## _cr1615

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---

### Recent economic developments and outlook
- Real GDP growth for 2015 revised up to 4.3 percent, driven by a 19 percent year-on-year increase in tourist arrivals in the first nine months of 2015.
- Tourist-source specifics:
  - India fastest growing market (direct flights to Mumbai).
  - China delivered 12 percent growth.
  - Arrivals from Russia down 20 percent compared to 2014.
- Average length of stay declined to 9.3 days in Q1 2015 from 10.6 days a year ago.
- Exchange rate appreciated 6.7 percent against the U.S. dollar during the first three quarters of the year.
- Central Bank of Seychelles (CBS) purchased US$79 million through end-October 2015.
- Current account deficit expected to fall to 14.4 percent of GDP.
- Output gap estimated to be around zero.
- Inflation: spike to 5.8 percent in March (technical revisions); expected to recede to 4.4 percent by end-2015, supported by low international energy and food prices and monetary policy tightening.
- Private sector credit growth decelerated to 14.3 percent in September 2015, from 25.7 percent at end-2014.
- Outlook for 2016: growth projected at around 3.3 percent; near-term outlook benign but subject to downside risks from weaker external demand.

### Program performance and macro balances
- All end-June 2015 performance criteria (PCs) met by comfortable margins; preliminary data indicate all third-quarter indicative targets met.
- Mid-year fiscal primary surplus target exceeded by nearly ¾ percent of GDP.
- Tax receipts slightly 0.4% of GDP above H1 projections; total revenues and grants ½ percent of GDP lower than projected due to shortfall in non-tax revenues and grants.
- CBS reserve accumulation: US$79 million purchased by end-October, exceeding end-June target by US$31 million and end-September indicative target by US$53 million.
- Reserve coverage brought to just under five months of imports.
- Reserve money targets on daily average achieved in Q2 and Q3 2015; tighter liquidity pushed up government securities yields (treasury bill yields doubled since end-December 2014 across the whole yield curve).
- Broad money reporting revision: inaccurate recording led to broad money being higher by 7.7 percentage points compared with December 2014; reserve money target for end-December 2015 revised slightly upwards.
- The three-year Extended Arrangement under the Extended Fund Facility (EFF) for SDR 11.445 million (105 percent of quota) expires on June 4, 2017.

### Fiscal policy stance and debt dynamics
- Authorities on track to achieve a primary fiscal surplus close to 4 percent of GDP in 2015, exceeding budget target.
- Fiscal anchor: reduce public debt below 50 percent of GDP by 2018.
- Fiscal policy in 2016 targets a primary surplus of 3.8 percent of GDP.
- Baseline medium-term path: primary fiscal surpluses of 3½ to 4 percent of GDP to allow debt reduction while protecting essential infrastructure and human capital spending.
- Monetary debt issued to sterilize reserve accumulation complicates achieving debt-to-GDP below 50 percent by 2018; assuming no unwinding of monetary debt stock, debt-to-GDP at end-2018 would stand above 50 percent.
- Baseline scenario assumes normalization of global interest rates starting in 2017 improving CBS returns on international reserves, allowing partial unwinding of Treasury monetary debt in 2017–2018.

### Monetary policy and external stability
- Tight monetary policy in 2015 helped contain inflation and reduce credit growth; CBS has normalized its stance following prior tightening.
- Policy objective: stabilize inflation at low levels with a flexible exchange rate.
- Given stronger external buffers, foreign exchange purchases can be limited to preserving adequate coverage; further accumulation constrained by sterilization costs.
- Sterilization required issuance of additional monetary debt and has tightened domestic liquidity conditions.

### Financial sector and prudential issues
- Offshore banking sector headwinds:
  - Barclays announced exiting offshore sector on August 31.
  - BMI Offshore Bank under CBS management with a reorganization plan approved by the Supreme Court.
- Risks in banking: lending concentrated in few sectors; rise in unsecured lending products and dynamics in foreign currency loans require vigilance.
- Micro-prudential recommendations include:
  - Strengthening risk weights to bolster capital buffers.
  - Limits on debt service-to-income ratio.
- Seasonal and systemic liquidity pressures have led to precautionary liquidity buffers occasionally falling into negative territory.
- Financial soundness indicators (end of period 2015, Q2 2015 values):
  - Regulatory capital to risk weighted assets: 22.9.
  - Nonperforming loans to gross loans: 7.4.
  - Return on assets (annualized): 3.4.
  - Regulatory tier 1 capital to risk weighted assets: 18.3.
  - Core liquid assets to total assets: 34.9.
  - Broad liquid assets to total assets: 52.8.

### Structural agenda and reform priorities
- Ongoing reform actions and priorities:
  - Improve business climate, particularly for small and medium-sized enterprises.
  - Improve quality of fiscal expenditures to allow critical investment in human and physical capital while maintaining fiscal discipline.
  - Address potential fiscal risks from state-owned enterprises (SOEs); monitor SOEs closely (Air Seychelles and Seychelles Petroleum Company on track to achieve profits in 2015).
  - Ensure offshore sector operates in line with international best practice.
  - Strengthen public financial management and governance of SOEs.
- Planned micro-prudential measures and structural reforms aim to reduce risks, promote sound credit growth to productive sectors, and foster inclusive growth in the medium term.

### Risks
- Domestic risks: excessive risk-taking in SOEs could endanger public debt reduction.
- External risks: growing weakness in traditional and emerging tourism source regions could reduce tourist arrivals relative to 2015 experience.
- Financial integrity and de-risking global trends pose headwinds for the offshore banking sector.

### Box 1 — Structural Excess Liquidity: Causes, Management, and Options
- Causes and context:
  - Structural excess liquidity in the banking system for many years.
  - Recent excess liquidity resulted from unsterilized purchases of foreign exchange by the CBS as it built reserves buffer, which now stands at about $500 million, or one third of GDP.
- Sterilization program (early 2014):
  - Issuance of over SR800 million of Treasury bonds (maturities 2, 3, and 5 years) to mop up much of the existing excess liquidity.
  - Reserve money objective introduced targeting the average of daily reserve money over the quarter.
  - Sterilization carried out largely through government securities starting in March 2014, leading to a rapid increase in government debt (Treasury bills and treasury bonds issued for monetary policy purposes are included in public debt).
- Trade-offs and fiscal implications:
  - Cost of sterilization rests on consolidated public finances.
  - Issuance of government securities safeguards the CBS balance sheet but can put at risk the goal of reducing debt-to-GDP to 50 percent by 2018.
- Options and operational considerations:
  - Ministry of Finance to continue issuance of debt for monetary purposes; CBS could use part of existing government securities on its balance sheet for sterilization operations.
  - As U.S. monetary policy normalizes, CBS should be able to increase returns from foreign exchange reserves and bear more sterilization costs.
  - Raising minimum required reserves: existing minimum reserve requirement set at 13 percent appears appropriate; upward revision would impose a further tax on financial intermediation.
  - Transferring large cash balances of government, agencies, or parastatals from commercial banks to the CBS can be cost-effective where balances are substantial; a single treasury account for the central government is already in place.
  - Promote money market development to reduce need for frequent CBS interventions.
- Key statistics (as reported):
  - Reserves buffer: about $500 million, or one third of GDP.
  - Treasury bond issuance for sterilization: over SR800 million (maturities 2, 3, and 5 years).
  - Existing minimum reserve requirement: 13 percent.
  - Monetary debt expanded to around 15 percent of GDP in mid-2015.
  - Reserve coverage: 4.8 months of prospective imports, or 159 percent of the Assessing Reserves Adequacy metric.
  - Eurobond repayment commencing in 2016: USD 168 million.

