The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
Document of The World Bank
Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No: PGD212
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT FOR A
PROPOSED LOAN
IN THE AMOUNT OF US$15 MILLION
Public Disclosure Authorized TO THE
REPUBLIC OF SEYCHELLES
FOR A
COVID-19 CRISIS RESPONSE EMERGENCY DEVELOPMENT POLICY FINANCING
JUNE 11, 2020
Macroeconomics, Trade And Investment Global Practice Public Disclosure Authorized Africa Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
. Public Disclosure Authorized
The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
Republic of Seychelles GOVERNMENT FISCAL YEAR January 1 – December 31
CURRENCY EQUIVALENTS (Exchange Rate Effective as May 31, 2020) Currency Unit =Seychellois Rupee (SCR) US$1.00 = SCR 17.59
ABBREVIATIONS AND ACRONYMS AML Anti-money Laundering NDS National Development Strategy ASA Analytical and Advisory Services NGO Non-governmental Organizations AfDB African Development Bank PA Prior Actions ASP Agency for Social Protection PA Prior Action BO Beneficial Ownership PCI Policy Coordination Instrument Cat DDO Catastrophe-Deferred Drawdown PEFA Public Expenditure and Financial Accountability CBS Central Bank of Seychelles PforR Program for Results CFT Combatting the Financing of Terrorism PFM Public Financial Management COVID-19 Corona Virus Disease 2019 PIM Public Investment Management CPF Country Partnership Framework PPBB Program Performance Based Budgeting DPF Development Policy Financing PPE Personal Protective Equipment DSA Debt Sustainability Analysis RAS Reimbursable Advisory Services ESAAMLG Eastern and Southern Africa Anti-Money RFI Rapid Financing Instrument Laundering Group FDI Foreign Direct Investment SCD Systematic Country Diagnostic FIU Financial Intelligence Unit SEYPEC Seychelles Petroleum Company Limited FSDIP Financial Sector Development SOE State Owned Enterprises Implementation Plan GDP Gross Domestic Product SWA Social Welfare Assistance GFN Gross Financing Need SRC Seychelles Revenue Commission GoS Government of Seychelles SWIOFish South West Indian Ocean Fisheries GRS Grievance Redress Services TSA Treasury Single Account IBRD International Bank for Reconstruction and US$ United States Dollars Development IDA International Development Association UN United Nations IMF International Monetary Fund VAT Value-added Tax JEE Joint External Evaluation WBG World Bank Group MoFTIEP Ministry of Finance, Trade Investment and WHO World Health Organization Economic Planning MSME Micro, Small and Medium Enterprises WB World Bank
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Regional Vice President: Hafez M. H. Ghanem Country Director: Mark R. Lundell Regional Director: Asad Alam Practice Manager: Mathew A. Verghis Task Team Leaders: Sashana Whyte, Brenden Jongman
The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
REPUBLIC OF SEYCHELLES
COVID-19 CRISIS RESPONSE EMERGENCY DEVELOPMENT POLICY FINANCING
TABLE OF CONTENTS
SUMMARY OF PROPOSED FINANCING AND PROGRAM ...... 3
1. INTRODUCTION AND COUNTRY CONTEXT ...... 5 2. MACROECONOMIC POLICY FRAMEWORK ...... 6 2.1 RECENT ECONOMIC DEVELOPMENTS ...... 6 2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY...... 13 2.3 IMF RELATIONS ...... 18 3 GOVERNMENT PROGRAM ...... 18 4 PROPOSED OPERATION...... 19 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ...... 19 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS ...... 20 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY...... 29 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ...... 30 5 OTHER DESIGN AND APPRAISAL ISSUES ...... 32 5.1. POVERTY AND SOCIAL IMPACT ...... 32 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS ...... 33 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS ...... 34 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY...... 36 6 SUMMARY OF RISKS AND MITIGATION ...... 37 ANNEX 1: POLICY AND RESULTS MATRIX ...... 40 ANNEX 2: IMF RELATIONS ANNEX ...... 42 ANNEX 3: LETTER OF DEVELOPMENT POLICY ...... 44 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE ...... 50
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The Seychelles COVID-19 Crisis Response Emergency Development Policy Financing was prepared by a World Bank Group core team led by Sashana Whyte (Economist, EA1M2) and Brenden Jongman (Disaster Risk Management Specialist, SAFU2) and comprising of Anita Schwartz (Lead Economist, HAFS1), Edmundo Murrugarra (Senior Social Protection Economist, HAFS1), Marco Ranzani (Economist, EA1PV), Kathrine A. Plangemann (Lead Public Sector Specialist, EECG1 ), John Gabriel Goddard (Lead Economist, EA1F2), Felipe Montoya Pino (Young Professional, SLCUR), Marcelle Ayo (Country Manager), Hoda Atia Moustafa (Head, MIGAF), Patrick Kabuya (Sr Financial Management Special, EA1G2 ), Erik von Uexkull (Sr. Economist, EA1M2), Natsuko Toba (Economist, IFC – CCE3), Brinda Devi Dabysing (Sr Financial Sector Specialist , EA1F2), Maud Juquois (Sr. Economist, HAFH1); Nejma Cheikh (Health Specialist, HHNGE), Rija Lalaina Andriantavison (ET Consultant, HAFH1); Thomas Buckley (CPC – AFCMU), Ana Campos Garcia (Sr Disaster Risk Management, SAFU2). The team benefitted from guidance from Mark Lundell (Country Director, AFCE2), Asad Alam (Regional Director, EA1DR), Thomas Buckley (Country Program Coordinator, AFCMZ), Mathew A.Verghis (Practice Manager, EA1M2), Emre Ozaltin (Program Leader, AFCE2), and Carolin Geginat (Program Leader, AFCE2). The team gratefully acknowledges the excellent collaboration of the Government of Seychelles and the comments of peer reviewers Markus Kitzmuller (Senior Economist, EA2M1) and Cornelius Fleischhaker (Economist, ELCMU)
The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
SUMMARY OF PROPOSED FINANCING AND PROGRAM
BASIC INFORMATION
Project ID Programmatic P174198 No
Proposed Development Objective(s)
To support the Republic of Seychelles in its response and recovery from COVID-19 crisis by (1) enhancing response mechanisms in health, social protection and private sector; and (2) supporting sustainable post-crisis recovery through strengthened financial systems and climate resilience.
Organizations
Borrower: REPUBLIC OF SEYCHELLES
Implementing Agency: MINISTRY OF FINANCE, TRADE, INVESTMENT AND ECONOMIC PLANNING, MINISTRY OF ENVIRONMENT, ENERGY AND CLIMATE CHANGE, DEPARTMENT OF HEALTH
PROJECT FINANCING DATA (US$, Millions)
SUMMARY
Total Financing 15.00
DETAILS
International Bank for Reconstruction and Development (IBRD) 15.00
INSTITUTIONAL DATA
Climate Change and Disaster Screening
This operation has not been screened for short and long-term climate change and disaster risks Overall Risk Rating
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
Results
Indicator Name Baseline Target Percentage of international arrivals having been tested for COVID-19 in accordance with the Department of Health protocol 0 (December 2019) 95 (December 2020) Percentage increase in households receiving social protection or social welfare support to alleviate COVID-19 impacts 0 (December 2019) 20 (June 2020) Number of workers in the private sector having benefited from salary 0 (December 2019) guarantee with the objective to reduce job and income losses 25,000 (December 2020) Percentage of firms benefiting from postponement of taxes to mitigate the 0 (December 2019) 90 (August 2020) impact of COVD-19 Percentage uptake of the credit line facility under the Private Sector Relief Scheme to help micro, small and medium enterprises (MSMEs) impacted 0 (December 2019) 80 (June 2021) by COVID-19 Percentage of legal entities that have submitted verifiable ownership 0 (December 2019) 80 (June 2021) information on the database held by FIU Number of government sectors guided on the mainstreaming of climate change in sectoral policies through the new National Climate Change 0 (December 2019) 10 (June 2021) Council chaired by the Vice President
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
IBRD PROGRAM DOCUMENT FOR A PROPOSED LOAN TO REPUBLIC OF SEYCHELLES
1. INTRODUCTION AND COUNTRY CONTEXT
1. The objective of the proposed operation is to support measures taken by the Republic of Seychelles to mitigate the economic impact of the Corona Virus Disease 2019 (COVID-19) pandemic and facilitate a resilient recovery. The financing of this operation consists of an IBRD loan in the amount of US$15 million. The proposed operation supports the Government’s response to mitigate the economic and social impact of the COVID-19 pandemic and to put in place measures to facilitate a recovery. This development policy financing (DPF) is both urgent and critical, given the magnitude of the economic crisis and the unanticipated financing gap caused by the pandemic. The proposed operation supports actions that provide financial relief to affected households and firms, structural reforms to improve the transparency and accountability of the financial system and policies to address climate change. These actions are aligned with the government’s announced emergency response measures as well as their broader reform program.
2. The pandemic has been contained in Seychelles. As of May 18, 2020, there have been only 11 reported cases, all of whom have recovered and no deaths due to COVID-19 have been reported. However, these cases have also demonstrated the limits of the Seychellois health system to treat higher numbers of severe COVID-19 cases simultaneously, underlying the importance of strong containment. The Public Health Commissioner of Seychelles declared a Health Emergency on 20th March 2020. This was followed by a ban on all tourist arrivals and drastic containment measures aimed at curbing the spread of the virus. The Government also prohibited public gatherings, closed schools and non-essential institutions and instituted social distancing measures. In addition, the Department of Health in collaboration with other relevant partners developed the National Response Plan for COVID 19. The plan laid out measures put in place by the Government to prevent and respond to the introduction of imported cases in Seychelles.
3. Seychelles had made significant economic progress leading up to the COVID-19 pandemic. Gross domestic product (GDP) growth averaged 4.2 percent between 2009 and 2019, and in 2015 Seychelles became a high-income economy, with GDP per capita of US$16,975 in 2019, up from US$11,130 in 2008. After years of an International Monetary Fund (IMF) program the Government has maintained its target of 2.5 percent primary balance and was on target to reduce the debt to GDP ratio to 50 percent by 2021 or 2022. While the country has achieved positive economic growth and stability outcomes, there has been limited structural economic change and innovation, and Seychelles remains a society and an economy in transition. Tourism and fisheries are still the two key sectors of the economy. Tourism centers on large hotels that offer comprehensive packages, with a high degree of vertical integration that limits the participation of local operators in offering complementary services. The fishing industry remains unchanged, with limited local value added. However, Seychelles is host to one of the largest tuna canneries in the world and the annual contribution to GDP varies from 8 to 20 percent and employs 17 percent of the total population. The authorities recently finalized the National Development Strategy (2019-2023), which includes an updated diversification strategy for these two industries.
4. The economic shock from COVID-19 is expected to be very significant despite the low infection rate. Given Seychelles’ strong dependence on international tourism, the economy will be significantly affected as tourist
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
arrivals are projected to decline by more than 50 percent in 2020. The tuna canning industry has not been severely affected by the pandemic, but should the crisis continue, the foreign fleet based in Seychelles may have difficulty operating and the availability of raw material for the cannery may be constrained. Capital flows to Seychelles are expected to decline significantly, which would translate into a significant external financing gap. The fiscal position is also expected to deteriorate drastically due to significant revenue losses triggered by the pandemic and additional spending needs to mitigate the negative economic impact and to prevent a potential outbreak in Seychelles. This shock puts fiscal sustainability at risk after several years of effort to build revenues and safeguard debt sustainability.
5. Seychelles has made impressive strides in poverty reduction. Over the last decade, high economic growth in Seychelles has been accompanied by an elimination of extreme poverty. By international norms, Seychelles has eradicated absolute poverty (individuals living on an income of under US$1.90 per day). However, the distribution of income in Seychelles is highly unequal and the Gini coefficient is estimated at 0.46 compared with an average of 0.41 among upper middle-income countries. The majority of low- income workers are employed in accommodation and food service activities, health services, and business support activities. This implies that vulnerable households linked to economic sectors affected by COVID-19 face a substantially elevated risk of falling into poverty, at least in the short-run. Based on the 2013 household budget survey, about 6 out of 10 poor individuals have a job, are largely employed in the services sector, and are more likely to be self-employed compared with the nonpoor. Poverty is projected to rise to between 43.2 and 46.1 percent in 2020 without a response of the Government to the crisis brought about by the COVID-19 pandemic (national poverty line).
6. The proposed DPF of US$15 million will provide emergency budget support to mitigate the economic impact of COVID-19 and protect the poor and vulnerable population. This operation is part of the World Bank’s COVID-19 support package that takes place in tandem with the IMF’s Rapid Financing Instrument (RFI) disbursement of US$31 million, which will help bolster foreign exchange reserves and close the external financing gap. Estimates from the government’s recently approved amended budget, indicate that the external financing gap is US$126 million (or 10 percent of GDP) in 2020. The proposed financing supports the Government’s efforts to mitigate the immediate social and economic fallout triggered by the COVID-19 pandemic and to put in place measures to facilitate a fast recovery and build buffers to future shocks.
2. MACROECONOMIC POLICY FRAMEWORK
2.1 RECENT ECONOMIC DEVELOPMENTS
7. Prior to the COVID-19 Pandemic, Seychelles maintained a robust macroeconomic policy framework. In 2008, Seychelles fell into sovereign debt default which led the country to embark on a path of major macroeconomic and institutional reforms. With the support of the international financial institutions and other development partners, Seychelles floated the exchange rate; adopted a new, independent monetary policy framework; tightened fiscal policy and reduced the public sector’s size and role in the economy to allow greater space for private sector development. The reforms undertaken by the Government re-established macroeconomic stability and led to an average real GDP growth of 4.2 percent between 2009 and 2019. In addition, the exchange rate regime has stayed flexible and the Government accumulated substantial reserves. On the fiscal side, public
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
debt sustainability has been restored through debt restructuring and the Government maintained primary budget surpluses.
