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AFRICAN DEVELOPMENT BANK
SEYCHELLES
INCLUSIVE PRIVATE SECTOR DEVELOPMENT AND COMPETITIVENESS PROGRAMME- PHASE II (IPSDCP-II)
APPRAISAL REPORT
OSGE DEPARTMENT
September 2014
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TABLE OF CONTENTS
CURRENCY EQUIVALENTS ............................................................................................................................................... i FISCAL YEAR ........................................................................................................................................................................ i ACRONYMS AND ABBREVIATIONS ............................................................................................................................... ii PROGRAMME INFORMATION ......................................................................................................................................... iv LOAN INFORMATION ....................................................................................................................................................... iv PROGRAMME EXECUTIVE SUMMARY ......................................................................................................................... vi PBO RESULTS FRAMEWORK ......................................................................................................................................... viii
I THE PROPOSAL ........................................................................................................................................................... 1
II COUNTRY CONTEXT ................................................................................................................................................. 2 2.1 Political Developments and Governance Context ................................................................................................. 2 2.2 Recent Economic Developments, Macroeconomic and Fiscal & Monetary Analysis .......................................... 3 2.3 Competitiveness of the Economy .......................................................................................................................... 4 2.4 Public Financial Management ............................................................................................................................... 5 2.5 Inclusive Growth, Poverty and Social Context ...................................................................................................... 6
III GOVERNMENT DEVELOPMENT PROGRAMME............................................................................................... 6 3.1 Government overall Development Strategy and Medium-Term Reform Priorities ............................................... 6 3.2 Challenges to National Development Programme................................................................................................. 7 3.3 Consultation and Participation Processes .............................................................................................................. 7
IV BANK SUPPORT TO GOVERNMENT STRATEGY ............................................................................................. 8 4.1 Link with Bank Strategy ........................................................................................................................................ 8 4.2 Meeting the Eligibility Criteria.............................................................................................................................. 8 4.3 Collaboration and Coordination with other Partners ............................................................................................. 9 4.4 Relationship with Other Bank Operations ............................................................................................................. 9 4.5 Analytical Works Underpinning .......................................................................................................................... 10
V THE PROPOSED PROGRAMME .............................................................................................................................. 11 5.1 Programme Goal and Purpose ............................................................................................................................. 11 5.2 Programme Components ..................................................................................................................................... 11 5.3 Policy Dialogue ................................................................................................................................................... 14 5.4 Application of Good Practice Principles on Conditionality ................................................................................ 15 5.5 Financing Needs and Arrangements .................................................................................................................... 15 5.6 Application of Bank Group Policy on Non-Concessional Debt Accumulation ................................................... 16
VI OPERATION IMPLEMENTATION ...................................................................................................................... 16 6.1 Beneficiaries of the Programme .......................................................................................................................... 16 6.2 Impact on Gender, Poor and Vulnerable Groups ................................................................................................. 16 6.3 Impact on Environment and Climate Change ...................................................................................................... 16 6.4 Impact on other Areas ......................................................................................................................................... 17 6.5 Implementation, Monitoring and Evaluation ....................................................................................................... 17
VII LEGAL DOCUMENTATION AND AUTHORITY ............................................................................................... 18 7.1 Legal Documentation .......................................................................................................................................... 18 7.2 Conditions Associated with the Bank’s Intervention .......................................................................................... 18 7.3 Compliance with Bank Group Policies................................................................................................................ 18
VIII RISKS MANAGEMENT ........................................................................................................................................ 18
IX RECOMMENDATION ........................................................................................................................................... 19
ANNEXES
i
CURRENCY EQUIVALENTS
As of April 2015
1UA = 18.63 SCR
1UA = 1.38 USD
1 USD = 13.50 SCR
FISCAL YEAR
January 1st- December 31
st
ii
ACRONYMS AND ABBREVIATIONS
ADB/AfDB: African Development Bank
AFRITAC: African Regional Technical
Assistance Centre
CBS: Central Bank of Seychelles
CEDAW: Committee on the Elimination
of Discrimination against
Women
COMESA: Common Market for Eastern
and Southern Africa
CPI: Corruption Perception Index
CPIA: Country Policy and Institutional
Assessment
CSI: Core Sector Indicator
CSP: Country Strategy Paper
DB: Doing Business
DBR: Doing Business Report
DBS: Development Bank of
Seychelles
DP: Development Partners
DPL: Development Policy Loan
DTF: Distance to Frontier
EFF: Extended Fund Facility
EGRP: Economic and Governance
Reforms Programme
EITI: Extractive Industries
Transparency Initiative
ESIA: Environmental and Social
Impact Assessment
EU: European Union
FAPA: Fund for Private Sector
Assistance
FDI: Foreign Direct Investment
FLP: Financial Literacy Programme
FPAC: Finance and Public Accounts
Committee
FRA: Fiduciary Risk Assessment
FSA: Financial Services Authority
FSC: Financial Service Commission
FSDIP: Financial Sector Development
Implementation Plan
FTC: Fair Trading Commission
FY: Fiscal Year
GAC: Government Audit Committee
GCI: Global Competitiveness Index
GCR: Global Competitiveness Report
GDP: Gross Domestic Product
GoS: Government of Seychelles
HRDS: Human Resource Development
Strategy
IMF: International Monetary Fund
IOC: Indian Ocean Commission
IOSCO: International Organisation of
Securities Commissions
IPR: Implementation Progress
Report
IPSAS: International Public Sector
Accounting Standards
IPSDCP: Inclusive Private Sector
Development and
Competitiveness Programme
LIBOR: London Interbank Offered Rate
MIC: Middle Income Country
MIC-TAF: Middle Income Country
Technical Assistance Fund
MIEDBI: Ministry for Investment,
Entrepreneurship Development
and Business Innovation
M&E: Monitoring and Evaluation
MFTBE: Ministry of Finance, Trade and
the Blue Economy
MOU: Memorandum of Understanding
MOV: Means of Verification
MTEF: Medium Term Expenditure
Framework
MTFF: Medium Term Fiscal
Framework
N/A: Not applicable
NA: National Assembly
NBFI: Non-Banking Financial Sector
NBS: National Bureau of Statistics
NDS: National Development Strategy
NTC: National Tender Committee
OECD: Organisation for Economic
Cooperation and Development
PAR: Projects at Risk
PBO: Programme Based Operation
PCR: Project/Programme Completion
Report
PEFA: Public Expenditure Financial
Assessment
PFM: Public Financial Management
POU: Procurement Oversight Unit
PPBB: Programme Performance Based
Budgeting
PRSP: Poverty Reduction Strategy
Paper
PSD: Private Sector Development
PUC: Public Utilities Company
iii
RISP: Regional Integration Strategy
Paper
RMC: Regional Member Country
SADC: Southern African Development
Community
SBFA: Small Business Financing
Agency
SCR: Seychelles Rupees
SEnPA: Small Enterprise Promotion
Agency
SME: Small and Medium Enterprise
SOE: State Owned Enterprise
SRC: Seychelles Revenue
Commission
TA: Technical Assistance
TI: Transparency International
UA: Unit of Account
UNDP: United Nations Development
Programme
USD: United States of America
Dollar
VAT: Value Added Tax
WEF: World Economic Forum
iv
PROGRAMME INFORMATION
INSTRUMENT General Budget Support
PBO DESIGN TYPE Single Tranche Operation
LOAN INFORMATION
Client’s information
BORROWER: Republic of Seychelles
EXECUTING AGENCY: Ministry of Finance, Trade and the Blue Economy
Financing plan for the fiscal year 2015 (General Budget Support)
Source Amount (USD) Instrument
ADB
10 million
Loan
World Bank 17 million Development
Policy Loans
ADB key financing information
Loan currency
United States Dollar (USD)
Loan Type Enhanced Variable Spread Loan
Interest Rate Base Rate +Funding Cost Margin+ Lending Margin
Base Rate Floating Base Rate based on 6-month USD LIBOR
with a free option to fix the Base Rate
Funding Cost Margin The six months adjusted average of the difference
between: (i) the refinancing rate of the Bank as to the
borrowings linked to 6- month LIBOR and allocated
to all its floating interest loans denominated in USD
and (ii) 6-month LIBOR ending on 30 June and on
31 December. This spread shall apply to the 6-
month LIBOR which resets on 1 February and on 1
August. The Funding Cost Margin shall be
determined twice per year on 1 January for the
semester ending on 31 December and on 1 July for
the semester ending on 30 June.
Lending Margin 60 basis points (0.6%)
Commitment Fee A graduated commitment fee ranging from 25 to 75
basis points applicable to undisbursed amounts of the
Loan within the timeframe negotiated per the Loan
disbursement schedule
Tenor Up to 20 years inclusive of Grace Period
Grace Period Up to 5 years
v
Timeframe - Main stepping stones (expected)
Concept Note approval
March, 2015
Programme approval September, 2015
Effectiveness September, 2015
Disbursement December, 2015
Completion December, 2015
vi
PROGRAMME EXECUTIVE SUMMARY
Programme overview
The Inclusive Private Sector Development and Competitiveness Programme- Phase II (IPSDCP-II),
is designed as a single-tranche general budget support (GBS) operation for the fiscal year 2015,
financed by an ADB loan of USD 10 million. It ensures continuity of the previous Programme
Based Operation (PBO), IPSDCP (2013-2014) and complementarity with the programs of other
development partners. The programme targets outputs aimed towards improving the investment
climate, more specifically an improved legal framework and systems for business facilitation and
investment promotion; initiatives to increase effective demand for Micro, Small and Medium
Enterprise (MSME) credit; and an improved regulatory framework for the non-banking financial
sector. The programme also targets outputs aimed at enhancing public sector efficiency, including
the establishment of a regulatory framework for public-private partnerships and improved
transparency and participation in procurement and budget processes.
Programme
outcomes The expected outcomes are 1) Improved conditions for investment and business development,
measured through improvements in the financial market development index of the global
competitiveness report and getting credit index of the doing business report, as well as an increase in
the number of women-led businesses provided with credit through the Government MSME scheme;
and 2) enhanced public sector efficiency measured through improved CPIA scores. The direct
beneficiaries of the PBO will be the Seychellois private sector actors, and in particular MSMEs
(with specific emphasis on those owned/operated by women and youth), as well as key GoS
agencies and departments. The entire Seychellois population will benefit indirectly through the
programme’s expected impact on inclusive growth and job creation.
Alignment with Bank
priorities
IPSDCP-II is aligned with the Bank’s strategic priorities for the country as outlined in the Country
Strategy Paper (CSP) and the Mid Term Review of the CSP, which has one main pillar of
strengthening private sector development and competitiveness. It is also consistent with Governance
Strategic Framework and Action Plan (GAP II), Financial Sector Development Strategy and the
Private Sector Development Strategy. The programme contributes towards the Bank’s dual strategic
objectives of supporting inclusive and green growth. This includes through providing opportunities
for domestic MSMEs to flourish and grow, and thereby creating local jobs. Furthermore, by
promoting public-private sector- partnerships (PPPs), the programme is establishing the conditions
to attract outside investment and innovation, paving the way for developments in green growth
areas such as renewable energy generation and waste management, in which there has been a
growing interest for PPPs.
Needs Assessment
and Justification
The Government of Seychelles (GoS) is currently implementing second-generation reforms aimed at
promoting sustainable and inclusive private-sector-led growth. The goal in the medium term is to
diversify the economy, with particular attention to the development of the financial services sector
given the potential for its contribution to the economy. Substantial progress has been made towards
regulatory simplification, financial sector development and the strengthening of public financial
management (PFM), which was supported by the AfDB under IPSDCP. Maintaining the momentum
and completing the reform agenda will be critical towards achieving the sought results. While
Seychelles is targeting a fiscal surplus of 3.8% of GDP in 2015, as part of its plans to reduce public
debt to 50% of GDP by 2018, it has a current account deficit of 20.5% of GDP. The IPSDCP-II will
target these reform areas, while giving the GoS the required foreign currency liquidity for key
infrastructure investments and improving the quality of public service delivery.
