## _cr15201 - 2017. The program aims to bolster the foundations for sustained and ## Source details **Canonical URL:** [_cr15201 - 2017. The program aims to bolster the foundations for sustained and](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15201.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15201.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15201.pdf.json) --- ### Context: microstate recovering from crisis - Seychelles is an upper middle-income country—the smallest in sub-Saharan Africa—rebuilding resilience following a debt crisis in 2008-09. - Income and social indicators: - Per capita income close to the World Bank threshold for high income status. - Gini of income inequality: 65.8 percent (2006/7 household survey); 2013 survey expected to yield a relatively high level. - Poverty: 0.25 percent of the population living on $1.25 or less a day in 2007. - Post-crisis reforms restored fiscal and monetary credibility, included Paris Club debt restructuring, and reduced the role of the state. - Growth historically driven largely by capital accumulation; significant productivity gains since 2008 (Annex 6). - Political context: Presidential elections due by May 2016; authorities stress continuity in economic policy and commitment to the EFF-supported program. - Public Financial Management: need to ensure all public enterprises submit audited accounts by end-March of the following year. ### Recent developments, outlook, and spillovers - Macroeconomic outcomes: - 2014: output growth subdued due to weakness in tourism and canned tuna exports. - August–October 2014: exchange rate depreciated 16 percent against the dollar. - Late 2014 onward: tighter monetary policy, tourism recovery, falling global fuel prices, and depreciation effects on imports helped contain external pressures. - Inflation: year-on-year inflation reached 5.8 percent in March 2015; historical pass-through estimated at 65 percent over 18 months. - Exchange rate depreciation (July 2014–April 2015) reduced to 9 percent. - Growth projection for 2015: 3½ percent. - Current account: 2014 deficit 21.0 percent of GDP; 2015 projection is a contraction of nearly 6 percentage points of GDP (to about 15 percent of GDP) aided by lower world commodity prices, lower import demand, and export recovery. - Financial sector: capital adequacy ratios substantially above regulatory minimums, strong profitability, roughly stable non-performing loan ratio despite rapid private sector credit growth. - November 2014: CBS intervened in Bank of Muscat International Offshore (BMIO); CBS managing the institution pending reorganization. - Spillovers and external influences: - Falling fuel prices, US dollar appreciation vs. euro, weak growth in Europe and certain EMs. - Tourism arrivals closely linked to Europe and certain EMs. - Risks (from Risk Assessment Matrix): - Domestic SOE distress (Likelihood: M; Severity: M). - Relaxation of fiscal discipline (Likelihood: L; Severity: M). - Protracted slow growth in advanced and emerging economies (Likelihood: H; Severity: M). - Persistent dollar strength (Likelihood: M; Severity: M-H). - Outbreak of disease/perception of health risks (Likelihood: L; Severity: M-H). - Geopolitical fragmentation (Likelihood: M; Severity: M). ### Program performance under the EFF - Overall: program broadly on track; supports sustainability and resilience. - Fiscal and reserve outcomes: - 2014 primary surplus: over 4½ percent of GDP, exceeding target. - Fiscal primary surplus PC exceeded by ⅓ percent of GDP. - CBS purchased nearly US$10 million after rupee stabilization in November and comfortably exceeded the net international reserves (NIR) PC; purchase = 6 percent of base money. - Ceiling on daily average reserve money breached by 0.4 percent (minor and temporary deviation); staff support waiver request. - Deviations and spending issues: - Unexpected support of $8.5 million to Air Seychelles. - Reduced lending to Public Utilities Corporation due to project delays. - Liquidity management: coordination difficulties and forecasting issues contributed to temporary breach of reserve money ceiling. ### Macroeconomic policy guidance (selected) - Monetary policy: - Maintain tight monetary stance to contain depreciation pressures and private sector credit growth. - Emphasize exchange rate flexibility as a shock absorber. - Private sector credit growth expected to settle in the "10-to-15 percent" range. - Fiscal policy: - Maintain tight fiscal stance to reduce public debt and accumulate reserves. - Public sector wage freeze in 2015 to restrain import demand. - Avoid relaxation of fiscal discipline, particularly in pre-election periods. - Financial sector and AML/CFT: - CBS to manage and reorganize BMIO with a KPMG Mauritius reorganization plan; MCM provided advice. - Address de-risking pressures from correspondent banking relationships. - Structural measures: - Strengthen PEMC capacity and SOE governance; ensure audited accounts submission. - Diversify tourism markets and air transport links; support open, competitive air transport policy. - Support Development Committee role in assessing large investment projects. ### Structural reform priorities (high level) - Strengthen PEMC capacity to monitor and assess SOE performance. - Strengthen governance structures for SOEs, including independent oversight. - Improve implementation of the Public Financial Management Act—ensure audited accounts for public enterprises by end-March following year. - Diversify tourism markets and air transport links to reduce vulnerability to source-region shocks. - Reform business incentives: review generous tax incentives for tourism investment and focus support on SME linkages to tourism. ### Program targets, reserves, and liquidity management (2015 adjustments) - NIR targets for 2015 revised upward to lock in prior overperformance and maintain stable reserve levels despite valuation effects. - Average daily reserve money ceiling for Q2 lowered to help rein in private sector credit growth. - Reserves: - Sufficient to cover more than four months of imports. - Reserves exceed external public and private short-term debt. - 2014 uptick in import coverage due to a transitory fall in imports during 2015 expected to unwind. - Under the terms of the public debt restructuring, external debt service will rise by 1½ percentage points of GDP over the next two years. ### Fiscal policy details and risks (selected) - 2015 budget primary surplus target: SR 720 million (equivalent to 3.7 percent of projected GDP). - Revenue and expenditure: - Revenues projected to fall relative to GDP as 2014 import-driven overperformance is not expected to repeat. - Primary current expenditure projected to decline to 23.6 percent of GDP. - Capital expenditure projected to rise to 6.2 percent of GDP. - Public wage spending: - Government wages: nadir 5.9 percent of GDP in 2010; since risen to 7 percent of GDP (or just under 9 percent including government agencies). - A reclassification for 2015 moved costs equivalent to 2 percent of GDP from salaries and goods and services to transfers. - Tax composition: - Business tax collections fell from 6.9 percent of GDP in 2009 to 4.2 percent last year. - Authorities plan tax audits (SB, end-September 2015) to assess causes. ### Monetary, financial, and exchange rate policy (selected measures) - Monetary stance to remain tight until inflation and credit growth slow. - Pass-through of depreciation expected to largely dissipate by Q3 2015. - Liquidity management: - Treasury resumed T-bill auctions for monetary sterilization in late December 2014. - CBS moved back to quantity-based deposit auctions; IMF MCM providing TA on liquidity management. - Financial soundness: - Capital adequacy ratios remain well above minimums despite some erosion from credit growth. - Valuation revaluation contribution to nominal credit growth estimated at 2 to 4½ percentage points of a 25 percent increase. - Plans to establish a Financial Stability Committee; interim committee via executive authority if legal changes delayed (SB, end-October 2015). - Exchange rate: - Flexible regime allowed adjustment in 2014–2015; staff and authorities agreed to allow market forces to equilibrate and intervene only for excess volatility. - Continued opportunistic reserve accumulation warranted. ### External stability and competitiveness (Box 2 highlights) - Reserve adequacy: - Reserves exceed all adequacy metrics by a comfortable margin; import coverage reached 4.6 months in 2014. - Estimated REER misalignment (Box Table; overvaluation (+); undervaluation (-)): - 2014: Macroeconomic Balance 15.4; External Sustainability 12.5; Equilibrium Real Exchange Rate -6.5 - 2016: Macroeconomic Balance 5.6; External Sustainability 3.0; Equilibrium Real Exchange Rate -6.6 - 2018: Macroeconomic Balance 4.6; External Sustainability 1.5; Equilibrium Real Exchange Rate -7.2 - Tourism competitiveness: - Seychelles remains competitive; share in world tourism arrivals growing gradually. - Early 2015: arrivals up 14 percent in Q1 2015 vs. prior year. ### Structural reforms to promote growth and reduce risks (selected) - Priority objectives: - (i) sustaining inclusive growth; - (ii) enhancing quality of fiscal policy; - (iii) improved oversight and efficiency for SOEs. - Social and inclusion measures: - Spending on health, education and social programs = one-third of government expenditure. - Free access to primary, secondary and most tertiary education; high literacy; low maternal and infant mortality. - Unemployment below 5 percent; high income inequality; skills mismatches persist despite high literacy. - Private sector and competitiveness: - MTNDS priorities: governance, the environment, and energy. - Focus on higher value-added tourism, diversification of source markets, broader air transport connections (including Europe and China where profitable). - Encourage tourism linkages to local SMEs and review generous tax incentives. - Improve business climate: Doing Business rank 85th in 2015. ### Business climate, FSDIP, and WTO accession - New Ministry of Entrepreneurship Development and Business Innovation considering measures to support new enterprises and refocus SME loan guarantee scheme. - WTO accession completed in April 2015; Seychelles became the 161st member. - Financial Sector Development Implementation Plan (FSDIP) approved by cabinet (SB, end-October 2014); elements include legal/supervisory framework, payments and credit information systems, and access to credit for SMEs. ### SOEs, SSI, and debt buyback for marine conservation - SOE oversight: - PEMC receives SOE financial data but needs capacity strengthening; only four SOEs submitted audited accounts this year (improvement from one last year). - Cabinet approved oversight measures including outside review of investment decisions (end-March 2015 SB); further capacity building needed. - SSI guidance: - SSI role should focus on government oversight; new investment mandate limited to clear market failures or public goods. - Strengthen SSI board independence and transparency. - Debt buyback (Paris Club / SCCAT): - Portion of estimated $27 million of Paris Club claims to be bought back and replaced by local currency obligations to fund marine conservation (SCCAT). - Expected debt service impact: fall by around $1.5-2.0 million per year up to 2022, then increase by a similar amount in the decade thereafter. - Paris Club buyback mechanics: Nature Conservancy funds SCCAT → SCCAT lends to government → government buys back Paris Club claims → government repays SCCAT over extended period, partly in local currency → marine conservation funded and endowment built. ### Program assessment, IMF recommendation, and governance commitments - Staff supports: - waiver for the end-2014 performance criterion on reserve money; - completion of the second review under the Extended Arrangement; - modification of the quantitative performance criteria for end-June and end-December 2015. - Authorities commit to consult with Fund staff on all economic and financial measures that impact program implementation and to provide additional information as requested. - Safeguards: recent mission found safeguards broadly adequate; central bank legal framework and audit functions need further strengthening. ### Macroeconomic projections and key numerical indicators (selected figures preserved exactly) - Nominal GDP (2014): US$ 1,423 million - Per Capita GDP (2014): US$15,887 - Real GDP (annual growth rates series): 6.6, 6.0, 2.8, 3.3, 3.0, 3.5, 3.7, 3.6, 3.5, 3.4, 3.4 - CPI (annual average series): 7.1, 4.3, 2.3, 1.4, 5.2, 4.3, 2.9, 3.0, 3.0, 3.0, 3.0 - CPI (end-of-period series): 5.8, 3.4, 4.8, 0.5, 2.5, 4.9, 3.8, 2.5, 3.3, 2.9, 3.1 - Program primary balance (percent of GDP series): 5.7, 4.6, 4.3, 4.6, 3.7, 3.8, 3.8, 3.8, 3.8, 3.0, 2.1 - Total public debt (percent of GDP series): 77.1, 64.1, 64.9, 65.3, 62.3, 63.7, 59.5, 54.7, 49.9, 45.9, 43.1 - Domestic: 32.0, 27.2, 28.2, 29.9, 23.8, 25.1, 23.0, 20.5, 17.1, 15.2, 15.1 - External: 45.1, 36.9, 36.7, 35.5, 38.5, 38.6, 36.5, 34.3, 32.8, 30.7, 28.0 - Current account balance (percent of GDP series): -19.9, -11.5, -22.5, -21.0, -20.5, -15.2, -14.6, -15.0, -13.6, -12.2, -11.5 - Gross official reserves (end of year, US$ millions series): 307, 425, 452, 463, 453, 463, 476, 505, 521, 539, 544 - Months of imports, c.i.f.: 2.8, 3.7, 4.1, 4.6, 4.0, 4.3, 4.2, 4.3, 4.2, 4.3, 4.3 - Exports of goods (US$ millions series): 497, 578, 595, 539, 579, 448, 487, 530, 549, 573, 592 - Tuna exports (US$ millions series): 249, 351, 341, 318, 344, 279, 293, 311, 323, 333, 343 - Exports of services (US$ millions series): 555, 628, 506, 643, 509, 633, 662, 697, 734, 773, 815 - Tourism earnings (US$ millions series): 388, 430, 327, 398, 328, 380, 399, 423, 448, 474, 502 - Financial soundness indicators (selected samples): - Regulatory capital to risk weighted assets (samples): 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, 21.7 - Nonperforming loans to gross loans (samples): 5.4, 5.6, 5.3, 8.1, 8.3, 9.2, 8.3, 9.3, 9.6, 12.5, 9.4, 10.3, 6.2, 8.3, 8.2 ### Public debt sustainability (Annex I) — summary and stress-test outcomes - Assessment: debt trajectory sustainable under baseline; on-track to reduce debt below 50 percent of GDP by 2018. - Key baseline numbers and targets: - Debt level end-2014: around 65 percent of GDP. - Debt reduction target: below 50 percent of GDP by 2018. - Projected debt in 2020 (baseline): 40 percent of GDP. - Gross financing needs: 18 percent of GDP (current); DSA threshold: 15 percent. - Eurobond outstanding principal: $169 million; annual principal payments under rescheduled plan: $17 million a year. - Stress tests: - Individual shocks (growth, real exchange rate, primary balance, real interest rate): debt-to-GDP generally remains below 70 percent high-risk benchmark though attainment of 50 percent target may be delayed. - Combined macro-fiscal shock: debt-to-GDP would peak around 85-90 percent; debt-to-revenue ratio would increase to almost 270 percent. - SOE contingent liability shock (assume government assumes costs equivalent to five percent of GDP in 2017): 2018 debt target exceeded by almost five percent of GDP, with debt resuming downward path thereafter. ### External debt sustainability (Annex 2) — overview and key metrics - Inclusion of private sector and commercial SOE data raised end-2014 external debt estimate to around 117 percent of GDP. - Stock at end-2014: - Total Gross External Debt: 1,670 (US$ Millions) - Government and government guaranteed debt: 505 - Multilateral: 161 - Bilateral Paris club: 77 - Bilateral non-Paris club: 45 - Commercial and Bonds: 222 - Private debt (including commercial SOEs): 1,165 - Direct investment: 653 - Portfolio investment: 0.4 - Other investment: 512 (long-term loans 178; short-term loans 232; trade credit and advances 103) - External debt ratios and baseline path (selected): - External debt (percent of GDP series, baseline): 2014: 117.4; 2015: 130.0; 2016: 127.9; 2017: 129.3; 2018: 128.7; 2019: 128.0; 2020: 127.2 - External debt-to-exports (percent): 2014: 165.4; 2015: 165.4; 2016: 163.6; 2017: 163.8; 2018: 165.4; 2019: 165.3; 2020: 164.9 - Selected stress-test results (scenario outputs): Combined shock: 178.1; Real depreciation (one-time 30 percent in 2015): baseline comparison value 127 - Stress sensitivity: - 30 percent depreciation would increase external debt-to-GDP ratio almost 60 percent in the first year after the shock (scenario does not include beneficial competitiveness second-round effects). ### External stability and competitiveness (Annex 4 highlights) - Balance of payments pressures that led to 16 percent rupee depreciation in H2 2014 have abated; CBS made reserves purchases. - Tourism and trade: - Arrivals recovered late 2014 and were 1 percent higher year-on-year for 2014 overall. - Preliminary Q1 2015 arrivals up 14 percent vs. prior year; arrivals from Russia down 25 percent while recovery from France and Italy offset declines. - Reserve adequacy: - Import coverage reached 4.6 months in 2014; projections show marginal decline as Eurobond service begins and capital inflows stabilize. - Exchange rate assessment: - CGER approaches (MB, ES, ERER) yield broadly congruous results; exchange rate misalignment small and within confidence intervals. - Competitiveness bottlenecks: - Weaknesses: access to electricity; starting a business; credit availability. - Recommendation: address Doing Business weaknesses and accelerate reforms to improve investment climate. ### Sources of growth (Annex 6) — findings and policy implications - Growth averaged 4.5 percent (1969–2013). - Growth decomposition (Cobb-Douglas, skilled-augmented labor): - Capital accumulation was a main driver historically; TFP negative in the 1990s and 2000s without labor augmentation. - With skilled-augmented labor, TFP positive in the 2000s; TFP for 2008-2013 reached 2.0 percent. - Sensitivity analysis: depreciation rate scenarios δ = 5 percent, 7 percent, 10 percent produced qualitatively similar results. - Policy recommendations to raise growth: - Increase savings and investment rates; improve access to credit. - Encourage greater labor market participation. - Accelerate investment in education to address skills mismatches. - Improve business climate, reduce regulation, enhance competition, and improve SOE governance. ### Data, statistics, and program monitoring (selected) - Authorities achieved compliance with SDDS on May 1, 2015. - New CPI basket and weights based on 2013 HBS introduced January 2015. - 2013 HBS results incorporated into the monthly CPI from January 2015; work underway to use HBS for HFCE and to calculate a poverty line with World Bank support. - Quantitative performance criteria (selected targets and monitoring): - NIR floors and reserve money ceilings specified in Table 1 (exact targets and adjusted outcomes provided in program tables). - Program accounting exchange rates and memorandum items listed for monitoring. *Source: IMF staff report content provided in the supplied PDF chapter excerpt.* ### 2017. The program aims to bolster the foundations for sustained and ### _cr15201 - 2017. The program aims to bolster the foundations for sustained and ### CONTEXT: MICROSTATE RECOVERING FROM CRISIS - Seychelles is an upper middle-income country—the smallest in sub-Saharan Africa—successfully rebuilding resilience following a debt crisis in 2008-09. - Per capita income has risen close to the World Bank threshold for high income status; income inequality appears high (Gini coefficient). - The 2006/7 household survey measured the Gini of income inequality at 65.8 percent; the 2013 household survey is expected to yield a relatively high level. - Absolute poverty appears low: only 0.25 percent of the population was living on $1.25 or less a day in 2007. - Reforms after the 2008 crisis restored fiscal and monetary credibility, included Paris Club debt restructuring, and reduced the role of the state. - Historically, growth driven largely by capital accumulation; significant productivity gains evident since 2008 (Annex 6). - Political context: Presidential elections due by May 2016; President Michel announced candidacy for re-election in February 2015; authorities stress continuity in economic policy and commitment to the EFF-supported program. - Public Financial Management: further progress needed in implementing the Public Financial Management Act, notably ensuring all public enterprises submit audited accounts by end-March of the following year. ### RECENT DEVELOPMENTS, OUTLOOK AND SPILLOVERS Findings and projections: - Macroeconomic outcomes remain solid; most external pressures experienced in 2014 have abated. - 2014: Output growth subdued due to weakness in tourism and canned tuna exports. - August–October 2014: Exchange rate depreciated 16 percent against the dollar. - Late 2014 onward: Tighter monetary policy, tourism recovery, falling global fuel prices, and depreciation effects on imports helped contain external pressures and stabilize the exchange rate. - 2014 fiscal outcome: primary surplus of over 4½ percent of GDP, exceeding target, with lower infrastructure investment than planned. - Inflation: year-on-year inflation reached 5.8 percent in March 2015; historical pass-through data suggest a pass-through of 65 percent over 18 months. - Exchange rate: depreciation from July 2014 through April 2015 reduced to 9 percent. - Growth: projected growth for 2015 is 3½ percent. - Current account: 2014 deficit was 21.0 percent of GDP; 2015 projection is a contraction of nearly 6 percentage points of GDP, aided by lower world commodity prices, lower import demand, and recovery in export volumes. - Contributing factors to lower import demand: decline in FDI-related imports, lagged effects of the 2014 depreciation, continued tight monetary policy (expected to gradually contain private sector credit growth), and a public sector wage freeze. - Tourism and tuna revenues: rising volumes expected to partially offset falling prices in dollar terms; tourism earnings methodology revised up significantly by CBS with STA support. - Financial sector: soundness indicators remain comfortable despite rapid rise in private sector credit; capital adequacy ratios substantially above regulatory minimum, strong profitability, roughly stable non-performing loan ratio. - November 2014: CBS intervened in Bank of Muscat International Offshore (BMIO); no significant domestic repercussions; CBS manages institution pending reorganization. - Spillovers: main external influences are falling fuel prices, US dollar appreciation vs. euro, and weak growth in Europe and certain EMs. Tourism arrivals closely linked to Europe and certain EMs (Annex 3). Risks identified (excerpted from Risk Assessment Matrix, Box 1): - Domestic risks: - Financial distress at major SOEs (Likelihood: M; Severity: M): could lead to falling fiscal balance, spike in public debt, or economic disruption. Policy response: improve PEMC capacity, strengthen governance, support Development Committee role. - Relaxation of fiscal discipline (Likelihood: L; Severity: M): could threaten reserve accumulation and debt reduction. Policy response: ensure continuity in current policy. - External risks: - Protracted slow growth in advanced and emerging economies (Likelihood: H; Severity: M): would reduce tourism receipts, lowering growth and worsening the balance of payments. Policy response: ensure exchange rate flexibility, diversify tourism markets. - Persistent dollar strength (Likelihood: M; Severity: M-H): would hurt profitability of tourism sector (prices in Euros, costs in dollars). Policy response: avoid ad-hoc measures undermining long-term revenue potential. - Outbreak of disease/perception of health risks (Likelihood: L; Severity: M-H): adverse effect on tourism. Policy response: diversify tourist sources and ensure health checks. - Geopolitical fragmentation (Middle East and Russia/Ukraine) (Likelihood: M; Severity: M): could reduce tourist arrivals and raise fuel prices. Policy response: support open, competitive air transport policy and adjust macroeconomic policies; rely on exchange rate flexibility. ### GOOD PERFORMANCE UNDER THE EFF Program performance and deviations: - The program is broadly on track, bolstering sustainability and resilience. - Fiscal balance benefited from revenue overperformance driven by strong import demand. - Spending roughly as anticipated, with declines in quality due to: - Unexpected support of $8.5 million to Air Seychelles. - Reduced lending to the Public Utilities Corporation due to project implementation delays. - Fiscal primary surplus performance criterion (PC) was exceeded by ⅓ percent of GDP. - After rupee stabilization in November, CBS purchased nearly US$10 million and comfortably exceeded the net international reserves (NIR) PC. - The purchase was equivalent to 6 percent of base money and boosted liquidity. - Due to difficulties in policy coordination, liquidity management tools, and end-year liquidity forecasting, the PC on the ceiling for daily average reserve money was breached by 0.4 percent. - Inflation remained contained and below program projections; reserve money was reduced below the program ceiling in January. - Given the minor and temporary deviation, staff support the authorities’ request for a waiver. ### MACROECONOMIC POLICY: BUTTRESSING STABILITY (selected policy guidance and measures) - Monetary policy: - Tightened to contain depreciation pressures and private sector credit growth; expected to gradually contain private sector credit growth. - Exchange rate flexibility emphasized as a shock absorber. - Fiscal policy: - Maintain tight fiscal stance to continue reducing public debt and accumulate reserves. - Public sector wage freeze in 2015 expected to restrain import demand and affect private sector earnings. - Avoid relaxation of fiscal discipline, particularly in pre-election periods. - Financial sector and AML/CFT: - CBS to manage and reorganize BMIO with reorganization plan (KPMG Mauritius commissioned) and strengthened internal controls; MCM offered advice. - Address de-risking pressures from correspondent banking relationships. - Structural measures: - Continue implementation of reforms to improve public enterprise management (PEMC), strengthen governance, ensure audited accounts submission. - Encourage diversification of tourism markets and travel connections; support open, competitive air transport policy. - Support Development Committee’s role in assessing large investment projects. ### STRUCTURAL REFORMS: REDUCING RISKS AND PROMOTING GROWTH (high-level priorities) - Strengthen PEMC capacity to monitor and assess SOE performance. - Strengthen governance structures for SOEs, including independent oversight. - Improve Public Financial Management Act implementation—ensure audited accounts for public enterprises by end-March following year. - Diversify tourism markets and air transport links to reduce vulnerability to shocks in key source regions. ### OTHER ISSUES AND NOTABLE OBSERVATIONS - Seychelles has not fully benefited from the fall in world fuel prices due to small purchase quantities and a long-term supply contract. - Tourism sector margins under pressure from Euro depreciation versus the dollar because hotels price rooms in Euros but incur costs in dollars and Seychellois Rupees. - Medium-term risks include poor operating results from key SOEs that could pressure the budget. *Source: IMF country report content provided in the supplied PDF chapter excerpt.* ### 10. Some program targets for 2015 are proposed to be strengthened. Considering the ### Some program targets for 2015 are proposed to be strengthened. Considering the ### Program targets, reserves, and liquidity management - Previously conservative NIR targets for 2015 have been revised upward to lock in last year’s overperformance and maintain stable reserve levels, despite downward pressure due to the valuation effect. - The average daily reserve money ceiling for the second quarter has been lowered slightly to help rein in private sector credit growth. - The CBS and Treasury resumed T-bill auctions for monetary purposes in late December 2014; price-based deposit auctions proved insufficiently flexible in rapidly evolving conditions. - Because the public sector foreign exchange cash flow is negative, the CBS must make significant purchases in the market just to maintain stable NIR levels; the valuation effect reduces the dollar value of stable reserves in other currencies, as the dollar appreciates. - Reserves: - Reserves are sufficient to cover more than four months of imports. - Reserves exceed the amount of external public and private short-term debt. - The uptick in reserve import coverage in 2014 is due to a transitory fall in imports during 2015 that is expected to unwind in future years. - The temporary dip in projected reserve coverage in 2016 reflects a transitory increase in imports in 2017 related to large FDI projects. - Under the terms of Seychelles’ public debt restructuring, external debt service will rise by 1½ percentage points of GDP over the next two years, requiring significant purchases in the market. ### Structural agenda implementation and benchmarks - Implementation is generally proceeding as planned, despite some delays (Tables 2a and 2b of Attachment 1, Appendix I). - The authorities met the two end-December 2014 structural benchmarks (SBs) on time. - The end-March 2015 and the end-June 2014 SBs were met with a delay—a substantial one in the latter case. - Key legislative and international actions: - The National Assembly amended the Seychelles Revenue Commission (SRC) Act to align the legislation with OECD guidelines in December 2014. - The National Assembly ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in April 2015 (SB, end-June 2014). - New and revised benchmarks: - Authorities propose a new benchmark on submitting legislation to the National Assembly on international corporate providers and trusts by end-December (being developed in consultation with the OECD and other international partners). - The end-October benchmark on a macroprudential framework is proposed to be revised to accommodate the need for legal changes. - SOE oversight measures, including outside review of investment decisions (end-March 2015 SB), were adopted in early May; further capacity building and rigorous evaluation of new investments are needed to contain sector risks. ### Fiscal policy — objectives and risks - The 2015 budget target: a 3.7 percent of GDP primary surplus remains appropriate and attainable. - Spending plans maintain stable domestically-financed investment, relative to GDP, aided by restrained current spending. - Revenues are projected to fall relative to GDP as the overperformance in 2014 due to strong imports is not expected to be repeated; tax policy largely unchanged except for some increases in fees and excises. - The depreciation of the Euro poses revenue risks as hotel yields come under pressure in rupee terms, though some reduced Euro-denominated government spending should offset this. - Medium-term debt target: reduce public debt below 50 percent of GDP by end-2018; last year’s depreciation will require a slight increase in the primary