8. The COVID-19 pandemic has significantly affected economic growth in Seychelles. While real growth was 3.8 percent in 2019, the global outbreak is expected to drastically reduce economic activity in 2020. The tourism sector accounts for approximately 30 percent of GDP, making the country highly vulnerable to the current COVID- 19 pandemic. International travel has been hit hard by the outbreak. The fall in tourism activities will have a domino effect on other sectors, directly and indirectly. This will affect other sectors such as transportation; art, recreation and entertainment sectors; wholesale and retail trade and the financial and insurance sector. In the fisheries sector, around 50 percent of the domestic artisanal catches of demersal species are sold locally to resorts and restaurants for tourists. With the closure of all resorts in Seychelles after the start of the pandemic and the uncertainty surrounding its recovery, the fisheries sector could be severely affected1. The economy is expected to contract by 10.8 per cent in 2020 compared to the pre-pandemic projected growth rate of 3.5 per cent. If the pandemic is prolonged, economic growth could decline by more than 15 percent.
Figure 1: Growth is forecast to decline sharply in Figure 2: Tourist Arrivals will decline 2020 dramatically 15.0 450,000
10.0 400,000 350,000 5.0 300,000 0.0 250,000 -5.0 200,000
-10.0 150,000 GDP Growth by Sector (%) Sector by Growth GDP -15.0 100,000 2015 2016 2017 2018 2019 2020 2021 2022 Arrivals Tourist of Number 50,000 Agriculture Industry 0 Services Real GDP Growth
2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020
Source: World Bank staff estimates (April 2020). Source: Seychelles’ National Bureau of Statistics and World Bank staff estimates (April 2020).
9. The labor market in Seychelles prior to the pandemic was consistent with the strong macroeconomic indicators of the last 10 years. In 2019, the unemployment rate was low at 2.4 percent, indicating a tight labor
1 To mitigate the impact in the fisheries sector, the GoS played the role of a “broker” to ensure that the local fish production could be bought by local processors and sold on the local market; this was also aimed to contribute to ensuring food security during the crisis, by substituting imports of fresh/frozen products. To keep the prices low, the GoS took steps to reduce prices of inputs such as bait (66 percent reduction) and ice (50 percent reduction) to local fishermen registered with Seychelles Fishing Authority (SFA). The Government also bought the catch of semi-industrial longline vessels (targeting tuna and swordfish) who could not export their products.
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
market. Rising labor demand in recent years has been met by a surge in expatriate workers. Expatriate workers account for 50 percent of employment in the formal sector and are employed in construction and tourism. Approximately 16 percent of the total labor force in Seychelles is employed in the informal sector2. Informality is particularly high in agriculture and fisheries, as well as in manufacturing and construction. Employment in the private sector is 67 percent of formal employment. Tourism accounts for 23.6 percent of the formal sector employment. The shock caused by the COVID-19 pandemic will likely cause large-scale economic effect to those in the formal sector as well as in the informal economy.
10. Tight monetary policy kept price levels stable. The inflation rate reached 2.0 percent in December 2019 due to declining international fuel prices and a tight monetary policy stance. However, inflation is expected to increase to 4.5 percent in 2020. This reflects the expected depreciation of the exchange rate as limited inflows due to the direct loss of income from tourism and other related economic activities are expected to place severe pressure on the exchange rate. The recent expansionary fiscal measures could also contribute to inflationary pressures. The inflationary effect of limited inflows and the stimulus package are anticipated to outweigh the benefits of lower oil prices.
2 Bhorat, Ewinyu and Yu, 2017
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
Table 1: Key Macroeconomic indicators, 2018-2023
2018 2019 2020 2020 2021 2022 2023 Prel. (Pre- COVID Proj. Proj. Proj. COVID) Real Economy Annual percent change, unless otherwise indicated Real GDP 3.8 3.9 3.5 -10.8 6.5 5.4 4.6 GDP deflator average 2.2 1.2 1.8 4.2 3.0 2.8 3.0 CPI (annual average) 3.7 1.8 2.1 4.5 3.1 3.1 3.0 CPI (end-of-period) 3.4 1.7 1.8 4.8 3.4 3.4 3.0 Fiscal Account Percent of GDP, unless otherwise indicated Total revenue and grants 37.5 36.4 40.3 34.9 37.1 34.9 35.5 Tax revenue 32.1 32.0 31.6 27.5 28.4 28.9 29.2 Expenditure 37.8 36.1 40.2 48.5 42.0 38.7 37.7 Current expenditure 32.8 32.4 34.3 44.6 35.7 33.3 31.3 Capital expenditure 5.1 3.7 4.8 5.7 6.4 6.4 6.5 Overall balance 0.7 -0.8 0.1 -13.6 -4.9 -3.8 -2.2 Primary balance 2.9 2.7 2.5 -9.7 -1.8 -1.0 0.3 Total government and government-guaranteed debt 60.9 59.1 57.2 85.8 80.0 74.5 67.7 Domestic 32.3 32.1 29.9 39.2 35.7 32.6 29.3 External 28.5 27.0 27.4 46.5 44.4 41.9 38.4 Selected Money Indicators Broad money 7.7 13.9 6.4 -6.0 … … … Credit to the private sector 11.5 22.3 10.1 -1.0 … … … External sector Current account balance including official transfers (in percent of GDP) -17.9 -16.7 -17.6 -29.2 -25.8 -24.1 -21.9
Exports, Goods and Services (growth) 9.5 -1.6 3.0 -38.9 28.8 12.6 13.6
Tourism (growth) 15.8 5.5 4.2 -47.3 19.1 17.7 17.5
Imports, Goods and Services (growth) 8.7 -1.4 3.2 -29.9 21.9 10.3 10.0 Gross official reserves (end of year, millions of U.S. dollars) 548 580 541 368 398 436 496 Months of imports 3.6 5.4 3.3 2.8 2.8 2.8 2.9
Other Memo Items Nominal GDP (US$ Millions) 1579 1651 1710 1252 1386 1551 1743 Source: World Bank Estimates based on data from the authorities (Central Bank of Seychelles (CBS) and Ministry of Finance, Trade Investment and Economic Planning (MoFTIEP)) and IMF data (April 2020). Note: Percent of GDP, unless otherwise indicated.
11. The banking sector was well capitalized and liquid leading into the crisis. Thus, it should be able to absorb some credit losses and liquidity squeeze. Non-performing loans declined to 2.8 percent of total loans in September 2019 from 3.5 percent in December 2018. The deterioration in macroeconomic conditions due to COVID-19
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
required swift intervention by the CBS to prevent the crisis from destabilizing the financial sector. These measures include the creation of a credit facility to assist commercial banks with emergency relief measures to assist businesses and individuals struggling with the financial impact of the pandemic (see Box1).
Box 1: Seychelles’ COVID-19 Policy Response The Government of Seychelles (GoS) has introduced emergency intervention measures to manage the economic and social impact of the COVID-19 pandemic. These measures include assistance that will give some relief to businesses in the private sector which will be severely affected.
Announced measures include: • Guarantee salary for three months (April to June 2020) for employees in the private sector, limited to SCR 30, 000 per month per employee (5.1 percent of GDP). • Suspension of hiring of non-essential staff and other current spending • Increase in allocations to health sector (0.5 percent of GDP) • Increase in allocations to social protection for the vulnerable group (0.25 percent of GDP) • The CBS reduced the policy rate by 100 bps to 4 percent. • Credit facility of approximately US$36 million to assist commercial banks with emergency relief measures to assist businesses and individuals struggling with the financial impact of the pandemic. • Central Bank sold US$10 million of FX to meet the unmet FX demand on April 9. • The National Assembly has allowed the Central Bank to provide (i) a limited credit to government up to SCR 500 million, preferably through purchase of securities, and subject to CBS Board approval; and (ii) extending the maturity of credit to commercial banks to three years.
12. The external account is strongly dependent on tourism earnings and investment. The current account deficit which reached 16.7 percent of GDP in 2019 has been driven by sizeable merchandise trade and income deficits that are only partially offset by large services trade surpluses. With the expected impact of COVID-19 on tourism and exports, the current account deficit is expected to reach 29.2 percent of GDP in 2020. In addition, most of the expected Foreign Direct Investment (FDI), which has been the major source of financing of the country’s current account deficits, will likely be postponed and only rebound in 2021. Without exceptional financing, the central bank’s gross international reserves (GIR) are estimated to decline to around US$240 million by end-2020, equivalent to only 1.8 months of imports.
13. The nominal exchange rate has depreciated due to the impact of COVID-19, prompting the central bank to intervene in the foreign exchange market. The significant slowdown of tourist arrivals caused a decline in income in the tourism industry. Consequently, foreign exchange inflow declined resulting in a depreciation of the domestic currency. The sudden depreciation prompted the central bank to intervene in the foreign exchange market with US$10 million in April 2020, to stabilize the market.
14. Fiscal policy was prudent with sizeable primary budget surpluses. At 2.6 percent, the primary surplus in 2019 marginally exceeded the targeted fiscal primary balance of 2.5 percent of GDP under a non-disbursing three- year IMF Policy Coordination Instrument (PCI). However, the contraction in tourism related activities and underperforming dividends are expected to have a significant negative impact on revenue collection in 2020. In
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
addition, expenditures are expected to increase drastically due to increase spending on health and the cost of the government’s COVD-19 response package (see Box 1). Consequently, the primary balance is expected to reach a deficit of 9.7 percent of GDP in 2020.
Table 2: Key Fiscal Indicators, 2016-2022 2018 2019 2020 2020 2021 2022 2023 (Pre- Prel. COVID) (COVID) Proj. Proj. Proj. Total revenue and grants 37.5 36.4 40.2 34.9 37.1 34.9 35.5 Total revenue 36.2 36.0 37.7 31.6 32.8 32.9 33.8 Tax 32.1 32.0 31.6 27.5 28.4 28.9 29.2 Nontax 4.1 4.0 6.0 4.1 4.3 4.0 4.6 External grants 1.3 0.4 2.6 3.3 4.3 1.9 1.7
Expenditure and net lending 37.7 36.1 40.2 48.5 42.0 38.7 37.7 Current expenditure 32.8 32.4 34.3 44.6 35.7 33.3 31.3 Primary current expenditure 29.6 30.0 31.9 40.7 32.6 30.5 28.8 Wages and salaries 10.3 10.8 12.3 13.6 12.6 11.6 10.9 Goods and services 12.7 12.0 12.1 12.7 12.2 11.2 10.6 Transfers 6.5 7.0 7.3 14.2 7.7 7.5 7.1 Social program of central government 0.5 0.7 0.7 5.9 0.8 0.7 0.7 Benefits and programs of Social Security 5.8 5.9 6.0 7.0 6.3 6.2 5.9 Other 0.1 0.2 0.1 0.2 0.1 0.1 0.1 Interest due 3.1 2.4 2.4 3.9 3.1 2.8 2.5 Capital expenditure 5.1 3.7 4.8 5.7 6.4 6.4 6.5 Net lending 0.4 0.6 0.6 0.5 0.5 0.4 1.7 Contingency 0.2 0.2 0.2 0.5 0.2 0.2 0.2
Primary balance 2.9 2.7 2.5 -9.7 -1.8 -1.0 0.3 Overall balance -0.2 0.2 0.1 -13.6 -4.9 -3.8 -2.2
Financing -0.7 0.8 -0.1 13.6 4.9 3.8 2.2 Foreign financing -0.2 -0.2 -0.7 8.9 3.0 2.4 2.1 IMF, World Bank and AfDB 0.0 0.0 0.0 5.6 0.0 0.0 0.0 Domestic financing, net -1.2 1.7 0.6 4.7 1.5 1.0 -0.2 Bank financing -2.6 1.2 0.5 2.9 1.4 0.9 -0.2 Nonbank 1.4 0.5 0.1 1.9 0.2 0.1 0.0 Source: World Bank Estimates based on data from the authorities (CBS and MoFTIEP) and IMF data. Note: Percent of GDP, unless otherwise indicated (April 2020).
15. Government revenue will decline significantly in 2020 compared to pre-COVID-19 expectations. Total revenue (excluding grants) is expected to decline to 31.6 percent of GDP in 2020 from 36 percent in 2019 and compared with 37.7 percent in the pre-COVID-19 budget. Before the crisis, the Government planned to introduce
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
measures such as: increase in environmental levy on motor vehicles; changes in the excise structure for alcoholic beverages; and introduce property tax. These measures would have increased revenue by approximately 1 percent of GDP. With the pandemic, tax revenue, which accounts for 80 per cent of total revenue, will decline by SCR 1.8 billion to 27.5 percent of GDP (from 31.6 percent of GDP) due to the predicted decline in tourism activities. Value-added tax (VAT) collection, accounting for ~35 percent of total tax revenue pre-COVID, is expected to decline by 35 percent (to 8.7 percent of GDP) compared to pre-COVID projections due to its strong dependence on tourism. Non-tax revenue will decline by SCR 592 million to 4.1 percent of GDP (from 6.0 percent of GDP in the pre-Covid19 budget) driven by an estimated 50 percent decline in dividend income associated with a reduction in profits.
16. Public expenditure will rise due to increased spending associated with the COVID-19 response package. Government expenditure is estimated to increase to 48.5 percent of GDP compared with 40.2 percent in the pre- pandemic budget. The increase in expenditure will be driven by measures implemented by the Government to address the economic and social impact of COVID-19. These measures include: guarantee of salaries for three months to workers in the private sector with a cap of SCR 30 000 per worker; increase in the allocation for the Social Protection Agency; and increase in spending in the Health Sector. The budget for capital expenditure will increase slightly to account for expected depreciation of the foreign exchange rate, which will affect the cost of projects, particularly those financed by loans. To ensure that the fiscal cost will be consistent with fiscal sustainability objectives, the Government limited spending on wage subsidy to no more than SCR 1.1 billion (5.1 percent of GDP). Some fiscal space (1 percent of GDP) was created by suspending the hiring of non-essential staff and other current spending and the suspension of officials’ travels and social events.
17. The COVID-19 response package and the reduction in the tax base will result in a fiscal financing gap. As a result of the stimulus package and lower economic activity, the budget balance is expected to go to -13.6 percent of GDP in 2020 from the pre-COVID-19 estimate of 0.1 percent of GDP. These baseline projections are subject to significant uncertainty over the magnitude of the economic impact of the COVID-19 crisis (on the revenue side) as well as the government’s response (on the expenditure side). As a result, the estimated fiscal financing gap could be larger.
