Interview on Seychelles economy over the past 20 years with Gafoor Yakub-‘Avoid expensive refinancing schemes against a deteriorating macroeconomic backdrop’


Mr Yakub Mr Yakub has worked for the government of Seychelles (1985-1994 as director general in the Ministry of Finance) and the Development Bank of Seychelles (1994-1996 as managing director) before serving at the International Monetary Fund (IMF) in Washington D.C., USA (1996-2010 as technical advisor specialising in assisting a number of IMF member countries with their fiscal reforms).

In the following interview, Mr Yakub, who believes it is important that we maintain a balanced but accurate and realistic view of the macroeconomic developments in our country, explains why and how Seychelles embarked on an International Monetary Fund-backed reform programme and the benefits it has brought us.

Seychelles Nation: As former director general who worked on fiscal policy in the Ministry of Finance 20 years ago, what was the economic scenario then and how has it changed from then to now in 2013?
Gafoor Yakub:
Twenty years ago, the government was the main economic player. It was the largest employer and main regulator of business and social welfare. We were a heavily controlled economy, with extensive state interventions in the economy. The Seychelles Marketing Board (SMB) now Seychelles Trading Company (STC) controlled most imports and all exports between 1985 and 1995. At the time, there were also a lot of other parastatal companies covering a wide spectrum of services in different sectors of the economy.

But over the years, the government has gradually liberalised the economy. Today we no longer have any price control nor exchange control. We have a floating exchange rate system and that must remain as an important part of our macroeconomic policy framework. Also today the private sector is the main economic player; it accounts for 72% of total employment and it is contributing more to the total output (GDP) of the country than it did 20 years ago.

Seychelles Nation: What were the challenges facing the government at the time?

Gafoor Yakub: One of the challenges for government at the time was to create jobs and generate sufficient foreign exchange (forex) to meet the country’s ever increasing import requirements, given that we were and we continue to remain a heavily import dependent country. Being the main economic player 20 years ago, the government saw itself as the main engine of growth and felt obliged to direct all major developments.

To create jobs, the government started a number of joint ventures with foreign companies such as Mauvillac of Mauritius; and Omisa, an Italian management firm created to operate Seypec when the Shell Company’s local operations were nationalised. Sey Tea & Coffee factory also started off as a joint venture with the late Mario Ricci’s involvement. I recall the Conserverie de L’Océan Indien (COI) was set up for tuna canning on an industrial scale with the government having a majority stake. The aim was to generate badly needed foreign exchange via the export of canned tuna. Some of these joint ventures were successful and created jobs but some of them failed.

The authorities tackled the failing entities by embarking on a bold privatisation programme, including the privatisation of previously nationalised hotels belonging to Seychelles Hotels Ltd in an attempt to generate some much needed foreign exchange earnings.

One concrete example of a successful transition was Penlac Co. Ltd. For 10 consecutive years (from 1985-1995) Penlac as a parastatal was a loss-making joint venture, with Mauvillac being in control even though the Seychelles government had majority share. The loss-making parastatal managed to only become profitable after it was privatised via public tender in 1995. Thanks to the company’s strict day-to-day general management, this import-substitution company gradually became profitable and sustainable. You have to remember at the time there was a serious forex problem which made it hard for private businesses to function properly but Penlac managed to stay the course and persevere.

In fact most private businesses have had to work extra hard because government did not really provide much support to the local manufacturing sector. Support or financial incentives were given on a case-by-case basis to foreign investors at the time, notably in the tourism and fisheries sector.

As I said earlier, not everything was a success. The Conserverie de L’Océan Indien or tuna canning factory struggled just over 20 years ago. It received a lot of export refinancing support via the National Budget just like Air Seychelles, Islands Development Company and several other parastatal bodies received huge subventions. This is one of the reasons why our government ended up running large budget deficits 20 years ago. Government through the Central Bank of Seychelles (CBS) had to borrow heavily on the local market and because of forex difficulties, there was a steady market for local government securities through treasury bills and bonds at the time. On top of that, because of limited forex resources, government gave priority to allocating forex for its own development programmes, therefore ‘crowding out’ the private sector.

Seychelles Nation: Can you tell us briefly what happened to the export of our indigenous crops?

