What does the IMF support programme mean for Seychelles? |13 July 2021
By Laura Pillay
It was announced last week by the Ministry of Finance, Economic Planning and Trade, the Central Bank of Seychelles (CBS) and International Monetary Fund (IMF) that Seychelles and the IMF have reached a staff-level agreement worth $107 million, to support the country with macro-economic reforms in the medium-term.
In a joint press conference, parties outlined the details of the 28-month programme which will span from this year to 2023 under the Extended Fund Facility (EFF) arrangement, and the conditions the Republic must satisfy in order to benefit, and secure the funding to support government’s policy and reform efforts aimed at reinforcing the country’s recovery from the pandemic, preserving macro-economic stability, and sustaining inclusive long-term growth.
As explained by Finance Minister Naadir Hassan, the state of the domestic economy is critical as a consequence of the Covid-19 pandemic and decline in the tourism industry, thus necessitating an IMF programme. The arrangement is yet to be presented to the IMF Board, but how will these reforms impact on important institutions in the country, and most importantly, how will citizens be affected?
Objectives of the programme
The programme with IMF seeks to reduce debt sustainability risks and address the issues of the country’s debt which towards the end of 2020 reached 100 percent of Gross Domestic Product (GDP), according to Secretary of State Patrick Payet. Approval of the programme will serve to play a catalytic role for budget support from other key development partners, as well as helping to improve Seychelles’ sovereign rating and inspiring confidence in investors.
As per SS Payet, by embarking on the programme, government will borrow SCR3.5 billion to honour the government’s contracts and contracts for services, and to be able to afford staff salaries. In addition, boosting investors’ confidence in the local economy could help to spur economical growth in the medium-term, by creating employment opportunities for school-leavers to be absorbed in full-time employment.
“So, with a situation where you find that your rate is no good and investors don’t have the confidence to keep investing in Seychelles, and businesses, if sovereign ratings are not good, a lot of businesses borrow internationally, and when they are borrowing they will be faced with a higher interest rate and definitely the cost of service which they provide to Seychellois and visitors will be more expensive, and at the end of the day, our competitiveness as compared to other countries will be in danger,” SS Payet noted, highlighting the benefits of the programme to local business organisations.
Key policy actions under the IMF programme will focus on fiscal consolidation and reducing debt sustainability risks following the necessary, but large, fiscal expansion implemented in 2020, whereby the government borrowed and injected money into the domestic economy to protect lives and livelihoods during the pandemic. As such, debt management and structural reforms are critical to fostering a sustainable private sector led growth, towards reducing fiscal and debt vulnerabilities while promoting economic growth and protecting the environment and the most vulnerable segment of the population.
Impact of the programme on government
To achieve the objectives of the programme, there will be a limitation with regard to government spending, to allow for the government to run a budget surplus in the medium-term.
“So, the government will need to prioritise spending. Each year when we are preparing the budget there is a long list of expenses the ministry wants, but we need to prioritise our spending and we will not be able to do all at once. Once there is some growth in the economy, then we can consider the other additional expenses, but in the medium-term we need fiscal discipline in all the ministries. There will be a number of key reforms, and for us, communication will be key during that process.”
“Another thing we talked about is economic transformation. As you know the pandemic affected Seychelles because of our dependence on tourism, and the impact this had on Seychelles. Therefore we need to in the medium-term look at other sectors that we can develop, so we can minimise the impact on the case that we are faced with another pandemic at some point. It will not happen overnight as we need to put in place the right infrastructure, and for this, when we are prioritising spending, especially in relation to capital projects, which expenses will help to bring about that transformation within the economy,” SS Payet stated.
Government also needs to improve on revenue collection and to put in place the relevant infrastructure to support revenue collection. Additionally, a number of legal amendments are necessary, with the assistance and support of the Attorney General’s (AG) office.
It is important to note that Seychelles embarked on macro-economic reforms with the IMF in 2008, and although fiscal primary balance targets have been consistently met in recent years, public debt remains on a firm declining path.
In 2008, Seychelles was in an overall balance deficit, but with the reforms, was able to improve the primary and overall balance. The country’s debt stood at 175 percent then, and had reduced this significantly to around 62 percent in 2019.
“There was contraction in GDP in 2020, almost 13 percent, but when we were preparing the 2021 budget, we were forecasting GDP growth of only 2 percent when the budget was announced. But with more tourism arrivals, we have revised the growth forecast for 2021 to 6.9 percent, and you will see that in the medium term and the transformation of the economy, we will definitely see more growth.”
