MIRA quarterly revenues shows 10.5 percent increase compared with previous year

The Maldives Inland Revenue Authority (MIRA) has released it’s first quarterly report of 2014, revealing that a total revenue of MVR2.78 billion was collected – an increase of 10.5 percent on the corresponding period in 2013.

91.5 percent of revenue was collected from five sources: Goods and Services Tax (GST) – 12.7 percent, Tourism Goods and Services Tax (T-GST) – 31.9 percent, Business Profit Tax – 27.9 percent, Tourism Land Rent – 9.3 percent, Tourism Tax (bed tax) – 5.3 percent, and Airport Service Charge – 4.4 percent.

MIRA noted that increased collection of fines for nonpayment as well as a “significant” rise in Land Sales Tax collected (0.3 percent).

59 percent of the total revenue was collected in US dollars – 29.5% more than the share of the previous quarter’s collection, and 7.7% more than the first quarter of 2013. The rise was driven largely by increased revenue from GST, Airport Service Charge, and Business Profit Tax – which grew by 24.7 , 45.1, and 16.4 percent respectively compared with twelve months ago.

MIRA’ s revenue streams are set to further increase from next month as telecommunications services will be subject to GST for the first time. T-GST is also scheduled to increase from the current rate of 8 to 12 percent in November, although the bed tax will be withdrawn in the same month.

The current government is considering a number of revenue-raising measures in order to address the MVR3.4 billion (US$224 million) shortfall in this year’s record MVR17.95 billion budge.


Government doubles third quarter income

The Maldives government has almost doubled state income for the third quarter of 2011, increasing revenue 92 percent on the same quarter last year, according to the Maldives Inland Revenue Authority (MIRA).

Total dollar income for the period, according to MIRA, was US$60.5 million, made up largely of tourism lease payments (31.7 percent) and income from the 3.5 percent Tourism Goods and Services Tax (19.3 percent, or US$11.6 million). That tax is set to increase to six percent next year.

Total state income stands at Rf 3.4 billion for the year so far (US$220 million), according to MIRA.

Presenting the 2012 budget to parliament this week, Finance Minister Ahmed Inaz predicted that altogether, government income was expected to reach a record Rf 9 billion (US$583 million) this year.

Total expenditure out of the 2012 state budget is estimated to be Rf14.6 billion (US$946.8 million), an 18 percent increase from 2011. However the Inaz highlighted that recurrent expenditure was in line with income for the first time in many years, and the deficit was expected to drop to single figures.

Based on current estimates for 2011 the Maldives had recorded economic growth of 7.5 percent, Inaz said, an improvement of 5.6 percent in 2010. Growth was aided by a 21 percent tourism arrivals – the Maldives expects to welcome its millionth visitor for the year.

The introduction of the TGST was particularly significant in 2011 as it revealed that the government had been substantially underestimating the size of the tourism economy, which based on TGST receipts was actually three times larger than previously imagined.

Registration and collection has also gone surprisingly smoothly. Speaking to Minivan News in May, Inaz remarked on willingness of tourism businesses of all sizes to declare and pay the tax.
“The TSGT is being taken from big resorts as well as small guest houses on remote islands – very small businesses. They declare – amazingly, they declare,” he noted.
However despite the large influx of foreign currency into the tourism sector the Maldivian economy remains subject to a ongoing dollar shortage, with most people unable to exchange rufiya into dollars at the official rate of Rf 15.42.

Inaz expressed concern that 47 percent of transactions in the domestic economy were made through other currencies – almost all resorts charge in dollars and bank overseas – and called on the Maldives Monetary Authority (MMA) as the country’s central bank to take measures to enforce the use of rufiya as legal tender.


September incomes topple August

Maldives Inland Revenue Authority (MIRA) has released figures showing that the state earned Rf269.6 million more in September than in August, when income was reported at Rf260.7 million.

Altogether, MIRA collected more than Rf500 million (US$32 million) as income through September.

Resort rents accounted for the largest amount of income received (Rf196.4 million). Tourism Goods and Services Tax (T-GST) came in at Rf71.9 million.

Nearly half of the state’s dollar income which goes through MIRA comes from tourism rent payments (US$12.8 million).


Limitless money-changing licenses allow resorts to manipulate foreign currency market, says MMA source

Resorts in the Maldives are using their money-changing licenses to operate as defacto banks, creating an artificial demand for dollars that is undermining the government’s efforts to stabilise the economy, an informed source in the Maldives Monetary Authority (MMA), has claimed.

Figures from the country’s central bank show that of the country’s 306 licensed money changers, 95 are resorts while 211 are private.

The present system allows resorts to exchange unlimited amounts of currency, weakening the flow of dollars into the official banking system and allowing resorts to manipulate the market, the source claimed.