Gafoor Yakub: Long before SMB was created and before it took over the entire export industry, a number of businesses in the private sector were exporting copra, cinnamon, vanilla, guano, etc. and it was competitive because the price of cropping was not too high.

But then with the set up of Seycom in 1982, later followed by SMB Trading, the prices of imported goods and basic essential goods gradually crept up unfortunately. SMB was in a monopoly situation. Instead of outsourcing cheaper alternative imports or allowing free and fair competition, government decided to mitigate these price increases by increasing wages in the public sector, thus setting the tone for the private sector to follow and for the price of cropping to increase. That eventually led to a drop in our country’s external competitiveness for its indigenous crops.

Seychelles Nation: What has happened to our agricultural sector in the last 20 years?
Gafoor Yakub:
In the last 20 years, agriculture has witnessed a progressive decline in investment. The agricultural sector hit rock-bottom in 2008-2009 when the lack of capital investment led to a decay in its infrastructure. No competitively-priced or concessionary loans were possible. Also the sharp depreciation of the rupee after end-2008 meant that all goods and services including agricultural ingredients became expensive. Those who managed in agriculture did it on their own investments.

Furthermore, the liberalisation of the meat and poultry import market by the government killed the local livestock sector because overnight it became uncompetitive. Because the crop sub-sector is linked to the livestock sub-sector, the crop sub-sector also got affected by manure supply.

At the moment, agriculture on its own represents less than 2% of our gross domestic product (GDP). But I think there is hope. In future, this sector can perhaps be revived through investment in infrastructure. But we also need to have a change of mind-set and find a whole new way of doing business in agriculture.

Seychelles Nation: What about tourism and fishing 20 years ago?
Gafoor Yakub:
On the tourism side, government was bold with its privatisation programme. A bit more than 20 years ago, the government had nationalised most of the larger hotels. In an attempt to help solve the forex crisis, government started offering incentives to lure in a few well-established foreign hotel chains to take part in the privatisation of its previously-nationalised hotels.

The decision to privatise the state-owned hotels in the tourism sector was aimed at maximising forex earnings by increasing tourist numbers through the vast market and networking connections of the new foreign hotel owners. As you know Fisherman’s Cove and Barbarons hotels were acquired by Le Méridien hotel group while Beau Vallon Bay Hotel and Praslin Beach Hotel for instance were bought over by the Berjaya hotel group. Those foreign investors of course enjoyed a range of incentives or tax concessions and they were allowed to retain their forex unlike local private businesses.

In 1994, the Investment Promotion Act was passed to attract new capital but the results were marginal. We still had shortages of forex. But in 2003, the Tourism (Incentives) Act gave much more concessions to the hotel industry like accelerated depreciation at 150% for capital expenditure, GST and trades tax exemptions, long tax holidays etc. That generated much investment in the hotels’ renovation.

On the fisheries side, the tuna cannery expanded after 1995 when 60% of its shares were sold to H J Heinz with government retaining a minority share. The cannery has since changed hands and been renamed Indian Ocean Tuna Ltd (IOT). The joint venture eventually worked out well for Seychelles in terms of employment creation and foreign exchange earnings. More foreign vessels were licensed to fish in our waters and production increased substantially by mid-1999. The fishing quay financed by Japan on Mahé also led to an increase in industrial fishing and fish processing.

But there is one thing we need to all appreciate when looking at published figures on the economy: Too often I hear people quoting gross figures, but they fail to look at the net effect or net gain. According to the International Monetary Fund (IMF) verified figures, in 2011 gross earnings from fishing (namely tuna) amounted to US $267 million. But we, as a country, have to pay the foreign purse-seiners for the tuna caught in our waters. Therefore the net retention of foreign exchange in our economy was only US $33 million from fishing in 2011 which is a meagre 12%.

In the case of tourism, the gross earnings in 2011 was an impressive US $340 million but the net retention was around 20% or US $68 million, only a bit better than fishing.

Personally, I think it would be desirable in the years ahead for us to brainstorm and work towards achieving a higher retention level and greater value added locally for tourism and fishing.

Seychelles Nation: What were the early signs of financing problems to come and how did the black market for foreign exchange come about?

