PUBLIC EXPENDITURE REVIEW Enhanced Fiscal Buffers for More Productive and Resilient Investments © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2024. Seychelles Public Expenditure Review. Washington D.C.: The World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. SEYCHELLES Public Expenditure Review Enhanced Fiscal Buffers for More Productive and Resilient Investments August 2024 TABLE OF CONTENTS EXECUTIVE SUMMARY...........................................................................................................................XI CHAPTER 1. MAINTAINING MACRO-FISCAL PRUDENCE..........................................................1 1.1 Sustaining strong economic growth and prudent macro-fiscal policies will face some challenges..............................................................................................................................................................................2 1.2 Fiscal consolidation has placed public finances on a sustainable path and reduced risks................................................................................................................................................................8 1.3 Strong revenues and modest capital spending have supported the fiscal balance.......... 12 a) Budgetary revenues are driven by the value-added tax.................................................................... 12 b) Budgetary expenditures in Seychelles are concentrated in current and non- discretionary spending............................................................................................................................................. 17 1.4 Options for increased fiscal space and improved spending efficiency...................................... 21 CHAPTER 2. ADDRESSING VOLATILITY AND THE IMPACT OF CLIMATE CHANGE.....25 2.1 Economic volatility could be addressed through countercyclical fiscal policy....................26 2.2 An effective national climate change policy requires more efficient PIM processes.........29 2.3 Options for promoting countercyclical fiscal policy and resilience to shocks...................... 34 CHAPTER 3. CONTAINING GROWTH IN THE WAGE BILL.......................................................37 3.1 A stable wage bill will support spending efficiency..............................................................................38 3.2 An affordable wage bill will help ensure fiscal sustainability and resilience..........................39 3.3 Transparency of the wage bill could be improved through improved management of inducements...................................................................................................................................................................... 42 3.4 There are high pay disparities that undermine the fairness of the wage bill......................... 45 3.5 Data challenges limit the assessment of the competitiveness of the wage bill.................. 47 3.6 Options for reforming the public wage bill................................................................................................48 Affordability: Establish a wage bill cap and an independent wage bill adjustment mechanism...................................................................................................................................................................... 48 Transparency: Use the planned functional review to Identify steps for improved wage bill management..........................................................................................................................................................49 Fairness: Minimize pay disparities for employees in the same job..............................................49 Competitiveness: Establish mechanisms to assess the competitiveness of public sector pay..........................................................................................................................................................................49 SEYCHELLES PUBLIC EXPENDITURE REVIEW ii Enhanced Fiscal Buffers for More Productive and Resilient Investments CHAPTER 4. HEALTH: MANAGING THE BUILD-UP OF RISING SPENDING PRESSURES................................................................................................................................................53 4.1 Noncommunicable diseases are a rising challenge............................................................................. 54 4.2 Basic health outcomes are strong in general.......................................................................................... 55 4.3 Disease burden stems largely from noncomunicable diseases....................................................58 Several risk factors have increased in recent years.............................................................................. 60 4.4 Access to public health facilities is adequate, but their capacity is under-utilized...........63 Some degree of understaffing may also impact access to services......................................... 64 A lack of data precludes facility level analysis of efficiency and quality................................. 66 Health financing is primarily from tax revenues.......................................................................................67 4.5 Greater efficiency in health spending can significantly improve service delivery...............69 Health spending has been rising and dominated by curative care.............................................70 Cost-savings from overseas referrals could be improved................................................................76 4.6 Improved health outcomes require rebalancing resources toward NCDs..............................80 4.7 Options for improved health spending efficiency..................................................................................85 CHAPTER 5. EDUCATION: REBALANCING SPENDING FOR GREATER EFFICIENCY ..91 5.1 Basic education outcomes are relatively strong, but there are youth at risk.........................92 5.2 Reducing dropout rates is a priority for youth at risk ..........................................................................93 5.3 Wages and compensation dominate education spending............................................................ 100 5.4 Primary and secondary spending levels are low relative to the tertiary level.....................102 5.5 Improved efficiency requires a greater focus on quality materials and teaching............. 106 The cost of enrolment in Seychelles is higher relative to comparators................................106 Improved Harmonized Learning Outcomes (HLO) will require increased focus on quality........................................................................................................................................................................108 At the school-level, outcomes could be improved by focusing on improved materials and teacher training................................................................................................................................................109 5.6 Higher education efficiency could be achieved through targeting and outsourcing.......111 Efficiency gains could be achieved by targeting scholarships for study overseas in higher education..........................................................................................................................................................111 Outsourcing of non-institutional services in schools could be scaled up............................ 113 5.7 Options for improved efficiency and addressing challenges faced by youth at risk........116 SEYCHELLES PUBLIC EXPENDITURE REVIEW iii Enhanced Fiscal Buffers for More Productive and Resilient Investments Annex 1: Overview of Comparator Countries ................................................................................................ 119 Annex 2: Areas for Further Analysis ....................................................................................................................120 Annex 3: Estimating the Impact of Climate Scenarios..............................................................................123 Annex 3: Debt Service Contribution to a Procyclical Fiscal Stance...................................................124 LIST OF BOXES Box 2.2: Global experience with climate budget tagging..........................................................................33 Box 5.1: International examples of targeting and selection criteria in university scholarship programs..................................................................................................................................... 112 LIST OF FIGURES Figure ES1 Fiscal pathways for improved and sustained results in Seychelles.............................xvi Figure 1.1: Seychelles ranks 70th in vulnerability to climate shocks across 185 countries......4 Figure 1.2: The infrastructure efficiency gap is between 25 and 30 percent.......................................5 Figure 1.3: Geographic and demographic constraints are associated with reduced efficiency of public expenditure.................................................................................................................. 6 Figure 1.4: Budget rigidity increased between 2015–19 and 2020–22......................................................7 Figure 1.5: Change in the fiscal balance between 2014 and 2022, percent of GDP......................12 Figure 1.6: Trends in revenue collection........................................................................................................................13 Figure 1.7: Cross-country comparison on property tax......................................................................................17 Figure 1.8: Trends in public spending............................................................................................................................. 19 Figure 2.1: Seychelles’ economic growth has been strong but volatile................................................26 Figure 2.2: Seychelles’ spending is procyclical, which magnifies economic volatility and associated costs....................................................................................................................................................27 Figure 2.3: Climate governance and green public procurement indictors..........................................31 Figure 3.1: Seychelles spends about 10 percent of GDP on the wage bill.........................................40 Figure 3.2: About 30 percent of total revenues goes toward the wage bill (%of total)..............40 Figure 3.3: Seychelles’ wage bill is on a par with its small island comparators (% of GDP)....42 Figure 3.4: Between 2018 and 2020, real growth in the public wage bill outpaced real GDP (year-on-year growth in real terms)........................................................................................................42 Figure 3.5: Allowances made up 29 percent of the wage bill, as of August 2023.........................42 SEYCHELLES PUBLIC EXPENDITURE REVIEW iv Enhanced Fiscal Buffers for More Productive and Resilient Investments Figure 3.7: There are 42 different allowances in the Seychelles (share of the total wage bill, %)...................................................................................................................43 Figure 3.6: Out of total public employees, 28 percent earn four or more allowances .............43 Figure 3.8: Wage bill arrears increased between May and August 2023.............................................44 Figure 3.9: Distribution of teachers according to monthly compensation 41 percent of teachers had unique take-home salaries..........................................................................................46 Figure 3.11: Public sector employees earn more, on average (2017–22)................................................47 Figure 3.10: The public sector is not the largest employer in Seychelles..............................................47 Figure 4.1: Adolescent fertility is high in Seychelles relative to comparator countries and groupings, 2021...........................................................................................................................................57 Figure 4.2: Top 10 causes of death and disability (DALYs) in 2019 and percent change 2009–19, all ages combined........................................................................................................................58 Figure 4.3: Major causes of mortality, 2018–22.........................................................................................................59 Figure 4.4: Diabetes prevalence is modest among adults aged 20–79, 2021................................. 60 Figure 4.5: Change in top 10 risk factors in terms of DALYs per 100,000 population, 2009–19...................................................................................................................................................................... 60 Figure 4.6: Total alcohol consumption per capita, projected estimated is high (liters), 2021.................................................................................................................................................... 61 Figure 4.7: Childhood obesity has been rising..........................................................................................................62 Figure 4.8: Nominal and real public health expenditure (SCR million), 2016–22.............................71 Figure 4.9: Per capita health spending, nominal and real (SCR and US$), 2016–21......................71 Figure 4.10: Administrative breakdown of health portfolio spending (%)................................................72 Figure 4.11: The five largest health sector programs by year, 2016–22...................................................72 Figure 4.12: Health sector spending a) by recurrent/development and b) recurrent by category, 2016–22........................ 74 Figure 4.13: HCA compensation by type of payment, mean percentage, 2016–22........................75 Figure 4.14: Destinations for overseas treatment, 2015–21................................................................................77 Figure 4.15: Overseas referrals total cost and average cost per case, 2015–21, SCR....................78 Figure 4.16: Cost per case per overseas treatment destination, various specialties, 2015–21, current US$.........................................................................................................................................79 Figure 4.17: Specialized medical treatment, nominal and as share of HCA G&S and total sector spending, 2016–22 .............................................................................................................................79 Figure 4.18: Growing importance of focus NCDs in terms of estimated DALYs, 1998–19.......... 81 Figure 4.19: Projected 2030 deaths and YLL due to the focus NCDs, under 3 scenarios..........82 Figure 4.20: Projected YLL from focused NCDs, and all NCDs in 2030...................................................83 Figure 5.1: Change in learning outcomes in African countries for two time periods between 2000 and 2017.........................................................................................................................................................93 SEYCHELLES PUBLIC EXPENDITURE REVIEW v Enhanced Fiscal Buffers for More Productive and Resilient Investments Figure 5.2: Seychelles' human capital aligns with the expected levels based on their GNI.......................................................................................................................................................................94 Figure 5.3: … but falls short relative to their public spending.........................................................................94 Figure 5.4: Two-thirds of students taking the IGCSE are female............................................................... 96 Figure 5.5: Pass rates are similar for males and females on STEM subjects, but higher for females in humanities...................................................................................................................................... 96 Figure 5.6: School size varies substantially................................................................................................................ 96 Figure 5.7: Larger schools have also more scores below C.......................................................................... 96 Figure 5.8: Dropouts are higher among male students and in larger schools.................................97 Figure 5.9: Employment rates are higher for younger men........................................................................... 99 Figure 5.10: Full-time employment is higher among women........................................................................ 99 Figure 5.11: Education spending in Seychelles as a percentage of GDP and total government expenditure, 2010–2021................................................................................................100 Figure 5.12: Composition of the education budget by agency, 2016–22..............................................101 Figure 5.13: Composition of education expenditure by program, Ministry of Education budget, 2016–23..................................................................................................................................................101 Figure 5.14: Composition of education expenditures..........................................................................................101 Figure 5.15: Government expenditure on education, total (% of total expenditure), 2022 or most recent year................................................................................................................................................ 102 Figure 5.16: Percentage of public expenditure on education allocated to each education level (2022 or the latest available year)............................................................................................. 103 Figure 5.17: Government expenditure per student as a percent of GDP per capita in primary and secondary education (2022 or the latest available year).......................................... 104 Figure 5.18: Potential coverage increase if Seychelles were at the efficiency frontier.............. 107 Figure 5.19: Potential educational quality increase if Seychelles were at the efficiency frontier ......................................................................................................................................................................108 Figure 5.20: Average IGCSE test scores in secondary school with high and low student- classroom ratios (top and bottom 20 percent)............................................................................110 Annex 3 Figure 1. Volatility of debt service on public external debt across countries..................125 LIST OF TABLES Table ES1: Seychelles PER Findings and Prioritized Recommendations.........................................xxiii Table 1.1: Seychelle’s fiscal policy has tended to be procyclical................................................................5 Table 1.2: Selected macro-fiscal indicators.................................................................................................................8 Table 1.3: Reform priorities to increase fiscal space and spending efficiency............................... 22 SEYCHELLES PUBLIC EXPENDITURE REVIEW vi Enhanced Fiscal Buffers for More Productive and Resilient Investments Table 2.1: Approaches to defining climate tagging.............................................................................................31 Table 2.2: Reform priorities for promoting countercyclical policy and resilience.......................34 Table 3.1: Cross-country examples of average annual government compensation (2000–08)...................................................................................................................................................................40 Table 3.2: Number of employees receiving 21 infrequently used allowances..............................44 Table 3.3: Number of variations in the basic salary beyond the Salary Table (August 2023)...........................................................................................................................................................46 Table 3.4: Cross-country examples of independent bodies that oversee wage bill adjustments..............................................................................................................................................................48 Table 3.5: Reform priorities for reforming the wage bill..................................................................................50 Table 4.1: Staff assigned to jobs targeting prevention of NCDs, late 2022....................................... 66 Table 4.2: Health expenditure by source, most recent years available.............................................. 68 Table 4.3: Domestic and external spending on health sector nonfinancial assets, 2017–22.........................................................................................................................................................................75 Table 4.4: Total costs using extrapolation of per capita spending on NCDs to 2030 Seychellois population.....................................................................................................................................83 Table 4.5: Total costs using extrapolation of 2017 cost per YLL................................................................83 Table 4.6: Health sector reform priorities for improved spending efficiency and more fiscal space..................................................................................................................................................87 Table 5.1: Employment is lower for males in single-female headed households..................... 98 Table 5.2: Government expenditure per primary student in US$ PPP (2022 or the latest available year).......................................................................................................... 103 Table 5.3: Government spending on education in percent of GDP, 2018 or most recent estimate.................................................................................................................................................................... 105 Table 5.4: Inputs and outputs used in the DEA estimation........................................................................106 Table 5.5: Results of the efficiency analysis at the school level: outputs, inputs, and efficiency scores..................................................................................................................................................110 Table 5.6: Distribution of non-teaching staff in primary and secondary schools by position................................................................................................................................................................ 115 Table 5.7: Reform Priorities for improved efficiency and addressing yoth at risk....................... 117 Annex Table 1: Description of Climate Change Damage Channels.............................................................123 Annex Table 2. Taxation of immovable property in selected small island countries..................... 126 Annex Table 3: Government Salary Table: April 2023.............................................................................................128 SEYCHELLES PUBLIC EXPENDITURE REVIEW vii Enhanced Fiscal Buffers for More Productive and Resilient Investments ACKNOWLEDGMENTS This report was prepared by a core team led by Kene Ezemenari, and comprised of Adolf Wayne Nourrice, John Litwack, Abdoulaye Ouedraogo, Zac Mills, Kirk Schmidt, Mariam Ally Juma, Alison Lake, Toni Joe Lebbos, Dmitry Chugunov, and Francisco Haimovich. Valuable inputs and contributions were provided by Heather Jane Ruberl, Alex Giron Gordillo, Valentina Bonifacio, Violeta Vulovic, David Mihalyi, Madi Sarsenbayev, Sashana Whyte, Cristina Savescu, Ian Forde, Emre Ozaltin, and Sjamsu Rahardja. Idah Pswarayi-Riddihough, Hassan Zaman, Marco Antonio Hernandez Ore, Ernest Massiah, Muna Salih Meky, and Safaa El Tayeb El-Kogali provided overall managerial guidance and direction. The main contributors to chapters in the report were as follows: Chapter 1 was written by Kene Ezemenari, John Litwack, Adolf Wayne Nourrice, and Abdoulaye Ouedraogo. Chapter 2 was written by Kirk Schmidt, John Litwack, and Kene Ezemenari. Chapter 3 was written by Zac Mills. Chapter 4 was written by Mariam Ally Juma, Alison Lake, and Toni Joe Lebbos. Chapter 5 was written by Dmitry Chugunov; Francisco Haimovich and Ana Maria Oviedo provided inputs and co-authored the chapter. BOOST data analysis for the PER was prepared by Alex Giron Gordillo. Valentina Bonifacio provided research assistance and Mohamad Mahgoub Hamid provided additional support. The report benefited from inputs provided by Violeta Vulovic (property taxation), David Milhayi and Madi Sarsenbayev (debt service volatility), and Heather Jane Ruberl (MFMod climate modeling). Nani Makonnen, Aimnn Mohamed Hassan, and Mary Emery provided administrative and logistical support during the production and dissemination of the report. The team thanks Diane Stamm and Peter Milne for editorial support; and Ha Doan and Yen Hai for design and typesetting of the report. The PER also benefited from comments from Kebede Feda and Samer Al-Samarrai on the education analysis, and from Federica Margini, Dayo Carol Obure, Frida Ngalesoni, and Miyuki Parris on the health analysis. Robert Utz, Andrew Blackman, and Pui Shen Yoong peer-reviewed the overall PER report. The team would like to express its sincere gratitude to government counterparts for the robust dialogue and engagement, including data received from the Ministry of Finance, Economic Planning, and Trade: Naadir Hassan (Minister), Patrick Payet (Secretary of State), Astride Tamatave (Principal Secretary for Finance), Elizabeth Agathine (Principal Secretary for National Planning), and Dick Labonte (Director General, Debt Management Division). From the Ministry of Education: Justin Valentin (Minister), John Lesperance (Principal Secretary for Education Sector Development), Jean Alcindor (Director, Technical and Vocational Education and Training and Entrepreneurship), Alain Theresine (Principal Performance Monitoring and Evaluation and EMIS Officer), and Sandra Lepathy (Principal Public Relations and Communication Officer). From the Ministry of Health: Peggy Vidot (Minister), Marthy Vidot (Attache to Minister), Bernard Valentin (Principal Secretary, Health), Danny Louange (Chief Executive Officer, Health Care Agency), and Agnes Chetty (Director General for Health Policy and Planning). SEYCHELLES PUBLIC EXPENDITURE REVIEW viii Enhanced Fiscal Buffers for More Productive and Resilient Investments ABBREVIATIONS AND ACRONYMS APDAR Agency for the Prevention of Drug Abuse and Rehabilitation APR Annual Performance Report BAU Business-as-Usual CHE Current Health Spending CIT Company Income Tax COVID-19 Corona Virus Disease of 2019 GDP Gross Domestic Product GER Gross Enrolment Rate HCA Home Care Agency HCI Human Capital Index HiAP Health in All Policies HIC High-Income Country HIV Human Immune Deficiency Virus IBBS Integrated Biological Behavioral Survey IFMIS Integrated Financial Management and Information System IMF International Monetary Fund LIC Low-Income Country MIC Middle-Income Country MoE Ministry of Education MoFEPT Ministry of Finance Economic Planning and Trade MoH Ministry of Health NBS National Bureau of Statistics NCD Noncommunicable Diseases NDC Nationally Determined Contribution NER Net Enrolment Rate NHA National Health Accounts OECD Organisation for Economic Cooperation and Development OOPS Out-of-Pocket Spending PIM Public Investment Management PIC Personal Income Tax PPBB Program- and Performance-Based Budgeting PPP Purchasing Power Parity SIDS Small-Island Developing States SOE State-Owned Enterprise STIs Sexually Transmitted Diseases TVET Technical and Vocational Education and Training VAT Value-Added Tax SEYCHELLES PUBLIC EXPENDITURE REVIEW ix Enhanced Fiscal Buffers for More Productive and Resilient Investments SEYCHELLES PUBLIC EXPENDITURE REVIEW x Enhanced Fiscal Buffers for More Productive and Resilient Investments EXECUTIVE SUMMARY SEYCHELLES PUBLIC EXPENDITURE REVIEW xi Enhanced Fiscal Buffers for More Productive and Resilient Investments SEYCHELLES HAS ACHIEVED IMPRESSIVE GAINS IN SOCIAL AND ECONOMIC DEVELOPMENT Despite the challenges arising from its small size and remote geography, Seychelles is among the few countries in Africa that have achieved high-income country (HIC) status. Seychelles is the smallest country in Africa, both in terms of land area and population size. With limited productive factors, elevated input costs, and little potential to reap economies of scale, productivity gains have been critical to its economic development. Seychelles has also relied heavily on its natural capital. An archipelago of 115 islands located 1,500 kilometers off the east coast of Africa, the country has abundant marine resources, coastal areas, and biodiversity that give it a comparative advantage in the blue economy and tourism. Nonetheless, its remoteness limits its external competitiveness. Prudent macroeconomic management and transformational reforms implemented in the wake of the 2008/09 global financial crisis enabled Seychelles to reach high-income status in 2015. A robust policy framework and good governance have been essential to the country’s growth and development. A well-sequenced reform program effectively calibrated monetary and fiscal policies, while much-needed structural reforms encouraged investment and fostered competition. The authorities liberalized the exchange rate and adopted a new independent monetary policy framework to contain rising inflation, while also consolidating the public debt, reducing public employment, replacing indirect subsidies with a social safety net, and privatizing or restructuring state-owned enterprises (SOEs) to correct market failures. As growth surged, gross domestic product (GDP) doubled between the 2000s and the 2010s. Seychelles' unique status as a high-income, sub-Saharan African, and small-island country complicates the comparison of its developmental experience with those of other countries. At times, single country comparators have also been determined by data availability. Consequently, this Public Expenditure Review (PER) places Seychelles in comparative perspective to several groups of countries, most notably other Sub-Saharan African (SSA) countries, other small-island developing states (SIDS), and other HICs, as summarized in Annex 1. By most development indicators, Seychelles compares favorably to countries in the first two groups, with indicators that are more aligned with middle-income country (MIC) comparators, while lagging behind most HICs. Supported by solid institutions, the Government of Seychelles consistently pursued prudent macroeconomic policies before, during, and after the COVID-19 pandemic. Ambitious but feasible targets for the primary surplus and the debt stock have consistently anchored fiscal sustainability. In the decade before the pandemic, the primary surplus averaged 4.3 percent of GDP, and the average budget deficit was less than 1 percent of GDP. The collapse of global tourism during the pandemic constituted a sizable external shock for a small country that depends on services exports. However, a deep recession was followed by a swift recovery, as the Government scaled up support to firms and households to mitigate the impact of the crisis, and then successfully rolled back these measures during 2021. As a result, the primary fiscal surplus reached 1.7 percent of GDP in 2021, with an overall deficit of just 1.3 percent of GDP. SEYCHELLES PUBLIC EXPENDITURE REVIEW xii Enhanced Fiscal Buffers for More Productive and Resilient Investments Sustained growth and sound public financial management have supported consistent gains in economic and social development outcomes. The Government instituted Universal Health Care in 1978, which contributed to gains in health indicators that today far exceed the average for SSA. Seychelles also has the highest literacy rates in the region, with universal access to primary education delivering remarkable improvements in educational outcomes. The literacy rate is close to 100 percent. Gross secondary enrolment is 76.9 percent, while gross primary enrolment is just under 100 percent, with full gender parity at both levels. In contrast, gross secondary enrolment rates average 50 percent for the SSA region. Seychelles’ harmonized learning outcomes (HLOs) are the second highest in the region after Mauritius. Meanwhile, the poverty rate declined from 9.7 percent in 2013 to 6.7 percent in 2018,1 and more recent perception-based poverty estimates derived from the 2022 Census indicate a continued decline. HOWEVER, EMERGING CHALLENGES ARE PLACING ADDITIONAL PRESSURES ON PUBLIC SPENDING Similar to other small-island developing states (SIDS), Seychelles faces the intensifying effects of climate change and increasing exposure to global shocks, all of which contribute to an increase in developmental risks and spending needs. Despite its record of prudent economic policy, the Government has maintained a procyclical fiscal stance that compounds economic volatility, with an exception being the strong countercyclical response to the pandemic starting in 2020. A high degree of budgetary rigidity, largely due to the high level of the public sector wage bill, also limits fiscal space to smooth volatility and implement productive investments in resilient and sustainable growth. Over the medium and longer term, demographic aging will also start to weigh on productivity, while placing further pressures on public expenditure. World Bank projections indicate that, depending on the policies and reforms implemented, budgetary spending on universal pensions could increase by 1–2 percent of GDP over the next 20 years. Seychelles has made significant progress in social development, but it continues to face challenges around health and education. A child born in Seychelles today would reach an estimated 63 percent of the productive potential that she might have reached if she had enjoyed a complete education and full health. Meanwhile, an aging population, adverse lifestyle factors, and the absence of effective prevention programs are contributing toward a rising incidence of noncommunicable diseases (NCDs). Obesity rates are increasing, particularly among children, with a high body mass index (BMI) being the fourth-largest contributor to the loss of disability- adjusted life years (DALYs). In the worst-case scenario, NCDs could increase by as much as 25 percent by 2030, resulting in the loss of almost 3,000 DALYs. Thus far, Seychelles’ strong revenue performance has enabled it to finance its health costs sustainably, but this will become increasingly difficult if NCD morbidity continues to rise at its current pace. 1 Poverty in Seychelles is measured at the upper middle-income country poverty line of US$6.85 per capita per day. EXECUTIVE SUMMARY xiii Meanwhile, rising rates of drug abuse and teenage pregnancy are increasing pressure on the health and education systems, while contributing to a vicious cycle of restricted life choices and inter-generational poverty. Alcohol consumption exceeds the average for HICs and OECD countries by at least one-third and is 2.5 times the level of small-state comparators. In addition to their negative health impact, these and other social challenges are driving down school-completion rates, disrupting the school-to-work transition, and undermining lifetime productivity. Gaps in foundational skills prevent Seychelles from maximizing its human capital potential and will negatively impact long-term growth. Adjusted for learning quality, educational outcomes are 26  percent below the frontier for a full formal education. Dropout rates are nontrivial, and male students account for 63 percent of all dropouts. The limited qualifications of teachers are an obstacle to qualitative improvements in education, and just 60 percent of primary teachers have the minimum diploma qualification. In 2020, almost one-quarter of young people between the ages of 15 and 24 were neither employed nor enrolled in education or training. Boys are more vulnerable to disengagement both from the education system and from the labor market. Climate change poses an array of increasingly difficult development challenges for Seychelles. As a small open economy and a SIDS, Seychelles is highly exposed to shocks that affect external demand, as demonstrated during the pandemic shock. Due to the country’s location, topography, and landscape, its population and economy are highly vulnerable to climate shocks and natural disasters. Between 1980 and 2020, the total cost of damage incurred during climate change-related events varied between 0.5 to 3.6 percent of GDP. This cost is likely to continue to rise, with estimated average annual losses of up to 6.5 percent of GDP in the medium term—significantly higher than the global annual average of just 0.5 percent. Rising sea levels, the increasing frequency and intensity of extreme weather events, together with other climate-induced disasters, will impose a mounting toll on the economy, society, and the environment, while putting additional pressure on public finances. SEYCHELLES’ TAX SYSTEM MOBILIZES ADEQUATE LEVELS OF REVENUE SIDS tend to have a narrow revenue base. Yet, Seychelles’ tax-to-GDP ratio averaged 28 percent between 2015 and 2023, one of the highest in Africa and comparing favorably to other tourism-dependent island economies. According to OECD2 estimates, the Bahamas’ tax-to-GDP was 19.6 percent in 2022. For St. Lucia the estimate was 18.4 percent, with the average for Latin America of 21.5 percent. By contrast, the average for OECD was 34 percent. Seychelles’ aspirational comparators such as Cyprus and Iceland average over 37 percent of GDP between 2015 and 2023. For structural and regional comparators, between 2015 and 2021 (latest date for which data is available) tax revenues averaged 14.6 percent and 15.5 percent of GDP, respectively. 2 https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/global-tax-revenues/revenue-statistics-latin- america-and-caribbean-bahamas.pdf. SEYCHELLES PUBLIC EXPENDITURE REVIEW xiv Enhanced Fiscal Buffers for More Productive and Resilient Investments The tax system is also less distortionary than that of many other countries, as a consequence of relying more on indirect taxes. Indirect taxes such as value-added tax (VAT), and custom duties, and excise duty are the largest source of revenues, while corporate income tax represented 17 percent of total tax and personal income tax accounted for about 12.5 percent in 2023. Overall, Seychelles’ tax system is relatively buoyant across most taxes, with total tax revenues increasing at a faster pace than GDP . The strong movement of tax revenues with economic growth suggests that sustained economic growth will contribute toward fiscal sustainability. Seychelles’ tax buoyancy is conducive to stimulating demand and stabilizing output. PARTLY DUE TO HIGH UNITARY COSTS, PUBLIC SPENDING EXCEEDS THAT OF OTHER HIGH-INCOME COMPARATOR COUNTRIES Its remote location, dispersed geography, and small population drives up the marginal cost of service delivery in Seychelles. As in other SIDS, elevated import costs and indivisibilities in the public sector constrain the Government’s capacity to deliver high-quality services. Between 2015 and 2023, total public spending averaged 35.4 percent of GDP, with current expenditures accounting for 87.5 percent of total spending. This contrasts with the SSA regional average spending of 21.5 percent of GDP or spending levels for structural comparators (31.3 percent of GDP) or aspirational comparators (33.8 percent of GDP). Seychelles’ low levels of capital investment partly reflect the tendency for under-execution of the capital budget. Execution of the capital budget averaged 81 percent between 2015 and 2022. Development spending also needs to address new challenges, which will increase pressure on public finances. A 2017 Climate Change Policy Assessment found that Seychelles would need to spend at least 3 percent of GDP each year between 2017 and 2030 to meet its climate objectives. The country’s Nationally Determined Contribution (NDC), updated in 2021, estimates the total costs of implementing its climate strategy at US$670 million, or about 4 percent of GDP annually for 13 years. SEYCHELLES CAN OVERCOME CHALLENGES FROM HIGH MARGINAL COSTS OF SERVICE DELIVERY AND CLIMATE PRESSURES The Government can advance its development objectives by maintaining prudent macro- fiscal policies, while implementing reforms in three key areas. These include: (i) enhancing the fiscal framework to build adequate fiscal buffers to mitigate the threat posed by overlapping and intensifying shocks; (ii) improving service delivery by increasing the allocative and technical efficiency of public spending; and (iii) effectively integrating climate considerations into public financial management. EXECUTIVE SUMMARY xv Three pathways to continued prudent macroeconomic management in Seychelles Pathway I: Pathway II: Pathway III: Enhancing fiscal buffers Improving the quality of spending Integrating climate to mitigate the impacts for improved human capital considerations into public of intensifying shocks investments and service delivery finances Transition to countercyclical Address the rising NCD burden and Adopt legislation and fiscal policy through an improve value for money, by regulations to govern the effective mix of a stabilization rebalance spending between integration of climate fund and other financial curative relative to preventive, considerations in PIM instruments promotive, and public health processes from indentification, services, including implementation appraisal, and execution to Reduce budget rigidity by of “Health in all Policies” ex-post evaluation adopting mechanisms to effectively manage and Increase efficiency in curative care, Implement climate tagging to contain the public wage bill by empanelment of primary level track and evaluate related NCD case management, and spending and introduce a standardized contracting functional categorization in the Expand fiscal space through mechanisms for overseas treatment budget domestic revenue mobilization efforts, including transfer pricing Adopt youth at risk policies, Update existing legislation particularly to reduce the incidence governing public private of teenage pregnancies and drug partnerships (PPPs) to include and alcohol abuse climate considerations Rationalize tertiary education spending, particurly overseas scholarships, to rebalance spending towards primary and secondary levels, and TVET education Source: Responsible macro-fiscal policies have been vital to Seychelles’ development, and building fiscal buffers is increasingly important as external shocks become more frequent and severe. The Government aims to reduce its vulnerability to external shocks by maintaining fiscal surpluses over the medium term and improving debt sustainability. Creating greater fiscal space—either through increased revenue, a decline in the share of rigid expenditures, or a mixture of both—will be necessary to increase productive investment, manage macroeconomic volatility, and provide high-quality public services that meet the changing needs of the population. A reliably countercyclical fiscal stance would mitigate economic downturns, facilitate a robust response to natural disasters, and help finance the infrastructure investments necessary to address climate change. Fiscal rules can be combined with other instruments, such as insurance and contingent financing that shifts risk to a lender or third party at a cost. In parallel, establishing a stabilization fund could enable Seychelles to lower its borrowing and insurance costs, and maintain a countercyclical fiscal policy. SEYCHELLES PUBLIC EXPENDITURE REVIEW xvi To ensure adequate budgetary flexibility, the government will need to contain the growth of rigid expenditures, and continue to effectively manage growth in the public-sector wage bill. Rising wage payments are narrowing the fiscal space for capital investment and countercyclical spending. Government has taken steps to further strengthen management of the wage bill, and limit its growth. Specifically, government has maintained a recruitment freeze in non-critical areas. A comprehensive functional review on the size and current structure of the public sector will help identify business needs and redundant positions. This will facilitate a further streamlining of the wage bill, supported by a new Human Resource Management System to be operationalized by 2025. These efforts are complemented by government’s target to contain public-sector wages at their current level of 11 percent of GDP. The functional review would also inform determination of a systematic approach to annual wage adjustments, to limit the growth of entitlements and arrears while maintaining budgetary flexibility. The Government can attenuate climate risks by integrating climate considerations into the public investment process. Legal and regulatory reforms are necessary to mainstream climate considerations into public investment planning and execution. Climate-tagged spending and a new functional classification in the budget could improve the tracking of expenditures related to climate change and the blue economy. Updating the legislation governing public-private partnerships (PPPs) to include climate considerations will also help increase resilience and crowd in resources from the private sector. The master plans for tourism, coastal resources, and marine management all call for investments in critical infrastructure and climate-related projects. IMPROVED TAX ADMINISTRATION AND IMPLEMENTATION OF TRANSFER PRICING WOULD HELP RAISE REVENUES Improved implementation of transfer pricing would help expand the tax base (and possibly allow room to bring rates more into balance by easing the burden on a few firms). As of 2023, an estimated 35 percent of the registered medium to large businesses (largely in the financial sector) were contributing more than 70 percent of VAT collections. Simultaneously, the tourism sector accounted for only 8 percent of business tax revenues, while generating 47 percent of VAT collection, suggesting that there is room to improve the balance in taxation. To that end, recent transfer pricing reforms have entailed regulations that require businesses to provide documentation explaining their related parties and business organization. These reforms should help with a risk-based approach to auditing and provide data for future estimates and analysis of the potential for profit-shifting. Coupled with efforts to strengthen tax administration, with a focus on e-services, these measures could help bring more firms into the formal sector, while raising tax compliance. Government recently adopted reforms to the tax rate to better align it with international benchmarks. In particular, property tax rates were increased from 0.25 to 0.5 percent of the valued asset. The administration of property taxes could also be strengthened by establishing a valuation database in which market values can be updated regularly. In EXECUTIVE SUMMARY xvii addition to efforts to implement transfer-pricing regulations, government efforts are also focused on the digitization of tax administration to help improve compliance. Accurate and comprehensive data are vital to efficient tax administration, and reliable datasets are critical for effective monitoring and evaluation. GREATER EXPENDITURE EFFICIENCY WILL BE NECESSARY TO MEET EVOLVING EXPENDITURE NEEDS Seychelles faces multiple long-term trends that will put increasing pressure on public finances. Demographic aging and the rising incidence of NCDs will raise health-care costs. At the same time, social challenges linked to drug use and teenage pregnancy have become key public health issues. According to Ministry of Health data, one-third of admissions to psychiatric wards in 2022 was due to the illicit use of drugs, including opioids, cannabis, or multiple drugs. The high prevalence of teenage pregnancy, drug use, and violence contribute to dropout rates in education and a rising fiscal burden. Climate change will also continue to damage the country’s human, physical, and natural capital, while increasing the need for emergency spending. Reforms to strengthen expenditure efficiency could enable Seychelles to meet the investment targets set out in its updated NDC, which could boost growth by as much as 3 percentage points relative to the baseline scenario over the medium term. A CROSS-SECTORAL APPROACH TO HUMAN CAPITAL INVESTMENTS WOULD SUPPORT MORE EXPENDITURE EFFICIENCY Key challenges in the health and education sectors can be addressed through more efficient cross-sectoral support and interventions. International experience shows that a single-sector or