IMF ‘delays’ third payment as Maldives makes “little progress” addressing deficit

The International Monetary Fund (IMF) has described as “absolutely false” claims made this week by opposition-aligned People’s Alliance (PA) MP Ahmed Nazim, that the institution had suspended its support of the Maldives because its program was not being followed.

MP Nazim, who is Deputy Speaker and also Chair of Parliament’s Finance Committee, told Minivan News yesterday that the leader of the Maldives IMF delegation, Rodrigo Cubero, “said so in a meeting on November 4.”

“I think [the suspension] will make it difficult for other international financial institutions and donors to entertain the requests of the Maldivian government in the future,” Nazim said.

“Even though the amount of the IMF program is only US$92.5 million, adherence to the IMF program would have led to comfort letters from the IMF to other donors assuring them of the sound fiscal policies of the government.”

“Absolutely false”

At a press conference held in the Maldives Monetary Authority (MMA) on Monday, Cubero stated that media reports based on the claims were “absolutely false. That is not the position of the IMF. What we have said is that the disbursement under the second review of the program has been delayed. We have not suspended our program or our relations with the country, and we continue strongly engage with the authorities to complete the second review, and put policies in place to restore fiscal sustainability and economic prosperity in the Maldives.”

The ‘delay’, Cubero explained, was due to the “fiscal slippages” caused by insufficient progress  towards reducing the wage bill and passing tax legislation – most significantly, the Business Profit Tax.

Civil Service without a smile

The country’s financial deficit has 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 Rf 3000 to Rf 11,000 and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country, almost triple that of a comparative island nation such as the Caribbean.

Both these measures – salary increases and civil service hires – doubled government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

Nonetheless, despite the fourfold increase in salaries, a legal scrap this year between the Civil Service Commission (CSC) and the Finance Ministry following a 15 percent cut to civil servant salaries has effectively immobilised the government’s ability to reduce the wage bill.

For its part, the CSC does not contest the crippling state of the economy, but argues that cuts must be distributed fairly. The Ministry of Finance meanwhile accused the CSC of hiding “a political agenda”, and in February filed a case with the police asking them to investigate it on suspicion of trying to topple the government “and plunge the Maldives into chaos.”

State Finance Minister Ahmed Assad explained that the President last year issued an executive order to bring the salaries down, but had been blocked by the opposition-majority parliament.

“The Majlis stood against it,” he said. The government had initiated discussion with the Civil Service Commission, “but it has taken us nowhere and there’s been little progress this last year.”

The disagreement over salary restoration culminated in the Permanent Secretaries of Ministries being ordered to submit differing wage sheets by both the Finance Ministry and the CSC.

Meanwhile, the country’s financial deficit has grown to 26.5 percent of GDP, among the highest of any country in the world, placing the Maldives at risk of economic catastrophe. The IMF refused financing to Sri Lanka because the country’s fiscal deficit reached 10.5 percent.

Budget for austerity in 2011, or else: IMF

The forthcoming 2011 budget, explained Cubero, was “a crucial opportunity for the government to implement the austerity measures much needed. We will return to Washington and wait for the the numbers to be finalised. At the moment, the current policy stance is not sustainable.”

He acknowledged that the government faced “enormous difficulties, political and legal, in implementing its policy decisions”, but reiterated that the entire country was “living beyond its means.”

“With the government borrowing at the rate it has, it reduces the amount of credit available to the private sector, and that constrains the ability of the private sector to provide jobs and employment,” Cubero explained. “That then constrains economic growth. Furthermore, by spending more than it earns, the government is putting pressure on imports and the exchange rate.”

“This is in reality a simple thing. Think of an individual – if a family is consuming more than it earns, the only way to finance that is by accumulating debt. At some point the banks or creditors may not be willing to finance your debt. “

Continued growth of the deficit would impact the population as a whole, Cubero predicted. “We do hope the gravity of situation prevails and a reasonably constrained 2011 budget is passed.”

Last year parliament’s finance committee, headed by Nazim, amended the budget to include an additional Rf 800 million (US$62 million), including the restoration of civil servant salaries following the 15 percent pay cut, and subsidies for sectors ranging from fishing and agriculture to private media.

Media subsidies, when they arrived, were also allocated by the Finance Committee with 50 percent of the Rf 4 million total going to the two wealthiest private TV stations.

The government took a dim view of the ‘extras’:  “It has to be kept in mind that the budget is made up of numbers; it is a mathematical transaction. If things are done for political reasons, the numbers won’t add up,” said President Nasheed in December 2009.

