IMF Survey: Reforms, IMF Support Pull Seychelles Back From the Brink

IMF News, June 30, 2009

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By mid-2008 Seychelles faced an economic crisis driven by a spike in commodity prices and long-standing macroeconomic imbalances.
Historical policy choices:
- From the late 1970s Seychelles pursued a socialist-oriented development strategy that "raised living standards but eroded the work ethic and led to large fiscal deficits."
- Government revenue was constrained by tax concessions to foreign investors in the tourism sector; borrowing on international capital markets financed sustained spending.
Policy responses prior to the crisis were too gradual (2003 through 2007) to correct imbalances.
Exchange rate management and distortions:
- To maintain the exchange rate peg, pervasive foreign exchange restrictions and discretionary tax exemptions were introduced, leading to an active parallel market and endemic foreign exchange shortages.
- Official reserves fell to very low levels and arrears on debt to official bilateral creditors began to accumulate.
In 2007–08 the petroleum and food price shock caused inflation to surge; the crisis peaked in mid-2008 when authorities missed payments on private foreign debt and Standard & Poor’s downgraded Seychelles to selective default.

Timeline of major policy actions:
- Late June 2008: Authorities contacted the IMF seeking support for a public debt restructuring request to the Paris Club.
- July and September 2008: Discussions focused on a coherent set of policy reforms to restore external balance.
- Early November 2008: All exchange restrictions were abolished and the currency floated.
- Mid-November 2008: IMF support approved in the form of a heavily frontloaded two-year $26 million Stand-By Arrangement.
Key policy components implemented:
- Currency float and exchange liberalization.
- Tightened fiscal policy including a major reduction in government staff and introduction of a targeted social safety net.
- Interest rates were freed and a basic monetary policy introduced; interest rates rose sharply with the move to market-based monetary policy and later began easing from their peaks.
- The 2009 budget removed virtually all indirect product subsidies and broadened the tax base.
Exchange rate and inflation outcomes:
- Following the float, the rupee stabilized at a level about 50 percent lower against the US dollar and in spring 2009 appreciated significantly.
- Disinflation is described as "firmly entrenched."

Public external debt restructuring launched in late 2008 aimed to put public debt on a sustainable path by significantly reducing debt service obligations.
Paris Club outcome:
- Mid-April 2009: Paris Club creditors granted exceptional debt treatment under the 2003 Evian approach, reducing the debt stock by 45 percent in nominal terms in two tranches.
- The remainder of Paris Club claims was rescheduled over 18 years with 5 years’ grace.
The report notes that comparable treatment from other creditors is needed to close financing gaps over the medium term and secure public debt sustainability.

The focus is shifting from macro stabilization to structural reforms to ensure sustainable growth and resilience as a small island economy.
Two overriding objectives highlighted:
- Fundamental reform of the tax system to level the playing field and remove distortions and inefficiencies.
- Specific calendar commitments in the text:
- The 2010 budget will introduce a broader and flatter business tax, and a personal income tax.
- A value-added tax will be introduced by 2012.
- Major reinforcement of control over the parastatal sector to address weaknesses that could jeopardize macro stabilization and public finances.
Other risks noted include external factors beyond government control, such as the impact of increased Indian Ocean piracy on tourism.

IMF Survey: Reforms, IMF Support Pull Seychelles Back From the Brink — June 30, 2009