budget deficit – Page 3 – Minivan News

Fiscal deficit in 2011 expected to fall to single digit, says President

The government expects the fiscal deficit to have fallen to a single digit at the end of the year, below the previous forecast of 11 percent of GDP, President Mohamed Nasheed said in his weekly radio address on Friday.

“The budget deficit as a percentage of GDP or national productivity has been estimated for next year at [budget] meetings with ministers and heads of government offices,” he said. “From that estimate we know that government expenditure has been substantially reduced in a number of different areas. For this year, we forecast a budget deficit of 11 percent. We have noted now that it has been reduced by three or four points.”

The government hoped that the fiscal deficit would be below 10 or “a single digit figure” when it is calculated at the end of the year, he said.

The budget deficit, which stood at just 1.9 percent of the economy in 2004, expanded to 7.3 percent in 2006 and ballooned to 23.9 percent in 2007, according to the International Monetary Fund (IMF).

The fiscal deficit exploded on the back of a 400 percent increase in the government’s wage bill between 2004 and 2009, with tremendous growth between 2007 and 2009. On paper, the government increased average salaries from Rf3000 to Rf11,000 and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country – doubling government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

While preliminary figures had pegged the 2010 fiscal deficit at 17.75 percent, “financing information points to a deficit of around 20-21 percent of GDP”, down from 29 percent in 2009, the IMF noted in March this year.

“We see bringing the fiscal deficit down as the key macroeconomic priority for the Maldives,” the IMF’s Mission Chief to the Maldives, Rodrigo Cubero, told Minivan News at the time. “A large fiscal deficit pushes up interest rates, thereby undermining private investment and growth, and also drives up imports, putting pressure on the exchange rate and inflation, all of which hurts the Maldivian people, particularly the poor.”

“Further efforts are still needed to reduce the fiscal deficit. Those efforts should comprise further tax reforms as well as measures to reduce expenditure and to improve the channelling of social expenditures to the needy.”

Meanwhile in a booklet issued to media titled “the DRP’s response to the government’s economic nuisance package,” the main opposition Dhivehi Rayyithunge Party (DRP) strongly objected to a bill on fiscal responsibility currently before parliament.

The bill was “a plot” devised to wrest financial control from local councils and negate parliament’s contentious amendments to the Public Finance Act, the DRP argued.

The DRP also noted that provisions on imposing limits to government spending would only come into force after 2013.

“In the past three years, the MDP [Maldivian Democratic Party] government earned billions of rufiya by selling off state assets, facilitating business opportunities for their friends and introducing new taxes,” the DRP said. “Nonetheless, while the health sector, the education and overall standard of living has gone from bad to worse, it is unclear how the government spent the billions and billions of rufiya it received.”

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Details of government spending and revenue made public

Government expenditure outstripped revenue by 20 percent between January 1 and September 8, 2011, according to the first of weekly expenditure statements made public by the Ministry of Finance and Treasury yesterday.

While government income reached Rf6.3 billion (US$408.6 million) at the end of last week, government spending however stood at Rf7.5 billion (US$486.4 million), resulting in a fiscal deficit of Rf1.3 billion (US$84 million) financed by loans and sale of Treasury bills.

In addition to Rf3.2 billion (US$207.5 million) spent on salaries and allowances for state employees – the single largest source of expenditure – Rf2.4 billion (US$155.6 million) was needed to cover recurrent expenditure or administrative costs.

Capital expenditure was meanwhile Rf1.2 billion (US$77.8 million) while spending on debt service or debt repayment reached Rf563 million (US$36.5 million).

President Nasheed announced at a ceremony held in August to unveil the government’s ‘Fiscal and Economic Reform Programme’ that the government would publicise details of expenditure on a weekly basis.

In December 2010, parliament approved a Rf12.37 billion (US$802 million) annual state budget with a projected revenue of Rf8.8 billion (US$570.7 million) and recurrent expenditure of Rf9.8 billion (US$635.6 million) – 49 percent of which was to be spent on salaries and allowances.

