Seychelles Pioneers Novel Financing Instruments and Taps IMF Climate Facility
July 5, 2023
A biodiversity hotspot, the country is pursuing an ambitious plan to finance its climate change agenda
Seychelles is successfully balancing conservation and economic development by tapping innovative financing instruments. The East African island nation relies largely on tourism and fishing for revenue and was the first country to issue a blue bond and to designate its fragile coastal areas for protection in return for a novel deal relieving it of part of its sovereign debt.
It is now also the second African country, after Rwanda, to access the IMF’s Resilience and Sustainability Facility (RSF)—funding aimed at helping countries with limited room in their budget address long-term challenges, such as climate change and pandemic preparedness.
In an interview with Country Focus, Naadir Hassan, Seychelles’ Minister of Finance, National Planning and Trade, and Calixte Ahokpossi, IMF Mission Chief, talk about the RSF and Seychelles’ innovative approach to financing its climate goals.
How is climate change impacting the economy of Seychelles?
Minister Hassan: As a low-lying island nation, Seychelles relies heavily on its coastal zone, making it especially vulnerable to the effects of climate change. About 90 percent of the population and most of the country’s critical infrastructure, such as power stations, food storage facilities and ports, are concentrated in the narrow coastal plateau surrounding the main populated islands of Mahé, Praslin, and La Digue. As sea levels continue to rise, there is an increased risk of coastal erosion, saltwater intrusion into freshwater sources, and damage to buildings and infrastructure.
Climate change also poses a threat to the country's pristine beaches and coral reefs, which are major tourist attractions. Tourism is a crucial sector for the Seychelles economy, contributing to over 20 percent of GDP and a quarter of employment.
Finally, climate change affects fish populations by altering ocean currents, water temperatures, and ecosystems. This disruption can lead to reduced fish stocks, impacting the economy and livelihoods of many people.
We recognize the urgency of addressing climate change and have been actively involved in international climate negotiations. We also have comprehensive adaptation and mitigation strategies in place and a long-term goal of switching to renewable energy to meet our target of zero emissions by 2050. The costs of implementation, however, are large—over US$ 600 million over the next decade, or about 5 percent of GDP per year. We are seeking financial assistance from international organizations to support our efforts.
How will the IMF’s Resilience and Sustainability Facility help?
Minister Hassan: The financial support provides much needed fiscal space to implement policies aimed at building resilience, mitigating climate change impacts, and promoting sustainable development. It should also help to catalyze further private financing for climate projects. The technical assistance and capacity building offered by the IMF will also help to strengthen our institutional and policy frameworks.
Seychelles was the first country to successfully undertake a debt-for-climate swap aimed at marine conservation. What other innovative climate financing options are you tapping?
Minister Hassan: In addition to the climate swap, Seychelles launched the world’s first sovereign blue bond in 2018—a pioneering financial instrument designed to support sustainable marine and fisheries projects. The bond raised US$15 million from international investors and demonstrates the potential for countries to harness capital markets for financing the sustainable use of marine resources.
Going forward, the country remains open to considering other innovative climate financing options such as carbon trading and sustainability bonds.
Climate change is an existential challenge for us—we believe that we must be creative and innovative in tackling it and are trying to tap all the opportunities we can.
What reforms are being proposed under the RSF?
Calixte Ahokpossi: The reform measures can be grouped into three areas. First is public investment and fiscal management. The RSF will ensure that budget and project appraisal procedures are revised to help promote climate-resilient infrastructure investments.
Second, is the financial sector. The RSF aims to improve Seychelles’ access to climate finance and to strengthen the climate resilience of the financial sector by stress testing banks and collecting and disseminating relevant data.
Third, is climate change mitigation and adaptation. The RSF will help to facilitate the country’s transition to renewables, to promote the adoption of climate-sensitive building codes, and to develop and implement disaster risk financing strategies.
How will you monitor progress?
Calixte Ahokpossi: We will follow the standard review process. RSF reviews will take place concurrently with reviews of the Extended Fund Facility (EFF), which aims to strengthen Seychelles’ macroeconomic stability and policy frameworks and boost inclusive growth. The reviews will assess progress on each RSF reform measure against predetermined targets. In addition, the government will provide updates on its broader climate change agenda.