Five years of economic reforms in Seychelles |02 November 2013

Seychelles’ successful economic reform programme is a result of the Seychellois people’s resilience, sacrifices and willpower during this difficult time.

The country’s successful economic programme has been recounted in a book entitled ‘Seychelles: How Classic Policies Restored Sustainability’ launched in June this year during a special ceremony at State House.

The book is written by Sawkut Rojid, an economist at the World Bank; Emilio Sacerdoti, senior advisor to the Ministry of Finance, Trade and Investment; and former finance principal secretary Ahmed Afif.

Five years after the reform was introduced on October 31, 2008, Seychelles’ success has been seen as an example.

In this special centrespread, we bring you views of the Central Bank of Seychelles governor Caroline Abel, former finance principal secretary Ahmed Afif, former finance director general and ex-Development Bank of Seychelles managing director Gafoor Yakub.

Interview with Central Bank Seychelles (CBS) governor Caroline Abel

‘Seychelles’ economic environment has improved significantly’

What are our economic achievements as a result of the five-year reform programme?

Seychelles has made great strides in its effort to stabilise the economy and address the structural imbalances which the country faced prior to the launch of the macroeconomic reform programme.
 
The economic environment has improved significantly. Despite an initial period of uncertainty, a prolonged period of stability has followed. The external value of the rupee which shot up to roughly R17 against the US dollar after the float, has stabilised over a relatively short time period. The removal of all restrictions on foreign exchange transactions helped in building up confidence in the domestic currency and since the float of the rupee, there has been a constant supply of hard currencies. The Central Bank has also been accumulating external reserves which are expected to reach US $400 million end-December 2013 compared to around US $50 million in 2008 which provides a buffer in the event of major external shocks.
 
The stable exchange rate combined with the improved economic environment has provided a certain level of stability in the general price levels. Statistics show that there has been a gradual decline in the level of inflation compared to the period immediately after the launch of the reforms when the annual average rate of inflation stood at 37%, the figure for September 2013 stood at 5.1%.

The structural reforms undertaken thus far have improved the business environment significantly. The various revisions in legislations and introduction of new policies are all meant to put in place a framework where government acts as facilitator and allows the private sector to become the engine of growth.

While there was an urgent need to address the economic imbalances, the more vulnerable members of society were not forgotten. The authorities ensured that there were safety nets in place to assist those in need.

Also important for Seychelles is the normalisation of relationship with our foreign partners, some of which sees Seychelles as an example of how the right policies can transform the economic environment over a relatively short period. In addition, the fiscal discipline coupled with the success of the debt restructuring exercise has significantly improved the sustainability of the country’s external debt position.

What are the remaining challenges and how are they affecting our economic progress and at the same time how are they being addressed?

As a Small Island Developing State (Sids) with limited natural resources and a scarcity of land, economic diversification remains a perpetual challenge for Seychelles. The main pillars of our economy are tourism, fisheries and financial services.

Therefore they need to maintain sustainable growth levels while at the same time minimising risk exposure to ensure the economic prosperity seen in more recent times continues.  

The tourism and more broadly, the services sector are highly vulnerable to developments in the Eurozone area. Adverse developments in that region directly impact tourism activity and hence the performance of the domestic economy. The fisheries sector is one that not only requires management of a finite resource but also has to deal with the ills of piracy in a more direct manner whereas the financial sector remains open to public scrutiny and global economic backlash as a result of the financial crisis.  

The economy also remains highly dependent on imports given its limited resource base, with imports of goods and services on average accounting for over 100% GDP (gross domestic products). Given the high dependence on imports and limited economic diversification, the economy therefore remains highly vulnerable to terms of trade shock.

Substantial efforts have been made to not only diversify the tourism sector but to ensure that promotions to other niche markets are also pursued albeit mindful of the fact that Seychelles promotes a green economy. Double-digit growths have been recorded in several new markets, including the Middle East and China.  

With regards to the fisheries sector, key partnerships have been pursued to minimise the risk of piracy and ensuring that fish stocks are sustainable in the long term. As for the financial sector and in conjunction with the IMF, capacity development has improved the regulatory framework while ensuring that monetary and prudential policies in place are conducive to financial sector development.

Economic diversification is also being pursued and it is expected that the fibre-optic cable shall bring new avenues for growth and contribute to spill-over effect in the entire economy. It is evident that the reforms that started in 2008 have served as a platform for private sector-led growth and provided the momentum to undertake the structural changes to ensure the economy is on the path to maintain sustainable growth levels.