Gafoor Yakub: More than 20 years ago, we had a United States tracking station at La Misère which was paying a rental income of around US $8 million per annum. This was equivalent to Seychelles’ annual fuel import bill at the time. That kept us going. But later on in 1990s when it announced it was closing, the loss of that rental income contributed partly to a ‘financing gap’, along with other prevailing conditions.

But what supported us as a country 20 years ago were countries like Cuba, Algeria, Libya, India and some Eastern bloc countries which offered us scholarships and balance of payments and budgetary support through grants and concessionary bilateral loans and the supply of military hardware. That helped offset our country’s expanding budgetary expenditures for a while. But it wasn’t enough.

Our Central Bank had no real independence – the Governor of the Bank was also the principal secretary of finance at the time. Between 1980s-1990s, the Central Bank of Seychelles (CBS) had to finance large budget deficits. Such deficits led to our increasing domestic debt.

Grant aid started to decline rapidly especially from the Western countries. In 1992 international pressure grew for Seychelles to introduce multi-party politics and such elections were held in 1993. The National Youth Service (NYS) system was also being reviewed. NYS was first reduced to one year and later scrapped after alternative schools had been built with the support of some African Development Bank (ADB) loan financing.

20 years ago our country was facing forex shortages and we were spending rupees we didn’t have and, as a result, creating domestic liquidity. Government was controlling the official exchange rate but as the supply of forex became scarce, a black market for US dollars started to develop with the dollar being sold at a higher rate which the local market could bear. The forex shortages became worse after the Indian Ocean Island Games of 1993 because the financing gap created by the hosting of the Games could not be bridged.

In 1993 it was our turn to host the Indian Ocean Island Games. It required serious capital investment in new sports infrastructure of nearly US $30 million, equivalent to R165 million at the official exchange rate. I remember very clearly I argued for it to be postponed just like the other Indian Ocean countries had done before us but a decision was taken at the highest political level to go ahead with it even if as a budget technician I felt we would not be able to sustain it.

Despite increases in tourist arrivals, our tourism receipts were limited because of leakages into the emerging parallel market in foreign exchange. Even with all the direct flights to/from Europe, we could not make up or catch up to cover the huge financing gap of R165 million to R200 million at the time.

So this, along with other factors, led to a forex pipeline scheme being established in 1994 which involved queuing for forex at the commercial banks. This meant that businesses were tying up their hard-earned rupees and capital resources for indefinite periods, thus affecting business development and cash flow. Businesses as well as government departments like the Ministry of Health, which needed critical medical supplies, got frustrated by the long queues for forex at the commercial banks. The CBS had to often come to the rescue to make available its limited forex reserves to the banks in order to pay for life-saving medicines on behalf of the government.

20 years ago, the Seychelles rupee was officially pegged to a basket of currencies whereby you had a system of rate fixing. In view of repeated budget deficits year after year, this resulted in a run on the country’s reserves and increased government borrowing. After 1992-1993, with multi-party politics and the Indian Ocean Island Games, expansionary fiscal policies weakened our country’s balance of payments further, i.e. our current account deficit exceeded the long-term capital inflows and the excess was funded by an accumulation of arrears and a drawing down of our external reserves.

From 1995 there were a number of privatisations as I said earlier which helped a bit, but the importation system and allocation of forex continued to be restrictive until the mid-2000s. Essential imports like milk, rice and sugar, fruit and vegetables, including juices were still under SMB’s control.

The economy grew at around 6% per annum on average in the 10 years from 1980s to 1990s but our growth was financed by borrowing; we were following a Keynesian approach to fiscal management and we basically spent our way to growth. This was equivalent to an indirect way of printing money. Today it is known by a fancy name: ‘quantitative easing’.

For the following 10 years, in the 1990s to 2000s, the economy grew at around 4.9% per annum on average. But by then tourism and Seypec (with its fuel re-export sales to foreign airlines) had become more established and that allowed government to undertake some ambitious capital infrastructure projects such as dredging – the East Coast land reclamation, new roads, power generation, water desalination, purchase of new petroleum tankers and low cost housing projects.

In any economic policy action, there are often ‘trade-offs’ that we have to make in our choices or prioritisations. The intention to undertake such bold capital investments was no doubt good but, given that most of these projects were not capable of generating revenues to the Consolidated Fund of the government, we should have better planned their financing at the time.

