Tag: finance ministry

Expenditure on political appointees two percent of state wage bill, says Finance Ministry

Expenditure on 244 political appointees in the executive branch is two percent of the state’s wage bill or Rf99 million (US$6.4 million) a year, according to official figures released by the Ministry of Finance and Treasury.

The Rf1.6 billion (US$103 million) of annual spending on 20,476 civil servants meanwhile accounts for 39 percent of total state expenditure on salaries and allowances, followed by 24 percent for uniformed bodies (5,949 police and army officers), 17 percent for local councils (1,091 elected councillors), 10 percent for independent institutions (1,904 employees) and five percent for the judiciary (1,461 employees).

Annual expenditure on parliament (211 employees) accounts for two percent while administrative staff at the President’s Office (186 employees) represent one percent of the total wage bill.

A press statement issued by the ministry today notes that the figures were made public because “misleading statements” were being made about government spending.

“The economy has been adversely affected as a result of the state budget deficit in past years,” it reads. “One thing to be noted is the significant increase of recurrent expenditure compared to revenue. Recurrent expenditure is 12 percent above the government income forecast for 2011. Moreover, 49 percent of the state’s recurrent expenditure is spent on salaries and allowances for state employees.”

“Tip of the iceberg”

Speaking to Minivan News today, MP Dr Abdulla Mausoom of the opposition Dhivehi Rayyithunge Party (DRP) said that expenditure on political appointees in the executive was “just the tip of the iceberg.”

“The whole country was corporatised,” he explained. “There’s a roads corporation and all sorts of corporations. The people appointed to the boards of these corporations are all purely political appointees. They were appointed directly by the President to promote a political agenda.”

He added that the corporations were created “to give political posts to [ruling Maldivian Democratic Party] MDP activists.”

Moreover, said Mausoom, the corporations have “taken millions of dollars in loans to give salaries to these MDP activists.”

“Some of these people are not qualified at all,” he claimed. “There are people who have been made Managing Directors who cannot even read an MoU [Memorandum of Understanding] written in English.”

Dr Mausoom argued that the majority of senior officials in the corporations were filling “useless posts.”

The Public Accounts Committee (PAC) of parliament had requested information about expenditure on corporations, he continued, but the figures had not been provided.

“Most of them don’t even show up at the office,” he said. “Every day between sunrise and sunset, a new post is created in these corporations.”

“Distortions”

Finance Minister Ahmed Inaz however dismissed Dr Mausoom’s contention as “an attempt to distort” the information made public today.

Inaz insisted that senior officials of corporatised entities were not paid salaries or allowances out of the government’s wage bill.

The Finance Minister explained that state-owned enterprises such as the State Trading Organisation (STO) were managed as businesses and paid their employees from income raised through their operations.

“Other corporations such as Dhiraagu pay dividends to the government,” he said.

While subsidies were granted to the State Electricity Company (STELCO), Inaz said that the government’s policy was to switch to targeted subsidies for the poor.

“What would happen if we suddenly brought a speeding motorcycle to a halt?” he asked, referring to public companies. “It will slide off the road and crash.”

On the cost of political appointees, the Finance Minister argued that two percent of the wage bill was “a negligible amount.”

“Say for example that we eliminated all political posts and only President Nasheed is left in the executive,” he said. “Reducing or eliminating two or three percent would not have a significant impact on state expenditure.”

Austerity battles

In August 2009, the government’s decision to introduce a raft of austerity measures – including unpopular pay cuts of up to 15 percent for civil servants to reign in the ballooning budget deficit – was met with fierce resistance from opposition parties.

The pay cuts sparked a protracted legal dispute between the Finance Ministry and the Civil Service Commission (CSC), which won a court case against the ministry in April 2010 to restore salaries to previous levels.

Meanwhile an internal World Bank report produced for the donor conference in May 2010 noted that increases to the salaries and allowances of government employees between 2006 and 2008 reached 66 percent, which was “by far the highest increase in compensation over a three year period to government employees of any country in the world.”

