Public Information Notice: IMF Concludes Article IV Consultation with Seychelles

December 26, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On November 3, 2000, the Executive Board concluded the Article IV consultation with Seychelles.1


Seychelles has achieved one of the highest standards of living in Africa. In recent years, however, the sustainability of these achievements has been threatened by growing macroeconomic imbalances and structural problems that have made the economy less efficient and competitive. Real GDP has stagnated in the past two years, inflation is rising, and serious balance of payments problems have emerged, causing a near depletion of net international reserves to less than two weeks of imports, and the accumulation of some US$50 - US$60 million in external payments arrears.

The main macroeconomic imbalance underlying the current economic difficulties is the large fiscal deficit, which averaged 14 percent of GDP during 1996-99, and resulted in the growth of government debt from 133 percent of GDP in 1996 to 168 percent of GDP in 1999. Although, in the past two years, the government has taken important steps to correct its fiscal problems, including by reducing transfers to parastatals, tightening eligibility requirements for social welfare benefits, and strengthening expenditure management, the gains have been offset by growth in capital spending, which, as a percent of GDP, far exceeds that of countries of similar size, wealth, and economic orientation.

The decline in net saving by the government during 1996-99 has been reflected in strong import demand, worsening export performance, and a widening external current account deficit. With insufficient autonomous capital inflows to finance these higher deficits, and the authorities' policy of keeping the official exchange rate of the rupee unchanged, trade and foreign exchange restrictions have had to been tightened in order to ration foreign exchange. The illegal parallel foreign exchange market that has emerged (with an exchange rate premium of up to 100 percent) now accounts for the financing of a large proportion of all imports of goods and services in Seychelles.

Seychelles faces serious structural impediments to economic growth, many of which arise from the extensive intervention of the government. These impediments include controlled prices, a foreign exchange allocation system, a restrictive import licensing system, and intervention in manufacturing and distribution by the parastatals, often with monopoly power or privileges not granted to the private sector. As a result, the latter has remained reluctant to invest, and economic efficiency has been hurt. In the past two years, there has been some progress in correcting structural problems, including the reduction of the list of goods for which the Seychelles Marketing Board (SMB) has exclusive importation rights, the introduction of competition in the telecommunications industry, and the repeal of the Economic Development Act, which contained clauses that could have encouraged money laundering activity. However, more economic distortions have been introduced through the tightening of trade and exchange restrictions.

Executive Board Assessment

Executive Directors expressed concern that the economic conditions in Seychelles have steadily deteriorated since the last Article IV consultation in July, 1998, because of growing macroeconomic imbalances and persistent structural problems. Real GDP has declined, the public debt has continued to grow at an unsustainable rate, inflation has picked up, and official foreign exchange reserves have declined.

Against this backdrop, Directors urged the authorities to implement a credible and comprehensive package of reforms that should lead to a sustained recovery of the economy. In particular, emphasis should be placed on improving public finances, realigning the exchange rate, tightening monetary policy, and removing administrative controls.

Directors considered the authorities' goal of reducing the budget deficit significantly in 2001 to be ambitious but achievable, provided that strong and determined measures were taken. They advised the authorities to target a surplus in recurrent fiscal operations, with capital spending limited to an amount that could be covered by the recurrent surplus and foreign financing, including grants. On recurrent spending, the priority should be to achieve budgetary savings through wage restraint combined with the rationalization in the civil service, social services, and the welfare system.

Directors agreed that economic efficiency could be considerably improved by reforming the tax system. They called on the authorities to reduce the tax burden on businesses, especially the high and progressive social security tax rates, and to broaden the tax base by curtailing the use of ad hoc and statutory tax exemptions and concessions. Directors also encouraged the authorities to reform the indirect tax system through the introduction of a sales tax and a liberalized and simplified tariff structure.

Directors were concerned that the official exchange rate of the Seychelles rupee was out of line with current economic fundamentals and stressed the need to correct the misalignment by unifying the official and parallel-market exchange rates. While some Directors saw an urgent need to move to a market-based exchange rate without delay, others felt that a more gradual but determined approach might be appropriate to restore equilibrium. In setting the course to correct the exchange rate misalignment, which would need to take account of the special circumstances in the tourist industry, Directors encouraged the authorities to consider not only the steps that needed to be taken in the period immediately ahead, but also the choice of an appropriate exchange rate regime for the medium term. The correction of the exchange rate misalignment would facilitate a phased removal of existing foreign trade and exchange restrictions, the normalization of relations with creditors, and the rebuilding of reserves.

In any event, Directors emphasized the need for sufficiently tight financial policies to pave the way for, and support action on, the exchange rate. In addition to fiscal restraint, these measures would include raising nominal interest rates and placing limits on the overall expansion of banking system credit. Directors were of the view that, after some time, the authorities should move progressively toward a more market-based approach to monetary management.

On structural reforms, Directors urged the authorities to push forward with the policy of economic liberalization aimed at stimulating private sector activity and improving economic efficiency. They stressed that crucial steps were needed to promote greater competition in domestic production and marketing and to pave the way for removing the controls on prices and profit margins, eliminating the administrative allocation of foreign exchange, and privatizing the major state enterprises.

The authorities have undertaken a number of initiatives to strengthen the operations and regulation of the offshore financial sector. Directors welcomed the recent repeal of the Economic Development Act, and noted the subsequent endorsement given to the country by the Financial Action Task Force.

Directors expressed concern that deficiencies in the national income accounts and price statistics limited their usefulness for Fund surveillance, economic analysis, and policy formulation. Discrepancies between the fiscal and monetary accounts also needed to be reconciled. While supporting the authorities' request for further Fund technical assistance to improve the quality of national accounts and price statistics, Directors, however, urged the authorities to step up efforts in strengthening the staffing and administrative capacity of Seychelles's statistics office in line with the recommendations of recent Fund technical assistance missions.

Seychelles: Selected Economic Indicators

  1996 1997 1998 1999 2000 1/

Domestic economy  
Real GDP 4.7 5.3 3.4 -3.0 1.2
Retail price index (period averages) 1.1 0.7 2.6 6.2 6.7
  (In millions of U.S. dollars, unless otherwise indicated)
External economy          
Export, f.o.b. 46 73.3 90.6 111.0 128.7
Imports, f.o.b. 244.9 288.2 342.6 368.1 350.8
Current account balance -65.9 -63.3 -101.6 -104.8 -61.5
(In percent of GDP) -12.1 -10.7 -17.0 -17.1 -9.8
Capital and financial account balance 45.6 62.8 82.4 99.6 33.2
Official reserves (end of period) 18.1 23.6 21.4 29.7 15.7
(In weeks of prospective imports) 2.6 2.9 2.4 3.5 1.9
Debt service 45.7 48.7 55.6 63.7 60.3
(In percent of exports of goods and nonfactor service          
Change in real effective exchange rate (in percent) 2/ -3.1 -1.1 -0.7 8.6 -3.0
  (In percent of GDP, unless otherwise indicated)
Financial variables          
Total revenues and grants 43.1 43.9 45.8 48.3 41.5
Total expenditure and net lending 52.4 52.9 69.6 61.0 57.3
Overall deficit, cash basis -9.2 -9.0 -23.7 -12.7 -15.7
Change in broad money (in percent) 12.7 29.3 16.4 19.1 12.0
Interest rate (six-month deposits; weighted average) 9.2 9.1 8.3 6.4 ...

Sources: Seychelles authorities; and IMF staff estimates.

1/ projections
2/ A negative sign signifies a depreciation.    

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100