0 months at end-2012.
  - Going forward, pressures on the balance of payments and reserve coverage expected to increase moderately due to rising debt service and investment income and slowing tourism growth.
- Fiscal performance:
  - The 2013 fiscal outturn largely in line with targets; the primary surplus target was attained.
  - Business and income tax revenues somewhat weaker than expected, offset in part by stronger-than-projected non-tax revenues.
  - The primary surplus target for 2014 is 4 percent of GDP and is characterized as feasible and appropriate.

### Key vulnerabilities and risks
- Major vulnerabilities:
  - Public debt remains high at 65 percent of GDP.
  - Current account deficit remains elevated at 18.5 percent of GDP (statement in paragraph 2).
  - Balance of payments headwinds as debt service and investment income payments rise while tourism growth slows.
  - Revenue and grants falling as a proportion of GDP; current spending rising amid pent-up spending demands.
  - Economy heavily open and tourism-dependent: imports equivalent to 90 percent or more of GDP.
- Growth and external exposure risks:
  - Exposure to demand from Europe, Russia, China and the Middle East.
  - Domestic constraints: infrastructure bottlenecks, skills mismatch, and space constraints for hotel construction.
- SOE-related risk:
  - SOEs remain a risk to debt reduction, particularly from major new expansion or diversification.

### Program strategy and policy framework
- Macroeconomic anchor and objectives:
  - Anchor: reduce the debt-to-GDP ratio below 50 percent by 2018.
  - Staff projections: primary surpluses of 3 to 4 percent of GDP needed to meet target (Annex 1. DSA).
  - Note: the 50 percent of GDP target is higher than the average for peers (below 40 percent); gradual debt reduction after 2018 is advisable.
- Fiscal policy:
  - Maintain continued fiscal primary surpluses to anchor fiscal policy and economic confidence.
  - Protect public investment spending for infrastructure and critical growth-enhancing projects, including by SOEs.
  - Program supports capital spending over the medium term, including on-lending to the Public Utilities Corporation.
  - Current spending envelope to remain tight; program envisages slight declines in current spending and the wage bill in GDP terms (following significant wage raises in 2014).
  - Revenue strategy: improve tax compliance and administration rather than fundamental tax policy reforms given revenue-to-GDP ratio over 30 percent.
  - Tax administration measures: streamline exemptions, improve excise management, enhance audit functions, strengthen compliance (including addressing transfer pricing).
- External resilience and exchange rate:
  - Ensuring adequate international reserve coverage is a priority; desirable reserve range around 4 months of imports or 180 percent of the IMF 2011 ARA metric (Annex 2).
  - Reserve accumulation should be gradual and opportunistically timed.
  - Exchange rate flexibility remains key; updated assessment finds the Seychellois Rupee broadly in line with fundamentals and should continue to adjust with fundamentals.
- Monetary policy:
  - Address structural excess liquidity that impeded move to interest-rate based framework.
  - Treasury and CBS agreed issuance of medium-term Treasury bonds (2 to 5 years) supplemented by Treasury bills in amount of SR800 million (about 4½ percent of GDP) by end-May 2014 to help address excess liquidity and enhance short-term interest rate signaling.
  - Program adopts average reserve money targeting: quarterly reserve money objective equal to the average of daily reserve money levels over the quarter with a corridor of 3 percent in both directions; the upper band serves as the ceiling for the performance criterion.
  - Quarterly reserve money targets for 2014 set to reduce targeted free bank reserves progressively.
- Structural reforms and financial sector:
  - Ambitious structural reforms to support growth, enhance public financial management, and reduce SOE risks.
  - Reforms indicated in financial sector, SOE performance and oversight, and public financial management.

### Program role, modalities, and financing
- Request:
  - Three year arrangement under the EFF for SDR 11.445 million (about US$17.8 million, 105 percent of quota).
- Rationale:
  - Ongoing balance of payments need from difficulties maintaining reserve coverage amid increasing debt service and other external pressures.
- Arrangement design:
  - Extended arrangement reflects medium-term nature of balance of payments problems and aligns with authorities’ ambitious macroeconomic and structural reform agenda.
  - Proposed level of access: seven purchases of 15 percent of quota each (Table 8), less than half of the previous EFF arrangement, keeping total credit outstanding to the Fund below 300 percent of quota over the program period.
  - Reviews semi-annual with quantitative targets for: program primary fiscal balance, net international reserves, average reserve money, external debt financing, and non-accumulation of external arrears.
  - Structural benchmarks on macro-critical structural reforms to enhance foundations for sustained growth and strengthen key institutions.
- Downside risks:
  - Moderate downside risks to a successor program; capacity to repay Fund is strong.
  - Significant short-term downside risks from external shocks identified in March 2014 Global Risk Assessment Matrix (e.g., global financial market volatility affecting exchange rate; negative surprises on growth in Europe or emerging markets affecting tourism).
  - Specific shocks to travel and tourism (e.g., geopolitical instability or infectious diseases).
  - CBS to be subject to an update of the Safeguards Assessment by the First Review; preparations underway.

### Staff appraisal: assessments and policy recommendations
- Overall assessment:
  - Despite strong performance under previous EFF-supported program, Seychelles faces important challenges: external debt high by emerging market standards; external reserves face increasing pressures; monetary policy framework evolving; further reforms needed for inclusive and sustained growth and to contain SOE-related risks.
- Program-relevant recommendations:
  - Fiscal policy:
    - Target of reducing public debt below 50 percent of GDP remains appropriate.
    - Restraint on current expenditure and improvements to revenue administration, including compliance and enforcement, are key to ensuring room for capital spending.
    - Streamlining exemptions and adjusting specific excise taxes may be required over the medium term to preserve fiscal space.
  - Exchange rate policy:
    - Flexible exchange rate appropriate and should adjust in line with fundamentals.
    - Further efforts needed to preserve and build external buffers given emerging balance of payments pressures and increased external debt service after post-crisis restructuring.
  - Monetary policy:
    - Issuance of medium-term debt instruments to absorb structural excess liquidity supports a stronger, more flexible monetary policy and low inflation.
    - Proposed move to average reserve money targets should stabilize monetary aggregates and short-term interest rates.
  - Financial sector policy:
    - Timely adoption of the Financial Sector Development Implementation Plan with broad consultations is important.
    - Support for strengthening supervision of the payment system is opportune.
    - Rapid compliance with OECD recommendations to combat tax evasion welcomed.
  - Building resilience and sustaining growth:
    - Adoption of MTNDS and associated MTFF will identify priorities and sources for medium-term growth and ensure necessary resources.
    - New frameworks for monitoring investment implementation and for PPPs will support infrastructure investment.
    - Establishing a registry of state assets will protect public resources and boost transparency.
    - Strengthen oversight of SOEs to contain fiscal risks and avoid excessive expansion crowding out the private sector.
    - Pursue measures to advance privatization, increase competition (e.g., in port services) and reduce cross-subsidies in utilities more rapidly.
- Risk outlook:
  - Risks to the program appear contained and repayment capacity is strong.
  - Authorities’ reform commitment demonstrated over last five years, though public support for further reforms is not guaranteed.
  - Seychelles remains highly vulnerable to external shocks given its size and openness.
  - CBS will be subject to an update of the Safeguards Assessment by the First Review; preparations are underway.

### Financial sector reforms and structural reforms (detailed)
- Financial sector reform objectives and measures:
  - Objective: support growth and stability by enhancing financial deepening and inclusion, improving financial infrastructure, and further improving bank supervision.
  - Institutional strategy:
    - Develop a Financial Sector Development Implementation Plan with World Bank’s FIRST initiative and IMF staff coordination for Cabinet approval (Structural Benchmark (SB, October 2014)).
    - Plan focus: improving private sector access to credit.
  - Pension fund policy:
    - Seychelles Pension Fund to adopt a new investment strategy shifting from real estate development toward longer-term financial instruments.
  - Financial infrastructure:
    - Development of a collateral registry.
    - Establishment of a modern payments system; related legislation to be submitted to the National Assembly to foster efficiency and inclusiveness through services such as mobile payments.
  - Supervision and oversight:
    - Strengthen supervision of non-bank financial institutions through establishment of a new Financial Services Authority (FSA).
    - CBS continues to strengthen bank supervision with AFRITAC technical assistance and establish work plan for implementing appropriate core elements of the Basel II and III standards.
    - A macroprudential surveillance framework is being formulated and will be implemented.
  - Systemic note: the banking system appears financially sound (Table 5).
- Structural reforms to strengthen growth and efficiency:
  - Rationale: prior reforms stabilized recovery but a new generation of ambitious structural reforms is needed.
  - Priority constraints for growth: private sector access to credit; cost and access to public utilities; more efficient management of public resources and SOE performance.
  - Key actions and timing (selected):
    - Adoption of a Medium-Term National Development Strategy (MTNDS) (SB, October 2014).
    - Adoption of the financial sector development strategy (SB, October 2014).
    - Continue reforms to bring Seychelles into compliance with OECD recommendations (SB, June 2014).
    - Establish a MTFF (SB, September 2014).
    - Establish a registry of state assets, including land, beginning with five large SOEs (SB, December 2015).
    - Full consolidation of accounts of the government and SOEs; governance audits of major SOEs (SB, December 2014).
    - Revamp procurement policies in SOEs (SB, September 2014).
    - Sale of government stake in SACOS in 2014 and review of other holdings for possible sale.
    - Reform utility tariffs to reduce substantial cross-subsidies (equivalent to at least 1 percent of GDP).
    - Explore greater private sector competition in key sectors (e.g., port services).

### Program schedule, reviews, and disbursements
- Arrangement size and access:
  - SDR 11.445 million (105 percent of quota).
  - Immediate disbursement: SDR 1.635 million (15 percent of quota) on Board approval (June 4, 2014).
- Schedule of reviews and purchases (2014–17):
  - Board approval (June 4, 2014): 1.635 million SDR (15 percent of quota).
  - First review (September 15, 2014): 1.635 million SDR (15 percent of quota).
  - Second review (March 31, 2015): 1.635 million SDR (15 percent of quota).
  - Third review (September 15, 2015): 1.635 million SDR (15 percent of quota).
  - Fourth review (March 31, 2016): 1.635 million SDR (15 percent of quota).
  - Fifth review (September 15, 2016): 1.635 million SDR (15 percent of quota).
  - Sixth review (March 31, 2017): 1.635 million SDR (15 percent of quota).
  - Total: 11.445 million SDR (105 percent of quota).

### Selected macroeconomic projections and key statistics (selected indicators)
- Nominal GDP (2013): US$ 1,386 million
- Per Capita GDP (2013): US$15,644
- Population, end-year (2010): 90,000
- Real GDP growth (selected years): 7.9 (2013), 2.8 (2014), 3.5 (2015), 3.7 (2016), 3.8 (2017), 3.7 (2018), 3.6 (2019), 3.5 (2020), 3.4 (2021)
- CPI (annual average) (selected years): 2.6 (2013), 7.1 (2014), 4.3 (2015), 3.6 (2016), 2.9 (2017)
- Program primary balance (percent of GDP): 5.3 (2013), 5.7 (2014), 4.7 (2015), 4.0 (2016)
- Total public debt (percent of GDP): 73.2 (2013), 77.5 (2014), 65.3 (2015), 64.5 (2016), 61.0 (2017), 57.4 (2018), 53.3 (2019), 49.1 (2020), 45.9 (2021)
- Current account (percent of GDP): -27.4 (2011), -25.2 (2012), -16.9 (2013), -18.5 (2014), -17.7 (2015), -16.0 (2016)
- Tourism earnings (millions of US Dollars): 291 (2011), 310 (2012), 344 (2013), 366 (2014), 390 (2015)
- Gross official reserves (end of year, millions of US Dollars): 277 (2011), 307 (2012), 423 (2013), 455 (2014), 481 (2015)
- Months of imports, c.i.f.: 2.8 (2011), 3.0 (2012), 3.8 (2013), 4.0 (2014), 4.1 (2015)

### Debt sustainability (Annex I) — baseline, risks, and scenarios
- Baseline DSA findings:
  - Public debt level high but falling sharply since 2008 due to primary surpluses and debt relief.
  - Under baseline, gross public debt expected to fall below 50 percent of GDP by 2018.
  - Gross public debt around 65 percent of GDP at end-2013.
  - Projected fall in debt-to-GDP: projected to fall by almost 20 percentage points in the medium term, reaching 46 percent in 2019.
- Key vulnerabilities:
  - Depreciation risk: 60 percent of the debt is in foreign currency.
  - Deviation from baseline fiscal path and large financing needs implied by substantial current account deficit.
- Shock scenarios:
  - Growth shock: debt-to-GDP ratio would peak in 2016 and fall thereafter but remain above 50 percent target.
  - Real exchange rate shock: debt would increase slightly in 2015 before falling thereafter.
  - One-time shocks to the primary balance and real interest rate: moderate pace of debt decline.
  - Combined macro-fiscal shock: debt-to-GDP ratio would peak around 90 percent before falling gradually; debt-to-revenue ratio would increase to almost 290 percent.
- Gross financing needs and rollover:
  - Gross financing needs remain significant and above the 10 percent indicative threshold for high risk throughout projection period under baseline.
  - Short-term and currency exposures: almost 30 percent of debt stock in short-term domestic instruments; 60 percent of debt in foreign currency.
  - Mitigants: large cash reserves; government deposits equal to around one-fifth of annual rollover needs; 97 percent of marketable securities held by domestic banking system; excess domestic liquidity.
- External debt:
  - Gross external debt 38 percent of GDP at end-2013.
  - Under current policies, external debt burden expected to fall further as current account deficit financed largely through FDI.
  - Seychelles discussing a debt-for-nature swap with external creditors that could reduce external debt obligations.

