## _cr1425

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---

### Seychelles’ EFF-Supported Program: Objectives and Achievements

- EFF-supported arrangement approved December 23, 2009 aimed to reach a sustainable external and fiscal path and support structural reforms to raise growth and buttress macroeconomic stability.
- Fiscal and macro outcomes (selected):
  - Public debt-to-GDP ratio reduced from 124 percent of GDP at end-2009 to an estimated 71 percent at the end of 2013.
  - Average primary surplus in 2010–2013: over 6 per-cent of GDP.
  - Inflation fallen below 5 percent (targeted low single digits at start of program).
  - External reserves improved from just over 2 months of imports at program start to over 3½ months at end-2013.
- Structural reforms achieved:
  - Tax base broadened and system simplified: introduction of a flat-rate personal income tax and a VAT (VAT replaced GST in January 2013).
  - Budget process reforms: new procurement and transparent tendering; establishment of a Public Enterprise Monitoring Commission (PEMC) under the PEMC Act.
  - Financial sector reforms: credit information system, electronic clearing house, Leasing Act, commercial court; Leasing Bill approved October 2013.
- Remaining vulnerabilities and risks:
  - High exposure to exogenous shocks as a small tourism-dependent island economy; tourism from Europe still more than two-thirds of tourism earnings.
  - External risks: tourism downturn in Europe; financial turbulence from unwinding unconventional monetary policy; potential fallout from OECD Global Forum non-compliance declaration.
  - Domestic risks: public enterprises pose medium-term fiscal risks; large wage increases could raise inflation, imports, and weaken competitiveness.
- Labor market note:
  - Survey-based estimated unemployment: 4.1 percent of the labor force in 2011–12.

### Recent Economic Developments (2013 highlights)

- Growth and activity:
  - Real GDP growth for 2013 projected at 3.5 percent, driven by a projected 11 percent gain in tourism earnings.
  - Total tourist arrivals up 15 percent in the first three quarters of 2013.
  - Production indicators for canned tuna, electricity, and telecommunications remain strong; credit to the private sector showed modest growth.
- External position and reserves:
  - Current account deficit projected to narrow to 22.6 percent of GDP in 2013 (4½ percentage points lower than in 2012).
  - Reserve cover projected at 3.7 months of imports at end-2013, up from 2.9 months in 2012.
  - CBS foreign exchange purchases: US$45 million through end-June 2013 (program projection US$15 million); US$75 million by end-October 2013.
  - Gross official reserves on track to reach US$400 million at end-2013 (equivalent to 3.7 months of imports).
- Inflation and monetary conditions:
  - Annual inflation: 3.7 percent in August 2013 (yoy); expected to reach 4.5 percent in December 2013 (yoy) after utility tariff adjustments.
  - Inflation projected at 4.3 percent for end-2014.
  - Nominal credit growth: 2.5 percent by June 2013; 4.9 percent by September 2013.
- Fiscal position:
  - Government on track to achieve target primary surplus of 5 percent of GDP.
  - Public-debt-to-GDP ratio expected to fall to 71.6 percent by end-2013.
- Financial system soundness:
  - Nonperforming loans at 9.4 percent of total loans, fully provisioned and declining.
  - Two largest banks hold 70 percent of the system’s assets (high concentration).
  - Loan-deposit spreads remain high.

### Program Performance and Implementation

- Fiscal and reserves targets in 2013:
  - Primary surplus targets for March (indicative) and June (performance criterion) observed; June target of 2.8 percent of GDP exceeded by 0.4 percentage points due to under-execution of investment budget.
  - September indicative target met despite tax revenue weakness; authorities investigating revenue shortfall and plan to restrain non-priority expenditure to attain year-end target.
- Net international reserves (NIR):
  - CBS purchases exceeded program projections (US$45 million by end-June vs. projected US$15 million; US$75 million by end-October).
  - Reserves on track for US$400 million at end-2013 (3.7 months of imports).
- Monetary policy implementation and liquidity:
  - CBS allowed treasury bill interest rates to fall as inflation declined; deposit and lending rates followed.
  - Reluctance to sterilize more forcefully increased excess liquidity and money-market volatility to meet end-quarter reserve money targets.
  - Excess liquidity reached SR1.2 billion (equivalent to 15 per-cent of broad money) at end-October.
  - Prudential limits: net open foreign-currency position cannot exceed 30 percent of equity capital.
  - CBS aims to reduce aggregate liquidity to revive interbank market activity.
- Structural benchmarks: completed with some delays (utility tariff adjustments implemented in November; Leasing Bill in October; financial instructions and accounting manual in November).

