November 24, 2006

No solace in IMF official’s words

The government of President James Michel has finally managed to use the IMF in its domestic political propaganda campaign to try and give the illusion of economic progress as part of his 100 days in office milestone.

This week, a stage managed meeting between staff members of IMF, who are all trained economists and government officials - among whom was one specially invited non-government economist representing his conglomerate- were shown on television -  a rare public occasion. None state controlled media was not invited to hear the prepared statement or to ask questions. During the SBC voice over of the subsequent broadcast, the pictures on the screen depicted all the members of the Seychelles delegation in the room with sombre faces as if they were being treated to unpalatable news. 

Then we were treated to the head of the IMF team reading from a prepared text, part of which were broadcast on state controlled television and radio, while an extract appeared in the state controlled Seychelles Nation newspaper. From the extract which appeared in the Nation, government should not read too much in what the IMF staff said. For example:

- “The economic situation is improving, with strong tourism arrivals and construction activity driving the recovery. Real GDP growth is projected to reach 41/2 percent in 2006, after increasing by 1.2 percent in 2005.” The economic situation is improving only in the sector which employs large numbers of expatriates, such as the five star hotels and the construction industry. Minus their wages, which they transfer abroad, from the GDP figures and we are left with a much smaller Net National Income (NNI) which is what is accrued to the residents. Despite the GDP growth unemployment continues to grow, especially among the new entrants to the labour force. Disguised unemployment is in the form of a large number of able bodied men and women who describe themselves as self employed only because they have given up looking for a job. Their activities bare generate sufficient net income for them to live above the poverty line. As for the “strong tourism arrival” it doesn’t appear to have translated into to an increase in tourism earnings according to figures from the commercial banks. Figures made public by the Central Bank covering the first eight months of 2006 show a cumulative total of SR 462 million compared to SR 760 million last year – not taking account the depreciation of our currency. Further more, an increasingly larger proportion of those earnings remain out of reach to the general public since they are kept in foreign currency accounts, hence generating very little trickled down economic activities.

- Underlying inflationary pressures resulting from a rapid liquidity increase have not been reflected in the official price statistics. That is not a success story but rather an expression by the IMF of a shortcoming or failure to account for what is very obvious in the official calculations – that although everyone are experiencing a rapid rise in their cost of living due to the increasing cost of imported goods and local services, these are not reflected in the statistics being published.  Hence, the IMF wants us to take its GDP growth estimate with a large pinch of salt.

- The fiscal outturn of the consolidated government in 2006 is expected to fall somewhat short of the budget target. This is an expression of disappointment rather than praise. It shows that the government is still unable to control public expenditure, hence it will be difficult for the government to generate sufficient surplus to repay its debts in the future. That means the external debts due for repayment next year will fall into arrears and the government will default on its bonds in five years time. The large domestic debt due to the local banking system will continue to threaten the sanctity of our financial system.

- On the external front, the current account deficit is being financed by record inflows of foreign direct investment, which indicate renewed confidence in the economy. The current account deficit plus principal repayments due are one measure of a country’s requirement for foreign exchange, according to economists. The financing requirement can be met via net inflows of foreign direct investment, portfolio investment, IMF credits, building up arrears (not repaying debt or meeting interest payments), other capital flows such as short term borrowing, or drawing down on official reserves. Until the foreign currency bonds were issued (short term borrowing), direct inflows were positive only because we were not paying our debts. So far neither the foreign direct investment inflows nor the bond proceeds have alleviated the foreign exchange situation which will worsen once all the new hotels have been built and the bonds have to be repaid. In a highly open economy such as ours the size of current account deficit is a direct function of foreign investment, since portfolio investment is non-existent.

The rest of the statement is simply more of the same promises government has been making to the IMF each year. Once again the IMF welcomes the government stated intention to undertake reforms and praises it for the measures implemented so far. But the Government has consistently not lived up to its commitments and expectations. This is reflected, for example, in the comments by the Executive Board of the IMF in its 2005 report:  Directors consistently mentioned the need for Seychelles to implement a comprehensive reform agenda, to address the unsustainable level of pubic debt (182 percent of GDP) and the overvalued exchange rate. Directors noted that these recommendations are not new but were proposed by the staff and supported the Executive Board for the past few years. The authorities (government) have undertaken some reform measures, but these have not been sufficient to prevent economic decline.

One hope that when the IMF issues its 2006 report to the Government next year, President Michel will have the guts to allow them to publish it in its entirety on their website as most countries do. This year it was this newspaper that made it public. Judging from the propaganda the state controlled media is peddling about it beforehand, it should be a favourable report.  Thus we expect to see it in the public domain as soon as the Executive Board of the IMF has attached its comments, – especially as we are now in an era of transparency.  Watch this space or visit www.seychellesweekly.com.

Copyright 2006: Seychelles Weekly, Victoria, Mahe, Seychelles