“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.

In April this year, the government launched a programme to incentive voluntary redundancy in the civil service.

Finance Minister Inaz told Minivan News in May that the programme “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.”

Inaz observed at the time that slimming down the civil service would not be easy: “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.”

State wage expenditureAnnual expenditure on salaries and allowancesPercentage of total wage bill or expenditure on employees
Civil servants or employees under the executive (excluding political appointees and councillors)Rf1,596,029,00739 %
Uniformed bodiesRf1,001,489,48624 %
Political appointees in the executive branchRf99,178,9802 %
Administrative staff at the President’s OfficeRf27,326,7301 %
CouncilsRf717,250,03017 %
JudiciaryRf210,282,4635 %
People’s Majlis or legislative branchRf79,210,7182 %
Institutions dependent on state budgetsRf393,620,94310 %
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ACC clears Gasim of wrongdoing as finance minister

The Anti-Corruption Commission (ACC) has cleared former Finance Minister Gasim Ibrahim of wrongdoing in the leasing of ‘Red Crescent Six’ shop.

Haveeru reports that the commission had investigated a complaint alleging that the shop was rented out in violation of bidding rules.

While the investigation did not uncover any evidence of corruption, a statement from the ACC however notes that the lack of regulations governing leasing and renting of state property caused legal problems for the commission.

The statement reiterates calls for the Finance Ministry to amend regulations under the Finance Act to specify guidelines for leasing state property.

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IMF approves three year programme as Maldives commits to new tax regime

The International Monetary Fund (IMF) has given preliminary approval for a three year economic programme in the Maldives, after the government agreed to “a package of policy reforms that will help stabilise and strengthen the Maldives’ economy.”

The IMF has spent two weeks in the Maldives meeting with President Mohamed Nasheed, Minister of Finance and Treasury Ahmed Inaz, Governor of the Maldives Monetary Authority Fazeel Najeeb, senior government officials, donors and the Majlis.

“The Maldives’ economy is growing robustly on the back of strong tourist arrivals, but it continues to suffer from large fiscal and external imbalances,” the IMF observed in a statement.

“The Maldives has recently faced challenges with respect to inflation, but there is no indication that inflationary momentum has risen. The introduction of the exchange rate band was a welcome step, but it needs support from a tightening of fiscal and monetary policies. The mission and the authorities agreed that such a tightening of policies would be important to promote fiscal and external sustainability, continued growth, and low inflation.”

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.

“Monetary policy would be tightened to complement fiscal adjustment, counter inflation, improve confidence in the rufiya, and support international reserves. Gradual accumulation of international reserves, along with the fiscal space created through debt reduction, would reduce Maldives’s vulnerability to external shocks. Financial sector reforms will support the soundness of the banking system and increase the depth of the foreign exchange and financial markets.”

The IMF observed that if approved by the IMF’s Executive Board, the Maldives’ subscription to the program would likely encourage other key donors to contribute further financial support.

Speaking at a joint press conference held by the Finance Ministry and the Maldives Monetary Authority (MMA), Finance Minister Ahmed Inaz acknowledged that previous concessions made by the government with the IMF – such as reducing the public sector wage bill, “didn’t materialise because some of them were not politically possible in the country at the time.”

“But given the current situation we are hopefully the proposed medium-term measures we are proposing will be possible when [parliament] sessions resume.”

According to Inaz, under the new IMF program the Maldives has committed to:

  • Raise import duties on pork, tobacco, alcohol and plastic products by August 2011 (requires Majlis approval);
  • Introduce a general goods and services tax (GST) of 5 percent applicable to all sectors other than tourism, electricity, health and water (requires Majlis approval);
  • Raise the Tourism Goods and Services Tax (TGST) from 3.5 percent to 6 percent from January 2012, and to 10 percent in January 2013 (requires Majlis approval);
  • Pass an income tax bill in the Majlis by no later than January 2012;
  • Ensure existing bed tax of US$8 dollars a night remains until end of 2013;
  • Reduce import duties on certain products from January 2011;
  • Freeze public sector wages and allowances until end of 2012;
  • Lower capital spending by 5 percent

“This is not about how much we get from IMF or donor agencies, this is something we been advocating, even if we have not been heard,” said Inaz. “We have always been saying that the deficit should be balanced with additional revenue measures.”

