Seychelles - ECONOMY

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Seychelles - THE ECONOMY

A notable feature of the Seychelles economy was the high per capita GDP of US$5,900 in 1992, some fifteen times the average of sub-Saharan Africa. Total GDP was estimated at US$407 million in 1992. Economic growth, which had proceeded at a strong 5 to 6 percent annually since the mid-1980s, resumed in 1992 at an estimated rate of 4 percent.

The major source of economic activity is the tourist industry and tourist-related services in terms of employment, foreign earnings, construction, and banking. Although earnings from the tourism sector are impressive, providing about 50 percent of GDP, they are offset by the need to import large amounts of food, fuels, construction materials, and equipment, costing some 70 percent of tourism income. Gross tourism foreign exchange earnings in 1993 were SRe607 million. Moreover, the possibilities for expanding tourism are limited, and it is vulnerable to unpredictable shifts in demand, as occurred in 1991 when the Persian Gulf War contributed to a sharp decline from 103,900 tourists in 1990 to 90,000 in 1991. By 1993 there was a strong recovery in the tourist trade, bringing more than 116,000 visitors.

Hoping to avoid overdependence on tourism, the government has attempted to diversify economic activity by encouraging new industries and revitalizing traditional exports. Production of food and other items is being emphasized to reduce the heavy burden of imports needed to sustain tourism. Development of the nation's marine resources remains a principal governmental goal, pursued by expanding indigenous coastal fisheries and by profiting from fees and services provided to foreign fishing fleets operating in Seychelles' EEZ. Small traditional fishing accounted for less than 3 percent of GDP in the early 1990s but provided jobs for about 1,500 persons and growing foreign exchange earnings.

The Seychelles' traditional marketings of copra and cinnamon bark had declined to an insignificant level by 1991. The government's goal of achieving 60 percent self-sufficiency in food has not been realized although its efforts have resulted in increases in fruit, vegetable, meat (mainly chicken and pork), and tea production.

Parastatal (mixed government and private) companies proliferated in many sectors of the economy under the Ren� regime. State-owned and parastatal companies accounted for more than half the country's GDP and about two-thirds of formal employment. The parastatals enjoyed mixed success, and by 1992 the government had begun to divest itself of selected enterprises.

Seychelles traditionally has run a large trade deficit because of the need to import nearly all manufactured and most agricultural commodities. Much of the gap has been covered by revenues from the tourism sector and to a lesser extent by remittances from Seychellois workers abroad and by overseas loans and grants.

Seychelles has been relatively successful in containing inflation. The retail price index, which includes some goods and services whose prices are set by the government, rose by 3.3 percent in 1992 and 4.0 percent in 1993. The generally stable price environment has resulted in part from wage discipline, the weakness in world oil prices, and a policy of importing from countries with low prices, including South Africa, whose currency has depreciated steadily against the Seychelles rupee.

To support its anti-inflationary strategy, the government has pursued a liberal exchange rate policy. Since 1979 the rupee has been pegged to the International Monetary Fund's (IMF) special drawing rights (SDR). The rupee's relative stability has contributed to the stability of domestic prices.

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Seychelles - THE ECONOMY - Government Role

Under the socialist policies of President Ren�, the government has taken a leading role in developing the national economy. Beginning in 1978, the Ministry of Planning and Development has drawn up very detailed "rolling" five-year development plans, which are updated and extended every year. The Ministry of Finance is responsible for economic decisions and budgetary policy. A separate Monetary Authority supervises the banking system and manages the money supply. Although foreign banks operate branches in Seychelles, the government owns the two local banks--the Development Bank of Seychelles, which mobilizes resources to fund development programs, and the Seychelles Savings Bank, a bank for savings and current accounts.