piecemeal approach can be inadequate in addressing the social challenges faced by youth. A revision of the school curriculum to include comprehensive safe sex, healthy living, and family planning education could help reduce teenage pregnancy rates, substance abuse among youth and students, and associated school dropouts. This could be complemented by targeted interventions such as mentoring programs, after-school activities, and youth counseling services. A key priority is the development of a robust mechanism for identifying and supporting children and youth who are predisposed to engage in risky behaviors. The Youth at Risk Technical Assistance Note (World Bank 2024, forthcoming) shows that in certain districts young people face several challenges that put them at risk. Combining data on poverty, single-parent-headed households, and youth outcomes, including low IGCSE exam scores and teenage pregnancy, a pattern emerges. For instance, districts Plaisance and Perseverance concentrate high rates of poverty, single- parent-headed households, and have both the highest rates of teenage pregnancy and of low IGCSE scores. Meanwhile, districts such as Anse Royale have relatively lower poverty but a higher single-parent-headed household share and a higher share of low scores. SEYCHELLES PUBLIC EXPENDITURE REVIEW xviii Enhanced Fiscal Buffers for More Productive and Resilient Investments Complementary measures in the education and health sectors can also be used to contain the rising trend in NCDs. A cross-sectoral approach is also needed to ensure an adequate number of medical specialists in the health sector through the availability of corresponding educational opportunities, particularly for aspiring doctors and dentists. The high cost of tertiary education can be addressed by fostering relationships between higher education institutions in Seychelles and their counterparts overseas. The implementation of mixed or blended learning programs could be instrumental in reducing the unit cost of education (particularly in the medical field) and expanding access to higher education. THE RISING INCIDENCE OF NCDS REQUIRES GREATER FOCUS ON PREVENTIVE HEALTH SERVICES To improve health outcomes amid a persistent increase in the incidence of NCDs, public health spending and resources could be rebalanced from curative interventions toward more preventive interventions and public health campaigns. Refocusing budgetary resources on programs aimed at reducing risky behaviors would help improve disease prevention. Scaling up early-detection and case-management capabilities in primary health-care facilities could proactively address conditions related to hypertension, high cholesterol, and elevated BMI, improving health outcomes while lowering costs. Improved continuity of care and the early identification of changes in underlying risk factors could further enhance case management. This can be implemented using the Health in All Policies (HiAP) approach, which promotes collaboration between different public health depatrments, other sector departments, government sectors and non-government stakeholders to maximize the health benefits of government policies and reduce health inequalities. HiAP is being used to implement the National Health Strategic Plan (NHSP) and should also be adopted to address rising NCDs. Prioritizing programs that address drug addiction could also be highly cost effective. Improving the Ministry of Health’s budget execution rate, which averaged only 72 percent during the period 2016–22, would help improve the overall efficiency of the health system. Using cost-benefit analysis to inform decisions on overseas treatments and leveraging strategic purchasing of goods and services would increase value for money in the health sector. Overseas treatments cost an average of 0.13 percent of GDP each year between 2015 and 2021. Analyzing these treatments to determine which services could be provided more cost-effectively by domestic health facilities would help reduce costs and could also improve health outcomes. A cost-benefit analysis and other transparent criteria should be used to determine thresholds for overseas referrals and help evaluate achieved results. In addition, upgrading competencies for contracting and purchasing outsourced services would increase value for money, including negotiated group rates for treatments at overseas facilities. Determining the degree to which spending should be rebalanced between effectively covering preventive, promotive, and public health care requires updated data and information systems. It is clear that there should be more focus on preventive care but the EXECUTIVE SUMMARY xix resources allocated to prevention are not fully captured. This makes it difficult to assess the current level of spending and additional resources needed, both overall and in specific areas. Clearly defining the budget item and reporting this in the annual reports would greatly facilitate an assessment of the relative allocation between curative and preventive health services. It will also be important to collect information on the geographical distribution of facilities and health workers by level of care (i.e., primary, secondary, tertiary), and to define the health catchment area for each facility. This should be complemented by a development of a National Health Account (NHA) to help assess equity and out-of-pocket spending. To ensure adequate financing of the sector, the National Health Strategic Plan, the National Strategy for NCDs, and the essential care package should all be costed. Also, the overseas treatment dataset should be updated to help in assessing the efficiency of the overseas treatment program. Finally, improving the quality of budget documents could enhance implementation and increase execution rates. Seychelles’ performance and program-based budgeting could be strengthened by more closely linking inputs and outputs, adding new monitoring indicators, adequately costing programs, and accurately estimating the funding needed to achieve the targets. To accomplish this, the authorities involved in preparing the budget will need to build their analytical and evaluation capacities. Improving data quality and moving away from process-oriented indicators could enhance performance and program-based budgeting. Instituting systems to track health expenditures in real time could inform more effective planning and budgeting. Timely NHA data and empanelment information are especially critical to support budget planning and prioritization. REBALANCING SPENDING TOWARD PRIMARY AND SECONDARY EDUCATION COULD IMPROVE EDUCATION OUTCOMES Seychelles spends a larger share of its education budget at the tertiary level than do most comparator countries, and outcome indicators suggest these expenditures are not cost effective. Tertiary education accounts for one-third of total education spending, largely due to the cost of financing scholarships for overseas studies, which consumes one-fifth of the education budget. Seychelles also allocates less to primary and secondary education, as a share of GDP, than do many other SIDS, while HICs that spend a similar amount in per-capita terms achieve superior outcomes. Students in countries with the most efficient education expenditures receive 3 to 4 additional learning-adjusted years of school for the same level of spending as students in Seychelles. Additional resources for public primary and secondary education could help improve learning outcomes while increasing efficiency and progressivity of spending. As Africa’s only HIC, Seychelles has an opportunity to accelerate human-capital formation to support future productivity growth. The Government could increase overall spending at the underfunded primary and secondary levels, while rationalizing spending on overseas scholarships. Financial needs are not currently considered in the allocation of overseas scholarships, and introducing needs assessments would promote equity by improving targeting. SEYCHELLES PUBLIC EXPENDITURE REVIEW xx Enhanced Fiscal Buffers for More Productive and Resilient Investments High-quality technical and vocational education and training (TVET) and other post- secondary education programs could improve labor-market outcomes among younger workers. Increasing the quality, relevance, timing, and flexibility of TVET programs could boost enrolment and retention rates, increasing expenditure efficiency while enhancing labor-force skills. The creation of a National Technical School to consolidate certificate- level TVET programs and improve their quality would boost value for money in post- secondary education. Overseas scholarships, as well as outsourcing of certain administrative activities, are appropriately implemented in Seychelles but additional analysis is needed to identify additional areas or approaches to improve cost-efficiency. The scholarship program is an important means of higher education training focused on the critical needs of the economy. The PER noted that the scholarship program could also incorporate some targeting to more needy students as a means of containing costs, as wealthier students are better placed to pay their own way. In the case of outsourcing, an analysis of data disaggregated by teaching and administrative staff could shed more light on the cost-effectiveness in recruitment for some administrative functions relative to others. There could also be additional analysis benchmarking teachers’ salaries relative to administrative staff to help assess this ratio against global comparators, to identify factors driving the differences in wages. To improve student retention and learning outcomes, and make sure all graduates have adequate skills for the modern economy, Seychelles should undertake two critical assessments: (i) to tailor its educational investments and policy reforms assessment to ensure these are focused on the key factors/issues impacting the school system in Seychelles (including school safety, gender-based violence, drug and alcohol abuse, as well as family dynamics and socio-emotional health); (ii) to support curriculum reform and improved educational quality, including technology integration, within the Seychelles education system. This will provide insights into curriculum development and ensure that the curriculum is updated to include technological components, thereby meeting contemporary educational demands and equipping students with essential digital competencies.3 This PER identifies some key fiscal risks for Seychelles but does not focus on SOEs or the pension system. Primary attention is given to growing risks from volatility, climate change and increasing budget rigidity. Fiscal risks arising from SOEs now appear to be low, with ongoing reforms aimed at improving SOE oversight by strengthening reporting requirements. Transfers to SOEs were just 0.16 percent of GDP in 2023, down from 1.8 percent in 2020. The target to reduce the debt-to-GDP ratio to 50 percent by 2029 is on track, and there are ongoing reforms to raise revenues. Subsidies, as a share of the budget, averaged 0.6 percent between 2015 and 2023. The Government is also pursuing measures to further reduce subsidies through reforming the tariff structure for energy and sewage, which together account for most subsidies. Finally, the aging population poses some 3 The WBG stands ready to support the government in the above efforts through (i) the Global Education Policy Dashboard (GEPD) -- a tool that measures drivers of learning outcomes in basic education by highlighting gaps between current practice and what the evidence suggests would be most effective in promoting learning; (ii) Education and Technology Readiness Index (ETRI) -- an assessment tool of the current state of technology use in education. EXECUTIVE SUMMARY xxi fiscal challenge to the provision of pension benefits in Seychelles. However, Seychelles has some important room for maneuver here. Increases in the currently very generous (by international standards) universal pensions provided from the budget to all citizens could be controlled in various ways. The Government has already undertaken a recent important measure in this regard by increasing the retirement age to 65. This is aligned with the approach adopted in other countries that have raised the retirement age to keep up with a higher life expectancy, to help contain costs. A contributory pension system has been in place since the 1990s and social taxes into the Pension Fund now constitute 10 percent of wages. As the size of pensions coming from the contributory system increases, the Government can explore feasible options for moderating the role of the budget in providing pensions. Other countries have combined this with a means-tested portion to further reduce the cost to the budget. The PER analysis highlights priority policy actions to increase fiscal space and improve resilience to economic shocks and climate risks through investments in human and physical capital. Chapter 1 focuses on Seychelles’ recent fiscal performance and examines trends in its public finances. Chapter 2 explores ways to counter the increasing threat of economic volatility and the negative impact of climate change. Chapter 3 examines the policy and institutional framework for managing public sector compensation, which will be vital to reverse an ongoing trend toward greater budget rigidity. Chapters 4 and 5 analyze the effectiveness and efficiency of public spending in the critically important health and education sectors, respectively. The report concludes with a set of proposed reforms based on two key criteria: (i) the amount of fiscal savings or gains generated; and (ii) the projected impact on social and economic outcomes. SEYCHELLES PUBLIC EXPENDITURE REVIEW xxii Enhanced Fiscal Buffers for More Productive and Resilient Investments Table ES1: Seychelles PER Findings and Prioritized Recommendations Policy Context Recommendation Potential Fiscal Effect on Efficiency Effect on Equity Effect on Climate Impact and Welfare Pathway 1: Enhancing fiscal buffers to mitigate the impacts of intensifying shocks 1) Seychelles fiscal Medium-term: Transition to Positive: Fiscal Positive: Impact on Slightly Positive: Positive: Generated policy is significantly countercyclical fiscal policy by savings relative growth and welfare If some fiscal fiscal reserves procyclical, which adopting a stabilization fund to the current as economic volatility savings are would go toward magnifies high and that creates a fiscal buffer and approach declines. channeled to the rebuilding to growing economic complements other financial that relies on most vulnerable. promote increased volatility to the instruments adoption of fiscal rules expensive adaptation. detriment of the along with based on international debt following country's development. experience. a negative economic shock. 2) Recent rapid growth Short-term: Undertake a functional Neutral fiscal Positive: Improved Positive: A Positive: Less in budget rigidity poses review of the size and current impacts. However, flexibility of wage bill that is rigidity in the budget a potential threat to structure of the public sector to controlling the the budget, fairer and more should translate to effectiveness due to (i) identify business needs and size of the wage with increased transparent will improved climate growth in the public redundant positions; and (ii) establish bill, will create transparency, fairness, promote greater resilience as wage bill. The recent an approach for annual adjustments more fiscal space and efficiency of the equity. released resources 11% of GDP cap on to the wage bill. for policies and wage bill. And, more are put toward the wage bill should programs to budget resources climate-related Medium-term: Standardize wages be supported with support inclusive appropriated for policies. Improved across different jobs and benchmark an institutionalized growth and programs will lead to flexibility also these against comparable private implementation climate resilience. a positive impact on supports improved sector positions and wages. mechanism. growth and welfare implementation of Implement effective payroll performance-based management systems to prevent budgeting and arrears from occurring in the future, efficiency to support ensuring timely and accurate inclusive and payments climate-sensitive growth. EXECUTIVE SUMMARY xxiii Policy Context Recommendation Potential Fiscal Effect on Efficiency Effect on Equity Effect on Climate xxiv Impact and Welfare 3) Most of the CIT Short-term: Implement recent Positive: Fiscal Positive: Improved Positive: This will Neutral: Some of the collected in Seychelles transfer pricing reforms that put gains of up to 8 fiscal space and lead to a more extra revenue could (79 percent) is from the onus on the tax filing company percent of GDP a more balanced equitable tax be put into climate- about 30 companies, to outline their related parties and could be achieved tax burden for burden. related investments while companies with organizational structure, and to if the larger hotels businesses. but direct effects turnover below SCR 870 maintain documentation supporting paid taxes in are expected to be 000 (i.e., the bottom 70 their application of the arm’s length proportion to their neutral. percent or deciles 1 to principle. contribution to 7) only accounted for value added. 1.3 percent of revenue. There is scope to expand the base and limit evasion. 4) Administration of Short-term: Build on government’s Positive: Fiscal Positive: (i) Improved Positive: Neutral: Increased SEYCHELLES PUBLIC EXPENDITURE REVIEW property taxes could recent changes to the property tax gain of 0.12 fiscal space Redistributes taxes on property be strengthened by rate by strengthening the approach percent of GDP and increased wealth from would have limited establishing a database for land valuation and maintenance of over the medium progressivity of the wealthy to impact on climate; to track timely changes relevant databases. term, with the taxes; but (ii) Possibly ordinary citizens. but some of the in land values. government negative impact extra revenue could decision to double for large property finance the climate the rate owners. agenda. Enhanced Fiscal Buffers for More Productive and Resilient Investments Pathway 2: Improving the quality of spending for improved human capital investments and service delivery 5) Inefficient curative Medium-term: To address rising Positive: Positive: Neutral: Neutral: No climate- care spending, including NCDs and value for money Empanelment Empanelment could Although, related effects are overseas treatment, strengthen curative care and would help reduce coordination empanelment expected. fails to address rising overseas treatment, by adopting: to reduce costs, and improved could have a incidence of NCDs: coordination costs allocation of relatively greater (i) the “Health in all Policies” Follow-up of patients and improve resources would help positive effect for approach.. identified with major health, and reduce incidence the less well off. NCDs appears passive (ii) strengthening continuity of positively impact of NCDs and create rather than proactive care through empanelment as welfare. positive welfare and the purchase of recommended in the 2018 WB effects. medical supplies is Quality and Efficiency study, inefficient. combined with digital messaging, follow-up of patients, and strategic purchases of medical supplies. Policy Context Recommendation Potential Fiscal Effect on Efficiency Effect on Equity Effect on Climate Impact and Welfare (iii) Expediting the analysis of the 2023 NCD survey to update operational planning. 6) Capacity for overseas Short-Term: Improve OT value for Positive: Gains Positive: Qualified staff Neutral: Neutral: No climate- treatment (OT) money: Establish mechanisms for made would in place is expected However, related effects are contracting is lacking, uniform contracting with overseas outweigh initial to improve efficiency increased expected. with no evidence of facilities to reduce and standardize costs to fill vacant in service delivery. staffing could explicit criteria for costs. positions and facilitate selecting countries or would be further improved Establish data and monitoring facilities. Limited staffing supported through targeting or systems for contract terms to monitor of the OT Unit in the potentially higher implementation cost-effectiveness and efficiency Health Care Agency efficiency once of needs for adjustments / realignments and (HCA) with key positions positions are filled. assessment renegotiation of contracts. vacant at the time of this analysis. Strengthen OT Capacity: Fill vacant positions as a priority. 7) (i) Teenage pregnancy Short-term: Adopt youth at risk Neutral: However, Positive: Reforms Potentially: Neutral: is high relative to policies: enforcement of are expected to Lowering other HICs and OECD regulations may help reduce the pregnancy (i) Enforce the change in legislation countries; and (ii) help to reduce incidence of teenage should reduce to enable teenagers to access family alcohol and drug abuse the behavior that pregnancies and the socio- planning without parental consent, remain high, with rising leads to adverse thereby contribute economic increase access points for such use by schoolchildren. health outcomes, to improved health factors that limit services, and ensure education on These trends are eventually leading outcomes while the likelihood the same is included in school health adversely affecting to positive fiscal reducing adverse of completing services. health outcomes and impacts. effects on labor education and labor force participation, (ii) Publish and enforce regulations force participation. attachment to leading to significant related to the 2019 Alcoholic Drinks Increased staffing to the labor market. social and health costs. Act. DASPTR is expected to help improve (iii) Increase staff and resources efficiency in service of DSAPTR to be able to expand delivery for the coverage of preventive interventions, prevention of NCDs. and to continue provision of harm reduction kits. EXECUTIVE SUMMARY xxv Policy Context Recommendation Potential Fiscal Effect on Efficiency Effect on Equity Effect on Climate xxvi Impact and Welfare 8) Educational outcomes Medium-term: Rationalize tertiary Neutral: Positive: Convergence Positive: The Neutral lag behind other HICs. A education spending, particularly Depending of Seychelles' re-allocation disproportionate share of overseas scholarships, to rebalance on resource education outcomes will be pro- education budget goes spending towards primary and allocations to in primary and poor, improving to scholarships for higher secondary levels, and TVET higher education secondary education public primary education and study education to improve quality and (scholarships), to the average and secondary abroad that are currently raise test scores, combating rising the fiscal impact among HICs. This will education that is allocated without an dropouts through targeted programs can be neutral. boost human capital guaranteed to all assessment of financial (including for youth at risk), and Probably at least (growth). citizens. need. Primary and raising the currently low qualifications another 1 percent Better preparation Quality TVET secondary education of many teachers. of GDP should and integration of will help could benefit from a be allocated Introduce needs assessments as TVET graduates into increase skills greater commitment of to primary and one of the criteria for allocation of productive labor in development budgetary resources in a secondary scholarships the workforce. including for the SEYCHELLES PUBLIC EXPENDITURE REVIEW number of areas. There is education. poor. also low value for money Develop and adopt an action plan/ Given the current in technical vocational program to reduce waste, improve excess capacity, and education training the quality / relevance of TVET, and much could likely (TVET), with low demand attract more student demand. be achieved and excess capacity in through greater existing programs. efficiency in a fiscally neutral Enhanced Fiscal Buffers for More Productive and Resilient Investments manner. Pathway 3: Integrating climate considerations into public finances 9) Public Investment Short-term: Adopt legislation and Positive: A potential Positive: Reduced Slightly positive. Positive: As the Management (PIM) regulations to govern the integration 2 percent of GDP severity in economic Due to reduced proposed reforms processes could of climate considerations in PIM increase in capital volatility due to volatility in the directly address be strengthened to processes by: (i) specifying in the budget spending climate shocks; income of the climate change increase value for budget circular, guidance to budget based on stronger reduced economic poor arising from adaptation and money, efficiency, and agencies for identifying and reporting PIM processes to losses from climate climate shocks mitigation. resilience of adaptation on climate spending; and (ii) adopting improve execution shocks (as a result that impact the investments. a framework for incorporating climate of the capital of investments poorest more impacts in project identification, budget, and that more strongly severely. appraisal, and ex-post reviews and incorporate climate address climate maintenance manuals. considerations in adaptation and the PIM process. mitigation). Policy Context Recommendation Potential Fiscal Effect on Efficiency Effect on Equity Effect on Climate Impact and Welfare 10) Seychelles is a Medium-term: Implement climate Positive: Fiscal Positive: Increased Neutral: Positive: Proposed leader in innovative tagging to track and evaluate related impacts because investments to Although, more reforms would financing instruments spending and introduce a functional this has potential address adaptation to financing for directly strengthen for climate and blue categorization in the budget through to increase climate should also investments climate adaptation economy investments issuing regulations to govern financing to help support greater to support efforts. that could be climate tagging of expenditures for support adaptation productivity and adaptation strengthened by the agriculture, blue economy and measures. resilience. would greatly integrating climate infrastructure sectors that categorize, benefit the considerations in PIM measure, and monitor climate- poorest who are processes. Climate- relevant public spending to better most affected by related expenditure is identify and mobilize fiscal resources climate shocks. currently not tracked for climate resilience. making it difficult to assess spending efficiency and spending allocations against results achieved. This would also greatly facilitate the raising of additional resources through evidence- based assessments of returns on investments/ spending. 11) Engaging the Short-term: Update existing Positive: Fiscal Positive: Engaging Positive: Due Positive: Proposed private sector in raising legislation governing public private impacts by the private sector to increased reforms will directly investments for climate partnerships (PPPs) to incentivize creating more will help to improve productivity and support climate adaptation will be increased private investments that fiscal space for efficiency of public resilience of adaptation. critical given the extent address climate change. investments that investments. investments. of resources needed address climate (between 4 to 6 percent shocks. of GDP) against current levels of spending of 0.9 percent of GDP. EXECUTIVE SUMMARY xxvii CHAPTER 1. MAINTAINING MACRO-FISCAL PRUDENCE CHAPTER 1. 1 Maintaining Macro-fiscal Prudence Following the 2007/08 global financial crisis, Seychelles made significant progress in building an effective and fiscally sustainable budgetary system. A buoyant tax system provides the highest revenues relative to GDP in sub-Saharan Africa, the allocation of expenditures adheres to international norms in most areas, and primary budgetary surpluses have facilitated bringing government debt and public finances back to manageable and sustainable levels. However, Seychelles faces some strong future challenges for effective macroeconomic and budgetary management. The fiscal policy stance remains procyclical, despite high economic volatility that is expected to increase given the country’s vulnerability to climate change, and high dependence on the tourism and fishing industries. Recent rapid growth in the public wage bill is increasing budget rigidity. Seychelles’ limited capacity to execute and absorb high levels of public investment is evident from the persistent under-execution of the capital budget. Sustaining the positive momentum in economic growth and welfare will require igniting productivity growth supported by substantial public investment in human and physical capital, including climate-resilient infrastructure. Budgetary efficiency will need to be increased in a number of areas. 1.1 SUSTAINING STRONG ECONOMIC GROWTH AND PRUDENT MACRO-FISCAL POLICIES WILL FACE SOME CHALLENGES 1. Seychelles has sustained strong economic growth on the back of transformative macroeconomic and institutional reforms. Following the 2007/08 global financial crisis, Seychelles liberalized its exchange rate and consolidated public finances, doubling GDP growth between 2009 and 2019 relative to the preceding decade. With average annual growth of 4.5 percent over 2010–14, the country achieved high-income status in 2015; and maintained prudent macroeconomic policies during and after the COVID-19 pandemic. Support to firms and households was scaled up during the pandemic to limit adverse impacts on the economy, then successfully rolled back by 2021. The country also implemented a liability management operation by exchanging treasury bills for treasury bonds, thereby lengthening the average maturity of the domestic debt portfolio to 4.8 years from less than one year. Finally, transfers to state-owned enterprsies (SOEs) declined to 0.2 percent of GDP in 2023 compared with 2.0 percent in 2020. This was complemented by reforms to strengthen oversight and operation of SOEs to further encourage competition while reducing fiscal risks. Fiscal consolidation has enabled Seychelles to reduce its debt-to-GDP from over 160 percent in the mid-2000’s to just under 60 percent in 2023. SEYCHELLES PUBLIC EXPENDITURE REVIEW 2 Enhanced Fiscal Buffers for More Productive and Resilient Investments 2. Robust growth helped reduce poverty and inequality despite large external shocks. Based on the upper middle-income country (MIC) level of US$6.85 per capita per day, the poverty rate declined from 9.7 percent in 2013 to 6.7 percent in 2018.4 The average worker in the bottom quintile experienced a 25-percent increase in wages between 2013 and 2018, as did workers in the middle-class. The bottom 40 precent (B40) of households also experienced a similar increase in self-employment earnings. Returns to education also contributed to poverty reduction. Among the employed, individuals with a university or a postgraduate degree earned 30 percent more than those with a polytechnic degree. At the same time, there was a significant increase in the share of individuals completing vocational education during the period 2013–18. 3. However, stagnant productivity growth, climate shocks, and an aging population will place increasing demands on public finances, making efficiency of public expenditures central to strong economic growth and fiscal sustainability. A 2017 Climate Change Policy Assessment in Seychelles found that climate financing alone would require about 3 percent of GDP annually between 2017 and 2030.5 The 2021 Seychelles Updated Nationally Determined Contributions (NDC) estimates total costs of US$670 million for implementation. This translates to around 4 percent of GDP annually for 13 years. 4. Labor productivity growth has slowed and is now stagnant. Labor productivity contributed only 0.35 of a percentage point to growth over the period 2015–22 compared with 0.33 of a percentage point over the previous period 2010–14. Strong growth in Seychelles requires boosting labor productivity’s contribution to growth (2017 World Bank Systematic Country Diagnostic (SCD) for Seychelles and 2023 SCD Update). More in-depth analysis is needed to understand the causes of the stagnation in labor productivity growth but contributing factors include high and growing levels of drug and alcohol abuse.6 In 2017, the Integrated Biological Behavioral Survey (IBBS) found that 4,318 people in Seychelles reported using heroin—an increase of 53 percent since 2011. According to the former Agency for the Prevention of Drug Abuse and Rehabilitation (APDAR), these numbers are likely higher, at between 5,000 and 6,000, making Seychelles one of the countries with the highest number of heroin consumers per capita in the world. 5. As a small island state, Seychelles is increasingly vulnerable to adverse climate effects. While many of Seychelles’ islands lie outside the cyclone belt, implying less exposure to catastrophic natural disasters compared with other island countries, Seychelles is nonetheless vulnerable. The country ranks 70th among 185 assessed countries with respect to current vulnerability to climate shocks (Figure 1.1), and the expected future impact of climate change will be a key challenge. Most disasters in Seychelles are triggered by storms, floods, rain, and 4 “Progress Towards Inclusive Growth: A Poverty and Equity Assessment for Seychelles,” World Bank, Washington, DC, 2021. 5 S. Allan, A. V. Bahadur, S. Venkatramani, and V. Soundarajan 2019. The Role of Domestic Budgets in Financing Climate Change Adaptation. Rotterdam and Washington, DC. Available online at www.gca.org. 6 The demographic characteristics of heroin users point to the adverse effects on employment, i.e.: a male (85.1 percent), between 20 and 29 years (39.3 percent), single (54.4 percent, living alone and never married), with a secondary education (62.9 percent), who is not fully employed (88.4 percent). The young man is likely to have children, indicating family issues and that the use of substances may have started at a young age. The heroin user is likely to be living alone and not to have formed a stable relationship with a partner (Vel, 2018). CHAPTER 1. 3 Maintaining Macro-fiscal Prudence landslides as was the case in December 2023. Heavy rains, flooding, landslides, and related damage resulted in a one-day state of emergency with significant fiscal costs. Average annual losses from floods are estimated at US$2.5 million (roughly 0.24 percent of Seychelles’ GDP). In addition to climate shocks, rising sea levels and ocean warming (leading to coral bleaching) present additional growing threats to the country. Chapter 2 provides more discussion of the fiscal implications of these climate shocks. 6. The combination of geography and concentration of economic activity in tourism and fisheries makes Seychelles susceptible to high economic volatility from external shocks. In addition to their direct impact, climate disasters negatively affect tourism and fisheries. As a small island open economy, Seychelles is also exposed to external demand shocks and risks, as demonstrated during the pandemic that caused an 8.5 percent decline in GDP in 2020. As of 2022, tourism, including accommodation, food services, and various other services, directly accounted for about one-quarter of total GDP and employment. Industry contributes about 13.5 percent of value added, mainly due to the world’s second-largest tuna cannery. Much of the rest of Seychelles' economy consists of non-tradables linked to incomes generated from tourism and fisheries. Figure 1.1: Seychelles ranks 70th in vulnerability to climate shocks across 185 countries 0.60 Vulnerability Index1 SEYCHELLES 0.40 0.20 CHE DEU IRL ISR PRT GRC MLT TKM CYP QAT LTU TJK DZA TUN ARG BRN GEO SRB BWA GUY GTM NIC ECU SYC PHL DJI PLW MOZ TZA HTI COM BGD GIN MRT NRU SLB FSM Source: ND- Gain (University of Notre DAME). 1/ Vulnerability is the propensity or predisposition of human societies to be negatively impacted by climate hazards. It is composed of the following dimensions: Exposure, sensitivity and adaptive capacity. 7. High economic volatility in Seychelles is compounded by a procyclical fiscal policy stance. Except for the years 2020 and 2017, Seychelles’ net fiscal impulse has tended to increase as the economy grows and decline as the economy contracts. Specifically, Table 1.1 shows that at times, during periods of economic growth, Seychelles increased government spending and reduced taxes, reinforcing procyclical trends. Conversely, during economic contractions, austerity measures were adopted at times by reducing government spending or increasing taxes in an attempt to rein in the budget deficit. Chapter 2 elaborates further on these trends and how this contributes to a procyclical fiscal stance. SEYCHELLES PUBLIC EXPENDITURE REVIEW 4 Enhanced Fiscal Buffers for More Productive and Resilient Investments Table 1.1: Seychelle’s fiscal policy has tended to be procyclical 2014 2015 2016 2017 2018 2019 2020 2021 2022 Output gap, % of potential GDP 1.5 0.4 0.7 -0.6 -0.7 0.4 -10.6 -8.5 -2.9 Fiscal impulse 0.1 0.5 1.5 1.0 -0.9 0.3 11.2 -8.8 -1.6 Expansion of expenditure -1.6 -3.2 3.7 -1.9 0.8 -1.8 10.3 -7.2 -3.3 Contraction of revenues 1.6 3.6 -2.2 2.9 -1.7 2.1 0.9 -1.6 1.8 Source: World Bank staff calculations. 8. Fiscal management in Seychelles has Figure 1.2: The infrastructure efficiency been prudent and its budgetary programs gap is between 25 and 30 percent effective when compared with most Percent of the frontier (100) average other small island countries, but there 100 are opportunities for improvement. For 80 example, while Seychelles can boast both 60 a high quantity and quality of infrastructure 40 20 relative to most other countries in the 0 region, it could potentially carry out public rts I e t s rt d ty LP or ad ur oa investment in a more efficient manner. po ci Po sp ct tri Ro ilr ns an ru ec Ra ra Seychelles’ infrastructure efficiency gap, st Tr El rt fra Ai In which measures its distance from frontier Seychelles Regional Structural Aspirational countries according to a composite measure Source: World Bank staff calculations. of efficiency, is estimated at between 25 and 30 percent (Figure 1.2).7 Seychelles’ human capital efficiency gap is of a similar magnitude. Specifically, Seychelles’ Human Capital Index (HCI) is 63 percent, indicating that a child born today will be 63 percent as productive as she could be, as an adult, with completed education and in full health.8 Accounting for the number of unemployed adults would yield an adjusted HCI of 47 percent. Seychelles’ HCI is higher than the modal value for sub-Saharan Africa (40 percent) and for small Pacific island countries (50 percent), but lags well behind most other high-income countries (80 percent). 7 A measure of efficiency is estimated based on a composite indicator of seven indices from the World Economic Forum over the period 2017–19, employing the methodology of Herrera and Ouedraogo (2018). The composite index of infrastructure includes: measures on the overall quality of infrastructure, transport infrastructure, electricity supply, air transport infrastructure, port infrastructure, railroad infrastructure, and roads. Additionally, the composite indicator includes the World Bank's Logistics Performance Index due to its frequent updates. The study considers public and private investment per capita, as well as GDP per capita as measures of input. 8 The HCI quantifies the contribution of health and education to the productivity of the next generation of workers. It measures the country’s distance to the frontier of complete education and full health for a child born today and the human capital the child can expect to attain by age 18, given the risks of poor health and education that prevail in the country where he or she lives. CHAPTER 1. 5 Maintaining Macro-fiscal Prudence 9. However, a small population size, coupled with large distance from world markets (as is the case with other small island states), constrains the capacity to deliver high quality services with efficiency. These characteristics also result in a typically narrow revenue base. In Figure 1.3, an efficiency measure is derived based on the distance of each country from the cross-country regression line of the HCI against per capita expenditure for over 200 countries. This is plotted against population size, as well as countries’ geographic remoteness from world markets, to assess the cross-country links between efficiency and indicators of geographic and demographic constraints. Figure 1.3a indicates that, in general, more populous countries tend to have higher HCI levels (or are better at producing higher levels of human capital). It also shows that Seychelles’ HCI is roughly at the level expected for its population size. Figure 1.3b shows that the further a country is from world markets the lower its expected HCI level. Seychelles’ HCI is slightly less than what would be expected given its remoteness. There is room for Seychelles to improve its HCI, particularly given the fact that Seychelles’ GDP per capita is high relative to most other states of similar geography and demography. Figure 1.3: Geographic and demographic constraints are associated with reduced efficiency of public expenditure A: Population size and B: Remoteness and Efficiency of Public Expenditure Efficiency of Public Expenditure 0.3 0.3 0.2 0.2 MLT MLT 0.1 MUS 0.1 MUS ISL Efficiency Efficiency ISL 0.0 0.0 -0.1 -0.1 BHR BHR SYC -0.2 SYC -0.2 -0.3 -0.3 10000 1000000 100000000 10000000000 5000 7000 9000 11000 13000 15000 2020 population 2020 remoteness     Note: Population size has been logarithmically transformed. Remoteness is measured as the GDP-weighted distance from world markets. Source: WDI, adapted from “Raising Pasifika: Strengthening Government Finances to Enhance Human Capital in the Pacific.” World Bank 2023. 10. To support higher levels of productivity necessary for sustained and inclusive growth, improved efficiency in spending will be critical. Higher efficiency is particularly critical considering significant expected additional future demands on public finance from climate change and an aging population. Given stagnant labor productivity, particular attention to education and health outcomes is warranted. In the education sector, Seychelles maintains a low student-teacher ratio in primary and secondary education compared with other countries, resulting in an estimated 85 percent of the education recurrent budget going to salaries in basic education. This is similar to trends in Jamaica, where 87 percent of education spending goes to wages for basic education (World Bank 2021). It contrasts also with spending levels SEYCHELLES PUBLIC EXPENDITURE REVIEW 6 Enhanced Fiscal Buffers for More Productive and Resilient Investments among the Pacific Island countries. Among the four high-spending Pacific Island countries, the teacher wage bill is below 60 percent, on average, and accounts for less than 20 percent of public spending on education in Tuvalu and around 40 percent in Kiribati (World Bank 2023). Also, Seychelles' spending per student is relatively low (and falls below the international benchmark of 20 percent of total spending established by the 2015 Incheon Declaration). During the period 2010–21, Seychelles allocated, on average, 1.3 and 1.1 percent of GDP to primary and secondary education, respectively, whereas small island developing states (SIDS) allocated on average about 1.8 and 1.9 percent of GDP, respectively, to those subsectors. There is also a gender dimension, whereby boys/men have lower education and health outcomes than girls/women. In the health sector, the focus remains on curative care despite a rising incidence of noncommunicable diseases (NCDs), which accounted for 71 percent of deaths in 2021. In addition, a rising incidence of drug use and continued high rates of teenage pregnancy have also undermined the relationship between youth at risk and the labor market. 11. Improved budget efficiency will entail containing rising budget rigidity. Budget rigidity can be defined as the share of public spending devoted to wages, social transfers, pensions, and debt service that represent relatively fixed multi-year commitments. A country with high budget rigidity will therefore have very limited resources remaining for key public investments in infrastructure, education, health, security, and other important areas. Recent evidence from Latin American and the Caribbean indicates that rigidity of the budget significantly reduces spending efficiency.9 While budget rigidity in Seychelles is in line with comparators, its rapid increase should be arrested (Figure 1.4). Establishing mechanisms for appropriate management of the wage bill, which is the main driver of budget rigidity, should be a key objective. Figure 1.4: Budget rigidity increased between 2015–19 and 2020–22 SEYCHELLES' BUDGET RIGIDITY INCREASED BETWEEN 2015-2019 AND 2020-2022 (percent of GDP) 50.0 19.5 40.0 17.0 21.1 20.2 30.0 12.5 16.45 13.2 13.7 2.1 2.3 1.7 2.4 20.0 2.5 2.1 2.2 5.8 2.2 8.4 9.6 4.8 10.0 3.1 7.0 3.5 4.1 9.9 11.7 9.4 9.8 7.2 6.9 7.5 7.5 0.0 Seychelles Seychelles Regional Regional Structural Structural Aspirational Aspirational Period Period Period Period Period Period Period Period average average average average average average average average 2015-2019 2020-2022 15-19 20-22 15-19 20-22 15-19 20-22 Wage bill Social benefits Goods and services Interest payments Subsidies Other Capital expenditure Source: BOOST. 9 Herrera, S. and Olaberria, E. 2020. Budget Rigidity in Latin America and the Caribbean Causes, Consequences, and Policy Implications: https://openknowledge.worldbank.org/server/api/core/bitstreams/1a34178a-b45a-5e9f-a82c- 9b6240d3ae15/content. See also Blog: https:/ /blogs.worldbank.org/en/developmenttalk/budget-rigidities-will- constrain-fiscal-policy-years-come. CHAPTER 1. 7 Maintaining Macro-fiscal Prudence 12. Seychelles will need to expand its capacity to execute and absorb public investment. A modest volume of annual realized public investment in Seychelles is due primarily to an under- execution of the capital budget. Capital expenditure execution rates averaged 80.7 percent between 2015 and 2022, varying from 72 percent in 2018 and 90 percent in 2022. High levels of budget under-execution weigh on both the volume and efficiency of capital expenditure, and make meeting growing public investment needs challenging. Improved efficiency will be critical, for example, in realizing the additional climate adaptation investment needs outlined in Seychelles’ updated 2021 NDC. 13. In the absence of reforms to improve spending efficiency, growth will remain at historical levels. A simulation exercise (Annex 2) illustrates the important potential impact of increasing the efficiency of capital expenditure for economic growth. Under a business-as-usual scenario, or a continuation of historical measures without reforms to adapt to climate shocks, growth remains at an average annual 3 percent. With full implementation of reforms to strengthen efficiency and meet investment targets set out in the 2021 Seychelles NCD Update, annual growth could average as much as 6 percent of GDP in the medium term. 1.2 FISCAL CONSOLIDATION HAS PLACED PUBLIC FINANCES ON A SUSTAINABLE PATH AND REDUCED RISKS 14. Seychelles has maintained fiscal prudence and is on track to realize its debt reduction targets. The country has been performing well under an IMF program that targets primary balance surpluses and debt reduction. Peak spending occurred in 2020, to mitigate the impact of the pandemic, amounting to 10.6 percent of GDP, and driven by wages and guarantee of salaries to the private sector and an increase in allocations to social protection to finance the unemployment relief scheme program. These programs were then later scaled back in 2021 and 2022. In 2023, strong business and property tax collections mitigated higher public spending on wages and the costs of establishing the Home Care Agency (HCA). This resulted in a primary fiscal surplus of 1.74 percent of GDP and an overall deficit of 1.2 percent. A relatively modest capital budget was under-executed by 19 percent and the unspent portions were applied to other current expenditure items. Debt repayments in turn contributed to a decline in public debt to 58.3 percent of GDP. Table 1.2: Selected macro-fiscal indicators (percent of GDP, unless otherwise stated) Projections 2021 2022 2023 2024 2025 2026 2027 Nominal GDP (million) 25163.76 29372.96 30019.09 31463.67 33422.31 35365.26 37873.61 Real GDP Growth 0.55 14.98 3.20 3.70 4.10 3.73 3.56 (percent) Current Account Balance -9.01 -6.81 -7.22 -7.25 -7.76 -8.39 -9.08 Trade Balance -4.08 -2.39 -4.71 -4.84 -4.88 -5.38 -5.77 CPI (year on year, percent) 7.85 2.53 -2.71 1.23 2.27 2.99 3.54 SEYCHELLES PUBLIC EXPENDITURE REVIEW 8 Enhanced Fiscal Buffers for More Productive and Resilient Investments Projections 2021 2022 2023 2024 2025 2026 2027         Total Revenue and 33.20 29.96 32.46 33.54 34.63 34.55 34.47 Grants Total revenue 30.47 29.58 31.59 32.35 33.26 33.78 33.77 Tax Revenue 26.71 25.17 27.21 28.21 29.88 30.51 30.70 Income Tax 4.10 3.70 3.96 3.99 4.07 4.11 4.23 Custom Duties 0.90 1.03 1.10 1.09 1.10 1.12 1.14 Excise Tax 4.80 4.82 4.75 4.75 4.95 4.90 4.97 Value Added Tax 9.23 10.09 10.00 10.05 10.94 11.36 11.39 Business Tax 5.78 4.11 5.33 5.57 6.22 6.39 6.37 Corporate 0.24 0.04 0.02 0.00 0.00 0.00 0.00 Responsibility Tax Tourism Marketing Tax 0.24 0.28 0.36 0.30 0.28 0.29 0.28 Property Tax 0.18 0.10 0.12 0.23 0.22 0.21 0.20 Other Tax 1.42 1.10 1.69 2.22 2.09 2.11 2.12 Non-Tax Revenue 3.76 4.41 4.38 4.14 3.38 3.27 3.08 Grants 2.73 0.38 0.87 1.19 1.37 0.77 0.69 Expenditure and net 39.04 31.38 33.63 34.95 35.59 35.34 34.27 lending Current expenditure 33.77 28.87 29.80 30.09 29.68 29.32 28.67 Wages and salaries 10.98 9.51 10.03 10.76 10.63 10.65 10.65 Goods and services 11.23 10.65 11.93 11.86 11.59 11.30 10.76 Social program of 1.86 0.91 0.81 0.91 0.88 0.85 0.93 Government Transfers to Public 0.95 0.94 0.16 0.16 0.16 0.15 0.10 Enterprises Benefits and approved 5.62 4.66 3.96 3.98 3.88 3.90 3.86 programs of SSF Others 0.18 0.15 0.00 0.04 0.04 0.04 0.04 Interest due 2.94 2.04 2.92 2.38 2.50 2.43 2.33 Capital Expenditure 4.47 2.02 3.30 4.51 5.61 5.62 5.62 Development Grant 0.41 0.42 0.52 0.00 0.00 0.00 0.00 Net lending 0.16 -0.05 -0.11 0.07 0.15 0.26 -0.21 Contingency 0.23 0.12 0.12 0.28 0.15 0.14 0.20 Primary Balance -2.90 0.63 1.74 0.98 1.53 1.64 2.52 Overall Balance -5.84 -1.42 -1.17 -1.40 -0.96 -0.79 0.19 Public Debt 73.61 61.13 58.53 60.02 59.07 57.22 57.00 Poverty at US$6.85 8.36 6.36 5.94 5.94 5.59 … … a day, percent of the population CHAPTER 1. 