The Economic & Geopolitical History of Seychelles
The Relatively Successful Island economy of 100K people
Seychelles (“Say”-”Shells”) is an African nation composed of 115 mainly-uninhabited islands in the Indian Ocean. The country is shrinking from rising sea levels due to climate change, and the nation is mainly Christian. The country has the highest average income per capita of any African country, roughly $12K annually, with a population that is slightly over 100K.
Seychelles’ economy is almost as big as Guinea-Bissau which has 20x Seychelles’ population. If you adjusted for purchasing power parity, the average Seychellois (“Say-shuh-loo-ee”) $12K annual income feels more like $28K a year. It is the least corrupt nation in Africa, ranking 23 in the world for transparency, slightly beating the United States, Taiwan, and South Korea. Also, 94% of Seychellois have a bank account, which is remarkable compared to most of Africa.
The country is virtually devoid of significant quantities of natural resources. At best, Seychelles might have 500M barrels of oil, which would put it at 51st place for oil as of 2024. But it’s largely untapped and Seychelles mainly imports crude and refines it. Seychelles makes most of its foreign exchange though offshore boat & yacht registry, tourism, and fishing. The country is a preferred high-end spot destination spot for European tourists, with celebrities like Prince William and Kate Middleton having their honeymoon in Seychelles.
Also, Seychelles ranks among the among the top 10 countries for offshore yacht & boat registry. Yachts from Gibraltar, Cayman Islands, Belize, and Bermuda prefer to register their yachts in Seychelles to lower their taxes. Seychelles offers maximum confidentiality, allows 100% foreign ownership, and there are tax exemptions for all earnings and profits for the vessel. This is called “Flag of convenience”. All that Seychelles asks for in return is a registration and recurring fee. The easy yacht registration in Seychelles has made this country excellent for “Yacht Tourism”.
Furthermore, Seychelles allows billionaires to buy Seychelles’ islands. Liliane Bettencourt, heiress to L’Oreal used to own a Seychelles island for $60M. By being a playground for billionaires via tourism, island purchases, & yacht registry, billionaires can feel good knowing their lavish spending is funding Seychelles’ social programs. Seychelles has the 2nd highest human development index (HDI) in Africa (a composite score of income, education, and health). Its HDI is 78.5%, beating non-Africa countries like Cuba, China or Moldova.
As a result of being dependent on tourism (vacation & yacht tourism) & airlines for 55% of export revenue & 20% employment, when COVID halted global travel, Seychelles’ economy was horrifically damaged. It is still in recovery mode today.
What’s remarkable is that Seychelles, for a country of 100K has a better and higher offshore yacht registration & yacht tourism than the rest of the African continent combined of 1.4B people. In other words, 82% of the African yacht registration revenue comes from .007% of the African population. Yacht registry is really an exercise in branding and low taxes, making Seychelles an excellent African country for businesses to register their yachts.
Seychelles is an example of a country where its socialist foundations of government ownership of enterprise, rose people’s income swiftly. However, since the turn of the millennia, Seychelles has been trying to become more capitalist. Currently, with 32 state-owned or partially state-owned enterprises (i.e. utilities, seaports, refined petrol, import/export trade, retail, airlines, housing and tourism) the government agencies and state owned enterprises employ 66% of the economy. Seychelles aims to privatize non-productive industries while embracing capitalism, evidenced by the establishment of its first stock exchange in 2012. It’s also starting to welcome more foreign investment, with Mauritius (its neighbor), Cyprus and Russia as the top three countries with the most investors deploying capital in their country. Below you will see Seychelles’ gross income per capita:
If you are a libertarian/neoliberal in my audience, you probably asking “how did a developing country develop through socialism?? You have given us plenty of examples of socialism failing in Africa - the family theft of the state owned oil firm in Angola, Toure of Guinea’s government beating up women for selling goods at black market prices, and the famine caused by the failures of collectivized farming by the Derg in Ethiopia and Machel in Mozambique.”
My response is that’s true that socialism (in this case, government ownership of businesses & government dictation of all prices) has a paltry track record in Africa, but I think two things actually matter for socialism to work. Firstly is that socialism is easier to scale with 60K to 100K people, and secondly what matters is how much foreign currency the government is making per capita in order to fund those programs for its people. Seychelles, increased its foreign currency revenue from making $150 per person in 1976 (similar to Nigeria) to $2000 to 1990 to $15,000 (surpassing Saudi Arabia) by 2014. Seychelles makes more in exports per capita than its average annual income of each person. Libya was another relative socialist success story, until the civil war & NATO’s “no fly zone”. For Seychelles, its massive foreign exchange earner was tourism and for Libya that was oil & gas, and their extremely low populations in proportion to the level of money they gained through tourism or oil & gas helped them develop.
