PARADISE LOST: HOW CORRUPTION BANKRUPTED SEYCHELLES

C O N F I D E N T I A L SECTION 01 OF 05 PORT LOUIS 000381

SIPDIS

AF/E FOR MARIA BEYZEROV
JOHANNESBURG AND CAPE TOWN FOR FCS

E.O. 12958: DECL: 11/06/2018
TAGS: PGOV PREL ECON ETRD EINV SE
SUBJECT: PARADISE LOST: HOW CORRUPTION BANKRUPTED SEYCHELLES

REF: A. A) PORT LOUIS 267

B. B) PORT LOUIS 316

C. C) PORT LOUIS 365

Classified By: Ambassador Cesar B. Cabrera for reasons 1.4 b and d.


1. SUMMARY: (SBU) An overall lack of transparency and
corruption throughout the ranks are behind the Seychelles'
recent international appeal for help after a chronic lack of
foreign exchange, loan defaults, drastic inflation, and an
excessive debt burden of 175 percent of GDP effectively left
the country bankrupt. After defaulting twice on government
debt payments, Seychelles will be forced to accept economic
reforms they have so long rejected and possibly confront and
correct a seemingly corrupt, government controlled, opaque
economic system. END SUMMARY.

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CURRENT SITUATION
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2. (U) According to studies conducted by various
International Monetary Institutions (IMI) as well as the
Seychelles Chamber of Commerce and Industry (SCCI),
Seychelles has been flirting with bankruptcy for years due to
poor economic policies, severe foreign exchange shortages,
and excessive state control of the economy. Despite having a
per capita GDP of 10,000 USD and being classified as an
"upper-middle income" country by the World Bank, the
Seychelles recently was forced to the breaking point due to
rising inflation and perennial shortages of foreign exchange.


3. (U) In July 2008, lack of foreign exchange led to
Seychelles defaulting on a principal and interest repayment
of a 85 million USD private placement note causing
international credit rating agency Standard and Poors (S&P)
to downgrade the country's foreign currency sovereign credit
rating to Selective Default (SD) from the already low rating
of CCC/C. The July default prompted S&P to lower the credit
rating on Seychelles 230 million USD global bond, which
matures in 2011, to CCC- from CCC, in anticipation of the
government also defaulting on this loan, which indeed did
happen in early October 2008.


4. (U) According to an October 29 Reuters Africa report, the
government is asking 12 percent of its civil service, the
largest employer in the nation, to "voluntarily" resign in
order to cut costs on the national economy, which has a debt
burden that, according to government statistics, equals about
175 percent of GDP. On November 3, international press
reported that after exchange controls on the Rupee were
lifted in accordance with the new IMF program, the Rupee
depreciated 78 percent to the U.S. Dollar moving the exchange
rate from USD 1 = SRs 8 to USD 1 = SRs 14.29. This coupled
with the global credit crisis is sure to peak already high
inflation rates in Seychelles.


5. (C) The credit downgrades and continued defaults coupled
with an all time high year-on-year inflation rate of 31.6
percent driven by rising food and oil prices suggest that
Seychelles will have a difficult time securing foreign loans
to continue to finance their debt. The Paris Club lenders
stance to reject a request to reschedule Seychelles' debt
until they worked with the IMF on a comprehensive program
made Seychelles' desperation more apparent.

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REASONS GIVEN FOR THE CURRENT CRISIS
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6. (C) A quick glance at international headlines on the
Seychelles economy will suggest that this small,
net-importing island nation is a victim of the global
financial crisis, or rising commodity prices. The Seychelles
Government (GOS) offers vague official statements that cite
"irregularities" or "errors" as a reason for recent defaults
on debt payments. Even though it is clear that the current
global economic situation has exacerbated the problem,
history, local contacts, and recent occurrences suggest
instead that Seychelles faces this situation due to internal
culprits -- especially the lack of transparency, government

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cronyism, and corruption.