9 Maintaining Macro-fiscal Prudence Projections 2021 2022 2023 2024 2025 2026 2027     GHG, metric tons of CO₂- 8.30 9.06 10.04 11.18 12.46 … … eq percapita Fuel combustion, 78.43 79.65 81.00 82.27 83.43 … … percent of total Waste, percent of total 11.66 10.79 9.88 9.01 8.21 … … Industry, percent of total 9.41 9.11 8.74 8.38 8.07 … … Other, percent of total 0.50 0.45 0.38 0.33 0.29 … … Source: Ministry of Finance and World Bank staff estimates. 15. The balance of payments has also stabilized in line with the economic recovery. The collapse in tourist demand during the pandemic sharply weakened the current account and the tax revenue base. However, this situation stabilized as the economy recovered. In 2023, a current account deficit of close to 7 percent of GDP was more than financed by foreign direct investment of 13.8 percent of GDP, primarily in hotels and resorts. Foreign exchange reserves increased to US$68.1 million in 2023, covering 3.8 months of imports. 16. A positive economic outlook, with GDP growth expected to average 3.8 percent in the medium term, is consistent with the Government’s continued commitment to fiscal prudence (Table 1.2). Higher service quality and new products in the tourism industry are expected to boost spending per arrival and help raise tourism revenues growth to an annual average of 4 percent over the medium term. Forward-looking indicators, such as the number of bookings and scheduled flights, suggest that growth in the accommodation and food service industry has stabilized, with a projected 3-percent increase over the medium term. The contribution to growth from the ICT, transportation and storage sectors is expected to remain robust and contribute toward higher employment. A projected 1- to 2-percentage-point of GDP increase in public investment, coupled with higher spending efficiency and improved capital budget execution, will also support an expected average growth of 3.8 percent in the medium term. Improved efficiency of public investment management (PIM) processes and mainstreaming of climate considerations into PIM are expected to support more resilient growth. Investments are expected in critical infrastructure and climate-related projects linked to the implementation of master plans for tourism, and coastal and marine management. Fiscal consolidation is expected to boost investor confidence and attract foreign capital inflows. Meanwhile, inflation is projected to remain in the low single digits, supported by a stable rupee linked to higher tourism receipts. 17. The Government is expected to continue fiscal consolidation efforts to maintain a primary fiscal surplus. A fiscal consolidation of 1.9 percentage points of GDP is expected to be achieved by 2027 through both revenue and expenditure measures. On the spending side, the wage bill is projected to remain around 11 percent of GDP, while expenditures on goods and services is expected to decline by 1.2 percentage points of GDP to 10.8 percent of GDP over this period. At the same time, the Government is expected to safeguard social spending SEYCHELLES PUBLIC EXPENDITURE REVIEW 10 Enhanced Fiscal Buffers for More Productive and Resilient Investments while boosting capital investment to 5.6 percent of GDP in 2027 from 3.3 percent in 2023. The rebound in tourism along with increased revenues mobilization efforts, including enhanced tax compliance and administration through increased transparency, reduced evasion, and improved digitalization of services, will contribute to macroeconomic stability. 18. In the medium term, revenue collection will increase, driven by increased levels of economic activities, as well as measures to improve tax policy, such as: (i) the prevention of base erosion of the corporate tax base through international profit shifting (supported by a World Bank DPF series); and (ii) streamlining of value-added tax (VAT) exemptions (structural benchmark for the IMF Extended Fund Facility [EFF] program). Tax reforms are expected to generate 3.6 percent of GDP in the medium term. 19. Macro-fiscal prudence will require implementing measures to support greater resilience. Sustainable debt management will be a central element of ensuring fiscal policy is resilient. Equally important are policies that improve resilience against climate shocks, and the support of countercyclical fiscal policy to limit volatility in growth. 20. Proactive debt management and fiscal consolidation is expected to keep Seychelles’ public debt on a sustainable downward path. The debt sustainability analysis (DSA) concluded that Seychelles’ debt is sustainable. In 2024, the public debt-to-GDP ratio is expected at 60 percent as the Government gains access to additional external finance. In the medium term, the public debt-to-GDP ratio is projected to decline gradually, reaching 57 percent of GDP by 2027. The target to reduce the debt-to-GDP ratio to 50 percent by 2029 is on track, and there are ongoing reforms to raise revenues. 21. Seychelles has sought to enhance debt transparency by initiating a dedicated quarterly debt report. Debt transparency is especially critical at times of elevated financial risk. Debt vulnerabilities in Seychelles increased significantly due to the pandemic, making debt and debt management transparency even more important. The Ministry of Finance Economic Planning and Trade (MoFEPT) currently publishes the debt bulletin on a quarterly basis. This will enhance transparency of public debt management practices, including increased transparency through expanded debt data coverage. In addition, since 2022, the MoFEPT has started to expand the analysis of debt strategies in its Medium-Term Debt Management Strategy, and now publishes its annual borrowing plan. Moreover, a yearly issuance calendar with quarterly issuance plans has been published as of 2022. 22. Contingent liability risks have declined. Risks to debt sustainability from Air Seychelles have been reduced, particularly since Air Seychelles was put into administration and Air Seychelles is on a much more sustainable financial footing, following an agreement between Air Seychelles and the creditors in April 2022 for Air Seychelles to pay about US$28 million (33.3 percent) of the US$76.8 million debt (US$83.4 million, including late interest) owed to the Etihad Airlines Partners II bondholders. The Government also reached an agreement to pay only US$13 million of the initial US$69 million obligation to Etihad that the Government had taken onto its own books. In May 2022, the bondholders withdrew their petition for reorganization based on the agreement reached between Air Seychelles and the Government. CHAPTER 1. 11 Maintaining Macro-fiscal Prudence 1.3 STRONG REVENUES AND MODEST CAPITAL SPENDING HAVE SUPPORTED THE FISCAL BALANCE 23. Revenue performance has been strong and a key driver of the fiscal balance, despite the impact of some temporary shocks. Reforms undertaken in 2016 raised the personal income tax threshold, temporarily reducing income taxes by 0.5 of a percentage point of GDP in 2016. Additional reforms in 2018 further reinforced the progressivity of the income tax but contributed to a 1-percentage-point of GDP reduction in income taxes. This was followed by the pandemic, which caused a drop in total tax revenues to around 30 percent of GDP in 2021, but revenues have since recovered. As of 2022, the fiscal deficit stood at 1.4 percent of GDP (Figure 1.5) and is expected to further improve in 2023 to 1.2 percent of GDP. With the economic recovery and steady growth, coupled with ongoing reforms to strengthen revenue mobilization and expand the tax base, total revenue is estimated to reach around 34 percent of GDP in 2024. The fiscal balance has been further impacted by increases in the wage bill, and goods and services, which have been partially mitigated by fiscal savings from under- execution of the capital budget. Figure 1.5: Change in the fiscal balance between 2014 and 2022, percent of GDP 3 2 1 0 -1 -2 -3 -4 -5 Balance Tax revenues Other revenues Wages & salaries Goods & services Interest payments Other expenditures Capital expenditures Balance 2014 Revenues Expenditures 2022 Source: World Bank staff calculations. a) Budgetary revenues are driven by the value-added tax 24. Overall, Seychelles’ revenue uptake is high compared with other African countries and most other small island states (Figure 1.6). Between 2016 and 2023, the revenue-to- GDP ratio (including tax and no-tax revenues) averaged 31.4 percent, representing the highest across all African countries. The revenue-to-GDP ratio was 31.6 percent in 2023, below those of its aspirational comparators, such as Cyprus, Iceland and Malta, in the same year (Figure 1.6b). Seychelles’ tax-to-GDP ratio averaged 28 percent over the same period. Tax revenues as share of GDP is high relative to its comparator countries. Seychelles also collects high tax revenues as a share of its GDP compared with other small and highly tourism-dependent island economies. Seychelles’ tax revenues predominantly come from indirect taxes such as VAT, excise duty, and custom duties. The corporate (or business) tax is also a major source of income, making up 17.0 percent of total tax revenue in 2023. Personal income tax accounts for SEYCHELLES PUBLIC EXPENDITURE REVIEW 12 Enhanced Fiscal Buffers for More Productive and Resilient Investments about 12.5 percent of total revenues. Seychelles outperforms each of its structural comparators in the collection of taxes on goods and services/VAT. However, the country is well below its aspirational comparators in the collection of taxes on income, profits and capital gains (Figure 1.6d). Notably, while aspirational comparators such as Cyprus, Iceland, Malta, and Ireland have a portion of their revenues coming from social security contributions, this is not the case for Seychelles. Figure 1.6: Trends in revenue collection a. During the pandemic the contraction in b. Total revenue uptake is the fourth highest tourism-related activities reduced revenues among comparators (% of GDP), 2023 (% of GDP) a. During the pandemic the contraction in b. Total revenue uptake is the fourth highest 50.00 50 tourism-related activities reduced revenues among comparators (% of GDP), 2023 40.00 (% of GDP) 40 50.00 50 30.00 30 40.00 40 20.00 20 30.00 30 10.00 20.00 10 20 0.00 10.00 0 10 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 Comoros Singapore Gabon The The Mauritius Ireland Cabo Verde Guinea Barbados Seychelles Malta Malta Cyprus Iceland 0.00 0 Bahamas, Comoros Singapore Gabon Mauritius Ireland Cabo Verde Guinea Barbados Seychelles Cyprus Iceland Tax Nontax External grants Equatorial Bahamas, Tax Nontax External grants Equatorial Source: Government Fiscal Reports. Source: WEO. c. VAT contributes the most to tax revenues d. Revenue collection through taxes and (% of GDP) goods and services is the highest relative 40 c. VAT contributes the most to tax revenues to comparators 50 d. Revenue of GDP),taxes (%through collection 2019 and (% of GDP) goods and services is the highest relative 30 40 40 to comparators (% of GDP), 2019 50 30 20 30 40 20 30 10 20 10 20 0 10 0 10 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 Cabo Verde The The Cyprus Guinea Singapore Ireland Seychelles Iceland Gabon Mauritius Malta Malta 0 0 Bahamas, Tourism Marketing Tax (MTT) Cabo Verde Cyprus Guinea Singapore Ireland Seychelles Iceland Gabon Mauritius Equatorial Other Bahamas, Social TourismSecurity Tax Tax (MTT) Marketing Other Tax Excise Equatorial Social Added Value Tax Security Tax Corporate Excise Tax Social Responsibility Tax (CSR) Other Taxes Trade Tax Value Added Tax Social Security Contributions Personal CorporateIncome Tax Social Responsibility Tax (CSR) Tax onTaxes Other income, profits, & capital gains Business Trade TaxTax Tax on Goods and Social Security Services Contributions Personal Income Tax Tax on income, profits, & capital gains Business Tax Tax on Goods and Services e. Tax revenues Source: Government are relatively buoyant, Fiscal Reports. f. Space improvement in VAT collection forDatabase. Source: IMF GFS 2014–22 despite C-efficiency ratio of 0.7 Taxe. Tax revenues are relatively Type buoyant, Buoyancy Ratio 0.80f. Space for improvement in VAT collection 2014–22 despite C-efficiency ratio of 0.7 Tax Revenue 1.0 0.60 CHAPTER 1. Tax Type Buoyancy Ratio 0.80 13 Maintaining Macro-fiscal Prudence Income Tax 0.2 0.40 Tax Revenue 1.0 0.60 Custom Duties -0.1 Value Added Tax Corporate Social Responsibility Tax (CSR) Other Taxes Trade Tax Social Security Contributions Personal Income Tax Tax on income, profits, & capital gains Business Tax Tax on Goods and Services e. Tax revenues are relatively buoyant, f. Space for improvement in VAT collection 2014–22 despite C-efficiency ratio of 0.7 Tax Type Buoyancy Ratio 0.80 Tax Revenue 1.0 0.60 Income Tax 0.2 0.40 Custom Duties -0.1 0.20 Excise Tax 0.9 Value Added Tax 1.0 0.00 Cabo Verde Cyprus Bahamas, The Ireland Iceland Seychelles Mauritius Malta Business Tax 1.0 Tourism Marketing Tax 1.3 Source: World Bank staff calcualtions. Source: IMF GFS Database and PwC. 25. As with other countries affected by the pandemic, there was a decline in revenue in Seychelles (Figure 1.6a). The revenue-to-GDP ratio declined from 31.8 percent in 2019 to 30.5 percent in 2021. This was due to a decline in tax revenue performance from the contraction in the tourism industry and the associated reduction in aggregate consumption. In addition, the Government forwent revenues by offering tax breaks to businesses that were adversely affected by the pandemic. Revenues returned to historical levels after the pandemic, as the economy recovered. 26. VAT has been the main driver of tax revenue for Seychelles, accounting for 32.2 percent of total revenue in 2023 (Figure 1.6c). VAT replaced goods and services tax (GST), which had been in existence since 2001, in January 2013. There are two VAT rates in Seychelles, namely a standard VAT rate of 15 percent is collected on most goods and services and a rate of 0 percent (zero-rate) is collected on a specific list of transactions (principally exports but also a supply of goods by an individual farmer or fisherman and public utilities). In 2023, VAT as a share of GDP was about 10 percent. Seychelles has several VAT exemptions, because many products that are considered “basic necessities” are subject to VAT exemptions. These exemptions, primarily target agricultural and food products (fruits and vegetables, meat, dairy products, etc.), as well as other basic necessities (covering pharmaceutical products and some basic services). Examples of these include food items such as meat, fish, coffee, and tea. They also include sanitary products, public utility services, public transportation, health and life insurance, and education services. 27. The VAT collection efficiency (C-efficiency) ratio in Seychelles is estimated at 0.7, second only to the Bahamas, among small island countries (Figure 1.6f). While this ratio demonstrates commendable performance, opportunities exist for enhancing VAT collections. Efforts are underway to digitize processes through online services and implement a new Tax Management System. In addition, ongoing initiatives aim to streamline work procedures through business reengineering. Furthermore, the Government has introduced new transfer pricing legislation aimed at reducing revenue losses resulting from transfer pricing/profit-shifting. SEYCHELLES PUBLIC EXPENDITURE REVIEW 14 Enhanced Fiscal Buffers for More Productive and Resilient Investments 28. Corporate income tax also has been a key contributor to revenues, despite a marginal decline from 5.6 percent of GDP in 2010 to 5.3 percent of GDP in 2023 (Figure 1.6c). A key factor behind this decline in business tax revenues included lower profits in major companies. Corporate income tax (CIT) is generally levied on the taxable income of a business, i.e., its assessable income less any allowable deductions. The CIT rate is 25 percent on the first SCR 1 million of taxable income and 33 percent on the remainder. The CIT burden is highly concentrated on a small number of taxpayers (OECD 2020). A more updated analysis (Budget Speech 2023) estimated that 35 percent of the registered medium to large taxpayers contribute more than 70 percent of VAT collections. The tourism sector accounts for only 8 percent of CIT revenues compared with 47 percent of VAT collection. The 30 businesses that contribute the most to CIT revenues are predominantly in the financial sector, wholesale trade and transportation logistics. As of 2022, the Government has harmonized the tax regime by adopting a uniform rate of 15 (for taxable income up to and including SCR 1 million) and 25 percent (for taxable income above SCR 1 million). In addition, the policy of accelerated depreciation deductions was amended to a cap of 100 percent, as opposed to the previous practice which could exceed 100 percent. To further strengthen compliance, the Government has adopted the Business Tax Transfer Pricing Documentation Regulation and the Business Tax Related Party Dealings Regulation in 2023. 29. There is potential to significantly increase taxes revenues through effective implementation of transfer pricing reforms. If the larger hotels were to pay taxes in proportion to what they amass in terms of VAT, revenues could potentially increase by up to SCR 2.2 billion, or over 8 percent of GDP annually (OECD 2020 and Budget Speech 2023). Improved implementation of transfer pricing would help expand the tax base (and possibly allow room to bring rates more into balance by easing the burden on a few firms). This will also ensure that all transactions are handled the same (regardless of whether the parties are related or not, i.e., the arm’s length principle), and in turn help minimize tax evasion or loopholes. More recent transfer pricing reforms have entailed regulations that require businesses to provide documentation explaining their related parties and business organization. These reforms should help with a risk-based approach to auditing and provide data for future estimates and analysis of the potential for profit-shifting. Coupled with efforts to strengthen tax administration, with a focus on e-services, these measures could facilitate bringing more firms into the formal sector, while raising tax compliance. 30. Reforms to the personal income tax made it more progressive (Figure 1.6c). Personal income tax (PIT) stood at 4.0 percent of GDP in 2023. Reforms were undertaken in 2016 to make the PIT more progressive by exempting all employees earning less than the minimum wage of SCR 5,050 per month. This caused PIT to drop by 0.5 of a percentage point to 4.5 percent of GDP in 2015. Further reforms were undertaken in 2018 that raised the minimum wage (and exemption threshold) to SCR 8,555.50. The 2016 PIT threshold revisions and the 2018 change in the rates helped to address persistently large income disparities and contributed to an estimated 1.1-percentage-point reduction in poverty (2022 Seychelles Poverty and Equity CHAPTER 1. 15 Maintaining Macro-fiscal Prudence Assessment).10 This PIT reform also reduced tax arbitrage opportunities for taxpayers (IMF 2015). The new PIT schedule provides for a zero-rate bracket, and three progressive tax rates, at 15, 20 and 30 percent (Government of Seychelles 2018 Budget Speech). 31. Between 2014 and 2023, excise tax accounted for an average of 5.1 percent of GDP, or 16.1 percent of total government revenues (Figure 1.6c). Imported goods bear the largest portion of excise taxes, while locally manufactured goods and sugary beverages also make significant contributions. Excise tax as a percentage of GDP declined from 5.3 percent of GDP in 2019, to 4.8 percent in 2023, resulting from the appreciation of the rupee. 32. Overall, Seychelles has achieved strong revenue mobilization which has been further reinforced through introduction of property taxes in 2020. The scarcity of land is a very strong justification for immovable property taxes. As with other small islands, Seychelles is exposed to a high risk of flooding and other damage from natural disasters due to climate change. A tax on immovable property can be an effective tool to reduce incentives for coastal overdevelopment, as well as to raise much needed revenues for local governments to invest in adaptation measures. In January 2024, the Government doubled the property tax rate from 0.25 to 0.5 percent, bringing it closer to international benchmarks (Figure 1.7). In Madagascar, the annual building tax ranges from 5 to 10 percent, with land ownership taxable at a rate based on the nature of the land use. In the Bahamas, the first US$250,000 value of property is exempt from taxes but beyond the minimum exemption up to US$500,000, the tax rate is 0.625 percent; over US$500,000 up to US$12 million the tax rate is 1 percent and is capped at US$120,000 annually for land valued more that US$12 million (Annex Table 2 provides more country examples). Before undertaking further increases, it will be important to analyze data on changes in property values, and the impact on the property market and different categories of property owners. 33. The recent increase in Seychelles’ immovable property tax rate is certainly a move in the right direction, but certain aspects of tax administration could be further strengthened. No matter the policy design, effective implementation requires a proper market valuation, where market values are regularly updated, ideally on a rolling or moving average basis to reduce volatility in revenues. This would inform periodic and timely adjustments to the tax rate in line with market conditions. 34. Overall, the tax system in Seychelles is relatively buoyant11 across most taxes, reflecting the Government’s efforts to improve tax policy and tax administration. Tax revenues are broadly in line with GDP growth, except for trade taxes (Figure 1.6e). However, the high buoyancy in certain taxes may be driven by changes in the tax system during the period considered. The buoyancy of PIT, excise tax, VAT, CIT, corporate social responsibility (CSR) tax and tourism 10 file:///C:/Users/WB91272/Downloads/Poverty%20and%20Equity%20Assessment%20of%20Seychelles%20(6).pdf. 11 Tax buoyancy is defined as the ratio of the growth rate of tax revenues and the growth of the economy, in real terms. Examining tax buoyancy can clarify the relationship between economic development and revenue outcomes. Generally, as GDP increases, the tax base—and hence tax revenues—should grow proportionately without the need to make any adjustments to the tax base or tax rate. Tax buoyancy measures how tax revenues vary with changes in output. A buoyancy of one means that an additional 1 percent of GDP would increase tax revenue also by 1 percent, leaving the tax-to-GDP ratio unchanged. SEYCHELLES PUBLIC EXPENDITURE REVIEW 16 Enhanced Fiscal Buffers for More Productive and Resilient Investments Figure 1.7: Cross-country comparison on property tax 4 1.60 3 1.20 2 0.80 1 0.40 0 0.00 United Arab Emirates Malta Estonia Lithuania Romania Germany Ireland Portugal Norway Netherlands Uruguay Australia Switzerland New Zealand Japan United States France Equatorial Guinea Mozambique Senegal Somalia Botswana Guinea-Bissau Congo, Republic of Gabon Central African Republic Eswatini Mauritius Angola Burkina Faso Togo Côte d'Ivoire Seychelles South Africa Source: IMF GFS database. Source: IMF GFS database. marketing tax are much greater than 1, indicating that revenues from these taxes have grown much more rapidly than GDP. Tax buoyancy ratios in Seychelles indicate that tax mobilization is keeping pace with economic activity and is not a major issue in the country. b) Budgetary expenditures in Seychelles are concentrated in current and non-discretionary spending 35. Spending in Seychelles is predominantly recurrent spending and is higher than that of structural comparators.12 Between 2015 and 2023, total public spending averaged 35.4 percent of GDP and stood at 33.6 percent of GDP in 2023, in line with high income countries (HICs) (Figure 1.8a). Recurrent spending accounted for an average of roughly 87.5 percent of total spending and averaged 31.1 percent of GDP, which is 9 percentage points above the average or structural comparators over the period 2015–22. In contrast, Seychelles’ capital expenditure averaged 3.5 percent of GDP between 2015 and 2022, remaining within the same range as that of structural comparators. 36. Over the period spanning from 2015 to 2023, wages and spending on goods and services represented on average 66 percent of total current spending. During this period, the wage bill averaged 10 percent of GDP (with a peak of 12 percent of GDP in 2020), while goods and services averaged 11 percent of GDP. Notably, compared with structural comparators,13 spending on public sector wages is 1.5 percentage points of GDP higher, while spending on goods and services exceeds that of comparators by 5.4 percentage points of GDP. Meanwhile, spending on social benefits is in line with structural comparators and averaged 4.9 percent of GDP. 12 Structural comparators include: Bahamas, Barbados, Cabo Verde, Comoros, Mauritius. Aspirational comparators include: Cyprus, Iceland, Ireland, Malta, and Singapore. Regional comparators include: Cabo Verde, Comoros, Equatorial Guinea, Gabon, Mauritius, and São Tomé. 13 Structural comparators are as defined in footnote 11. CHAPTER 1. 17 Maintaining Macro-fiscal Prudence 37. Budget rigidity increased between 2015 and 2023, reaching a peak in 2020. Rigidity refers to the share of non-discretionary spending (i.e., wages, social benefits, and interest payment) either in GDP or total public spending. The share of non-discretionary spending in Seychelles in the period 2015–23 averaged 20 percent of GDP and 56 percent of total spending. Non-discretionary spending peaked in 2020, both as a share of GDP (29.5 percent) and a share of total spending (62 percent), given the large GDP contraction. The slight upward trend of rigidity in the budget has limited the ability to align spending to appropriated government programs and development priorities. Rigidity also limits the ability to effectively implement performance-based budgets. 38. Wages and salaries represent the largest component of non-discretionary recurrent spending that creates rigidity in the budget (Figure 1.8b). In 2023, wages were 10 percent of GDP and accounted for 33.6 percent of recurrent spending. As with most small island states, the size of the public service is relatively large in Seychelles. The number of public servants amounted to 18,448 as of March 2022, which is about 19 percent of the total population. This represents a significant increase relative to 2016 (earliest available data) when the number of public sector workers stood at 16,123 (17 percent of the population) and the wage bill amounted to 7.9 percent of GDP. The wage bill increased due in part to the introduction of a 13th month salary in 2017 for all public servants earning less than SCR 45,450 per year (US$2,771). 39. Recent reforms to raise the age of retirement will help contain growth in pension spending. Seychelles has set up a contributory pension system financed by social taxes, currently at 10 percent of wages. However, this system has only existed since 1991. The vast majority of pension benefits is financed directly from the budget as universal pensions payable to all citizens after the age of 65. The level of universal benefits is generous by international standards, amounting to over 45 percent of average wages. Major increases in benefits caused spending on universal pensions to reach an estimated 2.8 percent of GDP in 2020, compared to 1.9 percent in 2016. In response, the Government raised the retirement age from 63 to 65 (which became effective in 2023). At a higher retirement age of 65, assuming the universal pension level is adjusted in line with wage growth, World Bank projections suggest that spending on universal pensions wouldy increase by 1–2 percent of GDP over the medium term.14 40. Goods and services also account for a large share of spending but are largely discretionary (Figure 1.8c). Within this category, 37 percent of spending on goods and services went to the health and education sectors in 2022. A large share of expenditures in these sectors is outsourced. In the health sector, for example, several medical procedures are outsourced, in particular the Overseas Treatment program. Outsourcing in the health and education sectors are further discussed in Chapters 3 and 4, respectively. 14 Schwartz, Anita. 2019. Universal Pensions in Seychelles: Projections and Recommendations. Unpublished paper. World Bank. July. SEYCHELLES PUBLIC EXPENDITURE REVIEW 18 Enhanced Fiscal Buffers for More Productive and Resilient Investments 41. Interest payments averaged 2.7 percent of GDP between 2015 and 2023. In 2020 and 2021, interest payments increased to 2.9 percent of GDP due to higher domestic borrowing to close the financing gap created by spending to mitigate the impact of the pandemic. Interest payments declined to 2.0 percent of GDP in 2022 but increased back to 2.9 percent in 2023 due to higher interest rates. Figure 1.8: Trends in public spending a. Benchmarking expenditure as a share b. Goods and services, as well as wages of GDP, a. Benchmarking 2023 expenditure as a share and salaries, b. Goods andare key drivers services, of government as well as wages 50 of GDP, 2023 spending (% of GDP) and salaries, are key drivers of government 50 50 50 spending (% of GDP) 40 40 40 30 40 30 30 20 30 20 20 10 20 10 10 0 10 0 Singapore Gabon Ireland Guinea Comoros TheThe Mauritius Verde Barbados Seychelles Cyprus Malta Iceland 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 0 0 Singapore Gabon Ireland Guinea Comoros Mauritius Verde Barbados Seychelles Cyprus Malta Iceland 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Bahamas, Wages and salaries Goods and services Cabo Equatorial Bahamas, Transfers Wages and salaries Interest Goods due and services Cabo Equatorial Other Transfers Capital expenditure Interest due Other Capital expenditure Source: WEO. Source: Government Fiscal Reports. c. Expenditure on goods and services is d. Spending on general public services the highest among c. Expenditure comparators on goods except and services is accounts d. Spending 37 general foron percentpublic of total public services for Iceland (% of GDP), 2022 the highest among comparators except expenditure on average (% of accounts for 37 percent of total publicGDP) 50 for Iceland (% of GDP), 2022 classification on expenditure Functional average of public (% of GDP) expenditure 50 Percent of GDP 40 Functional classification of public expenditure 100 Percent of GDP 40 100 30 80 30 80 60 20 60 40 20 10 40 20 10 0 20 0 0 Seychelles Verde Mauritius Bahamas, The Iceland Malta Cyprus 2015 2016 2017 2018 2019 2020 2021 2022 0 Seychelles Verde Mauritius Bahamas, The Iceland Malta Cyprus 2015 2016 2017 2018 2019 2020 2021 2022 Cabo General services Defense Public safety Cabo General Economicservices affairs Defense Environment Public Housingsafety Capital expenditure Other Subsidies Economic Health affairs Environment Recreation Housing Education Capital Social expenditure benefits Subsidies Other payments Interest Health Social protection Recreation Other Education Social benefits Goods and services Interest Wage payments bill Goods and services Wage bill Social protection Other Source: BOOST. Source: BOOST. CHAPTER 1. 19 Maintaining Macro-fiscal Prudence 42. Transfers averaged about 7.3 percent of GDP between 2015 and 2023. In 2020, transfers peaked at 15.0 percent of GDP due to the increase in allocation to social protection to finance the unemployment relief scheme program, as well as higher transfers to public enterprises to cushion the effect of the pandemic. These schemes were all withdrawn in early 2021. Transfers also include pensions. Transfers decreased from 10.9 percent of GDP in 2014 to 4.9 percent in 2023, primarily due to the reduction in transfers to SOEs. However, the aging population of Seychelles poses a risk. The fraction of elderly is predicted to double in just 13 years from 9.2 percent in 2017 to 18 percent, while the share of the working age population will decrease rapidly. In addition, demographic dynamics have already been having a negative effect on the country’s productivity, starting from the 2010s (World Bank 2017), and only partly offset by the influx of working-age migrants. Seychelles approved a proposal by the Seychelles Pensions Fund to increase the retirement age from 60 to 65 in January 2023, to keep the pension fund sustainable. The change in retirement age also makes provision for members to retire from 60 years onward at a reduced pension rate. In addition, the contribution rate for employees increased from 3 to 5 percent.15 Employers’ contribution increased from 3 to 5 percent in April 2022. 43. The share of capital expenditure as a total of public spending has been relatively low reflecting a large non-discretionary spending envelope, as well as structural deficiencies in the public investment process. Spending on capital as a share of total expenditure declined from 16.5 percent in 2014 to 9.8 percent in 2023. This partly reflects chronic under-execution of the capital budget. Seychelles will need to increase public investment in the future, particularly considering the challenges from climate change. Public investment needs are large and rising, with climate adaptation projects under consideration, as well as important outlays needed in transportation—seaports and airports, and coastal infrastructures. The Government created the Agency for Infrastructure in 2021 to improve coordination and supervision of project implementation, and to establish better standards and efficiency in the planning of government projects. 44. Several years of Auditor General reports (i.e., 2015 to 2021) note persistent challenges with under-spending the capital budget. A key challenge noted by audit reports is the need to strengthen planning and monitoring the execution of projects for effective utilization of capital budgets. The Government has also made note of capacity issues among ministries, departments, and agencies (MDAs) with regard to planning for capital projects, which consequently affects the implementation rate of projects. Delays in project implementation, including for a number of grant-funded projects, is a key factor leading to under-spending of the capital budget. These delays are at times compounded by difficulties in capturing actual indirect project assistance, contributing to under-utilization of budgets. The execution of small district-level projects have also been affected in some years due to weak coordination, as the project list is finalized only after district-level budget discussions have been completed. This delays the entering of projects into the budget. 15 The contribution rate increased to 4 percent in April 2022, followed by another increase to 5 percent in January 2023. SEYCHELLES PUBLIC EXPENDITURE REVIEW 20 Enhanced Fiscal Buffers for More Productive and Resilient Investments 45. Seychelles has high overall spending on general public services but spends less on economic affairs, relative to its comparators. General public services,16 on average, accounted for about 36.6 percent of total public expenditure, while spending on economic affairs accounted for 7.5 percent (Figure 1.8d) between 2015 and 2022. The share of general public service expenditure in total expenditure declined after 2013, as spending on interest payments and amortization declined. It currently mostly consists of spending on transportation and transfers to SOEs. The average spending by structural comparators on general services is 28.6 percent of total public expenditure, while spending on economic affairs is, on average, 15.8 percent of public expenditure. The average spending on general services by aspirational comparators is 11.5 percent of public expenditure, while spending on economic affairs is 15.4 percent of total public expenditures. 46. Spending on social sectors accounts for about half of all public expenditures in Seychelles. From 2015 to 2022, the Government spent an average of 38.3 percent of its annual budget on three sectors: health (11.8 percent), social protection (15.6 percent), and education (10.9 percent). Together, this amounted to about 13.3 percent of GDP, with 72 percent of this (or 9.6 percent of GDP) going, on average, to wages across these sectors. Compared with its structural comparators, Seychelles has high social welfare expenditures (Figures 1.8c and 1.8d) that are above the norm, given its per-capita income. 1.4 OPTIONS FOR INCREASED FISCAL SPACE AND IMPROVED SPENDING EFFICIENCY 47. While fiscal policy remained prudent, large development needs, including associated investment needs, underscore the importance of expanding the fiscal space. While revenue performance is strong, there remains room to further expand the tax base by continuing to strengthen implementation of transfer pricing reforms to build on recent changes to property tax rates. Additional efforts to strengthen e-services for improved transparency and compliance are also needed, such as improved tax administration supported by the digitalization of taxpayer services. E-services include a tax registration portal, as well as filing and accounting modules. The Government is also working on audit, risk, and debt-collection modules. On the spending side, the share of capital spending in total spending is half that of aspirational comparators and high levels of under-execution of the capital budget result in overall inadequate levels of capital spending relative to development needs. At the same time, rapid growth in wages has contributed to increasing budget rigidity, which presents a challenge for implementing performance-based budgeting, while also limiting the ability to respond to shocks using fiscal policy. 16 Consists of transactions related to executive and legislative organs, financial and fiscal affairs, external affairs, foreign economic aid, general services, basic research, research and development related to general public services, general public services n.e.c; public debt transactions, transfers of a general character between different levels of government. CHAPTER 1. 21 Maintaining Macro-fiscal Prudence 48. There are several key policy and institutional reform recommendations for expanding the fiscal space. First, to accompany recent reforms to increase immovable tax rates, the Government should strengthen its land market valuation approach, and ensure these valuations are regularly updated. This would complement recent changes to the property tax rate. The Government should continue reforms to strengthen implementation of transfer pricing legislation by incorporating provisions into the 2022 Amendment of the Business Income Tax Act that will strengthen enforcement of the “arms’ length” principle.17 Operationalizing these regulations will limit tax evasion practices (such as profit-shifting) that undermine revenues. On the expenditure side, it will be important to strengthen implementation of PIM processes to increase capital budget execution, while also increasing budget allocations to capital expenditure. Public-private partnerships could be an effective solution to crowding in the private sector given that investment needs far exceed the already strong levels of revenue mobilization. Also, it would be important to evaluate results achieved in the context of the blue bond and debt-for-swap debt issues, and use this to inform the design of future financing instruments. Table 1.3: Reform priorities to increase fiscal space and spending efficiency Policy Context Policy Action Potential Fiscal Effect on Equity Effect on Climate Impact Change Most of the Short-term: Positive: Positive: Neutral: CIT collected Implement Fiscal gains of Improved fiscal Some of the in Seychelles recent transfer up to 8 percent space and a extra revenue (79 percent) pricing reforms of GDP could more balanced could be put to is from about that put onus be achieved if tax burden for climate-related 30 companies, on the tax the larger hotels businesses. investments but while companies filing company paid taxes in direct effects are with turnover to outline proportion to expected to be below SCR their related their contribution neutral. 870 000 (i.e., parties and to value added. the bottom organizational 70 percent or structure and deciles 1 to 7) to maintain only accounted documentation for 1.3 percent of supporting their revenue. There is application of scope to expand the arm’s length the base and principle. limit evasion 17 The arm’s length principle ensures that transactions are handled the same (regardless of whether the parties involved are related or not). Implementation of this principle incentivizes transparency and minimizes tax evasion. SEYCHELLES PUBLIC EXPENDITURE REVIEW 22 Enhanced Fiscal Buffers for More Productive and Resilient Investments Policy Context Policy Action Potential Fiscal Effect on Equity Effect on Climate Impact Change Seychelles Short-term: Positive: Positive: Neutral: has room to Strengthen the Fiscal gain of 0.12 Redistributes Increased taxes expand fiscal approach for percent of GDP wealth from the on property space through land valuation over the medium wealthy to poorer would have strengthening and maintenance term, with the citizens. limited impact administration of of relevant Government’s on climate, but property taxes databases decision to some of the to further double the tax extra revenue strengthen tax rate. could finance the administration. climate agenda. Persistent Positive: Positive: Fiscal Neutral: Neutral: under-execution Strengthen impact could Improved Unless climate of the capital capacity of be as much as capital budget considerations budget limits the MDAs to plan an estimated execution only are also reflected use of resources and budget and 0.9 percent of would not have in the PIM better coordinate GDP if improved distributional process, the between plans capacity leads consequences. climate effect is and the budget. to 100 percent expected to be capital budget neutral. execution rates. CHAPTER 1. 23 Maintaining Macro-fiscal Prudence SEYCHELLES PUBLIC EXPENDITURE REVIEW 24 Enhanced Fiscal Buffers for More Productive and Resilient Investments CHAPTER 2. ADDRESSING VOLATILITY AND THE IMPACT OF CLIMATE CHANGE CHAPTER 2. 25 Addressing Volatility and the Impact of Climate Change Seychelles’ growth has exhibited a high level of volatility. Empirical evidence shows that volatility can be detrimental to overall economic development. Due to climate change, this volatility is bound to increase. There is an urgency for Seychelles to develop policies and institutions to insulate the country from this volatility. This will require moving from a currently procyclical to a countercyclical fiscal policy stance. This will also require climate adaptation and related improvements in public investment processes. 2.1 ECONOMIC VOLATILITY COULD BE ADDRESSED THROUGH COUNTERCYCLICAL FISCAL POLICY 49. As a small island open economy with a concentrated economic structure exposed to climate risks, Seychelles faces the challenge of managing economic volatility. While Seychelles has achieved strong economic growth (4.3 percent average between 1990 and 2021), this growth experience has exhibited considerable volatility (Figure 2.1). Seychelles’ susceptibility to climate disasters, combined with high economic dependence on the tourism and fisheries industries, makes the country vulnerable to external shocks. These shocks are transmitted primarily through disruptions in tourism demand and international travel, and fluctuations in fishing stock, and are also linked to the prices of essential imports, such as fuel. Figure 2.1: Seychelles’ economic growth has been strong but volatile 15.0 10.0 5.0 0.0 -5.0 -10.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Seychelles Sub-Saharan Africa Low income Countries Source: World Development Indicators. 50. High growth volatility hinders development and stands to increase with climate change. Evidence suggests that the costs to economic development and growth from high volatility can be high (Barro 1991; Gavin and Haussman 1998; Loayza et al. 2009). Output volatility has pervasive welfare and distributional implications, as low-income and credit-constrained groups do not have the tools to smooth consumption. Climate change implies that natural disasters in Seychelles will become increasingly frequent and severe. The Seychelles economy depends critically on tourism and fisheries that stand to be negatively affected by climate disasters. SEYCHELLES PUBLIC EXPENDITURE REVIEW 26 Enhanced Fiscal Buffers for More Productive and Resilient Investments Domestic service industries also depend on income generated in these two sectors. Thus, the high volatility in economic growth highlighted in Figure 2.1 could become even greater due to climate change, imposing substantial development costs on the country. Between 1980 and 2020, total damage incurred climate change-related events varied between 0.5 and 3.6 percent of GDP. This cost is likely to continue to rise, with estimated average annual losses up to 6.5 percent of GDP in the medium term, significantly higher than the global average of 0.5 percent.18 51. Seychelles has already taken measures to protect itself from increasing climate-related volatility. Climate mitigation and adaptation measures implemented by the Government are a step in the right direction. In the area of finance, Seychelles has tapped into both a climate debt swap in 2017 and issued a blue bond in 2018. Both instruments could decrease borrowing costs for Seychelles under the condition that proceeds are used for climate-related policies and programs. 52. To counteract the expected increase in volatility, Seychelles could constructively pursue a countercyclical fiscal policy. Fiscal policy in many developing countries is procyclical, i.e., public spending increases are often higher than the increase in taxes during an economic upswing (Gavin and Perotti 1997; Lane 2003; Wyplosz 2002). Government spending and its components are considerably more procyclical in smaller countries, especially in the very small ones, and strong procyclicality results in macroeconomic volatility (Blanco et al. 2020). Higher procyclicality is due to the combination of relatively larger public sectors in smaller economies, Figure 2.2: Seychelles’ spending is procyclical, which magnifies economic volatility and associated costs 1.0 Public Spending Cyclicality 2000-2019 0.8 Setychelles Procyclical 0.6 0.50 0.4 0.2 0.0 -0.2 Counter Cyclical -0.4 Not significant (10%) Significant (10%) -0.6 -0.8 -1.0 Singapore United Arab Emirates Belgium France Australia Morocco Malaysia Paraguay Algeria Syria Tunisia India Uzbekistan Turkiye Mongolia Tanzania Eswatini Cambodia Maldives CostaRica Dominica Eritrea Thailand Puerto Rico Netherlands Myanmar The Bahamas Argentina Benin Philippines NorthMacedonia Rwanda Kazakhstan Cabo Verde St. Kittsand Nevis Burkina Faso St. Vincent and the Grenadines Belize Niger Kiribati Lao P.D.R. Mali Pakistan Madagascar Lithuania S udan Lebanon Estonia Bangladesh Suriname Ukraine Serbia Azerbaijan Islamic Republic of Iran Solomon Islands Romania Liberia Namibia Uruguay Nicaragua Source: IMF, WEO Apr 2023 Note: Public spending cyclicality is measured as the correlation between the cyclical component of real spending and real GDP, both calculated using the HP filter. 18 IMF (2017), Seychelles: Climate Change Policy Assessment (CCPA) 2017. CHAPTER 2. 27 Addressing Volatility and the Impact of Climate Change which magnify the procyclical impact of fiscal policies on output, investment, consumption, large public spending needs, and higher government revenues during an economic expansion. This has indeed been the case for Seychelles. Based on data from 2000–19, Seychelles ranks among countries with significant procyclical fiscal spending (IMF 2023, Figure 2.2). 