As expected, the IMF approved the second review of Seychelles' 2009-12 US$30m extended fund facility (EFF), in December (December 2010, Economic policy). The Fund said that all performance criteria at the end-September deadline were met comfortably (and were still on target by end-November) and that structural reforms are advancing. This allowed for the immediate disbursement of US$2.7m, taking the total to date to US$14.2m. However, two structural benchmarks were delayed because of capacity constraints. These were the submission of a new customs management act to the national assembly (which was three months late) and the slightly more problematic introduction of a new budgetary chart of accounts, which has been put off until the 2012 budget.

The Fund was impressed by the archipelago's strong fiscal performance, but the rapid repayment of domestic debt has generated excess liquidity within the financial system, which poses a risk to inflation. The Fund therefore recommends that monetary policy be tightened a little in 2011, primarily by mopping up excess liquidity via Treasury bill auctions (despite the cost in interest). However, the IMF advised against lifting banks' minimum reserve requirements, as the liquidity "overhang" will gradually dissipate as credit growth quickens. Despite a rise in non-performing loans in 2010-and lower interest earnings from government securities, especially as rates have fallen-the banking system is essentially sound and adequately capitalised (although still vulnerable to rare but "extreme" interest rate shocks). However, there is inadequate competition in the sector, which means that lending rates have not fallen as quickly as other rates-while private-sector credit (at 25% of GDP) is low compared with its island peers, despite excess liquidity. To help promote competition, the IMF recommends stronger disclosure requirements and a reduction in state involvement in the sector, as represented by Nouvobanq, Savings Bank and the Housing Finance Corporation (which has a virtual monopoly in mortgages).

Key reforms envisaged for 2011 include:

• amending the Financial Institutions Act to promote competition and risk management (April);
• reforming house financing to reduce the role of the state (June);
• launching a plan to reform the social security system (June);
• passing a new value added tax (VAT) act (June);
• developing a plan to privatise non-strategic enterprises (September);
• passing a new public finances bill to extend national assembly oversight (September); and
• reforming two key parastatals, the Public Utilities Corporation (PUC) and Air Seychelles, following strategic assessments by outside consultants.

Seychelles' solid performance in 2010, especially in the fiscal and debt spheres-coupled with the positive assessment by the IMF-convinced Fitch, a ratings agency, to upgrade the archipelago in February 2011. Fitch hiked Seychelles' long-term foreign-exchange rating from "B-" to "B", and its local currency rating from "B" to "B+", with a stable outlook. However, the wide current-account deficit (47% of GDP in 2010 according to the IMF) is a risk; a further ratings upgrade would require a larger hard-currency stockpile-although this has risen to US$211.3m by November 2010 from US$190.6m in 2009, it offers only two months of import cover-or a lower level of debt.