The World Bank Seychelles First Fiscal Sustainability and Climate Resilience Development Policy Financing (P176420) Program Information Document (PID) Concept Stage | Date Prepared/Updated: 09-Sep-2021| Report No: PIDC31548 Page 1 of 6 The World Bank Seychelles First Fiscal Sustainability and Climate Resilience Development Policy Financing (P176420) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Seychelles P176420 Seychelles First Fiscal Sustainability and Climate Resilience Development Policy Financing (P176420) Region Estimated Board Date Practice Area (Lead) Financing Instrument AFRICA EAST Dec 09, 2021 Macroeconomics, Trade Development Policy and Investment Financing Borrower(s) Implementing Agency Ministry of Finance, Trade, MINISTRY OF FINANCE, TRADE, INVESTMENT AND ECONOMIC PLANNING Investment and Economic Planning 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) support economic diversification. Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 30.00 DETAILS -NewFin3 Total World Bank Group Financing 30.00 World Bank Lending 30.00 Decision The review did authorize the preparation to continue B. Introduction and Context Country Context 1. The Covid-19 pandemic has caused significant disruptions in economic activities in Seychelles. Economic growth dropped from 3.9 percent in 2019 to -12.9 percent in 2020, driven by more than 60 percent decline in tourism – the mainstay of Seychelles’ economy. In addition to the decline in economic activity in 2020, the fiscal deficit widened to - 19.5 percent of GDP (from -0.9 percent of GDP in 2019) on account of lower revenues and higher COVID-related spending. Page 2 of 6 The World Bank Seychelles First Fiscal Sustainability and Climate Resilience Development Policy Financing (P176420) To finance the deficit, the GOS resorted to external finance from international organizations such as the World Bank, the International Monetary Fund (IMF), and the African Development Bank (AfDB) as well as increase domestic debt issuance. The increase borrowing, along with the decline in GDP and the depreciation of the Exchange rate led to an increase in the debt to GDP ratio to 100.8 percent of GDP. Economic activity is projected to recover in 2021 as tourist arrivals rebound. In addition, the government has discontinued the Financial Assistance for Job Retention scheme and significantly reduced the Unemployment Relief scheme in April 2021. The government is also committed to returning to a positive fiscal balance and aims to begin rebuilding fiscal buffers by 2024. 2. The proposed operation of US$ 30 million provides financing to the Government of the Republic of Seychelles to cover the financing gap that has arisen due to the impact of the COVID-19 pandemic. The financing will support post- COVID recovery and policies aimed at reducing the risks to fiscal and debt sustainability. Prior to the COVID-19 pandemic, Seychelles demonstrated a track record of prudent macroeconomic management and reforms that led to strong economic growth and continuous debt reduction since the financial crisis in 2008/9. This record, together with a recovery in tourism activities is expected to lead to a gradual reduction of the fiscal deficit in 2021-2023. Relationship to CPF 3. The proposed operation is aligned with the WBG strategic priorities and the Country Partnership Framework (CPF). The DPO incorporates the Green, Resilient, and Inclusive Development (GRID) approach of the World Bank that focuses on the interlinkages between people, the planet, and the economy. The DPO addresses all three in an effort to preserve natural capital, reduce risk affecting sustainability and address structural weaknesses and promote growth. The operation also seeks to implement structural reform that are in-line with the government’s plan to diversify the economy and improve transparency and accountability. C. Proposed Development Objective(s) 4. The Program Development Objectives are to support the government’s effort to: (i) strengthen medium�term fiscal sustainability; (ii) build resilience and (iii) support economic diversification . The financing of US$30 million provided by this first operation will address Seychelles’ immediate funding needs that arose due to the prolonged impact of the pandemic on the economy. The proposed approach is a programmatic series of three operations focused on strengthening the government’s medium to long-term reforms. Key Results 5. The key result for this operation is reducing fiscal risk and strengthening debt sustainability, building resilience and supporting a post COVID-19 recovery. It is expected that prior actions under Pillar 1 will strengthen medium�term fiscal sustainability by: improving debt transparency; enhancing revenue mobilization by ensuring fair levels of taxing multinational companies and high net worth individuals; and reducing debt sustainability risks by tackling state-owned enterprise (SOE) management. Prior Actions under Pillar 2 are expected to contribute to building resilience to climate change (through the adoption of an updated physical planning bill) and financial crisis (improvement in the AML/CFT regime. Pillar 3 supports economic diversification by laying the foundations for the development of