“Small resorts are operating like private banks, trading in rufiya and using cheques to do so in any amount of money, with no oversight from the banks or the MMA,” he said.

As a consequence, the government’s recent decision to float the rufiya within 20 percent of the pegged rate of Rf12.85 was unlikely to stabilise the currency until the underlying demand for dollars was addressed.

“The black market rate for the dollar was Rf14-15 before [the government’s decision to devalue the currency]. The reasoning is that now the official rate is Rf15.42, there shouldn’t be a black market. The fact that the black market rate is now Rf16.5 suggests this is not a problem with the economic fundamentals, but a problem of people manipulating the market.”

The source suggested that even if the market was given free reign and the rufiya reached Rf20 to the dollar, “resorts would still have the power to set the parallel market at Rf22.”

The source revealed that during its recent visit to the Maldives, the International Monetary Fund (IMF) had recommended that resort money-changing licenses be limited to changing cash, making it physically impractical to manipulate the market with large sums of money.

The theory, the source explained, was to force resorts to use the local banking system for foreign exchange and increase the flow of dollars through the official economy.

Most resorts presently charge customers in dollars (mostly via credit cards). With most large resorts banking overseas in financial hubs such as Singapore, beyond a fee taken by a local credit card operator such as Cyprea or the Bank of Maldives, very little of this passes through the Maldivian economy – approximately US$13 for every US$100 spent in the country.

“No other country allows another currency to divide the market,” the source said, noting that resorts earned 80 percent of the country’s foreign exchange.

“The taxis at Colombo airport are not permitted by law to accept US dollars, but here every corner shop does. There is a need for exchange control – our monetary regulation is from the 1980s and fits on a single piece of paper. You can see the problem.”

The MMA recently announced the enforcement of legal tender – rufiya – which will require a foreign currency transaction at the point-of-sale. Were resorts restricted to exchanging money by the physical limits of cash, they would be effectively be obligated to feed dollars into the local banking system, thus increasing the availability of foreign currency and greatly reducing the dollar shortage, the source suggested.

The Seychelles encountered similar problems with its exchange rate in late 2008, the source said, providing an IMF document showing that the country’s official exchange rate of 8 rupees to the dollar in late 2008 competing against a black market exchange rate of almost 14.

Following the Seychelles’ decision to float its currency, the rupee shot up to almost 18 to the dollar, but plunged to 10 a year later before eventually settling at 12.

Were foreign exchange controls passed in parliament and enacted, the Maldives could expect the dollar situation to stabilise “in less than a month”, the source predicted.

“This is why ministers are claiming the rufiya can potentially reach Rf10 – although if that stimulates excessive imports it is not necessarily a good thing.”


Local economist in a private consultancy Ahmed Adheeb said the Maldives’ economic situation was as much a problem of over-expenditure and high budget deficit.

“Successive IMF reports have raised real problems with the country’s expenditure,” Adheeb said. “You cannot just blame the resorts for manipulating the market.”

Low confidence in both the rufiya and the local banking system was a major concern, he explained, and forcing businesses into it could have wider ramifications.

“We have to build confidence in the financial system, otherwise we will just see black market banks emerge. Businesses need to be confident that their accounts will be protected and confidential, and that this will not be abused for political reasons,” he said.

“For instance, nowhere does a country’s Auditor General state a bank client’s name and debts in [publicly available] audit reports.”

The limited number of cross-currency transactions in local banks showed there was no confidence in the country’s financial system, Adheeb said, as businesses that banked in rufiya could not be confident of receiving dollars when required.

“The Finance Minister needs to provide reassurance that our banks are protected and regulated, and give confidence to businesses that bank confidentiality will be respected. In a small society like this, we have to listen to the entrepreneurs.”

Secretary General of the Maldives Association of Tourism Industry (MATI), ‘Sim’ Mohamed Ibrahim, said all resorts needed a foreign exchange license, and questioned the practicality of both enforcement and restricting these trades to cash: “Even small resorts trade in high volumes,” he said.

The government has meanwhile submitted five bills on taxation to parliament, part of an IMF-sanctioned economic reform package it hopes will radically boost the country’s earnings in future years.
The four bills include the General Goods and Services Tax Bill, Business Profit Tax Bill, Income Tax Bill, an Amendment Bill to Tax Administration Act and an Amendment Bill to the Maldives Import Export Act.

Tourism business worth US$2.5-3 billion, not US$700 million as thought, says President

The tourism industry in the Maldives is worth three to four times more than previous estimates, President Mohamed Nasheed acknowledged during a press conference this morning with journalists, ministers and industry leaders.

“Previously we had thought tourism receipts for the country were around US$700 million. But since collection of the 3.5 percent Tourism GST it has come to light that the figure is around US$2.5-3 billion,” President Nasheed said.