His remarks were met with outrage from members of the Majlis, who interpreted his comments as an attempt to undermine parliament’s role in the governance of the country.

Cubero said the IMF had presented its views of the economic situation to parliament and the opposition, and had held “a frank discussion”.

“We explained that there had a been delay with the third tranche pending completion of the second review. It was a very good and positive discussion, and I sense they have the commitment to do what is needed. They have very good opportunity to contribute to passing a tight 2011 budget, and needed tax reforms such as the business profit tax. Their support and the  support of all stakeholders will be crucial.

“Otherwise,” Cubero stated, “the implications will be negative for everyone. We hope austerity prevails.”

Playing politics with the economy

The IMF’s announcement came not without ample warning. In January 2010 it warned that: “Measures that substantially raise the budget deficit, such as a reversal of previously announced wage adjustments, [will put] put the program off track, jeopardising prospects for multilateral and bilateral international financing.”

Asked to comment on that warning at the time, Spokesperson of the CSC Mohamed Fahmy Hassan insisted that according to Maldivian law, the finance ministry had to pay the increased salary that month. In response, Assad pointed out that the IMF only gave economic advice, and was indifferent to a country’s law.

In June 2010, the IMF published its Country Report for the Maldives, which calculated that if the government continued to pursue economic reform at current pace and policy, the country’s fiscal deficit would increase by one percent of GDP in 2010 and 4.5 percent of GDP in 2011.

Meanwhile, the IMF observed in June, parliament passed the 2010 budget “with amendments totaling a seven percent (4.25 percent of GDP) increase over the government’s proposed budget.”

As a consequence, the report stated, “the annual deficit targets for 2010 and 2011 will be missed on current policies.”

Almost a year after the first warning, the generosity of the donor community and an uncharacteristically patient IMF – it has a reputation for being ruthlessly pragmatic with regard to local politics – have so far insulated the average Maldivian from the impact of the horrendous deficit. Consumer spending is booming and mobiles and mopeds abound, although indirect effects such as rising electricity costs and the resurgent dollar shortage have bitten the public.

But the IMF’s announcement today is a ‘shot across the bow’ that leaves the government in a decidedly unpleasant position, trapped between the source of its income – other donors do rely on the IMF’s assurances – and a parliament seemingly unwilling or unable to grasp the full extent of the problem as it closes its doors for the third week running.

Expenditure-wise, the government does not want to endure the loss of votes and most likely, unemployment, that will come with the degree of cuts demanded by the IMF.

As for revenue, vested business interests in parliament are unlikely to see the IMF’s vaunted Business Profit Tax passed unless the ruling Maldivian Democratic Party (MDP) were to gain a majority. The leaked audio recordings in early July added weight to the suspicions of many, as MPs were heard to negotiate the ceasing “of all work on the tax bills submitted by the government to the Majlis” until, among other things, a no-confidence motion was tabled against Finance Minister Ali Hashim. Nasheed’s cabinet resigned in protest against parliament “scorched earth politics” before this came to fruition.

The IMF did offer some good news. Despite the country’s twin problems of a crippling wage bill and inability to pass tax legislation through a suspiciously disinterested parliament, the country’s core economic base is sound, with a 5-6 percent increase this year on the back of a strong rebound in tourist arrivals.

But the IMF’s ‘delay’ in opening the purse strings for the third tranche ups the pressure and signals an impatience with the ‘business as usual’ approach taken by all parties involved.

So far the MMA’s efforts to drain excess rufiya from circulation have kept inflation under control, but worrying economic signals such as bank restrictions on the free flow of currency and repression of remittances from foreigners’ accounts have been mounting up. Minivan News has now spoken to the managers of several foreign businesses with offices in Male’, employing dozens of people, who say they are being forced to reevaluate the viability of operating in the Maldives.

These problems are are unlikely to be resolved in the long term by the US$78 million fee paid by Indian infrastructure giant GMR for Male’ International Airport, or yet more donor aid, as the government has implied. Aid is a moot point, as in January 2011 the UN graduates the Maldives to a ‘middle income’ country, severing the umbilical cord to both concessional credit and a degree of international aid funding.

Assad insists the government has included this graduation in its predictions, although he notes that the Finance Ministry had banked on the Majlis passing the tax bill by June.

“Some people say [the graduation] will increase borrowing capacity and give us more independence,” Assad said. “But like becoming an adult, it means taking on both freedom and responsibilities.”

And, most likely, severe growing pains.