“Maldives is spending beyond its means”: World Bank

The Maldives’ economy is at risk due to excessive state expenditure, the World Bank has warned in a new report.

The report titled “Maldives Development Update October 2013” (English) paints a dire financial picture, brought on by the Maldives pursuing untenable measures to finance the state budget.

Noted areas of excess include a high civil service wage bill, healthcare and electricity subsidies, and transfers to State Owned Enterprises (SOEs).

“Maldives is spending beyond its means and financing the budget risks affecting the real economy,” the report said.

Short-term budget financing measures such as selling T-bills and printing money poses risks such as the devaluation of the rufiyaa, while unpaid bills could disrupt basic services such as electricity, the report warned.

Foreign reserves are critically low – despite the Maldives Inland Revenue Authority (MIRA) reporting increased income from taxation – and remain under pressure from high public spending and high demand for imports.

President Abdulla Yameen’s administration has submitted a record MVR 17.5 billion (US$ 1.1 billion) budget for 2014 with a projected deficit of 2.2 percent of GDP. Recurrent expenditure continues to account for over 70 percent of the budget.

Excessive expenditure

According to the report, an already excessive wage bill ballooned by 55 percent in 2013 due to the Supreme Court ordered back payment of salary cuts, and salary increases for the police and military.

The government had budgeted MVR720 million (US$ 46,451,613) for the universal healthcare scheme Aasandha, but spent over MVR 900 million (US$ 58,064,516) the report stated, adding that electricity subsidies had also proved costlier than forecast due to an increase in international oil prices.

Transfers to SOE’s “increased significantly to cover operational losses and salary increases to SOE staff,” the report said.

In February this year, the CEO and Managing Director of Maldives Ports Limited Mahdi Imad was dismissed by the government shortly after the company’s board of directors approved remuneration of MVR120,000 (US$7800) for the post of MD, and MVR130,000 (US$8400) for the post of CEO. The board in November decided to reduce the CEO’s salary to MVR 62,000 (US$4000).

Public debt at 81 percent of GDP

In order to finance the deficit, the Ministry of Finance and Treasury is accused of undertaking measures that “pose macro risks” that have led to “significant accumulation of debt in a short period of time.”

At present, public debt stands at an “unsustainable” 81 percent of GDP, the report stated. The World Bank projects the debt will rise further to about 96 percent by 2015.

“This debt path is unsustainable and suggests there is little room for additional borrowing,” the report warns.

T-bills and monetisation

The government is increasingly relying on short-term commercial borrowing in the form of selling treasury bills (T-bills) to the banking, private sector, and high net worth individuals at steep interest rates. The report also notes the growing monetisation of the deficit and the increasing build-up of arrears.

According to the MMA’s figures, outstanding T-bills stood at MVR8.5 billion at the end of November.

With the private sector’s appetite declining for T- bills, the government has been forced to pay high interest rates. The short-term rates for 28-day and 91-day T-bills rose by 98 and 105 basis points respectively, the World Bank said, reiterating that such unsustainable debt limits room for further borrowing.

In August this year, MMA Governor Dr Fazeel Najeeb said banks were investing in T-bills instead of in the private sector, leading to a slowdown in the private sector.

He also said excessive government expenditure had forced the MMA to print “large quantities of money”. MMA figures show the government has printed over MVR1.7 billion (US$ 109,677,419) this year alone to plug the deficit.

Monetization is causing the value of the rufiyaa to drop, Najeeb warned.

“I believe that the private sector has slowed down, and investments by the banks are heading towards government treasury bills. The value of rufiyaa is dropping because government accounts do not have the money, because it is a necessity to print large quantities of money,” Najeeb said.

The Maldives is currently facing a dollar shortage, with clogged bank counters and the police warning the public to stay vigilant citing increased number of dollar exchange scams.

“The risk of money printing, due to the cash constraints, could threaten external stability, inflation, and risk sharp adjustment in the exchange rate. The biggest risk posed by a sharp exchange rate adjustment is its possible impact on poverty, since the most basic food items in Maldives are imported,” the report warned.

“Unpaid invoices disrupt fuel invoices”

The third measure the government has been taking to finance the budget is the accumulation of arrears. Although the Ministry of Finance and Treasury estimated arrears totalled 3 percent of GDP, the World Bank gave a figure closer to 6 percent.