### Policies for 2014 and Beyond: Fiscal Strategy

- Strategic balance:
  - Need to reconcile continued public debt reduction (requires sustained large primary surpluses) with necessary investments in physical and human capital to support long-term growth.
  - Central bank moving toward a more flexible monetary policy framework; agreement with government needed on sharing sterilization costs.
  - Continue structural reforms to reduce fiscal risks from parastatals and promote growth.
- Fiscal targets and projections:
  - Authorities committed to reducing public debt to 50 percent of GDP by 2018; staff view target as desirable and realistic with continued fiscal discipline.
  - 2014 primary surplus target: 4½ percent of GDP (would be 5 percent of GDP excluding net lending to PUC for investment of about ½ percent of GDP).
  - Under current projections, primary surpluses around 4½ percent of GDP would enable the 50 percent debt goal by 2018.
  - Projections sensitive to exchange rate, public enterprise fiscal risks (example: Air Seychelles’ problems added 2.5 percent of GDP to public debt in 2012), and treatment of debt issued for monetary purposes (equivalent to 5 percent of GDP in projections).
- Specific policy guidance:
  - Civil service wages:
    - Draft budget includes step increases of 10 to 20 percent; staff advised keeping wage-bill growth broadly in line with economy growth to preserve expenditure quality.
  - Investment spending:
    - Domestic and foreign-financed investment expected to fall as a share of GDP; authorities and staff concurred on improving revenue performance, restraining current spending, and reallocating proceeds to increase investment over the medium term.
  - Tax policy:
    - Focus on enhancing revenue collection rather than major tax changes in 2014; plan to reduce threshold for VAT registration.
    - Interest in introducing some progressivity into the current 15 percent flat-rate personal income tax, but more preparatory work required.
    - Staff cautioned against further exemptions and encouraged compliance measures and adjustments to taxes eroded by inflation.
  - Minimum wage:
    - Authorities and staff concluded a 20 percent increase in the minimum wage in 2014—much of it catch-up in real terms—would not harm macroeconomic stability, subject to keeping wage increases consistent with economic and fiscal capacity.

### Monetary, Financial, and External Sector Policies

- Monetary policy framework and liquidity management:
  - CBS to continue developing a more flexible framework and finalize arrangements with the government on sterilization cost-sharing.
  - Ministry of Finance and CBS agreed in principle on absorbing excess liquidity, including issuance of longer maturity treasury bills; amounts and modalities under development.
  - Quarterly reserve money targets to be set higher (including for end-December 2013) with average excess liquidity stabilized at significantly lower levels.
  - Reserve money targets to stabilize desired surplus liquidity rather than derive from a broad money target assuming a stable money multiplier.
  - Staff view changes as first step toward a more forward-looking regime anchored by stable market expectations; exchange rate to continue adjusting in line with fundamentals.
  - Mopping-up excess liquidity and enhancing liquidity forecasting and management identified as essential next steps; finalize agreement on sterilization costs preferably within a medium-term framework.
- Financial sector strengthening:
  - Continue improving bank supervision, fostering competition, and enhancing financial deepening.
  - AFRITAC technical assistance on moving toward risk-based supervision to continue.
  - Project to develop a Financial Sector Development Strategy with World Bank FIRST support; final recommendations expected as early as May 2014.
- External position and vulnerabilities:
  - External vulnerability remains high despite improvements.
  - Current account deficits elevated partly due to substantial imports linked to temporary surge in FDI; expected to adjust as exceptional factors taper off.
  - Negative International Investment Position (IIP): -135 percent of GDP at end-2012 (improvement from -230 percent at end-2010); liabilities overwhelmingly direct investment.
  - Under debt restructuring, public external debt service to double from 2013 to 2017 (reaching 3.8 percent of GDP), creating moderate but manageable balance-of-payments pressure under the baseline.
  - Staff assess external position broadly in line with fundamentals, but sensitive to shocks and policy assumptions.
- Utility tariff rebalancing:
  - Multi-year rebalancing launched; phase-in extended to eight to ten years.
  - Smaller residential electricity consumers: no increase for two years (direct government subsidies offset impact); water and sewerage increases front-loaded for larger users (over 40 percent this year) vs. small residential users (less than 10 percent).
  - Sewerage to rely on cross-subsidization over next 10 years under current plans.
  - IMF staff urged sustaining and possibly accelerating rebalancing and using targeted transfers to mitigate social impacts affordably.

### Structural reforms, PFM, and Public Enterprises

- Public investment and PFM:
  - Cabinet approved a Public Investment Management action plan to standardize project appraisal, monitoring, and review.
  - Public Sector Investment Plan (PSIP) under revision; to be key component of medium-term fiscal framework.
  - World Bank-supported Program Performance Based Budgeting (PPBB) piloted in Education and Natural Resources; extension planned in 2015.
  - Need to reconcile fiscal revenue/expenditure with below-the-line financing to ensure comprehensive budget out-turn.
- Public enterprise oversight:
  - PEMC operational; capacity-building needed to analyze parastatal financial data and governance.
  - Shares of ten main commercial parastatals transferring to holding entity Société Seychelloise d’Investissement (SSI); initial overlap between SSI board and parastatal senior managers requires establishment of an independent board.
  - Staff cautioned against parastatals expanding into non-core commercial activities (retail, construction, shipping) that could expose the state to commercial risk and crowd out private sector.

### Program Decision, Financing, and Macroeconomic Projections

- Staff recommendation:
  - Completion of the Eighth review under the Extended Arrangement and associated purchase of an amount equivalent to SDR 3.3 million.
- Selected macroeconomic projections and indicators (series as shown):
  - Nominal GDP (millions of Seychelles rupees): 13,119; 14,145; 15,292; 15,288; 16,544; 17,731; 18,974; 20,286; 21,667.
  - Real GDP (annual growth): 5.0; 2.9; 3.3; 3.5; 3.7; 3.8; 3.6; 3.6; 3.5.
  - CPI (annual average): 2.6; 7.1; 4.5; 4.5; 4.2; 3.5; 3.0; 3.0; 3.0.
  - Total public debt (percent of GDP): 74.3; 84.8; 72.0; 71.6; 69.0; 64.4; 59.4; 54.0; 48.8 (domestic and external components shown in series).
  - Current account balance including official transfers (percent of GDP): -27.0; -27.1; -23.2; -22.6; -19.5; -17.8; -16.6; -14.6; -12.8.
  - Gross official reserves (end of year, millions of U.S. dollars): 277; 307; 317; 400; 436; 436; 436; 436; 436.
  - Months of imports, c.i.f.: 2.8; 3.0; 2.7; 3.7; 3.9; 3.7; 3.6; 3.5; 3.3.
- Balance of payments highlights (annual, selected, millions of U.S. dollars):
  - Current account (levels): -217; -286; -280; -279; -286; -263; -252; -249; -233; -217.
  - Tourism earnings: 274; 291; 310; 331; 344; 379; 411; 446; 482; 521.
  - Exports of goods and services and imports series reported in tables (series as shown).

