AFRICAN DEVELOPMENT BANK

PROGRAMME: INCLUSIVE PRIVATE SECTOR DEVELOPMENT

AND COMPETITIVENESS PROGRAMME (IPSDCP) COUNTRY : SEYCHELLES

APPRAISAL REPORT

OSGE DEPARTMENT November 2013

TABLE OF CONTENTS

CURRENCY EQUIVALENTS, FISCAL YEAR, WEIGHTS & MEASUREMENTS, (i-iv)

ACRONYMS & ABBREVIATIONS, LOAN INFORMATION, PROGRAMME

EXECUTIVE SUMMARY, RESULT-BASED LOGICAL FRAMEWORK iv

I – THE PROPOSAL .................................................................................................................... 1

II – COUNTRY AND PROGRAM CONTEXT ......................................................................... 2

2.1 Government overall development strategy and medium-term reform priorities ................. 2

2.2 Recent economic-social developments, perspectives, constraints and challenges ............... 2

2.3 Bank Group portfolio status ................................................................................................. 6

III – RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY ......................... 7

3.1 Link with the CSP, country readiness assessment and analytical works underpinnings ..... 7

3.2 Collaboration and coordination with other donors ............................................................... 7

3.3 Outcomes of past and on-going similar operations and lessons ........................................... 8

3.4 Relationship with on-going Bank’s operations .................................................................... 9

3.5 Bank’s value added and comparative advantages .............................................................. 10

3.6 Application of good practice principles on conditionality ................................................. 10

IV – THE PROPOSED PROGRAMME ................................................................................... 10

4.1 Programme’s goal and purpose .......................................................................................... 10

4.2 Programme’s pillars, operational policy objectives and expected results .......................... 11

4.3 Financing needs and arrangements .................................................................................... 15

4.4 Programme’s beneficiaries ................................................................................................. 15

4.5 Programme’s impact on gender .......................................................................................... 15

4.6 Environmental and Social Impacts - sustainability of the programme ............................. 16

V – IMPLEMENTATION, MONITORING AND EVALUATION ...................................... 16

5.1 Implementation arrangements ............................................................................................ 16

5.2 Monitoring and evaluation arrangements

VI – LEGAL DOCUMENTATION AND AUTHORITY ....................................................... 17

6.1 Legal documentation ......................................................................................................... 17

6.2 Conditions Associated With Bank’s Intervention .............................................................. 17

6.3 Compliance with Bank Group policies ............................................................................. 18

VII – RISK MANAGEMENT .................................................................................................... 18

VIII – RECOMMENDATION ................................................................................................... 19

Boxes

Box 1 Prior Actions for the IPSDCP

Tables

Table 1 Seychelles: Key macroeconomic indicators

Table 2 Seychelles: Public Sector Investment Programme 2012-2016

Table 3 Lessons learned from EGRP

Table 4 Budget projections (2013-2014)

Table 5 Programme risks and mitigation measures

i

Appendices

Appendix 1 Letter of development policy

Appendix 2 Operation policy matrix

Appendix 3 IMF-country relations note

Appendix 4 Selected economic and financial indicators, 2010-2018

Appendix 5 Seychelles – Bank portfolio overview

Currency Equivalents

As of July 2013

1 UA = 17.95 SCR

1 UA = 1.50 USD

1 USD = 1.84 SCR

Fiscal Year

January 1st – December 31

st

Acronyms and Abbreviations

AfDB African Development Bank

CAR Commitment at Risk

CBS Central Bank of Seychelles

CPI Corruption Perception Index

CPIA Country Policy and Institutional

Assessment

CSO Civil Society Organization

CSP Country Strategy Paper

DB Doing Business

DBR Doing Business Report

DBS Development Bank of Seychelles

DP Development Partner

EARC Eastern Africa Resource Center

EFF Extended Fund Facility

EGRP Economic and Governance Reforms

Program

EIB European Investment Bank

EITI Extractive Industries Transparency

Initiative

ESIA Environmental and Social Impact

Assessment

FAPA Fund for African Private Sector Assistance

FLP Financial Literacy Program

FRA Fiduciary Risk Assessment

FSC Financial Services Commission

FTC Fair Trading Commission

FY Fiscal Year

GAC Government Audit Committee

GBS General Budget Support

GCI Global Competitiveness Index

GDP Gross Domestic Product

GoS Government of Seychelles

HRS Human Resource Strategy

ICT Information and Communication

Technology

IFAD International Fund for Agricultural

Development

IMF International Monetary Fund

IOSCO International Organization of Securities

Commissions

IPSDCP Inclusive Private Sector Development and

Competitiveness Program

LTS Long Term Strategy

M&E Monitoring and Evaluation

MDG Millennium Development Goals

MFTI Ministry of Finance, Trade and Investment

MIC Middle-income country

MoE Ministry of Education

MoH Ministry of Health

MoU Memorandum of Understanding

MTEF Medium Term Expenditure Framework

MTNDS Medium-Term National Development

Strategy

N/A Not applicable

NA National Assembly

NBS National Bureau of Statistics

PAR Projects at Risk

PBO Programme-Based Operation

PBPCG Policy-Based Partial Credit Guarantee

PCR Project/Program Completion Report

PEFA Public Expenditure Financial Assessment

PFM Public Financial Management

PPBB Program Performance Based Budgeting

PRSP Poverty Reduction Strategy Paper

PSD Private Sector Development

PSIP Public Sector Investment Programme

PUC Public Utilities Company

RISP Regional Integration Strategy Paper

RMC Regional Member Country

SBFA Small Business Financing Agency

SeNPA Small Enterprise Promotion Agency

SIBA Seychelles International Business

Authority

MSME Micro, Small and Medium Enterprise

SCR Seychelles Rupee

SRC Seychelles Revenue Commission

TA Technical assistance

TI Transparency International

UA Unit of Account

UNCTAD United Nations Conference for Trade

and Development

UNDP United Nations Development Program

USD United States Dollar

VAT Value Added Tax

WEF World Economic Forum

ii

Loan Information

BORROWER: Republic of Seychelles

EXECUTING AGENCY: Ministry of Finance, Trade and Investment (MFTI)

Financing plan for fiscal years 2013-2014 (General Budget Support)

Source Amount (USD) Instrument

AfDB 20 million IPSDCP Loan

World Bank* 14 million Development

Policy Loans

*The World Bank is implementing a 3-year programmatic DPL series in 2012-2014 in parallel to the IPSDCP.

However, the GoS is considering establishing a joint steering and M&E mechanism for both programmes.

ADB key financing information

ADB Loan currency United States Dollar (USD)

Loan Type Enhanced Variable Spread Loan

Lending Rate Base Rate + Funding Cost Margin + Lending Spread

Base Rate Floating Base Rate based on 6 month LIBOR with free option to

fix the Base Rate.

Funding Cost Margin The six months adjusted average of the difference between: (i)

the refinancing rate of the Bank as to the borrowings linked to

6- month LIBOR and allocated to all its floating interest loans

denominated in USD and (ii) 6-month LIBOR ending on 30

June and on 31 December. This spread shall apply to the 6-

month LIBOR which resets on 1 February and on 1 August.

The Funding Cost Margin shall be determined twice per year on

1 January for the semester ending on 31 December and on 1

July for the semester ending on 30 June.

Lending margin 60 basis points (0.6%)

Commitment fee Progressive - In the event of disbursement delays in relation to

the initial schedule specified in the loan agreement, a fee of 25

bps per annum will be applicable to the undisbursed amounts.

This fee will increase by 25 bps every six months up to a

maximum of 75 bps per annum.

Other fees Not Applicable

Maturity 20 years maximum

Grace period 5 years maximum

Timeframe – Main milestones

Concept Note approval

July 2nd

2013

Programme approval November 2013

Effectiveness November 2013

First Disbursement December 2013

Second Disbursement December 2014

Completion December 2014

iii

Programme Executive Summary

Programme

overview

The Seychelles Inclusive Private Sector Development and Competitiveness Programme

(IPSDCP) is a USD 20 million Programme-Based Operation (PBO) supporting the reform

agenda of the Government of Seychelles (GoS). Undertaken in an environment characterized by

macroeconomic and political stability, moderate fiduciary risk, and strong government

commitment to key reforms in the areas covered by the IPSDCP, the programme will be the

Bank’s second general budget support operation in Seychelles. The IPSDCP is designed as a

two year programme supporting the national budget of fiscal years 2013 and 2014. It is

supporting the implementation of a multi-year reform programme in conformity with the

Seychelles 2017 Strategy (the GoS’ main policy document guiding reforms since 2007), the

Medium-Term Expenditure Framework (MTEF), as well as the draft Medium-Term National

Development Strategy (MTNDS). Programme outputs include policy reforms addressing the

key constraints to private sector development (PSD) and strengthening GoS public financial

management (PFM) systems. The operation is fully complementary to a parallel Development

Policy Loan (DPL) Programme from the World Bank and the GoS is considering establishing a

common steering and monitoring and evaluation framework for both operations.

Programme

outcomes

The overarching goal of the IPSDCP is to strengthen competitiveness to promote inclusive,

sustainable and resilient economic growth. This goal will be achieved through two

complementary operational policy objectives, namely: (a) improving the enabling environment

for PSD and investment by addressing existing constraints (including access to finance,

regulatory barriers, and internal competition); and (b) strengthening PFM systems to support

PSD and maximize public sector efficiency in a context presided by fiscal consolidation thus

enabling the GoS to invest in economic infrastructure and enhance the quality of public

services. Expected outcomes include: (a) improvement in market efficiency (with an expected

increase in the goods market efficiency component of the Global Competitiveness Index from

4.3 in 2012 to 4.6 in 2014); (b) easier access to finance, in particular for domestic MSMEs (with

the expansion of the portfolio of the Small Business Financing Agency (SBFA) to at least 500

MSMEs with a total SCR 70 million at year-end 2014, from 355 MSMEs and SCR36.7 million

in 2012, with specific targets for MSMEs operated by women); and (c) improvement in key

PEFA indicators linked to the business enabling environment (PI-19.iii Public access to

procurement information, from C+ in 2011 to B in 2014; and PI-27 iii Adequacy of time for the

legislature to provide a response to budget proposals, from D in 2011 to B in 2014). The direct

beneficiaries of the Programme will be the Seychellois private sector actors, and in particular

MSMEs (with specific emphasis on those owned/operated by women and youth), as well as key

GoS agencies and departments. The entire Seychellois population will benefit indirectly through

the programme’s expected impact on inclusive growth and job creation.

Needs

Assessment

Since 2008, and after the successful implementation of first-generation reforms primarily aimed

at macro-economic stabilization and fiscal consolidation under an IMF Stand-By Arrangement,

the GoS is currently implementing a second-generation reform agenda aimed at enhancing

private-sector-led growth and investment. Substantial progress has been made in areas such as

of regulatory simplification, financial sector development or major PFM reforms, but further

work is required in particular to ensure the inclusiveness of growth and to boost economic

competitiveness. The IPSDCP will contribute to keep the momentum and deliver key reforms,

while giving the GoS the fiscal space to address key infrastructure needs and improve the

quality of public service delivery.

Bank’s

Added Value

The Bank’s added value arises from (a) its experience in the delivery of budget support to GoS

(through the 2009 Economic Governance and Reforms Program –EGRP–) as well as similar

programmes in other small-island and middle-income economies (e.g., Cape Verde, Mauritius);

(b) a holistic view to economic competitiveness comprising both PSD enabling environment and

public sector efficiency; and (c) the provision of complementary technical assistance (TA) and

capacity building in the areas of MSME development, public-private partnerships and

infrastructure planning, and human resource development, which will contribute to the overall

success of the programme.

Institutional

development

and

Knowledge

building

The IPSDCP will contribute to the strengthening of the GoS institutional framework for

investment and competitiveness promotion and financial sector development by supporting key

institutional transformations. In addition, PFM reforms will strengthen the overall capacity of

the GoS. Knowledge building will be promoted through the related TA programme as well as

through the preparation of the programme completion report.

iv

Results-Based Logical Framework Country and project name: Seychelles: Inclusive Private Sector Development and Competitiveness Program

Purpose of the program : To address key constraints for PSD and competitiveness, with a focus on inclusiveness, public sector efficiency, and SME development

RESULTS CHAIN PERFORMANCE INDICATORS

MOV RISKS/MITIGATIO

N MEASURES Indicator (including CSI*) Baseline Target

IMP

AC

T

Strengthened competitiveness to

promote inclusive, sustainable and resilient economic growth

Global Competitiveness Index 4.1 (2012) 4.5

(2015) WEF,

NBS, MFTI

Reform fatigue and

Government capacity:

Mitigating measures:

The program is selective

and avoids overburdening

the reform agenda. GoS

has implemented reforms

in consultation with

stakeholders and this will

be scaled up. Capacity

will be strengthened

through complementary

TA.