Most of these payments are owed to the State Owned Enterprises providing utilities and services. About half of the arrears are owed the State Trading Organization (STO) which is responsible for all the trading activity on behalf of the Maldivian government.

“The bulk of the liabilities come from the import of fuel for supplying electricity. Since the company has been relying on credit from suppliers to continue operations, in the event that unpaid invoices disrupt fuel imports, the electricity supply in certain islands could be affected,” the report warns.

In November, newly elected President Abdulla Yameen Abdul Gayoom announced that the STO was bankrupt.

Fears of an impending oil shortage crisis had a risen earlier in the month after then-Managing Director Shahid Ali warned that the company would run out of oil as early as November 10 if it did not pay some of its US$20 million debt to suppliers.

Shahid told an emergency meeting of parliament that government-owned companies had failed to pay the STO the almost US$40 million it was owed, and appealed to the central bank to use the foreign currency reserves to bail it out of its debt. According to local media, MMA printed the money.

“External reserves critically low”

Although reserves have held up “better than expected,” they will continue to be under pressure from high public spending, high demand for imports and pressure on the currency.

The World Bank report notes that foreign reserves dwindled at the beginning of 2013, with the Maldives having to to repay US$100 million in treasury bonds to the Indian government by February 2013. Gross reserves improved, however, due to increased income from MIRA, which had offset the decrease.

At present, reserves stand at US$341.8 million, worth approximately 2.5 months of imports.

With regard to balance of payments, the government estimates the current account deficit will reach US$690 million or 28 percent of GDP by the end of 2013.

“This means reserves will continue to face serious pressures in the future, which could be exacerbated if the government is forced to pay compensation for the reversal of the GMR airport concession,” the report said.

Reserves are also at risk from the potential US$1.4billion compensation settlement resulting from the terminated GMR airport concession deal – an amount that eclipses the annual state budget.


22 thoughts on ““Maldives is spending beyond its means”: World Bank”

  1. All the more reason to increase the exchange rate from 15 to 20rf per USD. Solutions.

    - The hunger for imports fueld by cheap doller needs to be stopped.
    - Exports to be boosted by increasing catch capacity by easing credit for investment and fishermans training.

  2. Actually enforcing monetary laws (even now on paper), ie allowing only Maldivian Ruffia as legal tender within the local economy (resorts includes here) it would go a long way to improving the situation.

    Ofcourse licensed forex's should also be established.

  3. The fishy heads are so ignorant even their economists don’t really know what an economy is. Morons think if you have a printing machine that is enough. During last ten years there has never been any increase in foreign currency income but keep making budget with figures even these so called economist don’t know the true amount of such figures. And keep distributing this unworthy paper and draining the foreign currency reserve. The real value of coconut money is now 40.00 to US$. Now trying to squeeze Tourism to bleed to death and seems the end of banana republic is near. If the Rufiya is not devalued in the next one year, there will be no dollars to import, where you can’t even fart without importing. When that happens will see where Allah jumps in to rescue the faithful.

  4. Solutions - just a thought;

    Wouldn't increasing the ceiling for the managed float make things worse with speculators getting more opportunity to artificially inflate the price on the parallel market. I'm you'll agree that the change in the upper limit will not affect the supply of dollars by itself. The fear is that demand will also not drop because of the dependency on imports and foreign services.

    Investment on fisheries is all well and good but for the short-term, how much of a benefit would that hold - given that fisheries figures as around only 1% of GDP.

  5. The country is almost bankrupt. Maybe they could have a fire sale and sell off stuff like the MNDF and Police to return to fiscal sobriety. Oh yes, and maybe they could get a better income from the tourism assets they have already given to friends. Anyway, it's not sea level rise and global warming the people should guard against, but mounting debt incurred by the fishy heads. And, no, halal fish labelling will not cut it.

  6. @ tsk tsk

    fisheries figures may be 1% of GDP according to 'figures'

    Also according 'figures' Maldives would be under water in 2050.

    Fact of the matter is fisheries contributes MORE to local economy than tourism. This inludes
    - 50% employment
    - investment in fishing boats
    - government spending on fisheries.

    Brush up your economics and so some figures. The last thing to trust in Maldives would be those gov statistics figures. example, You don't even know how many foreigners work in Maldives illegally. And no one know how many tourists arrive because even transit passengers are counted as tourists.

    Fisheries in Maldives would be at least 25% or more of the GDP if calculations are done right..