### Annex II — Reserve adequacy (summary)
- Reserve rebuild:
  - Reserves rebuilt from ½ month to 3.8 months of imports (equivalent to 170 percent of the ARA metric).
  - Gross international reserves reached $425 million by year-end 2013 (a 38 percent increase over 2012).
- Staff and authorities’ view:
  - Standard metrics underestimate country-specific needs; desirable objective around 4 months of import cover or somewhat above 150 percent of the ARA metric.
  - Program envisages further gradual reserve accumulation to preserve reserve coverage.
- Insurance-model findings:
  - Seychelles can withstand a shock to tourism earnings of up to 40 percent or a terms of trade shock increasing food and other imports (excluding fuel) by 20 percent.
  - A combined shock (40 percent decline in tourism earnings + 20 percent increase in imports) would almost entirely exhaust reserves.
- Key statistics:
  - Reserve cover: ½ month (initial) to 3.8 months (end-2013).
  - ARA metric coverage: 170 percent (at rebuild high).
  - Desired objective: around 4 months of import cover or somewhat above 150 percent of the ARA metric.
  - Import bill: 90 percent of GDP.
  - Current account deficits: around 20 percent of GDP.
  - Foreign currency deposits: about a third of total deposits at end-2013.

### Program monitoring, quantitative performance criteria, and structural benchmarks
- Monitoring modalities:
  - Semi-annual program reviews; quantitative performance criteria (QPCs) and indicative targets; structural benchmarks.
  - TMU defines QPCs, indicative targets, and adjusters.
  - A new Safeguards Assessment of the CBS to be completed by the first review.
- Selected QPCs and targets (End-June / End-September / End-December 2014 as presented):
  - Net international reserves of the CBS, millions of U.S. dollars (floor): 340350357
  - Reserve money (ceiling on daily average): 2,7312,7212,716
  - Primary balance of the consolidated government (cumulative floor): 310593721
  - Contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 526070
  - Contracting or guaranteeing of new short-term external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 0.00.00.0
  - Accumulation of external payments arrears by the public sector (ceiling): 0.00.00.0
  - Accumulation of domestic payment arrears by the government (ceiling): 0.00.00.0
- Structural Benchmarks (2014) — selected target dates:
  - Cabinet approval of the Medium-Term National Development Strategy. Target Date: End October, 2014.
  - Submission to National Assembly of amendment of Seychelles Revenue Commission Act and ratification of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Target Date: End June, 2014.
  - Cabinet approval of a Strategic Plan on Financial Sector Development. Target Date: End October, 2014.
  - Cabinet approval of a Medium-term Fiscal Framework (MTFF). Target Date: End September, 2014.
  - Establish and publish comprehensive asset register for 5 SOEs (Air Seychelles, Seypec, SCAA, STC, PUC). Target Date: End December, 2014.
  - Endorsement by the National Tender Board of procurement policies of all SOEs incorporated under the companies act. Target Date: End September, 2014.
  - Approval by PEMC Board of a plan for governance audits of SOEs. Target Date: End December, 2014.

*Source: INTRODUCTION (content unit: _cr14186).*

### INTRODUCTION _____________________________________________________________________________________  4

### INTRODUCTION

### Overview and program purpose
- In the five years following the 2008 balance of payments and debt crisis, the authorities floated the exchange rate, eliminated all exchange restrictions, turned fiscal deficits into surpluses, and cut public debt in half, with the help of a restructuring agreement with external creditors.
- The Fund supported these reforms through an SBA approved in December 2008, which was succeeded by an EFF arrangement from December 2009 to December 2013.
- The authorities have requested a successor EFF arrangement to:
  - buttress macroeconomic policies and protect reserve coverage over the extended period (including the presidential elections planned for 2016),
  - support wide-ranging structural reforms to foster sustained and inclusive growth, and
  - catalyze significant official financing (Table 6) needed to prevent serious deterioration in reserve coverage.

### Recent economic developments and outlook
- Growth and labor market
  - Real GDP growth averaged 5 percent during 2010 to 2013.
  - Real GDP growth accelerated to around 3.5 percent in 2013 (up from 2.8 percent in 2012).
  - Unemployment returned to low levels (around 4 percent).
- Tourism and production
  - Tourist arrivals rose by 11 percent in 2013 (yoy).
  - So far this year, arrivals are up 5 percent (yoy); increases in Russian and Chinese arrivals have more than made up for weak arrivals from Western Europe.
  - Production indicators for canned tuna, electricity, and telecommunications were strong.
- Inflation
  - Inflation fell to 3.4 percent (yoy) in December 2013.
  - For March 2014, inflation fell further to 2.2 percent.
  - For the full year, inflation is projected to remain roughly stable at around 4 percent.
- External position and reserves
  - The current account deficit is estimated at 16.9 percent of GDP in 2013 compared to 25.2 percent in 2012.
  - FDI flows remained strong in 2013, along with FDI-related imports.
  - Reserve coverage reached an estimated 3.8 months of imports at end-2013, up from 3.0 months at end-2012.
  - Going forward, pressures on the balance of payments and reserve coverage are expected to increase moderately due to rising debt service and investment income and slowing tourism growth.
- Fiscal performance
  - The 2013 fiscal outturn was largely in line with targets; the primary surplus target was attained.
  - Business and income tax revenues were somewhat weaker than expected, offset in part by stronger-than-projected non-tax revenues.
  - The primary surplus target for 2014 is 4 percent of GDP and is characterized as feasible and appropriate.

### Key vulnerabilities and risks
- Public debt remains high at 65 percent of GDP, constituting a major source of risk and limiting borrowing capacity.
- The current account deficit remains elevated at 18.5 percent of GDP (statement in paragraph 2).
- The balance of payments faces headwinds as debt service and investment income payments rise while growth in tourism earnings slows.
- Revenue and grants have been falling as a proportion of GDP; current spending has been rising amid pent-up spending demands.
- The economy is heavily open and tourism-dependent: imports are equivalent to 90 percent or more of GDP.
- Growth risks include exposure to demand from Europe, Russia, China and the Middle East; domestic constraints such as infrastructure bottlenecks, skills mismatch, and space constraints for hotel construction.

### Program strategy and policy framework
- Macroeconomic anchor and objectives
  - The program’s macroeconomic framework is anchored on the authorities’ goal of reducing the debt-to-GDP ratio below 50 percent by 2018.
  - Staff projections suggest primary surpluses of 3 to 4 percent of GDP will be needed to meet the target (Annex 1. DSA).
  - Staff and authorities agreed the envisaged path balances debt reduction pace with social and investment needs.
  - Note: the 50 percent of GDP target is higher than the average for peers (below 40 percent); gradual debt reduction after 2018 is advisable.
- Fiscal policy: sustain growth and reduce vulnerabilities
  - Maintain continued fiscal primary surpluses to anchor fiscal policy and economic confidence.
  - Protect public investment spending for infrastructure and critical growth-enhancing projects, including by SOEs.
  - The program supports capital spending over the medium term, including on-lending to the Public Utilities Corporation, to enable essential investment in water and electricity systems.
  - Current spending envelope will remain tight; the program envisages slight declines in current spending and the wage bill in GDP terms (following significant wage raises in 2014).
  - Revenue strategy focuses on improving tax compliance and administration rather than further fundamental tax policy reforms, given Seychelles’ revenue-to-GDP ratio is at over 30 percent and above regional comparators.
  - Tax administration measures will focus on streamlining exemptions, improving excise management, enhancing audit functions, and strengthening compliance (including addressing transfer pricing issues).
- Strengthening external resilience
  - Ensuring adequate international reserve coverage is a priority; the adequate reserve coverage range is higher than generally recommended by reserve metrics given Seychelles’ characteristics (Annex 2. Reserve Adequacy).
  - The desirable reserve range is around 4 months of imports or 180 percent of the IMF 2011 reserve adequacy (ARA) metric; maintaining this will require continued reserve accumulation.
  - Reserve accumulation should be gradual and opportunistically timed, yielding a modest increase in import coverage and essentially no change relative to the ARA metric.
  - Exchange rate flexibility remains key; an updated exchange rate assessment (Annex 3) finds the Seychellois Rupee broadly in line with fundamentals and should continue to adjust with fundamentals.
- Monetary policy: locking-in stability
  - Core monetary aggregates were volatile in 2012–13 because structural excess liquidity (largely from FX reserve build-up) was not continuously sterilized; this impeded a move to a more forward-looking interest-rate based framework.
  - The Treasury and CBS agreed on issuance of medium-term Treasury bonds (2 to 5 years), supplemented by Treasury bills, in the amount of SR800 million (about 4½ percent of GDP) by end-May 2014 to help address excess liquidity and enhance short-term interest rate signaling.
  - The program will adopt average reserve money targeting: a quarterly reserve money objective targeting the average of daily reserve money levels over the quarter, surrounded by a corridor of 3 percent in both directions; the upper band will serve as the ceiling for the performance criterion.
  - Quarterly reserve money targets for 2014 are set to reduce targeted free bank reserves progressively to establish the new monetary approach.
- Structural reforms and financial sector
  - Ambitious structural reforms aim to support growth, enhance public financial management, and reduce risks from state-owned enterprises.
  - Further reforms are indicated in the financial sector, SOE performance and oversight, and public financial management to support macro-stabilization and growth.

### Program role and financing
- The program is expected to play a catalytic role in mobilizing significant official financing (Table 6), which is judged necessary to prevent a serious deterioration in reserve coverage.
- Official external support, generous in recognition of reform efforts, is expected to gradually wind down over the program period.

*Source: INTRODUCTION (content unit: _cr14186).*

### 18.  Reforms in the financial sector aim to support growth and stability by enhancing

### _cr14186 - 18.  Reforms in the financial sector aim to support growth and stability by enhancing

### Financial sector reforms: objectives and measures
- Objective: support growth and stability by enhancing financial deepening and inclusion, improving financial infrastructure, and further improving bank supervision.
- Institutional strategy:
  - Development of a Financial Sector Development Implementation Plan with World Bank’s FIRST initiative and IMF staff coordination for Cabinet approval (Structural Benchmark (SB, October 2014)).
  - Plan focus: improving private sector access to credit, identified as a key constraint to growth.
- Pension fund policy:
  - Seychelles Pension Fund to adopt a new investment strategy shifting from real estate development toward longer-term financial instruments.
- Financial infrastructure measures:
  - Development of a collateral registry.
  - Establishment of a modern payments system; related legislation to be submitted to the National Assembly to foster efficiency and inclusiveness through services such as mobile payments.
- Supervision and oversight:
  - Strengthening supervision of non-bank financial institutions, including global business services, through establishment of a new Financial Services Authority (FSA).
  - CBS continues to strengthen bank supervision with AFRITAC technical assistance, including establishing a work plan for implementing appropriate core elements of the Basel II and III standards.
  - A macroprudential surveillance framework is being formulated and will be implemented to ensure macro-financial stability.
- Systemic note: the banking system appears financially sound (Table 5).