Now that Seychelles will soon start repaying its rescheduled debt, how would this impact on the economy, on the lives of ordinary citizens and businesses?

The authority is committed to reducing the country’s public debt to 50% of GDP by 2018. Following the signature of several debt rescheduling agreements with our external creditors initiated in 2009, the public external debt has been on a downward trend ever since. This has also been supported by the good fiscal performances, and today, the amount that are required to service public external debt annually are at a more manageable level.

The savings made over the reform period will ensure that government has sufficient space for debt repayments. Since the start of the programme, the country has been able to remarkably accumulate external reserves which put Seychelles on a better external footing. Therefore, repayment of the country’s external debt is not expected to negatively impact the ordinary citizens and businesses. On the contrary, as the country reduces its external debt, this will positively impact on the ability of private businesses to borrow abroad. This is because a reduction in public debt positively impacts the sovereign rating of the country.  

Seychelles has been congratulated for its successful reform programme but how great has been the impact on ordinary people and businesses?

One of the key features of the reform programme was the adoption of more liberalised policies, including the foreign exchange market. Prior to the reform, the demand for hard currency by the ordinary citizen could not be met fully officially or in some cases even in the parallel market. This situation has changed for the better for everyone. Hence, following the reform, demand for hard currency is fully met in the formal foreign exchange market and in addition, the ordinary citizens are able to use their credit or debit while abroad.  

The reform has also brought about confidence in the domestic economy, which has improved the investment environment.

Consequently, the benefits to Seychellois are two-fold. Firstly, more investment and businesses increase the number and types of goods and services that are available in Seychelles.  Secondly, the higher business activity creates more employment opportunities in the economy.  

Over a longer term period, as the economy continues on a sustainable growth path, and public debt commitment has significantly been reduced, the government is able to reduce the tax level and or increase investment in important capital projects, all of which will lead to an improvement in the living standard of the citizens.  

What in your opinion has led to the success of the reforms?

An important factor that has contributed to the success of the reform programme is the commitment by the authority to introduce difficult measures and policy with the underlying objective to improve the economic situation. Also equally important is the innumerable support and sacrifices made by the Seychellois people during the difficult times.

How would you describe the state of the country’s financial reserves five years after the reform programme?

The country’s gross external reserve five years on from the start of the reform programme is in a relatively healthy state but there is always room for improvement. At the time the Seychelles authorities opted to undertake the reform programme the country’s external reserves amounted to around US $50 million which could finance only days of the country’s imports.
 
However, an important objective of the reform programme is the accumulation of international reserves.  This has been possible due to a combination of foreign exchange receipts from the country’s partners in support of the reforms programme as well as purchases of foreign currency from the market by the Central Bank. At the end of 2012, the country’s external reserves reached US $307 million or equivalent to 3.1 months of import cover. For the year 2013, given the strong performance of the tourism sector an associated increase in foreign exchange inflows, the Central Bank has been able to opportunistically purchase foreign currency in the market to build reserves which is expected to end the year 2013 at around US $400 million or equivalent to around months of the country’s import.  

Having a healthy level of international reserves is very important for an economy like Seychelles which is a net importer and vulnerable to terms of trade shocks. Therefore, having adequate levels of reserve provides a buffer against external shocks.  

Some people are not sure if we can maintain the fiscal discipline when the IMF programme ends. How are we planning to manage this?

Over the reform period, Seychelles went from a Selective Default (SD) credit rating to an overall rating of ‘B’, in October 2013 based on the review undertaken by Fitch Ratings Agency. It stated that the “strict fiscal discipline and budget surplus were contributing factors for the rating”.  Fitch has also stated in its report that factors which could lead to an upgrade in ratings were continued reduction of public debt levels, enhanced credibility of the macroeconomic framework, continued increase in external liquidity, and sustained GDP growth underpinned by continuing structural reforms.

Since 2008, government has consistently outperformed its fiscal programme targets and has given its commitments to reduce overall public debt to 50% of GDP by 2018. It is important to note that this target is not an IMF-imposed target but one set and committed to by the Seychelles government. The target has been deemed achievable by the country’s reform partners and rating agency if fiscal discipline is maintained.  

It is clear that the country has more to lose than to gain by not continuing with its fiscal discipline commitment and the government has already demonstrated such obligation over the past five years. In addition, when the IMF-supported economic reform programme will come to an end, the country will be in a better position and able to honour its external commitments.

