Maldives’ currency reserves “dwindling to critical levels”: World Bank

Currency reserves in the Maldives have “dwindled to critical levels”, according to the World Bank’s bi-annual South Asia Economic Focus report.

The report highlighted that growth in South Asian countries – including the Maldives – is still below pre-economic crisis levels.

“Much of the recent slowdown in economic growth can be attributed to stagnating investment,” the World Bank stated in its findings. “Economic recovery could falter in the absence of a stronger investment climate.”

South Asian countries are “now more vulnerable” due to widening current account balances, slowing foreign direct investment, and persistently high inflation that has “limited the ability” of central banks to counter economic downturn via monetary policies.

Rising imports, and the Maldives dependency on those imports, also leaves the country more vulnerable to commodity price increases, argued the findings.

“Countries will need to improve their business climate to attract the private sector investment needed for these new entrants to find productive jobs, thereby reducing poverty and boosting shared prosperity,” said Martin Rama, Chief Economist for the South Asia Region at the World Bank.

Improving tax revenue collection and curbing energy subsidies are required for further progress to be achieved.

Maldives Monetary Authority (MMA) statistics released in January 2013 indicated that gross state reserves have shrunk to MVR 4.9 billion (US$317.7 million).

This is essentially only enough for one month of imports.

Between November and December 2012, reserves dropped 14 percent, or MVR 849.7 million (US$55 million). In comparison with the start of 2012 – when the State reserve was MVR 5.3 billion (US$343 million) – January 2013 had seen an eight percent decline.

MMA statistics explained that the reason for the downward slide at the end of 2012 was due to depletion of state funds in local and foreign banks, according to local media.

The ballooning 2012 budget deficit alerted the International Monetary Fund (IMF), which previously expressed concern that without raising revenue and cutting expenditures, the country risked exhausting its international reserves and sparking an economic crisis.

Finance Minister Abdulla Jihad told MPs in December 2012 that additional revenue was needed to finance the fiscal deficit and rein in soaring public debt, which was projected to reach MVR 31 billion (US$2 billion) or 82 percent of GDP by the end of 2013.

The governor of the country’s central bank said back in May 2012 that the Maldives was facing its worst economic crisis in recent memory.

Fiscal responsibility

Despite parliament recently rejecting an increased airport service charge, legislation on fiscal responsibility submitted in 2011 by former President Mohamed Nasheed’s government was passed with 42 votes in favour and 10 against at a sitting of parliament on April 15.

If the bill is ratified, the government would be prohibited by law from obtaining loans after January 1, 2016, in order to finance recurrent expenditure or loan repayments.

The bill also sets limits on government spending and public debt based on the proportion of GDP, mandating the state to not allow public debt to exceed 60 percent of GDP.

Borrowing from the central bank or MMA should not exceed seven percent of the projected revenue for the year, while such loans would have to be paid back in a six-month period under additional finance conditions outlined under the recently approved legislation.

Moreover, a statement outlining the government’s mid-term fiscal policy must be submitted annually to parliament at the end of the financial year in July.

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, the 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 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.


Doubling salary spend in 2007-09 crippled economy: World Bank

An internal World Bank bank report produced for the donor’s conference, called ‘Placing the Macro Challenge Facing the Maldives in Context’ has revealed the full extent of the economic challenge facing the country.

“The Maldives faces the most challenging macroeconomic situation of all democratic transitions that have occurred since 1956,” the report claims, noting that the full level of financial strife “may not be fully appreciated.”

In terms of GDP growth rate the Maldives is in the lowest 10 percent of the distribution of all transitions, and in terms of public sector deficit, the Maldives faces the worst situation of all previous democratic transitions.

Under the heading ‘How did the Maldives get into this situation?’, the World Bank report notes that “the origin of the crisis is very clear… the wage bill for public sector employees grew dramatically in a very short time.”

An accompanying graph of the country’s total spending on ‘salaries and allowances’ shows a doubling of expenditure between 2003 and 2007, and a sharp increase between 2007 and 2009 as spending more than doubles yet again from Rf2 billion to almost Rf5 billion. Revenues meanwhile plummet steadily during 2008.

Inflated spending on salaries in 2007 sparked an economic crisis

“Even before government revenues fell and when government revenues were at an all time high in 2008, the ratio of the wage bill to revenues at 46.5 percent was also at an all-time high (46.5 percent compared to an average of 38.1 percent between 2000 and 2007). When revenues plummeted in 2009, the share of the wage bill to revenues rose an astronomical 89 percent,” the report explains.

“While part of the increase was due to hiring more workers, the major part of the increase was due to the increase in compensation,” it said.

Increases to the salaries and allowances of government employees between 2006 and 2008 reached 66 percent, “by far the highest increase in compensation over a three year period to government employees of any country in the world,” the report noted.

Spokesman for the Civil Service Commission (CSC) Mohamed Fahmy said the increases needed to be considered in the context of “the total budget situation”, and were in line with government expenditure during the period.

“We have a tradition of salary increases every other year,” he said, rather than an annual increase based on inflation.

Those paid by the government included not only civil servants, “but political appointees, commissions, the judiciary”, he emphasised.

“Our case all long has been that everyone employed by the government has to be treated equally,” Fahmy said.

“If the government does not have the money to pay in full, then whatever it does have has to be paid out in an equitable manner that upholds the constitution. Everybody has to be treated equally – it is very important to make that distinction.”

World’s greatest tax haven

Meanwhile, the World Bank’s annual ‘Doing Business’ report for 2010 saw the Maldives’ ‘ease of doing business’ ranking fall from 71 to 87, and identified no ‘business-friendly’ reforms. The report acknowledges the Maldives as the world’s number one tax haven, although this could soon change if a pending bill on taxation is passed by Parliament.

Countries with successful business reforms “follow a longer-term agenda aimed at increasing the competitiveness of their firms and economy,” the report noted.

“But while successful reformers follow a clear direction in their policy agenda, they do not hesitate to respond to new economic realities,” it said. “Mauritius, the top-ranked economy in Sub-Saharan Africa, just announced a new insolvency act ‘to maintain the viability of the commercial system in the country.'”

The top countries in which to do business are Singapore, New Zealand and Hong Kong, the report noted.

Correction: An earlier version of this story described Mohamed Fahmy as a member of the ‘Civil Service Association(CSC)’.  Fahmy is a member of the Civil Service Commission (CSC).