### Relations with the Fund and Next Steps

- Seychelles’ capacity to repay the Fund remains satisfactory; obligations to the Fund peak in 2018 but remain less than half a percent of GDP.
- Budget support from World Bank and African Development Bank with disbursements expected December 2013; further loan programs under development.
- Agreements reached to fully complete restructuring of external debt.
- Authorities indicated intent to request a successor arrangement to continue policy continuity and support structural reforms.
- Press Release (December 19, 2013) noted:
  - IMF Executive Board completed eighth and final review on a lapse-of-time basis, enabling disbursement of SDR 3.3 million (about US$5.1 million).
  - Total disbursements under arrangement to date: SDR 26.4 million (about US$ 40.7 million).
  - EFF approved December 23, 2009 for SDR 19.8 million and augmented by SDR 6.6 million in 2012.
  - Program achievements reiterated: public debt reduced from 124 percent of GDP at end-2009 to an estimated 71 percent at end-2013; inflation below 5 percent; external reserves improved to over 3½ months.

### Staff Appraisal — Key Judgments and Policy Recommendations

- Near-term outlook brightened by strong policies and expansion in tourism, but economy remains highly vulnerable to external shocks.
- Determined fiscal adjustment has reduced public debt, anchored macro stability and confidence.
- CBS’ opportunistic foreign exchange purchases improved import coverage; reserve accumulation exceeded program targets reflecting stronger tourism and investment inflows.
- Key recommendations (selected):
  - Mop up excess liquidity and enhance liquidity forecasting and management; finalize agreement between monetary and fiscal authorities on sterilization costs, preferably within a medium-term framework.
  - Continue fiscal consolidation: maintain a strong primary surplus and restrain current primary expenditure.
  - Safeguard recent tax reforms by resisting further exemptions and improving compliance.
  - Address falling revenue-to-GDP ratio and potential growth implications from lower investment spending.
  - Advance structural reforms: public enterprise oversight (governance, investment decisions), deepen financial markets, and promote inclusive growth.
  - Move expeditiously to ensure full compliance with Global Forum’s standards for transparency and exchange of information for tax purposes.

*Source: Seychelles authorities and IMF staff estimates and projections as presented in the source PDF.*

### 1.   Seychelles’ EFF-Supported Program: Objectives and Achievements _______________________________ 3

### Seychelles’ EFF-Supported Program: Objectives and Achievements

### Context
- The EFF-supported arrangement approved in December 2009 aimed to reach a sustainable external and fiscal path and support structural reforms to raise growth and buttress macroeconomic stability.
- Achievements cited:
  - Public debt-to-GDP ratio reduced from 124 percent of GDP at end-2009 to an estimated 71 percent at the end of 2013.
  - Average primary surplus in 2010–2013: over 6 per-cent of GDP.
  - Inflation fallen below 5 percent (somewhat higher than low single digits targeted at start of program).
  - External reserves improved from just over 2 months of imports at program start to over 3½ months at end-2013.
- Structural reform progress:
  - Tax base broadened and system simplified with introduction of a flat-rate personal income tax and a VAT.
  - Budget processes reformed: new procurement and transparent tendering processes; establishment of a Public Enterprise Monitoring Commission under the PEMC Act.
  - Public enterprise reporting requirements clarified; rebalancing of tariffs initiated.
  - Financial sector reforms: introduction of a credit information system, an electronic clearing house, the Leasing Act, and a commercial court.
- Remaining vulnerabilities and risks:
  - High exposure to exogenous shocks as a small tourism-dependent island economy.
  - External risks include: tourism downturn in Europe (still source of more than two-thirds of tourism earnings); financial turbulence from prospective unwinding of unconventional monetary policy in advanced economies; possible repercussions from the OECD Global Forum’s decision to declare Seychelles non-compliant with standards to combat tax avoidance.
  - Domestic risks: public enterprises still pose medium-term fiscal risks absent further reforms; potential macroeconomic risks from large wage increases (inflation, higher imports, weakened competitiveness).
- Labor market note: Survey-based data suggest an estimated 4.1 percent of the labor force in Seychelles was unemployed in 2011–12.