Harmonisation There is a strong partnership between the GoS and multilateral development partners, with good
coordination between IMF, World Bank and the AfDB. The Department of External Finance within
the Ministry of Finance, Trade and the Blue Economy (MFTBE), is responsible for overall donor
coordination. A mechanism was established to ensure regular monitoring (bi-weekly) of the IMF
Extended Fund Facility (EFF), which will be extended to cover the AfDB Programme Based
operation and the World Bank Development policy loan. There is strong alignment and
complementarity of assistance and programme focus. The joint appraisal mission with the IMF and
the World Bank was proposed and managed by the MFTBE, in order to further enhance
coordination and facilitate joint dialogue.
Bank’s Added Value
The Bank’s added value arises from (a) its experience in the delivery of budget support to GoS and
continuous engagement in policy dialogue (through the 2013 IPSDCP and 2009 Economic
Governance and Reforms Programme) as well as similar programmes in other small-island and
middle-income economies (e.g. Cape Verde, Mauritius); (b) a holistic view of economic
competitiveness comprising both private sector development (PSD) enabling environment and
public sector efficiency; and (c) the provision of complementary technical assistance (TA) and
capacity building in the areas of MSME development, public-private partnerships, financial sector
development, infrastructure planning, and human resource development, which will contribute to the
overall success of the programme.
vii
Contributions to
Gender Equality and
women’s
empowerment.
By supporting MSME development policies and increased access to finance, the IPSDCP-II will
contribute to women’s economic empowerment in Seychelles, as there is anecdotal evidence that a
significant proportion of Seychellois MSMEs are owned/operated by women (e.g., women
accounted for 50% of the Small Business Financing Agency’s (SBFA) new loans to MSMEs in
2014). Furthermore in supporting the development of a financial literary programme, both men and
women stand to gain from increased knowledge and understanding of financial products and
affordable financing opportunities, as well as financial protection, which will also contribute to their
economic empowerment. Finally in ensuring easier access to budgetary information, the operation
will also enable greater participation of civil society organisations, including women’s groups in
budget discussions and accountability mechanisms.
Policy dialogue and
linked technical
assistance
The policy dialogue will focus on the reforms and policies proposed in the programme. Policy
dialogue will be led by the relevant sector experts, and by the country economist for Seychelles.
Guidance and expertise will be provided as part of the dialogue towards ensuring that the
programme is properly managed and implemented so that the targeted results are met. The dialogue
will be further bolstered by the complementary TA that will be provided especially in the areas of
MSME development, PPPs and financial sector development. This will also serve to sustain
dialogue beyond the operation timeframe and provide bases for future PBO engagement.
viii
PBO RESULTS FRAMEWORK
Country and project name: Seychelles: Inclusive Private Sector Development and Competitiveness Programme-IPSDCP-II
Purpose of the programme: Enhance competitiveness in Seychelles, through improving the investment climate and public sector efficiency.
RESULTS CHAIN PERFORMANCE INDICATORS
MOV RISKS/MITIGATIO
N MEASURES Indicator (including CSI*) Baseline Target
IMP
AC
T Impact: Enhanced
competitiveness for
inclusive and
sustainable economic
development
Global Competitiveness Index 3.9 2014-2015
(92/144 rank)
Increase to 4.1 by
2015-2016 WEF, NBS,
MFTBE
Reform slowdown
and Government
capacity: Mitigating
measures: selective
focus on a few critical
reforms- provision of
complementary TA.
Macroeconomic
stability – external
shocks: Mitigating
measures: Implementation of
NDS, Maintaining
reform agenda aimed
at building economic
competitiveness and
resilience;
implementation of
IMF EFF program;
continued budget
support from WB and
AfD, and continued
strengthening of the
institutional capacity
will enhance the
country’s capacity to
manage adverse
external shocks
Fiduciary risk is
moderate:
Mitigating
measures: Continued
implementation of
PFM reforms- new
PFM Action Plan
2015-2017;
Debt Sustainability:
Mitigating measures:
Fiscal discipline; DP
finance
Disasters: Mitigating
measures: GoS is
implementing a
master plan for
Disaster Risk
Management. The
World Bank has
provided a Disaster
Risk Management
DPL with catastrophe
deferred drawdown.
Real GDP growth 2.8% in 2014 3.7% by 2016
Employment in private sector and
average wage
33,370 (2014)/
9052 SCR month 10% increase by 2016
OU
TC
OM
E
Outcome A.1
Improved conditions
for investment and
business development
Financial Market Development Index
(Global Competitiveness sub-factor
index)
3.6 (2014)
Positive change of
+0.5 (2015-2016)
GCR 2016
Getting credit (CSI) and # businesses
provided with SBFA loan/ % headed
by women
DTF 10% (2014,
2015); 671(2014)
Positive change of 10
percent by 2016; 30%
by 2015
DBR 2016,
SBFA Annual
report
Outcome A.2
Enhanced Public sector
efficiency
CPIA-B- Public Administration and
CPIA-D Governance scores
CPIA-B 3.36 and
CPIA-D 3.66
(2013)
CPIA-B 3.5 and CPIA-
D 3.75 (2015)
ADB CPIA
OU
PU
TS
A.1 Improving the investment climate
A.1.1 Improved legal
framework and systems
for business facilitation
and investment
promotion.
1.1.1 IT Land registration system
1.1.2 E-tax filing and payment system
for business tax returns
1.1.3 Competition bill
IT system not in
full use
E-tax system in
development
Competition policy
approved in 2014
IT system in use by
end 2015;
E-tax filing and
payment system
operational;
Cabinet approval by
end 2015
MFTBE,
MIEDBI,
SRC website;
Fair Trade
Commission,
cabinet
minutes, IPR
A.1.2 Increasing
effective demand for
MSME credit
1.2.1 MSME Development Strategy
(Gender mainstreamed)
1.2.2 Financial Literacy Programme
(FLP) (Gender mainstreamed)
None, but both
prioritized in
FSDIP 2014
Cabinet approval of
MSME strategy by end
2015
FLP developed in 2015
MFTBE,
cabinet
minutes, IPRs
A.1.3 Improved
regulatory framework
for non-banking
financial sector
1.3.1 FSA strategic plan
1.3.2 IOSCO affiliation
1.3.3 International Business
Companies bill
None; IOSCO non-
compliance;
Outdated
Companies bill
1972
Board approval by end
2015; IOSCO
affiliation membership
by end 2015; Cabinet
approval of IBC bill
MFTBE,
CBS, FSA,
Cabinet
minutes, IPR
A.2 Enhancing public sector efficiency
A.2.1 Improved
framework for private
sector participation in
public investments
2.1.1 PPP policy framework
Procurement
regulations cover
PPP, but no policy
in place.
PPP policy approved
by cabinet in 2015
MTFBE,
cabinet
minutes, IPR
A.2.2 Improved
transparency and
participation in
procurement and
budget processes.
2.2.1 First annual report on
performance in procurement
2.2.2 Publication of budget reports on
Government website in timely manner
Required by
procurement
regulations of
2014, but not yet
implemented.
MFTBE website
non functional
Approved by cabinet
and posted on POU
website by end 2015
Budget for 2015 and
2016 posted on
website in 2015
MTFBE
website,
PEFA 2015,
IPR
AC
TIV
ITY
Input: Funding US$ 10 million- ADB
1
REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE BANK GROUP
TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF
SEYCHELLES FOR THE INCLUSIVE PRIVATE SECTOR DEVELOPMENT AND
COMPETITIVENESS PROGRAMME- PHASE II
I. THE PROPOSAL
1.1 Management submits the following report and recommendation for a proposed loan of USD 10
million to finance the Seychelles Inclusive Private Sector Development and Competitiveness
Programme (IPSDCP) phase II. The IPSDCP-II is designed as a single-tranche general budget support
(GBS) operation for the fiscal year 2015. It ensures continuity of the previous PBO- IPSDCP (2013-
2014) and complementarity with the programmes of other development partners. The programme was
appraised in March 2015 in response to a request for assistance from the Government of Seychelles
(GoS) in October 2014.
1.2 The IPSDCP-II is fully aligned with the Seychelles 2017 Strategy, the GoS main policy
document guiding reforms since 2007, the Medium-Term Fiscal Framework (MTFF) as well as the
National Development Strategy (NDS) (2015-2019). The IPSDCP-II is also aligned with the strategic
priorities of the Bank’s Mid-Term Review of the Seychelles Country Strategy Paper (CSP) 2011-
2015, as well as the Bank’s broader strategic framework encapsulated in the Ten-Year Strategy, the
Private Sector Development (PSD) Strategy, the Financial Sector Development Strategy, the
Governance Strategic Framework and Action Plan (GAP-II) 2014-2018 and the Gender Strategy
2014-2018.
1.3 GoS is currently implementing second-generation reforms aimed at promoting sustainable and
inclusive private-sector-led growth. The goal in the medium term is to diversify the economy, which
is currently highly dependent upon tourism and fisheries, with particular attention to the development
of the financial services sector, given the potential for its contribution towards achieving this goal.
Substantial progress has been made towards regulatory simplification for businesses, financial sector
development and the strengthening of public financial management (PFM), which was supported by
the AfDB under IPSDCP. Maintaining the momentum and completing the reform agenda initiated
under IPSDCP is critical to achieving the expected results. The IPSDCP-II will aim to target these
reform areas, while providing GoS with more fiscal space to undertake the required investments in
infrastructure and to improve the quality of public service delivery.
1.4 The goal of the proposed programme is to contribute to achieving inclusive and sustained
economic growth through enhanced competitiveness of the Seychellois economy. This will be
supported by two complementary policy objectives namely: 1) improving the investment climate and
2) enhancing public sector efficiency. In supporting the investment climate, focus is given to the
business enabling environment, MSME development, financial inclusion and financial sector
development, in view of their potential to contribute to inclusive growth through job creation and
financial security, as well as economic diversification. Furthering public sector efficiency, through an
improved platform for private sector participation in public service delivery, will contribute towards
maintaining a tight fiscal regime, while ensuring the required investments in public infrastructure.
1.5 Expected outcomes include: a) positive change, for the country, in the financial market
development index of the Global Competitiveness Report by 2016 (from 3.6 in 2014 to 4.1); b)
increased ease of accessing credit measured through improvement of the getting credit index of the
doing business report for 2016 (positive change of 10 %) and increased number of men and women
beneficiaries of the GoS credit scheme; and c) improvements in CPIA scores relating to public sector
efficiency. The direct beneficiaries of the Programme will be the Seychellois private sector actors, and
in particular MSMEs (with specific emphasis on those owned/operated by women and youth), as well
as GoS agencies and departments. The entire Seychellois population will benefit indirectly through
the programme’s expected impact on inclusive growth and job creation.
2
1.6 The Programme has been designed to ensure full complementarity with a parallel
Development Policy Loan (DPL) (2015-2016) from the World Bank, currently the only other DP
providing budget support, as well as the IMF Extended Credit Facility (EFF) programme. Informal
coordination is already strong and the GoS has established a common steering and monitoring and
evaluation framework for the IMF and budget support operations. Programme implementation will be
further supported through the provision of complementary technical assistance (TA) and capacity
building in the areas of financial sector development, MSME development, PPPs and infrastructure
planning, and human resource development, with funding from the Fund for African Private Sector
Assistance (FAPA) and the Middle Income Countries (MIC) Trust Fund.