### Annex 1 — Private Sector Credit Growth: Assessment and Policy Options
- Credit-to-GDP ratio: 24 percent.
- Financial intermediation low: private sector loans account for less than half of customer deposits.
- Asset allocation: banks invested about 17 percent of assets in government securities and almost 32 percent in non-resident securities.
- Vulnerabilities are primarily micro-prudential: concentrated sectoral distribution (tourism, households, real estate, and mortgages account for about 70 percent of lending), rapidly growing foreign-currency lending, and proliferation of unsecured credit products.
- Foreign-currency lending:
  - Grew sharply late 2014 and early 2015 (by 75 percent in Rupee terms), reaching ¼ of total bank credit.
  - Most foreign-currency exposure to tourism and real estate (naturally hedged).
  - Recommendation: close monitoring of foreign-currency lending to unhedged sectors; consider micro-prudential measures if necessary.
- Unsecured consumer loans:
  - No collateral requirements; average maturity 5 years.
  - Interest rates range between 18-25 percent.
  - Account for half of commercial banks’ total exposure to households and individuals.
  - Three banks offer this product; one bank implemented a debt-service-to-income limit.
- Policy options (micro- and macro-prudential):
  - Raise risk weights for foreign-currency lending and unsecured consumer lending to require additional capital buffers.
  - Consider formal limits on debt service-to-income ratio with systematic reviews.
  - Transition from Basel I to Basel II; CBS considering these measures.
- Data and supervisory improvements:
  - System-wide capital adequacy ratios comfortably above prudential minima; asset quality requires monitoring.
  - Half of the non-performing portfolio due to one large loan; excluding it NPL ratio is 3.9 percent.
  - Macro-prudential framework expected to become operational in early 2016 (structural benchmark under the Fund’s Extended Arrangement).
  - CBS closing data gaps: collect default ratios by currency, develop house price index, conduct regular bank surveys.

### Key projections and selected macro-financial figures (as presented)
- Nominal GDP (2014): US$ 1,422 million.
- Per Capita GDP (2014): US$15,887.
- Real GDP (annual growth rates, percent):
  - 2016 Est.: 6.0
  - 2017 Est.: 3.3
  - 2018 Proj.: 3.5
  - 2019 Proj.: 4.3
  - 2020 Proj.: 3.3
- CPI (annual average, percent):
  - 2016 Est.: 4.3
  - 2017 Est.: 1.4
  - 2018 Proj.: 4.3
  - 2019 Proj.: 4.3
  - 2020 Proj.: 2.5
- Current account balance including official transfers (percent of GDP):
  - 2016 Est.: -14.4
  - 2017 Proj.: -15.3
  - 2018 Proj.: -15.1
  - 2019 Proj.: -13.3
  - 2020 Proj.: -12.4
  - 2021 Proj.: -11.3
- Total public debt (percent of GDP):
  - 2016 Est.: 66.2
  - 2017 Proj.: 62.7
  - 2018 Proj.: 56.7
  - 2019 Proj.: 49.7
  - 2020 Proj.: 46.1
  - 2021 Proj.: 43.3
- Gross official reserves (end of year, millions of U.S. dollars; months of imports):
  - 2016 Est.: 521 (4.8)
  - 2017 Proj.: 517 (4.5)
  - 2018 Proj.: 541 (4.5)
  - 2019 Proj.: 568 (4.6)
  - 2020 Proj.: 593 (4.6)
  - 2021 Proj.: 607 (4.6)
- External debt outstanding (millions of U.S. dollars; percent of GDP):
  - 2016 Est.: 1,786 (123)
  - 2017 Proj.: 1,876 (122)
  - 2018 Proj.: 2,006 (124)
  - 2019 Proj.: 2,119 (124)
  - 2020 Proj.: 2,221 (123)
  - 2021 Proj.: 2,317 (123)

### Policy recommendations and operational guidance (summarized)
- Monetary and exchange rate policy:
  - Continue normalizing monetary policy while stabilizing inflation and maintaining a flexible exchange rate.
  - Limit foreign exchange intervention to preserving adequate reserve coverage and stemming excessive exchange rate volatility given sterilization costs.
  - Improve liquidity forecasting and modernize liquidity management operations; emphasize interest rate channels and money market functioning.
- Fiscal policy:
  - Maintain primary surpluses around 3½ to 4 percent of GDP over the medium term to reduce debt and preserve investment in infrastructure and human capital.
  - Exercise closer control over current expenditure and wages; improve execution of planned investment spending and minimize shifting unused resources to current spending.
- Financial sector and prudential measures:
  - Strengthen micro-prudential tools (risk weights, debt-service-to-income limits) and operationalize macro-prudential framework.
  - Enhance supervision of offshore sector and align international financial services regulation with transparency and exchange of information standards.
  - Develop Financial Stability Committee and Financial Stability Unit; modernize payment systems (SEFT, CSD, RTGS) and credit information system reforms.
- Structural reforms:
  - Improve business climate for MSMEs, strengthen SOE governance, finalise state ownership policy, and maintain focus on fiscal risk monitoring.
  - Advance PFM and PIM reforms, implement PPP framework, and improve tax administration and revenue collection strategies.

*Source: IMF staff report for Seychelles — Third Review Under the Extended Arrangement and Request for Modification of Performance Criteria (December 4, 2015).*

### 4.3 percent, reflecting strong tourist arrivals and expanding credit to the private sector. The

### _cr1615 - 4.3 percent, reflecting strong tourist arrivals and expanding credit to the private sector. The

### Recent economic developments and outlook
- Real GDP growth for 2015 revised up to 4.3 percent, driven by a 19 percent year-on-year increase in tourist arrivals in the first nine months of 2015.
- Tourist-source specifics: India fastest growing market (direct flights to Mumbai); China delivered 12 percent growth; arrivals from Russia down 20 percent compared to 2014.
- Average length of stay reported to have declined to 9.3 days in Q1 2015 from 10.6 days a year ago.
- Exchange rate appreciated 6.7 percent against the U.S. dollar during the first three quarters of the year.
- Central Bank of Seychelles (CBS) purchased US$79 million through end-October 2015.
- Current account deficit expected to fall to 14.4 percent of GDP.
- Output gap estimated to be around zero.
- Inflation: spike to 5.8 percent in March (technical revisions), expected to recede to 4.4 percent by end-2015, supported by low international energy and food prices and monetary policy tightening.
- Private sector credit growth decelerated to 14.3 percent in September 2015, from 25.7 percent at end-2014.
- Outlook for 2016: growth projected at around 3.3 percent; near-term outlook described as benign but subject to downside risks from weaker external demand.

### Program performance and macro balances
- All end-June 2015 performance criteria (PCs) were met by comfortable margins; preliminary data indicate all third-quarter indicative targets were met.
- Mid-year fiscal primary surplus target exceeded by nearly ¾ percent of GDP; tax receipts slightly (0.4% of GDP) above H1 projections but total revenues and grants ½ percent of GDP lower than projected due to shortfall in non-tax revenues and grants.
- CBS reserve accumulation exceeded targets: US$79 million purchased by end-October, exceeding end-June target by US$31 million and end-September indicative target by US$53 million.
- Reserve coverage brought to just under five months of imports (CBS accumulation noted earlier).
- Reserve money targets on daily average achieved in Q2 and Q3 2015; tighter liquidity pushed up interest rates on government securities (treasury bill yields doubled since end-December 2014 across the whole yield curve).
- Broad money reporting revision: inaccurate recording led to broad money being higher by 7.7 percentage points compared with December 2014; reserve money target for end-December 2015 revised slightly upwards accordingly.
- The three-year Extended Arrangement under the Extended Fund Facility (EFF) for SDR 11.445 million (105 percent of quota) expires on June 4, 2017.