surplus path relative to the program request to preserve debt dynamics (Annex 1). - Tax system and revenue composition: - Business tax collections fell from 6.9 percent of GDP in 2009 to 4.2 percent last year. - Authorities are increasing tax audits (SB, end-September 2015) to help assess the causes. - Accession to the WTO in April will result in relatively minor changes to the overall tax regime with little immediate impact on revenues. - Public wage spending and expenditure quality: - Primary current spending was 10 percent of GDP lower in 2013 than in the pre-crisis period. - Government wages reached a nadir of 5.9 percent of GDP in 2010, less than half their pre-crisis level. - Since then, wages have risen to 7 percent of GDP—or just under 9 percent if wages of workers in government agencies are included. - A reclassification for the 2015 budget (creation of the Healthcare Agency) moved costs equivalent to 2 percent of GDP from salaries and goods and services to transfers. - Staff cautioned that any further increase in the public wage to GDP ratio risks crowding out investment spending or other current spending priorities, and potentially weakening competitiveness. - Authorities’ stance: - Reiterated commitment to the debt reduction goal. - Noted efforts to audit large businesses and recent initiatives to improve compliance and collect tax arrears. - Emphasized the need for investment in education while accepting the need for restraint on current expenditures. - Staff suggested further efficiencies across the public sector, e.g., more efficient use of personnel or greater use of technology. ### Monetary, financial, and exchange rate policies - Monetary policy stance: - Monetary policy should remain tight to contain potential inflationary pressures and strong private sector credit growth. - By the third quarter of 2015, pass-through of exchange rate depreciation is expected to have largely dissipated. - Private sector credit growth should settle into a more sustainable pace: 10-to-15 percent range. - The CBS tightened reserve money targets for the second quarter; active sterilization policies will be needed to avoid volatility in monetary conditions and interest rates. - Liquidity management and instruments: - Immediate problems in late 2014 were corrected in Q1 2015 through improved coordination with the Treasury; the Treasury agreed to provide amounts of T-bills deemed necessary by the CBS for monetary sterilization. - Quarterly average of daily reserve money moved back into the target corridor. - The CBS has moved back to quantity-based deposit auctions. - IMF MCM is providing ongoing technical assistance, particularly in liquidity management. - Financial soundness and macroprudential measures: - Financial soundness indicators remain strong; recent rapid private sector credit growth has reduced some capital adequacy ratios, but they remain well above minimum levels. - Some increase in private sector credit was a revaluation of foreign exchange denominated debt; the valuation impact is estimated to have contributed 2 to 4½ percentage points of the 25 percent increase in nominal credit to the private sector. - Private sector credit as a proportion of GDP was only returning to previous levels. - Asset quality merits careful monitoring if credit growth does not moderate as planned. - With TA from MCM, the CBS is enhancing capacity to assess and monitor systemic risk and to develop capital-based, liquidity, and sectoral policy tools. - Plans to establish a Financial Stability Committee that encompasses all supervisory agencies; pending legal changes, an interim committee will be established using executive authority (SB, end-October 2015). - CBS is drawing lessons from BMIO to strengthen offshore banking supervision and bank resolution frameworks. - Exchange rate behavior and policy: - The flexible exchange rate facilitated adjustment to volatile external conditions in 2014 and 2015; small market size contributed to occasional backlogs in clearing transactions. - Exchange rate showed two-way flexibility: large depreciation in August-October 2014 followed by partial recovery. - Exchange rate now appears broadly in line with medium-term fundamentals (Box 2 and Annex 4). - Staff and authorities agreed to allow market forces to equilibrate demand for foreign exchange and to intervene only in case of excess volatility. - Continued gradual accumulation of reserves on an opportunistic basis is warranted to maintain coverage. ### External stability and exchange rate assessment (Box 2 highlights) - Immediate risks to external stability appear contained. - Reserves exceed all metrics for adequacy by a comfortable margin and mark steady improvement compared to post-crisis years (Annex 4). - Seychelles remains competitive in tourism; share in world tourism arrivals has been growing gradually. - Box Table. Estimated REER Misalignment: - 2014: Macroeconomic Balance 15.4; External Sustainability 12.5; Equilibrium Real Exchange Rate -6.5 - 2016: Macroeconomic Balance 5.6; External Sustainability 3.0; Equilibrium Real Exchange Rate -6.6 - 2018: Macroeconomic Balance 4.6; External Sustainability 1.5; Equilibrium Real Exchange Rate -7.2 - Note: Overvaluation (+); undervaluation (-). ### Structural reforms to promote growth and reduce risks - Priority objectives for the structural reform agenda: - (i) sustaining inclusive growth; - (ii) enhancing quality of fiscal policy; - (iii) improved oversight and efficiency for SOEs (Tables 8 and 9 for Structural Benchmarks). - Social outcomes and inequality: - Spending on health, education and social programs account for one-third of government expenditure. - Free access to primary, secondary and most tertiary education, and to healthcare; literacy rates very high; maternal and infant mortality very low. - Unemployment levels below 5 percent, but income inequality is high. - Non-Seychellois workers fill many skilled and professional jobs, suggesting a skills mismatch despite high literacy. - Private sector-led growth and diversification: - MTNDS priorities include governance, the environment, and energy. - Tourism has historically driven growth; small size and higher-end market niche limit expansion via more hotels. - Medium-term structural reforms should focus on higher value-added tourism activities, diversification of source markets, and broader air transport connections, including direct links to Europe and China where profitable. - To make growth more inclusive, tourism could have more linkages to the local economy (e.g., promoting guesthouses and other tourist services provided by local SMEs); generous tax incentives for investment in the industry should be reviewed. - Business climate and competitiveness: - Seychelles’ ranking in World Bank Doing Business indicators was 85th in 2015 (up two places from 2014). - Businesses cite high cost of electricity, driven in part by cross-subsidies that the government plans to reduce over the next 8-10 years; staff encouraged accelerating reduction in cross-subsidies. - Success in expanding the global business services sector depends on strengthening governance of the sector and bringing it into conformity with international norms. - Large infrastructure projects, e.g., in the port, could boost sustainable growth if carefully planned and financed; staff stressed that Public Private Partnerships need to minimize risks to the public balance sheet. - Reducing restrictive practices in the port (cabinet approval of a strategy, SB, end-May 2015) would boost activity and support increased fishing activity—part of the “Blue Economy.” - Support for entrepreneurship and SMEs should focus on removing impediments to establishing businesses (financial literacy, red tape) rather than tax incentives that could distort behavior and erode the revenue base. *Source: _cr15201 - 10. Some program targets for 2015 are proposed to be strengthened. Considering the (IMF staff report excerpt).* ### 25. The authorities agreed on the need to improve the business climate. A new Ministry of ### _cr15201 - 25. The authorities agreed on the need to improve the business climate. A new Ministry of ### Business climate, entrepreneurship, and WTO accession - A new Ministry of Entrepreneurship Development and Business Innovation is considering measures to support new enterprises, including working with other departments and the private sector to overcome hurdles to establish new businesses, and refocusing the government’s SME loan guarantee scheme. - Authorities acknowledged electricity price as an issue but highlighted the potential distributional impact of speeding up the planned rebalancing. - In March 2015 Seychelles completed the WTO ratification process and has become its 161st member, which should support policy stability and access to foreign markets. - On Public Private Partnerships (PPPs), authorities were working with the African Development Bank and other partners to formulate a policy to ensure transparency and accountability in taking any risks on the public balance sheet. ### Financial Sector Development (FSDIP) and access to finance - The Financial Sector Development Implementation Plan (FSDIP) was approved by cabinet (SB, end-October 2014) and developed with World Bank support. - Macroeconomically important elements: - Enhancing the legal and supervisory frameworks for financial institutions (banks, nonbank financial institutions, offshore banks, and other offshore financial services). - Fostering capital market development. - Other FSDIP components: - Developing financial infrastructure, in particular the payments and credit information systems. - Improving access to credit for SMEs and households. - Authorities are in discussions with partners, including the IMF, on accessing technical support. - Staff and authorities agreed on the need to maintain momentum in implementation. ### Public finances, budgeting, and public investment - Public financial management reforms advancing; following adoption of a Medium-Term Fiscal Framework (SB, end-September 2014), the next step is to adopt a Medium-Term Budget Framework to set ministerial budgets in line with MTNDS’ priorities. - Extension of Program Performance Based Budgeting (PPBB) will promote more cost-effective spending and medium-term planning. - Public investment spending suffers from chronic under-execution of capital expenditure despite the recent introduction of a Public Sector Investment Plan (PSIP). - Note: "The PSIP does not include some large infrastructure projects that may be needed over the medium term (notably the rehabilitation and extension of the main port)." - A new Public Expenditure and Financial Accountability (PEFA) assessment will provide an assessment of progress since the 2011 assessment and suggest areas for improvement. - Over the medium term, public spending must adjust to new challenges: healthcare shifting toward diseases of affluence and an ageing population; education refocusing on serious skills mismatch. ### State-owned enterprises (SOEs) and Société Seychelloise d’Investissement (SSI) - Progress on SOE reform noted, but further action needed to contain fiscal risks, ensure efficiency, and protect the role of private business. - PEMC regularly receives data on SOEs’ financial performance, but its role could be strengthened by enhancing capacity to analyze data and audit SOE governance (SB, end-June 2016). - Footnote: While all SOEs are required to submit audited accounts to the PEMC by end-March, only four have done so this year, an improvement on the one company that submitted on time last year. - Authorities approved plans to strengthen oversight, including of new investment plans (SB, end-March 2015). - Fiscal risks are rising as key SOEs expand: - Seychelles Trading Company (STC) is expanding into a new larger retail outlet. - Air Seychelles has added new destinations despite large operating losses. - Seychelles Public Transport Corporation (SPTC) recorded a loss last year despite government subsidy. - Staff recommendations on SSI: - SSI’s role should focus on government oversight and not the creation of new sources of risk. - Any new investment mandate proposed by SSI management (relying on dividends and leveraging its balance sheet) should be limited to clear instances of market failure or public goods in short supply, with careful vetting of proposed investments. - Strengthen independence of SSI’s board from the management of its component companies. - Authorities noted enhanced role of PEMC and progress in defining division of labor between SSI and PEMC. - Air Seychelles: authorities worked with management to establish a clear plan to return the airline to profitability without budgetary support over three years, including clear milestones; any public support should be transparently budgeted, accommodated within agreed medium-term fiscal balances, and subject to review if milestones are not met. - Authorities see a strategic need for a strong state-owned company in preventing over-reliance on foreign carriers given dependence on tourism and the small size and relatively-undeveloped private sector; stressed SSI’s mandate not designed to compete with the private sector and agreed to work with the World Bank and IMF in defining the SSI’s new mandate. ### Debt buyback for marine conservation and climate adaptation - Paris Club agreed in February 2015 to an innovative proposal by Seychellois authorities for financing marine conservation through a debt buyback operation (Box 3). - Operation mechanics and impacts: - A portion of estimated $27 million of debt bought back from the Paris Club (out of total public external debt of $512 million) will be replaced by local currency denominated obligations to the conservation project. - Debt service is re-profiled, reducing a near-term hump; foreign currency debt service is reduced. - Most significantly, debt service payments will go to marine conservation that protects Seychelles’ fisheries and supports tourism. - Box 3 mechanism summary: 1. The Nature Conservancy funds a new trust in Seychelles (Seychelles Conservation and Climate Adaptation Trust, or SCCAT) through its own resources and additional grants. 2. SCCAT lends the funds to the government, which proceeds with the Paris Club buyback. 3. Government agrees to repay SCCAT at the face value of the claims over an extended period, partly in local currency. 