53. A procyclical fiscal stance can amplify economic fluctuations that can impose costs on economic development. Procyclical fiscal policy reduces the effectiveness of automatic stabilizer (Melitz 2000; Parry 2002). Given these considerations, most HICs and MICs pursue countercyclical fiscal policies to smooth and reduce the volatility caused by business cycles. Several developing economies with high dependency on commodity exports have put in place institutions to counteract the economic impact of volatility in commodity prices. While Seychelles does not depend on commodity exports, it nevertheless faces similar challenges to economic stability stemming from its vulnerability to climate change. 54. Countercyclical fiscal policy to smooth out fluctuations in income can be supported through numerous instruments. A combination of policies can serve to limit public spending during boom times and make more resources available during an economic downturn. A new generation of fiscal rule, including the use of well-designed escape clauses, has helped countries to attain more flexible fiscal frameworks to mitigate the effects of external shocks, including commodity price volatility, to reduce output cyclicality, while preserving the flexibility to accommodate fluctuations in the business cycle, and respond to severe economic downturns and the impact of natural disasters. In the case of Seychelles, it is critical to create fiscal buffers (stabilization fund) that could both contribute to reducing economic volatility and provide resources to respond to disasters or economic downturns. Debt instruments are commonly used partly for this purpose, enabling governments to borrow during an economic downturn when their own revenues are usually lower. Foreign debt can be repaid on an accelerated schedule during boom times, instead of increasing domestic spending. Some debt instruments may explicitly include insurance clauses that make repayment contingent on economic conditions. For example, climate-resilient debt clauses can grant countries temporary debt relief in the event of a natural disaster (see Annex 4). Another common and important instrument is a fiscal buffer or stabilization fund that accumulates money during an economic upswing and disburses to the budget during a downturn. 55. Seychelles could profit from creating a fiscal buffer (fund) that could both reduce economic volatility and make available needed additional resources in the event of disasters or economic downturns. While Seychelles can also employ other instruments to insure itself against the risk of volatility linked to climate disasters, the creation of a multi- year budgetary fund that accumulates resources in upswings and disburses in downturns represents one of the most effective and least costly options. Most countries now employ instruments of this type. While the world experience of managing multi-year sovereign wealth and stabilization funds has been mixed, particularly on the governance side, the institutional strength of Seychelles suggests that it may be able to emulate the best practices.19 Evidence shows that these instruments have been effective, on balance, in making fiscal policy more 19 Some of this best practice was embodied in the Santiago Principles for Sovereign Wealth Funds in 2008 (IWF 2008). SEYCHELLES PUBLIC EXPENDITURE REVIEW 28 Enhanced Fiscal Buffers for More Productive and Resilient Investments countercyclical (Al Sadiq and Gutierrez 2023). During economic upswings, the accumulation of resources in a stabilization fund helps prevent economic overheating and (possibly) excessive real appreciation of the currency. During economic downturns or climatic disasters, fiscal resources would be immediately available for stimulus and finance without delays and cost of additional borrowing. While these types of stabilization funds are currently more common in countries that face high risks from commodity price volatility, several Pacific Island countries are employing such instruments specifically as fiscal buffers against anticipated environmental disasters (Nishizawa et al. 2019; Pacific Island Forum’s Secretariat 2021). 56. Seychelles can combine a fiscal buffer/stabilization fund with other financial instruments for both risk retention and risk shifting to effectively manage the risks from climate disasters to ensure a more countercyclical policy stance (see Box 2.1). Under the current fiscal framework, fiscal policy in Seychelles is excessively procyclical. The country can pursue a comprehensive strategy to ensure a countercyclical fiscal policy stance. The most basic instrument is a fiscal buffer that allows the Government to carry budgetary resources from one fiscal year to the next, allowing disbursement in the event of an economic downturn or disaster. There are many options for rules that could govern the operation of such an instrument. A fiscal buffer (precautionary savings) or self-insurance instruments that help build buffers that would allow mitigation of the negative impacts of negative shocks (fiscal rules, stabilization, and natural disaster funds) can be combined with other risk-management instruments, such as insurance (weather-related insurance, derivative instruments to help deal with commodity price fluctuations) and contingent financing instruments that shifts risk to a lender or third party at a cost. Maintaining a fiscal buffer/stabilization fund in this mix would allow Seychelles to both economize on borrowing/insurance costs and support a countercyclical fiscal policy that moderates overall economic volatility. 2.2 AN EFFECTIVE NATIONAL CLIMATE CHANGE POLICY REQUIRES MORE EFFICIENT PIM PROCESSES 57. Seychelles can also help manage volatility through policies and programs directly aimed at adapting to climate change and mitigating its impact. Investments in climate- resilient infrastructure and an integrated risk management strategy that includes the utilization of disaster funds consistent with the objective of countercyclical policy could help mitigate the climate change-induced output volatility. Frequent and intense natural disasters put pressure on government spending, while negatively affecting economic activity and government revenues, resulting in high fiscal costs, including the costs of repairing damaged infrastructure. It also includes mitigation measures that can help protect Seychelles’ own ecology that is vital for the country’s future successful development. 58. Seychelles has made implementing projects for climate change adaptation and mitigation a key part of its current economic strategy and has been performing well in this area. In 2015, Seychelles submitted its Nationally Determined Contribution (NDC) and ratified the Paris Agreement in 2016. In line with the United Nations Framework Convention for Climate Change (UNFCCC), the Government is reviewing the tariffs system to create a conducive CHAPTER 2. 29 Addressing Volatility and the Impact of Climate Change environment to attract higher investment in renewable energies. In 2020, the country released the first National Climate Change Policy, the key goals of which include guiding the country to transition to a low-carbon economy and putting in place measures to adapt, build resilience, and minimize vulnerability to the impacts of climate change. Seychelles is beginning to tap international climate funds such as the Green Climate Fund (GCF) and the Global Environmental Facility (GEF), with most of the support going toward climate adaptation investments.20 In the 2022 Environmental Performance Index (EPI)—which provides a data-driven summary of the state of sustainability around the world in the areas of climate change performance, environmental health, and ecosystem vitality—Seychelles ranked first in the sub-Saharan Africa region and 32nd out of 180 countries. 59. There are major untapped opportunities for Seychelles, particularly in climate change adaptation and climate-resilient infrastructure. Under-execution of infrastructure investment, particularly on projects addressing climate risks such as coastal protection, has been a recurring problem for Seychelles. A 2023 Public Investment Management Assessment (PIMA) (IMF 2023) for Seychelles identified important institutional gaps in climate resilience of the PIM framework. First, climate change considerations are not adequately integrated into the national and sectoral investment planning process, thus creating a risk of misalignment between major infrastructure investments and strategies to manage climate risks. Second, significant gaps remain in ensuring that the country’s overarching climate initiatives are reflected in the appraisal, selection, and budgeting for such investments. Third, fiscal risk management could be improved by incorporating a robust analysis of fiscal risks from climate change and natural disasters, and by preparing for sufficient fiscal responses. 60. Integrating climate considerations into the PIM system requires a well-structured legal and regulatory framework. This includes a climate-related regulatory framework, planning instruments, and green procurement process. Examples include climate and environmental legislation, national and sectoral policies, and medium- and longer-term strategies. Transparency in regulation and planning is important to providing clear signals to the private sector, households, and individuals, to encouraging their contribution when defining climate change priorities, and to promoting compliance with climate standards. It can also contribute toward the building of trust and enhancing the level of ambition for climate action. These frameworks should also identify adaptation and mitigation options. Based on the identified climate risks, formulators should consider an array of project options that help mitigate or adapt to those risks. Options may consider grey versus green infrastructure, project designs with more or less flexibility, and alternative locations, among others. 61. Seychelles has taken measures to improve legal and regulatory processes, but additional action is needed. Compared with its comparators, Seychelles is lagging in several metrics from the World Bank Climate Global Governance Indicators (Figure 2.3). By mainstreaming climate into PIM, Seychelles has an opportunity to incorporate climate and 20 The GCF is supporting four regional projects with a total share of US$23.4 million going to Seychelles to support climate resilience and renewable energy. The GEF currently has 10 active national projects with Seychelles, amounting to US$30.3 million worth of financial support to co-finance investment projects in the areas of biodiversity, land degradation, and climate change. SEYCHELLES PUBLIC EXPENDITURE REVIEW 30 Enhanced Fiscal Buffers for More Productive and Resilient Investments strengthen its PIM system simultaneously. For example, based on a regulatory climate change framework set at the PFM level, all projects should assess whether land use zoning requirements are met, and whether applicable construction standards are met (e.g., green or infrastructure-resilient standards). Figure 2.3: Climate governance and green public procurement indictors Climate Governance Indicators Country Frame- LTS or Coordina- Local- Fiscal Risk Budget CC in Project work Law 2050 CC tion Mech- Level Risk State- Guidelines Budget Screening Plan anism Assess- ments ments Seychelles No No Partial Partial No Partial No No Mauritius Yes No Yes Yes Yes No No Yes Cabo Verde No No Yes No No No No No Croatia Yes No Partial Partial No No Partial Partial Panama Partial Yes Yes Yes Partial Partial Partial Partial Antigua & Yes No Yes No No No No Partial Barduda Green Public Procurement (GPP) Indicators Country GPP in GPP GPP Standardized GPP GPP GPP Plans and Practices Practices Environmental Strategies Information Implementation Strategies in Law Mandatory Criteria for for Sectors Collection Reporting GPP Seychelles No No No None No No No Mauritius Yes No No None No No No Cabo Verde No Yes No None No No No Croatia Yes Yes No None No No No Estonia No No Yes Yes Yes (20) Yes Yes Panama No Yes Yes Yes Yes (8) NA No Antigua & Yes Yes No None Yes NA No Barduda Source: World Bank Global Governance Indicators 2021. Table 2.1: Approaches to defining climate tagging Objective-Based Definition Policy-Based Definition Cambodia (OECD Rio markers) Bangladesh (44+6, based on policy) Colombia (OECD Rio markers and GFLAC Ecuador (15 categories, 3–6 specified activities for definition) each) Ethiopia (OECD Rio markers and reference to Ghana (list of policy objectives and operations) national strategies and sectoral plans) France (own definitions consistent with EU Nepal (11 climate change–related categories taxonomy) defined by working group) CHAPTER 2. 31 Addressing Volatility and the Impact of Climate Change Objective-Based Definition Policy-Based Definition Honduras (own definition, aligned with OECD Rio Pakistan (11 tasks/sectors from policy, indicative markers) activities) Indonesia (aligned with OECD Rio markers, indicative list) Ireland (aligned with ICMA GBP) Nicaragua (own definition, based on IPCC/ UNFCCC focus on loss and damage, and disaster risk management) Kenya (OECD Rio markers, indicative list) Mixed Approach Moldova (intent, type of activity, or part of policy; classification according to activity category) Philippines (objective; classification according to policy) Uganda (objective; classification according to type of policy responses and specific strategy) Source: 2021. “Climate Change Budget Tagging: A Review of International Experience” EFI Insight- Governance. Washington, DC: World Bank. 62. Budget climate tagging can be used to better track expenditures related to climate change across government. Seychelles’ current Integrated Financial Management and Information System (IFMIS) lacks the ability to track climate-related expenditures throughout activities and programs, and the Government has not yet established a mechanism to track, monitor or report climate-related expenditures or impacts outside of the IFMIS. The lack of a proper tracking system impedes the provision of comprehensive and timely updates on the implementation of the Blue Economy roadmap. In several countries, the introduction of a tagging system as part of a broader effort to mainstream climate action has contributed to a better understanding of climate change-related challenges. Climate tagging helps communicate a government’s commitment to climate change action, enhances transparency, and enables accountability. It can also support accountability, through scrutiny and review of public information by civil society groups. Although climate budget tagging has emerged only recently, it builds on previous budget tagging initiatives focused on poverty, gender, and international development goals.21 Tagging methodologies distinguish between climate- relevant and development expenditures following two approaches. Objective-based definitions mostly use the OECD Rio markers to distinguish climate-relevant activities on the basis of the intended impact of the activity. A second approach is using policy-based definitions that limit climate-relevant activities to those that are specifically referenced in national climate change policy documents. Table 2.1 shows which countries use each approach and several that use a mixed approach between object and policy-based definitions.22 21 2021. “Climate Change Budget Tagging: A Review of International Experience” EFI Insight-Governance. Washington, DC: World Bank. 22 Ibid. SEYCHELLES PUBLIC EXPENDITURE REVIEW 32 Enhanced Fiscal Buffers for More Productive and Resilient Investments Box 2.2: Global experience with climate budget tagging Coverage and types of expenditure included in budget tagging – examples and approaches in other countries Selected All Sectors, Investment Invesment Tax Ex- Subnational Transfers Sectors, Ministries, Budget & Recurrent penditrues Transfers/ to SOEs or Ministries, & Agencies Only Budget Include Budgets Autonomous & Agencies Include Include Include Bodies Only Included Bangladesh Ecuador Ireland Bangladesh France Bangladesh Ecuador Cammbodia Ghana Mexico Cammbodia (transfers) France Colombia France Moldova Colombia Colombia Pakistan Ethiopia Honduras Nepal Ecuador Ecuador Phillipines Indonesia Ireland Odisha France Ghana Odisha Kenya (India) Ghana Honduras (de- (India) Moldova Honduras concentrated) Pakistan Mexico Indonesia Kenya Nepal Kenya Nepal (black Nicaragua Nicaragua grants) Phillipines Pakistan Pakistan Uganda Phillipines Phillipines Uganda Uganda The Philippines has established a cross-sectoral budget program specifically focused on adaptation and risk resilience as a means of coordinating different implementing agencies and their budgets to deliver a harmonized program of investment. It utilizes a climate change expenditure tagging typology code applied to line items that has six digits: the first identifies the activity as either adaptation or mitigation; the second allocates it to one of the seven priorities under the National Climate Change Action Plan; the third allocates it to a sub-priority under the respective strategic priority; the fourth identifies the type of instrument deployed (policy and governance, research and development, knowledge, capacity building, and training, and action delivery); and the last two identify the specific activity. In an effort to support transparency and accountability, the Philippines produces climate budget briefs for key agencies, as well as a national climate budget document, and all climate-relevant expenditures are subject to compliance audits but not performance audits. Bangladesh follows a multi-step “objective-based cost component approach.” It applies a climate-relevance weight to all expenditures. The weight is the percentage of total expenditure for each climate intervention minus the share of the expenditure that would take place under a business-as-usual scenario. For example, the development of seed production, storage, and supply systems is considered 100 percent climate relevant, but 40 percent of the expenditure would take place in the absence of climate change and so the weight assigned is 60 percent. The weight for the overall program (a four-digit code) is given by subtracting the sample standard deviation from the maximum intervention weight. Projects can be mapped to up to three climate-relevance criteria. The climate-relevance criteria map to the 44 programs and six thematic areas under the national climate change strategy. Bangladesh has included climate tags in the coding structure of their IFMIS system. These are specific codes that are pre-tagged by the central finance agency so that climate tags are applied automatically when entering budget data. Source: 2021. “Climate Change Budget Tagging: A Review of International Experience” EFI Insight-Governance. Washington, DC: World Bank. CHAPTER 2. 33 Addressing Volatility and the Impact of Climate Change 2.3 OPTIONS FOR PROMOTING COUNTERCYCLICAL FISCAL POLICY AND RESILIENCE TO SHOCKS 63. In conclusion, economic volatility represents a growing threat to Seychelles’ economic development, but the country can meet this challenge with policy adjustments and reforms. In particular: • Seychelles should transition from a procyclical to a countercyclical overall fiscal policy stance. It can support this transition through a combination of measures including operating with fiscal buffers, debt, and insurance instruments. For example, the combination of budget balance and debt rules with spending rules would reinforce the commitment to fiscal sustainability and attenuates fluctuations in the business cycle. • Seychelles should promote policies and institutions to support climate-resilient infrastructure and other National Climate Policy priorities. This partly involves mainstreaming the climate agenda through improved PIM, including though climate budget tagging. Adding a functional classification to the budget could also support improved tracking of climate and blue economy-related spending. Table 2.2: Reform priorities for promoting countercyclical policy and resilience Policy Context Policy Action Potential Fiscal Effect on Effect on Impact Equity Climate Change Fiscal policy Medium-term: Transition Positive: Fiscal Slightly Positive: is procyclical, to countercyclical savings relative positive: If Generated fiscal which magnifies fiscal policy through an to the current some fiscal reserves would high and growing effective mix of a fiscal approach savings are go toward economic buffer (stabilization that relies on channeled rebuilding volatility to the fund) and other financial expensive to the most to promote detriment of instruments based on debt following vulnerable. increased the country's international experience. a negative adaptation. development economic shock. Seychelles has Medium-term: Adopt Positive: Up to Slightly Positive: The been a leader legislation / regulations 0.9 percent of positive. Due proposed in innovative governing integration GDP increase in to reduced reforms directly financing of climate issues in capital budget volatility in the address instruments PIM processes by: (i) spending based income of the climate change for climate and specifying guidance on stronger poor arising adaptation and blue economy in the budget circular, PIM processes from climate mitigation. investments for reporting on to improve shocks that that could be climate spending; (ii) execution of the impact the made stronger adopting a framework capital budget. poorest more by integrating for incorporating severley. climate climate issues in ex- considerations in post reviews and PIM processes maintenance manuals; SEYCHELLES PUBLIC EXPENDITURE REVIEW 34 Enhanced Fiscal Buffers for More Productive and Resilient Investments Policy Context Policy Action Potential Fiscal Effect on Effect on Impact Equity Climate Change and (iii) issuing regulations to govern tagging of climate spending in agriculture, the blue economy, and infrastructure sectors that measure and monitor climate-relevant public spending to better identify and mobilize fiscal resources for climate resilience. CHAPTER 2. 35 Addressing Volatility and the Impact of Climate Change SEYCHELLES PUBLIC EXPENDITURE REVIEW 36 Enhanced Fiscal Buffers for More Productive and Resilient Investments CHAPTER 3. CONTAINING GROWTH IN THE WAGE BILL CHAPTER 3. 37 Containing Growth in the Wage Bill The proliferation of inducements and allowances have led to large differences in wages for the same position. Recent government policies have also affected the wage bill, contributing to growth in the wage bill, further increasing rigidity in Seychelles’ budget. Containing growth in the wage bill to improve flexibility of the budget and support a countercyclical fiscal policy stance requires building on steps government has taken to consolidate allowances. The next stage in reforms should focus on improving transparency in the wage bill, and strengthening the mechanism for setting the wage bill. 3.1 A STABLE WAGE BILL WILL SUPPORT SPENDING EFFICIENCY 64. Cross-country evidence indicates that rigidity of the budget reduces spending efficiency and fiscal space. Examples from Latin American and the Caribbean support the evidence.23 Furthermore, an increase in public spending that is difficult to reverse tends to reinforce procyclical spending. In the case of Seychelles, between 2015 and 2022, over 50 percent of the budget was allocated to wages, social benefits, and interest payments on average. This figure was 51 percent for Seychelles in 2022 and is generally in line with comparators across the same years (Figures 1.5 and 1.8c indicate this figure has remained roughly the same across different time periods, ranging between 40 and over 50 percent). 65. A stable public wage bill is essential for fiscal planning and to ensure effective service delivery. Seychelles, with its unique economic landscape, requires strategic allocation of resources to various sectors. By keeping the wage bill stable as a share of GDP, the Government can allocate funds judiciously, ensuring that essential areas such as health care, education, and infrastructure are adequately covered. This approach enhances fiscal planning efficiency, contributing to the sustainable development of Seychelles. A well-managed wage bill ensures that resources are allocated efficiently, supporting public services that are essential for the welfare and prosperity of Seychellois citizens. Whether it be health care, education, or social programs, a stable wage bill contributes to the seamless delivery of services, thereby reinforcing the Government's commitment to meeting the demands of its diverse population. 66. Four key interconnected principles are central to a stable wage bill that bolsters resilience, encourages investment, and fosters social equity: affordability, transparency, fairness, and competitiveness. Tensions may arise among these principles as policies, economic conditions, and other factors evolve. For instance, a lack of transparency in the wage bill can impact fairness, while an uncompetitive compensation system can affect affordability. 23 Herrera, S. and Olaberria, E. 2020. Budget Rigidity in Latin America and the Caribbean Causes, Consequences, and Policy Implications: https://openknowledge.worldbank.org/server/api/core/bitstreams/1a34178a-b45a-5e9f-a82c- 9b6240d3ae15/content. See also Blog: https:/ /blogs.worldbank.org/en/developmenttalk/budget-rigidities-will- constrain-fiscal-policy-years-come. SEYCHELLES PUBLIC EXPENDITURE REVIEW 38 Enhanced Fiscal Buffers for More Productive and Resilient Investments Attention to these four principles in the wage bill and its management will help to address the underlying structural challenges that contribute to inefficiencies and inequality. 67. Analysis of these principles in Seychelles draws from aggregated information from official sources and a diverse selection of detailed individual-level payroll data made available by the MoFEPT. The individual-level data encompass 11,689 public employees as of the end of August 2023, which represent roughly 20 percent of total employment in the country. An estimated 23 percent of public employees are in the education sector, while this figure is 18 percent in the health sector. Public administration accounts for 57 percent of government employment. The micro-level analysis excludes employees of regulatory bodies or other SOEs. 3.2 AN AFFORDABLE WAGE BILL WILL HELP ENSURE FISCAL SUSTAINABILITY AND RESILIENCE 68. Affordability can only be assessed within the context of country circumstances and the overall dynamics in the wage bill trend. The assessment should also consider if the public sector is able to sustainably finance the wage bill, including the opportunity cost of resources that could have been spent on other development areas. Affordability also encompasses predictability of wages and the ability to forecast wages. In the case of Seychelles, affordability could be improved through improved management of allowances (including inducements used to incentivize employment for particularly challenging to fill positions). For example, Egypt was able to reduce its wage bill by nearly 3.5 percentage points of GDP between 2014 and 2019, by implementing tighter controls on bonuses and allowances (IMF 2023). 69. There is no global consensus on the "right size" for the public wage bill. Cross-country comparisons provide only a static view and do not inherently indicate good or bad performance or sustainability. Countries vary in revenue, economic structure, and governance effectiveness. Smaller states often have larger governments. A high wage bill-to-GDP ratio can be sustainable with a strong revenue base, fiscal capacity, and effective governance. For instance, Denmark consistently has a ratio exceeding 20 percent of GDP, while maintaining high public service satisfaction compared with the average rating for Organisation for Economic Co-operation and Development (OECD) countries. Specifically, over 80 percent of Danish citizens are satisfied with education and health services compared with an average of under 70 percent for OECD countries.24 70. The size of the public wage bill in Seychelles is equivalent to 10.2 percent of GDP in 2022 (Figure 3.1). As a share of GDP, it peaked in 2020 (12.8 percent) and has since declined. The wage bill has averaged SCR 2.7 billion since 2017 and accounts for 31.1 percent of total spending. It is one of the biggest expenses in the Government’s budget. In terms of resource availability, between 2015 and 2022, the wage bill averaged around 32.6 percent of revenue, peaking at 40.3 percent during the pandemic in 2020 (Figure 3.2). This is, on average, in line with 24 OECD 2023. CHAPTER 3. 39 Containing Growth in the Wage Bill historical cross-country data (Table 3.1) and depends on both the ability to generate revenue, as well as spending on wages. The ratio of government employee compensation or wages to domestic revenues is slightly higher in LICs than in MICs (Table 3.1). Africa and the Western Hemisphere contain the highest ratios, at about 30 percent of central government revenues. In the case of LICs, higher ratios may reflect low revenue capacity. Figure 3.1: Seychelles spends about 10 Figure 3.2: About 30 percent of total percent of GDP on the wage bill revenues goes toward the wage bill (%of total) 3.0 2.84 2.76 2.79 20 40 2.47 2.51 18 35 2.5 16 2.08 30 2.0 14 25 Percent 12 1.5 10 20 8 15 1.0 6 10 0.5 4 2 5 0.0 0 0 2017 2018 2019 2020 2021 2022 2017 2018 2019 2020 2021 2022 Wage bill (left axis, billions) Wage bill as a share of revenue Wage bill as a share of GDP (right axis) Wage bill as a share of expenditure Note: Left-hand axis = SR billions; right-hand axis = % of GDP. Source: Seychelles Ministry of Finance, National Planning Source: Seychelles Ministry of Finance, National Planning and Trade; IMF World Economic Outlook, World Bank staff and Trade; IMF World Economic Outlook, World Bank staff calculations. calculations Table 3.1: Cross-country examples of average annual government compensation (2000–08) Central Government General Government Country Sample Percent Percent of Percent of Sample Percent Percent of Percent of Groups Size of GDP Government Government Size of GDP Government Government Expenditure Revenues Expenditures Revenues Africa 41 6.5 30.4 29.5 9 9.8 33.4 30.7 Asian and 18 5.1 26.6 23.1 11 6.6 27.5 22.9 Pacific Europe 41 5.7 17.4 17.5 40 10.2 26.5 25.4 Western 24 8.2 31.0 29.6 15 9.2 36.0 33.2 Hemisphere Middle East 19 7.1 28.9 24.8 11 8.3 32.8 26.4 & Central Asia SEYCHELLES PUBLIC EXPENDITURE REVIEW 40 Enhanced Fiscal Buffers for More Productive and Resilient Investments Central Government General Government European 27 5.2 15.9 16.3 27 9.9 25.4 25.3 Union Low-Income 39 5.2 28.6 27.9 6 7.0 25.8 26.8 Countries Middle- 68 7.3 27.6 26.0 44 8.7 31.8 28.2 Income Countries High-Income 36 6.1 20.4 18.6 36 10.4 29.0 25.9 Countries Note: Annual average over 2000–08, as available. Source: Clements et al. 2010, Table1 and IMF Government Finance and Statistics. 71. The Government recently adopted a policy that caps the wage bill at 11 percent of GDP to contain spending on wages. Several countries have adopted similar approaches, using different basis for the targets aside from GDP. For example, countries in the West African Economic Community have set targets of 35 percent of domestic revenue to ensure affordability . In the case of the United Kingdom, there are cash limits for the overall public wage bill (OECD 2022). 72. The wage bill is higher compared with its regional comparators, but similar to that of other Small Island Developing States (Figure 3.3). Small Island Developing States (SIDS), such as Seychelles, face challenges linked to limited economies of scale within the public sector in delivering essential functions and fundamental services.25 Extending basic services such as health care and education to all areas or islands in Seychelles is costly. This is a key reason why many SIDS, including Seychelles, tend to have relatively larger public wage bills as a share of GDP. 73. The public wage bill has grown faster on average than GDP during the past five years, especially in 2018 and 2020 (Figure 3.4). During the 2020 pandemic, the divergence was extreme as economic output declined while the needs of public services increased. In more recent years, GDP growth has rebounded while wage bill growth has moderated. 74. In the current context, controlling wage bill growth is crucial for the Seychelles. Several factors have exacerbated challenges in wage bill management as the country recovers from the pandemic. The economic fallout from the global health crisis has underscored the need for Seychelles to adopt a strategic and disciplined approach to fiscal governance. To prevent any additional shocks from making the wage bill a source of fiscal instability, Seychelles must prudently manage wage bill growth to maintain fiscal space and strengthen resilience. 25 Horscroft 2014. CHAPTER 3. 41 Containing Growth in the Wage Bill Figure 3.3: Seychelles’ wage bill is on Figure 3.4: Between 2018 and 2020, real a par with its small island comparators growth in the public wage bill outpaced real (% of GDP) GDP (year-on-year growth in real terms) 12 11.3 20 10.7 10.2 10.1 10 9.5 15 10 8 5 Percent Percent 6.1 6 0 -5 2018 2019 2020 2021 2022 4 -10 2 -15 0 -20 Real Wage Bill Growth GDP Growth ca nd n s ji ev s as Fi lle N itt la o m ai Is m s is & K he m ha lo . St Ja yc So Ba Se Note: Most recent data, Jamaica and St. Kits (2022), Note: Real growth refers to the nominal amounts adjusted for Bahamas, Fiji, Solomon Islands (2021), Seychelles (2022). inflation. Source: World Development Indicators. Source: IMF World Economic Outlook; World Bank calculations real growth means deflated by the CPI. 3.3 TRANSPARENCY OF THE WAGE BILL COULD BE IMPROVED THROUGH IMPROVED MANAGEMENT OF INDUCEMENTS 75. Transparency in the wage bill structure implies that it is clear and easy to understand. Such transparency contributes also to predictability of the wage bill. In the case of Seychelles, the multiplicity of allowances (including inducements) makes it difficult to predict the wage bill, undermining transparency. 76. Streamlining allowances, which Figure 3.5: Allowances made up 29 percent account for roughly 29 percent of the of the wage bill, as of August 2023 wage bill, would contribute significantly Basic Salary and Allowances, 2023 to improved transparency (Figure 3.5). 100 The high share of allowances is notably above global standards. In many OECD Percent countries, allowances account for less than 50 20 percent of the wage bill, while the base salary is a minimum of 80 percent of the 0 total compensation.26 Emphasizing the base April May June July August salary is important because it should reflect Basic Salary Allowances qualifications, experience, responsibility, Source: Seychelles Ministry of Finance, National Planning and and job-related risks. Allowances, in Trade; World Bank staff calculations. contrast, should only serve to supplement the base salary for highly specific or short- term purposes. 26 World Bank 2020. SEYCHELLES PUBLIC EXPENDITURE REVIEW 42 Enhanced Fiscal Buffers for More Productive and Resilient Investments 77. There are 42 different types of Figure 3.6: Out of total public employees, allowances currently in the Seychelles 28 percent earn four or more allowances payroll system. About 28 percent of 4,000 employees earn four or more allowances, 3,500 3,486 Number of Employees while only 2.3 percent of employees 3,000 2,761 do not earn any allowances (Figure 2,500 3.6). Inducements are the largest form 1,885 2,000 1,610 of allowance, followed by the long- 1,500 service allowance (Figure 3.7). The official 930 1,000 definition, specific objective, or rationale 478 500 271 192 for the inducements and longservice 58 16 2 0 allowance were not available and 1 2 3 4 5 6 7 8 9 10 11 therefore are not clear. Number of Allowances Source: Seychelles Ministry of Finance, National Planning and Trade; World Bank staff calculations. Figure 3.7: There are 42 different allowances in the Seychelles (share of the total wage bill, %) BasicSalary 71.32 19 - Inducement 13.87 45 - Long Service Allowance 3.88 26 - Commuted Overtime 1.23 35 - Location Inducement Allowance 1.16 27 - ExpatriatSupplementation 1.14 12 - Responsibility 1.09 43 - Duty 0.86 10 - Overtimepay 0.78 44 - On-call 0.75 40 - RetentionAllowance 0.62 34 - Meal 0.52 Other 2.78 0 20 40 60 80 Source: Seychelles Ministry of Finance, National Planning and Trade; World Bank staff calculations. 78. A recent wage bill reform that came into effect in April 2023 consolidated four key allowances into the basic salary. The consolidation of these allowances (the 5-percent supplementation allowance, marketable skills allowance, graduate allowance, and public service commission performance allowance) was part of a public service salary review that implemented a new Salary Table. The 2023 Salary Table consolidates the 20 bands of basic salaries down into 12 bands, while maintaining 15 steps (or increments) for each band (see Annex Table 3). As part of this reform, a 10-percent increase was applied to each salary, with the minimum increase of SCR 1,000. 79. As a consequence, the share of allowances in the total wage bill decreased from 40 percent in March 2023 to 29 percent in April 2023. This consolidation has resulted in a higher share of employees earning less from allowances than in the past. However, 91 percent CHAPTER 3. 43 Containing Growth in the Wage Bill of employees still earn the inducement allowance, which suggests that it could also be consolidated into the basic salary. Furthermore, the inducement allowance currently has 188 different levels, ranging from SCR 200 to SCR 111,807 in the August 2023 payroll data. Table 3.2: Number of employees receiving 21 infrequently used allowances Allowance Employees Allowance Employees Allowance Employees 09 - Expatriate 60 - Island Service 1 13 46 - Stand-By 48 Housing Allowance 06 - Overtime 45A - Subsistence 1 49 - Advance 16 55 Taxable 101 - 5% 24 - Overseas/ 11 - Rotating Supplementary 2 17 58 Foreign Services Shift Allowance 14 – Public Service 17 - Night Duty Commission 2 25 - Acting 17 64 Contract Supplementation 9A – Housing 23 - Part-time 48 - Access to 2 Allowance 22 67 Allowance information (temporary) 08 - Unrostered 20 - Bonus 8 15 - Leave Pay 24 71 Duty 22 - Additional 38 - Night at Sea 18 - General Duty 10 32 Inducement 74 Allowance Allowance Source: Seychelles Ministry of Finance, National Planning and Trade; World Bank staff calculations. 80. However, there are 21 allowances that are infrequently used (Table 3.2). Only 74 employees receive the additional inducement allowance. Furthermore, there are 11 allowances earned by less than 20 employees each. This finding suggests that there is further scope to consolidate these allowances into the basic salary or to eliminate them entirely. The planned functional review on the size and current structure of the public sector will help identify business needs and redundant positions. This functional review presents an opportunity to review the remaining structure of allowances and inducements and identify an approach for their improved management. 81. There have also been arrears in Figure 3.8: Wage bill arrears increased allowance payments. In April 2023, there between May and August 2023 were almost no arrears, but from May to 1.6 Arrears as percent of Wage Bill August 2023, they averaged 1 percent of 1.39 1.4 the wage bill (Figure 3.8). It is crucial for the 1.13 1.2 Government to ensure timely and consistent 1 allowance payments to maintain a positive 0.8 0.77 work environment and financial stability for 0.6 0.54 employees, thereby fostering trust between 0.4 employers and their workforce. Measures 0.2 0.07 should be taken to identify the root causes 0 April May June July August of the arrears and to resolve these delays going forward. Source: Seychelles Ministry of Finance, National Planning and Trade; World Bank staff calculations. SEYCHELLES PUBLIC EXPENDITURE REVIEW 44 Enhanced Fiscal Buffers for More Productive and Resilient Investments 3.4 THERE ARE HIGH PAY DISPARITIES THAT UNDERMINE THE FAIRNESS OF THE WAGE BILL 82. The core principle of fairness is to provide equal compensation for the same job. Equal compensation includes all forms of payments and perks, such as basic salary, allowances, bonuses, and non-salary benefits. When this principle is not upheld, it can result in low morale, reduced productivity, and a high turnover rate among employees. 83. In Seychelles, the equal pay principle is compromised by the fact that nearly half of public employees receive individualized take-home salaries. While differences in pay can be justifiable in a fair, performance-based system, these variations should be determined solely by an individual's job performance and responsibilities.27 Excessive disparities in pay suggest the likely presence of pay inequalities. In the August 2023 payroll database, 47.6 percent of employees (5,565 out of 11,689) received unique total monthly salaries.28 This divergence creates disparities among employees with similar roles who receive different compensation, making wage bill management more challenging and potentially affecting employee morale. 84. This variation is in part driven by basic salaries that do not correspond to the parameters set in the Salary Table (Table 3.3). Both the 2013 and 2023 Salary Tables prescribe 15 steps within each band. However, there are more than 15 different types of basic salary in Bands 1–9, which cover 98.9 percent of employees. Furthermore, 80 employees are not mapped to a pay band between 1–12, which was prescribed under the April 2023 salary reform. 85. For the job category of “Teacher”, 41 percent of employees had a unique take home salary (Figure 3.9). This high variation has resulted in some teachers earning as much as three times more than other teachers for performing the same job with the same responsibilities. While some pay variation can be justified, especially to incentivize teachers to work in remote islands, excessive non-policy-prescribed pay variation among teachers can have adverse effects on the education system. When teachers within the same school experience significant pay disparities, it can lead to demoralization, reduced job satisfaction, and lower retention rates. This turnover can disrupt the continuity and quality of education for students, as schools may struggle to maintain a stable and experienced teaching staff. Moreover, pay discrepancies can create tension among colleagues, undermining teamwork and collaboration, which are vital for creating a positive and effective learning environment. 27 OECD 2004. 28 A unique total monthly salary refers to an employee’s compensation, comprising both their basic salary and allowances, which is distinct from that of any other individual. CHAPTER 3. 45 Containing Growth in the Wage Bill Table 3.3: Number of variations in the basic salary beyond the Salary Table (August 2023) Pay Band Max Different Basic Different Basic Salaries Employees in Band Salaries in Law29 in Practice Band 01 15 52 2,851 Band 02 15 55 3,790 Band 03 15 40 2,186 Band 04 15 35 689 Band 05 15 34 1,107 Band 06 15 28 468 Band 07 15 21 284 Band 08 15 25 141 Band 09 15 19 56 Band 10 15 13 25 Band 11 15 8 12 Band 12 15 0 0 Band 13 N/A 1 1 Band 14 N/A 3 6 Band 15 N/A 3 3 Band 16 N/A 4 5 Band 17 N/A 12 29 Band 18 N/A 3 3 Band 19 N/A 1 1 Band 20 N/A 2 2 N/A N/A 25 30 Note: N/A = not applicable. Also note that the basic salaries in this table is separate from the island inducement allowance. Source: Seychelles Ministry of Finance, National Planning and Trade; World Bank calculations. Figure 3.9: Distribution of teachers according to monthly compensation 41 percent of teachers had unique take-home salaries 350 327 309 300 262 Number of Teachers 250 236 200 145 150 104 100 56 50 20 3 0 2 1 1 2 0 0 0 00 0 0 0 0 0 0 0 0 0 00 0 00 50 50 00 50 00 50 00 50 00 50 50 ,0 00 2, 7, 2, 7, 2, 7, 2, 0, 0, 5, 0, 5, 15 -4 -1 -2 -3 -4 -1 -2 -3 -2 -3 -1 -2 -3 0- 00 00 00 00 00 00 00 00 00 00 00 00 00 0 ,0 ,0 ,5 ,5 ,0 ,0 ,0 ,0 ,0 75 ,5 ,5 ,5 ,5 37 10 15 12 20 25 30 22 40 35 32 17 27 Source: Seychelles Ministry of Finance, National Planning and Trade; World Bank staff calculations. 29 Based upon the April 2023 Basic Salary reform (see Annex). SEYCHELLES PUBLIC EXPENDITURE REVIEW 46 Enhanced Fiscal Buffers for More Productive and Resilient Investments 86. These high variations in pay are prevalent throughout the public sector. Some level of pay variation based on factors such as performance, experience, and responsibilities can be justifiable and even necessary to incentivize excellence and retain top talent. However, the key is to strike a balance that ensures fairness, motivates employees, and supports the organization's goals without creating extreme pay disparities that could negatively impact morale and undermine efficiency. Addressing these disparities should be a top government priority. 3.5 DATA CHALLENGES LIMIT THE ASSESSMENT OF THE COMPETITIVENESS OF THE WAGE BILL 87. Competitiveness impacts the Government’s ability to attract and retain staff, but more information is needed to assess this in Seychelles. Among the data needed include a labor force survey, and data on hiring and retention of public employees. These data would provide an evidence-based basis to assess the degree of competitiveness of the public sector and wages, and would also help to ensure that growth in the wage bill is aligned to market fundamentals. 88. Unlike in most Small Island Figure 3.10: The public sector is not the Developing States, the public sector is not largest employer in Seychelles the largest source of formal employment Annual Formal Employment in the Seychelles (Figure 3.10). Rather, in 60,000 Seychelles, it is the private sector, which Number represents around 65 percent of formal 40,000 employment, followed by the Government 20,000 at 20 percent, and parastatals at 15 percent. These shares have been relatively 0 consistent from 2017 to 2022. 2017 2018 2019 2020 2021 2022 Private Parastatal Government 89. Government employees, however, Source: Seychelles National Bureau of Statistics. have the highest average annual earnings (Figure 3.11). In 2022, government employees earned an average monthly salary of SCR 18,101, higher than the average monthly salary earned in parastatals of SCR 16,746, or in the private sector of SCR 13,620. This substantial discrepancy reflects in part the challenge linked to attracting highly qualified labor to some key government positions. Figure 3.11: Public sector employees earn more, on average (2017–22) 20,000 Average Annual Formal 15,000 Earnings 10,000 5,000 0 2017 2018 2019 2020 2021 2022 Private Parastatal Government All Sectors Source: Seychelles National Bureau of Statistics. CHAPTER 3. 47 Containing Growth in the Wage Bill 90. To determine whether government compensation is competitive on a job-by-job basis, further analysis is required. Labor force surveys are commonly used and control for education, gender, age, and location to identify whether there is a public sector wage premia across different jobs in the public sector. In addition, the demand for government jobs can also be calculated by the number of applicants per job opening and whether employees are leaving the public sector for other employment opportunities. 