Selected Issues


Selected Issues

Possible Options to Buttress the Authorities’ Medium-Term Debt Target1

In order to shore up the medium-term debt target, the authorities would need to articulate a set of permanent fiscal measures to be implemented in 2018. By eliminating preferential business tax treatment for tourism companies and introducing revenue measures which have been under discussions, including rationalization of fuel taxes and introduction of sugar tax, the authorities could fill up the estimated fiscal gap in 2018. There is scope to further streamline public sector wage bill and better target social welfare spending.

A. Context

1. After several years of impressive fiscal consolidation, social concerns led to fiscal policy slippages in 2016. Seychelles has recorded significant primary fiscal surpluses for eight consecutive years since 2009 while enjoying strong economic growth during the period. As a result, the public debt to GDP ratio has been reduced by almost two thirds between 2008 and 2015. However, the Household Budget Survey (HBS) published in late 2015 indicated wide spread poverty, causing social concerns about inequality. Then-President Michael announced a series of fiscal commitments in his State of the Nation Address (SONA) in early 2016, which are estimated to cost 3 percent of GDP annually.2 The authorities are committed to reducing the public debt to GDP ratio below 50 percent by 2020, which would require a primary surplus of 3 percent of GDP each year from 2017 onwards. While the 2017 budget is in line with this primary surplus target, it largely relies on one-off measures to fill the fiscal gap created by the 2016 SONA.


Seychelles: Tax Revenue to GDP Ratio


Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A005

Sources: IMF, World Economic Outlook

2. After the one-off measures in the 2017 budget expire, the authorities would need to implement significant amount of permanent fiscal measures in 2018. If no additional measures are taken in a 2018 budget, the authorities will face a fiscal gap of about 1½ percent of GDP from 2018 onward compared with the primary surplus targeted at 3 percent of GDP. This chapter explores possible options, both on the revenue and expenditure sides, to fill this gap by permanent measures. It refers to the trends in Seychelles revenue and expenditure, in comparison with a peer group, and the discussions held during the 4th and 5th EFF reviews.

B. Revenue Side

3. While Seychelles’ tax revenue to GDP ratio compares favorably with peer countries, business taxes have shown less favorable trends. Seychelles collected more tax revenues, in percent of GDP, compared with other tourism-dependent island economies (see text chart). However, this overall picture masks some less favorable trends. Business taxes to GDP ratio has been hovering 4¼-5½ percent since it peaked at 7.1 percent in 2011 (see text chart). Business taxes are relatively narrow based in Seychelles, with 30 companies accounting for over two-thirds of tax business collections. In particular, tourism-related companies’ share in total business tax collections hovered around 7¾-10¼ percent during 2011–15. This is a significant underrepresentation, compared with their share of 25–34 percent in personal income tax and VAT, which broadly matches with the tourism industry’s GDP contribution. While transfer pricing by international hotel chains seem to play a role, preferential treatment, including preferential rate and high deductions from business income could explain this low business tax contribution from the tourism-related companies.

4. By eliminating the preferential rate and other preferential treatments on business tax for tourism companies, Seychelles could significantly enhance tax revenues. Tourism-related companies are subject to the business tax rate of 15 percent, against 30–33 percent applied to other companies. Furthermore, the Tourism Investment Acts provides various business tax concessions including: (i) accelerated and additional depreciation for investments; (ii) 200 percent bonus deduction on marketing and promotion expenses up to 5 percent of turnover; and (iii) extra deduction for training expenses and salaries paid for one year to qualified graduates. The 2016 FAD TA mission pointed out that, the revenue loss of these preferences and the lower business tax rate of the 24 sample companies was estimated at 0.6 of GDP


Seychelles: Tax Revenues

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A005

Sources: Seychelles authorities; and IMF staff calculations.

