Government’s revision of import duties “doesn’t make sense”, say former economic ministers

Minister of Finance and Treasury Abdulla Jihad yesterday announced the government’s intention to revise the changes made to import duties and to reduce the Goods and Services Tax (GST), after arguing that these policies had failed to improve the state’s finances.

The measures, introduced under the previous government, followed consultations with the International Monetary Fund (IMF) over how to strengthen and stabilise the economy.

These policies included introducing a general Goods and Services Tax (GST); raising import duties on pork, tobacco, alcohol and plastic products; raising the Tourism Goods and Services Tax (T-GST) to 6 percent; and reducing import duties on certain products.

The shortfall from reduced import duties was expected to be more than compensated for by Rf 2 billion (US$129.8million) in Tourism Goods and Services Tax (T-GST), effective since February 2011, and Rf1 billion ($US64.9 million) as general Goods and Services Tax (GST), introduced in August 2011.

Jihad yesterday explained that it was the failure of these taxes to cover lost import duties that prompted a revision of these policies.

“There hasn’t been an increase in State revenue by increasing GST after reducing duties. The GST had been increased from this year to cover the cut down on duty rates. But GST revenue does not even come close to covering it,” Jihad told Haveeru.

Amendments to the Export-Import Act were passed in the Majlis in November last year. The amendments eliminated import duties for items such as construction material, foodstuffs, agricultural equipment, medical devices, passenger vessels and goods used for tourism services.

Duties were raises for tobacco, whilst the motion to increase pork and alcohol duties – items considered haraam under Islam and therefore consumed only on the resort islands – was defeated.

T-GST, as well as GST, was raised to 6 percent in January this year. The IMF has more recently urged that T-GST be raised to 12 percent in order to expedite the government’s deficit reduction efforts.

Jihad is reported as having told Haveeru that the government will also look to increase T-GST as it works to reduce a budget deficit that is anticipated to reach 27 percent of GDP this year – Rf9.1billion (US$590million).

Last month Jihad told Minivan News that the government was seeking to reduce all non-wage expenditure by 15 percent. He also explained that a pay review board was to be convened in order to “harmonise” the pay of all government employees, although he was keen to add that wage cuts would only be considered as a last resort.

“It doesn’t make sense”

Haveeru yesterday reported that around Rf1 billion (US$64.9 million) had been lost after the reduction in import duties.

Former Finance Minister Ahmed Inaz, who presided over the previous government’s economic reforms, said that this figure was inaccurate. He argued that the import duties lost amounted to a figure closer to Rf500million (US$32.5million).

Inaz also pointed out that Jihad’s proposed policy revision went against the Maldives’ previous commitments to free trade.

“We are founding members of the World Trade Organisation (WTO) and members of the South Asian Free Trade Area (SAFTA). We should be increasing trade – tariffs are not the best way to do this,” said Inaz.

“GST is a more transparent system [than import duties] which also enhances opportunities for the business sector,” he added.

GST benefits companies with less initial capital as products are taxed at the point of sale rather than up front upon entry to the country.

Jihad’s assertions that the previous government’s economic reforms are failing appear not to be borne out by the Maldives Inland Revenue Authority (MIRA) figures, the most recent of which show that the state has received Rf 418 million (US$27.1million)  and Rf 789 million (US$51.2million) in GST and TGST respectively, over the first five months of this year.

Should this revenue stream continue on a similar path, the government can be expected to receive around Rf 2.9 billion (US$188.3million) from GST and TGST. The government income from import duties over the past five years has been just over Rf 2 billion (US$129.8million).

Jihad was not responding at time of press.

Former Minister for Economic Development Mahmood Razee believed that the government was “trying to confuse the issue”.

“They are trying to create the illusion that this is the case but the calculations were confirmed and passed through the Majlis,” he said.

Failing a large reduction in the amount of goods coming into the country, Razee continued, these calculations should  still be valid. He added that he had been unable to get specific details on such figures from customs.

Both Razee and Inaz were confused as to the merit of the seemingly contradictory measures of increasing import duties whilst reducing GST.

Speaking to Minivan News separately, both said: “It doesn’t make sense.”

Inaz last night Tweeted: “Rationalising state expenditure and increasing revenue from tax is the only way forward”.

