By Richard Lough
VICTORIA, Jan 9 (Reuters) - The Seychelles president called on Friday for creditors to cancel half the archipelago's $800 million foreign debt to help a slowing economy at the sharp edge of the global crisis.
Far from the world's financial hubs and best-known as a luxury tropical retreat for tycoons and celebrities, the Indian Ocean nation of just 85,000 people saw a dramatic fall in growth last year and foreign reserves neared exhaustion.
In an interview with Reuters at the former British governor's colonial mansion, President James Michel said he hoped donors would give his plans a vote of confidence.
"With the reform that is being done, with the approval of the International Monetary Fund (IMF), we hope the Paris Club will take our case," he said.
"We hope we might get something in excess of 50 percent. If we get that then it will be very good for the Seychelles."
Government sources say Seychelles' foreign debt is split about evenly between commercial and official debt, with between $200-$250 million owed to Paris Club creditor nations. Commercial creditors often take their cue from Paris Club deals.
Talks with creditors are underway, and in November the IMF unveiled a $26 million, two-year rescue package. But disbursement of funds depends on a raft of fiscal and monetary reforms aimed at liberalising the economy and cutting spending.
The IMF predicts the Seychelles economy will contract by 0.5 percent [ID:nL3091821] this year, compared to 3.1 percent growth last year and 7.3 percent growth in 2007.
The Fund said the islands' tourism sector, a vital source of foreign exchange, would take a hit as the global downturn forced European holidaymakers to tighten purse strings.
Michel said the Seychelles' five- and six-star resorts had so far been relatively unscathed, and that overall tourist numbers were down by just 1 percent on 2007.
But he said the industry expected tougher times ahead: "The way things are going, we feel we may see a reduction of 20-25 percent in visitor numbers compared to 2008."
SOCIALIST LEGACY
Michel, 64, came to power in 2004 and inherited a highly interventionist state that had strong ties with Moscow until the collapse of communism.
The socialist legacy has remained: free healthcare and
education, tight control of the media, and a national currency,
the rupee
Government spending was 38 percent of GDP last year according to the IMF and until recently the Seychelles was not shy to run substantial deficits. The archipelago borrowed heavily to invest in doctors, schools and housing, Michel said.
"I will not say we borrowed irresponsibly, but I will say that any government in power for 30 years will have made some mistakes," said Michel, a former finance minister and vice president in the 1990s.
"We had to borrow in order to develop as our economic base was so small."
The strategy was, however, unsustainable, and the onset of the global financial turmoil has revealed the fragility of the small Seychelles economy.
Last October, it defaulted on an interest payment on $230 million of bonds maturing in 2011 as the crisis compounded a severe depletion of foreign reserves.
Under the IMF rescue plan, the Seychelles will still service some low-interest loans from multilateral donors, but bilateral payments are on hold.
Michel said the offshore financial services sector was growing, but overall economic performance this year would be determined by the strength of tourism.
He said he remained optimistic the nation would regain the path to growth, and said his vision of doubling GDP per capita to $16,000 remained realistic.
"So far we are meeting all our targets set by the IMF and we hope we will see positive results from the reforms, making our economy more resilient and on a more solid foundation," he said. (Editing by Daniel Wallis)