4. A marine conservation initiative is funded with these regular payments, with a fraction set aside to establish an endowment dedicated to funding the project permanently. - Benefits listed: - SCCAT is final beneficiary of negotiated discount and receives annual flows plus a permanent endowment; debt service is redirected to marine conservation. - GoS extends repayment period and partially converts payment of claims into rupees while benefiting from marine conservation implementation. - Paris Club obtains immediate payment of a share of its claim at a moderate discount. ### Macroeconomic outlook, monetary and fiscal policy guidance - Seychelles’ capacity to repay the Fund remains strong as obligations remain small relative to exports and reserves (Table 6). - Adequate level of international reserves and authorities’ commitment to achieving their debt objective provide a strong anchor for macro-stability; economy remains vulnerable to external shocks. - Recent safeguards mission found safeguards broadly adequate, although central bank’s legal framework and audit functions need further strengthening. - Staff appraisal key points: - Several years of fiscal discipline led to a significant reduction in the public debt burden. - Fiscal and monetary authorities cooperated to mop up substantial structural excess liquidity, enabling monetary policy to play growing role in managing demand and supporting stability. - The sharp tightening of liquidity conditions was both effective and appropriate in response to depreciation pressures in the second half of 2014. - Maintaining an adequate level of reserves enhances resilience. - External vulnerabilities: - Tourism outlook susceptible to Euro Area recovery, weakness in the Euro, geopolitical tensions disrupting Middle Eastern travel hubs, and higher oil prices. - Authorities are developing multiple tourism markets and building macroeconomic buffers (debt dynamics and reserves). - Exchange rate appears broadly in line with fundamentals. - Policy recommendations: - Maintain appropriately tight monetary policy stance until inflation and private sector credit growth slows appreciably. - Rapid private sector credit growth in 2014 weakened macroeconomic stability and was not sustainable. - Progress on technical elements of a forward-looking monetary policy framework: liquidity and inflation forecasting and strong policy coordination. - Develop macro-prudential tools to safeguard financial sector strength if necessary. - Continue financial deepening consistent with macroeconomic and financial sector stability. - Continue commitment to debt reduction target as a clear and transparent anchor to fiscal strategy. - Close control over current expenditure to ensure sustainability and room for infrastructure investment. - Improve execution and efficiency of planned investment spending; progress on medium-term budget framework is a high priority. - On SOEs: assess failures to achieve milestones (e.g., Air Seychelles) and consider prompt corrective action, including rationalizing operations to profitable routes; carefully vet and monitor STC expansion plans. - SSI’s new investment mandate should focus exclusively on areas where public involvement is essential; strengthen transparency, accountability, and independence of SSI’s Board. - Reforms to support private sector and competition: open protected sectors (e.g., port services), rapidly reduce cross-subsidization in electricity prices, develop financial sector, entrepreneurship and SMEs, address skills mismatches, and improve targeting of social programs to support higher labor force participation. - Maintain exchange rate flexibility together with macroeconomic discipline, sustained debt reduction, and preservation of adequate reserve coverage. ### Data, statistics, and safeguards - Authorities achieved compliance with SDDS on May 1, 2015. - Further work underway to improve compilation of external statistics and the international investment position (IIP). - Recent safeguards mission found safeguards broadly adequate; central bank’s legal framework and audit functions need strengthening in ongoing institutional development. *Source: IMF staff report content provided in the supplied text.* ### 41. In light of the authorities’ continued strong program implementation and determined ### _cr15201 - 41. In light of the authorities’ continued strong program implementation and determined ### Program assessment and IMF recommendation - Staff supports the authorities’ request for: - a waiver for the end-2014 performance criterion on reserve money; - the completion of the second review under the Extended Arrangement; and - the modification of the quantitative performance criteria for end-June and end-December 2015. - It is recommended that the next Article IV consultation with Seychelles be held in accordance with the decision on Article IV Consultation Cycles adopted on September 28, 2010, as amended. ### Macroeconomic developments and projections (key indicators) - Nominal GDP (2014): US$ 1,423 million - Per Capita GDP (2014): US$15,887 - Real GDP (annual growth rates): 6.6, 6.0, 2.8, 3.3, 3.0, 3.5, 3.7, 3.6, 3.5, 3.4, 3.4 - CPI (annual average): 7.1, 4.3, 2.3, 1.4, 5.2, 4.3, 2.9, 3.0, 3.0, 3.0, 3.0 - CPI (end-of-period): 5.8, 3.4, 4.8, 0.5, 2.5, 4.9, 3.8, 2.5, 3.3, 2.9, 3.1 - GDP deflator average: 10.5, 3.2, 2.5, 3.1, 3.4, 2.1, 2.8, 3.0, 3.0, 3.0, 3.0 - Nominal GDP (Seychelles rupees, selected years): 15,544; 17,015; 18,342; 18,133; 19,539; 19,168; 20,434; 21,796; 23,233; 24,740; 26,355 ### Fiscal outcomes and public debt - Total revenue, excluding grants (percent of GDP): 34.2, 31.9, 31.6, 32.4, 31.0, 31.6, 31.4, 31.3, 31.4, 31.3, 31.0 - Expenditure and net lending (percent of GDP): 36.1, 36.0, 32.3, 32.7, 32.6, 33.6, 32.0, 31.6, 31.2, 31.7, 32.3 - Overall balance, including grants (percent of GDP): 2.2, 0.3, 2.1, 2.0, 0.3, 0.3, 1.2, 1.4, 1.5, 0.8, 0.0 - Program primary balance (percent of GDP): 5.7, 4.6, 4.3, 4.6, 3.7, 3.8, 3.8, 3.8, 3.8, 3.0, 2.1 - Total public debt (percent of GDP): 77.1, 64.1, 64.9, 65.3, 62.3, 63.7, 59.5, 54.7, 49.9, 45.9, 43.1 - Domestic: 32.0, 27.2, 28.2, 29.9, 23.8, 25.1, 23.0, 20.5, 17.1, 15.2, 15.1 - External: 45.1, 36.9, 36.7, 35.5, 38.5, 38.6, 36.5, 34.3, 32.8, 30.7, 28.0 ### External sector and balance of payments (selected) - Current account balance, percent of GDP: -19.9, -11.5, -22.5, -21.0, -20.5, -15.2, -14.6, -15.0, -13.6, -12.2, -11.5 - Total external debt outstanding (millions of U.S. dollars, selected): 1,556; 1,583; ...; 1,670; ...; 1,788; 1,881; 2,010; 2,123; 2,225; 2,320 - Total external debt (percent of GDP): 137, 112, ..., 117, ..., 130, 128, 129, 129, 128, 127 - Gross official reserves (end of year, millions of U.S. dollars): 307, 425, 452, 463, 453, 463, 476, 505, 521, 539, 544 - Months of imports, c.i.f.: 2.8, 3.7, 4.1, 4.6, 4.0, 4.3, 4.2, 4.3, 4.2, 4.3, 4.3 - Exports of goods (millions of US$): 497, 578, 595, 539, 579, 448, 487, 530, 549, 573, 592 - Of which: tuna exports: 249, 351, 341, 318, 344, 279, 293, 311, 323, 333, 343 - Exports of services (millions of US$): 555, 628, 506, 643, 509, 633, 662, 697, 734, 773, 815 - Tourism earnings (millions of US$): 388, 430, 327, 398, 328, 380, 399, 423, 448, 474, 502 ### Monetary and financial indicators - Broad money (percentage change, selected): -0.6, 23.7, 12.0, 17.5, 5.3, 5.7, ... - Reserve money (end of period; 12–month percent change): 6.9, 15.4, 16.5, 13.9, 5.6, 8.0, ... - Reserve money (average of last quarter): ... ... -17.4, -14.5, 5.6, 2.1, ... - Money multiplier (broad money/reserve money): 4.2, 4.5, 4.3, 4.6, 4.3, 4.5, ... - Credit to the private sector (12–month percent change): 8.5, 4.5, 15.2, 25.2, 3.3, 12.4, ... - Financial soundness indicators (selected, percent end of period): - Regulatory capital to risk weighted assets (samples): 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, 21.7 - Nonperforming loans to gross loans (samples): 5.4, 5.6, 5.3, 8.1, 8.3, 9.2, 8.3, 9.3, 9.6, 12.5, 9.4, 10.3, 6.2, 8.3, 8.2 - Return on assets (annualized, samples): 3.9, 3.1, 3.6, 5.6, 3.5, 3.9, 4.2, 3.1, 2.3, 3.3, 3.2, 1.9, 2.3, 2.0, 2.1, 3.3 ### IMF credit, disbursements, and program financing - Outstanding use of IMF resources: SDR 29.16 millions (267.49 percent of quota) - Table of reviews and purchases under the Extended Arrangement (2014–17): - Board approval (June 4, 2014): 1.635 (Millions of SDR), 15 (Percent of quota) - First (September 15, 2014): 1.635, 15 - Second (March 31, 2015): 1.635, 15 - Third (September 15, 2015): 1.635, 15 - Fourth (March 31, 2016): 1.635, 15 - Fifth (September 15, 2016): 1.635, 15 - Sixth (March 31, 2017): 1.635, 15 - Total: 11.445 (Millions of SDR), 105 (Percent of quota) - Indicators of Fund credit (stock of existing and prospective Fund credit, in millions of SDR, selected): 28.3, 29.2, 30.8, 31.4, 29.5, 25.0, 19.9, 14.6, 10.3, 6.6 - In percent of quota: 259.4, 267.5, 282.4, 288.5, 270.7, 229.1, 182.4, 133.9, 94.1, 60.1 *Source: Seychelles authorities and IMF staff estimates and projections (extracted from the referenced IMF staff report).* ### Annex I. Public Debt Sustainability Analysis ### Annex I. Public Debt Sustainability Analysis ### Summary assessment - Seychelles’ debt trajectory is assessed as sustainable under the baseline scenario. - Under the baseline the country is on-track to attain its longstanding goal of reducing debt below 50 percent of GDP by 2018. - Debt is projected to reach 40 percent of GDP in 2020 under the baseline. - Debt at end-2014 is around 65 percent of GDP, close to the 70 percent indicative threshold used in the DSA framework to highlight high risk debt levels. - Gross financing needs are at 18 percent of GDP and are expected to decline over the medium term. ### Macroeconomic and fiscal assumptions - Real GDP growth: projected at 3.5 percent in 2015 and remaining around that level in the medium term. - Inflation: projected at around 3 percent over the medium term. - Program primary fiscal surplus: expected to remain just under 4 percent until the authorities’ overarching debt target is attained, after which it is projected to decline somewhat. - The assumptions underpinning the DSA follow the baseline scenario of the staff report and are broadly similar to those underlying the DSA at the time of the program request. ### Definition of public debt and special factors - Public debt definition in this DSA includes: (i) central government debt as reported by the authorities; (ii) government guarantees issued for loans extended to state-owned enterprises; and (iii) obligations to the IMF. - Debt issued by the central government for monetary purposes is included in the public debt stock due to its interest cost and rollover need, despite an offsetting unremunerated deposit in the central bank. - “Net public debt” figures shown in the tables are gross debt less the government deposits held at the central bank as counterpart to sterilization operations; other smaller government deposits are not excluded. - The DSA does not incorporate the impact of the recent debt buy-back operation agreed with the Paris Club because repayments to the Seychelles Conservation and Climate Adaptation Trust have yet to be finalized. The operation is expected to have a limited, albeit positive, net impact on debt sustainability. - The operation is expected to achieve a modest re-profiling and small shift to debt service in local currency; debt service is expected to fall by around $1.5-2.0 million per year in the period up to 2022 as a result of the operation, but increase by a similar amount in the decade thereafter. ### Baseline projections and composition dynamics - Debt level: around 65 percent of GDP at end-2014; projected to fall by almost 25 percentage points in the medium term under the baseline, reaching 40 percent in 2020. - Gross financing needs: 18 percent of GDP currently; expected to fall over the medium term and to fall below the 15 percent indicative threshold by the end of the projection period. - Short-term domestic debt: higher fiscal surpluses are assumed to pay down short-term domestic debt to reduce rollover risk and interest costs; this is projected to lengthen average maturity over the medium term. - External public debt service will increase significantly as payments come due on the rescheduled Eurobond: outstanding principal of $169 million with first principal payments due in the second half of 2016; biannual principal payments in equal installments over a decade imply $17 million a year. - The higher debt service payments are expected to remain manageable given the country’s comfortable reserve position and expected external inflows. - A large and growing proportion of debt is owed to non-residents in foreign currency, but risks are mitigated by significant finance available on favorable terms from official creditors. - External financing needs have been met largely through FDI in the past; any reduction in FDI should also reduce FDI-related imports that account for a significant proportion of the trade deficit. ### Stress tests and shock scenarios — outcomes and implications - Under individual shock scenarios (growth shock, real exchange rate shock, primary balance shock, real interest rate shock), the debt-to-GDP ratio generally remains below the 70 percent high-risk benchmark, though attainment of the 50 percent target by 2018 can be delayed. - Growth shock: debt-to-GDP would peak in 2017 and fall thereafter, but would remain 10 percentage points above the 50 percent target for 2018. - Real exchange rate shock: debt would increase slightly in 2016 but fall rapidly thereafter. - One-time shocks to the primary balance and the real interest rate would moderate the pace of debt decline and delay the debt reduction goal by one or two years. - Combined macro-fiscal shock (aggregation of shocks to real growth, interest rate, primary balance, and exchange rate) would push debt-to-GDP above the critical value of 70 percent: - Under the combined shock the debt-to-GDP ratio would peak around 85-90 percent before falling gradually. - Under the combined shock the debt-to-revenue ratio would increase to almost 270 percent. - SOE contingent liability shock: - Assumes government would have to assume costs equivalent to five percent of GDP in 2017 (equivalent to liabilities assumed during the Air Seychelles restructuring in 2012). - Under this scenario the 2018 debt target would be exceeded by almost five percent of GDP, although debt would resume a downward trajectory over the medium term. - Overall, the DSA indicates Seychelles remains vulnerable to exogenous shocks, but strong policy implementation and continued fiscal consolidation and growth should reduce risks over the medium term. ### Key quantitative indicators and projections (selected figures preserved exactly) - Debt level end-2014: around 65 percent of GDP. - Indicative high-risk benchmark: 70 percent of GDP. - Debt reduction target: below 50 percent of GDP by 2018. - Projected debt in 2020 (baseline): 40 percent of GDP. - Gross financing needs: 18 percent of GDP (current); threshold used in DSA: 15 percent. - Eurobond outstanding principal: $169 million. - Annual principal payments on Eurobond (equal installments over a decade): $17 million a year. - Expected change in debt service from Paris Club operation: fall by around $1.5-2.0 million per year up to 2022, then increase by a similar amount in the decade thereafter. - Combined shock peak debt-to-GDP: around 85-90 percent. - Combined shock debt-to-revenue ratio: almost 270 percent. - SOE contingent liability assumed cost: five percent of GDP in 2017. - Primary fiscal surplus under program: just under 4 percent (until debt target attained). - Real GDP growth projection for 2015: 3.5 percent. - Inflation projection over medium term: around 3 percent. _Source: IMF staff._ ### Annex 2. External Debt Sustainability Analysis ### Annex 2. External Debt Sustainability Analysis ### Overview and data updates - For the first time, this DSA includes data from the private sector and commercial SOEs. - As a result of the newly collected data, the debt-to-GDP ratio at end-2014 is now estimated to be around 117 percent. - The newly collected data may be subject to revisions in the future. - Staff view risks as mitigated in light of the composition of external debt and maturity profile, and the analysis projects the external debt burden to be on a downward trajectory under the baseline scenario. - The debt trajectory remains sensitive to exogenous shocks, especially in the exchange rate, given the country’s small size, large external debt, and heavy import dependence. ### Composition and characteristics of external debt (Stock at end-2014) - Total Gross External Debt: 1,670 (US$ Millions) - Government and government guaranteed debt: 505 - Of which multilateral: 161 - Bilateral Paris club: 77 - Bilateral non-Paris club: 45 - Commercial and Bonds: 