”I was told that the government’s expenditure was too high, but I told them it was not that the expenditure was high, but that the revenue was too low. There are not many ways we can decrease the expenditure of the government,” Nasheed said.

Nasheed was speaking ahead of parliament’s resuming sessions next week, where the ruling Maldivian Democratic Party (MDP) hope their new voting majority will push through major economic reforms. Most ministers were in attendance, as well as senior industry figures including Jumhoree Party (JP) leader Gasim Ibrahim.

Secretary General of the Maldives Association of Tourism Industry (MATI), Sim Mohamed Ibrahim, suggested the US$2.5 billion figure was optimistic, “as a lot of it is guesstimate.”

“The TGST income is variable depending on season, occupancy and volume of business,” he explained. “If they are projecting the figures from Jan-March for the rest of the year, that is the biggest time of the year and the figure will be very rosy. It may be a few years before we can calculate this accurately.”

Nonetheless, “the government will have a lot more money at its disposal for national development,” Sim predicted.

“I don’t think traders will have any problem paying taxes so long as other charges and levies are lowered. What business needs is predictability – this has been lacking in the past, particularly the calculation of rent and lease periods. They need confidence in the system, and things to be spelt out clearly. I think this is now happening.”

Historically the government had derived most its revenue from import duties, followed by bed taxes on the resorts, President Nasheed explained, both of which ultimately be abolished in favour of a modern tax economy.

One impending change – which was not given a date – was the sale of land for commercial purposes, Nasheed said, with all land, including resort islands, becoming a tradeable commodity.

“Ultimately that is where we have to go. I understand that this not the law right now,” he said.

The Maldives currently does not recognise freehold land, and furthermore lacks a central register of land ownership. Currently land is owned by the government and leased to commercial operators, although these agreements can extend up to 99 years. Resort leases are shorter, but under the current government are extendable to 35-50 years when a certain percentage is paid upfront.

Sim observed that only 20 percent of resorts had invested in the longer leases, “either due to their income [required for the upfront payment] or because the banks aren’t lending.”

“[Land purchase] might be an advantage to the industry, as resort land has always been treated differently,” he said.

“It was briefly introduced in the past but was later revoked. Given the shortage of land in the Maldives, land ownership can be a touchy subject. But now it is possible for the government to reclaim land.”

Nasheed has previously observed that the government’s new financial changes, which include an income tax and a general GST it hopes to approve in parliament, were “perhaps far more radical that introduction of political pluralism in the semi-liberal society that we had.”


Q&A: Finance Minister Ahmed Inaz

Finance Minister Ahmed Inaz was approved by parliament in late April 2011, replacing Ali Hashim who was among President Mohamed Nasheed’s cabinet ministers to be ousted by the opposition-majority parliament. He was approved just as the government implemented a managed float of the rufiya, and spoke to Minivan News about the recent and rapid changes to the country’s economy, the challenges it is facing and the future outlook.

JJ Robinson: An International Monetary Fund (IMF) mission is in town following the conclusion of the Article IV consultation last year. What is the current status of the government’s involvement with the IMF?

Ahmed Inaz: The IMF is discussing a new three program [with the government]. We are talking about structural adjustments that need to be brought in, and on the revenue side we are agreeing measures we foresee need to take in the next two years. We are trying to agree on the policy side.

They have their suggestions and recommendations and we have the policies the President is proposing, and we are trying to come a common agreement hopefully by the start of next week. I’m hopeful we will re-enter the program.

JJR: The IMF delayed the third tranche of funding in November last year citing “significant policy slippages” on behalf of the government. Did the third tranche get delivered?

AI: The question is not about that, the question is what can be practically done in this country. The new government came in with a new democratic setup, but not the budget to support that. The budget didn’t carry the cost of the new reforms.

It is not a matter of whether we can cut down expenditure – yes there are fat layers in the country, not only in the civil service, also in the judiciary and independent institutions. But the fundamental issue is that because of the democratic transition we have a state with recurrent expenditure higher than its revenue.

To make matters worse, the salaries of the state payroll are higher than our income. You can see where the problem lies.

What we foresee is that there are two ways in which we have to work to rectify this issue.

One is to trim the fat layer, by matching outputs with staff and increasing productivity.

The other thing is by increasing our revenue. We need to move from the current inefficient way of raising revenue – which bases revenue on import duties – to a more direct taxation policy.

We currently have the import duty which is a burden for businessmen, because they are taxed before they sell. We will abolish most duties, apart from those on items that are environmentally damaging, those that affect health, and other discouraged items.

The rest will be abolished and we will move into a direct taxation policy when the business profit tax starts in July. We have also started collecting revenue from a Tourism Goods and Services Tax (TGST), and we propose that we increase this as well as introducing a general GST for the public, and an income tax.

