The Maldives has significantly underestimated the value of tourism to the local economy by over a billion dollars, according to a report by economics lecturer and Assistant Manger of the Maldives Monetary Authority (MMA)’s Monetary policy and Research Division, Ibrahim Ameer.
In the first month following the introduction of 3.5 percent Tourism Goods and Services Tax on the tourism sector, the Maldives Inland Revenue Authority (MIRA) collected US$7.2 million from 800 of the 871 registered tax payers.
“This means the whole tourism industry’s revenue (market value) would amount to approximately US$210.0 million for the month of January and approximately US$2.5 billion for the whole year,” observes Ameer.
In comparison, the government’s official figure for the total market value of all goods and services produced in the country – not just tourism – is US$1.5 billion.
In his report, Ameer recalculates the budget deficit based on updated GDP figures and concludes that the deficit sits at nine percent, “as opposed to 17 percent of GDP in 2010 as per government authorities.”
“I suspect these underestimated figures are used by the authorities to prolong the preferential treatment Maldives has and in some cases continues to receive as a [former] Least Developed Country (LDC),” Ameer surmises, suggesting that “ our country’s problems are primarily a case of the state’s inability to collect revenue through taxation rather than a budget deficit.”
“It should be agreed that as the country marches towards full democratization, with new independent statutory institutions, local and atoll councils and increased civil service salaries, the country needs to rethink it tax policy,” Ameer states.
In an agreement reached with the International Monetary Fund (IMF) last week, the Maldives has committed to:
- Raise import duties on pork, tobacco, alcohol and plastic products by August 2011 (requires Majlis approval);
- Introduce a general goods and services tax (GST) of 5 percent applicable to all sectors other than tourism, electricity, health and water (requires Majlis approval);
- Raise the Tourism Goods and Services Tax (TGST) from 3.5 percent to 6 percent from January 2012, and to 10 percent in January 2013 (requires Majlis approval);
- Pass an income tax bill in the Majlis by no later than January 2012;
- Ensure existing bed tax of US$8 dollars a night remains until end of 2013;
- Reduce import duties on certain products from January 2011;
- Freeze public sector wages and allowances until end of 2012;
- Lower capital spending by 5 percent
Comparison figures Ameer provides for corporate, income and GST/VAT tax regimes regionally and around the world, show the proposed figures for the Maldives are substantially lower.
India, for example, has a 25 percent business profit tax (BPT), individual income taxes of 0-30 percent, and a GST of up to 12.5 percent. Pakistan has a 35 percent BPT, 7.5-35 percent income tax and a GST of 17 percent. Barbados, another tropical island tourism destination, collects a BPT of 25 percent, income tax of 25-25 percent and a GST of 15 percent.
In his conclusion, Ameer argues against substantial cuts of the Rf12 billion state budget, noting the impossibility of reducing that to match the government’s present RF7 billion in revenue, and presses for the careful introduction of taxation.
“We could save some expenditure through cutting waste, prioritising projects and eliminating corruption. On the other hand, we must all agree that in certain areas wage and salaries given are very low compared to many countries,” he suggests.
As a result, “it is difficult to retain skilled and highly educated people in the country. This is why we see so many bright Maldivians leaving the country to work abroad. In the education sector, where the future of the country is molded and where the bright and the best are needed to teach future generations, the remuneration is pathetically low. The average wage for leading teacher with a Master’s degree is Rf 8354 (US$540).”
“The academic and education sector should be highly competitive and more rewarding if we are to build a better future and save ourselves from the sort of ‘brain-drain’ that we cannot afford. The situation is more or less the same with the healthcare sector of this country, with many of the brightest doctors and nurses opting for work abroad in countries as diverse as New Zealand and Canada,” Ameer observes.
He notes that the disproportionately high rents in Male’ swallowed 70-80 percent of the income of many residents in the city, “and as a result, disposable income is lower than it should be to encourage a more competitive market place and economy.”
“Because only Male’ is equipped with all the necessary facilities, like education and health care, more than one third of the population is living here. This creates irreparable social and economic damage,” Ameer claims.
Much of the visible development in Male’ he claims is the a result of a “coffee-shop bubble, a smokescreen that is bound to burst dragging the economy into depression.”
“To achieve sustainable development we need to see past supermarkets, boutiques and coffee shops in every corner,” he suggests.
“The wealthy need to realize that it is more lucrative to have businesses that decline, over our dependence on imports. The present business model increases imports and puts more pressure on the foreign exchange. It only widens the disparity between the rich and the poor when there is a negative impact on the economy.”
