## _cr14356

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---

### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK
- Economic performance:
  - "Performed well in the first half of the year" (Tables 1–4 and Figures 1–2).
  - Central Bank of Seychelles (CBS) purchased US$24 million more than planned, building reserves above levels projected for end-June.
  - FDI exceeded projections driven by several large projects in the tourism sector.
  - Inflation: decelerated to 1.1 percent (yoy) in June; remained low through September at 0.6 percent (yoy).
  - Personal earnings economy-wide grew 13 percent; private sector credit growth reached 17 percent (yoy) in September.
  - Tax revenue collections exceeded mid-year projections by ⅓ percent of GDP, largely from imports.
- Sectoral developments:
  - Tourism: arrivals down 1 percent (yoy) up to September; tourism revenues fell an estimated 5 percent.
  - Tuna production weakened as production shifted to lower-cost locations, in part due to high domestic electricity prices.
- External and exchange rate developments:
  - Balance of payments pressures emerged by mid-year as strong domestic demand coincided with weak foreign exchange earnings; commercial banks slowed processing of FX transactions creating backlogs.
  - From early August to late October, the Rupee fell in nominal effective terms by 10.9 percent; against the dollar the depreciation was 14.0 percent.
- Growth and current account projections:
  - Projected growth for 2014 revised down to 2.8 percent (from 3.7 percent).
  - Growth expected at 3.0 percent in 2015.
  - Projected current account deficit reaches 22.5 percent of GDP in 2014, improving to 20.5 percent in 2015.
- Reserves and public debt:
  - Reserve coverage projected to improve in 2014 over 2013; public debt reduction remains on track despite depreciation.
  - CBS took management control of BMI Offshore Bank on November 11; the bank described as liquid, well capitalized, and not a systemic risk.

### PROGRAM PERFORMANCE
- Overall assessment:
  - Implementation of the EFF-supported program has been strong despite balance of payments difficulties.
  - End-June performance criteria (PCs) were met by comfortable margins; all but one structural benchmark (SB) were completed, some with minor delays.
- Fiscal outturns and budget:
  - Mid-year primary surplus target exceeded by nearly 2 percent of GDP.
  - Supplementary budget passed in September authorized new spending of 1.2 percent of GDP and identified savings of just under 1.0 percent of GDP.
  - Transfers to Air Seychelles: $5 million capital injection and a $3.5 million transfer in 2014; further $5 million capital injection to come in 2015.
  - Capital budget significantly under-executed; preliminary indications are end-September indicative target exceeded by 1½ percent of GDP.
  - Contracting of new external debt was significantly below the ceiling for the year (some loans postponed to 2015).
- Reserves and monetary aggregates:
  - (Adjusted) net international reserves (NIR) target over-performed by US$30 million due to early-year purchases.
  - Multi-year Treasury bonds issued between March and June absorbed structural excess liquidity equivalent to 4.3 percent of GDP.
  - Cumulative quarterly reserve money fell 6.7 percent below the program ceiling as of end-September.
  - CBS moved from quantity-based to price-based auctions of money market instruments and transitioned to targeting average daily reserve money over a quarter.
- Structural agenda progress:
  - All SBs planned through end-October either completed or expected by end-December.
  - Cabinet approved strategies on Medium-Term National Development, the Financial Sector, and the Medium-Term Fiscal Framework in November.
  - Plan to submit amendment to the Seychelles Revenue Commission Act to National Assembly in December and ratify the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (minor legal sequencing delays noted).
  - All commercial SOEs submitted procurement plans to the National Tender Board for endorsement in November.
  - PEMC Board approved a plan in October to carry out audits of governance structures and practices of SOEs over next several years.
  - Progress continuing on establishing and publishing a comprehensive asset register for five large SOEs (SB for end-December).

### POLICIES IN THE PERIOD AHEAD — OVERVIEW
- Authorities acting decisively to restore external balance:
  - Fiscal policy tightened relative to previous plans while remaining anchored to debt reduction goal.
  - CBS tightened monetary policy forcefully and committed to maintain the stance at least through first half of 2015.
  - Structural reforms to support sustained and inclusive growth and reduce vulnerabilities.

### A. FISCAL POLICY
- Targets:
  - 2014 primary surplus target tightened by ⅓ percent of GDP; higher primary surplus of 4.3 percent of GDP now targeted.
  - 2015 primary balance target established at 3.7 percent of GDP, ½ percentage point higher than previously envisaged.
- Composition and measures:
  - Domestically-financed capital expenditures projected roughly in line with budgeted levels; externally-financed investment expected to fall significantly short in 2014.
  - Authorities plan to conserve resources from any under-execution and allocate them to higher capital spending in subsequent years.
  - Cabinet approved implementation of a Results Based Management framework and expansion of Programme-Performance Based Budgeting beyond the two pilot ministries.
  - Plan to complete pension system reform by transferring remaining assets of the Social Security Fund to the Seychelles Pension Fund in January 2014 (for program purposes this transfer will not be considered as expenditure).
- Revenue management for 2015:
  - 2014 tax revenues expected around ½ percentage point of GDP higher than budgeted, largely driven by import surge (85 percent of VAT over-performance came from imported goods).
  - Proposed 2015 budget measures: increase in road fees and excise on tobacco and spirits, and postponement of a planned reduction in corporate tax rates.
  - Government investigating decline in business tax receipts and has hired new experts to carry out additional audits (SB).

### B. MONETARY POLICY
- CBS actions and stance:
  - CBS set an average daily reserve money target for Q4 2014 seven percent below the original program target.
  - Interest rates have risen sharply; private sector credit expected to stabilize in Q4 as banks’ free reserves for lending become limited.
  - CBS committed to maintain a tight monetary policy stance at least through H1 2015.
  - Full impact of tightening on credit aggregates and foreign exchange conditions expected to be felt in H1 2015; inflationary impact of depreciation also to continue into H1 2015.
  - CBS will start normalizing the monetary policy stance once inflation starts to recede in the second half of 2015.
  - CBS refining macro-prudential toolkit (SB) over the next year, focusing on unsecured consumer lending.
- Additional demand restraint:
  - Government tightened eligibility requirements of SME lending program to help restrain demand.

### C. EXTERNAL STABILITY
- Reserve strategy and outlook:
  - EFF-supported program targets only stability in gross reserves for 2015.
  - External pressures more acute than previously anticipated; public sector’s net foreign exchange cashflow projected to become moderately negative in 2015 as debt service increases.
  - Supporting gross reserves will require purchases in the market by the CBS; authorities plan modest and back-loaded purchases.
  - Strategy projected to roughly maintain current levels of reserve adequacy, including the import coverage ratio, as imports are projected to stabilize.
  - Original PC on end-2014 NIR, adjusted by new projections, would have been US$344 million. The new proposed NIR target is US$350 million.
  - Staff supports prudent approach to reserve accumulation in 2015 while encouraging opportunistic reserve building as market conditions permit.
- Market functioning:
  - Authorities committed to exchange rate flexibility and standing ready to intervene to prevent excessive volatility.
  - Authorities engaging market participants to investigate causes of FX transaction backlogs.

