The Maldives Monetary Authority (MMA) has advised against making ad hoc changes to policies outlined in the 2015 state budget that could affect projected revenue and expenditure.
“If policies are changed the budget deficit would increase and become difficult to finance,” the central bank cautioned in its professional opinion (Dhivehi) on the budget, which was made public on Thursday (November 20) after media was excluded from parliament’s budget committee’s meeting with the MMA governor last week.
The MMA recommended ensuring that forecast revenue would be realised in full if policy changes become necessary during the year.
While the budget included a ‘green tax’ for tourists of US$10 per day, Tourism Minister Ahmed Adeeb later announced that the government has decided to lower the rate to US$6 and exempt guest houses.
The MMA recommended introducing the tax before November 2015 as planned in order to raise the income anticipated in the budget.
During the budget debate in parliament last week, minority leader Ibrahim Solih questioned whether the MVR21.5 billion (US$1.3 billion) revenue forecast in the budget could be realised.
While MVR340 million (US$22 million) was forecast as income from the green tax in the last quarter of 2015, Solih observed that the decision to lower the rate and delay implementation would lead to a revenue shortfall of about MVR300 million (US$19.4 million).
The MMA also advised against launching infrastructure projects without securing financing.
Following its annual Article IV consultation, the International Monetary Fund (IMF) advised last week that “large capital investments should only be embarked upon when full financing is secured at affordable costs and the growth benefits clearly outweigh the costs.”
The MMA meanwhile recommended targeting subsidies to the needy from January 2015 onward.
Finance minister Abdulla Jihad noted in his budget speech to parliament that targeting the electricity subsidy to low-income families or households would save 40 percent of the government’s expenditure on the subsidy.
In May, MMA Governor Dr Azeema Adam called for “bold decisions” to ensure macroeconomic stability by reducing expenditure – “especially the un-targeted subsidies”.
Deficit financing
The central bank also recommended implementing a population consolidation policy in the medium-term in order to “reduce state expenditure and provide services to the public in a sustainable way”.
Additionally, the MMA suggested that 85 MPs in the People’s Majlis and more than 1,000 councillors were disproportionately high and advised revisions to the framework of governance.
The current model of more than 1,000 elected councillors approved in 2010 by the then-opposition majority parliament was branded “economic sabotage” by the Maldivian Democratic Party government, which had proposed limiting the number of councillors to “no more than 220.”
The new layer of government introduced with the first local council elections in February 2011 cost the state US$12 million a year with a wage bill of US$220,000 a month.
Recurrent expenditure in 2015 is meanwhile expected to be MVR15.8 billion (US$1 billion) or 65 percent of the budget.
Referring to the proposed tax and tariff hikes in the budget, the MMA suggested that businesses were not able to adequately prepare or plan accordingly when new taxes are introduced with each year’s budget.
Taxation on businesses should be planned at least three years in advance and should not be raised in that period, the central bank recommended.
The MMA also recommended changing short-term debt to long-term and to cease depending on the domestic market to finance deficit spending in favour of “selling long-term foreign bonds at low interest rates”.
In his budget speech, finance minister Jihad revealed that public debt is expected to reach MVR31 billion (US$2 billion) or 67 percent of GDP at the end of 2014.
According to the central bank, the total outstanding stock of government securities was MVR13.6 billion (US$881 million) at the end of September while the outstanding stock of treasury bills sold in the domestic market was MVR10 billion (US$648.5 million) as of November 6.
“This year we estimate that MVR1.2 billion worth of T-bills have been used by the state for finances. In 2015, it will be MVR440 million,” Jihad told the budget committee earlier this month.
Rolling over T-bills was proving to be a “nightmare” as the finance ministry has to plead with banks for extension of repayment periods, Jihad said.
While the government proposed raising MVR112.3 million from the domestic market to finance the deficit, the MMA revealed that the figure reached MVR1 billion during the year.
The MMA noted that reliance on commercial banks to finance deficit spending would squeeze lending to the private sector.
In its concluding statement, the MMA stressed that expenditure should not exceed budgeted amounts and income should be collected in full if the government was to achieve it economic policy objectives.
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