“We need political agreement to reduce expenditure in order to achieve maintainable economic stability,” he told Minivan News today.


State budget for 2012 submitted to parliament

The state budget for 2012 was submitted to parliament today by Finance Minister Ahmed Inaz with a projected fiscal deficit of 9.7 percent, down from 21 percent in 2009, 16.1 percent in 2010 and 10.1 percent in 2011.

In his introductory statement, Inaz said the programme-based budget was prepared with special focus on producing results and maintaining recurrent expenditure in line with income.

“The programmes included in the budget are based on the Strategic Action Plan,” he explained. “Special attention has been given in the budget programmes to provide adequate and quality service to the public. The government’s aim is to match up the figures in the budget with development plans and ensure that all state expenditure is made to achieve a stated target.”

Steering committees have been formed to oversee the 31 programmes in the budget, Inaz continued, urging MPs to evaluate the progress of implementation over the course of the year.

Total expenditure out of the 2012 state budget is estimated to be Rf14.6 billion (US$946.8 million), representing an 18 percent increase from 2011.

With the enactment of taxation legislation under the government’s economic reform package, revenue is projected to increase 11 percent from 2011 to Rf10.8 billion (US$700 million) next year with tax revenue expected to account for Rf7.3 billion (US$473 million).

The resulting fiscal deficit is to be plugged with Rf1.9 billion (US$123 million) in foreign loan assistance, Rf2 billion (US$129.8 million) forecast as budget support, and Rf750 million (US$48.6 million) from privatisation proceeds and sale of treasury bills and bonds in the domestic market.

Among the programmes that account for the increase in government spending, said Inaz, include a universal health insurance scheme and construction of housing units with foreign loan assistance.

Inaz noted that Rf2.1 billion (US$136 million) was allocated for education – which includes the ‘Hunaru’ training programme, student loan schemes and projects for improving school infrastructure – and Rf100 million (US$6.8 million) as capital investment for health corporations along with Rf20 million (US$1.2 million) for local councils to strengthen the public health sector.

While 44 percent of recurrent expenditure will be spent on salaries and allowances for state employees, Inaz said the wage bill has been reduced as a result of the voluntary redundancy programme conducted this year and the transfer of civil servants to corporatised entities.

State benefits and subsidies meanwhile account for 30 percent of recurrent expenditure followed by 17 percent (Rf120 million or US$7.7 million) on administrative costs.

The government is currently undertaking a review with World Bank assistance to ensure that subsidies are “means-tested and targeted” in 2012, Inaz revealed.

Inaz observed that unlike previous years, state revenue in 2012 will cover recurrent expenditure while deficit spending will be on capital investments.

The Rf3.8 billion (US$246 million) allocated for capital expenditure and net lending in 2012 represents a 43 percent increase from 2011, Inaz noted, adding that “the main reason [for the increase] is the estimated rise in foreign aid and large projects” such as the construction of 500 housing units with loan assistance from the Indian Exim (Export-Import) Bank and 2,500 housing units with loan assistance from the Chinese Exim Bank.

“Although total expenditure will increase as a result of these projects, we believe it is one of the most important projects that should be undertaken right now as resolving the shortage of housing is also the solution to a number of social problems,” Inaz said.

Investment programmes in 2012 fall under two broad categories of climate change and adapation programmes – which includes coastal protection, harbour construction, land reclamation, investments in renewable energy as well as establishing water and sanitation systems – and socio-economic investment programmes such as the housing projects.

Reiterating that the main priority in formulating the budget was to ensure value for money spent in terms of providing services, Inaz however explained that “due to the present structure of the state, Rf32 out of every Rf100 is spent on salaries and benefits, Rf6 is spent on interest payments on loans and Rf13 is spent on administrative costs.”

“After spending Rf27 [out of every Rf100] on capital expenditures, there is just Rf22 left to spent on services that offer direct benefits to the public,” he said, adding that Rf22 out of every Rf100 had to be spent on loan repayments.


As expenditure outstripped revenue by Rf3 billion (US$194.5 million) in the 2011 budget of Rf12.9 billion (US$836 million), Inaz said the deficit was plugged through foreign aid and loan assistance as well as proceeds from privatisation and sale of T-bills and bonds.

