“Tariff rationalisation a positive to economy”: Care Ratings Maldives

The new tariff structure that came into force on January 1, 2012 will have a positive impact on the domestic economy, predicts an economic review report for December released by Care Ratings Maldives this week.

Care Ratings Maldives became the first credit ratings agency recognised by the Capital Markets Development Authority (CMDA) in May 2011 to carry out ratings of debt instruments and facilities.

“The new export-import tariff structure may be viewed as a pragmatic policy, designed to diminish structural fragilities of the Maldivian economy,” the report found.

Amendments to the Export-Import Act proposed by the government as part of its economic reform package was passed by Parliament on November 21 and ratified by the President shortly thereafter. Import duties were subsequently reduced and scrapped entirely for a range of items.

Under the new tariff structure, the report observes, “products such as metals, minerals, chemical products and manufactured goods, which together constitute about 57 percent of total [imports], have by and large been awarded with a reduction in tariffs.”

However it noted that tariffs or import duties for certain items have been significantly hiked, such as tariffs for tobacco from 50 to 150 percent and non-biodegradable plastic bags from 200 to 400 percent.

The report also noted that the contribution of import duties to government revenue has been declining, from 73 percent in 2008 to 46 percent in the first ten months of 2011.

Meanwhile the implementation of new taxes, such as the Goods and Service Tax (GST) and Business Profit Tax (BPT), is expected to account for a higher portion of government income.

“It may be noted that the Maldivian government is making a conscious attempt at augmenting revenues from direct tax sources, rather than indirect taxes,” the report stated.

The report predicts that “the largest beneficiary of this new tariff structure” could be the secondary sector as tariffs have been lowered significantly (between 10 percent and 100 percent reduction) for inputs of the manufacturing and construction industries.

As a result, the report forecast that the contribution of both sectors to the GDP could reach pre-recession levels of five and 11 percent, respectively.

“The reduction in import tariff would impact the construction sector by freeing resources for projects under implementation and reducing their costs during gestation periods,” the report explains, adding that the construct boom “could boost the tertiary sector of the economy as well.”

Retailers meanwhile expect prices of foodstuff to fall in the wake of the import duty waiver. Items with GST rate set at zero percent for which import duties have now been scrapped include rice, flour, sugar, salt, milk, cooking oil, eggs, tea, fish products, onions, potatoes, fruits and vegetables, baby food, diapers, gas, diesel and petrol.

While the State Trading Organisation (STO) announced a reduction in diesel and petrol prices, Maldivian airline reduced airfares for domestic flights by Rf50 in line with the reduction in import duty for jet fuel.


Maldives hopes “global slowdown” will bolster rufiya

Although the Maldives’ economy expanded in October, higher food and transport costs combined with the depreciating rufiyaa has bloated inflation rates to 8.3 percent, a CARE Maldives report has shown.

“Inflation during the period was mostly influenced by food index owing to the increase in prices of both fish (41.6%) and other food items (11.19%) followed by the increase in the transportation costs,” states the report.

“But this is not singular for this economy as rising prices have been witnessed across the globe,” the report contends.

Quoting a “global slowdown” in economic activity, the report suggested that international commodity prices are due to fall in coming months. The drop could temper the Maldives’ rising prices.

The recently-implemented Goods and Services Tax (GST) caused many Maldivians to note a price hike with anxiety. However, the President assured the people that further reforms scheduled for January 2012 would temper the new rates.

CARE Maldives suggested that a drop in international commodity prices would also reverse the widening trade deficit and declining reserves of foreign currency. Gross international reserves declined by approximately US$27 million between December 2010 and September 2011.

Statistics show an increase of US$33.2 million in reserves to date compared with August 2010, the report claims.

CARE estimates that the fiscal deficit will remain at 11 percent of the GDP; total revenue is expected to increase from 23 percent of GDP to 29 percent by the end of the year.

Meanwhile, total expenditure continues to surpass revenue. Records indicate a four percent increase from 37 percent of GDP in 2010 to 41 percent in 2011, primarily due to growing government salaries.

“The increase in expenditure mainly reflects the restoration of wages of government employees to the levels prior to 2009. The government has however taken some steps in terms of rationalisation of manpower. The overall fiscal deficit is estimated to remain at 11 percent of GDP.”

Approximately ten percent of the Maldivian workforce is employed by the government, an ungainly figure that has been targeted as a key hemorrhage point in the government’s budget. The Finance Ministry recently asked government institutions to curb job creation and new hires.

Earlier this month, President Mohamed Nasheed said the government aimed to bring the fiscal deficit down to a single digit number.

“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,” he said.

CARE Maldives summarized its report by criticising the growing inflation rate and trade deficit, but praised government policies that target these issues.

“The progressive policy measures taken by the government especially on the exchange rate combined with declining commodity prices globally would help to reverse these trends.”