Cutting the deficit by sacking state employees – current 75 percent of the state budget – was not possible at the moment, he said, “although we are trying our best with redundancy payments.”

“Hopefully 1350 [voluntary redundancies will bring us Rf101 million in savings next year, but that not enough. State revenue has to increase with the new constitution. We hope the Majlis will approve these bills, and we hope much of the burden of the deficit will be released in 2012.”

Governor of the MMA Fazeel Najeeb acknowledged that “there will be some eyebrows raised and some reservations on the measures – this is inevitable in any country changing its taxation regime.”

“There are instabilities and I hope these will be short term. But I think what we are doing is in the interest of the economy and will bring it out of the mess it is in. I think it is necessary that we act together now,” Najeeb said.

The IMF package, he noted, represented “a joint commitment by the Ministry of Finance and the central bank: a state affair in the interests of the economy and the country.”

“Everybody in the country realises and recognises that there needs to be a change in the status quo. The status quo is a fiscal stance that is unmanageable.”

Asked whether he felt the new taxes were likely to be passed by parliament, “I think when it comes down to the details of what and how the legislation takes shape, that should be left to Majlis. What I can say is that status quo needs to change, and I don’t think this can be only reduction [in expenditure]. There needs to be a considerable amount of income increase. A combination of revenue as well as expenditure.”

Until recently the government was publicly calling for Najeeb’s dismissal by the Majlis due to a perceived lack of cooperation on tackling the currency crisis facing the country.

Asked if the IMF deal represented a new era of cooperation, Najeeb said the MMA “is always willing to cooperate with the government. There are issues on which we professionally disagree, but that shouldn’t be interpreted as lack of cooperation.

“We will continue to cooperate as we have done before, and whenever we are called upon to participate in press conferences such as this one, we will do it. We will leave it at that.”

State Minster for Finance Ahmed Assad said that despite media efforts “to sensationalise” the relationship between the MMA and the government, “we are not going to fight in public. Any fight will be within the walls of the MMA, or the Ministry of Finance. Because these are technical policy issues on which we don’t agree.”

“The MMA is not elected by the people and is not responsible [for the economy] – it is the President who heads the government and therefore the responsibility falls on the government to point the economy in the right path,” Assad said.

“Therefore whatever we do, the MMA is there to support us. If we’re wrong they’re there to criticise us. If we choose the right path their sole goal is to assist us. There are times that we disagree but that is purely professional. We should not have a hostile attitude towards this.”

Assad observed that even with the new taxes proposed by the government, the Maldives was still had the most generous tax system in the region – even compared with other island nations, and neighbouring countries such as India and Sri Lanka.

“We can’t say taxes are exorbitantly high and will bring total destruction to the industry,” he suggested.

The President’s Press Secretary Mohamed Zuhair meanwhile said the agreement with the IMF represented “a vote of confidence” in the government’s handling of the economy.

“We inherited huge amounts of debt and millions of dollars in unpaid bills from the former administration but have nevertheless managed to cut the budget deficit in half, bring down inflation and raise government income to put our economy on a steady path to prosperity,” Zuhair said.

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Finance Minister walks out of negotiations with “politically influenced” youth

Finance Minister Ahmed Inaz yesterda  walked out of a meeting with several young people claiming to represent the ‘concerned youth’ behind the recent week of violent protests in the capital Male’.

Governor of Maldives Monetary Authority (MMA) Fazeel Najeeb also attended the meeting.

The faction of the opposition party loyal to former President Maumoon Abdul Gayoom have maintained that the protests over rising commodity prices were “youth-led”.