Government income is meanwhile expected to reach a record level of Rf9 billion (US$583.6 million) this year.

Based on current estimates, said Inaz, the economy grew by 7.5 percent in 2011 compared to 5.7 percent in 2010. The forecast for economic  growth in 2012 is however 5.5 percent.

On the tourism industry, which accounts for 70 percent of GDP, Inaz said arrivals were expected to have risen 21 percent in 2011 from the previous year.

As of the end of September, tourist arrivals are 17.7 percent higher than 2010.

Although fish catch by volume rose 3.9 percent from 2010 in the first seven months of the year, Inaz said the Maldivian fisheries industry was not expected to improve in the next two years with the continuing decline of fishing in the Indian Ocean.

The introduction of long-line fishing and development of an aqua-culture and mari-culture industry was important to raise productivity, Inaz suggested.

With imports expected to rise in 2012, Inaz said the current account deficit will increase from 26 percent of GDP in 2011 to 28 percent next year.

To plug the widening current account deficit, said Inaz, economic policies in the budget were geared towards increasing exports and growing small and medium-sized businesses.

Inaz explained that the worsening balance of payments was tied to the ballooning fiscal deficit since 2005, which increased local currency in circulation and resulted in an “unstable foreign exchange market” and the creation of a black market for dollars.

In addition to tightening fiscal policy and rationalising expenditures, Inaz said money changers had to be regulated and the use of Maldivian rufiyaa as the legal tender should be enforced.

Expressing concern that 47 percent of transactions in the domestic economy were made through other currencies, the Finance Minister called on the Maldives Monetary Authority (MMA) as the country’s central bank to take measures to enforce the use of rufiyaa as legal tender.

A senior government official meanwhile told Minivan News that the government was still waiting on the income tax bill to be passed by parliament. The proposed tax will apply only to those who earn over Rf 30,000 a month (US$2000).

“It is not significant in terms of revenue, but it is important in terms of governance as it gives us the full picture,” the source said. “It will enable a full system of reporting and close loopholes that allow people to pass off business income as their own.”

The 3.5 percent tourism goods and services tax will be raised to six percent next year.


State cannot afford subsidies for fishermen: Finance Minister Inaz

Finance Minister Ahmed Inaz told parliament today that the state would have to reduce other subsidies to issue Rf100 million (US$6.4 million) as oil subsidies for fishermen.

Responding to a query during Minister’s Question time at the first sitting of this year’s final session of parliament, Inaz explained that parliament had approved reducing amounts from other budget items to free up funds to subsidize oil for fishermen.

“It would have been easier if parliament had decided to reduce from a particular item,” he said, noting that potential items included subsidies for water, oil and foodstuffs as well as state benefits for persons with special needs.

“If we cut any of the [budget] items, we would be cutting basic needs,” he said. “The Majlis has not asked the government to cut any particular item so the government cannot cut any item and hasn’t been able to find a fair way to issue subsidies for fishermen.”

Inaz noted that there were other government policies geared towards assisting fishermen and developing the industry.

The Finance Minister added that the 2011 budget was structurally in deficit and oil subsidies could be issued after new tax revenue is collected.

The oil subsidy was added to the budget by parliament when it approved the 2011 state budget in December last year.

During today’s debate on a binding resolution proposed by MP Riyaz Rasheed to compel the government to issue the fishermen’s subsidy, opposition MPs insisted that delays to releasing the funds were “unacceptable” while the government was continuing its “wasteful and useless expenditures.”


Details lacking in government expenditure statement: DRP

The first of weekly government expenditure and income statements made public by the Ministry of Finance and Treasury this week lacks detail and does not serve to promote transparency, contends the main opposition Dhivehi Rayyithunge Party (DRP).

DRP MP Dr Abdulla Mausoom, also a member of the parliament’s Public Accounts Committee, told Minivan News today that the party “welcomed” the government following through on its pledge to publicise government expenditure on a weekly basis.

“But half the truth is often more deceptive than lies,” he said. “First of all, there were no details in the statement. It was just categorised expenditure without any detail of the expenditure.”

While the Health Ministry has spent Rf744 million (US$48 million) this year, said Mausoom, “we don’t know what the money was spent for or where it went.”