### Structural reforms to strengthen growth and efficiency
- Rationale: sustain growth and tackle risks to stability requires a new generation of ambitious structural reforms; prior reforms stabilized and supported a rapid recovery but further reforms are needed (Appendix 1. Attachment 1, especially Table 2).
- Priority constraints for growth:
  - Private sector access to credit.
  - Cost and access to public utilities, including critical infrastructure investment.
  - More efficient management of public resources (quality of spending, land use, performance of SOEs).
- Priority areas for stability:
  - Enhancing management and transparency of public finances.
  - Strengthening oversight of SOEs.

- Buttress foundations for sustained growth:
  - Adoption of a Medium-Term National Development Strategy (MTNDS) (SB, October 2014) to identify priorities and sources for medium-term growth and outline supporting policy measures.
  - Adoption of the financial sector development strategy (SB, October 2014) to enhance the sector’s contribution to inclusive growth by enhancing access to credit and financial services.
  - Continue reforms to bring Seychelles into compliance with OECD recommendations to combat tax evasion; the global business sector accounts for an estimated 4 percent of GDP. Priorities: make legislation fully consistent with international standards (SB, June 2014) and strengthen international cooperation and enforcement (notably through the new FSA).

- Improve quality of fiscal policy to support growth:
  - Establishment of a medium-term fiscal framework (MTFF) to ensure financing for critical growth-enhancing public investments, including by SOEs (SB, September 2014), alongside the MTNDS.
  - Work on Performance Program-Based Budgeting, developing a Medium-Term Budget Framework, and enhancing planning and management of public sector investment.
  - Public investment plans focus on large electricity, water and sewage projects addressing key constraints to growth, especially in tourism.
  - Develop a new framework for Public Private Partnerships to support infrastructure investment and private sector role (e.g., port services).
  - Reforms to tax administration; strengthen one stop window for customs to improve ease of doing business and compliance.
  - Establish a registry of state assets, including land, beginning with five large SOEs (SB, December 2015), to protect public finances and support efficient land use.
  - Approval of a plan to ensure long-term financial health of the pension fund to protect public finances.

- Continue reform of state-owned enterprises:
  - Strengthen oversight of SOEs to contain fiscal risks, foster accountability and efficiency, and protect private business.
  - Fully consolidate accounts of the government and SOEs; adopt a plan to carry out governance audits of all major SOEs (SB, December 2014).
  - Revamp procurement policies in all SOEs incorporated under the Companies Act (SB, September 2014).
  - Clarify SOE mandates and define annual performance objectives with World Bank assistance to avoid risky expansion and diversification.
  - Support private sector development, including sale of government stake in State Assurance Corporation of Seychelles (SACOS) in 2014 and review of other holdings for possible sale.
  - Reform utility tariffs: simplify tariff structure and seek opportunities to accelerate medium-term plans for rebalancing utility tariffs to reduce substantial cross-subsidies (equivalent to at least 1 percent of GDP).
  - Explore opportunities for greater private sector competition in key sectors (e.g., port services).

### Program modalities, financing, and risks
- Request: three year arrangement under the EFF for SDR 11.445 million (about US$17.8 million, 105 percent of quota).
- Rationale: ongoing balance of payments need from difficulties maintaining reserve coverage amid increasing debt service and other external pressures.
- Arrangement design:
  - Extended arrangement reflects medium-term nature of balance of payments problems and aligns with authorities’ ambitious macroeconomic and structural reform agenda.
  - Proposed level of access: seven purchases of 15 percent of quota each (Table 8), which is less than half of the previous EFF arrangement, reflecting reduced balance of payments needs while keeping total credit outstanding to the Fund below 300 percent of quota over the program period.
  - Reviews semi-annual with quantitative targets for: program primary fiscal balance, net international reserves, average reserve money, external debt financing, and non-accumulation of external arrears (Appendix 1, Attachment 1, Table 2).
  - Structural benchmarks on macro-critical structural reforms to enhance foundations for sustained growth and strengthen key institutions.

- Downside risks:
  - Moderate downside risks to a successor program; capacity to repay Fund is strong (Table 7).
  - Significant short-term downside risks from external shocks identified in March 2014 Global Risk Assessment Matrix (e.g., global financial market volatility affecting exchange rate; negative surprises on growth in Europe or emerging markets affecting tourism).
  - Specific shocks to travel and tourism (e.g., geopolitical instability or infectious diseases).
  - SOEs remain a risk to debt reduction, particularly from major new expansion or diversification.
  - CBS to be subject to an update of the Safeguards Assessment by the First Review; preparations underway.

### Staff appraisal: assessments and policy recommendations
- Overall assessment:
  - Despite strong performance under previous EFF-supported program, Seychelles faces important challenges: external debt remains high by emerging market standards; external reserves face increasing pressures; monetary policy framework is evolving; further reforms needed for inclusive and sustained growth and to contain SOE-related risks.
- Program-relevant recommendations:
  - Fiscal policy:
    - Target of reducing public debt below 50 percent of GDP remains appropriate.
    - Restraint on current expenditure and improvements to revenue administration, including compliance and enforcement, are key to ensuring room for capital spending.
    - Streamlining exemptions and adjusting specific excise taxes may be required over the medium term to preserve fiscal space.
  - Exchange rate policy:
    - Flexible exchange rate is appropriate to buffer economy against domestic and external shocks and should continue to adjust in line with fundamentals.
    - Further efforts needed to preserve and build external buffers given emerging balance of payments pressures and increased external debt service after post-crisis restructuring.
  - Monetary policy:
    - Issuance of medium-term debt instruments to absorb structural excess liquidity provides a base for a stronger, more flexible monetary policy that supports low inflation.
    - Proposed move to average reserve money targets should stabilize monetary aggregates and short-term interest rates.
  - Financial sector policy:
    - Timely adoption of the Financial Sector Development Implementation Plan with broad consultations is important.
    - Support for strengthening supervision of the payment system is opportune.
    - Rapid compliance with OECD recommendations to combat tax evasion is welcomed to further international cooperation and safeguard an important sector.
  - Building resilience and sustaining growth:
    - Structural reform agenda is appropriately ambitious and targeted on reducing fiscal risks, building resilience, and preparing for sustained growth.
    - Adoption of MTNDS and associated medium-term fiscal framework will identify priorities and sources for medium-term growth and ensure necessary resources.
    - New frameworks for monitoring investment implementation and for Public Private Partnerships will support infrastructure investment.
    - Establishing a registry of state assets will help protect public resources, boost transparency, and support public trust.
    - Strengthen oversight of SOEs to contain fiscal risks and avoid excessive expansion crowding out the private sector.
    - Pursue measures to advance privatization, increase competition (e.g., in port services) and reduce cross-subsidies in utilities more rapidly.

- Risk outlook:
  - Risks to the program appear contained and repayment capacity is strong.
  - Authorities’ reform commitment demonstrated over last five years, though public support for further reforms is not guaranteed.
  - Seychelles remains highly vulnerable to external shocks given its size and openness, including commodity price movements and tourism-sector shocks.
  - CBS will be subject to an update of the Safeguards Assessment by the First Review; preparations are underway.

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

### 25.  In this context, staff supports the authorities’ request for a 3-year arrangement under

### _cr14186 - 25.  In this context, staff supports the authorities’ request for a 3-year arrangement under

### Program support and Fund decision
- Staff supports the authorities’ request for a 3-year arrangement under the EFF with access of SDR 11.445 million (105 percent of quota).
- The LOI/MEFP provides a strong set of policies to pursue the objectives of the program.

### Macroeconomic development and projections (selected indicators)
- Nominal GDP (2013): US$ 1,386 million
- Per Capita GDP (2013): US$15,644
- Population, end-year (2010): 90,000
- Real GDP growth: 7.9 (2013), 2.8 (2014), 3.5 (2015), 3.7 (2016), 3.8 (2017), 3.7 (2018), 3.6 (2019), 3.5 (2020), 3.4 (2021)
- CPI (annual average): 2.6 (2013), 7.1 (2014), 4.3 (2015), 3.6 (2016), 2.9 (2017), 3.0 (2018), 3.0 (2019), 3.0 (2020)
- GDP deflator average: 5.3 (2013), 13.1 (2014), 4.5 (2015), 4.4 (2016), 3.2 (2017), 3.3 (2018), 3.3 (2019), 3.2 (2020), 3.1 (2021)

### Fiscal balances, public debt, and fiscal projections
- Total revenue, excluding grants: 35.3 (2013), 34.4 (2014), 32.4 (2015), 31.0 (2016)
- Expenditure and net lending: 35.2 (2013), 36.2 (2014), 36.6 (2015), 33.1 (2016)
- Current expenditure: 27.2 (2013), 25.8 (2014), 27.1 (2015), 26.0 (2016)
- Capital expenditure (including onlending): 8.0 (2013), 10.4 (2014), 9.5 (2015), 7.1 (2016)
- Overall balance, including grants: 0.9 (2013), 2.2 (2014), 0.3 (2015), 0.7 (2016)
- Program primary balance: 5.3 (2013), 5.7 (2014), 4.7 (2015), 4.0 (2016)
- Total public debt (percent of GDP): 73.2 (2013), 77.5 (2014), 65.3 (2015), 64.5 (2016), 61.0 (2017), 57.4 (2018), 53.3 (2019), 49.1 (2020), 45.9 (2021)
- Public domestic debt (percent of GDP): 27.7 (2013), 32.2 (2014), 27.7 (2015), 27.3 (2016), 24.6 (2017), 22.5 (2018), 20.2 (2019), 18.2 (2020), 16.9 (2021)
- External public debt (percent of GDP): 45.6 (2013), 45.3 (2014), 37.6 (2015), 37.2 (2016), 36.5 (2017), 34.9 (2018), 33.1 (2019), 31.0 (2020), 29.0 (2021)

### External sector and financing
- Current account balance (millions of US Dollars): -294 (2011), -285 (2012), -234 (2013), -273 (2014), -274 (2015), -264 (2016), -277 (2017), -274 (2018), -288 (2019)
- Current account (percent of GDP): -27.4 (2011), -25.2 (2012), -16.9 (2013), -18.5 (2014), -17.7 (2015), -16.0 (2016), -15.9 (2017), -14.8 (2018), -14.8 (2019)
- Exports of goods (millions of US Dollars): 477 (2011), 497 (2012), 598 (2013), 587 (2014), 601 (2015), 615 (2016), 624 (2017), 632 (2018), 638 (2019)
- Exports of services (millions of US Dollars): 470 (2011), 435 (2012), 504 (2013), 538 (2014), 576 (2015), 613 (2016), 653 (2017), 695 (2018), 739 (2019)
- Tourism earnings (millions of US Dollars): 291 (2011), 310 (2012), 344 (2013), 366 (2014), 390 (2015), 415 (2016), 442 (2017), 471 (2018), 500 (2019)
- Imports of goods (millions of US Dollars): -915 (2011), -967 (2012), -1,023 (2013), -1,097 (2014), -1,113 (2015), -1,137 (2016), -1,178 (2017), -1,217 (2018), -1,262 (2019)
- Total public external debt outstanding (millions of US Dollars): 490 (2011), 512 (2012), 521 (2013), 549 (2014), 566 (2015), 575 (2016), 577 (2017), 572 (2018), 566 (2019)
- Gross official reserves (end of year, millions of US Dollars): 277 (2011), 307 (2012), 423 (2013), 455 (2014), 481 (2015), 506 (2016), 531 (2017), 555 (2018), 577 (2019)
- Months of imports, c.i.f.: 2.8 (2011), 3.0 (2012), 3.8 (2013), 4.0 (2014), 4.1 (2015), 4.2 (2016), 4.2 (2017), 4.2 (2018), 4.3 (2019)
- Total public external debt outstanding (percent of GDP): 45.6 (2011), 45.3 (2012), 37.6 (2013), 37.2 (2014), 36.5 (2015), 34.9 (2016), 33.1 (2017), 31.0 (2018), 29.0 (2019)

