Tag: deficit

Proposed budget faces cross-party criticism

The state budget for 2013 submitted to parliament by Finance Minister Abdulla Jihad has come under heavy criticism from both opposition and government-aligned parties during last week’s 16-hour budget debate.

Speaking during Thursday’s sitting, Majority Leader MP Ibrahim Mohamed Solih ‘Ibu’, parliamentary group leader of the formerly ruling Maldivian Democratic Party (MDP), contended that the proposed budget could not be salvaged or improved through amendments.

Ibu suggested that parliament should “set this aside” and approve enough funds for the state to function in the first three months of 2013.

“After that, appeal [to the government] to propose a budget that is beneficial to the whole nation and represents all constituencies. I don’t believe we can implement this budget any other way,” the majority leader said.

Ibu argued that the estimated revenue of MVR 12.9 billion (US$836 million) was unlikely to materialise.

“This [projected income] includes MVR 1.8 billion (US$116 million) in new revenue. [But] this will not be received,” Ibu asserted.

The MDP MP for Lhaviyani Hinnavaru explained that parliamentary approval would be required for the new revenue raising measures, such as reversing reduced or eliminated import duties, hiking T-GST to 15 percent, raising the airport service charge from US$18 to US$30 and introducing GST for telecom services.

Ibu claimed that the import duty revision to raise tariffs on oil “will not be passed in this Majlis,” calling on the budget review committee to scrap the estimated revenue forecast from import duties.

The MDP would not support increasing T-GST without consultation with the tourism industry, he added.

Predicting that the revenue in 2013 would reach “only MVR 11 billion at most,” Ibu warned that income would not be enough to meet recurrent expenditures on salaries and administrative costs.

Moreover, the fiscal deficit would be considerably higher than the forecast of six percent of GDP, he contended.

“The Finance Minister said the budget deficit in 2013 would be MVR 2.3 billion, that is MVR 2 billion less than the current year. This, too, is a serious deception,” he said, adding that the figure would be closer to MVR 5.9 billion (US$382.6 million) or higher than 10 percent of GDP.

Ibu also noted that while US$50 million was to be taken as foreign loans at an interest rate of 10 percent for budget support, the Finance Ministry did not include any information of the supposed lender.

“The [budget] document says we don’t yet know where the money is going to come from,” he said.

With a public debt-to-GDP ratio of 85 percent at the end of 2013, Ibu said international financial institutions would declare the Maldives “bankrupt.”

The majority leader also criticised Finance Minister Jihad for failing to mention budgeted salary increases for military and police officers as well as plans to hire 800 new officers for the security services.

Combined with the transfer of about 5,400 employees in the health sector to the civil service, Ibu explained that the wage bill would shoot up by 37 percent.

Ibu further questioned whether funds would be available to implement the proposed public sector investment programme (PSIP) of MVR 3.1 billion (US$201 million).

“I am saying that not even 25 percent of this MVR 3 billion PSIP can be implemented next year,” he said, adding that details of lenders for the proposed loans were not provided.

Ibu also protested that the only project for Hinnavaru in 2013, the sixth largest population in the country, was a youth centre worth MVR750,000 (US$48,638).

Echoing the concerns of the parliamentary group leader, MDP MP Eva Abdulla revealed that MVR 6 million (US$ 389105) was added to the budget of the Maldives National Defence Force (MNDF) following the controversial transfer of presidential power on February 7.

Since the MDP government was ousted in the wake of a police mutiny on February 7, Eva said that the police and army have hired 250 and 350 new staff respectively.

Consequently, the institutions spent more than MVR 75 million (US$4.8 million) in addition to the approved budgets for 2012, she claimed.

The proposed budget of MVR 930.9 million (US$60.3 million) for defence expenditure in 2013 was meanwhile 14 percent higher than 2012.

Eva observed that the increase in the government’s wage bill of 37 percent was approximately MVR1.7 billion (US$110 million), which was also the amount allocated for harbour construction in the 2013 budget.

These funds should instead be spent for “harbours, education, sewerage and housing,” she argued.

“I know that the coming year is an election year. But what we know from the experience of [the presidential election in] 2008 is that the election cannot be won by adding employees to the government,” she said.

Coalition partners

Meanwhile, minority leader MP Abdulla Yameen, parliamentary group leader of the Progressive Party of Maldives (PPM), said that the government’s objectives or policies could not be discerned from the proposed budget.