This would not be a payroll tax. It would be an income tax on people earning above Rf 30,000 (US$2300) per month. We think this is more justifiable.

Some may feel that this will collect only a very small amount of revenue – but this not just revenue from employment, but income from business dividends, house sales and so forth.

JJR: The former auditor general reported difficultly getting people to declare assets. Is this difficult with high net-worth individuals in the Maldives?

AI: One thing you have to understand is that this is a path other countries have walked. I remember when I was doing my graduate studies, even then we were talking about this. It was something the educated intellects were advocating. It never happened because there was no political willingness – willingness we now have.

I believe that once we start we will sort the rest of the issues. The TSGT is already being taken from big resorts as well as small guest houses on remote islands – very small businesses. They declare – amazingly, they declare.

I think this is something the country can take, and then we can move to rectify problems and perfect the system.

JJR: The general popularity of the idea seems quite sour with members of the opposition. How do you propose getting this tax through the opposition-majority parliament?

AI: All the businessmen I have met – all the reasonable businessmen I have met – believe that the country has to move to a much more structured, predictable and more coherent system of governance. And to do that we need an economic system that supports social change, and supports the change we have brought politically.

To sustain their businesses it is important that they have social and political stability. It would be a grave mistake if one stands up and says they don’t support [income tax], because that will bring instability to the country and harm businesses.

The other thing is that once you have a system of redistributing wealth through direct tax, such as we are proposing, this is spent on infrastructure, welfare, education, transport – all of these things that directly benefit wealthy businessmen, because they don’t have to pay for it on an individual basis. So the cost of doing business will be lowered.

I believe MPs, businessmen and business-MPs will support this. Those I have met have given their full support – they just want to be consulted first.

JJR: Don’t you think that as a potentially populist issue this may become a victim of the country’s adversarial politics?

AI: I think the opposition is very mature. When we were in the opposition, then the opposition was very mature. I think they will choose the best for the country. We are doing the tough job here – by 2013 the game will be easier. We are laying the foundation for the country, not only by changing the political scenario but bringing huge economic changes. I think they will support it.

JJR: Back to the IMF. A theme in their reports last year – and also those of the World Bank – was that while the Maldives’ income might be increased gradually, the country’s immediate problem was the inflated state budget, leading to a high deficit, while the country was at the same time insisting on a pegged currency. The government’s attempt to introduce cuts last year were scuttled – in your mind what were the reasons for this?

AI: One thing was that the business profit tax was delayed in parliament – for reasons I don’t think I have to elaborate. The TGST we proposed was higher than what are getting now, and that has also had an impact on us.

Also we have to remember that the redundancy of the civil service is not an easy thing – the country’s employment has been totally dependent on the government. It is a very big change, and we have said we want the government to be a policy maker, a regulator, but not doing business, so jobs are created in the private sector.

I’m happy to say our redundancy program – with assistance from the Asia Development Bank (ADB) – has to this date enrolled 800 people and already some of them have already been paid and moved out of the civil service. We hope over the next few weeks we will achieve our target of 1300 – the idea is that they will retrained and not return to the government for at least three years.

JJR: A key criticism of the government’s economic policy from the opposition is its spending on political appointees.

AI: Out of total government expenditure, 75 percent is paying the payroll. The political appointees are three percent of that payroll.

I believe that any appointee, whether political, civil service or judicial – any unproductive appointee – is a burden on our system and we should make them redundant.

JJR: Enmity between the Finance Ministry and the Civil Service Commission (CSC) last year led to the ministry filing charges with police against the CSC, just as the cuts issue entered the court system. What is the relationship like now between the Ministry and the CSC?

AI: We are working very closely with them and they have been very cooperative on the redundancy issue.

JJR: A number of private sector businesses have expressed concern that while the Maldives Monetary Authority (MMA)’s decision to enforce the use of the rufiya for all transactions is fine when you have a freely-convertable currency, it presents a serious problem when the banks refuse to sell dollars to them.

AI: The government doesn’t print dollars, and the government doesn’t earn dollars, except for fees and taxes, which is a very small percentage of the total demand for dollars in the country. The dollars are earned primarily by the resorts and fish exporters.

What we want is a system where the foreign exchange system operates as a market. We have introduced a banded float [within 20 percent of the pegged Rf12.85 to the dollar]. What we want is that the dollar earners will sell this to the market, and within the next three months an equilibrium will be achieved.

I don’t mean a low rate – I mean an equilibrium. Once that is set and the speculation and market adjustment has competed, we will have addressed the fundamental reason as to why the black-market existed.

Firstly, because the existing laws and regulations were not enforced, and existing legislation relating to money changers legislation was not being enforced – we cannot have 220 money changers in the country. I have not seen this in other countries. They have to be proper money changers who have invested a certain amount of capital, just like the banks.