5. While many tourism-dependent economies implement various tax incentives, recent empirical research indicates that tax incentives may affect FDI but their ultimate economic benefits may be limited. Klemm and Van Prays (2009) find that, while lower corporate income tax rates and longer tax holidays are effective in attracting FDI, these policy instruments are not effective in boosting total investment or economic growth, based on a dataset on tax incentives in over 40 Latin American, Caribbean, and African >countries for the period 1985–2004. This would suggest that either that FDI crowds out domestic investment or that these instruments affect mainly ownership transfers, which are part of FDI but not that of the total domestic investment.3

Seychelles: Revenue measures discussed with the mission but not introduced in the 2017 budget

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Source: Ministry of Finance and staff estimates

6. The authorities could examine the list of possible revenue enhancing measures discussed with the Fund mission in 2016. In the context of the 4th and 5th EFF reviews, the authorities discussed with the Fund staff potential revenue enhancing measures to fill the gap in 2017 onwards. Text table below is the list of the measures discussed but not incorporated in the 2017 budget. These measures could create additional revenue of around ¾ percent of GDP (see text table).4 In particular, the fuel excise increase would raise the revenue take by about ½ percent of GDP and contribute to the authorities’ efforts to reduce carbon emission in accordance with Nationally Determined Contribution (NDC) under the United Nations Framework Convention on Climate Change (UNFCCC).


SADC -- Economic Classification (in percent of total), Latest Value Available

Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A005

C. Expenditure Side

7. Seychelles’ government expenditure composition is skewed toward current spending compared with peer countries. In this section, Seychelles’ government spending composition, level of major spending items, and efficiency of key social spending are benchmarked against Caribbean countries and Southern African Development Community (SADC) members.5 These countries are chosen as Seychelles’ peer group because the former includes most of the tourism-dependent small economies and the latter includes most of the small middle-income countries (SMICs) in SSA.6 Capital spending’s share in total spending is 12¾ percent in Seychelles, while this share slightly exceeds 20 percent on average among Caribbean countries and SADC members (see text chart). Meanwhile, the share of wage bill and goods and services in total spending exceeds 60 percent in Seychelles, higher than that in the peer countries. In view of the authorities’ priority investment needs in water, sewage, and electricity, expressed in the Public Utilities Company’s (PUC’s) ambitious capital spending plan for 2017–20,7 as well as climate change mitigation and adaptation investments over the long term, the share of capital spending should increase in the medium to long term. In this context, keeping a firm grip on current spending, particularly on wage bill and goods and services, will be essential.

Source: IMF FAD Expenditure Assessment Tool (EAT), World Economic Outlook, Seychelles authorities.

8. The government could tighten the rein on wage bill: its expenditure is higher compared with majority of the peer countries. Seychelles spends 10½ percent of GDP on compensation, which is higher than most of the Caribbean countries and the SADC members on average. Meanwhile, wage bill to GDP ratio is envisaged to reach 11 percent of GDP in the 2017 budget from around 9½ percent in 2015.8 Here could be scope to streamline salary costs in the public sector, for instance by more efficient use of personnel or greater use of technology, as the cross-country spending efficiency analysis in the education sector implies (see ¶10).


Wage Bill, in percent of GDP, Latest Value Available

Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A005

Sources: IMF FAD Expenditure Assessment Tool (EAT), IMF Investment and Capital Stock Dataset, and World Economic Forum.

9. The government could create savings by better targeting the social welfare spending. While Seychelles spends about 4½ percent of GDP on social protection, the current social protection system supports households that are not needy, while most households in need do not get assistance.9 Eligibility criteria create inequities through a complex system of exclusions, deductions, and cost sharing arrangements. There would be room to create savings over the medium term by implementing recommendations proposed in the Social Protection Policy Note by the World Bank (June 2016), including review and adjustment of means test and benefit level of home care program and social welfare assistance.

10. There is scope to improve the efficiency of education spending in Seychelles. To measure the efficiency of education spending, we use the data envelopment analysis (DEA) approach. This approach allows the relative efficiency of a country in translating public spending (inputs) into measurable outcomes (outputs). Based on the input-output data of countries that maximize output for a given level of inputs, or minimize the use of inputs for a given output level, the “efficient frontier” is estimated. Then countries are ranked according to the distance from the frontier: the closer a country is to the frontier, the more efficient is its spending.10 For a given country, the distance to the frontier is the output increase that could be achieved with the same inputs should the country be at the efficiency frontier, or the reduction of inputs that could be achieved while leaving output unchanged. In the text charts below, primary and secondary education spending is used as inputs while net enrollment ratio as outputs. The charts indicate that Seychelles does not compare favorably with many Caribbean countries, whose per-capita income level and geographic characteristics are similar to Seychelles.11 The World Bank’s Public Expenditure Review in 2014 found that salary costs accounted for over 90 percent of all education costs, leaving little for other vital spending such as learning materials. The government could find a way to restrain personnel costs across the public sector.