### Recent Economic Developments
- Growth and activity:
  - Real GDP growth for 2013 projected at 3.5 percent, driven by a projected 11 percent gain in tourism earnings.
  - Total tourist arrivals up 15 percent in the first three quarters of 2013.
  - Production indicators for canned tuna, electricity, and telecommunications remain strong; credit to the private sector showed modest growth.
- External position and reserves:
  - Current account deficit projected to narrow to 22.6 percent of GDP in 2013 (4½ percentage points lower than in 2012).
  - Reserve cover projected at 3.7 months of imports at end-2013, up from 2.9 months in 2012.
  - CBS purchased a total of US$45 million through end-June 2013 (program projection US$15 million) and US$75 million by end-October 2013.
  - Gross official reserves just above three months of imports as of end-June; on track to reach US$400 million at end-2013 (equivalent to 3.7 months of imports).
- Inflation and monetary conditions:
  - Annual inflation fell to 3.7 percent in August 2013 (yoy).
  - Adjustments in utility tariffs (postponed to November from July) expected to push inflation to 4.5 percent in December 2013 (yoy).
  - Inflation projected at 4.3 percent for end-2014.
  - Nominal credit growth: 2.5 percent by June 2013 and 4.9 percent by September 2013.
- Fiscal position:
  - Government broadly on track to achieve its target primary surplus of 5 percent of GDP.
  - Slight revenue under-performance offset by lower-than-anticipated capital expenditure.
  - Public-debt-to-GDP ratio expected to fall to 71.6 percent by the end of the year.
- Financial system soundness:
  - Nonperforming loans at 9.4 percent of total loans, fully provisioned and declining.
  - Two largest banks hold 70 percent of the system’s assets, indicating high concentration.
  - Loan-deposit spreads remain high.

### Program Performance
- Fiscal and reserves targets in 2013:
  - Primary surplus targets for March (indicative) and June (performance criterion) were observed; June target of 2.8 percent of GDP exceeded by 0.4 percentage points due to under-execution of the investment budget.
  - September indicative target met despite weaknesses in tax revenues.
  - Authorities investigating revenue weakness and plan to restrain non-priority expenditure to attain the year-end target.
- Net international reserves (NIR) performance:
  - CBS purchases of foreign exchange exceeded program projections (US$45 million by end-June vs. projected US$15 million; US$75 million by end-October).
  - Reserves on track for US$400 million at end-2013 (3.7 months of imports).
- Monetary policy implementation and liquidity:
  - CBS allowed interest rates on treasury bills to fall as inflation declined; deposit and lending rates followed.
  - Reluctance to sterilize more forcefully led to increased excess liquidity and money-market volatility to meet end-quarter reserve money targets.
  - Excess liquidity reached SR1.2 billion (equivalent to 15 per-cent of broad money) at end-October.
  - Excess liquidity has not undermined stability in the short run; banks constrained by prudential limits on net open foreign exchange positions (net open foreign-currency position cannot exceed 30 percent of equity capital).
  - High excess liquidity undermines interbank market activity; CBS aims to reduce aggregate liquidity to incentivize interbank trading.
- Structural benchmarks:
  - Completed with some delays: utility tariff adjustments initiated in November (four months late); Leasing Bill approved in October (planned end-June); financial instructions and accounting manual approved in November (planned end-June).

### Policies for 2014 and Beyond
- Strategic balance:
  - Authorities must balance reducing public debt (requires continued large primary surpluses) with investing in physical and human capital to support long-term growth.
  - Central bank moving toward more flexible monetary policy framework; needs agreement with government on sharing sterilization costs.
  - Continue structural reforms to reduce fiscal risks from parastatals and to promote growth.
- Fiscal policies (detailed):
  - Debt target: authorities committed to reducing public debt to 50 percent of GDP by 2018; staff agreed target is desirable and realistic but requires continued strong fiscal discipline.
  - 2014 primary surplus target: 4½ percent of GDP (surplus would be 5 percent of GDP if net lending to Public Utilities Corporation (PUC) for investment of about ½ percent of GDP were excluded).
  - Under current projections, primary surpluses of around 4½ percent of GDP would enable Seychelles to achieve its 50 percent goal by 2018.
  - Risks and sensitivities: projections sensitive to exchange rate, fiscal risks from public enterprises (example: Air Seychelles’ financial problems added 2.5 percent of GDP to public debt in 2012), and treatment of debt issued for monetary purposes (equivalent to 5 percent of GDP in projections).
- Specific fiscal policy areas and guidance:
  - Civil service wages:
    - Draft budget includes step increase in civil service wages of 10 to 20 percent, which could be accommodated within the budget envelope.
    - Staff advised keeping growth in the government wage bill broadly in line with growth in the economy to preserve fiscal expenditure quality.
  - Investment spending:
    - Both domestically and foreign-financed investment will fall as a proportion of GDP (domestic squeezed by falling revenue and primary surplus target; foreign by expected fall in external project support).
    - Authorities and staff concurred on improving revenue performance, restraining current spending, and allocating proceeds to increase investment over the medium term.
  - Tax policy:
    - Focus on enhancing revenue collection rather than major tax policy changes in 2014.
    - Plan to reduce threshold for VAT registration to continue.
    - Interest in introducing some progressivity into the current 15 percent flat-rate personal income tax, but more preparatory work required.
    - Staff cautioned against issuing further exemptions given recent fall in revenue-to-GDP ratio; encouraged measures on compliance and specific taxes (erosion over time with inflation).
  - Minimum wage:
    - Authorities and staff concluded a 20 percent increase in the minimum wage in 2014—much of it catch-up in real terms—would not harm macroeconomic stability.
    - Staff noted importance of keeping wage increases in line with capacity of the economy and government finances to protect fiscal position, balance of payments, and inflation.

### Monetary, Financial, and External Sector Policies (summary points from source)
- Central bank should continue developing a more flexible monetary policy framework and finalize implementation arrangements with the government on sterilization cost-sharing.
- Reduce excess liquidity to strengthen monetary policy effectiveness and revive interbank market functioning.
- Continue financial sector reforms to address high cost of credit and limited competition.

