Government announces expenditure cuts to curb ballooning budget deficit

The Finance Ministry has cut back on planned development projects and reduced recurrent expenditure by 20 percent in an effort to curb a ballooning budget deficit.

A circular issued by the ministry on September 28, and publicised today, has assured that wages and allowances will not be affected.

The initially projected MVR1.3 billion deficit in this year’s record budget is now expected to rise to over MVR4 billion due to shortfalls in revenue and increases in unplanned expenditure – in particular the raising of pensions from MVR2300 to MVR5000.

Tourism Minister Ahmed Adeeb had pledged to raise revenue for elderly pensions through T-bill sales, but Finance Minister Abdulla Jihad admitted in August that the government had been forced to rely on the state budget for the handouts.

In the same month, Jihad also warned that the deficit may affect the government’s ability to pay civil servants.

“We try to make regular salary payments even if we have to take loans in order to do so,” he said.

The government currently employs just under 25,000 civil servants, representing over 7 percent of the population. This high figure has long been identified as one of the causes of country’s fiscal imbalances.

According to Maldives Monetary Authority figures, while the government had spent MVR10.1 billion by June 2014, it only raised MVR6.3 billion in revenue during the same period. Meanwhile, government spending in June rose 58 percent compared to the same period in 2013.

Opposition leader and former President Mohamed Nasheed in a rally last night contended the deficit was plugged with the public’s savings at banks, and expressed concern over the impact on the financial sector should the government find itself unable to pay back treasury bills.

Meanwhile, the government is also facing the prospect of a potentially crippling payout to infrastructure giant GMR after a Singapore court of arbitration ruled in favour of the Indian company in a dispute over the premature termination of its airport concession deal.

The MMA’s 2013 Macroeconomic Development report said that shortfalls in revenue and overruns in expenditure could jeopardise the country’s debt sustainability – currently 81 percent of GDP.

President Abdulla Yameen’s economic development plans have focused almost solely on attracting foreign investment for large infrastructure projects and special economic zones (SEZs).

The recently passed SEZ Act is a “landmark law” that will “transform” the economy through diversification and mitigate the reliance on the tourism industry, Yameen has said.

The government maintained that SEZs with relaxed regulations and tax concessions were necessary to attract foreign investors and launch ‘mega projects’ for economic diversification, which would create jobs and elevate the economy to a “new production frontier.”

Meanwhile, Nasheed has noted that attempts to attract investment in the government’s 11 months in power have failed. Nasheed last night claimed foreign multi-national companies were reluctant to invest in the Maldives.

“We are saying the [Progressive Party of Maldives’] government has failed because they are not practicing what they preach at all,” he said during a speech in Fuvahmulah.

Nasheed also criticised the PPM’s failure to provide a pledged MVR10,000 a month to fishermen during lean periods and the failure to provide MVR8000 to farmers.

Both the outgoing and incoming governors of the MMA have this year called on the state to reduce expenditure alongside increases in revenue.

Successive governments have imposed similar spending cuts, while an IMF delegation visiting the country in February expressed surprise at the economy’s continuing resilience.

“For a long time we’ve been saying that reserves at the MMA are very low and that the fiscal deficit is quite difficult and we expect the economy to run into some problems,” said resident representative Dr Koshy Mathai.

“But somehow the economy has shown resilience, a lot of resilience, and we’ve been surprised – happily surprised but surprised nonetheless.”


Finance Ministry imposes cost cutting measures

The Ministry of Finance and Treasury last week instructed all government offices to enforce cost cutting measures in a bid to reduce recurrent expenditures and manage government cash flow.

A circular issued by Finance Minister Abdulla Jihad instructed offices to limit overtime pay to no more than five percent of the office’s annual budget.

Other cost cutting measures included targeting subsidies, limiting allowances to 35 percent of an employees’ salary, and not covering phone expenses of senior officials – with the exception of cabinet ministers.

Moreover, offices were instructed not to hire speedboats for official travel in areas with a ferry service.

Finance Minister Jihad told local media this week that the government has also decided to reduce the MVR80 million (US$5 million) allocated in this year’s budget for civil servant’s salary bonus to MVR40 million (US$2.5 million).

Jihad said recurrent expenditure was too high for the government to “make ends meet.”

