IMF predicts dire consequences if deficit reduction fails

The IMF yesterday warned the People’s Majlis that if the country does not reduce its expenditure, it risks running out of reserves and miring the country in poverty.

“The expenditure has not been under control since 2009. It has been rising, and we have been [issuing] warnings since then,” Haveeru reported the Chief of the IMF mission in the Maldives, Jonathan Dunn, as telling parliament.

Previously highlighting “significant policy slippages”, in particular the government’s failure to curtail spending, the IMF felt it necessary to delay the third tranche of funding in 2010. Nasheed’s government contended that it had tried to impose austerity measures, in particular pay cuts for civil servants, but had been blocked by the Civil Service Commission (CSC) and then-opposition majority parliament for political reasons.

Dunn recommended against printing money or obtaining loans from other countries, given the current economic frailty of the Maldives.

His suggestions for expenditure reduction included revising civil servants’ salaries and allowances, increasing the Goods and Services Tax (GST) from 6 percent to 15 percent, re-introducing import duties, and increasing bed tax by 50 percent, from US$8 to $12.

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.”

Originally, it was foreseen that the shortfall from import duties was to be covered by Rf2 billion in tourism goods and services tax (T-GST) and Rf 1 billion as general goods and services tax (GST) revenue.

The IMF representative also noted that budget figures they studied did not represent the change in the way lease extensions for resorts were now being received.

The new government recently revised the policy on lease extension payments for resort islands, making the sums payable in instalments rather than lump sums. Former Tourism Minister Mariyam Zulfa has argued that this policy is largely responsible for the current budget deficit, instantly creating a US$135 million hole in the budget for the short-term financial benefit of several influential Maldivian resort owners.

Detailed national income statistics are now published monthly by the Maldives Inland Revenue Authority (MIRA). Total revenue collected in March was Rf 648.7 million (US$42.1 million), more than triple the amount received in March 2010.

However, “revenue received [in March 2012] is 37.9 percent lower than the projected revenue, mainly due to the unrealised revenue from Lease Period Extension,” MIRA observed.

Total revenue collected during the first quarter of 2012 represents a 113.9 percent increase on the same period last year. Half of the revenue collected during this period was attributable to the Business Profit Tax (BPT) and GST, introduced during Nasheed’s government.

Head of the Majlis’s Financial Committee, Deputy Speaker and People’s Alliance (PA) MP Ahmed Nazim, met with the IMF last week and said their main concern was that the 2012 budget “may not be realised.”

“The IMF feels there is a big hole in the forecast revenue,” said Nazim.

He also felt the investigation of the expenditure on the Aasandha health insurance scheme to be relevant, as it represents more than 10 percent of the budget.

Although he described the scheme’s future as assured, he expressed grave concerns over the sustainability of the scheme as currently practiced.

“It is a hole in the pocket of the government. It seems odd that half of the population has used it, there is no epidemic, and yet it has used Rf 3 million (US$195,000) a day on medicine,” said Nazim.

Nazim also mentioned the shortfall of over Rf 500 million from the failure to privatise  Maldives Post Ltd, Island Aviation and Maldives In-flight catering.

Tourism Revenues

Due to the country’s reliance on imports, the waning of reserves was described as very dangerous, with the IMF comparing the situation with that of the Seychelles in 2008.

The Seychelles secured a US$26 million Stand-By Arrangement from the IMF after a balance of payments crisis saw the country default on international loans. In exchange, the Seychelles, whose economy also relies heavily on tourism, undertook stringent cuts, including shedding 12.5% of the government workforce.

The Seychelles crisis was partly attributed to a fall in the tourism trade damaging the country’s finances. Concerns have been raised regarding the effect of the current political crisis on the current Maldives’ government, with some figures suggesting numbers were down as a result.

Dunn anticipated that the tourism figures were likely to affect the amount of the GST that would be received, which he argued could not replace the income forfeited by suspending many import duties. Both measures were introduced with cross party support at the start of the year under the previous government.

The Maldives Association of Tourism Industry (MATI) had previously warned that the industry stands to lose as much as US$100 million in the next six months due to widespread media coverage of the country’s political unrest.

More recently, however, the Tourism Ministry declared its confidence that this year’s arrivals will break all previous records. Maldives Association of Travel and Tour Operators (MATATO) yesterday revealed plans to specifically target certain markets with specially assigned staff members to help achieve those aims.

Deputy Minister of Tourism Mohamed Maleeh Jamaal said that the Tourism Ministry did not forecast that the decline would continue.

“The Chinese market is improving. Our [predictions] do not show that the Chinese market will decline to the extent the IMF has said, and we had a positive growth in the last three months,” he said.

Concluding his presentation, Dunn pressed home the harsh reality of the economic climate.

“These are tough steps to take. It requires your [MPs’] cooperation. It is your responsibility as well. This is necessary for the nation. Immediate steps have to be taken. This is the reality, we have to face it.”


11 thoughts on “IMF predicts dire consequences if deficit reduction fails”

  1. "Both measures were introduced with cross party support at the start of the year under the previous government."

    DRP and PPM MPs voted against GST

  2. Tourist numbers will drop if gst was increased by that amount, repeat visitors would look elsewhere for holidays unless resorts dropped prices to counterbalance the increase in gst - (doubt that would happen)
    Gratuities to hardworking staff would stop.
    Cuts need to be made with civil servants salaries etc - like the rest of the world.....

  3. Majlis represent their own primary id needs, not the interests of the country and the welfare people. With this regime and being more concerned with Police pay rises and MNDF bonuses the country will soon be in massive debt again. GST block will be the nail in the coffin.

    I know, why don,t we get Gayoom a new yacht and palace while we are at it?

  4. "His suggestions for expenditure reduction included revising civil servants’ salaries and allowances, increasing the Goods and Services Tax (GST) from 6 percent to 15 percent, re-introducing import duties, and increasing bed tax by 50 percent, from US$8 to $12."

    Now, as I recall, there was a government in this country that tried to carry out these steps. Also I recall a very vocal group of opposition figures who fought against these very policies.

    Today, those opposition figures are sitting in positions of power. Do they have the balls to eat their own words and impose this harsh medicine? I don't think so! The Maldivian economy is doomed at the hands of retards...

  5. "... increasing the Goods and Services Tax (GST) from 6 percent to 15 percent, re-introducing import duties, and increasing bed tax by 50 percent, from US$8 to $12."

    The tycoons who are behind the current regime will never ever allow those measures! After all, they are doing everything they can to stop paying taxes in whatever form.

  6. Oh, I'm sorry. The IMF needs to be informed that any aid will go to the payment of villa police fees,while things like basic healthcare is 'unimportant' to Waheed and co.

  7. The number of people who are using aasaandh will now reduce. The increase was induced by Yaameen to bankrupt this program. 90% of Meemu atoll people used this in the first 45 days.

  8. so Qasim you were responsible for the mess we have got in. any plans for getting us out? or are you too busy planning and scheming to dump master minder and manipulator!!

  9. Middle level civil service staff do nothing in the ministries filled with thugs n activitist on the top layer. Top level civil service staff is taking a ride using the thugs n activists without even a slight knowledge n background of the mandates of the ministries. They are enjoying their travel abroad and enjoying their salaries. This country is on a huge down hill . The Baghees have to take responsibility for destroying this country ..

  10. Yeah and welcome minivan news. Im always here to correct your mistakes.

  11. Any further increase in GST or bedtax would have serious ramifications in attracting more guests to the Maldives.

    Key operators into the Maldives are already at their limit with prices.

    The only option is to make your government more efficient, reduce your civil service staff, reduce wages and increase working hours.


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