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Seychelles Economic Outlook 'Favourable'

by Mary Swire,, Hong Kong

29 December 2010

On December 20, 2010, the International Monetary Fund (IMF) completed a consultation with the Seychelles and concluded that the economic outlook for the country is definitely favorable.

IMF Directors commended the authorities’ stabilization efforts that helped Seychelles overcome the 2008 balance of payments and debt crisis and the recent global recession. Directors noted a remarkable turnaround of economic policies, including foreign exchange market liberalization and floating of the rupee, exceptional fiscal adjustment, and enhanced management of public finances and the central bank. They also noted the important role played by international assistance, which facilitated successful restructuring of external debt and the return of investor confidence.

It was agreed that, with improved economic fundamentals, the medium-term outlook is positive, but risks remain. They observed that upbeat growth projections, a benign inflationary environment, and the strong revenue performance in 2010 offer room for more expansionary fiscal policies in 2011 in support of the country’s development needs, including priority recruitment in the public sector and infrastructure investment. At the same time, uncertainty about the global economy and large external vulnerabilities favor the rebuilding of policy buffers. Directors welcomed further steps to rationalize the tax system, including the launch of a value-added tax in mid-2012, enhanced transparency and accountability of public finances, and the planned reform of the social security system.

The IMF took note of the staff’s assessment that the exchange rate is broadly in line with fundamentals, and welcomed the authorities’ intention to maintain a flexible exchange regime, which has played an important role on the recovery path. However, vigilance is needed against the inflation and exchange rate risks stemming from excess liquidity in banks, which is emerging from the quick reduction of domestic public debt. In this context, Directors welcomed the authorities’ commitment to mop-up liquidity, including by issuing treasury bills for monetary policy purposes, and to maintain inflation in the low single digits.

Directors noted the soundness of the banking system and welcomed improvements in financial regulations. At the same time, they thought that greater competition among banks would facilitate credit growth and intermediation. They encouraged the authorities to reduce state intervention in the financial system, and enhance disclosure requirements and consumer protection.

The authorities were commended for successful implementation and strong ownership of the reform program, and for their commitment to sustain the reform momentum. Directors stressed the need to address capacity bottlenecks, which have delayed two structural benchmarks. They also emphasized the need to maintain an ambitious path toward debt sustainability, and welcomed the measures aimed at enhancing efficiency of public enterprises, underscoring the importance of ensuring financial sustainability of the national airline and Public Utilities Company.

TAGS: environment | tax | investment | economics | value added tax (VAT) | fiscal policy | banking | social security | currency | regulation | inflation | Seychelles

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