“These projects are very random or ad hoc. The government’s planning should be better than this,” he said.

While continuing deficit spending and accumulating high levels of public debt was a serious concern, “a good thing about this budget is that it hasn’t considered taking funds from the MMA’s [Maldives Monetary Authority’s] ways and means account, or in common language printing money, to finance this MVR 4 billion (US$259 million) [deficit].”

Financing the deficit with loans from the central bank leads to depreciation of the rufiyaa and rising inflation, Yameen said.

Securing commercial or concessional loans to plug the deficit was however “fine in itself if it can be repaid,” he added.

While President Dr Mohamed Waheed Hassan Manik has noted the high salaries paid by institutions such as the People’s Majlis as “a serious problem,” Yameen said he could not see “any kind of sign” of reducing recurrent expenditure or salaries and allowances for government employees.

In his budget speech last month, Finance Minister Jihad noted that almost half of recurrent expenditure was paying salaries and allowances.

On the proposed revenue raising measures, Yameen said PPM could not support introducing GST for telecom services.

“I believe there should be ways to raise income for the government without taking this tax. Therefore, we, our party, cannot support trying to get MVR 200 million (US$12 million) in additional income through imposing GST on telecommunications,” he said.

Concurring with the MDP parliamentary group leader, Yameen called on the government to consult the Maldives Association of Tourism Industry (MATI) to determine whether the sector would be adversely affected by the proposed T-GST hike from 8 to 15 percent.

Government-aligned Jumhooree Party (JP) Leader MP Gasim Ibrahim, business magnate and chair of the budget review committee, said that parliament should consider the economic and social impact “at the micro-level” of the proposed revenue raising measures.

Gasim urged MPs on the budget committee to assess the costs and benefits of the proposed measures, noting that increasing import duties would lead to higher prices.

The MP for Alif Dhaal Maamigili appealed against proposing “unrealistic and empty documents” with the budget and pledging infrastructure projects that could not be delivered.

“The budget we passed for this year was in reality higher than MVR 16 billion (US$1 billion). But coming to year’s end we know from the revised budget that we achieved about MVR 12 billion or MVR 13 billion. So we are actually showing a dream to the public. We are intoxicating them with hopeful fantasies,” he said.

MP Visam Ali of the government-aligned Dhivehi Rayyithunge Party (DRP) meanwhile said it was regrettable that a sizeable portion of the population did not have access to “basic services” such as sewerage, water and electricity while the GDP per capita was forecast to exceed US$5,500 in 2013.

With public debt projected to reach 82 percent of GDP next year, Visam said immediate steps were needed to avoid “bankruptcy”.

She added that it was questionable whether the proposed revenue raising measures could be approved next year as the government had yet to submit any of the amendments or bills required for its implementation.

Visam also expressed concern with administrative costs for government offices increasing by more than MVR 500 million (US$32.4 million) in 2013 compared to this year, noting that it diverts funds away from the public sector investment programme.

In a recurrent complaint of most MPs who spoke during the budget debate, Visam said the two islands in her constituency were neglected in terms of development projects in 2013.

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State expenditure rises 13.5 percent for first eight months of 2012

State expenditure for January to August this year increased 13.5 percent on the same period last year, according to figures from the Department of Planning.

According to statistics from the Finance Ministry, the Maldives is facing a budget deficit of MVR 2.1 billion (US$136 million) on the back of revenue of MVR 7.7 billion (US$499 million), and expenditure of MVR 9.8 billion (US$635 million).

Meanwhile, revenue figures published by the Maldives Inland Revenue Authority (MIRA) for September showed an increase in revenue of 16 percent compared to the same month in 2011, however this was 2 percent less that expected.

More than a third of total revenue (36.4 percent) came from tourism land rent, an increase of US$1.8 million on the previous year to 14.6 million, followed by the Goods and Services Tax (GST) which increased US$2.6 million to US$7.2 million – representing 28.6 percent of total revenue for the month.

Source: MIRA

The MIRA figures do not include import duties which are received by customs.

The Maldives Monetary Authority (MMA)’s September review observed that while an increase in tourism arrivals had registered improvements in both monthly and annual terms, real GDP growth was expected to fall to 5.5 percent in 2012, a fall of two percent on 2011.