Because Seychelles rakes in more from tourism & yacht fees than Saudi Arabia rakes in from oil, this high level of exports per capita has maintained Seychelles’ ability to fund its vast social programs and subsidies for government owned enterprise. For Nigeria, due to population growth and challenges to increase oil output due to oil smuggling and corruption has not been able to capitalize on its oil resources. Nigeria, whose main export is oil, can’t even export $1000 of goods & services per person.
Inequality
Also, for a country that used to be explicitly socialist, it is remarkably more unequal than America.
“You take 50 wealthy people out of Seychelles, you can become poor overnight,” — Former Seychelles Finance Minister, Naadir Hassan
According to the World Inequality database (WID), the top 10% make 52% of the income in Seychelles. (In America, top 10% make 48.3%, in France 10% make 34.8%).
French Colonialism:
Seychelles was uninhabited by humans until the Europeans brought settlements there. (Note, Europeans first settled there; however, the Malagasy, Southeast Asians, Persians & Arabs have known of the island for centuries).
France claimed Seychelles in 1756 establishing a plantation colony for crops such as cotton, sugar, rice, spices, pepper, and corn. Named after French politician Viscount Jean Moreau de Séchelles, the island was cultivated by a diverse population, including black and Malagasy slaves, along with Indian and Chinese indentured servants. Over time, Seychelles evolved into a fusion of Chinese, Indian, African, and European cultures and people. In 1794, Britain conquered the island.
British Colonialism:
During the end of the Napoleonic Wars, Britain took over the island, solidified in the Treaties of Paris in 1814. In 1835, Britain ended slavery but then started “forced labor” and switched crops to coconut, vanilla, and cinnamon. Britain would capture Arab dhows (“Dow” -Arab sailing vessels) of African slaves and then brought liberated slaves to work for food rations and meager pay. The economy relied on these crops until the 1970s.
In the 1970s, Chief Minister James Mancham focused on investments, establishing an international airport for Europeans and White South Africans to travel to. Tourism almost instantly became an big industry. This led to a sustained push for real estate construction there - Coral Strand Smart Choice, Vista Do Mar, and Bougainville Hotel.
In his 5 years, the Chief Minister was able to make an airlines, construction, and tourism industry. By this point he felt that Seychelles had everything it needed to survive through services-led growth instead of being a chronically bankrupt economy dependent on selling agricultural exports and needing an IMF loan the moment agricultural prices fall like some other African countries. By late 1974, Mancham requested independence of British Seychelles.
Independence:
In 1976, Seychelles gained independence from the UK, and in the first election, James Mancham of the Democratic Party, a liberal Western party, triumphed over France Albert Rene of the Marxist-Leninist, Soviet leaning, People’s United Party.
James Mancham(1976-1977)
Mancham increased tourism. But people became upset with him since he had a reputation of being an out-of-touch playboy and “Western puppet”.
He was deposed in a coup by France-Albert Rene who had the support of revolutionaries in Tanzania and the Soviet Union.
France Albert Rene (1977-2004)
Rene had to eras. The “Marxist-Leninist Rene” and “Democratic Rene”
Marxist-Leninist Rene
Rene transformed Seychelles into a socialist state, receiving support from Tanzania, Algeria, Libya, and East Germany. In 1979, he ended Western-style multiparty democracy and made the nation a one-party socialist state in 1979.
Unlike, many African failures of socialism which I have discussed in Guinea, Mozambique, and Angola, Rene was pretty successful.
Rene prioritized tourism, employing 30% of the labor force, shifting people from farming to tourism for better pay. Tourism revenue enabled funding for universal education, healthcare, environmental reforms, reduced child mortality, increase literacy rate to 90%, and increased wages.
He officially neutral in the Cold War, but in reality, he preferred communist states. Mao of China provided housing and poly-technical schools. In addition, the Kim II Sung in North Korea helped Seychelles boost its military, and Fidel Castro of Cuba provided scholarships to Seychelles people. The future 4th President, Danny Faure studied at University of Havana. Lastly Rene supported the Soviet invasion of Afghanistan, and the Soviets provided navy and military troops to support Seychelles after Apartheid South Africa tried to kill him. Apartheid South Africa paid British mercenary, “Mad Mike” Hoare to murder Rene. The American CIA also tried killing him.