18. External financing is expected to play a significant part in supporting the government’s response by helping to fill the financing gap. Foreign financing, including through the proposed operation, is expected to finance 56 percent of the external financing gap (see table 3). With domestic financing of 4.7 percent of GDP, the IMF RFI of 2.5 percent of GDP; total World Bank financing (including this operation) of 2.4 percent of GDP and Africa Development Bank Financing of 0.7 percent of GDP, the Government has a remaining financing gap of 4.4 percent of GDP (44 percent of the fiscal financing gap). The GoS intends to finance the financing gaps through additional external borrowing or grants from bilateral partners. If external financing does not materialize the Government plans to resort to domestic financing including the issuance of a bond and issuance of government securities to the private sector (including commercial banks) to finance the fiscal financing gap.
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
Table 3: Balance of Payments Financing Needs and Sources, 2019-2023
2019 2020 2020 2021 2022 2023 (Pre- Prel. COVID) (COVID) Proj. Proj. Proj. Financing Requirements Current Account Deficits -275.4 -305.6 -366.1 -357.8 -374.0 -381.5 Balance on Goods and Services -179.3 -192.9 -274.4 -265.5 -262.3 -235.9 Balance on Primary Income -89.7 -95.5 -94.1 -97.1 -113.4 -140.2 Balance on Secondary Income -6.5 -17.2 2.4 4.7 1.7 -5.5 Amortization -32.0 -39.0 -38.7 -42.8 -51.5 -50.9 Financing Capital Account 48.5 59.3 35.2 63.9 46.2 45.3 Financial Account 266.5 256.6 -0.4 329.6 371.1 407.5 Direct Investment, net 243.1 260.6 80.4 216 259.9 276.1 Portfolio Investment, net -59.9 -34.0 -80.1 -39.7 -29.9 -20.1 Other Investment, net 83.2 30.0 -0.7 150.2 141.2 151.5
Overall Balance 39.5 10.2 -331.6 35.6 43.2 71.2 Change in Net International Reserves -39.5 -10.2 242 -35.6 -43.2 -71.2 Financing Gap 0.0 0.0 125.7 0.0 0.0 0.0 (in percent of GDP) 10.0 Additional Financing Sources IMF 31.2 World Bank 30.0 African Development Bank 9.0 Unidentified Budget Support 55.5
Nominal GDP (US$ Millions) 1651.2 1710.0 1252.2 1385.9 1551.4 1743.0 Source: World Bank, IMF and GoS (April 2020).
2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
19. Economic growth is projected to rebound in 2021 but the growth path will be slow. Real GDP growth is projected to increase to 6.5 percent in 2021 driven by a recovery in the tourist industry and resumption in capital flows. Tourism arrivals are projected to rebound in 2021, however, the recovery of the sector will be slow as tourist arrivals will reach 2019 levels only in 2025. Uncertainty remains around the level of economic recovery as the pandemic is on-going and global recovery remains fragile. Inflation is expected to decline over the medium-term as global supply chains and foreign exchange markets normalize. The average annual inflation rate is expected to decelerate to 3.1 per cent in 2021.
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
Table 4: Balance of Payments Financing Needs and Sources, 2020-2023
Indicator Pre-COVID COVID 2020 2021 2022 2023 2020 2021 2022 2023 Real GDP growth 3.5 4.1 4.0 3.8 -10.8 6.5 5.4 4.6 CPI (annual average) 2.1 2.9 2.9 3.0 4.5 3.1 3.1 3.0 Total revenue excluding Grants (percent of GDP) 40.3 36.2 35.5 35.5 31.6 32.8 32.9 33.8 Expenditure (percent of GDP) 40.2 39.1 36.8 36.6 48.5 42.0 38.7 37.7 Overall balance (percent of GDP) 0.1 0.0 0.2 0.4 -13.6 -4.9 -3.8 -2.2 Primary balance (percent of GDP) 2.5 2.5 2.5 2.5 -9.7 -1.8 -1.0 0.3 Total government and government-guaranteed debt (percent of GDP) 57.2 57.3 51.7 46.9 85.8 80.0 74.5 67.7 - Current account balance (in percent of GDP) 17.6 -17.9 -18.0 -17.5 -29.2 -25.8 -24.1 -21.9 Exports, Goods and Services (growth) 3.0 6.0 4.9 7.0 -38.9 28.8 12.6 13.6 Tourism (growth) 4.2 4.2 6.0 5.0 -47.3 19.1 17.7 17.5 Imports, Goods and Services (growth) 3.2 6.7 4.9 6.0 -29.9 21.9 10.3 10.0 Source: World Bank, IMF and GoS (April 2020).
20. On the external sector, the current account balance as a share of GDP is expected to remain in deficit but will narrow over the medium-term. The current account will largely reflect improvements in export of goods and services due to a rebound in tourist arrivals. However, tourist arrival is not expected to reach pre-crisis level until 2025. Capital inflows are also projected to increase, reflecting a recovery in foreign direct investment. There is significant uncertainty about travel habits in a post-COVID world and corresponding tourism inflows to Seychelles.
21. The fiscal deficit is expected to contract over the medium-term, as the increase in spending associated with COVID-19 subsides. Revenue will rebound beginning 2021 (see table 4), reflecting a resumption of economic activities, although generous loss carry forward provisions and gradual recovery in tourism will likely continue to suppress VAT and business tax collection below pre-crisis levels for several years to come. This recovery in revenue is below the pre-COVID projections and revenue will not reach pre-COVID 2019 levels until 2025, in line with the recovery path of the tourism sector. Meanwhile, expenditure is projected to remain higher than pre-crisis levels in 2021 due to increase capital spending (this might not materialize due to execution constraints). The fiscal deficit is expected to reach 3.8 percent in 2022, if the Government implements cost saving measures. The fiscal deficit will continue to narrow over the medium-term, however the GoS is not expected to meet its PCI primary surplus target until 2025.
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
Table 5: Seychelles Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario (in percent of GDP, unless otherwise indicated) Actual Projections 2009- 2017 2018 2019 2020 2020 2021 2022 2023 2024 2025 (Pre- COVID) COVID 2021 2022 2023 2024 2025 Nominal gross public debt 79.5 60.9 59.1 57.3 85.8 80.0 74.5 67.7 61.8 55.4 Of which: guarantees 1.9 3.2 3.8 6.3 5.4 4.9 4.5 4.2 3.9 3.7 Public gross financing needs 24.2 27.9 24.1 27.7 39.3 37.5 33.5 28.7 26.0 23.4
Net public debt 51.6 50.5 52.6 77.9 74.1 70.2 64.8 60.1 54.5
Real GDP growth (in percent) 4.3 3.8 3.9 3.5 -10.8 6.5 5.4 4.6 4.1 4.0 Inflation (GDP deflator, in percent) 5.4 2.2 1.2 1.8 4.2 3.0 2.8 3.0 3.0 3.0 Nominal GDP growth (in percent) 9.8 6.0 5.1 5.4 -7.1 9.8 8.3 7.7 7.2 7.2 Effective interest rate (in percent) 5.1 5.3 4.4 6.3 6.7 5.5 5.2 4.9 4.8 4.6
Source: Joint IMF-World Bank DSA (April 2020).
22. Seychelles public debt will exceed the high-risk benchmark (60 percent of GDP) in 2020 but remains sustainable. The deterioration of the indicators due to the shocks of the COVID-19 pandemic will cause the public debt to exceed the high-risk benchmark in 2020 (see table 5). In the medium-term the public debt to GDP ratio is projected to decline, reaching 55.4 percent of GDP by 2025 as gross financing needs gradually decline to 23.4 percent of GDP by that time. The improvement is predicated on the government’s commitment to implementing fiscal saving measures to bring the primary balance to a surplus of 2.5 percent of GDP over the medium term.
23. The public debt path will remain above the high-risk benchmark under all shock scenarios. The two most extreme shocks are the real interest rate shock and the primary balance shock scenarios. Under both scenarios the debt-to-GDP ratio would increase to 82.5 percent in 2020 and decline at a slow path from the peak in 2020, staying above the 70 percent high-risk benchmark in 2025. The real exchange rate shock (real depreciation by around 16 percent after 2020) and a one-time shock to real GDP growth (lower than the baseline by 2 percent during 2021‒ 22) would cause an increase in the debt to GDP ratio to 82.5 percent in 2020, with the ratio falling below the 70 percent high-risk benchmark in 2025 (at 61 percent of GDP). A combined macro fiscal shock which is an aggregation of the shocks to real growth, the interest rate, the primary balance and the exchange rate would cause the debt to GDP ratio to remain elevated throughout the medium-term period and reach 85 percent of GDP in 2025. Gross financing needs are significantly higher under the real interest rate shock and the combined macro-fiscal shock throughout the period of projection. A persistently looser fiscal position would keep debt at an elevated level and could prevent the authorities’ planned debt reduction from being attained in the foreseeable future.
24. Contingent liability poses risks to medium-term debt reduction. State-owned enterprises in Seychelles have substantial debt, amounting to approximately 13 percent of GDP (IMF PCI 2019). Majority of this debt is owed by Seychelles Petroleum Company Limited (SEYPEC) and Air Seychelles. While the debts do not benefit from an
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explicit government guarantee, in the past these debts have been assumed by the Government3. Air Seychelles has already announced reductions in flight activity due to COVID-19 and resulting additional losses will further aggravate its financial position and create more demand for government support. In addition, Air Seychelles’ project box bond of $71.5 million4 (around 5 percent of GDP) owed to Etihad could pose roll over risks to the company in 2020 and 2021. To mitigate the risk associated with state-owned enterprises (SOEs) the GoS will discuss the future of the company with the other shareholder. In addition, the GoS will examine the scope for further privatization of some SOEs, including Air Seychelles, to reduce the fiscal risks and improve economic efficiency over the medium term.
25. Risks to the outlook are highly tilted to the downside and depend on the duration the crisis. Downside risks to medium-term growth outlook include a prolonged COVID-19 outbreak, a continued decline in foreign direct investment, and a further decline in tourist arrivals. To quantify this risk, the team prepared a downside scenario assuming a prolonged global outbreak and containment measures. In that scenario, GDP growth would further drop to -15.8 percent due to a protracted lockdown and disruptions in tourism and FDI. Domestic risks are centered around potential fiscal slippages as the Government may face challenges implementing permanent saving measures and high gross financing needs. This would lead to a fiscal deficit of 18.5 percent and higher external financing needs. If the external budget support does not materialize, domestic financing would need to increase to cover the shortfall. While the domestic financial sector is adequately capitalized this scenario is not ideal and would significantly increase gross financing needs (GFN) in the next several years due to the short maturity of domestic debt. To mitigate the risks arising from the high gross financing needs the authorities would need to extend the maturities of the domestic debt.
3 In 2012, the Government of Seychelles assumed liabilities and obligations of Air Seychelles amounting to around 5 percent of GDP. 4 Etihad (owns 40 percent of Air Seychelles) wrote off US$34 million of Air Seychelles debt and agreed to convert US$30 million of its current liabilities into preference shares.
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Figure 3. Indicators of Public Debt under Shock Scenarios (2020–2025)
Macro-Fiscal Stress Tests
Baseline Primary Balance Shock Real Interest Rate Shock Real GDP Growth Shock Real Exchange Rate Shock
Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs (in percent of GDP) (in percent of Revenue) (in percent of GDP) 100 300 45 90 40 250 80 35 70 200 30 60 25 50 150 20 40 30 100 15 20 10 50 10 5 0 0 0 2020 2021 2022 2023 2024 2025 2020 2021 2022 2023 2024 2025 2020 2021 2022 2023 2024 2025
Additional Stress Tests
Baseline Combined Macro-Fiscal Shock SOE bailout Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs (in percent of GDP) (in percent of Revenue) (in percent of GDP) 100 50 300 90 280 45 80 260 40 70 240 35 60 220 30 50 200 25 180 40 20 160 30 15 140 20 120 10 10 100 5 0 80 0 2020 2021 2022 2023 2024 2025 2020 2021 2022 2023 2024 2025 2020 2021 2022 2023 2024 2025
Source: Joint IMF-World Bank DSA (April 2020). Note: 1) The most extreme stress test is the test that yields the highest ratio on or before 2029.
26. Overall, while substantial downside risks remain, the macroeconomic policy framework is adequate for the proposed operation. The COVID-19 outbreak has severely impacted Seychelles’ economy. To bridge the financing gaps created by the crisis, the Government has requested emergency support from the IMF, the World Bank and other partners. Economic stability is expected in the medium-term as the tourism sector recovers and fiscal consolidation resumes. Outcomes remain subject to uncertainty and notable downside risks, particularly regarding the duration of the global COVID-19 pandemic. The COVID-19 crisis will increase debt levels significantly in the short-term. However, in the medium-term debt levels will return to sustainable levels as the Government returns to the prudent fiscal stance it maintained through a PCI with the IMF. Under the PCI, the GoS has a primary fiscal surplus target of 2.5 percent of GDP and net international reserves target of US$400 million.
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2.3 IMF RELATIONS
27. The proposed DPF has been closely coordinated with the IMF, which prepared an emergency support to Seychelles through a RFI. On May 8, 2020, the IMF Board approved a RFI of US$31 million, equivalent to 100 percent of quota, to support the GoS. The requested funds will be used as direct budget support to the MoFTIEP to support the urgent needs arising from the economic impact and mitigation efforts to the COVID- 19 pandemic. The GoS has been under a PCI, with the IMF since 2017 following the conclusion of three successive IMF financial programs. Performance under the PCI-supported program was strong and the Government met all end-December 2019 quantitative targets. Periodic monitoring also continued through Article IV consultations the latest of which was March 2019.
3 GOVERNMENT PROGRAM
28. The medium-term program of Seychelles remains valid, but the crisis triggered by COVID-19 has shifted the government short-term priority. The Government has introduced fiscal and monetary policy measures to stimulate the economy and provide liquidity support to the private sector and financial institutions to sustain jobs and livelihoods (see Box 1). Specifically, the government’s response package includes a three-month wage subsidy (5.1 percent of GDP in 2020); additional spending to the health sector (0.5 percent of GDP); and additional funds to social protection spending for the vulnerable group (0.25 percent of GDP). The Government is committed to limiting the spending of wage subsidy to no more than SCR 1.1 billion (5.1 percent of GDP) to ensure that the fiscal cost will be consistent with fiscal sustainability objectives.
