While the Maldivian economy is performing well, fiscal indiscipline remains a problem as budget deficits continue to grow says the International Monetary Fund (IMF).
“We see that the economy is relatively buoyant,” said the IMF delegation in a statement given to the media today.
“However, despite the improvement in the real economy, the fiscal deficit has continued to widen and this is because of very high public expenditure and public debt is very high, so we think the fiscal position does need to be addressed.”
Parliamentary debate on the record MVR24.3 billion (US$1.5 billion) state budget for 2015 concluded this week, with opposition MPs expressing doubts over whether the MVR21.5 billion revenue forecast could be realised.
Regarding the recently introduced special economic zones (SEZs), the IMF delegation noted today the importance of a “transparent and even handed” regulatory framework and that any exemptions to tax are “clearly ring-fenced and limited”.
Meanwhile, it was noted that revisions to estimates of the current account deficit had indicated greater stability in the economy than previously thought.
During the IMF’s last visit to the country in February this year, the delegation expressed surprise at the resilience of the economy, admitting that it was still studying how the domestic economy has remained afloat in the face of soaring public debt and persistent budget deficits.
Maldives Monetary Authority estimates of the final current account deficits for 2014 fell from US$562.5 million in April to US$269.9 million in a macroeconomic report released in May.
The latter report,however, contained warnings against “slippages in revenue or current expenditure” which were echoed by the IMF today.
“The 2015 budget includes both revenue and spending measures to tackle the fiscal deficit and we think it’s very important that these measures are fully implemented,” explained the delegation today.
The IMF – which has previously urged greater taxation of the lucrative tourist industry – said today that it supported the recently announced green tax, as well as pushing for more efficient subsidies.
The delegation noted that measures to target electricity subsidies to areas where they are most needed had been included in next year’s budget.
MVR3.4 billion (US$220 million) – or 14 percent of the budget – is anticipated from new revenue raising measures which includes revisions of import duty rates from July onward, fees from investments to the SEZs, income from the home ownership programme, and leasing 10 islands for resort development.
Minister of Finance Abdulla Jihad noted in August that spiralling expenditure and revenue shortfalls could see the budget deficit balloon MVR4 billion (US$259 million), although he gave the Majlis a revised figure of MVR1.6 billion (US$103 million) when presenting budget this month.
While the World Bank recently predicted that the Maldives economy would grow by 4.5 percent this year, Jihad has said public debt is expected to reach MVR31 billion (US$2 billion) or 67 percent of GDP at the end of 2014.
“Despite achieving economic progress, the Maldivian economy is fragile and the Maldives’ financial situation is not in the most appropriate state at present,” Jihad told the Majlis.
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