_International Monetary Fund_

### 15.  The CBS plans to make its monetary policy framework both stronger and more flexible.

### 15.  The CBS plans to make its monetary policy framework both stronger and more flexible.

### Monetary policy framework and liquidity management
- The CBS will continue to enhance international reserves coverage in 2014, albeit at a more moderate pace.
- The ministry of finance and the CBS have agreed in principle on a division of responsibilities for absorbing the stock of excess liquidity, including through the issuance of longer maturity treasury bills; the amounts and modalities are still being developed.
- Under a new approach to setting quarterly reserve money targets, they will be higher (including for end-December 2013), while average excess liquidity will be stabilized at significantly lower levels, strengthening the monetary policy transmission mechanism.
- The CBS’ gradual reformulation of its monetary policy framework is being guided by TA delivered by MCM in February 2013. As a first step under these recommendations, reserve money targets will be set to stabilize the desired level of surplus liquidity reserves in the banking system, rather than being derived from a broad money target, assuming a stable money multiplier.
- Staff view these changes as an important first step toward a more forward-looking regime anchored by stable market expectations regarding inflation, interest rates, and the exchange rate; the exchange rate will continue to adjust in line with fundamentals.
- Mopping-up excess liquidity is identified as an essential next step; subsequent enhancements of liquidity forecasting and management should strengthen the framework and transmission mechanism.
- It is important that the monetary and fiscal authorities reach a final agreement on sharing the cost of sterilizing excess liquidity, preferably within a medium-term framework.

### Financial sector strengthening
- Policies will focus on further improving bank supervision, fostering bank competition, and enhancing financial deepening.
- AFRITAC technical assistance on moving toward risk-based bank supervision will continue.
- Authorities launched a project to develop a Financial Sector Development Strategy, with support from the World Bank’s FIRST initiative and IMF staff involvement; final recommendations are expected as early as May 2014.

### External position and vulnerabilities
- Despite recent improvements, external vulnerability remains high.
- The current account deficit remains elevated, owing in large part to substantial imports connected to the temporary surge in FDI; as this exceptional factor tapers off, imports and current account deficits are expected to adjust progressively.
- Key indicators of external resilience, such as debt dynamics and reserves import coverage, have improved markedly and are projected either to continue to improve or to remain roughly stable, but they are sensitive to shocks and to the projections’ assumptions of continued policy discipline.
- New preliminary data show a substantially negative International Investment Position (IIP): a negative IIP of 135 percent of GDP at end-2012, which is an improvement from end-2010 (230 percent); liabilities are overwhelmingly direct investment.
- Under the terms of the debt restructuring, service on public external debt will double from 2013 to 2017 (reaching 3.8 percent of GDP), generating some moderate pressure on the balance of payments that is expected to be manageable under the baseline scenario.
- Overall, staff assess that the external position remains broadly in line with fundamentals.

### Structural reforms and public enterprises
- Oversight of public enterprises continues to improve, although risks remain significant.
- The Public Enterprise Monitoring Commission is operational, but further capacity-building is needed to analyze financial data and governance in parastatals.
- Shares of ten main commercial parastatals are being transferred to a holding entity, the Société Seychelloise d’Investissement (SSI); in the initial stage there is substantial overlap between the board of SSI and senior managers of parastatals, and establishing a fully independent board is important.
- Staff stressed the need for clearly defined roles, adequate capacity, and independence for effective oversight, and cautioned about public enterprises expanding commercial activities beyond core mandates (retail, construction, shipping), which could expose the state to commercial risk and crowd out private sector activity.

### Utility tariff rebalancing
- The multi-year rebalancing of utility tariffs has been launched; implementation speed is crucial.
- The phase-in period was stretched to eight to ten years (rather than seven as recommended by consultants).
- Adjustments for smaller residential electricity consumers will be back-loaded, with no increase for two years (during which direct government subsidies will offset the financial impact).
- Water and sewerage tariff increases were more front-loaded for larger users (over 40 percent this year) than small residential users (less than 10 percent).
- Under current plans, sewerage will continue to rely on cross-subsidization over the next 10 years.
- IMF staff welcomed the launch but emphasized that the slower pace will delay many benefits and suggested more targeted transfers could mitigate social impact more affordably; IMF and World Bank staff urged sustaining and possibly accelerating rebalancing (for example, by reducing downward revisions of tariffs that might occur under the fuel cost adjustment mechanism).

### Public financial management and investment
- In mid-2013, the cabinet approved a Public Investment Management action plan to standardize procedures for project appraisal, monitoring, and review.
- The Public Sector Investment Plan (PSIP) is under revision and will be a key component of the planned medium-term fiscal framework.
- With World Bank support, the ministry of finance launched Program Performance Based Budgeting (PPBB) on a pilot basis in departments (Education and Natural Resources), with a view to extending these pilots in 2015.
- Additional improvements called for include regular procedures to reconcile fiscal revenue and expenditure data with below-the-line financing data to ensure the budget out-turn provides a comprehensive picture of government activity.
- Authorities will need to manage the debt reduction process carefully: build capacity, seek to extend maturities on domestic borrowing, and take into account the full costs of external borrowing (including implications for domestic liquidity sterilization).

### Relations with the Fund and program prospects
- Seychelles’ capacity to repay the Fund remains satisfactory; obligations to the Fund peak in 2018, but remain less than half a percent of GDP.
- Budget support is being provided by the World Bank and African Development Bank, with disbursements expected in December 2013; further loan programs are being developed for subsequent years.
- Agreements have been reached to fully complete the restructuring of the external debt.
- Authorities indicated intent to request a successor arrangement to continue close cooperation with the Fund; a follow-on arrangement could provide policy continuity and support for addressing vulnerabilities and advancing structural reforms.
- Staff and authorities jointly organized a stakeholder conference with broad support for continued macroeconomic discipline and public debt reduction and discussion on pace and priorities for public enterprise and banking sector reforms.