The expansion of parastatal companies since 1979, when the first such institution was created, has had primary economic significance. By 1988 the number of parastatals had reached thirty-five, but in 1994 there were indications that the government's more liberal economic policy would probably reduce the role and number of parastatals. Among the most important organizations of the public sector is the Seychelles National Investment Corporation, whose role is to promote economic development in areas neglected by private enterprise or to become a major stockholder in private companies that encounter economic difficulties. The most powerful of the state enterprises is the Seychelles Marketing Board (SMB), which is the sole importer of key commodities, exercises controls over other imports, and regulates prices, production, and distribution of most goods and services.

The state-owned Seychelles Timber Company has responsibility for reforestation and for operating the government sawmill at Grande Anse. The fishing Development Company controls industrial tuna fishing and the tuna cannery operated as a joint venture with France. Air Seychelles, a parastatal, flies both international and interisland routes, making a critical contribution to the tourist routes, making a critical contribution to the tourist industry. The Islands Development Company (IDC) was established in 1980 to develop agriculture, tourism, and guano production on ten of the outlying islands-- guano deposits have since been depleted. A hotel complex on le Desroches is among the projects conducted by the IDC. Opened in 1988, the Desroches resort is managed by another parastatal, Islands Resorts. A US$12 million shrimp farming project on Coetivy Island remained in the final development stage in 1992. The high initial investment and heavy transport costs raised doubts about its viability, although a study has indicated that about 8 tons of shrimp could be caught annually in the area.

Despite the government's strong involvement in the economy, it has never imposed a policy of forced nationalization. Rather, the government encourages foreign investment, preferably as joint ventures. Concurrently with the political liberalization in 1992, the government has attempted to strengthen the private sector, announcing measures to attract investment and planning to divest some state-owned companies. Among companies scheduled for privatization are the agro-industrial division of the SMB and Stationery, Printing, and Computer Equipment, to be sold as three separate enterprises. A parastatal holding 65 percent of Seychelles hotel assets reportedly is ready to sell some hotels or to privatize their management. Private investors nevertheless remain cautious because of the continued high level of state economic control.

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Seychelles - Economic Development

The government has detailed its economic development targets in successive five-year plans. The plan for 1985-89 emphasized tourism, agriculture, and fisheries. It proposed to improve the balance of payments by achieving 60 percent self-sufficiency in food and by stimulating tourism. Improved productivity, increased exports, and a lowering of the unemployment level were additional aims. The 1990-94 plan stressed the need to attract foreign investment and the need for greater food self-sufficiency. A tenyear plan for protecting the environment was supported by a pledge of US$40 million from World Bank donors. The total projected investment was SRe4,206 million in constant 1989 prices, of which 26 percent would be funded by the public sector. It was not expected, however, that the investment goals would be realized. Capital spending was aimed at improved living standards--water supplies, waste disposal, and housing. Tourism and related investments were also regarded as priorities.

An ambitious government initiative is the East Coast Development Plan to reclaim land on Mah� for residential and commercial construction. Some 800 new homes are to be built to ease the housing shortage among ordinary Seychellois. In addition, part of the area will be reserved for luxury housing and tourist facilities. In 1993 the government announced that it would seek private sector investment to help complete this major project.

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Seychelles - Labor

The government is the nation's largest employer, providing jobs for 38 percent of the wage-earning labor force in 1991. The parastatal sector employed a further 26 percent, leaving only 36 percent of workers in the private sector. The total labor force was about 29,600 in 1991; some 19 percent were domestic workers, self-employed, or family workers. The remainder were in formal wage employment. Hotel and restaurant workers formed the largest single category (14.1 percent), followed by transportation (13.8 percent), manufacturing (11.2 percent), public administration (10.9 percent), and agriculture (9.1 percent).

