Seychelles faces a foreign investment dilemma

The tiny island state of Seychelles is rethinking its future in the light of the Covid-19 pandemic and the first democratic change in its ruling party in 43 years.

Charting a new way forward for the country, increasing food security and building new industries based on the blue economy and knowledge are priorities for the new government of Wavel Ramkalawan, former opposition leader and now president. It will involve assistance from partners such as India, China and Japan, and it won’t be an easy task.

Although Seychelles has long experience in balancing competing external interests, increased geostrategic competition in the Indian Ocean may make it harder to secure the foreign investment it urgently needs to rebuild after the severe economic impacts of the pandemic.

When it achieved independence from Britain in 1976, the new country was quickly drawn into wider global networks. Its position as an ‘unsinkable aircraft carrier’ in the western Indian Ocean made it attractive to the big powers.

A socialist coup soon after independence propelled it towards the Soviet bloc, but, even then, Seychelles trod a fine line between opposing factions, and the US continued to operate a satellite tracking station on the main island of Mahé.

A long runway built in 1971 helped establish international tourism, which soon became the main pillar of the economy.

With half of its forests protected from development and its sandy beaches and the surrounding ocean teeming with fish, the country was promoted as a tropical paradise.

Other mainstays included fish processing and an offshore finance facility, which led to an unwanted reputation for money laundering and illegal transactions.

Over the past decade, the economy has been reasonably sound. The World Bank designated Seychelles as a high-income country. Until recently, the nation had credible reserves of foreign exchange, and it scores well on measures of health, education and social welfare.

From the start of this century, there has been a construction boom. Even 10 years ago, the roads were relatively empty; now, daily rush hours are commonplace.

But the Covid-19 epidemic caused international flights to be cancelled and prompted a domestic lockdown. Seychelles has recorded very few cases of coronavirus, but that has come at the cost of a booming tourist industry. Inflows of foreign exchange were drastically reduced, the exchange rate fell, prices rose and there were shortages of some goods. Many businesses were caught in debt traps.

Elections in October 2020 led to the comprehensive defeat of the party that had held power for more than four decades. The priority for Ramkalawan and his government is to work towards a new future. To revive the economy there must be more tourists, although that will risk a rise in the number of infections.

In the longer term, the economy must diversify, make smarter use of people’s skills and include more knowledge-based occupations. This will require a revolution in broadband capacity and an upgraded program of ICT training and education.

Digital capability upgrades can only be achieved with the support of international partners. But, as the past has shown, there’s invariably a price to be paid for such assistance, whether through security concessions or votes in the United Nations.

Developing the blue economy may also help. Seychelles made an early start in promoting the concept of sustainable seafood production and blue energy, but there have been few tangible results.

Tapping the energy reserves of tides and currents is still far from being realised, and little has been done to see what can be grown in the sea itself. Considerable investment is needed for research and development, which is beyond the reach of a small nation. Partners with access to more resources are essential if oceanic opportunities are to be realised.

Comparable challenges in neighbouring island states in the western Indian Ocean (Mauritius, Réunion, Comoros) should encourage a regional approach that produces economies of scale in investment and governance. Making the blue economy work is also of interest to other small island states in the Pacific and Caribbean. Ideas and experience can be shared to the benefit of all.

Another vulnerability highlighted in recent months is Seychelles’ heavy dependence on food imports. It’s self-sufficient in fish and eggs but imports up to 90% of other foods. Supply lines can’t be guaranteed, and increasing locally sourced supplies is imperative.

The previous government identified pork, poultry and a range of vegetables as candidates for greater production, ideally leading to self-sufficiency. More also needs to be done to ensure that food grown locally is organic.

Securing external assistance to aid economic recovery will require careful diplomacy. Seychelles has always attracted the interest of big powers—first France and Britain as colonial powers, then the US and the Soviet Union during the Cold War, and more recently India and China.

There are close relations with the United Arab Emirates, and Japan has recently opened a new embassy. Meanwhile, the US, from its strongholds in Diego Garcia and Djibouti, maintains a watching brief.

The country has long benefited from loans, grants and infrastructure investment. Recovery won’t be possible without further support, but it will be a challenge to accept funding from one source without upsetting another. If, for example, India revives its interest in a naval base on the outer island of Assumption, the strategic concerns of China will need to be addressed.

It’s no coincidence that, in 2018, just a few months after the former president, Danny Faure, went on a state visit to India, he was then invited to meet President Xi Jinping in Beijing. No details were released about what was discussed, but some kind of balancing concession will surely have been on the agenda.

‘A friend of all and an enemy of none’ is a term often used to sum up the nation’s diplomacy. This has been tested before, but perhaps not at any time more than now.

This post is part of an ASPI research project on the vulnerability of Indo-Pacific island states in the age of Covid-19 being undertaken with the support of the Embassy of Japan in Australia.