Macroeconomic stability

– external shocks:

Mitigating measures:

Since 2008, the GoS has

built a strong track-record

of maintaining

macroeconomic stability,

including successful

implementation of the

IMF program and

continued budget

surpluses.

Fiduciary risk is

moderate: Mitigating

measures: The FRA has

identified a number of

mitigating measures to be

implemented prior and

during program

implementation. Together

with other PFM reforms

included in the GoS 2012-

2014 PFM Action Plan,

these measures should be

sufficient to mitigate any

fiduciary risks.

Political stability:

Mitigating measures:

The controversy regarding

the 2011 election has been

dealt with through

protracted consultations

on electoral reforms led

by the Seychelles

Electoral Commission.

The country is not facing

any major election during

the period of the IPSDCP

policy programme, with

the next presidential and

legislative elections

scheduled for 2016.

Natural disasters:

Mitigating measures:

The GoS has a National

Climate Change Strategy,

a Disaster Risk

Management Policy, and

early warning systems is

currently preparing a

master plan for Disaster

Risk Management. The

Bank and other DPs

reacted swiftly to provide

the GoS with emergency

assistance to address the

damages caused by the

tropical cyclone Felleng in

February 2013.

Real GDP growth 2.9 (2012) 3.5% (2015)

Employment (number of employed

persons in formal/other sector)

51,426 / 6,044

(2012) 52,500 / 6,160 (2015)

OU

TC

OM

ES

Outcome A.1

Improved environment for enterprise development

Goods market efficiency (GCI) 4.3 (2012) 4.6 (2014) GCR

MSMEs getting SBFA loan/ %

headed by women/total loans

approved/recovery ratio / MSMEs

under credit facility with commercial

banks and % headed by women

355/177/36.78

M SCR/44%/0

Min 500/250/min 70M (cummulative

2013-2014)/Min 65%/ 50 and 30%

(end 2014)

SBFA/M

FTI

Outcome A.2

Enhanced public sector efficiency to support economic

competitiveness

PEFA PI-19 iii C (2011) B (2014) PEFA/M

FTI

PEFA PI-27 iii * D (2011) B (2014) PEFA/MFTI

OU

PU

TS

A.1 Addressing Key Constraints to Private Sector Development

Operationalize e-Government capabilities

Operationalize online platform for planning permissions and license

applications, tax, MSME registrations; computerize registries;

new simplified tax regime for small

businesses

None of these

platforms are

operational.

Online platform operational and tax regime in force in in 2013; registries

computerized end 2014

MFTI, Registrar

, SEnPA, SRC

Improve legal framework to

facilitate business registration, modernize corporate law, and

improve dispute resolution

Adopt Legal Practitioners (LP) Bill

and revise Companies Bill; adopt mediation and civil rules for

Commercial Court

-

LP Bill approved by Cabinet by end

2014; Companies Bill and mediation and civil rules by end 2014

MFTI

Strengthen competition and

consumer protection policies, legal and institutional framework

Adopt Competition Action Plan and

Competition Policy, revise Competition Act and strengthen

cooperation between FTC and other

regulatory bodies, adopt Consumer Protection Policy Outline

-

Competition action plan adopted by

FTC and MoUs with three major regulators signed end 2013; Revised

Act submitted to NA and Policy

approved by Cabinet end 2014, Consumer Outline Policy adopted by

FTC end 2014

MFTI

Adoption of key draft legislation

and standards for non-banking financial services

FSC bill, leasing bill, hire purchase

and credit sales bill, IOSCO reports -

FSC created; legal texts on leasing hire

purchase and credit sales approved by Cabinet by end 2013, IOSCO

compliance by end 2014

MFTI,

FSC, CBS

Adoption of draft legislation and

key policies to promote financial inclusion and financial education

Legal text on national payment

systems (including mobile banking),Financial Sector

Development Implementation Plan,

Financial Literacy Plan (FLP)

document and implementation reports

-

Legislation on payments system

approved by Cabinet by end 2013, Financial Sector Development Plan

adopted and implementation begins by

end 2014; FLP adopted and

implemented in 2014

MFTI,

CBS

Operationalize new MSME

financing scheme and SBFA as

credit facility for MSMEs; improve coordination between

SEnPA, SBFA, DBS and SBA

MoU on MSME scheme, SBFA bill,

SBFA strategic plan and policy, and

SenPA, SBFA, DBS and SBA MOU -

MSME financing scheme operational

2013, SBFA operational 2014; SBFA

and DBS strategy adopted and implemented and MOU signed 2014

MFTI,

SBFA,

SEnPA

A.2 Strengthening PFM Systems to Maximize Public Sector Efficiency and Support Private Sector Development

Adopt and implement new

procurement regulation including

standard bidding documents

Text on procurement regulation and

standard bidding documents

Procurement

law exists

Standard bidding documents adopted

and applied by 2013; Procurement

regulations in 2014

MFTI

Involve CSO in Budget preparation and execution

monitoring

Minutes of meetings on budget with CSOs

Little involvement

CSO representation starting 2013 MFTI

Increase period given to National

Assembly (NA) to review budget proposal and publish the budget

and execution reports on a web

page

Budget transmission (time before

year-end); budget reports available on a webpage

Less than 1

month/not published

More than 1 month in 2013 and more

than 6 weeks in 2014; budget and budget execution reports published on

webpage in 2014

MFTI

Funding: USD 20 million (ADB Window)

1

REPORT AND RECOMMENDATIONS OF MANAGEMENT TO THE BOARD

OF DIRECTORS ON A PROPOSED LOAN FOR THE SEYCHELLES INCLUSIVE

PRIVATE SECTOR DEVELOPMENT AND COMPETITIVENESS PROGRAMME

I – THE PROPOSAL

1.1 Management submits the following report and recommendation for a proposed loan of USD 20

million to finance the Seychelles Inclusive Private Sector Development and Competitiveness

Programme (IPSDCP). The IPSDCP is designed as a multi-tranche general budget support (GBS)

operation through two separate tranches of USD 10 million each covering fiscal years 2013-2014. The

programme was prepared in response to a November 2012 request for assistance from the Government

of Seychelles (GoS). Policy dialogue on the Programme has been continuous since January 2013 and

appraisal took place in July 2013.

1.2 The IPSDCP is fully aligned with the Seychelles 2017 Strategy, the GoS’ main policy

document guiding reforms since 2007, the Medium-Term Expenditure Framework (MTEF) as well as

the draft Medium-Term National Development Strategy (MTNDS). The IPSDCP is also aligned with

the strategic priorities of the Bank’s Seychelles Country Strategy Paper (CSP) 2011-2015, as well as

the Bank’s broader strategic framework encapsulated in the new Ten-Year Strategy, the Private Sector

Development (PSD) Strategy, and the draft Governance Action Plan (GAP) 2013-2017. Undertaken in

an environment characterized by macroeconomic and political stability, moderate fiduciary risk, and

strong government commitment to key reforms, Programme design has incorporated the lessons

learned from the Bank’s previous GBS in Seychelles as well as the good practice principles on

conditionality.

1.3 Since 2008, the GoS has successfully implemented first-generation reforms primarily aimed at

macro-economic stabilization and fiscal consolidation with support from the IMF, the World Bank,

the EU, the AfDB and other development partners. The GoS is currently implementing second-

generation reforms aimed at promoting a sustainable and inclusive private-sector-led growth.

Substantial progress has been made in areas such as of regulatory simplification, financial sector

development and PFM reforms. Further work is however required in particular to ensure sustainable

and inclusive growth and to boost economic competitiveness. The IPSDCP will contribute towards

maintaining the momentum for delivery of key reforms, while giving the GoS the fiscal space to

address key infrastructure needs and improve the quality of public service delivery.

1.4 The overarching goal of the IPSDCP is to strengthen competitiveness to promote inclusive,

sustainable and resilient economic growth. This goal will be achieved through two complementary

operational policy objectives, namely: (a) improving the enabling environment for PSD and

investment by addressing existing constraints (including access to finance, regulatory barriers, and

internal competition); and (b) strengthening PFM systems to maximize public sector efficiency in a

context of fiscal consolidation thus enabling the GoS to invest in economic infrastructure and enhance

the quality of public services. Expected outcomes include: (a) improvement in market efficiency (with

an expected increase in the goods market efficiency component of the Global Competitiveness Index

from 4.3 in 2012 to 4.6 in 2014); (b) easier access to finance, in particular for domestic MSMEs (with

the expansion of the portfolio of the Small Business Financing Agency (SBFA)); and (c) improvement

in key PEFA indicators directly linked to private sector development. The direct beneficiaries of the

Programme will be the Seychellois private sector actors, and in particular MSMEs (with specific

emphasis on those owned/operated by women and youth), as well as GoS agencies and departments.

The entire Seychellois population will benefit indirectly through the programme’s expected impact on

inclusive growth and job creation.

1.5 The Programme has been designed to ensure full complementarity with a parallel

Development Policy Loan (DPL) series from the World Bank as well as the IMF programme.

Informal coordination is already strong and the GoS is considering a common steering and monitoring

and evaluation framework for budget support. Programme implementation will be further supported

through the provision of complementary technical assistance (TA) and capacity building in the areas

2

of MSME development, PPPs and infrastructure planning, and human resource development, with

funding from the Fund for African Private Sector Assistance (FAPA) and the Middle Income

Countries (MIC) Trust Fund.

II – COUNTRY AND PROGRAM CONTEXT

2.1 Recent economic-social developments, perspectives, constraints and challenges

2.1.1 Seychelles has a stable political system. The country has held several multi-party elections

since 1991. During the last presidential elections held in May 2011, the incumbent president, Mr.

James Michel, was elected for another five-year. Parliamentary elections in September 2011 were

boycotted by the main opposition party. This triggered the establishment of the ‘Forum for Electoral

Reform’ Committee, which was to make recommendations of reforms to the Government by the end

of 2012. The work of the Committee, while delayed, is nearing completion with a draft report on

recommendations to revise the electoral laws expected to be tabled in Parliament before the end of

year.

2.1.2 Seychelles recent economic performance has been broadly positive, although it remains

vulnerable to various external and internal risks. Economic and social indicators in Seychelles are

well above regional averages. Since a major debt crisis in 2008, the country has outperformed

virtually all quantitative and structural benchmarks agreed with the IMF in the context of a Stand-By

Arrangement first and an Extended Fund Facility (EFF). Growth has recovered solidly, monetary

policy has been effective in stabilizing the exchange rate and bringing down inflation despite some

volatility, and decisive fiscal consolidation has proceeded according to schedule.1 In December 2012,

the three-year EFF was extended for an additional year until end-December 2013. The main challenge

the country is currently facing is to strengthen resilience against external shocks, to which it is highly

vulnerable given its position as a small island economy highly dependent on tourism-related activities.

To achieve this, the GoS is maintaining its strong commitment to fiscal consolidation while trying to

strengthen economic competitiveness.

2.1.3 Growth has remained strong in challenging circumstances and is expected to accelerate

in the medium term. Growth declined in 2012 to about 2.9 % (compared with 6.7% in 2010 and

4.9% in 2011), mainly due to the European financial crisis and its impact on the tourism sector.

Despite this decline, Seychelles growth performance can be considered quite resilient to external

downturns, as a drop in tourism from traditional European countries of origin was swiftly offset by an

increase in tourist arrivals from less-traditional markets (e.g., Gulf region, Russia) to bring about an

overall 8% increase in revenue, and the telecommunications sector has experienced a boost from the

new submarine fibre-optic cable. Tourist arrivals have further grown by about 15% in the first half of

2013 partly thanks to a modest recovery of the European market. Growth is expected to accelerate to

3.3% in 2013 and to figures between 3.5% and 3.9% starting in 2014.