### Gross financing requirements and available financing
- Gross external financing requirements (millions of US Dollars): 301.2 (2012), 256.5 (2013), 300.4 (2014), 299.8 (2015), 299.8 (2016), 323.6 (2017), 320.0 (2018), 333.1 (2019)
- Current account deficit (millions of US Dollars): 284.5 (2012), 234.0 (2013), 278.5 (2014), 275.9 (2015), 265.2 (2016), 278.5 (2017), 273.8 (2018), 288.2 (2019)
- Amortization of medium- and long-term debt (millions of US Dollars): 16.6 (2012), 22.5 (2013), 21.9 (2014), 23.9 (2015), 34.6 (2016), 45.2 (2017), 46.2 (2018), 44.9 (2019)
- Net FDI (millions of US Dollars): 208.2 (2012), 183.5 (2013), 243.6 (2014), 231.2 (2015), 241.3 (2016), 252.5 (2017), 264.8 (2018), 278.2 (2019)
- Available financing (millions of US Dollars): 326.5 (2012), 370.0 (2013), 265.0 (2014), 288.6 (2015), 292.9 (2016), 323.4 (2017), 327.2 (2018), 340.0 (2019)
- Remaining financing gap (millions of US Dollars): 0.0 (2012), 0.0 (2013), 66.4 (2014), 34.3 (2015), 31.3 (2016), 27.9 (2017), 23.9 (2018), 23.9 (2019)
- Program financing (millions of US Dollars): 0.0 (2012), 0.0 (2013), 66.4 (2014), 34.3 (2015), 31.3 (2016), 27.9 (2017), 23.9 (2018), 23.9 (2019)

### Monetary sector, banking soundness and reserves
- Broad money (millions of Seychelles rupees): 7,266 (2010), 7,596 (2011), 7,554 (2012), 9,340 (2013), 9,583 (2014), 9,753 (2015), 9,918 (2016), 10,111 (2017)
- Broad money growth (12–month percent change): 13.5 (2010), 4.5 (2011), -0.6 (2012), 23.7 (2013), 24.9 (2014), 16.3 (2015), 14.3 (2016), 8.3 (2017)
- Credit to the private sector (12–month percent change): 23.6 (2010), 5.2 (2011), 8.5 (2012), 4.5 (2013), 2.1 (2014), 7.7 (2015), 3.5 (2016), 6.8 (2017)
- Net foreign assets (central bank, millions of Seychelles rupees): 2,709 (2010), 3,303 (2011), 3,434 (2012), 4,580 (2013), 4,897 (2014), 4,805 (2015), 4,967 (2016), 5,107 (2017)
- Gross international reserves (millions of U.S. dollars) (memorandum): 254 (2010), 277 (2011), 307 (2012), 425 (2013), 456 (2014), 480 (2015), 506 (2016), 531 (2017), 555 (2018), 577 (2019)

- Financial soundness indicators (selected, percent end of period)
  - Regulatory capital to risk weighted assets: 21.4 (Q1 2010) progressing to 26.7 (Q4 2013)
  - Nonperforming loans to gross loans: 4.1 (Q1 2010), rising to 9.4 (Q4 2013) with a peak 12.5 (Q3 2013)
  - Return on assets (annualized): 3.4 (Q1 2010), 1.9 (Q4 2013)
  - Core liquid assets to total assets: 43.5 (Q1 2010), 41.6 (Q4 2013)
  - Net open foreign exchange position to capital: 22.2 (Q1 2010), 8.9 (Q4 2013) (quarterly series shown)

### Schedule of reviews and purchases under the proposed Extended Arrangement, 2014–17
- Board approval (June 4, 2014): Availability 1.635 million SDR (15 percent of quota)
- First review (September 15, 2014): Completion of first review and compliance with end-June 2014 quantitative performance criteria — 1.635 million SDR (15 percent of quota)
- Second review (March 31, 2015): Completion of second review and compliance with end-December 2014 quantitative performance criteria — 1.635 million SDR (15 percent of quota)
- Third review (September 15, 2015): Completion of third review and compliance with end-June 2015 quantitative performance criteria — 1.635 million SDR (15 percent of quota)
- Fourth review (March 31, 2016): Completion of fourth review and compliance with end-December 2015 quantitative performance criteria — 1.635 million SDR (15 percent of quota)
- Fifth review (September 15, 2016): Completion of fifth review and compliance with end-June 2016 quantitative performance criteria — 1.635 million SDR (15 percent of quota)
- Sixth review (March 31, 2017): Completion of sixth review and compliance with end-December 2016 quantitative performance criteria — 1.635 million SDR (15 percent of quota)
- Total: 11.445 million SDR (105 percent of quota)

*Source: IMF staff report and Seychelles authorities (as provided in the content unit).*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Overview
- Public debt level remains high by international standards but has been falling sharply since the 2008 crisis due to significant fiscal primary surpluses and substantial debt relief from creditors.
- Risks remain significant but are mitigated by the authorities’ strong commitment to further reducing the public debt-to-GDP ratio to below 50 percent of GDP over the medium term.
- Under the baseline scenario, gross public debt is expected to fall below 50 percent of GDP by 2018.
- Key vulnerabilities identified: depreciation (60 percent of the debt is in foreign currency), deviation from the baseline fiscal path, large financing needs implied by the substantial current account deficit.
- Key mitigants identified: authorities’ fiscal commitment, willingness of official creditors to provide support on favorable terms, predominant reliance on non-debt creating flows to the private sector, large cash reserves.

### Macroeconomic and fiscal assumptions
- Real GDP growth: projected at 3.7 percent in 2014, remaining around that level in the medium term.
- Inflation: projected at around 3 percent over the medium term.
- Program primary fiscal surplus (program definition, includes net lending by the government to SOEs): expected to remain just over 3 percent of GDP until 2017, after which projected to decline slightly.
- Projected outcomes for exports, tourism and FDI: strengthened since the last DSA, reflecting Seychelles’ success in diversifying sources of visitors and a stronger-than-projected FDI pipeline.
- The DSA tool assessing realism of main assumptions (growth, primary balance, inflation) does not indicate systematic forecast errors.

### Definition of public debt used in the DSA
- Includes:
  - central government debt as reported by the authorities;
  - government guarantees issued for loans extended to state-owned enterprises;
  - obligations to the IMF.
- Debt issued by the central government for monetary purposes is included in the public debt stock because it imposes an interest cost and rollover need and is not expected to be unwound over the medium term.
- Note on “net public debt”: net public debt figures shown in tables consist of gross debt less government deposits held at the central bank as counterpart to sterilization operations; net debt does not exclude other, smaller government deposits.

### Baseline projections and debt dynamics
- DSA framework places Seychelles’ public debt currently around the high-risk benchmark but falling rapidly.
- Gross public debt: around 65 percent of GDP at end-2013.
- Projected fall in debt-to-GDP: projected to fall by almost 20 percentage points in the medium term, reaching 46 percent in 2019.
- Under unchanged policies and no major negative shocks, debt-to-GDP ratio will continue falling far below 70 percent (the indicative threshold used to highlight high risk debt levels).
- Potential pressures on fiscal discipline: pent-up demands for investment spending and wage pressures.

### Shock scenarios and outcomes
- Growth shock:
  - Debt-to-GDP ratio would peak in 2016 and fall thereafter but remain above the 50 percent target (rather than falling below it as under the baseline).
- Real exchange rate shock:
  - Debt would increase slightly in 2015 before falling thereafter.
- One-time shocks to the primary balance and the real interest rate:
  - Would moderate the pace of decline in the debt-to-GDP ratio.
- Combined macro-fiscal shock (aggregation of shocks to real growth, the interest rate, the primary balance and the exchange rate):
  - Would send the debt-to-GDP ratio above the critical value of 70 percent.
  - Under this scenario the debt-to-GDP ratio would peak close at around 90 percent before falling gradually.
  - Debt-to-revenue ratio would increase to almost 290 percent.

### Gross financing needs, rollover risk, and heat map assessment
- Gross financing needs:
  - Remain significant over the medium term though on a declining trend.
  - Under the baseline, gross financing needs remain above the 10 percent indicative threshold for high risk throughout the projection period.
  - Gross financing needs increase significantly under various shocks, especially the combined macro-fiscal shock or the real GDP growth shock.
- Short-term and currency exposures:
  - Almost 30 percent of the debt stock is in short-term domestic instruments.
  - 60 percent of the debt is in foreign currency.
- Rollover risk mitigants:
  - Large cash reserves limit rollover risks.
  - Significant government deposits equal to around one-fifth of annual rollover needs.
  - Negligible non-resident participation in the domestic debt market: 97 percent of marketable securities are held by the domestic banking system.
  - Excess domestic liquidity offers ample scope for additional domestic issuance.
  - Continued fiscal consolidation and further measures to extend average maturity of domestic issuance would reduce rollover risks.
- Heat map summary:
  - Debt level risks: deemed low or medium (debt-to-GDP tends to remain under the 70 percent threshold).
  - All gross financing needs cells are red, indicating high risk according to the 10 percent of GDP threshold.
  - High current account deficit results in high gross external financing requirements, significant amounts of debt held by non-residents, and large debts held in foreign currency.

### External debt and external financing
- Gross external debt: stood at 38 percent of GDP at end-2013, less than half its level five years earlier.
- End-2013 external debt figure is 14 percentage points lower than projected in the previous DSA (reasons: 8.2 percent upward revision to 2012 nominal GDP, stronger-than-projected currency, slower-than-projected disbursements of debt supporting large infrastructure projects).
- Under current policies, external debt burden is expected to fall further as the large current account deficit continues to be financed largely through FDI, with modest external public borrowing confined to official bilateral and multilateral sources at favorable rates.
- External financing needs remain high over the medium term as repayment of privately held public debt rescheduled post-crisis begins to put pressure on the balance of payments.
- Current account deficit largely financed by relatively stable sources of FDI, particularly in the tourism sector.
- Seychelles is discussing a debt-for-nature swap with its external creditors, which if realized could reduce external debt obligations and reduce pressures on the balance of payments.

*Prepared by Joseph Thornton (AFR), with input from Naly Carvalho (AFR).*

### 1.1 percent rather than the 3.6 percent in the baseline, would lead to a brief increase in the

### _cr14186 - 1.1 percent rather than the 3.6 percent in the baseline, would lead to a brief increase in the

### Key findings on external debt vulnerability
- A lower growth scenario with Real GDP growth of "1.1 percent rather than the 3.6 percent in the baseline, would lead to a brief increase in the external debt-to-GDP ratio, but assuming that FDI flows were not affected, the ratio would still fall just below 30 percent of GDP by the end of the projection period as under the baseline."
- "A permanent ½ standard deviation shock to the current account (excluding interest payments) would have a more dramatic impact on the external debt burden and would increase the debt-to-GDP ratio to almost 50 percent by 2019, compared with 30 percent in the baseline scenario."
- "A permanent ½ standard deviation shock to interest rates would see the debt increase to 36 percent at the end of the projection period."
- "A 30 percent depreciation of the domestic currency would see the external debt-to-GDP ratio peak at around 55 percent in 2015 before declining thereafter to 44 percent in 2019."

### Baseline projections of external debt (selected indicators and years)
- External debt (in percent of GDP), selected series from the projections table: 89.9, 49.3, 45.6, 45.3, 37.6, 37.2, 36.5, 35.0, 33.1, 31.0, 29.0, 26.1
- External debt-to-exports ratio (in percent), selected projection endpoint: 37.3 (final listed value)
- Gross external financing need (in percent of GDP), projection endpoint: 15.3
- Gross external financing need (in billions of US dollars), repeated annual value: 0.3

### Stress-test scenarios and average scenario outcomes (as presented)
- Baseline average projection for external debt-to-GDP: 29 (listed in figures and boxes).
- Historical-scenario average projection for external debt-to-GDP: 50 (shown in historical box).
- Current-account (CA) shock scenario average: 48 (box label).
- Combined shock scenario average: 37 (box label).
- Real depreciation (30 percent in 2015) scenario average: 44 (box label).
- Growth shock scenario noted values: Baseline: 3.6; Scenario: 1.1; Historical: 4.3 (presented in projection summary).
- Baseline and scenario gross financing need narrative: Baseline: (in percent of GDP) 3.5 (baseline listed), Scenario: 4.2, Historical: 2.7 (presented in chart legend).

