Month: September 2011

Government expenditure outstripped revenue by 20 percent between January 1 and September 8, 2011, according to the first of weekly expenditure statements made public by the Ministry of Finance and Treasury yesterday.

While government income reached Rf6.3 billion (US$408.6 million) at the end of last week, government spending however stood at Rf7.5 billion (US$486.4 million), resulting in a fiscal deficit of Rf1.3 billion (US$84 million) financed by loans and sale of Treasury bills.

In addition to Rf3.2 billion (US$207.5 million) spent on salaries and allowances for state employees – the single largest source of expenditure – Rf2.4 billion (US$155.6 million) was needed to cover recurrent expenditure or administrative costs.

Capital expenditure was meanwhile Rf1.2 billion (US$77.8 million) while spending on debt service or debt repayment reached Rf563 million (US$36.5 million).

President Nasheed announced at a ceremony held in August to unveil the government’s ‘Fiscal and Economic Reform Programme’ that the government would publicise details of expenditure on a weekly basis.

In December 2010, parliament approved a Rf12.37 billion (US$802 million) annual state budget with a projected revenue of Rf8.8 billion (US$570.7 million) and recurrent expenditure of Rf9.8 billion (US$635.6 million) – 49 percent of which was to be spent on salaries and allowances.

Recurrent expenditure was expected to be 79 percent of government spending.

An additional Rf200 million (US$12.9 million) was injected to the budget in anticipation of the local councils that came into being in February this year.

Plugging the deficit

In March this year, the International Monetary Fund (IMF) warned that “significant policy slippages” have undermined the country’s ability to address the ballooning budget deficit.

“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 noted in a statement. “Also, the Business Profit Tax will come on stream eighteen months later than planned [the tax came into force on July 18, 2011].”

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 fiscal 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 (US$195) to Rf11,000 (US$713) 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.

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.”

An internal World Bank report produced for the donor conference in May 2010 meanwhile noted that increases to the salaries and allowances of government employees between 2006 and 2008 reached 66 percent, which was “by far the highest increase in compensation over a three year period to government employees of any country in the world.”

President Nasheed told delegates at the conference that the government was “committed to financial prudence and long-term stability.”

“We have scrapped the reckless policies of the past, which saw money printed to finance a growing budget deficit,” he said, adding that the government was working with “international multilateral organisations, to ensure we do not spend more than we can afford.”

On the size of the bloated civil service, Nasheed said, “In the past, the government offered people jobs not because there was work that needed doing. The government offered people jobs as bribes; to get their allegiance to a repressive regime. Almost 10 per cent of the population works for the government – a staggering amount.

“And there are more civil servants than there is work to be done. Many government employees are under worked; chained to demoralising jobs. Our administration will therefore dramatically reduce the number of civil servants. But we must provide loans for outgoing civil servants, to help them set up businesses or acquire new skills.”

In April, the government announced a programme to incentivise voluntary redundancy in the civil service.

“Political backlash”

A UNDP paper on achieving debt sustainability in the Maldives published in December 2010 meanwhile observed that former President Maumoon Abdul Gayoom responded to growing calls for democratisation in 2004 with “a substantial fiscal stimulus programme” of increased government spending, “much of which was not related to post-tsunami reconstruction efforts.”

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.”

However the new government’s efforts to reduce government spending with pay cuts of up to 20 percent along with 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 noted, referring to parliament’s addition of Rf800 million (US$51 million) to the 2010 budget.

“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.”

In July, the Finance Ministry publicised details of expenditure on state employees, showing that Rf1.6 billion (US$103 million) had to be spent on salaries and allowances for 20,476 civil servants.

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