2.1.4 The main sectors of the economy are tourism and fisheries. Tourism accounts for about 25% of

GDP, 37% of employment, and 70% of foreign exchange earnings. Canned tuna (8% of GDP, 7% of

jobs) is the country’s main export, with about 35% of the total value of exports. Both sectors are

currently exposed to vulnerabilities, including the impact of the Eurozone crisis on tourism (the EU

still accounts for over 70% of tourists), and the effects of declining fish stocks, increased

transhipment, and piracy in the western Indian Ocean on tuna canning and other fisheries activities.

According to the IMF, a decrease in tourist arrivals by 7% in 2013 (compared to the baseline scenario

of a 3% growth) would reduce GDP growth to nil and would further deteriorate the overall balance of

payments by 2% of GDP. Tourism and fisheries are expected to continue being the main engines of

growth, together with the booming telecommunications sector.

1 The GoS macroeconomic stabilization and structural reform programme was supported by the IMF and other

development partners, including AfDB in the context of the two-tranche, EUR 20-million Seychelles Economic and

Governance Reforms Program (EGRP) approved in 2009.

3

2.1.5 The Central Bank of Seychelles (CBS) has implemented an effective monetary policy

controlling inflation and stabilizing the exchange rate. Inflation experienced a significant increase,

from almost nil in 2010 to a 4-year peak of about 9% in mid-2012, mostly due to higher international

food and oil prices as well as a weakened rupee. However, towards the end of 2012 and overcoming

previous difficulties in monetary transmission, a tighter monetary policy by the CBS (including two

unsterilized interventions) managed to bring inflation down to 5.8% by December and to reverse the

depreciation of the rupee. In 2013, inflation has been further reduced: after a small increase at the

beginning of the year due to the introduction of the value-added tax (VAT), it has dropped to about

3.6% on a year-to-year basis in the second quarter. Annual inflation rates are expected to remain

stable at around 3% starting in 2014.

Table 1: Seychelles: Key macroeconomic indicators

(% of GDP, unless otherwise indicated)

2011 2012 Est. 2013 Proj.

PrProjetoj

2014 Proj.

Proj. Proj

2015 Proj.

Real GDP growth 5.0 2.9 3.3 3.9 3.8

Consumer prices annual average rate (%) 2.6 7.1 4.5 3.4 3.0

Current account, incl. official transfers GDP) -22.7 -21.7 -23.2 -18.4 -16.4

Total public debt 74.3 77.3 72.0 65.3 59.2

Gross intl. reserves (months of imports) 2.5 2.6 2.7 2.7 2.8

Primary budget balance 5.4 6.2 5.1 4.4 4.4

Overall budget balance, incl. grants 2.5 2.4 1.8 2.0 2.3

Source: IMF Article IV and Seventh EFF report, July 2013 (see Appendix 4).

2.1.6 Recent fiscal performance has been very strong and the GoS is strongly committed to

fiscal consolidation. The total stock of public debt has been reduced to 77.3% of GDP in 2012,

compared to 150% in 2008, when the country defaulted on its external debt. Today, debt restructuring

is almost complete, with all commercial private sector liabilities now restructured and only one

bilateral agreement outstanding. In 2012, the debt impact of the Air Seychelles restructuring (which

increased government debt by 2.5% of GDP) was compensated by another one-off event: the revenue

related to the sale of one island. Primary surplus for 2012 was 6.2% of GDP (compared to 8.6% in

2010 and 5.4% in 2011, and well in excess of the 4.3% target agreed upon with the IMF).

2.1.7 Total revenues (without grants) reached 37.5% of GDP in 2012 up from 36.1% of GDP in

2011. It is expected that tax revenues will increase in 2013 and 2014 but non tax revenues are

expected to decrease. Consequently, total revenues (without grants) are expected to reach respectively

37.3% of GDP and 35.8% of GDP in 2013 and 2014. Key fiscal revenue measures include the

reduction of the marginal business tax from 33% to 30% on profit, the introduction of the new VAT in

2013, the introduction of a simplified, presumptive tax of 1.5 percent of turnover for small businesses

with turnover of less than SR1 million to replace the business tax, the introduction of a corporate social

responsibility tax and of a tourism marketing tax. Measures are also implemented to increase tax

administration efficiency and tax compliance.

2.1.8 Expenditures reached SR 5.8 billion in 2012 and are expected to evolve to reach respectively

SR 5.94 billion and SR 5.77 billion in 2013 and 2014. The GoS is targeting a primary fiscal surplus in

line with its target of reducing public debt to 50% of GDP by 2018. Priority spending includes social

spending and infrastructure. Expenditure efficiency measures are being implemented to further

improve financial management including the new Utility Tariff Rebalancing Plan, enhanced oversight

of public enterprises, and PFM reforms.

2.1.9 A Public Sector Investment Programme (PSIP) has been prepared as part of the 2013 budget to

reflect GoS priorities until 2016. Total investments between 2012 and 2016 (SCR 5.91 billion) will

represent annually between 7 and 10% of GDP throughout this period.

4

Table 2: Seychelles: Public Sector Investment Programme 2012-2016 (% of total allocation)

Sectors 2012 2013 2013 2014 2015

General Public Services 2.4 4.2 7.1 8.2 5.2

Public Order and Safety 20.3 24.4 15.2 13.8 11.5

Economic Affairs (Energy, infrastructure) 34.9 33.4 31.3 24.6 19.2

Housing and Community 25.5 24.4 23.4 28.6 43.0

Health 9.0 5.8 9.2 5.1 6.2

Education 7.7 7.1 12.4 18.9 14.9

Social Protection 0.2 0.8 1.5 0.9 0.2

Total 100 100 100 100 100

Source: PSIP included in 2013 national budget

2.1.10 Seychelles has been able to finance significant current account deficits in recent years

and the country’s position is expected to improve. The country is currently experiencing a

significant current account deficit (22.7% of GDP in 2011 and 21.7% in 2012), mainly as a result of

the import content of large FDI flows in the tourism sector, a rise in merchandise imports, and weak

transport-related exports (after Air Seychelles discontinued its European routes). This deficit is

expected to continue in 2013 (23.2%) before subsiding progressively starting in to 2014 before

reaching 12-13% in 2017-2018. The country has had no problem to finance these deficits and, for

instance, Fitch has raised its Seychelles’ outlook from “stable” to “positive” in January 2013, with an

overall “B” grade. Total reserves have also increased modestly to about 2.6 months of imports.

2.1.11 Despite substantial progress in recent years, further PSD reforms are required to

strengthen economic competitiveness. In addition to fiscal consolidation, the main challenge for the

country is economic competitiveness. A recent IMF study based on a comparative analysis of external

vulnerabilities, export performance (including the performance of the tourism sector compared to

other small island economies) and non-price indicators, concluded that while external vulnerability is

decreasing (in particular through a drastic reduction of Seychelles’ external debt), it remains high.

Private-sector led and inclusive growth is key to ensure resilience. After decades of state-led policies,

reforms since 2008 have focused on broadening the scope for private sector development and reducing

state intervention in the economy. These reforms include the creation of two one-stop-shop entities for

licensing and off-shore/FDI activities (the Seychelles Licensing Authority, SLA, and the Seychelles

International Business Authority, SIBA), the refocusing of the Development Bank of Seychelles on

the SME sector (which was one of the benchmarks under the IMF program), new anti-money

laundering rules, the licensing of a stock exchange, and a new Financial Institutions Act allowing the

introduction of new financial products, enhancing competition, reinforcing the regulatory powers of

the Central Bank of Seychelles (CBS) and reducing the GoS’ role in the financial sector (e.g., partial

privatization of the Seychelles Savings Bank).

2.1.12 However, further reforms are necessary to improve the competitiveness of the Seychellois

economy and exploit the potential of the domestic private sector. The 2012-2013 edition of the Global

Competitiveness Report (GCR) was the first examining Seychelles. With an overall score of 4.1 over

7, the country ranked 76th

out of 144 countries. Other than market size, the country’s position is

weakest in financial market development (93rd

) and business innovation (94th

). Seychelles is ranked

74th

in the 2013 Doing Business Report (DBR), well below Mauritius (19th

) or South Africa (39th

),

and above Kenya (121st). This represents a modest improvement compared to the 2012 ranking (76

th).

Technical Annex V provides a detailed analysis of the main constraints to private sector development

and competitiveness in the country, and namely the three main obstacles that this operation is

targeting: (a) access to credit (Seychelles ranks 167th

in the “Getting Credit indicator of the DBR and

access to finance is most significant obstacle for businesses surveyed in the GCR); (b) business

regulation (where there is still room for improvement by expanding e-Government tools, streamlining

procedures, and modernizing the legal framework); and (c) internal competition (where there is a need

to operationalize a policy and institutional framework).

5

2.1.13 Other relevant constraints to private sector development include:

Skills gap. While educational levels are high (with a 95% literacy rate), Seychelles suffers

from a chronic skills gap, as a result of labour shortages (the country is the smallest in

Africa, with a population of 87,411 in 2011), high labour costs, limited capacity in tertiary

and specialized education, and certain attitudes towards work ethics among the youth (poor

work ethics is the second problem for doing business cited by local entrepreneurs

according to the GCR 2012-2013 survey).

Certain infrastructure gaps, including port facilities, energy, and water management.

Access to electricity is a problem as it takes an average of 147 days to get a connection for

commercial users, according to the 2013 DBR (compared to an African average of 133),

reportedly due to the limited availability of meters for commercial users given existing

stocks of the Public Utilities Corporation (PUC). Inadequate water supply (it is estimated

that the PUC can only meet about 60% of the total demand for potable water, due to

increased housing construction and pipe leakages) and expensive energy supply call for

additional investment (including through PPP frameworks). The problem of slow telecoms

speeds is being addressed with the new fibre-optic link with the continent.

2.1.14 In addition to the above constraints to private sector development, the country has not fully

realized the potential for diversification and value chain exploitation of its two main industries:

tourism and fisheries. As both industries currently face external challenges, the need for

diversification and value-added activities becomes even more important. Indeed, the GoS has been

successful in brining FDI into large hotel projects, but an opportunity remains to explore high-value

tourism niches (e.g., conference, business tourism) as an alternative to preserve the country’s image a

as luxury destination. Likewise, there is potential to increase the amount of fish resources captured in

the Seychelles Exclusive Economic Zone and/or transhipped through Victoria. In both cases, the

development of linkages to local MSMEs is key to increase domestic value-added and intra-sector

diversification.

2.1.15 Seychelles has a strong governance framework and has made significant progress in the

area of public financial management. Seychelles ranks 4th

in the 2012 Ibrahim Index of African

Governance, reflecting the strength of local institutions. The Global Competitiveness Report also

notes the existence of “strong and well-functioning institutions” in the country. Likewise, according to

the Corruption Perceptions Index (CPI) of Transparency International (TI), Seychelles ranks 51st out

of 176 countries, or 5th

in Sub-Saharan Africa, only behind Botswana, Mauritius, Cape Verde, and

Rwanda.

2.1.16 In contrast, regulatory quality and public management (specifically PFM) offers room for

improvement. For instance, the World Governance Indicator for regulatory quality remains quite low

(about the 25th

percentile) while the country holds the 30th

position in Africa when the “Public

Management” component of the Ibrahim Index is considered in isolation. According to the 2012-2013

GCR, government inefficiency and bureaucracy have been cited by the private sector as a hindrance to

doing business in the country.

2.1.17 A first PEFA assessment was carried out in 2008 and revealed some areas for

improvement. A second PEFA assessment was concluded in March 2011, documenting substantial

progress compared to the 2008 exercise. A new PFM Act was passed by Parliament in 2012 and the

GoS is currently implementing its 2012-2014 PFM Action Plan to accelerate reforms and address the

weaknesses identified in the 2011 PEFA Report, particularly in terms of external and internal control

of public finances, transparent budgeting, and public procurement. In parallel, the GoS is piloting the

implementation of Programme Performance Based Budgeting (PPBB) in the ministries of Health and

Education in 2013.

2.1.18 Social development in Seychelles is high partly thanks to a generous welfare system.

Seychelles is expected to achieve all the Millennium Development Goals (MDGs) by 2015 as most of

the eight goals have already been attained (see Technical Annex VII). The 2013 Human Development

6

Index (HDI) stands at 0.806 (ranking 46th

amongst 187 countries), a level comparable to many OECD

countries, and is on a positive trajectory. This performance is partly explained by a generous welfare

system in place, although key challenges include improving spending efficiency, targeting, and quality

of basic social services (e.g., education), as well as addressing the needs of vulnerable groups (youth

unemployment is reported to be 20%). In addition, the aftermath of the 2008 crisis has had an impact

on the living conditions of ordinary Seychellois. For instance, the number of households seeking

welfare assistance more than doubled over the past two years to reach a total number of 6,000 welfare

beneficiaries (about 8% of the total population).