In December, parliament passed a record MVR17.5 billion (US$1.16 billion) budget for 2014, prompting President Abdulla Yameen to call upon the legislature to approve revenue raising measures proposed by the government.

On Sunday, parliament accepted with a 38-vote majority three bills submitted by the government to raise additional revenue.

The bills included an amendment to raise the Tourism Goods and Services Tax (T-GST) from eight to 12 percent as well as two amendments to the Tourism Act in order to reintroduce the discontinued flat US$8 bed tax and to require resort lease extension payments to be paid as a lump sum.

An 11-member subcommittee chaired by business tycoon Gasim Ibrahim – leader of the government-aligned Jumhooree Party – is currently in the process of reviewing the government-sponsored legislation.

The committee met representatives of the Maldives Association of Travel Agencies and Tour Operators (MATATO) and the Maldives Association of Tourism Industry (MATI) today to discuss the impact of the tax hikes on the sector.

Following the Majlis’s failure to extend the tourism bed tax before the end of last year, Jihad told local media that the resulting shortfall in revenue would be MVR100 million a month.

In an interview with Minivan News last week, Tourism Minister Ahmed Adeeb criticised parliament for going into recess without passing bills designed to generate income.

“This causes the budget to expand, but there’s no way for the government to earn enough to implement it. The T-GST matters even more to the state income. The state keeps expanding, the allowances and salaries keep increasing, but the income for all of this still depends on the 25,000 tourist beds. Unless we expand this, how can we increase what we earn? We can’t keep expanding the state, and then squeezing the existing tourism sector without expanding it,” Adeeb warned.

Recurrent expenditure

Shortly after assuming the presidency, Yameen announced that he would only draw half the presidential salary of MVR100,000 (US$6,500), and would reduce the number of political appointees at the President’s Office.

Submitting the 2014 annual budget to parliament last year, Jihad noted that recurrent expenditure (MVR12 billion) accounts for 73 percent of the total budget, with almost half spent on salaries and allowances for state employees in addition to administrative costs, interest payments and subsidies.

Jihad advised implementing a raft of austerity measures, contending that the “expensive” public management model adopted in the Maldives was inappropriate for a small island state.

Almost 50 percent of government income was spent on employees, Jihad observed, advising revision of the state pension system and reduction of the numbers of island and atoll councillors as well as members of independent institutions and boards of government-owned companies.

In its professional opinion on the 2013 budget, the Auditor General’s Office stated that a policy of population consolidation together with effective measures to reduce the public sector wage bill was necessary to rein in the continuing fiscal deficits.

When announcing his resignation at a press conference earlier this month, former Maldives Monetary Authority (MMA) Governor Dr Fazeel Najeeb contended that the structure of government was outsized for the Maldives and warned against printing money to cover the “far too hefty expenses of many state institutions.”

In November last year, Najeeb told parliament’s finance committee that the public bank account was overdrawn by MVR1.5 billion (US$97 million) as a result of having to finance government expenditure.

“When we have to accommodate every request by the government we are forced to act completely against the MMA law,” he said, referring to printing money.

Jihad explained to MPs on the committee that the government was forced to approach the MMA because foreign banks were refusing to buy or rollover treasury bills.

While MVR500 million (US$32 million) a month was needed to pay salaries and allowances for state employees, government income in some months was just MVR300 million (US$19 million), Jihad noted, leaving no option but turning to the central bank.


Discontinued tourism bed tax will cost state 10 percent of revenue

The People’s Majlis’ failure to extend the country’s tourism bed tax before recess will result in losses of MVR100 million a month, the Finance Minister is reported to have told local media.

As of the start of 2014, the tourism bed tax taken under the Maldives Tourism Act of 1999 will be discontinued because of a deadline added to the act during its second amendment in 2010.

Article 35 – D of the amended act states that within three years of taking TGST (Tourism General Services Tax), the US$8 tourism bed tax per person per night shall be discontinued.

As the TGST was introduced with the year 2011, the current deadline came to pass at 12am this morning.

Quoting the Deputy Commissioner General of Maldives Inland Revenue Authority (MIRA) Hassan Zareer ‘Haveeru‘ has reported that this will result in a reduction of MVR1 billion – or ten percent of annual state revenue. He said the issue had been brought to the government’s attention. Minister of Finance Abdulla Jihad was quoted as saying that this change would incur a loss of approximately MVR100 million per month from the state cash flow.