“As per the latest government cashflow statement, the overall fiscal deficit of the government
worsened during Jan-Aug 2012 compared to the same period of 2011,” the MMA observed, predicting a higher than expected budget deficit for the year.

Fishing – the Maldives’ second largest industry after tourism and responsible for almost 40 percent of the country’s employment, has steadily declined in terms of both catch and export earnings. MIRA’s figures for US dollar earnings highlight the country’s near total-dependency on tourism as a means of earning foreign exchange.

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Finance Ministry orders government institutions to reduce budgets by 15 percent

The Finance Ministry has ordered all government institutions to immediately reduce their budgets by 15 percent, in a circular sent out by Minister Abdulla Jihad.

Independent and government institutions were in early June  instructed to reduce their budgets by June 20 and June 15 respectively.

According to Haveeru, only 14 of the 35 government offices met the deadline.

“Even though we have not received any complaints so far, they did express concern over reducing the budgets. Some offices will face difficulties. But we don’t have a choice,” Jihad told the paper.

In a statement, the Minister said that the state budget had to be decreased by 15 percent as income estimated for 2012 had fallen short of expectations.

Despite the order to cut budgets, a circular issued by the Finance Ministry on July 19 ordered all government offices to repay the amount cut from civil servant salaries from January 2010 to December 2012 by the former government, starting from July onwards.

The circular said the money should be paid monthly and not in a lump sum, and advised all institutions to pay the amount from the annual budget for wages. If the money in budget was not enough, the finance ministry advised the institution to cut the money from the budget allocated for other expenses.

The wage repayments, amounting to Rf443.7 million (US$28.8 million), has not been accounted for in this year’s state budget, contributing to a 27 percent budget deficit that has already drawn concern from the International Monetary Fund.

Besides a crippling deficit, the Maldives is also facing a foreign currency shortage, plummeting investor confidence, spiraling expenditure, and a drop off in foreign aid.

MIRA revenue

The Maldives Inland Revenue Authority (MIRA) has meanwhile published its second quarter report for 2012, detailing the majority of government revenue (with the exception of import duties).

The MIRA report highlights a 16.8 percent increase in revenue collected compared to the same period for 2011, attributable to the increase in tourism GST from 3.5 percent in 2011 to 6 percent in 2012.

Tourism land rent collected for the period was MVR 465.4 million (US$30.2 million)  – a drop of 24.9 percent that was 12.3 percent lower than expected.

Airport Service Charge revenue meanwhile fell 18.6 percent, to MVR 172 million (US$11.2 million).

Total revenue collection for the first half of the year was MVR 3.5 billion, an increase of 59.2 percent compared to the corresponding period of 2011 but 8.4 percent lower than projected.

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“Democratisation has its costs”: Maldives comes to terms with tax reform

The Maldives is coming to terms with a reformed tax system, following the introduction of a General Goods and Services tax this week.

Finance Minister Ahmed Inaz said the new system, which has raised the eyebrows of businesses, consumers and politicians alike, is a natural consequence of recent political changes and requires everyone’s support to function sufficiently.

“I think anybody could see that after the 2005 democratic reform, costs increased. These costs had to be met by additional revenue, but they weren’t,” he said.

Currently, the Maldives’ has a state deficit of Rf1.3 billion (US$85 million). Since democratisation, the Maldivian government has surpassed other national governments’ employment rates by employing 10 percent of the national work force. One third of government spending goes to state employees, and nearly half of the 2011 budget was spent on salaries and allowances.

The Goods and Services Tax (GST), which became operative on October 2, has raised a 3.5 percent tax on certain items. Contrary to an earlier tax which was paid for at the point of import and effectively invisible to the customer, the GST requires most businesses to charge an additional 3.5 percent directly to the customer at point of sale.

Certain items are tax exempt, a detail which has allegedly made it difficult to implement at stores selling a variety of products.

Inaz is optimistic that new tax reform system will cut costs and improve business operations. He said many businesses are compliant with the new measures, and are trying “their level best to be sure that this happens.”

“Business owners will have to crunch the numbers, and that will show them more about what is happening in their businesses. They will be able to better see how things operate.”

The GST is part of a larger tax reform system described in “a package of policy reforms that will help stabilise and strengthen the Maldives’ economy” agreed to by the Maldives and the International Monetary Fund (IMF) in May.