I emphasise this but I still don’t get the commitment I need from stakeholders to address it.

Secondly, the monetary regulation states that rufiya is the legal tender for all transactions, with the exception of the government’s collection of taxes and fees. I think we should enforce this irrespective of the sector. We should have rufiya prices – what other country has prices in another country’s currency?

You can still pay in dollars – but this is the exchange rate. For [the customer] it may still seem as though you are paying in dollars, but the transactions are actually happening in rufiya. In Colombo you pay in local currency, even if you use your credit card. We need to have that enforcement irrespective of the sector.

In the medium term we need to address the budget deficit, especially recurrent spending, which has to be matched with income. A state cannot be operated without matching recurrent expenditure to its income – that is madness. A state has to have a prudent economic system – capital expenditure can still be borrowed, because future returns are there.

We working with the ministries to streamline and reduce the deficit in the budget. Next year we are hoping to have a balanced budget.

JJR: The opposition-majority parliament has substantially added to the last two budgets submitted by the government, and the President has been compelled to ratify these. How do you deal with this?

AI: We are trying to work on the legal side as well as the practical, and make sure this is enforced – at least that recurrent expenditure and income is matched, and that any additional bill passed during that particular year is supported with a revenue measure.

They can’t just simply tell us to pass a budget, and then pass bills giving us additional expenditure – every bill comes at a cost. What we propose is that they think about this and rectify it – this is very important.

The third long term goal is increasing productivity and exports, to make sure that whichever government is in power, our manifesto continues and the country can move forward. We need exports to be increased, and earn dollars. Long term, that is the only solution to counter this [economic situation]. In the long run there should be a regulatory framework that supports this.

JJR: Speaking of the regulator, where does the Maldives Monetary Authority (MMA) fit into this? It was only recently that the government was calling for the resignation of MMA Governor Fazeel Najeeb for failing to help address the situation.

AI: I don’t want to dwell on that. For me the governor – whoever is there – I should work with them. What I want is the regulations to be there. For example, the devaluation of the currency within this 20 percent band – that has to be supported.

Once we make a decision, such as the devaluation, we cannot go back. The fundamental health of the economy told us that we had to do this. The President met with the MMA Board, which advised, and a decision was made. It is not time for us to affect the confidence of the economy – an economy cannot survive without confidence. That is the crucial factor an economy needs – and state institutions need to ensure that confidence is there.

JJR: If the government was convinced that the value of the rufiya was going to fall somewhere within that band, why not float the currency altogether?

AI: The reason what that if we float the currency it would have short-term consequences and immediate jumps. A band means the government will defend that band – that is what we are doing with the weekly auction of dollars to the banks.

Secondly we have numbers from the TGST income that suggest we have been underestimating our economy. By having our policies in place – productivity increasing policies and growing additional exports – we are confident we can pull the value of the rufiya down to 10 in the long term – that is our aim. It is not a joke.

JJR: There is a lot of concern, particularly in resort circles, that the new policy restricting expatriate remittances will reduce the willingness of people to work in the Maldives. What was the logic behind that decision?

AI: We understand that expatriate employees are very important. We will never hurt them and we will ensure that their interests are protected. The regulation that the Ministry and MMA are working on will only limit repatriation of what they earn legally under their contract. If they remit more, obviously they will have been earning illegally.

They are living and spending in the Maldives as well – but they can still repatriate up to what they earn. What we are trying to do is limit illegal workers [remitting dollars out of the country].

JJR: If at the same time you are enforcing use of the rufiya when there is some doubt as to whether you can walk into a bank and exchange that into dollars to remit it overseas – does that not impact confidence in the economy?

AI: We believe the market is currently unstable because of the changes we have brought, and that these changes will take three months for the various variables to work. In that period the government will work with the MMA to ensure that stability exists.

There will be a lot of low confidence and instability, and that will not only be felt by the expatriates. All our imports and consumables, medicine, education – is imported. But we are confident we can get through this.

JJR: Potential foreign investors looking at the economy and observing the recent changes may be unsettled by this instability. How do you address this concern?

AI: The current government is a centre-right government, and we are opening our doors to an unimaginable level for foreign investment.

We will not be treating foreign investors different from local businesses. We will not put in unreasonable controls on the economy, and we will make sure foreign investors are consulted, as with the locals.

We have not done this in the past.because we have been very tightly focused on politics as well as the economy, and haven’t been able to communicate as much in English perhaps as we should have.

I believe [foreign investors] have confidence in our economy, and we will ensure their investments are protected in this country, and that wel continue to have policies to encourage further investment. This country does not have a solid financial sector so we need foreign investors very much. That is understood by the current government, and the policy is to attract foreign investors.

JJR: So economy before politics from here on in?

AI: Yes. Until the next election!