II. COUNTRY CONTEXT
2.1 Political Developments and Governance Context
2.1.1. Seychelles is characterized by its political stability and strong governance framework.
Multi-party elections have been held regularly and in recent years significant efforts have been made
towards reinforcing good governance systems. During the last presidential elections held in May
2011, the incumbent president, Mr. J. Michel of the ‘Seychelles People’s Party’, was elected for
another five-year term with 55% of votes. Meanwhile, the opposition remains weak, with only one
member in the National Assembly. This is largely due to the opposition’s boycott of the previous
parliamentary elections in September 2011, in protest at the Government's failure to revise electoral
laws relating to the financing of election campaigns. A new electoral law was enacted in 2014 and the
next Presidential elections are scheduled for 2016.
2.1.2. Seychelles is among the top performers on Governance scores across the continent. The country
ranks 5th
in the 2014 Mo Ibrahim Index of African Governance (after Mauritius, South Africa, Cape
Verde and Botswana) with particularly high scores in areas such as human development, participation
and human rights. The country also ranked a high43rd
position out of 175 countries on the Corruption
Perceptions Index (CPI) of TI in 2014, representing the 3rd
place in sub-Saharan Africa after Botswana
and Cape Verde. The Bank’s Country Policy and Institutional Assessment (CPIA) ratings for
Seychelles have continued to increase since 2009. The overall score has risen from 3.29 in 2009 to
3.86 in 2013. The areas of the CPIA where there remains room for further improvement include the
sub-scores of the Governance CPIA index, ‘transparency, accountability and corruption’ and ‘quality
of the public administration’, as well as “property rights and rule-based governance’. Specific actions
required to improve these scores include enhancing the external scrutiny of the Government’s
financial statements; improving the registry of land/real estate and implementing measures to achieve
further efficiencies in public administration.
2.1.3. The government continues its efforts to increase public sector efficiency by improving
transparency and governance, including public financial management. Since 2008, the
government has implemented a series of reforms to improve fiscal policy and increase public sector
efficiency. The reforms also address public sector governance issues, including: (i) modernizing the
public sector by ensuring institutions are operating in accordance with their policies or service
delivery mandates; (ii) rolling back the frontiers of government in commercial activities by reducing
the role of State Owned Enterprises (SOEs) in the economy, improving their management and
oversight, and aligning wages with the private sector; and (iii) redefining the accountability structure
of the different institutions in charge of service delivery.
2.1.4. This effort also includes increasing the efficiency, and improving the governance of the social
protection system and the fisheries and petroleum sectors. In this regard, GoS is committed to the
Extractive Industries Transparency Initiative. There has also been important progress, and political
commitment, towards meeting international transparency and regulatory requirements in the financial
sector- including the Organisation for Economic Cooperation and Development (OECD) Global
Forum targets on tax transparency and exchange of information, and International Organisation of
Securities Commissions (IOSCO) membership.
3
These commitments complement other measures put in place by GoS to ensure good Governance of
the financial sector, such as its Anti-Money Laundering Act (2008) and the establishment of the
Financial Investigations and Asset Recovery Unit.
2.1.5. The Constitution provides for the right to information and the Government of Seychelles
(GoS) is in dialogue with civil society on the development of a freedom of information act. GoS
engages with civil society through various mechanisms, including the High Level Committee
established in 2014, chaired by the President, meeting monthly on specific issues of public interest
and concern. Civil society is also represented on the newly-established Government Audit Committee
(GAC) (2014). Meanwhile, the opportunity for the legislature and the public to engage on the budget
is constrained by limited access to budget information in a timely manner. The Bank’s discussions
with CSOs and parliamentarians during programme preparation confirmed the need for further
improvements in this regard.
2.2 Recent Economic Developments, Macroeconomic and Fiscal & Monetary Analysis
2.2.1 Recent economic performance has broadly been better than expected; and the medium
term outlook remains positive. Overall GDP growth in 2014 was better than initially forecasted.
Real GDP rebounded to 3.3% (up from the earlier revised estimate of 2.8%), though significantly
lower than the 6% growth registered in 2013. This was driven by better than projected performance of
major sectors of the economy during the last quarter of the year. This includes strong performance in
Tourism activities, which contribute almost 30% of the GDP, as well as manufacturing, ‘Water and
Electricity’ and ‘Information and Communication Technology (ICT)’ sectors. Credit expansion (by
about 25%) to the private sector also boosted growth in the ‘Financial sector and Insurance’ activities.
However, the expansion of private sector credit, and an increase in personal earnings owing to an
almost 20% rise in public sector wages, led to an increase in demand for imports, putting pressure on
the balance of payments and exchange rate depreciation.
2.2.2 Fiscal performance has also been strong. The country achieved higher than expected fiscal
performance in 2014, amounting to a surplus in the primary balance of 4.6% of GDP (up from 4.43%
of GDP forecasted and programmed for by the authorities). The major contributing factor was strong
revenue collection (particularly tax revenue). Total revenue collection, excluding grants, in 2014 was
32.4% of GDP (compared with a target of 31.6% forecasted), despite a challenging international
economic environment. Strong tax revenue performance (at 29.2% of GDP, up from a 28.1% forecast)
is well above prevailing levels in the country’s comparators, particularly those in Africa. The higher
amount of taxes collected, particularly value added, trade and excise taxes, resulted from the increased
demand for imported goods triggered by rise in public sector wages, and credit expansion scheme for
the private sector. At the same time, primary current and capital expenditures remained in line with
the GoS targets for the year (at 24.7% of GDP and 5.6% of GDP respectively). However, the higher
demand for imported goods put pressure on inflation; in response the Central Bank of Seychelles
effectively used monetary policy to lower the inflationary pressure. The success of the monetary
policy was also complemented by the low international oil prices. The overall macroeconomic
situation therefore is stable.
2.2.3 The outlook for the medium term is also positive. Tourism and fisheries will continue to be
the main engines of growth in Seychelles, together with the booming ICT sector. Real GDP growth is
projected at 3.5% in 2015 (up from the previous forecast of 3%) and at 3.7% in 2016 (see table 1 and
Appendix 4). Fiscal performance is also projected to remain strong, as revenue collection is expected
to increase further in 2015, while current expenditure is forecasted to decline slightly. However, the
economy remains highly vulnerable to external shocks largely due to lack of diversification of
economic activities. As the main sectors of the economy remain tourism and fisheries, a reduction in
tourism activities, due to continued economic crisis in the Eurozone, or a quick reversal of the trend in
international oil prices, would adversely impact the balance of payments, growth rates and inflation
outcomes.
4
2.2.4 The Central Bank of Seychelles implemented tight monetary policy in 2014 to dampen the
inflationary pressure, and will continue to do so through 2015. Annual average inflation rates are
projected to marginally rise to 4.3% in 2015, before coming down to 2.9% in 2016 (compared with an
average of 1.4% in 2014). Inflation will continue to be partially offset by a combination of tighter
monetary policy and the decline in international oil prices, which are expected to remain low over the
next two years. The decline in oil prices will also positively affect the county’s balance of payment as
the current account deficit (including official transfers) in 2015 is projected to decline to 15% of GDP
from 21% in 2014.
2.2.5 The government will continue fiscal consolidation in line with its debt stock target of 50% of
GDP by 2018. Preliminary results from the IMF’s Debt Sustainability Analysis (DSA), undertaken in
March 2015, indicates that public debt remains high at around 65 percent of GDP at end-2014, close
to the 70 percent indicative threshold of the DSA framework. However, this is a significant
achievement considering that Seychelles defaulted on its public debt in 2008, when it had reached
150% of GDP. The authorities are targeting for a modest increase in net international foreign
exchange reserves to SCR 453 million (or 4.6 months of imports) in 2015. They also plan to use
prudential debt policy aimed at reducing public debt/GDP ratio by about 3% to 62% of GDP from its
level in 2014. The economy will therefore continue to be resilient and a stable macroeconomic
condition is expected to be sustained.
Table 1: Selected Macroeconomic Indicators
2.2.6 Macroeconomic policies are therefore, overall, consistent with inclusive growth and poverty
reduction objectives, but caution should be exercised by addressing some of the challenges related to
lack of diversification and the potential macroeconomic effects of a rise in wages and credit
expansion. According to IMF data, a SCR 427 million financing gap is estimated for 2015, out of
which SCR 353 million is expected to be covered through programme/budget support financing. The
proposed ADB operation, at SCR 137 million, covers a significant portion of the programme/budget
support loan financing (see section 5.5).
2.3 Competitiveness of the Economy
2.3.1. Strengthening economic competitiveness and diversification is key to building resilience
and promoting inclusive growth. The Seychelles has several important economic constraints, which
cumulatively hinder competitiveness. Its small population of 90.000 contributes to labour shortages
and its consequent high cost. Furthermore, the fixed cost per capita of providing public infrastructure
and services becomes very high. The country’s remoteness from major markets contributes to high
freight, hence export cost. The small domestic market combined with high export cost reduces the
scope for mass production, economies of scale and cost reduction. In addition, the standard of goods
and services produced are often below internationally acceptable levels and further reduce the
possibility for export. International rankings of competitiveness and business climate still show
considerable room for improvement. The Global Competitiveness Report 2014-2015 edition ranked
2012 2013 2016
Prel Est. 1st Rev Proj 1st Rev Proj Proj.
Real GDP Growth 6.60 6.00 2.80 3.30 3.00 3.50 3.70
CPI (end-of-period) 5.8 3.4 4.8 0.5 2.5 4.9 3.1
Broad money -0.6 23.7 12 17.5 5.3 5.7 …
Current account balance including official transfer -19.90 -11.50 -22.50 -21.00 -20.50 -15.20 -14.60
Total public debt (External) 45.1 36.9 36.7 35.5 38.5 38.6 36.5
Total public debt (Domestic) 32.0 27.2 28.2 29.9 23.8 25.1 23.0
Gross official reserves (Months of imports) 2.8 3.7 4.1 4.6 4.0 4.4 4.2
Primary balance 5.7 4.6 4.3 4.6 3.7 3.8 3.8
Overall balance, commitment basis * 2.2 0 2.1 2.4 0.3 0.3 1.2
Overall balance, cash basis (after grants) 2.2 0.3 2.1 2.0 0.3 0.3 1.2
* Only interest payments on foreign debt are on a commitment basis. Other expenditures are recorded when checks are issued or transfers initiated.
Source:IMF
2014 2015
(Percentage change, unless otherwise indicated)
(Percent of GDP, unless otherwise indicated)
5
Seychelles 92nd
out of 144 countries, with a slight deterioration of its score from 2013, placing it
below the regional average. Other than market size, the country’s position is weakest in financial
market development (93rd
) and business innovation (94th
). Seychelles ranked 85th out of 189
economies in the 2015 Doing Business Report, which is only a marginal improvement from 2014,
when it ranked 87th
. While this still places Seychelles among the top ten for the African continent, it
remains below regional Island State comparators, such as Mauritius and Cape Verde.
2.3.2. Private sector development in the country is still constrained by three main factors: (a)
ineffective government regulation (despite reforms in recent years); (b) limited competition in various
economic sectors, further impeded by high production costs (labour, utilities, rental), and the heavy
presence of State Owned Enterprises in areas such as retail and construction; and (c) limited access to
finance, in particular by domestic MSMEs (Seychelles is ranked 171st out of 175 in the “Getting
Credit” indicator of the 2015 Doing Business Report; and access to finance is the most significant
obstacle for businesses surveyed under the Global Competitiveness Report). Further intervention and
reform is therefore necessary to improve the competitiveness of the Seychelles economy and exploit
the potential of the domestic private sector especially the MSMEs. The MSMES are estimated to
comprise about 5,000-7,000 firms, most of them operating in the services sector, as well as cottage
industries, small-scale agribusiness and fisheries. When tourism is excluded, MSMEs account for
approximately 90 percent of total employment in the private sector.