### Financial sector and prudential issues
- Offshore banking sector facing headwinds: Barclays announced exiting offshore sector on August 31; BMI Offshore Bank under CBS management with a reorganization plan approved by the Supreme Court.
- Risks in banking: lending remains concentrated in few sectors; rise in unsecured lending products and dynamics in foreign currency loans require vigilance.
- Micro-prudential recommendations discussed include: strengthening risk weights to bolster capital buffers and limits on debt service-to-income ratio.
- Seasonal and systemic liquidity pressures have led to precautionary liquidity buffers occasionally falling into negative territory.

### Fiscal policy stance and debt dynamics
- Authorities on track to achieve a primary fiscal surplus close to 4 percent of GDP in 2015, exceeding budget target.
- Fiscal anchor: reduce public debt below 50 percent of GDP by 2018.
- Fiscal policy in 2016 targets a primary surplus of 3.8 percent of GDP.
- Baseline medium-term fiscal path: primary fiscal surpluses of 3½ to 4 percent of GDP deemed appropriate to allow debt reduction while protecting essential infrastructure and human capital spending.
- Monetary debt issued to sterilize reserve accumulation complicates achieving the debt-to-GDP below 50 percent by 2018; assuming no unwinding of monetary debt stock, debt-to-GDP at end-2018 would stand above 50 percent.
- Baseline scenario assumes normalization of global interest rates starting in 2017 improving CBS returns on international reserves, allowing partial unwinding of Treasury monetary debt in 2017–2018.

### Monetary policy and external stability
- Tight monetary policy in 2015 helped contain inflation and reduce credit growth; CBS has normalized its stance following prior tightening.
- Policy objective: stabilize inflation at low levels with a flexible exchange rate.
- Given stronger external buffers, foreign exchange purchases can be limited to preserving adequate coverage; further accumulation constrained by sterilization costs.
- Reserve accumulation among highest since the 2008 crisis; sterilization required issuance of additional monetary debt and has tightened domestic liquidity conditions.

### Structural agenda and reform priorities
- Structural reforms progressing with some delays (legislation on International Business Companies delayed for further consultations; establishment of a macro-prudential unit requires legal framework).
- Policy priorities:
  - Improve business climate, particularly for small and medium-sized enterprises.
  - Improve quality of fiscal expenditures to allow critical investment in human and physical capital while maintaining fiscal discipline.
  - Address potential fiscal risks from state-owned enterprises (SOEs); monitor SOEs closely (Air Seychelles and Seychelles Petroleum Company on track to achieve profits in 2015).
  - Ensure offshore sector operates in line with international best practice.
  - Strengthen public financial management and governance of SOEs.
- Planned micro-prudential measures and structural reforms aim to reduce risks, promote sound credit growth to productive sectors, and foster inclusive growth in the medium term.

### Risks
- Domestic risks: excessive risk-taking in SOEs could endanger public debt reduction.
- External risks: growing weakness in traditional and emerging tourism source regions could reduce tourist arrivals relative to 2015 experience.
- Financial integrity and de-risking global trends pose headwinds for the offshore banking sector.

*Source: IMF staff report for Seychelles — Third Review Under the Extended Arrangement and Request for Modification of Performance Criteria (December 4, 2015).*

### Box 1. Structural Excess Liquidity: Causes, Management, and Options

### Box 1. Structural Excess Liquidity: Causes, Management, and Options

### Background and causes
- The economy of Seychelles has been characterized by structural excess liquidity in the banking system for many years.
- Recent excess liquidity resulted from unsterilized purchases of foreign exchange by the CBS as it progressively built its reserves buffer, which now stands at about $500 million, or one third of GDP.
- Volatility in core monetary aggregates during 2012-13 in the context of establishing a forward looking framework for monetary policy prompted policy action.

### Macroeconomic effects of excess liquidity
- Excess liquidity can weaken the monetary transmission mechanism because commercial banks may opt to maintain liquid assets rather than participate in Open Market Operations (OMO).
- Over time this can lead to a reduction in interest rates, with consequences for inflation (if demand grows too fast) and the exchange rate (if inflation expectations become unanchored).

### Sterilization program (early 2014) and outcomes
- CBS and the Ministry of Finance agreed on an ambitious sterilization program in early 2014 comprising the issuance of over SR800 million of Treasury bonds (with maturities of 2, 3, and 5 years) to mop up much of the existing excess liquidity.
- A reserve money objective was introduced that targeted the average of daily reserve money over the quarter to permanently reduce banks’ free reserves.
- The program resulted in a substantial reduction of excess liquidity in the banking system and strengthened the signaling function of short-term interest rates.
- Sterilization was carried out largely through government securities starting in March 2014, leading to a rapid increase in the level of government debt. (Treasury bills and treasury bonds issued for monetary policy purposes are included in the definition of public debt.)

### Trade-offs, fiscal implications, and instrument choice
- The cost of sterilization ultimately rests on the consolidated public finances; both government securities and Central Bank auctions are used in practice, with relative importance depending on country-specific circumstances.
- Issuance of government securities safeguards the CBS balance sheet (large issuances of interest-bearing monetary instruments can undermine the CBS financial position) and can play a catalytic role in financial development in a shallow market.
- However, issuance of government securities can put at risk the authorities’ goal of reducing the debt-to-GDP ratio to 50 percent by 2018.
- Monetary debt issuance to mop up liquidity increases gross debt but can be offset by deposits held in a blocked account at the central bank.

### Options going forward and operational considerations
- The Ministry of Finance would continue issuance of debt for monetary purposes, while the CBS could consider using part of the existing government securities on its balance sheet for sterilization operations.
- As monetary policy in the United States normalizes driving global interest rates up, the CBS should be able to increase the returns from its holdings of foreign exchange reserves, which in turn would allow the Central Bank to bear more of the costs of sterilization.
- Raising minimum required reserves could absorb domestic liquidity, but:
  - The existing minimum reserve requirement set at 13 percent appears appropriate.
  - Any upward revision would increase absorption of domestic liquidity only by imposing a further tax on financial intermediation.
- Transferring large cash balances of government, its agencies or parastatals from commercial banks to the Central Bank can be a cost-effective drain on surplus liquidity where such balances are substantial; in Seychelles:
  - A single treasury account for the central government is already in place.
  - Forcing SOEs to hold operational accounts at the CBS may hamper their capacity to make timely payments.
- Promoting money market development to reduce the need for frequent CBS interventions would help alleviate pressure on monetary debt and reduce reliance on government securities for systemic liquidity conditions.
- Consideration could be given to using existing debt instruments on the CBS balance sheet for monetary operations purposes.

### Key statistics and metrics (as reported)
- Reserves buffer: about $500 million, or one third of GDP.
- Treasury bond issuance for sterilization: over SR800 million (maturities 2, 3, and 5 years).
- Existing minimum reserve requirement: 13 percent.
- Monetary debt expanded to around 15 percent of GDP in mid-2015.
- Reserve coverage: 4.8 months of prospective imports, or 159 percent of the Assessing Reserves Adequacy metric.
- Eurobond repayment commencing in 2016: USD 168 million.