‘’I waited in the meeting until we could address the real issues, but they kept on criticising the government policy and some of the government projects,’’ Inaz told Minivan News. ‘’I did not want to have a heated political debate – we went there to negotiate with the youth regarding the dollar issues, not for a political debate.’’

Inaz claimed that the youth delegation included leader of the opposition-allied People’s Alliance (PA) sports wing, and two others he claimed were ‘’new political figures’’ created by senior party officials.

Inaz explained that government needs to find ways to increase its revenue.

‘’Currently 75 percent of the government’s revenue is spent on salaries. The government did try to decrease the salaries but other state institutions did not support the decision,’’ he said. ‘’There are other necessary things to do such as providing electricity, fix sewerage systems and supply water to those in need.’’

Spokesperson from the youth delegation, Mohamed Ahsan, said the delegation was unable to clarify information from the Finance Ministry as the minister left the meeting.

‘’However, the MMA officials were very cooperative,” he said. “We found out that the government have not been implementing the MMA’s suggestions to its full extent,’’ said Ahsan. ‘’The MMA clarified almost all the information we required.’’

He also said the finance minister “took it politically” because a PA member was present at the meeting.

‘’We have decided to recommence the protests, but due to exams we have temporarily delayed it,’’ he said. ‘’Once the examinations are over we will restart the protests.’’

A first round of negotiations held last week were described as “very upsetting” by the opposition’s Gayoom faction after the delegation accused President’s Office represenative Shauna Aminath of stating that the “political solution” to the country’s economic woes was the arrest for the former President.

Shauna did not comment on whether she had suggested Gayoom be arrested, and said the government was unable to officially respond to the delegation because it was unclear who they officially represented.

“We met with four people who claimed to represent youth,” she said. “They presented a piece of paper they said was a youth proposal, but there was almost no discussion of what was on it.

“They talked a little about youth unemployment, and the rising price of milk, cooking oil and petrol. They said that young people did not have enough money to pay for coffees or petrol for their motorbikes.”

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High Court upholds Civil Court’s ruling in favor of CSC regarding salary issue

The High Court has today ruled that Finance Ministry does not have the legal authority to overturn the salaries and allowances of civil servants against the will of the Civil Service Commission (CSC).

In April last year the Civil Court ruled in favor of the Civil Service Commission in a case against the Ministry of Finance regarding civil servants’ salary cuts. The CSC successfully contended that the Finance Ministry did not have the legal authority to make amendments to civil servant salaries.

Delivering the verdict at the time, Civil Court Judge Aisha Shujoon said that the Finance Ministry was not authorised to order offices to prepare salary sheets according to its revised (lower) salaries, and also ruled that the Ministry could not issue an order narrowing the powers of the commission to decide the civil servants’ salaries under articles 6, 18(a) and 43 of the Civil Service Act.

The salaries of the Civil Servants were reduced in October 2009 for three months, after an agreement between the Finance Ministry and CSC, part of austerity measures favoured by the International Monetary Fund (IMF).

After the three months duration was over, the Finance Ministry extended the duration for another three months without the consent of the CSC.

In January 2010, the CSC ordered permanent secretaries to submit the sheets with salaries at the levels prior to the government’s reductions in October, while the Finance Ministry threatened legal action against any civil servants who filled in salary sheets according to the restored amount.

Civil servants held protests in Male’ over the salary reduction, with the support of the opposition, after the government refused to restore the salaries to pre-cut levels citing the poor economic condition of the country.

The situation became especially heated that Feburary after the Finance Ministry filed a case against the CSC with police, alleging the commission was attempting to “to sow discord between the government and public”, and “bring the government to a halt.”

The Finance Ministry further claimed that certain members of the CSC were using the issue as a cover to attain “a hidden political agenda.”

“The CSC is making it difficult for the government to implement the necessary economic policies [and are therefore] indirectly trying to damage the economy,” the Ministry said in a statement, at the time.