Recurrent expenditure was expected to be 79 percent of government spending.

An additional Rf200 million (US$12.9 million) was injected to the budget in anticipation of the local councils that came into being in February this year.

Plugging the deficit

In March this year, the International Monetary Fund (IMF) warned that “significant policy slippages” have undermined the country’s ability to address the ballooning budget deficit.

“On the expenditure side, there have been no net fiscal savings from public employment restructuring, public sector wages will be restored to their September 2009 levels earlier than expected, and the new Decentralisation and Disability Bills will lead to considerable spending increases,” the IMF noted in a statement. “Also, the Business Profit Tax will come on stream eighteen months later than planned [the tax came into force on July 18, 2011].”

The IMF warned that the Maldives economy was presently unsustainable, on the back of “expansionary fiscal policies” from 2004 which left the country especially vulnerable to the decline in tourism during the 2008-2009 recession.

The country’s fiscal deficit exploded on the back of a 400 percent increase in the government’s wage bill between 2004 and 2009, with tremendous growth between 2007 and 2009. On paper, the government increased average salaries from Rf3000 (US$195) to Rf11,000 (US$713) and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country – doubling government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

The IMF said that while it recognised “the difficult political situation facing the authorities”, “decisive and comprehensive adjustment measures” were required to stabilise the economy, allow sustainable growth and reduce poverty. In particular, it raised concern about the “lack of significant progress in public employment restructuring.”

An internal World Bank report produced for the donor conference in May 2010 meanwhile noted that increases to the salaries and allowances of government employees between 2006 and 2008 reached 66 percent, which was “by far the highest increase in compensation over a three year period to government employees of any country in the world.”

President Nasheed told delegates at the conference that the government was “committed to financial prudence and long-term stability.”

“We have scrapped the reckless policies of the past, which saw money printed to finance a growing budget deficit,” he said, adding that the government was working with “international multilateral organisations, to ensure we do not spend more than we can afford.”

On the size of the bloated civil service, Nasheed said, “In the past, the government offered people jobs not because there was work that needed doing. The government offered people jobs as bribes; to get their allegiance to a repressive regime. Almost 10 per cent of the population works for the government – a staggering amount.

“And there are more civil servants than there is work to be done. Many government employees are under worked; chained to demoralising jobs. Our administration will therefore dramatically reduce the number of civil servants. But we must provide loans for outgoing civil servants, to help them set up businesses or acquire new skills.”

In April, the government announced a programme to incentivise voluntary redundancy in the civil service.

“Political backlash”

A UNDP paper on achieving debt sustainability in the Maldives published in December 2010 meanwhile observed that former President Maumoon Abdul Gayoom responded to growing calls for democratisation in 2004 with “a substantial fiscal stimulus programme” of increased government spending, “much of which was not related to post-tsunami reconstruction efforts.”

When the impact of the worst global recession in decades struck the Maldives in September 2008, “the Maldivian economy was already in the middle of a severe economic crisis with substantial fiscal and current account deficits, high liquidity growth, double digit inflation, pressure on the fixed exchange rate, increases in public and private sector debt, rising inequalities between the capital and the atolls, and a costly civil service.”

However the new government’s efforts to reduce government spending with pay cuts of up to 20 percent along with plans to downsize the civil service – which employs a third of the country’s workforce – was met with “a severe political backlash from parliament.”

“In March 2010, the parliament passed a 2010 budget with amendments which increased the government’s proposed budget by 7 percent (or 4.5 percent of GDP),” the paper noted, referring to parliament’s addition of Rf800 million (US$51 million) to the 2010 budget.

“Three quarters of this increase funded a reversal in civil service wage cuts implemented the previous year. Progress on redundancies has also been slower than expected and reforms in this area are unlikely to be completed until the end of 2011 at the earliest. This will have important fiscal consequences.”

In July, the Finance Ministry publicised details of expenditure on state employees, showing that Rf1.6 billion (US$103 million) had to be spent on salaries and allowances for 20,476 civil servants.