*Source: Box 1. Structural Excess Liquidity: Causes, Management, and Options (IMF staff report).*

### 24.  Staff welcomes the authorities’ continued commitment to sound macroeconomic

### _cr1615 - 24.  Staff welcomes the authorities’ continued commitment to sound macroeconomic

### Macroeconomic overview and policy intent
- The balance of payments pressures experienced in the latter half of 2014 were successfully addressed through a combination of tight monetary and fiscal policy.
- With the restoration of external balance helped by favorable terms of trade and strong tourism arrivals, the authorities should now focus on laying the foundations for broad-based and sustainable economic growth.

### Monetary policy and financial sector safeguards
- Given well-anchored inflation and slowing private sector credit growth, the authorities are appropriately normalizing monetary policy.
- Although the pace of growth of private sector credit is now moderating, it will be important to strengthen the micro-prudential tools to safeguard the soundness of the financial sector and mitigate emerging risks related to:
  - concentrated sectoral exposures,
  - foreign currency lending, and
  - unsecured credit products.
- Once the macro-prudential institutional framework becomes operational, some additional measures could be considered to address systemic risks.
- Continued progress is critical in strengthening the monetary policy framework, particularly by:
  - improving liquidity forecasting, and
  - gradually modernizing liquidity management operations.
- More emphasis should be placed on interest rates to improve traditional channels of monetary policy transmission and on strengthening the functioning of the money market to help reduce market interventions, and contain a rapidly growing stock of monetary debt.

### Fiscal policy and expenditure quality
- While fiscal discipline has anchored stability, greater attention must be paid to the quality of expenditures.
- The authorities’ continued commitment to reducing the debt-to-GDP ratio over the medium term should ensure that fiscal policy enhances policy buffers and supports external stability.
- However, closer control over current expenditure, and wages in particular, is also necessary.
- Wages have been consistently increasing as a percent of GDP since the crisis, particularly when wages of independent government agencies are taken into account.
- While some increase may be necessary to support investment in human capital, continued broad-based wage increases that exceed the growth of the economy would undermine the government’s ability to ensure sufficient room for investments in essential infrastructure, the foundation of long-term growth.
- Improving the execution of planned investment spending is a high priority, and shifting unused resources to current spending should be minimized.

### External buffers, reserve accumulation, and exchange rate policy
- After considerable progress in building external buffers to adequate levels, interventions should be limited going forward.
- Having fallen to a very low level during the crisis, international reserve coverage has now reached adequate levels, even after taking account of Seychelles’ high import dependency and undiversified economy.
- While this rapid reserve accumulation has resulted in the issuance of a considerable amount of monetary debt for sterilization purposes, there is an inevitable cost to building this buffer, and the use of these treasury instruments has been an essential corollary to the improved coverage.
- Going forward:
  - the fiscal authorities should continue to provide the CBS with all necessary instruments to conduct monetary policy, and
  - with the exchange rate in line with fundamentals, external buffers adequate, and the costs of sterilization high, foreign exchange intervention, beyond that needed to maintain current reserve levels, should be limited to stemming excessive exchange rate volatility.

### Structural policy recommendations
- The authorities should refocus on the structural agenda.
- While the role of the public sector in Seychelles may necessarily be different than in its larger peers, the primary role of the private sector in stimulating growth should nevertheless be recognized.
- The role of the public sector should be refocused on ensuring a level playing field and on instances where there is a clear market failure, and the temptation for public enterprises to invest in non-core activities should be resisted and rolled back.
- Regulation of the offshore sector needs to be continually reviewed to ensure that it is in line with international best practice, and that risks to the industry and the broader economy are appropriately contained.

*Source: _cr1615 - 24.  Staff welcomes the authorities’ continued commitment to sound macroeconomic*

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

### _cr1615 - 29.  In light of the authorities’ continued strong program implementation and determined

### Program decision and staff recommendation
- Staff supports the authorities’ request for:
  - the completion of the third review under the Extended Arrangement; and
  - the modification of the quantitative performance criteria for end-December 2015.

### Macroeconomic outlook and projections (selected)
- Nominal GDP (2014): US$ 1,422 million
- Per Capita GDP (2014): US$15,887
- Population, end-year (2012): 88,303
- Literacy rate (2010): 94 percent
- Main products and exports: Tourism, Canned Tuna

- Real GDP (annual growth rates, percent):
  - 2016 Est.: 6.0
  - 2017 Est.: 3.3
  - 2018 Proj.: 3.5
  - 2019 Proj.: 4.3
  - 2020 Proj.: 3.3

- CPI (annual average, percent):
  - 2016 Est.: 4.3
  - 2017 Est.: 1.4
  - 2018 Proj.: 4.3
  - 2019 Proj.: 4.3
  - 2020 Proj.: 2.5

- Current account balance including official transfers (percent of GDP):
  - 2013: -11.5
  - 2014: -21.1
  - 2015: -15.2
  - 2016 Est.: -14.4
  - 2017 Proj.: -15.3
  - 2018 Proj.: -15.1
  - 2019 Proj.: -13.3
  - 2020 Proj.: -12.4
  - 2021 Proj.: -11.3

- Total public debt (percent of GDP):
  - 2013: 64.1
  - 2014: 65.1
  - 2015: 63.7
  - 2016 Est.: 66.2
  - 2017 Proj.: 62.7
  - 2018 Proj.: 56.7
  - 2019 Proj.: 49.7
  - 2020 Proj.: 46.1
  - 2021 Proj.: 43.3

- External debt outstanding (millions of U.S. dollars; percent of GDP):
  - 2013: 1,583 (112)
  - 2014: 1,667 (117)
  - 2015: 1,788 (130)
  - 2016 Est.: 1,786 (123)
  - 2017 Proj.: 1,876 (122)
  - 2018 Proj.: 2,006 (124)
  - 2019 Proj.: 2,119 (124)
  - 2020 Proj.: 2,221 (123)
  - 2021 Proj.: 2,317 (123)

- Gross official reserves (end of year, millions of U.S. dollars; months of imports):
  - 2013: 425 (3.6)
  - 2014: 463 (4.6)
  - 2015: 463 (4.3)
  - 2016 Est.: 521 (4.8)
  - 2017 Proj.: 517 (4.5)
  - 2018 Proj.: 541 (4.5)
  - 2019 Proj.: 568 (4.6)
  - 2020 Proj.: 593 (4.6)
  - 2021 Proj.: 607 (4.6)

### External sector and balance of payments (selected)
- Current account balance (Millions of US Dollars; percent of GDP):
  - 2013: -162 (-11.5)
  - 2014: -300 (-21.1)
  - 2015: -209 (-15.2)
  - 2016 Est.: -209 (-14.4)
  - 2017 Proj.: -235 (-15.3)
  - 2018 Proj.: -243 (-15.1)
  - 2019 Proj.: -227 (-13.3)
  - 2020 Proj.: -222 (-12.4)
  - 2021 Proj.: -214 (-11.3)

- Exports of goods (Millions of US Dollars):
  - 2013: 578
  - 2014: 539
  - 2015: 448
  - 2016 Est.: 427
  - 2017 Proj.: 449
  - 2018 Proj.: 486
  - 2019 Proj.: 518
  - 2020 Proj.: 546
  - 2021 Proj.: 572

- Tourism earnings (part of exports of services, Millions of US Dollars):
  - 2013: 430
  - 2014: 398
  - 2015: 380
  - 2016 Est.: 404
  - 2017 Proj.: 424
  - 2018 Proj.: 451
  - 2019 Proj.: 480
  - 2020 Proj.: 510
  - 2021 Proj.: 542

- FDI (percent of GDP; note on methodology):
  - 2013: 15.4
  - 2014: 14.1
  - 2015: 10.8
  - 2016 Est.: 8.7
  - 2017 Proj.: 11.2
  - 2018 Proj.: 12.9
  - 2019 Proj.: 10.7
  - 2020 Proj.: 10.4
  - 2021 Proj.: 10.2
  - Footnote: From 2015 onwards the data reflect the findings of the IIP survey, which indicated that the proportion of equity to debt in FDI flows was being significantly overestimated.

