The World Bank SEYCHELLES SECOND FISCAL SUSTAINABILITY AND CLIMATE RESILIENCE DEVELOPMENT POLICY FINANCING (P178209) Program Information Document (PID) Concept Stage | Date Prepared/Updated: 20-Jul-2022| Report No: PIDC33630 Page 1 of 7 The World Bank SEYCHELLES SECOND FISCAL SUSTAINABILITY AND CLIMATE RESILIENCE DEVELOPMENT POLICY FINANCING (P178209) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Seychelles P178209 SEYCHELLES SECOND FISCAL P176420 SUSTAINABILITY AND CLIMATE RESILIENCE DEVELOPMENT POLICY FINANCING (P178209) Region Estimated Board Date Practice Area (Lead) Financing Instrument EASTERN AND SOUTHERN Nov 08, 2022 Macroeconomics, Trade Development Policy AFRICA and Investment Financing Borrower(s) Implementing Agency The Republic of Seychelles MINISTRY OF FINANCE, ECONOMIC PLANNING AND TRADE Proposed Development Objective(s) The Program Development Objectives are to support the government’s effort to: (i) strengthen medium�term fiscal sustainability; (ii) build resilience and (iii) strengthening policies for inclusive and sustainable growth Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 15.00 DETAILS -NewFin3 Total World Bank Group Financing 15.00 World Bank Lending 15.00 Decision The review did authorize the preparation to continue Page 2 of 7 The World Bank SEYCHELLES SECOND FISCAL SUSTAINABILITY AND CLIMATE RESILIENCE DEVELOPMENT POLICY FINANCING (P178209) B. Introduction and Context Country Context Seychelles is an archipelago of 115 islands with almost 98,000 citizens. About 90 percent of the country’s total population is clustered on the three main islands of Mahé, Praslin and La Digue. As a Small Island Developing State (SIDS) and a Large Ocean State (LOS) Seychelles is characterized by its remoteness, small land area, limited capacity and lack of resources. In addition, Seychelles relies heavily on its coastal zone as a site for economic development and this means that a large share of its critical infrastructure, tourism establishment and housing is located in the coastal zone, which is at risk to storms, coastal flooding, landslides and sea level rise. The country attained high-income status in 2015 and eliminated extreme poverty. Gross Domestic Product (GDP) per capita in 2020 was US$12,313. Tourism and fisheries are the two key sectors of the economy. A lack of economic diversification and the high dependence on the tourism and fishing sectors as well as imports, exposes Seychelles to external shocks. These shocks are transmitted through disruptions in international travel and tourism demand; fluctuations in fishing stocks and instabilities in the price of essential commodities such as food and fuel prices; and natural hazards. In June 2021, the country submitted its up-dated Nationally Determined Contribution (NDCs). While as a net sink of carbon, priority concern has been given towards climate change adaptation (with particular emphasis on Seychelles’ Blue Economy), the Government is also re-iterating and improving upon its conditional commitments towards increasing the reduction of greenhouse gas emissions from 188 ktCO2e to 293,8 ktCO2e by 2030. In 2021 Seychelles began to rebound from the impact of the COVID-19 pandemic as the number of COVID-19 cases dropped sharply to single digits. The recovery in 2021 was driven by tourism which declined from 60 percent in 2020 to 39.8 percent, mainly driven by tourist arrivals from Russia (which accounted for 20 percent of tourist arrivals). The 12- month average inflation rate stood at 8.3 percent in March 2022, whilst the year-on-year was at 2.2 percent. The average inflation rate is projected to be 4.1 percent in 2022. The nominal exchange has remained stable following a 34 percent appreciation in 2021 (after a significant depreciation in 2020). The overall fiscal deficit declined from 17.5 percent of GDP in 2020 to 6.0 percent of GDP in 2021. The Government of Seychelles successfully implemented a Liability Management Operation (LMO) in 2021. The success of the LMO combined with strong economic growth, fiscal consolidation and a sharp appreciation of the currency in 2021 has substantially reduced debt vulnerabilities. The debt-to-GDP ratio declined to around 76 percent of GDP in 2021 from 93 percent in 2020. The proposed Second Fiscal Sustainability and Climate Resilience Development Policy Financing (DPF) of US$ 15 million provides financing to the Government of the Republic of Seychelles to achieve fiscal sustainability and to support critical structural reforms that will lay the foundation for resilient economic growth. It is the second of three single-tranche DPOs in a programmatic series. The first operation (DPO1) was approved by the Board on November 16, 2021. Following a general election in October 2020, the opposition has been