### STRUCTURAL AGENDA AND INSTITUTIONAL ACTIONS
- Public financial management and SOEs:
  - MTFF approved in November sets out strategy for next three annual budgets, drawing on MTNDS.
  - A more detailed Medium-Term Budget Framework to be prepared next year.
  - PPBB frameworks prepared for two ministries and to be extended to three further ministries next year.
  - Interministerial committee to ensure investment program aligns with MTNDS and MTFF priorities.
  - Authorities intend to extend the public asset register to the entire public sector by end of 2015 (SB).
  - PEMC receives SOE financial performance data but needs further capacity; governance audits of five SOEs planned in 2015 (SB).
  - Staff stressed enhancing independence of the board of the state holding company, Société Seychelloise d’Investissement (SSI).
- Financial sector and AML/CFT:
  - Adoption of the Financial Sector Development Implementation Plan (FSDIP).
  - Reforms focus on capital markets, supervision/regulation of banks and NBFIs, and pension fund investment strategy changes.
  - Authorities aim to modernize the legal framework with World Bank assistance and adopt elements of Basel II and III over next two years.
  - CBS to develop and adopt a new macro-prudential framework in 2015 (SB), update the Credit Information System, establish a collateral registry, and build capacity of the Financial Services Authority.
  - Enhanced payments system supervision and regulation of offshore banking activities on the agenda; CBS intervened in a small offshore bank in November.
- Growth and private sector development:
  - Measures to improve Doing Business ranking: increased electronic payment use in interactions with SRC, facilitating trade via a trade portal and eventual one stop trade shop.
  - Seychelles’ accession to the WTO expected at the end of this year prompting trade legislation overhaul.
  - Government committed to reviewing greater private sector participation in port services and infrastructure with IFC collaboration; cabinet approved strategy to reduce restrictive practices at the Port of Victoria (SB).
  - Review of air transport policy underway to support tourism competitiveness.

### PROGRAM MONITORING, TARGETS, AND RISKS
- Proposed adjustments and targets:
  - Reserve money target for December 2014 is tighter by about 7 percent relative to the original program request.
  - Proposed fiscal primary surplus target for December 2014 is tighter by ⅓ percentage points of GDP relative to the original program request.
  - Proposed targets for 2015 are tighter: primary surplus tighter by ½ percentage points of GDP and reserve money targets tighter by about 7 percent.
  - Proposed NIR targets for 2015 set to maintain stable gross reserves; proposed ceiling on external debt contracting in 2015 is higher as loans slipped from 2014 to 2015.
  - Authorities proposed structural benchmarks for 2015 consistent with program objectives.
- Safeguards and TMU:
  - Updated Safeguards Assessment in September found CBS's safeguards framework broadly adequate; areas to strengthen internal audit and the CBS legal framework.
  - TMU revised to reflect recommendation that NIR compilation be subject to semi-annual internal auditing.
- Financing and risk assessment:
  - With planned budget support from the World Bank and African Development Bank, the program is fully financed for 2015.
  - Downside risks mostly external: renewed recession in Europe, downturn in Middle East/Asia growth markets, weak tourism arrivals, and limited but possible Ebola-related impacts via travel hubs.
  - Internal risks: potential SOE losses and failure to implement agreed policy measures.

### STAFF APPRAISAL AND POLICY RECOMMENDATIONS
- Macroeconomic assessment:
  - Staff welcome strong program implementation and determination to safeguard macroeconomic stability amid external pressures.
  - Planned policy tightening is appropriate to restore external balance.
  - With weak external demand and policy tightening, growth is expected to slow to around 3 percent this year and next.
- Key policy recommendations:
  - Continue to rely on exchange rate flexibility and promote smooth operation of the foreign exchange market.
  - CBS’s decision to tighten the reserve money target for Q4 2014 by 7 percent and maintain stance into 2015 is appropriate; remain ready to take further action if warranted.
  - Tighten fiscal policy next year, including a very tight wage round, to support restoration of external balance.
  - Continue commitment to reducing the debt-to-GDP ratio to 50 percent by 2018 as a transparent anchor.
  - Control current expenditure closely to preserve room for infrastructure investment; improve execution of planned investment spending and minimize shifting unused resources to current spending.
  - Public sector wage restraint to set an important example for the economy.
  - Remain steadfast implementing the structural agenda: transparency, efficiency and fairness in public resource use; focus SOEs on core mandates; strengthen SOE governance, especially at SSI.
  - Promote private sector contribution to sustained, broad-based growth by opening activities to private participation while avoiding crowding out by expanding SOEs.
  - Develop policy responses to competitiveness issues such as flight connections and high commercial electricity rates.
  - Continued strong implementation of policy plans is vitally important given continuing pressures and a small margin for maneuver.

### PROGRAM DECISION, MACRO HIGHLIGHTS, AND IMF REQUEST
- Staff supports authorities’ request for:
  - completion of the first review under the Extended Arrangement; and
  - modification of the quantitative performance criteria for end-December 2014.
- Selected macroeconomic figures and projections:
  - Nominal GDP (2013): US$ 1,386 million
  - Per Capita GDP (2013): US$15,644
  - Population, end-year (2010): 90,000
  - CPI (annual average / end-of-period): 2014: 2.6 / 5.5; 2015: 7.1 / 5.8; 2016: 4.3 / 3.4; 2017: 3.6 / 4.0; 2018: 2.3 / 4.8; 2019: 2.9 / 2.5
  - Real GDP growth (selected years): 2015 Prel. 7.9; 2016 Est. 2.8; 2017 Prog. 5.3; 2018 Proj. 3.7; 2019 Proj. 2.8
  - Stock of public debt (percent of GDP): 2011 73.2; 2012 77.5; 2013 62.6; 2014 64.5; 2015 64.9; 2016 62.3; 2017 58.1; 2018 53.8; 2019 49.2
  - Gross official reserves (end of year, millions of U.S. dollars) series: 277, 307, 425, 456, 452, 453, 479, 503, 544, 584 (series shown across 2006–18 and projections)
- External sector highlights (selected):
  - Current account balance (millions of US Dollars): 2011 -311; 2012 -298; 2013 -215; 2014 Prog. -273; 2015 Proj. -328; 2016 Proj. -307; 2017 Proj. -301; 2018 Proj. -292; 2019 Proj. -286; 2020 Proj. -295
  - Current account (percent of GDP): -28.9, -26.4, -14.9, -18.5, -22.5, -20.5, -18.9, -17.3, -16.0, -15.7
  - Exports of goods (millions of US Dollars) selected: 477, 497, 598, 587, 595, 579, 608, 632, 658, 691
  - Tuna exports series: 242, 249, 351, 343, 341, 344, 358, 374, 392, 412
  - Imports of goods (millions of US Dollars): -915, -967, -1,024, -1,097, -1,156, -1,075, -1,102, -1,136, -1,187, -1,256
  - Oil imports series: -255, -301, -269, -284, -304, -251, -292, -300, -308, -320
- IMF arrangement and schedule:
  - EFF approved June 4, 2014 for SDR 11.445 million (105 percent of quota).
  - Scheduled purchases under Extended Arrangement: eight purchases of 1.635 (Millions of SDR) each (15 percent of quota), totaling 11.445 (Millions of SDR); 105 (percent of quota).