The government establishes official minimum wages depending upon job classification, although most jobs are paid at well above the rates set. Average monthly earnings as of mid-1992 were about SRe2,750 in the government and parastatal sectors and SRe2,260 in the private sector. The differential was caused by high 1992 salary increases to government and parastatal workers amounting to 12.3 percent and 14.3 percent, respectively, which the private sector could not match. The Central Bank of Seychelles has noted that wage inflation, which averaged 10.8 percent for the entire labor force, greatly exceeded the retail price inflation of 3.3 percent and could not be justified by corresponding productivity gains. The bank feared that the government's salary awards would add to existing pressures on the country's cost base, its external competitiveness, and its external accounts. , which is controlled by the SPPF. All workers are members because a percentage of their social security contributions are earmarked for union dues. Workers can elect their own shop stewards, but candidates are screened by the NWU executive secretariat, which can dismiss any elected shop steward. Workers can strike only with the permission of the SPPF Central Committee. Nevertheless, two labor disputes occurred in the changed 1992 political environment. Workers in the main electrical generating plant organized a brief shutdown, winning increased allowances in their compensation packages, and stevedores struck for better conditions and higher compensation. To avoid disruption at a critical time for the industrial fisheries sector, the government essentially met the stevedores' demands.

In November 1993, the National Assembly passed the Trade Union Industrial Act, which gave Seychellois workers the right to join and to form their own unions. Any such unions, however, may not compete with the overall NWU. One independent union was formed in late 1993.

In addition to approving collective bargaining agreements and reviewing private wage scales, the Ministry of Employment and Social Affairs can enforce employment conditions and benefits. With many free or subsidized public services, notably education and health, even workers at the low end of the pay scale can sustain their families at a basic level. Even so, many families rely on two or more incomes to deal with the high price structure.

The government has set a legal work week of forty or thirtyfive hours, depending on the occupation. With overtime, the work week may not exceed sixty hours. Workers are entitled to a thirty-minute break each day and twenty-one days of paid annual leave. Comprehensive occupational health and safety regulations are enforced through regular workplace visits.

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Seychelles - Agriculture

The Ministry of Agriculture and Marine Resources in 1993 gave up the management of five state-owned farms, which were divided into small plots and leased to individuals. In addition, the agricultural sector consisted of state farms of the Seychelles Agricultural Development Company (Sadeco) and the outer islands managed by the IDC; three other large holdings producing mainly coconuts, cinnamon, and tea; about 250 families engaged in fulltime production of foodstuffs; and an estimated 700 families working on a part-time basis. Many households cultivate gardens and raise livestock for home consumption.

The total cultivable area of the islands is only about 400 hectares. Although rainfall is abundant, wet and dry seasons are sharply defined. Better irrigation and drainage systems are needed to improve food crops. The government has taken various measures to reduce dependency on imported foods, including deregulating production and marketing and reducing the trades tax on fertilizers and equipment. As a result, vegetable and fruit production climbed from 505 tons in 1990 to 1,170 tons in 1992. This increase failed to be matched by a commensurate decrease in imports of fruits and vegetables, which reached 3,471 tons in 1992. Local consumption had apparently increased, and substitution between imported and domestic foodstuffs was possible only to a limited degree. In most cases, imported produce is significantly cheaper in spite of air freight, import taxes, and other costs, necessitating a high import markup by the SMB to prevent disruption of domestic production. Neither rice, a dietary staple, nor other grains can be grown on the islands.

The expansion of livestock production is hampered by encroachment of housing and other development on agricultural land as well as by increased labor and animal feed costs. The number of cattle slaughtered in 1992 (329 head) was virtually unchanged from five years earlier. The slaughter of pigs (4,598) was about 45 percent higher than 1987, and chicken production (439,068) had risen by 60 percent.

The two traditional export crops of copra--dried coconut meat from which an oil is produced--and cinnamon have declined greatly because of the high cost of production and pressure from low-cost competitors on the international market. Vanilla, formerly important, is produced on a very small scale. Tea grown on the misty slopes of Mah� is a more recent plantation crop, serving mainly the local market.

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Seychelles - Fishing

The fisheries sector is divided into two distinct categories: traditional fishing by a domestic fleet of some 400 vessels; and industrial tuna fishing by foreign vessels, which began to develop in the mid-1970s and has emerged as a major revenue source. The domestic inshore fleet consists mainly of open boats equipped with inboard or outboard engines, operating within a radius of sixteen to forty-eight kilometers of the main islands. Domestic offshore operations on banks surrounding the Mah� group and the Amirantes Isles are conducted by handlines from larger boats with sleeping quarters. Most of the catch is frozen. The fish division of SMB bought and distributed fish landed on the three main islands to avoid serious price fluctuations. An export trade in the local catch developed after the opening of the international airport made possible deliveries to Europe and other markets.