On 9 December 2013 MP Abdul Aziz Jamal Abubakr, proposed an amendment to the act – on behalf of the government – extending the deadline for another year. However, it was not passed when the Majlis went to recess with the final sitting of the third session on 30 December 2013. The next session of the Majlis will begin on 1 March 2014.

MIRA statistics reveal that  from January – November 2013 the tourism tax accounted for 9.6% (MVR787,340,577) of the total revenue collected by the authority. Within the same period tourism land rents contributed 9.8%, and TGST 27.3% of the total revenue.

On 29 December the Majlis passed a MVR17.95 billion (US$1.16 billion) national budget, despite concerns from the public and various organisations. The central bank Maldives Monetary Authority (MMA) warned that if proposed revenue raising measures in it were not implemented, the budget could not cater for even the recurrent expenditure. The authority anticipates that the resulting budget deficit for 2014 could potentially increase from MVR886.6 million to 4.4 billion (11% of GDP).

The International Monetary Fund (IMF) also proposed the implementation of a number of measures to raise revenue and reduce spending.


Revenue raising measures remain biggest obstacle to budget, says Finance Minister

Finance Minister Abdulla Jihad has said that new revenue raising measures remain the biggest obstacle to the passing of the new budget.

He has, however, expressed his opinion that the collection of lease extension payments up-front – anticipated by the government to raise MVR1.2billion (US$77million)- would not be a problem.

“I don’t think it is a problem because we are giving them for 99 years – that’s quite a long time,” Jihad told Minivan News today. “The property belongs to everyone – it’s the people’s property.”

Maldives Association for Tourism Industry Secretary General Ahmed Nazeer reportedly told the Budget Review Committee yesterday that he anticipated that 50 percent of resort owners would refuse to pay the sum up front.

When asked for additional opinion on the proposed budget today, Nazeer told Minivan News that he felt it would be inappropriate to give further comment whilst the budget was still under review.

The Finance Minister was able to confirm that the government had requested approval for three loans – totalling MVR814million (US$52million) – from the Majlis, of which MVR453million will go towards budget support.

Earlier this month, the Auditor General suggested Jihad had foregone the mandatory parliamentary approval when obtaining MVR300million (US$ 19.45 million) worth of budget support from the Bank of Maldives in May 2012.

Jihad responded that the onerous procedural obligations were circumvented in order to avoid an impending financial disaster.

Budget support

The budget-support loan will come from the Bank of Ceylon, whilst additional loans await approval from Denmark’s Nordea Bank (€2.5million) for the upgrading of Malé’s electricity grid, and OPEC (US$20million) for sewerage projects.

After details of the high interest to be paid on the Bank of Ceylon’s loan emerged, Jihad last week use the term “beggars cannot be choosers,” noting that the Maldives has no choice but to borrow from commercial banks at high interest rates.

“We could go to Bank of New York, but they will not lend to us. The best bet now is Bank of Ceylon,” he said.

An agreement to receive 50 million yuan (US$ 8.2 million) in development aid from the Chinese government has already been approved this month, whilst Indian media has reported that President Abdulla Yameen’s state visit will see the resumption of a currently-dormant standby-credit facility.

The Budget Review Committee is expected to conclude deliberations upon the 2014 budget by December 20-21, explained Jihad, after which it will be sent to the full floor for further consideration.

Discussion of revenue raising measures is scheduled for Wednesday (December 18).

Similar issues

Failure to realise new streams of revenue, alongside an inability to curb expenditure saw the previous government – under which Jihad also served as finance minister – forced to divert capital expenditure to recurrent costs.

The proposed budget for 2014 is a record MVR 17.5 billion (US$1.1 billion), with a 6.7 percent growth in total expenditure mainly due to a MVR 1.1billion (US$72,687,239) increase in recurrent costs, accounting for over 73 percent of outgoings.

Both Jihad and Maldives Monetary Authority Governor Dr Fazeel Najeeb have told the Majlis committee that the proposed 2014 budget must be reduced if the government’s new revenue streams were not realised, with Jihad targetting the billion dollar tourism industry.