Government Education Spending and Outcome, primary, Latest Value Available 1/

Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A005


Government Education Spending and Outcome, secondary, Latest Value Available 1/

Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A005

11. While Seychelles is the top performer in the SSA in terms of health outcomes, there could be room to further enhance the outcome while creating fiscal savings. The World Bank’s Public Expenditure Review in 2014 pointed out that Seychelles is the top performer in Africa for health outcomes and its health indicators compared favorably with even some OECD countries. However, these impressive results could be further improved while making some fiscal savings. We conducted efficiency frontier analysis, like those applied to the education spending, using health-adjusted life expectancy as output and health spending as input. As the text charts below indicates, some SADC countries, as well as many Caribbean countries, scores better than Seychelles in the efficiency of health spending: these countries are located closer to the frontier. Both the country’s already impressive health outcomes and the fiscal balance could be further improved, for instance, by introducing sugar tax, which is under consideration by the government: sugar tax would help boost the revenue while it would help improve the health condition of the population.


Health Efficiency Frontier, Latest Value Available 1/

Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A005

Source: IMF FAD Expenditure Assessment Tool (EAT)

Health Efficiency Frontier, Latest Value Available 1/

Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A005

12. Despite the smaller share of capital spending in the total government spending, quality of public infrastructure in Seychelles compares favorably with its peers. The quality of major infrastructure (airports, ports, roads) ranks better than the peer countries (see text chart). Seychelles rank favorably in terms of stock (quantity) of physical infrastructure, too. Given that Seychelles allocates smaller share of total expenditure to capital spending, this outcome is impressive. However, the Public Expenditure and Financial Accountability (PEFA) assessment completed in late 2016 indicates that the authorities could further improve the efficiency and quality of public investments. While necessary institutions, including Development Committees and Public Sector Investment Plan, have been in place and the Public Investment Manual (PIM) has been adopted, the PEFA report highlights significant challenges towards a full compliance with the PIM. The report points out some weaknesses in project selection, costing, and monitoring. Capacity enhancement in these areas, as well as efficient use of PPPs, would help create space for the authorities’ priority investments in electricity, sewage, and water projects, as well as climate change and adaptation investments in the medium term.


Capital Stock and Infrastructure Quality, 2015

Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A005

Source: IMF FAD Expenditure Assessment Tool (EAT)

Prepared by Tetsuya Konuki (AFR)


See Box Country Report No 17/51


Other relevant research on this issue include Klemm (IMF WP/09/21, 2009) and Abbas, Klemm, Bedi, and Park (IMF WP/12/28, 2012).


In addition to the measures listed in the text table, the authorities are currently articulating specifics of a property tax to be introduced in the 2018 budget and increases in various fees.


All cross-country charts in this section are based on the data in the WEO and IMF FAD’s Expenditure Assessment Tool (EAT).


SMICs in SSA includes Botswana, Cabo Verde, Lesotho, Mauritius, Namibia, Seychelles, and Swaziland. Except for Cabo Verde, all of these countries are the members of SADC.


Much of the investment program of the PUC is supported by on-lending from the government.


The rise in the wage bill to GDP ratio since 2015 is partly explained by the introduction of the 13th month salary.


See the Social Protection Policy Note (World Bank, 2016).


For a discussion on efficiency frontier approach, see Grigoli and Kaplosi (2013).


The World Bank’s Public Expenditure Review in 2014 pointed out that internationally comparable test scores in Seychelles are unfavorable compared with other middle-income countries and peers in the region (Kenya, Mauritius, and Tanzania).

Seychelles: Selected Issues
Author: International Monetary Fund. African Dept.