### APPENDIX I — LETTER OF INTENT: KEY COMMITMENTS AND ACTIONS
- Program status and request:
  - Request that the IMF Executive Board complete the first review and approve purchase of SDR 1.635 million (15 percent of quota).
- Fiscal commitments and measures:
  - Historical annual average fiscal primary surplus of more than 7 percent of GDP over past six years.
  - For 2015 government will target a primary balance of at least SR720 million for 2015, almost SR 100 million higher than envisaged at program request.
  - Measures: freeze wages, maintain tight lid on goods and services spending, increase domestically financed investment spending, increase excise on tobacco and spirits, increase fees, strengthen tax compliance.
  - Recruit experienced tax auditors and conduct 60 tax audits of large businesses in January-September 2015 (proposed SB).
- Monetary operations and reporting:
  - Reserve money to serve as nominal anchor; CBS guided by quarterly average values of reserve money.
  - CBS started taking overnight deposits in August 2014 with introduction of an interest rate corridor.
  - Weekly issuance of T-bills increased from R60 million in June to R100 million in September 2014.
  - CBS requested IMF technical assistance to build capacity in monetary policy analysis and forecasting.
- Exchange rate and reserves:
  - Exchange rate market-determined; CBS may intervene to prevent excessive volatility.
  - CBS will purchase reserves opportunistically without exerting additional pressure on foreign exchange market.
  - CBS considering engagement on Reserves Advisory Management Programme (RAMP) with World Bank during first half of 2015.
- PFM, statistics, and structural actions:
  - MTFF approved; BOS to operationalize MTFF in 2015.
  - MTNDS approved by cabinet on November 24 (SB).
  - Asset register publication: five major SOEs by end of 2014 (SB); register for entire public sector by end of 2015 (proposed SB).
  - Underperformance in investment budget execution noted; government will conserve unspent resources for next year's investment budget.
  - SPF actions: employee and employer contributions rose by ½ percent of earnings each in 2014; transfer of assets from Social Security Fund to SPF in January 2015 estimated at SR 335.9 million or 30 percent of SPF total Funds.
- Financial sector development:
  - FSDIP finalized and cabinet approved in November 2014 (SB).
  - FSDIP deliverables to inform reforms for 2015–2017 including Non-Bank Financial Institutions Act and new Credit Reporting Act.
  - CBS to strengthen macro prudential framework; draft Financial Stability Framework to be implemented by end-October 2015 (proposed SB).
- Governance and statistics:
  - Prepare to adhere to SDDS standards with target date mid 2015.
  - Publication progress: quarterly GDP, quarterly labour market indicators, quarterly PPI and industrial production index.
- Implementation assurance:
  - Authorities view updated MEFP policies as sufficient and stand ready to take further measures and consult with the Fund in advance of revisions.

### STRUCTURAL BENCHMARKS AND STATUS (2014) AND PLANNED BENCHMARKS (2015)
- 2014 SBs (status):
  - Cabinet approval of FSDIP — Timing: End October, 2014 — Status: Met with delay (approved November 12).
  - Cabinet approval of MTFF — Timing: End September, 2014 — Status: Met with delay (approved November 24).
  - Establish and publish comprehensive asset register for five SOEs — Timing: End December, 2014 — Status: On track.
  - Endorsement by National Tender Board of procurement policies of all commercial SOEs — Timing: End September, 2014 — Status: Met with delay (endorsed November).
  - Approval by PEMC Board of plan for governance audits of SOEs — Timing: End December, 2014 — Status: Met (approved October).
- 2015 SBs (planned):
  - Conduct at least 60 tax audits of businesses (Jan–end-Sept 2015).
  - Update and publish on-line government asset register, including state land (End December, 2015).
  - Cabinet approval of policy to strengthen supervision of commercial SOEs (End March, 2015).
  - Conduct governance audits of five SOEs (End December, 2015).
  - Cabinet approval of strategy to reduce restrictive practices at the Port of Victoria (End May, 2015).
  - CBS Board approval of macro prudential surveillance framework (End October, 2015).
  - Submission to National Assembly of new legislation on International Business Companies (End June, 2015).

### TECHNICAL MEMORANDUM OF UNDERSTANDING — KEY DEFINITIONS AND REPORTING
- NIR (Floor): reserve assets of CBS minus reserve liabilities (including liabilities to the IMF); definitions and excluded items specified; semiannual internal audit of NIR data.
- Reserve Money and Reserve Money Band (Ceiling): Reserve money = currency issued + deposits held by other depository corporations at the central bank; targets are projected daily averages of the quarter surrounded by a symmetrical band of 3 percent.
- Program Primary Balance (Cumulative Floor): consolidated government and social security fund revenues less noninterest (primary) expenditures and net lending; transfer of assets from Social Security Fund to SPF in 2015 excluded from expenditures.
- Public External Debt (Ceiling): applies to contracting/guaranteeing new external liabilities by public sector; valuation at program exchange rates; zero sub-ceiling for short-term external debt (≤ one year).
- External and domestic arrears definitions and nonaccumulation performance criteria specified.
- Reporting requirements:
  - CBS weekly reporting (within one week): daily reserve money data; foreign exchange reserves position; summary table on FX market transactions; results of liquidity deposit auctions, primary T-bill auctions, and secondary auctions.
  - CBS monthly reporting (within four weeks): monetary survey; foreign exchange cash flow; financial soundness indicators; stock of government securities in circulation and debt service profile.
  - Ministry of Finance monthly reporting (within two weeks): consolidated government operations on commitment and cash basis in IMF format and GFSM2001; detailed revenues and expenditures; customs import/export data; public debt report; consolidated creditors schedule on domestic expenditure arrears.
  - Ministry of Finance quarterly reporting (within one month): accounts of public nonbank financial institutions.
  - Government and CBS to consult with Fund staff on measures impacting program implementation.

### IMF PRESS RELEASE HIGHLIGHTS (Press Release No. 14/571, December 12, 2014)
- Review outcome and disbursement:
  - Executive Board completed first review under the EFF; disbursement of SDR 1.635 million (about US$2.4 million), bringing total disbursements to SDR 3.27 million (about US$4.8 million).
  - EFF approved in June 2014 for SDR 11.445 million (about US$ 16.8 million, or 105 percent of Seychelles’ quota).
- Program performance and developments:
  - At first test date end-June 2014, all performance criteria met; preliminary data show all third quarter indicative targets also achieved.
  - Projected growth for 2014 revised down to 2.8 percent from 3.7 percent.
  - Exchange rate depreciated by 11 percent in nominal effective terms from early August to late-October.
  - CBS tightened reserve money target for Q4 2014 by 7 percent and will maintain stance into 2015.
  - Fiscal targets for 2014 and 2015 tightened to support restoration of external balance and reduce debt-to-GDP ratio below 50 percent by 2018.
  - Flexible exchange rate regime remains key tool to manage pressures and restore external equilibrium.
  - Structural priorities: transparency and efficiency in public resource use, strengthen SOE governance, enhance private sector environment.

*International Monetary Fund staff report excerpt contained in the provided PDF content.*

### 2017. The program aims to bolster the foundations for sustained and

### _cr14356 - 2017. The program aims to bolster the foundations for sustained and

### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK
- The Seychelles economy "performed well in the first half of the year" (Tables 1–4 and Figures 1–2).
- Central Bank of Seychelles (CBS) purchased US$24 million more than planned, building reserves above levels projected for end-June.
- FDI exceeded projections driven by several large projects in the tourism sector.
- Inflation decelerated to 1.1 percent (yoy) in June; remained low through September at 0.6 percent (yoy).
- Strong growth in private sector credit and personal earnings: personal earnings economy-wide grew 13 percent; private sector credit growth reached 17 percent (yoy) in September.
- Tax revenue collections exceeded mid-year projections by ⅓ percent of GDP, driven largely by buoyant tax collections on imports.
- Tourism: arrivals down 1 percent (yoy) up to September; tourism revenues fell an estimated 5 percent, attributed to fewer higher-spending French and Italian tourists and loss of some flight connections.
- Tuna production weakened as production shifted to lower-cost locations, in part due to high domestic electricity prices.
- Balance of payments pressures emerged by mid-year as strong domestic demand coincided with weak foreign exchange earnings; commercial banks slowed processing of FX transactions creating backlogs.
- Exchange rate developments: from early August to late October, the Rupee fell in nominal effective terms by 10.9 percent; against the dollar the depreciation was 14.0 percent.
- Growth and current account projections:
  - Projected growth for 2014 revised down to 2.8 percent (from 3.7 percent).
  - Growth expected at 3.0 percent in 2015.
  - Projected current account deficit reaches 22.5 percent of GDP in 2014, improving to 20.5 percent in 2015.
- Reserve coverage projected to improve in 2014 over 2013; public debt reduction remains on track despite depreciation.
- CBS took management control of BMI Offshore Bank on November 11; the bank is described as liquid, well capitalized, and not a systemic risk.

### PROGRAM PERFORMANCE
- Implementation of the EFF-supported program has been strong despite balance of payments difficulties.
- End-June performance criteria (PCs) were met by comfortable margins; all but one structural benchmark (SB) were completed, some with minor delays.
- Fiscal outturns and budget:
  - Mid-year primary surplus target exceeded by nearly 2 percent of GDP.
  - Supplementary budget passed in September authorized new spending of 1.2 percent of GDP and identified savings of just under 1.0 percent of GDP.
  - Transfer to Air Seychelles: $5 million capital injection and a $3.5 million transfer in 2014, with a further $5 million capital injection to come in 2015.
  - Capital budget significantly under-executed; preliminary indications are end-September indicative target exceeded by 1½ percent of GDP.
  - Contracting of new external debt was significantly below the ceiling for the year (some loans postponed to 2015).
- Reserves and monetary aggregates:
  - (Adjusted) net international reserves (NIR) target over-performed by US$30 million due to early-year purchases.
  - Multi-year Treasury bonds issued between March and June absorbed structural excess liquidity equivalent to 4.3 percent of GDP.
  - Cumulative quarterly reserve money fell 6.7 percent below the program ceiling as of end-September.
  - CBS moved from quantity-based to price-based auctions of money market instruments and transitioned to targeting average daily reserve money over a quarter.
- Structural agenda progress:
  - All SBs planned through end-October either completed or expected by end-December.
  - Cabinet approved strategies on Medium-Term National Development, the Financial Sector, and the Medium-Term Fiscal Framework in November.
  - Plan to submit amendment to the Seychelles Revenue Commission Act to National Assembly in December and ratify the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (minor legal sequencing delays noted).
  - All commercial SOEs submitted procurement plans to the National Tender Board for endorsement in November.
  - PEMC Board approved a plan in October (ahead of end-December) to carry out audits of governance structures and practices of SOEs over next several years.
  - Progress continuing on establishing and publishing a comprehensive asset register for five large SOEs (SB for end-December).

### POLICIES IN THE PERIOD AHEAD — OVERVIEW
- Authorities acting decisively to restore external balance: fiscal policy tightened relative to previous plans while remaining anchored to debt reduction goal; CBS tightened monetary policy forcefully and committed to maintain the stance at least through first half of 2015; structural reforms to support sustained and inclusive growth and reduce vulnerabilities.

### A. Fiscal Policy
- 2014 primary surplus target tightened by ⅓ percent of GDP; higher primary surplus of 4.3 percent of GDP now targeted to avoid adding to domestic demand pressures.
- 2015 primary balance target established at 3.7 percent of GDP, ½ percentage point higher than previously envisaged, to help meet the central goal of reducing public debt below 50 percent of GDP by 2018.
- Fiscal measures and composition:
  - Domestically-financed capital expenditures projected roughly in line with budgeted levels; externally-financed investment expected to fall significantly short in 2014.
  - Under-execution of investment spending raises concern about spending composition and infrastructure/growth objectives.
  - To preserve investment, authorities plan to conserve resources from any under-execution and allocate them to higher capital spending in subsequent years.
  - Cabinet approved implementation of a Results Based Management framework and expansion of Programme-Performance Based Budgeting beyond the two pilot ministries.
  - Plan to complete pension system reform by transferring remaining assets of the Social Security Fund to the Seychelles Pension Fund in January 2014 (for program purposes this transfer will not be considered as expenditure).
- Revenue management for 2015:
  - 2014 tax revenues expected around ½ percentage point of GDP higher than budgeted, largely driven by import surge (85 percent of VAT over-performance came from imported goods).
  - With import growth expected to fall, proposed 2015 budget includes revenue measures: increase in road fees and excise on tobacco and spirits, and postponement of a planned reduction in corporate tax rates.
  - Government investigating decline in business tax receipts and has hired new experts to carry out additional audits (SB).

### B. Monetary Policy
- CBS tightening actions and objectives:
  - CBS set an average daily reserve money target for Q4 2014 seven percent below the original program target.
  - Interest rates have risen sharply; private sector credit expected to stabilize in Q4 as banks’ free reserves for lending become limited.
  - CBS committed to maintain a tight monetary policy stance as long as necessary to support external balance and contain inflation; expected at least through H1 2015.
  - Full impact of tightening on credit aggregates and foreign exchange conditions expected to be felt in H1 2015; inflationary impact of depreciation also to continue into H1 2015.
  - CBS will start normalizing the monetary policy stance once inflation starts to recede in the second half of 2015.
  - CBS refining macro-prudential toolkit (SB) over the next year, with particular focus on unsecured consumer lending.
- Additional demand restraint:
  - Government tightened eligibility requirements of SME lending program to help restrain demand.

### C. External Stability
- Outlook and policy stance:
  - Balance of payments pressures expected to unwind gradually in 2015 as causes recede and policy responses take effect.
  - Current account deficit expected to decline as export growth resumes and import demand moderates with policy tightening and depreciation.
  - Authorities committed to exchange rate flexibility to ensure adjustment in line with fundamentals, while standing ready to intervene to prevent excessive volatility.
  - Authorities engaging market participants to investigate causes of FX transaction backlogs to promote smoother market functioning.

### STRUCTURAL AGENDA AND INSTITUTIONAL ACTIONS
- Medium-term strategies and governance:
  - Cabinet approvals for Medium-Term National Development, Financial Sector strategy, and Medium-Term Fiscal Framework.
  - Amendments to Seychelles Revenue Commission Act and ratification of Multilateral Convention on Mutual Administrative Assistance in Tax Matters planned (minor sequencing delays).
  - Strengthened PFM oversight: SOE procurement plans submitted; audits of SOE governance scheduled; comprehensive asset register for five large SOEs in progress.
- Financial sector and AML/CFT:
  - Action on BMI Offshore Bank: CBS took management control due to severed correspondent banking relationships; bank not expected to have significant fiscal or program implications.

*International Monetary Fund staff summary of Seychelles program performance and policy plans.*

### 14.  In this context of continuing external pressures, the EFF-supported program targets

### _cr14356 - 14. In this context of continuing external pressures, the EFF-supported program targets

### External pressures and reserve strategy
- The EFF-supported program targets only stability in gross reserves for 2015.
- External pressures have been more acute than previously anticipated, with disappointing exports and the public sector’s net foreign exchange cashflow projected to become moderately negative in 2015 as debt service increases.
- Supporting gross reserves will require purchases in the market by the CBS; authorities plan modest and back-loaded purchases given continuing external pressures and poor functioning of the foreign exchange market.
- This strategy is projected to roughly maintain current levels of reserve adequacy, including the import coverage ratio, as imports are projected to stabilize.
- Original PC on end-2014 NIR, adjusted by new projections on budget support and external debt service, would have been US$344 million. The new proposed NIR target is US$350 million. This increase is possible because of the strong NIR performance in the first half of the year.
- Staff supports the prudent approach to reserve accumulation in 2015 while encouraging opportunistic reserve building as soon as market conditions are propitious.