“The main revenue generator is tourism. From where else can we generate extra revenue? I don’t believe that we are presently charging taxes that are too high for the tourism sector,” local media reported him as saying yesterday.

The proposed revenue raising measures will provide the state with a total of  MVR3.4billion (US$ 224million). However, the People’s Majlis will need to amend laws including revisions to tax laws and import tariffs to realise the expected revenue.

Proposed measures include raising Tourism Goods and Service Tax by 50 percent, delaying the abolition of tourism bed tax, raising airport departure charges for foreign passengers by 28 percent, and leasing a further 12 islands for resort development.

In his inauguration speech, Yameen warned the country’s economy was in “a deep pit” and pledged to reduce state expenditure. Local media reports quote Yameen saying he would cut expenditure by amounts varying between MVR 1 billion and 4 billion.

A World Bank report on the state the Maldives’ economy last week described the country as “spending beyond its means”.


Week in review: December 8 – 14

This week saw the repeatedly delayed budget introduced to the People’s Majlis. Coming in at MVR17.5billion rufiya, the budget – purportedly revised to incorporate President Yameen’s austerity measures – eclipses all previous spending programmes.

A report from the World Bank made clear the tough task the new government faces in nursing the economy towards good health. The report stated that the Maldives continues to spend “beyond its means”.

Noted areas of excess include a high civil service wage bill, with the World Bank suggesting that the government’s short term financing measures risked further damaging the economy.

The exploitation of the country’s persistent shortage of dollars by criminal elements was exposed this week as police reported the activity of thieves masquerading as legitimate exchangers of currency.

When accused of illegally obtaining a budget support loan, recently reappointed Finance Minister pleaded desperation. Abdulla Jihad argued that he had sidestepped the onerous approval procedure to avoid a financial catastrophe in May 2012.

Yameen took fitful steps towards fulfilling his campaign’s austerity pledges this week, ordering the reduction of salary for two grades of state minister – though the cut was only around 12.5 percent instead of the 30-50 mooted before the election.

Similarly, the new government appeared to have reneged on its pledge to provide cash-handouts to old-age pensioners – opting for an insurance scheme instead.

Government performance

Former President Maumoon Abdul Gayoom, however, appeared pleased with his half-brother’s performance thus far, praising his handling of Indo-Maldivian relations while the Defence Minister discussed enhanced military cooperation with Indian counterparts.

The indistinct ‘National Movement’ this week suggested ulterior motives in the bureaucratic thwarting of its plan to celebrate the eviction of Indian infrastructure giant GMR, whose deal to develop the international airport was prematurely terminated twelve months ago.

Elsewhere, the coalition member Adhaalath Party, quashed rumours that it had parted ways with Yameen’s government this week, despite previous reports that it intended to campaign independently in the upcoming local and parliamentary elections.

The ‘roadmaps’ for the first one hundred days of the government continued to be drawn this week, with comprehensive lists now produced in the areas of  transport, health, and immigration.

Whilst the Transport Ministry has promised finished plans for the redevelopment of Ibrahim Nasir International Airport, the health minister talked of significant changes to the IGMH public hospital.

The police service also joined in the policy pledging, with its own promises to improve its service and to build public trust in the institution. The Police Integrity Commission this week suggested that the prosecutor general assist in this task by prosecuting two officers it had found to have been negligent during the arson attack which destroyed Raajje TV in October.

The vacancy at the head of the PG’s Office did not stop the filing of charges in the 8 year old ‘Namoona Dhoni’ case. Pro-democracy activists – prevented from reaching Malé for a national demonstration – now face fresh charges of disobeying lawful orders.

Trust between the Supreme Court and the judicial watchdog appeared scant this week as the Chief Justice baulked at the JSC’s re-shuffling of a number of senior judges. Members of the JSC were later reported to have rejected Chief Justice Faiz’s legal objections.

Corruption and human rights

Confidence in the transparency of the public in public institutions also appeared to be on the wane this week, as Transparency Maldives’ Global Corruption Barometer (GCB) survey revealed that 83 percent of its sample felt corruption to have increased or stayed the same over the past two years.