### Staff appraisal — key judgments and policy recommendations
- Near-term outlook brightened by strong policies and an expansion in tourism, but the economy remains highly vulnerable to external shocks.
- Determined fiscal adjustment has continued reducing public debt, anchoring macroeconomic stability and confidence.
- The exchange rate has strengthened, inflation has fallen below 5 percent, and the current account deficit is projected to narrow as percent of GDP.
- The CBS’ opportunistic purchases of foreign exchange have improved import coverage, and the pace of international reserves accumulation has significantly exceeded program targets, reflecting stronger than anticipated gains in tourism and investment inflows.
- The authorities’ intention to pursue further precautionary reserve accumulation is appropriate for a small, open, and highly import-dependent economy, although liquidity implications need to be suitably managed.
- Key recommendations and priorities:
  - Mop up excess liquidity and enhance liquidity forecasting and management; finalize agreement between monetary and fiscal authorities on sterilization costs, preferably within a medium-term framework.
  - Continue fiscal consolidation: maintain a strong primary surplus and restrain current primary expenditure.
  - Safeguard recent tax reforms by resisting further exemptions and improving compliance.
  - Address potential growth implications of a falling revenue-to-GDP ratio and the accompanying drop in investment spending.
  - Advance structural reforms: public enterprise oversight (governance, investment decisions), deepen financial markets, and promote inclusive growth.
  - Move expeditiously to ensure full compliance with Global Forum’s standards for transparency and exchange of information for tax purposes.

*IMF staff assessment as presented in the source document.*

### 29.  In view of the good performance under the program, staff recommends the completion

### _cr1425 - 29. In view of the good performance under the program, staff recommends the completion

### Program decision and financing
- Staff recommends the completion of the Eighth review under the Extended Arrangement and the associated purchase of an amount equivalent to SDR 3.3 million.

### Macroeconomic performance and projections (selected)
- Nominal GDP (millions of Seychelles rupees): 13,119; 14,145; 15,292; 15,288; 16,544; 17,731; 18,974; 20,286; 21,667 (series as shown).
- Real GDP (annual growth): 5.0; 2.9; 3.3; 3.5; 3.7; 3.8; 3.6; 3.6; 3.5 (series as shown).
- CPI (annual average): 2.6; 7.1; 4.5; 4.5; 4.2; 3.5; 3.0; 3.0; 3.0 (series as shown).
- CPI (end-of-period): 5.5; 5.8; 4.3; 4.5; 4.3; 3.0; 3.0; 3.0; 3.0 (series as shown).
- GDP deflator average: 6.4; 4.8; 4.6; 4.4; 4.4; 3.3; 3.3; 3.2; 3.2 (series as shown).

### Fiscal outcomes and projections (selected, percent of GDP unless noted)
- Total revenue, excluding grants: 35.8; 37.6; 36.4; 36.3; 34.6; 34.8; 35.0; 35.1; 35.2.
- Expenditure and net lending: 35.7; 40.2; 38.5; 38.1; 36.0; 35.1; 34.8; 34.3; 34.5.
- Current expenditure: 27.6; 28.8; 28.8; 30.1; 29.2; 28.6; 28.0; 27.6; 27.3.
- Capital expenditure and net lending: 8.1; 1.4; 9.8; 8.1; 6.8; 6.5; 6.8; 6.7; 7.1.
- Overall balance, including grants: 2.5; 2.4; 1.8; 1.0; 0.9; 1.2; 1.5; 2.0; 1.9.
- Primary balance: 5.4; 6.2; 5.1; 5.2; 4.4; 4.4; 4.4; 4.6; 4.3.
- Total public debt: 74.3; 84.8; 72.0; 71.6; 69.0; 64.4; 59.4; 54.0; 48.8.
  - Domestic: 28.0; 35.2; 25.7; 28.6; 26.7; 24.2; 22.1; 20.5; 18.6.
  - External: 46.2; 49.6; 46.3; 43.0; 42.4; 40.3; 37.3; 33.6; 30.2.

### External sector and reserves (selected)
- Current account balance including official transfers (percent of GDP): -27.0; -27.1; -23.2; -22.6; -19.5; -17.8; -16.6; -14.6; -12.8.
- Total public external debt outstanding (millions of U.S. dollars): 490; 512; 558; 545; 571; 572; 561; 535; 510.
  - (percent of GDP) 46.2; 49.6; 46.3; 43.0; 42.4; 40.3; 37.3; 33.6; 30.2.
- Gross official reserves (end of year, millions of U.S. dollars): 277; 307; 317; 400; 436; 436; 436; 436; 436.
- Months of imports, c.i.f.: 2.8; 3.0; 2.7; 3.7; 3.9; 3.7; 3.6; 3.5; 3.3.

### Balance of payments highlights (annual, selected, millions of U.S. dollars)
- Current account (levels): -217; -286; -280; -279; -286; -263; -252; -249; -233; -217.
- Balance of goods and services: -207; -219; -240; -251; -214; -202; -183; -168; -152; -133.
- Exports of goods: 400; 477; 497; 505; 547; 534; 558; 580; 606; 634.
  - Oil re-exports: 158; 194; 201; 196; 204; 207; 210; 214; 217; 222.
  - Tuna exports: 210; 242; 249; 269; 312; 302; 321; 337; 357; 376.
- Imports of goods: -781; -915; -967; -976; -1,011; -1,057; -1,102; -1,139; -1,174; -1,221.
  - Oil imports: -219; -255; -301; -307; -305; -326; -338; -345; -353; -362.
- Exports of services: 441; 470; 435; 632; 471; 553; 602; 650; 698; 748.
  - Tourism earnings: 274; 291; 310; 331; 344; 379; 411; 446; 482; 521.
- Gross international reserves (stock, e.o.p., millions of U.S. dollars): 254; 277; 307; 317; 400; 436; 436; 436; 436.