Economy’s pigeons come home to roost

The stated cause of the opposition-led protests in Male’ – the party claims the rallies are “youth led”, however opposition politicians are a leading fixture at the demonstrations – is the increase in the cost of living due to the government’s recent decision to implement a managed float of the rufiya, within a 20 percent band of the pegged rate of Rf 12.85.

An ongoing dollar shortage, reluctance of banks to exchange local currency, and a flourishing blackmarket that reached Rf 14.2-14.8 to the dollar, culminated in mid-April with the government finally acknowledging that the rufiya was overvalued – after a short-lived attempt to crack down on ‘illegal’ exchanges.

High demand immediately led to most banks and companies dealing in dollar commodities – such as airline ticketing agents – to immediately raise their rate of exchange to the maximum permitted rate Rf15.42.

With the Maldives almost totally reliant on outside imports, including fuel and basic staples such as rice, the government’s decision has effectively led to a 20 percent increase in the cost of living for most ordinary Maldivians.

Moreover the Maldivian economy is dependent on oil to such an extent that is spends a quarter of its GDP on it – US$245 million – the vast majority on marine diesel, making imported energy one of the single largest drains on the country’s economy.

Customs documents obtained by Minivan News in January showed that Maldives was spending almost US$100,000 more per day more on fossil fuels than it was in the summer of 2010. At that time, oil was US$86 a barrel. By the same calculations but with today’s oil price, the Maldives is paying an additional US$450,000 per day for oil compared to summer prices last year.

Amidst rising commodity costs and external pressures, the country’s insistence on maintaining a fixed rate while increasing government spending had late last year begun to affect shop shelves and raise the ire of the International Monetary Fund (IMF), which delayed the third tranche of its funding due to “significant policy slippages” concerning the government’s failure to curtail spending. That amount in itself was not substantial, but the IMF is used as a financial bell-weather by most major donors.

The government’s unwillingness to face the political difficulties inherent in its budget deficit of 21 percent – the legacy of a 400 percent increase in civil service expenditure since 2002 and a hot printing press – was compounded by the addition of an extra layer of local government added to the state payroll, and the country’s graduation from the UN’s ‘Least Developed Country’ status to ‘Middle Income’, and the loss of concessional credit and certain trade concessions.

In an article for Minivan News, Director of Structured Finance at the Royal Bank of Scotland Ali Imraan observed that ‘growth’ in the domestic economy had been driven by the public sector and “paid for by printing Maldivian rufiya and clever manoeuvres with T-Bills, which the government has used since 2009 to be able conveniently sidestep the charge of printing money. In simple terms: successive governments printed/created money to drive domestic economic growth.”

Imraan pressed for the Maldives to invest in private sector revenue growth “rather than building airports on every island”, and implement a progressive taxation system targeting high earners in the interest of income equality. He also urged the Majlis to uphold the constitutional stipulation whereby MPs – such as those with business interest in the tourism sector – removed themselves from voting on issue in which they had a vested interest, and further suggested that the government resolve the matter of stalled tourism developments “awarded to parties with no money or track record.”

“Moratoriums on lease payments or debt repayments may look innocuous enough, but they rob the country of vital growth opportunities and hence ultimately rob the people. We should not stand for it,” he said.

Imraan’s latter suggestion proved somewhat prescient when the Tourism Ministry renewed the lease for Hudhufushi in Lhaviyani Atoll, despite the resort island’s owner owing more than US$85 million in unpaid rent – most of it fines for non-payment.

The government’s decision to implement a managed float of the currency came as a least one local sales agent for international airlines operating in and out of the Maldives closed its doors to customers, blaming an inability to pay the airlines because of a lack of US dollars circulating within the economy.

Parallel economy

The Maldives’ profitable tourism industry is considered to be indirectly responsible for 70 percent of the country’s GDP, and certainly the vast majority of its foreign currency earnings.

However historically little of the industry’s financial success has reflected on the Maldives’ domestic economy, with the inflow of money limited to the flat rate bed tax, import duties and worker salaries – most of that in rufiya.

With the introduction this year of a 3.5 percent tourism goods and services tax, a business profit tax and a revision of the rents paid for resort islands, the government now has a number of economic levers it can pull to increase revenue in the future.

However it has struggled to explain that to people now paying 20 percent extra for basic commodities – an affront to the MDP’s pledge to reduce the cost of living – and seems have been caught unawares by this week’s populist protests.

Both factions of the opposition have meanwhile seized the political opportunity to take the focus off the party’s internal troubles, but have offered few alternatives beyond demanding the government “reduce commodity prices”.

“I believe a lot of people are very unhappy with rising prices. People are asking the government to bring down the prices,” opposition Dhivehi Rayyithunge Party spokesman Ibrahim ‘Mavota’ Shareef told Minivan News.