Despite only appearing mid-table in the list of organisations perceived as being corrupt, the MNDF reacted disproportionately to the local media’s reporting of the survey, labelling CNM’s article on the survey “highly irresponsible journalism”.

The Anti Corruption Commission announced the discovery of graft in the capital’s largest housing programme. The highest number of bribes reported in the GCB was in the area of land services.

International human rights day was observed by the government and civil society in the same week the president ratified the country’s first anti-human trafficking bill. Whilst welcoming the new law, both the Human Rights Commission and the immigration department suggested that institutional strengthening would need to accompany a successful anti-trafficking policy.

Finally, this week saw the release of a United Nations Population Fund report, calling on the state to review existing practices related to sexual behaviour within the judicial process, law enforcement, education and health sectors.

The report stated reproductive health services ought to be expanded to non-married couples as evidence makes clear that the assumption sex does not, or should not, occur outside of marriage is increasingly out of step with social realities.


Finance Minister joins ruling Progressive Party of Maldives

Recently reappointed Finance Minister Abdulla Jihad has joined President Abdulla Yameen’s Progressive Party of Maldives (PPM), becoming the second cabinet member to join the party this week.

Defence Minister Mohamed Nazim – also reappointed to his position after Yameen’s recent inauguration – announced his decision to join the PPM yesterday, commenting on social media that he had opted to join what he viewed as the most democratic party in the country.

Jihad told local media that his decision had come after a request made by former President  and Leader of the PPM Maumoon Abdul Gayoom.

He also revealed that the finance minister position in the cabinet had been reserved for a PPM member. The PPM is currently the second largest political party in the Maldives, both in terms of party members and MPs.

“My decision was based on President Maumoon’s request. I have always been of PPM’s ideologies and philosophies,” Jihad told Sun Online.

Gayoom himself released a tweet yesterday thanking Jihad for his decision: “U will be a great asset to us”.


Submission of revised budget delayed for fourth time

Amendments to the 2014 state budget could not be submitted as scheduled today, Finance Minister Abdulla Jihad has stated, delaying the submission process for the fourth time.

The budget – submitted by the outgoing administration of President Dr Mohamed Waheed – has been undergoing amendments in accordance with the aims of the new government of President Abdulla Yameen.

Jihad – finance minister under both presidents – told local media today that although the final draft cannot be submitted to parliament today, the majority of the work had been completed.

He stated that the main reason for the delay was that the government had so far not provided enough details about some projects they wished to include in the budget.

Jihad asserted that a final draft of the budget with all the required amendments will be ready for submission by Sunday, December 8.

The Finance Ministry has stated that issues such as decreasing overtime allowances and non-profit allowances, and revising conditions for the provision of subsidies will be reviewed when submitting the newly amended budget.

President Yameen has expressed concern over the economic vulnerability of the Maldives and pledged to reduce state expenditure by MVR1 billion (US$64.9million).

“State debt is sky high. The state budget’s expenses are extremely high. Hence, we have to prioritise reducing state expenditure. I will start work very soon to reduce budget expenses,” Yameen said during his inauguration speech.

The Maldives Monetary Authorities’ (MMA) most recent quarterly review noted that Government finances had “further deteriorated in the first six months of 2013” due to a sizeable shortfall in expected revenue coupled with a marked increase in recurrent expenditure.

While the delay has brought the work of Parliament’s budget committee to a temporary halt, Speaker of Parliament Abdulla Shahid has instructed the committee to submit its final review report on the budget to the Parliament floor by December 15.

Elsewhere, the Public Accounts Committee has today passed a proposal for the government to obtain a US$29million loan from the Bank of Ceylon as annual budget support and submitted it to the parliament.

The loan request was submitted by the Waheed administration in September.

The Public Accounts Committee report outlines that the loan is to be paid back by the government in a period of six years. The loan has a grace period of one year, after which a monthly payment of US$490,000 has to be paid to the Bank of Ceylon.

The committee has passed the proposal for the loan despite it having an 8% interest rate – the parliament had previously decided that any loans taken by the government must have an interest rate of no higher than 7%.

Earlier this week Indian media reported that the country would soon be releasing a further installment of the US$100million standby credit facility.


Government delays revisions to budget for third time

The Ministry of Finance and Treasury has delayed submitting revisions to the 2014 state budget for the third time.

