The Republic of Seychelles is a remote, small island-state with middle income country characteristics and an estimated population of 86,335 (2008). Per capita income — around US$10,290 (2008) — is among the highest of the Middle Income Countries (MICs). As with other island states, the size of the economy is small (US$833 million gross domestic product (GDP) in 2008) and is predominantly service-based and highly vulnerable to global shocks and climate change due to its isolation and small size. Seychelles comprises 115 tropical islands spread over 1.374 million square kilometers in the western Indian Ocean, covering 455.3 square kilometers in land area. Habitation is limited to 10 of the islands and around 90 percent of the population of Seychelles live in the largest island, Mahé (60 percent urbanized), where the capital, Victoria, and the main fishing port are located. The limited land space, capital, and human resources restrict Seychelles’ ability to benefit from economies of scale in production and economic diversification. Seychelles relies on imports for almost all raw materials, products, and specialized services. Fisheries and its processing are important activities, both for industrial and artisanal ends.
Economy
Seychelles faces constraints typical of a small island state; including, lack of economic diversification, vulnerability to external shocks, distance from markets, and risks of environmental degradation and weather-related disasters. Seychelles has extensive marine space and accessible coastlines. Tourism is the predominant sector, accounting for 25 percent of GDP, 30 percent of employment and 70 percent of foreign exchange earnings. The fish canning industry, especially tuna processing, contributes 15 percent to GDP, 97 percent of goods exports and employs 17 percent of the workforce.
After suffering a huge balance of payments and debt crisis in 2008, Seychelles has now achieved a two-year successful track record. Macroeconomic stabilization was attained thanks to bold fiscal reforms and fundamental exchange liberalization. Fiscal and monetary policies have been on targets, as evidenced by the low and stable inflation rate, falling interest rates, and positive economic growth performance since mid 2009. The rate of growth for 2010 is estimated at 6.2 percent and projected growth for 2011. The economic sectors leading the recovery are tourism, communication as well as construction activities. Preliminary estimates forecast the economy to grow by 4 percent in 2011 increasing to 5 percent in 2012.
Prudent monetary policy focusing on price stabilisation ensured virtually flat inflation rate in 2010. Inflation rate for the year 2011 is projected to increase to around 5 percent mainly due to continuous increase in imported commodity and oil prices. The current account deficit widened in 2010 increasing from 36.3 percent to 47.1 percent mirroring the temporary increased import bill due to higher demand from tourism projects as well as household consumption. Level of reserves, in terms of months of imports, has increased from 1.8 months in August 2010, to 2.35 months in February 2011.
Fiscal discipline has been maintained. After the strong fiscal adjustment that occurred in 2009 and 2010, budgetary measures for 2011 are expected to generate a 5 percent of GDP primary surplus down from the 9.4 percent of GDP reached in 2010. The Government has pursued a revamping of its tax system, including the 2 percent increase in goods and service tax (GST) on tourism services and the 5 percent increase in income tax rates applied to foreigners. In July 2010, a new Personal Income Tax (PIT) levied on wage income, was also introduced which replaced the Social Security contributions previously levied on employers and employees. There are further taxes reforms plans to modernize the tax system and render it easier to administer. The GST will be replaced by a value added tax system from July 2012.
As of February 2011, public sector debt stood at 82 percent of GDP (out of which 50.2 percent is external), down from the 140 percent in 2008. The Paris Club creditors granted exceptional debt treatment to Seychelles under the 2003 Evian approach to debt relief, reducing the debt stock by 45 percent in nominal terms in 2009 and an additional 22.5 percent of the original debt was cancelled in 2010. Discussions with non-Paris Club official bilaterals and other external commercial creditors, largely banks, also advanced in 2010, placing Seychelles finances on a sustainable footing for the medium- and long term. External debt in arrears as a ratio of GDP stood at 3 percent in as of February 2011 compared to 21.9 percent in 2009.
Performance under the International Monetary Fund (IMF) Extended Fund Facility (EFF) Arrangement is on track, despite some technical delays in government payments to one parastatal. The EFF arrangement was approved in 2009, for SDR19.8 million (about US$30.9 million), of which SDR 9.2 million (about US$14.3 million) has so far been disbursed. SDR 3.52 million (about US$5.5 million) would be available upon completion of the third review in May 2011.
Key Development Challenges
Despite progress made in the macroeconomic conditions, this small, open economy remains vulnerable to a variety of exogenous shocks (piracy acts, increasing food and energy prices, possible financial shocks) which may impact seriously on few concentrated sectors of the economy (tourism and fisheries) and its debt level (decreasing but still 84 percent to GDP).
Raising competitiveness to boost private sector development is limited by the absence of institutions and proper incentives. There are limited backward linkages between foreign investors and local firms and thus the potential for spillovers from the tourism and fishery sectors to the domestic economy remains untapped. The shortage of adequate skills and expertise, exacerbated by complex and lengthy procedures for hiring foreign qualified workers, is also an obstacle to create a diversified economy with a well developed financial services and knowledge industry, as per the vision of the Government.
Effectiveness in the public sector needs to be further improved. Additional reforms are needed to improve the allocative and executive efficiency of public expenditures, including (i) the preparation of budget programs and the use of transparent procurement procedures, and (ii) comprehensive social security and pension reforms that would respond to the needs of the population and vulnerable groups, financially sustainable over time, and with minimal political interferences.