### Structural agenda (public finances, SOEs, financial sector, and competitiveness)
- Public financial management reforms aim to better align expenditures with strategic priorities:
  - The Medium Term Fiscal Framework (MTFF) approved in November sets out a strategy for the next three annual budgets, drawing on the Medium Term National Development Strategy (MTNDS).
  - Next year a more detailed Medium-Term Budget Framework will be prepared to provide more guidance for establishing spending allocations for line ministries linked to specific policy goals.
  - With World Bank support, Program Performance Based Budgeting (PPBB) frameworks were prepared for two ministries and will be extended to three further ministries next year; ministries reported the PPBB process was time-intensive but useful.
  - A new interministerial committee will ensure the investment program aligns with MTNDS and MTFF priorities.
  - Authorities intend to extend the public asset register to the entire public sector by the end of 2015 (SB).
- SOE governance and oversight:
  - Public Enterprise Monitoring Commission (PEMC) now receives SOEs’ financial performance data but needs further capacity to analyze data and assess governance.
  - Authorities intend to strengthen supervision of commercial SOEs, including independent review of large investment plans (SB).
  - Staff stressed enhancing independence of the board of the state holding company, Société Seychelloise d’Investissement (SSI), from SOEs in its portfolio.
  - Governance audits of five SOEs will be conducted in 2015 (SB).
  - Public finances remain vulnerable to poor SOE performance and excessive risk-taking; 2014 highlighted risks via unexpected outlays from Air Seychelles restructuring and indications of weakening financial performance of some SOEs.
- Financial sector development:
  - Adoption of the Financial Sector Development Implementation Plan (FSDIP) provides a blueprint to enhance the sector’s contribution to inclusive growth.
  - Macro-important elements focus on developing capital markets and supervision/regulation of banks and non-bank financial institutions (NBFIs).
  - Planned reforms to the Seychelles Pension Fund investment strategy aim to deepen markets and extend the maturity horizon.
  - Authorities aim to modernize the legal framework with World Bank assistance and adopt relevant elements of Basel II and III over the next two years.
  - Financial soundness indicators reflect a strong capital position of the banking system (Table 5).
  - CBS intends to develop and adopt a new macro-prudential framework in 2015 (SB), update the Credit Information System, establish a collateral registry, and build the capacity of the Financial Services Authority.
  - Enhanced payments system supervision and regulation of offshore banking activities are on the agenda; CBS intervened in a small off-shore bank in November.
- Growth and private sector development:
  - Measures to improve Doing Business ranking include increased electronic payment use in interactions with SRC and facilitating trade via a trade portal and eventual one stop trade shop.
  - Seychelles’ accession to the WTO, expected at the end of this year, has prompted major overhaul of trade legislation and regulations.
  - Government committed to reviewing greater private sector participation in port services and infrastructure with IFC collaboration, including cabinet approval of a strategy to reduce restrictive practices at the Port of Victoria (SB).
  - Review of air transport policy is underway and important for tourism competitiveness.

### Program monitoring, targets, and risks
- Proposed program adjustments to support restoring external equilibrium:
  - Reserve money target for December 2014 is tighter by about 7 percent relative to the original program request.
  - Proposed fiscal primary surplus target for December 2014 is tighter by ⅓ percentage points of GDP relative to the original program request.
  - Taking into account over-performance in H1 and adjusters for shortfalls in external financing, the proposed NIR target for December is also higher.
  - Proposed targets for 2015 are tighter than the original program request: primary surplus tighter by ½ percentage points of GDP and reserve money targets tighter by about 7 percent.
  - Proposed NIR targets for 2015 are at a level consistent with stable gross reserves, reflecting a prudent approach to purchases until macroeconomic tightening takes effect in the foreign exchange market.
  - Proposed ceiling on external debt contracting in 2015 is higher as certain planned loans slipped from 2014 to 2015.
  - Authorities proposed structural benchmarks for 2015 consistent with program objectives.
- Safeguards and TMU:
  - An updated Safeguards Assessment completed in September found the CBS's safeguards framework broadly adequate, with continued progress; areas remain to strengthen internal audit and the CBS legal framework.
  - The TMU was revised to reflect the Safeguard Report’s recommendation that NIR compilation should be subject to semi-annual internal auditing.
- Financing and risk assessment:
  - With planned budget support from the World Bank and African Development Bank, the program is fully financed for 2015.
  - Downside risks mostly external: renewed recession in Europe, downturn in Middle East/Asia growth markets, weak tourism arrivals, and limited but possible Ebola-related impacts via travel hubs.
  - Internal risks focus on potential SOE losses and failure to implement agreed policy measures, which would be costly given Seychelles’ high openness and difficult external environment.

### Staff appraisal and policy recommendations
- Macroeconomic assessment:
  - Staff welcome strong program implementation and determination to safeguard macroeconomic stability amid external pressures from strong domestic demand and weak external demand for tourism and canned tuna.
  - Planned policy tightening is appropriate to restore external balance.
  - With weak external demand and policy tightening, growth is expected to slow to around 3 percent this year and next.
- Policy recommendations:
  - Continue to rely on exchange rate flexibility and promote smooth operation of the foreign exchange market.
  - CBS’s decision to tighten the reserve money target for Q4 2014 by 7 percent and maintain stance into 2015 is appropriate; CBS should remain ready to take further action if warranted.
  - Tighten fiscal policy next year, including a very tight wage round, to support restoration of external balance.
  - Continue commitment to reducing the debt-to-GDP ratio to 50 percent by 2018 as a transparent anchor to fiscal strategy and the program.
  - Control current expenditure closely to ensure sustainability and preserve room for infrastructure investment; improve execution of planned investment spending and minimize shifting unused resources to current spending.
  - Public sector wage restraint will set an important example for the economy.
  - Remain steadfast implementing the structural agenda: transparency, efficiency and fairness in public resource use; focus SOEs on core mandates; strengthen SOE governance, especially at SSI.
  - Promote private sector contribution to sustained, broad-based growth by opening activities to private participation (e.g., port) while avoiding crowding out by expanding SOEs.
  - Develop policy responses to competitiveness issues such as flight connections and high commercial electricity rates.
  - Continued strong implementation of policy plans is vitally important given continuing pressures and a small margin for maneuver.

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

### 26.  In light of the authorities’ continued strong program implementation and determined

### _cr14356 - 26.  In light of the authorities’ continued strong program implementation and determined

### Program decision and staff recommendation
- Staff supports the authorities’ request for:
  - completion of the first review under the Extended Arrangement; and
  - modification of the quantitative performance criteria for end-December 2014.

### Macroeconomic development and projections (highlights)
- Nominal GDP (2013): US$ 1,386 million
- Per Capita GDP (2013): US$15,644
- Population, end-year (2010): 90,000
- CPI (annual average) and CPI (end-of-period) projections (selected years):
  - 2014 CPI (annual average) 2.6; CPI (end-of-period) 5.5
  - 2015 CPI (annual average) 7.1; CPI (end-of-period) 5.8
  - 2016 CPI (annual average) 4.3; CPI (end-of-period) 3.4
  - 2017 CPI (annual average) 3.6; CPI (end-of-period) 4.0
  - 2018 CPI (annual average) 2.3; CPI (end-of-period) 4.8
  - 2019 CPI (annual average) 2.9; CPI (end-of-period) 2.5
- Real GDP growth (selected years):
  - 2015 Prel. 7.9
  - 2016 Est. 2.8
  - 2017 Prog. 5.3
  - 2018 Proj. 3.7
  - 2019 Proj. 2.8
- Stock of public debt (percent of GDP), selected entries:
  - 2011 73.2
  - 2012 77.5
  - 2013 62.6
  - 2014 64.5
  - 2015 64.9
  - 2016 62.3
  - 2017 58.1
  - 2018 53.8
  - 2019 49.2
- Gross official reserves (end of year, millions of U.S. dollars): 277, 307, 425, 456, 452, 453, 479, 503, 544, 584 (series shown across 2006–18 and projections)