91. In parallel, a more structural approach to managing public wages and ensuring these are competitive would be to base public wage increases or the setting of the wage bill on private sector developments. Adopting a practice of comparisons against a reference point also plays an important role in public sector wage-setting. This approach should also take into consideration the budget constraint, to help moderate growth of the wage bill as a share of GDP. Countries such as the United Kingdom have achieved this through cash limits for the overall public wage bill. 3.6 OPTIONS FOR REFORMING THE PUBLIC WAGE BILL Affordability: Establish a wage bill cap and an independent wage bill adjustment mechanism 92. Setting a wage bill cap is crucial for fiscal responsibility, both in the short and medium term. A cap on wages will help to control expenditure, ensure fiscal discipline, and aid in budgetary planning. It will also necessitate important discussions about the role of government in the economy and whether the wage bill should continue to be the largest expenditure item in the budget. Table 3.4: Cross-country examples of independent bodies that oversee wage bill adjustments Independent Role body United The Review Body on Senior Salaries provides independent advice to the Prime Kingdom: Minister and other government ministers on the pay, pensions, and other conditions Review Body on of service for senior civil servants, the judiciary, and other high-ranking public Senior Salaries officials. United States: The Federal Salary Council advises the President of the United States on the Federal Salary establishment and adjustment of pay rates for federal employees. It evaluates and Council makes recommendations on locality-based comparability payments and other issues related to federal employee compensation. Australia: Australia has various Remuneration Tribunals at the federal and state levels. Remuneration These tribunals review and determine the remuneration and allowances for public Tribunal officials, including Members of Parliament, judges, and top public servants. India: Central India’s Central Pay Commission is responsible for periodically reviewing and Pay Commission recommending pay structure changes for central government employees, including civil servants and defense personnel. Singapore: Singapore’s Public Services Commission oversees remuneration and terms of Public Services service for civil servants, to ensure the public service remains competitive, attracts Commission and retains talented individuals. SEYCHELLES PUBLIC EXPENDITURE REVIEW 48 Enhanced Fiscal Buffers for More Productive and Resilient Investments 93. The planned functional review of public servants could also be used to design an approach for a relatively more independent annual review and adjustment to the wage bill. Notable approaches from other countries are presented in Table 3.4. For example, in Singapore an independent Public Service Commission oversees remuneration and terms of service for civil servants. Independent reviews would help to minimize political influence and promote greater transparency, fairness, and predictability in compensation decisions. In addition, functional reviews could be institutionalized and used to improve the assignment of functions across sectors and implementation of controls. Transparency: Use the planned functional review to Identify steps for improved wage bill management 94. Allowances should only be maintained for specific purposes that are not met through the basic salary. The planned functional review would inform approaches to improved wage adjustments and possibly identify where further consolidation of bonuses and allowances could feasiblty take place. This would help increase transparency and fairness of government pay, address salary inequities, and enforce pay controls. A comprehensive and proactive approach to address and rectify delayed payments to employees should include the following steps: a thorough examination of the causes behind arrears; streamlined administrative processes; the deployment of efficient payroll systems; and a commitment to adhere to established payment schedules. Eliminating payroll arrears facilitates timely compensation for public servants and fosters a positive work environment, employee satisfaction, and overall financial stability within the public sector. Fairness: Minimize pay disparities for employees in the same job 95. Decisive steps are needed to minimize disparities in take-home pay among employees occupying similar positions, and standardize the take-home pay across different job professions. This necessitates a comprehensive review and adjustment of salary structures for fairness and equity in compensation. One option could be a common framework grading structure that aligns jobs in different occupational groups into a common salary spine, or pay hierarchy, to enable a comparison of the relative weight or job content across different occupational categories. Common criteria could include specialized knowledge and skills, leadership and managerial requirements, decision-making requirements, level of accountability, etc. Standardization of take-home pay would promote transparency and equality, leading to a more harmonized and just remuneration system that reflects the value of each job profession within the workforce. This in turn creates an inclusive and balanced compensation framework, that fosters a positive and equitable work environment. Competitiveness: Establish mechanisms to assess the competitiveness of public sector pay 96. By continually evaluating and adjusting pay structures based on a robust assessment framework, the Government can attract and retain top talent, ensuring that public CHAPTER 3. 49 Containing Growth in the Wage Bill sector employees are fairly compensated. This involves implementing comprehensive methodologies, such as regular salary benchmarking against comparable roles in the private sector and relevant industries. In addition, conducting surveys and analyses of compensation trends and practices can provide valuable insights into how public sector pay aligns with prevailing market standards. Moreover, the Government could track the number of candidates applying for roles within the public sector to gauge demand. Simultaneously, it could evaluate whether government personnel are leaving their positions to explore opportunities beyond the public sector. Table 3.5: Reform priorities for reforming the wage bill Policy Context Policy Action Potential Fiscal Effect on Equity Effect on Climate Impact Change Recent rapid Short-term: Neutral fiscal Positive: A wage Positive: Less growth in budget Undertake impacts. However, bill that is more fair rigidity in the rigidity poses a a functional controlling the and transparent budget should potential threat review to inform size of the wage will promote translate to to effectiveness the approach bill, will create greater equity. improved climate due to growth in for annual more fiscal space resilience as the public wage adjustments to the for policies and released resources bill. The recent wage bill, and to programs to are put toward 11% of GDP cap help standardize support inclusive climate-related on the wage wages across growth and policies. Improved bill should be different jobs climate resilience. flexibility also supported with an and benchmark supports improved institutionalized these against implementation implementation comparable of performance mechanism private sector budgeting and positions and efficiency to wages. support inclusive and climate sensitive growth. SEYCHELLES PUBLIC EXPENDITURE REVIEW 50 Enhanced Fiscal Buffers for More Productive and Resilient Investments SEYCHELLES PUBLIC EXPENDITURE REVIEW 52 Enhanced Fiscal Buffers for More Productive and Resilient Investments CHAPTER 4. HEALTH: MANAGING THE BUILD-UP OF RISING SPENDING PRESSURES CHAPTER 4. 53 Health: Managing the Build-up of Rising Spending Pressures Seychelles has historically financed health costs through taxes. This has been possible given strong growth in recent years, substantial tax revenues and stable public spending as share of GDP, and the priority given to the health sector. However, health-care spending pressures are building up given the aging population, absence of visible progress in the prevention of avoidable noncommunicable diseases, rising expectations of the population, and continued price effects of external shocks. These trends will make it increasingly challenging to sustainably finance rising health care costs, making it imperative to increase fiscal space through improved efficiency, including through a sharper focus on preventive rather than curative services. 4.1 NONCOMMUNICABLE DISEASES ARE A RISING CHALLENGE 97. Seychelles has achieved significant progress in health outcomes. Free primary health care is enshrined in Article 28 of the Constitution, and includes overseas treatment provided free at the point of delivery. Seychelles has attained physical Universal Health Coverage. The decision to ensure publicly funded, universal access to health care was taken in 1978, and the Government has ensured that recurrent funding of the health sector facilitates access to doctor-led health services in a network of primary health centers across all islands. This includes six hospitals, regional health centers, and the tertiary level Seychelles Hospital on Mahé. Seychelles has also adopted a lifecycle approach to health-care provision, under the banner “from womb to tomb.” The package of care around reproductive health is comprehensive and includes a package of services, all delivered at the primary level except for delivery care for which hospital care is the norm. 98. Health outcomes are in line with that of HICs. Prior to the pandemic, average life expectancy at birth in the Seychelles was similar to OECD countries, at 73.9 years in 2019. Life expectancy jumped to 77.3 years in 2020, as public health restrictions were established during the initial phase of the pandemic, resulting in fewer deaths from external causes. However, there is a large gap in life expectancy between men (72.7 years) and women (82 years), which has persisted since 1980. 99. A key challenge is the high rates of avoidable morbidity and mortality, due primarily to a large and growing burden of noncommunicable diseases (NCDs). Rising rates of NCDs point to a major inefficiency of the current health system, which fails to adequately prioritize public health and preventive services. In 2021, an estimated 71 percent of deaths were due to NCDs, while the incidence of communicable diseases (particularly dengue and leptospirosis) is also high. Outcomes of some avoidable NCDs are worse than among OECD countries.30 Over one-third of total deaths (34.4 percent) between 2016 and 2020 were due to cardiovascular 30 World Bank 2018, 34–37. SEYCHELLES PUBLIC EXPENDITURE REVIEW 54 Enhanced Fiscal Buffers for More Productive and Resilient Investments disease, and a further 18.4 percent linked to cancer. Disability-adjusted life years (DALYs) lost due to diabetes increased by almost 60 percent over the past decade. High rates of teenage pregnancy and substance abuse contribute to a vicious cycle of restricted life choices and the perpetuation of poverty. 100. Despite rising NCDs, the health sector continues to prioritize relatively inefficient curative care over public health and preventive services. Seychelles requires substantial investments in public health and preventive services to reduce the burden of NCDs that account for 7 of the 10 most significant causes of DALYs lost. In the context of a small island economy, the benefits of prevention are amplified. Despite physicians providing 56 percent of attendances at the primary level, effective follow-up, and management of NCD patients appear insufficient to effectively reduce the need for curative care, whether provided within the Seychelles health system or overseas, resulting in higher costs. 4.2 BASIC HEALTH OUTCOMES ARE STRONG IN GENERAL 101. Between 2020 and 2021, excess deaths from the pandemic caused average life expectancy to fall by 3.8 years, to reach 73.5 years.31 The impact on women was greater, with life expectancy at birth for women falling by 6.5 years to 75.5 years, the lowest level since 1990, while the fall for men was lower at just over one year to 71.3 years. Estimates of life expectancy at birth are yet to be calculated for 2022 due to adjustment of the Census data. However, the gap is expected to have widened again. Pre-pandemic, the health-adjusted life expectancy (HALE) for 2019 was estimated by the World Health Organization (WHO) at 61.9 for men and 66.4 for women, or 64 years on average.32 These trends imply that the last eight and 11 years of the lives of men and women, respectively, were lived in poor health. 102. Differences in life expectancy between men and women is partly explained by external causes of death. Causes include accidents, poisoning, and injuries, which are prevalent among young men in Seychelles, as they make up 80 percent of such deaths, accounting for 6–10 percent of all deaths. During the pandemic, with restrictions on activity and movement, average annual deaths from external causes declined from 50 per year in 2017–20 to 34 per year in 2020–21,33 but significantly rose again in 2022 to 71.34 Drowning, road traffic accidents and suicides were among the major causes of deaths from external causes in 2022. 103. Seychelles is considered a leader within Africa in reducing maternal mortality, with a maternal mortality ratio (MMR) in 2022 of zero.35 The country has virtually achieved 100 percent facility-based deliveries,36 with 99.3 percent delivered by skilled health personnel in 2022. In 2021, 1,660 of 1,688 deliveries (93 percent) took place at Seychelles Hospital. Given the 31 MoH 2022b, p6. 32 WHO, cited in MoH (2023b, 30); https:/ /data.who.int/countries/690#:~:text=In%20the%20Seychelles%2C%20life%20 expectancy,to%2073.3%20years%20in%202019. 33 NBS 2022b, 11. 34 MoH 2023, 32, Figure 12. 35 It is worth pointing out that a single death shoots the MMR upward due to the small population. 36 MoH 2023b, 27. In 2022 there were 11 per 1,512 deliveries outside a facility; that is, less than 1 percent. CHAPTER 4. 55 Health: Managing the Build-up of Rising Spending Pressures typically higher costs of a tertiary facility, this may not represent value for money in a context where antenatal care is almost universal, and risks to mother or baby might be expected to be detected early. However, due to the small population and declining fertility rate, the relatively low number of births—fewer than five per day on average—may require such concentration of the service to maintain the skills of the obstetric staff. The recent opening of a new hospital on La Digue should, once fully staffed and operational, reduce the need for travel to Mahé for delivery, thereby improving physical accessibility. 104. Despite zero maternal deaths in 2022, the five-year moving average for MMR remains above target. The Seychelles has experienced between zero and three maternal deaths each year since 1978.37 However, population size and the relatively small numbers of deliveries mean that a single maternal death has a substantial impact on MMR, and annual MMR figures fluctuate widely. As such, the use of five-year moving average is more stable. Data show that this measure has been above the NHSP 2022–26 target of 50 since 201538 and has fluctuated at about 70 to 75 between 2018 and 2022.39 Though flagged as a concern, no immediate explanation for this is evident, although the two 2021 maternal deaths were of COVID-19 patients. 105. Also, mortality from all causes rose slightly in 2022. With 929 deaths and a projected population of 100,424, the implied mortality rate of 9.2 remained higher than in the immediate pre-pandemic period of 2017–19 when it averaged 7.5 deaths per 1,000 population. The contribution of NCDs to total deaths remained high, though deaths from the three main (non- COVID-19) causes, namely cardiovascular, cancers, and respiratory diseases, was lower at 67 percent compared with a pre-pandemic average of 70 percent. 106. Adolescent fertility in Seychelles is significantly higher than the average for high income or OECD country groupings, though it is on a par with other small states. At 55 births per 1,000 girls aged 15–19, the adolescent fertility rate is almost five times the HIC average (Figure 4.1).40 In addition to typically greater risks at the time of delivery among younger mothers-to-be, the experience of becoming a young mother can lead to fewer employment opportunities for those women, resulting in greater poverty, as reflected in the ninefold higher poverty rate for young women relative to the rate of young men.41 This then risks becoming a cycle affecting the opportunities of their children. At the national level, this dampens overall workforce participation and productivity, and thus potential GDP. 37 MoH 2022a. 18. 38 The NHSP 2016–20 target was 70. 39 MoH 2023 (Figure 6, p. 28). 40 MoH data for 2021 suggest an even higher rate of 63 per 1,000 adolescent girls (April p. 4). 41 Borgen 2017. SEYCHELLES PUBLIC EXPENDITURE REVIEW 56 Enhanced Fiscal Buffers for More Productive and Resilient Investments Figure 4.1: Adolescent fertility is high in Seychelles relative to comparator countries and groupings, 2021 60.0 50.0 40.0 Percent 30.0 20.0 10.0 0 e s s os ji s ta a e a s us rs a Fi te le iu ve vi ni rd m ni al pr ad be rit t el to ta co Ve ua di La M Cy au ch rb Es ls em al in th bo Ba M al y M Li h m Se Sm ig Ca D H EC O Source: World Bank World Development Indicators. 107. National data show a slight fall in the proportion of total births to girls and women under 19 years in 2022, but it remains to be seen whether this improvement will be sustained. From a high of 14.8 percent of total births in 2019 it declined to 10.6 percent in 2022. The revision of legislation to allow the provision of contraception to girls under 18 years without parental consent is encouraging but needs to be enacted to yield any benefit. On its own, this legislative change is unlikely to be sufficient, given the complex social and economic factors that contribute to the high teenage pregnancy rate. 108. Infant and child mortality have both increased since the 2020 baseline for the NHSP 2022–26, though there has been a small decline in the neonatal mortality rate. Infant mortality rose from 11.6 to 15.3 deaths per 1,000 live births, while the under-five mortality rate rose from 14.2 to 18.5 per 1,000 live births over the same period, moving them further from their respective targets by the end of the NHSP period. The rate of stillbirths also rose over the two- year period. Both the number of neonatal deaths and the neonatal mortality rate fell slightly, from 14 to 13 and from 9 to 8.3 per 1,000 live births, respectively, and the neonatal mortality rate remains a distance from the 2026 target of less than 5 deaths per 1,000 live births. The 2022 figures show that, although deaths in the perinatal period were still significant (41 percent of under-five deaths, down from 59 percent in 2020), they were accompanied by an increase in the number of post-neonatal infant deaths (38 percent of under-five deaths). 109. Childhood immunization rates are high in Seychelles and were largely maintained throughout the pandemic period. Coverage of bacille Calmette-Guerin (BCG) ranged between 98 and 100 percent coverage, while for measles (1st dose), Hepatitis B (3rd dose) and Haemophilus B (3rd dose), coverage was 99 percent in 2018/19, dropping to 97 and 94 percent in 2020 and 2021, respectively, then recovering to 97 to 98 percent, in 2022. Coverage of the second dose of measles vaccine was hit harder, dropping from 99 to 100 percent to 86 CHAPTER 4. 57 Health: Managing the Build-up of Rising Spending Pressures percent coverage in 2021, and recovering to 98 percent in 2022.42 WHO/UNICEF estimates are largely consistent with official estimates, though no validation survey has been undertaken in the past five years. It will be important to conduct a validation survey. HPV vaccination was introduced for school-age girls in 2014, with 82 percent coverage in 2022, with the aim of reducing the future incidence of cervical cancer. 4.3 DISEASE BURDEN STEMS LARGELY FROM NONCOMUNICABLE DISEASES 110. Seychelles underwent the epidemiological transition from infectious to noncommunicable diseases over 20 years ago and has a similar disease burden as other high-income countries. Communicable diseases, particularly dengue and leptospirosis, persist, while the prevalence and outcomes of some avoidable NCDs are worse than among OECD countries.43 Data from 2019, preceding the pandemic and associated disruption to service delivery, indicate that the number of disability-adjusted life years (DALY) lost due to nine of the top ten causes of morbidity and mortality in the country had increased over the previous decade, neonatal disorders being the exception. For diabetes, DALYs lost grew by almost 60 percent over the decade (Figure 4.2). Figure 4.2: Top 10 causes of death and disability (DALYs) in 2019 and percent change 2009–19, all ages combined NCD - Hypertensive heart disease I - Road injuries NCD - Low back pain CMNND - Neonatal disorders NCD - Cirrhosis liver NCD - Chronic kidney disease NCD - Diabetes CMNND - Lower respiratory infect NCD - Stroke NCD - Ischemic heart disease -20 -10 0 10 20 30 40 50 60 70 Note: Color-coded by type: CMNND = communicable, maternal, newborn, and nutritional disease; I = injuries; NCD = noncommunicable disease. DALYs = disability-adjusted life years. Source: IHME 2023. 111. Seychelles has been malaria-free for decades but continues to see cases of dengue fever and leptospirosis. Dengue cases were lower in 2022 than before the pandemic, with three deaths, though it remains to be seen whether this pattern will continue. A rise in dengue 42 UNICEF/WHO 2023. 43 World Bank 2018, 34–37. SEYCHELLES PUBLIC EXPENDITURE REVIEW 58 Enhanced Fiscal Buffers for More Productive and Resilient Investments fever globally has been attributed in part to climate change, and suggest that surveillance activities remain critical. Leptospirosis deaths have also been lower than pre-pandemic, with deaths largely among males. As a bacterial infection spread by contaminated soils and waters, cases could also rise with increased flooding due to climate change. Confirmatory testing for these two diseases was not undertaken in 2021 or 2022. 112. This situation with NCDs is complicated by some key social challenges linked to teenage pregnancy and drug abuse, which further undermine health outcomes. High rates of teenage pregnancy and substance abuse contribute to a vicious cycle of restricted life choices and the perpetuation of poverty. Specifically, the human immunodeficiency virus (HIV) epidemic is concentrated in key populations, particularly persons who inject drugs. Also, teenage pregnancy remains high relative to other HICs and in OECD countries. Seychelles has adopted a lifecycle approach to health-care provision, under the banner “from womb to tomb.” The package of care around reproductive health is comprehensive and includes services all delivered at primary level except for delivery care. This could be strengthened to address the challenges of teenage pregnancy. 113. NCDs continue to dominate mortality Figure 4.3: Major causes of mortality, 2018–22 figures, accounting for 63 percent of 100% deaths in 2021 (Figure 4.3). Over one- 25% 25% 20% 17% 22% third of total deaths (35 percent) between 10% 17% 17% 15% 13% 2018 and 2020 were due to cardiovascular 14% 20% 17% disease, and a further 20 percent due to 19% 20% 19% 10% cancer. Diabetes mellitus accounted for 12 38% 34% 33% 30% 30% percent of NCD deaths in 2021 and, when 0% both the leading and contributory causes 2018 2019 2020 2021 2022 of death are considered, was a factor in Others Endocrine, nutritional & Genito-urinary system metabolic diseases one in five deaths.44 Despite this, diabetes Cancers Respiratory system is underreported as a cause of death.45 Cardio-vascular Covid-19 virus Figure 4.3 shows the major causes of Sources: NBS 2022a (Table 8a); MoH 2023b, 32. death during the period 2018–22. 114. Diabetes, though less significant in terms of mortality, presents a burden in terms of morbidity, and along with hypertension, is the leading cause of end-stage renal disease (ESRD). Diabetes prevalence is measured locally through the Seychelles Heart Study surveys, the most recent was undertaken in 2013/14. A new survey took place in late 2023 and findings are not yet published. Projections at the time suggested that 8 percent of the population will be diabetic by 2030, a figure which excludes pre-diabetes. More recent data suggest that the level is already higher at 8.5 percent. Diabetes prevalence is on a par with HICs and is slightly lower than the OECD average (Figure 4.4). 44 MoH 2022b, 38. 45 MoH 2022a, 22. CHAPTER 4. 59 Health: Managing the Build-up of Rising Spending Pressures Figure 4.4: Diabetes prevalence is modest among adults aged 20–79, 2021 25.0 20.0 15.0 9.0 8.5 8.4 10.0 5.0 0.0 s ls s EC Ma es em s h lles e Es ta a a bo rica e rs n ia iu do m ive ni Li tvi m r ji rd al n Ba Fi t Se be rit to ta co Ve ha ua H che La Ca Af M Sm ba ld au in Sa th al y M ra ig D b- O Su Source: WHO 2023a. Data from International Diabetes Federation, Diabetes Atlas. Figure 4.5: Change in top 10 risk factors in terms of DALYs per 100,000 population, 2009–19 B - Malnutrition -342.8 E/O - Air pollution 137.1 M - High LDL 98.3 M - Kidney dysfunction 253.9 B - Alcohol use 213.4 B - Dietary risks 238.5 M - High body-mass index 811.4 B - Tobaco 379.8 M - High fasting plasma glucose 833.6 M - High blood pressure -600 -400 -200 0 200 400 600 800 1000 Note: B – Behavioral risk factor; M – metabolic risk factor; E/O – Environmental/Occupational risk factor. Source: https://www.healthdata.org/research-analysis/health-by- location/profiles/ Seychelles. Several risk factors have increased in recent years 115. Risk factors that contribute most to the loss of DALYs in Seychelles have increased. Comparison of risk factors over the period 2009–19 shows that these increased for all except one, namely malnutrition (Figure 4.5). Figure 4.2 points to an apparent association between rapid growth in high BMI and high fasting glucose with that of mortality from diabetes. 116. Substance abuse continues to represent a significant health and social challenge in Seychelles. The 2015 Global School Health Survey found that 15 percent of students had used drugs by age 17. This varied by sex, with 20 percent of boys and 11 percent of girls acknowledging use. Abuse of substances including cannabis, alcohol, and opioid or poly-drug use accounted SEYCHELLES PUBLIC EXPENDITURE REVIEW 60 Enhanced Fiscal Buffers for More Productive and Resilient Investments for half of 2022 admissions to the hospital psychiatric ward. Harm reduction interventions include HIV testing and a needle-syringe exchange program, but coverage remains low.46 117. Alcohol consumption is much higher in Seychelles than in comparator countries. Figure 4.6 shows that, at 12 liters per capita in 2021, estimated overall alcohol consumption exceeds that of the HICs and the OECD countries by at least one-third and is 2.5 times as high as in the small states comparator group. Projected consumption is much higher for men (18.4 liters) than for women (4.7 liters), the latter being closer to HIC and OECD groups. As a risk factor for hypertension, heart disease, liver disease, various cancers, and poor mental health among other health issues, it is of concern that the MoH reports that utilization of services for alcohol abuse prevention were low in 2022. Though the evidence is dated, use of alcohol starts at an early age, with 48 percent of 13–15 year olds and 58 percent of 16–17 year olds reporting having had at least one alcoholic drink in the 30 days preceding the survey,47 and 43 and 55 percent, respectively, reporting having been very drunk more than once in their life. The SHS survey planned for 2023 will provide essential updated data on this and other NCD risk factors on which to prioritize and refine existing plans. Figure 4.6: Total alcohol consumption per capita, projected estimated is high (liters), 2021 14.0 12.0 12.0 10.0 9.2 8.6 8.0 6.0 4.8 4.0 2.0 0.0 yc ia s Ba nia s em e M alta bo ius e s a s Es a rs Li lle O igh do ra te ve ric m rd al i Se atv ni j be Fi Ca urit to ha ta D nco Su Sm Ve ua di he Af M ba L s th a r n Sa all i M m H EC b- Source: WDI data, from WHO. Note: Defined as projected estimated liters of pure alcohol among those 15+ years of age. 118. Childhood obesity has increased steadily over the years (Figure 4.7). This was noted since 2002, when 12.6 percent of children were identified as overweight, and 3.8 percent as obese, and the situation has worsened over intervening years, with the 2023 school health screening finding 14.5 percent of boys and 16.3 percent of girls to be obese.48 Being overweight and suffering from obesity persist into adulthood and, among adults, obesity is on a par with other comparator countries. High body mass index was the fourth-highest risk factor contributing to 46 MoH 2023, 4. 47 2015 Global School-based Student Health Survey: Seychelles 2015 Fact Sheet. 48 MoH 2023, p.5. CHAPTER 4. 61 Health: Managing the Build-up of Rising Spending Pressures excess DALYs lost in both 2009 and 2019, rising by 46.4 percent over the decade. The current National Health Strategic Plan (NHSP) aims to muster a multipronged effort to combat obesity across sectors through the declaration of a public health emergency. Figure 4.7: Childhood obesity has been rising 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Boys: Overweitght Boys: Obese Girls: Overweitght Girls: Obese Linear (Boys: Overweitght) Linear (Boys: Obese) Linear (Girls: Overweitght) Linear (Girls: Obese) Source: Data from MOH 2023b, i.e., MOH APR 2022. 119. While Seychelles does not see the levels of undernutrition often found in other African countries, it is still a concern. Undernutrition was estimated to contribute twice as much to multidimensional poverty as obesity (8 percent compared with 4 percent), and wasting and stunting among young children are associated with lifelong impact on cognitive function, educational outcomes, and economic productivity. 120. Human immunodeficiency virus (HIV) in Seychelles presents as a concentrated epidemic in key populations, particularly persons who inject drugs. New cases had reduced steadily from 2018 to 2021 but rose in 2022 to 72 (46 male and 26 female), up from 59 in 2021.49 In total, 56 percent of these new cases were reported as arising through heterosexual transmission, with 24 percent among men who have sex with men, and 14 percent through injecting drugs. Coinfection with Hepatitis C appears to be on the rise and 2022 saw a surge in syphilis diagnoses among those aged 18–39,50 which suggests a need to strengthen prevention of sexually transmitted infections (STIs) more generally. Prevention of HIV and other communicable diseases falls to units in the Centre for Disease Control Division at PHA. 49 PHA 2023, cited in MOH 2023, Fig 35 on p.46. 50 MoH 2023, 5. SEYCHELLES PUBLIC EXPENDITURE REVIEW 62 Enhanced Fiscal Buffers for More Productive and Resilient Investments 4.4 ACCESS TO PUBLIC HEALTH FACILITIES IS ADEQUATE, BUT THEIR CAPACITY IS UNDER-UTILIZED 121. Seychelles is well-served with public health facilities, with over 75 percent of the population able to access a health facility within 30 minutes in 2017.51 This stems from the priority given to investments in primary health care over the past decades and the commitment to ensuring access to a health facility within 20 minutes’ walk. Consultations are provided both during and outside working hours, with 16 to 18 percent of visits outside working hours. There are wide variation in the volume of attendances at different facilities. The per-capita utilization rate for consultations with doctors was 2.3 in 2021, below the OECD average of 6.52 Overall, 229,018 consultations (55.8 percent) were with a doctor, 130,972 (31.9 percent) with a nurse, and 50,429 (12.3 percent) were for dressing. rowth in private health services increases demand for health professionals which in trun puts pressure on the public sector through staff exit. This in turn puts more emphasis on clinical care rather than public health and prevention.53 122. Overall occupancy at Seychelles Hospital was 62 percent in 2022, back up from 53 percent in 2021, though this masks wide variations between wards. Bed occupancy in referral facilities is low relative to the benchmark of 90 percent,54 suggesting some over-supply and potential inefficiencies. Recent figures show that the number of beds was reduced from a high of 244 in 2019 to 230 in 2021, in line with earlier World Bank recommendations. Given that, ward occupancy ranges from 90 percent in the male medical ward and intensive care units (ICU), down to 39 percent in the neonatal ICU and 51 percent on the pediatric ward. Specialist facilities at the Northeast complex run close to 100 percent occupancy, suggesting a need for either decongestion, or expansion. Data for Praslin and La Digue indicated occupancy rates of 22–25 and 8–10 percent, respectively. However, it is difficult to know to what extent these trends are due to the COVID-19 virus (or a rebound in the use of facilities after the drop in attendance during the pandemic). It seems unlikely that “normal” occupancy exceeds 50 percent. The service package and staffing profile at referral facilities other than Seychelles Hospital is unclear. Most treatment of more advanced NCDs is handled through specialist outpatient clinics rather than as an inpatient, and considered as part of primary health care. Inpatient care is needed for critical care such as stroke, heart attack or for diabetic amputations by which time disease is well advanced. Such care is generally provided at the Seychelles Hospital. 123. However, some hospital facilities are under-utilized. A new 20-bed hospital, St. Mary’s, in La Digue, was inaugurated in August 2023 and is expected to also serve as a referral facility for Praslin.55 Financed largely by donation from the United Arab Emirates (AED 25 million56) the hospital was expected to be operational from October and will offer services including 51 World Bank 2018, 14. 52 OECD 2023. Most countries reported 4–10 consultations. It should be noted that health systems configuration explains some of the variation. 53 MOH 2023b, 71. 54 Barnum and Kutzin 1993. 55 https://www.nation.sc/articles/18956/la-digue-gets-new-hospital. 56 https://wam.ae/en/details/1395303187954. CHAPTER 4. 63 Health: Managing the Build-up of Rising Spending Pressures emergency care, general medicine, maternity care, and cardiology, in addition to dialysis for end stage renal failure. No details were available on the distribution of beds. The 10 percent bed occupancy of Logan Hospital, and the revealed preference of many patients to seek more advanced care at the Seychelles Hospital on Mahé, suggest that this new facility may be under-utilized. 124. There is also under-utilization of community health centers and services. Utilization of some community health services fell during the pandemic but are now showing clear signs of recovery. The community health services program under HCA includes home visits, school health activities, and services provided at the 18 health centers across the islands. Home visits to women within 14 days of delivery have recovered to their pre-pandemic level of 53 percent, having dropped to 19 and 24 percent during 2020 and 2021, respectively. Coverage of all post- partum visits was almost universal in 2022, at 97 percent.57 125. While Seychelles is well advanced on the road to Universal Health Coverage in terms of service coverage and financial protection, there is still room for improvement in the quality of care. The 2018 benchmarking of selected quality indicators against OECD countries found a mixed picture, with Seychelles performing well in areas such as hospital admissions for chronic obstructive pulmonary disease and congestive heart failure, and in relation to obstetric trauma, but worse in terms of survival and mortality outcomes for various cancers, diabetes admissions and lower limb amputation rates.58 126. Recent reforms put more emphasis on quality. Quality features strongly in the NHSP, under Strategic Direction 2, Protect and Improve UHC. A Quality-of-Care Committee was established in 2022, tasked with development of a strategy and operational plan. However, the link with the Quality Assurance Unit needs to be further clarified. Also, the focus appears to be on curative and less on preventive care across the system. Greater emphasis on preventive care would contribute significantly to quality. Some degree of understaffing may also impact access to services 127. Seychelles exceeds the WHO threshold for the ratio of core medical staff per 1,000 population, but relies on foreign-born expatriate nursing and medical staff for some key positions. Data for 2019, the latest available for comparator countries, indicate that Seychelles had slightly over 10 core staff (i.e., doctors, nurses, and midwives) per 1,000 population. This is above the WHO SDG index threshold of 4.45 proposed in 2016,59 but slightly lower than the average for OECD countries. 128. The active doctor-population ratio is 2.4 per 1000 population, which is well within recommended thresholds. The challenge may lie more in the distribution of staff, both by cadre, specialization, location, and whether staff hired are citizens or shorter-term expatriate 57 MoH 2023, p.95. 58 World Bank 2018. 59 WHO 2016, p.41. This figure provides an “updated, needs-based “SDG index” of minimum density” of the three cadres based on available data. Limitations of the method are noted in the report. SEYCHELLES PUBLIC EXPENDITURE REVIEW 64 Enhanced Fiscal Buffers for More Productive and Resilient Investments staff. A more comprehensive analysis requires complete data on the distribution of medical professionals, which are not currently available. However, available data indicate that 70 percent of positions have been filled within the HCA. Of the positions filled, largely in hospital services (64.9 percent), community services (34 percent), with the rest in the CEO’s office. 129. Doctors and dentists are trained overseas, given the small population that creates diseconomies of scale and scope in tertiary education. Nurses and other allied health professionals are trained by the National Institute of Health and Social Studies (NIHSS). Data on overseas study are maintained by the Agency for National Human Resource Development, which forms part of the education portfolio, and shows 63 pre-service students of medicine,60 and 25 in-service students studying for a master’s degree or other unspecified medical specialization, in addition to seven nursing degrees. None of the postgraduate students currently in training appears to be studying public health, which might be considered a priority given the need to shift focus from curative to preventive services to improve efficiency in the diagnosis and follow-up on NCDs. 130. The HCA is lacking some key staff, which is likely to affect output. As of end-2022: • Director and Deputy Director of the Overseas Treatment Unit. • Director and sole additional position within the Quality Assurance Unit. • Director (and sole position) of Contract Management Unit. • Both Director and Hospital Administrator of the Seychelles Hospital. • Human Resource Development Director and Officer. • All four staff of the Secretariat and Health and Safety Unit of the Facilities Planning and Management Division. 131. In total, of 2,154 positions at the HCA, 1,723 were filled (80 percent), with 341 vacancies (16 percent) and 90 posts frozen (4 percent). The organization of the data does not permit more detailed exploration of the extent to which this might reflect either shortfalls or maldistribution of human resources. Further analysis is warranted to assess the degree of the HCA’s efficiency (in relation to the size of Seychelles’ health delivery system, the burden of disease, and the most cost-effective service package). However, statistics that stand out include the following: • The Division of Community Health (DCH) has half the number of positions filled in the Hospital Services Division, despite the DCH being responsible for preventive and primary curative care throughout the islands. • The Division of Oral Health has two-fifths as many staff as the DCH despite the burden of disease from oral health conditions being far lower than those addressed by the DCH. 60 Pre-service medicine here includes the labels “Medicine”, Medicine – General”, “General Medicine” and “Medicine and Surgery”. CHAPTER 4. 65 Health: Managing the Build-up of Rising Spending Pressures • The Health Promotion and Education section has a total establishment of 16 positions, of which only 10 were filled, despite this seemingly being a critical service. A lack of data precludes facility level analysis of efficiency and quality 132. The absence of data on hospital activity and capacity from other referral facilities precludes any discussion of efficiency at some individual facilities or for first level referral in general. These not only include the long-standing cottage hospitals, but also the new hospital facility on La Digue. It is important that efficiency data are complete and are produced regularly for review not only annually but over the course of each year. A more complete dataset would enable better comparison of the efficiency of different facilities of a similar nature. It is possible that such data are included in the annual Hospital Report referred to in the 2022 Annual Health Sector Performance Report (APR), but these were not available. 133. An assessment of the level and quality of staffing is also constrained by data limitations. This assessment would improve understanding of the factors impacting health facility attendance, including the relative appointment of staff to preventive versus curative care. The current primary health-care report does not include data on staffing at individual health centers. This precludes analysis of attendances per staff member, which would also allow for comparison of potential efficiency gaps at individual facilities or, at a minimum, flag issues for further research. Inclusion of nominal catchment populations per health center would strengthen such analysis. Preventive services have a relatively low profile within the HCA, included as a unit within an agency, rather than as a full Division. Staffing of positions targeting prevention of NCDs is limited, with some vacancies relative to posts (Table 4.1). While acknowledging that staff at the health-center level are also expected to engage in prevention and promotion activities, this staffing allocation contrasts sharply with, for example, the Division of Oral Health within the HCA, which has a secretariat larger than the NCD control Section at PHA, and an overall establishment of 176 posts. Table 4.1: Staff assigned to jobs targeting prevention of NCDs, late 2022 Position Agency Division Section Unit Vacant/ Filled as Filled frozen % of total Secretariat 1 1 50% Hospital services Nutrition services Nutrition services 7 4 64% Reproductive health 1 1 100% Expanded programme on 1 2 33% HCA immunisation Community Health Promotion services & Education Child adolescent 1 100% School health 1 100% Matemity health 1 100% Diabetes 2 2 50% SEYCHELLES PUBLIC EXPENDITURE REVIEW 66 Enhanced Fiscal Buffers for More Productive and Resilient Investments Position Agency Division Section Unit Vacant/ Filled as Filled frozen % of total Secretariat 2 0 100% Centre for UPCCD 3 2 60% PHA NCD Control Disease Control Cancer and mental 3 1 75% health Source: Ministry of Health and World Bank staff estimates. 134. Data on the distribution of staff by cadre and health facility were not available. This prevents analysis of contacts per cadre and staff member in different facilities, to help in assessing efficiency of current distribution of staff across facilities. Similarly, no data on catchment population were readily available. The ratio of doctor to nurse contacts varies widely, from no nurse contacts at Mont Fleuri to one in four at Takamaka and SDPF clinic. Without more information on distribution of existing staff, catchment populations, staffing norms, and the expected service package, it is difficult to comment on what might be a recommended staff mix, or what accounts for the variation. Health financing is primarily from tax revenues 135. While the government finances most health care in Seychelles, recent data point to a potential rise in out-of-pocket spending (OOPS). Table 4.2 shows a large increase in household spending through OOPS payments, which are recognized as a barrier to accessing health care, particularly for the poorest, and are a potential source both of inefficiency and inequity in health financing. This increase in OOPS, beyond the WHO threshold of 20 percent, which has the potential to push people into catastrophic expenditure levels, is a concern. Updated calculation is needed for the UHC financial risk protection indicators. Despite the availability of 2018 Household Budget Survey data, this was being measured using 2013 survey data as late as 2022.61 A new HBS is expected in 2024. 136. In theory, out-of-pocket payments should be limited given the constitutional right to free primary health care and the extension of this de facto to higher level referral care. A flat rate prescription charge of SCR 25 (US$1.78) was introduced in 2019, with exemptions for under- 18s, over-63s, young persons in full time education, pregnant women, and those with chronic diseases, these groups accounting for around 80 percent of the population. However, the fees were scrapped in 2022 due to their administrative cost relative to revenues generated.62 The families of patients referred overseas sometimes contribute toward flight or treatment costs, but no reliable estimate of the frequency or level of contribution was possible. Given this context, it is possible that the increase in OOPS (Table 4.2) is due to the expansion of the private sector in Seychelles. Private general practice services more than tripled, while the number of private pharmacists increased fourfold between 2017 and 2021. However, between 2019 and 2020, 61 MoH 2023. 62 MoH 2023. CHAPTER 4. 67 Health: Managing the Build-up of Rising Spending Pressures comparison with selected comparator countries using data from WHO indicates that OOPS fell as a share of current health expenditure (CHE) in most but that the fall was sharpest in Seychelles, from 25 to 14 percent. This may be an effect of the pandemic, and it will be important to confirm and monitor these trends through updated and timely NHA exercises in the coming years. Table 4.2: Health expenditure by source, most recent years available 2009 2013 2016 2017 SCR m % SCR m % SCR m % SCR m % Government 307 87% 513 92% 681 69% 744 70% Private 25 7% 23 4% 265 27% 270 25% o/w household (Out of Pocket, OOP) 18 5% 12 2% 249 25% 252 24% Rest of the world 22 6% 19 4% 29 4% 45 4% Current Health Expenditure (CHE) 353 555 958 1,059 Capital Formation 29 55 40 557 Total Health Expenditure (THE) 382 610 1,025 1,615 Per capita in USD Current Health Expenditure (CHE) 298 512 781 810 Total Health Expenditure (THE) 322 562 813 1,325 Sources: World Bank 2018; MoH 2020; World Bank staff calculations. 137. Seychelles’ classification as an HIC limits external funding, though various contributions were received in cash and in-kind from partners during the pandemic. The most recent NHA estimates external funding as contributing 3.9 and 4.2 percent of CHE in 2016 and 2017, respectively. Seychelles benefits from in-kind support through volunteer/external health workers, in a Chinese medical team that rotates every two years, and Cuban doctors who supplement the Seychellois medical staff. India is financing a new Health Management Information System; and the WHO maintains a technical office in-country. 138. To achieve the country’s Vision 2033, the Government is guided by the National Development Strategy (NDS 2019–2023). The goal for health anchored in the second pillar of the NDS is to "achieve the highest level of health and well-being". The National Strategic Health Plan (NHSP) and the National Health Policy (2015) are aligned with the NDS, which places health and wellbeing at the Centre of National Development, as they both benefit from and contribute to socio-economic development. It affirms the right to health enshrined in the Constitution and emphasizes individual responsibility in health matters. Priorities for health financing over the course of the NHSP 2022–2026 are the following: 1. Make performance and program-based budgeting (PPBB) work for the sector. 2. Address inefficiencies in health care management and delivery. 3. Improve revenue collection and ensure sustainability of health-care financing. 4. Increase spending on preventive and promotive care.63 63 MoH 2022a. SEYCHELLES PUBLIC EXPENDITURE REVIEW 68 Enhanced Fiscal Buffers for More Productive and Resilient Investments 4.5 GREATER EFFICIENCY IN HEALTH SPENDING CAN SIGNIFICANTLY IMPROVE SERVICE DELIVERY 139. The sector produces an annual performance and program-based budgeting (PPBB) assessment, which provides useful details on the budget, actual expenditure by agency, program, and economic classification. However, targets and indicators could be strengthened and not all are measured. Also, the current NHSP states that the format has not delivered the expected results. Targets do not appear to be costed, and clear links between inputs and outputs are not yet evident in the PPBB budget documentation. Too many poorly defined targets and indicators are included, many of which are process indicators more suited to departmental operational plans. Health expenditure tracking is delayed and is not institutionalized within the sector agencies despite several rounds of NHAs, limiting the evidence-base for strong planning and budgeting. Essential capacities for costing and economic evaluation are lacking across the sector. 140. The MoH Annual Performance Report (APR) could be used to improve definition of indicators. The APR includes summary details of spending, updates health output and outcome indicators, and provides information on major achievements and new or ongoing challenges within the sector during the year just ended. PPBB documents include data on spending by agency, by economic category, and by program, from two years earlier (actual, and revised budget), the current approved budget, and forecasts for the two subsequent years. They also provide a summary of key achievements and challenges. Institutionalizing the NHA data would help further strengthen budgeting and planning. The MoH 2022 APR indicates that five rounds of NHA have been undertaken. However, the most recent report available to the PER team was for 2016–17. Some data for 2018 are included in later APRs, and the delay in completion of later rounds is likely linked to the pandemic and impacts on activity within the sector, but the absence of up-to-date and detailed evidence on past spending hampers analysis of spending patterns and clear recommendations. 