29. The government’s medium-term economic program is defined in the National Development Strategy (NDS) 2019-2023, under the theme ‘Towards a sustainable and inclusive future.’ This NDS is the first in a series of three five-years plan. The NDS 2019-2023 identifies Seychelles’ most critical development priorities “the 3 Ps”: Productivity, Participation, and Performance and highlights what needs to be done to overcome these challenges. Productivity focuses on how Seychelles could benefit from placing more emphasis on boosting the efficiency with which it uses its existing resources. Participation refers to how the Seychelles’ education system needs to equip graduates with the tools they need to reap the benefits of the growing opportunities offered by the country’s increasingly sophisticated economy. It also addresses the fact that social spending needs to be better targeted to shore up its sustainability, boost its impact for protecting the vulnerable, and empower Seychellois to get high quality jobs. Performance requires a public sector that is efficient enough to deliver high quality public services, agile enough to respond to and anticipate emerging priorities, and small enough not to divert scarce financial and human resources away from the private sector, which is responsible for generating the bulk of employment and income.
30. The NDS encompasses six strategic pillars. These include: (i) good governance; (ii) people at the center of development; (iii) social cohesion; (iv) having an innovative economy, underpinned by advances in science, technology and innovation for development; (v) economic transformation; and (vi) environment sustainability and resilience. The pillars address the need to make fundamental changes in the traditional approach to development and achieve socioeconomic transformation.
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The World Bank Seychelles COVID-19 Crisis Response Emergency Development Policy Financing (P174198)
31. The operation supports actions within the Government’s emergency response measures and its broader reform agenda where the World Bank Group (WBG) has played a leading role in policy dialogue. In this context, the following interdependent filters were applied to guide the choice of sectors and reforms: (i) the relative urgency of reforms; (ii) a strong Government commitment to implement the reforms within the operation’s timeline; (iii) the presence of strong analytical underpinnings and a good knowledge base to inform the choice of actions; (iv) robust implementation arrangements; and (v) coordination with other development partners. These filters reflect key lessons learned from the World Bank’s extensive experience in preparing DPFs.
4 PROPOSED OPERATION 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION
32. The proposed operation supports the Government’s overall response to the COVID-19 crisis. The proposed development policy loan is a single-tranche, stand-alone operation to support the Government’s response to COVID-19. The operation supports the GoS to manage the health crisis, mitigate the impact on the poor and vulnerable while stabilizing fiscal policy and supporting economic recovery.
33. The Program Development Objective (PDO) is to support the Republic of Seychelles in its response and recovery from COVID-19 crisis by (1) enhancing response mechanisms in health, social protection and private sector; and (2) supporting sustainable post-crisis recovery through strengthened financial systems and climate resilience. First, the proposed operation provides budget support needed by the GoS to manage the economic and fiscal impacts of the crisis. Second, the operation supports reforms aimed at assisting vulnerable people and businesses affected by COVID-19. Finally, the operation builds longer-term resilience to future shocks by strengthening economic and social systems.
34. The design of the operations builds on key lessons from previous DPF operations in the country, such as the Sustaining Reforms for Inclusive Growth Development Policy Loan (P153269) delivered in 2016 and subsequent Analytical and Advisory Services (ASAs) on social protection (P152882), and Reimbursable Advisory Services (RAS) on Financial Sector Development (P156528). Key lessons emerging from these operations that will be considered in the design of the proposed DPF are: 1) improved access to credit in Seychelles would support private sector development, including the ability of newer entrants to pursue economic opportunities; 2) the revised national health framework allows the Government to adapt to the evolving burden of disease and new technologies over time. Furthermore, management of inputs (training, purchase of equipment and medicines) has been simplified; 3) with the introduction of the Social Welfare Information System (SWIS), efficiency and effectiveness of service delivery have improved, and decision making has become more objective. The operation also supported upgrading of the monitoring and evaluation (M&E) capacity of the ASP, which has improved control of social assistance; and 4) enhanced efficiency in public investment helps to remove supply side constraints, addressing specific infrastructure bottlenecks constraining economic activity, and helping to contain business costs, and thus facilitate more investments and employment.
35. The proposed operation is in line with the corporate guidance on COVID-19 emergency operations5.
5 World Bank, 2020. The economic policy response to the Covid-19 crisis, Note for Discussion.
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Lessons learned include the following: a. Support jobs and firms: supporting jobs and firms through guarantees, wage subsidies and debt relief is demonstrated as an effective socioeconomic response to the major crisis caused by COVID-19. This operation supports this through salary guarantees for the private sector and postponement of business taxes. b. Use existing systems for social protection: scale-ups of existing social protection systems, especially those targeting the poorest and most vulnerable, is a tried and tested approach in COVID-19 crisis response. This operation builds upon those lessons by supporting increased budget allocation to the social protection system and an increase in the one-off assistance paid under the social welfare program. c. Prevent a financial sector collapse: In past crises, solvency issues in the financial sector have further deepened job losses and hampered subsequent recovery. Protecting financial institutions, markets and payment systems is crucial for an effective recovery. This operation supports financial systems by amending policies governing the Central Bank and Financial Institutions in order to facilitate flexibility in crisis response.
4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS
Pillar 1 – Protecting Lives and Livelihood
Prior Action #1: The Borrower, through its Cabinet of Ministers, has approved the Seychelles Response Plan to Covid-19 as laid out in Cabinet Memorandum C20/MEM/066, which defines the strategy for the immediate response to the first wave of COVID-19 and lays the foundation for subsequent reopening and testing strategies, and took adequate measures to prevent imported cases.
36. Rationale: The initial global outbreak of COVID-19 posed a significant challenge for Seychelles, which has limited capacity in response to infectious diseases. In 2018, the World Health Organization (WHO) conducted a Joint External Evaluation (JEE) of Seychelles’ capacity in 19 technical and 48 sub-technical fields on how to deal with the risks of infectious diseases through a coordinated response. Out of 48 sub-technical fields, Seychelles received a score of 1 or 2 (the maximum is 5) on 24 indicators, showing the weak institutional capabilities of the country in dealing with health crises. The evaluation shows that Seychelles need to formalize existing procedures, and document existing processes. In addition, the report finds that Seychelles was ill-prepared in antimicrobial resistance or capacity to prevent zoonotic diseases like COVID-19. Seychelles was also assessed as less able to rapidly respond to and mitigate the spread of an epidemic (Rapid Response), due to weak emergency preparedness response planning. These findings highlight the need to strengthen institutional capacities to adequately address public health emergencies. The COVID-19 pandemic exposed the serious gaps in the Government’s capacity to respond to this public health emergency with an ad-hoc and poorly coordinated, rather than a well institutionalized approach. As to date the COVID-19 outbreak seems to be contained in the Seychelles (out of the 11 positive cases, last one to be registered was on April 6th, 2020, and all of them have now recovered), the focus on setting-up proper mechanisms to prevent and manage potential new outbreaks in mid-term is essential.
37. Policy action: This DPO supports the adoption of the Seychelles Response Plan to COVID-19. This Response Plan lays out the strategy and costing of the country’s emergency response to the first wave of COVID-19 and lays a foundation for the development of mid- and long-term health-sector response strategies including the COVID-19
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testing strategy. The Response Plan, in combination with action taken to prevent the importation of new cases by closing the borders, has proven effective in minimizing the health impact of COVID-19 in Seychelles demonstrated by the total case count of 11 by June 2020. The consecutive mid- and long-term plans are being prepared by the GoS with support from WHO based on the initial Response Plan and are scheduled to be completed before the end of June 2020.
38. Results: Given the importance of imported cases for Seychelles’ epidemic trajectory, the Seychelles Response Plan to COVID-19 includes strong testing guidelines to ensure that all new arrivals in Seychelles are properly screened and tested. The current guidelines6 mandate a negative test 48 hours or less before entering the territory for all passengers. The proposed result indicator is the effective enforcement of the guidelines, resulting in at least 95 percent of new arrivals having been screened and tested according to protocol.
39. Status: Completed. The COVID-19 Response Plan was approved by Cabinet of Ministers in May 2020.
Prior Action #2: The Borrower through its National Assembly and Cabinet of Ministers approved measures to support vulnerable households affected by COVID-19 through: (i) increase in allocation to social protection; and (ii) increase in the one-off assistance paid under the Social Welfare Assistance benefit.
40. Rationale: Seychelles had a comprehensive social protection policy in place prior to the advent of COVID- 19. A major component of this was the Social Welfare Assistance (SWA) benefit, which was provided to various households needing income assistance. Seychelles had been in the enviable position of having more job openings than there were job seekers. To promote more social inclusion and economic productivity, since 2017 the Agency for Social Protection (ASP) had instituted a mechanism whereby those applying for SWA on the basis of unemployment would first be screened by the Department of Employment with regards to their occupational skills and experience and potentially matched with available jobs. Those unable to be matched with jobs could then be entered into the Unemployment Relief Scheme for a period of 6 months to a year. This is essentially a public works scheme where the individual would be employed by a government agency doing whatever type of work the person was capable of doing, such as cleaning parks. During the placement process, households were given SWA on a temporary basis, until the placement with either a job or the Unemployment Relief Scheme could take place. Welfare assistance schemes in Seychelles are means-tested, with imputed expenditures for a household of that particular composition subtracted from total household income. The Government is engaging with the World Bank in a social protection Program for Results (PforR) which will go to Board September 2020. The PforR will support revisions in the means-testing criteria to include information like socioeconomic needs in addition to income and expenditures. Lack of social protection for low-income households increases their vulnerability to shocks caused by health crises such as COVID-19 as well as climate-related hazards.
41. Policy action: Given the heavy concentration of employment around the tourism industry, which has now been temporarily shut down, the Government responded to mitigate the risk of high unemployment. In order to provide coverage to informal workers or others who were facing hardships, the Government increased the budget for both SWA and the Unemployment Relief Scheme. SWA increased from an originally budgeted Rs. 47.772 million to Rs. 77.772 million, a 62 percent increase. The Unemployment Relief Scheme has received double its previous
6 Department of Health, 2020. Conditions for Entry of Persons into Seychelles. URL: http://tourism.gov.sc/wp- content/uploads/2020/05/Conditions-for-entry-of-persons-into-Seychelles-002.pdf
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allocation of Rs. 10 million to cover the increased potential demand from those who are facing needs. While there are no changes in the criteria to benefit from the schemes, since household income has fallen, for even existing beneficiaries, there is likely to be an increase in the size of benefit and consequently an increase in the number of households being covered.
42. Results: This prior action is expected to result in a 20 percent increase of the number of people benefiting from social protection or social welfare to buffer the impact of COVID-19. In the case of Social Welfare Assistance, which is a means-tested scheme, both the number of beneficiaries may increase and the average benefit per household may increase. Benefits are based on the difference between actual household income and imputed expenditures for a household with the same characteristics. Some beneficiary households who were earning some income may have seen this income evaporate, resulting in higher benefits going to these households. In other cases, households who were previously not receiving benefits may now find themselves in need and requiring benefits. In yet other cases, households who had been receiving the benefit while awaiting job placement are likely to be waiting longer, again increasing the caseload of beneficiaries. By contrast, the Unemployment Relief Scheme which pays similar to minimum wage, is expected to increase the number of beneficiaries. Again, while some of these are new beneficiaries, some of the beneficiaries who would have reached their time limit, may be continued in their role until the emergency passes. Increased access to social protection will reduce benefitting households’ vulnerability to shocks, including those caused by climate-related hazards for those beneficiaries located in flood, landslide and erosion hazard zones.
Status: Completed as evidenced by the Appropriation (Amendment) Act of 2020 (Act 13 of 2020), published in the Borrower’s Supplement Official Gazette on April 11, 2020).
Prior Action #3: The Borrower through its National Assembly approved: (i) guarantee salaries to all employees in companies affected by the COVID-19 pandemic for three months and (ii) postponement of taxes until September 2020 (Corporate Social Responsibility, Tourism Marketing Tax, Business Tax and taxes on Non- Monetary Benefits Income).
43. Rationale: This prior action seeks to support the Government in managing the adverse economic impact of COVID-19 by guaranteeing the salaries of employees in the formal private sector and temporarily lessening the tax burden for businesses. The COVID-19 related impacts on international tourist arrivals and closure of local economic activities has affected most private sector operators and most of the Seychelles work force. Supporting the private sector through salary guarantees and postponement of taxes aims to mitigate the effect of COVID-19 on the private sector and allow productive sectors to maintain their viability. The measures also reduce the direct and indirect impacts of income loss to the work force. Certain economic sectors, which are large employers, such as for instance tourism, are particularly affected by imposed social distancing measures or supply chain and labor disruptions. The tourism sector directly accounts for 58 percent, 27 percent and 12 percent of tourism marketing tax, corporate social responsibility tax and businesses tax, respectively. Thus, the postponement of the payment of these taxes will help to provide temporary relief and lessen the burden on businesses as they try to stay viable.
44. Policy action: This operation supports a direct financial support mechanism to companies and workers through the guarantee of salaries and postponement of the payment of taxes (Corporate Social Responsibility, Tourism Marketing Tax, Business Tax and taxes on Non-Monetary Benefits Income). These policy measures were
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approved in the amended budget with a total of around US$88 million for the salary guarantees alone as part of the GoS Covid-19 response package. Indications from the April and May processing of the scheme suggest that uptake for the salary guarantee may be less than budgeted. The GoS will enhance liquidity for businesses by deferring payments of taxes by private sector companies. The tax deferment was also approved in the amended budget approved by the National Assembly on March 30, 2020. Deferment of the taxes lasts from April to September 2020. The GoS created the Financial Assistance for Job Retention (FA4JR) Committee to administer the government’s private sector wage guarantee scheme to help businesses pay the salaries of their employees7. The scheme is primarily intended to assist private businesses and non-governmental organizations (NGOs) which already submit a monthly payroll to the Seychelles Revenue Commission (SRC), regardless of how many employees they have. Applicants must be able to meet all of the following criteria:
• Be able to explain how COVID-19 has caused significant disruption to its business activity • Prove a reduction in turnover of more than 25 percent • Be temporarily unable to pay normal salaries • Agree that no staff are to be made redundant
45. In addition, the full list of businesses and organizations that received assistance will be published in the public domain after the assistance period is over. Only fixed allowances will be paid by the government assistance. Periodic allowances and commissions that vary month-on-month (e.g. service charge) will not be covered.
