The Executive Board of the International Monetary Fund (IMF) yesterday approved a three year SDR 11.445 million (about US$ 17.6 million, or 105 percent of Seychelles' quota) arrangement under the Extended Fund Facility (EFF) for the Republic of Seychelles to support the authorities' economic program.
The approval enables the immediate disbursement of SDR 1.635 million (about US$ 2.5 million), while the remaining amount will be phased over the duration of the program, subject to semi-annual program reviews.
The authorities' EFF-supported program aims to reduce the high debt levels, improve external buffers and sustainability in the face of emergent balance of payments pressures, and strengthen the economy through sustained and inclusive growth.
Following the Executive Board discussion on Seychelles, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, said:
"The authorities have undertaken comprehensive reforms since the 2008 crisis that have supported a strong recovery and improvements in fiscal and external sustainability. Growth was strong in 2013, boosted by increased tourism arrivals.
Inflation stabilized at a low level. The current account deficit fell sharply, allowing the central bank to rebuild its reserves.
However, debt levels and the current account deficit remain high, while some persistent structural weaknesses are holding back growth potential and economic resilience.
"The authorities' economic program supported by the EFF-arrangement appropriately focuses on reducing vulnerabilities and containing fiscal risks while fostering sustained and inclusive growth.
The authorities' target of reducing the debt-to-GDP ratio to below 50 percent by 2018 remains an anchor for stability, while allowing the necessary investments in human and physical capital to support growth.
The new monetary policy framework builds on recent progress in mopping up structural excess liquidity, and exchange rate flexibility and moderate reserve accumulation continue to facilitate adjustment to external shocks.
"The structural reform agenda is ambitious and targeted. The adoption of a Medium-Term National Development Strategy, the associated medium-term fiscal framework, and a financial sector development strategy, together constitute critical reforms needed to promote growth.
Reforms also aim to strengthen the management and transparency of public finances. Building on the progress already made, it is important to enhance the oversight of state-owned enterprises to contain fiscal risks and avoid excessive expansion from crowding out the private sector."
Recent economic developments
In the five years following the 2008 crisis, the Seychellois authorities have successfully enacted a comprehensive IMF-supported program of reforms - floating the exchange rate, eliminating exchange restrictions, turning fiscal deficits into surpluses, and halving the debt burden with the assistance of external debt relief.
Structural reforms sought to foster long-term growth, including through simplifying the tax system and promoting the private sector.
These reforms have borne fruit in the form of a strong and sustained recovery: real Gross Domestic Product (GDP) growth accelerated to around 3.5 percent in 2013, boosted by strong tourist arrivals. Inflation fell to 2.2 percent in March 2014.
The external position improved thanks to a boom in tourism and tuna exports, and Foreign Direct Investment (FDI) flows remain strong.
Reserve coverage reached an estimated 3.8 months of imports at end-2013, up from 3.0 months at end-2012.
The 2013 fiscal outturn was largely in line with the authorities' ambitious targets, although business and income tax revenues were somewhat weaker than expected.
Nevertheless, important risks and challenges remain. At 65 percent of GDP, Seychelles' public debt remains high, as does the current account deficit (18.5 percent of GDP), --although the latter has been largely funded by FDI.
Moreover, the balance of payments faces headwinds as debt service and investment income payments rise.
Sustained GDP growth will require adequate infrastructure investment and an active reform agenda to enhance productivity.
At the same time, fiscal policy faces pressures, as revenue and grants have been falling as a proportion of GDP.
The program is designed to strengthen macroeconomic stability, reduce vulnerabilities, and support wide-ranging structural reforms aimed at laying the foundation for sustained and inclusive growth.
The macroeconomic framework is anchored on the authorities' goal of reducing the debt-to-GDP ratio below 50 percent by 2018.
This requires continued fiscal primary surpluses of 3 to 4 percent of GDP over the medium term, a fiscal path which strikes a balance between the pace of debt reduction and addressing vital social and investment needs.
Revenue measures under the program will focus on improving tax compliance and administration, while enhancing the quality of fiscal spending will be a core priority of the program.
The monetary policy framework aims to maintain low and stable inflation. In advance of the new program, the excess liquidity problem has been largely addressed through the issuance of medium-term Treasury bonds.
The adoption of average reserve money targeting will further strengthen the policy framework, supporting the move towards a more forward-looking framework.
While reserve coverage has recently reached the desirable range, maintaining it will require continued reserve accumulation in the face of balance-of-payments pressures. Exchange rate flexibility remains key to ensuring external stability over the medium term.
Sustaining growth and tackling risks to stability will require the implementation of a new generation of ambitious structural reforms, including: the adoption of a Medium-Term National Development Strategy, a medium-term fiscal framework, and a financial sector development strategy, as well as measures to combat international tax evasion.
A new framework for Public Private Partnerships will support infrastructure investment and promote the role of the private sector.
Establishing a registry of state assets, including land, will help protect public finances and support more efficient land use. The oversight of state owned enterprises will also be progressively strengthened, building on past progress, to contain fiscal risks and focus them on their core missions.
1Includes on lending to the parastatals for investment purposes.
2 Includes debt issued by the Ministry of Finance for monetary purposes.