141. However, execution of approved budgets broadly deviates from plans. The extent to which the budget is executed as planned is an important indicator of efficiency. Overall budget execution in the health sector has been variable over the review period, ranging from 89 to 112 percent. Shortfalls in 2016 and 2017 are attributed to delays in recruitment and implementation of a new scheme of service at the MoH, along with a senior resignation, while overspend in 2018 was due to late payment of allowances from previous years. Procurement delays and later than planned implementation of the new Health Information System were among other justifications, along with unfulfilled plans for the National Institute of Health and Social Services. Substantial overspending in 2020 was in part due to pandemic-related spending. 142. The budget has generally been underspent with execution varying by agency and year. The MoH has typically underspent its allocation, averaging 72 percent execution over the period 2016–22. Expenditure exceeded the budget only in 2021, partly due to the reabsorption of APDAR staff (and budget) back into the ministry. The mean execution rate for the HCA and PHA were 100 and 101 percent, respectively, with the HCA execution rates ranging from 90 CHAPTER 4. 69 Health: Managing the Build-up of Rising Spending Pressures percent (2017) to 118 percent (2020) due to an additional SCR 20 million spent on Materials and Supplies, as a result of the pandemic. Budget execution at PHA ranged between 75 percent (2018) and 123 percent (2021). The latter was due to SCR 16 million capital spending not included in the budget, while the former was due to nonexecution of budgeted capital. Data for APDAR are available only for 2020, when two-thirds of the budget was executed. However, it would be useful to have more detail in the datafiles to get a good sense of the factors causing under- or overspending. In general, the extent and regularity of deviation point to challenges in the budget process. 143. Budgeting for medicines and medical supplies appears to be a particular challenge, with the budget routinely overspent. The extent of variation in points either to challenges in planning and budgeting, or to lack of flexibility in the ability to reallocate funding during the financial year. Inability to absorb available funding in the context of limited resources is a challenge in many countries, and a more detailed analysis would be useful, given the growing demands upon the Seychelles health budget. Health spending has been rising and dominated by curative care 144. Health spending as a share of GDP was 4.6 percent in 2022. Seychelles’ health spending averaged 3.6 percent between 2015 and 2019. This average rose to 5 percent between 2020 and 2022, with a high of 5.5 percent of GDP in 2021. This contrasts with spending on health in OECD countries prior to the pandemic of 9 percent of GDP. As a share of general government expenditure, Seychelles’ spending on health was, on average, around 12 percent prior to the pandemic and in 2020. This rose to over 14 percent in 2021 and 2022. 145. Both nominal and real public spending on health were rising steadily before the pandemic, with large jumps in 2020 and 2021 in response to pandemic-related needs (Figure 4.8). Between 2016 and 2019, nominal health spending grew by more than 10 percent per year, on average, then jumped by almost one-third with the onset of the pandemic, which necessitated a budget revision. As of 2022, there has been a reversion to trend, with a year-on- year drop of 14 percent. 146. Per-capita spending has followed a similar pattern, rising consistently over the period under review in both Seychelles rupees and US dollars (Figure 4.9). Between 2016 and 2021, nominal per capita health expenditure increased by 82 percent, from SCR 7,809 to SCR 14,230, while in real terms the figure grew by 70 percent. In US dollar terms, the nominal and real per capita figures were US$764 and US$677, respectively, in 2021, following growth of 30.4 and 16.4 percent, respectively, over the same five-year period. It is worth noting that the rebasing of the population figures following the 2022 Census will affect these figures significantly, due to the estimated 14 percent increase in the resident population, amplified by the reduction in spending, post-pandemic. Nominal per capita health spending fell by 29 percent year-on-year between 2021 and 2022, to SCR 10,140. SEYCHELLES PUBLIC EXPENDITURE REVIEW 70 Enhanced Fiscal Buffers for More Productive and Resilient Investments Figure 4.8: Nominal and real public health Figure 4.9: Per capita health spending, expenditure (SCR million), 2016–22 nominal and real (SCR and US$), 2016–21 1,600 1,600 900 1,419 14,230 1,340 13,609 800 1,400 1,400 1,216 1,320 13,237 700 1,200 1,271 1,200 10,319 12,912 979 1,007 1,131 10,115 600 SCR million 1,000 1,000 8,364 802 945 7,809 9,454 9,680 500 USD SCR 800 739 915 800 737 764 7,786 7,973 400 600 600 300 400 400 200 200 200 100 0 0 0 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 Health spending, nominal (SCR million) PC health spending, USD current Health, real (using GDP deflator, 2014 prices) PC health spending, USD 2014 P PC health spending, SCR current P PC health spending, SCR 2014 P Note: Data for 2021 are estimated actuals from 2023 budget as Source: As for Figure 4.10; Population data from NBS. MoF figures supplied were incomplete. Source: Ministry of Health data. 147. Maintaining these high levels will be difficult post-pandemic, given that nominal health spending fell by 14 percent between 2021 and 2022. Per-capita spending grew by 72 percent to SCR 14,230 between 2016 and 2021 in constant (2014) Seychellois rupees, but by only 16 percent in constant US dollars, to US$677, a slight fall compared with 2020, due to the depreciation of the rupee. More recently, the large population adjustment following the 2022 Census reduced per-capita spending from SCR 12,715 to SCR 10,788 (US$891 to US$761). Also, the share of out-of-pocket payments is increasing, which may threaten financial protection. 148. Across administrative units, costs are driven largely by the HCA, which accounts for around 88 percent of public expenditure (Figure 4.10). Within the HCA, the Hospital and Specialized Services Program, which includes treatment overseas, accounts for the bulk of spending. Figure 4.10 shows the relative shares over time, of the different agencies within the sector, including the professional bodies (where data were available). During its short life, APDAR received almost the same level of funding as the PHA, and largely accounts for the rise in the MoH share in 2021 and 2022 following its dissolution. Although data are not complete, the three professional councils each account for around 0.1 percent of total spending, while the National AIDS Council spent between 0.2 and 0.8 percent over the period. CHAPTER 4. 71 Health: Managing the Build-up of Rising Spending Pressures Figure 4.10: Administrative breakdown of health portfolio spending (%) 100% 6.0% 5.5% 5.2% 4.9% 5.7% 4.6% 5.3% 4.8% 90% 80% 70% 60% 50% 88.5% 89.7% 86.8% 88.7% 88.4% 86.0% 85.8% 88.4% 40% 30% 20% 10% 4.5% 6.0% 5.0% 3.5% 2.8% 5.7% 6.2% 7.7% 0% 2016 2017 2018 2019 2020 2021 2022 2023 Ministry of Health Health Care Agency Public Health Authority Seychelles Nurses & Midwives Council Health Professional Council National AIDS council Seychelles Medical and Dental Council Agency for Prevention of Drug Abuse & Rehabilitation Source: MoH data. Figure 4.11: The five largest health sector programs by year, 2016–22 100% 5% 5% 8% 7% L8%^ 90% 3% 2% 4% 5% 4% 9% 16% 4% 80% 11% 10% 4% 10% 9% 4% 70% 19% 8% 19% 18% 60% 16% 16% 50% 40% 30% 57% 60% 57% 55% 49% 20% 10% 0% 2016 2018 2020 2021 2022 HCA P2 HCA P3 HCA P4 PHA P2 HCAP1 MOH P1 Others Source: Detailed MoH/MoF data on HCA spending 2014–22. 149. Although the HCA is the main body responsible for service provision, the epidemiological profile of Seychelles requires substantial investment in public health and preventive services to reduce the burden of NCDs. NCDs account for seven of the ten most significant causes of DALYs lost and represent a huge financial burden on the country, not to mention the reduction in productivity due to morbidity from these diseases. This argues for greater spending to the PHA, responsible for public health, and for the Community Services Section within the HCA. Spending on the PHA was at its highest in 2016, at 6 percent of sector expenditure. SEYCHELLES PUBLIC EXPENDITURE REVIEW 72 Enhanced Fiscal Buffers for More Productive and Resilient Investments 150. Allocation of spending by program is dominated by Hospital and Specialized Services, and Curative and Preventive Services, both under the HCA. The annual budget for the health portfolio is presented as a PPBB by agency, with most agencies having one program for administration and management, alongside more technical programs. Unsurprisingly, the largest programs fall under the largest agency, the HCA, and the five largest programs have accounted for between 90 and 95 percent of total spending between 2016 and 2022 (Figure 4.11). 151. The pattern of programmatic expenditures has changed slightly in recent years. This is in part due to the pandemic response, which resulted in an increased share being assigned to HCA P1, Governance, Management and Administration in 2020 and 2021. From 2023, the sector budget incorporates activity previously under APDAR through a new, dedicated program within MoH, P3 Drug Abuse Prevention and Rehabilitation, with subprograms broadly corresponding to the APDAR programs.64 152. Based on economic classification, costs have been largely split between compensation and goods/services. In terms of compensation, multiple allowances make up just under half of total compensation in Seychelles. Basic pay accounted for around 52 to 55 percent of total financial compensation over the period 2016–22, apart from 2017 and 2018 when fewer allowance types were paid out. “Allowances (excluding Public Sector Contract [PSC] allowances)” and “Other allowances” accounted for the next two most significant categories at 14 to 18 percent and 16 percent, respectively. However, details of spending within these allowances were not available. 153. Within recurrent spending and compensation, as well as goods and services (G&S) have been more or less evenly split, averaging 46 and 54 percent between 2016 and 2021 (Figure 4.12). Medicines and medical supplies dominate HCA G&S spending, at 47 percent, with hemodialysis supplies one-third of this amount, excluding costs of the contract with the external provider. Goods and services cover a wide variety of complementary inputs required to deliver health services, including transport, office supplies, and essential medicines and health commodities. Detailed expenditure data for the MoH and the HCA show that the largest categories were Other uses of G&S and Medical and Laboratory Supplies, respectively. Specialized Medical Services, i.e., overseas treatment, was included within the HCA G&S category up to 2021, under Other uses of G&S, and accounted for 8 to 13 percent of HCA G&S over that period. In 2022, for some reason it appeared as Nonfinancial Assets. 64 APDAR had four programs. CHAPTER 4. 73 Health: Managing the Build-up of Rising Spending Pressures Figure 4.12: Health sector spending a) by recurrent/development and b) recurrent by category, 2016–22 1,600.00 1,400.00 1,200.00 1,000.00 800.00 600.00 400.00 200.00 0.00 2016 2017 2018 2019 2020 2021 2022 Actual Estimated Revised actual budget Recurrent Capital 1,400.00 1,200.00 1,000.00 800.00 600.00 400.00 200.00 0.00 2016 2017 2018 2019 2020 2021 2022 Actual Estimated Revised actual budget Compensation Use of Goods & Services Note: Data on smaller agencies (HPC, SMDC, APDAR) missing for selected years. Source: MoF data (Health Portfolio budget documents). 154. Spending on medicines and medical supplies is a significant cost driver for the health sector. This is due both to the need for expensive NCD medicines and supplies, as well as due to the reliance on imports which are subject to exchange rate fluctuations.65 Over the period 2017 to 2022, spending under the HCA code 2242 ranged between 44 and 50 percent of HCA G&S spending, with hemodialysis supplies alone one-third of this amount. Specific codes in the chart of accounts for medicines for certain NCDs and ophthalmology were introduced in 65 This analysis excludes spending on clothing and linen. SEYCHELLES PUBLIC EXPENDITURE REVIEW 74 Enhanced Fiscal Buffers for More Productive and Resilient Investments 2022 enabling greater transparency of spending on certain priority conditions, and accounting for 4 percent of spending on medicines and medical supplies. 155. Another large driver of spending is the wage bill, which is driven by the high number of allowances (Figure 4.13). Allowances account for just over 45 percent of the average wage bill in the HCA, over the period 2016–22. Figure 4.13: HCA compensation by type of payment, mean percentage, 2016–22 Supplementation allowances Public Service Contract (PSC) allowance 1.9% 18.2% Overtime Gratuities to workers 3.0% 2.5% Long service allowance Returning Graduate allowance 0.8% 1.4% Allowances (excluding PSC) Basic pay 1.4% 54.7% Other allowances 16.1% Source: MoH data. Table 4.3: Domestic and external spending on health sector nonfinancial assets, 2017–22     2017 2018 2019 2020 2021 2022 Local   - - - - 988,898 MoH External 500,000           Donations             Local   10,071,487 30,221,487 15,489,108 30,014,826 21,571,983 HCA External 40,350,079 47,045,239 2,706,820   48,639,928 12,022,236 Donations       101,794,588 151,815,602 5,164,602 Subtotal   40,850,079 57,116,726 32,928,307 117,283,695 230,470,356 39,747,720 Source: Detailed expenditure data, MoH and HCA. 156. The Nonfinancial Assets category includes both domestic spending and the relatively small external contributions to the sector, to the extent that they are captured on account. The split between the two is shown in Table 4.3 for the MoH and the HCA, the only agencies for which detailed data were available.66 Since 2017, the HCA accounted for all nonfinancial assets, except in 2017 and 2022 when the MoH spent 1 to 2 percent of the total for the two agencies. Domestic nonfinancial asset spending has largely been allocated to the construction and upgrading of health facilities, including the new St. Mary’s Hospital on La Digue. Foreign grants and loans contribute to the new HMIS and there have been significant donations of support 66 Assumptions have been made regarding coding of local, external loan, and external donation. CHAPTER 4. 75 Health: Managing the Build-up of Rising Spending Pressures for the pandemic response in recent years, among others. The data appear to exclude the external contribution to St. Mary’s Hospital from the United Arab Emirates. Cost-savings from overseas referrals could be improved 157. Overseas referrals represent a rational option for many complex treatments, particularly for NCDs, with feasible opportunities for efficiency gains. Overseas treatments cost an average of 0.13 percent of GDP pereach year between 2015 and 2021. These are classified as either “Other” or “Goods/services” in the budget, and account for between 8 and 13 percent of the HCA goods and services spending, equivalent to between 3 and 6 percent of health spending between 2015 and 2021 (Figure 4.15). The small population size of Seychelles, together with constraints in human resources for health, equipment and infrastructure, has historically made it more cost-effective to refer some patients outside the country for various tertiary level treatments. While the pandemic, through international restrictions on movement, supply chain challenges, and a depreciating currency and initial fall in GDP67 increased the per person cost of such treatment, data for 2022 show both a return to pre-pandemic numbers for patient referrals and a reduction in cost per patient. 158. Overseas treatment is managed by the HCA, through the Overseas Diagnosis and Treatment Unit. The Unit falls directly under the CEO and, as of December 2022, both the manager and deputy manager posts were vacant, with only the position of Assistant Administrative Officer filled.68 It is not clear how long this situation has prevailed, but given the volume and cost of overseas treatment, a full complement of three staff would seem to be a minimum requirement for adequate functioning. No data are available on how decisions are made on where to send patients, with no evidence of active contracting. Instead, it seems as though decisions are made on a “by patient” basis. 159. Access to overseas treatment appears to be largely equitable. While the dataset was small and incomplete, referrals over the period covered all age groups, all islands, and included patients ranging from high level government officials to the unemployed, manual laborers and pensioners. Prior to 2020, referrals were made either through the Overseas Diagnosis and Treatment Board, or by direct recommendation from senior officials, with the latter peaking at 22 percent in 2016. Following the passing of an updated Act in 2018, direct referrals ceased; all referrals must now be approved by the Board. 160. During the pandemic, fewer patients were referred overseas and the destinations of such patients changed. Data69 from the HCA Overseas Treatment Unit, which manages such referrals, show that over the period 2015 to 2021, around 1,410 patients were approved for overseas treatment. Numbers rose from 187 patients in 2015 to just over 250 in 2016 and 2017, after which there was a 16 percent reduction to around 210. In 2020, 161 patients were referred overseas, and in 2021 only 134 traveled. 67 IMF 2022. 68 HCA nominal roll, 22 November 2022. 69 The dataset covered the period 2015 to early 2022 with the latter excluded from analysis. Not all details were available for all patients, and denominators vary. The maximum considered was all patients with a case number, i.e., 1,410. SEYCHELLES PUBLIC EXPENDITURE REVIEW 76 Enhanced Fiscal Buffers for More Productive and Resilient Investments 161. Most cases are referred to India and Sri Lanka, accounting for up to 93 percent of overseas referrals between 2015 and 2019. Preferred providers are the MIOT group of hospitals in India (928 cases), and the HEMAS (154) and Lanka (112) hospitals in Sri Lanka. While India continued to receive a significant share of referrals through the worst of the pandemic, the relative openness of the United Arab Emirates saw a shift from Sri Lanka toward Dubai in 2020 and Abu Dhabi in 2021 (Figure 4.14). Anecdotal reports from government officials indicated that La Réunion and Mauritius were used either in emergency cases, given their proximity to the Seychelles or, in the former case, for high-ranking officials and personalities. Figure 4.14: Destinations for overseas treatment, 2015–21 300 250 200 150 100 50 0 2015 2016 2017 2018 2019 2020 2021 Abu Dhabi Czech republic Dubai India Mauritius Reunion Singapore Sri Lanka Sri Lanka/ Indi USA Seychelles Source: MoH data on HCA spending 2014–22. 162. Almost half of those referred overseas (47 percent) were aged 50 years or over, giving an odds ratio of 1.4 relative to their population share of 34 percent. Apart from 2015, this age profile has remained steady at between 46 and 52 percent of the total. Those of prime working age, between 18 and 49 years, accounted for 24 to 37 percent of overseas referrals over the period 2016–21, while those under 18 years of age made up the remaining 15 to 24 percent of cases. 163. Seventy-five percent of referrals were to just five specialties over the review period: oncology, ophthalmology, cardiovascular, paediatrics, and orthopaedics. Cancers and cardiovascular problems accounted for almost half of referrals, with investigation and/or treatment of various cancers alone representing 35 percent of cases. This mirrors the mortality pattern in the country. CHAPTER 4. 77 Health: Managing the Build-up of Rising Spending Pressures Figure 4.15: Overseas referrals total cost and average cost per case, 2015–21, SCR Total cost Average cost per case 60 55.0 400 335 50 46.7 350 43.1 299 41.5 300 SCR Millions 40 Thousands 36.3 34.4 250 202 213 30 189 200 22.2 142 158 20 150 100 10 50 0 0 2015 2016 2017 2018 2019 2020 2021 2015 2016 2017 2018 2019 2020 2021 Source: MoH dataset. 164. The total cost of overseas referrals between 2015 and 2021 was SCR 281 million, equivalent to around US$18.9 million (Figure 4.15).70 Figure 4.15 shows the large jump in both the total cost of overseas treatment and average cost per case in 2020 in Seychelles rupees, despite the fall in the number of cases, due to the depreciation of the currency and subsequent drop in 2021. Where available, cost data include both the cost of airfares and of the treatment. 165. Gastroenterology was the most expensive specialty over the review period. The cost per case for gastroenterology was US$61,315, almost 3.5 times as high as for oncology at US$18,443. The top five specialties in terms of cost also included general surgery (US$17,329), neurology (US$14,044) and orthopaedics (US$13,518). The mean cost per case across all specialties was US$13,424.71 The top five specialties combined accounted for 65 percent of the total cost of Overseas Treatment, but only 49 percent of cases. Costs are heavily skewed by gastroenterology, with only four patients receiving such treatment over the period. Costs for the three cases varied significantly, at roughly US$2,700, US$21,400, and US$221,200.72 This degree of variation may be due to a wide range of treatments. 166. The average cost of referrals varies significantly according to destination. Figure 4.16 shows the cost per case for selected specialties. While not controlled for the severity of cases, the graphs indicate that cost per case was substantially higher in La Réunion than in India for the four specialties represented. Information was not available on contracting mechanisms with individual hospitals. 167. Most referrals for cancer diagnostics and treatment are for so-called amenable or preventable cancers for which certain risk factors are known and can be managed or controlled. These include breast, cervical, and prostate cancers, which together accounted for majority of the cases. This finding was also noted in the 2014 Public Expenditure Review and 2018 Health Services in Seychelles: Availability, Quality of Care, and Efficiency in Health Spending, yet little progress appears to have been made in reducing the need for treatment. 70 Note that this includes costs borne by Government only, as the dataset excludes the cost of airfares when paid by the patient or their family. Graphs based on 1,310 cases due to incomplete data. 71 Note that for 13 of the 1,410 cases, no specialty was given. 72 Data on treatment cost were available for only three of the four cases. SEYCHELLES PUBLIC EXPENDITURE REVIEW 78 Enhanced Fiscal Buffers for More Productive and Resilient Investments Figure 4.16: Cost per case per overseas treatment destination, various specialties, 2015–21, current US$ Cost per case: Cardio-vascular Cost per case: Oncology 45,000 70,000 11 USD, current prices USD, current prices 40,000 6 60,000 3 35,000 6 50,000 2 30,000 25,000 3 40,000 49 20,000 30,000 15,000 1 74 91 20,000 410 10,000 5,000 10,000 0 0 i ai a us on ka i ai a on ka b b di di ub ub ha ha an i an ni ni rit In In D D u D D u au iL iL Re Re u u Sr Sr M Ab Ab Cost per case: Ophthalmology Cost per case: Neurology 12,000 60,000 USD, current prices 7 USD, current prices 1 5 10,000 70 50,000 8,000 40,000 6,000 30,000 120 4,000 20,000 3 1 35 5 2,000 10,000 0 0 bi ai a n ka ka ai a n di io ub di io ha ub an an In un In un D D iL D iL Re Re u Sr Sr Ab Note: Data labels indicate the number of cases seen in each country over the period. Source: HCA data. Figure 4.17: Specialized medical treatment, nominal and as share of HCA G&S and total sector spending, 2016–22 90 14% 80 78.8 12% 70 10% 60 SCR Millions 50 8% 40 41.1 43.2 41.8 41.1 48.6 6% 40.0 30 4% 20 2% 10 0 0% 2016 2017 2018 2019 2020 2021 2022 Spec. medical treatment % HCA G&S % Total sector spending Source: Detailed HCA dataset. CHAPTER 4. 79 Health: Managing the Build-up of Rising Spending Pressures 168. Overseas medical treatment appears in the budget of the HCA, classified either as Other uses of G&S (2015–21) or as Nonfinancial Assets (2022). It is one of the major cost drivers within the sector, accounting for between 8 and 13 percent of the HCA G&S spending, equivalent to between 3 and 6 percent of sector spending over the period (Figure 4.17). 4.6 IMPROVED HEALTH OUTCOMES REQUIRE REBALANCING RESOURCES TOWARD NCDS 169. Seychelles (as with other SIDS) will continue to experience increasing incidence of NCDs, which represent rising costs to the economy. This is largely because of rising life expectancy that will cause people to live longer with NCDs. Seychelles is currently undergoing a demographic transition and may be able to reap a demographic dividend in the coming years. But this is accompanied by a small and aging population. Diseconomies of scale of a small population mean that, even with the same burden of disease (BoD), the health system costs of secondary and specialized care are higher, with fewer specialized human resources in helath (HRH), resulting in the need for expatriate specialists and overseas treatment. These rising trends in NCDs are likely to be exacerbated by additional risks from climate change in the form of air pollution and flooding, with significant costs to the economy. 170. Costs to the economy include forgone growth and productivity, as well as higher costs to the budget from disease. Recent research from Fiji found that every 1-percent increase in NCD mortality reduced per-capita output by 0.012 percent, with cancer mortality resulting in the highest reduction in output.73 Bloom et al. estimated the economic losses due to NCDs and mental health in Costa Rica at US$81.96 billion (2015 US$) and in Jamaica at US$18.45 billion.74 Case studies on investments to prevent and control NCDs in various countries, developed with United Nations support, found that scaling up interventions would save lives and reduce illness, reduce direct costs of treatment, save economic productivity losses through illness, and contribute to faster GDP growth. In Jamaica, where costs of treating NCDs are estimated to absorb 15 percent of the health budget, a rate of return of 2.10 was calculated for each Jamaican dollar of investment.75 In Barbados this figure was 1.9 over five years, and 4.1 over 15 years, the longer timeframe allowing for impact of more preventive interventions.76 171. Seychelles has adopted various strategies to address NCDs. These include the Seychelles Strategy for the Prevention and Control of Noncommunicable Diseases, 2016–2025, approved by the Cabinet and the National Assembly in mid-2016, and the current NHSP 2022– 2026. In late November 2019, Seychelles formally adopted the WHO Package of Essential NCD interventions (PEN), adapting these for Seychelles, in the context of the Seychelles Package of Essential NCD interventions Project (SEY-PEN). 73 Chand et al. 2020. 74 Bloom et al. 2018. 75 UNIAFT, UNDP, and PAHO 2018. 76 WHO and UNDP 2015. SEYCHELLES PUBLIC EXPENDITURE REVIEW 80 Enhanced Fiscal Buffers for More Productive and Resilient Investments 172. The most recent iteration of the Seychelles Heart Survey that was launched August 2023 will also inform future strategies to combat NCDs. Responsibility the Heart Survey falls under the PHA Unit for Prevention and Control of Cardiovascular Disease (UPCCD) and will report its findings shortly. It covered 1,700 persons and aims both to identify the proportion of the population suffering from NCDs and to identify gaps in existing ministry services.77 173. Projections of the future burden of disease from NCDs are presented below for two different measures, deaths and Years of Life Lost (YLL), both drawn from IHME data. Projections are made both for “focus NCDs”, i.e., the four on which the Seychelles Strategy is based (neoplasms, CVD, chronic respiratory diseases, and diabetes mellitus),78 and for all NCDs, through to 2030. The decision to include the two measures enables some discussion of the changes in projected BoD for individual priority diseases, and how ongoing strategies and interventions might affect these, while the use of all NCDs is consistent with the available NHA data on spending. 174. The Seychelles NHSP includes extrapolations of the previous Seychelles Heart Survey, also projecting to 2030. Time did not permit the use of multiple sources of data, and the most recent IHME estimates stem from the 2019 iteration of the Global BoD study and may therefore be more accurate. Unfortunately, projections are not available for DALYs that would capture the effect of morbidity from NCDs, as well as premature mortality. However, the current BoD as estimated using DALYs is available for the period up to 2019, through the Global Burden of Disease project,79 and is presented here for additional context. 175. IHME data estimate that the focus on Figure 4.18: Growing importance of focus NCDs accounted for 8,484 DALYs in 1998, NCDs in terms of estimated DALYs, 1998–19 rising by 51 percent to 12,803 DALYs in 2019. These four diseases contributed 69 25,000 percent of all DALYs due to NCDs, and 55 20,000 21% percent of DALYs due to all causes in 2019 22% 15,000 23% 24% (Figure 4.18). Total DALYs due to all NCDs in 26% 28% 2019 were estimated at 24,437. 10,000 55% 5,000 52% 48% 0 1998 2010 2019 Focus NCDs Other NCDs Other causes of DALYs Note: The focus NCDs include neoplasms, CVD, chronic respiratory diseases, and diabetes mellitus. Source: IHME GBD data. 77 https://www.health.gov.sc/index.php/2023/08/21/survey-to-assess-cardiovascular-health-and-non-communicable- diseases-in-seychelles/. 78 Diabetes is clustered with chronic kidney disease (CKD) in the IHME data. Estimates and projections of deaths and YLLs from CKD equal those from chronic respiratory disease and diabetes combined, while the costs of dialysis are significant and rising. This suggests that best buy interventions to prevent worsening CKD should receive higher priority in the next NCD Strategic Plan. 79 GBD 2019 Diseases and Injuries Collaborators 2020. CHAPTER 4. 81 Health: Managing the Build-up of Rising Spending Pressures Figure 4.19: Projected 2030 deaths and YLL due to the focus NCDs, under 3 scenarios Deaths YLL 700 14,000 600 5% 12,000 5% 6% 500 5% 10,000 4% 6% 400 6% 6% 8,000 YLL Deaths 300 50% 54% 6,000 55% 47% 200 4,000 100 34% 43% 39% 35% 2,000 0 0 2019 Better Reference Worse 2019 Better Reference Worse Estimate 2030 Projections Estimate 2030 Projections Neoplasm CVD Chronic Resp. Diabetes Neoplasm CVD Chronic Resp. Diabetes Note: The focus NCDs include neoplasms, CVD, chronic respiratory diseases, and diabetes mellitus. Source: IHME data, https://vizhub.healthdata.org/gbd-foresight/. 176. Figure 4.19 shows projected deaths and YLL for 2030, under “reference”, “better” and “worse” scenarios. The number of deaths remains stable overall under the better scenario between 2019 and 2030. However, the relative contributions of the four diseases change, with an increase in mortality from neoplasms and a corresponding reduction in COVID-19 deaths. For YLL, the projection under the “better scenario” is lower in 2030 than in 2019, falling from 8,993 YLL to 8,468 YLL (6 percent), while under the “worse” scenario the YLL rise to 11,985, an increase of 25 percent. Again, there is a substantial change in the distribution of YLL by cause. This change in distribution is likely due to the earlier impact of the COVID-19 virus, due to expanding coverage with antihypertensives and other medicines. Impact on the incidence of cancers takes longer due to the nature of interventions requiring behavior change (UNICEF 2015). 177. Looking at the overall increase in YLL from the focus NCDs (Figure 4.20), the worst-case scenario projects a 25 percent increase by 2030, almost 3,000 additional YLL, compared with a 9 percent increase, or roughly 1,000 YLL, in the reference case. When YLLs for all NCDs are considered (Figure 4.21b), the change is similar. The “better” scenario projects a 6 percent fall in overall YLL, while the reference scenario leads to almost 1,500 additional YLL (a 10-percent increase). In the “worse” case, a rise of over 4,000 YLL (a 24-percent increase) is projected. SEYCHELLES PUBLIC EXPENDITURE REVIEW 82 Enhanced Fiscal Buffers for More Productive and Resilient Investments Figure 4.20: Projected YLL from focused NCDs, and all NCDs in 2030 Focus NCDs All NCDs YLL per 100,000 population YLL per 100,000 population 14.000 20.000 11021.12 11984.66 14896.76 16723.63 12.000 8861.14 9912.68 15.000 12150.22 14177.94 10.000 7757.20 10597.69 8.000 8467.88 12261.14 10.000 6.000 4.000 5.000 2.000 0 0 1998 2010 2019 2030 1998 2010 2019 2030 Reference Better Worse Note: The focus NCDs include neoplasms, CVD, chronic respiratory diseases, and diabetes mellitus. Source: IHME Foresight data. Table 4.4: Total costs using extrapolation of per capita spending on NCDs to 2030 Seychellois population Scenarios/Assumptions 2030 per capita 2030 Seychellois Total projected SCR outlay population outlay in 2030 No inflation in per capita outlay SCR 4,698 SCR 494,590,990 7.7% increase in annual per capita 105,284 outlay based on difference between SCR12,358 SCR 1,301,065,001 2016 and 2017 figures Table 4.5: Total costs using extrapolation of 2017 cost per YLL Assumptions Scenario 2030 Cost per YLL 2030 YLL estimate Total projected (all NCDs) outlay in 2030 (SCR) S1a - Reference 14,178 512,125,881 A1 - No inflation S1b - “Better” SCR 36,121 12,261 442,888,538 S1c - “Worse” 16,724 604,079,559 A2 - Inflation at S2a - Reference 14,178 1,263,243,648 7.2% (per 2016 to S2b - “Better” SCR 89,099 12,261 1,092,458,229 2017) S2c - “Worse” 16,724 1,490,062,687 178. Given the above projects in disease incidence, Tables 4.4 and 4.5 show widely varying potential future costs for the management of NCDs. These range from SCR 443 million (in Scenario S1b), without any cost inflation applied to the projected YLL under the “better” scenario, to SCR 1.49 billion (in Scenario S2c) with 7.2 percent cost inflation and the “worse” projection of YLL. It should be noted that the most recent IHME estimates, and associated projections predate the pandemic, which had an immediate impact on the cost of imports, including medicines. CHAPTER 4. 83 Health: Managing the Build-up of Rising Spending Pressures 179. The projections indicate the potential scale of the challenge ahead for the Government in tackling the economic and social losses due to NCDs. A comparison of the linear projection of CHE with the most and least optimistic scenarios from the YLL projections and their estimated cost is shown in Table 4.6. Under the optimistic scenario (S1b), the nominal cost of NCD management rises slightly by 2030, by just under SCR 8 million, but represents a substantially lower share of overall CHE. The pessimistic scenario (S2c) on the other hand, projects a quadrupling of the cost of NCD management, which would absorb almost three- quarters of total CHE. 180. Updated data would help improve the precision of the projections. The findings of the 2023 Seychelles Heart Survey will provide essential updated information on risk factors from which a more detailed projection can be made. Combining the new data with a specific One Health or similar costing exercise will provide scenarios around the projected future cost burden of NCDs in the Seychelles. This detailed study will be critical to assess the burden of NCDs, both in financial costs to the Government and the population through rising OOPS, and the economic cost to the nation of morbidity and premature mortality. Additional analysis would help to improve design of interventions. 181. There are various options to reduce costs associated with NCDs in Seychelles. Reducing risk behaviors would help improve prevention of disease. For example, scaling up screening for early detection and management at the primary health level, to prevent worsening of risk factors such as hypertension, high cholesterol, and raised body mass index. The NCD Strategy also includes interventions some of which are already in place, but monitoring remains limited, and it is difficult to determine the extent of effective coverage. Given the significance of hemodialysis as a cost driver in the sector (16 percent of HCA G&S spending), and the fact that estimated YLL lost in 2019 to chronic kidney disease (1,425) are double those of diabetes (489) and chronic respiratory diseases (506), the scope of the NCD Strategy could be expanded to explicitly include CKD and also liver cirrhosis (675) due to alcohol abuse and/or hepatitis C. 182. A move to empanelment, as recommended in 2018,80 could potentially ensure a more proactive approach to NCD management, with better continuity of care and early identification of changes in underlying risk factors facilitating improved case management. This should be complemented by a Health in All Policies (HiAP). In principle, the HiAP approach aims to improve health by incorporating a health lens into decision-making across sectors and policy areas. It also builds the capacity of health policy professionals to recognize and support the development goals of other sectors, recognizing the interdependent nature of social, economic and environmental development. Upgrading competencies for contracting and purchasing of outsourced services, such as hemodialysis, would also aid greater efficiency of overseas referrals through tighter contracting procedures. Enhanced capacity for and use of cost-effectiveness analysis to determine thresholds for referrals, as well as discussion of other criteria for approval will help reduce overseas referrals. 80 World Bank 2018, 44–45. SEYCHELLES PUBLIC EXPENDITURE REVIEW 84 Enhanced Fiscal Buffers for More Productive and Resilient Investments 4.7 OPTIONS FOR IMPROVED HEALTH SPENDING EFFICIENCY 183. Place more emphasis on prevention to address the rising incidence of NCDs. This is critical for addressing the potential rise in costs. An aging population, coupled with potential external shocks, could contribute to significant cost increases. There may be some scope for increasing fiscal space if growth remains strong but the more feasible source of additional resources will most likely come from increased efficiency gains and cost-savings. To that end, addressing NCDs will help reduce the cost of care and curative services. 184. Strengthen efficiency in the overseas treatment program. Little information was obtained on how decisions are made as to which countries and hospitals patients are referred for treatment overseas. Despite the Seychelles Constitution guaranteeing free primary health care to all, the de facto extension of this to all publicly provided health services, up to and including overseas medical treatment, is a substantial burden on the sector. There appears to be no contracting or strategic purchasing of oversease services, nor forward-looking economic analysis of which services might be cost-effectively delivered in a given country. 185. The proposed overseas treatment should take account of resource constraints, and the potential benefits to the broader economy, as well as cost-effectiveness. Transparency improved with the updating of the Act, and the requirement that all referrals are approved by the Overseas Diagnosis and Treatment Board. However, in addition to medical professionals, the Board should include capacity for health economics (both in terms of representation and analysis), to increase spending efficiency. 186. Institutionalize the NHA. The 2018 NHA are substantively out of date given the updated Census results, growing private sector, and the start of implementation of the new NHSP. The importance of expenditure tracking through tools such as Public Expenditure Reviews and the NHA is critical for collecting timely data to support planning and prioritization. However, the NHA has not yet been institutionalized despite five rounds completed to date. Technical assistance (over a two-year period) could provide immediate support for a fixed (or two- year) period, coupled with a succession plan and training budget, to build local capacity. Government could also consider the United Kingdom’s ODI Fellowship Scheme, World Bank/ UN Junior Professional Officer scheme, or similar technical support to build essential capacities for costing and economic evaluation across the sector. 187. Strengthen data for evidence-based planning, implementation, and evaluation. Currently, basic efficiency indicators cannot be calculated though it is anticipated that the new HIS will assist here. The re-establishment of individual health facilities as cost centers combined with data on staffing distribution and fund flows is recommended as a precursor to more strategic purchasing and benchmarking of service delivery performance, for example, through the introduction of a capitation payment mechanism for the primary level. Interventions such as empanelment, as recommended in 2018, could strengthen early identification, and continuity and quality of treatment for key chronic conditions. It is also important to put in place a mechanism for monitoring OOPS, which increased multiple times up until 2017 and has likely increased further since then. CHAPTER 4. 85 Health: Managing the Build-up of Rising Spending Pressures 188. Further analysis of workforce data is needed to determine the most cost-effective distribution of available staff in the short term, and to guide human resource development and planning over the longer term. Redressing the imbalance between health workers engaged in preventive and promotive activities relative to curative is essential to address the increasing burden of NCDs, as the availability of trained health professionals appears highly skewed toward areas such as oral health, for which the burden of disease is relatively low. To take just one example, the combined total number of staff across the HCA who are assigned to cardiovascular disease and cancer appears to be more than 10, compared with a total of zero for other specialties. There is one frozen position for health promotion and education for diabetes. 189. Although the MoH and the NBS produce highly useful information through their various reports and bulletins, there are areas where information has been lacking or is hard to access, and that would facilitate planning. Key among these are the following: • Distribution of key cadres by island and facility type; • Improved data on the distribution of staff provided through technical assistance and support; • Distribution of beds by facility, for improved benchmarking and analysis of efficiency indicators such as bed occupancy, length of stay, etc.; and • Spendingby level and by facility, i.e., disaggregation of spending data within HCA subprograms. 190. Consider strategic purchasing of goods and services to improve cost-effectiveness.. Mechanisms for improved monitoring of cost centers, and alternatives to input based funding of hospital services should also help improve cost-effectiveness. 191. Increase support to address drug addiction and reconsider positioning the APDAR under the MoH. The move to absorb the functions of the NAC into other sector agencies makes sense in the context of the low and focused HIV problem in Seychelles, but the same cannot yet be said for the return of the functions of APDAR to the MoH. This challenges the separation of functions, which appears to have worked successfully since the reforms of 2014– 15, and risks inadequate attention and resources being targeted at reducing substance abuse, both of alcohol and illicit drugs. The high prevalence of intravenous drug users, the known heightened risk of HIV and recent increase in STIs, and the likely links to crime, indicate a higher priority in a country reliant on tourism for a sizable share of its GDP, not to mention the human cost. Rehabilitation requires a multisectoral approach, ensuring educational and employment opportunities for former users to minimize the chances of relapse. SEYCHELLES PUBLIC EXPENDITURE REVIEW 86 Enhanced Fiscal Buffers for More Productive and Resilient Investments Table 4.6: Health sector reform priorities for improved spending efficiency and more fiscal space Effect on Potential Fiscal Effect on Policy Context Policy Action Climate Impact Equity Change Strengthen data and evidence base for analysis and decision making National Health Short-term: Institutionalize Neutral: Neutral: But Neutral: No Accounts (NHA) NHA within the annual However, improved climate- are outdated, planning and reporting cycle institutionalizing data would related resulting in poor for timely data to inform the NHAs would help to target effects are evidence for policy implementation by significantly interventions expected. planning and either strengthening the increase the budgeting Policy Unit within the MoH, or efficiency of embedding it in the NIHSS. spending. Planning and Short-term: Clarify and Neutral: Neutral: Neutral: But, implementation strengthen the links between However, However, could be is undermined inputs and outputs in the improved improved positive if cli- by weak M&E PBB budget documentation analysis data could be mate related needed to define and select high level, SMART linking inputs used to bring indicators are the links between indicators for monitoring and outputs in a needs specifically inputs and through PBB; others through would greatly approach into included as outputs in the PBB the APR and individual strengthen part of the documentation agency/unit progress reports. effectiveness implemen- and efficiency of tation of the Medium-term: Build capacity PBB. PBB frame- for data collection, analysis, work. and evidence-based monitoring and planning in MoH, including data (for the new HMIS) for tracking the distribution of staff and beds by facility, program, regional, including supplies Health: Strengthen operations of the Overseas Treatment Unit for improved efficiency in service delivery Limited staffing Medium-term: Fill vacant Negative: Initially Neutral: How- Neutral: No of the Overseas positions as a priority. filling positions ever, increased climate- Treatment (OT) Establish mechanisms for will cost money staffing could related Unit in the HCA uniform contracting with however, once facilitate effects with key positions overseas facilities to reduce positions are improved expected. vacant at the time and standardize costs. filled efficiency targeting or of this analysis. Establish data and monitoring may increase implementa- Capacity for OT systems for contract terms leading to tion of needs contracting is to monitor cost-effectiveness improved assessment lacking, with and efficiency for adjustments outcomes. no evidence of / realignments and explicit criteria renegotiation of contracts, for selecting including the analysis of the countries or 2023 NCD survey to update facilities for the operational planning. provision of OT. CHAPTER 4. 87 Health: Managing the Build-up of Rising Spending Pressures Effect on Potential Fiscal Effect on Policy Context Policy Action Climate Impact Equity Change Adopt policies to address youth at risk and related health challenges Teen pregnancy Short-term: Enforce the Neutral: Positive: These Neutral: No remains high change in legislation to However, measures will climate- relative to OECD enable teens to access family enforcement of help reduce related and other HICs planning without parental regulations may the factors effects that adversely consent, increase access help to reduce that limit the expected. effects health points for such services, and the behavior that likelihood of outcomes and ensure education on the leads to adverse completing labor force same is included in school health outcomes, education and participation. health services. and lead to attachment Alcohol and Short-term: Publish and positive fiscal to the labor drug abuse enforce regulations related impacts. market. remains high, to the 2019 Alcoholic Drinks with rising use by Act. Increase staff and schoolchildren, resources of DSAPTR to be resulting in able to expand coverage of significant social preventive interventions, and and health costs to continue provision of harm reduction kits. Allocate more resources to address the rising incidence of NCDs Inefficient Medium-term: Expedite the .Positive: Positive: Neutral: No spending on analysis of the 2023 NCD Empanelment Reduced climate- curative care, survey to update operational would help costs, and related including overseas planning. Accord greater to reduce improved effects are treatment priority to primary prevention, coordination allocations expected. health education, and the risk costs and would help factors for NCDs, including improve health, reduce NCD through the Health in all and positively incidence . Policies (HiAP) approach impact welfare. Follow-up of Medium-term: Strengthen patients with continuity of care through major NCDs empanelment, combined appears to be with digital messaging and passive rather patients follow-up for patients than proactive SEYCHELLES PUBLIC EXPENDITURE REVIEW 88 Enhanced Fiscal Buffers for More Productive and Resilient Investments SEYCHELLES PUBLIC EXPENDITURE REVIEW 90 Enhanced Fiscal Buffers for More Productive and Resilient Investments CHAPTER 5. EDUCATION: REBALANCING SPENDING FOR GREATER EFFICIENCY CHAPTER 5. 