“[The CSC’s actions] will result in an increased budget deficit, make it difficult to maintain the value of the rufiyaa against the dollar and will damage the Maldivian economy, affecting each and every citizen of this country.”

After the matter descended into the court system, the government appear to accept that it was unlikely to shake the CSC’s hold on the salary issue, as demanded by the IMF, and instead embarked on an ambitious program of corporatisation whereby entire departments were transformed into 100 percent government-owned corporate entities, outside the jurisdiction of the CSC.

More recently, cabinet launched a program to encourage civil servants to leave the government and enter the private sector or further their education, a move welcomed by the CSC.

Under the scheme, civil servants and government employees were 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).

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Half of Rf12.37 billion state budget to be spent on employees

The Finance Ministry has unveiled a state budget of Rf12.37 billion (US$962.6 million) for 2011 with a target of reducing the deficit to 15.3 percent of GDP in the coming year, down from 26.25 percent in 2009.

The Fiscal and Economic Outlook 2009 to 2013 published alongside the budget on the Ministry’s website this week states that the main objective of the government’s fiscal policy is to bring expenditure in line with revenue and maintain the deficit within a sustainable range.

The Finance Ministry reveals that while capital investment amounts to 21 percent of the budget, 49 percent of expenditure in 2011 will be on salaries and allowances for government employees.

“If the cost of health insurance to employees is included, half of the state budget is spent on employees,” reads the budget summary.

Foreign loan assistance along with Rf1.4 million (US$108,949) in income from privatisation and Rf1.3 million (US$101,167) expected from the sale of treasury bills was proposed to plug the budget deficit.

In November, the International Monetary Fund (IMF) delayed its third disbursement under a US$92.5 million program pending the approval by parliament of significant austerity measures in the budget.

In its Country Report for the Maldives published in June, the IMF warned that as a result of the failure to enforce pay cuts and the injection of an additional US$62.2 million in spending by parliament, “the annual deficit targets for 2010 and 2011 will be missed on current policies.”

An internal World Bank report produced for the donor conference in May identified dramatic growth in the public sector wage bill as the source of the ballooning budget deficit.

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

The deficit in 2010 is now expected to be at 16.4 percent of GDP, above forecasts of 14.8 percent in the 2010 budget.

While the economy grew by 4.8 percent in 2010 after a 2.3 percent contraction in 2009, nominal GDP, which accounts for a 5.5 percent inflation rate, grew by 12.2 percent this year.

Revenue and expenditure

Government income fell by 23 percent in 2009 in the wake of the global financial crisis, which saw tourist arrivals decline by 4 percent and revenue from import duties down by 25 percent over the previous year.

Offering resorts under development that were facing difficulties with financing an additional year to pay rent contributed to the decline in government income, resulting in a 36 percent decrease in revenue from resort rent in 2009.

While Rf6.8 billion (US$529 million) in revenue in 2010 was forecast at the end of last year, current estimates place the figure at Rf6 billion (US$467 million)  – an 11 percent  shortfall the Finance Ministry attributes to parliament’s failure to pass legislation on corporate profit taxation as well as delays in implementing a goods and services tax (GST).

Moreover, as only three out of 13 resorts expected to open in 2010 began operations this year, estimates of Rf1.7 billion (US$132 million) in revenue have been lowered to Rf1.1 billion (US$85 million).

However, income from state-owned enterprises is now expected to be higher than originally forecast at over Rf1 billion (US$77.8 million) by the end of the year.

Revenue in 2011 is projected to be Rf8.7 billion (US$677 million), a 44 percent increase from 2010 expected to be driven by the introduction on business profit taxes, GST and extension of resort leases.

Income from taxation is projected to account for 59 percent of government income in 2011, with Rf612.5 million expected from business profit taxes.

The Finance Ministry notes that delays in passing taxation legislation is “the biggest obstacle” to continued assistance from international agencies.

Main industries

The seven-year trend of decline in fisheries is expected to continue in 2011, with the industry expected to have contracted by 5.8 percent by the end of 2010.