On October 30, Minister of Finance and Treasury Abdulla Jihad presented a MVR 16.4 billion budget for 2014 with a projected deficit of 2.5 percent of GDP to parliament.

However, with the inauguration of President Abdulla Yameen Abdul Gayoom on November 16, opposition Maldivian Democratic Party (MDP) called for the state budget to be revised to include the Progressive Party of the Maldives’ (PPM) campaign pledges.

Jihad – who was reappointed under President Yameen – asked the People’s Majlis budget committee to allow the government to present a revised budget on November 25. The budget committee has suspended work until a new budget is submitted.

The Finance Ministry then delayed submitting revisions until November 28. The government was unable to meet its own deadline and further delayed submissions to today.

Local media reports the government is facing difficulties in cutting costs and will present revisions on December 5.

Yameen has expressed concern over the economic vulnerability of the Maldives and pledged to reduce state expenditure by MVR 1 billion.

“State debt is sky high. The state budget’s expenses are extremely high. Hence, we have to prioritise reducing state expenditure. I will start work very soon to reduce budget expenses,” Yameen said during his inauguration speech.


STO head assures oil imports problem will be resolved

The Managing Director of the State Trading Organisation (STO) has assured that the country’s looming oil payment crisis will be resolved tomorrow after the central banking authority committed to financing overdue payments.

“MMA [Maldives Monetary Authority] has given certain commitments – we still need to arrange everything – tomorrow we are going to work on it,” Shahid Ali told Minivan News today.

Shahid told MPs last week that the STO would run out of oil as early as November 10 if it did not pay some of its US$20million oil debt.

“The exact amounts have not been agreed upon,” Shahid explained today (October 3). “Tomorrow we need to make at least some payments.”

During an emergency meeting of the Majlis Finance Committee last week – with both MMA Governor Dr Fazeel Najeeb and Finance Minister Abdulla Jihad in attendance – Shahid told MPs that government-owned companies owed the STO more than MVR600 million.

Jihad informed the committee that he had asked the MMA to provide MVR50 million to the STO but was told that the central bank could only arrange for MVR20 million as the public bank account was overdrawn.

The MMA governor said the state did not have the financial resources to provide the requested amount, adding that the central bank would be forced to print money to meet the government’s requirements.

In the event that the country runs out of oil on November 10, Jihad then said he would resign from his post.

“I am asking the MMA for cooperation to provide the funds. This is a basic necessity. Otherwise there is a fear that we could completely run out of oil. Funds have to be arranged for citizens’ basic needs even if the public bank account is overdrawn,” he said.

Minivan News was unable to reach Dr Najeeb at the time of press.

When asked if the MMA was printing money in order to finance the oil payments, Shahid simply repeated that the authority had “given certain commitments”.

The MMA’s quarterly figures show that the Maldives’ petroleum imports amounted to US$248.4 million in the first half of 2013 – representing 29 percent of the cost of all goods brought into the country.

Najeeb also told the Majlis Public Accounts Committee last week that state reserves were insufficient to balance the country’s growing deficit.

Local media reported Najeeb as warning that the state was on the verge of being forced to print money.

“Parliament must also consider ways to reduce the structure of the State. I think this is very serious. Or else, the value of our money will keep dropping,” the Governor was quoted as saying.

The MMA’s most recent Quarterly Economic Bulletin revealed that government finances had “further deteriorated in the first six months of 2013” due to a sizeable shortfall in expected revenue coupled with a marked increase in recurrent expenditure.

After measures to raise 15 percent of total revenue budgeted for 2013 – MVR1.8 billion (US$116.7 million ) – failed to materialise, Finance Minister Abdulla Jihad was forced to seek parliamentary approval to divert MVR 650 million (US$42 million) allocated for infrastructure projects in the budget to cover recurrent expenditure.

In recent months, the government has become increasingly reliant on the issuance of short term treasury bills in order to plug gaps in the current budget.

Whilst introducing a proposed MVR16.4 billion (US$1 billion) budget for next year to the Majlis last week, the Finance Minister urged the government to pursue austerity measures.

In November 2012, a team from the International Monetary Fund (IMF) advised that strengthening government finances was “the most pressing macroeconomic priority for Maldives”.