“It has been a sudden and tremendous jump and people were not prepared for it. This feeling is shared across party lines.”

Shareef accused the MDP of financial mismanagement and recklessly increasing spending, without investing “in productive resources that ensure future revenue for the country, and reducing expenditure in areas that do not affect the people – such as foreign missions.”

“They need not reduce the civil service, because these are the lowest paid government employees and reducing their numbers would have not tangible effect. But the top players in government – the political positions – and positions in the paper companies created by the government are many areas [that can be reduced],” Shareef claimed.

“Before the tsunami the country’s finances were very well managed, and even after the tsunami, given the circumstances, they were well managed. Tourism infrastructure was damaged, islands needed reconstruction and in some cases resettlement. We had to spend a lot of money, and increased the budget from Rf4 billion to Rf5.5-6 billion. It was still a manageable level, and although it was not the best option we had no choice at the time,” he claimed.

The opposition – and the Civil Service Commission (CSC) – for much of last year opposed the reductions in the 21,000-strong civil service demanded by the IMF, with the issue becoming mired in the court system.

The opposition contested that it is unfair to reduce the number of civil servants while increasing the number of political appointees. While the government now has only 170 political appointees on its books, Shareef claimed “they do not show up on paper because of the paper companies the government created in the name of corporatisation to try and fool the International Monetary Fund and the World Bank. I don’t think a country of this size – 350,000 people – needs to have so many political appointees.”

The government has since changed tactics, offering incentives to civil servants as young as 18 to leave the state payroll.

Under the scheme, the application deadline for which was May 31, civil servants and government employees are eligible for one of four retirement incentive packages: no assistance, a one time payment of Rf 150,000 (US$11,700), a payment of Rf 150,000 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).

The move to incentivise the departure of civil servants is likely to draw further support from the IMF, which has finished its Article IV consultation and may be weighing up the provision of further support.

Meanwhile, the government is unable to respond to demands from the constituency to reduce commodity prices without explaining the complexities of the situation it finds itself in. Yet neither is it realistic “to pin our hopes on some sort of tourism growth bonanza in the short term,” wrote Imraan. “We might as well play the Euro lottery every week if this is the only plan.


MMA to increase auction of dollars by 20 percent

The Maldives Monetary Authority (MMA) has increased the amount of dollars auctioned to local banks by 20 percent, after setting a dollar exchange reference price of Rf14.75.

The MMA has previously set a limit for the sale of dollars based on its reserve of foreign currency, when dollars could only be sold at the pegged rate of Rf12.85.

The managed float of the rufiya within a 20 percent band of that rate has increased competition among local banks selling dollars, with rates at some institutions dropping to Rf13.8. Prior to the managed float, the blackmarket was hovering between Rf14.2-Rf14.8.

However while the move has increased competition with banks, many companies dealing in dollar commodities such as air travel have increased their rates of exchange to the maximum permitted Rf15.42.


IMF praises managed float of rufiya, “unpredictable” and “high risk” warn local experts

The International Monetary Fund (IMF) has praised the Maldives’ decision to effectively devalue its currency, allowing the rufiya to be traded within 20 percent of the pegged rate of Rf12.85 to the dollar.

“Today’s bold step by the authorities represents an important move toward restoring external sustainability,” the IMF said in a statement. “IMF staff support this decision made by the authorities. We remain in close contact and are ready to offer any technical assistance that they may request.”

The Bank of Maldives was today trading the dollar at the maximum selling price of Rf15.42 and buying at Rf12.75 while the Bank of Ceylon was selling it at 13.80 and buying at Rf13.60.

At a press conference this afternoon, newly-appointed Finance Minister Ahmed Inaz explained that the government decided to change the fixed exchange rate to a “managed float” to shape government policy towards increasing the value of the rufiya and ultimately bring the exchange rate down to Rf10 – an oft-repeated pledge of President Mohamed Nasheed.

The worsening balance of payments deficit could not be plugged without allowing the market to set the exchange rate, Inaz continued, adding that through lowering the fiscal deficit and spurring private sector job growth “a path would open up for us to reach the lower band (Rf10.28).”

“My estimate is that it will take about three months for the market to stabilise and reach a balanced [exchange] rate,” he said.

MMA Deputy Governor Aishath Zahira acknowledged on state television last night that the fixed exchange rate in effect since July 2001 had been “artificial.”

Economic Development Minister Mahmoud Razee argued that as a result of the artificially fixed exchange rate, “we do not really know, based on the breadth of the domestic economy, what the value of the Maldivian rufiyaa is right now.”

The managed floating rate, said Razi, would allow the government to decide specific measures that would be needed to improve the exchange rate – such as the extent to which foreign exchange reserves should be increased.