7. (C) International bodies, including USG advisors, have
warned Seychelles for many years that their economy was in
need of drastic reform. For example, in 2005, a visiting
World Bank team urged them to prepare an 'Economic
Restructuring and Debt Workout' plan and provided them with a
proposed timetable for its implementation. Key first steps
in this plan included devaluing the currency, privatizing
state-owned enterprises, and meeting with donors to address
debt in arrears. Even before the World Bank suggestions,
Paris Club lenders urged Seychelles to adopt an IMF program
and devalue their currency. Seychelles remained defiant to
these suggestions. In 2006, the Permanent Secretary at the
Ministry of Finance (MOF) explicitly told a USG-funded debt
management advisor that GOS would not consider currency
devaluation in the immediate future. Furthermore, despite
the exasperating effects that overvaluing the rupee had on
foreign exchange and GOS' ability to pay off foreign debt,
the Central Bank of Seychelles (CBS) and MOF Debt Management
Team encouraged the USG advisor to focus on domestic debt
only, even though at the time GOS had just taken out a 200
million dollar global loan (approximately 1/3 of GDP) with a
2011 maturity date.


8. (C) Although government officials cited concerns for
short-term social unrest as the reason they avoided
implementing economic reform, opposition leaders, private
sector representatives, and others -- in private meetings
with EMBOFFS -- all pointed to fraud and corruption as the
real reason. Continued pressure from the IMF and
multilateral lenders to undertake reform measures caused GOS
to finally accept the need to introduce modest reform in late
2006 to allow the rupee to fall from USD 1= SRs 5.50 to USD 1
= SRs 8, announce moderate privatization of the Seychelles
Savings Bank and several units of the former Seychelles
Marketing Board (renamed the Seychelles Trading Company
(STC)),and use budget surpluses to pay down domestic debt.


9. (C) GOS acceptance to undertake these reforms seems
positive until one considers that shortly after initiating
reforms, GOS halted the depreciation of the rupee leaving it
overvalued, as witnessed by its persistent trading on the
black market. The STC does not have any buffer stock of
commodities, so price inflation was immediate at the onset of
economic reform, which wreaked havoc on foreign exchange
reserves, so the GOS remained hesitant to restart
depreciation measures (Note: On November 3, GOS lifted
exchange controls due to a mandate by the new IMF program.
End Note.) In addition, even the moderate privatization
announced concerning the Savings Bank and STC has yet to take
place, and according to Post contacts in the private sector,
there is still reason to suspect that budget surpluses will
continue to be spent on government projects instead of
financing domestic debt.


10. (C) In a September 2008 conversation, local businessmen
and SCCI members told ECONOFF that they have little faith in
the government paying down its domestic debt (currently 2/3
of GDP) with budget surpluses because throughout the years,
the government has consistently put any reported surplus into
heavily lauded but ineffective government projects. One
businessman noted the 25 million USD desalination project,
championed by the head of the ruling Seychelles People's
Progressive Front (SPPF) and, by most accounts, real ruler of
Seychelles, Albert Rene as the project that would make water
shortages something of the past. To date, Seychelles has
water shortages and the plant still does not work. In
another example, local businessman Marc Hoareau, mentioned
the prawn farm in Coetivy Island as another lionized
initiative that has not lived up to its billing, left the
country indebted some 75 million USD, and could not be sold
to any private management company because it was deemed
non-competitive on the world market.

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SHADY LINKS BETWEEN BUSINESS AND GOVERNMENT
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11. (C) According to the Indian Ocean Newsletter, a weekly
periodical sponsored by Indigo Publications, the government

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could not find a buyer for the prawn project on Coetivy
Island, so it decided to cut its losses and sell the island
for 117 million USD to Indian businessman and recently
president-appointed Ambassador-At-Large, Chinnakannan
Sivasankaran, or as the locals call him, Siva. Reportedly,
Siva will use the island to create a tourist complex of ten
250 room hotels. Although this seems like it could be a
regular business deal, many local contacts tell EMBOFFS that
business deals like these, that hint at corruption and are
motivated by political gains with little regard to the local
economy, are destroying Seychelles' economic future.