### Government operations (selected monetary and fiscal magnitudes)
- Total revenue and grants (millions of Seychelles rupees, cumulative): 50; 146; 024; 144; 112; 129; 722; 601; 450; 940; 606; 172; 597; 961; 106; 437; 689; 1 (table layout as reported).
- Total revenue (millions of Seychelles rupees): 469; 553; 221; 220; 105; 126; 202; 513; 404; 139; 035; 566; 555; 657; 166; 169; 664; 3 (table layout as reported).
- VAT replaced GST in January 2013 (policy note present in table footnotes).

### Monetary and banking sector indicators (selected)
- Net foreign assets (monetary survey, millions of Seychelles rupees): 3,644; 4,450; 5,297; 5,172; 4,814; 5,235; 5,593; 5,309; 6,520; 5,474; 6,737; 7,635.
- Broad money (end period, millions of Seychelles rupees): 7,266; 7,596; 7,554; 7,410; 7,674; 7,286; 8,389; 7,316; 8,674; 7,426; 8,786; 9,508.
- Credit to the private sector (12–month percent change, memorandum): 23.6; 5.2; 8.5; 14.0; 4.7; 5.7; ...; 4.0; ...; 14.0; 4.7; 5.7 (table shows detailed quarterly/annual series).
- Reserve money (12–month percent change): 34.7; -2.7; 6.9; 11.5; 7.4; 13.5; 8.0; 18.8; 13.5; 12.3; 26.0; 13.9.
- Money multiplier (broad money/reserve money): 4.2; 4.5; 4.2; 3.8; 4.1; 3.7; 4.5; 3.6; 4.5; 3.6; 3.8; 3.6.

### Financial soundness indicators (banking sector, selected end-period percent)
- Regulatory capital to risk weighted assets: 13.6; 17.8; 22.0; 21.7; 21.4; 22.1; 21.7; 21.5; 23.3; 24.8; 26.3; 24.2; 24.9; 25.9; 26.2; 26.7; 26.9; 26.0 (quarterly series as shown).
- Nonperforming loans to gross loans: 2.3; 4.3; 4.2; 3.8; 4.1; 6.9; 6.4; 5.5; 5.4; 5.6; 5.3; 8.1; 8.3; 9.2; 8.3; 9.3; 9.6; 9.5 (quarterly series as shown).
- Return on assets (annualized): 5.3; 3.0; -0.2; 3.2; 3.4; 5.0; 3.0; 3.7; 3.9; 3.1; 3.6; 5.6; 3.5; 3.9; 4.2; 3.1; 2.3; 3.3 (quarterly series as shown).

### IMF program financing and schedule (selected)
- Table of reviews and purchases under the Extended Arrangement shows program approvals and purchases from December 23, 2009 through September 30, 2013.
  - December 23, 2009 Board approval: 0.88 (Millions of SDR), 8.1 (Percent of quota).
  - March 15, 2010: 2.20, 20.2.
  - June 15, 2010: 2.20, 20.2.
  - September 15, 2010: 2.20, 20.2.
  - December 15, 2010: 1.76, 16.1.
  - March 31, 2011: 3.52, 32.3.
  - September 30, 2011: 3.08, 28.3.
  - March 31, 2012: 2.64, 24.2.
  - September 30, 2012: 1.32, 12.1.
  - March 31, 2013: 3.30, 30.3.
  - September 30, 2013 (Eighth): 3.30, 30.3.
  - Total: 26.4 (Millions of SDR); 242.3 (Percent of quota).

- Indicators of Fund credit (millions of SDR): existing Fund credit stock and projected EFF disbursement noted; assumes a disbursement of SDR 3.3 million in December 2013 following review of June 2013 test date.

*Source: Seychelles authorities and IMF staff estimates and projections (content as presented in the source PDF).*

### APPENDIX I: Letter of intent

### APPENDIX I: Letter of intent

### Progress under the EFF program and macroeconomic outcomes
- The EFF program was approved on December 23, 2009; "significant progress" achieved during the four year program.
- Growth in 2013 is estimated to reach 3.5 percent, supported by a strong performance of the tourism sector.
- Central bank gross official reserves by December 2013 are expected to reach 3.7 months of imports coverage.
- FDI "continues to be buoyant."
- Inflation projected average in 2013: 4.5 percent.
- Public debt reduced from 84.7 percent in 2012 to a projected 71.6 percent in 2013.
- Authorities request completion of the eighth review and approval of disbursement of SDR 3.3 million.

### Fiscal policy, targets, and medium-term objectives
- Primary surplus achieved:
  - Attained the primary surplus target of end-June 2013.
  - On track to reach a primary surplus of 5.2 percent of GDP by end-December 2013 (higher than the 5.1 percent program target).
- Revenue-to-GDP ratio objective under the program: 36.4 percent (expected to be "broadly achieved").
- Draft budget for 2014 targets a primary surplus of 4.4 percent of GDP (SR 721 million).
  - Excluding net lending to the Public Utilities Corporation for investment, the primary surplus would be equivalent to 5 percent.
- Fiscal policies and intentions:
  - Continue gradual privatization of non-strategic state enterprises; proceeds to strengthen capital budget.
  - Primary current spending projected to remain stable as a percentage of GDP to protect investment spending.
  - Rebalancing civil service wages will result in a slight increase in the public wage-to-GDP ratio next year, with intention to keep the ratio stable over the medium term.
- Medium-term public debt objective: bring down public debt to 50 percent of GDP by 2018.

