Economy and Trade
The Seychelles is an archipelago of 115 tropical islands in the Indian Ocean, about 1,600 kilometers east of Kenya. The two main islands are Mahe and Praslin. About 90% of the Seychellois people live on Mahe Island. Most Seychellois are descendants of early French settlers and the African slaves brought to the Seychelles in the 19th century by the British, who freed them from slave ships on the East African coast. The country’s economy depends heavily on a fishing industry, focused on tuna, and upmarket tourism. Altogether, the service sector accounts for around 70% of GDP, with manufacturing accounting for a further 20%. The country is in the World Bank’s “upper middle” income bracket, and, consequently, it has received relatively little foreign aid. However, given the small size of the economy and its heavy dependence on tourism, the island remains vulnerable to external shocks.
Economic Policy over 12 Months
The left-wing governments that ruled the Seychelles after the country gained independence from the British in 1976 implemented generous social-service benefits, free education, free healthcare, and subsidized housing. They also kept the local currency, the rupee, pegged artificially high. At the same time, the country borrowed extensively from overseas, and consistently incurred large fiscal deficits.
In 2005 and 2006, the government implemented several measures aimed at reforming the economy, including liberalizing the trade regime, privatizing state-owned entities, and gradually liberalizing foreign-exchange restrictions. However, these limited measures were insufficient to address the long-standing macroeconomic imbalances that had developed over the previous decades.
In 2008, as global economies slowed, and oil and food prices rose, the nation’s foreign-exchange reserves dwindled, while the rupee came under pressure, losing 24% of its value in the first half of the year. As foreign debt ballooned because of the plunging currency, the central bank was forced to ration foreign exchange to both public and private industry.
On July 1, 2008, the government defaulted on the repayment of one of its foreign debts. In October, the Seychelles defaulted again, and the government admitted that it was unable to service its foreign debts. It turned to the International Monetary Fund (IMF) for help, and, in an attempt to meet the conditions for a standby loan, started to implement a program of radical reforms.
The reforms included a fundamental liberalization of the exchange regime, involving the elimination of all foreign-exchange controls, and allowing the rupee to float freely. The authorities also cut spending, and sold state assets. The IMF approved a two-year, US$26 million standby loan in mid-November 2008. After the Seychelles dropped its currency peg on November 1, the rupee collapsed, tumbling to 16.51 per US dollar by 22 December, from 8.90 on November 3.
By the end of 2008, external debt stood at US$808 million, of which US$263 million was in arrears. As at September 30, 2008, the country’s public debt stood at US$1.3 billion, or 153% of GDP. Only Lebanon has a higher debt ratio among B-rated emerging-market nations, at 163% of estimated 2008 GDP. In December 2008, the Seychelles government asked the Paris Club group of nations to help it reschedule its external debt. Finance minister Danny Faure said that the debt would become unsustainable if no agreement was reached. The government is hoping that around half of its foreign debt will be cancelled.
Economic Performance over 12 Months
The economy grew by 3.1% in 2008, but conditions deteriorated rapidly in the second half of the year after the government defaulted on its foreign debt repayments, and was forced to implemented IMF-inspired austerity measures. The IMF estimates that the economy experienced zero growth in the final quarter of 2008.
2009 is likely to prove much bleaker. In December 2008, the IMF forecast that the economy would contract by 9.5% in 2009. The global economic downturn, which is causing a slump in tourism, is compounding the archipelago’s troubles. Visitor numbers fell by 15% in the first two months of 2009, compared to the same period in 2008, and the government anticipates that numbers could fall by 25% during the course of the year. The industry generated US$321 million in foreign-exchange earnings in 2008.
Layoffs in the public sector and tourism-related industries are having a dramatic impact on the jobless rate, which rose from just 1% in November 2008 to 3.6% by the end of January 2009. Meanwhile, the annual rate of inflation accelerated to 63.3% in December 2008, from 60.6% in November, the second-highest rate in Africa after Zimbabwe. Prices rose 3.5% during the month, as the cost of fish advanced 0.5% and prices for other foods jumped 6.3%.
However, in February 2009, the IMF claimed that “in early 2009, signs of success of the reform effort are beginning to appear, and the [IMF] mission believes the program will achieve its macroeconomic stabilization and reform objectives.” The IMF added that “interest rates have begun to ease from their peak, and inflation is declining sharply, thanks to the tightened fiscal and monetary policies.” However, it concluded that “2009 will be a challenging year, as Seychelles is being hard hit by the deterioration in the global economy.”
The organization added that the government’s finances had been significantly tightened, and public-sector employment was being reduced sharply, in part under a voluntary departure scheme. It also said that declining commodity prices, especially for petroleum, and higher public revenue from fisheries would partially offset the loss of tourism receipts in the balance of payments.
On an even more positive note, the Economist Intelligence Unit has forecast that 2010 will bring relief. It says that the improved global economic climate will boost tourism figures and foreign investment in 2010, lifting real GDP growth to 5%.
Support for Inward Investment and Imports
The government has been consistently business-friendly, and has actively supported the development of an offshore financial-services sector. There is no discrimination against foreigners in terms of conducting business in the country, except that they need official approval to own land. The government established the Seychelles Investment Bureau (SIB) in 2004 to promote investment and support foreign investors. An import permit must be obtained from the Ministry of Finance for all imports. This is usually issued within 48 hours of application.
In order to encourage investment, the government has provided several incentives and tax exemptions. For further details, see the website of the SIB.
GDP growth: 3.1% (2008, est., government figures)
GDP per capita: US$18,700 (2008, est.)
CPI: 63.3% (December 2008, government figures)
Key interest rate: 3.6% (December 31, 2007)
Exchange rate versus dollar: Seychelles rupees per US dollar—16.51 (Bloomberg)
Unemployment: 3.6% (January 2009, government figures)
Current-account deficit/surplus −28.8% of GDP (2008, IMF estimate)
Population: 82,247 (July 2008, est.)
Source: CIA World Factbook except where stated