Getting back to economic fundamentals

In our July 17, 2013 special issue, we published a report on the Seychelles politics and economics of the last 20 years.

It was a very well-read piece written by Penlac and Chaka Bros chief executive Gafoor Yakub and now that Seychelles has clocked five years since embarking on the economic reform programme, the Seychelles Nation newspaper contacted him for his opinion about the country’s growth since taking this bold step.

Mr Yakub 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).

Former finance principal secretary Ahmed Afif, who also worked with the Central Bank of Seychelles and served as chief executive of the Seychelles International Business Authority, also joined Mr Yakub for this collective interview on the way forward for Seychelles after undergoing five years of economic reform under the supervision of the IMF.

Mr Afif played a central role in designing and executing major economic reforms in Seychelles.

Thursday October 31, 2013 marked the fifth anniversary of the IMF-backed reform programme that Seychelles has been following since October 31, 2008. What was the economic reality then and how has the Seychelles macroeconomic situation changed during the last five years of reform?

The economic reality that Seychelles faced as it braced itself to undertake the reform programme in 2008 can be summarised as follows:

• Price controls, import controls and exchange controls were not effective; they did not achieve much.
• The Seychelles rupee had to be devalued and ultimately floated.
• The government had to push for national budget surpluses and get rid of the perpetual budget deficits of the past.
• Seychelles was in need of some debt relief in order to get a head start in its path to recovery

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.

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.

After some debt restructuring (including debt relief) and after generating annual primary budget surpluses, the country’s Debt-to-GDP ratio stood roughly at 87% by 2010. We have a commitment towards the international community to bring our external debt down to 60% of GDP by 2015 and 50% of GDP by 2018 namely through the generation of fiscal surpluses which will mean a tightening of our national budget strings.

The last five years have really been a first phase of adjustment. Our economy must now maintain on a path aimed at securing long-term economic stability and growth, strengthening infrastructure and productivity, while also continuing to bringing public sector debt down to a sustainable level. 

Unfortunately, the global economy, especially in Europe, is uncertain and precarious. Seychelles relies predominantly on tourism largely from Europe. We are grappling with the cancellation of a number of direct air links. Our small, open economy is under threat on two fronts – the fiscal and external positions. Slower global economic growth could depress domestic growth and tax revenues, even as pressures on government spending would likely continue. The fiscal position remains fragile, with a public debt that is still high and projected to decline by only a modest amount in the medium term but with a target of 50 percent of GDP by 2018 as stated earlier.

This objective requires maintaining the primary surplus in the government budget at around 4.5% of GDP throughout the period. Additionally, our current account deficits on the balance of payments, although high, have to date been financed mostly through high foreign direct investment, but this trend could quickly reverse if international financial markets deteriorate.

This means that we need to substantially increase public sector efficiency, enhance private sector competitiveness, invest in human development and in public infrastructure (information technology, utilities) and improve social protection programmes to better cushion poor and vulnerable people. The key challenges for the budget under this scenario are to maintain an adequate tax effort and manage expenditure prudently. To a great extent, tax revenues depend on:

(i)                  good performance in the tourism sector and the indirect taxes levied on the sector,

(ii)                performance of the private sector in general, and additional revenue generated by lowering the Value Added Tax (Vat) threshold in the medium term, and

(iii)               effective tax administration and management.

How does Seychelles stay on the path of economic stability and growth?

We have to get back to economic fundamentals. The primary issues right now are our fiscal position, which is supported by monetary policy, and our external or balance of payments position. The government must keep pressure on the national budget to control its expenditure and generate annual budget surpluses. The parastatal companies have to also do their bit and undertake reforms in order to be self-sustaining.

Despite the useful head start that we got as a country with the external debt write-off, our overall public debt is still high and it is estimated that it will only decline slightly in the medium-term. The current account of our balance of payments is funded by some foreign direct investment (FDI) inflows into the capital account, but this situation could change if the international markets don’t perform well. The flexible exchange rate regime seems to be well suited for a country like Seychelles which is vulnerable to large external shocks. The gamble taken by the government seems to be working. It has reduced its own role in economic activities except for strategic industries like public utilities, transport, petroleum and so on. It is trying to reduce this culture of total dependency on its resources.

In order for the country to stay on the path of stability and recovery, it might help if the private sector could perhaps start taking a more active role in riskier sectors previously dominated by the government like say low-cost housing projects, subject to getting access to suitable financing.