the digital economy Page 3 of 6 The World Bank Seychelles First Fiscal Sustainability and Climate Resilience Development Policy Financing (P176420) (approval of measures to increase access to e-services) and the ocean economy (adoption of aquaculture). These reforms will lay the foundation for sustained and resilient economic recovery. D. Concept Description 6. The proposed operation focuses on accelerating reform actions to tackle the challenges that have been triggered by the COVID-19 crisis and implementing structural reforms that are critical for a strong recovery. The crisis has demonstrated the inadequacy of Seychelles’ current growth model and has opened a window of opportunity to advance reforms where consensus has strengthened or that have become more critical for Seychelles’ resilience. 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. Pillar A aims to strengthen medium-term fiscal sustainability by reducing fiscal risks from SOEs and restoring the public debt path. This 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 and cementing the public debt ratio on a declining path. Pillar B aims to strengthen resilience. As a Small Island Developing State Seychelles is exposed to the adverse effects of climate change. In addition, the pandemic has posed significant risks to the financial sector. As a result, the government has shown strong leadership to better understand the sources of vulnerabilities and to build greater resilience against climate change, natural disasters and financial sector risk. Pillar C supports economic diversification by laying the foundation for the development of the digital economy and the blue economy. 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 7. The DPO’s proposed measures are, a priori, not expected to have a direct impact on the poor. The prior actions under pillar 1 focused on reducing fiscal risks, promoting debt transparency and increasing revenue mobilization are expected to have indirect poverty reducing effects as the resources for service become more efficient. Enhanced performance of SOEs and compliance with the new monitoring and reporting framework are expected to increase accountability to the public and limit the cost of underperforming SOEs on the budget, freeing up more resources for service delivery and public investment targeted to the poor and vulnerable. Improvements in the mobilization of tax through the ratification of Multilateral Implementation (MLI) Regulations aimed at lessening the opportunity for tax avoidance by multinational enterprises is further expected to strengthen the fiscal position of the government. Prior action #6 and #7 under pillar 3 aimed at developing the digital and the blue economies are likely to spur economic growth and have poverty reducing effect through promotion of competition, increase in businesses’ access to new financial services Page 4 of 6 The World Bank Seychelles First Fiscal Sustainability and Climate Resilience Development Policy Financing (P176420) and development of the aquaculture sector. 8. The prior actions under pillar 2 aimed at strengthening resilience are expected to generate positive social effects. In terms of disaster management and resilience, a World Bank report estimated that the impacts of disasters are more than twice as significant for poor people than anyone else1. This is because low-income communities tend to be located in low-cost risk prone areas in fragile dwellings, and commonly have no, or limited, access to credit or insurance to mitigate the post-disaster impacts. Land use planning and integration of hazard and risk information in planning are paramount in mitigating the impact of future climate change induced events on the country’s poor. Environmental, Forests, and Other Natural Resource Aspects 9. Prior Action #4 and #7 are expected to have a direct positive impact on the environment. Prior Action #4 is expected to have a positive direct impact on the environment through the passing of a legislation that will provide the basis for enacting binding land use plans, which are not existing so far. The new Physical Planning Bill also accounts for changes to the development trajectory of Seychelles and will indicate no-development zones, which tend to comprise wetlands, protected coastline and National Parks. Prior Actions # 7 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. . CONTACT POINT World Bank Sashana Whyte Economist Borrower/Client/Recipient Ministry of Finance, Trade, Investment and Economic Planning Elizabeth Agathine Principal Secretary elizabeth@finance.gov.sc Implementing Agencies MINISTRY OF FINANCE, TRADE, INVESTMENT AND ECONOMIC PLANNING Elizabeth Agathine Principal Secretary elizabeth@finance.gov.sc 1 Hallegatte, Stephane; Vogt-Schilb, Adrien; Bangalore, Mook; Rozenberg, Julie (2017). Unbreakable: Building the Resilience of the Poor in the Face of Natural Disasters. Climate Change and Development. Washington, DC: World Bank. Page 5 of 6 The World Bank Seychelles First Fiscal Sustainability and Climate Resilience Development Policy Financing (P176420) 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 Approved By APPROVALTBL Country Director: Zviripayi Idah Pswarayi Riddihough 01-Oct-2021 Page 6 of 6