### External sector and balance of payments (selected figures)
- Current account balance (millions of US Dollars):
  - 2011 -311
  - 2012 -298
  - 2013 -215
  - 2014 Prog. -273
  - 2015 Proj. -328
  - 2016 Proj. -307
  - 2017 Proj. -301
  - 2018 Proj. -292
  - 2019 Proj. -286
  - 2020 Proj. -295
- Current account (percent of GDP), same sequence:
  - -28.9, -26.4, -14.9, -18.5, -22.5, -20.5, -18.9, -17.3, -16.0, -15.7
- Exports of goods (millions of US Dollars) 2011–2020 (selected): 477, 497, 598, 587, 595, 579, 608, 632, 658, 691
  - Of which: tuna exports 242, 249, 351, 343, 341, 344, 358, 374, 392, 412
- Imports of goods (millions of US Dollars): -915, -967, -1,024, -1,097, -1,156, -1,075, -1,102, -1,136, -1,187, -1,256
  - Of which: oil imports -255, -301, -269, -284, -304, -251, -292, -300, -308, -320
- Gross official reserves (stock, e.o.p.) series (millions of US Dollars): 277, 307, 425, 456, 452, 453, 479, 503, 544, 584
- Total public external debt outstanding (millions of U.S. dollars) series: 490, 512, 520, 549, 535, 575, 585, 586, 584, 591
  - (percent of GDP) 45.6, 45.3, 36.0, 37.2, 36.7, 38.5, 36.7, 34.8, 32.8, 31.5

### Fiscal performance and public finances (selected highlights)
- Total revenue, excluding grants (percent of GDP for selected years): 35.3, 34.4, 31.1, 31.0, 31.6, 31.0, 30.8, 30.7, 30.8, 30.9
- Expenditure and net lending (percent of GDP, selected): 35.2, 36.2, 35.2, 33.1, 32.3, 32.6, 31.3, 30.7, 30.4, 30.9
- Current expenditure (percent of GDP, selected): 27.2, 25.8, 26.1, 26.0, 26.1, 25.8, 24.9, 24.1, 23.6, 23.4
- Program primary balance (percent of GDP): 5.3, 5.7, 4.5, 4.0, 4.3, 3.7, 3.7, 3.7, 3.7, 3.1
- Overall balance, including grants (percent of GDP): 0.9, 2.2, 0.3, 0.7, 2.1, 0.3, 0.8, 1.3, 1.5, 1.0
- Total public debt (percent of GDP) trajectory (selected): 73.2 (2011), 77.5 (2012), 62.6 (2013), 64.5 (2014), 64.9 (2015), 62.3 (2016), 58.1 (2017), 53.8 (2018), 49.2 (2019), 45.3 (2020)

### Monetary sector and central bank (selected indicators)
- Broad money (end-period, millions of Seychelles rupees) series includes: 7,266 (2010), 7,596 (2011), 7,554 (2012), 9,340 (2013), and projected path to 11,016 (2015 Proj. Dec.)
- Broad money growth (12–month percent change): 13.5 (2010), 4.5 (2011), -0.6 (2012), 23.7 (2013), 24.9, 32.1, 16.3, 22.0, 14.3, 22.2, 8.3, 12.0, 4.9, 4.1, 1.2, 5.3 (quarterly/annual series)
- Reserve money (end of period; 12–month percent change) series: 34.7, -2.7, 6.9, 15.4, 41.5, 28.6, 40.7, 34.4, 37.5, 29.2, 25.8, 16.5, 1.6, -2.2, 0.3, 5.6
- Money multiplier (broad money/reserve money): 4.2, 4.5, 4.2, 4.5, 3.6, 4.2, 3.7, 4.0, 3.8, 4.3, 3.8, 4.3, 4.3, 4.3, 4.3, 4.3
- Gross international reserves (millions of U.S. dollars) (memorandum): 254, 277, 307, 425, 446, 456, 437, 472, 446, 467, 456, 452, 456, 445, 442, 453 (series shown)

### Financial sector and banking soundness (selected indicators, end-of-period percent)
- Regulatory capital to risk weighted assets (percent): ranges shown including 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, 26.1, 26.7, 26.7, 24.6, 22.4
- Nonperforming loans to gross loans (percent): 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, 12.5, 9.4, 10.3, 6.2, 8.3
- Provisions as percentage of nonperforming loans (percent): 41.7, 26.0, 26.0, 31.4, 30.9, 37.3, 40.4, 33.8, 33.9, 32.1, 33.3, 29.5, 37.0, 37.3, 27.6, 39.2, 36.2, 57.4, 44.6
- Return on assets (annualized, percent): 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, 2.7, 1.9, 2.3, 2.0, 2.1
- Core liquid assets to total assets (percent): 43.5, 44.7, 44.7, 46.9, 47.1, 47.1, 47.7, 49.9, 49.6, 48.6, 47.9, 39.6, 38.9, 39.5, 41.4, 41.6, 41.5, 42.0, 36.9
- Foreign exchange loans to total loans (percent): 34.3, 29.7, 27.8, 25.5, 23.7, 20.1, 18.5, 18.4, 20.9, 20.0, 17.9, 18.7, 17.8, 17.1, 18.6, 18.7, 17.9, 18.5, 19.9

### IMF credit, obligations, and schedule under the Extended Arrangement
- Indicators of Fund Credit (in millions of SDR), existing Fund credit stock (end of period series): 28.3 (2013), 27.7 (2014), 25.9 (2015), 23.3 (2016), 19.7 (2017), 15.2 (2018), 10.5 (2019), 6.1 (2020), 3.3 (2021), 1.2 (2022)
- Stock of existing and prospective Fund credit (millions of SDR): 28.3 (2013), 29.3 (2014), 30.8 (2015), 31.4 (2016), 29.5 (2017), 25.0 (2018), 19.9 (2019), 14.6 (2020), 10.3 (2021), 6.5 (2022)
- In percent of quota (stock of existing and prospective): 259.4, 269.2, 282.3, 288.5, 270.6, 229.1, 182.4, 133.9, 94.0, 60.0
- Table of scheduled reviews and purchases under the Extended Arrangement, 2014–17:
  - June 4, 2014: Board approval of the Extended Arrangement — Amount 1.635 (Millions of SDR); (15 percent of quota)
  - First: September 15, 2014: Completion of first review and compliance with end-June 2014 quantitative performance criteria — Amount 1.635 (Millions of SDR); (15 percent of quota)
  - Second: March 31, 2015: Completion of second review and compliance with end-December 2014 quantitative performance criteria — Amount 1.635 (Millions of SDR); (15 percent of quota)
  - Third: September 15, 2015: Completion of third review and compliance with end-June 2015 quantitative performance criteria — Amount 1.635 (Millions of SDR); (15 percent of quota)
  - Fourth: March 31, 2016: Completion of fourth review and compliance with end-December 2015 quantitative performance criteria — Amount 1.635 (Millions of SDR); (15 percent of quota)
  - Fifth: September 15, 2016: Completion of fifth review and compliance with end-June 2016 quantitative performance criteria — Amount 1.635 (Millions of SDR); (15 percent of quota)
  - Sixth: March 31, 2017: Completion of sixth review and compliance with end-December 2016 quantitative performance criteria — Amount 1.635 (Millions of SDR); (15 percent of quota)
  - Total: 11.445 (Millions of SDR); 105 (percent of quota)

*Source: IMF staff report _cr14356 (excerpts provided).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Program status and IMF request
- IMF board on June 4, 2014 approved a 3-year arrangement under the Extended Fund Facility (EFF) for an amount of SDR 11.445 million (105 percent of quota).
- Seychelles has met all the quantitative Performance Criteria for end-June 2014 and is on track to complete the structural benchmarks for the first review.
- Request that the IMF Executive Board complete the first review of the EFF-supported program and approve the associated purchase of the second tranche of SDR 1.635 million (15 percent of quota).