2.2 Government overall development strategy and medium-term reform priorities

2.2.1 Pending the adoption of the draft MTNDS, Seychelles’ medium-term development

priorities are articulated in the Seychelles 2017 Strategy. The Seychelles 2017 Strategy was

launched in 2007 with the following strategic priorities: (i) sound macroeconomic management; (ii)

enhancing competitiveness and governance; (iii) fostering equity; and (iv) improving infrastructure,

land management and biodiversity. The main objective of the Strategy was to double GDP per capita

by 2017, from a level of USD 8,722 in 2007. While the impact of the 2008 global financial crisis has

jeopardized the achievement of this objective, the GoS has made considerable progress in achieving

macroeconomic stabilization, improving the business enabling environment and the governance and

financial management framework, reforming and strengthening its generous social safety nets, and

investing in vital infrastructure while preserving the country’s rich natural endowment.

2.2.2 A new medium-term development strategy is currently under preparation following the

thrust of the Seychelles 2017 Strategy. The GoS is currently preparing a Medium-Term National

Development Strategy (MTNDS) 2013-2017, expected to be finalized by the end of 2013. It is

expected that the focus areas of the 2017 Strategy will be maintained, with an emphasis on

sustainable, broad based growth through PSD and improved public sector efficiency. The current draft

MTNDS defines three national development goals: (a) Strengthening the foundations of economic

growth; (b) Improving the quality of life; and (c) Ensuring Environmental sustainability. Within the

first goal, the draft MTNDS calls for specific actions in the areas of PSD and PFM. First, the draft

MDTS emphasizes the need to build resilience by diversifying the economy “to cushion the

Seychelles economy from tourism and exchange rate shocks,” which in turn requires developing the

institutional structure to promote industrial sector competitiveness, promoting SMEs through the

creation of industrial clusters, furthering the development and promotion of the financial and

management services, or fostering an entrepreneurial environment for Seychellois investors. Second,

the draft MTNDS emphasizes the link between macroeconomic stability and the effort to, inter alia:

(a) strengthen financial management and public expenditure tracking and control; and (b) develop and

implement mechanisms to ensure transparent and full accountability of Government/public revenues

within the national budget process.

2.3 Bank Group portfolio status

2.3.1 Since the Bank commenced operations in Seychelles, cumulative approvals net of

cancellations as at June 2013 amounted to UA 95.398 million, of which 73% was from the African

Development Bank (ADB), 13% from the African Development Fund (ADF), 11% from the Nigeria

Trust Fund, and the remaining from the African Water Facility and the Special Relief Fund. The

Bank’s currently active portfolio in Seychelles comprises 6 operations approved and/or on-going

including 2 projects, 2 studies, 1 policy-based partial risk guarantee (PBPCG), and 1 emergency relief

assistance. The total commitment, net of cancellations, is UA 15.597 million as of June 2013. Multi-

sector operations (PBPCG, statistical capacity development, and emergency relief) account for 50.4%

of the active portfolio in value, followed by the infrastructure sector (ICT and water and sanitation)

with 45.4%, and the agriculture sector (4.2%). Sovereign operations represent 53% of the portfolio

and non-sovereign operations account for the remaining 47%. Cumulative disbursement ratio stands at

44.18% (July 2013). The portfolio’s average age is 1.64 years. At present there are no Problematic or

Potentially Problematic Projects and no Project Completion Report (PCR) backlog. Appendix 5

provides a detailed overview of the Bank portfolio in the country.

7

III- RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY

3.1 Link with the CSP, country readiness assessment and analytical works underpinnings

3.1.1 The IPSDCP is fully aligned with the Bank’s CSP. The Programme is solidly anchored on

the Bank’s 2011-2015 which has a single pillar, Strengthening private sector development and

economic competitiveness, with three components (1) Infrastructure development; (2) Enabling

financing and regulatory environment; and (3) Human capital development. Given its focus on

competitiveness and private sector development through business environment reforms and financial

sector development, the IPSDCP policy programme is closely linked to sub-component (2). Its

emphasis on MSME development and capacity building and support for public sector efficiency

through PFM reforms (including capacity development in key areas) equally aligned to component

(iii) of the CSP which aims to develop priority skills required for a private sector driven economy and

skills required for efficient delivery of public services. Moreover, the changes introduced in the recent

CSP mid-term review to incorporate PFM as a priority under a new reformulated component 2

focusing on “Economic and Financial Governance” reinforce the strategic alignment of the IPSDCP.

In addition, the IPSDCP is in sync with Bank’s broader strategic framework set out in the new Ten-

Year Strategy (in particular through its emphasis on inclusive growth and job creation), the new PSD

Strategy approved in July 2013, and the draft GAP 2013-2017.

3.1.2 Seychelles fulfils all eligibility criteria for a programme-based operation under the Bank

Group Policy on Programme Based Operations. The country enjoys overall political and economic

stability (see Section 2.1, above); GoS’s commitment to reforms is very strong with a well-designed

agenda being successfully implemented within a viable and credible macro-economic and financial

framework (anchored in the Seychelles 2017 Strategy and supported by an IMF programme with

quantitative and structural benchmarks that the GoS has consistently met or exceeded and further

assisted by other donors through budget support or project grants/loans); there is a solid partnership

and policy dialogue between the GoS and Development Partners (DP), and an effective budget

support coordination mechanism will be in place to replace already strong informal mechanisms; and

several satisfactory fiduciary reviews have been carried out, including PEFA assessments in 2008 and

2011 and a Fiduciary Risk Assessment (FRA) in 2013. Technical Annex I provides a detailed analysis

of the eligibility criteria for general budget support.

3.1.3 The IPSDCP has been prepared using several key analytical works including: the PCR of the

2009 Economic and Governance Reforms Program (EGRP), the 2008 and 2011 PEFA reports, the

Bank’s Gender Profile, the Bank’s Regional Domestic Resource Mobilization Study, Bank-conducted

analysis of the financial sector and the business environment, the Bank-sponsored Seychelles

Infrastructure Action Plan, the different IMF Staff Reports produced under the EFF and Article IV

consultations, the World Bank’s 2009 and 2011 Public Expenditure Reviews (PERs), the Seychelles

country briefs under the 2013 DBR and the 2012-2013 GCR, and the World Bank/IFC “Doing

Business in Seychelles: Reform Opportunities.” Key recommendations emerging from these studies

include: (a) given the geographic characteristics of the country and their impact on cost structures,

emphasising competitiveness to build resilience against shocks; (b) prioritising the key outstanding

constraints to PSD in the country (and namely: access to finance, certain regulatory bottlenecks in

business and land registration, limited competition in various economic sectors, and procurement and

other PFM-related obstacles); (c) focusing in the implementation of the major PFM reforms adopted

since 2009 to improve public efficiency and provide the budgetary space to invest in infrastructure

and quality public services in a context presided by fiscal consolidation; and (d) ensuring not only the

resilience and sustainability of growth but also its inclusiveness by addressing the constraints faced by

youths, women, and MSMEs.

3.2. Collaboration and coordination with other donors

3.2.1 The IPSDCP will provide an opportunity to strengthen development partner (DP)

coordination in the area of budget support. Formal DP coordination to date has been rather limited,

8

mostly due to the lack of physical presence in Seychelles. However, DP cooperation is already strong.

The Bank has used the IPSDCP preparation as an opportunity to strengthen cooperation amongst the

DPs providing general budget support (currently AfDB and the World Bank and formerly the EU).

Indeed, a joint steering and M&E system is currently being discussed under the overall coordination

of the GoS (see Section 5.2., below).

3.2.2 In addition to AfDB, key DPs include the World Bank, the IMF, the EU, and UNDP. The

World Bank has supported GoS stabilization effort and structural reforms with two Development

Policy Loans (DPLs) in the past. The ongoing Sustainability and Competitiveness programmatic DPL

series (with USD 21 million to be disbursed in 3 years) is focusing on (a) improving the private sector

business environment (in particular, entry and exit, commercial court system, and housing finance);

(b) improving transparency in key economic sectors (i.e., oil and fisheries sectors); (c) improving

expenditure efficiency (through PFM reforms and monitoring and governance of public enterprises;

(d) improving targeting, automation, and M&E framework in the social protection system; and (e)

ensuring cost recovery and long-term financial sustainability of utilities. The IPSDCP has been

designed to ensure complementarity and avoid the risks of overlapping with this operation. In

addition, the World Bank is providing analytical work, and TA through a series of three PERs, the

preparation of a Financial Sector Development Strategy funded by the FIRST initiative, as well as

advisory services on pension reforms, public administration reforms, housing finance, electricity tariff

revisions, and PPBB, all of which will indirectly support the objectives of the IPSDCP. A detailed

description of the World Bank DPL series and the IMF programmes and their complementarity to the

IPSDCP is provided in Technical Annex VIII.

3.2.3 The EU’s portfolio in the country includes general budget support and projects with an overall

budget of around EUR 36 for the period 2008-2013. In particular, the EU general budget support of

EUR 16.5 million (disbursed in three tranches in 2009, 2010, and 2011) was delivered under the

Seychelles Economic Reform Program (SERP) with a focus on macroeconomic policy, PFM, and the

creation of an enabling environment for private sector development. A EUR 5 million line of credit by

the European Investment Bank (EIB) to the Development Bank of Seychelles (DBS) was approved in

August 2012 together with complementary TA. Additional EU resources have been mobilised

connection with the international fight against piracy and additional budget support in response to the

costs of piracy for the Seychelles economy. UNDP has a small program in the country, mostly

focused on statistical capacity building, good governance promotion (in particular in connection with

human rights and non-State actor participation in development policy, in cooperation with the EU),

and environment and sustainable development. Other DPs include IFAD (with a USD-3 million

project focused on small-scale agriculture), UNCTAD (through assistance in revision of the

competition and consumer protection legal frameworks), and the IMF, which, in parallel to the EFF,

has been providing technical assistance on various topics relating to macroeconomic management and

PFM through AFRITAC South.

3.2.4 Key stakeholders have been consulted. During the preparation of IPSDCP, key GoS

stakeholders were consulted, including the Vice-President, the Ministry of Finance, Trade and

Investment (MFTI), the CBS, the Ministry of Natural Resources, the Ministry of Tourism, the

Department for Entrepreneurship Development and Business Innovation attached to the Office of the

President, and several sector regulatory bodies. The operation also benefited from consultations with

external stakeholders, including private sector, civil society, the judiciary, the National Assembly, and

other DPs (e.g., the World Bank and the IMF).

3.3 Outcomes of past and on-going similar operations and lessons

3.3.1 The EGRP was instrumental in assisting the GoS with the first generation of reforms and

provides valuable lessons for the IPSD. Approved in 2009, the EGRP’s objective was to support the

GoS’s efforts to promote macroeconomic stability and sustainable growth in order to rebalance the

economy, by improving economic and financial governance. The PCR, approved by the board in

November 2011, ranks Programme Outcome as “Satisfactory” and identifies a number of

achievements under the EGRP policy programme, including the introduction of a medium-term fiscal

9

framework and a medium-term debt strategy, the setting-up of the Financial Analysis Branch at

MFTI, the adoption of the Audit Act (Amendment Bill), the approval of the Financial Institutions Bill,

the revision of the Investment Code, and the Licencing Act (Amendment) Bill. Key outcomes

included improvements in budget formulation, oversight and transparency; greater efficiency and

transparency in public procurement, an improved public debt management; and an improved

investment climate. Lessons learned from the EGRP PCR have been incorporated in the design of the

IPSDCP and are summarized in Table 3, below.