Political Developments
The Republic is a relatively young democracy with seven Presidential elections held since independence from the United Kingdom in 1976. A year after independence, a coup d’état established a one-party socialist state which lasted until December 1991, when President France Albert René of the Seychelles People's Progressive Front announced a shift to multi-party pluralism. President René won the first multiparty presidential elections in 1993, after the adoption of a new constitution. He governed Seychelles until April 2004, when he stepped down and appointed James Alix Michel as the interim President. President Appointee Michel was re-elected in 2006, for a five-year term in a close race with opposition leader Wavel Ramkalawan of the Seychelles National Party. Since his election, President Michel has taken a new approach towards the governance of the country’s political economy. Under his leadership, the government has been pursuing sound policy framework including the promotion of entrepreneurship, attracting foreign direct investment, reduction of poverty and attainment of self-reliance, dismantling inefficient regulatory system, investing in infrastructure, developing the financial service sector as a third economic pillar and increasing competitiveness. Presidential elections are planned for May, 2011.
Social Development
Seychelles’ social indicators are ranked among the highest of the small state Middle Income Countries (MICs). Seychelles ranked 57th (out of 182) in the United Nation’s 2009 Human Development Index rankings (the highest African country ranked) and not surprisingly has met the target for most of the eight Millennium Development Goals (MDGs). Health outcome indicators, including life expectancy, child and maternal mortality rates are better than many other small islands states and are comparable to European levels. Life expectancy is 73 years; infant mortality per 1,000 births is 11 while under-5 mortality per 1000 births is 13.
Education in Seychelles is free at pre-primary, primary, and secondary and vocational levels. Compared to other small islands states at similar levels of development, Seychelles is doing well in terms of enrolments. Primary Net Enrollment Rates is 99 percent while secondary Net Enrollment Rates is 94 percent. While there is small margin of gender imparity in primary enrolments, there seems to be gender parity in terms of secondary enrolments.
The government of Seychelles has been running a generous and broad based welfare state; including provision of housing, universal free public healthcare and education. As the economic reforms got underway, a well targeted (formula based) social safety net was put in place to protect those who were adversely impacted, principally through redundancies in the public and parastatal sector. The scheme has been operational since the beginning of 2009, and is administered by a new Social Welfare Agency. The other core mandate of the Agency has been to mitigate the impact of the macroeconomic reforms by providing human capacity assistance in form of training and incentive-to-work schemes.
Since Seychelles joined the International Bank for Reconstruction and Development (IBRD) in 1980, only three IBRD loans for a total of US$19.7 million have been approved: (i) a US$6.2 million loan approved in fiscal year 1986 to help finance the Mahe East Coast Development Project, principally for port improvement and the rehabilitation of the road network on the main island; and (ii) the US$4.5 million Environment and Transport Project approved on December 22, 1992, together with the Country Assistance Strategy (CAS), for improvement of infrastructure in Praslin Island (the second most important tourism destination in Seychelles), protection of the unique environment of the Aldabra ecosystem (protecting the giant land tortoises) and control of marine pollution in the Port of Victoria, and (iii) two Development Policy Operation (DPL) approved in FY10 and FY11 equivalent to US$9 million each.
Following fruitful engagement based on an Interim Strategy Note (ISN) for the years FY 2010-2011, approved by the Board in 2009, the Bank is currently preparing a four-year Country Partnership Strategy (CPS) in consultation with stakeholder in Seychelles. The Strategy will be presented to the Board in FY 2012. This strategy should be guided by the short-term and medium term challenges of the country as well as the long term vision of the country as outlined in the “Seychelles Strategy 2017”.
The strategy will focus on key analytic work relevant for macroeconomic stabilization, improving competitiveness, diversification of the economy and modernizing the social protection framework. Policy dialogue and analytic work will focus on: (i) developing the Bank’s knowledge base of Seychelles in reform areas key to potential sources of (inclusive) growth and diversification (ii) helping the Government strengthen fiscal governance (budgeting and procurement) and public sector services (safety net, utility pricing); (iii) options to reform the enabling environment to improve competitiveness that would boost private sector development; and (iv) helping to modernize the social protection system by strengthening the social welfare approach, consolidating corporate functions of agencies operating in this sphere, upgrading the management information system and introducing an appeal mechanism. Grant implementation will provide ways to build Government’s knowledge of World Bank processes and procedures and to build internal expertise to improve statistical and analytical capacities.
International Finance Corporation (IFC) is still developing its business model in Seychelles. Seychelles has had modest engagement from IFC in recent years. In 2004, IFC's FIAS reviewed the policy, regulatory and administrative environment for investment in Seychelles and issued a report. In April 2006, IFC approved a US$10 million loan to Nouvobanq, the country's leading bank, but IFC cancelled the credit line because Nouvobanq was unable to comply with the disbursement conditions. Currently, IFC is in the process of finalizing the financing of a hotel, Labriz, pending the completion of the environmental impact study. IFC is also in discussion with the government to potentially privatize two banks.
Multilateral Investment Guarantee Agency (MIGA) is considering underwriting a large guarantee in support of a hotel investment. A MIGA guarantee is envisioned for a large investment in the tourism sector of over US$300 million, but progress will depend on improved global conditions for high-end tourism products. In the meantime, a number of reviews have already taken place, including a review of the macroeconomic situation, the legal environment, the investment climate in the country, and the environmental circumstances of the project.
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