Also we have to be balanced and fair in our review of the economy. As a country, we were stable politically and socially. The strong ‘political will’ paved the way for us to undertake the significant investments in infrastructure and the maintenance of a generous social welfare system, which have boosted the overall social conditions and welfare of our Seychellois people compared to other similar micro-states.

But what was lacking was a more thorough planning of the financing of such large scale capital outlays. The irresponsible borrowing that followed is what led the country into an increasingly deepening hole.

Seychelles Nation: How did the government tackle the parallel market problem?

Gafoor Yakub: As I stated earlier, the government undertook some bold initiatives in privatising the tuna fish canning factory and the state-owned hotels in the tourism sector with the aim of maximising forex earnings.

In 1994, as part of its diversification programme, the government introduced the Seychelles International Business Authority (Siba) to regulate the offshore financial services sector. This was then declared to be the third pillar of the economy. International business companies and trusts were allowed to be registered under Siba. This attracted new investors and the new financial services grew rapidly although it involved mainly the registration of new companies offshore that did not do any business in Seychelles. I’m afraid this in itself did not resolve the domestic forex shortages but Siba did well and it was broadly self-sustaining, not requiring budget support.

In trying to tackle the deepening black market, foreign exchange control and price control were introduced in June 2001. But it was still an uphill battle for government.

In 2003, a reform programme known as Macroeconomic Reform Programme (MERP) was introduced. It introduced a broad-based sales tax or GST and a cut in exemptions presumably based on the Singapore model. That helped increase the national budget revenue and it helped reduce the overall budget deficit. GST was more straight-forward than the trades tax system.

But MERP wasn’t enough to bring back confidence. To me, the MERP was ‘half-baked’ or lop-sided because it focussed mostly on fiscal reforms. It was not a comprehensive reform package: It did not address the external sector (forex side), the monetary sector or the supply side or real sector. A more ‘holistic’ approach is what is needed when tackling the macroeconomy.

Government expenditure remained high. The government kept borrowing more rupees at an interest rate that was not market-driven. The lack of foreign exchange and continued over-regulation of the exchange rate resulted in the black market getting out of control. Our real sector activities like agriculture, manufacturing, trade and commerce suffered as forex became scarcer and scarcer. Foreign loan funding at concessionary rates started to dry up.
Seychelles Nation: So, what occurred after the foreign loan funding started to dwindle? How did the IMF-backed reform programme come about?

Gafoor Yakub: When government could no longer secure bilateral or multilateral funding from abroad, it ventured into commercial funding on the international money market. A first syndicated loan of US $30 million was granted by Citibank in September 1998; it involved high fees and charges and was short-term. At the time government embarked on a bold reclamation project known as East Coast Land Reclamation Project Phase III costing US $75 million to pay for the dredger, rock armouring and for fuel consumption – this was supported by a bond which was for two years only. Because it was too short and had to be refinanced via a second bond issued via ABN-Ambro to repay the first, followed by a third one a few years later in 2007 through Bank of Tokyo-Mitsubishi. Each refinancing was bigger than the previous one.

By 2001, net credit to government accounted for nearly 85% of domestic credit from the commercial banks. This led to a rapid increase in the money supply (12% per annum in 2001) and a rise in consumer price inflation to 6%. Government secured its funding from the banking sector via the local asset ratio (LAR) requirement which in layman’s terms is simply a monetary policy tool for forcing the banks to invest a set part of their assets in local government securities like treasury bills and bonds. In 2003, the bank surrender requirement was 65% of their LAR. Now in 2013, it has improved a lot. I think the LAR is down to about 13% after the introduction of a comprehensive IMF-backed reform package.

Total public external debt due had reached US $320 million by 2001. In that some US $54 million of the debt were in arrears. On top of that, the banks were having substantial private sector arrears to deal with, those with money stuck in the forex pipeline. Some private firms, especially tour operators and hotels who could afford it started to finance their imports or purchases from accounts held abroad and Seychellois consumers increasingly travelled with their US $400 or 300 Euros forex allocation (ration) and with the rest somehow obtained from the black market which led to a tightening of security searches at the airport for outbound Seychellois passengers.

