IMF predicts dire consequences if deficit reduction fails

The IMF yesterday warned the People’s Majlis that if the country does not reduce its expenditure, it risks running out of reserves and miring the country in poverty.

“The expenditure has not been under control since 2009. It has been rising, and we have been [issuing] warnings since then,” Haveeru reported the Chief of the IMF mission in the Maldives, Jonathan Dunn, as telling parliament.

Previously highlighting “significant policy slippages”, in particular the government’s failure to curtail spending, the IMF felt it necessary to delay the third tranche of funding in 2010. Nasheed’s government contended that it had tried to impose austerity measures, in particular pay cuts for civil servants, but had been blocked by the Civil Service Commission (CSC) and then-opposition majority parliament for political reasons.

Dunn recommended against printing money or obtaining loans from other countries, given the current economic frailty of the Maldives.

His suggestions for expenditure reduction included revising civil servants’ salaries and allowances, increasing the Goods and Services Tax (GST) from 6 percent to 15 percent, re-introducing import duties, and increasing bed tax by 50 percent, from US$8 to $12.

According to the World Bank, a 66 percent increase in 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.”

Originally, it was foreseen that the shortfall from import duties was to be covered by Rf2 billion in tourism goods and services tax (T-GST) and Rf 1 billion as general goods and services tax (GST) revenue.

The IMF representative also noted that budget figures they studied did not represent the change in the way lease extensions for resorts were now being received.

The new government recently revised the policy on lease extension payments for resort islands, making the sums payable in instalments rather than lump sums. Former Tourism Minister Mariyam Zulfa has argued that this policy is largely responsible for the current budget deficit, instantly creating a US$135 million hole in the budget for the short-term financial benefit of several influential Maldivian resort owners.

Detailed national income statistics are now published monthly by the Maldives Inland Revenue Authority (MIRA). Total revenue collected in March was Rf 648.7 million (US$42.1 million), more than triple the amount received in March 2010.

Total revenue collected during the first quarter of 2012 represents a 113.9 percent increase on the same period last year. Half of the revenue collected during this period was attributable to the Business Profit Tax (BPT) and GST, introduced during Nasheed’s government.

Head of the Majlis’s Financial Committee, Deputy Speaker and People’s Alliance (PA) MP Ahmed Nazim, met with the IMF last week and said their main concern was that the 2012 budget “may not be realised.”

“The IMF feels there is a big hole in the forecast revenue,” said Nazim.

He also felt the investigation of the expenditure on the Aasandha health insurance scheme to be relevant, as it represents more than 10 percent of the budget.

Although he described the scheme’s future as assured, he expressed grave concerns over the sustainability of the scheme as currently practiced.

“It is a hole in the pocket of the government. It seems odd that half of the population has used it, there is no epidemic, and yet it has used Rf 3 million (US$195,000) a day on medicine,” said Nazim.

Nazim also mentioned the shortfall of over Rf 500 million from the failure to privatise  Maldives Post Ltd, Island Aviation and Maldives In-flight catering.

Tourism Revenues

Due to the country’s reliance on imports, the waning of reserves was described as very dangerous, with the IMF comparing the situation with that of the Seychelles in 2008.

The Seychelles secured a US$26 million Stand-By Arrangement from the IMF after a balance of payments crisis saw the country default on international loans. In exchange, the Seychelles, whose economy also relies heavily on tourism, undertook stringent cuts, including shedding 12.5% of the government workforce.

The Seychelles crisis was partly attributed to a fall in the tourism trade damaging the country’s finances. Concerns have been raised regarding the effect of the current political crisis on the current Maldives’ government, with some figures suggesting numbers were down as a result.

Dunn anticipated that the tourism figures were likely to affect the amount of the GST that would be received, which he argued could not replace the income forfeited by suspending many import duties. Both measures were introduced with cross party support at the start of the year under the previous government.

The Maldives Association of Tourism Industry (MATI) had previously warned that the industry stands to lose as much as US$100 million in the next six months due to widespread media coverage of the country’s political unrest.

More recently, however, the Tourism Ministry declared its confidence that this year’s arrivals will break all previous records. Maldives Association of Travel and Tour Operators (MATATO) yesterday revealed plans to specifically target certain markets with specially assigned staff members to help achieve those aims.

Deputy Minister of Tourism Mohamed Maleeh Jamaal said that the Tourism Ministry did not forecast that the decline would continue.

“The Chinese market is improving. Our [predictions] do not show that the Chinese market will decline to the extent the IMF has said, and we had a positive growth in the last three months,” he said.

Concluding his presentation, Dunn pressed home the harsh reality of the economic climate.

“These are tough steps to take. It requires your [MPs’] cooperation. It is your responsibility as well. This is necessary for the nation. Immediate steps have to be taken. This is the reality, we have to face it.”

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