Country Brief

Last Updated September 2009

Political Background

Seychelles is among the smallest, and most indebted countries in the developing world. With an estimated population of 84,600 (2006), Seychelles’ per capita income of US$8,960 (2008) is among the highest of the Middle Income Countries (MICs), yet total public debt stock to GDP ratio is around 140 percent (2008). As with other island states, the size of the economy is small (US$920 million GDP in 2008) and is predominantly service-based and highly vulnerable to global shocks and climate change mostly for its isolation and small size. Seychelles comprises 115 tropical islands spread over 1.374 million km2 in the western Indian Ocean, covering 455.3 km2 in land area. Habitation is limited to 10 of the islands and around 90 percent of the population of Seychelles lives 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.

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 majority opposition leader led by Mr. 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 is to pursue a sound policy framework encompassing encouragement of entrepreneurship, attracting foreign direct investment, removal of poverty and attainment of self-reliance, dismantling of any inefficient regulatory system, investing in new infrastructure, develop the financial service sector as a third economic pillar and increasing competitiveness

Seychelles has social indicators comparable to many Organization for Economic Co-operation and Development (OECD) countries and emerging market economies. A comprehensive welfare system introduced in the mid-1970s aimed to minimize income and gender disparities, subsidize housing for low-income and large families, provided free and universal access to health care and high standard of education system, provided a guaranteed  minimum income to the elderly, the unemployed, and the poor. In addition, it also provided a subsidized transport facility to the elderly and students. As a result, Seychelles’ social indicators are ranked among the highest of the small state Middle Income Countries (MICs). Seychelles ranked 50th in the United Nation’s 2007/08 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). 

Macroeconomic imbalances and an unsustainable debt burden coupled with the external shocks from global commodity prices led to rapidly depleted stocks of foreign exchange and to missed external debt payments in the middle of 2008. The gradual and piecemeal reform effort that begun in 2003 and the 2006 “Seychelles Strategy 2017” did not succeed in reducing vulnerabilities and restoring macroeconomic balance. Fiscal reform momentum eventually proved difficult to maintain during the Presidential and Parliamentary elections in 2006 and 2007. Moreover, the global slowdown and sharp food and fuel price increases of 2007-08 further exacerbated longstanding vulnerabilities. As a result, foreign exchange shortages disrupted manufacturing output (falling 10 percent in 2007), inflation rose, and fiscal and current account imbalances grew. Significant financing gaps surfaced by mid-2008 when large external debt payments came due while external bilateral arrears continued to accumulate. In August 2008, due to low reserves (two weeks of import cover), the government defaulted on the €54.7 million external promissory note payment and subsequently, Seychelles defaulted on a coupon payment due on the US$230 million Eurobond. After the default, Standard & Poors (S&P) lowered the foreign currency sovereign credit ratings to 'SD' (Selective Default).

Seychelles found itself in a balance of payment and debt crisis. Between 2007 and 2008, the value of essential commodity imports increased by an estimated 50 percent and the value of oil imports tripled, while foreign exchange shortages restricted the required imported inputs for local manufacturers. The rupee depreciated between 2006 and October 2007 by 43 percent against the US dollar and even more steeply against the Euro. The deficit of the external current account worsened in 2008 to 32 percent of GDP from 14 percent two years earlier due to lower growth in tourism receipts, the petroleum and food price shock, and the higher costs of transportation services. External public debt reached record levels above US$800 million or around 134 percent of GDP in 2008 (US$310 million are in arrears, with US$162 million owed to Paris Club creditors), from less than half these levels in 2001, and from only US$4 million in 1978. Continuing to run sizeable fiscal deficits on an annual basis also exacerbated balance of payments imbalances, leaving Seychelles vulnerable to debt distress and in the midst of economic crisis. Inflation rose fast, in part as a result of the 2006-07 nominal depreciation of the rupee, up to 63.3 percent (year-on-year) at end-December 2008, compared to virtually zero in 2005-06. Foreign exchange shortages and less buoyant tourism growth due to the global recession led to a sharp decline in real GDP growth in 2008, to near zero percent (0.1 percent) from an average of around 7.5 percent of GDP in 2005-07. The transition to a market based economy and a realignment of the exchange rate, together with an improved business climate for local and foreign investors would provide an opportunity to reverse this decline.

