The Maldives has “substantially understated” its budget deficit, the International Monetary Fund (IMF) has warned, by underestimating its spending and “probably” overestimating tax revenues.
“Moreover, not all of the financing for even the approved budget has been identified, and additional risks exist as well – including the need to clear reported unpaid bills carried over from 2011 and the possible loss of lease extension payments (Rf 700 million, or US$42.4 million) assumed in the budget,” the IMF’s mission chief for Maldives, Jonathan Dunn, told Minivan News.
While the 2012 budget put the deficit at less than 10 percent of GDP, “the IMF team sees the figure as more likely to be 17.5 percent of GDP, and perhaps larger than this,” Dunn said.
“The financing gap for 2012 is thus at least 7.5 percent of GDP, or about US$160 million, and possibly substantially larger than this,” he added.
As a result, economic growth and stability in the Maldives were unlikely to be maintained “in the medium term” unless the government substantially cuts spending.
Meanwhile, government revenue for the first quarter of 2012 has fallen 15.5 percent below projections, the Maldives Inland Revenue Authority (MIRA) has reported.
Revenue from tourism land rents fell 18.6 percent on the previous quarter, however the largest contributor to the drop were the new government’s changes to resort lease extension payments, which saw a 76.1 percent drop in revenue below projected figures.
Inflation meanwhile spiked 13.4 percent in February, with the price of food increasing 28 percent.
Government revenues for the quarter has nevertheless increased 76.2 percent compared to the same period in 2011, “mainly because of the significant increase in Business Profit Tax (BPT) and Goods and Services Tax (GST) collections”, MIRA noted: Rf 361.7 million (US$23.4 million) and Rf 721.9 million (US$46.8 million) respectively.
However, Dunn warned that revenue collection by MIRA “does not provide a full picture of total revenue performance in the country.”
“Revenue from import duties – previously the single largest revenue – collected by Customs and is not reported by MIRA. Due to implementation of the 9th Amendment to the Maldives Export Import Act, revenue collection from import duties is expected to decline substantially in 2012, fully offsetting the increase in tax revenues from GST and BPT.”
Dunn observed that printing money would only facilitate the much-larger-than-expected 2012 fiscal deficit.
“This, in turn, would imply that national imports would be substantially larger than expected, because in the Maldives, where most goods are imported, almost any spending by either the government or the private sector turns, directly or indirectly, into import demand,” he noted.
As a result, the imbalance between the demand for dollars and the supply would become even larger, “and the MMA would likely have to supply dollars from its own reserves to meet the shortfall.”
“Usable reserves at the MMA are low, so if the fiscal gap this year is financed via money creation, it is likely that the MMA’s usable reserves would soon dry up,” he said.
Another option, Dunn suggested, was for the Maldives to borrow more money. However borrowing from domestic sources “will be difficult to achieve, as it is unclear whether the banks have much more appetite for buying treasury bills.”
Obtaining foreign grants “would be helpful but is probably not realistic.” Foreign loans, meanwhile, “would have to be considered carefully, given that Maldives already has a very high debt-GDP ratio, but they may be needed in the short run to avoid the consequences of printing money.”
Dunn emphasised that the only sustainable solution was for relevant parties to rationalise the budget by boosting revenues and cutting expenditure, despite the political difficulties.
“These may be politically difficult measures, but the consequences of not reducing the budget deficit are likely to be even more difficult,” he warned.
Furthermore, ongoing dollar shortage would not be resolved while the Maldives continued to substantially increase spending, Dunn added.
The foreign currency crisis – the bane of many of the country’s importers, who are forced to use unofficial channels outside the banking system to obtain currency necessary to purchase overseas – was exacerbated by the number of unrestricted foreign exchange licenses issued to resorts and other private businesses, “without the requirement that they hold substantial capital to back up that business.”
This practice allowed such nonfinancial businesses to conduct large-value foreign exchange operations outside the banking system, “an unusual arrangement and sustains the parallel foreign exchange market,” Dunn noted.
“In a more typical situation, nonfinancial businesses [such as resorts] would have licenses only for the exchange of small-value cash transactions and would be required to channel large-value foreign exchange transactions through the banking system. In the case of Maldives, this would substantially increase liquidity in the official foreign exchange market,” he suggested.
However, “as long as the government continues to inject substantial amounts of new spending into the economy, the foreign exchange situation in the country will not be resolved.”
Dunn emphasised that “fiscal imbalances in the Maldives have been present for many years and that fiscal adjustment remains necessary”.
Faced with increasing pressure from the IMF to lower expenditure after failed attempts in 2010 to cut the salaries of civil servants – a maneuver blocked by the Civil Services Commission (CSC) and backed the then opposition – former President Mohamed Nasheed’s administration insisted that increased revenue from the new taxes would match expenditure, and boasted that the 2012 budget was the first in many years to balance income and expenditure.
Following the police mutiny and controversial change of government in what the MDP contends was a coup d’état, spending by President Dr Mohamed Waheed’s administration has escalated as it seeks to shore up support in a fractious political environment.
Newly-announced expenditure in the last few months includes:
- The promotion of 1000 police officers – approximately a third of the force – and plans to both recruit 200 new officers in 2012 and appoint four new Assistant Commissioners;
- Lump sum payment of two years of allowances to military personnel;
- An unspecified amount for an international public relations firm, to combat negative publicity and “rally an alliance of support” in the international media following the controversial change of power and coverage of police crackdowns;
- Rf 100 million (US$6.5 million) in fishing subsidies;
- A proposal to create two new ministries, including the Ministry of Gender, Family and Human Rights, and the Ministry of Environment and Energy;
- The reimbursement of Rf 443.7 million (US$28.8 million) in civil servant salaries from July 1, following cuts by Nasheed’s administration in 2010. In addition, civil servant working hours have been reduced to 8am-3pm;
- The doubling of the budget for the Maldives Marketing and Public Relations Corporation (MMPRC) to US$S4.5 million.
Lost income has also increased, with MIRA warning in March of unrealised revenue from the new government’s recent decision to accept resort island’s lease extension payments in installments, an amendment that former Tourism Minister Dr Mariyam Zulfa contends was pushed through by several local resort owners with vested interests, that immediately cost the treasury US$135 million.
In March, MIRA anticipated receiving a total of Rf375 million (US$ 24 million) for lease extensions, however the income received dropped to Rf23 million (US$1.5 million) as a result of the decision.
Meanwhile today the publicly-owned State Trading Organisation (STO) dropped legal attempts to reclaim a US$1.2 million debt owed by the Meridian Services owned by MP Abdulla Riyaz of the new ruling coalition. The STO justified the decision in a letter to the court, by stating that it did not have enough board members to meet quorum and make decisions.
In a bid to address spiralling costs, the government is reviewing the Aasandha universal health scheme introduced by Nasheed’s administration on January 1 this year, which “is and will always be completely financially unsustainable in a country such as the Maldives”, according to President Waheed’s Special Advisor, Dr Hassan Saeed, in an article for newspaper Haveeru.
“The introduction of unrestricted, universal free healthcare with no agreed regulation or management was an act of folly, recklessness and irresponsible political immaturity that rivals any of the actions of Mr Nasheed’s administration,” Dr Saeed contended.
“And what’s more he knew this but still went ahead with it. And the consequence is that we now have the IMF breathing down our necks and a budget deficit that threatens to derail all government social programmes,” Dr Saeed wrote.