The policy reforms include raising the Tourism Goods and Services Tax (TGST) from 3.5 percent to 6 percent from January 2012, and to 10 percent in January 2013. Tourism is one of the Maldives’ leading economic contributors.

Inaz stressed that the tax was a step towards self-sufficiency for the Maldives.

“The international community will not give us the money required to balance our deficit, it is us who have to raise that money and that’s everyone’s responsibility. We have to make sure we can stand on our own feet.”

Meanwhile, opposition party Dhivehi Rayyithunge (DRP) has expressed concern over the tax. After supporting its initial pass through Parliament, DRP released a booklet titled “DRP’s response to the government’s economic nuisance package.” The booklet said businesses were not sufficiently prepared for the transition, and requested a six month delay.

Noting “administrative confusion” and the country’s heavy reliance on imports, the DRP also suggested levying a customs duty at the entry point to the country as a more effective means of raising revenue.

“We believe the GST is a regressive expense. The government doesn’t have the infrastructure to support it, implementation of GST means it will have hire a lot of people.”

DRP Spokesperson Ibrahim ‘Mavota’ Shareef said today that the tax system had not been implemented prematurely, but that it would only benefit large businesses while harming smaller ones.

“The government is doing the opposite of what it preaches,” he said. “Our main problem with the bill is that the government has decreased the tax burden on the very rich, especially in the tourism sector. We want to see the current tax system overhauled and replaced with a modern one.”

Shareef said DRP supports other progressive taxes, and was in favor of the recently announced plan to decrease import duties starting in January 2012.

President Mohamed Nasheed yesterday said a policy to reduce import duties would bring prices down starting early next year.

The President’s Office Press Secretary Mohamed Zuhair told Minivan News that the waiving of certain import duties would be significant.

“Once the new tax system is fully operating, all will fall into place. Prices will drop to even lower than originally,” Zuhair said.

A bill to finalise the tax system is currently before the Majlis, and is expected to take another two or three months to be properly processed.

During the President’s tour of retail, grocery, and supermarket stores on October 3, Zuhair said that operations were “running smoothly”.

“The only issue was that many businesses had a shortage of coins. Maldivians have a habit of rounding up to avoid coin transfers, but in a successful economy coins are important. Maldives Inland Revenue Authority (MIRA) has been doing a commendatory job in distributing coins, and the Maldives Monetary Authority (MMA) foresaw the issue and has a distribution system in place,” he said.

When asked about the DRP’s opposition to the GST, Zuhair alleged that the party’s motives were political.

“They made their case to the President, but the President was advised by his advisors and economic experts that a taxation system needed to be implemented,” said Zuhair.

“It is true that the very rich have not been taxed appropriately as per their earnings,” he acknowledged. “Once the tax system is fully in place, things should stabilise.”

Shareef did not accept that there were political motivations behind the DRP’s objections. “It’s an economic and social issue, concerning the distribution of wealth,” he said.

Inaz did not wish to comment on the matter. “This is an economic issue,” he said.

State Minister for Finance Ahmed Assad previously observed that even with the new taxes proposed by the government, the Maldives still had the most generous tax system in the region – even compared with other island nations, and neighbouring countries such as India and Sri Lanka.

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Economic stability threatened by “significant policy slippages”, warns IMF

The Maldives has suffered “significant policy slippages” that have undermined the country’s capacity to address its crippling budget deficit in 2011 and beyond, the International Monetary Fund (IMF) has warned, in a statement concluding its Article IV consultation with the Maldives.

“On the expenditure side, there have been no net fiscal savings from public employment restructuring, public sector wages will be restored to their September 2009 levels earlier than expected, and the new Decentralisation and Disability Bills will lead to considerable spending increases,” the IMF stated. “Also, the Business Profit Tax will come on stream eighteen months later than planned.”

The IMF warned that the Maldives economy was presently unsustainable, on the back of “expansionary fiscal policies” from 2004 which left the country especially vulnerable to the decline in tourism during the 2008-2009 recession.

The country’s financial deficit exploded on the back of a 400 percent increase in the government’s wage bill between 2004 and 2009, with tremendous growth between 2007 and 2009. On paper, the government increased average salaries from Rf3000 to Rf11,000 and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country – doubling government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

While preliminary figures had pegged the 2010 fiscal deficit at 17.75 percent, “financing information points to a deficit of around 20-21 percent of GDP”, down from 29 percent in 2009, the IMF reported.