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"Raise the Tourism Goods and Services Tax (TGST) from 3.5 percent to 6 percent from January 2011..."
From January 2012, i believe.
Who is this guy and has the report been peer reviewed?
Raise the TGST to over 10%. Only a handful of people have stolen all our money and have made our parents slaves for their companies. They a control over 90% of the wealth. Its a shame these guys are arguing against taxes and policies such as minimum wage. Its time for economic reform and economic justice.
Ibrahim Ameer is the Asst Manager of the Economic Research Division of the MMA and a lecturer of Economics at Clique College. He is also a founding member of the Maldives Institute for Economic Research (MIER), a respectable non governmental organization for researching and advising economic policy and reform to both the private and public sector. Ibrahim Ameer graduated from MMU Malaysia with a Bachelors in International Economics, and recently won the prestigious Fulbright Scholarship to study Economics at an Ivy League university.
This one of the best articles I have seen published anywhere in the Maldives. Ameer has highlighted all the important areas that need addressing. Papers like this increase our confidence in the staff at the Central Bank.
"The wealthy need to realize that it is more lucrative to have businesses that decline, over our dependence on imports."
The importance of this cannot be stated enough. Everyone tries in the Maldives opens an import business trying to get rich quick. This doesn't help the economy at all! It does more damage than good. In fact, the elimination of most of the import based shops in the busy Male districts will infact have a positive impact on the economy.
How the hell does importing burgers, cakes and milk shakes and ice creams provide a positive impact to the economy? These are lazy and easy to target schemes to dupe consumers. There are very few businesses that actually contribute to the economy.
I have always thought that the Government will not state the actual income of this Country one reason and the first being to leave room for corruption and the second being to get the benefits of an LDC. How do you expect the tax payers not to play around and distort their figures to avoid taxes when this is what happens at the top of our country's administration.
Some good points made in this article on economic disparity, on salary scales etc. What is the point of holding a degree when all you get is a mere 7 to 8t. the rent of a single room apartment is 9t.
The month of January and December are the when the occupancies are the highest and the room rates are also the highest. Occupancies and Revpar (Revenue per available room)drastically declines from March through October and again begins to rise, January and December being the most profitable, May and June being the least. In comparison some companies make just 20% of the revenue in June that they make in January.
There are many other variables, not all resorts fare the same, not all years' are the same, tourism is a fickle industry. We also cannot discount fudging of accounting to dodge taxes.
Given all the variables, to estimate the revenue of the year just based on the revenue gained in the month of January is not what you expect from a high school students' report, much less a govt policy maker. Though the rest of the report in general seems to make valid points, I'm taking all figures and numbers quoted with a grain of salt.
While this very enlightening, I have to disagree with Ameer on one point. I don't think brain drain can be avoided even by raising wages. Even developed countries like New Zealand and Singapore are experiencing it, which is why they are formulating policies to attract the brightest and best from developing countries by offering PR and such. I think it has more to do with globalization and changing aspirations of youth.
True. why learn the engineering or refrigeration course when expats with absolutely no knowledge of these trades are employed for 70$ per month? Sure anybody can learn basic house wiring within a month of experience..
congrats ameer, for your present to the government for ur ex boss naseer and inaz. presenr u cn give for the scholarship they helped.
u missed to point out the wasteful expenditure of the state with every one deciding to choose salaries and etc pointed out the ow salary for letcturers but look at the sum of money given to politicians.
as an economist u did not point out the importance of private sector but u focused on the importance of financing the government. with all corruption and wastage taking us to hell.. thanks for the educated slaves of this gov helping to break this economy into pieces...
Our economy is just like our drugs trade. No one really knows much about either of them. All we know is there's "quite a bit" of dollars milling around in both industries.
It isn't exactly rocket science to get accurate figures on the scale of economic activity, but I suspect the reason is either incompetence or unwillingness on the part of those responsible.
Part of it could well be deliberate hiding of financial information from large businesses and they are good at this sort of thing. However, there are ways of getting around their smoke screens, if one is willing to do so.
He makes some interesting points but its all bit over simplified. Apart from the seasonal nature of the tourism revenues already mentioned above I believe the exodus of skilled young maldivians has as much to do with quality of life aspects as it does with pay levels. Even if we had salary parity with London can Maldives offer them the cultural and social benefits that they can get in places like Singapore or New Zealand? How about housing, security, entertainment, schooling for their children? These are reasons why even the best paid expats don't last more than a few years in this country.