The situation was clearly unsustainable. Government recognised the severe adverse effect of restricting forex via exchange controls and rationing. It tried to secure support from IMF-World Bank and also from the ADB. A memorandum of understanding was drafted and about to be signed but government was concerned about the inflationary impact of devaluation and backed out. By 2005, there was some relaxation of forex and tourism earnings picked up a bit but still not enough to make a huge turnaround.

If I am not mistaken, the last huge bond underwritten by the CBS was undertaken with the Lehman Brothers in 2006 for US $200 million, payable in a single-bullet payment in 2011, some 5 years later.
 A further US $30 million in government bonds were followed in August 2007, followed by a separate issue for 55 million euros. To make matters worse for us at the time, oil prices tripled.
Seychelles faced a very tough situation. But as you know Lehman Brothers went belly up by October 2008, leading to a series of external shocks and financial mishaps that triggered a worldwide recession. 

Around mid-2008, government had exhausted all its avenues. There was little or no choice but to start fresh negotiations with the IMF and World Bank and a bold economic restructuring home-grown programme was conceived and agreed upon by November 1, 2008. By end-2008, our total external debt amounted to nearly US $800 million, of which 42% or nearly US $336 million was in arrears.

With the support of the IMF-World Bank, the forex crisis was tackled, debts were rescheduled and limits to borrowing were set as targets. The debt rescheduling was a major help and would not have been possible without the strong backing of the sister organisations – IMF and World Bank – whereby some US $310 million or 40 to 45% of the total debt was written-off.

The reform programme brought very good results. At the planning stage, we have principally Vice-President Danny Faure who was then Minister for Finance, his principal secretary Ahmed Afif and the support of President James Michel, to thank for that. At the implementation stage, we had the newly appointed CBS governor at the time, Pierre Laporte, to thank and his CBS team along with finance principal secretary and his technicians at the Ministry of Finance who were all part of the implementation effort.

In short, it has been a home-grown reform programme that is ‘owned’ by the authorities and that is why it has been successful so far. From a crippling debt situation, the country has managed to attain a good degree of economic stability.

But we must remember that the IMF or World Bank does not have all the solutions. They can offer you advice on best practices based on tried and tested macroeconomic solutions. But we must chart our own course.

We need to also realise that each one of us, irrespective of our position, is but ‘a cog in a vast machine’. We each need to do our part, both in the private and public sectors. And we need to put our national interest first if we are serious about having real and lasting success.

Seychelles Nation: Seychelles has now come a long way from following expansionary fiscal policies to a comprehensive home-grown reform programme supported by the IMF and World Bank. What are the main lessons learned from the Seychelles experience?

Gafoor Yakub: Firstly, the reforms were successful and the quantitative performance criteria were met because the programme was based on an accurate and realistic assessment of the country’s economic situation. This made it possible to pursue appropriate and viable solutions.

Secondly, there was clear ownership of the programme and what made it more acceptable is that a number of the solutions were home-grown. I also feel that without political backing from the top and competent technicians within the government to help support, defend and implement the package, the reform programme would have failed. A strong commitment to implementation can often be possible by the politicians supporting and standing by their key technical personnel. And of course you need an effective teamwork to implement the reform measures.

I think it is also important to always try to bring onboard the key stakeholders in the private sector through simple dialogue and by adopting a participatory approach to planning the implementation of policies and the monitoring of the reform package.

One key lesson from the Seychelles experience is to avoid expensive refinancing schemes against a deteriorating macroeconomic backdrop. It is important to look closely at the economic fundamentals.
 It is also a valuable lesson to those creditors or greedy bankers to avoid rushing into granting expensive financing just because it is guaranteed or underwritten by the Central Bank. In the case of Lehman Brothers, their financing secured in 2006, 2 years before the end-2008 reforms, caused them to lose 50% of their investment because Seychelles could not repay more than that amount.
Seychelles Nation: As someone who has had experience in both the public sector and the private sector, what are your broad wishes for the future?

Gafoor Yakub: In a nutshell, my wishes for the future are as follows:

1. Remove petty politics from economic management. Of course you need political support to implement your broad economic policies but I am not referring to that. Let us put our national interest first and refrain from politicising every single thing we do or say in this precious little country of ours.

2.  Maintain a balanced and objective view of things at all times. Stay away from negativity.

3. I’d like to see both the private sector and public sector consulting more with each other and working together constructively to formulate policies that can benefit the country as a whole and not be guided by their own self-interests.