222 - Private debt (including commercial SOEs): 1,165 - Direct investment: 653 - Portfolio investment: 0.4 - Other investment: 512 - Long-term loans: 178 - Short-term loans: 232 - Trade credit and advances: 103 - One third of the country’s external debt is long-term government borrowing, largely from official sources. - A further third is FDI-related borrowing, largely to the hotel sector. - Less than 20 percent of the debt is short-term, largely trade credits and other lines of credit. - Much of the debt stock reflects intra-company lending, which is believed to pose lower risks than unrelated lending due to factors such as greater ease of rescheduling in the event of a downturn. ### Recent developments and baseline projections - External debt stood at 117.1 percent of GDP in 2014, 4.9 percentage points higher than in the previous year but considerably below the levels prevailing during 2010-12. - Drivers and offsets in 2014: - Widening current account deficit and the rupee depreciation increased the debt burden. - Large FDI inflows, lower-than-projected public borrowing, and the fall in the Euro (over a quarter of the country’s debt stock is Euro-denominated) offset the wider current account deficit and the effect of the currency depreciation. - As a result of IIP data compilation, the CBS revised the relative composition of FDI from 2015 and beyond: recent data suggest the debt component of FDI is larger than previously assumed. - This revised assumption explains the increase in the stock of external debt to 130 percent of GDP in 2015 and the more modest contribution of non-debt creating capital inflows compared to previous years. - Under current policies, the external debt level is projected to fall gradually over time. ### Stress tests and shock sensitivity - Standardized stress tests confirm particular sensitivity to currency depreciation shocks: - A 30 percent depreciation of the domestic currency would increase the external debt-to-GDP ratio almost 60 percent in the first year after the shock, and the ratio is projected to remain considerably higher than the baseline by the end of period. - The 30 percent depreciation scenario does not account for beneficial second-round effects from improved competitiveness and trade balance; these gains are likely smaller for Seychelles given structural constraints. - Interest rate, growth, and current account shocks have more muted effects: - A ½ standard deviation increase in nominal external interest rates on new debt over the period 2015–2020 would have minor consequences on the external debt stock profile, reflecting relatively low and fixed historical interest rates and concessional official lending. - A permanent ½ standard deviation shock to either growth or the current account (excluding interest payments) would lead to a slow build up of the external debt-to-GDP ratio over time, overshooting the baseline projection by about 10 percentage points in 2020. - Selected scenario box values from stress-test figure: - Historical: 149 - Baseline: 127 - Baseline and historical scenarios: 133.1 - Interest rate shock: 139.6 - Growth shock: 137.6 - Non-interest current account shock: 141.7 - Combined shock: 178.1 - Real depreciation shock (one-time real depreciation of 30 percent occurs in 2015): 127 (baseline shown as 127 in comparison panels) ### Key numerical projections and dynamics (selected lines from the External Debt Sustainability Framework, 2010–2020) - Baseline: External debt (in percent of GDP) - 2010: 142.7 - 2011: 156.5 - 2012: 137.2 - 2013: 112.2 - 2014: 117.4 - 2015: 130.0 - 2016: 127.9 - 2017: 129.3 - 2018: 128.7 - 2019: 128.0 - 2020: 127.2 - Debt-stabilizing non-interest current account: -8.2 (percent of GDP) - Change in external debt (line 2) - 2014: 5.2 - 2015: 12.7 - 2016: -2.2 - 2017: 1.4 - 2018: -0.5 - 2019: -0.7 - 2020: -0.9 - Identified external debt-creating flows (line 3) - 2014: 11.4 - 2015: 6.7 - 2016: 6.1 - 2017: 5.7 - 2018: 4.8 - 2019: 4.1 - 2020: 3.7 - Current account deficit, excluding interest payments (line 4) - 2014: -20.0 (percent of GDP) - 2015: -14.0 - 2016: -13.4 - 2017: -13.8 - 2018: -12.4 - 2019: -11.0 - 2020: -10.0 - Net non-debt creating capital inflows (line 8) - 2014: -8.6 (percent of GDP) - 2015: -4.2 - 2016: -4.1 - 2017: -4.9 - 2018: -4.6 - 2019: -3.9 - 2020: -3.3 - Automatic debt dynamics (line 9) - 2014: 0.0 - 2015: -3.1 - 2016: -3.2 - 2017: -3.1 - 2018: -3.1 - 2019: -3.0 - 2020: -3.0 - Contributions to automatic debt dynamics (lines 10–12) - Contribution from nominal interest rate (line 10): 2015: 1.2; 2016: 1.3; 2017: 1.2; 2018: 1.2; 2019: 1.2; 2020: 1.2 - Contribution from real GDP growth (line 11): 2015: -4.2; 2016: -4.4; 2017: -4.3; 2018: -4.3; 2019: -4.2; 2020: -4.2 - Contribution from price and exchange rate changes (line 12): 2014: 2.8 (other projection-period entries not shown as dots in table) - External debt-to-exports ratio (in percent) - 2014: 165.4 - 2015: 165.4 - 2016: 163.6 - 2017: 163.8 - 2018: 165.4 - 2019: 165.3 - 2020: 164.9 - Gross external financing need (in billions of US dollars) and percent of GDP - 2014: 20.8 (billion US$); 41.5 (percent of GDP) - 2015: 70.4; 39.8 - 2016: 58.6; 37.5 - 2017: 15.2; 39.6 - 2018: 18.7; 37.5 - 2019: 16.2; 35.5 - 2020: 23.9; 34.2 - Scenario with key variables at their historical averages (selected values) - 2014: 140.6 - 2015: 144.8 - 2016: 149.3 ### Interpretation and implications - Despite a high level of external debt (around 117 percent of GDP in 2014 and projected 130.0 percent in 2015 under revised FDI debt assumptions), vulnerability is considered mitigated by: - Debt composition skewed toward long-term official government borrowing and FDI-related intra-company debt. - Large share of lending on relatively low and fixed rates, including concessional official financing and past restructuring at favorable rates. - Exchange rate shocks represent the most acute near-term vulnerability: a large depreciation can substantially raise the debt ratio in the short run. - Interest rate shocks are less impactful given existing debt terms and the global low interest rate environment. - Permanent adverse shocks to growth or the current account would gradually raise debt ratios, potentially overshooting baseline projections by about 10 percentage points by 2020. *Source: Annex 2. External Debt Sustainability Analysis (IMF staff).* ### Annex 4. External Stability and Competitiveness Assessment ### Annex 4. External Stability and Competitiveness Assessment ### External stability outlook - Under the current policy plans, external stability is strengthening and near-term risks appear contained. - The balance of payments pressures that led to a 16 percent depreciation in the rupee percent against the dollar in the second half of 2014 have abated as tourism recovered, such that the Central Bank was able to make additional international reserves purchases. - The current account deficit is expected to fall over the medium term as FDI flows moderate, policy tightening has an effect, and the oil price stabilizes at levels lower than those prevailing in the recent past. - Medium-term vulnerabilities remain significant and require: - continued fiscal discipline; - structural reforms to support diversification of the economy; - exchange rate flexibility. ### Tourism competitiveness and trends - Seychelles remains a competitive destination for tourism; its share in global tourist arrivals has been growing gradually during the last six years, though after an exceptional 2013 there was a slight dip in 2014. - Arrivals recovered towards the end of 2014 and closed 1 percent higher compared to the previous year. - Source-market dynamics: - Traditional source markets are in Europe; sector development suffered from Europe’s protracted slow growth. - Increased arrivals from Germany partially offset reductions from France and Italy. - Early 2015 performance: - Preliminary evidence for the first quarter of 2015: arrivals up 14 percent compared to previous year. - Recovery from France and Italy offset a drop of 25 percent in arrivals from Russia. - Medium-term outlook is positive given projected recovery in Europe and a marketing strategy to penetrate new markets (China, India, and the Gulf). ### Reserve adequacy and international reserves path - Reserve coverage is projected to remain at adequate levels, taking into account Seychelles’ vulnerabilities. - The import coverage ratio reached 4.6 months in 2014, higher than projected, helped by the rapid decline of the oil price which reduced the import bill. - The Central Bank capitalized on favorable foreign exchange market developments to strengthen international reserves. - Projections indicate a marginal decline in reserve coverage in outer years as the debt service due on the Eurobond begins to fall due and as inflows of foreign capital stabilize. Key statistics (from Table 1 and memorandum items) - In months of prospective imports of G & S: 2.7, 2.8, 3.7, 4.6, 4.3, 4.2, 4.3, 4.2, 4.3 (for 2011–2019, Prel/Proj sequence shown in table) - Import coverage ratio in 2014: 4.6 months - Reserve adequacy metrics (IMF Floating formula series): 411, 343, 359, 356, 361, 370, 377, 382, 387 - Seychelles, percent of the metric: 67, 90, 119, 130, 128, 129, 134, 136, 139 - International reserves ($ million): 277, 307, 425, 463, 463, 476, 505, 521, 539 - Nominal GDP ($ million): 1.07, 1.13, 1.41, 1.42, 1.37, 1.47, 1.56, 1.65, 1.74 ### Exchange rate assessment - Exchange rate flexibility has allowed the value of the Seychellois Rupee to remain broadly in line with fundamentals. - Staff’s empirical strategy follows Vitek’s “Exchange Rate Assessment Toolkit” (2012), applying three CGER approaches: macroeconomic balance (MB), external sustainability (ES) and equilibrium real exchange rate (ERER). - Results are broadly congruous across the three methodologies; estimated exchange rate misalignment is comparable to past trends and falls within the statistical confidence interval. - MB approach: - Measured real exchange rate misalignment was around 5 percent in 2013, increased in 2014, but is expected to recover promptly in the following years. - ERER approach: - The equilibrium exchange rate has remained fairly constant since 2008, while monthly observations capture a rising undervaluation that bottomed by the last quarter of 2014. - Estimated real exchange rate misalignment remains roughly stable compared to the previous year; confidence bands encompass the zero line. - ES approach: - Captures the widening current account deficit and detects a real exchange rate overshooting, but the widening current account is temporary and the misalignment small in size. - The newly adopted methodology to estimate tourism earnings increased the value of service exports, and the current account norm under the ES approach is now estimated around -12 percent of GDP, in line with the MB approach. - Staff view: the EBA-lite approach suggested a current account norm close to balance, which staff consider not consistent with Seychelles’ position as a tourism-dependent small island state. ### Assessment of investment climate and competitiveness bottlenecks - Areas of weakness identified by World Bank Doing Business indicators: - Access to electricity; - Starting a business; - Credit availability. - Improvements observed: - Scores improved in contract enforcement and the process of resolving insolvency, relevant for tourism and conducive to foreign investments. - Recommendation: - Additional actions by the authorities to achieve a more expeditious improvement in overall doing business indicators. ### Policy implications and recommendations (implicit in assessment) - Maintain exchange rate flexibility to help absorb shocks and contain misalignment. - Preserve and strengthen reserve adequacy buffers while monitoring Eurobond debt service schedules and capital inflow stabilization. - Continue fiscal discipline and structural reforms to reduce medium-term vulnerabilities and support economic diversification. - Enhance the investment climate by addressing Doing Business weaknesses (electricity access, ease of starting a business, credit availability) to attract foreign and domestic investors. - Leverage tourism marketing strategy to diversify source markets (China, India, Gulf) and consolidate recovery in traditional European markets. *Source: Annex 4. External Stability and Competitiveness Assessment (text and tables as provided).* ### Annex 6. Sources of Growth ### Annex 6. Sources of Growth ### Introduction - Growth in Seychelles averaged 4.5 percent between 1969 and 2013, compared to 3.8 percent for Sub-Saharan Africa. - To determine drivers of growth in Seychelles, the study used the Cobb-Douglas production function augmented for skilled labor, assuming constant returns to scale. - Production function and growth decomposition: - Yt = At Kt^α Lt^(1-α) - dY/Y = dA/A + α dK/K + (1-α) dL/L - Skilled-augmented labor: Ls = S L - With augmentation: dY/Y = dA/A + α dK/K + (1-α) dLs/Ls - Total factor productivity (TFP) is calculated as the residual and captures the impact of other factors such as institutions and infrastructure. ### Methodology - Capital stock constructed using: - Kt = (1-δ) Kt-1 + It - δ is the depreciation rate; I is gross capital formation. - Initial capital stock calculated following the Harberger approach. - Three depreciation rates were used in the analysis: δ = 5 percent, δ = 7 percent, and δ = 10 percent. - Data sourced from the World Development Indicators of the World Bank. - Where average years of schooling were unavailable for Seychelles, enrolment rate was used as a proxy for skilled labor. ### Capital Stock - Choice of depreciation rate is important because errors can accumulate over subsequent years. - Analysis presented using multiple δ scenarios to assess sensitivity of results. ### Analysis of Results - Using δ = 7 percent and the traditional model (labor not augmented), output was driven more by capital accumulation; TFP was negative in both the 1990s and 2000s. - Augmenting labor (using enrolment as a proxy for skills) increases the contribution of TFP; inclusion of skilled-augmented labor led to positive TFP in the 2000s. - Results were robust to the other depreciation scenarios (δ = 5 percent and δ = 10 percent), which gave similar qualitative results. - The reforms of the 2000s, particularly following the 2008/9 crisis, supported productivity growth; TFP for 2008-2013 reached 2.0 percent. - Low or negative TFP is not uncommon in middle income small island economies, with the exception of Mauritius. ### Quantitative Results (selected decompositions) - Using δ = 7 percent, labor not augmented (1986-89, 90s, 2000s, 1986-2013): - Labor: 0.32, 1.65, 1.97, 1.62 - Capital: 2.59, 3.34, 1.28, 2.20 - TFP: 2.29, -0.12, -0.44, 0.06 - A: 3.28, -0.17, -0.63, 0.09 - Using δ = 7 percent, labor augmented: - Labor: 0.64, 1.94, 0.47, 1.02 - Capital: 2.59, 3.34, 1.28, 2.20 - TFP: 1.98, -0.41, 1.06, 0.66 - A: 2.82, -0.59, 1.51, 0.95 - Using δ = 5 percent, labor augmented: - Labor: 0.64, 1.94, 0.47, 1.02 - Capital: 2.46, 3.18, 1.44, 2.21 - TFP: 2.10, -0.26, 0.90, 0.66 - A: 3.00, -0.37, 1.28, 0.94 ### Policy Recommendations - Continued macroeconomic stability is an essential precondition for further growth. - Additional measures to achieve the economy’s full potential include: - Increasing savings and investment rates, including improving access to credit. - Reforms to encourage greater labor market participation. - Accelerating investment in education to address existing skills mismatches. - Broader reforms to improve the business climate, including strengthening the role of the private sector