After a 29 percent decrease in the construction industry in 2009, the industry is expected to have registered growth of 2.6 percent in 2010.

With nine new resorts under development next year, the industry is projected to grow by 9.7 percent in 2011.

A strong rebound by the tourism industry – which accounts for 27 percent of GDP – saw revenue in 2010 14 percent higher than projected in 2009.

While tourist arrivals increased by 13 percent in the first nine months of 2010 compared to the same period last year, arrivals are expected to have increased 20 percent by the end of the year.

Moreover, a 70 percent decline in occupancy in 2009 was followed by a 74 percent increase in 2010 – with 131,107 more visitors than 2009 recorded in 2010.

Nominal GDP per capita in 2010 is calculated to be at US$4,628 and is projected to climb to US$5,114 in 2011.

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Media receives government subsidies

The Finance Ministry has begun distributing Rf4 ($311,000) million in subsidies to private media organisations allocated by Parliament’s finance committee following its review of the 2010 state budget.

VTV, owned by businessman Gasim Ibrahim, received the highest amount (Rf1,060,000), followed by DhiTV (Rf820,000) and DhiFM (Rf434,000).

Other recipients were Radio Atoll (Rf 294,000), Faraway FM (Rf 252,000), Haveeru Daily (Rf 246,000), Aafathis (Rf 162,000), FutureTV (Rf 120,000), Miadhu Daily (Rf 102,000), Haama Daily (Rf 90,000), and HFM (Rf56,000).

Minivan News has not applied for subsidies.

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CSC demands restored salaries be included in next year’s budget

The Civil Service Commission (CSC) has called on the government to include the restored salaries for the civil servants in next year’s budget.

In September last year the Finance Ministry and the Civil Service Commission agreed to reduce the salaries of civil servants for three months because of the country’s poor financial circumstances. The matter became controversial towards the end of September when the Finance Ministry refused to restore all of the salaries to former levels.

The CSC has since taken the Finance Ministry to court, winning the first round in the civil court and forcing the government to appeal in the High Court.

At the same time, in its Country Report for the Maldives, the International Monetary Fund (IMF) acknowedged the “intense political pressure” but maintained that the restoration of public sector wages “would have a large fiscal impact”, and prevent economic recovery “in the near term”.

President of the CSC, Hassan Fahmy, said today that the commission had met with President Mohamed Nasheed to discuss the issue, and that he had told the commission that the salaries “could be restored soon.”

“Nine months have passed, and we have been trying to resolve the issue through the legal system,’’ Fahmy said. “When the Civil Court ruled that the Finance Ministry does not have the authority to give out orders to decrease the salaries of civil servants, instead of implementing the verdict, the government has appealed in the High Court.”

The High Court has yet to rule on the issue.

Fahmy said the commission wanted “the original salaries of civil servants to be included in the budget next year.”

“It cannot be said that salaries were ‘increased’,” Fahmy said. “It will be the ‘original’ salary of civil servants.”

He said the commission had also sent a letter to the president yesterday as well.

“If it is included in the budget, then it will be for the MPs to approve it [and not the government],’’ Fahmy said. “We hope the government will understand and take leadership to restore the salaries of civil servants.”

The President has meanwhile established a committee to hold discussions between the governtment and the CSC, according to a statement issued by the President’s office.

The Committee will be chaired by the President and will include Minister of Finance and Treasury Ali Hashim, Minister of Economic Development Mahmood Razee, Attorney General Ahmed Ali Sawad, Minister of Fisheries and Agriculture Dr Ibrahim Didi, President of CSC Mohamed Fahmy Hassan, Vice President of CSC Ahmed Hassan Didi, CSC member Dr Mohamed Ali, CSC member Khadheeja Adam, Secretary General of CSC Abdulla Khaleel.

The President’s Press Secretary Mohamed Zuhair and State Minister for Finance Ahmed Assad were not responding to calls at time of press.

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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.

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