### Fiscal sector (selected)
- Total revenue, excluding grants (percent of GDP):
  - 2013: 31.9
  - 2014: 32.4
  - 2015: 31.6
  - 2016 Est.: 31.7
  - 2017 Proj.: 32.6
  - 2018 Proj.: 28.8
  - 2019 Proj.: 32.9
  - 2020 Proj.: 32.8
  - 2021 Proj.: 32.5

- Expenditure and net lending (percent of GDP):
  - 2013: 36.0
  - 2014: 32.7
  - 2015: 33.6
  - 2016 Est.: 31.5
  - 2017 Proj.: 34.3
  - 2018 Proj.: 33.0
  - 2019 Proj.: 33.0
  - 2020 Proj.: 33.5
  - 2021 Proj.: 33.7

- Overall balance, including grants (percent of GDP):
  - 2013: 0.3
  - 2014: 2.0
  - 2015: 0.3
  - 2016 Est.: 1.2
  - 2017 Proj.: 1.3
  - 2018 Proj.: 1.0
  - 2019 Proj.: 1.2
  - 2020 Proj.: -0.2
  - 2021 Proj.: -0.5

- Program primary balance (percent of GDP):
  - 2013: 4.6
  - 2014: 4.6
  - 2015: 3.8
  - 2016 Est.: 3.8
  - 2017 Proj.: 3.8
  - 2018 Proj.: 3.6
  - 2019 Proj.: 3.6
  - 2020 Proj.: 2.0
  - 2021 Proj.: 1.6

### Financial sector and monetary indicators (selected)
- Broad money (12–month percent change):
  - 2013: 23.7
  - 2014: 25.8
  - 2015: 12.5
  - 2016 (various quarterly readings): 6.3; 10.3; 3.7; 7.6; 4.5; 5.7

- Reserve money (end of period; 12–month percent change):
  - 2013: 15.4
  - 2014: 13.9
  - 2015: 1.6
  - 2016 (quarterly readings): -1.6; -3.1; -6.1; -0.2; 1.3; 8.0; 13.1; 15.0; 16.7; 11.9; 6.5

- Credit to the private sector (12–month percent change):
  - 2013: 4.5
  - 2014: 25.7
  - 2015: 24.1
  - 2016 (quarterly readings): 2.5; 20.6; 19.5; 16.6; 14.3; 12.4; 12.6; 13.1; 12.0; 11.2; 10.6

- Financial soundness indicators (selected, end of period 2015):
  - Regulatory capital to risk weighted assets: 22.9 (Q2 2015)
  - Nonperforming loans to gross loans: 7.4 (Q2 2015)
  - Return on assets (annualized): 3.4 (Q2 2015)
  - Regulatory tier 1 capital to risk weighted assets: 18.3 (Q2 2015)
  - Core liquid assets to total assets: 34.9 (Q2 2015)
  - Broad liquid assets to total assets: 52.8 (Q2 2015)

### Fund arrangements and balance of support
- Schedule under the Extended Arrangement, 2014–17 (per review date):
  - Total amount: 11.445 (Millions of SDR)
  - Percent of quota per review: 15 (each disbursement)
  - Reviews and availability dates listed from June 4, 2014 through March 31, 2017 with six disbursements of 1.635 (Millions of SDR) each.

### Key data series highlighted in figures and tables
- Exchange rate series: Seychelles rupees per US$1 (end of period) noted as 12.1 (2013) and 14.0 (2014) in the tables.
- Tourism arrivals growth (year-on-year percent change, monthly, seasonally adjusted) shown in Figure 2 across Jan'11–Jul'15.
- Monthly indicators of activity include Telecommunications Usage, Fishing Output (tons), Electricity Production (Millions, KWh), and Tourist Arrivals for Jan'11–Jun'15 / Jul'15.

*Source: Seychelles authorities and IMF staff estimates and projections as presented in the provided content.*

### Annex 1. Private Sector Credit Growth: What are the

### Annex 1. Private Sector Credit Growth: What are the Policy Options?

### Assessment of Credit Growth and Vulnerabilities
- The level of credit-to-GDP is low relative to peers and regionally; the credit-to-GDP ratio is 24 percent.
- Financial intermediation, measured by credit to deposits, appears low; private sector loans account for less than half of customer deposits.
- Banks invested about 17 percent of assets in government securities, and almost 32 percent in non-resident securities (including placements within foreign banking groups abroad).
- Vulnerabilities stem more from micro-prudential considerations: concentrated sectoral distribution of credit, rapidly growing foreign-currency lending, and proliferation of unsecured credit products, rather than the overall size of credit.

### Historical and Recent Credit Dynamics
- Private sector credit reached 48 percent growth by end-2008, preceding the crisis.
- Credit growth plummeted in 2009 during the global downturn, recovered and peaked above 20 percent in 2010.
- In 2011, credit stagnated at low single digits.
- In 2014, credit growth rose to over 25 percent, boosting the credit-to-GDP ratio by almost 4 percent in one year.
- In the second half of 2015, credit decelerated to more sustainable levels and was expected to decline further by end-year.

### Sectoral Distribution of Credit
- Credit is highly concentrated in a few sectors: tourism, households, and real estate; together with mortgage loans, these account for about 70 percent of commercial banks’ lending portfolio.
- In 2015, tourism, households and mortgages received the largest portion of credit.
- Among Rupees-denominated loans, building and construction benefited considerably from new lines of credit in 2015, partially offset by declining foreign-currency loans to this sector.
- Credit to SOEs picked up in 2015 from a very low base and accounts for slightly over 5 percent of total credit to the economy.

### Foreign-Currency Lending: Risks and Monitoring
- Foreign-currency loans grew sharply in the last months of 2014 and at the beginning of 2015 (by 75 percent) in Rupee terms, reaching ¼ of total bank credit.
- Most foreign-currency exposure is to tourism and real estate (naturally hedged by foreign currency receipts). Rapid growth of foreign-currency credit to manufacturing and health sectors would raise concerns if borrowers are not hedged.
- Recommendation: foreign currency lending to sectors not hedged by foreign currency receipts requires close monitoring; in the absence of a macro-prudential framework, consider specific micro-prudential measures.

### Unsecured Consumer Loans: Features and Risks
- Unsecured loans have no collateral requirements; review of a credit application can take one day; customers are not required to present collateral or disclose loan purpose; amount limited by income level.
- The average maturity of unsecured credit is 5 years.
- Interest rates on unsecured loans range between 18-25 percent depending on the bank.
- Unsecured lending accounts for half of commercial banks’ total exposure to households and individuals, and in nominal terms exceeds lending to sectors like transport or manufacturing.
- Three banks currently offer this product; one bank has implemented a debt-service-to-income limit.

### Micro-prudential and Macro-prudential Policy Options
- Mitigation options for foreign-currency exposures and unsecured lending:
  - Raise risk weights when estimating risk-weighted assets to require additional capital buffers and discourage foreign-currency lending to unhedged borrowers.
  - Change risk weights for unsecured consumer lending.
  - Consider formally introducing limits on debt service-to-income ratio to restrict monthly debt service as a fixed share of income; such limits should be subject to systematic reviews and updates to account for changing incomes and interest rate adjustments.
- The CBS is considering these measures in the context of transitioning from Basel I to Basel II.

