Deficit will increase at current pace on public payroll cuts: IMF

The International Monetary Fund’s (IMF) Country Report for the Maldives, published earlier this month, pegs the country’s fiscal deficit in 2009 at 26.25 percent and notes that while the “political climate for public expenditure cuts remains difficult… the coming months will be a crucial test of [the government’s] ability to prevail.”

The report provides a neutral assessment of the country’s economic condition and its progress towards economic reform and reduction of its significant budget deficit.

It notes that the authorities “have taken remarkable steps to bring about the very large fiscal adjustment”, most explicitly, salary cuts to government employees of between 10-20 percent, “something seen in just a handful of countries worldwide”, alongside “a 40-60 percent increase in electricity tariffs.”

The IMF also lauded the governments “initiation of a program for public employment reform that will ultimately reduce the government’s payroll by one-third”.

The government was facing “intense political pressure”, the IMF report observed, after being compelled by the Civil Service Commission (CSC) to restore salaries backdated to January 1.

“The government has so far paid wages at the reduced levels, including for the police and army, who are not governed by the CSC,” the report said, adding that the decision had been “publicly challenged by the government on legal and economic grounds.”

A final court resolution on the law suit filed by the CSC could take up to one year, the report noted.

Meanwhile, parliament passed the 2010 budget “with amendments totaling a seven percent (4.25 percent of GDP) increase over the government’s proposed budget.”

As a consequence, the report stated, “the annual deficit targets for 2010 and 2011 will be missed on current policies.”

Therefore, it stated, a “key risk” to the country’s economy “concerns the ability of the government to maintain the public sector wage cuts. A negative outcome on this would have a large fiscal impact,” the report said, adding that government’s target for public sector employment cuts had already been pushed back a year from the end of 2010 to the end of 2011.

Secondary risks to the economy included delays in passing taxation reforms through parliament, and “planned public employment cuts.” Tourism was “bouncing back”, it noted, but whether this would affect the recovery of the domestic economy was “highly uncertain”.

Therefore, the government’s capacity to withstand political pressure on the issue of cuts would decide the country’s fiscal recovery “in the near term”, the IMF suggested.

The report was critical of the government’s decision to acquiesce to parliament’s recommendation to restore the wages of independent commissions in January this year, and its commitment to pay civil servant pension contributions from May 2010 until wages were restored to September 2009 levels.

The IMF report acknowledged that “direct redundancies were proving difficult”, however “the transfer of employees to the private sector (which accounts for about two fifths of the planned payroll cuts) has taken place in line with projections.”

Nonetheless, the IMF calculated that if the government continued to pursue economic reform at current pace and policy, the country’s fiscal deficit would increase by one percent of GDP in 2010 and 4.5 percent of GDP in 2011.