The IMF said that while it recognised “the difficult political situation facing the authorities”, “decisive and comprehensive adjustment measures” were required to stabilise the economy, allow sustainable growth and reduce poverty. In particular, it raised concern about the “lack of significant progress in public employment restructuring.”

“Efforts to strengthen the financial sector and improve the business climate will also be critical,” the IMF said, noting that private sector credit had all but stalled. However it generously conceded that the pace of adjustment “should take into account political constraints.”

The IMF’s Mission Chief to the Maldives, Rodrigo Cubero, told Minivan News that while the government had introduced the core components of a modern tax regime that would begin generating revenue from this year, these achievements were offset by new spending on legislative reforms such as the decentralisation act.

“We see bringing the fiscal deficit down as the key macroeconomic priority for the Maldives,” Cubero said. “A large fiscal deficit pushes up interest rates, thereby undermining private investment and growth, and also drives up imports, putting pressure on the exchange rate and inflation, all of which hurts the Maldivian people, particularly the poor.”

“Further efforts are still needed to reduce the fiscal deficit. Those efforts should comprise further tax reforms as well as measures to reduce expenditure and to improve the channelling of social expenditures to the needy.”

He would not be drawn into the politics of the Maldives’ economic situation, “but what we can say with confidence is that broad political support will clearly be needed both to design an economic programme and to carry it out as planned. That is why we also support as broad a spectrum of consultations with different stakeholders as possible.”

Graduation impact

The Maldives graduated in January 2011 from the UN’s ‘Less Developed Country’ designation to ‘Middle Income’, a move which reduces its access to certain concessional credit and donor aid.

Cubero said that as far as the IMF was concerned, “the Maldives remains eligible to the IMF’s concessional financing under the Poverty Reduction and Growth Trust (PRGT). The IMF follows its own rules and procedures to determine PRGT eligibility; the criteria include income per capita, market access, and short-term vulnerabilities.”

The Maldives had, he said, “made significant economic progress in recent decades, allowing it to reach middle-income status. However, given the large public debt and still very large fiscal deficit, it is very important that the financing terms for the Maldives’ public borrowing remain as favourable as possible. While reducing the fiscal deficit is imperative to maintain debt sustainability, favourable financing conditions would also help keep debt manageable.”

Confidence

In its report, the IMF was broadly confident that the Maldives could stabilise its economy in the medium term, due to the tight monetary policy of the Maldives Monetary Authority (MMA) in mopping up excess liquidity, as well as the passing of the Business Profit Tax and a Tourism Goods and Service Tax.

The economy had rebounded strongly after shrinking 2.25 percent in 2009, and GDP growth for 2010 was an estimated 4.75 percent, the IMF said, with an expected inflation rate of five percent in 2010.

As for the ongoing dollar shortage, while the IMF did not actively advocate a revision of the pegged exchange rate, it did call for “continued discussions between the authorities and the staff on this issue while being mindful of the risks involved and the impact on the poor.”

“The MMA continues to ration the supply of foreign exchange to banks, while fully meeting the demand from the central government and some state-owned enterprises,” the IMF stated. “Dollar shortages persist, and the parallel market premium has increased somewhat.”

In November 2010 the IMF delayed a disbursement under the second review of its program with the Maldives, ahead of the 2011 budget.

The delay, Cubero explained at the time, was due to the “fiscal slippages” caused by insufficient progress towards reducing the wage bill and passing tax legislation – most significantly, the Business Profit Tax.

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Razee confident budget aims can be met as voting day looms

With voting to finalise the 2011 state budget expected to take place later today, acting Finance Minister Mahmood Razee said he remains confident that the government remains on target to meet its financial objectives, though stressed it was too early to say without “seeing amendments” suggested by parliament.

Despite criticisms by some opposition MPs regarding what they see as a lack of detail in the budget over the exact nature of government spending – particularly in areas of decentralisation and broadcaster funding – Razee said this morning that he believed any potential member-submitted amendments would not set back proposed aims of trying to reduce spending.

“We would only be concerned [by the amendments] if the total budget goes over the 12.37bn (US$962.6 million) originally set,” he said.

Razee added that it would also be vital to try and ensure the predicted 2011 budget deficit remained at about 16 per cent, after coming under pressure from financial institutions like the International Monetary Fund (IMF) to cut the current figure of around 26.5 per cent.