46. Results: Results will be measured in (i) the number of workers in the private sector having benefited from salary guarantee with the objective to reduce job and income losses and (ii) the number of firms benefiting from the postponement of taxes. The salary guarantee scheme will provide assistance to national and foreign workers in the private sector with an individual ceiling of R30,000, with a total budget allocation for the scheme of R1,090,531,200. The target for this prior action is set at 25,000 workers (67 percent of the estimate private sector workforce in 2019) benefiting from a salary guarantee and increase in the percentage of small and medium enterprises benefiting from postponement of taxes to mitigate the impact of COVID-19 to 90 percent.
47. Status: Completed, as evidenced by the Employment (Amendment) Act of 2020 (Bill No.19 of 2020), published in the Borrower’s Supplement Official Gazette on April 29, 2020 and the Appropriation (Amendment) Act of 2020 (Act 13 of 2020), published in the Borrower’s Supplement Official Gazette on April 11, 2020.
Prior Action #4: The Borrower, through its Cabinet of Ministers, approved the Central Bank Act, 2020 (Amendment) and the Financial Institutions Act (Amendment), 2020, to allow the Central Bank to support the economy during the economic crisis created by the COVID-19 pandemic.
48. Rationale: Past crises have shown the crucial importance of maintaining a healthy financial sector for a rapid and balanced economic recovery. The financial sector in Seychelles is sound, albeit with challenges related
7 To prohibit the reduction of wages of a worker and the deferment of payment without the approval of a competent officer, the Cabinet of Ministers approved amendments to the Employment Act on April 29, 2020. The amendment states that an employer shall not, whether with agreement of the worker or otherwise defer the payment of wages, whether partly or otherwise, of a worker, or reduce the wages of a worker. It also provides that any approval given by a competent officer to temporary lay-off a Seychellois worker or terminate the employment of a Seychellois worker on grounds of redundancy in certain circumstances shall not take effect prior to 1st July 2020.
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to weak capacity of commercial banks to serve certain market segments, and the relative absence of non-bank financial institutions and deep capital markets. Micro, Small and Medium Enterprises (MSMEs) play a critical role in the Seychellois economy but face challenges in obtaining credit. This challenge is expected to be exacerbated as the crisis triggered by the pandemic is expected to cause a reduction in income for households and MSMEs and lead to liquidity constraints and a rapid rise of non-performing loans in the financial sector. The DPF supports the GoS in policy reforms to offer the financial sector the required flexibility to effectively respond to the crisis by ensuring adequate access to credit and the normal functioning of financial markets by providing extra liquidity to commercial banks. In a statement issued on March 21, 2020 the CBS announced the creation of a credit facility that will fund the private sector relief scheme to MSMEs.
49. Policy action: This Prior Action is composed of two linked policy actions that holistically contribute to the financial sector sustainability during the COVID-19 crisis. The CBS Act, 2004 was amended to permit the CBS, in the event of a force majeure8, to make loans, advances and rediscounts to banks and other financial institutions in Seychelles for periods not exceeding 3 years (this was increased from 18 months) and to purchase or acquire treasury bills and other securities guaranteed by the Government9. The amendments to the Financial Institutions Act include changes to the definition of financial institutions to include the Development Bank of Seychelles and the Seychelles Credit Union to enable these institutions along with 7 commercials banks10 to administer the private sector relief scheme. The Private Sector Relief scheme is funded by a credit line facility of SCR500 million to assist MSMEs with an annual turnover of up to SCR25 million. Credit facilities under this scheme carry a fixed interest rate of 1.5 percent per year as well as a 6-month moratorium, where borrowers will have the option of not repaying both the principal and interest amount during that period. The maximum repayment period for loans is 3 years. Funds can be borrowed in the form of loans or overdraft facilities to cover critical expenditures including rent, utilities, salaries, taxes and goods and services contracts for a period of 6 months. The scheme was activated on May 18, 2020 following the finalization of the enabling legal framework and signing of the Agreement by the stakeholders sharing the risks of the credit facilities - notably the CBS, Government and the participating credit- granting institutions. The Government is providing a guarantee of 70 percent of the total funds disbursed under this scheme. Eligible MSMEs have a period of 6 months starting May 18, 2020 to apply for assistance under the Private Sector Relief Scheme. The CBS will be closely monitoring the administration of the scheme by the credit- granting institutions. To benefit from the Private Sector Relief Scheme MSMEs need to have an annual turnover of up to Rs. 25 million or less, are not defaulters on any existing loan repayment as at end-February 2020 and are facing revenue constraints due to COVID-19. All the applications are subject to credit assessment which is different for each bank. If the business is being supported by the Government, it will not be eligible for such a loan.
8 Force majeure includes activities that substantially and materially disrupt or are likely to substantially and materially disrupt the stability of the economy and financial system such as: (a) an unforeseeable or unavoidable natural event, circumstance or cause ; (b) a disaster as defined in the Disaster Risk Management Act, 2014 (Act 15 of 2014); (c) an external economic event, circumstance or cause; (d) a state of emergency declared under the Constitution; (e) a public health emergency declared under the Public Health Act, 2015 (Act 13 of 2015); or (f) the spread of an infectious disease affecting or likely to affect a substantial part of the population within a short period. 9 The aggregate value of the treasury bills or Government securities purchased or acquired during force shall not at any time exceed such percentage of the Government’s revenue from the previous year, as determined annually by the Bank, in consultation with the Ministry of Finance and published by notice in the Gazette.” 10 The commercial banks include Absa Bank (Seychelles) Ltd, Mauritius Commercial Bank (Seychelles) Ltd, Bank of Baroda, Nouvobanq, Seychelles Commercial Bank, Al Salam Bank Seychelles Ltd and Bank of Ceylon.
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50. Results: Both actions not only provide the financial sector with a more resilient policy framework during this crisis but will remain in place for future health or disaster emergencies, including for a potential second wave of the COVID-19 pandemic in Seychelles. This prior action facilitates the enabling legal environment to create and administer the private sector relief which is expected to lead to greater resilience of MSME firms and lay the foundation for a more rapid post-crisis recovery. In the short-term, many MSMEs will face liquidity constraints even if the business model is viable over the medium-to-longer term. The ability to support those principally viable enterprises through the private sector relief scheme is critical. The result indicator related to this prior action specifically measures percentage uptake of the credit line facility under the Private Sector Relief Scheme to help micro, small and medium enterprises (MSMEs) impacted by COVID-19.
51. Status: Completed, as evidenced by the CBS (Amendment) Act of 2020 (Act 11 of 2020), published in the Borrower’s Supplement Official Gazette on April 9, 2020; and Financial Institutions (Second Amendment) Act of 2020 (Act 11 of 2020), published in the Borrower’s Supplement Official Gazette on April 9, 2020.
Pillar 2 – Protecting the Future
Prior Action #5: The Borrower through is National Assembly approved new anti-money laundering and combating the financing of terrorism anti-money laundering/combatting the financing of terrorism (AML/CFT) Act 2020 and Beneficial Ownership (BO) Act 2020 to strengthen the domestic financial sector and to establish and maintain an up to date register of beneficial owners.
52. Rationale: Seychelles offshore financial sector and the broader financial industry has faced challenges with pressures to comply with global transparency standards and AML regulations. In addition, the sector has faced the challenge of declining correspondent banking relationships through the de-risking efforts of US and European banks. In February 2020, the European Union took the decision to add Seychelles to the list of non-cooperative jurisdictions for tax purposes. France has also blacklisted the territory for insufficient provision of information on offshore entities. The industry and its regulators face a challenge to ensure compliance with tighter global regulations. To restore its reputation and maintain its attractiveness for foreign direct investment, Seychelles has undertaken to comply with international compliance standards. Otherwise, Seychelles is likely to be further negatively affected by the global trend of banks “de-risking” their correspondent relationships, hampering the financial transactions needed for international trade, and further financial sector development. However, an effective date has not been set as the AG’s office advised to wait for the regulations which are under preparation and will be ready by mid-July 2020. With regards to implementation, the financial sector RAS is providing support to develop the risk-based supervision methodology and tools as well as capacity building. With regards to the BO register, the Financial Intelligence Unit (FIU) has the intention to customize the existing GoS AML database (the team has not yet engaged on this).
53. Policy action: This DPF supports the implementation of the AML/CFT and BO laws. Both laws have benefitted from support from the global team under the financial sector RAS and takes into consideration the latest international guidance. The implementation of the AML/CFT and BO laws will assist to promote transparency and better align the country’s legal framework with international standards by introducing new measures to combat money laundering and terrorist financing. Additionally, the laws will also help address threats to the integrity of the financial system as well as reputational risks and help counter other threats, such as corruption and tax crimes.
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The BO Act seeks to provide for identification and verification of beneficial ownership of legal persons and legal arrangements; to establish and maintain an up to date register of beneficial owners. The Act stipulates that the Register has to be kept by all legal persons and legal arrangements and shall be maintained in confidentiality. The FIU shall be the nodal agency to maintain the Seychelles BO database by populating the beneficial ownership information (including the periodic update requirements) reported by the legal persons or the legal arrangements, through their resident agent. In addition, the National AML Committee (NAC) will undertake programs to create awareness of the provisions of the legislations among the relevant stakeholders and the general public.
54. Results: A new AML legislation has been enacted that includes measures to strengthen entity transparency, particularly on IBCs. A National AML/CFT Committee has been appointed to improve coordination among relevant agencies and implement the recommendations of the 2018 Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) mutual evaluation report. Results will be measured by the percentage of legal entities that have submitted verifiable ownership information to the database held by the FIU.
55. Status: Completed, as evidenced by the Anti-Money Laundering and Countering the Financing of Terrorism Act of 2020 (Act 5 of 2020), published in the Borrower’s Supplement Official Gazette on March 6, 2020; and as evidenced by the BO Act of 2020 (Act 4 of 2020), published in the Borrower’s Supplement Official Gazette on March 6, 2020
Prior Action #6: The Borrower through its Cabinet of Ministers approved the new Climate Change Policy to reduce Seychelles’ vulnerability to climate change impacts.
56. Rationale: Climate change impacts both present and future generations of Seychelles. Seychelles is categorized as a Small Island Developing State (SIDS) and a Large Ocean State (LOS) based on the similar characteristics of other SIDS and LOS in relation to their remoteness, small land area, limited capacity and lack of resources. With their own particular characteristics, this makes the islands vulnerable and susceptible to climate change. About 90 percent of its total population is clustered in the shoreline of the inner islands of Mahé, Praslin and La Digue. Already today, Seychelles faces frequent coastal flooding and erosion, extreme rainfall and drought events. Climate change is expected to make these hazards more frequent and more intense. Specifically, sea-level rise and climate change induced changes in rainfall patterns may cause increased levels of damage to housing, infrastructure and agriculture. Changing monsoons and rain patterns in Seychelles are furthermore thought to have an effect on the persistence of epidemics like dengue fever as favourable temperature and humidity conditions during the rainy season increases the spread of such viruses11. Whereas Seychelles on a global level only has a minor contribution to climate change, the country emits an average of 5.38 tons of Co2 per person, and this is growing annually. About 95 percent of these GHG emissions come from the energy sector from electricity generation and transport and they are mainly CO2 emissions. The remaining 5 percent is mainly methane coming from the wetlands and the landfills12.
11 McGough, S. F., Clemente, C. L., Kutz, J. N., & Santillana, M. (2019). Combining weather patterns and cycles of population susceptibility to forecast dengue fever epidemic years in Brazil: a dynamic, ensemble learning approach. bioRxiv, 666628 12 Republic of Seychelles. (2015). Intended Nationally Determined Contribution. United Nations Framework Convention on Climate Change
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57. Being an inherently cross-sectoral issue, the institutional leadership on climate change has lacked a clear framework. The subject is under the responsibility of the Ministry of Environment, Energy and Climate Change, who lead the representation of Seychelles at the international level and develop national guidance. However, no high-level coordination mechanism has been in place to help mainstream climate change into sectoral planning or establish and implement cross-sectoral goals for adaptation and mitigation.
58. Policy Action: This operation supports the Cabinet of Ministers approval of the first national Climate Change Policy. The main objective of the Policy is to facilitate a coordinated, coherent, proactive and effective response to the local, regional and global challenges and opportunities presented by Climate Change. Six specific objectives are defined under this umbrella, namely to (1) advance understanding of Climate Change and its impacts on Seychelles; (2) strengthen capacity and social empowerment at all levels to adequately respond to Climate Change; (3) mainstream and integrate Climate Change considerations into all relevant sectors and all levels of government; (4) achieve transition to a low carbon economy; (5) put in place measures to adapt, build resilience and minimize vulnerability to the impacts of Climate Change; and (6) contribute effectively to regional and global negotiations on Climate Change. To reach these objectives, the Policy envisages the establishment of the National Climate Change Council. This Council will be chaired by the Vice President of Seychelles with representation of key ministries and authorities and will be responsible for the national coordination of climate change objectives, including the mainstreaming in sectoral plans and policies and the definition of adaptation and mitigation targets.
59. The Climate Change Policy builds upon a series of Policies, Plans and Legislation pertinent to climate change governance, including the Environment Protection Act of 1995 (Amended in 2016), the Conservation and Climate Adaptation Trust of Seychelles Act of 2015, the Disaster Management Act of 2014, the Energy Act of 2012, the Seychelles Sustainable Development Strategy (SSDS) of 2012-2020, the Blue Economy Strategic Policy Framework and Roadmap of 2018-2030 and the Coastal Management Plan 2019 – 2024. It is furthermore linked directly to international commitments, including the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement.
60. Results: Number of government sectors guided on the mainstreaming of climate change in sectoral policies through the new National Climate Change Council chaired by the Vice President.
61. Status: Completed, as evidenced by the Cabinet of Ministers’ Decision of May 20, 2020, published in the government’s website, approving the Seychelles’ National Climate Change Policy “Making Seychelles Climate Resilient”, dated May 2020.