Table 3: Lessons Learned from EGRP

3.4 Relationship with on-going Bank’s operations

3.4.1 There are important synergies with other Bank operations. The IPSDCP policy

programme is complementary and has possible synergies with the remaining projects in the Bank’s

portfolio. These include the 2009 Policy-Based Partial Credit Guarantee (PBPCG) (which supports the

GoS debt restructuring exercise by assisting in improving the public debt management framework and

encouraging the restructuring of commercial debt under Paris Club conditions), the Statistical

Capacity Building Program (which is supporting the National Bureau of Statistics and its crucial role

in policy-making), and the private-sector-financed Sub-Marine Cable Project, which is addressing a

key infrastructure constraint for the competitiveness of the Seychellois economy and the development

of its private sector, in line with the objectives of the IPSDCP. Finally, the implementation of the

IPSDCP policy programme will be further strengthened by the on-going or planned TA with trust

fund resources (MIC Fund and FAPA) to prepare a National Human Resource Strategy, the GoS

EGRP Lessons Actions to Integrate Lessons in IPSDCP

The short duration of the EGRP (1 year and 5 months)

was aligned with the GoS 2008-2010 reform agenda.

Future budget support operations to accompany the

second-round reforms should provide for three years.

Programme will have a total duration of 2 years but policy

dialogue with the GoS has contemplated a potential

extension to a third year (2015) and the programme has

been designed accordingly.

Choice of program intervention areas and the

conditionality framework were closely aligned with

GoS’s priorities and reform program, ultimately

contributing to the EGRP’s overall success.

All actions in the policy program are part of on-going or

planned reforms and match the key priorities of the GoS

(economic competitiveness, private sector development,

public sector effectiveness).

In the absence of a formal coordination mechanism or a

performance assessment framework (PAF),

coordination amongst development partners (including the EU, the World Bank, the IMF, and the

Bank) on the basis of the GoS reform agenda (including

joint preparation mission, use of WB and UNECA

analytical work to prepare operation) was key to avoid

duplication of labour.

The program draws extensively on analytical work carried

out by other partners (e.g., PEFA reports, Doing Business

Report, Public Expenditure Reviews). Project design has

been undertaken in close coordination with the World

Bank and ensuring complementarity with the IMF

programme. Following a recommendation from the Bank,

the IPSDCP and the World Bank DPL series may be

subject to a common steering and M&E framework led by

MFTI.

Regular and intensive country dialogue between the

Bank and the GoS was instrumental in the success of the

program. Supervision should take place more than

once even in cases where, like in Seychelles, the

government remains firmly committed to reform. Task

managers have to provide technical advisory support

particularly in the face of human resource constraints.

Supervision will take place twice a year, with permanent

support from task managers and continuous policy

dialogue during programme implementation. Associated

TA will be used to strengthen capacity in key areas.

Measurable and quantifiable outcome indicators including at least one of the Bank’s Core Sector

Indicators, are essential in PBO operations.

Measurable and quantifiable outcome indicators have been

used for both outcomes and outputs, including Bank’s

Core Sector Indicators (budget submission timeframe, time

to start a business and to pay taxes)

The provision of institutional support in parallel to

budget support is a pressing need in cases like

Seychelles, where governments face serious human

resources constraints. The MIC grants were noted as the

only available instrument for ADB-only countries and

their focus is limited to studies.

This operation will be further supported through parallel

TA projects in key areas. The Bank is already providing

support for the development of a Human Resource

Strategy and an Infrastructure Master Plan. In parallel to

the IPSDCP, the Bank will fund an MSME development

programme and the preparation of a full-scale PPP

framework using FAPA and MIC resources

10

Infrastructure Action Plan, a PPP framework, and a comprehensive MSME development programme

complementing the reforms supported by the IPSDCP to boost inclusive growth.

3.5 Bank’s value added and comparative advantages

3.5.1 The Bank’s value added is strong and based on significant comparative advantages. The

Bank’s comparative advantage is three-fold: (a) its experience in the delivery of budget support to

GoS (through the EGRP) as well as similar programmes in other small-island and middle-income

economies (e.g., Cape Verde, Mauritius); (b) a holistic view to economic competitiveness comprising

both PSD enabling environment and public sector efficiency; and (c) the provision of complementary

TA and capacity building to reinforce the IPSDCP policy programme (see above). The Bank will

provide further value added through policy dialogue with the GoS in the context of the joint

mechanism to be established for the implementation of budget support in the country. This joint

framework is to be established following the recommendation and guidance from the Bank. Through

the IPSDCP, the Bank will also be contributing to the implementation of the Paris Declaration, the

Accra Agenda for Action and the Busan Partnership by increasing the level of aid on budget, using of

national systems and joint missions, avoiding parallel PIUs, and enhancing aid predictability.

3.6 Application of good practice principles on conditionality

3.6.1 Good practice principles on conditionality have been applied. The IPSDCP is fully aligned

to the GoS strategic framework, as developed through multi-stakeholder consultations (including the

Seychelles 2017 Strategy, the draft MTNDS, and the MTEF), and its prior actions focus on a limited

set of critical policy actions relevant and achievable within the programme’s time-frame. The use of

joint steering and M&E systems common to all budget support operations in the country and

incorporating civil society and private sector representatives will contribute to: (a) the reinforcement

of country ownership; (b) the development of a coordinated accountability framework customized to

country circumstances; and (c) a reduction of transaction costs (See Technical Annex II for an in-

depth analysis).

IV – THE PROPOSED PROGRAMME

4.1 Programme’s goal and purpose

4.1.1 The purpose of the IPSDCP is to address the key constraints to private sector development and

competitiveness in Seychelles, with a focus on inclusiveness, public sector efficiency, and SME

development. Reforms since 2008 focusing on macroeconomic stability and the promotion of private-

sector-led growth have been successful. Fiscal consolidation and investment climate reforms have led

to economic recovery and a credible path to debt sustainability. However, Seychelles is currently

facing two main challenges: (a) building resilience against external shocks by strengthening economic

competitiveness; and (b) ensuring that economic growth is inclusive and reaches out to vulnerable

segments of the population. To address these challenges, the GoS is committed to address the main

constraints for private sector development, including access to credit, certain outstanding regulatory

barriers, and insufficient competition in certain domestic markets. Particular attention will be given to

MSME development in view of its potential impact on promoting inclusive growth and economic

diversification. The inclusion of PFM reforms in this programme is based on a two-fold rationale.

First, certain key PFM reforms concerning, e.g. procurement and budget transparency, will have a

direct positive impact on the business environment and private sector development in the country.

Second, and more generally, strengthened public expenditure efficiency and quality can contribute to

increased competitiveness and inclusiveness by maximizing the returns of public investment in

economic infrastructure and enhancing quality and access to key public services (e.g., education,

health, social protection), particularly in a context of fiscal consolidation. Against this background, the

proposed development objective of the IPSDCP is to strengthen competitiveness to promote inclusive,

sustainable and resilient economic growth. The IPSDCP strategic focus is aligned with the IMF

recommendations under its Article IV consultations, which included an emphasis on “raising

inclusiveness through fostering private sector-led growth and capacity building.”

11

4.1.2 The IPSDCP is paying special attention to domestic MSMEs. In the absence of comprehensive

data on the make-up of the MSME sector, it is estimated that between 5,000 and 7,000 MSMEs are

active in Seychelles, mostly focusing on services, cottage and crafts, small-scale agribusiness, and

fisheries. The development of this segment alongside the traditional drivers of the economy (tourism

and fisheries) is key to bring about economic diversification, job creation, and the development of

value chains from large hotel projects and the tuna canning business. The MSME development agenda

will be particularly beneficial for women and youth. Women-led MSMEs will represent at least 50%

of the enterprises benefiting from expanded access to credit under the policy actions supported by the

IPSDCP. Likewise, the creation and growth of domestic MSMEs will be instrumental to address

youth unemployment, as GoS entrepreneurship programmes are primarily targeted to this segment.

4.2 Programme’s pillars, operational policy objectives and expected results

4.2.1 The IPSDCP has two components: (a) Addressing key constraints to private sector

development; and (b) Strengthening PFM systems to maximize public sector efficiency.

Component 1: Addressing key constraints to private sector development

4.2.2 As described in Section 2, above, Seychelles has made substantial progress in improving the

business climate. However, private sector development in the county is still hindered by a number of

significant constraints which affect negatively the overall competitiveness and diversification of the

economy, and have a disproportionate impact on domestic MSMEs. The IPSDCP policy programme

tries to address three of these constraints by improving the regulatory environment for business

development and investment, encouraging domestic competition, and promoting more inclusive and

diversified financial markets. Two additional constraints to private sector competitiveness (i.e.,

infrastructure bottlenecks and skills gaps) are being addressed through parallel technical assistance

interventions supporting the preparation of the GoS Infrastructure Action Plan, the development of a

comprehensive PPP framework, and the preparation of a National Human Resource Development

Strategy (see Technical Annexes III and IV).

4.2.3 Improving the regulatory environment for business development and investment. A first

priority for the GoS is regulatory streamlining. Under the IPSDCP policy programme, the GoS will

improve its e-Government capabilities by operationalizing online platforms for planning permission

applications (a process currently taking over 48 days on average), license applications (following up

on the creation of the Seychelles Licensing Authority as a one-stop-shop for licensing and the

simplification of licensing requirements for various activities), registration of small business

(currently done by the Small Enterprise Promotion Agency, SEnPA), VAT and business tax return

filing, and most government-related payments (including taxes). Likewise, the Office of the Registrar

is undergoing a profound transformation to improve its operational efficiency, including the

introduction of a document management system to computerise and systematise its files and the

computerization of the land registry, which will include a search engine covering land ownership and

title transfers. On the tax front, the GoS has introduced in 2013 a simplified Business Tax regime for

small businesses (defined as those with an annual turnover below SCR 1 million) based on a fixed rate

on the enterprise’s turnover rather profits. This presumptive approach based on a simple one-page tax

return, will likely increase formalization and total tax collection from MSMEs.

4.2.4 The IPSDCP also includes the Cabinet’s approval in 2014 of two major bills that are likely to

improve the investment environment in Seychelles: (a) a revision of the Legal Practitioners Act

(which, together with the standards of conduct introduced by the Supreme Court, will introduce

malpractice liability in the legal profession and increase competition in the supply of legal services,

which is often cited by domestic and foreign investors alike as a major constraint), and (b) the

Companies Act. While the country has made progress in facilitating business entry (through

regulatory simplification) and exit (through a new insolvency legal framework), a comprehensive

revision of the 1972 Companies Act is necessary to further facilitate the incorporation of new

business, align the country’s corporate governance regime and accounting requirements with

international best practices, and, ultimately, to promote domestic and foreign investment through an

12

streamlined, modern legal system. Legal reforms will also include new mediation and civil rules for

the Commercial Court, which are expected to increase the use of alternate dispute resolution

mechanisms thus reducing the substantial judicial backlog (about 250 cases at the Supreme Court at

end 2012).

4.2.5 Competitiveness and inclusiveness in the Seychellois private sector also requires measures

aimed at promoting domestic competition. Given the small size of the internal market and its impact

on the pervasiveness of market failures, the enforcement of competition and consumer protection

policies is crucial to improve market efficiency, ensure quality in the delivery of key services for

private sector activities (e.g., telecommunications, banking, energy), and establish a level playing field

for businesses. The GCI components measuring the intensity of market competition and market

dominance (where Seychelles ranks 89th

and 94th

over 144) leave room for improvement to boost

overall economic competitiveness. Since its creation in late 2009, the Fair Trading Commission (FTC)

has pursued about 35 competition and over 700 consumer cases. In the context of the IPSDCP, the

GoS is committed to mainstreaming competition and consumer protection policy through the approval

and implementation of a comprehensive competition policy; the reform of the Fair Competition Act

2009 and the FTC Act 2009, based on the shortcomings identified in a recent UNCTAD Independent

Review Report; and the signing of memoranda of understanding (MoUs) with regulators in order to

mainstream competition/consumer concerns in regulatory analysis while strengthening cooperation

between regulators and competition enforcers.

4.2.6 Finally, and although not included in the perimeter of the IPSDCP policy matrix, the GoS is

currently working on the development of a full public-private-partnership (PPP) framework with

technical support from the Bank. The approval of the Public Sector Investment Program (PSIP) in

2013 is a first step in this direction, which will be completed through the preparation of draft

legislation and a detailed action plan by 2015. Opportunities for private sector development through

PPPs will arise not only in the context of infrastructure projects (where the Bank is also supporting the

GoS in the preparation of its Infrastructure Action Plan, with a significant focus on PPP structures

given the constraints imposed by fiscal consolidation), but also in the contracting-out of government

services, where domestic MSMEs will likely have a major role to play.