State wage expenditure	Annual expenditure on salaries and allowances	Percentage of total wage bill or expenditure on employees
Civil servants or employees under the executive (excluding political appointees and councillors)	Rf1,596,029,007	39 %
Uniformed bodies	Rf1,001,489,486	24 %
Political appointees in the executive branch	Rf99,178,980	2 %
Administrative staff at the President’s Office	Rf27,326,730	1 %
Councils	Rf717,250,030	17 %
Judiciary	Rf210,282,463	5 %
People’s Majlis or legislative branch	Rf79,210,718	2 %
Institutions dependent on state budgets	Rf393,620,943	10 %

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Government inherited outstanding debts of US$446 million, says Finance Minister

The former government left a dispersed outstanding debt of US$446.5 million owed to foreign and local banks, Finance Minister Ahmed Inaz informed MPs today during Minister’s Question Time in parliament.

In response to a query by Dhivehi Qaumee Party (DQP) MP Riyaz Rasheed about the amount of loans obtained by the previous and incumbent governments, Inaz revealed that as of April 30 2011, the new administration has taken loans amounting to US$196.4 million.

“Out of that, US$5.1 million has been paid back in accordance with the agreement,” he said. “Therefore, the total dispersed outstanding amount is US$191.2 million.”

Inaz stressed that the loans of both governments were being paid on schedule “without any default.”

Outstanding debts of the previous government included a loan obtained for a fisheries project in 1979, Inaz said.

Asked by MP Abdulla Yameen – leader of minority opposition People’s Alliance – if the figures provided included receipts from sale of treasury bills, Inaz explained that “the total figures I’ve provided do not include treasury bills because the question today was about loans, which is different from securities.”

The total domestic debt in November 2008 – including T-bills issued by the former government – when the new administration took office stood at Rf809 (US$52.4 million), Inaz revealed.

“As of July, 2011, there is now Rf4.9 million (US$317,700) as total debt in T-bills,” he said, adding that parliament approved a budget with Rf1.3 billion (US$84 million) from issuance of T-bills to cover recurrent expenditure.

Inaz noted that the state budget passed by parliament in past years was structurally in deficit, with expenditure outstripping revenue: “To solve this, the tax bills proposed by the government has to be passed and I hope the honourable Majlis will solve this,” he said.

Jumhooree Party (JP) Leader Gasim Ibrahim – who as Finance Minister oversaw the expansionary fiscal policies – meanwhile asked to clarify if the total outstanding debt of the former government included foreign loans to assist victims displaced by the December 2004 Asian tsunami.

According to a UNDP paper on the Maldives’ debt sustainability published in December 2010, “as a percentage of GDP, public debt levels have almost doubled from 55 percent in 2004 to approximately 97 percent in 2010.”

“Public debt service as a percent of government revenues will more than double between 2006 and 2010 from under 15 percent to over 30 percent,” the paper noted. “The IMF [International Monetary Fund] recently classified the country as ‘at high risk’ of debt distress. From a human development perspective, the extent to which increased debt service obligations may put at risk key social and infrastructure expenditures give serious cause for concern.”

In May, 2011, the IMF warned that the Maldives “continues to suffer from large fiscal and external imbalances.”

The IMF agreed to a “medium-term” policy from the government to reduce its budget deficit “substantially”, “both through additional revenue measures – which would require the support and approval of the Majlis – and through expenditure restraint.“

“The authorities have introduced an initial voluntary separation plan for government employees and are continuing their detailed analysis of the public service, with an eye toward right-sizing government over the medium term,” the IMF noted.

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Government income must be doubled, says President

Government income has to be doubled to create fiscal space for increased capital expenditure and investment for development opportunities, President Mohamed Nasheed said in his radio address yesterday.

Speaking on the cabinet decision last week to incentivise voluntary redundancy in the civil service, President Nasheed reiterated that facilitating more attractive and higher paying employment opportunities for civil servants and government employees remains “a major goal for the government.”

“Development opportunities are going to be very limited if a large part of state revenue is recurrent expenditure,” he said. “We have to increase capital expenditure. The best way is to exponentially increase government income.”