“We would need to maintain the deficit at that level [16 per cent].  Most of the discussions we have had about the deficit have been in line with this,” he said. “However, I don’t know what will happen until voting.”

The passing of the annual budget is constitutionally required to be completed before the end of the previous calendar year, with the government having claimed to be focused on spending cuts as part of plans to try and reduce the country’s budget deficit.

There has been concern over whether the budget will be passed on time, with debate taking place within parliament over the last few days as members have attempted to add amendments to the annual expenditure before passing it through the Majlis.

Budget criticism has come from both opposition MPs like Ahmed Nazim and independent members like Mohamed ‘Kutti’ Nasheed over claims that there is insufficient detail about the exact nature of certain government spending projects.

Nazim has claimed that although opposition members were just as committed to ensuring the country’s budget was completed within the deadline, there remained concerns over issues such as the government supplying about Rf54 million to the Maldives National Broadcasting Corperation (MNBC) without seemingly including it in the budget.

“There are so many problems with the budget, which is lacking details regarding a number of projects and figures,” he said.

Nasheed, an independent MP, also said last week that he had identified some preliminary concerns over spending allocation in the budget, particularly in areas such as decentralisation, despite claiming he was optimistic that the finance document would be passed before the New Year deadline.

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Opinion divided over budget evaluation deadline

Acting Finance Minister Mahmood Razee has said progress is being made within an ongoing multi-party evaluation of the 2011 State Budget, despite claims by Ahmed Nazim, the Deputy Speaker of Parliament, that talks “have not gone well” due to a lack of details on planned state spending.

Opinion appears divided within the ongoing parliamentary joint committee evaluation, which is being overseen by members from both the country’s finance and economic committees, upon how near the budget is to being agreed upon by parliament before the deadline of the New Year.

Razee, who was allowed to present the budget this month despite ongoing battles in the Majlis over cabinet appointments, said he was confident the government could still meet its aims to cut the country’s budget deficit to about 16 per cent, despite allowing for concessions requested by opposition MPs.

The government is under considerable pressure from the International Monetary Fund (IMF) to reduce the deficit, which President Mohamed Nasheed last month said was around 26.5 per cent.

Speaking to Minivan News today, Razee claimed that the parliamentary joint committee was generally “committed” to trying to find an agreement that would allow for reductions of the budget deficit. He therefore hoped to have the evaluation completed by Sunday, December 27.

“The basic principles [of the budget] remain the same, the budget deficit needs to be reduced and this is accepted by most parties,” said Razee. “We maybe will need to make some adjustments during the evaluation. A budget deficit of 16 per cent is what we are targeting given the current circumstances.”

Ahmed Nazim conceded that a need to meet a looming New Year deadline to approve the 2011 budget would require members within the parliamentary committee to put aside their political differences and “let bygones be bygones”.

However, the parliament Deputy Speaker claimed that the finance Ministry has “not been communicating” with the Majlis on the budget, a situation he said that was reflected within the evaluation process.

Nazim cadded that anticipated delays in providing information on the budget could make the discussions “go right to the wire” in terms of meeting an evaluation deadline of December 30.

“We are not looking for concessions, the government has a mandate to pursue its own economic policies,” he said. “But there are so many problems with the budget, which is lacking details regarding a number of projects and figures.”

As the evaluation process has continued, Nazim claimed that Information had been arriving “in bits and pieces” to help provide greater detail on budgetary spending, however he said expected that the evaluation process will ultimately take a “long time” to complete.

“We are looking for a reasonable budget,” said Nazim. “Reasonable, like for example, with housing funds, where the government is looking to sell land in Male’, but where is the land that can be sold? They have gone on to say it will actually be land in Huhlumale’ and other islands.”

Due to the levels of cost involved, the Deputy Speaker added that the evaluation committee has “asked for breakdowns” regarding individual expenditure – pointing to an apparent lack of funding in the budget for the Maldives National Broadcasting Corperation (MNBC), despite the government admitting it will be providing money.

“There is no budget [for MNBC], yet they have given Rf54 million [to the broadcaster],” claimed Nazim.

Mohamed ‘Kutti’ Nasheed, an independent MP who is not involved with the evaluation committee, said that despite holding some preliminary concerns over spending allocation, particularly in areas such as decentralisation, he believes the budget will be completed within its New Year deadline.