by reducing regulation and enhancing competition, and improving governance of the SOEs to strengthen their finances and focus their activities on their core mandates. *Source: _cr15201 - Annex 6. Sources of Growth* ### 6. In 2015 we expect real GDP growth to accelerate modestly to 3.5 percent, up from ### 6. In 2015 we expect real GDP growth to accelerate modestly to 3.5 percent, up from ### Macroeconomic outlook and external sector - Real GDP growth: 3.5 percent in 2015, up from 3.3 percent in 2014. - Inflation: expected to come close to 5 percent for the 12 months of 2015 due to pass-through of the depreciation of the exchange rate, partially offset by the decline in international prices of fuel. - Current account (balance of payments deficit): expected to decline from 21 percent of GDP in 2014 to 15 percent of GDP in 2015 as petroleum import costs decline significantly. - Tourism earnings: could decline modestly in US dollar terms because a large part of hotel tariffs are priced in the weakening euro. - Net international reserves (NIR): target is stable NIR in dollar terms to offset a substantial negative valuation effect from international exchange rate movements of early 2015. - Public debt: aim to reduce the public debt/GDP ratio by around three percent to 62 percent of GDP. ### II. Fiscal policies — targets and composition - Primary surplus target for 2015: SR 720 million (equivalent to 3.7 percent of projected GDP). - Revenue strategy: build on strong consumption tax performance in 2014; strengthen business tax revenues through administrative measures (see Tax policy section). - Expenditure composition: - Primary current expenditure: projected to decline by 1 percentage point to 23.6 percent of GDP (via wage restraint and tight control of goods and services). - Capital expenditure: projected to rise by 0.7 percentage points to 6.2 percent of GDP, with significantly higher capital grants owing to larger external assistance. ### III. Tax policy and improvements in tax administration — SRC action plan for 2015 - III.1. Online submission and e-payments - Online submission of Business Tax Returns: scheduled for testing in mid-March and expected to become operational in April 2015. - Expand e-payment facility to include two additional banks: MCB and Nouvobanq. - III.2. Building transfer pricing analysis capability - Public Ruling of Section 54 of the Business Tax: draft to explain SRC’s view on when and how Section 54 will be used; will include requirement of transfer pricing documentation and be distributed to tax practitioners for input. - Training of staff: develop a Transfer Pricing Manual/Procedure guide; on-the-job training and mentoring by expatriate auditors and technical specialists. - Enhance Customs–Tax cooperation: improve sharing of information between Post Clearance Audit (PCA) and intelligence/audit section in tax; train Tax staff in ASYCUDA World. - FIU assistance/training: liaise with newly recruited FIU advisor for potential assistance and training. - III.3. Business tax audits - Conduct audits of 60 businesses from January to September 2015; list identified and some cases already allocated to auditors. - III.4. Improving collection of tax arrears — two-part strategy - Amnesty on arrears: - Applies to business tax due as at December 2013 and other taxes (including Customs) due as at December 2014. - 100 percent of penalties waived on arrears cleared by May 31, 2015. - 50 percent of penalties waived on arrears cleared by August 31, 2015. - 25 percent of penalties waived on arrears cleared by October 31, 2015. - Complementary measures: - Proactively seek payment of taxes due monthly, especially VAT & Income Tax (stop growth of debt). - Monitor top 100 business taxpayers (Pay As You Go) for early warning/weak signal analysis. - Use more frequent and intensive field visits to enforce payment. - Create a unit to manage, monitor and undertake field work for Customs debts. - Reconcile outstanding and duplicate Bills of Entry from transition from ASYCUDA ++ to ASYCUDA World (June 2013 – June 2014). - More extensive use of legislative provisions: Garnishee Notices; Seizure of Assets; Departure Prohibition Order (some success in late 2014); Tax Clearance Certificate prior to awarding Government contract; Liquidation of persistent non-complying companies or bankruptcy. - III.5. Capacity building in PCA and investigation - Improve PCA and investigation capability via formal training through international agencies (e.g., INTERPOL), specialist mentoring from SRC’s Customs Advisors and IMF TAs. - PCA to focus on working with importers to improve compliance. - III.6. Customs Compliance Program - Develop a Diploma level Customs Compliance Program to address professional knowledge deficiencies among Customs Agents and Direct Traders/importers, reduce delays, and correct taxes/duties application. - Program to support development of an Authorized Economic Operator program and a risk-based approach to trade facilitation. - III.7. Excise measures - Address excise leakage (previously estimated up to 60 percent) through projects including: - Alignment of Seychelles excise tax regime with other SADC member states (scheduled to commence in June 2015). - Implementation of a ‘Customs registration process’ for licensed excise operators. - Establish framework to remove excise collection through CMS and enable electronic collection through ASYCUDA World (Customs to take full ownership of excise). - Draft legislative amendments to provide excise officers with required powers to monitor manufacturers and enforce penalties. - Proposed implementation of a tax stamp initiative as a control tool. - Apply SEYPEC systems audit findings and implement Customs control measures to eliminate non-sanctioned use of duty-free fuel in Seychelles. ### IV. Public Financial Management (PFM) and expenditure reform - IV.1. MTFF - Medium Term Fiscal Framework (MTFF) benchmark approved by Cabinet in November 2014. - In 2015 MTFF will establish indicative Budget ceilings over a five year period and serve as first step in formulation of the 2016 Budget. - Fiscal working group established comprising members from MoFTBE divisions to update MTFF variables and resolve issues. - Next task: set policy framework to incorporate integrated multi-year policy-based targets for debt, financing, primary balance, revenues and expenditures; foundation for a full MTBF. - IV.2. PPBB - Program Performance Based Budgeting (PPBB) adopted for first two pilot ministries in 2015 with World Bank support. - Three other pilot ministries and related agencies joined piloting; second WB technical assistance completed in March 2015, finalizing program structures and migration of spending to PPBB baselines. - Next mission to develop portfolio medium term expenditure strategies. - IV.3. PFM Action Plan - Adopt new PFM action plan 2015–2018 to improve capital project cash and asset management and medium term budget framework (MTBF). - Emphasis on management of state-owned enterprises through management and governance audits to enhance SOE transparency and efficiency. - A new Public Expenditure and Financial Accountability assessment to be carried out in 2015 to set priorities. - IV.4. PIM - Development Committee appointed in March 2015 to ensure public sector capital projects over R10 m in PSIP are coordinated, appraised and funded. - With World Bank technical assistance, guidelines and templates for capital project submission and appraisal to be developed; training for project officers and decision makers in project appraisal to be provided. - IV.5. IPSAS - Government to produce annual audited financial reports in accordance with IPSAS for the second year. - Aim for 2014 audited financial report: full consolidation of State-Owned Enterprises with central Government to provide consolidated overview of cashflows. - Government working with Auditor General to resolve queries early so audited accounts are submitted around July 2015. - IV.6. Cash Management - Reinforce Treasury Single Account (TSA) by improving reporting of all commercial bank balances outside TSA. - Quarterly reconciliation of all government’s budget dependent entities’ commercial bank accounts to be submitted to Treasury to facilitate annual government financial statement reporting. - IV.7. Public Private Partnership (PPP) - Develop comprehensive PPP framework to support private sector participation, ensure value for money and limit fiscal risks. - First phase: PPP policy preparation launched with Investment Climate Facility for Africa (ICF). - Needs assessment included: review of legal/institutional/regulatory framework; examination of past and ongoing PPPs; assessment of government agency capacities; identification of potential sectors for PPP. - Policy drafted, reviewed by Government, discussed in validation workshop on the 15th of April; final national PPP policy expected to be submitted to cabinet for approval in Q2 2015. - Next phase: develop PPP Legal, Regulatory and Operational framework with technical assistance from AFDB. ### V. State-owned Enterprise (SOE) reform and performance - Corporate governance and oversight: - Public Enterprise Monitoring Commission (PEMC) to develop a Code of Governance for Public Enterprises for Cabinet adoption. - PEMC to initiate creation of an Institute of Directors and provide training for Board appointees. - Governance reviews and operational/business assessments on Public Enterprises: three by end-June, 2016 (revised SB), with World Bank assistance. - Develop a State Ownership Policy to separate ownership from policy and regulatory functions to enhance PEMC monitoring role. - Development Committee (approving investments above SR10M in PSIP) to review SOE investments above the same threshold; cabinet paper approved on the 6th of May 2015 (SB). - Transparency and asset management: - Comprehensive asset registers for five SOEs published via PEMC website (SB for End December 2014); intent to publish remaining Public Enterprises’ asset registers. - Operational performance highlights: - SEYPEC and PUC operational performance improved in 2014. - Air Seychelles: operational losses in 2014 offset by government and other shareholders (Etihad) contributions as part of restructuring; significant losses on European route via Abu Dhabi due to modest load factor; launched direct route to Europe from July 1 codeshared with Air France (success dependent on attracting high load factor). - SEYPEC tankers: modest loss after loan repayment, much lower than in 2013, could break even in 2015. - PUC benefits from decline in cost of fuel oil and will pass savings to consumers in April. - Government considering time-bound, limited marketing contribution to Air Seychelles for initial phase of new route; amount to be defined and incorporated within existing fiscal balances and conditional on company achieving key milestones; Seychelles Tourism Board to support marketing. - SSI (Société Seychelloise d’Investissement) reforms: - SSI established to guide strategy and oversee performance of government-owned commercial parastatals; may serve as government holding company and investment vehicle. - Participation of any CEO on SSI board to be phased out to improve governance. - Government committed to ensure SOE dividends accrue to State budget and are not diverted for investment purposes; new investments require clear justification for government intervention. - SSI to use Development Committee services for major SOE investments; government drawing on advice from World Bank, IMF and other partners to define SSI mandate. ### VI. Promoting growth and private sector development - Policy commitment: promote competition and increase private sector involvement in infrastructure, fisheries and port services. - Port of Victoria development: - Decision to build new quay for commercial fishing via PPP with private operator; joint venture established with government 40 percent share to be in SSI portfolio. - Private partners provide most funds for quay construction. - Government benefitted from an IFC report on options regarding existing concession agreement with Land Marine (runs to 2022, currently gives exclusive right to run port services). - Government reviewing renegotiation options to open services to competition and planned to present options to Cabinet before end of May 2015 (SB). *International Monetary Fund — Seychelles: selected policy and program measures and 2015 outlook as presented in the source text.* ### 31. The government will also facilitate title registration, by adopting an automated system, in ### _cr15201 - 31. The government will also facilitate title registration, by adopting an automated system, in ### Public Debt Management Strategy - Seychelles is on track with its strategy of reducing public debt to sustainable levels. - Public debt is expected to be reduced below 50 percent of GDP in 2018. - Objectives: - Continue borrowings on favourable terms and gradually extend maturities of the debt portfolio. - Smooth out the external debt service profile and shift public borrowing to local currency wherever possible. - Recent actions and outcomes: - Medium term Treasury bonds issued locally in 2014 for a total amount of SR813 million were fully subscribed. - Most external borrowings have been from multilaterals. - Implementing a partial swap/buyback of Paris Club debt maturities at a fair market price. - Paris Club transaction (25th February 2015): - An amount of US$30 million will be transferred in terms of a fund for the protection and development of the marine space of Seychelles. - Enables Seychelles to buy back a portion of the debt maturities falling due to the Paris Club between 2015 and 2021 at a 5 percent discount to face value. - The debt to be bought back will be converted into new Government of Seychelles debt obligations, which will be partly repaid in local currency, to be issued to the Seychelles Conservation and Climate Adaptation Trust (SCCAT). ### Foreign Trade Regime - WTO accession: - General Council of WTO approved Seychelles’ Accession Package in December 2014. - Package presented to the Seychelles National Assembly in the third week of March 2015 for ratification. - National Assembly enacted the Protocol on accession on 24th of March 2015. - President James Michel signed the Instrument of Acceptance on the 25th March 2015 and subsequently deposited it to the WTO Director General. - On the 26th April, Seychelles became the 161st Member of the WTO. - SADC: - In March 2015 the National Assembly ratified Seychelles’ accession to the SADC Trade Protocol. - Upon gazettal of the SADC FTA Regulations under the Customs Management Act, 2011, Seychelles shall also become a member of the SADC FTA. ### Monetary, Exchange Rate, and Financial Sector Policies - Monetary framework and tools: - Quarterly average value of reserve money will serve as the nominal anchor. - Interest rate corridor introduced to guide the market and improve liquidity management and interest rate transmission. - CBS has requested technical assistance from the IMF to improve monetary policy analysis and forecasting. - Government securities: - Under the Memorandum of Understanding, the Ministry will continue to issue T-Bills and T-Bonds for monetary policy purposes and has agreed to issue government securities as needed during 2015 in support of monetary policy. - Policy stance and inflation outlook: - CBS to maintain a tight monetary policy stance as long as necessary to mitigate inflationary pressures and support external balance. - Revised CPI basket data for January 2015 suggest some inflationary risks starting 2015. - Aim to