Interest rates should be used to control liquidity. The reserve money target should be used to lower inflation and influence the exchange rate level by buying and selling of foreign exchange to the banks. We need to diversify the economic sectors away from the traditional markets in Europe, especially tourism, and it’s fair to say that the Tourism and Culture Ministry and Seychelles Tourism Board are already working on that. Of course, we still need to improve our services in this important industry and encourage any initiative to restore direct air access from Europe to Seychelles where the bulk of the tourism markets lies.

We need to also improve the business climate by providing access to credit for viable business ventures; introduce electronic payment options for most services without the banks overcharging customers or business operators for such services. We also need to generally reduce paperwork and bureaucracy in processing import and export bills.

On the human resources side, we require higher skills and a sound health and an education system that continues to churn out the kind of robust workforce that will allow Seychelles to leapfrog into the age of technologically driven enterprises with a competitive level.

The government needs to seriously ensure that its workforce is motivated, led by example and it needs to place quality, proficiency and credibility as the main criteria for all key appointments.

And how can Seychelles become more productive and competitive?

We are at an economic crossroad at the moment. With the various taxes levied on incomes and on goods and with our fluctuating exchange rate, you may have noticed that both the cost of labour and imported materials is rising.

If we are serious about making it a better place to do business, we must also be prepared to look inwards and address the hiccups in the system at the operational level such as the earlier rushed implementation of Asycuda World, the red-tape in our lop-sided employment laws, the possible leakages of tax revenue at the air and sea ports, and so on. These can only be resolved by ensuring that experienced hands lead change and the effort to solve many of the problems that have been clearly identified are unhindered so that we can create a professional working environment guided by the rule of law, consistent service delivery and a work ethos based on meritocracy.

Take Singapore as an example with regards to its rising operational costs. Despite the window dressing and rosy picture being painted, the Singapore model is currently under strain. It is feeling a squeeze on its competitiveness caused by rising costs, namely labour costs. The government there introduced new levies in an attempt to tackle the influx of unskilled or low-skilled labour, thus making it more expensive to employ foreign labour. This has been impacting on the profit margins and competitiveness of its real sector businesses. If companies pass on the extra labour charges to consumers via price increases, that can fuel inflation. Rising costs are therefore making Singapore’s exports less competitive. As a result the low-wage economies like Vietnam, Cambodia and Laos are snapping up business from Singapore.

We in Seychelles need to ensure that we have a good mix of big and small or medium-sized enterprises (SMEs), not just in the services industry like tourism but also in manufacturing, agriculture, fishing and other sectors of the economy. This could help us spread the risk during the hard times when one sector is down, especially now when the world economy is facing a prolonged downturn.

It is encouraging to see that the government is keen to ensure that new financing schemes are created for SMEs in the productive manufacturing sectors. However, the system proposed is one that subsidises banks which are highly profitable any way.

Should the answer not have been in allowing more competition in the banking sector?

How will established businesses get access to better-priced financing schemes?

We need to encourage and support productivity with schemes such as “productivity credit” whereby a company can claim back, say, up to 50% of its capital assets that have helped increase its labour productivity. Such ideas have to be explored in more detail of course.

There is much talk about the need to attract Foreign Direct Investment (FDI). What are your views about that?

We are in the 21st century and this is an age ofinterdependence. We cannot afford to show preference for any group of investorsor any other group of foreigners if they are all bringing in FDI. We must realise that some problems must be tackled with the help of others. We need to engage with the outside world if we are going to attract FDI inflows but we need to show that we treat all partners fairly and on even terms whether they are Seychellois or not. It’s the smart thing to do.

We must avoid the narrow pursuit of interests and not allow others to impose their values on us.

Take Finland as a country for instance. It enjoys triple-A ratings (AAA) compared to other European countries. It has a thriving private sector plus a transparent business environment. Red tape is minimal. Finland has also been classified as one of the least corrupt countries in the world. We understand their corporation tax is being reduced from 24.5% to 20% from January 2014. All these qualities are highly conducive to FDIs. There’s much we can learn from them.

What would be a realistic strategy in the way forward?

We need to put our heads together and come up with a vision or strategy that marries people’s expectations of prosperity with an economy that is more sustainable in the period ahead. We must of course be realistic in the pursuit of our dreams. Let us avoid projects or public undertakings that are not going to generate any long-term sustainable outcomes.

We need to have open, serious national debate on major public infrastructure decisions so that there is consensus all round that we are indeed planning our future taking at heart our long-term financial and economic interests first.