Seychelles subsequently embarked on a comprehensive economic restructuring program with support from the IMF and its multilateral partners. On September 30, 2008, Seychelles announced publicly that it would seek support of its creditors in restructuring its US$800 million external debt in order to clear accumulated arrears and put debt on a sustainable path within the framework of an IMF supported economic and financial reform program. The IMF responded rapidly and on November 14, 2008, the IMF Board discussed and approved the two-year Stand-By Arrangement (SBA), Seychelles’ first ever IMF program for SDR 17.6 million or 200 percent of quota. Official Paris Club creditors have indicated their willingness to consider a restructuring of their claims under the Evian Approach, once the IMF SBA was in place, and discussions with private creditors are ongoing. The government has now officially requested support from the International Monetary Fund (IMF), the World Bank, the African Development Bank (AfDB), and other international financial institutions to support the macroeconomic stabilization program and to help develop a medium-term structural reform program that would place Seychelles on a sustainable path in the medium term.

Fundamental exchange liberalization and public sector reform lie at the heart of the macroeconomic stabilization. In early November 2008, the government abolished all exchange rate restrictions and adopted a managed market-based float exchange rate regime. Following the float, the rupee depreciated by about 60 percent against the U.S. dollar, and has since stabilized at around 16.5 rupees to the US$. Prior to liberalizing the exchange rate, the Central Bank introduced a market-based monetary policy framework directed at establishing price stability through greater emphasis on reserve money management. As part of the budget 2008, the government tackled subsidies to the public enterprise sector, addressed inefficiencies, and cut spending in such areas as wages and salaries, health and education sectors. In October 2008, all indirect product subsidies were eliminated and replaced with a means-tested social safety net to be implemented under a new Welfare Act. On January 1, 2009, the Government also eliminated an electricity rebate to households, raised the public bus fare to operational cost-recovery levels, eliminated the implicit and explicit subsidies for agro industries, hatcheries, and the Seychelles Trading Company, and eliminated the liquefied petroleum gas subsidy by the state oil company.

Performance under the IMF program has been broadly satisfactory so far. The first review of the Stand-By carried out during February 2009 indicated that the program has made a good start, reflecting the authority’s strong commitment and ownership of the reforms, and that early signs of success were encouraging, for example: (i) the new exchange rate market mechanism is functioning adequately; (ii) the parallel exchange market has disappeared; (iii) previously controlled interest rates rose to market-determined levels, helping to stabilize the rupee; (iv) government finances were significantly tightened; and (v) public sector employment has been reduced sharply by some 3,300 employees (17 percent of staff) in support of a rationalization in the public sector wage bill. The quantitative performance criteria and the three structural benchmarks for end-December were met, with the exception of the primary fiscal surplus target (because of reclassification of parastatal accounts below the line) and the temporary accumulation of external arrears (this issue has since been resolved). The three structural benchmarks met were: (i) submission to Parliament of a Public Debt Law; (ii) submission to Parliament of a Public Procurement Law; and (iii) approval of a memorandum of understanding formalizing the operational terms and conditions under which the Central Bank of Seychelles acts as an agent for the government. Preliminary IMF evidence to date suggests that bank portfolios are weathering the impact of higher credit risk. The first review also noted that Seychelles’ public debt remains unsustainable.

