The state budget for 2012 was submitted to parliament today by Finance Minister Ahmed Inaz with a projected fiscal deficit of 9.7 percent, down from 21 percent in 2009, 16.1 percent in 2010 and 10.1 percent in 2011.
In his introductory statement, Inaz said the programme-based budget was prepared with special focus on producing results and maintaining recurrent expenditure in line with income.
“The programmes included in the budget are based on the Strategic Action Plan,” he explained. “Special attention has been given in the budget programmes to provide adequate and quality service to the public. The government’s aim is to match up the figures in the budget with development plans and ensure that all state expenditure is made to achieve a stated target.”
Steering committees have been formed to oversee the 31 programmes in the budget, Inaz continued, urging MPs to evaluate the progress of implementation over the course of the year.
Total expenditure out of the 2012 state budget is estimated to be Rf14.6 billion (US$946.8 million), representing an 18 percent increase from 2011.
With the enactment of taxation legislation under the government’s economic reform package, revenue is projected to increase 11 percent from 2011 to Rf10.8 billion (US$700 million) next year with tax revenue expected to account for Rf7.3 billion (US$473 million).
The resulting fiscal deficit is to be plugged with Rf1.9 billion (US$123 million) in foreign loan assistance, Rf2 billion (US$129.8 million) forecast as budget support, and Rf750 million (US$48.6 million) from privatisation proceeds and sale of treasury bills and bonds in the domestic market.
Among the programmes that account for the increase in government spending, said Inaz, include a universal health insurance scheme and construction of housing units with foreign loan assistance.
Inaz noted that Rf2.1 billion (US$136 million) was allocated for education – which includes the ‘Hunaru’ training programme, student loan schemes and projects for improving school infrastructure – and Rf100 million (US$6.8 million) as capital investment for health corporations along with Rf20 million (US$1.2 million) for local councils to strengthen the public health sector.
While 44 percent of recurrent expenditure will be spent on salaries and allowances for state employees, Inaz said the wage bill has been reduced as a result of the voluntary redundancy programme conducted this year and the transfer of civil servants to corporatised entities.
State benefits and subsidies meanwhile account for 30 percent of recurrent expenditure followed by 17 percent (Rf120 million or US$7.7 million) on administrative costs.
The government is currently undertaking a review with World Bank assistance to ensure that subsidies are “means-tested and targeted” in 2012, Inaz revealed.
Inaz observed that unlike previous years, state revenue in 2012 will cover recurrent expenditure while deficit spending will be on capital investments.
The Rf3.8 billion (US$246 million) allocated for capital expenditure and net lending in 2012 represents a 43 percent increase from 2011, Inaz noted, adding that “the main reason [for the increase] is the estimated rise in foreign aid and large projects” such as the construction of 500 housing units with loan assistance from the Indian Exim (Export-Import) Bank and 2,500 housing units with loan assistance from the Chinese Exim Bank.
“Although total expenditure will increase as a result of these projects, we believe it is one of the most important projects that should be undertaken right now as resolving the shortage of housing is also the solution to a number of social problems,” Inaz said.
Investment programmes in 2012 fall under two broad categories of climate change and adapation programmes – which includes coastal protection, harbour construction, land reclamation, investments in renewable energy as well as establishing water and sanitation systems – and socio-economic investment programmes such as the housing projects.
Reiterating that the main priority in formulating the budget was to ensure value for money spent in terms of providing services, Inaz however explained that “due to the present structure of the state, Rf32 out of every Rf100 is spent on salaries and benefits, Rf6 is spent on interest payments on loans and Rf13 is spent on administrative costs.”
“After spending Rf27 [out of every Rf100] on capital expenditures, there is just Rf22 left to spent on services that offer direct benefits to the public,” he said, adding that Rf22 out of every Rf100 had to be spent on loan repayments.
As expenditure outstripped revenue by Rf3 billion (US$194.5 million) in the 2011 budget of Rf12.9 billion (US$836 million), Inaz said the deficit was plugged through foreign aid and loan assistance as well as proceeds from privatisation and sale of T-bills and bonds.
Government income is meanwhile expected to reach a record level of Rf9 billion (US$583.6 million) this year.
Based on current estimates, said Inaz, the economy grew by 7.5 percent in 2011 compared to 5.7 percent in 2010. The forecast for economic growth in 2012 is however 5.5 percent.
On the tourism industry, which accounts for 70 percent of GDP, Inaz said arrivals were expected to have risen 21 percent in 2011 from the previous year.
As of the end of September, tourist arrivals are 17.7 percent higher than 2010.
Although fish catch by volume rose 3.9 percent from 2010 in the first seven months of the year, Inaz said the Maldivian fisheries industry was not expected to improve in the next two years with the continuing decline of fishing in the Indian Ocean.
The introduction of long-line fishing and development of an aqua-culture and mari-culture industry was important to raise productivity, Inaz suggested.
With imports expected to rise in 2012, Inaz said the current account deficit will increase from 26 percent of GDP in 2011 to 28 percent next year.
To plug the widening current account deficit, said Inaz, economic policies in the budget were geared towards increasing exports and growing small and medium-sized businesses.
Inaz explained that the worsening balance of payments was tied to the ballooning fiscal deficit since 2005, which increased local currency in circulation and resulted in an “unstable foreign exchange market” and the creation of a black market for dollars.
In addition to tightening fiscal policy and rationalising expenditures, Inaz said money changers had to be regulated and the use of Maldivian rufiyaa as the legal tender should be enforced.
Expressing concern that 47 percent of transactions in the domestic economy were made through other currencies, the Finance Minister called on the Maldives Monetary Authority (MMA) as the country’s central bank to take measures to enforce the use of rufiyaa as legal tender.
A senior government official meanwhile told Minivan News that the government was still waiting on the income tax bill to be passed by parliament. The proposed tax will apply only to those who earn over Rf 30,000 a month (US$2000).
“It is not significant in terms of revenue, but it is important in terms of governance as it gives us the full picture,” the source said. “It will enable a full system of reporting and close loopholes that allow people to pass off business income as their own.”
The 3.5 percent tourism goods and services tax will be raised to six percent next year.