4.2.7 Promoting more inclusive and diversified financial markets. As noted in Section 2, above,

access to finance is the main obstacle to private sector development and competitiveness in

Seychelles, in particular for domestic MSMEs. The GoS, in cooperation with the sector regulators

(CBS for banking services and the Seychelles International Business Authority –SIBA– for other

financial services), is committed to broaden financial inclusion and improve the country’s rankings in

international benchmark reports (DBR, GCR) through a two-track strategy: introducing policy

reforms to increase competition in the banking sector and developing targeted schemes to promote

access to credit by MSME, and encouraging the development of non-banking financial services.

4.2.8 In this context, the GoS has introduced various reforms aimed at strengthening creditor rights

(e.g., new insolvency legislation), addressing information asymmetries (including through the

establishment of a credit information system managed by the CBS for banks to assess the credit record

of prospective borrowers, the second phase of which will be supported by the IPSDCP policy

programme), and improving the national payments system to lay the foundations for new methods of

financial service delivery, including mobile banking (through the approval of draft legislation in May

2013). Moreover, the CBS is leading the preparation of a comprehensive Financial Sector

Development Strategy including a detailed action plan to increase financial inclusion in the country.

In parallel, the GoS has adopted various initiatives targeting both the supply side and the demand side

of the provision of financial services for MSMEs.

4.2.9 Supply-side interventions include: (a) the establishment of the Small Business Financing

Agency (SBFA) as a SCR 40 million revolving facility for micro- and small enterprises, with a focus

on business start-ups and youth-operated businesses; and (b) a new MSME finance scheme in

collaboration with commercial banks, where the GoS provides targeted interest rates subsidies and

guarantees part of the underlying credit risk. Specifically, regarding SBFA, the IPSDCP will support

13

not just the establishment but also the development of a clear strategic plan and the strengthening of

its credit risk and loan recovery capabilities, also relying on parallel technical assistance provided by

the Bank in the context of a comprehensive MSME development programme (see Technical Annex

IV).

4.2.10 On the demand-side of access to finance, the CBS has been conducting in the past a financial

awareness programme which it intends to scale-up in 2014 with the participation of CSOs, financial

service providers, and other stakeholders. In addition, low management skills among local MSMEs

result in significant risk perception and a limited number of bankable projects. MSME capacity

building will be specifically targeted by the establishment of a new cooperation framework between

SBFA, the Development Bank of Seychelles (DBS), SEnPA (Seychelles’ MSME development

agency, focusing on the provision of training and capacity building to entrepreneurs), and the

Seychelles Banking Association to build a partnership for the provision of technical assistance and

financial support for small businesses.

4.2.11 In parallel, the GoS is promoting the diversification of financial services in the country,

including through the development of capital markers. A new stock exchange is operating in

Seychelles since 2012 under SIBA supervision and the GoS is expected to propose, in the course of

2013, legislation on leasing and hire purchase and credit sales. Also in the second half of 2013, SIBA

will be transformed into a full-fledged Financial Services Commission (FSC) with regulatory and

supervision powers over insurance, securities, and other non-banking financial activities. SIBA/FSC

has already started discussions with the International Organization of Securities Commissions

(IOSCO) to become a member, and is committed to adhere to IOSCO’s Objectives and Principles of

Securities Regulation.

4.2.12 Expected outcomes for this component is an improved enterprise environment as measured by

an appreciable improvement of the goods market efficiency component of the GCI (measuring the

impact of regulatory reforms and competition enforcement) and an indicator of access to finance by

MSMEs (including women-led) through existing facilities.

Component 2: Strengthening PFM systems to maximize public sector efficiency and support private

sector development

4.2.13 The 2011 PEFA assessment confirmed that, in general terms Seychelles has a solid PFM

framework. However, specific weaknesses were detected in terms of the credibility of the budget (in

particular regarding the forecasting of non-tax revenues), multi-annual budget planning, effectiveness

in the collection of tax payments, effectiveness of internal audit (in particular due to capacity

limitations), certain dimensions of public procurement, the use of international accounting standards,

Parliamentary scrutiny of budget preparation, and limited follow-up to external audit reports (see

Technical Annex VI). Addressing those weaknesses is key to improve the efficiency and quality of

public expenditure in a context characterized by fiscal consolidation. Improved PFM systems will thus

give the GoS the crucial fiscal space it needs to provide basic economic infrastructure and quality

public services to strengthen human capital, ultimately enhancing economic competitiveness. More

specifically, certain PFM reforms will have a direct positive impact on the domestic private sector,

particularly through easier access to public procurement or greater transparency over government

priorities and investments.

4.2.14 The GoS 2012-2014 PFM Action Plan (see Technical Annex VI) has been designed to address

those weaknesses. Great progress has been achieved in the implementation of the Action Plan,

including key legislative measures (e.g., Public Debt Management Act, Public Enterprise Monitoring

Act, Public Procurement Act, Auditor General Act, and the new Public Finance Management Act

2012, which entered into force in January 2013). Other key reforms include revising the Chart of

Accounts to incorporate functional and programmatic classifications; improving multi-year budgeting,

especially by establishing sector strategies and developing comprehensive cash-flow forecasting tools;

revising the Financial Instructions and Accounting Manual (currently scheduled for August 2013);

strengthening commitment control; strengthening the Parliament’s Finance and Public Accounts

14

Committee; and adopting public sector accounting standards. In addition, the new PSIP lays the

foundations for a better management of capital expenditure and infrastructure prioritization, while

PPBB will likely improve value-for-money in the delivery of public services.

4.2.15 Against this background, two types of PFM actions will be supported by the Programme: (a) a

key set of reforms aimed at expanding the opportunities for the domestic private sector thus

supporting the specific objectives of Component 1; and (b) a broader set of pending reforms (starting

with key provisions of the Public Finance Act) aimed at strengthening the GoS fiduciary capacity to

improve expenditure efficiency and, ultimately, economic competitiveness. The PFM reforms

supported by this operation have also been chosen carefully to address the issues identified in the FRA

(see Technical Annex III).

4.2.16 The first group of reforms, which will be subject to closer monitoring under the Programme’s

logical framework, include major improvements in public procurement and budgeting transparency. In

the area of public procurement, the IPSDCP is supporting the introduction and use of standard bidding

documents as well as the adoption of the implementing regulations of the 2008 Public Procurement

Act, which have experienced significant delays but which will be adopted in early 2014 at the latest.

The new regulations will provide the necessary clarity for domestic firms to access business

opportunities (including, crucially, the publication of procurement plans and resolutions of

procurement complaints, identified as an issue in the PEFA 2011). In addition, budget preparation and

execution will be improved by adding transparency and accountability. This will include the creation

of a Government Budget Committee along the lines of the GAC above, involving representatives of

CSOs in budget preparation and monitoring, as well as an expansion in the time given to the National

Assembly to review the budget proposals for 2014 and 2015 (at least one month and then six weeks),

and the publication of the full budget and budget implementation reports on a website.

4.2.17 The second group of reforms focuses on supporting the actual implementation of certain

selected reforms to increase expenditure efficiency in order to increase the GoS’ fiscal space to boost

competitiveness through infrastructure and public service spending. This includes the centralization of

the accounting function in the MFTI, undertaken in 2013 to strengthen coordination and service

delivery, or the implementation of a comprehensive capacity building programme, which translated

into the launch of a two-year PFM Diploma in April 2013 by the MFTI and the School of Business

Management. 25 accounting staff are already being trained and a post-graduate diploma and master-

level course in PFM is currently being developed. The IPSDCP will also support the introduction of

asset registries in key GoS departments. The software is currently being deployed in the largest

ministries (Health, Education, and Environment) and will be gradually rolled out to other departments.

4.2.18 Internal and external auditing will be strengthened through the establishment, in 2013, of the

Government Audit Committee (GAC), as an advisory committee reporting to the MFTI on the prudent

use of resources, safeguard of assets of the state, the operation of adequate and effective systems and

control processes and improvement in accountability and transparency through effective risk

management mechanisms. The GAC is expected to follow-up on the implementation of external and

internal audit reports and will include CSO and private sector representatives. Internal audit capacity

will also be strengthened with more staff resources and a better utilization of time (with at least 50%

of staff time devoted to systemic issues).

4.2.19 Expected outcomes for this Component include an appreciable improvement in PEFA scores

concerning the publication of procurement information as well as budget transparency.

Box 1: Prior actions for the IPSDCP 1) Supreme Court Chief Justice adopts the Legal Practitioners (Professional Conduct) Rules defining the standards for

professional conduct in the legal profession

2) MFTI enters into MoU with commercial banks providing for a financing scheme for MSMEs concerning loans of up

to SCR 3 million based on interest rate subsidies and GoS guarantees

15

4.2.20 Prior actions: During country

consultations and in accordance with

good practice principles on conditionality

a set of prior actions to be fulfilled before

Board presentation of the operation were

identified jointly by the GoS and the

Bank. The prior actions are presented in

Box 1. All the prior actions are

considered to be critical measures to

reach the expected development

objectives of the IPSDCP and have been

selected in agreement with the authorities

based on the GoS’ own calendar of

reforms.

4.3 Financing needs and

arrangements

4.3.1 As presented in Table 4, the GoS

budgets for fiscal years 2013 and 2014

are fully funded. The Bank’s general

budget support will contribute to fund the

budget for both years in the form of a loan. Including parallel financing from the World Bank DPL

series, budget support loans account for a total SCR 216 million and SCR 219 million in 2013 and

2014, respectively. Other resources funding the 2013 and 2014 budgets include external grants and

project loans. Government tax revenues and non-tax revenues amount to SCR 5.57 billion in 2013 and

5.87 billion in 2014, while net domestic financing will be limited to SCR 754 and 879 million in the

same years.

4.4 Programme’s beneficiaries

4.4.1 MSMEs, key GoS entities and civil society will benefit from the Programme. The main

direct beneficiaries of the programme will be private sector operators (in particular MSMEs, with a

special emphasis on those owned or operated by women and youth), and public institutions, including

MFTI, CBS, the Judiciary, Planning Authority, Registrar’s Office, SRC, FTC, FSC, SBFA, SEnPA,

and key line ministries (including MoH and MoE) as well as civil society (through a greater

participation in budgetary processes). Given the strategic focus of the Programme, domestic MSMEs

will be key beneficiaries. Given the expected positive impact on growth, job creation, and economic

competitiveness, the entire Seychellois population can be considered to be indirect beneficiaries.

Budget execution, as supported with funds from the IPSDCP, will also have direct impact on the

population through spending on social services, including health and education, and on infrastructure.

4.5 Programme’s and impact on gender

4.5.1 The IPSDCP will have a positive impact on Seychellois women entrepreneurs. Gender-

related statistics in Seychelles compare very favourably with most RMCs and are in line with some of

the world’s best performers. For example, 44% of parliamentarians in 2012 (compared to 24% in

2010) and 45% of high-ranking public servants (chief executive or middle management) are women.

There are also more women employed in government (63% in 2011). The Seychellois Constitution

promotes non-discrimination and guarantees equal rights and protection for both men and women and

the country has also signed and ratified the principal conventions related to gender discrimination,

such as the Convention on all Forms of Discrimination against Women (CEDAW), the African Union

Protocol, the SADC Declaration on Gender and Development, and the IOC Gender Policy. The GoS

has also developed a National Action Plan to address gender-based violence, which is still a major

concern. By supporting MSME development policies and increased access to finance, the IPSDCP

will contribute to women economic empowerment in Seychelles, as there is anecdotal evidence that a

Table 4: Budget projections (in million SCR) 2013 2014

Revenues and grants 6,172 6,247

Total revenues 5,566 5,867

Tax revenue 4,897 5,253

Non-tax revenue 670 614

External grants 604 380

Total expenditure and net lending 5,893 5,920

Current expenditure 4,323 4,437

Capital expenditure 1,339 1,241

Net lending 157 191

Contingency 75 50

Overall Balance (Cash basis, after grants) 279 327

Financing -279 -327

Foreign financing 405 513

Disbursements 609 742

Project loans 393 523

Programme/budget support 216 219

of which, AfDB financing 120 122

Scheduled amortizations -203 -228

Domestic financing, net -754 -879

Privatization / Long-term lease of fixed assets 70 38 Source: Estimates of Revenue and Expenditure in 2013 Budget and

Appropriation Bill; IMF estimates (July 2013)

16

significant proportion of Seychellois MSMEs are owned/operated by women (e.g., women accounted

for 50% of SBFA’s new loans to MSMEs in 2012).