### Banking Sector Soundness and Supervision
- System-wide capital adequacy ratios are comfortably above required prudential minima; banks are on average profitable and highly liquid.
- Asset quality needs careful monitoring, especially with double-digit credit growth.
- Half of the non-performing portfolio is due to one large loan in the health sector secured by land and fully provisioned; excluding this loan brings the non-performing ratio to 3.9 percent.
- Increasing risks warrant close monitoring, regular supervisory assessment, and strengthening micro-prudential tools.

### Development of a Macro-prudential Framework and Data Improvements
- A macro-prudential framework is expected to become operational in early 2016 and is a structural benchmark under the Fund’s Extended Arrangement.
- Once institutional and legal frameworks are in place, other measures (including special or dynamic provisions) could be considered.
- To support macro-prudential surveillance, the CBS is closing data and information gaps by:
  - Collecting detailed information on default ratios with breakdown by currency exposures.
  - Developing a house price index to track changes in the real estate market.
  - Conducting a regular survey among banks to gather specific qualitative information on lending.

*Source: Annex 1. Private Sector Credit Growth: What are the Policy Options? (IMF content unit).*

### 5. Tourism activities have picked up this year with visitor arrivals growing by double digits since

### 5. Tourism activities have picked up this year with visitor arrivals growing by double digits since

### Tourism performance
- By the end of July, visitor arrivals increased by 17 per cent compared to the same period last year.
- Growth by source market:
  - Traditional European market: growth of 10 per cent.
  - Emerging Asian market: growth of 33 per cent.
- Outlook: For the next half of the year, growth in arrivals is expected to be sustained at current levels.

### Revised Budget 2015 — revenues and grants
- Government revenue excluding grants expected at SR 6.23bn for revised Budget 2015.
  - This is SR 43.2 million higher than the original 2015 budget.
  - The initial 2015 Budget figure was SR 6.18bn.
  - Upward revision forecasted of SR 8m compared to the initial Budget of SR 6.18bn.
  - Positive adjustment equivalent to a 0.7 per cent increase.
- Large and unexpected refund payments (relating to Business tax and VAT) affected end-2015 outlook.
- Grant income expected to be SR 148m less in 2015.
  - Overall decrease of total revenue and grants by SR 104.7 million in the revised 2015 budget.

### Midyear fiscal position and expenditure
- Primary expenditure revised downwards by R46 m from R5, 889 m to R5, 843 million due to savings within a few expenditure lines.
- Wages to GDP ratio projected to remain at 5.8% as a result of the Manpower Budgeting Exercise.

### Fiscal strategy and 2016 projection
- Government committed to debt reduction target: below 50% by 2018.
- For 2016:
  - Primary surplus projected at 3.8% of GDP.
  - This will represent a surplus of R767 million rupees.
- Spending measures to achieve objectives:
  - Freeze on allocation of non-essential items within goods and services while maintaining most goods and services budget line items at 2015 levels.
  - Approximate 1% targeted cut in most MDAs budget, mostly to reduce spending on stationary, hospitality and consumables items.
  - Expectation that Trades Tax, Vat and TMT will increase substantially in line with GDP growth.
  - Business tax collection expected above 2015 level due to SRC Audits.
  - Income tax expected to rise due to implementation of the 13th month salary.

### Public sector wage, pensions, and employment measures
- Implementation of a 13th month salary scheme based on performance aimed at improving productivity in the civil service.
- Provision for an increase in Pension.
- Implementation of a Youth Employment Scheme to increase employment opportunities for school leavers.
- Budget priority for recruitment planned during the 2015 MBE, promotions, returning graduates, implementation of salary increments according to existing schemes of service, and full year allocation of schemes introduced in mid 2015.

### Public financial management (PFM) and investment management
- Program performance based budgeting (PPBB):
  - In 2016, 5 portfolio ministries operating on a program-performance based budget.
  - Partial roll out expected in 2017 for the remaining 7 portfolio ministries.
  - Authorities discussing with the World Bank for the way forward.
- 2015–2018 PFM action plan implementation with considerable progress in asset and capital project management.
  - Discussion underway for a Medium Term Budget Framework (MTBF) mission with AFR ITAC South.
  - New PEFA assessment planned in 2016 to assess progress and revise the PFM action plan.
- Public Investment Management (PIM) guidelines approved by Government in June 2015.
  - A Project Manager recruited to coordinate PIM processes.
  - Government staff being trained with World Bank assistance on PIM appraisal requirements.
- Government Annual Financial Statement (AFS) for 2014 being finalized with Office of the Auditor General.
  - SOE accounts consolidated with central government except two SOEs which had not submitted accounts; work planned to ensure full consolidation in 2016.

### Infrastructure and PPPs
- Government will balance infrastructure expansion with fiscal consolidation and financial risk management.
- National PPP policy approved by cabinet on the 1st July 2015.
- Procurement in process (AfDB funded) to develop PPP regulatory and operational framework:
  - Draft PPP regulations for submission to cabinet (proposed new SB).
  - Develop PPP implementation manual.
- Public and private forum organized in the first quarter of 2016 (funded by ICF) to present PPP policy, sensitize stakeholders, share experiences, and discuss potential PPP projects.
- Communications strategy to promote PPP concept in Seychelles being developed.

### Private sector, MSMEs, and SOE governance
- Revised MSME policy to be submitted to cabinet for approval (proposed new SB).
- Strengthening corporate governance of SOEs:
  - Public Enterprise Monitoring Commission (PEMC) received the approved OECD Code of Governance and intends to adopt it as basis for a local Code.
  - Commission to initiate the 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) and a further 3 by end-December 2016 (proposed new SB).
- Development of a State Ownership Policy to separate state’s ownership function from policy and regulatory functions.
- Asset registers for state owned enterprises published via the PEMC website, except L’Union Estate and the Seychelles Ports Authority (AFS 2014 not yet received).
- Operational updates:
  - SEYPEC showing positive operational performance with a provisional profit as of September 2015.
  - PUC: marginal increase of 3% in profit above December 2014 as of end-September 2015, aided by decline in cost of fuel oil.
  - Air Seychelles on track to achieving profitability in 2016.
- Societé Seychellois d’investissement (SSI) mandate clarified; will better manage fiscal risks through monitoring and independent analysis of portfolio companies.
  - In cooperation with the World Bank, focus on shareholder policy for SSI, investment strategy, and operating guidelines.

### Tax administration and revenue strengthening
- SRC to develop a Collection Enforcement Strategy to improve methods for collection of total tax arrears.
  - Strategy to modify approaches used by tax officers based on age of debt and level of compliance.
  - Strategy to be completed by March 2016 followed by implementation.
- Auditing efforts:
  - SRC completed 66 tax audits by September (SB).
  - A further 60 business tax audits to be conducted by November 2016.

### Monetary policy and Central Bank of Seychelles (CBS) initiatives
- Monetary policy framework:
  - Quarterly average reserve money will remain as the nominal anchor.
  - Emphasis on promoting better liquidity management to improve transmission of interest rates.
  - Aim to eventually shift from quantitative target to an interest-rate based target when conditions permit.
  - Technical Assistance (TA) from the MCM department of the IMF to enhance forecasting and modeling capacity.
- Coordination with fiscal policy:
  - Per Memorandum of Understanding, the Ministry will issue government securities for monetary policy purposes as needed and conscious of the debt target.
- Inflation and policy stance:
  - CBS to consider a gradual and cautious loosening of monetary policy as from the fourth quarter of 2015, mindful of inflation outlook and external sector developments.
  - Policy mix since second half of 2014 and decline in global energy and commodity prices had dampening effect on potential inflationary pressures.
  - Credit growth, particularly for consumer goods financing, has slowed since the beginning of the year; private sector credit growth will be monitored closely.