While revenue was increasing year by year, Nasheed continued, current levels of annual income have to be “doubled” to make fiscal space for capital investments.

“It will take time for the state to reach that level,” he added. “It is necessary for the government to maintain recurrent expenditure at a certain level to reach [the goal]…The government’s purpose, or objective, is to find ways for employees to improve their standard of living.”

Under the scheme launched by cabinet on Tuesday, civil servants and government employees will be eligible for one of four retirement incentive packages: no assistance, a one time payment of Rf150,000 (US$11,700), a payment of Rf150,000 and priority in the small and medium enterprises loan scheme (for those 18-50 years of age), or a lump sum of Rf 200,000 (US$15,600) and priority in government training and scholarship programmes (for those 18-40 years of age).

Government employees above the age of 55 who retire voluntarily will be given the same benefits as those released by the Civil Service Commission (CSC) at the mandatory retirement age of 65.

The deadline to apply for the programme with the Finance Ministry is May 31, 2011.

Austerity battles

In August 2009, the government’s decision to implement austerity measures to alleviate the crippling budget deficit – including unpopular pay cuts of up to 15 percent for civil servants – was met with protests and fierce resistance from opposition parties and the CSC.

President Nasheed announced at the time that the government planned to halve the 32,000-strong civil service by 2011 through redundancies and transfer of employees to corporations.

While the President stated that the civil service should be composed of no more than 18,000 well-paid and qualified staff, CSC Chair Mohamed Fahmy told Minivan News last week that the commission currently has 19,000 permanent staff.

At the height of a protracted legal dispute between the CSC and government last year, the parliament-appointed independent commission was accused of attempting to topple the government and “plunge the Maldives into chaos.”

International organisations such as the International Monetary Fund (IMF) and the World Bank meanwhile insist that reckless expansionary fiscal policies from 2004 onward that saw doubling expenditure on salaries between 2007-2009 crippled the economy.

“The Maldives faces the most challenging macroeconomic situation of all democratic transitions that have occurred since 1956,” read a World Bank report in March 2010.

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Positive economic development requires “less destructive political climate”, says World Bank

A strong rebound in tourism and government policy efforts to redress macroeconomic imbalances have stabilised the macroeconomic situation and spurred growth in 2010, but a fractious political environment and accelerating international commodity prices remain key challenges, according to a World Bank Economic Update Report published last week.

The report notes that fiscal consolidation – reigning in the ballooning budget deficit with austerity measures and the introduction of taxation on business profits – “remains the foremost challenge in the coming years”.

“A less destructive political climate” will be needed to maintain recent positive developments, the World Bank cautions.

“Despite having posted better-than-expected fiscal results in the first half of the year, the country will be hard-pressed to sustain this in the medium term,” it reads. “However, despite the challenges, the government remains steadfastly committed to fiscal consolidation.”

An internal report by the World Bank, obtained by Minivan News in May, revealed that the doubling of spending on state salaries in 2007-09 crippled the country’s economy, and left the Maldives “facing the most challenging macroeconomic situation of any democratic transitions that has occurred since 1956.”

Fiscal consolidation

While maintaining public sector pay cuts and other austerity measures introduced in October 2009 was “one of the government’s main achievements”, the most recent report notes that it is “highly likely that the forthcoming budget for 2011 will restore the civil service salaries to previous levels.”

With the restoration of civil service salaries in January 2011, salaries of police and army officers as well as political appointees will also be simultaneously restored – “thus completely reversing the pay cuts for all categories of public sector workers.”

The report flags slow progress on “rightsizing the public sector”, noting that planned layoffs “have not been carried out to a significant extent.”

Moreover, public sector workers transferred to corporatised entities – currently state-owned – “remain directly within the payroll of the government.”

In addition, the government’s pledge in May to the seven percent contribution from public sector employees to the pension fund “would likely result in an additional Rf94 million (or 0.5 percent of GDP) in expenditure over the remaining seven months of the year.”

The new structure of island and atoll councils is meanwhile expected to cost the government an extra Rf173 million (US$13.5 million).