2.3.3. Other relevant constraints to private sector development include:
Skills gap. While educational levels are high (with a 95% literacy rate), Seychelles suffers from
a chronic skills gap, as a result of labour shortages, high labour costs, limited capacity in
tertiary and specialized education and certain attitudes towards work ethics among the youth
(poor work ethics is the second problem for doing business cited by local entrepreneurs
according to the GCR 2014-2015 survey).
Certain infrastructure gaps, including port facilities, energy, and water management. Access to
electricity is a problem as it takes an average of 147 days to get a connection for commercial
users, according to the 2013 DBR (compared to an African average of 133), reportedly due to
the limited availability of meters for commercial users, given existing stocks of the Public
Utilities Corporation (PUC). Inadequate water supply (it is estimated that the PUC can only
meet about 60% of the total demand for potable water, due to increased housing construction
and pipe leakages) and expensive energy supply call for additional investment (including
through PPP frameworks).
2.3.4. In addition to the above constraints to private sector development, the country has not fully
realized the potential for diversification and value chain exploitation of its two main industries:
tourism and fisheries. As both industries currently face external challenges, the need for
diversification and value-added activities becomes even more important. In both cases, the
development of linkages to local MSMEs is key to increasing domestic value-added and intra-sector
diversification. The Government is also looking to expand economic opportunities through
diversifying and developing new sectors of the economy- such as the financial sector, which has been
identified by GoS as the third pillar of economic development after tourism and fisheries. Its
development is a key element in the strategies planned by the Seychelles Government to ensure that
the financial sector maximises its contribution to the economic and social development of the country.
2.4 Public Financial Management
2.4.1 The GoS has continued to demonstrate considerable commitment and ability to progress in the
area of Public Financial Management. The new PFM Act 2012, and the PFM action plan 2012-2014,
ensured a continuation of the comprehensive reforms introduced in 2008 as part GoS’s ambitious
reform agenda to bring debt under control, and responded to the weaknesses identified by the 2011
PEFA. Major improvements to cash management and budget credibility were made with the
introduction of a Treasury Single Account, and the establishment of a forecasting and analysis bureau
in 2010. The monitoring of SOEs was overhauled with the 2010 passage of the Public Enterprise
6
Monitoring and Control Act, which mandated comprehensive reporting to the Public Enterprise
Monitoring Division, established in 2013. Considerable progress has also been made in improving the
accounting framework; financial statements have since 2013 been prepared in accordance with the
cash-based IPSAS methodology. The 2012 PFM Act introduced Performance Based Budgeting, which
is being piloted in the Ministries of Education and Natural Resources in 2015. MFTBE developed its
Public Sector Investment Plan in 2013, with a view to better plan, prioritise and monitor capital
investments over the medium term. Progress has also been made in the areas of procurement (new
regulations adopted in 2014) and external scrutiny (establishment of the Government Audit
Committee) - many of these areas had low scores (C or D) in the last PEFA 2011 (see PEFA summary
in technical annex 3).
2.4.2. Despite this progress, more remains to be done to deliver an efficient and effective public
sector. Adoption of a full medium-term budget framework will require moving towards a more
comprehensive, top-down budget process, wherein rolling multi-year expenditure plans are prepared,
and indicative ceilings issued to ministries at the beginning of the annual budget process to guide their
budget submissions. Budget credibility must also be improved by reducing forecasting error: while
revenue projections are much improved and generally accurate, expenditures, and in particular
investment planning and spending, remain an area of concern. Finally there is room for further
improvements in the areas of internal controls, transparency of procurement and external scrutiny (see
updated fiduciary risk assessment in technical annex 2).
2.5 Inclusive Growth, Poverty and Social Context
2.5.1. Social development is high. Seychelles has the third highest ranking on the Human
Development Index in Africa at 0.756, placing the country in the category of high human
development. GDP per capita reached 14,219 USD in 2013, which is the highest on the continent.
Meanwhile, widening income inequalities, demonstrated by high Gini-coefficient, point to some
underlying structural problems. A comprehensive welfare and social protection system is in place,
ensuring global access to health and education services. Seychelles has achieved many of the MDG
sub-targets, in particular with regards to education, gender equality, reducing child and maternal
mortality and environmental sustainability. GoS social development expenditures accounted for 36%
of total recurrent expenditures during 2011-2013. Key challenges include improving spending
efficiency and quality of social services. Gender equality is relatively high (see section 6.21),
meanwhile, gender disparities are visible among vulnerable groups, with a higher number of women
than men receiving welfare support from the Government, particularly single young mothers. The
Government, with the assistance of the Bank, is developing a Social Impact Assessment Framework,
which will enhance socially responsible development planning, and improve the overall assessment
framework for investments and public service delivery.
2.5.2. Unemployment in Seychelles is under 2%, and 80% of the Seychellois youth (15-24 years),
representing about 16% of the total population, are either regular wage earners or in education or
training. The key challenges in the labour market relate to Seychellois selectivity in the jobs they
accept, skills demand/supply mismatch, and inadequate skills level that affects incomes earned. There
is Government commitment to provide full employment and develop skills in line with the changing
needs of the private sector, furthering employment generation as well as inclusiveness in a gender-
balanced manner.
III. GOVERNMENT DEVELOPMENT PROGRAMME
3.1 Government overall Development Strategy and Medium-Term Reform Priorities
3.1.1. Seychelles’ long term development priorities are articulated in the Seychelles 2017
Strategy, which was launched in 2007 with the following strategic priorities: (i) sound
macroeconomic management; (ii) enhancing competitiveness and good governance; (iii) fostering
equity; and (iv) improving infrastructure, land management and biodiversity. The main objective of
the Strategy was to double GDP per capita by 2017, from a level of USD 8,722 in 2007. GoS is well
7
on track to deliver this objective. In the process, considerable progress has been made towards
achieving macroeconomic stabilization, improving the business enabling environment and governance
and financial management framework, reforming and strengthening social safety nets, and investing in
vital infrastructure while preserving the country’s rich natural endowment.
3.1.2. A new medium-term National Development Strategy (NDS) has been prepared following
the thrust of the Seychelles 2017 Strategy. The NDS, launched in 2015, aims to support the
priorities of the 2017 Strategy through strategic actions defined within four key areas of results: 1)
Governance; 2) Economic development; 3) Social development and 4) Environment and Energy.
Under governance, specific actions relate to improving public sector efficiency, while under economic
development emphasis is given to the need for economic diversification, development of small and
medium businesses and the financial sector. The NDS also forms the basis for performance based
budgeting and is closely aligned to the medium term fiscal framework.
3.1.3. Considerable attention is given to the financial sector, as a potential new pillar of the economy.
The Government has prepared a Financial Sector Development Implementation Plan (FSDIP), which
focuses on access to finance, financial markets, financial infrastructure, banks and non-banking
financial institutions’ (NBFI) supervision and regulation. These have been identified by GoS as
priority areas for reform considering their potential high impact on individuals, businesses and
government agencies and on the overall efficiency and security of the financial sector. Similarly, the
Government intends to finalise its MSME development strategy and plan by the end of 2015, which
will also further refine priority areas of intervention.
3.1.4. The Budget Speech 2015 reflects the priority areas of reform as outlined in the NDS, and re-
affirms the Government’s commitment to “Staying the Course towards Sustainability”. The objective
is to consolidate efforts towards macro-economic stability through sustainable expenditure levels. The
Government’s commitment and ability to implement reforms was demonstrated in the wake of the
2008 debt crisis, when it successfully implemented an expansive set of reforms aimed at macro-
economic stabilization and fiscal consolidation with support from the IMF, the World Bank, the EU,
the ADB and other development partners. The country has outperformed virtually all quantitative and
structural benchmarks agreed with the IMF in the context of a Stand-By Arrangement and
subsequently an Extended Fund Facility (EFF).
3.2 Challenges to National Development Programme
3.2.1 While there is strong political will to implement reforms to achieve the objectives the NDS, a
daunting challenge relates to the insufficient capacity of the various Government bodies and agencies,
exacerbated by the small national labour force and lack of relevant skills. This situation is further
complicated by the fiscal consolidation target, which has led Government to institute a recruitment
freeze on civil servants for the past few years. This has been a main reason for delays and
impediments to the implementation of reforms in the past. The Government is trying to address these
challenges and has established new training programmes in public administration, and has also opened
up for the recruitments of expatriates. The Bank is currently assisting with the development of a
National human resources development strategy (HRDS), which will support this process. Additional
support is also being requested from development partners, in the form of technical assistance.
Finally, another critical challenge to the delivery of the NDS and associated Public Sector Investment
Plan is taking on additional long-term finance, in a context where Government needs to meet its debt
targets, and ensure external debt repayments, while concurrently addressing the current account
deficit.
3.3 Consultation and Participation Processes
3.3.1 The NDS was elaborated using a participatory approach in order to benefit from the
contribution of all stakeholders and reinforce relevance and ownership of the strategy. Institutional
mechanisms put in place for the elaboration of the NDS included the following: 1) A Secretariat and
Coordination Unit, assumed by the External Finance Management Division of MFTBE to manage the
process on a day-to-day basis; 2) Four Technical Working Groups composed of civil servants and
8
officials from various ministries and institutions, one per strategic focus area, to review existing
documentation, collect and analyse data, propose content and ideas, and write sections of the strategy
document according to the agreed upon methodology. The NDS was also subjected to a multi-
stakeholder validation process, which involved civil society, including private sector representatives.
The NDS was finally submitted to cabinet for validation in November 2014. Continuous engagement
with CSOs on its implementation will be assured through the various mechanisms established for this
purpose (see section 2.1.5).
IV. BANK SUPPORT TO GOVERNMENT STRATEGY
4.1 Link with Bank Strategy
4.1.1. The proposed operation is fully aligned with the GoS National Development Strategy and
the Bank’s Country Strategy Paper for Seychelles (2011-2015). Given its focus on enhancing
competitiveness for inclusive sustainable economic development through improved investment
climate and public sector efficiency, the IPSDCP-II is closely aligned with the NDS focus on
sustainable, broad-based growth through private sector development and improved public sector
efficiency. It is also aligned with the Bank’s current CSP with a focus on strengthening private sector
development and economic competitiveness. It is expected that the new CSP under preparation will
maintain a similar focus on diversifying growth through private sector development. In addition, the
IPSDCP- II is very much consistent with other Bank Group assistance strategies namely: the Ten
Year Strategy (2013-2022), the Regional Integration Policy and Strategy 2015-2024, the Regional
Integration Strategy paper for Eastern Africa, the PSD Strategy (2012-2017), the Financial Sector
Development Strategy (2014-2017), and the Governance Strategic Framework (2014-2018).
4.1.2. The relevance of the strategic orientation of the PBO has also been confirmed by civil
society. Consultations with civil society, including private sector representatives, have been
continuous throughout the programme development, and have confirmed the appropriateness of the
strategic focus of the Bank’s planned intervention under this operation. The proposed policy actions
are also considered by CSOs as priority or important areas of intervention.
Table 2: Link between the National Development Strategy, the CSP and the Proposed Operation NDS CSP Proposed Operation
Strategic Objective
Economic diversification, public
sector efficiency and stimulating
environment for private sector
development
Strategic Objective
Strengthening Private sector
development and competiveness
Strategic Objective
Enhance competitiveness in Seychelles,
through improving the investment climate
and public sector efficiency.