### Drivers of external debt dynamics (identified contributions)
- Identified external debt-creating flows (sum of components labeled 4+8+9): yearly series includes 11.7, -9.9, 5.5, 5.2, -4.8, -1.7, -0.5, -0.7, -0.9, -1.0, -0.9, -2.3 (table).
- Current account deficit, excluding interest payments: 17.8, 25.4, 26.3, 24.1, 16.2, 17.5, 16.5, 14.8, 14.7, 13.7, 13.7, 12.3 (annual series).
- Deficit in balance of goods and services: 16.7, 21.6, 20.9, 21.5, 10.6, 14.8, 12.6, 10.8, 10.5, 10.0, 9.9, 8.7 (annual series).
- Net non-debt creating capital inflows (negative): -21.3, -25.9, -17.0, -17.8, -13.3, -17.8, -16.8, -15.5, -15.6, -14.7, -14.7, -14.3 (annual series).
- Automatic debt dynamics contributions (nominal interest rate, real GDP growth, price and exchange rate changes) are reported, including contribution from nominal interest rate: 3.6, 1.9, 1.0, 1.1, 0.7, 1.0, 1.1, 1.2, 1.1, 1.1, 1.0, 0.7 (annual series).

### Key macroeconomic assumptions underlying the baseline (selected)
- Real GDP growth (in percent): -1.1, 5.9, 7.9, 2.8, 3.5, 3.7, 3.8, 3.7, 3.6, 3.5, 3.4, 3.4 (series in table).
- GDP deflator in US dollars (change in percent): -11.4, 8.0, 2.7, 2.2, 18.6, 2.7, 1.4, 2.2, 2.4, 2.4, 2.0, 1.5 (series).
- Nominal external interest rate (in percent): 3.8, 2.5, 2.3, 2.6, 1.9, 2.8, 3.2, 3.6, 3.5, 3.5, 3.6, 2.6 (series).
- Growth of exports (US dollar terms, in percent): -7.7, -1.1, 12.7, -1.6, 18.2, 2.0, 4.6, 4.4, 4.0, 3.9, 3.8, 3.8 (series).
- Growth of imports (US dollar terms, in percent): -8.6, 5.9, 11.6, 0.2, 6.4, 7.5, 2.2, 2.5, 3.9, 3.6, 3.9, 2.4 (series).
- Current account balance, excluding interest payments (in percent of GDP): -17.8, -25.4, -26.3, -24.1, -16.2, -17.5, -16.5, -14.8, -14.7, -13.7, -13.7, -12.3 (series).
- Net non-debt creating capital inflows: 21.3, 25.9, 17.0, 17.8, 13.3, 17.8, 16.8, 15.5, 15.6, 14.7, 14.7, 14.3 (series).

### Policy considerations and financing trade-offs (from text footnotes)
- "In considering the appropriate mix between domestic and external financing, the authorities will need to weigh the longer maturities offered by external creditors against the foreign exchange risk and possible consequences for increased sterilization needs that external finance can entail."
- "Under the proposal, Seychelles would buy-back or swap part of its foreign debts in exchange for issuing (domestic) debt instruments to a trust which would support marine conservation efforts."
- Coverage note: "This external DSA is based largely on public and publicly-guaranteed debt, in the absence of good data on the extent of private external borrowing. Work is ongoing to improve the coverage of private debt data. A large part of private debt liabilities are believed to have been incurred by the larger hotel groups, including intra-group loans from the (foreign) parent company."

*Source: IMF staff (Seychelles Public Sector Debt Sustainability Analysis, as presented in the provided content).*

### Annex II. Reserve Adequacy

### Annex II. Reserve Adequacy

### Overview and background
- Under the previous SBA and EFF programs, reserves were rebuilt from ½ month to 3.8 months of imports (equivalent to 170 percent of the ARA metric).
- Seychelles is characterized as a remote, highly open, and tourism-dependent micro-state; standard reserve adequacy metrics underestimate country-specific needs.
- Staff and the authorities consider levels equivalent to around 4 months of import cover or somewhat above 150 percent of the ARA metric as a desirable objective.
- The program envisages a further gradual accumulation of reserves to preserve reserve coverage levels at about their current levels despite balance of payments pressures.

### Reserve accumulation in 2013
- Gross international reserves reached $425 million by year-end (a 38 percent increase over 2012), bringing reserve cover to 3.8 months of prospective imports.
- The accumulation resulted from opportunistic purchases by the central bank, consistent with the program.

### Role of reserves for Seychelles
- For a small open economy like Seychelles, holding international reserves is desirable primarily to deal with current account shocks and to smooth consumption in a tourism-dependent economy.
- Key vulnerabilities and structural features:
  - Import bill equals 90 percent of GDP.
  - Current account deficits around 20 percent of GDP (albeit financed to a large degree by FDI).
  - Heavy reliance on tourism earnings.
  - Reliance on imports for nearly all basic necessities.
- Relative strengths reducing capital account risk:
  - Foreign currency deposits accounted for about a third of total deposits at end-2013.
  - External debt has been substantially restructured and reduced.
  - Foreign capital is overwhelmingly in the form of direct investment.

### Optimal reserves under an insurance model
- The optimal level of reserves weighs benefits against costs and can be estimated for different shocks using standard literature calibrations.
- Seychelles can withstand certain shocks at current reserve levels:
  - A shock to tourism earnings of up to 40 percent (comparable to the Maldives tsunami impact in late 2004).
  - A terms of trade shock that could push up food and other imports (excluding fuel) by 20 percent.
- However, at current reserve levels, reserves would be almost entirely exhausted in the event of a combined shock: a 40 percent decline in tourism earnings plus a 20 percent increase in imports of goods and services.
- The analysis notes that such a combination cannot be dismissed, for example if severe commodity price shocks trigger both effects.

### Reserve adequacy metrics and peer comparisons
- Traditional metrics show reserve coverage reached comfortable levels:
  - Seychelles fares average in peer comparison of traditional reserve coverage metrics.
  - In import cover (most relevant), Seychelles had 3.8 months of reserves at end-2013—around the mean among tourism-dependent peers but in the second to bottom quartile among all emerging markets (emerging markets average around 6 months of imports).
- IMF reserve adequacy metric (2011) assessment:
  - Using the metric for floating exchange rate regimes, coverage was below the minimum threshold until 2011.
  - Reserves surpassed the upper suggested limit of 150 percent in 2013 and are projected to remain slightly above it in the medium term.
  - Staff recommendations support an additional buffer reflecting small island sensitivity to external shocks, extreme openness, and tourism dependency.
- Alternative measures:
  - Lipschitz et al. suggests inadequate reserve cover for all years except 2013.
  - A small islands-specific metric (Mwase, 2013) shows adequate coverage starting in 2011 under a floating exchange rate regime.
- Projections and regime considerations:
  - Using the metric for fixed regimes, reserves would be barely above the 100 percent threshold for the projection period.
  - Seychelles maintains a flexible exchange rate regime, but intervention might be necessary more often than in conventional circumstances due to extreme openness and tourism dependency.

### Key statistics (as presented)
- Reserve cover: ½ month (initial) to 3.8 months (end-2013).
- ARA metric coverage: 170 percent (at rebuild high).
- Desired objective: around 4 months of import cover or somewhat above 150 percent of the ARA metric.
- Gross international reserves: $425 million by year-end 2013 (a 38 percent increase over 2012).
- Import bill: 90 percent of GDP.
- Current account deficits: around 20 percent of GDP.
- Foreign currency deposits: about a third of total deposits at end-2013.
- Combined shock scenario: 40 percent decline in tourism earnings + 20 percent increase in imports of goods and services would almost entirely exhaust reserves.

### Policy implications and program stance
- Although minimum reserve thresholds have been reached, maintaining a marginally comfortable reserve coverage requires substantial and sustained efforts.
- Medium-term projections rely on considerable nominal reserve accumulation supported by:
  - Disciplined macroeconomic policies.
  - Disbursements under the proposed IMF-supported program.
- Aiming for a strong reserve cover is warranted from a precautionary perspective to fend off potential current account shocks, provided benefits outweigh costs of holding reserves.

*Source: _cr14186 - Annex II. Reserve Adequacy*

### 3. The decline in public debt was achieved through a combination of higher than

### _cr14186 - 3. The decline in public debt was achieved through a combination of higher than

### Fiscal outcomes (2010–2013)
- Primary budget surpluses consistently exceeded program targets and averaged 5.5 percent of GDP during 2011-13, and 4.7 percent of revised GDP in 2013.
- Public external debt fell from 48 percent of GDP at end-2010 to 36 percent at end-2013.
- Revenue performance: revenue–to–GDP ratio averaging 35.3 percent during 2010-13.
- Capital investment: on average 7 percent of GDP in 2010-13, including on-lending of external borrowing to the public utility company.

### Monetary policy and reserves
- Monetary policy contained inflation; policy tightening in mid-2012 countered exchange rate pressures.
- In 2013 the exchange rate strengthened and the Central Bank of Seychelles increased gross reserves.
- Domestic liquidity was controlled through treasury bills issuance for monetary purposes and liquidity absorbing operations despite volatility in some monetary aggregates.
- Monetary policy framework: Bank to control domestic liquidity through policy directed at meeting average quarterly bank reserve targets, anchored by quarterly targets on average daily reserve money.

### Structural reforms implemented under EFF-supported program
- Taxation: introduction of the VAT in January 2013; reduction of the business tax rate; simplification of excise taxes.
- Expenditure management: adoption of international accounting standards and budget framework; new chart of accounts; new Public Finance Management Act; piloting of Performance Program-Based Budgeting (PPBB).
- SOE monitoring and reforms: new law establishing an independent commission; measures to enhance public utility company financial viability including new electricity and water tariff; partial privatization of the national airline (sale of 40 percent in 2012); restructuring of SEYPEC tankers’ debt.
- Banking and financial system modernization: reform of the Development Bank; new policy of housing finance and reorganization of housing finance corporation with smart subsidies; launching of the stock exchange; introduction of a credit information system; modernization of the payment system including an electronic clearing house and electronic fund transfers.

### Key objectives for the successor arrangement (2014–2016)
- Strengthen macroeconomic stability and fiscal and external sustainability.
- Maintain disciplined fiscal and monetary policy to place debt on a strong path toward sustainability by reducing gross public debt to below 50 per cent of GDP by 2018 and contribute to further international reserves accumulation.
- Sustain economic growth and enhance efficiency through intensified structural reforms in taxation, public finance management, banking and financial system, SOE management and oversight, and support for private sector development.

### Fiscal policy stance and targets
- To meet the target of reducing gross public debt below 50 percent of GDP by 2018 while allowing room for critical infrastructure investment, maintain adequate primary budget surpluses, not less than 3.2 percent per year (barring significant negative exogenous shocks).
- Monetary policy will aim at maintaining inflation at low single digits in the context of a flexible exchange rate regime.

### Medium-term macroeconomic projections and drivers
- Main macroeconomic objectives for the next three years:
  - achieve an average growth rate of GDP of 3.7 percent;
  - contain inflation in single digits;
  - narrow the current account deficits and build reserves further; and
  - bring debt to sustainable levels.
- Current account deficit: expected gradual decline from 17 percent of GDP in 2013 to 14.5 percent in 2016.
- Reserve coverage: increase official reserve coverage to about 4.2 months of imports by 2016.
- Tourism earnings: expected to rise by 6-7 percent per year in US dollar terms.
- Foreign direct investment: expected to remain sustained, at a level close to that of 2011-12.