  7. The World Bank is a Jewish organization and we Muslims should not listen to what they say. They have been saying the same thing for many years and Allah has always given us Rizq and will continue so. Did we go bankrupt in last thousand years? No. Keep praying and everything will be fine. If we stop all alcohol and pork import Allah will increase our Rizq and not decrease it. It is the Haram things we are doing that is making us poor.

  8. Banks do not have dollars but every beggar in Maldives has a USD cheque book from each bank and they issue cheques even if they do not earn a single dollar!
    It is time MMA requests all banks to stop opening USD accounts and force all local payments to be done in MVR.

  9. Solutions..

    The solution you give: devaluation of the rufiyaa is EXACTLY what should NOT happen. This is typical irresponsible development country behavior and increases poverty among common people greatly.

    The government printing rufiyaa and then changes the exchange rate artificially = The government steals money from everyone who has got rufiyaa at that time.

    What should happen is a law which forbids to print rufiyaa if there is no counterbalance in stable foreign currencies (dollar, euro, yen, ...).

  10. That's what you get when you vote for a thug who thinks he's an economist, Maldivians.

    Suck it up and starve for a few years. Maybe that'll stop you from being such obscene political prostitutes who sell your votes for 100Rf in the future.

  11. Just my observation re dollar exchange rate.

    The government could set the exchange rate at 20 or 40, will not make a difference. Because the "unregulated" private dollar market has more dollars than the banking sector.

    Try as the government may, when the demand for the dollar is so high the final benchmarks will be set by those with the deeper pockets.

  12. @ Riyaz

    as you mention, the issue is an unregulated cowboy market with the regular looking the other way. What would you do when you become MMA governor?

  13. If you have balls you can get this over within six months. Destroy all coconut printed toilet paper currency of so called Rufiya and make official currency of Maalu Dhivehin to be Green bucks. If you give these bonobos license to print money as being an independent country, these morons will keep printing them like some currency maniacs they get highly exited when they see currency . These are brainless people who lived in isolation for centuries without having seen the money power. They even don’t have enough neurons to compute simple arithmetic. It seems the only person who really was sympathetic to this poor people was Anni who had bit of some sense in his head. A sensible person cannot survive within fools and that’s what happened to

  14. Money is a legal tender for goods and services. You earn money from useful work which produces or adds value to a product. Money represents work.

    Government services exist to facilitate a functioning society and provide opportunity for employers in the economic sector, which is Tourism and fishing in our case.

    It has come to a point that govt employees are not only more numerous than Maldivians' employed in Tourism and Fishing industries, they are paid much more.

    The govt had long taken the decision to employ people to for the sake of employing them. Time to swallow the bitter pill and reverse this policy. Or else the Rufiya paid to the thousands of govt employees will be worth just the work they do, which is almost nothing.

  15. @Solutions

    Some solutions that I would not prefer but take;

    1) Tourism pays their taxes in dollars, they can pay salaries (other payments) in dollars as well.

    2) Force them to always maintain a percentage of their dollar exchange earnings in the Maldives banking sector.

    For starters 🙂

  16. @peasant

    IMO, it's less to do with the number employed by the government and more to do with the salaries paid by the government compared to the private sector.

    that has multiple consequences. eg: industry has difficulty keeping general staff because they can always move to the civil service for a higher pay.

  17. For that matter STO is not bankrupt. It's the government that is bankrupt, owing STO 1.5b Rf.

    I hope the new management will not come out with fairy tales but I suspect they will.

  18. @Riyaz:

    I don't think it's a solution to FORCE an industry (especially one that controls the entire economy) to do anything.

    Rather it would be wonderful if we could provide the proper incentives along with tighter regulation for the tourism industry to bank in the Maldives. Currently the banks here are not that attractive and offers little in the form of an re-investment because of the infant securities market.

    @Indian Railways;

    You're right. I wholeheartedly agree. The focus on the fisheries sector is only because of the fact that employment is disproportionately high because of the traditional nature of the activity. I was merely pointing out that investment in the fisheries sector has long term benefits but would not really do much for the forex shortage in the short-term.

  19. @tsk

    Hence, I have qualified my statement with "not prefer".

    Also, its nice on paper to about "incentives" - but what the heck is that? Give something concrete.

  20. Any government that cuts imports must be thrown out.

    Trade is the saviour of a tourist paradise.


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