Seychelles will modify its taxes to bolster revenue and curb public spending next year to support a return to growth for its heavily indebted economy, the finance minister said in his budget speech on Monday.
Danny Faure said year-on-year inflation would plummet to 2 percent on the import-dependent Indian Ocean archipelago after peaking at 63.6 percent last December following reforms to liberalise the economy.
"Real GDP growth is projected to recover to 4 percent in 2010 and to 5 percent in 2011-12, while inflation is expected to remain in the low single digits," the minister told parliament.
"I am pleased to report that when inflation data is released within the next two weeks we expect it to be around only 2 per cent year on year."
He said the government would start revamping the tax structure in January 2010.
"New tax thresholds will be set and rates of Business tax will be reduced, with the top marginal rate of 40 percent being lowered to a rate of 33 percent," he told parliamentarians.
Faure added a flat-rate income tax of 18.75 percent would replace social security fund contributions as of July 2010. This rate will be reduced to 15 percent as of January 2011.
Africa analysts said the measures were a step in the right direction. "This should help to put the fiscal finances on a sustainable footing," Lisa Lewin, head of Sub-Saharan Africa at Business Monitor International told Reuters.
Faure said the roughly $900 million economy was gradually stabilising following last November's reform package which lifted exchange rate controls, slashed fiscal spending and overhauled monetary policy.
The tourism and fisheries-driven economy is expected to contract by 7.5 percent this year, the IMF forecasted. [ID:nL2306527]
Analysts say the archipelago's default on an interest payment on bonds worth $230 million in October 2008 has dealt a massive blow to investor confidence.
Total external debt topped $800 million at the beginning of 2009 before the Paris Club cancelled debt worth nearly $70 million in April.
"It will take time for confidence to return, in spite of the marked turnaround in policy seen over the past year," Lewin said.
Faure said a successful external debt restructuring would improve the country's sovereign rating and boost foreign direct investment.
The minister said visitor arrival numbers would be down 2-3 percent this year on 2008 but would see a 5-6 percent pick up next year with revenues bolstered.
"The external current account deficit is expected to widen again in 2010, due to higher growth and FDI, but will narrow over the medium-term as tourism earnings recover," Faure said.
"Foreign exchange reserves are projected to rise gradually to nearly three months of import coverage by end 2012."
