Michel Promises Devaluation to IMF

The Seychelles government has agreed with the IMF that a major devaluation of the rupee must happen soon, according to the IMF Report on Seychelles. But, according to IMF officials it will not happen until after the elections, which they were told would be in September.

This is how the IMF reported on the Government's agreement in their 2005 consultative document handed to the Government in March this year:

The authorities mentioned in the report is Seychelles Government. But the IMF report of Seychelles which is a form of audit of the economy by the world institution on every member country - remains a state secret.

Unlike most other countries of the world, both Mr Rene and Mr Michel have consistently refused the IMF permission to publish its findings on its website under the PIN agreement. Public Information Notices (PINs), forms part of the IMF's effort to promote transparency of the IMF's views and analysis of economic developments and policies. Both Mr Rene and Mr Michel, it appears want to hide the true state of the economy of Seychelles not only from the Seychellois public but also to businessmen and investors.

Just in case the report leaked out before the election it appears, the Governor of the Central Bank Mr Francis Chang Leng was sent on television in a programme hosted by Jude Louange called economic watch in April to seemingly reinforce the official line that there will be no devaluation. Chang Leng's words were repeated in a publication associated with Mr Michel called Isola Bella. Members of the SPPF in the National Assembly were ordered to repeat the no-devaluation line.

But the fact is, devaluation is coming and it will be much worse than most people feared. In its memorandum attached to the report, the directors of the of the IMF in unanimity insisted that unless there was substantial devaluation, major budget cuts and real privatisation, the Seychelles economy will continue to decline because the level of public debt has become unsustainable.

According to the report, the economy of Seychelles has been in decline for the past five years. Real gross domestic product (GDP), the standard measure of the productive wealth of the country, has declined by 11% in real terms since 2000 according to the IMF. This means that the standard of living of the average Seychellois has declined by absolute amounts over the last six years. Seychelles is only one of two countries in Africa which are not in a civil war, that has experienced economic decline instead of economic growth. The other country is Zimbabwe. According to the IMF, the average economic growth of Africa has been in the region of 6%.

But the international institution has an even gloomier warning. Doing nothing is not even an option, the IMF says. To prevent further decline in the economy the “authorities must initiate a comprehensive reform process promptly, so as to prevent a further deterioration of the economy.” If we do nothing real GDP will continue to decline in 2006 and beyond (read Seychellois getting poorer); shortages will get worse; external debt arrears will keep accumulating and the government would find it more and more difficult to borrow money from the local banks to keep going, the report says.

The staff of the IMF had very little praise for the so-called Macro Economic Reform Programme (MERP) promoted by Mukesh Valabhji and former President Rene in 2003, one year before Rene stepped down as president and pointed out that Mr Rene consistently ignored their recommendation to address the overvaluation of the currency. They said that MERP was an incomplete programme that not only failed to generate economic recovery but also contributed to a large decline in real gross domestic product.

One of the institutions which our country has great difficulty in paying back its debt to, is the African Development Bank (AfDB) based in Tunis. According to the IMF the arrears of Seychelles to this institution has reached a staggering $41 million as at December 2005. That is why Mr Peter Sinon had great pains in telling us, on SBC, exactly what message he had delivered to President Michel from its Governor. Mr Sinon, a trained economist whose aunt has been appointed one of the additional Ministers in the Cabinet (to her great surprise she candidly admitted) is the Seychelles representative to the AfDB. The message from the AfDB to President Michel, Mr Sinon cryptically let out was, don't count on us for anymore loans.

Although they did not specify the extent of the devaluation, the staff of the IMF pointed out that it would need to be “large enough to signal a credible change”. But the IMF observed what they called “a non-negligible share of private activity currently operates at the parallel rate”. Hence, they say, the target devaluation rate range should be 8-12 rupees to the dollar, as the likely level of devaluation that would be credible.

According to the IMF staff, whilst there were countries in similar situations that had undergone successful planned devaluations, Seychelles faces some unique problems we are more vulnerable and our problems are more deep seated because we have consistently failed to take corrective measures in the past. Nevertheless, they pointed out, we can learn from the experiences of Hungary, Poland, and Turkey who have managed to extricate themselves under very difficult circumstances. We can also learn, the IMF staff say, from the CFA (French) countries.

The report presented its own programme for economic recovery called “challenges and Medium term outlook”. The IMF made it clear that they would prefer a very comprehensive adjustment programme to kick start the economy back to life and generate economic growth in the shortest possible time. But the IMF warns that a partial implementation would be as catastrophic since even with the most radical measures total public debt would remain high at 130% of GDP.

That is why this newspaper welcomes the appointment of Mr Danny Faure as the new Minister of Finance because the only thing missing at the moment is political will. For if Mr Faure has any ambition to succeed Mr Michel, he must support the IMF's comprehensive adjustment programme and defy his mentor Mr Rene. He has no other choice. The chickens have come home to roost.