The Maldives’ economy is at risk due to excessive state expenditure, the World Bank has warned in a new report.
The report titled “Maldives Development Update October 2013” (English) paints a dire financial picture, brought on by the Maldives pursuing untenable measures to finance the state budget.
Noted areas of excess include a high civil service wage bill, healthcare and electricity subsidies, and transfers to State Owned Enterprises (SOEs).
“Maldives is spending beyond its means and financing the budget risks affecting the real economy,” the report said.
Short-term budget financing measures such as selling T-bills and printing money poses risks such as the devaluation of the rufiyaa, while unpaid bills could disrupt basic services such as electricity, the report warned.
Foreign reserves are critically low – despite the Maldives Inland Revenue Authority (MIRA) reporting increased income from taxation – and remain under pressure from high public spending and high demand for imports.
President Abdulla Yameen’s administration has submitted a record MVR 17.5 billion (US$ 1.1 billion) budget for 2014 with a projected deficit of 2.2 percent of GDP. Recurrent expenditure continues to account for over 70 percent of the budget.
The government had budgeted MVR720 million (US$ 46,451,613) for the universal healthcare scheme Aasandha, but spent over MVR 900 million (US$ 58,064,516) the report stated, adding that electricity subsidies had also proved costlier than forecast due to an increase in international oil prices.
Transfers to SOE’s “increased significantly to cover operational losses and salary increases to SOE staff,” the report said.
In February this year, the CEO and Managing Director of Maldives Ports Limited Mahdi Imad was dismissed by the government shortly after the company’s board of directors approved remuneration of MVR120,000 (US$7800) for the post of MD, and MVR130,000 (US$8400) for the post of CEO. The board in November decided to reduce the CEO’s salary to MVR 62,000 (US$4000).
Public debt at 81 percent of GDP
In order to finance the deficit, the Ministry of Finance and Treasury is accused of undertaking measures that “pose macro risks” that have led to “significant accumulation of debt in a short period of time.”
At present, public debt stands at an “unsustainable” 81 percent of GDP, the report stated. The World Bank projects the debt will rise further to about 96 percent by 2015.
“This debt path is unsustainable and suggests there is little room for additional borrowing,” the report warns.
T-bills and monetisation
The government is increasingly relying on short-term commercial borrowing in the form of selling treasury bills (T-bills) to the banking, private sector, and high net worth individuals at steep interest rates. The report also notes the growing monetisation of the deficit and the increasing build-up of arrears.
According to the MMA’s figures, outstanding T-bills stood at MVR8.5 billion at the end of November.
With the private sector’s appetite declining for T- bills, the government has been forced to pay high interest rates. The short-term rates for 28-day and 91-day T-bills rose by 98 and 105 basis points respectively, the World Bank said, reiterating that such unsustainable debt limits room for further borrowing.
In August this year, MMA Governor Dr Fazeel Najeeb said banks were investing in T-bills instead of in the private sector, leading to a slowdown in the private sector.
He also said excessive government expenditure had forced the MMA to print “large quantities of money”. MMA figures show the government has printed over MVR1.7 billion (US$ 109,677,419) this year alone to plug the deficit.
Monetization is causing the value of the rufiyaa to drop, Najeeb warned.
“I believe that the private sector has slowed down, and investments by the banks are heading towards government treasury bills. The value of rufiyaa is dropping because government accounts do not have the money, because it is a necessity to print large quantities of money,” Najeeb said.
The Maldives is currently facing a dollar shortage, with clogged bank counters and the police warning the public to stay vigilant citing increased number of dollar exchange scams.
“The risk of money printing, due to the cash constraints, could threaten external stability, inflation, and risk sharp adjustment in the exchange rate. The biggest risk posed by a sharp exchange rate adjustment is its possible impact on poverty, since the most basic food items in Maldives are imported,” the report warned.
“Unpaid invoices disrupt fuel invoices”
The third measure the government has been taking to finance the budget is the accumulation of arrears. Although the Ministry of Finance and Treasury estimated arrears totalled 3 percent of GDP, the World Bank gave a figure closer to 6 percent.
Most of these payments are owed to the State Owned Enterprises providing utilities and services. About half of the arrears are owed the State Trading Organization (STO) which is responsible for all the trading activity on behalf of the Maldivian government.
“The bulk of the liabilities come from the import of fuel for supplying electricity. Since the company has been relying on credit from suppliers to continue operations, in the event that unpaid invoices disrupt fuel imports, the electricity supply in certain islands could be affected,” the report warns.
In November, newly elected President Abdulla Yameen Abdul Gayoom announced that the STO was bankrupt.
Fears of an impending oil shortage crisis had a risen earlier in the month after then-Managing Director Shahid Ali warned that the company would run out of oil as early as November 10 if it did not pay some of its US$20 million debt to suppliers.
Shahid told an emergency meeting of parliament that government-owned companies had failed to pay the STO the almost US$40 million it was owed, and appealed to the central bank to use the foreign currency reserves to bail it out of its debt. According to local media, MMA printed the money.
“External reserves critically low”
Although reserves have held up “better than expected,” they will continue to be under pressure from high public spending, high demand for imports and pressure on the currency.
The World Bank report notes that foreign reserves dwindled at the beginning of 2013, with the Maldives having to to repay US$100 million in treasury bonds to the Indian government by February 2013. Gross reserves improved, however, due to increased income from MIRA, which had offset the decrease.
At present, reserves stand at US$341.8 million, worth approximately 2.5 months of imports.
With regard to balance of payments, the government estimates the current account deficit will reach US$690 million or 28 percent of GDP by the end of 2013.
“This means reserves will continue to face serious pressures in the future, which could be exacerbated if the government is forced to pay compensation for the reversal of the GMR airport concession,” the report said.
Reserves are also at risk from the potential US$1.4billion compensation settlement resulting from the terminated GMR airport concession deal – an amount that eclipses the annual state budget.