Priorities: Public sector reforms; e-
government; public financial
management; public investment
management; development of
productive sectors (MSMEs);
development of services sectors
(financial sector)
Priorities:
Economic and financial
governance, including support to
MSME development and support
to public financial management
reforms
Priorities:
-Investment climate- including MSME
enabling environment and deepening of
financial sector
-Public sector efficiency
4.2 Meeting the Eligibility Criteria
4.2.1 The IPSDCP-II is fully compliant with Bank Group Policy-Based Operation (PBO)
eligibility criteria. All eligibility criteria for a PBO are met. The country enjoys overall political and
economic stability; the GoS commitment to reform is very strong, anchored on the Seychelles 2017
Strategy and supported by an IMF programme with quantitative and structural benchmarks that GoS
has consistently met; there is good partnership and policy dialogue between GoS and development
partners (DPs). (Technical Annex 1 provides a detailed analysis of the eligibility criteria for general
budget support).
9
4.3 Collaboration and Coordination with other Partners
4.3.1 At the request of the Government, the IPSDCP-II was appraised in early 2015 in parallel with
the IMF Article IV Consultation and Extended Fund Facility (EFF) supervision mission, and the
World Bank’s Development Policy Loan (DPL) dialogue mission. Appraisal also coincided with a
mission of the Investment Climate Facility to prepare a technical assistance package. This provided a
unique opportunity for a coordinated and joint dialogue between the Government, DPs and other
stakeholders, including civil society, which is not always possible as none of the main DPs are
physically based in Seychelles. This coordination also facilitated discussions, and agreement, on the
areas to be supported by the World Bank and African Development Bank programmes, thus ensuring
full complementarity of the respective budget support and related TA operations of the two
institutions.
4.3.2 The Department of External Finance within MFTBE is responsible for overall donor
coordination. There is no formalised DP coordination framework around budget support. Given that
the only providers of budget support are currently the World Bank and African Development Bank,
and the coordination between the two organisations, IMF and the Government is strong, GoS has not
considered it necessary to establish a joint Performance Assessment Framework to coordinate budget
support.
4.3.3 The World Bank’s DPL for 2015 has two pillars related to the components of the AfDB
proposed operation: 1) access to finance, and 2) public investments. Under the first pillar, the policy
triggers relate to credit supply, including establishment of collateral registry and expansion of the
credit information management system; while under the second pillar, policy triggers include
establishment of guidelines for preparation and appraisal of investment projects and establishment of a
development committee to oversee public sector investment planning. The WB is also providing
technical assistance (TA) in these areas. The IMF EFF includes targets relating to PFM, governance of
SOEs and Financial Sector Development. Jointly, the two Banks and the IMF are ensuring
comprehensive coverage of priority reforms in these areas (see technical annex 7 for full overview of
programmes). Complementarity is also being assured with other DPs engaged in these sectors,
including AFRITAC, COMESA, Commonwealth Secretariat, EU and the UNDP, who are also
providing technical assistance.
4.3.4 A mechanism was put in place to ensure regular monitoring of the IMF Extended Fund
Facility programme in 2014. This arrangement has been extended to cover the ADB PBO and the
World Bank Development Policy Loan. Through this mechanism, a committee of relevant
stakeholders, chaired by the Minister of Finance and the Governor of the Central Bank, meets bi-
weekly to follow-up on implementation progress, and report on a quarterly basis to the Cabinet. There
is strong alignment and complementarity of assistance and program focus.
4.4 Relationship with Other Bank Operations
4.4.1 IPSDCP II supports the continuation and deepening of the reform agenda pursued under
IPSDCP (2013-2014) and the Economic Governance and Reform Programme (2009). The IPSDCP
focused on two main components: (a) addressing key constraints to private sector development; and
(b) strengthening PFM systems to maximize public sector efficiency. The results achieved include:
greatly improved access to finance for MSMEs, with over 670 businesses benefitting from the
Government MSME credit scheme; and significant strengthening of public procurement systems.
Important reform accomplishments under this previous operation included the operationalization of a
new MSME financing scheme; the establishment of the Financial Supervision Agency; legislation on
payment systems; the passing of a new legal practitioner’s bill; the development of a competition
policy and the approval of new procurement regulations (see technical annex 9). While the majority of
the targeted policy actions were fulfilled, a few critical areas remained outstanding. Thus a main
recommendation in the project completion report (PCR) of IPSDCP is the need to maintain the
momentum on the reform agenda in order to ensure its completion for sustainability and effectiveness.
Other lessons and recommendations from past operations that have informed the design of the
10
proposed operation include the importance of high degree of country ownership for success. This
underscores the importance of encouraging country ownership, while accompanying the Government
in its implementation of reform priorities. The provision of TA, as envisaged by the Bank, will also
further strengthen ownership through addressing capacity constraints thereby supporting the
implementation of reforms (see technical Annex 6).
4.4.2 The PBO has strong links with other recent and ongoing Bank projects in Seychelles. The
Bank is providing technical assistance in support of MSME development and towards establishing a
PPP framework with financing from MIC and FAPA grants. Both interventions were launched in
January 2015 and have commenced implementation. Furthermore, a new technical assistance project
is being prepared in support of financial sector development. This will assist in ensuring that the
policies relating to financial sector development are implemented. In addition, the Bank recently
approved an investment project in the water sector. All these projects will contribute towards
enhancing competitiveness and private sector development in the Seychelles. The performance of the
Bank’s portfolio is good, while there are no projects at risk there have been issues around assuring
successful project start-up emphasising the importance of launching and regular supervision (see
technical Annex 10).
Table 3: Lessons Learned from Previous Bank Operations in the Country Key lessons learned Action taken to integrated lessons into the Programme
Continuity and sustainability- aim to consolidate and build on
reforms supported by previous
PBOs in the country - this is
critical for sustainability and
results.
IPSDCP-II builds on IPSDCP and ensures continuity and completion of reforms
and policy actions contained in the previous PBO. A lot of progress was
achieved under IPSDCP, but there are a number of areas where the reforms
have not yet been fully implemented. The Bank has also established good
dialogue on these areas and is engaging on supplemental TA.
Ownership/ Leadership/
Commitment: Ensure broad
Government commitment to
reforms.
The policy actions contained in the PBO are of high priority to the GoS and
contained in the Budget speech 2015, FSDIP and MTNDS. Ministry of Finance,
Trade and the Blue Economy is coordinating the reforms to be supported by
DPs overall programme of reforms supported by AfDB. IMF and WB for
approval by cabinet.
Focus on a few critical policy
actions that are likely to be
achieved within the timeframe of
the operation.
During appraisal, the critical reforms to be maintained in the log frame were
agreed and selected with Government. It was agreed to keep the total number of
monitored indicators under 10.
Capacity: Greater consideration
needs to be given to capacity and
resources required to implement
the proposed actions,
The Bank in 2015 is providing TA towards a number of the policy areas
included in the PBO- MSME development, PPPs and Financial sector
development. Furthermore Investment Climate Facility (ICF) will provide
complementary TA towards some of the critical reforms included in the log
frame (FLP, Companies act)The GoS has also agreed to ensure that the required
resources are provided for the implementation of the proposed reforms
Multi-year programmatic
approach to the provision of
PBO ensures better alignment with
medium term reform agenda and
continuity of dialogue 3-year
period.
Initially the Bank had advised GoS that the first phase IPSDCP should be
designed as programmatic PBO spanning three years, meanwhile GoS requested
for a two year programme with the option for a third year if additional financing
was required. To ensure continuity of the reform programme IPSDCP-II has
been designed as a continuation of IPSDCP.
Ensure Regular and intensive
country dialogue and provision
of technical advisory support
during missions particularly in the
face of human resource constraints.
A supervision mission will be fielded in coordination with other DPs prior to
disbursement, to ensure the programme is on track. Relevant experts from
within the Bank will participate in the mission to provide advisory support as
required. Technical assistance (2 ongoing and 1 new projects) will be used to
ensure capacity is built to ensure implementation.
4.5 Analytical Works Underpinning
4.5.1 The programme is underpinned by a wide range of analytical works including the PCR of
the IPSDCP, the Financial Sector Development Implementation Plan (FSDIP), the 2015 PPP Needs
Assessment, the 2015 updated FRA, the 2011 PEFA, the 2014 COMESA Gender Report, the CPIA
analysis, Bank analysis of the financial sector and the MSME environment, IMF reports and Case
11
studies from other Island States1. There is general acknowledgement of the progress achieved, but also
the need to enhance economic competitiveness through developing the financial sector, while ensuring
key improvements in the business environment (in particular for MSMEs) and strengthening PFM
systems to increase public sector efficiency. Through the Bank’s on-going TA support packages,
analytical work in the areas of PPPs and MSME development for Seychelles will be produced in
2015. This will provide the basis for continued dialogue in these areas, and identify strategic and
policy priorities for the future. During 2015, a new technical assistance project through MIC Grant is
being processed in support of financial sector development. This intervention will assist in ensuring
that the priority policies relating to insurance supervision, pension regulation, capital market and
financial literacy are implemented. Through this support, priority policy actions for the future of this
sector will also be defined.
V. THE PROPOSED PROGRAMME
5.1 Programme Goal and Purpose
5.1.1 The goal of the proposed programme is to achieve inclusive and sustained economic growth
through enhanced competitiveness of the Seychellois economy. The purpose of the operation is to
support priority reforms of the Government aimed at achieving two complementary policy objectives
considered as crucial towards enhancing competitiveness in Seychelles, namely: 1) improved
investment climate, and 2) enhanced public sector efficiency. The investment climate will be
addressed through improving the businesses enabling environment, including supporting Financial
Sector and MSME development, given the potential impact on promoting inclusive growth and
economic diversification. Furthering public sector efficiency will also remain a priority, given the
need to increase public investments in underlying infrastructure, and to ensure an environment of
transparency, which is critical for attracting investments and promoting competitiveness.
5.2 Programme Components
5.2.1 The Programme has two main components:
Component 1: Improved Investment Climate
5.2.2 Challenges and Constraints: Recent reforms have considerably contributed towards
establishing the foundations for an improved investment climate, but there is still room for
further improvement. The DBR 2015 edition rankings continue to indicate problems for business
start-up, Seychelles ranks 127th
, not far from the Sub-Saharan Africa average (129th
). While
Seychelles performs relatively well in other areas, rankings have slipped in registering property (from
76th
in 2014 to 78th
in 2015) and paying taxes (32th in 2014 to 43th in 2015). Despite reforms
undertaken, the processes relating to starting a business remain overly cumbersome, fuelling the
perception in the business community of “Inefficient Government Bureaucracy”, which is cited in the
GCR- 2014-2015 as the fourth most problematic factor for doing business. Furthermore, weaknesses
remain in the current business legal system (in particular regarding corporate law); a full
revision/modernization of the Companies Act (1972) is underway. Related to the legal and regulatory
framework, healthy market competition is key to market efficiency and thus business productivity.
Since its creation in late 2009, the Fair Trading Commission (FTC) has pursued over 35 competition
and over 700 consumer cases. However, the country still lacks comprehensive legislation in
competition and consumer protection, which are key, not only for improving market efficiency, but
also for ensuring adequate provision of key economic infrastructure and other services (e.g.,
telecommunications, energy, financial services) and establishing a level playing field for businesses
and market operators.
