The Maldives is spending beyond its means with government expenditure outstripping revenue for years, the World Bank has warned.
Contrary to the government’s estimate of 3.4 percent of GDP for the fiscal deficit in 2014, the World Bank said the deficit has been on “an upward trajectory since 2011” and reached an estimated 11.6 percent last year.
“Despite high revenue of 32.4 percent of GDP, Maldives is spending beyond its means reaching 44 percent of GDP, leading to persistent fiscal imbalances,” reads the South Asia Economic Focus 2015 report released last week.
“Subsidies, transfers and social welfare payments contributed substantially to the expansive spending,” the report stated.
The spike in expenditure resulted from President Abdulla Yameen’s decision to increase wages and an allowance to senior citizens from MVR 2300 to MVR 5000.
The World Bank meanwhile said the country’s risk of external debt distress has been reduced from high to moderate due to revised estimates of a lower current account deficit.
However, overall public debt is high at 74.6 percent of GDP in 2014, the report noted.
“Although the level of external public and publicly guaranteed debt remains below the policy-dependent thresholds under the baseline, a shock to tourism exports could make it difficult for the country to service its external debt,” the World Bank cautioned.
While imports and tourism receipts nearly balance each other out, the report explained that “substantial outflows through interest payments, dividends and remittances keep the current account in a deficit at 8.0 percent of GDP.”
“The current account is more than fully financed by Foreign Direct Investment (FDI), and gross international reserves are estimated to have increased. Net FDI inflows are estimated at 13.3 percent of GDP,” it added.
Usable reserves are estimated at US$120 million, enough for less than half a months imports, but “the private sector is able to supply sufficient quantities of foreign exchange.”
“Faced with limited investment opportunities in the private sector, banks are parking their assets elsewhere; meanwhile financial soundness indicators have been improving,” it added.
While the government’s forecast for economic growth in 2015 is 10.5 percent, the World Bank said growth is projected at five percent and warned of a negative impact from spending cuts.
The International Monetary Fund has also welcomed the government’s cost-cutting and revenue raising measures for 2015, including imposing a green tax, acquiring fees from Special Economic Zones, raising import duties, a public employment freeze, and better targeting of subsidies.
The World Bank meanwhile suggested that state-owned enterprises may pose risks as “most are loss-making and depend on government support”.
Only nine companies have contributed dividends in the past four years, it noted.
“The immediate macroeconomic challenge is the fiscal and external imbalances driven by high and rising public spending,” the report advised.
“However, the economy also remains undiversified and sources of growth and employment remain misaligned. Besides, Maldives’ form of tourism- led growth has followed an enclave model, reliant on imported goods, labor and finance.”
Balancing the budget in two years is a campaign pledge of president Yameen, who said last year that the record MVR24.3 billion (US$1.5 billion) state budget for 2015 has a “primary balance surplus.”
The projected fiscal deficit for 2015 is MVR1.3 billion (US$84 million) or 2.5 percent of GDP, which president Yameen said was allocated for arrears or unpaid bills from recent years.