### Monetary policy and reserve management
- All monetary policy objectives under the program in 2013 were met.
- Net international reserves targets were exceeded by wide margins; CBS rebuilt the reserve buffer.
- Quarterly reserve money targets were all met; contributed to stable inflation and exchange rates.
- Monetary policy implementation has become more flexible under the monetary targeting framework and takes into consideration broader macroeconomic conditions.
- CBS policy actions and objectives:
  - Targets banks’ reserves to improve liquidity management and pricing and support development of a benchmark yield curve.
  - Monetary policy discussions and decisions to be elevated to the Board level and communicated publicly on a quarterly basis.
  - Continue coordination between monetary and fiscal policies to address the prevailing liquidity overhang.
  - Monetary policy will continue to support stable inflation, gradual reserve accumulation, and an exchange rate that is generally stable and adjusts in line with economic fundamentals.

### Financial sector development and reforms
- CBS secured funding and technical assistance from the FIRST Initiative to develop:
  - A Secured Lending and Collateral Registry.
  - A Financial Sector Development Strategy.
- Expected outcomes:
  - Secured Lending System and Collateral Registry will permit lending against movable collateral (e.g., inventory) and expand enterprise access to finance.
  - Support for the recently approved Financial Leasing Bill to enhance competition in the financial sector.
  - Financial Sector Development Strategy to provide a coherent vision and prioritized roadmap for a sound, efficient, and inclusive financial sector.
- Legislative and regulatory progress:
  - Financial Leasing Bill approved by National Assembly in October 2013.
  - Value Added Tax satisfactorily implemented January 1, 2013.
  - Quarterly automatic adjustment of utility tariffs introduced in July 2013; tariff rebalancing exercise began in November 2013.
  - Reforms in Public Finance Management underway; piloting Program Performance Based Budgeting.
  - Cabinet approval of Financial Instructions and Accounting Manuals in line with new PFM Act and IPSAS (approved in November 2013).

### Structural benchmarks and implementation status (selected)
- Commission and complete a study on optimal tariffs for utilities: Target End-June 2012 — Met. Final version received October 2012.
- Cabinet approval of the Public Sector Investment Program (for 2013 budget planning): Target End-September 2012 — Met.
- Implementation of Electronic Clearing House system: Target End-September 2012 — Met.
- Introduce VAT: Target January 1, 2013 — Met.
- Cabinet approval of the action plan to rebalance utility tariffs: Target End-March 2013 — Met.
- Cabinet approval of Financial Instructions and Accounting Manuals in line with new PFM Act and IPSAS standards: Target End-June 2013 — Met (Approved in November).
- Approval of Leasing Bill by National Assembly: Target End-June 2013 — Met (Approved in October).
- Implement the first step of the utilities tariffs rebalancing: Target July 1, 2013 — Met (Implemented in November).

### Relations with the Fund, program completion, and next steps
- Authorities remain committed to policy dialogue with the Fund and to provide requested information for monitoring implementation.
- Authorities indicated intention to request a successor arrangement to:
  - Provide policy continuity,
  - Anchor inflation as the monetary policy framework evolves,
  - Further build buffers (particularly reducing public debt and raising reserves levels),
  - Support continuation of structural reforms, improve economic governance and transparency, deepen the financial sector, and support sustained and inclusive growth.
- Discussions with Fund staff for the eighth review initiated during the mission and to continue early next year.
- Press Release (December 19, 2013) notes:
  - IMF Executive Board completed the eighth and final review on a lapse-of-time basis, enabling disbursement of SDR 3.3 million (about US$5.1 million).
  - Total disbursements under the arrangement to date: SDR 26.4 million (about US$ 40.7 million).
  - EFF approved in December 2009 for SDR 19.8 million and augmented by SDR 6.6 million in 2012.
  - Program achievements cited: public debt reduced from 124 percent of GDP at end-2009 to an estimated 71 percent at end-2013; inflation below 5 percent; external reserves improved from just over 2 months of imports to over 3½ months.

### Key quantitative indicators and program items (as reported)
- Growth 2013: 3.5 percent.
- Reserves coverage by Dec 2013: 3.7 months of imports.
- Inflation 2013 (projected average): 4.5 percent.
- Primary surplus target end-December 2013: 5.2 percent of GDP (program target 5.1 percent).
- Revenue-to-GDP objective: 36.4 percent.
- Public debt: 84.7 percent (2012) → projected 71.6 percent (2013).
- Draft 2014 primary surplus target: 4.4 percent of GDP (SR 721 million); equals 5 percent excluding net lending to Public Utilities Corporation.
- Medium-term public debt target: 50 percent of GDP by 2018.
- Requested IMF disbursement upon completion of eighth review: SDR 3.3 million.
- EFF total disbursements to date: SDR 26.4 million (about US$ 40.7 million).
- EFF original approval: SDR 19.8 million (Dec 23, 2009); augmentation: SDR 6.6 million (2012).
- Press Release date: December 19, 2013.
- Exchange market liberalized November 2008; exchange rate policy: floating. On October 31, 2013 US$ 1 = SR 12.05 (mid rate).

*Letter of intent, November 26, 2013.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1425.pdf_