### Exchange rate, reserves, and reserves management
- Exchange rate policy:
  - CBS remains committed to a floating exchange rate regime.
  - Following 2014 depreciation, the Seychelles rupee appreciated against the USD in the first half of the year and remains stable against main counterparts.
  - Lower international energy and commodity prices expected to continue supporting external value of the domestic currency.
- Reserves accumulation strategy:
  - Authorities will continue to pursue reserves accumulation; CBS will purchase foreign exchange from the market to build reserves without influencing the exchange rate when opportunities arise.
  - Authorities hope to exceed reserves targets depending on market conditions.
- Reserves management capacity:
  - CBS engaged in the Reserves Advisory and Management Programme (RAMP) with the World Bank following Board approval in late 2014.
  - Several staff benefited from workshops and TA offered by RAMP.
  - Staff involved with reserves management started second part of training provided by Crown Agents Investment Management (CAIM) in the third quarter of 2015.

### Financial stability, consumer protection, and financial inclusion
- Financial Stability Committee (FSC):
  - To be set up and chaired by the Governor of the Central Bank of Seychelles.
  - Interim committee until required legal framework established.
  - Membership: the Ministry of Finance, Trade and the Blue Economy; the Central Bank of Seychelles; the Financial Services Authority; the Financial Intelligence Unit.
  - A Financial Stability Unit (FSU) to be set up within CBS to monitor and carry out research on macro-financial matters to support the FSC.
  - Intended operational date for FSC and FSU: by end-March 2016.
- Consumer protection and financial literacy:
  - CBS to enhance mandate for consumer protection and develop a strategy for financial literacy.
  - Government signed a Reimbursable Advisory Services (RAS) agreement with the World Bank to access TA to establish a comprehensive consumer protection framework.
  - Options for establishing a financial ombudsman function with adequate enforcement powers will be explored.
  - A financial literacy baseline study will be commissioned to identify target groups and design a comprehensive and cost effective strategy and implementation plan.
  - Funding sought from the Investment Climate Fund for the baseline strategy and from the AfDB for the design of the financial literacy strategy.

### Banking regulation, AML/CFT, and international standards
- Banking regulation:
  - Complete review of the Financial Institutions Act underway to cater for implementation of Basel 2 and 3 in 2017 as per the revised road map prepared with IMF assistance.
  - TA anticipated from the IMF regarding implementation of the pillar 2 component of Basel II in the first half of 2016.
  - Enhanced resolution framework for banks to be developed drawing on recent CBS bank intervention experiences.
- AML/CFT and offshore sector:
  - Authorities commit to sign the Model 1 B Intergovernmental Agreement for FATCA with the US and to sign the Multilateral Competent Authorities Agreement for the Automatic Exchange of Information (AEOI) with Seychelles’ commitment for first automatic exchange by 2017.
  - World Bank TA in fourth quarter of 2015 regarding the National Risk Assessment in preparation for the Mutual evaluation against FATF principles scheduled for the second half of 2016.
  - Tripartite MoU between CBS, FIU and FSA signed to ensure greater coordination.
  - An action plan to implement recommendations from IMF TA mission has been finalized.
  - CBS and FIU undertaking joint inspections regarding AML matters.
  - Regulation of the offshore banking sector to be enhanced to mitigate contagion risks.

### Credit Information System (CIS) reforms and payments system
- CIS reforms:
  - Significant reforms planned to increase usefulness for lenders.
  - CBS to enhance scope of CIS by including credit data from all relevant lenders, including those not under its regulatory purview, and eventually other data providers such as utilities companies.
  - Improve frequency and type of data collected and information distributed back to lenders.
  - Medium-term goal: more comprehensive legal and regulatory framework for credit reporting activities to be addressed through the RAS.
- SEFT payment system modernization:
  - SEFT phase one implemented across all banks in mid-August 2013.
  - Phase two under implementation since July 2014, with new scheduled completion date: third quarter 2016.
  - Since phase one launch, majority of participants have integrated CORE banking systems to SEFT for straight-through processing.
  - Phase two will extend the internet-based online platform from banks domain to the general public to modernize and increase efficiency of the country’s payments systems.

*Source: _cr1615 - 5. Tourism activities have picked up this year with visitor arrivals growing by double digits since*

### 38. CBS remains committed in its endeavor to modernize the country’s national payment system.

### _cr1615 - 38. CBS remains committed in its endeavor to modernize the country’s national payment system.

### National payment system modernization — strategy, governance, and timelines
- CBS is formalizing Terms of Reference for the National Payments Task Force and the National Payments Council to provide a regular schedule of meetings and set out objectives for the two forums driving modernization.
- CBS, in collaboration with other stakeholders, is preparing a new vision and strategy for modernization of the national payment system covering the period from 2016 to 2020.
- Regulations on the continuous oversight of payment systems will be issued by June 2016 with World Bank TA.
- IMF TA received in April 2015 commenced an assessment of the National Payment System’s compliance with the Principles for Financial Market Infrastructures; further capacity building to achieve alignment with international standards is expected in 2016.

### External assistance, feasibility work, and diagnostic studies
- CBS is engaging AfDB/ICF for external consultants to undertake a feasibility study for implementing modern settlement systems in 2015; outcomes will inform the introduction of:
  - a Central Securities Depository (CSD), and
  - a Real Time Gross Settlement System (RTGS).
- AfDB/ICF TA will also support diagnostic studies for government payments and assessment of the international remittance market, including:
  - improving remittance services (regulatory and governance framework, greater transparency, and consumer protection),
  - assessing infrastructure for government payments and public financial resources payments to provide recommendations to ensure these are managed and effected in a sound, efficient, reliable and transparent manner.

### Regulatory, legal, and institutional reforms across financial sectors
- CBS commenced review of the Central Bank of Seychelles Act, 2004 (CBS Act) in Q1 2015 to strengthen corporate governance; proposed amendments aim to meet established best practice standards.
- Internal Audit Division (IAD) to undergo an external Quality Assurance review by an independent provider by mid-2017 to evaluate conformance with IIA Standards and overall effectiveness; IAD will build capacity with consultant assistance (quality, mentoring, audit supervision, project monitoring).
- Measures to safeguard the international financial services sector and align with transparency/exchange of information in tax matters:
  - An international financial services industry strategy to be developed and submitted for cabinet approval by end-June 2016 (proposed new SB).
  - New obligations on International Corporate Service Providers (ICSPs) include: strengthened sanctions for non-compliance (including striking off companies), prohibited bearer shares, requirement for International Business Companies to provide declaration of compliance with ownership and accounting obligations, obligation to maintain share register at ICSP’s office in Seychelles, restructured supervisory authority of the offshore sector with strengthened supervisory powers, increased number of inspections and proportion of inspected IBCs, and application of penalties and strike-off where noncompliance persists.
- The Financial Services Authority completed focused onsite inspections on all ICSPs in April 2015 and is using a risk-based approach to rank ICSPs by risk level; outcome: Seychelles obtained a new rating of “Largely Compliant” by the Global Forum.