Because Apartheid South Africa and United States kept trying to kill him, Rene became paranoid and started torturing, disappearing, killing, and detaining people without trial who could have thought of been collaborators with Apartheid South Africa or United States.
“Democratic Rene”
By 1990s, due to the death of the Soviet Union and the Warsaw pact, the Soviet bloc was dead. Apartheid in South Africa ended in 1994. Also, the World Bank changed its policy — it started to condition foreign aid grants on democratic reforms. As a result, the government decided to end the one party state, and allow multiparty democracy.
Once the cold war ended, Russia had issues with shock therapy and America stopped monitoring the country. This left this place open for China to strengthen its partnership. China built more hospitals, schools, low-cost houses, and the National Assembly building.
Land reform: In 1993, the Seychelles’ ministry of agriculture and marine resources sold its five state owned farms as private plots leased to families.
Yacht Registry: Under the 1992 Merchant Shipping act, Yachts and Boat Vessels can be registered under the Seychelles flag for a small fee ($2500 per vessel as of 2024). This started to help make boat vessel registration an important source of foreign exchange for Seychelles.
Industrial Fishing: He signed laws to encourage private fishing companies, which helped Seychelles make more foreign exchange selling clams, prawn, and oysters.
Real Estate: He encouraged massive real estate construction of hotels, villas, and spas.
By 2000, Seychelles export revenues from tourism, fishing, and boat registry started to exceed Saudi Arabia’s export revenues from oil.
James Michel (2004-2016)
Michel was Rene’s VP, and he took over after Rene stepped down in 2004. In his first few months, a tsunami devastated the country and tourism didn’t rise.
As a result, Michel executed significant policy reforms:
Economic Diversification: Michel looked at which sectors he could increase growth in and he acted with 2005 Agriculture & Fisheries Incentives Act. This act boosted the fishing industry, which is now one of Seychelles’ main exports.
Investor Friendly Policies: Michel opened up property ownership for foreigners & investors 2007. No income tax, no capital gains tax, and no inheritance tax. Foreign developers came flushing in, building more hotels, spas, villas, and etc.
International Borrowing: In 2006, Seychelles received its first international credit rating (“B”) and it was the first Sub-Saharan African country that wasn’t South Africa, that issued eurobonds to international investors. It was a $200M five year bond with a 9.125% interest rate, and he wanted to use that money for education, infrastructure, and tourism.
However, by 2008, the global financial crisis smashed Seychelles’ tourism industry. Most tourists came from Europe, which was suffering from the Eurozone Crisis. Without tourism, Seychelles couldn’t fund its social programs and was cash strapped to import oil. Seychelles defaulted on its eurobond and bank loan payment in 2008. After the default, Seychelles had to restructure the debt with bondholders. Bondholders had to take a “71% haircut”.
Finance - Terminology Translation - “Haircut”
Taking a haircut on a defaulted bond means accepting a reduction in the bond's face value. In a debt restructuring following a default, bondholders may negotiate and agree to a lower amount. For instance, if a bond originally valued at $1,000 undergoes a 71% haircut, bondholders would receive only $290 instead of the full $1,000 upon restructuring. This approach aims to share losses among investors, facilitate debt repayment, and provide some recovery for bondholders.
After bondholders agreed to take a painful loss, Michel sought a ~50% debt reduction ($163M forgiven) from the Paris Club, a group of 22 Bilateral lenders including America, Canada, UK, South Korea, France, Israel, Switzerland, Brazil, Russia and etc. After getting debt reduction, Seychelles took its first IMF loan in 2009, for $25M. The IMF stipulates neoliberal reforms to obtain the loan so the loan can be paid back. Seychelles had to cut government spending, privatize state owned firms, and add a value-added tax.
-For example, Indian firm Bharti Airtel bought Telecom Seychelles for $62M.
- In addition, the state-owned firm, Air Seychelles cut its long-haul fleet to only one Boeing 767. It wanted to increase profitability by stopping its unprofitable long haul European flights and focusing on regional routes from Mauritius and South Africa. The government reduced its unsustainable subsidies as well and launched a massive job cut firing 116 workers (20% of staff). Then cut another round of staff cuts bringing the staff count to under 500 by 2012.
- Lastly, the year after Seychelles announced downsizing & job cuts, UAE’s Etihad Airways bought a 40% in Air Seychelles and also loaned $25M so the airline can fund new services and boost growth. Etihad had a five year management contract with Air Seychelles. By 2013, Air Seychelles became profitable.
By this point, Michel realized that he can’t depend on tourism like they did the past thirty years and started to seriously think about being an offshore financial center like other island states were. He passed laws like (the International Business Companies Act, the Securities Act, the Mutual Funds and Hedge Fund Act) to try to become an African Cayman Islands.
