Seychelles opts for IMF support for its economic reforms By Laura Pillay |08 July 2021

(L to r) Governor Abel, Minister Hassan, Ms Yontcheva and SS Payet during the press conference yesterday (Photo: Louis Toussaint)

The Seychelles authorities and International Monetary Fund (IMF) have reached a staff-level agreement on a USD ($) 107 million arrangement under the Extended Fund Facility (EFF), to help Seychelles undergo economic reforms.

The announcement came yesterday morning in a joint press conference headed by Minister for Finance, Economic Planning and Trade Naadir Hassan, Governor of the Central Bank of Seychelles (CBS) Caroline Abel, Secretary of State for Finance Patrick Payet, and IMF Mission Chief to Seychelles Boriana Yontcheva.

According to Minister Hassan, the domestic economy is in a “critical state” as a result of the Covid-19 pandemic and the drastic decline in travel, tourism and related sectors, necessitating reforms towards a more stable domestic economy and brighter economic future.

“We had also announced that we were in negotiations with IMF for a programme, and why did we need a programme? Firstly, it is because our debt was not sustainable. Secondly, the government was running in a large deficit and we needed to narrow this. And, because we are in a deficit, we also need external funding to close the existing financing gap, and for resources to be available in the domestic market. This means we need to look to external markets for budget support, at an affordable interest rate for us, so, concessionary financing,” Minister Hassan said.

“That is the reason why we needed to go along that line towards an IMF program. Of course, when IMF lends you money, there are certain conditions that they lay out to you and to which you must agree, and the conditions are in line to help bring debt to a sustainable level in the long-term. The IMF endorsement and programme also unlocks other sources of funding for the government, for instance through the African Development Bank (AfDB) and the World Bank,” Minister Hassan stated.

The EFF arrangement, for the duration of 28-months over 2021 and 2023, seeks to support the government’s policy and reform efforts aimed at reinforcing the country’s recovery from the pandemic, preserving macroeconomic stability, and sustaining inclusive long-term growth.

Key policy actions under this programme will focus on reducing debt sustainability risks following the necessary, but large, fiscal expansion implemented in 2020 to protect lives and livelihoods during the pandemic, while promoting economic growth and protecting the environment and most vulnerable segments of the population.

For his part, SS Payet said: “According to our forecasts, without support and the IMF, we will find ourselves in a problem at the end of 2021. With support we will borrow almost R3.5 billion just for this year, and if we do not opt for this support, the government will not have cash to spend. So definitely, the government will not be able to honour its contracts, deliver on services and, will not even be able to afford to pay salaries this year,” SS Payet stated.

SS Payet explained that the programme will see the government prioritising its spending, improving on revenue collection and infrastructure supporting revenue collection, as well as reforms to downsize public service in the long-term. The CBS will be among the institutions undergoing reforms to support the banking system and economy in general.

Another area which could possibly see reforms is retirement benefits and possibly the increase of retirement age, as it is“not sustainable on the budget” according to Minister Hassan. The Seychelles Pension Fund (SPF) last week announced that monthly pay-outs are gradually becoming more than what is collected in contributions.

Ms Yontcheva, who carried out a mission in the country from June 23 to July 6, noted that the staff-level agreement is subject to IMF management approval and Executive Board consideration.

She also highlighted the urgency in reducing fiscal and debt risks, tackling structural issues and strengthening debt and state-owned enterprise (SOE) management.

“Tourism and its related sectors account for about two-thirds of Seychelles’ GDP. As the Covid-19 pandemic affected the world in March 2020, global travel came to a halt, tourism receipts plummeted, and the Seychellois economy was badly hit. Real GDP contracted by about an estimated 13 percent leading to a deterioration in the external position and public finances. The authorities responded with exceptional measures to mitigate the economic fallout on businesses and households. The domestic primary balance swung from a surplus of 2.8 percent in 2019 to a deficit of 16.3 percent in 2020. Public debt burden indicators hit their highest levels in 2020, peaking at about 100 percent of GDP in 2020. Emergency financing from the IMF through the Rapid Financing Instrument (US $31.2 million) helped meet urgent balance of payments needs in 2020.”

“The IMF team welcomes the progress made by the authorities in the fight against the Covid-19 pandemic. As Seychelles led the world in its vaccination effort and reopened its borders on March 25, 2021, tourists have returned, and economic activity has begun to revive. There was a recent flare-up in infections, but cases have peaked and are now going down. GDP is expected to grow by 7.7 percent in 2021.The current account deficit is expected to narrow to 22 percent of GDP in 2021 as tourism receipts resume. The 2021 budget addresses the lingering effects of the pandemic while setting the stage for the resumption of a declining path for public debt, after the surge caused by the economic impact of the pandemic. The 2021 primary deficit is expected to decrease to 9.7 percent to GDP,” Ms Yontcheva noted.

Upon concluding the IMF mission on July 6, Ms Yontcheva issued a statement in which she highlighted the necessity for relevant authorities to uphold governance and transparency commitments, including the completion of an audit of Covid-19 emergency spending and related procurement, and improvements in the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regime.

Reform efforts will be anchored by several key pillars: reducing risks to debt sustainability through an ambitious but realistic fiscal consolidation and liability management operation, tackling structural fiscal issues, including the implementation of a medium-term fiscal or budget framework, and strengthening debt and state-owned enterprise (SOE) management.

Under the EFF, Seychelles will receive $69.4 million in 2021, $18.9 in 2022 and $19 million in 2023.

Laura Pillay