4.6 Environmental and Social Impacts - sustainability of the programme

4.6.1 The IPSDCP has been classified as a Category III programme, according to the procedures for

the environmental and social impact assessment. Given that IPSDCP is a general budget support

operation, its policy reforms will not have any direct negative impact on the environment. Moreover,

the social impact of the IPSDCP is expected to be positive. The reform programme being

implemented by the GoS and the execution of the National Budget, supported through the IPSDCP,

will have a positive impact on social outcomes. The GoS is implementing special programmes

targeting vulnerable groups through a generous welfare system. Through a positive impact on job

creation, in particular by MSMEs, the IPSDCP will contribute to keep the country’s unemployment

rate at very low levels (4%) while providing opportunities for the youth (in particular employment and

greater opportunities to develop their entrepreneurial potential).

4.6.2 Due to the country’s climatic vulnerability, the GoS has made efforts to conserve the

environment. Seychelles is a signatory to the United Nations Convention on Biological Diversity,

under which various types of protection areas exist. A Sustainable Development Strategy (SSDS)

2012-2020 has been adopted to mainstream economic, environmental, and social issues into all sectors

through the integration of relevant objectives, strategies, and policies. Furthermore, the Seychelles’

National Climate Change Strategy approved in 2009 provides a coherent and consolidated national

response to climate change.

4.6.3 Bank support through the IPSDCP, for instance to the implementation of GoS’s PFM reform

programme, will enhance the capacity to increase its fiscal resources and improve efficiency and

effectiveness of public expenditures as well as contribute to sustainable financing of the GoS medium-

term reform agenda. Finally, increased competitiveness through reforms in both the private and the

public sector, will build resilience against external shocks and strengthen the sustainability of

economic development in the country.

V. – IMPLEMENTATION, MONITORING AND EVALUATION

5.1 Implementation arrangements

5.1.1 Responsible Institution: MFTI will be the executing agency of the IPSDCP. It will work in

close collaboration with relevant institutions, including the CBS and the key agencies responsible for

SME development (i.e., DEDBI, SEnPA, SBFA, DBS) and business environment reforms (Planning

Authority, SRC, FSC, Registrar, Judiciary, etc.).

5.1.2 Disbursement and Funds Flow: On fulfilment of the disbursement conditions, the proposed

loan of USD 20 million will be disbursed in two successive tranches to fund the Budget execution for

fiscal years 2013 and 2014. The Bank will disburse the funds into a foreign currency account opened

by the GoSs at the CBS. The local currency equivalent of the funds deposited at CBS will be

transferred to the Treasury Single Account (TSA) of the GoS to finance budgeted expenditures and

will be accounted for within the financial management system of the country. GoS will make

payments to various beneficiaries from the TSA. MFTI will be required to send a letter the Bank

confirming that the amount deposited in the foreign currency account has been credited to the TSA.

The letter will clearly indicate the exchange rate used for the transaction.

5.1.4 Procurement: As a General Budget Support operation, procurement will be done following

country procurement systems in accordance with the public procurement law. According to the FRA

(see Technical Annex III), overall risk rating in public procurement is moderate provided that certain

actions are adopted, including the approval of the procurement regulations, which the IPSDCP will

support as part of its policy matrix. Seychelles has generally made progress in procurement reforms

and this is evidenced in the 2011 PEFA assessment, which rated B the PI-19 indicator related to

competition, value for money and controls in procurement (from D+ in 2008), with a possible

17

continued positive and upward trajectory if the regulations are finalized and capacity building

activities are initiated.

5.1.5 Financial Management arrangements: The existing financial management systems of the

GoS will be used to manage the resources of the IPSDCP. The FRA concluded that the country’s PFM

system is reasonably adequate to support the proposed General Budget Support. The GoS has made

good progress in implementing PFM reforms through the PFM Action Plan 2012-2014 which has

brought about concrete improvement in country systems, especially in the Comprehensiveness and

Transparency of the Budget. Key remaining challenges relate to Internal Controls and Financial

Reporting and External Scrutiny, which will be addressed through certain policy actions under the

IPSDCP. The overall risk rating was assessed as “Moderate” in the FRA. The FRA took into account

the 2008 and 2011 PEFA assessments and the PFM Action Plan 2012-2014, through which the GoS is

addressing some of the above shortcomings.

5.1.6 External Audit: In line with the Bank Policy on PBOs and the Paris Declaration, the

Accra Agenda for Action and the Busan Partnership, the utilization of Loan proceeds will subject to

regular country audit systems and structures, namely the Office of the Auditor General. The GoS has

undertaken to provide the Bank with the annual audit reports of the Auditor General on the Financial

Annual Statements of the Seychelles. The annual reports will be presented to the Bank promptly after

submission to the National Assembly, which is due nine months after the fiscal year in question.

5.2 Monitoring and evaluation arrangements

5.2.1 Institution responsible: MFTI will be responsible for the monitoring and evaluation of

the IPSDCP. MFTI, through its Directorate for External Finance Management, is ensuring

coordination with the DPs active in the country and has demonstrated its capacity to monitor the

implementation of the Bank’s previous budget support operations as well as the budget support

operations of other DPs effectively.

5.2.2 Monitoring system: Notwithstanding the absence of a formalised framework,

coordination among DPs currently providing budget support is very strong. In addition, the GoS is

currently planning to put in place a common institutional mechanism to monitor the implementation

of general budget support operations in the country (currently the IPSDCP and the World Bank’s DPL

series). Supervision will be undertaken twice a year from EARC.

5.2.3 Evaluation system: To promote mutual accountability, the GoS is studying the possibility

of entering into a Partnership Agreement with DPs active in general budget support setting out a

common monitoring system with specific indicators. In this context, joint reviews (or alternatively

separate reviews in the context of joint missions) will provide a platform for the Bank to evaluate

implementation progress of the IPSDCP. Moreover, a joint Bank-GoS PCR will be prepared at the end

of the programme.

VI – LEGAL DOCUMENTATION AND AUTHORITY

6.1 Legal documentation

6.1.1 The financing instrument used for this operation is an AfDB Loan of USD 20 million in the

form of general budget support to the Republic of Seychelles. The loan will be governed by a Loan

Agreement to be signed between the Bank and the Republic of Seychelles.

6.2 Conditions Associated With Bank’s Intervention

6.2.1 Prior Actions and entry into force: Before the Loan proposal is presented to the Board, the

GoS shall provide evidence to the Bank that the measures listed in Box 1 have been implemented. The

entry into force of the Loan Agreement shall be subject to the fulfilment by the Borrower of the

provisions of Section 12.01 of the General Conditions Applicable to Loan Agreements of the Bank.

18

6.2.2 Conditions precedent to the disbursement of the first tranche in 2013 for a total sum of

USD 10 million: The disbursement of the first tranche of the Loan will be subject to the following

conditions:

Transmission to the Bank of the details of a Treasury account with the Central Bank of

Seychelles (CBS), for purposes of receiving the resources of the Loan.

Maintenance by the Borrower of an appropriate macroeconomic framework.

6.2.3. Conditions precedent to the disbursement of the second tranche in 2014 for a total sum of

USD 10 million: The disbursement of the second tranche of the Loan will be subject to the following

conditions:

Transmission to the Bank of evidence that the Cabinet has approved the Legal Practitioners

Bill (including a provision for malpractice liability).

Transmission to the Bank of evidence that the Cabinet has approved the Competition Policy.

Transmission to the Bank of evidence that the new Procurement regulation has been gazetted.

Maintenance by the Borrower of an appropriate macroeconomic framework.

6.3 Compliance with Bank Group policies

6.3.1 The IPSDCP complies with all applicable Bank Group policies and guidelines, including the

Bank’s PBO policy.

VII- RISK MANAGEMENT

7. Table 5, below, provides a detailed review of the main risks and mitigation measures for the

implementation of the IPSDCP.

Table 5: Programme risks and mitigation measures

Risks Mitigation measures

Reform fatigue and Government

Capacity: The GoS has implemented a

substantial number of reforms since

2008 regarding both Private Sector

Development and PFM. Reform fatigue

may weaken the GoS commitment to

the IPSDCP policy programme.

The IPSDCP programme is selective and avoids overburdening the reform

agenda. In the past, the GoS has implemented reforms in consultation with

key stakeholders and this will be scaled up through thanks to the IPSDCP

policy programme (including the creation of the GAC and the Government

Budget Committee to involve CSOs in budget formulation and

implementation). Government capacity will be strengthened through

complementary TA programmes.

Macroeconomic instability due to

external and/or internal shocks: Seychelles remains vulnerable to

external shocks, which could include a

decrease in tourist arrivals due to a

prolonged Eurozone crises or a rise in

the international price of oil and other

commodities. Internal macroeconomic

risks arise from the performance of the

20 companies with state participation

(e.g., the restructuring of Air Seychelles

had a total cost for the country of 6% of

GDP) in 2011-2012.

Since 2008, the GoS has built a strong track-record of maintaining

macroeconomic stability, including successful implementation of the IMF

program (Stand-by Arrangement first and EFF since 2009) and continued

budget surpluses. Current account deficits have been financed in the past

without any problem. The Central Bank has intervened in the foreign

exchange market to address excessive volatility and will do so again if

needed, despite its commitment to a floating exchange rate regime. Support

from the DPs (including a potential use of further budget support resources)

and continued strengthening of the institutional capacity will enhance the

country’s ability to manage adverse external shocks. As of July 2013, the

country was weathering well the Eurozone crisis and tourism revenue had

increased by 15% in the first 6 months of the year. Regarding parastatals, the

GoS is adopting measures to improve financial and operational performance

as well as transparency under the new Public Enterprise Monitoring

Commission.

Fiduciary risk: The Fiduciary Risk

Assessment (FRA) found the fiduciary

risk to be moderate.

The FRA has identified a number of mitigating measures to be implemented

prior and during program implementation (e.g., PFM capacity building,

adoption of procurement regulations, improvement of internal audit and

accounting functions). Together with other PFM reforms included in the GoS

2012-2014 PFM Action Plan, these measures should be sufficient to mitigate

any fiduciary risks.

Political stability: The main opposition

party boycotted the 2011 legislative

The controversy regarding the 2011 election has been dealt with through

protracted consultations on electoral reforms led by the Seychelles Electoral

19

Risks Mitigation measures

elections. Commission. The country is not facing any major election during the period

of the IPSDCP policy programme, with the next presidential and legislative

elections scheduled for 2016.

Natural disasters: Given its

geographic position and make-up,

Seychelles is vulnerable to natural

disasters, including flooding

The 2009 National Climate Change Strategy (SNCCS) put in place measures

to adapt, build resilience and minimize vulnerability to the impacts of climate

change. In addition, the GoS has developed a Disaster Risk Management

Policy and a comprehensive early warning system and is currently preparing a

Master Plan for Disaster Risk Management. The Bank and other DPs reacted

swiftly to provide the GoS with emergency assistance to address the damages

caused by the tropical cyclone Felleng in February 2013.

VIII – RECOMMENDATION

8.1 Management recommends that the Board of Directors approve the proposed Loan in an

amount of USD 20 million to the Republic of Seychelles in the form of general budget support for the

purposes and subject to the conditions stipulated in this report.

