Monday, February 2, 2009

Seychelles takes painful path to recovery

By Richard Lough, VICTORIA, Jan 27 (Reuters)

Foreign accents fill the lunchtime air at a beachfront restaurant while diners clad in Ralph Lauren and Prada sunglasses knock back succulent tiger prawns and chilled white wine.

It is the scene the Seychelles archipelago has built its image on. But for locals, who had been enjoying one of Africa's highest standards of living, the good life is on ice.

The Indian Ocean islands are in the midst of a severe economic crisis, prompted by the global financial downturn on top of years of unsustainable borrowing.

A raft of painful economic reforms demanded by the International Monetary Fund in return for emergency funding have seen the local rupee lose half its value against the dollar since floating in November. That has pushed inflation beyond 60 percent -- the highest rate in Africa after Zimbabwe.

"It was like a fever, everything just shot up at once," lamented a local taxi driver, David, who didn't give his surname, saying he feared authorities would revoke his licence.

"Fuel, food and cooking gas, they've all at least doubled in the last three months. The shock has been too big," he said.

The timing hurts too.

This year, the Seychelles economy is predicted to shrink by at least 0.5 percent according to the country's central bank, compared to 3.1 percent growth in 2008.

Tourism revenues are expected to fall by 10 percent -- roughly $32 million -- over the next year. A deepening sense of uncertainty prevails across the visitor-dependent archipelago.

"I just have no confidence," said an anxious Captain Philip Hoareau, as his catamaran shuttle service made a steady 26 knots en route to Praslin island's turquoise bays.

"If tourism slumps, then the economy will collapse. We do not earn much from anything else."

EXCESSIVE SPENDING HABIT

For more than 20 years, the Seychelles has consistently over-run its budgets, borrowing heavily from foreign governments and commercial creditors to invest in health, education and housing, as well as tourism and fisheries.

After defaulting on a payment towards a $230 million sovereign bond last October, the country accepts it had been borrowing beyond its means. President James Michel, who intends to stand for re-election in 2011, told Reuters there was now a need to "tailor our clothes in accordance to the cloth we have".

The government has already moved to cut spending, downsizing the public sector, scrapping subsidies and freezing pending investment projects while increasing its tax revenues.

With external debt topping $800 million, Michel is calling for half of it to be cancelled.

"The global credit crunch may not have been the direct cause of the Seychelles' crisis, but it has certainly been a catalyst," wrote Christopher Eads, of the Economist Intelligence Unit (EIU), in a December 2008 country report.

PAINFUL PATH

The question now is: how quickly will the economy recover?

The Seychelles is not the first small, fragile economy exposed to external shocks to extend itself too far.

In recent years, Belize, Jamaica and Cape Verde have all implemented austerity reforms to rein in public debt.

But with the current world economic climate shattering consumer confidence, observers say much will depend on how the recession in Europe impacts tourism.

"The financial crisis means the Seychelles is unlikely to recover as quickly as hoped," said Richard Segal of the Africa-focused investment bank, UBA Capital.

The devaluation of the currency would soften the blow as the price of travel to the Seychelles decreases.

"The early signs are good, but the reforms have to be carried through for a year at least," said Segal. "We've seen it before where reforms are encouraging, but after six months sentiment is high and they relax."

If the absence of a lunchtime queue at the once popular Andrew's Hotdog and Burger van is an indicator of consumer sentiment, then the Seychellois are bracing for a bumpy road.

"These reforms are necessary but should have been done in small doses over time," said office-worker Noella Frederick, standing alone at the counter. "Let us get on with these reforms and be done with them."