State Minister for Finance Ahmed Assad told press that TGST (tourism goods and services) receipts in February had revealed that previous estimates of the amount of dollars that enter the country were well below the actual figure. The government now estimates a minimum annual income of US$2.5 billion.

Assad urged citizens to use banks to purchase and exchange dollars to avoid “becoming prey to [black market operators].”

A senior government source said the decision was made based on the government’s speculation “that people are hoarding dollars. We hope this will send a signal to the market. It also shows our commitment to a market economy.”

“High risk”

The government has struggled to cope with an exacerbating dollar shortage brought on by a high budget deficit – triggered by a spiralling public sector expenditure – in comparison with the foreign currency flowing into the country. Civil service expenditure has increased in real terms by 400 percent since 2002.

Banks subsequently demonstrated reluctance to sell dollars at the pegged rate, and high demand for travel, commodities and overseas medical treatment forced most institutions to ration their supply.

A watershed moment last week – a crackdown on the hitherto ignored blackmarket sale of dollars at rates of up to Rf14.5 – led to increasing desperation among the lower-paid of the country’s 100,000 expatriate workers, who found themselves blocked from trading currency and unable to remit money home to their families.

The government’s decision yesterday is effectively a ‘rose-tinted’ devaluation of the currency, at least in the short-term, but according to one financial expert could have unpredictable consequences once the market catches up in 4-6 weeks.

“Other countries have a maximum band of eight percent. I have not come across any countries with 20 percent. I think it’s too wide,” said Ahmed Adheeb, a local financial expert working in the private sector. “Why did the government overshoot the blackmarket rate of Rf14.5, and why did it take them two years to come to this decision?”

Adheeb predicted that the construction industry would be among the hardest-hit, “as ongoing projects will now face additional costs. In addition, smaller and medium-sized enterprises supplying resorts may find that their commission and profit is gone if their contracts are in rufiya.”

The public would also be impacted, Adheeb said, as importers passed on the rising cost of goods.

The devaluation came at the same time as the tourist season was winding down for the year, and pilgrims were searching for dollars for the upcoming Hajj. Pilgrims could be called on to make additional payments, Adheeb speculated, while Ramazan importers could face additional challenges this year.

The general public would be also be impacted as the cost of commodities rises to fill the new exchange rate, Adheeb said, while the government’s commitment to projects such as harbour construction could be delayed due to the risks of taking on even more debt.

“This will also affect business contracts, particularly [those concerning] foreign employment, and students studying overseas,” Adheeb said, predicting that “if the market does not stabilise then in three months time we will see a further devaluation. The government is taking a huge risk.”

Structural adjustments

The move will put the government on good terms with the IMF, which spent last year trying to encourage the government to make difficult political decisions for the sake of the economy, and just stopped short of calling for a devaluation of the currency on conclusion of its Article IV consultation.

The IMF, which has shown resounding disinterest in local politicking, in February 2011 criticised the government for “significant policy slippages” claiming that its failure to reduce its expenditure had undermined the country’s capacity to address its crippling 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 stated. “Also, the Business Profit Tax will come on stream eighteen months later than planned.”

It did however praise the government for getting much-needed business profit tax and tourism goods and services tax legislation through parliament, signalling that this was a major step towards long-term economic maturity. The bills had faced obstacles in parliament, which includes among its MPs some of the country’s wealthiest figures in the resort industry, and who were instrumental in increasing the budgets sent to parliament by the Finance Ministry.

Opposition Dhivehi Rayyithunge Party (DRP) MP Ali Waheed this morning proposed a motion without notice condemning the government’s decision to relax the dollar exchange rate.

Waheed said that he was prompted to submit the motion out of concern for the plight of Maldivian students in foreign institutions and patients who need to fly abroad for treatment.

The DRP MP for Thoddoo also accused the government of compromising the independence of the country’s central bank by trying to influence monetary policy.

In the ensuing one-hour debate, opposition MPs argued that the immediate consequence of the new floating exchange rate would be a 20 percent rise in inflation.

DRP Leader Ahmed Thasmeen Ali explained that government revenue from import duties would increase by 20 percent but the affected businesses would pass the cost to customers.

“We are in this state because the government increased the [amount of rufiya] in circulation by printing money and taking on credit,” said Thasmeen, in a statement likely to raise political hackles among the ruling party, considering that the IMF has stated that the economic crisis in the Maldives was triggered by “expansionary fiscal policies” from 2004 – under the former administration.

This left the country especially vulnerable to the decline in tourism during the 2008-2009 recession. However the financial 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 reported.

Adheeb said today that parliament, independent institutions, civil service and political appointees had continued to make salary demands on the state “but nobody is thinking about the economy.”

“Economic decisions are being politicised when the economy should be the first priority – we cannot survive without it. Only then can political stability be achieved,” he said.