### Recent macroeconomic performance and balance of payments pressures
- Tourism revenues directly account for about 84 percent of the foreign exchange sold in the market; tourism revenues have fallen by an estimated 5 percent in 2014.
- Other factors behind balance of payments pressures: wage increases in public and private sectors stronger than anticipated; faster-than-projected expansion of credit to the private sector.
- Despite external difficulties, the Central Bank has continued to accumulate gross official reserves to about 4 months of imports.

### Fiscal policy stance and targets
- Historical performance: annual average fiscal primary surplus of more than 7 percent of GDP over the past six years.
- Commitment to primary fiscal target and further debt reduction.
- For 2015 the government will target a primary balance of at least SR720 million for 2015, almost SR 100 million higher than the amount envisaged at the time of the program request.
- Measures to meet targets: freeze wages, maintain tight lid on goods and services spending, increase domestically financed investment spending, increase excise on tobacco and spirits, increase fees for various Government services, strengthen tax compliance.
- Recruit experienced tax auditors and conduct 60 tax audits of large businesses in January-September 2015, compared to 49 in 2014 (proposed new structural benchmark).
- Supplementary budget passed in September 2014 accommodated unanticipated pressures, including a capital transfer for Air Seychelles planned in the 2012 restructuring.

### Monetary policy framework and liquidity management
- Reserve money will continue to serve as the nominal anchor; Central Bank of Seychelles (CBS) guided by quarterly average values of reserve money.
- CBS started taking overnight deposits in August 2014 with the introduction of an interest rate corridor.
- Weekly issuance of T-bills for monetary policy purposes increased from R60 million in June to R100 million in September 2014.
- CBS will tighten further if needed to promote price stability and will accompany fiscal tightening with appropriate monetary policy measures.
- CBS has requested IMF technical assistance to build capacity in monetary policy analysis and forecasting.

### Exchange rate and reserves policy
- Exchange rate will remain market-determined and serve as a shock absorber.
- CBS will consider intervening in cases of excessive exchange rate volatility or self-fulfilling expectations that could cause overshooting.
- Bank will purchase reserves further whenever the opportunity arises, to the extent that this would not exert additional pressure on the foreign exchange market.
- Prudent reserve targets have been established for 2015; aim to exceed these targets in 2015 and build reserves further in 2016, as market conditions allow.
- CBS considering engagement on the Reserves Advisory Management Programme (RAMP) with the World Bank during the first half of 2015.

### Public financial management and medium-term frameworks
- Medium Term Fiscal Framework (MTFF) recently approved by Government (structural benchmark).
- Budget Outlook Strategy Paper (BOS) will operationalize MTFF in 2015 and update MTFF annually on a rolling three years timeframe.
- MTFF aligned with the Medium Term National Development Strategy (MTNDS), which was approved by cabinet on November 24 (structural benchmark).
- Plan to undertake a new PEFA assessment in 2015/2016 with donor TA.
- Program Performance Based Budgeting (PPBB) frameworks developed for Ministry of Education and Ministry of Natural Resources for 2015 PPBB Statements; pilot rollout to three other ministries for the 2016 budget.
- Public Investment Management (PIM) and Public Sector Investment Program (PSIP) development committee established; discussions with World Bank for further PIM assistance.
- Government submitted the 2013 financial statement in cash based IPSAS methodology; audited and being finalized for submission to the National Assembly.
- Asset register publication: five major SOEs by end of 2014 (structural benchmark); register for entire public sector by end of 2015 (proposed new structural benchmark).

### Investment budget execution and multi-year approach
- Underperformance in execution of investment budget noted over past two years due to a major external credit line not materializing and capacity constraints in line ministries.
- Government will minimize reallocation of resources from capital to current expenditure in supplementary budgets and conserve unspent resources to allocate to an upward adjustment of the following year's investment budget.

### Pension reform and Social Security Fund actions
- Seychelles Pension Fund (SPF) proposal approved to increase contributions of employees and employers: employee and employer contributions both rose by ½ percent of earnings each in 2014.
- Strategic plan for long-term self-sufficiency of the Fund to be presented to Government for approval in April 2015.
- Investment strategy to be put to the Board for approval in December 2015.
- Government will transfer all assets presently held by the Social Security Fund to the SPF in January, 2015, currently estimated at SR 335.9 million or 30 percent of the SPF total Funds.

### Financial sector development, regulation, and stability
- CBS, FSA and MoF finalized a diagnostic project supported by the World Bank's FIRST initiative to develop a Financial Sector Development Implementation Plan (FSDIP); cabinet approved the FSDIP in November 2014 (structural benchmark).
- FSDIP deliverables to inform reform measures for 2015–2017, including legal framework for additional financial services, enactment of the Non-Bank Financial Institutions Act and the new Credit Reporting Act.
- CBS to strengthen macro prudential policy framework; draft position paper on Financial Stability Framework finalized; framework to be implemented by end-October 2015 (proposed new structural benchmark).
- TA received in April 2014 on Basel II and III components; recommendations guiding implementation with timeline up to 2016.
- Modern payment systems law approved in July 2014; second phase of Electronic Funds Transfer project scheduled for conclusion by end-September 2015 and includes a new internet based online platform.

### CBS operations, governance, and strategic planning
- Internal Audit Department (IAD) self-assessment found partly compliant with IIA standards; action plan prepared to achieve full compliance and independent quality assessment by mid-2016.
- CBS 2014 – 2018 Strategic Plan guides the Bank’s objectives; performance monitoring and quarterly reporting in place.

### External integration, trade, and structural reform agenda
- Seychelles’ accession to the World Trade Organization expected in December 2014.
- Market access offer for entry into the SADC Free Trade Area accepted in June 2014; implementation of SADC FTA expected to commence in January 2015.
- Plan to submit revised tax legislation to the National Assembly by end of year (structural benchmark) to allow signing and ratification of the multilateral convention in early 2015; supplementary report to ensure compliance with OECD standards after signing.
- In 2015 plan to submit new legislation on International Business Companies (proposed new structural benchmark).
- Intend to adopt a strategy to reduce restrictions at the Port of Victoria (proposed new structural benchmark).

### SOE governance and oversight
- Procurement policies of all commercial SOEs endorsed by the National Tender Board in November 2014 (structural benchmark).
- Public Enterprise Monitoring Commission (PEMC) approved a plan for governance audits in October 2014 (structural benchmark); governance audits to be conducted on five SOEs in 2015 (proposed new structural benchmark).
- Intend to adopt a new government policy to strengthen supervision of commercial SOEs, including independent review of large investment plans (proposed new structural benchmark).

### Statistics and data transparency
- Preparing to adhere to the SDDS standards; work ongoing to produce the SDDS Real Sector indicators and achieve SDDS compliance by the committed target date of mid 2015.
- Publication progress: quarterly GDP statistics, quarterly labour market indicators including quarterly unemployment rates, quarterly producer price index (PPI) and industrial production index.
- Plans to expand coverage of PPI and later include other services; work to improve balance of payments statistics including increased coverage of the off-shore business sector.

### Implementation assurance and readiness to act
- Authorities view updated MEFP policies as sufficient to overcome current balance of payments pressures and remain on track to attain program objectives.
- Stand ready to take further measures if necessary and will consult with the Fund in advance of revisions.