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Table 6: DPF Prior Actions and Analytical Underpinnings Prior Actions Analytical Underpinnings (PA)
Pillar 1: Protecting Lives and Livelihoods Department of Health, March 2020. National Preparedness and Response Plan for COVID-19. The National Preparedness and Response Plan for COVID-19 has included surveillance measures at the point of entry, deployment of rapid response teams, national public health laboratory capacity, infection prevention and control measures, case management, risk communication and community engagement and logistics. PA 1 Coronavirus disease (COVID-19) technical guidance (WHO, 2020). A national public health emergency preparedness and response plan is critical for guiding response. Diagnostic testing for COVID-19 is critical for tracking the virus, understanding epidemiology, informing case management, and for suppressing transmission. The Economic Policy Response to the COVID-19 Crisis (World Bank, April 2020a). Use of existing structures especially where there are social safety nets in place is the preferred social policy response. Other channels that should be considered are community-driven and local mechanisms. PA 2 Social Protection and Jobs Responses to COVID-19: A Real-Time Review of Country Measures (World Bank, April 2020b). Cash transfer programs are the most widely used interventions by governments for social assistance. The Economic Policy Response to the COVID-19 Crisis (World Bank, April 2020a). Supporting jobs and firms is justified in the context of a major crisis.
Assessing the impact and policy responses in support of private-sector firms in the context of the COVID-19 pandemic. COVID-19 Notes Finance Series (World Bank, March 2020). Policy responses during the recovery phase should focus on helping firms return to their pre-crisis production and employment. Short-term support to keep firms viable includes grants, guarantees, concessional lending, trade finance, increased bank lending, factoring, and tax credits. It may involve temporary suspension, reprofiling or even cancellation of a range of financial obligations, such as taxes, debt repayments, and rental or utility payments. Easing financial conditions and exercising regulatory PA 3 forbearance might be necessary as long as conditions remain difficult.
COVID-19 Outbreak: Implications on Corporate and Individual Insolvency (World Bank, 2020c). In a systemic crisis, the scramble for liquidity increases the risk of pushing viable firms into liquidation, especially vulnerable MSMEs with unnecessary widespread employment losses and fire sale of assets. Ensuring that sound firms are given a fair chance to survive the expected temporary market disruption, is therefore critical.
Secured Transactions and Collateral Registry (IFC, 2010). A well-functioning legal framework for secured lending can have a positive impact on increasing a business' ability to access private credit at a lower cost.
PA 4 Seychelles Financial Sector Development Implementation Plan (FSDIP)
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Pillar 2: Protecting the Future World Bank (2015): Access to BO Information of Seychelles International Business Companies
RAS on Financial Sector Development (P156528).
Seychelles FSDIP
The Republic of Seychelles Systematic Country Diagnostic (SCD, June 2017) (P155250).
PA 5 Anti-money laundering (AML) regulations to international standard are not being implemented in practice for Seychelles International Business Companies (IBCs). In recent years, Seychelles’ IBCs have been implicated in a number of high-profile international corruption scandals and bank frauds. To be a driver of growth for Seychelles in the global context of higher disclosure and compliance requirements to combat crime and terrorism, the sector would likely need to shift away from its current “mass market” model of registering and providing basic company secretariat services to IBCs. This would require a robust domestic regulatory and enforcement system to prevent reputational risks to Seychelles. Disaster Risk Management Development Policy Loan with a Cat DDO (P148861). As a small island state, Seychelles is exposed to a disproportionately high economic, social and environmental impact of natural and environmental disasters. Vulnerability characteristics such as the concentration of population and development in narrow coastal zones make the country extremely sensitive to the natural hazards and associated impacts. Adaptation to the adverse impacts of climate change and a robust disaster prevention and mitigation program are major priorities for Seychelles.
Assessing climate risks and behavior associated with waste management in Seychelles (P169875). Among the registered 636 disaster events in Seychelles National Loss Database was developed (1980 PA 6 to 2014, UNISDR), storm is ranked the first, followed by flood, rain, landslide and tsunami. The largest share of economic loss is flood, followed by tsunami, landslide, rain and storm.
Seychelles Coastal Management Plan 2019 – 2024. Small Island Developing States (SIDS) such as Seychelles are likely to be impacted by factors such as coastal erosion, flooding, tidal variations and tropical cyclones that are exacerbated by climate change. Moreover, the growing population and economic development will simply add more pressure on land use and the natural resources along the coastal zones. Seychelles needs to protect its natural assets for its coastal communities and for future economic prosperity.
4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY
62. The WBG is providing a fast and flexible response to the COVID-19 pandemic, utilizing all WBG operational and policy instruments and working in close partnership with governments and other agencies. The proposed operation is strongly aligned with the framework of the WBG response to COVID-19. In addition, the operation builds on existing instruments to support IDA/IBRD-eligible countries in addressing the health sector and broader development impacts of COVID-19. The WBG COVID-19 response will be anchored in the WHO’s COVID- 19 global Strategic Preparedness and Response Plan (SPRP) outlining the public health measures for all countries
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to prepare for and respond to COVID-19 and sustain their efforts to prevent future outbreaks of emerging infectious diseases. In addition to the support provided by this operation, the World Bank is also supporting the GoS in its response to COVID-19 through US$8 million increased financing to a proposed Social Protection Program for Results operation and a proposed Development Policy Loan with a Catastrophe Drawdown Option (CAT DDO) of US$8 million.
63. The operation builds upon previous and ongoing WBG operations. Specifically, the operation is directly linked to (1) the World Bank’s support on social protection, including the preparation of the Strengthening Quality of the Social Protection System Program for Results (P168993), the foreseen results of which are aligned to the operation at hand; and (2) the Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P148861), some of the results of which are fortified in the Climate Change Policy (Prior Action 6). Prior Action 5 will also leverage and be informed by upcoming ASAs, such as the Seychelles tax and offshore sector advisory (P173929) which will assist the GoS in reviewing and reforming its offshore sector to increase transparency and avoid risk of tax and AML related blacklisting, while also assisting Seychelles in enhancing its performance with regard to tax collection through capacity building and reform support on international tax rules and tax avoidance. This operation also builds on the South West Indian Ocean Fisheries (SWIOFish3) Project (P155642), which supports transition to sustainable fisheries and the implementation of the Blue Economy to make the sectors of the Blue economy more resilient to shocks and climate change.
64. The proposed operation is aligned with the WBG strategic priorities and the Country Partnership Framework (CPF)13. The proposed operation is aligned with the WBG twin goals of ending extreme poverty and boosting shared prosperity. It contributes to the implementation of the WBG Africa strategy by promoting reforms that reduce the social and economic impact of shocks in the most vulnerable population; maintain the viability of the productive and financial sectors; and enhance revenue collection, reduce tax avoidance and increase transparency as the economy recovers from the disruption created by COVID-19. The proposed operation also supports the Government in achieving its social and economic vision of a sustainable and inclusive future as outlined in its National Development Strategy 2019-2023. The support provided in this emergency operation is informed by the priority SCD (June 2017) constraints and directly relates to the CPF for FY18-FY23, which acknowledged that Seychelles’ isolation increases costs and limits opportunities, thus weakening the capacity to absorb shocks. Specifically, policy measures included in Prior Actions 2, 3, 4 and 6 in this operation contribute to the CPF focus area 1 (Growth for Shared Prosperity) while Prior Action 5 contributes to focus area 2 (Fostering Inclusion and Public Sector Performance).
4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS
65. The proposed emergency DPF operation is broadly aligned with the GoS response plan. The design of the program was informed by the response of the GoS to the COVID-19 pandemic and was prepared with extensive consultations with government officials from various ministries including the MoFTIEP, the Department of Health, and the SRC. The World Bank team has closely coordinated with the IMF, European Commission and other development partners. The operation also addresses some key issues covered in the CPF including the lack of
13 Country Partnership Framework for the Republic of Seychelles, 2018-2023. Report number 122493-SC
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AML/CFT regulations and the need for policies to address climate change.
66. The program has benefited from the World Bank’s consultation and coordination with various stakeholders in Seychelles through various projects and engagements. Given the quick unfolding of the crisis, travel ban and no resident staff in Seychelles, stakeholder consultations on PA1 have focused on relevant government agencies as well as regular exchanges with development partners (including WHO).The remining prior actions were designed pulling from ongoing analytical work such as an ongoing P4R for social protection reform (PA2) and an ongoing RAS on AML (PA5) which was informed through a wide stakeholder consultation process, including all relevant private sector players. The last formal private sector consultation in Seychelles took place during a CD visit in February 2020. Discussions focused on key constraints to the private sector in the country, including the then distant threat of Covid19. Private sector operators emphasized their concerns over the country’s strong dependence on tourism and the potential disruptive effects of Covid19. Private sector operators also highlighted identifying and training workers with the right skill sets as a key constraint to business operation in Seychelles, consistent with the tight labor market, skills mismatches, and dependence on migrant labor. PA3 supports labor retention, at least in the short run, to avoid unnecessary adjustment costs while PA4 supports liquidity constraints due to the crisis. Through previous work on Disaster Risk Management the team has consulted extensively on climate change risk adaptation issues, including with District Administrators, Regional Council members, NGOs, development partners and private sector representatives.
67. The GoS has consulted with various stakeholders. The Seychelles national response plan to the coronavirus was prepared by the Department of Health in collaboration with the WHO and other stakeholders such as the Integrated Disease Surveillance and Response committee (IDSR). The CBS has conducted a series of meetings with various stakeholders, including private sector representatives, on the Private Sector Relief Scheme that has been set up to assist Micro, Small and Medium Enterprises (MSMEs) facing revenue constraints due to COVID-19. The private sector, through the Seychelles Chamber of Commerce and Industry (SCCI) provided feedback to the Central Bank on the Private Sector Relief Scheme, some of which were incorporated. In addition, various government ministries, SOEs, private sector operators and civil society organizations were involved in the preparation of the amended budget.
68. The proposed operation complements programs by other development partners in response to the COVID-19 crisis. It has been closely coordinated with the IMF, which prepared a RFI to support the GoS response to the COVID-19 pandemic. The RFI disbursement of US$31 million will help to bolster foreign exchange reserves and, together with the World Bank’s funds, partially finance the fiscal financing gap. The World Bank and IMF collaborated on the macroeconomic policy framework, and the assessment of the impact of COVID-19 on the economic and the fiscal and BoP financing gaps arising from the crisis. This operation will benefit from IMF’s agreement with government on strict transparency and accountability measures regarding expenditures related to the COVID-19 response. The African Development Bank (AfDB) is also preparing a budget support operation of US$9 million.
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5 OTHER DESIGN AND APPRAISAL ISSUES
5.1. POVERTY AND SOCIAL IMPACT
69. The policy actions supported under the proposed DPF are expected to mitigate the negative economic and social impact of COVID-19 on the most vulnerable households. The COVID-19 pandemic could affect the most vulnerable through a number of channels: loss of income due to illness or the need to attend to sick family members effects of the illness and lost/reduced earnings due to job losses and reduced working hours among wage workers (formal and informal); loss of remittances; and loss of access to education and health services.
70. Prior Actions #1 and #2 which focus on strengthening the health response and protecting the most vulnerable will have direct positive effects on the most vulnerable households. Prior Action #1 supports measures that increase Seychelles’ preparedness to manage the outbreak and provide the necessary health and emergency services (including ensuring the availability of materials needed to manage the outbreak) to help curb the expansion of the outbreak. The COVID-19 outbreak will impact the welfare of households mainly through a negative effect on labor income through shocks to earnings and employment caused by a decline in aggregate demand and supply disruptions. Estimates based on the 2013 household survey indicates that poverty will rise to between 43.2 and 46.1 percent in 2020 without a response of the Government to the crisis brought about by the COVID-19 pandemic (national poverty line). Prior Action #2 aims to provide timely relief to the affected population by increasing funding to the social protection agency. Prior Actions #2 is therefore expected to reduce poverty and improve distributional outcomes.
71. Prior Actions #3 and #4 under the first pillar are expected to have a significant direct positive effect on the wellbeing of the poor. Estimates based on the 2013 household budget survey, indicates that about 6 out of 10 poor individuals have a job, are largely employed in the services sector, and are more likely to be self-employed compared with the nonpoor. To mitigate the immediate impacts of the crisis for a limited period, prior action #3 will provide guarantee salary to the employees in the private sector for three months for salaries up to SCR 30 000. This will protect labor income of poor households, at least in short-run, as majority of the working poor are employed in accommodation and food service activities (13.2 percent), health services (11.6 percent), and business support activities (9.7 percent) which are the hardest hit by the crisis. Prior Action #4 supports poverty reduction indirectly by creating the proper regulatory environment for the government to create a credit facility that will be used to provide liquidity to the private sector. Thus, shielding households from future income losses and prevent households from falling into poverty.
72. Measures under Pillar 2 aimed at building buffers against future shocks would indirectly affect poverty by improving the regulatory environment that will improve growth prospects. Prior Action #5, strengthening the financial system through the introduction of measures to combat money laundering and terrorist financing will have a neutral effect on poverty reduction. On the one hand, these measures will help to restore the reputation of the financial system and potentially lead to the restoration of corresponding banking relationships. On the other hand, overly cautious AML/CFT safeguards can have the unintended consequence of excluding legitimate businesses and consumers from the financial system. To mitigate against this, the Financial Action Task Force
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emphasized the need to ensure that such safeguards also support financial inclusion.14 . Prior Actions #6 indirectly supports poverty reduction in the medium-term by strengthening Seychelles’ Climate Change Policy which will help to protect the fishing industry which accounts for approximately 0.7 percent of GDP. The continued sustainability of the fishing industry is critical to food security in Seychelles. Poorer households would be hard hit by a depletion of local fish supply and rising prices, as they spend the greatest share of their income on food, including fish.
5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS
73. This DPF supports policy actions under two pillars. From an environmental perspective, the proposed policy actions can be grouped into those having potentially direct environmental impacts; those that could pose moderate to low risk (and provide an opportunity to strengthen compliance with the overall regulatory approach and improved environmental planning and enforcement); and those with no environmental footprint but are related to transparency, awareness, inclusion and accountability. Improved consultations and better information disclosure is likely to have positive social effects, and indirect positive environmental effects through improvement of policies and improved compliance.
74. Prior Actions under Pillar 1 are not expected to have significant direct impact on the environment. Possible environmental impacts from the implementation of the COVID-19 Emergency Preparedness and Response Plan are threefold. First, health and safety issues of healthcare workers and the general community associated with testing and handling of infectious samples. Second, risk of spread of infection through improper segregation, treatment and disposal of infectious medical waste including untreated personal protective equipment (PPE); and lastly increased plastic waste due to larger numbers of PPE and single-use plastics, which can result in overstretching the limited landfill capacity or polluting the marine space if not disposed indiscriminately. Medical waste is well managed in Seychelles. Occupational health and infection control measures of healthcare workers is given high priority and hospitals operate high capacity incinerators to dispose of infectious waste; while incinerator ash is sent to the landfill. The GoS has procured essential Personal Protective Equipment (PPEs) with assistance from bilateral partners, the African Union, and United Nations (UN) agencies, including the WHO. Hospitals in Seychelles have high capacity incinerators and the ash is sent to the landfill. In addition, worker protection at hospitals is a priority. The GoS has procured essential PPEs with assistance from bilateral partners, the African Union, and UN agencies, including the WHO.