elected to form the new government for the first time since the coup d'état in 1977. However, the new Government remained committed to a sustainable debt path and to the prospects for sustainable and inclusive medium-term growth. The macroeconomic framework is deemed adequate despite risks to the outlook. Government is appropriately balancing its commitment to return to fiscal sustainability with its efforts to achieve inclusive growth. The COVID-19 outbreak has severely impacted Seychelles’ economy. To bridge the financing gaps created by the crisis, the GoS requested support from the IMF (approved July 2021); the AfDB; and the World Bank. Economic stability is expected in the medium-term as the tourism sector recovers and the government continues fiscal consolidation. However, outcomes remain subject to uncertainty and notable downside risks. Risks to medium-term growth outlook include a prolonged COVID-19 outbreak Page 3 of 7 The World Bank SEYCHELLES SECOND FISCAL SUSTAINABILITY AND CLIMATE RESILIENCE DEVELOPMENT POLICY FINANCING (P178209) as variants of the virus materialize, and the ongoing war between Russia and Ukraine would result in a reversal of the improvement in foreign direct investment, and a reduction in tourist arrivals. Domestic risks are centered around potential fiscal slippages as the Government may face challenges implementing permanent saving measures if the pandemic continues. Risks to the macroeconomic framework will be mitigated by the government’s strong commitment to fiscal consolidation and debt sustainability which is being supported by this DPF series as well as the IMF EFF program. Relationship to CPF The structural reform agenda supported by the DPO series addresses fiscal sustainability, resilience and strengthening policies to create the enabling environment for sustained and inclusive growth. The series selectively addresses 3 binding constraints identified in the 2017 Systematic Country Diagnostic (SCD): macroeconomic and fiscal policy stability; addressing the sustainability of the resource base of the economy as well as financial stability and creating an environment for growth in non-traditional sectors (information and communications technology (ICT) and the blue economy). Addressing these constraints would help foster inclusive growth and reduce the vulnerability to external shocks. The DPO is also directly related to the CPF for FY18-FY23, which acknowledged that Seychelles’ isolation increases costs and limits opportunities, thus weakening the capacity to absorb shocks. The proposed operation also supports the Government in achieving its social and economic vision of a sustainable and inclusive future as outlined in its National Development Strategy 2019-2023. C. Proposed Development Objective(s) The Program Development Objectives of this proposed programmatic series are to (i) strengthen medium-term fiscal sustainability; (ii) strengthen resilience and (iii) strengthen policies to create an enabling environment for inclusive and sustainable growth. The financing of US$15 million provided by this operation will address Seychelles’ immediate funding needs. The proposed approach is a programmatic series of three operations focused on strengthening the government’s medium to long-term reforms. The DPF program was modified at the time of the preparation of the second DPF due to some adjustments to timing of the Government’s reform agenda as well as underlying capacity constraints at the Attorney General’s office. Overall, the policy reforms under the second DPF remain grounded in recent analytical work and extensive policy dialogue. Key Results The key result for this operation is achieving fiscal sustainability and supporting critical structural reforms that will lay the foundation for resilient economic growth. Prior actions under Pillar 1 are expected to have an important impact on business tax revenue collected by the Seychelles Revenue Commission through (i) the prevention of the erosion of the corporate tax base through international profit shifting and (ii) the strengthening of the operations of the tax commission. Prior Actions under Pillar 2 are expected to improve the physical resilience concerning hazard and climate risk by addressing land use and zoning decisions as well as development permits. Also under Pillar 2, the beneficial ownership databases are expected to improve the level of transparency around the owners of the IBCs in Seychelles. Pillar 3 supports policy reform that is expected to expand financial inclusion and boost uptake of digital financial services by enabling the expansion of the financial sector. Moreover, under Pillar 3, development of the aquaculture sector in Seychelles will help bring about greater additions to the supply volumes and diversifications