### Fiscal policy measures and 2014 budget
- 2014 budget aims to protect investment spending while continuing to reduce debt; targets a primary surplus including net-lending to state-owned enterprises of 4 percent of GDP.
- Despite an increase in wages, current expenditure will decline as a share of GDP.
- Privatization proceeds from non-strategic state enterprises will be used to strengthen the capital budget.
- Total revenue excluding grants in 2014 expected to decline from 32.3 percent of GDP to 31 percent of GDP.

### Tax policy and tax administration improvements
- Focus on improving tax administration, with emphasis on VAT, trade and excise taxes, electronic filing, speeding up VAT refunds, reducing exemptions, simplifying trade documentation, and strengthening SRC audit and investigative capacity.
- Specific measures:
  - Mandatory requirement for compulsory VAT registered businesses to file their monthly return online starting on July 1, 2014, following establishment of an e-payment facility.
  - Reducing exemptions on VAT and further reduction of the threshold for compulsory registration.
  - Strengthening the single window principle at customs to avoid involvement of more than one agency for trade documentation.
  - Action plan on excise management including amendments to regulations, following a 2013 TA report.
  - Recruitment of more specialized audit personnel at SRC to strengthen investigative and auditing function.
  - Review of Corporate Social Responsibility and Tourism Marketing Taxes collection to ensure fair and equitable application.

- Strengthening of auditing capacity:
  - Recruitment and integration of more experienced tax auditors into units including Customs Investigation Unit.
  - Use of a risk management process to prioritize SRC audit workload.

### Timed fiscal policy actions (selected)
- Sep-14: Cabinet approval of the Medium-Term Fiscal Framework (MTFF) (Structural Benchmark (SB)) — support continued strong fiscal policies and ensure adequate financing for medium-term development objectives.
- Sep-14: Improve Seychelles Revenue Commission's analysis, audit, and investigative capacity — enhance revenue mobilization.
- Sep-14: Extend e-filing and e-payment beyond VAT — facilitate tax compliance.
- Oct-14: Review the current system of turnover taxes — minimize distortions and consider introducing deductibility.
- Sept 15: Modernize customs administration and support trade facilitation by creating a single window system and on-line portal — promote transparency and compliance at customs.

### Public Financial Management and Expenditure Reform
- Priorities:
  - prepare a full MTFF (to be approved by Cabinet by end-September 2014 — structural benchmark);
  - gradually widen adoption of PPBB (started with two ministries in 2014; PPBB to be introduced in three more ministries in 2015);
  - strengthen public investment management by developing the PSIP instrument, formulating infrastructure plans, and preparing detailed guidelines for project stages;
  - adopt guidelines to prepare financial statements according to IPSAS principles (pilot basis for 2011);
  - establish and publish comprehensive asset register for SOEs and public land and strengthen public land management.
- MTFF role: establish integrated multi-year policy-based targets for main fiscal aggregates – debt, financing, primary balance, revenues and expenditures.
- PPBB rollout: first step to prepare strategic plans in two pilot ministries by June 2014; further preparation in all ministries with assistance.
- PSIP and PIM:
  - Establish PSIP Development Committee to coordinate preparation of Investment program.
  - Ministry of Finance to carry out quarterly review of projects above the threshold of SR 10 million.
  - Develop integrated PIM guidelines covering all stages from proposal to monitoring and evaluation.
  - Budget circular to add reporting on monitoring as a budgeting requirement; establish mechanism for periodic, on-site joint monitoring by Ministry of Finance, NTB, and line ministries.
- IPSAS implementation: 2011 financial statements prepared in IPSAS format as a parallel year; legal/regulatory amendments and accounting manual updates required.

### PFM actions and timing (selected)
- Jun-14: Reporting in IPSAS format — enhance transparency and economic governance.
- Dec-14: Establish and publish comprehensive asset register for 5 state-owned enterprises (Air Seychelles, Seypec, SCAA, STC, PUC), including state land (SB).
- Dec-15: Establish and publish comprehensive government asset register, including state land; review regulatory framework governing use and disposal of state land.
- Jun-14: Establish a special unit in Ministry of Finance for quarterly monitoring of execution of PSIP.
- Oct-14: Cabinet adoption of strategic plan to ensure long term financial self-sufficiency of Seychelles Pension Fund (SPF).
- Jan-15: Extension of PPBB to three more ministries in 2015.

### State-Owned Enterprise (SOE) reform and oversight
- PEMC to strengthen transparency and ensure SOEs meet performance objectives; seek technical assistance to strengthen PEMC capacity.
- Key actions:
  - Creation of a web-based public information system to publish financial performance reports by PEMC, to be established by end-June 2014.
  - Full consolidation of SOEs and government accounts by June 2014.
  - Establishment of annual performance objectives for all SOEs starting with 2014.
  - Quarterly performance reports by PEMC to the Ministry of Finance.
  - PEMC Board to approve a plan for governance audits of SOEs, including capacity plans (SB).
  - Privatization of government’s stake in SACOS by end-2014; review other holdings for possible privatization.
  - Endorsement by the National Tender Board of procurement policies of all SOEs incorporated under the companies act by September 2014 (SB).
  - Simplification of tariff structure for electricity and water utility company adopted in 2013 and review to accelerate tariff rebalancing.
  - Adoption of International Financial Reporting Standards (IFRS) by all SOEs by end of 2016.

### SOE actions and timing (selected)
- Jun-14: Full consolidation of SOEs and government accounts.
- Aug-14: Creation of a web-based public information sharing system to report on financial performance of SOEs by PEMC.
- Sep-14: Privatization of State Assurance Corporation of Seychelles (SACOS).
- Dec-14: Approval by PEMC Board of a plan for governance audits of SOEs (SB).
- Dec-14: Cabinet approval of a simplified tariff structure for the utilities company.
- Dec-14: Institute annual performance objectives for all major SOEs.
- Sep-14: Clarify supervisory roles of the SSI and of the PEMC.
- Sep-14: Endorsement by the National Tender Board of procurement policies of all SOEs incorporated under the companies act (SB).

*Source: _cr14186 - 3. The decline in public debt was achieved through a combination of higher than*

### 17.  The government places the highest priority on sustained and inclusive growth and

### 17.  The government places the highest priority on sustained and inclusive growth and

### Real Sector and Private Sector Development
- The MTNDS (Medium-Term National Development Strategy) is currently being prepared to provide a coordinated approach to the country’s development and align sectoral strategies; implementation of strategies and investment will be consistent with the overall macro-economic framework.
- Extensive consultation with all stakeholders, including the private sector and civil society, will be carried out to maximize input and ownership.
- Recognizing that the private sector is the engine of growth, government will continue to promote competition and private sector involvement in key sectors, including infrastructure, such as fisheries and port services.
- Expansion of the port of Victoria is capital intensive; government strategy is to attract private investors under a Public-Private Participation scheme that shares risk and provides appropriate incentives.
- Government will consider measures to eliminate restrictive practices in the provision of port services, which currently restrict competition and pose a barrier to efficiency and to attracting private operators for redevelopment of the commercial port.
- Government will facilitate title registration by adopting an automated system to speed up provision of housing financing by financial institutions.
- Government will join the Extractive Industry Transparency Initiative (EITI) program by implementing the necessary steps to apply for adherence, with a view to attaining full adherence by June, 2016.

- Actions, Timing, Objectives:
  - Cabinet approval of the Medium-Term National Development Strategy (SB). — Oct-14
    - Promote growth by aligning development efforts both domestically and with external partners and ensuring that medium term fiscal plans support medium-term growth objectives.
    - Coordinate strategy with public sector investment plans, including SOEs, in a medium-term fiscal framework which ensures adequate financing for priority investment.
  - Develop a framework for private sector participation (e.g., Public Private Partnership (PPP)) in large infrastructure projects such as expansion of Port Victoria that shares risks and provides proper incentives to private sector. — Mar-15
    - Enhance private sector participation in key infrastructure projects, such as the port, taking advantage of competition and efficiencies in the private sector, while limiting the risks to public finances.
  - Eliminate restrictive practices at the Port of Victoria. — Dec-14
    - Enhance efficiency and competitiveness of port services and strengthen the role of the port as regional hub and logistics platform.
  - Join Extractive Industry Transparency Initiative (EITI) program by implementing the 5 EITI steps — Jun-16
    - Enhance transparency in reporting of any future revenues from oil or other natural resources, to promote fiscal soundness and fairness.

### Public Debt Management Strategy
- External debt restructuring launched in 2009 is near completion; focus will shift to management of government and government guaranteed debt.
- Over the long term, intend to gradually shift, to the extent possible, the financing mix for investment projects towards domestic sources (government revenues, domestic borrowing) and away from external borrowing.
- Proposed initiative: debt swap of the existing Paris Club debt for environmental project, which, if successful, would help shift financing toward domestic borrowing.
- Annually present to the National Assembly, together with the budget, an update of the debt management strategy for the following year highlighting amount and composition of expected borrowing, terms envisaged, and impact on debt and debt service profile to evaluate consistency with medium term debt target.

### Foreign Trade Regime
- Seychelles is in the final stages of WTO accession and aims to complete accession in the second half of 2014; a legal action plan agreed with the WTO Secretariat was fully implemented in April 2014.
- Finalizing negotiations for membership of the SADC Free Trade Area; anticipate joining in mid-2014.

### Monetary, Exchange Rate, and Financial Sector Policies
- CBS revised its Monetary Policy Framework to allow more flexibility and to strengthen transmission by adopting a forward-looking approach to monetary policy.
- Operational objective: stabilise commercial banks’ reserves through use of short-term instruments to develop a benchmark yield curve and strengthen interest rate transmission.
- Reserve money will continue to serve as the nominal anchor; CBS will be guided by quarterly average values rather than end-quarter targets to provide flexibility and focus on short-term liquidity conditions.
- Under a formal agreement, the Ministry of Finance committed to issue T-Bonds for the amount of SR 800 million for monetary policy purposes to address the bulk of the liquidity overhang and to strengthen operations under the new monetary policy framework.
  - As of end-April, over 80 percent of the bonds have already been subscribed.
  - By end-June, any remaining shortfall to the SR 800 million will be covered by issuance of additional government securities for sterilization purposes.
- Commitment to a flexible exchange rate: exchange rate determined in the market and adjust in line with economic fundamentals; CBS will intervene in case of excessive volatility to ensure orderly market conditions.
- Current reserve coverage viewed as broadly adequate to face even severe external shocks; Bank will continue to accumulate external reserves opportunistically to achieve set targets.
- In 2014 the Bank engaged Crown Agent Investment Management (CAIM) through a 3-year agreement to invest a portion of reserves and provide training to staff involved in reserves management.

### Financial Sector Development and Stability
- CBS enlisted a diagnostic project supported by the World Bank's FIRST initiative to develop a comprehensive Financial Sector Development Implementation Plan (FSDIP) focusing on access to finance, financial markets, financial infrastructure, banks and NBFIs’ supervision and regulation.
  - Final report and recommendations expected by June 2014; authorities intend to endorse a strategic plan by October 2014 (SB).
  - The strategic plan will inform reform measures for 2014 – 2017.
- Following the Financial Leasing Act (late 2013), CBS is preparing enabling Regulations including licensing regulations and capital adequacy and reserve fund regulations; once issued, CBS will start accepting license applications for financial leasing.
- CBS is working towards a Corporation Agreement with the International Finance Corporation for assistance with upcoming phases including sensitization campaigns and capacity building.
- CBS will strengthen the macro prudential policy framework:
  - Drafted timeline begins with identification of key indicators for macro prudential surveillance for financial stability, followed by development of appropriate tools and guidelines on computing financial stability indicators by end 2014.
  - Aim to formulate and implement a framework for macro-prudential surveillance by end 2015.
- CBS will receive technical assistance to analyze relevant components of Basel II and III applicable to Seychelles and to develop a roadmap for implementation.
- Modern payment system acceleration:
  - First phase of Electronic Funds Transfer (EFT) implemented across all banks in mid-August 2013.
  - Second phase scheduled for completion by end-September of 2014; will extend internet-based online platform from banks to the general public.
  - Payments system oversight enhancements: new payments system law will become effective by the end-July of 2014; oversight function operational by the fourth quarter of 2014.