“I think it will be done, there is willingness,” he said.

However, Nasheed claimed that he had been concerned that the initial budget had failed to outline any finance plans for local councils once they are expected to be formed following February’s elections.

IMF concerns

Beyond trying to outline funding of the state for the year of the ahead, the passing of the annual budget within a constitutionally mandated deadline of the end of the calendar year is also being seen as vital to groups such as the IMF.

Back in November the IMF delayed its third disbursement to the country because of the government’s inaction on the matter of the budget deficit during 2010, pending the release of the 2011 budget.

While the IMF program itself is worth US$92.5 million, other foreign donors and investors consider the IMF’s opinion of a country’s fiscal policies when making decisions.

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Half of Rf12.37 billion state budget to be spent on employees

The Finance Ministry has unveiled a state budget of Rf12.37 billion (US$962.6 million) for 2011 with a target of reducing the deficit to 15.3 percent of GDP in the coming year, down from 26.25 percent in 2009.

The Fiscal and Economic Outlook 2009 to 2013 published alongside the budget on the Ministry’s website this week states that the main objective of the government’s fiscal policy is to bring expenditure in line with revenue and maintain the deficit within a sustainable range.

The Finance Ministry reveals that while capital investment amounts to 21 percent of the budget, 49 percent of expenditure in 2011 will be on salaries and allowances for government employees.

“If the cost of health insurance to employees is included, half of the state budget is spent on employees,” reads the budget summary.

Foreign loan assistance along with Rf1.4 million (US$108,949) in income from privatisation and Rf1.3 million (US$101,167) expected from the sale of treasury bills was proposed to plug the budget deficit.

In November, the International Monetary Fund (IMF) delayed its third disbursement under a US$92.5 million program pending the approval by parliament of significant austerity measures in the budget.

In its Country Report for the Maldives published in June, the IMF warned that as a result of the failure to enforce pay cuts and the injection of an additional US$62.2 million in spending by parliament, “the annual deficit targets for 2010 and 2011 will be missed on current policies.”

An internal World Bank report produced for the donor conference in May identified dramatic growth in the public sector wage bill as the source of the ballooning budget deficit.

A 66 percent increase to salaries and allowances for government employees between 2006 and 2008 was “by far the highest increase in compensation over a three year period to government employees of any country in the world,” the report noted.

The deficit in 2010 is now expected to be at 16.4 percent of GDP, above forecasts of 14.8 percent in the 2010 budget.

While the economy grew by 4.8 percent in 2010 after a 2.3 percent contraction in 2009, nominal GDP, which accounts for a 5.5 percent inflation rate, grew by 12.2 percent this year.

Revenue and expenditure

Government income fell by 23 percent in 2009 in the wake of the global financial crisis, which saw tourist arrivals decline by 4 percent and revenue from import duties down by 25 percent over the previous year.

Offering resorts under development that were facing difficulties with financing an additional year to pay rent contributed to the decline in government income, resulting in a 36 percent decrease in revenue from resort rent in 2009.

While Rf6.8 billion (US$529 million) in revenue in 2010 was forecast at the end of last year, current estimates place the figure at Rf6 billion (US$467 million)  – an 11 percent  shortfall the Finance Ministry attributes to parliament’s failure to pass legislation on corporate profit taxation as well as delays in implementing a goods and services tax (GST).

Moreover, as only three out of 13 resorts expected to open in 2010 began operations this year, estimates of Rf1.7 billion (US$132 million) in revenue have been lowered to Rf1.1 billion (US$85 million).

However, income from state-owned enterprises is now expected to be higher than originally forecast at over Rf1 billion (US$77.8 million) by the end of the year.

Revenue in 2011 is projected to be Rf8.7 billion (US$677 million), a 44 percent increase from 2010 expected to be driven by the introduction on business profit taxes, GST and extension of resort leases.

Income from taxation is projected to account for 59 percent of government income in 2011, with Rf612.5 million expected from business profit taxes.

The Finance Ministry notes that delays in passing taxation legislation is “the biggest obstacle” to continued assistance from international agencies.

Main industries

The seven-year trend of decline in fisheries is expected to continue in 2011, with the industry expected to have contracted by 5.8 percent by the end of 2010.

After a 29 percent decrease in the construction industry in 2009, the industry is expected to have registered growth of 2.6 percent in 2010.