12. (C) SCCI Chairman Albert Payet recently told POLOFF that
in 2004, when the SCCI met with MOF, the SCCI recommended
amending the Tourism Incentive Act (TIA) so that once tourism
was operating at almost full capacity, investors and hotels
would receive fewer concessions, but to their chagrin, the
new TIA released earlier this year granted even more
concessions. Official MOF documents dated November 26, 2007,
show concessions given to the Ephelia Resort which exempts
the resort from 75 percent of the regular taxes imposed on an
investor. Moreover, SCCI members reported with
disappointment that many tourist resorts (specifically citing
North Island, Le Marriott, The Banyan Tree, and the
Silhouette) that do their business primarily in foreign
currencies effectively bring little foreign exchange (FOREX)
through Seychelles banks because of retention rates that
allow some to retain up to 100 percent in foreign coffers.


13. (C) In an October 30 meeting, Ralph Vocere, editor of a
local paper and member of an opposition party, illustrated
the situation further with an anecdote about the Barbaron
Hotel, the hotel with reportedly the most revenue earned in
FY 2008. According to Vocere, the foreign owners of Barbaron
Hotel also have a commanding stake in Aitel Phone Services,
which is a big local phone service provider that does 95
percent of its business in rupees. The owners could not
repatriate the funds from Aitel given the current status of
the rupee, so GOS reportedly made a deal with the owners that
they could invest in a local hotel to earn foreign exchange
and would be able to keep 100 percent of their earnings. This
is allegedly how the owners bought the Barbaron Hotel and now
are able to retain 100 percent of the FOREX. Contrastingly,
according to post contacts, local Seychellois hoteliers are
allowed to keep only 15 percent of the foreign exchange they
earn.


14. (C) Vocere reports that corruption, coupled with the
selling off of lands to what he calls the "business mafia,"
is what is holding back the Seychelles economy. He believes
that until this problem is tackled, the IMF and World Bank
can keep attempting to help the Seychelles, but it will be to
no avail. Vocere added that the "mafia" consists of key
Seychellois figures such as SPPF chief Albert Rene and other
SPPF cronies, Indian businessman Siva, local businessmen the
Savy brothers, and "Arab investors." "Mafia" member or not,
no one can deny that Siva has profited from his time in
Seychelles. He now owns many business, three islands in the
Seychelles archipelago, and was nominated Ambassador-at-Large
by President Michel after only being in Seychelles for about
a year. This nomination was supposedly a reward for
bankrolling Seychelles debt and providing money to government
officials. Soon after awarding him the position, the
Government of Seychelles requested a U.S. diplomatic visa for
Ambassador-at-Large Siva. When Post requested information as
to the plans and nature of the diplomatic trips planned by
Siva, the GOS withdrew the application.


15. (C) According to Vocere, the current IMF team has
uncovered 3 billion USD in overseas Seychellois bank
accounts. The day after Vocere made this information public
during a delivered speech in downtown Victoria on November 4,
he was arrested on charges of "unlawful assembly" and remains
detained. This is not the first time Vocere has been
detained for criticizing the government. In October 2008,
Vocere's printing press was shut down by the Seychelles
government and he traveled to Mauritius to print his
opposition paper. According to the GOM, the Mauritians
detained Vocere at the airport because of a tip from the
Seychelles authorities that he was smuggling heroine into
Mauritius. No heroin was found and the GOM released him

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without any charge.


16. (C) When asked about possible corruption on a local
television program on September 4, Guy Adams, the head of
Seychelles Petroleum Company -- one of the largest and most
profitable companies in the nation -- said that his company
had not been properly audited in 20 years. This would have
made it easy, he declared, to siphon off millions of dollars
if had wanted to do so.