In 2010, Seychelles returned to the eurobond market borrowing $169M for a 16 year term which was exchanged with the holders of the previous bond. Since Seychelles had its credit rating crushed from the previous default, the bonds were guaranteed with payments from the African Development Bank.
As Michel was busy with restructuring a debt default and trying to make Seychelles a tax haven, he had to deal with pirates.
Somali Piracy
Starting in 2009, Seychelles had massive issues with Somali pirates stealing their yachts. The problem was so big that insurance costs in Seychelles rose 50%, it also decreased port fees and fishing exports from Seychelles. Seychelles called on China, America, India, the EU, and UK to help them crush Somali pirates. India provided Seychelles a $10M radar system to combat Somali piracy. Seychelles also made its own ministry to deal with the pirates. Pirate attacks dropped rapidly by 2012, but still occur infrequently.
More Foreign Capital
In 2011, United Arab Emirates’ Abu Dhabi Fund gave Seychelles a $37M grant to make houses and wind farms. Also, Seychelles received a $12M loan from the African Development bank to fund the construction and maintenance of submarine telecommunications cables with Tanzania. Lastly, Seychelles needed another IMF loan in 2014, this time taking a $5M loan.
Danny Faure (2016-2020)
Rising incomes and economic growth in Seychelles made the $169M bond sustainable, resulting in an upgraded credit rating of BB- by Fitch in 2019, among the highest in Africa.
Recognizing the threat of climate change, President Danny initiated the world's first "Blue Bond" in a debt-for-nature swap, raising $15M to enhance resilience to tsunamis, protect coastal infrastructure, and invest in sustainable fishing. The World Bank guarantees 33% of the payments.
However, by 2020, Seychelles faced a significant economic setback due to the impact of COVID-19, resulting in a painful recession.
Wavel Ramkalawan (2020-Present)
Wavel, Seychelles’ 1st non-socialist President from the liberal centrist party, faced a severe recession upon taking office. In response to a 78% drop in tourism revenues due to Covid in the early 2020s, his administration requested an IMF Extended Fund Facility loan for $107M for roughly 2 years.
Despite a swift vaccination campaign, by March 2021, Seychelles managed to get 180K tourist arrivals, which is less than the 385K visitors it attracted before COVID.
Increase FDI: His government passed the Seychelles Investment Act of 2022 which encourages for investors to invest in renewables and construction of more villas. Wavel is also trying to follow Bahamas strategy by making Seychelles an offshore financial center. The strategy seems to be working since the EU added Seychelles to the tax haven blacklist in 2023.
Find oil and bait countries:
Despite concerns about rising sea levels from climate change, Seychelles signed an oil exploration deal with Adamantine Energy. Geologists have done a seismic survey stating that Seychelles has 500M barrels of oil (51st place for oil reserves). This move is prompted by the fact that the country's relatively high per capita income makes Seychelles ineligible for concessionary (below market) financing like lower-income African nations receive like Gambia or Madagascar. Ramkalawan seeks cheap concessionary financing for renewables, threatening to exploit Seychelles' oil if not granted.
“Unless you have cards these days, you aren’t taken seriously,” — Ramkalawan says in an interview at the COP27 summit
Conclusion
It’s clear to me from Seychelles that socialism, or rather government control of businesses & prices can work if the government has a massive, sustainable source of revenue to fund all these social programs, a relatively small population, and the government isn’t super corrupt. For gulf states and Gaddafi that source was oil and for Seychelles that was tourism & yacht fees, allowing them both to make huge revenues of foreign exchange relative to their population. For countries like Guinea or Mozambique, they lacked a lucrative foreign exchange earner to make socialism work. For most of Africa. the 1980s-2000s was terrible due to commodity prices crashing, meanwhile tourism was a sustainable way for Seychelles to rake in foreign currency.
While lessons for mainland Africa are limited due to Seychelles' unique circumstances, poorer African island nations (Sao Tome & Principe, Comoros, Cape Verde) could consider prioritizing tourism, yacht registration, and island sales for foreign exchange.
A fascinating article. I remember in the 1980s that my high school participated in a Model UN. Since we joined late, we represented Seychelles.
It is very interesting to read about the unique characteristics that made Socialism work better in Seychelles than in other nations. It does not seem like a very scalable long-term model for development (i.e. lots of money from overseas).
There is probably other opportunities like becoming a haven for digital nomads which is becoming an increasing large segment of the global workforce. For that one should take cues from Estonia.