“Secondly, in relation to the fiscal balance, as you are aware, the amount we put in place to support the private sector and those who were most vulnerable in 2020, which resulted in us having an overall balance of almost 19.5 percent GDP. Based on our debt, we increased our debt from 62 percent in 2019, to 100.8 percent in 2020. Which is why we are working on a primary balance to reduce the deficit which was 16.3 percent in 2020, we are forecasting that we will end 2021 with still a deficit, of 9.7 percent and for 2022 it will still be a deficit, but will reduce to 5 percent. But if you look at the medium-term, that is why we need to initiate reforms in government spending and revenues, so the deficit can reduce to a positive or target balance surplus in the medium-term. This will help to reduce our debt from 100 percent of GDP 2020, and according to our forecast, in 2026, this will be below 70 percent, at 64.5 percent to GDP, so all of these reforms will help us to render our debt more sustainable,” SS Payet added.
With the reforms, government is seeking funding from development partners including the IMF itself, the World Bank, African Development Bank (AfDB), and other bilateral budget support. The majority of the funds are required this year, at a total of $210.4 million, $69.4 million under the EFF, $53 million from the World Bank, $20 million from the AfDB and $68 million in other bilateral budget support.
The World Bank will in 2022 and 2023 disburse $30 million, while the World Bank will make available $32 million in 2022, and $40 million in 2023. In 2022, Seychelles will benefit from $18.9 under the EFF, and a further $19 million in 2023.
Key policies to be addressed as part of the programme
First and foremost, government will implement policies aimed at reducing the debt level to below 70- percent in 2026, which means that expenditure and additional debt needs to remain at a minimum, to reduce the risks and pressure on debt sustainability.
As such, policies will be geared towards limiting transfers to state-owned enterprises, and improving the effectiveness of public expenditures.
“One of the risks we have identified is Air Seychelles, as based on our forecast, if we do not initiate this transformation with regard to Air Seychelles, we will have a risk to the budget of around 5%-6% of GDP, and this in terms of money is around 1.2 billion, so we need to ensure that with any restructuring, we reduce on this position as we do not have any additional budgets in the medium-term to offer that much support,” SS Payet noted.
Furthermore, policy reforms are focused on improving the business environment to fuel growth in the private sector. As for policies with the aim of consolidating expenditure, SS Payet detailed reforms within public administration to lower the wages and salaries rate from 12.6 percent of GDP where it currently stands, to the forecasted 11 percent of GDP, in time for the 2023 budget process. This will see a results-based management framework introduced, towards ensuring that public administration “can do more with less” while still providing results. The policy will also have a retraining component on account that there will be no additional recruitments in public service for some years, and to sustain other sectors in which there is growth.
In addition to reforms within the public service, government intends to conduct a public expenditure review in the two largest ministries, namely, Health and Education, with the aim of determining how to improve efficacy in these two ministries.
As questions have been raised with regard to retirement benefit sustainability, government is expected to initiate reforms to increase the retirement age to 65 years, subject to approval of the cabinet.
Other key policies to be addressed under the programme relate to revenue administration, which will see a number of proposals tabled to cabinet over the next three years, starting off with a proposal to revise business tax laws to streamline exemptions, towards the end of September 2021, to be followed by a proposal to revise the Value-Added Tax (VAT) framework, also to streamline exemptions as from September 2022. Towards the end of September 2023, it is expected that government would have completed the customs automation project, all of which are aimed at strengthening revenue mobilisation.
“We will review whether the VAT regime is best for a small-island state. We have already started discussions with the private sector for reforms to the business tax. The exemptions which exist, especially in the tourism sector, so accelerated depreciation which means they are actually getting 145 percent, and we expect to reduce it to 100 percent. In the medium-term we expect that large hotels pay their business tax as many of them are presently not doing so,” SS Payet added.
As part of the conditions agreed upon with the IMF, efforts must be channelled into ensuring that all necessary legislation is to be tabled before cabinet to ensure Seychelles is fully compliant to be removed on the EU list of non-cooperative jurisdictions and upgrade the country’s rating on OECD partially compliant exchange of information rating by the end of September 2021.
Reforms at CBS
As is the case with major economic reforms, the CBS has an instrumental role in ensuring the success of the reforms.
“We have some work to do under the programme, although this was already in our work plan, we need to ensure that our monetary policy stance works and responds to the economic needs at any point in time. We also need to ensure the foreign exchange market works well, and another component is financial stability. We know our financial institutions ensure that money is circulated in the economy, so when the reforms are ongoing, financial resources are directed towards where it should. So we need to ensure that our institutions are strong and resilient, even if the economic environment is difficult,” Governor Caroline Abel stated.
Therefore, reforms at CBS will entail modernising the financial system and enhancing the regulatory and supervisory framework with the aim of deepening the financial sector to achieve inclusive and sustainable growth, while preserving financial stability.
CBS is also committed towards ensuring a stable and well-capitalised banking system that can support the recovery by effectively monitoring and supervising the health of the financial system, and taking timely enforcement actions where necessary.
Other reforms at the Central Bank include the implementation of an enhanced credit information system (CIS) and the supporting legal framework to extend the coverage of credit information, the further development of the National Payment System, and taking on the responsibility for Anti-Money Laundering/ Combating the Financing of Terrorism supervision for certain institutions, in line with the new mandate assigned by the Anti-Money Laundering Act of 2020.