91 Education: Rebalancing Spending for Greater Efficiency Seychelles has achieved universal primary education with education outcomes that are the highest in sub-Saharan Africa. However, Seychelles’ education outcomes are below those of other HICs, given its level of per student public spending. To achieve improved educational outcomes, the analysis presented in this chapter suggests scope to reallocate and optimize inputs without jeopardizing education outcomes. There could be some room to achieve equity and efficiency gains by reallocating spending toward lower levels of education from tertiary levels, targeting overseas scholarships, and strengthening data systems, including sex-disaggregated and other indicators to track youths at risk. These could be linked to performance budgeting to incentivize and strengthen actions to improve education outcomes. 5.1 BASIC EDUCATION OUTCOMES ARE RELATIVELY STRONG, BUT THERE ARE YOUTH AT RISK 192. Seychelles has achieved strong educational outcomes, but these are nonetheless below those of other HICs with similar spending levels. Literacy rates are close to 100 percent. There is high public provision of pre-primary education, universal primary education, and secondary level enrolment rates exceed the average for sub-Saharan Africa (SSA). Despite this, for its level of spending, Seychelles could achieve higher educational outcomes. 193. Educational outcomes for youth at risk present a particular challenge that needs to be addressed. Outcomes are undermined by risky behaviors, such as substance abuse and teenage pregnancy, that contribute to a low attachment to the education and labor markets. In addition, because of the unusually large number of households headed by women, there is growing concern regarding the role of men in society and the lack of male role models. 194. Seychelles would appear to have ample room for increasing allocative efficiency in education spending. Student-teacher ratios are low, and still Seychelles’ educational outcomes are below those of countries with higher student-teacher ratios. The average student-teacher ratio in Seychelles is 15:3 for primary and 10:5 for secondary education, compared with 20:8 and 14:6, respectively, in SIDS. The process of transforming physical inputs into outcomes (i.e., system efficiency) in Seychelles has significant scope for improvement through further rationalization of the system of physical inputs. Enrolment could be improved at the pre- primary and tertiary levels. Seychelles could potentially increase enrolment by improving its efficiency in the use of resources in the education sector to the same level as comparator countries. Seychelles performs below the global frontier in terms of quality. In 2021, more than 40 percent of exam takers had scores below C. Girls perform better than boys in the humanities, while in science, technology, engineering, and mathematics (STEM) subjects boys and girls have a 51 percent pass rate. SEYCHELLES PUBLIC EXPENDITURE REVIEW 92 Enhanced Fiscal Buffers for More Productive and Resilient Investments 195. This chapter analyzes the level and composition of public spending in the education sector, and identifies policy directions for improving learning outcomes and quality across all levels, while also addressing the challenges faced by youth at risk. Analysis of public expenditure indicates that Seychelles has room to potentially allocate more resources to the primary and secondary levels (relative to comparator countries). There is also room to allocate more resources toward learning materials to raise learning outcomes. The remainder of this chapter provides an overview of outcomes in education, summarizes the trends and composition of spending, analyzes efficiency, and concludes with policy options. 5.2 REDUCING DROPOUT RATES IS A PRIORITY FOR YOUTH AT RISK 196. Seychelles has the highest literacy rate of any country in sub-Saharan Africa. As of 2020, 96.2 percent of the population aged 15 and over were literate, with female literacy rates (96.4 percent) that are above male literacy rates (of 95.4 percent). Few countries in the world have female literacy rates that are above male literacy rates. Students in Seychelles scored 484 on the Harmonized Learning Outcomes (HLO) scale, where 625 represents advanced attainment and 300 represents minimum attainment (Figure 5.1). Seychelles’ score is the highest in SSA after Mauritius, which scored 498 HLO points (World Bank HLO). Figure 5.1: Change in learning outcomes in African countries for two time periods between 2000 and 2017 550 500 450 400 350 300 250 200 Mauritius Seychelles Swaziland Kenya Namibia Botswana Uganda Zimbabwe Lesotho Tanzania Senegal Burkina Faso Mozambique Burundi Benin Cameroon Côte d’Ivoire Malawi Zambia Congo, Rep. of Togo Rwanda South Africa Madagascar Gambia South Sudan Chad Liberia Niger DRC Mali Ghana HLO, earliest year HLO, latest year Source: World Bank staff calculations using HLO data. 197. Seychelles has achieved close to universal access for primary education. Female and male enrolment are largely equal, with a Gender Parity Index of 1.01. Between 2015 and 2022, the number of enrolled children increased by 6.3 percent (to 9,538 in 2022), with 49.4 percent girls. The number of primary teachers decreased by 6.8 percent (to reach 609 in 2021), with 87.5 percent of teachers being women. 198. There is broad public provision of pre-primary schooling, in contrast to comparable countries, where service is provided mainly by private operators. The growth rate in pre- CHAPTER 5. 93 Education: Rebalancing Spending for Greater Efficiency primary students increased 1.6 percent annually between 2015 and 2022 (exceeding the annual population growth rate of 1 percent) to reach 3,325 in 2022, with 48 percent girls). Pre- primary teaching staff decreased by 8.8 percent to reach 155 in 2022. But the ratio of children to teaching staff in pre-primary institutions increased from 17:1 to 21:1. 199. At the secondary level, the gross enrolment rate (GER) as of 2022 was 76.9 percent, which is higher than the average for the SSA region (50 percent). Seychelles’ secondary level GER decreased by two percentage points relative to 2016 and is below the average for its income group (107 percent). Secondary school students increased by 8.7 percent between 2015 and 2022, reaching 8,038 in 2022 (with 51 percent female). However, with primary level enrolment growing at 6.3 percent and secondary level at 8.7 percent, many primary students do not transition to the secondary level. Estimates are that around one out of eight students enrolled in secondary school drop out. The number of secondary teachers increased 9.6 percent to reach 657 in 2021, with 55.3 percent of teachers in secondary schools being women. 200. Outcomes at the tertiary level are not as positive as achievements at lower levels. The tertiary GER increased from 1.6 percent in 2012 to 19.2 percent in 2022, with the maximum value of 21.6 percent in 2019. During the pandemic, the GER fell to 16.7 percent for one year. The school life expectancy at the tertiary education level in Seychelles is only 0.72 years (2022). The ratio of students to academic staff in tertiary education increased from 9:1 in 2014 to 20:1 in 2022 (UIS). Figure 5.2: Seychelles' human capital Figure 5.3: … but falls short relative to aligns with the expected levels based their public spending on their GNI HCI AND GNI PER CAPITA HCI AND PUBLIC EXPENDITURE PER CAPITA 0.9 0.9 MLT MLT ISL 0.8 0.8 MUS 0.7 0.7 2020 HCI 0.6 0.6 2020 HCI BHR BHR 0.5 MUS 0.5 SYC SYC 0.4 0.4 0.3 0.3 0.2 0.2 0 10000 20000 30000 40000 50000 60000 70000 80000 0 5010 10010 15010 2020 GNI per capita (constant 2015 US$) Public Expenditure per capita (average 2015- 2020, constant 2015 US$) Source: World Development Indicators. Source: World Development Indicators. SEYCHELLES PUBLIC EXPENDITURE REVIEW 94 Enhanced Fiscal Buffers for More Productive and Resilient Investments 201. Overall, outcomes are not as high as they could be relative to other HICs that spend at similar levels (Figures 5.2 and 5.3). Based on the HCI, a child born in Seychelles today will be 63 percent as productive when she reaches age 18 as she could have been if she had completed her education with full health. The HCI conveys the productivity of the next generation of workers compared with a benchmark of complete education and full health. This is higher than the average for the SSA region, but lower than the average for HICs. Between 2010 and 2020, the HCI value for Seychelles increased from 0.57 to 0.63. 202. A child who starts school at age four in Seychelles can expect to complete 13.1 years of school by her 18th birthday. Factoring in what children actually learn, the adjusted years of schooling is only 9.7 years. This finding points to some critical gaps in foundational skills of school learners, as children learn 26 percent less than what they could have achieved with the same level of formal education. In primary education, only 15 percent of learners in P6 scored grade C (pass) and above in English in 2020, and 26 percent of students passed the exam in English.81 In secondary education, only half (54 percent) of learners in S5 enrolled in IGCSE passed the exam in math. The pass rate in English was high, with 94 percent of students achieving the required score. The low student achievement can be partially explained by low qualification of teachers. Less than two-thirds of primary teachers (60 percent) have the minimum qualifications (diploma).82 203. Evidence indicates that youth at risk are also falling behind, with boys dropping out of the system at higher rates than girls. Boys are over-represented among the vulnerable or at- risk groups. Dropout rates are linked to youths’ risky behaviors (teenage pregnancy and drug use), leading to disengagement from the labor market. While many countries in Africa and elsewhere have historically seen boys outperform girls in overall educational achievement, in Seychelles boys experience more problems in school (Geisler and Pardiwalla 2010). As several studies show that this is not because of barriers to access but is rather due to other less clear- cut reasons linked to societal attitudes, and lack of parental and school support. Boys’ relative under-achievement has been noted as an issue for some years in Seychelles (AfDB 2009). 204. Secondary enrolment is equal among females and males but those taking and passing the Cambridge International General Certificate of Secondary Education (IGCSE) are largely female. While enrolment in secondary school is equal among females and males, among those who take the IGCSE exams, two-thirds are female.83 Figure 5.4 shows this is the case for both STEM and humanities subjects. Likewise, as Figure 5.5 shows, girls have better scores than boys in humanities, where the pass rate is higher for girls. 81 Ministry of Finance, Economic Planning and Trade of the Republic of Seychelles 2022. 82 Ibid. 83 This is the final exam at the secondary education level. See https://www.cambridgeinternational.org/programmes-and- qualifications/cambridge-upper-secondary/cambridge-igcse/. CHAPTER 5. 95 Education: Rebalancing Spending for Greater Efficiency Figure 5.4: Two-thirds of students Figure 5.5: Pass rates are similar for males taking the IGCSE are female and females on STEM subjects, but higher for females in humanities Exams Exams by by orientation orientation Passing Passing rate rate by by Orientation Orientation and and Gender Gender Female Female Male Male 100% 100% 80% 80% 60% 60% 34% 34% 36% 36% 40% 40% 20% 20% 0% 0% 66% 66% 64% 64% Female Male Female Male Total Total Female Male Female Male Total Total HUMANITIES HUMANITIES STEM STEM Fail Fail Pass Pass HUMANITIES HUMANITIES STEM STEM Source: World Bank staff calculations with administrative data for 2021. Figure 5.6: School size varies Figure 5.7: Larger schools have also substantially more scores below C Valid scores by school Share of school in total LA DIGUE 20 PERSEVERANCE ENGLISH RIVER 15 10 ANSE ROYALE PRASLIN 5 0 ANSE BOILEAU PLAISANCE MONT FLEURI BEAU VALLON POINTE LARUE Enrollment Fail Source: World Bank staff calculationswith administrative data for 2021. 205. School size varies and is correlated with grades achieved (Figure 5.7). The number of valid IGCSE scores (as a proxy for school size) varies from 90 students in La Digue to 348 in Perseverance. Interestingly, the share of scores below the C grade is strongly correlated with school size, with Perseverance accounting for the highest share of scores below C (17.8 percent), while Plaisance has a higher share of scores below C (10.4 percent) than its share of total valid exams (8.5 percent). There is strong evidence from around the world about the benefits of smaller schools, including better academic results. Studies have shown that smaller schools contribute positively to student outcomes, including higher student achievement, better attendance, higher graduation rates, and greater engagement in extracurricular activities (Barrett et al. 2018; Asim et al. 2019). Studies conducted in SIDS show that pass rates are higher in smaller and more remote schools located both in the main and outer islands. This suggests that smaller schools in these contexts can achieve high learning outcomes (Utz et al. 2021). SEYCHELLES PUBLIC EXPENDITURE REVIEW 96 Enhanced Fiscal Buffers for More Productive and Resilient Investments 206. In general, the secondary dropout rate between 2015 and 2022 averaged about 0.4 percent of the student body per year. During this period, in absolute numbers, 389 students dropped out, and the yearly number of dropouts declined significantly from a high of 68 students in 2019 to only 31 in 2021 (Figure 5.8). In a small country, these numbers can represent a burden for families and for the Government, especially in terms of foregone productivity and additional expenditures on social safety nets and health, particularly since youth dropouts are typically at risk of economic inactivity and substance abuse (Geisler and Pardiwalla 2010). Moreover, between 2015 and 2021, males accounted for 63 percent of all dropouts. Three schools (Anse Royale, Plaisance, and Anse Boileau) accounted for 57 percent of all dropouts and 59 percent of male dropouts. As Figure 5.1 shows, dropout rates are larger in larger schools (as would be expected), but it does not seem to be closely linked to the number of teachers, which is relatively even across schools of similar size. Indeed, larger schools with higher student-teacher ratios such as Perseverance seem to have lower dropout rates than similar or smaller schools with lower ratios. Figure 5.8: Dropouts are higher among male students and in larger schools Drop out 2015-22 by school vs. teaching staff Number of students 100 80 Number teachers 70 80 dropping out 60 60 50 40 40 30 20 20 10 0 0 RO le LS e Po Os u LA e Is r Ss e RA in VA n EL ie FL ri D e (E ive (M leu (B allo (P anc (P ru ER c (L igu B a (P sl (B lon (A oya (P an (A ile s) s) ) s) ) ) s) s) s) s) ) Is La a R D tF Pr R Bo Be s er V R ish ai te La ev au on se Pl se in gl rs Be M An En An Pe Male Female Teaching staff Note: In the absence of administrative data on enrolment by school, size is proxied by the number of IGCSE valid scores for 2021. Source: World Bank staff calucations with administrative data for 2015–22. 207. The Youth at Risk Technical Assistance Note (World Bank 2024, forthcoming) shows that, in certain districts, young people face several challenges that put them at risk. Combining data on poverty, single-parent-headed households, and youth outcomes including low IGCSE exam scores and teenage pregnancy, a pattern emerges. For instance, districts Plaisance and Perseverance concentrate high rates of poverty, single-parent-headed households, and have both the highest rates of teenage pregnancy and lowest IGCSE scores. Meanwhile, districts such as Anse Royale have relatively lower poverty rates but a higher single-parent-headed household share and a higher share of low scores. 208. Growing risks of substance abuse and other social problems also further impact dropout and completion rates. The 2020 youth labor statistics (National Bureau of Statistics 2021) reported that 23.6 percent of youth aged 15–24 were not in employment, education or CHAPTER 5. 97 Education: Rebalancing Spending for Greater Efficiency training (known as NEET).84 Family formation is strongly defined by female household headship. The 2018 HBS indicates that 61 percent of households were headed by females. Also, the 2021 population statistics (National Bureau of Statistics 2022) reported that, out of the 1,665 births registered in 2021, 326 (19 percent) occurred within marriage, while 1,095 (66 percent) were “acknowledged” and 244 (15 percent) were “natural.” The share of births among married couples declined slightly from 22 percent in 2020.85 This suggests a corresponding disengagement of men in family matters, in particular contributing to, and sharing responsibility for, raising their own children and the burden on women, who bear a disproportionate responsibility for unpaid care work and domestic tasks. In turn, this also explains continued high levels of sexual and gender-based violence in the country, and the persistence of the underperformance of boys in schools, and associated issues of substance abuse and drug use primarily affecting young men (AfDB 2019). Table 5.1: Employment is lower for males in single-female headed households Male is employed Female is employed Household head 0.07 Age group: 25–54 0.35 0.41 55–62 0.23 0.29 63+ -0.26 -0.28 Highest education completed: Primary 0.16 0.03 Secondary/Advanced level 0.24 0.13 Vocational 0.41 0.25 Polytechnic 0.38 0.27 University/Postgraduate 0.41 0.26 Household head is single female -0.09 0.00 Household size -0.01 0.00 Constant 0.25 0.24 Observations 2,517.00 2,980.00 Note: Bold numbers indicate significance at the 5 percent level. Source: World Bank staff calculations with HBS data for 2018. 209. Youth are particularly vulnerable to growing risks of substance abuse. According to the National Drug Control Master Plan 2019–2023 (Republic of Seychelles, 2019), the lifetime prevalence of illicit drugs usage was estimated at 15 percent among students in 2015. This consisted largely of cannabis (16 percent among boys and 6 percent among girls) and, to a lesser extent, other drugs including cocaine, heroin and synthetic drugs. Importantly, the 84 In 2019, the NEET rate was 22 percent, and this rate has been structurally above 20 percent. 85 In the HBS (2018), 44 percent of children under five live in households where the head is married, although the marital status in the survey is self-reported. On the other hand, 27 percent of children lived in households where the head is either single, separated, divorced, or widowed (a larger share than the 15 percent “natural” births reported in the population statistics). SEYCHELLES PUBLIC EXPENDITURE REVIEW 98 Enhanced Fiscal Buffers for More Productive and Resilient Investments prevalence of depression among students in the same study was high at 21 percent. In turn, the 2017 Integrated Biological Behavioral Survey (IBBS) found that 4,318 people reported using heroin—an increase of 53 percent since 2011.86 The percentage of people who use drugs in the country was estimated at 3.3 percent of the population in 2017 by some estimates and possibly up to 10 percent. The figures suggest that there is a significant heroin dependence problem in Seychelles and that this is a serious public health issue. The level of heroin dependence in the population can be expected to have a major impact not only on public health and learning outcomes (as well as public expenditures and management), but also on the national development of the country, through its impact on labor, employment, education and training, and the ability of the population affected to participate fully in the socio-economic development of the country.87 210. Indications are that these social pressures have differential effects on the extent of labor market disengagement for males and females. Specifically, for males the probability of being employed is lower if they live in a household where the head is a single female (Table 5.1), whereas this is not the case for women. In addition, even though employment rates are slightly higher for men than women (Figure 5.2), the prevalence of full-time employment among those employed is significantly higher among women, which implies lower levels of quality employment for young men (Figure 5.3). Figure 5.9: Employment rates are higher Figure 5.10: Full-time employment is for younger men higher among women 100% 100% 100% 100% 80%80% 80%80% 60%60% 60%60% 40%40% 40%40% 20%20% 20%20% 0% 0% 0% 0% Female Male Female Male Female Female Male Male Female Female Male Male Female Female Male Male Female Male Female Female Male Male Female Male 15-19 15-19 20-24 20-24 25-29 25-29 15-19 15-19 20-24 20-24 25-29 25-29 Working Working time Full Full time PartPart timetime Casual Casual Apprentice Apprentice Own Own account account worker worker Self-employedOther Self-employed Other Source: World Bank staff calculations,with HBS data for 2018. Source: World Bank staff calculations,with HBS data for 2018. 86 According to the Agency for the Prevention of Drug Abuse and Rehabilitation (APDAR), the number could be between 5,000 and 6,000, making Seychelles one of the highest per-capita heroin consumers in the world https:/ /www.bbc.com/ news/world-africa-50488877. The Drug Prevention Program registers 5,000 people, which represents about 5 percent of the population. 87 The demographic characteristics of heroin users suggest a profile of a male (85.1 percent), aged between 20 to 29 years (39.3 percent), single (54.4 percent, living alone and never married), with a secondary education (62.9 percent), who is not in full-time employment (88.4 percent). The young man, however, is likely to have children. This profile is suggestive of issues with the family, indicating that the use of substances may have started at a young age. There are also clear personal issues as the heroin user is likely to be living alone and not to have formed a stable relationship with a partner (Vel 2018). There are concerns that the problem might be worsened by a shift to other drugs such as synthetic heroin and crack. CHAPTER 5. 99 Education: Rebalancing Spending for Greater Efficiency 5.3 WAGES AND COMPENSATION DOMINATE EDUCATION SPENDING 211. Between 2020 and 2022, Seychelles devoted, on average, about 4.7 percent of its GDP to education annually (Figure 5.11). This level of spending is within the international best practice range of 4 to 6 percent of GDP. Education spending also amounted to 13.3 percent of total government outlays in 2022, which is below the international benchmark of 20 percent of public expenditure allocated to education, as recommended by the Incheon 2015 Declaration.88 There is therefore room for raising allocations, but equally important is the need to raise the efficiency of education to improve learning outcomes. Figure 5.11: Education spending in Seychelles as a percentage of GDP and total government expenditure, 2010–2021 13.3% 15% 10% 4.3% 5% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 as % of GDP as % of government expenditure Source: World Bank staff calculations based on World Bank WDI. 212. The Ministry of Education (MoE) is by far the largest of the five main education agencies in Seychelles. During 2019–22, the MoE accounted for an average of 79 percent of total education expenditure. Together with the Agency for National Human Resource Development, the MoE spends 99 percent of education resources in the budget (Figure 5.12). Before 2019, the Agency for National Human Resource Development was financed as part of the MoE. Roughly 1 percent of education spending goes each to the Institute of Early Childhood Development and the Seychelles Qualifications Authority, while the Tertiary Education Commission is allocated about 0.2 percent. 213. By program (MoE budget), primary education commands the largest share of the education budget. Between 2016 and 2022, the share of spending on primary education out of total education spending averaged 27.5 percent (Figure 5.13). Secondary education accounted for the second-largest share of education expenditure, averaging 26.3 percent during 2016– 22. This is followed by spending on education development (19.3 percent), and tertiary non- university education (15.2 percent). The remaining spending (averaging less that 12 percent of education spending) goes to early childhood care and education (6.5 percent); governance, management, and administration (5 percent); and human resource development (0.2 percent). 88 https://uis.unesco.org/sites/default/files/documents/education-2030-incheon-framework-for-action-implementation- of-sdg4-2016-en_2.pdf. SEYCHELLES PUBLIC EXPENDITURE REVIEW 100 Enhanced Fiscal Buffers for More Productive and Resilient Investments Figure 5.12: Composition of the education Figure 5.13: Composition of education budget by agency, 2016–22 expenditure by program, Ministry of Education budget, 2016–23 100% 100% 100% 100% 13.7% 17.0% 13.7% 16.0% 17.0% 12.4% 16.0% 12.4% 16.7% 14.2% 16.7% 16.3% 14.2% 16.3% 20% 20%15% 15%19% 19%23% 23% 80%80% 80%80% 23.4%23.4% 28.6% 28.6% 26.2% 26.2% 26.6% 28.8% 28.8% 26.6% 22.9% 22.9% 28.0% 28.0% 60%60% 60%60% 98% 98% 99% 99%99% 99% 25.0% 25.0% 78% 78%82% 82% 26.4% 26.4% 28.6% 28.6% 27.3% 26.2% 27.3% 26.2% 28.6% 28.6% 40%40% 79% 79%76% 76% 40%40% 30.3% 30.3% 8.9% 8.9%5.7% 5.7% 7.8% 7.8% 5.4% 5.4%5.4% 5.4% 6.7% 6.7%5.8% 5.8% 20%20% 20%20% 23.0% 23.0% 18.9%18.9% 16.7%16.7% 16.5% 19.7% 16.5% 19.7% 17.9%17.9% 22.3%22.3% 0% 0% 4.8% 4.8% 4.6% 4.6% 0% 0% 4.8% 4.8%6.1% 6.1% 5.3% 5.3%4.0% 4.0% 5.6% 5.6% 2016 2017 2016 2018 2017 2018 2019 2020 2019 20212021 2020 2022 2022 2016 2017 2016 2018 2017 2019 2018 2019 2020 20212021 2020 2022 2022 Tertiary Education Tertiary Education Commission Commission Tertiary Tertiary Education Education Seychelles Qualifications Seychelles Qualifications Authority Authority Secondary Secondary Education Education Institute Institute of Early of Early Childhood Childhood Development Development Primary Primary Education Education Agency Agency for National Human for National Resources Human Resources Development Development ECCE ECCE Ministry of Education Ministry of Education Education Education Development Development Governance, Governance, Management Management & Administration & Administration Source: National Budget Reports, Ministry of Finance, National Note: ECCE = Early Childhood Care and Education. Planning and Trade. Source: National Budget Reports, Ministry of Finance, National Planning and Trade. Figure 5.14: Composition of education expenditures Panel A: Composition of education expenditures by Panel B: Composition of current expenditures economic classification (MoE budget), 2016 to 2021 by level of education (MoE budget), 2020 100% 100% 20% 16% 11% 15% 11% 23% 28% 41% 32% 28% 31% 32% 50% 50% 98% 89% 77% 72% 52% 52% 57% 52% 59% 0% 0% 2016 2017 2019 2021 ECCE Primary Secondary Tertiary Non- Tertiary Education Education University Education Wages and salaries Goods and services Education Commission Capital expenses Compensation of Employees Goods and Services Source: National Budget Reports, Ministry of Finance, National Planning and Trade. Note: ECCE = Early Childhood Care and Education. 214. According to economic classification (of the MoE), wages and salaries (compensation of employees) accountied for the largest share of the budget (or 53.5 percent, on average, over 2016–21) (Figure 5.14, Panel A). The capital expenditure budget contracted from 20.0 percent of the education budget in 2016 to just 11.0 percent in 2019. In 2021, the Government allocated 15.0 percent of its education budget to capital projects. Current expenditures constitute, on average, 84 percent of the education budget. In primary education, salaries CHAPTER 5. 101 Education: Rebalancing Spending for Greater Efficiency and wages constitute 89 percent of recurrent expenditures,89 and 77 percent of secondary education spending (Figure 5.14, Panel B). The lowest share of wages in current expenditures is found in tertiary non-university education, at 59 percent. These figures align with cross- country public spending on education, with the largest part of education expenditure taken up by recurrent expenditures, such as salaries. On average, countries devote less than 13 percent of their education spending to capital expenditure. This figure is less than 10 percent at the pre-primary, primary, and secondary levels.90 5.4 PRIMARY AND SECONDARY SPENDING LEVELS ARE LOW RELATIVE TO THE TERTIARY LEVEL 215. Compared with other SIDS, Seychelles allocates a relatively low share of its spending to education. During the period 2010–21, Seychelles allocated, on average, 4.2 percent of GDP to education, whereas comparable countries91 allocated about 5.3 percent of GDP to education. As a share of total expenditures, expenditure on education in Seychelles lags that of many comparable countries (Figure 5.15). In Mauritius, where the percentage of public spending on education as a percentage of GDP is similar to Seychelles’ (4.6 percent), the education sector receives much higher shares of overall public spending—17.5 percent on average over the period 2010–21. In Seychelles, public spending was about 10.5 percent over the same period. Figure 5.15: Government expenditure on education, total (% of total expenditure), 2022 or most recent year Belize 22.2% Barbados 16.6% Samoa 16.2% Mauritius 16.1% Palau 15.7% Turks and Caicos islands 13.0% Seychelles 10.5% Antigua and Barbuda 9.9% Dominica 8.3% 0% 5% 10% 15% 20% 25% Source: UNESCO Institute for Statistics (uis.unesco.org). Data as of June 2022. 216. The share of public education expenditure by level of education for Seychelles and selected comparable countries is shown in Figure 5.16. Pre-primary education, which has always been deeply underfunded relative to other education levels, has started to receive more support in many countries, from both governments and international development partners. Over the past decade, the share of the education budget devoted to pre-primary education in HICs has approached the international benchmark of 10 percent.92 Seychelles, 89 For comparison, the share of wages in the recurrent budget in primary education is 42 percent in Malta, 55 percent in Maldives, and 64 percent in Dominican Republic. 90 UNESCO 2011. 91 Comparator small island developing states: Antigua and Barbuda, Barbados, Belize, the Cook Islands, Cuba, Dominica, Mauritius, Montserrat, Palau, Samoa, and Turks and Caicos Islands. 92 UNICEF 2017. SEYCHELLES PUBLIC EXPENDITURE REVIEW 102 Enhanced Fiscal Buffers for More Productive and Resilient Investments with 9 percent of its education budget allocated to pre-primary education, is close to that international target. At the primary level, Seychelles spends about US$3,500 per primary student (Table 5.2), countries such as Oman, with a similar GDP per capita, allocate twice as much (US$7,280). Croatia, with the same level of economic development, spends three times more than Seychelles per primary student. Figure 5.16: Percentage of public expenditure on education allocated to each education level (2022 or the latest available year) Turks & Caicos Islands 14.8 17.2 35.0 11.4 21.7 Palau 14.6 44.9 9.6 10.3 20.7 Cook Islands 10.1 35.8 36.0 3.3 14.9 Seychelles 9.0 30.8 27.4 11.0 21.8 Belize 5.2 35.5 42.8 5.4 11.1 Mauritius 24.0 64.8 7.5 Barbados 33.1 30.4 3.2 32.9 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Pre-primary Primary Secondary Post-secondary non-tertiary Tertiary Note: The bars show government expenditure as percent of GDP in each level in the last available year as a proportion of the sum across all levels. Source: World Bank staff calculations based on World Bank WDI. Table 5.2: Government expenditure per primary student in US$ PPP (2022 or the latest available year) GDP per capita, PPP Government Government (current US$) expenditure per expenditure per primary education primary school-age student, PPP US$ children, PPP US$ Seychelles 30,517 3,502 3,515 Small Island Development States: Belize 7,315 1,254 1,385 Mauritius 23,882 3,594 3,577 Barbados 16,331 3,261 3,272 Samoa 6,796 514 592 Turks and Caicos Islands 30,548 1,453 1,694 min: 514 min: 592 max: 3,594 max: 3,577 Countries with similar GDP per capita: Oman 28,508 7,280 7,494 Malaysia 29,620 4,643 4,889 Croatia 31,131 11,167 10,564 Greece 32,506 5,735 5,699 Latvia 33,021 6,122 6,098 min: 4,643 min: 4,889 max: 11,167 max: 10,564 Source: World Bank staff calculations based on UNESCO UIS data. CHAPTER 5. 103 Education: Rebalancing Spending for Greater Efficiency Figure 5.17: Government expenditure per student as a percent of GDP per capita in primary and secondary education (2022 or the latest available year) Panel A: Primary Panel B: Secondary Barbados 20.8% Mauritius 31.3% HICs 20.3% Barbados 28.0% Belize 16.6% Belize 27.3% Mauritius 15.6% HICs 22.6% Seychelles 14.2% Turks & Caicos Islands 18.4% Turks & Caicos Islands 5.7% Seychelles 15.3% 0% 5% 10% 15% 20% 25% 0% 5% 10% 15% 20% 25% 30% 35% Panel C: Tertiary Turks and Caicos 87.6% Islands 70.7% Seychelles 27.3% Belize 25.4% HICs Mauritius 9.6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Note: HICs = high-income countries. Source: World Bank staff calculations based on World Bank WDI. 217. Many countries allocate education funding disproportionately to higher levels of education. Given that children from poor backgrounds are more likely to be excluded from higher levels of the education system, this expenditure category typically disproportionally benefits the children of wealthy households. Post-secondary education in Seychelles absorbs one-third of the spending on education—more than in many comparable countries with similar levels of enrolment. In 2022, primary and secondary schooling received 58.2 percent of the education budget, including 30.8 percent to primary education and 27.4 percent to secondary. Another 32.8 percent went to post-secondary institutions (tertiary and non-tertiary). Seychelles’ spending per pupil is relatively low, at the primary and secondary levels. There is scope to increase spending per student at the primary and secondary levels relative to the tertiary level. 218. Seychelles spends more per student than many SIDS but less than HICs at a similar level of economic development (i.e., countries with similar level of GDP per capita) (Figure 5.17). To avoid misleading comparisons because of differences in prices across countries, spending per student (unit cost) is often expressed as a percentage of GDP per capita. Also, the study looks at spending per primary student converted to US dollars using the purchasing power parity (PPP),93 inflation and the exchange rate. For instance, the unit cost in primary education (i.e., government expenditure per student as a percent of GDP per capita) was 14.2 percent of 93 PPP is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries’ currencies and, to some extent, their people’s living standards. In many cases, PPP produces an inflation rate equal to the price of the basket of goods at one location divided by the price of the basket of goods at a different location. SEYCHELLES PUBLIC EXPENDITURE REVIEW 104 Enhanced Fiscal Buffers for More Productive and Resilient Investments GDP per capita in Seychelles, lower than in Mauritius (15.6 percent), Belize (16.6 percent), and Barbados (20.8 percent). The unit cost in secondary education was the lowest among selected countries—about 15.3 percent of GDP per capita in Seychelles. Mauritius spends almost one- third (31.3 percent) of its GDP per capita per student on secondary education. 219. Table 5.3 categorizes countries according to the share of public expenditure allocated to education and public expenditure as a percentage of GDP. This categorization makes it possible to identify the flexibility that countries have to increase public resources for education as a percentage of GDP. For example, the Central African Republic, the Democratic Republic of Congo, Comoros, Guinea, Mauritania, and Uganda have both a low capacity for internal resource mobilization and a low allocation of public expenditure to education. For these countries, public spending on education does not exceed 3 percent of GDP. These countries have room to increase both the government budget through improved tax collection efficiency and the share of the national budget devoted to education. In contrast, Burkina Faso, Senegal, Sierra Leone, São Tomé and Principe, Eswatini, Tunisia, and Belize have much less room to maneuver. Table 5.3: Government spending on education in percent of GDP, 2018 or most recent estimate % of education in government expenditure Less than 15% 15%-20% more than 20% Barbados, Cote The Central African D’Ivoire, Less Republic, Cameroon, Guinea- Ethiopia, Togo, than DR Congo, Comoros, Bissau, Tanzania 20% Guinea, Mauritania, Uganda Madagascar, Chad, Palau Government Burkina Faso, expenditure as Burundi, Congo, Djibouti, Dominica, Senegal, Sierra % of GDP 20%- Ghana, Kenya, Mali, Gabon, Gambia, Leone, Sao Tome & 30% Mauritius, Malawi, Rwanda Principe, Eswatini, Niger, Zambia Tunisia more Liberia, Lesotho, Cabo Verde, Mauritius, than South Sudan, Mozambique, Samoa, Belize 30% Seychelles, Zimbabwe South Africa Source: World Bank staff calculations based on data from the UNESCO Institute for Statistics and the IMF. 220. For Seychelles (along with Liberia, Lesotho, South Sudan, and Zimbabwe), the margins are more likely to be found in intersectoral tradeoffs. Indeed, government spending in these countries already represents more than 30 percent of GDP, while education’s share of public spending is less than 15 percent, so there is space for a potential increase in the budget through intersectoral reallocations. Spending could be increased to meet the international benchmark CHAPTER 5. 105 Education: Rebalancing Spending for Greater Efficiency of 20 percent of total expenditures (Incheon 2015 Declaration). Seychelles’ education spending was 4.3 percent of GDP or 13.3 percent of the overall budget. Although public spending on education fell within the international best practice range of 4 to 6 percent of GDP, in 2022 it still was less than the international benchmark. 5.5 IMPROVED EFFICIENCY REQUIRES A GREATER FOCUS ON QUALITY MATERIALS AND TEACHING The cost of enrolment in Seychelles is higher relative to comparators 221. The efficiency of education spending in Seychelles is assessed by comparing the level of inputs and outputs in Seychelles with selected countries. The analysis includes a basic data envelopment analysis (DEA) to roughly quantify the inefficiency level in key education spending categories (see Education Public Expenditure Review 2024). Efficiency in the DEA is measured in relation to the performance of the best units in the population of countries used. Table 5.4 summarizes the variables used as inputs and outputs for the DEA analysis undertaken for the education sector. Table 5.4: Inputs and outputs used in the DEA estimation Inputs Outcomes Government expenditure on primary and Harmonized Learning Outcomes secondary education per student (US$ PPP) (HLO) Overall efficiency Government expenditure on education per Net enrolment ratio/ school-aged child, by level of education (US$ PPP) Gross enrolment ratio Note: PPP = purchasing power parity. 222. Assessment of enrolment achievement is based on the enrollment rates and spending per child (Figure 5.18). Seychelles spends US$3,720 per primary school-aged child, with a NER equal to 98.3 percent. Only a few countries spend less on primary education per student and have higher NERs than Seychelles. Among SIDS, Samoa achieves the highest enrolment given similar levels of spending per student. With just US$557 spent per primary school- age student, it has a NER of 99.0 percent. Grenada and Maldives spend the same amount of money per school-aged child but have higher primary NERs. They spend US$1,480 and US$3,200 per primary school-aged child, respectively, and achieved 99.2 percent and 99.9 percent NERs. SEYCHELLES PUBLIC EXPENDITURE REVIEW 106 Enhanced Fiscal Buffers for More Productive and Resilient Investments Figure 5.18: Potential coverage increase if Seychelles were at the efficiency frontier Panel A. All countries Panel B. Small Island Developing States Percentage increase in coverage Percentage increase in coverage Pre-primary 38.8% Pre-primary 25.4% Primary 1.7% Primary 1.7% Lower secondary 3.7% Lower secondary 2.9% Upper secondary 13.0% Upper secondary 7.5% Post-secondary 21.5% Post-secondary 21.5% non-tertiary non-tertiary Tertiary 697.4% Tertiary 504.5% Note: a. Percentage increases in coverage are obtained from the efficiency indexes of table 3.6 using the formula [(1 / efficiency index) - 1] x 100 percent. b. The gross enrolment ratio in pre-primary; net enrollment rates in primary, lower secondary, and upper secondary; gross enrollment ratio in post-secondary non-tertiary; and the gross graduation ratio in tertiary are used as coverage measures. c. The benchmark refers to the group of countries used for the estimation of the efficiency indexes in the data envelopment analysis. Source: Elaboration based on UNESCO data. 223. The cost of enrolling an additional student at these levels of education in Seychelles is higher compared with several comparator countries. The efficiency of public spending in post-secondary, non-tertiary, and pre-primary education in Seychelles is 80 percent of what could have been achieved. At the tertiary level, Seychelles’ efficiency index ranges between 0.13 and 0.17, meaning that, at the current level of spending, student enrolment in tertiary education institutions could be six to eight times higher. The Dominican R Assessment of enrolment achievement is based on the enrollment rates and spending per child (Figure 5.18). Seychelles spends US$3,720 per primary school-aged child, with a NER equal to 98.3 percent. Only a few countries spend less on primary education per student and have higher NERs than Seychelles. Among SIDS, Samoa achieves the highest enrolment given similar levels of spending per student. With just US$557 spent per primary school-age student, it has a NER of 99.0 percent. Grenada and Maldives spend the same amount of money per school-aged child but have higher primary NERs. They spend US$1,480 and US$3,200 per primary school-aged child, respectively, and achieved 99.2 percent and 99.9 percent NERs. Epublic spends 10 times less than Seychelles per tertiary education student and has a gross enrolment rate 3.5 times higher (61 compared with 17). CHAPTER 5. 107 Education: Rebalancing Spending for Greater Efficiency Figure 5.19: Potential educational quality increase if Seychelles were at the efficiency frontier 18% 15.4% Percentage increase in HLO 9% 3.2% 0% Benchmark: All countries Benchmark: Small Island Developing States Note: a. Percentage increases in coverage are obtained from the efficiency indexes of Table 3.7 using the formula [(1 / efficiency index) - 1] x 100%. b. The benchmark refers to the group of countries used for the estimation of the efficiency indexes in the data envelopment analysis. Source: Elaboration based on UNESCO data. 224. If Seychelles were as efficient in spending funds on education as its comparators, it could substantially increase education coverage, or student enrolment. Figure 5.19 displays a potential coverage increase if Seychelles were at the efficiency frontier. Even though in Seychelles access to pre-primary education is almost universal, with the GER reaching 104 percent in 2021,94 some countries achieve similar results in terms of education coverage while spending less. For instance, Mauritius, with a GER similar to Seychelles’ (102 percent), spends just one-quarter of what Seychelles spends per student, while Grenada, while spending one- third of what Seychelles spends per student, has a GER of 131 percent. 225. In technical and vocational education and training (TVET), an important way to increase efficiency could be to make better use of existing resources, as it appears that TVET providers are not all operating at full capacity. According to the MoE, TVET institutions struggle to attract sufficient learners for at least some of their programs, due partly to weaknesses in the quality and relevance of training provision and partly to preferences for more academically oriented education.95 Improving the quality and relevance of training provision would be a way to increase enrolment and retention in TVET, thereby both increasing efficiency and providing the labor market with much needed well-skilled labor. Another way to make better use of TVET infrastructure, teachers, and equipment would be for providers to introduce or increase the offer of training programs provided in evenings and weekends, including particularly part-time and short programs aimed at adults. The MoE is creating the “National Technical School” (NTS), which will consolidate the offer of certificate-level TVET that is currently provided in secondary schools throughout the country. This bundling of resources in the NTS, complemented with expected investments to modernize and improve its training offer, would contribute to increasing the value for money of TVET investments. Improved Harmonized Learning Outcomes (HLO) will require increased focus on quality 226. If learning outcomes improved by 3.2 percent for Seychelles, they would reach the efficiency frontier of SIDS (Figure 5.19). Seychelles’ efficiency index is 0.97 when benchmarked 94 UNESCO Institute for Statistics (uis.unesco.org). 95 MoE 2022. SEYCHELLES PUBLIC EXPENDITURE REVIEW 108 Enhanced Fiscal Buffers for More Productive and Resilient Investments against SIDS. If compared globally, however, countries at the efficiency frontier achieve higher educational outcomes with the same amount of spending per student in primary and secondary education. Their learning scores are 15.4 percent or 71 Harmonized Learning Outcome (HLO) points higher than in Seychelles, which is equivalent to one standard deviation in HLO scores or three to four years of learning. According to the literature on student assessment, learning gains on most national and international tests during one year are equal to between one- quarter and one-third of a standard deviation.96 227. Increasing per-student spending in education per se will not necessarily improve educational outcomes. It is mostly factors that capture the quality of education that explain the differences in educational outcomes across countries. These factors include the availability of trained teachers, school infrastructure, and learning materials, among others. In addition, equity in education spending is critical to leveling the playing field for underserved students in under-resourced schools. Recognizing that traditional per-unit allocation formulas have not led to equal outcomes, some countries have attempted to target spending in favor of disadvantaged groups, which has resulted in relatively more equitable learning outcomes. For example, South Africa’s Provincial Equitable Share formula is one of the most developed systems aimed at reducing inequalities and attaches varying weights to population and disadvantaged pupil characteristics, though it has had mixed success.97 Rwanda, Tanzania, and Zimbabwe have also adopted needs-based financing models.98 However, the inability of many allocation formulas to reach the intended outcomes of equity remains a significant issue in education financing worldwide. At the school-level, outcomes could be improved by focusing on improved materials and teacher training 228. Next, the analysis looks at the efficiency of resource usage in secondary schools by comparing the availability of teachers and classrooms (number of teachers and classrooms per student) as inputs in producing learning outcomes, i.e., results of the International General Certificate of Secondary Education (IGCSE)99 in 10 subjects100 (Figure 5.20). 229. According to official Education Management Information System data for 2021, some inequalities in teacher and classroom distribution exist in Seychelles’ secondary education. Some secondary schools are better equipped with classrooms. The average student-classroom ratio is 25:1, which is within international best practice, though the ratio varies from 18:1 to 30:1. The data suggest that students studying in more resourced secondary schools (as proxied by the number of classrooms) have high learning outcomes (Figure 5.20). Note that since we do not control for student socio-economic status (due to a lack of data), the difference in learning outcomes among schools cannot be fully attributed to resource availability. 96 Woessmann 2016. 