With nine new resorts under development next year, the industry is projected to grow by 9.7 percent in 2011.

A strong rebound by the tourism industry – which accounts for 27 percent of GDP – saw revenue in 2010 14 percent higher than projected in 2009.

While tourist arrivals increased by 13 percent in the first nine months of 2010 compared to the same period last year, arrivals are expected to have increased 20 percent by the end of the year.

Moreover, a 70 percent decline in occupancy in 2009 was followed by a 74 percent increase in 2010 – with 131,107 more visitors than 2009 recorded in 2010.

Nominal GDP per capita in 2010 is calculated to be at US$4,628 and is projected to climb to US$5,114 in 2011.

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Government debt reaches $553 million, a third of GDP

President Mohamed Nasheed has highlighted the financial problems the government is facing, mainly foreign debt and a gaping budget deficit.

In his speech President Nasheed reminded the Majlis of his address last year, when he said his “administration was prepared to provide equitable services to all citizens and to be accountable for the people.”

The president noted his administration had made “satisfactory progress in these endeavours,” but also mentioned some startling figures regarding budget deficit and debt.

In 2009 the government’s debt to foreign financial agencies and banks stood at US$553.8 million (Rf7 billion), which amounted to 37.6% of the country’s GDP. The government’s total expenditure for the same year was US$617.2 million (Rf7.9 billion).

The estimated government expenditure for 2010 is of US$648.4 million (Rf8.3 billion). The People’s Majlis approved a total of US$710.9 million (Rf9.1 billion) to be allocated for government spending.

The estimated revenue for 2010 is of US$781.2 million (Rf10 billion) and the estimated deficit for this year is of US$429.7 million (Rf5.5 billion).

Mr Rodrigo Cubero, IMF mission chief for Maldives, said in a press release issued in January 2010: “The Maldivian economy continues to face serious challenges. In particular, addressing the very large fiscal deficit is of paramount importance to secure a stable economy, equitable growth, and lasting poverty reduction.”

The government has said it plans to minimise the deficit by reducing government expenditure, including by cutting down the number of public servants and decentralising several government agencies. Both measures have encountered heavy opposition.

On this subject, President Nasheed said “the government will continue to make every possible effort to bring about a positive change to the salaries of civil servants and government employees.”

The government will also “include processes to increase revenues of the state.” This includes the proposed taxation bills—the bill on administration of taxation, the bill on business profit tax, and a newly submitted bill on taxing from sales of tourism service providers.

The president said he was “confident that this Majlis will work to ensure that these…bills are passed as soon as possible.”

Permanent Secretary for the Finance Ministry Ismail Shafeeq explained that most of the debt was owed to “loans from foreign institutions, banks and other agencies” as well as foreign and domestic borrowings, most of which are being used in the economic development of the Maldives.

“The loans will take a long time to pay back, some of them are for 40 years,” said Shafeeq, but added that the government is making the payments on time.

“The deficit is a problem. It means a shortage – the government has spent so much.”

The Ministry of Foreign Affairs, in partnership with the UNDP, will be hosting the IV Maldives Partnership Forum, also known as the Donor’s Conference, later this month. The forum seeks to find foreign investment for their development plans, which would help significantly in lowering government expenditure.

“Reducing expenditure and restricting unnecessary spending” are key to solving the country’s financial debt, according to Shafeeq.

The government is also following recommendations from the IMF and ADB, both of whom have given out significant loans to the government for the economic development program.

In a press release produced by the IMF in December 2009 Deputy Managing Director and Acting Chair of the IMF, Mr Takakoshi Kato, said:

“The authorities’ program, while subject to considerable risks, is strong, comprehensive, and well-focused, and deserves strong support of the international community. If fully implemented, it will put the Maldivian economy back on a path of macroeconomic stability and set the conditions for sustained economic growth and poverty reduction.”

President Nasheed said in his speech that “the government has embraced the advice of international financial agencies and begun the implementation of some of the measures suggested by these agencies. We have started enjoying the benefits of these measures.”

The IMF allocated a loan of US$92.5 million last December to go towards the economic recovery program.

The ADB has assisted with two loans, one of US$\1.5 million and one of US$3 million. Both are to go towards the economic recovery programme.

The Ministry of Finance could not provide Minivan News with the estimated debt for 2010 at time of publication.

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