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CHANG-LENG: CHARACTER OF CORRUPTION
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17. (SBU) While corruption allegations surround many SPPF
partisans and associates, no figure has received as much
negative attention for the current crisis as former Central
Bank Governor, Francis Chang-Leng. Admittedly, there were
many reports in local press accusing Chang-Leng of corruption
before the recent loan defaults, but even if there were truth
to the claims none was substantiated beyond normal Seychelles
gossip. Among the many allegations against Chang-Leng, one
promulgated by many sources is that he spent 8 million SRs of
Seychellois taxpayer rupees to treat a select group of female
employees that he calls his "Strategic Team" to overseas
trips with him.


18. (C) While in recent meetings with ECONOFF, Chang-Leng
dismissed the Seychelles load default as an "irregularity,"
local press reported that Chang-Leng unilaterally issued the
government debt that caused the default and that it was
months before the Ministry of Finance or President knew about
it. Press reports also suggested that the Lehman Brothers'
representative who bought the risky debt had close ties with
Chang-Leng and alleged that some money issued had been
pocketed by Chang-Leng. In an October 30 meeting, Ralph
Vocere said that he has been accumulating corruption evidence
against Chang-Leng, but was waiting for the right time to
release it. Vocere believes Chang-Leng's recent streak of
independence and his recent vacating of his CBS post leaves
him vulnerable for the attack, which will force President
Michel's hand to investigate the claims. Even with hard
facts of corruption, the general take from many Post contacts
is that a conviction of Chang-Leng will be difficult due to
"a weak judiciary."

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JUDICIARY
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19. (C) Another suspicious situation is the liquidation and
subsequent sell-off of The Plantation Club, formerly the
second largest hotel in Seychelles. On August 5, Judge
Andrew Ranjan Perera ordered the liquidation and helped the
GOS -- who only held an eight percent share -- shutdown the
hotel. The next day, Perera was made Chief Justice. Local
media reported that Perera was appointed Chief Justice as a
reward for his judgment in SPPF's favor. This raised
concerns of the local private sector community and the
opposition press. The perception and allegations of
government corruption grew when the hotel was eventually sold
off to the lowest bidder out of three, European Hotels and
Resorts Limited, a newly formed group of hotel investors with
ties to the SPPF establishment and a Saudi businessman,
Sheikh Abdul Mohsin bin Abdulmalik Al-Shaikh, who has,
according to the previous owner, threatened to force the
former owner, a U.S. Citizen, out of business since 2006.
European Hotels and Resorts Limited's directors, lawyers, and
bankers have direct links to the Saudi businessman.


20. (C) According to many sources, including the former
Plantation Club owner and SCCI members, the Plantation Club
ruling is only one of many corrupt rulings by the weak
Seychelles judiciary. The constitution states that the
judiciary is independent; Embassy contacts, such as
Seychellois lawyer Frank Elizabeth, say that this is not the
case. For example, most court judges are either naturalized
citizens or citizens of other Commonwealth countries, such as
Tanzania, Uganda, and Sri Lanka. There is only one Supreme
Court judge, one appeals court judge, and two magistrate
court judges who are citizens by birth. Initially,

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recruiting foreign judges and magistrates made up for the
lack of professionals in the years following independence,
but today Post contacts report that the foreigners are put in
these positions because they are more malleable.
Allegations abound that the government also uses a patronage
system to yield influence over the judiciary. For example,
Former Chief Justice Vivekanand Alleaar, a Mauritian citizen
who resigned in January 2008 after numerous allegations of
corruption, is rumored to have received prime real estate for
a development project from the SPPF and funding for his son's
education in England for his loyalty to the party.

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Comment
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21. (C) For all of the speculation and shadowy figures in
Seychelles, it is hard to get any concrete evidence to point
at any one person. The plethora of circumstantial evidence,
however, does support that there is significant corruption in
the system. Post believes that corruption is the critical
reason why a country as wealthy as Seychelles (900 million
USD GDP) has suffered so many persistent economic problems.
The current IMF economic reforms coupled with the global
financial crisis are sure to have drastic social implications
in the Seychelles. Although sharp inflation, and job loss
may cause social unrest, it could also lead to Seychellois
finally confronting the corruption behind the system that put
them in this mess.
CABRERA