97 Ally and McLaren 2016. 98 International Commission on Financing Global Education Opportunity 2016. 99 The IGCSE is an international student assessment for students aged 14 to 16, developed by Cambridge Assessment International Education and administered in more than 160 countries. More than 3,000 schools worldwide offer IGCSEs, and many of the top UK independent schools have recently switched to IGCSEs. The IGCSE is recognized around the world by employers and universities as evidence of academic ability. 100 Math, physics, English, geography, art and design, chemistry, design and technology, ICT, biology, and history. CHAPTER 5. 109 Education: Rebalancing Spending for Greater Efficiency 230. There are 7,300 students enrolled in secondary schools in Seychelles and 547 teachers, of which 56 percent are women.101 The average student-teacher ratio of 11:1102 is low compared with countries in the SSA region, and to low and high MICs. The student-teacher ratio ranges from 7:7 to 13:0. About 40 percent of secondary schools have a school-level public-teacher ratio below the national average. The uneven distribution of teachers across schools means that students in secondary schools with higher numbers of teachers benefit more. A typical student at a school with a bottom-decile student-teacher ratio benefits from investment in teacher salaries of SCR 29,000 (US$1,800) per year of schooling, compared with just SCR 19,500 (US$1,200) in schools in the highest decile.103 Figure 5.20: Average IGCSE test scores in secondary school with high and low student-classroom ratios (top and bottom 20 percent) 80 60 40 20 0 Art And Biology Chemistry English Geography History ICT Math Physics Design More classrooms Fewer classrooms Note: ICT = information and communications technology. Source: World Bank staff calculations based on data from Education Management Information Systems 2021 and the IGCSE. Table 5.5: Results of the efficiency analysis at the school level: outputs, inputs, and efficiency scores Output Inputs Ratio of % of Efficiency Ideal School ID Average Teachers per Classrooms teachers to female score score test score student per student all staff teachers 1 68.9 0.13 0.05 0.77 54% 100% 68.9 2 60.2 0.08 0.04 0.79 50% 85% 70.6 3 61.6 0.10 0.04 0.83 59% 83% 74.6 4 59.9 0.10 0.04 0.83 52% 81% 73.7 5 60.0 0.10 0.05 0.82 59% 80% 75.1 6 57.7 0.09 0.04 0.85 47% 77% 75.2 7 58.8 0.09 0.04 0.88 60% 76% 77.9 8 59.9 0.09 0.04 0.84 63% 75% 80.5 101 MoE 2022. 102 Average school-level student-teacher ratio. 103 Estimate based on data from Evans, Yuan, and Filmer (2020). SEYCHELLES PUBLIC EXPENDITURE REVIEW 110 Enhanced Fiscal Buffers for More Productive and Resilient Investments Output Inputs Ratio of % of Efficiency Ideal School ID Average Teachers per Classrooms teachers to female score score test score student per student all staff teachers 9 54.8 0.08 0.03 0.83 45% 74% 73.7 10 58.9 0.08 0.04 0.81 63% 74% 79.5 Average 60.1 0.09 0.04 0.83 55% 80% 75.0 Source: World Bank staff calculations based on data from Education Management Information Systems 2021 and the IGCSE. 231. According to the results of the data envelopment analysis of combined test scores and the combined inputs, the average relative efficiency of resource use by secondary schools is 80 percent. Only one secondary school (ID #1 in Table 5.5) is on the efficiency frontier. Students there achieved the highest test scores. Thus, that school is considered efficient given the level of resources it receives to deliver learning. There is a potential to increase learning outcomes through better use of available resources. This is further discussed in the next section. 5.6 HIGHER EDUCATION EFFICIENCY COULD BE ACHIEVED THROUGH TARGETING AND OUTSOURCING 232. This section assesses the potential efficiency gains in two specific categories of expenditures: (i) scholarships for higher education; and (ii) outsourcing of non-institutional services for education. These programs were identified by the Government as potential sources of saving and are particularly pertinent given that tertiary education accounts for one- third of total education spending, due largely to the cost of financing scholarships for overseas studies, which consumes one-fifth of the education budget. Efficiency gains could be achieved by targeting scholarships for study overseas in higher education 233. The Government, through the Agency for National Human Resource Development (ANHRD), awards scholarships to high-performing students to pursue higher education degrees. Students are supported to study online, locally, or overseas, in approved countries and institutions that have been established by the ANHRD. Students are supported to undertake their studies in areas of priority (such as medicine, engineering, business administration, architecture, and journalism, etc.) to the country. These areas are determined by the ANHRD as part of its research and consultative mandates, and are further elaborated in Box 5.1. The Scholarship Scheme is based on four main principles: (i) equal opportunity for tertiary education for all Seychellois; (ii) training in areas of national priority; (iii) established criteria met by students; and (iv) scholarships awarded subject to availability of funds. CHAPTER 5. 111 Education: Rebalancing Spending for Greater Efficiency Box 5.1: International examples of targeting and selection criteria in university scholarship programs University scholarship programs often have a variety of targeting and selection criteria. This includes the academic merit of applicants, and their financial need to pursue fields of study or careers, while other scholarships may aim to support students from groups that are underrepresented in higher education, such as racial and ethnic minorities. Examples are provided below. Type of Eligibility Criteria Targeting Method Country Examples Program Financial Need Students in financial Evidence of student Fulbright Program (US) need or from low-income financial need, such African Leadership background as family income Academy (African statements or other continent) financial documentation German Academic Exchange (Germany) Underrepre- Underrepresented Applicants demonstrate Gates Millennium sented Groups students from how they have Scholars Program (US) underrepresented or contributed to or Forum for African marginalized groups, overcome challenges Women Educationalists such as women, related to their (Africa) minorities, or individuals underrepresented with disabilities. status Japanese Government Scholarship Program (Japan) Leadership may require evidence Demonstrated Chevening Scholarship and of leadership roles, leadership skills and a (UK) Community community involvement, strong commitment to Mandela Rhodes Involvement and impact on others community service Scholarships (Africa) Schwarzman Scholars program (China) Other criteria used Field of Study Students studying in Area of study German Academic : Targeting Germany Exchange Service students in (Germany) Students from specific fields developing countries Australia Awards Scholarships (Australia) Unique Talents Exceptional students Area of study Stamps Scholarship or Traits with exceptional talent in (US) subject The MEXT Scholarship Students studying in (Japan) Japan, with proficiency in Japanese. SEYCHELLES PUBLIC EXPENDITURE REVIEW 112 Enhanced Fiscal Buffers for More Productive and Resilient Investments 234. Scholarships for higher education represent about 20 percent of the education budget. In 2022, the ANHRD approved budget was SCR 221 million (US$16.3 million equivalent) and the budget allocation to the scholarship program was SCR 213 million (US$15.7 million equivalent). About one in four students receives scholarships to study in higher education, and they support those studying in local institutions or abroad (representing 69 and 31 percent of the total scholarships granted, respectively). In 2022, 228 students, of which two-thirds were female, were pursuing higher education degrees with financial support from the Government. Thus, the unit cost of running the scholarship program is estimated at US$92,700 a year. 235. Eligibility criteria are defined by the Scholarship Scheme. Students scoring 18 academic points and above qualify to study abroad on full scholarship, in an approved venue, if the chosen course is not offered at the University of Seychelles. Students scoring 12 to 17 points qualify to study locally on full scholarship or receive partial financing to study abroad. Applicants must meet the following eligibility requirements: (i) be a Seychellois national residing in Seychelles at the time of application; (ii) studied full time at an academic institution; and (iii) have high academic achievement, i.e., have obtained at least 2 As and 1 B in the A-Level examination in one sitting, or alternatively, have attained comparably excellent grades in an equivalent examination system. 236. Students in better-resourced schools (are likely to be better off economically) and score higher on final exams. As a result, those that benefit from the Scholarship Scheme are likely more well-off, pointing to the need to improve the targeting of needier students. Cross- country and international evidence indicates that those enrolling in higher education are much more likely to belong to the highest quintiles of the population—an important concern is whether the scholarships are well-targeted to those who need this support to continue their studies. To ensure the neediest are supported, including those that may be coming from more vulnerable backgrounds, the eligibility criteria of the Seychelles Scholarship Scheme should include a financial need assessment. This could be accommodated to cover as many students as possible by limiting the participation of students from wealthy socioeconomic backgrounds. Outsourcing of non-institutional services in schools could be scaled up 237. Outsourcing of non-institutional services for education, such as school meals and cleaning services, is an effective measure to improve the efficiency of spending in education. Currently, schools in Seychelles outsource several types of work, including security and enforcement, school meals, printing and cleaning services, and youth hostel services. Based on international experience, outsourcing these services can help streamline school administration, making it more efficient and effective. It can also help improve communication among different school departments and staff members. 238. Outsourcing has created a win-win situation for all stakeholders, allowing businesses, entities, and institutions to focus on their core capabilities. This also helps foster innovation, and address skill or knowledge shortages in specific areas. For the same reason, schools are beginning to see the benefits of outsourcing. For example: (i) teachers focus on their core CHAPTER 5. 113 Education: Rebalancing Spending for Greater Efficiency competency—teaching; (ii) domain specialists provide the most up-to-date information, tools, and skills to help students improve their academic and skill development; and (iii) outsourcing brings in a breath of fresh air, broadening each learner’s horizon of possibilities to improve student achievement, school status, and business revenue. 239. Several types of school services could be outsourced to improve the efficiency of resource use and enhance the quality of learning: • School management. Outsourcing certain school management services could help free up time for school staff to focus on more important tasks, while reducing overhead costs. Various school administration tasks can be outsourced, such as payroll, human resources, finance, and marketing. Each school will have different needs, so it is important to choose the right tasks to outsource. Finally, schools can save money by consolidating some administrative tasks. For example, instead of having separate payroll and human resources departments, these could be combined into one department, helping to save on personnel costs, as well as the cost of renting or leasing office space. • Specialized learning, such as STEM and robotics. Some schools have the resources, including funds and sometimes even labs and kits, to teach STEM subjects, while many fall short in their ability to teach the subjects properly. Outsourcing of specialized learning together with information technology (IT) support and mobile science/computer labs shared by several schools can significantly reduce costs. • Technology/ICT-supported learning. While there are many instructional websites available, schools would benefit from e-learning platforms that are tailored to the demands of their specific student group. Providing structured, curated, and thoughtfully designed e-learning platforms might turn education into a fun adventure for students. Teachers could use their time in the classroom, aided by the most up-to- date assessment, lesson plans, and tests, to provide the most useful input that they alone are capable of—a teacher-student relationship fostered through individual and personal guidance. • Physical education. Outsourcing physical education to external providers, especially in primary schools, has become a common practice in Australia and internationally, with studies reporting that there are a large number of external providers,104 and a high percentage of schools that engage external providers.105 Several academics in physical education have suggested that the provision and the delivery of components of physical education seem to be normalized and accepted as part of physical education programs.106 Although there is an increasing research base exploring external provision of physical education activities107, there are still some aspects of outsourcing that are less well understood and could be further explored, including in secondary schools. 104 For example, Petrie, Penney, and Fellows 2014. 105 For example, Williams, Hay, and Macdonald 2011; Williams and Macdonald 2015; Dyson et al. 2016; Mangione et al. 2020. 106 For example, Petrie, Penney, and Fellows 2014; Smith 2015; Sperka and Enright 2018; Bowles and O’Sullivan 2020. 107 For example, Sperka and Enright 2018; Sperka, Enright, and McCuaig 2018. Hoffman 1987; Tinning 1992; Williams, Hay, and Macdonald 2011 highlight the potential for negative effects on the delivery, scope, and existence of physical education. SEYCHELLES PUBLIC EXPENDITURE REVIEW 114 Enhanced Fiscal Buffers for More Productive and Resilient Investments • Transportation and school maintenance. Outsourcing these services can save money on fuel and maintenance costs, as well as free up staff to focus on other tasks. Outsourcing can also be used for custodial services, landscape maintenance, and even food services. The key is to determine which services to outsource to improve operational efficiency and increase cost savings. 240. Outsourcing services often have lower labor costs because of fewer overhead costs and employees. Hiring people in-house means paying for salaries, equipment, software, training, office space, and more. However, hiring employees can be risky because they may resign at any time. According to the International Organization for Standardization (ISO), outsourcing can help companies reduce an average of 15 percent of their costs. But the actual savings depend on how many business operations are planned to be outsourced and other changes implemented in-house. The Harvard Business Review states that around 20 to 30 percent of cost reductions could be achieved by outsourcing non-core business processes, such as billing and payments, payroll, recruitment, and lead generation.108, 109 Table 5.6: Distribution of non-teaching staff in primary and secondary schools by position # of Including % of Position   staff female female Technical support: science lab technician, system Could be 36 10 28% support outsourced Maintenance: housekeeper, warden, housing officer 40 40 100% Office support: office assistant, office manager, 96 88 92% Could be attendance officer, counselor, supervisor outsourced Librarian/librarian assistant 40 40 100% Other: A-level student, supply teacher 6 4 67% Headteacher 22 12 55% Total 240 194 81% Source: World Bank staff calculations based on Seychelles MoE data. 241. Seychelles’ outsourcing of school services is aligned to best international practices. The Government should continue outsourcing the provision of school meals, security/ enforcement, and printing services. In addition, more than half of the 240 non-teaching staff positions in primary and secondary schools in Seychelles could be outsourced (Table 5.6). According to the literature, the most commonly outsourced positions are related to in-school technical support (such as science lab technicians, system support) and school maintenance (such as housekeepers, wardens, housing officers). The Government should also consider outsourcing jobs related to office support, including office assistants, office managers, school attendance officers, counselors, and work supervisors. 108 Coyne, Coyne, and Coyne 2010. 109 “Lead generation is the process of gaining the interest of potential customers to increase future sales” (https://www. salesforce.com/in/learning-centre/marketing/what-is-lead-generation/#:~:text=Lead%20generation%20is%20the%20 process,sales%20process%20of%20many%20companies.). CHAPTER 5. 115 Education: Rebalancing Spending for Greater Efficiency 5.7 OPTIONS FOR IMPROVED EFFICIENCY AND ADDRESSING CHALLENGES FACED BY YOUTH AT RISK 242. Spending per student as a share of GDP is relatively high for Seychelles, but comparator countries achieve higher learning outcomes at similar levels of spending. This suggests that greater attention is needed to strengthen the quality of other inputs such as learning materials. Evidence presented here from other countries indicates that greater attention to the quality of inputs (coupled with improved teacher training) is necessary to raise learning outcomes. 243. Spending per student as a share of GDP per capita is also disproportionately high at the tertiary relative to lower education levels. Similar to many countries across the world, Seychelles allocates more resources disproportionately to higher education levels (that typically benefit more the children of wealthy households). Children from poor backgrounds are more likely to be excluded from the higher levels of the education system. Post-secondary education in Seychelles absorbs one-third of the spending on education, more than in many comparable countries with similar levels of enrolment. In 2022, primary and secondary schooling received 58.2 percent of the education budget (with 30.8 percent to primary education and 27.4 percent to secondary). Another 32.8 percent went to post-secondary institutions (tertiary and non-tertiary). 244. In addition, it is important to improve the factors that determine the quality of education (and explain the differences in educational outcomes across countries), as well as reach youth at risk. These factors include the availability of trained teachers, school infrastructure, learning materials, and others. In addition, equity in education spending is critical to leveling the playing field for underserved students in under-resourced schools. Recognizing that traditional per-unit allocation formulas have not led to equal outcomes, some countries have attempted to target spending in favor of disadvantaged groups, which has resulted in relatively more equitable learning outcomes. For example, South Africa’s Provincial Equitable Share formula is one of the most developed systems aimed at reducing inequalities and attaches varying weights to population and disadvantaged pupil characteristics, though it has had mixed success.110 Rwanda, Tanzania, and Zimbabwe have also adopted needs-based financing models.111 However, the inability of many allocation formulas to achieve the targeted level of equity remains a significant issue worldwide. 245. Analysis of school-level quality and outcomes points to a need to reallocate resources to raise outcomes for poorer performing schools. Despite high completion rates, a small number of youth, especially boys, are leaving before completing secondary education. Three schools (Anse Royale, Plaisance, and Anse Boileau) account for 57 percent of all dropouts and 59 percent of male dropouts. Differences in outcomes across school are largely due to some inequalities in teacher and classroom distribution in Seychelles’ secondary education. Also, some secondary school classrooms are better equipped. Reforms could focus on strengthening the curriculum to meet the needs of the private sector and address the challenges faced by vulnerable youths. 110 Ally and McLaren 2016. 111 International Commission on Financing Global Education Opportunity 2016. SEYCHELLES PUBLIC EXPENDITURE REVIEW 116 Enhanced Fiscal Buffers for More Productive and Resilient Investments 246. The uneven distribution of teachers across schools means that students in secondary schools with higher numbers of teachers benefit more. A typical student at a school with a low student-teacher ratio benefits from investment in teacher salaries of SCR 29,000 (US$1,800) per year of schooling, compared with just SCR 19,500 (US$1,200) in schools with higher ratios.112 Given that Seychelles’ level of spending is high and yet outcomes are below that of other HICs, there may be a need to place greater emphasis on other inputs (aside from teachers per student), such as strengthening teaching materials to improve learning outcomes. 247. At the tertiary level, TVET institutions could be strengthened to help ensure that skills are aligned to the needs of the private sector. Reforms should first address the challenges linked to low utilization or demand for TVET (given the tendency to prefer university education over TVET) by the increasing quality of learning materials. There could be programs to ensure closer ties or stints of student placement during the course of their degree or apprenticeships. TVET programs could also aim to target youth at risk much earlier in secondary school. 248. Seychelles could achieve additional savings by targeting scholarships and continuing to outsource administrative services. Targeting would ensure poorer and qualified students have greater opportunities to gain access to higher education, which would help address some of the challenges for youth at risk. Outsourcing should be maintained and expanded to include other services such as counseling. 249. Boys’ underachievement is related more to societal attitudes, lack of parental presence, and low school attendance. National examination results and surveys reveal that girls outperform boys at school in all subjects across the curriculum, including math and science, and in completion rates at the secondary level. In a school environment dominated by female staff, girls appear to be more adapted to schooling than boys. Reforms could focus on developing more male models, including through hiring male teachers. Table 5.7: Reform Priorities for improved efficiency and addressing yoth at risk Effect on Potential Fiscal Effect on Policy Context Policy Action Climate Impact Equity Change A disproportionate share Medium-term: Positive: Positive: Neutral of education budget goes Introduce needs Fiscal savings Scholarships to scholarships for higher assessments as from decreasing will become education and study abroad one of the criteria the costs of available that are currently allocated for allocation of financing some for students without an assessment of scholarships. richer students. in financial financial need need. 112 Estimate based on data from Evans, Yuan, and Filmer (2020). CHAPTER 5. 117 Education: Rebalancing Spending for Greater Efficiency Effect on Potential Fiscal Effect on Policy Context Policy Action Climate Impact Equity Change Educational outcomes lag Medium-term: Neutral: Positive: Neutral behind other high- income Increase spending Depending Re-allocation countries. Primary and on primary and on resource will be secondary education could secondary education allocations to pro-poor, benefit from a greater with focus on higher education to improve commitment of budgetary performance (scholarships). public resources in a number of (including test Probably at least primary / areas scores), to reduce another 1 percent secondary dropouts through of GDP should education targeted programs be allocated that is (including for youth to primary and guaranteed to at risk), and improve secondary all citizens. teacher qualifications. education. Low value for money in in Medium-Term: Given the Positive: Neutral TVET, with low demand and Comprehensive current excess Quality TVET excess capacity in existing program needed to capacity, much will benefit programs reduce waste and could likely ordinary improve TVET quality be achieved citizens. / relevance to attract through greater students. efficiency in a fiscally neutral manner. SEYCHELLES PUBLIC EXPENDITURE REVIEW 118 Enhanced Fiscal Buffers for More Productive and Resilient Investments ANNEX 1: OVERVIEW OF COMPARATOR COUNTRIES Type of Comparator Comparator Countries Basis of comparison Country Structural Bahamas; Barbados Small Island State, Peers High/Middle Income Small Island Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Small Island State as Group Belize, British Virgin Islands, Cuba, Dominica, Dominican defined by UN: https:// Republic, Grenada, Guyana, Haiti, Jamaica, Montserrat, www.un.org/ohrlls/ Netherlands Antilles, Puerto Rico, Saint Kitts and Nevis, Saint content/about-small- Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad island-developing- and Tobago, United States Virgin Islands, American Samoa, states Cook Islands, Micronesia (Federated States of), Fiji, French Polynesia, Guam, Kiribati, Marshall Islands, Nauru, New Caledonia, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, Vanuatu, Bahrain, Cabo Verde, Comoros, Guinea-Bissau, Maldives, Mauritius, Sao Tome and Principe, Seychelles, Singapore, Bermuda, Cayman Islands, Curaçao, Guadeloupe, Martinique, Sint Maarten (Dutch part), and Turks and Caicos Islands. Regional Cabo Verde; Comoros; Mauritius African Small Island Peers State/small state Equitorial Guinea; Gabon African Small State Upper Middle Income Aspirational Cyprus; Iceland; Malta Small Island State/ Peers tourism and Industrial Ireland; Singapore Industrial OECD Group Australia; Austria’ Belgium; Canada; Chile; Czech Republic; As defined by OECD Denmark; Estonia; Finland; France; Germany; Greece; membership Hungary; Israel; Italy; Japan; Korea; Latvia; Lithuania; Luxembourg; Mexico; Netherlands; New Zealand; Norway; Poland; Portugal; Slovak Republic; Slovenia; Spain; Sweden; Switzerland; Turkey; United Kingdom; United States ANNEX 119 ANNEX 2: AREAS FOR FURTHER ANALYSIS Area of analysis Data gaps Fiscal Resilience Updated information on the related parties, 1 Analysis of transfer pricing and forgone taxes. organizational structure, and earnings for large multinational businesses. Fiscal rules can be combined with other instruments, such as insurance and contingent financing that shifts risk to a lender Evaluation of alternative financing approaches to 2 or third party at a cost. In parallel, establishing mitigate the effects of climate shocks. a stabilization fund could enable Seychelles to lower its borrowing and insurance costs and maintain a countercyclical fiscal policy. Impact of existing tax policies on property Database to enable regular evaluation of 3 values and investment patterns. property market values. Health To help assess where there is equal pay for 1 equal work by evaluating the fairness and Formula and eligibility of allowances consistency of allowances. Benchmarking analysis to compare public sector remuneration with similar roles in the 2 Competitiveness private sector to gauge attractiveness and retention. To understand reasons for public sector 3 employee departures and address attrition Resignations and exit surveys and retention challenges. To assess the demand for public sector 4 Number of applicants for entry-level positions positions. To assess whether wage bill adjustments 5 correspond to broader fiscal goals and How are wage bill changes made each year? government budget objectives. 1 Structure of the health system, and Clarity of information on the number of health geographical distribution of facilities of facilities by level different types/levels – contextual information Distinguishing features of the different levels (eg also useful for examining efficiency. The primary, secondary, tertiary) available information differed by source. Essential health package (2022) document referred to in Annual Health Sector Performance Report 2023 2 Adequacy and efficiency of health worker Information on the distribution of health workers distribution at the primary level between primary health care – both numbers and cadres Information on catchment areas and populations SEYCHELLES PUBLIC EXPENDITURE REVIEW 120 Enhanced Fiscal Buffers for More Productive and Resilient Investments Area of analysis Data gaps 3 Discussion of the adequacy and efficiency Any cost data related to the National Health of existing financing of the sector requires Strategic Plan information on the costs of key plans and Any cost data related to the National Strategy for strategies – this was missing NCD Any cost/economic data related to the essential health package (2022) 4 More complete analysis of the overseas The dataset on overseas treatment was treatment dataset requires data to be incomplete, though this may be a historic issue complete and more consistent for certain since decisions made by VIPs have been ended categories (eg diagnosis using ICD-10 and Consistency in data entry in the overseas treatment) treatment dataset is needed – using ICD 10 diagnoses or similar. The existing dataset uses a combination of symptoms and diagnoses 5 Assessment of progress with the SDG3 Background data from the 2018 Household financial protection indicator Budget Survey National Health Accounts data from 2018 onwards 6 Analysis of the efficiency of overseas Data on contracts or agreements with individual treatment would be more detailed and hospitals and the basis for such contracts was complete completely lacking but (apparently) does not actually exist which is a significant shortcoming in a system which relies on such overseas treatment 7 Analysis of the efficiency of the health Information on budgets and expenditures facilities/levels of care require budgets and per cost centres or level of care eg PHC or expenditures data for the specific units of Preventive services were not available. expenditures and levels of care 8 Analysis of hospital efficiency need Expenditure data for hospital level efficiency is expenditure data and other inputs eg beds not available. All spending occur at the HCA level capacity, human resources per hospital not at the Hospital level. 9 Analysis of the equity of the health system National Health Accounts (NHA) which provide need expenditure information which is up to required data for Out of Pocket Expenditures is date outdates, the last NHA study was done in 2017. Education 1 Teacher Education and training to attract Statistics on the current teacher training system: more qualified candidates (as much of the number of institutions, students, graduates; challenges in attracting teachers, based on employment of graduates; financing. cross-country experience, is not always just Competence levels of teacher training graduates due to pay - other factors such as curriculum, and primary/secondary school teachers. or constraints at the policy and institutional/ school level) 2 Increasing enrollment at pre-primary and Assessment of the current state of preschool tertiary levels (with attention to scholarships at and tertiary education systems in Seychelles: the tertiary level and selection criteria) institutions, enrollment of children/students, staffing, quality of programs (curriculum review). ANNEX 121 Area of analysis Data gaps 3 Learning outcomes -in primary and secondary Analysis of factors and characteristics of education -what can be done particularly for students at risk of dropping out from school. boys and youth at risk Student-level results of learning assessments with individual characteristics of students, including their socio-economic status. 4 TVET -and how to improve the perception/ Analysis of TVET system performance: number attractiveness and relevance to align with of TVET schools, student enrollment by program country needs and priorities for economic and specialization, graduation of students, and growth their employment. 5 Student attitudes to school and behavior to School satisfaction survey data, behavioral support retention and learning outcomes assessments (qualitative data collection). 6 Technological advancement Assessment of the current state of technology availability and use in education: (i) to identify areas where technology integration is strong and where it needs improvement. (ii) to benchmark against global best practices to guide investments in educational technology, inform policy development, and highlight the need for capacity building among educators. This work is proposed under the Education Technology Readiness Index (ETRI) ASA. SEYCHELLES PUBLIC EXPENDITURE REVIEW 122 Enhanced Fiscal Buffers for More Productive and Resilient Investments ANNEX 3: ESTIMATING THE IMPACT OF CLIMATE SCENARIOS Climate projections are run through biophysical and economic models to assess the country’s vulnerability to climate change under different development scenarios. The business-as-usual (BAU) scenario assumes investments to address climate change remain at the current level of 0.9 percent of GDP annually, with limited implementation of reforms to improve spending efficiency. Aspirational scenario involves accelerated reforms (with a 15 percent increase in efficiency) as well as investments to partially meet NDC targets of about 3 percent of GDP annual increase (over the BAU) between 2027 and 2050. The full Adaptation scenario encompasses a 6 percent increase in investment to fully meet NDC needs, over the period combined with a 50 percent increase in productivity over the BAU. Climate scenarios are defined using a representative set to assess macroeconomic shocks arising from relevant “channels of impact” under climate change. Shocks from impact channels are estimated using physical damage functions under different climate scenarios (see Annex Table 1 below). MFMod is used to estimate the reduction in GDP due to climate shocks. Results from the simulation show that under a BAU scenario (in the absence of reforms needed to improve spending efficiency), growth remains at around 3 to 4 percent annually, over the medium-term. With the full Adaptation scenario, Implementation of reforms to strengthen efficiency while investing to meet NDC targets raises potential growth to an average annual rate of just under 6 percent. The close results between the ASP and ADP scenario also underscore the point that higher investments without increasing efficiency limits results that can be achieved in terms of growth and productivity. Annex Table 1: Description of Climate Change Damage Channels Name of Channel Description of how Climate Change Translates to Damages Human Health and Development Shock to labor productivity from daily heat stress to both indoor and Heat and Labor 1 outdoor workers. Considers occupation-specific work ability curves from Productivity the International Labor Organization. Human Health Shock to labor supply from changes in the incidence and mortality of 2 and Labor vector-borne (malaria and dengue), water-borne (i.e., diarrheal), and Supply temperature-related diseases. Agriculture Shock to crop revenues through changes in yields. Based on the Food 3 Crop Production and Agriculture Organization’s crop-specific yield response functions to water availability and heat stress. Shock to crops from topsoil erosion and flooding due to vegetation 4 Erosion Impacts conditions. Impacts on erosivity from changes in rainfall are based on the Revised Universal Soil Loss Equation model. Infrastructure ANNEX 123 Name of Channel Description of how Climate Change Translates to Damages Shock to capital from changes in the recurrence of peak precipitation events that result in fluvial (riverine) flooding. Estimates drainage and 5 Inland Flooding flood depths through the Itzi model and uses depth-damage curves for damage estimation. Shock to coastal capital from changes in mean sea level and storm 6 Sea Level Rise surge, using a bathtub approach. Natural Capital and the Blue Economy Shock to fish production due to the impacts of climate change (sea level 7 Fisheries rise; ocean temperature changes) on the stock of natural marine capital. Shock to tourism sector revenues due to changes in climate variables, 8 Tourism which alter the country’s overall tourism potential. Shock to the value of coral reef tourism due to losses in coral cover as a 9 Corals result of increasing sea surface temperatures. Climate scenarios were selected to capture the broadest range of climate change effects across General Circulation Models (GCMs). In doing so, the vulnerability of the economy and the performance of adaptation options under possible wet versus dry and hot versus warm GCM outcomes are assessed. Two sets of scenarios identified were based on changes from the baseline climate as compared to the period between 2051 and 2060: • Dry/hot scenarios: Three scenarios around the 10th percentile of mean precipitation changes (i.e., dry) and the 90th percentile in mean temperature changes (i.e., hot), across SSP2–4.5 and SSP3–7.0 GCMs. Final channel results also include the average climate impact of the three Dry/Hot GCMs selected. • Wet/warm scenarios: Three scenarios around the 90th percentile of mean precipitation changes (i.e., wet) and the 10th percentile in mean temperature changes (i.e., warm), across SSP2–4.5 and SSP3–7.0 GCMs. Final channel results also include the average climate impact of the three Wet/Warm GCMs selected. The Dry/Hot scenarios (i.e., SSP2–4.5 NESM3; SSP2–4.5 CNRM-ESM2-1; SSP3–7.0 CNRM- ESM2-1) and Wet/Warm (i.e., SSP2–4.5 NORESM2-LM; SSP2–4.5 INM-CM5-0 SSP2–4.5 INM- CM5-0; SSP3–7.0 MPI-ESM1-2-HR) are appropriate for exploring individual realizations of climatic conditions, providing a low- and high-end estimate of impacts. ANNEX 3: DEBT SERVICE CONTRIBUTION TO A PROCYCLICAL FISCAL STANCE Seychelles faces the challenge of considerable volatility in debt service. Seychelles’ total repayments on public external debt averaged around 3 percent of GDP over 2017 to 2022 but jumped to almost 4 percent of GDP in 2023 (likely reflecting the general rise in global interest rates). Analysis of historical data reveals no clear cyclical patterns to debt service, with correlations of cyclical components of debt service payments and GDP based on various SEYCHELLES PUBLIC EXPENDITURE REVIEW 124 Enhanced Fiscal Buffers for More Productive and Resilient Investments methods low and statistically insignificant.113 However, Seychelles’ debt service is moderately volatile, as shown in Figure 1. The graph displays standard deviations114 of year-on-year changes in debt service for 119 countries over 2004–23, sorted from low to high. As can be seen, Seychelles lies below the 75th percentile, meaning that its debt repayments are less volatile compared with countries with the highest 25 percent of values. Nevertheless, it exhibits more variability than the median country, highlighting the country’s vulnerable to debt service spikes. Sharp swings in debt repayments could be especially destabilizing in bad times, when funding needs are high and access to commercial funds may be more limited. Annex 3 Figure 1. Volatility of debt service on public external debt across countries (standard deviations of y-o-y change (%), 2004-23) 180 160 140 120 Seychelle 100 80 60 40 20 0 Source: WB staff calculations based on WB International Debt Statistics (IDS) database and data provided by authorities. Note: Country coverage includes all countries captured by the WB IDS database plus Seychelles. Outlier years (with y-o-y change over 600%) and countries with less than 10 observations (Iraq, Somalia, Suriname, Syria) are excluded. Orange bars represent countries below the 25th percentile and green bars countries above the 75th percentile. The median country is denoted by the black bar. To manage its debt service volatility, Seychelles has employed different tools. Seychelles’ debt management office already produces a Medium-Term Debt Strategy and an Annual Borrowing Plan, which are the primary documents that outline how the country will meet its borrowing needs in the coming year. As part of such planning, the Government aims to have new borrowings that are do not create a bunching of maturities. Specifically, Seychelles has adopted Liability Management Operations to lengthen the repayment period. Government has also employed debt buybacks or debt swaps to help smooth its debt service profile. Seychelles has also taken advantage of Innovative debt instruments provided by official creditors to create more fiscal space in bad times. For example, Seychelles employed a Catastrophe Deferred Drawdown Option (CAT-DDO) in the past, that provided immediate liquidity following a natural catastrophe including natural disasters and the pandemic public health emergencies. 113 The correlation coefficient between the cyclical component of the two series (in levels) over 2003–23 is equal to 0.3 and with a p-value of 0.19. Results using log series are nearly identical. 114 The standard deviation indicates how dispersed the data is relative to the mean. High values suggest that data points are more spread out, while low values imply that they are clustered close to the mean. As an example, if a country’s debt service grew on average by 10% per year with a standard deviation of 40%, then about every third year the growth values would be expected to lie outside the -30% and 50% range. A lower standard deviation would make this interval shorter, indicating that values would lie closer to the mean. ANNEX 125 Emerging instruments such as the Climate Resilient Debt Clauses (CRDCs) could also enable borrower governments to temporarily defer their debt service payments during shock events (e.g., tropical cyclone, hurricane, earthquake, pandemic or epidemic). An increasing number of multilateral creditors (e.g., the World Bank) and bilateral official creditors (e.g., the United Kingdom) have either recently started to introduce CRDCs in their loan contracts or are in the process of implementing them for eligible countries requesting them. Based on past debt service data around 18 percent of Seychelles’ debt service on public external debt (about 0.6 percent of GDP) could fall under CRDC suspension in the event of a shock.115 However, a large portion—12 percnet of debt service (0.4 percent of GDP)—is subject to uncertainty stemming from the ongoing CRDC finalization by creditors. To put these figures in context, various estimates put the average cost sustained by Seychelles from natural disasters at about 0.20 to 0.25 percent of GDP per year, with severe individual events causing damages of around 0.70 to 0.80 percent of GDP.116 Good debt management and innovative debt instruments should be part of a broader toolkit in building resilience. This broader toolkit may involve building up strong fiscal buffers and setting up contingency funds. Parametric insurance is another possibility, which offers fast payouts based on pre-specified trigger events such as extreme weather events or natural disasters.117 Hence, weighing various options and optimizing their use could better assist Seychelles in developing its strategy to create more fiscal space in the event of future shocks. Annex Table 2. Taxation of immovable property in selected small island countries Country Description Cook Islands, Maldives, Marshall Islands, Micronesia, There is no recurrent property tax Nauru, Niue, Palau, Samoa, Tonga, Tuvalu Fiji, Papua New Guinea, Only land is subject to tax. Solomon Islands, Vanuatu An annual building tax is imposed on the owner of buildings at rates ranging from Madagascar 5% to 10%. Land ownership is also taxable at a rate depending on the nature of the land. 115 Many creditors are yet to publish a list of eligible borrower countries as a result, the calculations presented here include all creditors that mention offering CRDCs to SIDS in public documents. Based on data availability, the analysis is based on the years 2017­23, overwhich averages of past fluctuations in debt service are used in the estimation of shares. 116 See, for example, the Government of Seychelles Damage, Loss, Needs Assessment (report on the 2013 floods). 117 For example, the African Risk Capacity (ARC) Group is a Specialized Agency of the African Union and offers parametric insurance to member states including against epidemic, flood, and cyclones. Seychelles is not a member of ARC, but it is a member of the African Union. SEYCHELLES PUBLIC EXPENDITURE REVIEW 126 Enhanced Fiscal Buffers for More Productive and Resilient Investments Country Description The land tax (aka General Rate/House Rate) is levied by local government councils. Municipal Councils levy rates on the owners of any immovable property. Mauritius The tax base is the annual value of both land and buildings based on market rentals. Property tax is imposed on residential and commercial buildings and undeveloped land. Agricultural commercial land, properties owned by charitable organizations and a foreign entity are exempt. Residential property tax depends on whether the home was occupied by its owner for at least six months of the calendar year. A. Owner-occupied property (owner resides and uses exclusively as a dwelling). - 1st US$300,000 of property value: Exempt - Next US$200,000 of property value: 0.625% of the next US$200,000 of property value Bahamas - Above US$500,000 of property value (balance): 1% of remaining part of value B. Residential properties (has 4 units or less, and is used solely as a dwelling place) - Up to US$75,000 of property value: US$300 flat fee - Anything above first US$75,000 of property value: 0.625% of property value C. Commercial properties (above 4 units, including residential) or foreign owned rental properties - 1st US$500,000 of property value: 0.75% of property value - Next US$1,500,000 X 1% Balance X by 1.5% D. Vacant land for foreigners - 1st US$7,000 of property value: US$100 flat fee - Anything above US$7,000: 2% of remaining property value E. Vacant land for Bahamians is exempt A. Improved Land (for Residential purposes) 0.0% on land valued up to US$150,000 0.1% on the excess of the improved value greater than US$150,000 but not exceeding US$450,000 0.7% on the excess of the improved value greater than US$450,000 but not exceeding US$850,000 1.0% on the excess of the improved value greater than US$850,000 B. Improved Land (for Non-Residential purposes) Barbados 0.95% on the improved value of each parcel of land on which there is a building other than a residence *Tax on improved land is calculated on the improved value of the land C. Vacant Land 0.8% on the site value of vacant land measuring less than 4,000 sq. ft. or 371.6 M2 0.9% on the site value of vacant land measuring over 4,000 sq. ft. & valued up to US$450,000 1.0% on the site value of vacant land measuring over 4,000 sq. ft. & valued over US$450,000 There are no real property taxes; but municipal taxes are levied on properties in the Dominica cities of Roseau and Canefield. The tax rate is 1.25% levied on the assessed value of the property. ANNEX 127 Annex Table 3: Government Salary Table: April 2023 128 Band Band 12 Band 11 Band 10 Band 9 Band 8 Band 7 Band 6 Band 5 Band 4 Band 3 Band 2 Band 1 Step 1 87,893 70,137 55,968 44,661 35,639 28,439 22,694 18,109 14,451 11,531 9,202 7,343 Step 2 89,225 71,200 56,816 45,338 36,179 28,870 23,038 18,384 14,670 11,706 9,341 7,454 Step 3 90,578 72,279 57,677 46,026 36,727 29,308 23,387 18,662 14,892 11,884 9,483 7,567 Step 4 91,951 73,375 58,552 46,723 37,284 29,752 23,742 18,945 15,118 12,064 9,627 7,682 Step 5 93,345 74,487 59,439 47,431 37,849 30,203 24,101 19,233 15,347 12,247 9,773 7,998 Step 6 94,760 75,616 60,340 48,150 38,423 30,661 24,467 19,524 15,580 12,432 9,921 7,917 Step 7 96,196 76,763 61,255 48,880 39,006 31,126 24,838 19,820 15,816 12,621 10,071 8,037 Step 8 97,654 77,926 62,184 49,621 39,597 31,597 25,214 20,120 16,056 12,812 10,224 8,158 SEYCHELLES PUBLIC EXPENDITURE REVIEW Step 9 99,134 79,107 63,126 50,373 40,197 32,076 25,596 20,425 16,299 13,006 10,379 8,282 Step 10 100,637 80,306 64,083 51,137 40,806 32,563 25,984 20,735 16,546 13,204 10,536 8,408 Step 11 102,163 81,524 65,054 51,912 41,425 33,056 26,378 21,049 16,797 13,404 10,696 8,535 Step 12 103,711 82,760 66,041 52,699 42,053 33,557 26,778 21,368 17,052 13,607 10,858 8,664 Step 13 105,283 84,014 67,042 53,498 42,690 34,066 27,184 21,692 17,310 13,813 11,023 8,796 Enhanced Fiscal Buffers for More Productive and Resilient Investments Step 14 106,879 85,288 68,058 54,309 43,337 34,582 27,596 22,021 17,572 14,022 11,190 8,929 Step 15 108,499 86,580 69,090 55,132 43,994 35,107 28,015 22,355 17,839 14,235 11,359 9,064 REFERENCES African Development Bank Group. 2021. 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