The Maldives Monetary Authority – the country’s central bank and banking regulator – has published its professional opinion on the 2014 budget, painting a dark outlook and proposing urgent measures to prevent the economy from plunging further into debt.
The document was prepared upon an official request from the People’s Majlis, which is set to consider the spending plans when they emerge from committee on Saturday (December 21).
In the document, the MMA warned that the national debt is estimated to rise from MVR27.7 billion in 2013 to MVR31.5 billion in 2014 – equating to MVR92,196 per head.
Forecast GDP growth rate for 2014 is 4.5% – lower than the average of past ten years.
Inflation can be sustained at 4%, but this will depend on changes in the world market, stated the authority
Despite pledges to reduce state expenditure, the government returned a record MVR17.5 billion budget for consideration by the Majlis this month.
Subsequent recommendations in committee have seen the likely figure to rise to MVR18 billion.
Reducing government expenditure
Rising government expenditure was cited as the biggest challenge for the country right now. The agency advised the government to reduce recurrent expenditure to MVR10.2billion from its current level or MVR12billion, offering the following recommendations to do so:
- Ensuring government subsidies are carefully targeted to the rightful persons.
- Downsizing the state apparatus to one that’s appropriate for the Maldives’ size and income – including downsizing of parliament, councils, and independent institutions.
- Finding ways of reducing recurrent expenditure and improving governance – suggesting the combination of local, parliamentary, and presidential elections was suggested.
- Stop spending on government-run companies from the budget, or dissolve such companies.
- Don t proceed with projects (e.g. in contractor finance basis) unless funds have been secured or guaranteed.
- Reduce debt, turn existing short-term debts in to long-term ones – for instance, by selling long-term foreign bonds at a small interest rate rather than depending on the domestic market for financing debt.
- Prepare to implement the Fiscal Responsibility Act in 2014.
Finding better ways of financing the deficit
The document stated that the government had been financing the budget deficit mainly by taking short-term loans, selling treasury bills and treasury bonds, and by the MMA itself printing money. Instead of managing this deficit through a market mechanism, the government has resorted to dealing with it mainly through printing cash.
Overdrawing from the state’s Public Bank Account (PBA) to accommodate government spending has significantly increased the flow of the rufiyaa in the economy. The authority stated that this has reduced the foreign exchange reserves to dangerous levels – just two months of imports by the end of October 2013.
It was also noted that the increased flow makes it difficult to stabilise the foreign exchange rate.
According to the authority the PBA overdraft facility was misused by the government, using it to finance long term budget deficit even though it was intended to manage cash flow within a short period of time (a few weeks).
The amount overdrawn from PBA started increasing in October 2012 and reached MVR2.5 billion by 9 December 2013.
The MMA advised the state to pay all due treasury bills, treasury bonds and PBA overdrawing debts to the authority, whilst also noting that the MVR945 million required to pay for this had not been included in the proposed budget.
New revenue raising measures and legal changes
One of the key points highlighted throughout the document was the importance of implementing the new revenue raising measures – most of which is hoped to come from advance payments from resort lease extensions – which account for 23% of the total revenue in the budget.
If these measures are not implemented, the budget cannot cater for the recurrent expenditure and the estimated budget deficit for 2014 will increase from MVR886.6 million to 4.4 billion (11% of GDP), the MMA warned.
The MMA requested the state to proceed with amending the laws necessary for implementing new revenue increasing measures as soon as possible, and asked to find ways to generate an income from various industries instead of depending only on tourism for revenue.
Another notable recommendation was the reduction of the number of foreigners working in the country in order to create a more favorable balance of payments situation.
Read the full document (dhivehi) here.