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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. 
 
----------------- 
CURRENT SITUATION 
----------------- 
 
¶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. 
 
----------------------------------- 
REASONS GIVEN FOR THE CURRENT CRISIS 
----------------------------------- 
 
¶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 
 
PORT LOUIS 00000381  002 OF 005 
 
 
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. 
 
------------------------------------------- 
SHADY LINKS BETWEEN BUSINESS AND GOVERNMENT 
------------------------------------------- 
 
¶11. (C) According to the Indian Ocean Newsletter, a weekly 
periodical sponsored by Indigo Publications, the government 
 
PORT LOUIS 00000381  003 OF 005 
 
 
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 
 
PORT LOUIS 00000381  004 OF 005 
 
 
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. 
 
----------------------------------- 
CHANG-LENG: CHARACTER OF CORRUPTION 
----------------------------------- 
 
¶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." 
 
--------- 
JUDICIARY 
--------- 
 
¶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, 
 
PORT LOUIS 00000381  005 OF 005 
 
 
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. 
 
------- 
Comment 
------- 
 
¶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