1 Designing Financial Systems for Competitive Island Economies: Developing the Case for the Caribbean, Taylor &
Peterson 2013, University of Aruba; Seychelles, How Classic Policies Restored Sustainability, Rojid, Afid and Sajerdoti,
World Bank 2013
12
5.2.3 A key issue affecting the domestic investment climate, particularly for MSMEs, is access
to finance, which is the most problematic factor of doing business in Seychelles; it ranks first in the
list of problems mentioned by the local business community surveyed for the GCR 2014-2015 edition
(21.9% of responses). The 2015 edition of DBR ranks “Getting Credit” component (171st) very low
for Seychelles’ income level (the average for Sub-Saharan Africa is 122nd
). Significant efforts have
been made to ease the supply of credit; an area requiring additional attention is in ensuring effective
demand for credit. The Banking sector is well capitalized, and the Government is providing special
financing schemes for micro and small businesses. Meanwhile, business entrepreneurs are not fully
knowledgeable of the financial products available, and lack capacity to prepare business plans and
make effective use of these products, including in the non-banking sector. The insufficient targeting
and relevance of current Government business development services, and poor coordination among
the different stakeholders involved in MSME financial inclusion, particularly between government
and the commercial banks, translates into inefficient interventions.
5.2.4 Non-Banking Financial Sector: The Financial Services Authority (FSA) was created in 2014
(replacing the Seychelles International Business Authority, SIBA) to regulate and supervise non-bank
financial institutions (NBFI), including the insurance and securities markets sectors. As this is a new
institution, capacity needs to be built and attention given to ensuring that it adequately performs its
supervisory and regulatory role. The non-banking financial sector remains undeveloped and
underutilised. Encouraging the productive growth of this sector, by creating an appropriate legal and
regulatory foundations and promoting greater transparency, remains of paramount importance.
5.2.5 Recent Government Actions: In recent years, GoS has undertaken several reforms aimed at
improving the investment climate. Recent reforms include the establishment of two one-stop-shops for
licensing and off-shore/FDI activities (the Seychelles Licensing Authority (SLA), and Financial
Services Authority (FSA)); introduction of e-services in land and property registration and taxation;
simplified business taxation; establishment of a commercial court, supported by a modern case
management system; as well as the introduction of mediation civil rules in 2013. Various pieces of
legislation are under review governing international and domestic businesses. To promote sound
competition and consumer protection, the Government established the Fair Trade Commission in
2013, approved a new competition policy in 2014, and is in the process of revising relevant
legislation. To support the MSME sector, initiatives have included the refocusing of the Development
Bank of Seychelles on the SME sector; the creation of the Small Enterprise Promotion Agency
(SEnPA) with the objective to assist MSMEs in setting up a business and providing training to
enhance business management skills; and various initiatives aimed at providing financing, mostly
heavily subsidized financing schemes, through the recently-created Small Business Finance Agency
(SBFA), potentially sowing the seeds for the development of a microfinance industry in Seychelles. In
January 2015, a new Ministry for Investment, Entrepreneurship Development and Business
Innovation, was established, in line with the GoS commitment to increase efforts towards
strengthening the investment climate. The Government has also embarked upon an important
programme of reforms in the financial sector, including the establishment and operationalization of
the Financial Services Authority in 2014, to regulate the non-banking financial sector; enactment of
various pieces of legislation; and the approval of the Financial Sector Development Implementation
Plan, which clearly outlines the reform priorities (see technical annex- 8).
5.2.6 Programme Activities: The IPSDCP-II will ensure that the Government reforms initiated and
supported under the last PBO relating to business enabling environment are further advanced, while
also supporting priority actions towards financial sector development. Targeted outputs in relation to
business enabling environment that remain outstanding from IPSDCP include the full
operationalization of e-government initiatives, such as the electronic land registry system, which is
crucial to ease property registration and investment, as well as fulfil collateral requirements for access
to finance. On-line filing and payment of business taxation is also still under development, and once
fully established will greatly ease the process of paying taxes. Under IPSDCP the government
approved the competition policy, paving the way for a new competition bill, which will address
13
current overlapping functions of agencies, ensure harmonization with other national and regional
competition legislation and alignment with international best practice. In order to ensure greater
coherence and comprehensiveness of the support offered by the government for MSME development,
a MSME development strategy and financial literacy programme will be prepared. It will be ensured
that both mainstream gender concerns to address any inequality issues, and to ensure optimal targeting
of GoS programmes. It is expected that the newly established MIEDBI will ensure additional impetus
and leadership needed to implement these reforms.
5.2.7 In support of financial sector development, IPSDCP-II will target outputs that support the
implementation of FSDIP, specifically areas relating to strengthening the regulatory framework for
NBFIs. Targeted outputs will include the Financial Services Authority strategic plan, the affiliation to
IOSCO international standards and the approval of the international business companies’ bill. These
reforms are in furtherance of actions under IPSDCP, which supported the establishment FSA, and also
had IOSCO compliance as a target for 2014. This target was not achieved due to the time required to
implement reforms and capacity constraints.
Component 2: Enhanced Public Sector Efficiency
5.2.8 Challenges and constraints: Furthering the efficiency of the public sector remains crucial
given the tight fiscal targets required to reduce debt, while providing quality service delivery and
ensuring public sector investments to support private sector development and enhanced
competitiveness. GoS has undertaken considerable reforms towards enhancing public sector
efficiency, especially through strengthening public financial management (PFM). As outlined in
section 2, some important challenges remain in PFM, including the full roll-out of medium-term
budget framework; further enhancing budget credibility through tightening expenditure management,
particularly through public investment planning and delivery; strengthening internal controls and
ensuring greater transparency and oversight in PFM, including timely dissemination of budget
information and oversight of procurements, as well as external scrutiny.
5.2.9 In its efforts to improve the management and delivery of public sector investments,
particularly for infrastructure, GoS has prepared a 3-year rolling Public Sector Investment Plan
(PSIP); and efforts are also underway to ensure more rigorous selection and prioritisation procedures.
While this will promote better alignment with the Medium Term Fiscal Framework, it is clear that the
delivery and financing of the PSIP will remain a challenge due to capacity and resource constraints.
As a means of ensuring greater efficiency and mobilising resources for critical public sector
investments, GoS is keen to increase public-private partnerships (PPPs); however there is currently no
policy or institutional framework to facilitate its realisation. GoS has therefore not yet been able to
capitalize on the opportunities that the private sector can bring to public service delivery, as has been
demonstrated by the successful PPP in the ICT sector supported by the Bank. This is one of the very
few PPPs in Seychelles.
5.2.10 Strengthening transparency and accountability mechanisms is considered as crucial to
identifying opportunities for greater efficiency and ensuring the effective use of public finances. It
also provides opportunities for greater private sector participation in public service delivery. In this
regard, accessibility to budgetary information is critical, as well as regular reporting on public
expenditures, which is currently not the case. Following the important reforms towards enhancing
transparency in procurement, it would be important to monitor the effectiveness of these reforms and
the extent of competitiveness in procurement. There is also need for greater oversight of the award of
contracts; the procurement oversight unit has yet to publish a procurement monitoring report.
Performance in the production of annual audits has improved in line with the improved quality and
timeliness of financial reporting, and the external scrutiny mechanisms have been reinforced with the
establishment of the Government Audit Committee (GAC). However, follow up on audit and Finance
and Public Accounts Committee of Parliament (FPAC) recommendations needs to be reinforced.
5.2.11 Recent Government Action: GoS has embarked upon a number of initiatives towards
strengthening public sector efficiencies. The PFM action plan 2012-2014 ensured a continuation of
the comprehensive reforms introduced in 2008, as part of GoS’s ambitious reform agenda to bring
14
debt under control, and responded to the weaknesses identified by the 2011 PEFA. Specific areas of
recent progress relate to the credibility of the budget, procurement, accounting (adaption of IPSAS
cash basis accounting 2013), reporting and external scrutiny (functioning of the Government Audit
Committee). Many of these areas had low scores (C or D) in the last PEFA 2011. A new PFM Action
plan is currently being prepared for 2015-2017 to address remaining weaknesses. The Government
considers the strengthening of its PFM systems as critical for promoting a lean and efficient public
sector, and providing a stimulating environment for the development of the private sector without
compromising social concerns and environmental sustainability.
5.2.12 Programme Activities: Against a background of sustained fiscal consolidation, the IPSDCP-
II will support reforms aimed at improving the efficiency of the public sector through public-private
partnerships (PPPs). The specific output targeted will be the development of PPP Policy, which will
provide the basis for a comprehensive review and preparation of required regulatory and legal
framework. Through supporting these areas, the IPSDCP-II will positively influence GoS’s public
investment decision-making process, which has a direct bearing on the quality and delivery of
infrastructure and public services, both of which are essential for competitiveness. Ensuring an
appropriate PPP framework is also essential for leveraging private resources to achieve the objectives
of the NDS and the PSIP, without jeopardizing the targets of the MTFF. The area of PPP is also
critical to attracting private investments and opening up new sectors and opportunities for investors,
which is particularly important in a small economy such as the Seychelles. At a broader level, the
economic stability emanating from good public investment planning and management will contribute
towards improving the business environment.
5.2.13 IPSDCP-II will also focus on reforms aimed towards enhancing transparency and compliance
with international standards. This includes easing access to information around the budget and
expenditures, which is one of the outstanding outputs under IPSDCP-I. The targeted policy actions
will be for Government to post budget information on its website in a timely manner, as well as
produce a first monitoring report on procurement performance. Ensuring that the public, and the
private sector in particular, have access to information is crucial for a constructive engagement and
policy dialogue, which ensures that policy actions and reforms appropriately respond to domestic
needs.
5.3 Policy Dialogue
5.3.1 Policy dialogue will mainly be centered on the policy actions outlined in the programme,
aimed at ensuring that implementation is on track, that there is broad ownership of the reform agenda,
and adequate consultation and participation of relevant stakeholders. In particular the private sector
and civil society should be continuously consulted on order to facilitate achievements of the intended
results. The Bank is providing a package of TA to complement the IPSDCP-II. The TA will generate
products (MSME development strategy, PPP regulatory framework, financial literacy programme)
that will guide future policy decisions and public sector investments, and form the basis for a
continued and deepened dialogue beyond the time-frame of this operation.
5.3.2 The Bank shall continue to engage in general policy discussions with GoS with a view to
ensuring sustained satisfactory conditions for the provision of budget support, including concerted
efforts to maintain macro-economic stability; as well as continued positive reform efforts towards
ensuring an appropriate fiduciary environment and further enhancing donor coordination. In this
connection, the Bank will continue to support joint dialogue efforts with the IMF and World Bank,
including undertaking joint missions as and when requested by GoS.
15
5.3.3 Prior Actions
Policy measures adopted as prior actions to Board presentation are as follows:
- FSA Strategy approved
- Electronic Filing system for Business tax launched
5.3.4 Conditions to Precedent to Disbursement
Policy actions adopted as conditions prior to disbursement are as follows:
- PPP policy approved by Cabinet
- International Business Companies bill approved by Cabinet
5.4 Application of Good Practice Principles on Conditionality
5.4.1 Good practice principles on conditionality have been applied. The IPSDCP-II is fully aligned
to the GoS strategic framework, as developed through multi-stakeholder consultations on key
documents such as the NDS and the MTFF. The proposed prior actions focus on a limited set of
critical reform measures that are relevant and achievable within the programme’s time-frame. A
number of them are linked to previous outstanding policy actions under IPSDCP, which are now
being supported by complementary Technical Assistance. A harmonised M&E system has been
established to cover the IMF, WB and AfDB programmes.