Local consumption of fish traditionally has been high, and has been estimated at eighty-five kilograms per capita annually in the early 1990s. The local catch is also an important menu item at the tourist hotels. The domestic fisheries catch reached 5,734 tons in 1992, about 10 percent of which was accounted for by a new industrial fishing venture, the P�cheur Breton mothership-dory enterprise.

Beyond 100 kilometers from the Seychelles coasts, fishing is conducted by some fifty-five French and Spanish purse seiners based at Victoria. (The Spanish vessels briefly shifted their base to Mombasa in 1992 but returned when the Seychelles government reduced its port charges.) Some 160,000 tons of tuna were transshipped through Victoria in 1992, of which 45,000 tons were reported by the vessels' owners to have been fished within Seychelles' EEZ. The Seychelles authorities had no way of verifying these claims.

In 1991 Seychelles, Mauritius, and Madagascar formed the Tuna Fishing Association to promote their interests. In addition, a series of three-year agreements granted European Community (EC) vessels the right to fish in the Seychelles EEZ. The fourth such agreement, signed in early 1993, was expected to generate US$13.5 million annually. The islands' economy also benefit from the resulting business activity at Victoria in the form of port services, stevedoring, and ship chandling. The Seychelles government had leased one purse seiner to profit more directly from the tuna industry, and is building ten seiners, but the project has encountered financial difficulties.

In 1992 the Seychelles Fishing Authority issued 292 licenses to long-lines fishing vessels mainly from Taiwan and the Republic of Korea (South Korea). These vessels make few calls at Victoria, offloading their catches onto motherships in mid-ocean. Seychelles is unable to carry out naval and air surveillance of possible illegal fishing, especially in more remote parts of the EEZ. There is a strong presumption, however, that unauthorized use is being made of its fishing grounds.

The tuna canning plant opened in 1987, with 70 percent of its capital of Seychelles origin and 30 percent invested by a French cooperative; the plant is designed to process 8,000 to 10,000 tons of fish a year. It employs 425 people, mostly women, and has brought a rapid growth of export earnings, reaching US$12.3 million by 1991. The net gain in balance of payments was less because the operation required some imports, notably the cans, which could not be produced domestically.

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Seychelles - Oil

Seychelles depends on imported petroleum to meet its domestic power requirements. Following the increase in oil prices in 1990, fuel accounted for nearly 8.6 percent of the nation's import bill, exclusive of reexports. The possibility of commercially exploitable offshore oil led to the granting of exploration rights in 1977 to a consortium headed by Amoco Oil Company. Amoco later bought out its partners and acquired additional exploration rights but ceased drilling in 1986 when all of its test wells proved dry.

The government embarked on a new program to interest oil companies in exploration in 1985 with technical assistance from Norway in preparing feasibility studies. In 1987 the British Enterprise Oil Company and the United States Texaco Corporation, obtained rights for areas south and west of Mah�. After completing promising seismic studies, Enterprise announced plans to begin drilling in 1995. The Seychelles government retains rights to participate in joint development of the concession if commercial quantities of oil are found. In August 1990, Ultramar Canada, Inc. stated that it had an agreement to search 10,200 square kilometers of seabed northeast of Mah�.

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Seychelles - Manufacturing

Owing to the small size of the local market and the lack of raw materials, manufacturing occurs on a very limited scale. As of 1991, only 2,563 persons were employed in a total of eightyeight enterprises, twelve of them parastatals. Most employed fewer than ten people, and only five firms employed as many as 100. A number are import-substitution industries, the largest of which is a brewery and soft drink plant. Other firms include cigarette, clothing, paint, plastics, and furniture factories, cinnamon and coconut processing plants, and some handicrafts catering to the tourist industry. To encourage foreign interest in the manufacturing sector, the government has developed a new investment code guaranteeing full repatriation of profits and capital, protection against nationalization, free import of capital goods, and other incentives. The government reserves the right, however, to require that the state share an interest in larger-scale industrial activities.