*Source: Appendix I. Letter of Intent*

### 2014. The delay occurred due

### _cr14356 - 2014. The delay occurred due

### Structural benchmarks and implementation status (2014)
- Financial Sector
  - Cabinet approval of a Strategic Plan on Financial Sector Development.
    - Timing: End October, 2014
    - Objective: To deepen the financial system and reinforce inclusiveness.
    - Status: Met with delay. The Cabinet approved the Financial Sector Development Implementation Plan (FSDIP) on November 12.
- Fiscal Policy
  - Cabinet approval of a Medium-term Fiscal Framework (MTFF).
    - Timing: End September, 2014
    - Objective: To ensure medium-term fiscal framework is sustainable and has adequate financing for priority public investment projects, including SOEs.
    - Status: Met with delay. The Cabinet approved the MTFF on November 24.
- 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.
    - Timing: End December, 2014
    - Objective: To ensure transparency in use of state assets.
    - Status: On track for completion by end-December.
- State-Owned Enterprises
  - Endorsement by the National Tender Board of the procurement policies of all those state-owned enterprises incorporated under the companies act.
    - Timing: End September, 2014
    - Objective: To bring procurement policies of SOEs in line with provisions of the procurement act.
    - Status: Met with a delay. The National Tender Board endorsed the procurement policies of all the SOEs in November. Extra time required for a necessary regulatory change.
  - Approval by PEMC Board of a plan for carrying out governance audits of SOEs, including a plan for ensuring sufficient capacity.
    - Timing: End December, 2014
    - Objective: To enhance management practices and accountability in SOEs.
    - Status: Met. The PEMC Board approved the plan in October.

### Structural benchmarks under the Extended Arrangement (2015)
- Fiscal and Public Financial Management Policy
  - Enhance collection of business tax by conducting at least 60 tax audits of businesses from January 2015 to end-September 2015.
    - Timing: End September, 2015
    - Objective: Strengthen compliance and enhance revenue collections, especially in business taxes.
  - Update and publish on-line a government asset register, including state land.
    - Timing: End December, 2015
    - Objective: Safeguard public finances and enhance economic governance through better management of state assets.
- State-Owned Enterprises (SOEs)
  - Approval by Cabinet of a policy to further strengthen supervision of SOEs that operate on commercial terms, including independent review of large investment plans.
    - Timing: End March, 2015
    - Objective: Enhance the oversight of SOEs and the governance of SSI.
  - Conduct governance audits of five SOEs.
    - Timing: End December, 2015
    - Objective: Reinforce the monitoring and oversight of SOEs.
- Real Sector and Private Sector Development
  - Cabinet approval of a strategy to reduce restrictive practices at the Port of Victoria.
    - Timing: End May, 2015
    - Objective: Enhance efficiency and competitiveness of port services and strengthen the role of the port as regional hub and logistics platform.
- Financial Sector Development
  - Approval by the Board of CBS of a framework for macro prudential surveillance.
    - Timing: End October, 2015
    - Objective: Strengthen financial stability.
- International Financial Services Sector
  - Submission to National Assembly of new legislation on International Business Companies consistent with international standards.
    - Timing: End June, 2015
    - Objective: Safeguard the global business sector, following the OECD finding, and lay the foundation for sustained growth through best practice regulation.

### Technical Memorandum of Understanding — Key quantitative definitions and rules
- Purpose
  - Presents definitions of variables included in the quantitative performance criteria and indicative targets, key assumptions, and reporting requirements.
  - Quantitative performance criteria and indicative targets, and the benchmarks for 2014 are listed in Tables 1 and 2 attached to the LOI.
- 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 for reserve requirements.
  - Calculation method: Reserves assets and liabilities at each test date converted into U.S. dollars using the end of period exchange rates assumed in the program.
  - Monitoring and reporting: Semiannually, net international reserves data submitted by the CBS to the IMF will be audited by the CBS’ internal audit division in accordance with International Standards on Auditing; reports submitted to the IMF no later than two months after each test date.
  - Adjusters: The floor on NIR will be adjusted upward (downward) by the amount by which the external non-project loans and non-project cash grants exceeds (falls short of) the amounts assumed in the program (LOI Table 1). Floors also adjusted upwards (downwards) by the amount that external debt service payments fall short (exceed) the amounts assumed in the program.
- 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, surrounded by a symmetrical band of three percent in both directions. The upper bound serves as performance criterion or indicative target (ceiling). Quarterly average calculated as arithmetic average of reserve money observed on all days over the quarter.
  - Monitoring and reporting: Daily reserve money data submitted by the CBS to the IMF on a weekly basis with a time lag no later than one week. The cumulative average over the quarter monitored and reported weekly.
- Program Primary Balance of the Consolidated Government (Cumulative Floor)
  - Definition: 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. For program purposes, transfer of assets from the Social Security Fund to the Seychelles Pension Fund planned for 2015 will be excluded from expenditures.
- Public External Debt (Ceiling)
  - Scope: Applies to contracting or guaranteeing of new external liabilities by the public sector (central government, CBS, public agencies and parastatals for non-commercial operations). Does not apply to use of Fund resources, external debt restructuring operations, 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. A zero sub-ceiling applies to contracting or guaranteeing of short-term external debt with original maturity up to and including one year.
  - Debt definition: Follows “Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements,” Decision No. 6230-(79/140), as amended. Includes loans, suppliers credits, leases (present value at inception), arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt.
- External Arrears of the Public Sector
  - Continuous performance criterion: Nonaccumulation of arrears to external creditors.
  - Definition: External payments arrears = external debt service due and not paid within contractually agreed period, subject to any applicable grace period, including contractual and late interest. Arrears under agreed clearance frameworks or where rescheduling is sought are excluded.
- Domestic Arrears of Government
  - Performance criterion: Nonaccumulation of budget expenditure arrears measured on net basis from beginning of 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 for longer than 30 days; and (3) debt service payments on domestic debt of the government or guaranteed by the government not made within contractually agreed period.

### Data and reporting requirements
- The CBS will report:
  - Weekly (within one week from the end of the period):
    - Daily reserve money data.
    - Foreign exchange reserves position.
    - A summary table on the foreign exchange market transactions.
    - The results of the liquidity deposit auctions, primary Treasury bill auctions, and secondary auctions.
  - Monthly (within four weeks from the end of the month):
    - The monetary survey in the standardized report form format.
    - The foreign exchange cash flow, actual and updated.
    - Financial soundness indicators.
    - Stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report.
- The Ministry of Finance will report:
  - 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.
    - The 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 the cash operations to minimize any statistical discrepancy.
    - 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.
- Consultation: The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation, and provide any additional relevant information as requested.

### IMF press release highlights (Press Release No. 14/571, December 12, 2014)
- Review outcome and disbursement
  - The Executive Board completed the first review under the Extended Fund Facility (EFF) for Seychelles.
  - Completion enables a disbursement of SDR 1.635 million (about US$2.4 million), bringing total disbursements under the arrangement to SDR 3.27 million (about US$4.8 million).
  - The EFF was approved in June 2014 for SDR 11.445 million (about US$ 16.8 million, or 105 percent of Seychelles’ quota).
- Program performance and economic developments
  - At the first test date of end-June 2014, all performance criteria were met; based on preliminary data, all third quarter indicative targets were also achieved.
  - Projected growth for 2014 revised down to 2.8 percent from 3.7 percent due to weaker demand for Seychelles’ two main exports—tourism and canned tuna.
  - Exchange rate depreciated by 11 percent in nominal effective terms from early August to late-October.
  - Central Bank tightened the reserve money target for the fourth quarter of 2014 by 7 percent and will maintain stance into 2015.
  - Fiscal targets for 2014 and 2015 were tightened to support restoration of external balance and progress toward reducing the debt-to-GDP ratio below 50 percent by 2018.
  - The flexible exchange rate regime remains a key tool to manage pressures and restore external equilibrium.
  - Structural agenda priorities: ensuring transparency and efficiency in use of public resources, strengthening governance of state-owned enterprises, enhancing environment for private sector development.

*International Monetary Fund*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14356.pdf_