bring credit growth to the private sector down to a more sustainable level over the full year 2015. - Inflationary pressures expected to be dampened by appreciation of the domestic currency and falls in fuel and utility prices. - Monetary policy is to be relaxed once inflation starts to recede, forecasted to happen in the second half of 2015. - Exchange rate regime: - CBS committed to a floating exchange rate regime. - Rupee depreciated sharply in the second half of 2014 then traded in a relatively narrow range but remains vulnerable to excess demand and a weakened Euro. - Bank will intervene only in the event of excessive volatility. - Reserves and reserves management: - Reserves accumulation remains an important objective; during 2015 CBS to accumulate international reserves through opportunistic purchases without influencing the exchange rate and will seek to exceed reserves targets if conditions allow. - In December 2014 the Board approved engagement on the Reserves Advisory and Management Programme (RAMP) with the World Bank. - In Q1 2015, staff concerned with reserves management intend to complete the first part of training provided by Crown Agents Investment Management (CAIM). ### Financial Sector Development and Stability - Macroprudential framework: - CBS will implement a Financial Stability Framework with establishment of a Financial Stability Committee (FSC). - FSC primary responsibility: take action to reduce systemic risks and enhance resilience of the Seychelles financial system. - Basic elements of the framework will be set up by October 2015. - CBS to establish a macroprudential unit within the Financial Services Supervision Division (FSSD) and achieve Board approval for macroprudential policies and measures under the existing legal framework. - Consumer protection and financial literacy: - CBS will enhance its mandate for consumer protection and develop a strategy for financial literacy. - With World Bank TA, options for establishing a financial ombudsman function will be explored. - CBS will be the focal point for financial literacy and will commission a financial literacy baseline study. - Regulatory upgrades and resolution framework: - A complete review of the Financial Institutions Act will be effected to cater for implementation of Basel 2 and 3 per the revised road map (proposed to push to 2017) prepared with IMF TA. - An enhanced resolution framework for banks will be developed; TA from the IMF has been requested. - Offshore sector regulation and AML: - CBS, FIU, and FSA will strengthen regulation of the offshore sector and align industry and local regulatory standards with international AML developments. - CBS will undertake joint inspections with the FIU and is receiving TA from the IMF to enhance offshore banking regulation. - Credit Information System (CIS) reforms: - CBS will increase the scope of CIS to include credit data from all relevant lenders and utilities companies, improve frequency and type of data collected and information distributed. - Medium-term: develop a more comprehensive legal and regulatory framework for credit reporting activities. - Payment systems modernization: - SEFT project: - Phase one implemented across all banks in mid-August 2013. - Phase two under implementation since July 2014 with a new scheduled completion date of June 2016. - Phase two will extend the internet based online platform from banks to the general public. - National Payments Task Force and National Payments Committee Terms of Reference being formalized. - Work on a new vision and strategy for national payment system covering 2015 to 2018. - CBS engaging AfDB for external consultants to undertake a feasibility study in 2015 and assist with introduction of a Central Securities Depository (CSD) and a Real Time Gross Settlement System (RTGS). - Regulatory enhancements: - New division within CBS in 2014 to regulate payment systems. - National Payment Systems Act issued in August 2014; Licensing and Authorisation Regulations issued in December 2014. - Regulations on continuous oversight of payment systems expected in 2015 with World Bank TA. - Assessment of compliance with the Principles for Financial Market Infrastructures commenced with IMF TA in April 2015. ### Financial Services Authority and Non-Bank Financial Services Sector - Global Forum and ICSPs: - Priority for the FSA is work with the Global Forum on transparency and exchange of information in tax matters. - New obligations imposed on International Corporate Service Providers (ICSPs) for record-keeping (ownership registers, directorship registers, annual returns) and reporting non-compliance to the FSA. - FSA completed focused onsite inspections on all ICSPs in April 2015 and is using a risk-based approach to rank ICSPs. - Legislative developments and capacity building: - New IBC law undergoing final industry consultation and expected to be submitted to the National Assembly by the end of June 2015. - Global Corporations legislation to replace the Companies (Special Licence) Act expected to be enacted by September 2015. - New International Corporate Service Providers Act and Trusts Act expected to be submitted to National Assembly by December 2015. - Seychelles Gambling Act enacted in January 2015; FSA to administer it. Act expected to be operational in the last quarter of 2015. - ADB through ICF to provide technical assistance to the FSA for insurance and pensions sector capacity support. - FSA will seek TA from the IMF or World Bank to review laws on Insurance, Securities, and Mutual and Hedge Funds. ### Implementation of the Convention on Mutual Administrative Assistance in Tax Matters - Background: - Convention developed by the OECD and the Council of Europe in 1988 to promote international co-operation in tax laws and combat tax avoidance and evasion. - 84 countries so far have signed the Convention. - Aim: enable the Seychelles Revenue Commission (SRC) to engage in exchange of information, assistance in recovery of tax, and service of documents with other signatory countries. - Global Forum peer review: - At its sixth meeting in Jakarta on 21st to 22nd November 2013, the Global Forum published Seychelles’ ratings; Seychelles was assigned the overall rating “non-compliant”. - Element C.2 (Exchange-of-information mechanisms with all relevant partners) was deemed Partially Compliant. - Actions taken: - Cabinet approval (Cabinet Minutes Ref No. C13/M21) on 30th October 2013 and a letter of intent signed on 22nd November 2013 in Jakarta expressing commitment to become party to the OECD Multilateral Convention. - Amendment to the Seychelles Revenue Commission Act was gazetted on 19th January 2015 to ensure confidentiality of information received under the Convention. - Convention was signed on 24th February 2015. - National Assembly ratified the SRC Act amendments and the Convention on 14th April, 2015. - Signing and ratifying the Convention complements Element C of the Peer Review and could be utilised to trigger Seychelles’ supplementary review toward compliance. ### National Statistics - SDDS subscription and related actions: - An SDDS assessment mission by the IMF was undertaken in early February 2015 with meetings involving NBS, Ministry of Finance, Trade and the Blue Economy, and Central Bank of Seychelles. - A template for the SDDS National Summary Data Page (NSDP) and the Advance Release Calendar (ARC) was agreed and populated; uploaded on the NBS website. - The populated template link was submitted to the IMF at the end of February 2015; template to be polished with relevant hyperlinks and updated periodically in line with the ARC. - Agreement reached that Seychelles could graduate to the SDDS at the end of April 2015. - Seychelles officially graduated to the SDDS starting on May 1st, 2015. - Major recommendations: - Monthly compilation of the Industrial Production Index (IPI) and the Producer Price Index (PPI). These are currently being compiled and published on a quarterly basis through the use of a flexibility option on both frequency and timeliness. - Incorporation of offshore activities in the BOP, IIP and external debt position of the country. - Creation of a website for the MFT&BE. - Reviewing all metadata and submission of the same to the IMF by end of March 2015. - Mentioned survey: - 2013 Household Budget Survey (HBS) *International Monetary Fund — content unit _cr15201* ### 58. The results of the 2013 HBS have been incorporated in the compilation of the monthly CPI as ### _cr15201 - 58. The results of the 2013 HBS have been incorporated in the compilation of the monthly CPI as ### Incorporation of 2013 HBS into CPI - The results of the 2013 HBS have been incorporated in the compilation of the monthly CPI as from January 2015. - This includes new basket and weights. ### Use of 2013 HBS for GDP (expenditure) and HFCE - Work has started to use 2013 HBS results to compile Household Final Consumption Expenditure (HFCE) as part of the short to medium term objective of compiling GDP using the expenditure approach GDP (E), in addition to the production approach. - This work is being done with the assistance of the NA expert from the IMF-AFRITAC South institute. ### Poverty line and World Bank support - The data from the 2013 HBS will also be further exploited and used to calculate a poverty line. - This poverty study is being supported by the World Bank through technical assistance missions and will include training in the use of the ADEPT software. - This project is planned to take place in April and May 2015 and the Agency for Social Protection (ASP) is expected to participate in this exercise. ### Quantitative Performance Criteria (selected items from Table 1) - Net international reserves of the CBS, millions of U.S. dollars (floor): 350 363 356 373 345 367 345 364 345 363 - Net international reserves (adjusted targets; outcomes): 351 373 ........................ - Reserve money (ceiling on daily average): 2,515 2,526 2,529 2,529 2,552 2,529 2,566 2,552 2,656 2,655 - Primary balance of the consolidated government (cumulative floor): 793 836 -321 311 311 539 539 720 720 - Contracting or guaranteeing of new external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 45 45 60 60 70 70 70 70 90 90 - Contracting or guaranteeing of new short-term external debt by the public sector (Millions of U.S. dollars; cumulative ceiling): 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Accumulation of external payments arrears by the public sector (ceiling): 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Accumulation of domestic payment arrears by the government (ceiling): 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Memorandum items (selected) - Net external non-project financing (millions of U.S. dollars; cumulative): -16.3 -15.5 6.4 8.2 -2.5 -2.6 -5.3 -4.8 -8.8 -3.9 - External budget loans: 17.3 17.3 7.0 7.0 14.0 10.0 14.0 10.0 27.0 27.0 - Cash payments on foreign debt service: 35.8 35.8 2.6 1.9 18.6 17.4 21.3 19.6 37.9 35.7 - External budget grants: 2.2 3.0 2.1 3.1 2.1 4.8 2.1 4.8 2.1 4.8 - Reserve money target (daily average): 2,442 2,526 2,455 2,455 2,478 2,455 2,491 2,478 2,578 2,578 Program accounting exchange rates (end-of-quarter) - SR/US$ (end-of-quarter): 13.43 13.43 13.43 13.74 13.43 13.74 13.43 13.74 13.43 13.74 - US$/Euro (end-of-quarter): 1.26 1.26 1.26 1.12 1.26 1.12 1.26 1.12 1.26 1.12 - US$/UK pound (end-of-quarter): 1.62 1.62 1.62 1.54 1.62 1.54 1.62 1.54 1.62 1.54 - US$/AUD (end-of-quarter): 0.87 0.87 0.87 0.78 0.87 0.78 0.87 0.78 0.87 0.78 - US$/CAD (end-of-quarter): 0.89 0.89 0.89 0.80 0.89 0.80 0.89 0.80 0.89 0.80 - US$/SDR (end-of-quarter): 1.48 1.48 1.48 1.41 1.48 1.41 1.48 1.41 1.48 1.41 Sources noted in the table: Seychelles authorities and IMF staff estimates and projections. ### Structural Benchmarks (selected highlights from Tables 2a and 2b) - Real Sector - Cabinet approval of the Medium-Term National Development Strategy (MTNDS): Target End October, 2014. Status: Met with a delay. Cabinet approved the MTNDS on November 24. - Submission to National Assembly of amendment of Seychelles Revenue Commission Act and ratification of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Target End June, 2014. Status: Met with a delay. National Assembly approved on April 14, 2015. - Financial Sector - Cabinet approval of a Strategic Plan on Financial Sector Development: Target End October, 2014. Status: Met with delay. Cabinet approved the Financial Sector Development Implementation Plan (FSDIP) on November 12. - Fiscal Policy - Cabinet approval of a Medium-term Fiscal Framework (MTFF): Target End September, 2014. Status: Met with delay. Cabinet approved the MTFF on November 24. - Public Financial Management - Establish and publish comprehensive asset register for 5 state-owned enterprises (Air Seychelles, Seypec, SCAA, STC, PUC), including state land: Target End December, 2014. Status: Met. The asset register was published on December 16. - State-Owned Enterprises (2015-2016 benchmarks) - 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. Status: Met with a delay. Cabinet approved measures in May 2015. - Conduct governance reviews and operational/business assessments of three SOEs: Timing End June, 2016. - Real Sector and Private Sector Development - Cabinet approval of a strategy to reduce restrictive practices at the Port of Victoria: Timing End May, 2015. Status: The strategy is under development and is planned for Cabinet consideration by end May. - Financial Sector Development (2015) - Establishment of a macroprudential unit within the Central Bank of Seychelles, Board approval of a set of macroprudential policies and measures, and setting up of a financial stability committee under the chairmanship of the CBS: Timing End October, 2015. Objective: Strengthen financial stability. (Benchmark was revised, pending legislative changes.) - International Financial Services Sector (2015) - Submission to National Assembly of new legislation on International Business Companies consistent with international standards: Timing End June, 2015. - Submission to National Assembly of new legislation on International Corporate Service Providers and Trusts consistent with international standards: Timing End December, 2015. ### Technical Memorandum of Understanding — Key definitions and monitoring arrangements - 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 benchmarks for 2015 are listed in Tables 1 and 2 attached to the MEFP. - 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. Reserve liabilities comprise liabilities to nonresidents contracted by the CBS and any net off-balance-sheet position (futures, forwards, swaps, or options), including those to the IMF. - Calculation method: Reserve assets and liabilities at each test date must be converted into U.S. dollars using the end of period exchange rates assumed in the program. - Monitoring and reporting: Semiannually, at each test date, NIR data submitted by the CBS to the IMF will be audited by the CBS’ internal audit division in accordance with International Standards on Auditing. Reports will be submitted to the IMF no later than two months after each test date. - Adjusters: The floor on the CBS’s NIR will be adjusted upward (downward) by the amount by which 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 by the amount that external debt service payments fall short (exceed) 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 those denominated in foreign currencies. 