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Seychelles - Tourism

Tourism is the most important nongovernment sector of the economy. About 15 percent of the formal work force is directly employed in tourism, and employment in construction, banking, transportation, and other activities is closely tied to the tourist industry. Foreign exchange gross earnings from tourism were SRe607 million in 1993. The direct contribution of the tourism sector to GDP was estimated at 50 percent, and it provides about 70 percent of total foreign exchange earnings. Although difficult to measure, the import content of tourism expenditures is high, so net tourism earnings are significantly lower.

The tourist industry was born with the completion of the international airport in 1971, advancing rapidly to a level of 77,400 arrivals in 1979. After slackening in the early 1980s, growth was restored through the introduction of casinos, vigorous advertising campaigns, and more competitive pricing. After a decline to 90,050 in 1991 because of the Persian Gulf War, the number of visitors rose to more than 116,000 in 1993. In 1991 France was the leading source of tourists, followed by Britain, Germany, Italy, and South Africa. Europe provided 80 percent of the total tourists and Africa--mostly South Africa and Reunion-- most of the remainder. European tourists are considered the most lucrative in terms of length of stay and per capita spending.

Under the 1990-94 development plan, which emphasizes that the growth of tourism should not be at the expense of the environment, the number of beds on the islands of Mah�, Praslin, and La Digue is to be limited to 4,000. Increases in total capacity are to be achieved by developing the outer islands. To avoid future threat to the natural attractions of the islands, 150,000 tourists per year are regarded as the ultimate ceiling. The higher cost of accommodations and travel, deficiencies in services and maintenance of facilities, and a limited range of diversions handicap Seychelles in attracting vacationers at the expense of other Indian Ocean tourist destinations.

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Seychelles - Foreign Trade

Seychelles has experienced recurrent foreign exchange problems because of its limited export potential and fluctuations in tourist traffic. Growing national income has been accompanied by pressures for increased imports of manufactured consumer goods that cannot be produced domestically. In 1991 the government took measures to restrain imports, and in 1992 it imposed surcharges on luxury goods, in addition to taking other actions to restrict domestic spending.

Until 1987 the nation's principal export was fresh and frozen fish, followed by high-quality copra, for which Pakistan, the leading importer, paid premium prices. Cinnamon bark and shark fins were the only other exports of consequence. Reexports, mainly of tourist-related duty-free items and petroleum products for aircraft and ships, were considerably higher than earnings from merchandise exports. From 1987 onward, canned tuna dominated the islands' export trade. With a value of SRe64.1 million, canned tuna constituted 73 percent of all domestic exports in 1991. Fresh and frozen fish exports brought SRe17.7 million, but copra and cinnamon had shrunk to insignificant levels.

France had been the principal destination of Seychelles exports for many years, sometimes absorbing more than 60 percent of the islands' products. In 1991 the Seychelles trade pattern shifted sharply in favor of Britain (52.7 percent of total exports), followed by France (22.8 percent), and Reunion (13.6 percent). Both Reunion and Mauritius are leading customers for frozen fish.

Seychelles imports a broad range of foods, manufactured goods, machinery, and transportation equipment. The largest single category is petroleum fuels and lubricants, although much of this is reexported through servicing of ships and aircraft. Seychelles' main suppliers in 1991 were Bahrain, South Africa, Britain, Singapore, and France. Because of its high import dependence, the country's visible trade is always heavily in deficit. In 1991 its total of domestic exports and reexports (SR258 million) was only 28 percent of total imports (SR910 million). Gross receipts from tourism usually cover some 60 percent of imports but fall short of bridging the gap in the balance of payments. In 1993 Seychelles joined the Preferential Trade Area for Eastern and Southern Africa, which should improve its trade because of greater currency convertibility, particularly with Mauritius.

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