75. Prior Actions 2, 3 and 4 are not expected to have a significant environmental impact. PA2 provides additional funding to the Social Protection Agency, this is expected to go to people who are affected by COVID-19 and is expected to be used primarily for food and other necessities. Thus, this prior action is not expected to affect the environment. PA3, the salary guarantee will be transferred directly from the accounts of MoFTIEP to the business accounts of firms and self-employed individuals, once their application has been processed and approved. Given, that these monies will be used to cover salaries for existing businesses, no activities that will likely cause significant negative impacts (such as construction or any development activity) on the environment will be financed. Similarly, the Private Sector Relief Scheme is geared towards covering day-to-day operating expenditures that includes, but is not limited to payment of rent, utilities, salaries, taxes, goods and services
14 Demirguc-Kunt and Klapper (2012).
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contracts thus there is not expected to be any environmental impact from direct construction or development, nor any activity in protected or ecologically sensitive areas.
76. The GoS is cognizant of its vulnerability and challenges regarding waste management and is committed to implementing waste reduction and recovery strategies. The Ministry of Environment, Energy and Climate Change has strengthened its institutional and legal framework and upgraded waste operations in line with international good practices. The Waste enforcement and Permit Division of the Environment Department is responsible for developing all policies regarding waste, waste collection, characterization, treatment and disposal. The GoS recognizes the issue of marine plastic and its impact on the Blue Economy and has recently implemented two sets of regulations imposing restrictions on importation, manufacturing, distribution, and sale of plastic bags and on plastic utensils and polystyrene boxes. There will be a need to ensure that the use and proper disposal of PPE is also incorporated within the regulations
77. Seychelles natural resource endowment faces threats from rising sea levels, variable weather patterns and ocean acidification due to climate change. These threats raise concerns about the economic costs of temperature rise (coral bleaching and losses to fisheries and tourism); extreme rainfall (crop and fish losses, flooding); and sea-level rise (coastal erosion and salinization, and consequent losses to tourism and food and water security). Prior Action #6, under Pillar 2 has direct environmental impact by supporting reforms that address the challenge of resource utilization and support the transitioning to a low carbon economy. In addition, prior action #6 seeks to put in place measures to adapt, build resilience and minimize vulnerability to the impacts of Climate Change.
78. The COVID-19 pandemic could have consequences for marine resources if not properly mitigated. The pandemic, through a shut-down on tourism facilities and restaurants, has caused a decrease in demand for fish. The GoS has been supporting its fisheries sector through a decrease in the price of inputs and ensuring that catch is being bought and marketed by local processors and has been buying catch from the semi-industrial fleet. These measures could maintain or even increase the pressure on fishing, and without the proper management tools in place, this may negatively impact fisheries resources through further overexploitation of the domestic fisheries stocks. The implementation of the Mahé Plateau Management Plan, which has been recently officially published, will be supported by the World Bank through the SWIOFish3 Project. Activities under the Plan will include the development of a fleet management plan and a new licensing framework that will mitigate the risk from this shock on marine resources.
5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS
Strengths and weaknesses of Public Financial Management System
79. Seychelles has substantially improved its Public Financial Management (PFM) system that will be used to support the proposed operation. This is evidenced by the improved rating in the Public Expenditure and Financial Accountability (PEFA) in 2016. The report indicates improved fiscal discipline, efficient budget formulation and allocation and effective budget execution, reporting and oversight. The improvement is due to implementation of PFM reforms in 2012 -2014 PFM action plan prepared after 2011 PEFA. The key reforms included adoption of
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PFM Act 2012, phased implementation of Programme Performance Based Budgeting (PPBB) to improve allocative efficiency, operational efficiency and accountability of the achieved results; revising chart of accounts to incorporate functional and programmatic classification; developing comprehensive cash-flow forecasting tools; revising Financial Instructions and Accounting Manual 1997; strengthening Finance and Public Accounts committee and adopting public sector accounting standards. The budget information is transparent and freely available to the public on timely basis in the Ministry of Finance, Trade, Investment and Economic Planning website.
80. The Government is committed to implementing the identified PFM weaknesses in the 2016 PEFA report. In this regard, the Government developed 2017 -2020 PFM action plan which they have been implementing. The weaknesses relate to the need to improve efficiency of Public Investment Management (PIM); improve asset register to include buildings and land, improving commitment controls, improving internal controls, and improving public access to procurement information. The Auditor-General has regularly reported weaknesses on adequacy and adherence with internal controls in his annual reports. Based on recent reforms, the Public can now access procurement related information in the Procurement Oversight Unit and National Tender Board websites.
81. The IMF 2018 Safeguard Assessment report of the CBS concluded that the CBS’s internal controls, financial reporting, and external audit and internal audit systems were adequate and continue to comply with international standards. However, further efforts are needed to support the development of internal audit, which lacks capacity and absence of Head of the Unit since 2013. CBS has committed itself to addressing the identified weaknesses in order to improve the safeguard environment. The joint auditors, the Auditor General and independent external audit firm issued an unqualified audit report for financial statements (prepared using international financial reporting standards) as at December 31, 2019: the statements are published on the CBS website.
Disbursements - Funds Flow Arrangements 82. The loans disbursement will follow the World Bank’s procedures for development policy lending. The loan will be disbursed in a single tranche upon effectiveness of each operation and provided IBRD is satisfied with the implementation of the development policy program and the appropriateness of the country’s macroeconomic policy framework. The loan proceeds from the World Bank will be credited to an account that is part of the country’s official foreign exchange reserves at the CBS. The CBS will credit the Seychelles Rupee equivalent to the Ministry of Finance Treasury Single Account (TSA) using the prevailing exchange rate on the date the funds are credited to the TSA. The TSA – which is part of budget management system - centralizes government revenues for financing of public spending; upon its deposit, the DPF disbursement will become available to finance budgeted expenditures. The Central Bank will not impose any charges or commission on the government for these transactions.
83. The Government, through the office of the Comptroller General at the MoFTIEP, will provide written confirmation to the World Bank within 30 days. The confirmation will state that (a) the loan proceeds were received into an account of the government that is part of the country’s foreign exchange reserves indicating the date and the name/number of the government’s bank account in which the amount has been deposited; and (b)
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an equivalent amount has been recorded in the country’s budget management system (including the Chart of Accounts name/account number, the date, and the exchange rate used). The loan proceeds shall not be applied to finance excluded expenditures in the negative list as defined in the Loan agreement. If any portion of the loan is used to finance ineligible expenditure as so defined, the World Bank shall require the Government to promptly refund the amount upon notice from the World Bank.
Accounting and Auditing 84. The accounting and auditing of the loan proceeds will be the responsibility of the Comptroller General at the MoFTIEP and the Auditor General. Government procedures will be followed to manage, record and report the loan proceeds and related payments. The loan proceeds shall be subject to external audit by the Auditor- General under the normal auditing arrangements applicable to the Government. The IBRD will have access to these audit reports. Since the fiduciary risk related to the control environment is considered to be moderate, no additional fiduciary requirements shall apply.
5.4. MONITORING, EVALUATION AND ACCOUNTABILITY
85. The MoFTIEP is responsible for supervision and monitoring of the reform program supported by this operation. The monitoring will be closely coordinated by the principal secretary. The participating ministries, departments and agencies will furnish relevant information and documentation on the status of their respective programs to MoFTIEP which will monitor progress against the operation’s objectives and results framework. For those that are not, MoFTIEP will liaise with focal points in the other ministries involved as needed to provide such information at a frequency and in a format satisfactory to the World Bank. The World Bank may provide implementation support and periodic monitoring and dialogue with the relevant line ministries and other stakeholders to ensure timely implementation and adequate monitoring of indicators and outcomes of the program.
86. Data availability and quality are appropriate to monitor progress of the DPO Program. The Program outcomes will be monitored through results indicators as detailed in the Policy and Results Matrix (Annex 1). Most of these results indicators are based on routinely published information and for those that are not, the concerned ministries or agencies will be responsible for collecting the data, tracking the relevant indicators and providing these to the MoFTIEP on a timely manner. MoFTIEP will be responsible for submitting such information at a frequency and in a format satisfactory to the World Bank. The World Bank will provide implementation support, including technical assistance in needed reform areas as described above, to ensure timely implementation and adequate data collection and monitoring of indicators and outcomes of the program.
87. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as
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a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. ”
6 SUMMARY OF RISKS AND MITIGATION 88. The overall risk level for the operation is substantial. This reflects a range of risks including political and governance, macroeconomic, institutional capacity, fiduciary and environmental and social. The most relevant risks are described below.
89. The political and governance risk is rated as moderate. Seychelles’ next general election is scheduled for December 2020. However, there is no significant political uncertainty expected with the transition of power. The Government has committed to the reforms supported by this DPF. To ensure transparency, the GoS will submit monthly reports of the emergency spending on wage subsidies, health, and social spending to the Finance and Public Accounts Committee of the National Assembly and publish the reports with 3 months. In addition, the GoS will facilitate an independent audit of emergency spending and related procurement processes and the audit report will be published.
90. The macroeconomic risk for the operation is rated as high. Although Seychelles has maintained macroeconomic prudence and achieved economic stability over the last 10 years, as with most other countries, the pandemic has affected the economy of Seychelles through both domestic and external channels. The significant decline in economic activity has resulted in lower domestic revenue and drastically higher government spending in response to the economic and social effects of the crisis (see section 2.2). A prolonged COVID-19 outbreak would continue to affect tourism and FDI inflows, causing a deeper recession and prompting further intervention by the Government. This would result in a widening financing gap for which the Government could seek additional external financing or resort to domestic financing. The financing of the wider deficit will weigh on fiscal debt sustainability in the medium term. In addition, contingent liabilities from State Owned Enterprises, in particular Air Seychelles poses additional risk to debt sustainability. This operation contributes to the mitigation of fiscal risks by providing concessional financing which would lower debt service costs as compared to financing through capital markets.
91. The risk associated with sector strategies and policies is rated as moderate. The policies and strategies prepared by the GoS in response to COVID-19 are generally adequate for the purposes of the operation and the structural reforms are in-line with the Government’s NDS. In addition, Seychelles generally has a well-developed strategic and policy framework in the sectors involved in the program, including at the level of finance and economic planning, health and environment. Gaps in both the strategic and policy level remain to be addressed, to which this operation is contributing. Most notably, on the health response side, a comprehensive strategy and policy framework for mid-term COVID-19 response is still missing. However, the government with support from the World Health Organization is currently finalizing this framework.
92. The risk surrounding the technical design of the program is rated as moderate. Factors related to the technical design of the proposed operation are unlikely to have an adverse impact on the achievement of its development objective. The program design is fully aligned with government priorities and is informed by an assessment of sectoral capacities. The prior actions have been informed by preparatory work and extensive
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conversations with Government agencies. However, risks in the technical design remain. On Prior Action 1, technical effort and financial investment is needed by government to meet the COVID-19 testing targets. Similarly on Prior Action 6, the GoS needs to take the institutional step of launching the National Climate Change Council in order to reach climate change mainstreaming results.
93. The institutional capacity for implementation and sustainability risk are substantial. The implementation of the reforms supported by this DPF requires strong collaboration among a number of implementing agencies and strong coordination by MoFTIEP as executing agency. While Seychelles has made significant progress in institutional capacity building since 2009, implementation capacity is lagging. The DPF mitigates this risk by providing strong dialogue between the World Bank and the Government and close coordination with the international development partners.
94. The fiduciary risk is rated as moderate. Seychelles has substantially improved its PFM system, and the CBS safeguard framework, accounting systems and auditing arrangements are deemed adequate and continue to comply with international standards. The proposed loan disbursement will follow the World Bank’s procedures for development policy lending.
95. The environment and social risks are rated moderate. Environmental risk is linked to the management of hazardous waste related to the health-sector response to COVID-19 (see Section 5.2). However, this risk is mitigated both at the sectoral and national level. At the national level, all responsibilities for managing environmental risk lie with the Ministry of Environment, Energy and Climate Change (MEECC) which has strengthened its institutional and legal framework and upgraded waste operations in line with international good practices. Within the health sector, hospitals have high capacity incinerators for hazardous waste and send the ash to the landfill. The landfill in Seychelles is within capacity, although concerns around potential leakage and capacity constraints are under discussion. The Waste enforcement and Permit Division of the Environment Department is responsible for developing all policies regarding waste, waste collection, characterization, treatment and disposal. Social risk is related to the expected impact of COVID-19 on the poorest households and the lack of efficiency and equity of the social protection system. Specifically, there is inadequate targeting of beneficiaries. To mitigate these risks, the World Bank is preparing a PforR in social protection that will provide technical support in this area. The PforR will address the removal of obstacles that prevent reaching those that need support most, with better targeting; rebalancing of the social assistance resources dedicated toward the bottom two quintiles of beneficiaries, possibly through cost-sharing measures for the upper quintiles; and introducing a robust and fully automated management information system that includes the full range of benefits. There are risks related to the transparency and accountability around the use of the payment system for social protection. This risk is mitigated by audit requirements that will be put in place during the PforR. Finally, to ensure transparency of emergency fiscal spending (social spending, wage subsidies and spending on health), the government will submit monthly reports of the emergency spending to the Finance and Public Accounts Committee of the National Assembly and make such reports public within three months. Additionally, an independent audit on emergency spending and related procurement processes will be conducted and the audit report published.
96. Stakeholder risk is moderate. Reforms in Pillar I related to the COVID-19 health response, increase in allocation to social protection, increase in one-off assistance under the Social Welfare Assistance benefit and the support to the private sector, are widely supported by stakeholders. The structural reforms under pillar II, particularly PA#6 on climate change could face difficulties in implementation. For example, ensuring that government sectors are guided on the mainstreaming of climate change in sectoral policies. To mitigate these risks
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the Government has been conducting extensive stakeholder consultation and is receiving technical assistance from partners, including the Global Climate Change Alliance and the WBG to build institutional capacity to manage and sustain the implementation of these reforms.
