Seychelles: Country and Foreign Investment
Economy and Currency
Originally based on cotton-growing, the Seychelles' economy switched to coconut plantations after the abolition of slavery. In modern times, tourism and fishing have become economic mainstays. Services account for just over 62% of the economy, while tourism contributes over 70% of foreign exchange earnings. The international airport, opened in 1971, handled 618,675 passengers and 9,242 tonnes of cargo in 2010.
The islands lie on many international shipping routes, so that cruise liners are a growing source of tourist business; the Government has also opened the Seychelles Industrial Trade Zone (SITZ) which is successfully targetting trans-shipment and re-processing trade. In the last 20 years the Government has made a sustained effort to attract 'offshore' financial services, particularly in banking and insurance.
The official unit of currency is the Seychelles Rupee, divided into 100 cents. Prior to November 2008, the currency was pegged to the US dollar at a rate of USD1 - SR5.5. The peg was removed as part of a package of economic reforms which included a loan from the International Monetary Fund to help pay the country's debt. After a sharp fall, by the spring of 2009 the Seychelles rupee had stabilized at a rate about 50% lower than 6 months previously. In mid-2012, USD1 was worth SCR13.
After a reverse during the first Gulf War, the economy rebounded, with growth averaging 4-5%. However, the artificially high exchange rate held back tourism, and growth in 2002-2004 averaged only 1.5%. Tourism was damaged by 9/11, and just as the islands were recovering in 2004, with economic reforms under the new president beginning to have an effect, the Asian tsunami dealt a very heavy blow to the Seychelles, severely damaging tourism, infrastructure and the fishing industry. GDP fell by 3% in 2005.
While the Seychelles Central Bank was optimistic on growth prospects for 2007 and 2008, the commodity price spike caused inflation to shoot up, and in combination with a shortage of currency reserves, the country defaulted on much of its debt and the economy faced crisis. In mid-2008 the government was forced to turn to the IMF for assistance. Discussions in July and September that year culminated in the abolition of all exchange restrictions and led to a tightening of fiscal policy, a broadening of the tax base and the introduction of a monetary policy.
Most of the country's debt with sovereign partners had been frozen as a result of a one-year moratorium announced by the Paris Club for countries affected by 2004 tsunami.
The authorities launched a public external debt restructuring initiative in late 2008 to put public debt on a sustainable path, by significantly reducing debt service obligations over the long-term to levels consistent with the country’s limited payment capacity. A two-year SCR17.6 million (about USD27.3 million) Stand-By Arrangement for the Seychelles was approved on November 14, 2008.
In mid-April 2009, Paris Club creditors granted exceptional debt treatment to Seychelles under the 2003 Evian approach to debt relief, reducing the debt stock by 45 percent in nominal terms in two tranches, with the remainder rescheduled over 18 years with 5 years’ grace. Comparable treatment from other creditors is needed to close financing gaps over the medium-term and secure public debt sustainability.
Following confirmation by the IMF that the Seychelles was meeting all of the performance criteria under its three-year Extended Fund Facility approved in early 2010, the Seychelles government launched a comprehensive reform of the tax system with the 2010 budget, of which the first stage was the introduction of a revised Business Tax Act from January 1, 2010.
The business tax reform broadened the tax base and provided for a gradual reduction in rates to promote competitiveness and achieve harmonization across sectors. As a first step, the maximum rate has been revised downward by 7%, to 33%. At the same time, the tax-free threshold was abolished for companies and reduced for sole traders and partnerships.
The second stage has been the introduction, from July 1, 2010, of a withholding-based personal income tax on wages to replace social security contributions, expanding the labour income tax base to resident expatriates and eliminating existing sectoral concessions.
Government policy is to broaden the application of the income tax to other sources of domestic-sourced income (for example, dividends and interest on savings) once the tax becomes established and the new system has been assessed. The rates will be harmonized at 15% for all categories of workers, effective January 1, 2011.
Finally, a value-added tax (VAT) will be introduced from January 1, 2013 (postponed from 2012). The VAT will replace the current multiple-rate goods and services tax (GST), broadening the indirect tax base and improving both the efficiency of the indirect tax system and external competitiveness.
Steps in this direction were taken in the 2010 budget, including the expansion of the GST base to a broader range of services and the reduction of cascading effects through the option of levying GST either on imports or sales. The concessional 10% GST rate that applied in the tourism sector was raised to 12% in November 2010, prior to alignment with the general GST rate of 15% by November 2011 in preparation for the introduction of the VAT.