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

_IMF News, June 30, 2009_

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## Bibliographic details
- Authors: Paul Mathieu, Patrick Imam IMF African Department June
- Published: June 30, 2009

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### Crisis background and triggers
- 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.

### Liberalization and IMF-supported stabilization measures
- 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."

### Debt restructuring and external support
- 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.

### Remaining risks and structural reform agenda
- 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*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [Seychelles and the IMF](https://www.imf.org/external/country/syc/index.htm)
- [IMF backs Seychelles reforms](https://www.imf.org/external/np/sec/pr/2008/pr08282.htmh)
- [IMF staff sees success signs](https://www.imf.org/external/np/sec/pr/2009/pr09174.htm)
- [IMF’s Seychelles staff report](https://www.imf.org/external/pubs/cat/longres.cfm?sk=22873.0)
- [$26 million Stand-By Arrangement](https://www.imf.org/external/np/sec/pr/2008/pr08282.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar063009a_