97. Other risks are moderate. The spread and duration of the COVID-19 crisis both at the national and global levels remain uncertain and hence the extent of both the health and economic impacts. While Seychelles was able to contain the first wave of the COVID-19 virus the capacity of the health system is low and a more severe public health shock from COVID-19 represent an added risk to both the cost on lives and livelihoods. The burden on the healthcare systems from COVID-19 could impede treatment of other diseases and the provision of other routine care (preventive, promotional and adaptative) which can hamper Human Capital accumulation in the long term. The GoS is working with the WHO on a framework to address a possible second wave of the virus.
Table 6: Summary Risk Ratings
Risk Categories Rating 1. Political and Governance ⚫ Moderate
2. Macroeconomic ⚫ High
3. Sector Strategies and Policies ⚫ Moderate
4. Technical Design of Project or Program ⚫ Moderate
5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial
6. Fiduciary ⚫ Moderate
7. Environment and Social ⚫ Moderate
8. Stakeholders ⚫ Moderate
9. Other ⚫ Moderate
Overall ⚫ Moderate
.
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ANNEX 1: POLICY AND RESULTS MATRIX
Prior actions and Triggers Results
Prior Actions Indicator Name Baseline Target
Pillar A--- Protecting Lives and Livelihood
Prior Action #1. The Borrower, through its Cabinet of Ministers, has approved the Seychelles Percentage of international Response Plan for Covid-19 as laid out in Cabinet Memorandum C20/MEM/066, which defines the 95 arrivals having been tested for 0 (December strategy for the immediate response to the first wave of COVID-19 and lays the foundation for (December COVID-19 in accordance with the 2019) subsequent reopening and testing strategies, and took adequate measures to prevent imported 2020) Department of Health protocol cases. Prior Action #2. The Borrower through its National Assembly and Cabinet of Ministers approved Percentage increase in households measures to support vulnerable households affected by COVID-19 through: receiving social protection or 0 (December 20 (June (i) increase in allocation to social protection; an social welfare support to alleviate 2019) 2020) (ii) increase in the one-off assistance paid under the Social Welfare Assistance benefit. COVID-19 impacts
Number of workers in the private 25,000 0 (December sector having benefited from (December Prior Action #3. The Borrower through its National Assembly approved: (i) guarantee salaries to all salary guarantee with the 2019) employees in companies affected by the COVID-19 pandemic for three months and (ii) postponement 2020) objective to reduce job and of taxes until September 2020 (Corporate Social Responsibility, Tourism Marketing Tax, Business Tax income losses and taxes on Non-Monetary Benefits Income). Percentage of firms benefiting 0 (December 90 (August
from postponement of taxes to 2019) 2020) mitigate the impact of COVD-19 Percentage uptake of the credit Prior Action #4. The Borrower, through its Cabinet of Ministers, approved the Central Bank Act, 2020 line facility under the Private (Amendment) and the Financial Institutions Act (Amendment), 2020, to allow the Central Bank to Sector Relief Scheme to help 0 (December 80 (June support the economy during the economic crisis created by the COVID-19 pandemic. micro, small and medium 2019) 2021) enterprises (MSMEs) impacted by COVID-19
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Prior actions and Triggers Results
Pillar B--- Protecting the Future
Percentage of legal entities that Prior Action #5. The Borrower through is National Assembly approved new AML/CFT Act 2020 and have submitted verifiable 0 (December 80 (June Beneficial Ownership (BO) Act 2020 to strengthen the domestic financial sector and to establish and ownership information on the 2019) 2021) maintain an up to date register of beneficiary owners. database held by FIU Number of government sectors guided on the mainstreaming of Prior Action #6. The Borrower through is Cabinet of Ministers approved the new Climate Change climate change in sectoral policies 0 (December 10 (June Policy to reduce Seychelles’ vulnerability to climate change impacts. through the new National Climate 2019) 2021)
Change Council chaired by the Vice President
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ANNEX 2: IMF RELATIONS ANNEX IMF Press Release No. 20/212 May 8, 2020
• The IMF approved Seychelles’ request for emergency financial assistance under the Rapid Financing Instrument (RFI) of about US$31.2 million. • The near-term economic fallout of the COVID-19 pandemic is expected to be severe. Restriction in travel will hinder tourism and weaken fiscal and external positions, creating large additional financing needs. • The authorities reacted swiftly by taking immediate measures of containment, including border closures, strengthening health policy responses and supporting households and firms.
The Executive Board of the International Monetary Fund (IMF) approved today Seychelles’ request for emergency financial assistance under the Rapid Financing Instrument (RFI) equivalent to SDR 22.9 million (about US$31.2 million, or 100 percent of quota) to meet the country’s urgent balance of payment needs stemming from the COVID-19 pandemic.
The near-term economic fallout of the COVID19 pandemic is expected to be severe. Travel restrictions and the subsequent loss of tourism receipts are sharply reducing economic activity and weakening the fiscal and external positions, creating large additional financing needs. The authorities reacted swiftly by taking immediate measures of containment, including border closures, strengthening health policy responses and supporting households and firms.
The RFI will provide timely resources to the authorities to address the urgent balance of payments needs and soften the hit on the budget. The IMF will continue to monitor Seychelles’ situation closely and remain in close dialogue with the authorities.
Following the Executive Board discussions, Mr. Tao Zhang, Deputy Managing Director and Chair, made the following statement:
“Seychelles’ hard-won economic gains since the 2008 crisis, supported by successive Fund arrangements, are being eroded by the severe impact of the COVID-19 pandemic.
“A temporary fiscal expansion as well as expeditious external support are needed to address the large output contraction. The authorities have taken decisive measures to prevent a local outbreak and mitigate the economic fallout on affected businesses and the most vulnerable households. Once the pandemic dissipates and confidence is restored, the authorities are committed to return to a fiscal stance that stabilizes debt.
“The central bank’s prompt response to provide emergency assistance will help alleviate the economic fallout. The flexible exchange rate has served Seychelles well, and the resilience of the banking system will play a crucial role in restoring external and internal balances. The central bank should remain vigilant to potential market stress and emerging risks to financial markets.
“The emergency IMF support under the Rapid Financing Instrument provides timely resources to the authorities to address the urgent balance of payments and budgetary needs. The assistance of other international financial institutions and development partners is crucial to close the remaining financing gaps, ease the adjustment burden, and preserve economic growth. The authorities are committed to transparency and good governance in
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the use of emergency financing by providing monthly reports of pandemic-related expenditure to the National Assembly and undertaking an independent audit of such spending and procurement and publishing the results.”
Seychelles: Selected Economic and Financial Indicators, 2016–25
Nominal GDP (2017): US$1,498 million Per capita GDP (2017): US$15,735 Population, end-year (2016): 94,677 Literacy rate (2015): 95.3 percent Main products and exports: Tourism, Canned Tuna
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Act. Act. Prel. Proj. Proj.
(Annual percent change, unless otherwise indicated)
National income and prices
Nominal GDP (millions of Seychelles rupees) 19,002 20,806 22,064 23,191 21,538 23,643 25,607 27,575 29,563 31,680 Real GDP 4.6 4.4 3.8 3.9 -10.8 6.5 5.4 4.6 4.1 4.0 CPI (annual average) -1.0 2.9 3.7 1.8 4.5 3.1 3.1 3.0 3.0 3.0 CPI (end-of-period) -0.2 3.5 3.4 1.7 4.8 3.4 3.4 3.0 3.0 3.0 GDP deflator average -0.9 4.9 2.2 1.2 4.2 3.0 2.8 3.0 3.0 3.0
Money and credit
Broad money 12.1 16.4 7.7 13.9 -6.0 … … … … … Reserve money (end-of-period) 14.5 18.9 4.5 22.7 -16.4 … … … … … Velocity (GDP/broad money) 1.4 1.3 1.3 1.2 1.2 … … … … … Money multiplier (broad money/reserve money) 4.6 4.5 4.6 4.3 4.8 … … … … … Credit to the private sector 10.3 17.8 11.5 22.3 -1.0 … … … … … (Percent of GDP, unless otherwise indicated) Savings-Investment balance
External savings 20.6 20.1 17.9 16.7 29.2 25.8 24.1 21.9 19.6 18.6 Gross national savings 9.7 8.8 8.6 9.5 -3.8 3.4 6.1 8.4 9.2 10.2 Of which : government savings 3.8 3.7 4.2 4.4 -12.1 -2.2 1.3 4.6 5.5 6.5 private savings 5.9 5.0 4.4 5.1 8.3 5.5 4.8 3.8 3.7 3.7 Gross investment 30.2 28.9 26.6 26.2 25.5 29.2 30.2 30.2 28.8 28.8 Of which : public investment 1 5.0 4.4 5.1 3.7 4.0 6.4 6.4 6.3 6.3 6.3 private investment 25.2 24.5 21.5 22.5 21.5 22.8 23.8 23.9 22.5 22.5 Private consumption 47.1 51.3 52.7 53.1 52.9 55.0 55.0 54.0 53.5 53.3 (Percent of GDP) Government budget Total revenue, excluding grants 36.7 35.1 36.2 36.0 31.6 32.8 32.9 33.8 33.8 33.7 Expenditure and net lending 38.1 36.5 37.8 36.1 48.5 42.0 38.7 37.7 36.4 35.0 Current expenditure 33.1 32.1 32.8 32.4 44.6 35.7 33.3 31.3 30.3 28.9 Capital expenditure 1 5.0 4.4 5.1 3.7 4.0 6.4 6.4 6.5 6.1 6.2 Overall balance, including grants -1.4 0.1 0.7 -0.8 -13.6 -4.9 -3.8 -2.2 -1.3 -0.1 Program primary balance 3.4 3.1 2.9 2.7 -9.7 -1.8 -1.0 0.3 1.6 2.5 Total government and government-guaranteed debt 2 72.7 65.8 60.9 59.1 85.8 80.0 74.5 67.7 61.8 55.4 Domestic (including debt issued for monetary purposes) 40.5 36.2 32.3 32.1 39.2 35.7 32.6 29.3 25.5 20.0 of which: Monetary debt 16.2 11.2 9.2 8.6 7.9 5.9 4.3 2.9 1.7 0.9 External 32.2 29.7 28.5 27.0 46.5 44.4 41.9 38.4 36.3 35.3
External sector
Current account balance including official transfers (in percent of GDP) -20.6 -20.1 -17.9 -16.7 -29.2 -25.8 -24.1 -21.9 -19.6 -18.6 Total external debt outstanding (millions of U.S. dollars) 3 1,505 1,639 1,762 1,875 1,882 1,971 2,060 2,150 2,222 2,249 (percent of GDP) 105.5 107.5 111.6 113.6 150.3 142.2 132.8 123.3 115.6 109.3 Terms of trade (-=deterioration) -14.0 -2.6 -3.0 6.6 12.9 -1.0 0.0 0.5 0.3 0.3 Real effective exchange rate (average, percent change) -0.1 -3.2 ...... Gross official reserves (end of year, millions of U.S. dollars) 522.6 546 548 580 368 398 436 496 540 602 Months of imports, c.i.f. 3.7 3.5 3.6 5.4 2.8 2.8 2.8 2.9 2.9 3.1 In percent of Assessing Reserve Adequacy (ARA) metric 131.0 129.3 122.9 129.4 100.3 101.2 104.2 109.8 118.9 125.1 Exchange rate
Seychelles rupees per US$1 (end-of-period) 13.5 13.8 … … … … … … … … Seychelles rupees per US$1 (period average) 13.3 13.6 … … … … … … … …
Sources: Central Bank of Seychelles; Ministry of Finance; and IMF staff estimates and projections. 1 Includes onlending to the parastatals for investment purposes. 2 Includes debt issued by the Ministry of Finance for monetary purposes. 3 Includes private external debt.
Source: IMF, Rapid Financing Instrument 2020
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ANNEX 3: LETTER OF DEVELOPMENT POLICY
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ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE
Significant positive Significant poverty, social or Prior Actions or negative distributional effects positive or environment effects negative
Operation Pillar 1: Protecting Lives and Livelihoods
Prior Action #1. The Borrower, through its Cabinet of Ministers, has approved the Seychelles Response Plan for Covid-19 as laid out in Cabinet memorandum C20/MEM/066, Yes, positive effect through reduced which defines the strategy for the immediate response to the NA health and economic impacts of first wave of COVID-19 and lays the foundation for COVID-19 on the poor and vulnerable subsequent reopening and testing strategy, and took adequate measure to prevent imported cases. Prior Action #2. The Borrower through its National Assembly and Cabinet of Ministers approved measures to support vulnerable households affected by COVID-19 through: Yes, positive effect through reduced (i) increase in allocation to social protection NA social and economic impacts of COVID- 19 on the poor and vulnerable (ii) increase in the one-off assistance paid under social welfare assistance paid under the social welfare assistance benefit. Prior Action #3. The Borrower through its National Assembly approved: (i) guarantee salaries to all employees Yes, positive effect through reduced in companies affected by the COVID-19 pandemic for three social and distributional effects from months; and (ii) postponement of taxes until September NA 2020 (Corporate Social Responsibility, Tourism Marketing COVID-19 by supporting workers and Tax, Business Tax and taxes on Non-Monetary Benefits reducing job losses Income). Prior Action #4. The Borrower through its Cabinet of Ministers approved the Central Bank Act, 2020 Yes, positive effect through reduced (Amendment) and the Financial Institutions Act (Amendment), 2020 to allow the Central Bank to support NA risk of loss of economic activities and the economy during the economic crisis created by the jobs, safeguarding livelihoods COVID-19 pandemic.
Operation Pillar 2: Protecting the Future
Prior Action #5. The Borrower through is National Assembly approved new AML/CFT Act 2020 and Beneficial Ownership (BO) Act 2020 to strengthen the domestic financial sector NA Neutral and to establish and maintain an up to date register of beneficial owners.
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Yes, positive effect through the Prior Action #6. The Borrower through is Cabinet of Ministers reduction of climate change impacts approved the new Climate Change Policy to reduce Yes, positive effect on coastal communities and Seychelles’ vulnerability to climate change impacts. potentially reducing greenhouse gas emission and pollution.
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