“The whole health sector was corporatised,” he said. “But basic health services have not improved. There is a lack of equipment or facilities that need to be renewed and there’s always talk of how more doctors are needed.”

DRP Deputy Leader Ahmed ‘Andey’ Mohamed meanwhile explained that if a household servant was given Rf100 for shopping and asked to provide details of expenditure “for him to say I spent Rf50 at shop A, Rf30 at shop B and Rf20 at shop C does not mean he provided any details of what he bought.”

Citizens should be made aware of details of expenditure and the services provided with public funds, he added.

One of the “main areas of concern”, said Dr Mausoom, was Rf1.9 billion (US$123 million) spent out of the Finance Ministry’s contingency budget.

“That is almost Rf2 billion. Where did that money go?” he asked, adding that reduced amounts from civil servants salaries that the government was ordered to pay back by the courts had not been released.

The DRP MP for Kelaa also questioned whether the Rf489 million (US$31.7 million) released to state-owned enterprises so far this year could be categorised as “investment.”

A number of “dodgy companies” were dealing with domestic corporations, such as regional utilities and health corporations, he continued, and planning for “unfeasible business projects” with surveys and Memorandums of Understanding.

“A lot of cost would be incurred for that and it can’t really be considered investments,” he argued, revealing that there were 62 government-owned corporations.

Moreover, as a footnote of the expenditure and income summary stated that the figures were taken from reports that “have not been reconciled or audited,” Dr Mausoom suggested that “the numbers are likely to be understated” and subject to change.

“So there are a lot of unanswered questions,” he said. “But it is good that this has been made public because we are able to raise these issues. If the government wants to dispel all doubts, they should provide full details down to the last laari, which won’t be that hard to do.”

Finance Minister Ahmed Inaz was not responding at the time of press.

Deficit spending

Meanwhile among the highest spending line ministries and institutions were the Education Ministry with Rf1.2 billion (US$77.8 million), the Home Ministry with Rf751 million (US$48 million), Housing Ministry with Rf652 million (US$42 million) and local councils with Rf359 million (US$23 million).

According to the statement put out by the Finance Ministry, government expenditure (Rf7.5 billion) outstripped revenue (Rf6.3 billion) by 20 percent between January 1 and September 8, 2011.

As a consequence, the fiscal deficit reached Rf1.3 billion (US$84 million) at the end of last week.

In addition to Rf3.2 billion (US$207.5 million) spent on salaries and allowances for state employees – the single largest source of expenditure – Rf2.4 billion (US$155.6 million) was needed to cover recurrent expenditure or administrative costs.

Capital expenditure was meanwhile Rf1.2 billion (US$77.8 million) while spending on debt service reached Rf563 million (US$36.5 million).

DRP Deputy Leader Ahmed Mohamed observed that capital expenditure – capital outlays for local component of development projects, fixed assets maintenance and investments for state-owned enterprises – was “only 17 percent of the budget” while recurrent expenditure was over 75 percent.

In December 2010, parliament approved a Rf12.37 billion (US$802 million) annual state budget with a projected revenue of Rf8.8 billion (US$570.7 million) and recurrent expenditure of Rf9.8 billion (US$635.6 million) – 49 percent of which was to be spent on salaries and allowances.

The forecast for recurrent expenditure was 79 percent of government spending.

In March this year, the International Monetary Fund (IMF) warned that “significant policy slippages” have undermined the country’s ability to address its unsustainable 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 noted in a statement.

The IMF said that while it recognised “the difficult political situation facing the authorities”, “decisive and comprehensive adjustment measures” were required to stabilise the economy, allow sustainable growth and reduce poverty. In particular, it raised concern about the “lack of significant progress in public employment restructuring.

Dr Mausoom meanwhile insisted that as government revenue was expected to exceed previous forecasts because of new tax revenue and reach almost Rf10 billion (US$648.5 million), “the deficit should be reduced by a corresponding amount to the boost in income.”


Government inherited outstanding debts of US$446 million, says Finance Minister

The former government left a dispersed outstanding debt of US$446.5 million owed to foreign and local banks, Finance Minister Ahmed Inaz informed MPs today during Minister’s Question Time in parliament.

