A fiscal responsibility bill to impose limits on government spending and ensure public debt sustainability was proposed to parliament yesterday.
Presenting the draft legislation on behalf of the government, MP Ahmed Easa of the ruling Maldivian Democratic Party (MDP) said that a lot of effort was needed to “change the inherited, outdated and indebted economic system.”
“Since 2005, [expenditure] in the annual state budget was out of proportion to income and the budgets had a very high level of debt,” he explained.
As a consequence of issuing treasury bills (T-bills) to finance the budget deficit, Easa continued, banks reduced lending to local businesses in favour of buying government securities, which exacerbated unemployment and slowed growth.
Easa noted that 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.”
“We are seeing the bitter consequences today of spending out of the budget without any control or limit,” he said.
As measures to mandate fiscal responsibility, said Easa, the legislation would set limits on government spending and public debt based on proportion of GDP (Gross Domestic Product).
Borrowing from the central bank or Maldives Monetary Authority (MMA) should not exceed seven percent of the projected revenue for the year, Easa said, while the loan would have to be paid back in a six-month period.
Moreover, a statement outlining the government’s mid-term fiscal policy must be submitted annually to parliament at the end of the financial year in July.
Opposition
Opposition Dhivehi Rayyithunge Party (DRP) MP Dr Abdulla Mausoom however argued that the purpose of the legislation was to negate controversial amendments brought to the Public Finance Act last year.
Mausoom explained that the passage of the fiscal responsibility bill would abolish article five of the Finance Act amendments bill, which stipulated that the government must seek parliamentary approval before obtaining loans.
According to the amendments voted through by the opposition majority, “any relief, benefit or subsidy provided by the state” would also be subject to parliamentary approval.
The amendments were cited as the main reason for the cabinet resignation on June 29 last year – President Mohamed Nasheed announced at the time that he would veto the bill as the new laws would make it “impossible for the government to function.”
While President Nasheed has since ratified the bill after parliament overrode the veto, the government filed a case at the Supreme Court in December 2010 contesting the constitutionality of some provisions.
The DRP MP for Kelaa meanwhile argued that the fiscal responsibility bill was drafted to “take away all the powers given to local councils [under the Decentralisation Act] and give it back to the Finance Minister and President.”
Mausoom also criticised a provision that would empower the Finance Minister to change cash flow plans proposed to the state budget by independent commissions.
Debt sustainability
Finance Minister Ahmed Inaz informed parliament yesterday that the public debt of the Maldives – excluding government securities – stands at US$637.6 million – including US$446 million outstanding debt inherited from the previous administration.
A UNDP paper on achieving debt sustainability in the Maldives published in December 2010 observed that “as a percentage of GDP, public debt levels have almost doubled from 55 percent in 2004 to an estimated 97 percent in 2010.”
“Public debt service as a percent of government revenues will more than double between 2006 and 2010 from under 15 percent to over 30 percent,” it continued. “The IMF recently classified the country as ‘at high risk’ of debt distress.”
As short-term contributing factors for the country’s “rapid accumulation of public and private debt,” the paper identified the devastating tsunami of December 2004; the cost of the democratisation process that began in the same year; the concurrent global food-fuel-financial crises between 2007 and 2010; and the Maldives’ graduation from a Least Developed Country (LDC) in January 2011.
The UNDP paper noted that the reconstruction effort was largely financed by international donors: “Following the tsunami, ODA [Official Development Assistance] increased sharply from US$72 million in 2004 to US$824 million in 2005. ODA levels remained above US$500 million annually for the next four years,” the paper explains.
However as a consequence of high demand for local expertise by multilateral agencies, “increases in public sector salaries were implemented in order to retain qualified personnel with the government.
“Between 2004 and 2009, the average monthly salary of a government sector worker increased from MRF 3,223 (US$250) to MRF 11, 136 (US$866),” the paper notes.
It adds that the government of former President Maumoon Abdul Gayoom responded to growing calls for democratisation with “a substantial fiscal stimulus programme” of increased government spending, “much of which was not related to post-tsunami reconstruction efforts.”
“This strategy led to a large increase in the number of civil servants from around 26,000 in 2004 to around 34,000 by 2008 or 11 percent of the total population. Thus the government simultaneously increased the number of public sector workers as well as their salaries,” the paper notes.
Consequently, by 2010 recurrent expenditure – wage bill and administrative costs – was projected to exceed 82 percent of total expenditures “while capital expenditures will amount to just 18 percent in the same year.”
Moreover when the impact of the worst global recession in decades struck the Maldives in September 2008, “the Maldivian economy was already in the middle of a severe economic crisis with substantial fiscal and current account deficits, high liquidity growth, double digit inflation, pressure on the fixed exchange rate, increases in public and private sector debt, rising inequalities between the capital and the atolls, and a costly civil service.”
Meanwhile as the ballooning fiscal deficit reached 26 percent of GDP in 2009, tourist arrivals declined ten percent in the first year of the new administration.
However the new government’s efforts to reduce government spending with pay cuts of up to 20 percent and plans to downsize the civil service – which employs a third of the country’s workforce – was met with “a severe political backlash from parliament.”
“In March 2010, the parliament passed a 2010 budget with amendments which increased the government’s proposed budget by 7 percent (or 4.5 percent of GDP),” the paper observed.
“Three quarters of this increase funded a reversal in civil service wage cuts implemented the previous year. Progress on redundancies has also been slower than expected and reforms in this area are unlikely to be completed until the end of 2011 at the earliest. This will have important fiscal consequences.”
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