- Financial Sector Development — Action, Timing, Objectives:
  - Completion of the draft FSDIP, including matrix of past and ongoing projects/recommendations and sections on legal framework, financial infrastructure, financial markets, nonbank financial institution supervision, SME access to credit. — Jun-14
    - Devise a coherent strategy that identifies priorities and appropriate sequencing for reforms that enhance the sector’s contribution to inclusive growth and development.
  - Cabinet approval of a Strategic Plan on Financial Sector Development (SB). — Oct-14
    - Create political backing and legitimacy for action plan implementation.
  - Cabinet approval of a strategic plan to ensure the long term financial self-sufficiency of Seychelles Pensions Fund (SPF). — Oct-14
    - Foster financial deepening and increase availability of long-term funding in the financial system.
  - Implementation of the action plan under the FSDIP begins under the coordination and supervision of high level steering committee (including MFTI and CBS) supported by a technical secretariat to be established within the CBS. — 2015
    - Enhance the financial sector’s contribution to inclusive growth and development.

- Macro prudential Policy Framework — Action, Timing, Objectives:
  - Identify the key indicators required for macro prudential surveillance and develop guidelines on how to compute these indicators. — Dec-14
    - Strengthen financial stability.
  - Formulate and implement framework for macro prudential surveillance. — Dec-15
    - Strengthen financial stability.

- Payments System — Action, Timing, Objectives:
  - Submission to the National Assembly of the new Payments Systems Law. — Jun-14
    - Modernise the payments system.
  - Implementation of phase two of the Seychelles Electronic Funds Transfer system. — Dec-14
    - Enhance the efficiency of the payments system.
  - Start of the implementation of the new payments system oversight function. — Dec-14
    - Enhance resilience and safeguard integrity of the payments system.

### CBS Operations and Governance
- Internal Audit Division (IAD) performed an initial self-assessment under the Quality Assurance and Improvement Program (QAIP) of conformity with the Institute of Internal Auditors’ (IIA) Standards; an external consultant facilitated the exercise and result showed IAD was in partial conformity.
  - External consultant will carry out an assessment to validate the result of the initial exercise by September 2014.
  - IAD will follow a program to bridge any gap with the IIA standards.
- The CBS Board approved the new 5 year Strategic Plan 2014 – 2018 to guide the Bank in achieving its primary objective of promoting domestic price stability and the soundness of the financial system.
  - A matrix of key actions and timeframes has been prepared for implementation.
  - The action plan will be reviewed annually and monitoring performed quarterly.

### Financial Services Authority and Non-Bank Financial Services Sector
- The newly created Financial Service Authority (FSA) will provide a modern and effective framework for supervision of non-banking financial services; mandate includes supervising and regulating non-bank financial institutions not under the ambit of the CBS.
- FSA will continue to regulate offshore financial services (IBCs, Trusts, Foundations, etc.); functions of promoting financial services have been transferred to the Seychelles Investment Board to make the FSA purely a regulator.
- Commitment to meet best international practices on transparency and exchange of information on tax matters:
  - Continue to work closely with the OECD and other international partners to bring legal framework in line with best international practices on transparency and exchange of information on tax matters.
  - Part of Peer Review Assessment Team and expressed intention to become a signatory to the Multilateral convention on Mutual Administrative Assistance in Tax Matters.
  - Will further amend the Seychelles Revenue Commission Act, 2009 (SB-June 2014).
  - Enact new laws that cover IBCs, Trusts, etc., and expand TIEA and DTAA networks which are already based on the OECD model.

- International Financial Services Sector — Action, Timing, Objectives:
  - Submission to national assembly of (i) amendment of Seychelles Revenue Commission Act to be consistent with international standards; and (ii) ratification of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (SB). — Jun-14
    - To safeguard the global business sector by harmonizing domestic legislation with international best practice.
  - Enactment of new laws governing the international financial services sector such as (i) IBCs and Trust laws; and (ii) signing of more Tax Information Exchange Agreements (TIEAs) and Double Taxation Avoidances (DTAs). — Dec-14
    - Safeguard the global business sector, following the OECD finding, and lay the foundation for sustained growth in the business and financial services sector through best practice regulation for the sector, to enhance its contribution to growth.

### National Statistics
- Strategy to achieve compliance with the IMF’s Special Data Dissemination Standard (SDDS):
  - Bureau developed Strategic, Operational and SDDS Plans; work ongoing to produce SDDS Real Sector indicators and achieve SDDS compliance by the committed target date of mid-2015.
  - Work ongoing to produce real sector indicators and improve coverage of external sector statistics.
  - IMF Statistics Department TA mission assisted formulation and implementation of a survey to collect statistics from corporate service providers (CSP), allowing inclusion of data on international businesses in the country’s BOP and IIP statistics by end 2014.
- Quarterly national accounts and labour statistics:
  - A first set of preliminary quarterly GDP data for the period 2006 Q1 – 2013 Q3 was published in December 2013 on an experimental basis; work ongoing to improve quality, coverage and timeliness.
  - Bureau aims to publish QGDP as per indicated dates on the release calendar, in line with SDDS dissemination requirements; currently only constant price estimates are being compiled for all relevant quarters, and compilation of QGDP in “current” prices for the current and previous year is being explored.
  - A continuous quarterly labour force survey (QLFS) was launched in January 2014 to provide up-to-date statistics on unemployment to inform policy programs.
  - Bureau will continue to use administrative source data to compile quarterly employment numbers and earnings; deficiencies in the administrative data remain a primary concern and setback in timely compilation of statistics, and efforts will be made to resolve this in close collaboration with the Seychelles Revenue Commission (SRC).

*International Monetary Fund — Seychelles staff report excerpt*

### 39.  A Household Budget Survey (HBS) was conducted in 2013. The data is currently being

### _cr14186 - 39.  A Household Budget Survey (HBS) was conducted in 2013. The data is currently being 

### Household Budget Survey (HBS)
- A Household Budget Survey (HBS) was conducted in 2013. The data is currently being processed and the first set of preliminary results is expected by end-June 2014.
- Intended uses of the HBS results:
  - Update the basket of commodities and update the weights for the compilation of the monthly Consumer Price Index.
  - Inputs to the compilation of Household Final Consumption Expenditure (HFCE) in the estimated GDP project to be developed in the medium term.
  - Provide inputs to update poverty measures.

### Program Monitoring for the EFF-supported program
- Monitoring modalities:
  - Semi-annual program reviews.
  - Quantitative performance criteria (QPCs) and indicative targets.
  - Structural benchmarks.
  - Disbursements linked to meeting QPCs at end-June 2014 for completion of the first review.
- The Technical Memorandum of Understanding (TMU) defines QPCs, indicative targets, and adjusters.
- A new Safeguards Assessment of the CBS is to be completed by the time of the first review; the process has been initiated.

### Structural Benchmarks (2014) — summary of measures and target dates
- Real Sector
  - Cabinet approval of the Medium-Term National Development Strategy. Target Date: End October, 2014.
  - Submission to National Assembly of (i) amendment of Seychelles Revenue Commission Act to be consistent with international standards; and (ii) ratification of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Target Date: End June, 2014.
- Financial Sector
  - Cabinet approval of a Strategic Plan on Financial Sector Development. Target Date: End October, 2014.
- Fiscal Policy
  - Cabinet approval of a Medium-term Fiscal Framework (MTFF). Target Date: End September, 2014.
- Public Financial Management Policy
  - Establish and publish comprehensive asset register for the following 5 state-owned enterprises (Air Seychelles, Seypec, SCAA, STC, PUC), including state land. Target Date: End December, 2014.
- State-Owned Enterprises
  - Endorsement by the National Tender Board of the procurement policies of all those state-owned enterprises incorporated under the companies act. Target Date: End September, 2014.
  - Approval by PEMC Board of a plan for carrying out governance audits of SOEs, including a plan for ensuring sufficient capacity. Target Date: End December, 2014.

### Quantitative Performance Criteria Under the Extended Arrangement, 2014 (Table 2)
- Proposed performance criteria / proposed indicative targets / proposed performance criteria (End-June / End-September / End-December) as presented:
  - Net international reserves of the CBS, millions of U.S. dollars (floor): 340350357
  - Reserve money (ceiling on daily average): 2,7312,7212,716
  - Primary balance of the consolidated government (cumulative floor): 310593721
  - Contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 526070
  - Contracting or guaranteeing of new short-term external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 0.00.00.0
  - Accumulation of external payments arrears by the public sector (ceiling): 0.00.00.0
  - Accumulation of domestic payment arrears by the government (ceiling): 0.00.00.0
- Memorandum items (as presented):
  - Net external non-project financing (millions of U.S. dollars; cumulative): -8.3-8.1-3.3
  - External budget loans: 7.07.024.0
  - Cash payments on foreign debt service: 20.022.237.1
  - External budget grants: 4.77.19.8
  - Reserve money target (daily average): 2,6512,6422,637
  - Program accounting exchange rates (end-of-quarter):
    - SR/US$ (end-of-quarter): 12.1312.1312.13
    - US$/Euro (end-of-quarter): 1.381.381.38
    - US$/UK pound (end-of-quarter): 1.671.671.67
    - US$/AUD (end-of-quarter): 0.890.890.89
    - US$/CAD (end-of-quarter): 0.900.900.90
    - US$/SDR (end-of-quarter): 1.551.551.55

### Technical Memorandum of Understanding — Key Definitions, Methods, and Adjusters
- General
  - TMU presents definitions of variables included in QPCs and indicative targets, key assumptions, and reporting requirements.
- A. Net International Reserves (NIR) of the CBS (Floor)
  - Definition: Reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF). Reserve assets include holdings of SDRs, 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 to meet reserve requirements.
  - Calculation method: 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.
  - 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 due no later than two months after each test date.
  - Adjusters: The NIR floor will be adjusted upward (downward) by the amount by which external non-project loans and non-project cash grants exceed (fall short of) program assumptions. Floors also adjusted by differences in external debt service payments relative to program assumptions.
- B. Reserve Money and Reserve Money Band (Ceiling)
  - Definition: Reserve money = currency issued + deposits held by other depository corporations at the central bank (bank reserves), including foreign currency-denominated. Targets are projected daily averages of the quarter preceding the test date, with a symmetrical band of three percent in both directions. Upper bound of the band is the ceiling.
  - Monitoring and reporting: Daily reserve money data submitted weekly (time lag no later than one week). Cumulative average over the quarter monitored and reported weekly.
- C. Program Primary Balance of the Consolidated Government (Cumulative Floor)
  - Definition: Consolidated government primary balance from above the line on a commitment basis = total consolidated government and social security fund revenues (excluding privatization and long-term lease income receipts) less all noninterest (primary) expenditures and net lending of the government and social security fund.
- D. Public External Debt (Ceiling)
  - Coverage: Ceiling applies to contracting or guaranteeing of new external liabilities by the public sector (central government, CBS, all public agencies and parastatals for noncommercial operations). Excludes Fund resources, operations related to external debt restructuring, normal import-related credits, purchases of treasury securities by nonresidents, or borrowing by parastatals in normal commercial operations.
  - Valuation: Debt valued in U.S. dollars at program exchange rates. Zero sub-ceiling applies to short-term external debt (original maturity up to and including one year).
  - Definition of debt: As per the “Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements,” includes loans, suppliers credits, leases (present value of lease payments at inception), arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt.
- E. External Arrears of the Public Sector
  - Continuous performance criterion: Nonaccumulation of arrears to external creditors.
  - Definition: External payments arrears = amount of external debt service due and not paid within contractually agreed period, subject to grace periods, including contractual and late interest. Excludes arrears for which a rescheduling agreement is sought or a clearance framework agreed.
- F. Domestic Arrears of Government
  - Performance criterion: Nonaccumulation of budget expenditure arrears measured on a net basis from the beginning of a calendar year.
  - Definition: Budget expenditure arrears = sum of (1) invoices received and verified but unpaid within contractually agreed period or within 30 days if no grace period; (2) unpaid wages, pensions, or transfers pending longer than 30 days; and (3) debt service payment on domestic debt of the government or guaranteed by the government not made within contractually agreed period.