Table 5: Projected financing requirements and sources, 2015-2016
2015 2016
SCR USD
%
GDP SCR
Revenues and grants 6,477 479 33.8% 6,829
Total revenues 6,050 448 31.6% 6,409
Tax revenue 5,433 402 28.3% 5,751
Non-tax revenue 574 42 3.0% 593
External grants 427 32 2.2% 421
Total expenditure and net lending 6,415 475 33.5% 6,586
Current expenditure 5,045 373 26.3% 5,159
Capital expenditure 1,152 85 6.0% 1,105
Net Lending 173 13 0.9% 277
Contingency 45 3 0.2% 45
Overall Balance (Cash basis, after grants) 62 5 0.3% 244
Financing -62 -5 -0.3% -244
Foreign financing 417 31 2.2% 29
Disbursements 692 51 3.6% 417
Project loans 339 25 1.8% 417
Programme/ budget support 353 26 1.8% 0
of which, AfDB financing 137 10 0.7% N/A
Schedules amortizations -276 -20 -1.4% -388
Domestic financing, net -515 -38 -2.7% -273
Privatisation/ Long-term lease of fixed assets 36 3 0.2% 0
Source: IMF estimates (March 2015)
5.5 Financing Needs and Arrangements
5.5.1 Overall financing gap for 2015, before external grants, is about SCR 427 million, equivalent
to USD 31.6 million and 2% of GDP. The government plans to fill this financing gap using various
sources, including project and programme loans, and domestic financing including privatization. The
country’s foreign financing needs for 2015, according to the estimates by the IMF, amount to SCR
417 million, equivalent to USD 31 million. Out of this, SCR 353 million is expected to be covered
16
through programme/budget support financing. The AfDB’ s PBO, which is equivalent to about 137
million rupees (using the projected rupees/USD exchange rate of 13.7 at end December 2014) is
expected to cover a substantial portion (almost 40%) of the financing from such budget support
operations.
5.6 Application of Bank Group Policy on Non-Concessional Debt Accumulation
5.6.1 Seychelles is classified as an ADB country and therefore eligible for financing under the ADB-
Loan window. Preliminary results from the IMF’s Debt Sustainability Analysis (DSA), undertaken in
March 2015, indicates that public debt remains high at around 65 percent of GDP at end-2014, close to the
70 percent indicative threshold of the DSA framework. Meanwhile, it also indicated that risks are
somewhat mitigated by the composition and maturity profile of the debt. Fitch ratings maintained
Seychelles at B+ in 2015 with a stable outlook. The proposed ADB budget support loan will provide
the Government with external debt on favourable terms, helping to further improve the current debt
composition, lengthen the maturity of its debt and increase the foreign currency reserves, while
providing the needed foreign liquidity.
VI. OPERATION IMPLEMENTATION
6.1 Beneficiaries of the Programme
6.1.1 MSMEs, key GoS entities and civil society will benefit from the Programme. The main
direct beneficiaries will be private sector operators (in particular MSMEs, with a special emphasis on
those owned or operated by women and youth), and public institutions, including MFTBE, MIEDBI,
CBS, Registrar’s Office, POU, SRC, FSA, SBFA, SEnPA as well as civil society (through a greater
access to budgetary information). Given the expected positive impact on growth, job creation and
economic competitiveness, the entire Seychellois population can be considered to be indirect
beneficiaries. Budget execution, as supported with funds from the IPSDCP II, will also have direct
impact on the population through spending on social services, including health and education, and
infrastructure.
6.2 Impact on Gender, Poor and Vulnerable Groups
6.2.1 The IPSDCP II will have a positive impact on Seychellois women entrepreneurs. Gender-
related statistics in Seychelles compare very favourably with those of most RMCs, and are in line with
some of the world’s best performers. For example, 44% of parliamentarians in 2012 (compared to
24% in 2010) and 45% of high-ranking public servants (chief executive or middle management) are
women. There are also more women employed in government (63% in 2011). The Seychellois
Constitution promotes non-discrimination and guarantees equal rights and protection for both men and
women, and the country has signed and ratified the principal conventions related to gender
discrimination, such as the Convention on all Forms of Discrimination against Women (CEDAW), the
African Union Protocol, the SADC Declaration on Gender and Development, and the Indian Ocean
Commission (IOC) Gender Policy. GoS has also developed a National Action Plan to address gender-
based violence, which is still a major concern. By supporting MSME development and increased
access to finance, the IPSDCP-II will contribute to women economic empowerment in Seychelles;
there is anecdotal evidence that a significant proportion of Seychellois MSMEs are owned/operated by
women (e.g. women accounted for 50% of SBFA’s new loans to MSMEs in 2012). In elaborating the
MSME development strategy, attention will be given to mainstreaming gender. Furthermore, the
financial literacy programme will benefit both men and women, through increased knowledge and
understanding of financial products and affordable financing opportunities, as well as financial
protection (insurances/ pension), which will contribute to their economic empowerment and
protection.
6.3 Impact on Environment and Climate Change
6.3.1 IPSDC-II has been classified as a Category III programme, indicating no adverse
environmental or social impact is expected. Meanwhile, in supporting the development of the
17
financial sector, the PBO is supporting the development of “cleaner” economic activities compared to
i.e. tourism or manufacturing, which has a high import multiplier and threaten over-development, loss
of diversity, pollution, erosion and climate change, all of which fit uneasily with the objectives of
sustainable development. The policy action relating to an enabling framework for PPP will also be
essential to stimulate investment in cleaner technologies for energy and waste management, areas that
have received increasing interest from investors in recent years.
6.4 Impact on other Areas
6.4.1 The policy reforms targeted by IPSDCP-II are also expected to have positive impact on other
areas such as domestic resource mobilisation, through the establishment of an electronic e-filing and
e-payment system for business tax. This will contribute to greater compliance and ability to collect
business tax. Infrastructure development will be supported by the establishment of a PPP framework,
which will enable private sector engagement in critical infrastructure development plans and ensure
adequate resources. The capacity of Government entities will be strengthened in the areas supported
by the programme and through the complementary TA. Finally through strengthening the regulatory
framework for the financial sector- especially international business companies, the opportunities for
illicit financial activities will be minimised.
6.5 Implementation, Monitoring and Evaluation
6.5.1 The institution responsible for implementing the operation will be MFTBE. The IPSDCP-II was
presented to, and endorsed by, the Cabinet in April 2015. The mechanism established to ensure
regular monitoring (bi-weekly) of the IMF Extended Fund Facility has now been extended to cover
the proposed AfDB operation and the World Bank Development Policy Loan. A committee of
relevant stakeholders, chaired by the Minister of Finance and the Governor of the Central Bank, will
meet bi-weekly to follow-up on implementation progress, and report on a quarterly basis to the
Cabinet.
6.6 Financial Management and Disbursement
6.6.1. Country Fiduciary Risk Assessment (CFRA): In accordance with Bank Group’s Policy on
Programme-Based Operations released by the Operational Resources and Policies Department in
February 2012, a full fiduciary risk assessment (FRA) was carried out in 2013 and updated in 2015 to
assess the adequacy of the fiduciary environment and the existing country systems for managing the
Policy Based Operations. The updated fiduciary risk assessment noted that GoS has made good
progress in PFM reforms, through the implementation of its PFM Action Plan 2012-2014, leading to
concrete improvements in Seychelles’ PFM system especially in the Comprehensiveness and
Transparency of the Budget and in Procurement. However, there remains room for improvements in
Internal Controls, Internal Auditing, Financial Reporting and External Scrutiny. The overall risk was
rated as “Moderate”.
6.6.3 Financial Management and Disbursement Arrangements: Procurement and financial
management, including audit, will be done in accordance with country systems. The measures in the
public sector efficiency component of the proposed programme, and continued efforts of the
Government to improve PFM systems, will contribute to mitigating the risk. The IPSDCP-II will be
audited through the general audit report prepared by the Office of the Auditor General. The
accounting for the loan proceeds will be the responsibility of the Comptroller General at MFTBE.
Disbursement will be done in a USD 10 million single tranche payment to a Foreign Currency
Denominated Account (FCDA) opened by the GoS at the Central Bank of Seychelles (CBS). The
transmission to the Bank of the details of the FCDA will be a condition precedent to disbursement.
The disbursement will be subject to the satisfactory fulfilment of the conditions. As a PBO, the funds
will contribute to financing of the national budget.
18
6.6.4 Procurement: As a Programme Based Operation, procurement will be done following country
procurement systems in accordance with the Public Procurement Act, 2008. Overall risk rating in
public procurement in Seychelles has improved from the last Fiduciary Risk Assessment undertaken
in 2013, where it was rated as substantial. Given the positive progress in implementation of
recommended mitigation measures, specifically the adoption of regulations in 2014, and development
of standard bidding documents to operationalize the Act and implementation of capacity building
activities, the risk is now rated ‘moderate’. Seychelles has maintained a positive trajectory in terms of
procurement reforms and has plans to further strengthen transparency and compliance in procurement,
through the publication of the first procurement performance monitoring report in 2015. This action
has been included as a policy action in the programme.
VII. LEGAL DOCUMENTATION AND AUTHORITY
7.1 Legal Documentation
7.1.1 The financing instrument used for this operation is an ADB Loan of USD 10 million in the
form of general budget support to the Republic of Seychelles. The loan will be governed by a Loan
Agreement to be signed between the Bank and the Republic of Seychelles. Before the Loan proposal
is presented to the Board, GoS shall provide evidence to the Bank that the measures listed under
paragraph 5.3.3 have been implemented. The entry into force of the Loan Agreement shall be subject
to the fulfilment by the Borrower of the provisions of Section 12.01 of the General Conditions
Applicable to Loan Agreements of the Bank.
7.2 Conditions Associated with the Bank’s Intervention
7.2.1 The conditions precedent to disbursement of the single tranche of USD 10 million are
summarised in table 6. Below:
Table 6: PBO Conditions Precedent to Single Tranche Disbursement Conditions precedent to disbursement Evidence
Opening of a Foreign Currency Denominated Account at
the Central Bank of Seychelles (CBS), for purposes of
receiving the resources of the Loan.
Letter from the Central Bank of Seychelles containing
the details of the Foreign Currency Denominated
Account at the Central Bank of Seychelles for the
purpose of receiving the proceeds of the loan
PPP policy approved by Cabinet Evidence submitted by GoS to the Bank that the PPP
policy has been approved by Cabinet
International Business Companies bill approved by
Cabinet
Evidence submitted by GoS to the Bank that the IBC bill
has been approved by Cabinet
7.3 Compliance with Bank Group Policies
7.3.1 The IPSDCP-II complies with all applicable Bank Group policies and guidelines, including the
Bank’s PBO policy.
VIII. RISKS MANAGEMENT
Risks Mitigations Measures
Reform slowdown ahead of 2016 elections Selective focus on a few critical reforms, where progress has
already been noted.
Insufficient Government capacity to implement
reforms
Provision of complementary capacity building and training
Macroeconomic stability – external and internal
shocks
Seychelles remains vulnerable to external shocks,
which could include a decrease in tourist arrivals due
to a prolonged Eurozone crises or decline in the
fisheries exports.
Internal macroeconomic risks arise from the
Implementation of NDS, Maintaining reform agenda aimed at
building economic competitiveness and resilience;
implementation of IMF EFF programme; continued budget
support from WB and AfDB, and continued strengthening of
the institutional capacity will enhance the country’s capacity
to manage adverse external shocks.
Implementation of annual performance objectives for all
19
performance of the 20 companies with state
participation
major SOEs, drawing on clear definition of the strategic
mandate and scope of activities
Fiduciary risk is moderate Continued implementation of PFM reforms- new PFM Action
Plan 2015-2017;
The DSA framework suggests that:
(i) Seychelles’ public debt is currently slightly
below the high-risk benchmark
(ii) External public debt service will increase
significantly over the medium term as
payments come due on the rescheduled
Eurobond, posing challenges for debt
management.
