IMF Concludes Seychelles 2024 Consultation, Completes Two Reviews

• The Seychellois economy continued to recover in 2023, though at a slower pace than in 2022. Tourist arrivals continued to rise, and sectors such as IT and construction were strong. However, flooding and an industrial explosion in December 2023 dampened overall growth.
• The government has made considerable progress under the Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF) Arrangements-strengthening fiscal and external buffers, reducing public debt, and enhancing the policy framework to address climate change. The Executive Board's approval of the reviews will allow for a total disbursement of SDR 9.2 million ($12.2 million).
• Long term challenges center on the limits to sustainable tourism-based growth, economic diversification, and Seychelles' high vulnerability to the effects of climate change.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed today the second reviews of Seychelles' economic performance under the 36-month EFF and RSF Arrangements approved on May 31, 2023. The completion of the reviews allows for the authorities to draw the equivalent of SDR 6.1 million (about $8.1 million) under the EFF and SDR 3.1 million (about $4.1 million) under the RSF, bringing total disbursements to SDR 18.3 million (about $24.3 million) and SDR 6.2 million (about $8.2 million) under the EFF and RSF, respectively.

Seychelles' real GDP growth is estimated at 3.2 percent in 2023 compared to 15 percent in 2022. Tourist arrivals rose to about 91 percent of the pre-pandemic high (2019) but spending per tourist was flat. Information technology was the main impetus of non-tourism growth, along with fishing and construction. However, unseasonably heavy rains and flooding combined with an industrial explosion in December contributed to a contraction in manufacturing. Year-on-year headline inflation was -2.7 percent by December, reflecting lower global commodity prices and a broadly stable exchange rate. Gross international reserves increased to $682 million (3.2 months of imports) by end-2023. The government's primary fiscal surplus of 1.7 percent of GDP was higher than expected, due mainly to lower than projected current and capital spending.

Looking ahead, real GDP growth is projected to rise to 3.7 percent in 2024, and annual average inflation is expected to reach 1.2 percent. While the external current account is expected to remain broadly stable, gross foreign exchange reserves are projected to reach $751 million by end-2024, equivalent to 3.4 months of imports. Potential downside risks include Seychelles' high vulnerability to external shocks (such as volatility in commodity and shipping prices), climate-related events, or disruptions to tourism.

The Executive Board also concluded the 2024 Article IV Consultation[1] with Seychelles.

Following the Executive Board's discussion, Mr. Bo Li, Deputy Managing Director, and acting Chair, issued the following statement:

"The Seychellois economy has continued to demonstrate resilience, despite continued volatility in the external environment and the intensification of climate shocks. The performance under the Fund-supported Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF) arrangements has been strong. The authorities are committed to preserving macroeconomic sustainability, building buffers, and supporting inclusive growth and resilience. Strong support from development partners is critical for the successful implementation of the reform agenda.

"Sustained growth-friendly fiscal consolidation through revenue mobilization, prudent spending, and improved public financial management would help to reduce debt vulnerabilities and create fiscal space for priority social and climate-related investment spending. In that context, addressing bottlenecks in public sector hiring is also important. Strengthening the debt management framework and improving the governance, transparency, and monitoring of state-owned enterprises are important measures.

"The monetary stance is appropriate. Going forward, close monitoring of inflationary pressures is important. Measures to strengthen the central bank's balance sheet and enhance the monetary policy framework to improve policy transmission are essential. The authorities' commitment to maintaining a flexible exchange rate regime is welcome, given the susceptibility to external shocks. Close monitoring of non-performing loans is needed to safeguard financial sector stability. The planned upgrades of the regulatory framework for crisis prevention and management will help to ensure the resilience of the financial system. Further strengthening the AML/CFT framework, including by enhancing the transparency of beneficial ownership information is also important.

"The authorities are committed to reforms to boost inclusive growth, particularly aimed at economic diversification, modernizing public service and the education system, and strengthening climate change resilience, in line with the National Development Strategy. Implementation of reform measures under the RSF will help to strengthen the climate-focus of public investment, integrate climate change into the budget process, and facilitate development of a climate financing strategy. Efforts to strengthen climate-related risk management for financial institutions and deepen climate adaptation and mitigation reforms are important."

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the strong performance under the Fund‑supported programs, which has supported the ongoing recovery. While noting the favorable outlook, Directors recognized the challenges related to Seychelles' vulnerability to external and climate‑related shocks. Accordingly, Directors underscored the need to preserve macroeconomic sustainability, build buffers, and support inclusive growth and resilience. They also emphasized the critical role of support from development partners in achieving these objectives.

Directors agreed on the need for sustained growth‑friendly fiscal consolidation to build buffers, while ensuring sufficient space for critical social and climate‑related investment spending. Important measures include strengthening public investment management, addressing bottlenecks in civil service hiring, and bolstering revenues through modernization and streamlining of tax procedures. Recognizing the potential for lower access to concessional financing, Directors encouraged continued efforts to strengthen the debt management framework. Improving the governance, transparency, and monitoring of state‑owned enterprises is also important.

Directors agreed that the recent reduction in the monetary policy rate was appropriate. They encouraged the authorities to closely monitor inflationary pressures and to stand ready to adjust the policy stance, if needed. Directors also underscored the importance of strengthening the central bank's balance sheet and enhancing the monetary policy framework to improve policy transmission. Noting Seychelles' sensitivity to external shocks, Directors encouraged the authorities to continue building external buffers and welcomed their commitment to maintaining a flexible exchange rate regime.

Directors urged continued efforts to safeguard financial sector stability and close monitoring of non‑performing loans, given that they remain well above pre‑pandemic levels. They welcomed the planned upgrades of the regulatory framework for crisis prevention and management, which will help to strengthen the resilience of the financial system. Directors recommended further strengthening the AML/CFT framework, including by enhancing the transparency of beneficial ownership information.

Directors underlined the importance of advancing broader structural reforms focused on economic diversification and modernization of public service and the education system. They highlighted the need to strengthen climate change resilience, in line with the National Development Strategy, and welcomed the progress on implementing climate‑related reforms, supported by the RSF. They nonetheless stressed the importance of sustained reform implementation and strong support from development partners to achieve climate mitigation and adaptation goals.

It is expected that the next Article IV Consultation with Seychelles will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

Seychelles: Selected Economic Indicators (2021-2029)

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .