Parliament’s Financial Committee has projected that the Maldives budget deficit will reach 27 percent of the GDP by the end of year 2012, a 175 percent increase on earlier forecasts.
While the 2012 budget put the deficit at less than 9.8 percent of Gross Domestic Product (GDP), the figures revealed by the committee last week shows that the amount will increase up to a staggering 27 percent.
These figures confirm the International Monetary Fund (IMF)’s earlier warnings that the Maldives had “substantially understated” its budget deficit, by underestimating its spending and “probably” overestimating tax revenues.
Head of the Majlis’s Financial Committee, Deputy Speaker and People’s Alliance (PA) MP Ahmed Nazim, revealed to the reporters that government revenue for 2012 will be Rf2.6 billion (US$168.6 million) less than the projected amount of Rf10.87 billion (US$704 million) – a 23 percent plunge.
Meanwhile, government spending in 2012 is expected to increase by almost 24 percent, reaching Rf17.45 billion (US$1.13 billion) at the end of the 2012.
With the shortfall of revenue and increased government spending, Nazim observed that the budget deficit will exceed from Rf 3.9 billion (US$ 252 million) to Rf9.1 billion this year (US$590 million), amounting to 27 percent of the country’s GDP.
“The information shared by the Finance Minister Abdullah Jihad shows a dire economic outlook for the Maldives,” he warned, echoing the IMF’s recent predictions on the Maldives’ economic frailty.
Chief of the IMF mission in the Maldives, Jonathan Dunn, warned parliament in April that if the country does not reduce its expenditure, it risks running out of reserves and miring the country in poverty.
Although 2012 budget put the deficit at less than 10 percent of GDP, Dunn told Minivan News that “the IMF team sees the figure as more likely to be 17.5 percent of GDP, and perhaps larger than this.”
As a result of this, he warned that the economic growth and stability in the Maldives were unlikely to be maintained “in the medium term” unless the government substantially cut spending.
Dunn emphasised that the only sustainable solution was for relevant parties to rationalise the budget by boosting revenues and cutting expenditure, despite the political difficulties.
“These may be politically difficult measures, but the consequences of not reducing the budget deficit are likely to be even more difficult,” he warned.
New government increases spending
Despite urgent calls to reduce spending to curb widening deficits, parliament’s finance committee projects the government spending will have to be increased to cover additional costs which were not included in 2012 projections.
These expenses include food subsidies worth Rf270 million (US$17.5 million), electricity subsidies worth Rf250 million (US$16.2 million), capital expenditure by government institutions Rf735 million (US$47.6 million) and an allocation of Rf200 million (US$12.9) to the Aasandha Health Insurance scheme’s budget, according to Nazim.
Visiting Hirimaradhoo island last weekend, President Waheed said he would allocate Rf 30 million (US$1.9 million) in the 2013 state budget for development.
A total of Rf3.4 million (US$220,500) is also said to be allocated as benefits to former President Mohamed Nasheed of Maldivian Democratic Party (MDP) which alleges that Nasheed was ousted in a coup on February 7.
However, committee member and MDP MP for Kulhudhufushi, Abdul Ghafoor Moosa, told reporters that unplanned spending on police and military personnel and planned reimbursement of civil servants pay cuts in 2010, are both significant causes for rising costs to the government.
He observed that the largest shortfall in revenue is a direct result of the US$135 million pulled out from the budget with new government’s recently revised policy on lease extension payments for resort islands.
Maldives Inland Revenue Authority (MIRA) anticipated receiving a total of Rf375 million (US$ 24 million) for lease extensions, however the income received dropped to Rf23 million (US$1.5 million) as a result of the decision to accept the lease extension fees in an annual installment instead of a lump sum as decided by former administration.
The loss of concession fees from Ibrahim Nasir International Airport (INIA), the result of a successful Civil Court case to block the Airport Development Charge (ADC) filed by the Dhivehi Qaumee Party (DQP) while it was in opposition, also saw the government receive only US$525,355 from the airport for the quarter, compared to the US$8.7 million it was expecting.
The government-aligned PA’s Deputy Leader Nazim however contended that the the 23 percent drop in government income was caused by unrealised revenue from privatisation schemes and a shortfall of Rf 166.7 million and Rf435 million (US$28 million) from the projected dividends of Dhiraagu and import duties respectively.
He noted that the committee has decided to increase the treasury bond limit up to Rf1 billion following a request by the Finance Ministry to increase the limit from Rf727 million to Rf 1.5 billion. The ministry says that all monetary transactions will be halted if the limit is not extended, according to Nazim.
The IMF’s Dunn has however stated that further domestic borrowing “will be difficult to achieve, as it is unclear whether the banks have much more appetite for buying treasury bills.”
Meanwhile, in a bid to address spiraling costs, the committee is reviewing the Aasandha universal health scheme to block the Rf200 million extension of its budget, cut the budget of all institutions by 10 percent to save nearly Rf 1.5 billion, and save a further Rf300 million by issuing a moratorium of the further employment of staff. These measures will reduce state costs by Rf 2.2 billion (US$142 million), Nazim estimated.
However, recently released figures from Finance Ministry show that between January 1 to April 26, state expenditure exceeded over Rf 4 billion (US$259 million) while the income remained at Rf 2.10 billion (US$136 million), a deficit of Rf 1.5 billion (US$100 million).