(i) Authorities’ commitment to debt reduction and fiscal
discipline remains unchanged. The higher fiscal
surpluses are assumed to pay down short term domestic
debt, in light of its higher interest rate and the rollover
risks posed. This reduction of short-term debt is also
projected to improve the composition of debt over the
medium term, as the average maturity lengthens.
(ii) The risks are mitigated by the significant finance
available on favourable terms from official creditors.
Natural Disasters GoS is implementing a master plan for Disaster Risk
Management. The World Bank has provided a Disaster Risk
Management DPL with catastrophe deferred drawdown.
IX. RECOMMENDATION
Management recommends that the Board of Directors approve the proposed Loan in an amount not
exceeding USD 10 million to the Republic of Seychelles in the form of general budget support for the
purposes of, and subject to, the conditions stipulated in this report.
I
Letter of Development Policy Appendix 1
II
III
IV
V
VI
VII
VIII
IMF/ Country Relations Note Appendix 2
IMF Mission Commends Seychelles’ Macroeconomic Performance, Encourages Reforms to
Safeguard Progress
Press Release No. 15/140 March 26, 2015
An International Monetary Fund (IMF) staff mission led by Marshall Mills visited Victoria from
March 11-26, 2015 to conduct the 2015 Article IV consultation discussions and assess performance
under the second review of the Extended Fund Facility (EFF) Arrangement with Seychelles.1
At the conclusion of the visit, Mr. Mills issued the following statement:
“The resilience of the Seychellois economy continues to strengthen, with an improvement in the
external sector starting late last year. The strong fiscal position kept public debt on track to fall below
50 percent of GDP by 2018. Monetary policy targets were tightened significantly in the fourth quarter
of last year in response to exchange rate depreciation (11 percent against a trade-weighted basket of
currencies) and the inflationary pressures anticipated as a result. The authorities successfully met all
but one of their quantitative program targets for end-December 2014. The targets for the fiscal
primary surplus and increase in international reserves were surpassed comfortably last year, boosting
the resilience of the economy. The reserve money ceiling was exceeded by a very small margin,
which was later corrected.
“By December, the balance of payments pressures had largely abated following the monetary
tightening, the dampening impact of the depreciation on imports, and positive external developments,
notably the fall in fuel prices and a partial recovery in tourism. Estimated growth last year reached
3.3 percent, slightly higher than expected, while end-year inflation was 0.5 percent (year-on-year).
Inflation subsequently ticked up to 3.7 percent in February 2015, as expected. The external
stabilization demonstrated the appropriateness of the authorities’ policy response and the importance
of continuing exchange rate flexibility.
“The outlook for 2015 remains positive. The current account deficit is expected to contract as imports
fall with both lower demand and lower fuel and commodity prices. Although the weak Euro is putting
some pressure on yields, tourism arrivals are rising moderately, and growth is projected at
3.5 percent, higher than previously expected. The primary surplus targeted by the budget remains
attainable and appropriate. Continued tight monetary policy is needed to rein in inflationary pressures
and help moderate rapid credit growth; end-year inflation is expected to come in under 5 percent.
International reserves are expected to rise modestly in 2015, maintaining adequate import coverage.
The Central Bank of Seychelles stands ready to adjust policies in light of developments.
“The medium-term outlook is upbeat, following Seychelles’ strides since the 2008 debt crisis, but
challenges remain. Seychelles’ highly open economy is inherently vulnerable to external shocks,
while some deep-rooted structural weaknesses have not yet been fully addressed. Continued public
debt reduction underpins the growing resilience of the economy, while the increasingly forward-
looking monetary policy framework and strong international reserve position will reinforce
confidence.
“Like many small middle-income economies, sustaining rapid growth and achieving high-income
status in Seychelles will require continuing structural reforms that enhance competitiveness and
reduce risks. Staff welcomed measures to foster an environment conducive to private sector led
growth and encouraged further measures. Noting the weak operating results of certain public
enterprises, staff stressed the burden and risks that they can pose to the public finances. Staff
highlighted that safeguarding the hard-won economic gains of the past six years requires
strengthening the governance and oversight of public enterprises, including ensuring a focus on core
mandates, minimizing risk to the public finances from any new mandates, and preserving the space
for private sector development.
“The mission met with His Excellency President James Michel, Vice President Danny Faure,
Minister of Finance, Trade, and the Blue Economy Jean Paul Adam, and Governor of the Central
Bank of Seychelles Caroline Abel, as well other members of government, members of the National
IX
Assembly, and representatives of the private sector and civil society.
“Staff expects the IMF Executive Board to discuss the completion of the review in June. The mission
appreciates the high-quality discussions and thanks the authorities for their hospitality, as well as the
open and constructive dialogue.”
1 The Extended Fund Facility under the Extended Arrangement is an instrument of the IMF designed for countries facing serious
medium-term balance of payments problems because of structural weaknesses that require time to address. Assistance under the
extended facility features longer program engagement—to help countries implement medium-term structural reforms—and a longer
repayment period. (See http://www.imf.org/external/np/exr/facts/eff.htm). Details on Seychelles’ current arrangement are available at www.imf.org/seychelles.
X
Portfolio Overview 2015 Appendix 3
No. Sector and project name Type of
instrument
Amount
(UA)
% disb. as of
Jan 2015
Approval
date
A.1 TRANSPORT
1 Development of Quality of Service Standards MIC-TAF 102,000 0 3 Nov 2014
A.2 SOCIAL
2 Support to HRDS and Social Impact MIC-TAF 502,415 0 17 Sep 2007
3 Emergency Assistance to Address Cyclone
Damage
ADB Special Relief
Funds
705,552 0 24 June 2013
A.3 WATER SUPPLY/SANITATION
4 Integrated Sanitation Master Plan AWF 866,689 0 22 Dec 2014
5 Mahe Sustainable Water Augmentation
Project
ADB Loan 13,934,632 0 April 2015
A.4 AGRICULTURE
6 Agriculture Sector Study MIC-TAF 649,400 17.76 27 Feb 2013
A.5 PRIVATE SECTOR/GOVERNANCE
7 PPP Framework Development MIC-TAF 372,739 0 14 Nov 2014
8 MSME Development Project FAPA 705,552 0 3 June 2014
A.6 MULTISECTOR
9 Statistical Capacity Building Programme -
phase II
MIC-TAF 490,600 55.49 3 June 2014
XI
Selected Economic and Financial Indicators (IMF Data) Appendix 4
Table 1. Seychelles: Selected Economic and Financial Indicators, 2012–20
Nominal GDP (2013): US$ 1,386 million Quota: SDR 10.9 millions (0.03 percent of total)
Per Capita GDP (2013): US$15,644 Outstanding use of IMF resources: SDR 27.78 millions (254.85 percent of quota)
Population, end-year (2010): 90,000 Membership status: June 30, 1977
Literacy rate (2010): 94 percent
Main products and exports: Tourism, Canned Tuna
2012 2013 2014 2015 2016 2017 2018 2019 2020
Prel. Est. 1st Rev. Proj. 1st Rev. Proj. Proj. Proj. Proj. Proj. Proj.
National income and prices (Percentage change, unless otherwise indicated)
Nominal GDP
(millions of Seychelles rupees) 15,544 17,015 18,342 18,133 19,539 19,168 20,434 21,796 23,233 24,740 26,355
Real GDP 6.6 6.0 2.8 3.3 3.0 3.5 3.7 3.6 3.5 3.4 3.4
CPI (annual average) 7.1 4.3 2.3 1.4 5.2 4.3 2.9 3.0 3.0 3.0 3.0
CPI (end-of-period) 5.8 3.4 4.8 0.5 2.5 4.9 3.1 2.9 3.0 3.0
3.0
GDP deflator average 10.5 3.2 2.5 3.1 3.4 2.1 2.8 3.0 3.0 3.0 3.0
Money and credit (Percentage change, unless otherwise indicated)
Broad money -0.6 23.7 12.0 17.5 5.3 5.7 … … … … …
Reserve money (end of period) 6.9 15.4 16.5 13.9 5.6 8.0 … … … … …
Reserve money (average of last quarter) … … -17.4 -14.5 5.6 2.1 … … … …
Velocity (GDP/broad money) 2.1 1.8 1.8 1.7 1.8 1.7 … … … … …
Money multiplier
(broad money/reserve money) 4.2 4.5 4.3 4.6 4.3 4.5 … … … … …
Credit to the private sector 8.5 4.5 15.2 25.2 3.3 10.3 … … … …
Savings-Investment balance (Percent of GDP)
External savings 19.9 11.5 22.5 21.0 20.5 15.2 14.6 15.0 13.7 12.2 11.2
Gross national savings 17.5 26.5 14.7 16.3 15.2 18.6 19.4 18.6 18.6 19.6 21.2
Of which: government savings 8.6 5.2 6.1 6.6 6.1 5.4 7.5 7.9 9.5 8.4 7.1
private savings 8.9 21.2 8.6 9.8 9.2 13.3 12.0 10.6 9.1 11.2 14.1
Gross investment 37.4 37.9 37.2 37.3 35.8 33.7 34.1 33.5 32.3 31.8 32.3
Of which: public investment 1 10.4 8.9 6.2 6.3 6.8 6.7 6.8 6.6 7.0 7.4 7.6
Government budget
Total revenue, excluding grants 34.2 31.9 31.6 32.4 31.0 31.6 31.4 31.3 31.4 31.3 31.0
Expenditure and net lending 36.1 36.0 32.3 32.7 32.6 33.6 32.0 31.6 31.2 31.7 32.3
Current expenditure 25.7 26.7 26.1 26.5 25.8 26.8 25.2 24.9 24.2 24.3 24.6
Capital expenditure 1 10.4 9.3 6.2 6.3 6.8 6.7 6.8 6.6 7.0 7.3 7.6
Overall balance, including grants 2.2 0.3 2.1 2.0 0.3 0.3 1.2 1.4 1.5 0.8 0.0
Program primary balance 5.7 4.6 4.3 4.6 3.7 3.8 3.8 3.8 3.8 3.0 2.1
Total public debt 77.1 64.1 64.9 65.3 62.3 63.7 59.5 54.7 49.9 45.9 43.1
Domestic 2 32.0 27.2 28.2 29.9 23.8 25.1 23.0 20.4 17.1 15.2 15.1
External 45.1 36.9 36.7 35.5 38.5 38.6 36.5 34.3 32.8 30.7 28.0
External sector (Percent of GDP, unless otherwise indicated)
Current account balance
including official transfers -19.9 -11.5 -22.5 -21.0 -20.5 -15.2 -14.6 -15.0 -13.7 -12.2 -11.2
Total external debt outstanding
(millions of U.S. dollars) 1,556 1,583 … 1,670 575 1,788 1,881 2,010 2,123 2,225 2,320
(percent of GDP) 137 112 … 117 38 130 128 129 129 128 127
Terms of trade (-=deterioration) -0.1 -0.2 -0.6 2.0 0.8 12.0 -3.4 -1.5 -0.6 -0.3 -0.2
Real effective exchange rate
(average, percent change) -0.8 17.9 0.0 -2.8 ... ... ... ... ... ... ...
Gross official reserves
(end of year, millions of U.S. dollars) 307 425 452 463 453 472 479 493 506 520
534
Months of imports, c.i.f. 2.8 3.7 4.1 4.6 4.0 4.4 4.2 4.1 4.1 4.1 4.2
Exchange rate
Seychelles rupees per US$1
(end of period) 13.0 12.1 13.3 14.0 … … … … …
…
Seychelles rupees per US$1
(period average) 13.7 12.1 12.6 12.7 … … … … … …
Sources: Central Bank of Seychelles; Ministry of Finance; and IMF staff estimates and projections. 1Includes onlending to the parastatals for investment purposes. 2 Includes debt issued by the Ministry of Finance for monetary purposes