However, the introduction of a tourist goods and services tax (TGST) and replacing resort leases with a land rent was a “positive fiscal development.”

As of July, the fiscal deficit was 15.5 percent of GDP “against a target for the year of 18.2 percent of GDP.”

Total expenditure during the first seven months of the year was meanwhile below the target of Rf6 billion at Rf5.25 billion “due largely to a cut-back of non-salary operating expenses and capital expenditure.”

However, total revenue as of July was 12 percent below budget as a result of marginal increases in import duty collection and tourism tax receipts.

While the budget for 2010 anticipated that parliament would pass legislation for Business Profit Tax in December 2009, the “earliest likely start date” for the tax is now expected to be the first quarter of 2011.

The report notes that continuing delays to passing the bill “will hurt the fiscal position.”

Transformation in monetary policy

The Maldives Monetary Authority (MMA) ceasing printing money to finance the budget deficit – deficit monetising – in September 2009 was “a transformation” of monetary policy in the Maldives.

The report notes that open market operations (OMO) commenced by the MMA in August 2009 “has been carried out successfully, draining much of the excess rufiyaa liquidity in the system.”

As a result of the successful OMO, “[net] credit outstanding to the government from the MMA has dropped, thereby reaching the target of the IMF program for end-August.”

The MMA has also been assisting the government to “broaden the base of the domestic T-bill [Treasury Bill] market”, augmenting the existing portfolio of government securities in July with the introduction of the 182-day T-bill.

In December 2009, the government issued US$100 million worth of T-bills to the State Bank of India, the first issuance of securities denominated in US dollars.

The report notes that despite a gradual recovery in global commodity prices, “national headline inflation remains benign and in single digits” at 6.3 year-on-year at August 2010, down from 6.9 percent in July.

In August inflation at the atolls dropped to just 4.4 percent, despite being traditionally higher than in the capital Male’.

Public sector credit (PSC) meanwhile continued to stagnate in 2010, contracting one percent by July.

“Business sentiment remains subdued, with work on resort construction having hit a snag, and the domestic banking system not showing enthusiasm for credit expansion,” it finds.

However, despite recording “the fastest growth in PSC for nearly 20 months – 1.5 percent –driven mainly by credit to the resort sector” in July, “it may be a while before the PSC shows a sustained sign of recovery, with the global conditions still weak.”

Widening current account deficit

While the Balance of Payments situation improved significantly in 2009 “with a faster contraction in imports relative to exports”, rising import prices have contributed to a widening trade deficit.

“During the first seven months of 2010, total import growth (12.3 percent) outstripped export growth (nearly 9 percent), and resulted in a widening of the trade deficit to US$ 506.5 million – 13 percent higher than in 2009,” it reads.

“If global commodity price growth does not accelerate, the trade deficit is likely to remain manageable during the rest of the year, and coupled with higher inflows from tourism,15 the overall current account deficit is expected to narrow further in 2010 to 27 percent of GDP.”

As the Maldives is “one of the most open economies in the world” with imports accounting for over 90 percent of GDP, the report warns that rising international food and fuel prices could worsen the trade deficit, put pressure on foreign exchange reserves and increase consumer price inflation.

“One positive aspect of the rising value of commodity imports is that fiscal outcomes could improve, if planned expenditure cuts are implemented, since 30 percent of government revenues come from import duties,” it concludes.

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Economic recovery dependent on tourism: Adhil Saleem

Minister of State for Economic Development Adhil Saleem told Miadhu that economic recovery can only be confirmed when there is a clear progress in the tourism sector and tourist arrivals.

Saleem said the government is addressing the budget deficit by raising additional funds, mainly increased revenue from the tourism sector.

He added that the tourism sector has improved but not the government’s expectations.

“Economy will only progress when there is increased spending,” Saleem said, adding that the construction of new resorts is crucial to the recovery of the tourism industry.

Saleem also mentioned the importance of improving the fishing industry. “We cannot solely depend on tourism,” he said, adding that the fisheries industry is in “bad shape.”

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