in seafood products available to the value chains. Page 4 of 7 The World Bank SEYCHELLES SECOND FISCAL SUSTAINABILITY AND CLIMATE RESILIENCE DEVELOPMENT POLICY FINANCING (P178209) D. Concept Description The proposed operation supports reforms that are critical for a strong and inclusive recovery. As in all small state countries, the crisis has demonstrated the fragilities of Seychelles’ current growth model and has opened a window of opportunity to advance reforms where consensus has strengthened and have become more critical for Seychelles’ resilience. In sum, the operation supports reforms that would help the country to build back better, through measures that will help unleash the potential of other industries outside the tourism sector, such as digital and Blue economy. The reforms build on policies supported by previous DPFs and complementary advisory services and analytics (ASA). These ASAs have allowed the identification of prior actions and phasing of reforms during intensive dialogue between the government and the World Bank. The proposed programmatic DPF series aims to help the authority to implement crucial structural reforms: Pillar A aims to strengthen medium-term fiscal sustainability by reducing fiscal risks from SOEs and restoring the public debt path on a downward trajectory. The effect of COVID-19 on the economy and the resulting increase in borrowing has raised the urgency of measures to reduce fiscal risks and strengthen fiscal management. Consequently, enhancing revenue performance, and reducing fiscal risks are a priority for maintaining medium-term fiscal and debt sustainability, while cementing the public debt ratio on a declining path. Pillar B aims to strengthen physical and financial resilience. Seychelles remains vulnerable to the adverse effects of natural hazards and climate change. In addition, the impact of the pandemic on the economy (growth and employment) poses significant risks to the financial sector. The GoS has shown strong leadership to better understand the sources of vulnerabilities and to build greater resilience against natural hazards, climate change impacts and financial sector risk. Pillar C aims to strengthen policies to create an enabling environment for inclusive and sustainable growth by strengthening the legal and regulatory framework for the digital and blue economies. The digital economy offers a unique opportunity for Seychelles to accelerate economic growth, promote competition and enhance public service delivery. To realize the potential for transformative economic growth, there is a need to strategically and proactively invest in the elements of the digital economy to ensure that businesses and people can keep pace and thrive in an increasingly digital world. With the outbreak of COVID-19, there is an added urgency to transition to digital financial services and benefit from its gains in efficiency, tailored products, and new services. Similarly, the blue economy seeks to advance productivity and growth using Seychelles’ natural endowments while proactively preserving them. E. Poverty and Social Impacts, and Environmental, Forests, and Other Natural Resource Aspects Poverty and Social Impacts The COVID-19 pandemic is estimated to have reversed the strides made in poverty reduction in preceding years by deepening poverty and creating a new group of poor. Prior to the outbreak of COVID-19, Seychelles had made notable progress in reducing poverty, having declined by 13 percentage points from 38.3 percent in 2013 to 25.4 percent in 2018. The country had also become more equal as indicated by the decline in Gini coefficient from 0.35 in 2013 to 0.30 in 2018. Average income per adult increased from SCR 6,375 to SCR 7,025 per month (US$389 - 428) and the share of income held by the bottom 40 percent of the population increased from 19.6 percent in 2013 to 21.1 percent in 2018. Simulations suggest that the economic crisis from COVID-19 may have led poverty in 2020 to increase to 37.1 percent from the observed 25.3 percent in 2018, thereby wiping out progress achieved since 2013. This was primarily driven by contraction in services sectors which account for the largest share of employment. The measures introduced by the government in Page 5 of 7 The World Bank SEYCHELLES SECOND FISCAL SUSTAINABILITY AND CLIMATE RESILIENCE DEVELOPMENT POLICY FINANCING (P178209) response to the pandemic (the Financial Assistance for Job Retention program (FA4JR, the Unemployment Relief Scheme and the social welfare assistance) mitigated some of the impacts on welfare. The simulated poverty rate in 2020 dropped from 37.1 percent to 29.1 percent after incorporating mitigation measures, while inequality declined to about the same level as the pre-pandemic level. As tourism started to return in 