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 (ceiling). Quarterly average reserve money is the arithmetic average of reserve money observed on all days over the quarter. - Monitoring and reporting: Daily reserve money data submitted weekly by the CBS to the IMF 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: Consolidated government primary balance from above the line on a commitment basis = total consolidated government and social security fund revenues (excluding privatization and long-term lease income receipts) less all noninterest (primary) expenditures and net lending of the government and social security fund. For program purposes the 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: Ceiling applies to contracting or guaranteeing of new external liabilities by the public sector (central government, CBS, public agencies and parastatals for noncommercial operations). Exclusions: use of Fund resources, operations related to external debt restructuring, normal import related credits, purchases of treasury securities by nonresidents, or borrowing by parastatals in normal commercial operations. - Zero sub-ceiling: A zero sub-ceiling on short-term external debt (original maturity up to and including one year) applies. - Definition of debt: As per Point 9 of the “Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements,” Executive Board Decision No. 6230-(79/140), as amended — includes loans, suppliers credits, leases (present value at inception), arrears, penalties, and judicially awarded damages that constitute debt. - External Arrears of the Public Sector - Continuous performance criterion: Nonaccumulation of arrears to external creditors. Definition: external payments arrears = amount of external debt service due and not paid within contractually agreed period, subject to any applicable grace period, including contractual and late interest. Excludes arrears for which a clearance framework has been agreed or a rescheduling agreement is sought. - Domestic Arrears of Government - Performance criterion: Nonaccumulation of budget expenditure arrears measured on a net basis from the beginning of a calendar year. - Definition: Budget expenditure arrears = sum of (1) any invoice received and verified for goods/services/capital goods for which payment not made within contractually agreed period or within 30 days if no grace period; (2) unpaid wages, pensions, or transfers pending longer than 30 days to domestic or foreign residents; and (3) debt service payment on domestic debt of the government or guaranteed by the government not made within contractually agreed period. ### Data and reporting timetable (selected) - The Seychelles authorities (government and CBS) will provide Fund staff with the following: - 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. - The CBS will report 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. - The Ministry of Finance will report quarterly (within one month from the end of the quarter): - Accounts of the public nonbank financial institutions. *Source: _cr15201 - 58. The results of the 2013 HBS have been incorporated in the compilation of the monthly CPI as* ### 14. The government and CBS will consult with Fund staff on all economic and financial measures ### 14. The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation, and will provide any additional relevant information as requested by Fund staff. ### Commitment and scope - The government and the Central Bank of Seychelles (CBS) commit to consult with Fund staff on all economic and financial measures that would have an impact on program implementation. - The authorities will provide any additional relevant information as requested by Fund staff. ### Implementation context and institutional relations - Membership Status: Joined 6/30/1977. Article VIII member since 01/03/1978. - Quota and holdings (General Resources Account): - Quota: 10.90 - Fund holdings of currency: 39.35 - Reserve Position in Fund: 0.53 - SDR Department: - Net cumulative allocation: 8.28 - Holdings: 5.73 - Outstanding Purchases and Loans: - Extended Arrangement: 28.97 265.81 - Financial Arrangements (SDR Million): - EFF Jun 04, 2014 Jun 03, 2017 Amount Approved 11.45 Amount Drawn 3.27 - EFF Dec 23, 2009 Dec. 23, 2013 Amount Approved 26.40 Amount Drawn 26.40 - Stand-By Nov 14, 2008 Dec. 22, 2009 Amount Approved 17.60 Amount Drawn 4.84 - Projected Obligations to the Fund (SDR Million): - Forthcoming Principal and Charges/interest by year: - 2015 Principal 1.47 Charges/interest 0.23 Total 1.69 - 2016 Principal 2.60 Charges/interest 0.28 Total 2.89 - 2017 Principal 3.57 Charges/interest 0.25 Total 3.83 - 2018 Principal 4.54 Charges/interest 0.21 Total 4.75 - 2019 Principal 4.95 Charges/interest 0.16 Total 5.11 - Safeguards assessments summary: - Original 2008 assessment: high risks in all areas of CBS’s safeguards framework; measures were included in the program. - Updated assessments (July 2010 and October 2013): significant improvements; most previously recommended measures implemented. - 2014 follow-up safeguards mission: safeguards broadly adequate; areas for further development include the bank’s legal framework and internal audit procedures and capacity. - Exchange rate arrangement: - De jure exchange rate regime: floating. - On March 31st, 2015 US$1 = SR 13.637 (mid rate). - De facto arrangement history noted: reclassified from floating to crawl-like effective March 12, 2013, and reclassified back to floating effective March 27, 2014. ### Relevant technical assistance and statistical capacity affecting consultation - Technical assistance missions (2013–April 2015) included work on: - FOREX and Monetary Operations (February 2013) - External Sector Statistics (April 2013; March 2014; January 2015) - Medium Term Debt Strategy (October 2013) - SDDS Assessment Mission (February 2013) - Medium Term Fiscal Framework (March 2014) - Basle II/III Implementation (April 2014) - Strengthening the Monetary Framework (October 2014) - Central Bank Accounting (February 2015) - Risk-Based Supervision of Offshore Banks (March 2015) - Follow-up Assistance on Implementing Cash Basis IPSAS (April 2015) - Strengthen the Oversight of Financial Market Infrastructures (April 2015) - Data and dissemination: - Seychelles subscribed to the SDDS on May 1, 2015. - National accounts: base year 2006; quarterly national accounts 2006-14; rebasing to 2013 planned. - New consumer price index (CPI) introduced in January 2015 based on 2013 household budget survey. - Monetary statistics: SRF-based monetary data published in the IFS Supplement since March 2007. - External sector statistics: adoption of BPM6; expected to compile the international investment position in 2015 for the first time. - Table of Common Indicators (dates of latest observation and reporting frequency examples): - Exchange Rates: Date of latest observation 30/04/15; Date received 30/04/15; Frequency D (daily) - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 24/04/15; Date received 28/04/15; Frequency D/W/M - Broad Money: Date of latest observation 28/02/15; Date received 10/04/15; Frequency M - Consumer Price Index: Date of latest observation 31/03/15; Date received 10/04/15; Frequency M - GDP/GNP: Date of latest observation 31/12/14; Date received 31/03/15; Frequency Q ### Recent macroeconomic outcomes relevant to consultations (staff statement, June 17, 2015) - Tourism arrivals in the first four months of the year: 13 percent higher than during the same period in 2014. - Exchange rate and reserves: - Exchange rate rose to 13.2 SCR/Dollar, a nominal appreciation of around 6 percent against the dollar since the start of the year. - Gross international reserves: $512 million on June 8. - Net international reserves (NIR): $406 million, above the end-June target of $367 million. - Inflation: - Inflation had reached 5.8 percent in March, fell to 4.0 percent in May. - Fiscal and credit developments: - Preliminary data suggest the Q1 fiscal primary surplus exceeded the target by around ¾ of a percent of GDP. - Growth of credit to the private sector: annual growth decreased from 25 percent in December 2014 to 23 percent in March 2015. - Operational program performance: - Authorities purchased foreign exchange to boost reserves while monetary and fiscal policies remained in line with program targets. - Cumulative quarterly reserve money stayed within the target corridor during Q2 2015. *International Monetary Fund — excerpt from staff report materials (as provided).* ### 4. The authorities have also made progress on the structural agenda. On June 3 the ### 4. The authorities have also made progress on the structural agenda. On June 3 the ### Progress on structural reforms - Cabinet approved a strategy aiming to reduce restrictions and encourage competition in the provision of port services, meeting a structural benchmark with a small delay. - Consultations on new legislation on International Business Companies for submission to the National Assembly (structural benchmark, end-June) are advancing more slowly than expected; legislation is expected to be submitted in the second half of the year. - Authorities have made considerable progress on structural benchmarks, which remain broadly on track albeit with some delays. - Authorities are working with the African Development Bank and other partners to develop a PPP policy to ensure transparency and accountability in risks to the public balance sheet. ### Macroeconomic outcomes and outlook - Real GDP growth: 3.3 percent in 2014. - Exchange rate movements: depreciated by 16 percent in the three months to October 2014; appreciated by around 6 percent since the start of 2015. - Current account deficit: 21 percent of GDP in 2014; expected to contract to 15 percent of GDP in 2015. - Outlook for 2015: real GDP growth expected to accelerate to 3.5 percent; inflation likely to be around 5 percent. - Tourism earnings: US dollar value of tourism earnings has declined modestly, reflecting pricing of most hotel tariffs in the weakening euro. - External financing: current account continues to be financed by strong FDI inflows. ### Fiscal stance and public debt - 2015 budget primary surplus target: SR 720 million, equivalent to 3.8 percent of projected GDP. - Public debt targets: aiming to reduce public debt to 63.7 percent of GDP in 2015; on track to achieve 50 percent of GDP by 2018. - 2014 outcomes: primary fiscal surplus exceeded program targets; reserve money ceiling exceeded by a very small margin (later corrected). - Debt management objectives: smooth out debt service profile; shift borrowings to local currency where possible; place borrowings on favorable terms and gradually extend maturities. - Debt reorganization: Paris Club creditors and South Africa to receive immediate repayment of a share of claims at a moderate discount; repayments extended and partially converted into domestic currency; portion set aside for marine conservation through a global environmental NGO. ### Revenue, public financial management, and SOEs - VAT and flat-rate personal income tax have yielded sound revenue collections. - Focus areas: improving business tax collections; undertaking risk-based audits of 60 large businesses; improving capacity to analyze transfer pricing arrangements; simplifying payment procedures; improving collection of arrears. - PFM reforms: adoption of a Medium-Term Fiscal Framework; new PFM action plan for 2015-18 focused on capital project cash and asset management and enhancing the medium-term budget framework. - SOEs: strengthened accountability, monitoring and control; emphasis on management and governance audits to enhance transparency and efficiency. - Operational performance: SEYPEC and PUC improved in 2014; Air Seychelles recorded large operational losses but government and private shareholder contributions offset losses. - Air Seychelles: announced direct route to Paris from 1 July 2015, codeshared with Air France; government worked with airline to establish a plan with milestones to return to profitability. - Private sector role: authorities committed to ensuring SOEs do not obstruct private participation; pursuing PPP model for expansion of the port of Victoria. ### Institutional and governance integration with global standards - WTO membership: joined in April 2015. - Tax transparency: ratified the Convention on Mutual Administrative Assistance in Tax Matters; joined early adopters of the global standard to automatically exchange tax information. - Statistics: graduated from the GDDS to subscribe to the SDDS. - EITI: EITI Candidate country; will publish first EITI Report by February 2016. ### Monetary policy and financial sector resilience - Central Bank stance: CBS intends to maintain a tight monetary policy stance as long as necessary to guard against inflationary pressures and support external balance. - Reserve objectives: targeting a modest increase in net reserves in line with program objectives; CBS plans opportunistic purchases of international reserves that do not influence the exchange rate. - Monetary framework: moving towards a more forward-looking framework; an interest rate corridor is providing guidance to the market; Ministry of Finance to continue issuing T-Bills and T-Bonds for monetary policy purposes. - Liquidity management: temporary breach of reserve money ceiling in late 2014 was corrected; CBS receiving IMF technical assistance to strengthen liquidity management. - Regulatory standards: upgrading banking regulations for Basel II and III implementation; developing a new resolution framework for banks. - AML/CFT and offshore sector: bringing AML regulatory framework in line with international standards; strengthening frameworks for offshore banking supervision and bank resolution. - Case of BMIO: CBS took over management control of Bank of Muscat International Offshore (BMIO) in November 2014; by December 2014 re-established a correspondent banking relationship; CBS reorganized BMIO and retained full management control during the process; BMIO remained financially sound with funds primarily invested in liquid securities and no significant impacts on the economy. - Macroprudential framework: CBS establishing a Financial Stability Committee to address systemic risks. - Private credit growth: recent strong private credit growth expected to moderate following CBS policy tightening; no indications of weakening lending standards. - Financial infrastructure: continued development of payments and credit information systems; 2013 implementation of electronic transfer of funds across all banks; 2015 phase to extend online platform to the general public. - Consumer protection and financial literacy: CBS focused on enhancing both. ### Social spending, human capital, and inclusive growth - Social outcomes: sound outcomes in education, health, poverty eradication, and the environment under policies of free access to healthcare and education. - Authorities taking steps to improve training of functional skills to address skills shortages and mismatches. - Ongoing investments in health, education and social programs are being prioritized to support growth prospects and social outcomes. ### Program implementation and requests to the IMF - Authorities request completion of the second review and a waiver for the minor and temporary breach of the reserve money ceiling. - Program performance: met all but one quantitative program targets for end-December 2014. - Program priorities: further reduce public debt from high levels; accumulate additional international reserves; pursue deep structural reforms to promote inclusive growth. *Statement by Ms. Plater, Executive Director for Seychelles and Mr. South, Advisor to Executive Director for Seychelles; June 17, 2015.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15201.pdf_