The analysis of the taxation of imports is also rather simplistic. In this country it is uneconomical to engage in large scale manufacturing for several reasons. First is the lack of any of the basic raw materials - everything needs to be imported and is taxed at point of entry. Salary levels in this country may be low compared to western countries but they are not when compared to our neighbors. The size of the domestic market is so small that local producers can never achieve the economies of scale that outside manufactures have. It is extremely difficult for a manufacturer to be cost competitive if their basic inputs are already 30%-40% higher than those of their competitors. Using blanket import duties to try to address these structural problems ultimately only leads to higher prices for consumers.
Moving away from import duties to profit taxes will go some way towards addressing the issue. What is required is then an in-depth study of which products are feasible and desirable to be made locally and the government give very specific support to those industries in the form of tax relief, concessions on work permits etc. If we retain duties then it needs to be on mid level value added items that could be locally produced rather than basic commodities or luxuries. At the end of the day we will never produce milk or flour here but we may manufacture cheese or biscuits. I don't see toyota opening a car assembly plant here either.
@ jameel...I once hired a Maldivian guy to do electrical wiring at a house in male'...This is the truth..He would come to work about 11 or 12 noon..and then he would take a break about 2, and then start work around 4 by 6 or 7 in the evening he would be long gone..and then one day i went to see how the work was going , about 1 oclock , nobody was around i called him, he was in hulhumale' said he had to take his kid to school or PTA meeting or something and he can't come today...he never had the guts to tell me before i found out...Construction in Male' is very expensive, with bank loans and all..a lost day without tenets moving in is lost money, and we were unable to notify the tenets an exact date which they can move in because the wiring was not complete yet...Maldivians should learn work ethics before electrical wiring, i have no problem with taking tea breaks / prayer breaks but cant they start work a bit earlier maybe 7 in the morning and finish by 5-6 evening , a lunch break one hour....That i have no problem.
What you guys comment about looks very good in theory but sadly the reality aint so rosy.....
Laborers should be told and they should know that they cant work like CEO's..come when they like and leave when they like...
Surely, excess liquidity in the system is a problem. This whole problem was created by a man that Gayoom appointed as the Finance Minister in 2005. The budget was bloated three fold from Rf 4 bn to 12 bn overnight! The problem was further exacerbated due to the counterfeit Rufiyaa notes that were pumped into the system for the 2008 Presidential Elections. The phantom projects that were included in that year’s budget were never realized, hence, the entire budget deficit was monetized. We earn sufficient amount USD from the tourism industry. Our earnings from tourism industry stand between USD 2.2 bn and 2.5 bn. The problem is that these dollars never get to see the day light in the Maldives. These dollars are parked either in Chase Manhattan, NY or in Swiss banks! The government and the authorities need to bring this money into the Maldives and make them available in the banking system. Last year the foreign currency deposits of the entire banking system stood at USD 550 mn! And these deposits have been utilized in giving away loans or opening L/Cs, TTs and other remittances. Banks maintain a meager 2 % of the deposits as cash, which is translated to just USD 11 mn for all the banks. We have an import bill of USD 1 bn, and say take another USD 300 for debt payments and another USD 150 mn for expatriate labour remittances, we still should have an excess of USD 1 bn, if we had those tourist US Dollars in the Maldives. To get those funds, we should create confidence in the banking system. Now where on earth do they allow to settle your bills in another currency? If you go to India, Thailand, Indonesia or Malaysia your are required to pay in local currency to settle the bills; they don’t allow you to pay in Timbuktu Dinar!!! Come on get real man! MMA in fact should revoke the licences of all those money changers who do nothing but buy US Dollars and sell them in the parallel market. By enforcing the existing monetary regulations would certainly create a demand for Maldivian Rufiyaa and hence, would increase its value vis a vis other foreign currencies. The foreigners who patronize the services of our resorts would have to convert whatever the currency they are carrying to local currency. And the foreign tour operators would also be required to transfer the US Dollars or whatever the foreign currency to Maldives and get tehm converted to Rufiyaa to pay for the filthy rich resort operators! MMA should be stringent in enforcing the Monetary Regulations. The whole problem is caused due to a shortage of US Dollars in the formal banking system. Having the band and allowing the market forces to determine the equilibrium rate would not work, because there are only handful of guys who earn these Dollars, and they act as an oligopoly. And we need US Dollars like water for our survival, because we are a small open economy that is totally dependent on imports. With such a high inelastic marginal propensity to import and an inelastic demand for our tourist resort services (foreigners do not come to the Maldives because it is cheap, we cater to niche market), the trade balance would not improve due to the devaluation since it does not fulfill the Marshall Learner condition!! Our exports would not become relatively cheaper since they are all denominated in US Dollars and we cannot switch to inferior cheaper locally produced goods since we do not have that option! Besides, with the continued shortage in US Dollars people are going to hoard them, expecting the value to go up the next day!