### Data and Information Reporting Requirements (selection)
- CBS reporting
  - Weekly (within one week from the end of the period):
    - Daily reserve money data.
    - Foreign exchange reserves position.
    - A summary table on foreign exchange market transactions.
    - Results of liquidity deposit auctions, primary Treasury bill auctions, and secondary auctions.
  - Monthly (within four weeks from the end of the month):
    - Monetary survey in the standardized report form format.
    - Foreign exchange cash flow, actual and updated.
    - Financial soundness indicators.
    - Stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report.
- Ministry of Finance reporting
  - Monthly (within two weeks from the end of the month):
    - Consolidated government operations on a commitment basis and cash basis in the IMF-supported program format and in GFSM2001 format.
    - Detailed revenues and expenditures of the central government and social security fund.
    - Import and export data from the customs department.
    - Public debt report, reconciled with cash operations.
    - Consolidated creditors schedule on domestic expenditure arrears of the government.
  - Quarterly (within one month from the end of the quarter):
    - Accounts of the public nonbank financial institutions.

*Sources: Seychelles authorities and IMF staff estimates and projections.*

### 14. The government and CBS will consult with Fund staff on all economic and financial

### 14. The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation, and will provide any additional relevant information as requested by Fund staff.

### IMF Executive Board decision and program objectives
- Executive Board approved a three year SDR 11.445 million (about US$ 17.6 million, or 105 percent of Seychelles’ quota) arrangement under the Extended Fund Facility (EFF).
- Immediate disbursement: SDR 1.635 million (about US$ 2.5 million).
- Remaining amount to be phased over the duration of the program, subject to semi-annual program reviews.
- Program aims:
  - Reduce high debt levels.
  - Improve external buffers and sustainability in the face of emergent balance of payments pressures.
  - Strengthen the economy through sustained and inclusive growth.
- Authorities’ anchor: reduce the debt-to-GDP ratio to below 50 percent by 2018.

### Recent economic developments (Annex)
- Recovery and reform outcomes since 2008 crisis:
  - Real GDP growth accelerated to around 3.5 percent in 2013.
  - Inflation stabilized at a low level; inflation fell to 2.2 percent in March 2014 (Annex text).
  - Reserve coverage: estimated 3.8 months of imports at end-2013, up from 3.0 months at end-2012.
- Remaining vulnerabilities:
  - Public debt at 65 percent of GDP (Annex text).
  - Current account deficit: 18.5 percent of GDP (Annex text) — largely funded by FDI.
  - Balance of payments headwinds as debt service and investment income payments rise.
- Structural impediments to sustained GDP growth: need for adequate infrastructure investment and active reform agenda to enhance productivity.
- Fiscal pressures: revenue and grants falling as a proportion of GDP.

### Program design and macroeconomic framework (Program Summary)
- Macroeconomic anchor: debt-to-GDP ratio below 50 percent by 2018.
- Fiscal requirement: continued fiscal primary surpluses of 3 to 4 percent of GDP over the medium term.
- Revenue measures: focus on improving tax compliance and administration.
- Spending focus: enhance quality of fiscal spending; protect essential social and investment needs.
- Monetary framework:
  - Aim to maintain low and stable inflation.
  - Excess liquidity largely addressed through issuance of medium-term Treasury bonds prior to the program.
  - Adoption of average reserve money targeting to support a more forward-looking framework.
  - Exchange rate flexibility and moderate reserve accumulation to facilitate adjustment to external shocks.
- Structural reform priorities:
  - Adoption of a Medium-Term National Development Strategy (MTNDS).
  - A medium-term fiscal framework (MTFF).
  - Financial sector development strategy.
  - Measures to combat international tax evasion.
  - New framework for Public Private Partnerships (PPP).
  - Establishing a registry of state assets, including land.
  - Strengthening oversight of state owned enterprises (SOEs).

### Key quantitative indicators (selected from Seychelles: Selected Economic and Financial Indicators, 2011–19)
- Nominal GDP (millions of Seychelles rupees): 13,304 (2011), 15,468 (2012), 16,723 (2013), 18,103 (2014), 19,381 (2015), 20,750 (2016), 22,196 (2017), 23,716 (2018), 25,303 (2019).
- Real GDP (percentage change): 7.9 (2011), 2.8 (2012), 3.5 (2013), 3.7 (2014), 3.8 (2015), 3.7 (2016), 3.6 (2017), 3.5 (2018), 3.4 (2019).
- CPI (annual average): 2.6 (2011), 7.1 (2012), 4.3 (2013), 3.6 (2014), 2.9 (2015), 3.0 (2016), 3.0 (2017), 3.0 (2018), 3.0 (2019).
- CPI (end-of-period): 5.5 (2011), 5.8 (2012), 3.4 (2013), 4.0 (2014), 3.2 (2015), 3.1 (2016), 3.0 (2017), 3.0 (2018), 3.0 (2019).
- GDP deflator (average): 5.3 (2011), 13.1 (2012), 4.5 (2013), 4.4 (2014), 3.2 (2015), 3.3 (2016), 3.3 (2017), 3.2 (2018), 3.1 (2019).
- Credit to the private sector (percentage change): 5.2 (2011), 8.5 (2012), 4.5 (2013), 6.8 (2014).
- Broad money (percentage change): 4.5 (2011), -0.6 (2012), 23.7 (2013), 8.3 (2014).
- Reserve money (percentage change): -2.7 (2011), 6.9 (2012), 15.4 (2013), 25.8 (2014).
- External savings (percent of GDP): 27.4 (2011), 25.2 (2012), 16.9 (2013), 18.5 (2014), 17.7 (2015), 16.0 (2016), 15.9 (2017), 14.8 (2018), 14.8 (2019).
- Gross national savings (percent of GDP): 7.0 (2011), 12.4 (2012), 21.4 (2013), 17.5 (2014), 15.3 (2015), 14.8 (2016), 15.3 (2017), 15.0 (2018), 15.2 (2019).
- Gross investment (percent of GDP): 34.3 (2011), 37.6 (2012), 38.3 (2013), 36.0 (2014), 32.9 (2015), 30.9 (2016), 31.2 (2017), 29.8 (2018), 29.9 (2019).
- Total revenue, excluding grants (percent of GDP): 35 (2011), 34.4 (2012), 32.4 (2013), 31.0 (2014), 30.9 (2015), 30.9 (2016), 30.9 (2017), 30.9 (2018), 30.9 (2019).
- Expenditure and net lending (percent of GDP): 35.2 (2011), 36.2 (2012), 36.6 (2013), 33.1 (2014), 32.2 (2015), 31.8 (2016), 31.2 (2017), 31.0 (2018), 31.6 (2019).
- Current expenditure (percent of GDP): 27.2 (2011), 25.8 (2012), 27.1 (2013), 26.0 (2014), 25.2 (2015), 24.7 (2016), 24.2 (2017), 24.0 (2018), 24.2 (2019).
- Capital expenditure (including onlending) (percent of GDP): 8.0 (2011), 10.4 (2012), 9.5 (2013), 7.1 (2014), 7.0 (2015), 7.1 (2016), 7.0 (2017), 6.9 (2018), 7.4 (2019).
- Overall balance, including grants (percent of GDP): 0.9 (2011), 2.2 (2012), 0.3 (2013), 0.7 (2014), 0.3 (2015), 0.5 (2016), 0.9 (2017), 1.0 (2018), 0.3 (2019).
- Program primary balance (percent of GDP): 5.3 (2011), 5.7 (2012), 4.7 (2013), 4.0 (2014), 3.2 (2015), 3.2 (2016), 3.2 (2017), 3.1 (2018), 2.4 (2019).
- Total public debt (percent of GDP): 73.2 (2011), 77.5 (2012), 65.3 (2013), 64.5 (2014), 61.0 (2015), 57.4 (2016), 53.3 (2017), 49.1 (2018), 45.9 (2019).
  - Domestic (percent of GDP): 27.7 (2011), 32.2 (2012), 27.7 (2013), 27.3 (2014), 24.6 (2015), 22.5 (2016), 20.2 (2017), 18.2 (2018), 16.9 (2019).
  - External (percent of GDP): 45.6 (2011), 45.3 (2012), 37.6 (2013), 37.2 (2014), 36.5 (2015), 34.9 (2016), 33.1 (2017), 30.9 (2018), 29.0 (2019).
- Current account balance including official transfers (percent of GDP): -27.4 (2011), -25.2 (2012), -16.9 (2013), -18.5 (2014), -17.7 (2015), -16.0 (2016), -15.9 (2017), -14.8 (2018), -14.8 (2019).
- Total public external debt outstanding (millions of U.S. dollars): 490 (2011), 512 (2012), 521 (2013), 549 (2014), 566 (2015), 575 (2016), 577 (2017), 572 (2018), 566 (2019).
- Gross official reserves (end of year, millions of U.S. dollars): 277 (2011), 307 (2012), 425 (2013), 455 (2014), 481 (2015), 506 (2016), 531 (2017), 555 (2018), 577 (2019).
- Months of imports, c.i.f. (reserves): 2.8 (2011), 3.0 (2012), 3.8 (2013), 4.0 (2014), 4.1 (2015), 4.2 (2016), 4.2 (2017), 4.2 (2018), 4.3 (2019).
- Seychelles rupees per US$1 (end of period): 13.7 (2011), 13.0 (2012), 12.1 (2013).
- Seychelles rupees per US$1 (period average): 12.4 (2011), 13.7 (2012), 12.1 (2013).

### Statement highlights (Mr. Naoyuki Shinohara; Mr. Ian Davidoff and Ms. Nghi Luu)
- Acknowledgement of comprehensive reforms since the 2008 crisis that supported recovery and improved fiscal and external sustainability.
- 2013 outcomes:
  - Growth strong, boosted by increased tourism arrivals.
  - Inflation stabilized at a low level.
  - Current account deficit fell sharply, allowing the central bank to rebuild reserves.
- Risks noted:
  - Debt levels and the current account deficit remain high.
  - Persistent structural weaknesses hold back growth potential and economic resilience.
- Program emphasis:
  - Reduce vulnerabilities and contain fiscal risks while fostering sustained and inclusive growth.
  - Structural reform agenda ambitious and targeted: MTNDS, MTFF, financial sector development strategy, enhanced SOE oversight.
- Praise for authorities’ ownership and implementation of difficult reforms under the previous EFF-supported program.

### Outlook and policy priorities (Statements and Annex)
- Growth outlook:
  - GDP growth expected to average 3¾ percent in 2014 and 2015, before moderating to 3½ percent over the medium-term (Statement text).
  - Inflation forecast to remain steady at around 3 percent.
- Fiscal policy priorities:
  - Continue disciplined approach to fiscal sustainability.
  - Primary fiscal surplus: reached 4.7 percent of GDP in recent year.
  - Focus on improving tax administration, streamlining exemptions, enhancing audits, and strengthening compliance.
  - Improve financial performance of parastatals; align MTFF with MTNDS.
- Monetary policy and reserves:
  - Strengthen monetary framework; adopt a more forward looking regime.
  - Formal agreement to issue SR800 million Treasury bonds for monetary policy purposes (first quarter of 2014).
  - Authorities intend to accumulate reserves to a level slightly higher than four months of import coverage.
  - Support move to averaging (quarterly) reserve money targets under the program.
- Financial sector measures:
  - Financial Sector Development Implementation Plan and collateral registry under development.
  - Modern payment systems work underway.
  - CBS established a Corporation Agreement with the IFC to assist with regulations under the Financial Leasing Act.
  - Development of a macroprudential policy framework by the end of 2015.
  - Improve supervision of non-banking financial services through the newly created Financial Service Authority.
- Structural reforms:
  - MTNDS to promote coordinated medium-term growth and integrate public sector investment needs; completion and validation expected by September 2014, cabinet approval expected by October 2014.
  - Strengthen SOE oversight: annual performance objectives, quarterly reporting by Public Enterprise Monitoring Commission to the Minister of Finance.
  - Policies to improve productivity and increase value-added in tourism and fisheries.

*Source: Press Release No. 14/262 and Annexes, June 5, 2014; Statement by Mr. Ian Davidoff and Ms. Nghi Luu, June 4, 2014.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14186.pdf_