Parliament’s Finance Committee last week received a proposal from the Finance Ministry which, if accepted, would save MVR2.2billion (US$143million).
The austerity measures include raising Tourism Goods and Services Tax (TGST) to 15 percent, terminating electricity subsidies in Male’, increasing import duties on alcohol and imposing a 3 percent duty on oil, “reforming” the Aasandha health insurance scheme, and reducing the budget of every Ministry and independent institution by 15 percent – among other measures.
If successfully carried out the Ministry’s proposals would halve this year’s budget deficit, currently projected to reach MVR9.1billion (US$590million).
The original budget for 2012 envisioned that revenue would rise to MVR11.4billion (US$740million) with expenditure anticipated to be MVR14.5 billion (US$941million). This would have resulted in a budget deficit of around MVR3billion (US$194million), representing 10 percent of GDP.
However, the revised figures provided by the Finance Ministry have shown that revenue will only be MVR8.4billion (US$545million) for this year with actual expenditure rising to around MVR18 billion. The ensuing deficit would represent around 28 percent of the nominal GDP for 2012, which was predicted to be MVR31.7billion (US$2billion).
This ballooning deficit has alerted the IMF which has expressed concerns that without raising revenue and cutting expenditures the country risked exhausting its international reserves and sparking an economic crisis.
The Maldives Monetary Authority’s (MMA) most recent statistics show that the country’s gross international reserves had decreased by 2 percent in the 11 months up to May before dropping by a further 6 percent between May and June this year.
The MMA’s data shows this figure to represents around ten weeks worth of imports in the Maldives, a country which relies heavily on imports, spending around two thirds of its real GDP on foreign goods each year.
The current government has pointed the finger at the previous administration for the current budgetary issues whilst simultaneously implementing a series of policies which have added to its financial obligations.
These deficit expanding policies have included promoting 1000 police officers, doubling of the budget of the Maldives Marketing and Public Relations Corporation (MMPRC) to MVR69.3million (US$4.5 million), hiring of 110 new police officers, and a reinterpretation of the legal provision for the payment of resort island lease extensions which had cost the government MVR92.4million (US$6million) already in comparison with the same point last year.
The government also chose to reintroduce a MVR100 million (US$6.5 million) fishing subsidies and to reimburse MVR443.7 million (US$28.8 million) in civil servant salaries, reversing measures implemented during the previous government’s own austerity drive.
The raft of measures currently being considered by the Finance Committee represent the most comprehensive effort thus far to reign in the deficit.
The proposed measures for reducing state expenditure were published in local newspaper Haveeru. They include discontinuing electricity subsidies in Male’ City which, where around one third of the nation’s population live, saving MVR135million (US$8.7million).
Reducing the state’s offices budget by up to 15 percent is expected to save MVR1.5billion (US$97million) and was first suggested by Finance Minister Abdulla Jihad in May. Jihad mentioned at the time that a pay review board would be convened in order to “harmonise” the pay of government appointees.
The document received by Haveeru revealed details that this pay review body will seek to restructure pay schemes in order to save MVR100million (US$6.5 million). It also emerged that MVR300million (US$19.5million) could be saved by introducing a recruitment freeze in the civil service.
The austerity plan also includes a reform of the Aasandha national health care scheme, the cost of which promised surged ahead of its MVR720million (US$46.7million) budgeted allowance shortly after its introduction in January. After discussions with the government, the Aasandha company has decided to share the costs of private treatments with patients.
The Finance Ministry predicts that reform of the Aasandha scheme can save the government MVR200million (US$12.9million).
Proposed revenue raising measures include raising the import duty on oil, upon which the country relies heavily for fuel, to three percent. MMA figures show that the price of crude oil has decreased 15 percent in the 12 months leading up to June whilst the domestic price had remained the same with the exception of diesel which increased in price by 2 percent.
Import duties are also to be raised on items whose value exceeds MVR6.4million (US$41million) as well as on liquor imports. The duty on both of these items had been raised as part of the amended Export Import Act in December of last year which saw duties on pork and alcohol products, used exclusively by the resorts, go up by 42 percent.
The tourist industry will be similarly hard-hit by the proposals to raise Tourism Goods and Services Tax (TGST) to 15 percent. The IMF had previously urged the government to double the 6 percent tax levied on all goods and services sold in resorts with Tourism Minister Ahmed Adheeb announcing his intention in May to consult the tourism industry.
Minivan News discussed the potential increase with several resort managers at the time, and was told that an increase would have “serious ramifications” for certain sections of the market. One manager said that the fixed term contracts many resorts have with operators meant that increases to T-GST would have to be absorbed from revenue, resulting in potential cutbacks to staff or services.
Visitors to the Maldives could also be affected by the proposed increase in the Airport Service Charge from US$18 (MVR277) to US$30 (MVR462).
Further rises to the tax levied on luxury items would be accompanied by the introduction of taxes to the sale of flats and on telecoms service in the Finance Ministry’s plan.
The visa fee paid by foreigners working in the Maldives is also slated to see be increased by MVR150 (US$10). Estimates of expatriate workers are be as high as 110,000 although the same estimates suppose that around half to be undocumented.
Despite the recent suspension of sittings of the full Majlis, the Finance Committee continues to hold meetings as normal.