In August 2008, Seychelles was staring into an economic abyss. One month earlier the government had failed to make its payments on a tranche of foreign private debt and Standard & Poor’s had responded by slashing the country’s credit rating to selective default.
Several factors were blamed for pushing Seychelles to the brink – rising commodity prices that caused a spike in inflation, and a drop off in vital tourism revenues – but the roots of the problem extended far deeper. As the IMF put it, "Seychelles’ economic and financial crisis of 2008 reflected a decades-long pursuit of unsustainable policies and rising structural distortions."
The pace of reform was too slow to address the imbalances and the government, keen to maintain the value of the Seychelles rupee, introduced foreign exchange restrictions. All the while, international capital markets were being tapped to cover public spending – Seychelles was digging itself into a hole.
The IMF stepped in with a US$26 million standby arrangement conditional on action being taken to revive the economy. In December 2009, satisfied with the rate of progress, the IMF canceled the standby arrangement and agreed to a US$31 million three-year financial support package. The economy is expected to contract by 7.5% in 2009, an improvement on the 10.7% contraction projected in June. GDP growth is likely to return in 2010.
"The macro leverage of Seychelles has undergone a complete turnaround and lending agencies have come back and reviewed the country quite favorably," said Conrad Benoiton, managing director of Appleby Seychelles and formerly an official at the central bank. "All that is down to the measures the government has entered into under the IMF programs."
In addition to a restructuring of public debt, reforms included the removal of foreign exchange and interest rate restrictions, the reintroduction of monetary policy and a broadening of the tax base. Civil servant numbers were cut and government spending programs reformed. Steps have also been taken to make the public sector more transparent.
Seychelles’ medium-term strategy is one of consolidation and further reform. More can be done to raise public sector productivity, restructure debt and strengthen financial discipline. Alterations to the business tax are likely to continue and be joined by a personal income tax and a value-added tax.
There’s no room for complacency but Seychelles can look back on the progress of 2009 as a job well done. "The government has turned the fiscal situation around," said Peter Burian, director of Mayfair Trust, a corporate services provider. "Given that IMF reforms introduced elsewhere have not been so successful, perhaps Seychelles should be a role model."