Tag: austerity

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.

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Government cannot pay state salaries without Indian cash: Finance Minister

Minister of Finance Abdulla Jihad has said the government is unprepared to meet its recurrent expenditure – including salaries – for the final three months of 2012 without the US$25million loan promised by the Indian government.

Jihad, who was not responding to calls at the time of press, told local media outlet Sun Online that he believed the loan  is being delayed due to the ongoing controversy over Indian infrastructure company GMR’s development of Ibrahim Nasir International Airport (INIA).

The Ministry’s Financial Controller Mohamed ‘Kuday’ Ahmed was also not responding to calls at time of press.

India’s High Commissioner to the Maldives DM Mulay told Minivan News that “India stands by every commitment and hopes Maldives will reciprocate. We have excellent rapport with the GOM [Government of Maldives] and issues, if any, are sorted out amicably.”

India’s Ministry of External Affairs publicly expressed concern over the political stability and the investment climate in the Maldives earlier this month.

Sun meanwhile reported Jihad as saying he had made repeated requests via the High Commission for the loan to be expedited.

Jihad’s comments come during a week in which President Dr Mohamed Waheed Hassan has been campaigning in Faafu and Dhaalu Atolls, reportedly reassuring the people that the economy was running smoothly whilst crticising those who he claimed sought to weaken it.

A concerted campaign by government-aligned parties to annul the US$511million concession agreement with GMR – the single largest foreign investment in the country’s history – has sparked concerns over investor confidence with damaging implications for the long term development of the economy.

Waheed is also reported as saying that he would not resort to borrowing from foreign governments in order to finance government activities.

“I will not try to run the government by securing huge loans from foreign parties. We are trying to spend from what we earn”, he was reported to have told the people of Nilandhoo.

“The Maldivian economy is fine. Don’t listen to whatever people say. We don’t have to [worry] about the Maldivian economy being in a slump,” he was quoted as saying during a rally in Meedhoo.

Minivan News was unable to obtain comment from President’s Office spokesmen on this issue before going to press.

The US$25 million was agreed upon last month as part of the $US100 million standby credit facility signed with Prime Minister Manmohan Singh in November 2011.

Unpaid bills

Despite Waheed’s reassurances, this month has seen a number of state owned institutions face disconnection from the capital’s power grid as bills amounting to around MVR150million (US$9.7million) were said to be owed to the State Electricity Company (STELCO).

Responding to the institutions’ blaming of his ministry, Jihad told Sun that the finances were simply not there.

“We are not receiving foreign aid as was included in the budget. How can we spend more than we receive? That’s why those bills are unpaid. We can’t spend money we don’t have,” he told the paper.

He mentioned that the government would have difficulties paying the salaries of civil servants in the final quarter of this year.

Since coming to power in February, the government has committed to reimbursing civil servants for wage reductions made during the austerity measures of the previous government, amounting to Rf443.7 million (US$28.8 million), to be disbursed in monthly installments over twelve months from July.

A MVR 100million (US$6.4 million) fuel subsidy for the fishing industry was also approved by the Majlis Finance Committee earlier this month, with the hope of stimulating the ailing sector.

The overall deficit for government expenditure has already reached over MVR2billion (US$129million). Jihad has told the Majlis’ Finance Committee that he expected this figure to rise to MVR6billion (US$387million) by year’s end – 28percent of GDP – alleging that the previous government left unpaid bills equal to over one third of this anticipated deficit.

Former Minister of Economic Development Mahmood Razee told Minivan News that this increased expenditure in the face of a pre-existing deficit represented the government “ignoring reality.”

“If they don’t get the loan, they will have to cut travel expenses, stop certain programs – take drastic measures or get another loan,” said Razee, claiming that the only alternative would be to sell treasury bills.

Following reports in August that the government was attempting to raise funds through the sale of treasury bills, former Finance Minister Ahmed Inaz said that this would not address the concerns of the IMF, prolonging economic uncertainty.

China has made large commitments towards the Maldives’ economic development in recent months, although Razee said he believed that current changes within the Chinese government in the upcoming month made this an inopportune time to look there for additional financial aid.

