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Fifth anniversary of the economic reform |31 October 2013

Seychelles recovering strongly from debt crisis

A middle-income country, Seychelles has been recovering strongly from a debt crisis in 2008 and its economic and social indicators are well above those of other microstates and comparable to the most advanced small island economies.  

In the midst of an acute balance of payments and public debt crisis which was jeopardising its living standards and economic development, Seychelles took the bold decision to embark on an economic reform.

When he addressed the nation on Seychelles Broadcasting Corporation (SBC) TV on the night of Friday October 31, 2008, President James Michel said carrying out the reforms will not be easy at first but the programme offers us positive results in the long term.

President Michel added that the measures are vital to allow us to develop our economy into a modern one and he called on the nation to be responsible, resilient and realistic so it can progress to the next stage of its development.

The main thrust of Mr Michel’s address were on salaries, a new taxation system, reform of the public service, the country’s debt, protection for the most vulnerable, and review of the monetary and banking system.

On the same day, former International Monetary Fund chief Dominique Strauss-Kahn welcomed Seychelles’ economic reform programme and proposed that the IMF supports it with a stand-by arrangement.

"The authorities' reform programme is wide-ranging and bold, and I welcome the steps announced by President James Michel and the related legislative changes adopted by parliament," said Mr Strauss-Khan in a communiqué published on the institution’s website.

These steps included "fundamental liberalisation" of the country's exchange regime that will enable a floating of the rupee, significant fiscal tightening, and reform of monetary policies to promote liquidity management based on indirect instruments.

Mr Strauss-Khan added that major steps were taken to strengthen a targeted social safety net.

"These reforms merit the strong support of the international community and I am pleased to propose to the IMF’s executive board that the Fund supports the government's economic reform programme under a stand-by arrangement,” added Mr Strauss-Khan.

Today, Thursday October 31, 2013, is exactly five years since Seychelles took the decision to turn the leaf and aspire for a new beginning.

Speaking to Seychelles Nation, Penlac and Chaka Bros chief executive Gafoor Yakub said: “Seychelles has come a long way since the 2008 crisis. During the last five years the government has had to introduce much discipline and structural reforms to tackle the fiscal, debt, and external imbalances with the support of the IMF, the World Bank and other development partners. Economic restructuring focused on a fundamental liberalisation of the exchange regime, significant and sustained tightening of fiscal policy which had to be supported by a reduction in public employment.

 Monetary policy had to be reformed to focus on liquidity management, and there had to be a reduction in the state’s role in the economy in order to boost private sector development.”

Mr Yakub, who has worked for the government of Seychelles (1985-1994 as director general in the Ministry of Finance) and the Development Bank of Seychelles (1994-1996 as managing director) before serving at the International Monetary Fund (IMF) in Washington D.C., USA (1996-2010 as technical advisor specialising in assisting a number of IMF member countries with their fiscal reforms) added:

“One of the biggest challenges ahead in the next few years is whether we have the stamina and perseverance as a nation to remain fiscally disciplined with or without the external supervision of the IMF. Why? Because the government needs to generate about 4 to 5% of GDP (gross domestic products) in order to pay off its debts.”

Meanwhile, in its latest report, the IMF writes that macroeconomic stability has been re-established and the Seychelles authorities have demonstrated a high level of commitment to reform.

According to the same report, the Seychelles authorities have a strong record of implementing past Fund advice and moreover, they are implementing a significant structural reform agenda supported by extensive technical assistance from donors, including from the Fund.

In the span of a few years, Seychelles has made remarkable strides in creating room for private-sector led investment, transcending a model characterised by state intervention as the primary source for employment and growth. There are currently 20 companies with state involvement.

In 2009, the civil service was downsized and in 2011-12 administered prices of goods provided by parastatals began to be adjusted toward cost recovery levels. To temper the impact of economic transformation, the ample social protection system was further strengthened, while increasing the use of means testing. Despite these measures, some working poor have struggled under economic reform, supplementing income through welfare, adds the report.

Still according to the IMF, the programme is on track and the authorities have met all quantitative performance criteria and structural benchmarks.
Concerning the outlook and risks, the report says that macroeconomic performance has been broadly favourable and the authorities are on track to achieve their objective of bringing public debt down to 50% of GDP (gross domestic products) by 2018.

“The outlook is benign, but the economy will remain highly vulnerable to global developments and domestic shocks. While risks are broadly balanced, external downside risks are centered on a protracted period of slow European growth and rising commodity prices, while parastatals pose potential risks to fiscal sustainability,” according to the report.

Among the recommendations are policies that should aim to raise reserve buffers, improve the oversight and financial performance of parastatals, and strengthen the monetary policy framework. The IMF report also noted that structural measures should focus on raising inclusiveness through fostering private sector-led growth and capacity building.
 
With the introduction of bold economic reforms in 2008, Seychelles has been seeing the fruits of its efforts. A historic liberalisation of its exchange regime and bold fiscal measures, together with tight monetary policy, have stabilised the country’s economy.

Seychelles Nation will bring you more opinions on this issue in its Saturday issue.













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