I

Appendix 1

LETTER OF DEVELOPMENT POLICY

II

III

IV

V

VI

Appendix 2

IPSDCP Operation policy matrix

Medium

term

objectives

Policy actions (outputs) Institution

responsible

Outputs

indicator Outcomes indicators

Targets outcome CSP goals

2013 2014 Baseline Target

Component 1: Addressing Key Constraints to Private Sector Development

Strengthening Private

Sector Development and

Economic Competitiveness

Improved

business

and

investment

regulatory

environme

nt

Operationalize an online

platform for (a) planning

permission application; and

(b) license application

Operationalize a document

management system for all

registries maintained and operated

by the Registrar; Online platform for

land registry; Online registration of

small business/companies not

captured by the Registrar system

(i.e., registered with SEnPA)

MFTI, Registrar,

SEnPA

Measures

implemented as

confirmed

during Budget

Support

Reviews (BSR)

Improvement in average:

(a) number of days needed

to start a business / (b)

number of days to register

property / (c) Time (hours

per year) involved in

paying taxes

Baseline

(DBR, 2012):

39 / 33/ 76

34 / 30 / 70

Overall objective;

Economic and Financial

Governance component (in

particular, legal and

regulatory reform)

Establish an online system to

file VAT returns; online

system for government

payments (including all

taxes); simplified Business

Tax regime for small

businesses (rate based on

turnover rather than profits)

Expand the online tax return

platform to Business Tax MFTI, SRC

Cabinet approval of new Companies

Bill providing for, inter alia, a

simplification of company

registration requirements; develop

and publish online standardized

templates for company

incorporation and articles of

association

MFTI, Attorney

General’s Office

Adopt Legal Practitioners

(Professional Conduct) Rules

defining the standards for

professional conduct in the

legal profession

Cabinet approval of the Legal

Practitioners Bill (including a

provision for malpractice liability);

Adopt mediation and civil rules for

Commercial Court

MFTI, AG

Office, Judiciary

Reduction in court backlog

(number of civil suits

pending at Supreme Court)

Baseline

(end-2012):

300

250

FTC Board of Commissioners

Initiate preparation of the

Competition Policy and Legal

Reform Action Plan based on

the recommendations of the

UNCTAD report; FTC enters

into MoUs with key

regulatory bodies (at least

Cabinet approval of (a) Competition

Policy; and (b) bill amending

Competition Act, including reforms

on FTC structure and enforcement

powers; FTC Board of

Commissioners adopts a Consumer

Protection Policy Outline

MFTI, FTC,

sector regulators

Improvement in GCI

indicator on Effectiveness

of Anti-Monopoly Policy

Baseline

(2012/2013):

3.9

4.2

VII

Medium

term

objectives

Policy actions (outputs) Institution

responsible

Outputs

indicator Outcomes indicators

Targets outcome CSP goals

2013 2014 Baseline Target

CBS, Department of ICT,

National Tender Board) to

ensure cooperation and

mainstream competition/

consumer protection analysis

More

inclusive

and

diversified

financial

services

Cabinet approval of bill

creating Financial Services

Commission (FSC)

Comply with IOSCO Objectives and

Principles of Securities Regulation

MFTI, SIBA-

FSC

Measures

implemented as

confirmed in

Budget Support

Review (BSR)

Number of MSME

beneficiaries under SBFA

credit facility / minimum

number of MSMEs owned

or operated by women /

volume of loans approved

(SCR million) / loan

recovery ratio

Number of MSMEs

benefiting from the new

SME scheme / women

owned or operated

Baseline

(2012): 355 /

177 / 38.7 /

44%

Baseline

(2012): 0

500 / 250 / 70

(cumulative

2013-2014) /

Min. 65%

(end 2014)

50 / at least

30% (end

2014)

Overall objective;

Economic and Financial

Governance component (in

particular access to finance

and financial inclusion)

Cabinet approval of new bills

on (a) hire purchase and credit

sales, and (b) leasing. CBS

implements the second phase

of the Credit Information

System (including hire

purchase and leasing)

Adopt and implement a of

comprehensive financial literacy

program by the Central Bank of

Seychelles (preparation and

implementation should involve all

major stakeholders including CSOs,

private sector, financial operators,

etc.)

MFTI, CBS

Cabinet approval of draft

National Payments legislation,

inter alia, laying down the

legal framework for the

provision of mobile banking

services

Cabinet approval of a Financial

Sector Development Strategy with

specific measures to promote

financial inclusion

MFTI, CBS

MFTI enters into MoU with

commercial banks providing

for a financing scheme for

MSMEs concerning loans of

up to SCR 3 million based on

interest rate subsidies and

GoS guarantees

Establishment of the Small Business

Financing Agency (SBFA) as an

independent credit facility for

MSMEs with a clear definition of

SBFA’s mission and a mandate

focused on enterprise start-ups and

MSME owned/operated by;

increased resources in the form of a

SCR 40 million revolving fund;

develop a strategic plan, credit risk

assessment and loan recovery

procedures.

Signing of a Memorandum of

Understanding between SEnPA,

SBFA, DBS, and Seychelles

Banking Association to put in place

specific coordination mechanisms

for the provision of technical

assistance and financial support for

MSMEs.

MFTI, SBFA,

SEnPA, DBS

VIII

Medium

term

objectives

Policy actions (outputs) Institution

responsible

Outputs

indicator Outcomes indicators

Targets outcome CSP goals

2013 2014 Baseline Target

Component 2: Strengthening PFM Systems to Maximize Public Sector Efficiency

Strengthening Private

Sector Development and

Economic Competitiveness

Enhanced

public

financial

manageme

nt to

maximize

public

sector

efficiency

Introduce functional

centralization of accounting

function at the MFTI

Implement a PFM capacity building

programme in MFTI and sector

Ministries

MFTI

Measures

implemented as

confirmed

during Budget

Support Review

(BSR)

PEFA Index on:

PI-19 iii)

PI-21

PI-27 iii)

Baseline

(2011):

PI-19 iii):C

PI-21:C+

PI-27 iii):

D

PI-19 iii): B

PI-21: B

PI-27 iii): B

Overall objective;

Economic and Financial

Governance component (in

particular, PFM systems)

Introduce an asset registry in

Ministries of Health,

Education, and Environment

and Energy

Roll-out of asset registry to other

ministries and departments

Adopt and use standard

bidding documents

Cabinet approval of and implement

new procurement regulations

Establishment of Government

Audit Committee as an

advisory committee reporting

to the MFTI on the prudent

use of resources, safeguard of

assets of the state, the

operation of adequate and

effective systems and control

processes and improvement in

accountability and

transparency through effective

risk management mechanisms

Internal audit is operational for the

majority of central government

entities (measured by value of

revenue/expenditure), and

substantially meet professional

standards. It is focused on systemic

issues (at least 50% of staff time).

(ii) Reports are issued regularly for

most audited entities and distributed

to the audited entity, the ministry of

finance and the SAI.

(iii) Prompt and comprehensive

action is taken by many (but not all)

managers. Involve CSO in Budget

preparation and budget

execution monitoring through

a Government Budget

Committee

Involve CSO in Budget preparation

and budget execution monitoring

through a Government Budget

Committee

The Budget is prepared and

submitted to Parliament at

least one month before the

end of the fiscal year

The Budget is prepared and

submitted to Parliament at least 6

weeks before the end of the fiscal

year; the budget and budget

implementation reports are

published on a web page

IX

Appendix 3

IMF/Country Relations Note

IMF Executive Board Concludes 2013 Article IV Consultation with

Seychelles Public Information Notice (PIN) No. 13/52 May 15, 2013

On May 8, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Seychelles. 1

Background

In the few years since the 2008 debt crisis, Seychelles has made remarkable strides, quickly

restoring macroeconomic stability and creating room for private-sector activity.

Macroeconomic developments in the tourism-based island economy have been favorable,

despite the challenging global environment. Notably, growth held up as the tourism industry

successfully attracted arrivals from non-traditional markets as European arrivals slumped,

while a surge in foreign direct investment (FDI) supported construction in recent years. For

the most part, inflation remained contained, and the external position improved markedly following liberalization of the exchange rate in 2008 and debt restructuring started in 2009.

In 2012, despite robust tourist arrivals, growth moderated to 2.9 percent as large investment

projects were completed. Inflation spiked in July 2012 to 8.9 percent fueled by global as well

as domestic developments, but has since abated as a result of successful monetary

tightening. The external position continued to improve, albeit modestly. In particular, the

current account deficit declined slightly, but remained high at around 22 percent of gross

domestic product (GDP), but was fully financed by FDI and external borrowing, leading to a

modest rise in reserves. Debt restructuring is nearly complete, with only one loan agreement awaiting signature.

Fiscal policy in 2012 continued to support debt sustainability. The primary surplus is

projected to have risen to 6.2 percent of GDP, in part due to sizable windfall revenues which

were partly saved. Buoyant revenue and grants paved the way for needed capital

expenditure. Notwithstanding, public debt increased by over 3 percentage points of GDP due mostly to currency depreciation and the government assuming liabilities of Air Seychelles.

Monetary policy was tightened sharply in 2012 in response to rising inflation and an

unhinging of the exchange rate, and has since been relaxed. Starting in late-2011, rising

global food and fuel prices coupled with adjustments in administered prices pushed prices

higher. This was reinforced by current account pressures resulting from lower exports of

transportation services in the wake of the restructuring of Air Seychelles. The looming

inflation-depreciation spiral was broken in mid-2012 by two small foreign exchange market

interventions by the Central Bank of Seychelles and a tightening of monetary policy. By end-

2012, inflation had fallen to 5.8 percent and the exchange rate had strengthened beyond its end-2011 level.

Broad-based structural reform over the past five years has worked to improve financial

performance of the public sector and increase private sector participation in economic

activity. Statistical capacity continues to be strengthened. Seychelles subscribes to the IMF’s

General Data Dissemination Standard (GDDS) and is making progress at compiling higher

frequency economic data which will support strengthened macroeconomic oversight and analysis.

Executive Board Assessment

Executive Directors commended the authorities for their strong policy implementation.

Macroeconomic stability has been restored and growth has remained resilient. While the

outlook is favorable, the economy is vulnerable to an uncertain global environment and

domestic risks. Directors called for continued commitment to sound policies and structural

reforms to preserve macroeconomic and financial stability, build policy buffers, and foster strong and inclusive growth.

Directors welcomed the steps to improve financial discipline at the central government level

and the recent introduction of the VAT. They agreed that strengthening the oversight and

financial position of parastatals, including through adequate price mechanisms, and further

progress in public financial management will be key to ensuring fiscal sustainability. For the

X

medium term, Directors supported the authorities’ fiscal policy stance which aims at targeting

a primary fiscal surplus and reducing public debt to 50 percent of GDP. They welcomed that

the debt restructuring is nearly complete and encouraged the authorities to exercise caution when contracting new external debt.

Directors called for continued efforts to improve the monetary framework in order to stabilize

inflation expectations and policy interest rates. Absorbing excess liquidity over time will be

important to strengthen the monetary anchor and monetary transmission mechanism.

Directors considered that a further increase in international reserves, as market conditions

permit, would provide a stronger buffer against shocks. Directors noted that the financial

system is sound and welcomed the steps being taken to improve the functioning of the credit

market.

Directors commended the efforts towards improving the business and investment climate,

which is key to avoid a potential middle-income trap and to support broad-based growth.

They encouraged the authorities to foster private sector-led growth by addressing

infrastructure gaps, engendering lower cost and improved access to credit, correcting data

weaknesses, and moving ahead with plans for greater workforce education and capacity building.

XI

Appendix 4

Selected economic and financial indicators, 2010-2018 (from IMF Article IV Report, July 2013)

XII

Appendix 5

Seychelles – Bank portfolio overview

Table: Performance Characteristics of On-going and Approved

Bank Group Operations - June 2013

Sector

Project Name

Net C

om

mitm

ent (U

A m

)

Disb

ursem

ent (U

A m

)

Disb

ursem

ent R

atio

(%)

Perfo

rma

nce R

atin

g

Ag

e (yrs)

Sta

tus*

Multi-Sector Policy Based Partial Credit Guarantee

6.707 0.000 0.00 N/A 3.58 Non PP/

Non PPP

Emergency Assistance to Address the

Damages/Losses Caused by Cyclone Felleng

0.665 0.000 0.00 N/A 0.02 Non PP/

Non PPP

Statistical Capacity Building Program Phase

II (SCB-II)

0.491 0.272 55.49 2.22 Non PP/

Non PPP

ICT Seychelles Cable Systems Company (Sub-

Marine Cable Project)

6.484 6.484 100.00 2.18 Non PP/

Non PPP

Agriculture Agriculture Sector Study 0.649 0.000 0.00 N/A 0.34 Non PP/

Non PPP

Water &

Sanitation

La Gogue Water Supply Study 0.600 0.135 22.45 N/A 1.56 Non PP/

Non PPP

Total 15.597 6.891 44.18 1.65

*PP = Problematic Project;

PPP = Potentially Problematic Project

Table: Trends in Portfolio Key Performance Indicators:

2010 – 2013

Indicator 2010/11 2013

Number of Problematic Project (PP)

1 0

Number of Potentially Problematic

Project (PPP)

0 0

% of Projects at Risk (PAR)

16.67 0

% of Commitments at Risk (CAR)

2.83 0

Disbursement Ratio

33.27 44.18

Number of Ageing Projects 0 0

Average Age in years 1.56 1.65