Keep it up Ameer. Ur article is very good and u have mentioned v good points that some of the ppl in the higher management need to consider.
It will not be that easy to make things right, but we need to do some thing before its too late. We need to work as a team to make a better country for our future generation.
jameel on Your comment is awaiting moderation. Sun, 29th May 2011 1:40 PM
@Nars. Agree with the cowboy style work of local artisans! But i think we will see more responsible workers sooner as the talent pool grows bigger. currently we have only the ‘nan mashhoor’ electricians and ref mechanics working about in Male’ in the best wild-west style. I myself do all these maintenance types of work and am considering starting a maintenance service on pay-by-the-hour basis.
@Moosa
"First is the lack of any of the basic raw materials – everything needs to be imported and is taxed at point of entry."
You made some good general comments. However, you have to note that countries like Singapore don't have any raw materials either. They have a bit more land than us and that's it!
Large scale manufacturing will never happen in the Maldives. We don't even need to think about that. We should concern ourselves about small, light industries as well as the service sector. With creativity and access to right financial support, such industries can grow here, but needs a fundamental shift in focus, and the government has to lay the groundwork for that.
I also don't believe that pay disparity is what drives local talent away from the country. Just look at the quality of life in Male. Whether you earned millions or not, you're stuck in a hell hole. Who in their right mind would want that?
Unfortunately, the government plans on exacerbating the Male crowding. There are more mega projects in the pipeline for the Male region and nothing at all anywhere else. Don't tell me about the little harbour projects and fantasy airport projects on outer islands. They are figments of President Nasheed's imagination!
It is not prudent to say that approximately US$2.5
billion for the whole year can be generated because US$210.0 million was generated as TGST for the month of January (January to March is the peak of the high season). However, many businesses may have got TGST exemption and so it could be closer to USD 1.5 billion (but not 2.5 billion).
This is because the occupancy levels and average bed night rates teand to fall from April to May and starts to build up only from August onwards.
Therefore it maybe conservative / prudent to say that the total market value of all goods and services
produced in the country (GDP) can be US$1.5 billion as published by government agencies.
There is no other industry in Maldives other than fishing. If Maldives is able to generate and cultivate other industries such as shipping, fishing, aquaculture, agriculture or marinas, yachting, cruise liner facilities and other industries ... then total market value of all goods and services
produced in the country (GDP) at US$1.5 billion seems to be a good figure.
dear ameer. u r articles very good. i hope and pray u write very ood artcles always. u r very good economics. u write veryt well. iwants read manyt vgreat artcles like this. but i thinks u r also supprt anni. but its ok coz u write ur idea very well. i hope i can also writes like you very good artcles. thanks u
Everyone in the Maldives is an Economist now a days...that is including our Presidnet ...@ ameer...MMA has grossly underestimated tourism inflows, so much that , our BoP as worse , if not much worse than GDP , yah I get it who would see their own behind ei ? Minivan news is also losing credibility by publishing such voodoo economics. Such a big economist, and he's not even aware that GDP has been rebased since April of this year.
I concede,I might have been a bit rash in passing judgment, I wrote my comment above , based on the excerpts from the article.Reading the whole thing, I see that you have raised good points and overall good arguments. I disagree with you that the statistics have been underestimated deliberately to maintain LDC status , rather it might be more due to incompetence,cos ,of the weaknesses in our statistical system. Our GDP has been compiled at 1995 base year prices for a all these time . Though GDP has been now rebased to 2003 base year, for me even that is too far.This is one reason for the under estimation . And I reiterate, I see that BoP is as bad, if not worse that GDP . There are fundamental weaknesses in our statistical system, that effects the quality of all statistics.
PS; Again good article overall, but I'm sure ur Ivy League University Lectuer would tell you , to never quote wikipedia as a source 🙂 . And good luck and wish you all the best.
Plus I though there were inconsistencies in referencing, you either give referencing for all, or give no reference at all