In August, the current Finance Ministry announced its own austerity measures intended to wipe over MVR2.2billion (US$143million) from this year’s budget deficit though few of these propositions have as yet been followed through.

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India grants further US$25million to Maldives

India has granted a further US$25million to the Maldives as part of the $US100million standby credit facility agreed during last November’s official visit from Prime Minister Manmoham Singh.

Indian High Commissioner D M Mulay signed the agreement with Minister of Finance and Treasury Abdulla Jihad at the Indian High Commission, local media reported.

Mulay, who was not responding to calls at the time of press, said that the deal represented the third instalment of the credit facility, with the previous two instalments having amounted to US$50million.

The previous tranche of US$30 million was released following President Waheed’s first official visit to India in May.

Mulay is also reported to have said that the rest of the promised credit will soon be handed to the Maldivian government:  “The paperwork on the agreement is being processed now, the amount will soon be awarded to the Maldives,” Haveeru quoted Mulay.

A standby line of credit is normally forwarded to countries which have reached macroeconomic sustainability but experience short term financing issues.

The release of this credit comes just days after Waheed completed his first official state visit to China.

During this trip, Waheed finalised agreements for a US$500 million Chinese loan with the assurance of more aid available when needed.

The loans, equal to nearly one quarter of the Maldives’ GDP, are said to include $150 million (MVR2.3billion) for housing and infrastructure, with another $350million (MVR5.4billion) from the Export-Import Bank of China, reported Reuters.

Jihad told Minivan News last week that, despite securing this money from China, the government would still be considering austerity measures which are being considered in order to reduce the state’s budget deficit.

With income lower and expenditure higher than predicted, this year’s budget deficit had been forecast to reach MVR9.1billion (US$590million), equivalent to around 28 percent of nominal GDP.

India has traditionally enjoyed close ties with the Maldives, although there have been increasingly strong links between the Maldives and China, largely due to the number of Chinese tourists visiting the Indian Ocean nation.

A Chinese embassy opened in Male’ in time for the opening of the SAARC summit last November, reciprocating the opening of a Maldivian mission in Beijing in 2007.

Indian officials were reported at the time as having concern that the move was part of China’s “string of pearls” policy which supposedly involves Chinese attempts at naval expansion into the Indian Ocean.

After the awarding of the Chinese loan, however, former Foreign Minister and current UN Special Rapporteur to Iran, Dr Ahmed Shaheed was keen to play down any suggestions that the Maldives was about to significantly change its foreign policy priorities.

“This is very much in keeping with past policy. The lines so far drawn have demonstrated that the Maldives remains primarily SAARC focused, followed by trading partners in the EU and Singapore. China has moved into this second category,” he added.

“Nothing will change the fact that we are only 200 miles from Trivandrum,” said Shaheed.

When asked upon his recent return from Sri Lanka what the Maldives’ policy was regarding Sino-Indian competition in the region, President Waheed is said to have responded that the policy of a small nation like the Maldives ought to be to avoid too great an involvement in geopolitics.

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Finance Ministry proposes drastic austerity measures to Parliament

Parliament’s Finance Committee last week received a proposal from the Finance Ministry which, if accepted, would save MVR2.2billion (US$143million).

The austerity measures include raising Tourism Goods and Services Tax (TGST) to 15 percent,  terminating electricity subsidies in Male’, increasing import duties on alcohol and imposing a 3 percent  duty on oil, “reforming” the Aasandha health insurance scheme, and reducing the budget of every Ministry and independent institution by 15 percent – among other measures.

If successfully carried out the Ministry’s proposals would halve this year’s budget deficit, currently projected to reach MVR9.1billion (US$590million).

The original budget for 2012 envisioned that revenue would rise to MVR11.4billion (US$740million) with expenditure anticipated to be MVR14.5 billion (US$941million). This would have resulted in a budget deficit of around MVR3billion (US$194million), representing 10 percent of GDP.

However, the revised figures provided by the Finance Ministry have shown that revenue will only be MVR8.4billion (US$545million) for this year with actual expenditure rising to around MVR18 billion. The ensuing deficit would represent around 28 percent of the nominal GDP for 2012, which was predicted to be MVR31.7billion (US$2billion).