World Bank Assistance

The last Board discussion on a Country Assistance Strategy (CAS) for Seychelles was 17 years ago. Seychelles joined the International Bank for Reconstruction and Development (IBRD) in 1980, the International Finance Corporation (IFC) in 1981, and Multilateral Investment Guarantee Agency (MIGA) in 1992. The last CAS covered the FY93-95 period and was anchored around the Government's medium-term development objectives of improving the quality of life of all Seychellois and achieving environmentally sustainable development. Only two IBRD loans for a total of US$10.7 million have been approved since 1980: (i) a US$6.2 million loan approved in FY86 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 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. Both operations were satisfactory during supervision and at exit. Payments arrears led to IBRD loans being put into non-accrual status in August 2002. Seychelles cleared all payment arrears (US$770, 000) in October 2006. Seychelles subsequently prepaid in full its small outstanding balance to IBRD and cleared remaining issues with negative pledges.

Following the clearance of arrears, the World Bank provided support in response to the December 2004 tsunami. On October 18, 2007, during the Annual Meetings, the World Bank signed two grants as administrators of the Japan Social Development Fund. Both grants addressed the Bank’s global response in the aftermath of the deadly December 2004 tsunami and the immediate reconstruction. The Tsunami Emergency Grant for Rehabilitation of Fish Processing Quay (TF090482, US$1.96 million) assisted the fishing authority in the rehabilitation of the fish processing quay in the aftermath of the tsunami, which is helping to restore the livelihood of selected local communities and fishing businesses. The Strengthening the Capacity of the Seychelles Fishing Authority to Undertake Tsunami Ecosystem Impact Assessment Project (TF090421-SEY, US$368,000) is strengthening the Seychelles Fishing Authority to identify ecosystem changes attributable to the tsunami and determine how these changes reflect in the catches by artisanal and industrial fleets.

The World Bank is now preparing an Interim Strategy Note (ISN) to chart a two-year re-engagement program with the Republic of Seychelles. This strategy, the first for the World Bank in 17 years, aims at generating a robust policy dialogue based on “demand driven” and core analytic work and at preparing a focused development policy lending strategy. Bank lending will be informed by this analytic work, while following appropriate due diligence and carefully managing future debt default risks given Seychelles’ past default track record with the World Bank. The report documents the challenges of development, particularly those of: (i) restoring confidence in the rupee after the exchange rate liberalization; (ii) implementing a tight fiscal and monetary policy with good governance; (iii) supporting a debt workout that would put public debt back on a sustainable path; (iv) improving public sector efficiency to sustain social outcomes; (v) replacing the universal subsidies with a well-defined and transparent targeted social safety net; (vi) removing constraints to private sector development and supporting private sector investment; and (vii) managing climate change vulnerabilities. The Bank will focus on a subset of these challenges in developing a flexible medium-to-long term assistance strategy aligned with the evolving reform program and with “Seychelles Strategy 2017”, the Government’s long-term development vision. Judging the success of the strategy will depend on: (a) timeliness of the analytical work and quality at entry of lending (if any); (b) relevance of Bank support and advice to the Government’s development challenges and policy formulation; (c) performance of the Bank’s grant-based portfolio; and (d) Government’s interest in a continued partnership.

The strategy will focus on key analytic work relevant for macroeconomic stabilization and medium-term structural reforms, as well as grant implementation. Policy dialogue and analytic work will focus on: (i) developing the Bank’s knowledge base of Seychelles in reform areas key to macroeconomic stability and areas fundamental to medium term economic management; (ii) helping the Government re-orient and strengthen fiscal governance (budgeting and procurement) and public sector services (safety net, utility pricing); (iii) options to reform the enabling environment for private sector development; and (iv) helping to fine tune a new safety net and to set up poverty monitoring tools to understand and cushion the social impact of the economic transformation. Grant implementation will provide ways to build Government’s knowledge of World Bank processes and procedures while the policy framework is established and the country develops a track record. Mobilizing financial support will depend on a World Bank assessment of the track record of performance under the short term stabilization program and medium term reform program, including progress towards achieving debt sustainability.

International Finance Corporation (IFC).

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 is in the process now of cancelling the credit line because Nouvobanq was unable to comply with the disbursement conditions.

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