In response to a query by Dhivehi Qaumee Party (DQP) MP Riyaz Rasheed about the amount of loans obtained by the previous and incumbent governments, Inaz revealed that as of April 30 2011, the new administration has taken loans amounting to US$196.4 million.

“Out of that, US$5.1 million has been paid back in accordance with the agreement,” he said. “Therefore, the total dispersed outstanding amount is US$191.2 million.”

Inaz stressed that the loans of both governments were being paid on schedule “without any default.”

Outstanding debts of the previous government included a loan obtained for a fisheries project in 1979, Inaz said.

Asked by MP Abdulla Yameen – leader of minority opposition People’s Alliance – if the figures provided included receipts from sale of treasury bills, Inaz explained that “the total figures I’ve provided do not include treasury bills because the question today was about loans, which is different from securities.”

The total domestic debt in November 2008 – including T-bills issued by the former government – when the new administration took office stood at Rf809 (US$52.4 million), Inaz revealed.

“As of July, 2011, there is now Rf4.9 million (US$317,700) as total debt in T-bills,” he said, adding that parliament approved a budget with Rf1.3 billion (US$84 million) from issuance of T-bills to cover recurrent expenditure.

Inaz noted that the state budget passed by parliament in past years was structurally in deficit, with expenditure outstripping revenue: “To solve this, the tax bills proposed by the government has to be passed and I hope the honourable Majlis will solve this,” he said.

Jumhooree Party (JP) Leader Gasim Ibrahim – who as Finance Minister oversaw the expansionary fiscal policies – meanwhile asked to clarify if the total outstanding debt of the former government included foreign loans to assist victims displaced by the December 2004 Asian tsunami.

According to a UNDP paper on the Maldives’ debt sustainability published in December 2010, “as a percentage of GDP, public debt levels have almost doubled from 55 percent in 2004 to approximately 97 percent in 2010.”

“Public debt service as a percent of government revenues will more than double between 2006 and 2010 from under 15 percent to over 30 percent,” the paper noted. “The IMF [International Monetary Fund] recently classified the country as ‘at high risk’ of debt distress. From a human development perspective, the extent to which increased debt service obligations may put at risk key social and infrastructure expenditures give serious cause for concern.”

In May, 2011, the IMF warned that the Maldives “continues to suffer from large fiscal and external imbalances.”

The IMF agreed to a “medium-term” policy from the government to reduce its budget deficit “substantially”, “both through additional revenue measures – which would require the support and approval of the Majlis – and through expenditure restraint.“

“The authorities have introduced an initial voluntary separation plan for government employees and are continuing their detailed analysis of the public service, with an eye toward right-sizing government over the medium term,” the IMF noted.


Parliament approves Inaz as Finance Minister

Parliament today approved President Mohamed Nasheed’s appointment of Ahmed Inaz as Finance Minister with 68 votes in favour and two against.

Presenting the committee evaluation report, Mathiveri MP Hussein Mohamed said that the committee found that Inaz was qualified for the post and a majority voted to recommend consenting to his appointment.

Opposition Dhivehi Rayyithunge Party (DRP) Deputy Leader Ali Waheed argued that Inaz’s youth and perceived inexperienced should not be held against him while People’s Alliance (PA) MP Abdul Raheem Abdulla praised Inaz as capable and qualified.


MMA Governor meets Finance Minister to discuss dollar shortage

Maldives Monetary Authority (MMA) Governor Fazeel Najeeb met Finance Minister Ahmed Inaz last week to discuss the policy measures taken to alleviate the dollar shortage and determine what additional efforts could be undertaken to resolve the problem.

According to an MMA press statement on Thursday, Najeeb and Inaz agreed that given the continuing scarcity of dollars, “the problem of partiality by some to transactions with dollars instead of rufiyaa is tied to the dollar shortage.”

“It was therefore decided to go forward by consulting the business community about the issue,” it adds.

Deputy Governor Aishath Zahira, State Minister Ahmed Naseer and MMA technical staff also participated in the meeting.

Local media meanwhile reported a sharp rise in the wholesale prices of a number of commodities last week, ranging from powdered milk to areca nuts. Following the government’s decision earlier this month to replace the fixed exchanged rate with a managed float of the rufiya within a band of 20 percent of the 12.85 peg, newly-appointed Finance Minister Inaz told press that he expected the economy to stabilise within three months.