2021, social protection programs were ended as they became a burden to the national budget. While the end of social protection programs reduced government fiscal pressures, there are reasons to believe that poverty may have been negatively affected. Overall, the proposed measures in the DPF are expected to have a beneficial impact on the poor, particularly in the medium-term. All of the prior actions’ effect on poverty reduction will likely be indirect as the prior actions are aimed at adoption of laws and regulations to promote better fiscal management, risk-sensitive land use planning and strengthening policies to create an enabling environment for inclusive and sustainable growth. Once these regulations come into force and are implemented, however, the effects on poor are expected to be positive. First, improved fiscal space and a stable macroeconomic framework that crowds in private investment should help incentivize economic recovery. In addition, given the fundamental importance of the environment in the development of Seychelles, addressing challenges/constrains to the sustainability of these natural resources is expected to contribute to poverty reduction by improving future growth prospects. Similarly, addressing the AML/CFT issue and creating the enabling environment for digital development in particular digital payment systems will lead to more inclusive economic growth and thus poverty reduction in the medium-term. Environmental, Forests, and Other Natural Resource Aspects The policies supported by this DPO are not expected to have negative effects on Seychelles’ environment, forests, water resources, habitats, or other natural resources. Some of the reforms and policy actions supported by the proposed operation will have a positive impact on the country’s environment, forests, and other natural resources in the medium- term. All the actions supported by the operation are policy-oriented and do not directly finance environmentally impactful investments. Prior actions designed to strengthen fiscal management and to develop digital economy are environmentally neutral. Any eventual environmental and social adverse impacts associated with activities supported by the current DPF will rely on the existing national legal and regulatory framework. It will subsequently be monitored and addressed through the national procedures in place in Seychelles. The GoS environmental laws, regulations and policies are in place and generally acceptable. Biodiversity conservation and ecosystem protection are regulated under different legislation, notably the National Parks and Nature Conservancy Act (1969, as amended), the Fisheries Act (1987), the Wild Animals and Birds Protection Act (1961). To mitigate the identified weaknesses, the DPO has recommended a participatory policymaking process, and that the subsequent actions from the DPO do not lead to any weakening or disregard of the environmental and social due diligence process. As per Operational Policy 8.60, the World Bank has assessed whether the country policies supported by this DPF are likely to have an impact on the environment, forests, and natural resources. This assessment shows that the Prior Actions 1, 3 and 5 are likely to have a positive impact on the country’s environment, forests, an d natural resources. Prior Action 1 (expanding the SOEs’ reporting, to cover the service-delivery dimension, including through the use of KPIs) will have a positive impact on the country’s natural and human environment if KPIs consider environmental performance indicators. Managing and reporting on environmental performance can significantly benefit both SOE/businesses and the environment. Prior Action 3 on adopting a new Physical Planning Bill put in place measures to adapt, build resilience and minimize vulnerability to the impacts of Climate Change. Prior Actions 5, adoption of the aquaculture regulation address the challenge of resource utilization and support policies that address pressures exerted by the fisheries sectors on the coastal and marine natural resources to ensure their long-term sustainability. Page 6 of 7 The World Bank SEYCHELLES SECOND FISCAL SUSTAINABILITY AND CLIMATE RESILIENCE DEVELOPMENT POLICY FINANCING (P178209) . CONTACT POINT World Bank Sashana Whyte, Kenechukwu Maria Ezemenari Senior Economist Borrower/Client/Recipient The Republic of Seychelles Elizabeth Agathine Principal Secretary elizabeth@finance.gov.sc Implementing Agencies MINISTRY OF FINANCE, ECONOMIC PLANNING AND TRADE Elizabeth Agathine Principal Secretary elizabeth@finance.gov.sc FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Task Team Leader(s): Sashana Whyte, Kenechukwu Maria Ezemenari Approved By APPROVALTBL Country Director: Zviripayi Idah Pswarayi Riddihough 26-Jul-2022 Page 7 of 7