### Legislative timetable and sector-specific actions
- New IBC Bill: final industry consultation, expected submission to the National Assembly by December 2015 (SB).
- New International Corporate Service Providers Bill (including provision for register of beneficial ownership data) and Trusts Bill: expected submission to the National Assembly by December 2015 (SB).
- Global Corporations Bill (to replace the Companies (Special) License Act, 2003): undergoing industry consultation and expected to be enacted by April 2016.
- Seychelles Gambling Act: enacted December 2014; FSA to administer and regulate casinos, slot machines and interactive gaming; expected to become operational as of 1st November, 2015 to allow FSA capacity building and smooth transfer of powers from the SLA to the FSA.
- Technical assistance sought from AfDB and ICF to strengthen regulation of insurance and pensions sector; projects to amend the Securities Act, 2007 and Mutual Fund and Hedge Fund Act, 2008 to rectify gaps and align with international standards.

### Trade facilitation, poverty measurement, and real-sector statistics
- Following WTO accession in April, Government set up a National Trade Facilitation Committee to analyze and advise on measures and procedures related to movement of goods and provide inputs to international Trade Facilitation agreements; committee membership spans government and private sector and will develop action plans and work programs for Trade Facilitation reforms.
- Work on establishment of a poverty line and incidence of poverty is ongoing with World Bank TA; two approaches explored (consumption and income) with results expected to be released at the end of 2015.
- Data from the 2013 HBS will be used to compile GDP by expenditure (GDP (E)) with assistance from IMF-AFRITAC South; all data sources and methodology are being reviewed by the IMF AFRITAC advisor on Real Sector statistics.

### Technical Memorandum of Understanding (TMU) — monitoring framework highlights
- The TMU presents definitions, key assumptions, and reporting requirements for quantitative performance criteria and indicative targets for 2015–2016.
- Net international reserves (NIR) of the CBS definition and monitoring:
  - NIR defined as reserve assets of the CBS minus reserve liabilities of the CBS (including liabilities to the IMF); reserve assets include holdings of SDRs, foreign exchange, demand and short-term deposits at foreign banks abroad, liquid fixed-term deposits, and investment-grade securities; excludes project balances and blocked/escrow accounts and certain bank reserves.
  - Semiannual submission and internal audit of NIR data to IMF, reports due no later than two months after each test date.
  - Floor on NIR adjusted for deviations in external non-project loans and non-project cash grants and for deviations in external debt service payments relative to program assumptions.
- Reserve money and reserve money band:
  - Reserve money: currency issued plus deposits held by other depository corporations at the central bank (including foreign currency denominated).
  - Targets are quarterly daily averages surrounded by a symmetrical band of three percent in both directions; the upper bound is the ceiling.
  - Daily reserve money data submitted weekly to the IMF; cumulative quarterly average monitored and reported weekly.
- Program primary balance of the consolidated government (cumulative floor):
  - Defined as total consolidated government and social security fund revenues (excluding privatization and long-term lease income receipts) less all noninterest (primary) expenditures and net lending of the government and social security fund; transfer of assets from the Social Security Fund to the Seychelles Pension Fund planned for 2015 excluded from expenditures for program purposes.

*Source: _cr1615 - 38. CBS remains committed in its endeavor to modernize the country’s national payment system.*

### 9. The ceiling applies to the contracting or guaranteeing of new external liabilities by the public

### 9. The ceiling applies to the contracting or guaranteeing of new external liabilities by the public

### Scope of the ceiling on external liabilities
- Applies to the contracting or guaranteeing of new external liabilities by the public sector, including:
  - the central government,
  - the CBS,
  - all public agencies and parastatals for operations that are not directly linked to commercial activities.
- The ceiling does not apply to:
  - the use of Fund resources,
  - operations related to external debt restructuring,
  - normal import related credits,
  - purchases of treasury securities by nonresidents,
  - borrowing by parastatals in the conduct of normal commercial operations.
- The non-zero ceilings on the contracting or guaranteeing of external debt are to allow for normal public project finance and program support from multilateral institutions exclusively.
- Debt valuation: Debt shall be valued in U.S. dollars at program exchange rates.
- Short-term external debt sub-ceiling:
  - A zero sub-ceiling on short-term external debt applies to the contracting or guaranteeing of short-term external debt by the public sector, with an original maturity of up to and including one year.
- External debt is defined on a residency basis.

### Definition of debt for this performance criterion
- For the purposes of this performance criterion, the definition of debt is set out in Point 8 of the “Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements,” attached to Executive Board Decision No. 6230-(79/140), as amended.
- Debt is understood to mean:
  - a current, non contingent liability,
  - created under a contractual arrangement through the provision of value in the form of assets (including currency) or services,
  - which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future points in time;
  - these payments will discharge the principal and/or interest liabilities incurred under the contract.
- The ceiling on contracting official and officially guaranteed external debt includes all forms of debt, including:
  - loans:
    - advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers credits),
    - temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);
  - suppliers credits:
    - contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided;
  - leases:
    - arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the leasor retains title to the property,
    - the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property;
  - arrears, penalties, and judicially awarded damages:
    - arising from the failure to make payment under a contractual obligation that constitutes debt are debt.
    - Failure to make payment on an obligation that is not considered debt under this definition (e.g. payment on delivery) will not give rise to debt.

### External arrears of the public sector (performance criterion)
- The nonaccumulation of arrears to external creditors will be a continuous performance criterion under the program.
- Definition for program monitoring purposes:
  - External payments arrears are defined as the amount of external debt service due and not paid within the contractually agreed period, subject to any applicable grace period, including contractual and late interest.
  - Arrears resulting from the nonpayment of debt service for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded from this definition.

### Domestic arrears of government (performance criterion)
- The nonaccumulation of budget expenditure arrears will be a performance criterion under the program and will be measured on net basis from the beginning of a calendar year.
- Budget expenditure arrears are defined as the sum of:
  1. any invoice that has been received by a spending agency from a supplier of goods, services, and capital goods delivered and verified, and for which payment has not been made within the contractually agreed period, or in the absence of a grace period, within 30 days;
  2. unpaid wages, pensions, or transfers, pending for longer than 30 days to domestic or foreign residents, irrespective of the currency denomination of the debt;
  3. debt service payment on domestic debt of the government or guaranteed by the government that has not been made within the contractually agreed period.

### Data and information obligations
- The Seychelles authorities (government and CBS) will provide Fund staff with the following data and information according to the schedule provided.

- The CBS will report:
  - Weekly (within one week from the end of the period):
    - Daily reserve money data.
    - Foreign exchange reserves position.
    - A summary table on the foreign exchange market transactions.
    - The results of the liquidity deposit auctions, primary Treasury bill auctions, and secondary auctions.
  - Monthly (within four weeks from the end of the month):
    - The monetary survey in the standardized report form format.
    - The foreign exchange cash flow, actual and updated.
    - Financial soundness indicators.
    - Stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report.

- The Ministry of Finance will report:
  - Monthly (within two weeks from the end of the month):
    - Consolidated government operations on a commitment basis and cash basis in the IMF-supported program format and in GFSM2001 format.
    - The detailed revenues and expenditures of the central government and social security fund.
    - Import and export data from the customs department.
    - Public debt report, reconciled with the cash operations to minimize any statistical discrepancy.
    - Consolidated creditors schedule on domestic expenditure arrears of the government.
  - Quarterly (within one month from the end of the quarter):
    - Accounts of the public nonbank financial institutions.

- Consultation requirement:
  - 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.

*Source: _cr1615 - 9. The ceiling applies to the contracting or guaranteeing of new external liabilities by the public*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1615.pdf_