This ballooning deficit has alerted the IMF which has expressed concerns that without raising revenue and cutting expenditures the country risked exhausting its international reserves and sparking an economic crisis.

The Maldives Monetary Authority’s (MMA) most recent statistics show that the country’s gross international reserves had decreased by 2 percent in the 11 months up to May before dropping by a further 6 percent between May and June this year.

The MMA’s data shows this figure to represents around ten weeks worth of imports in the Maldives, a country which relies heavily on imports, spending around two thirds of its real GDP on foreign goods each year.

The current government has pointed the finger at the previous administration for the current budgetary issues whilst simultaneously implementing a series of policies which have added to its financial obligations.

These deficit expanding policies have included promoting 1000 police officers,  doubling of the budget of the Maldives Marketing and Public Relations Corporation (MMPRC) to MVR69.3million (US$4.5 million), hiring of 110 new police officers, and a reinterpretation of the legal provision for the payment of resort island lease extensions which had cost the government MVR92.4million (US$6million) already in comparison with the same point last year.

The government also chose to reintroduce a MVR100 million (US$6.5 million) fishing subsidies and to reimburse MVR443.7 million (US$28.8 million) in civil servant salaries, reversing measures implemented during the previous government’s own austerity drive.

The raft of measures currently being considered by the Finance Committee represent the most comprehensive effort thus far to reign in the deficit.

Austerity Measures

The proposed measures for reducing state expenditure were published in local newspaper Haveeru. They include discontinuing electricity subsidies in Male’ City which, where around one third of the nation’s population live, saving MVR135million (US$8.7million).

Reducing the state’s offices budget by up to 15 percent is expected to save MVR1.5billion (US$97million) and was first suggested by Finance Minister Abdulla Jihad in May. Jihad mentioned at the time that a pay review board would be convened in order to “harmonise” the pay of government appointees.

The document received by Haveeru revealed details that this pay review body will seek to restructure pay schemes in order to save MVR100million (US$6.5 million). It also emerged that MVR300million (US$19.5million) could be saved by introducing a recruitment freeze in the civil service.

The austerity plan also includes a reform of the Aasandha national health care scheme, the cost of which promised surged ahead of its MVR720million (US$46.7million) budgeted allowance shortly after its introduction in January. After discussions with the government, the Aasandha company has decided to share the costs of private treatments with patients.

The Finance Ministry predicts that reform of the Aasandha scheme can save the government MVR200million (US$12.9million).

Revenue raising

Proposed revenue raising measures include raising the import duty on oil, upon which the country relies heavily for fuel, to three percent. MMA figures show that the price of crude oil has decreased 15 percent in the 12 months leading up to June whilst the domestic price had remained the same with the exception of diesel which increased in price by 2 percent.

Import duties are also to be raised on items whose value exceeds MVR6.4million (US$41million) as well as on liquor imports. The duty on both of these items had been raised as part of the amended Export Import Act in December of last year which saw duties on pork and alcohol products, used exclusively by the resorts, go up by 42 percent.

The tourist industry will be similarly hard-hit by the proposals to raise Tourism Goods and Services Tax (TGST) to 15 percent.  The IMF had previously urged the government to double the 6 percent tax levied on all goods and services sold in resorts with Tourism Minister Ahmed Adheeb announcing his intention in May to consult the tourism industry.

Minivan News discussed the potential increase with several resort managers at the time, and was told that an increase would have  “serious ramifications” for certain sections of the market. One manager said that the fixed term contracts many resorts have with operators meant that increases to T-GST would have to be absorbed from revenue, resulting in potential cutbacks to staff or services.

Visitors to the Maldives could also be affected by the proposed increase in the Airport Service Charge from US$18 (MVR277) to US$30 (MVR462).

Further rises to the tax levied on luxury items would be accompanied by the introduction of taxes to the sale of flats and on telecoms service in the Finance Ministry’s plan.

The visa fee paid by foreigners working in the Maldives is also slated to see be increased by MVR150 (US$10). Estimates of expatriate workers are be as high as 110,000 although the same estimates suppose that around half to be undocumented.

Despite the recent suspension of sittings of the full Majlis, the Finance Committee continues to hold meetings as normal.

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