Tag: fiscal deficit

“Time for everyone to tighten their belts”: Finance Minister Jihad

Minister of Finance and Treasury Abdulla Jihad has said the state must brace to enact austerity measures in the long-term if authorities are to address the country’s fiscal deficit – with further budget cuts anticipated in all government departments over the next 12 months.

Jihad has told Minivan News that previous commitments by government institutions to cut their budgets by 15 percent would need to be followed by further reductions to state and civil service spending in next year’s budget, regardless of financial assistance secured from China and India.

The minister’s comments were made as Parliament’s Finance Committee – reconvening for the first time since July – agreed this week to provide an additional MVR 12 million (US$780,000) in budget to the Auditor General’s (AG’s) Office, according to local media.

Auditor General Niyaz Ibrahim said that under the existing state budget, an agreement was reached that an additional MVR 58.8 million (US$3.8 million) would be provided to the AG’s Office, though it was decided to request a smaller proportion of these funds, the Sun Online news service reported.

People’s Aliance (PA) party MP and Finance Committee Chair Ahmed Nazim was not responding to calls from Minivan News at the time of press.

However, Jihad claimed that the decision to provide the extended budget was a “concern” considering the state was not getting enough direct revenue at present to justify its spending.

“We need to be fair when it comes to the budget, everyone should have to follow the same rules,” he claimed. “Otherwise this would mean that I could only reduce the budget of the Finance Ministry in future. It is time that everyone should tighten their belts.”

According to Jihad, provisions for the extension of funds to the AG’s Office had been included in the state budget, but he claimed that the country needed to work together in reducing state spending where possible.

Regarding claims that further cuts to the state budget wuld be required during the next 12 months, Chairman of the Civil Service Commission (CSC) Mohamed Fahmy Hassan said that it had “managed” with the 15 percent cuts already made to its expenditure.

Fahmy added that as no request had so far been made by the government to reduce the size and budget of civil society organisations, it did not have concerns about potential job cuts.

“Our mandate is to provide human resources to the government. As long as there is no effect on the salaries or number of civil servants, we will not seek to intervene in the policy of government,” he said.

With state income lower and expenditure higher than predicted, this year’s budget deficit had been forecast to reach MVR9.1billion (US$590 million), equivalent to around 28 percent of nominal GDP.

Financial assistance

In the last few months, authorities in India and China had both pledged to provide financing to the Maldives. Finance Minister Jihad said that of these funds, US$25 million being provided by India would be put into “budget support” to try and address state spending. A large amount of the funding meanwhile from China, which would total US$500 million, was expected to be put towards development projects such as housing construction, the Finance Ministry added.

The Indian government had announced that it would be granting the Maldives an additional as part of the US$100 million standby credit facility agreed last year under the previous government.

China has also pledged funding to the government of President Dr Mohamed Waheed Hassan following an official state visit to the country.

The loans, equal to nearly one quarter of the Maldives’ GDP, are said to include $150 million (MVR2.3billion) for housing and infrastructure, with another $350million (MVR5.4billion) from the Export-Import Bank of China, reported Reuters.

Jihad has maintained that the state still needs to reassess where further spending cuts can be made going forward.

Just last month, the Finance Ministry forwarded proposals it claimed would cut MVR2.2billion (US$143million) form the national budget.

The austerity measures include raising Tourism Goods and Services Tax (TGST) to 15 percent,  terminating electricity subsidies in Male’, increasing import duties on alcohol and imposing a 3 percent  duty on oil, “reforming” the Aasandha health insurance scheme, and reducing the budget of every Ministry and independent institution by 15 percent – among other measures.

The original budget for 2012 envisioned that revenue would rise to MVR11.4billion (US$740million) with expenditure anticipated to be MVR14.5 billion (US$941million). This would have resulted in a budget deficit of around MVR3billion (US$194million), representing 10 percent of GDP.

However, several resort managers voiced concern at the time that the proposed revenue amendments would serve only to  affect the financial viability of the country’s tourism industry, while providing little improvement in service or support in return.

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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.

2011

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.

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Maldives hopes “global slowdown” will bolster rufiya

Although the Maldives’ economy expanded in October, higher food and transport costs combined with the depreciating rufiyaa has bloated inflation rates to 8.3 percent, a CARE Maldives report has shown.

“Inflation during the period was mostly influenced by food index owing to the increase in prices of both fish (41.6%) and other food items (11.19%) followed by the increase in the transportation costs,” states the report.

“But this is not singular for this economy as rising prices have been witnessed across the globe,” the report contends.

Quoting a “global slowdown” in economic activity, the report suggested that international commodity prices are due to fall in coming months. The drop could temper the Maldives’ rising prices.

The recently-implemented Goods and Services Tax (GST) caused many Maldivians to note a price hike with anxiety. However, the President assured the people that further reforms scheduled for January 2012 would temper the new rates.

CARE Maldives suggested that a drop in international commodity prices would also reverse the widening trade deficit and declining reserves of foreign currency. Gross international reserves declined by approximately US$27 million between December 2010 and September 2011.

Statistics show an increase of US$33.2 million in reserves to date compared with August 2010, the report claims.

CARE estimates that the fiscal deficit will remain at 11 percent of the GDP; total revenue is expected to increase from 23 percent of GDP to 29 percent by the end of the year.

Meanwhile, total expenditure continues to surpass revenue. Records indicate a four percent increase from 37 percent of GDP in 2010 to 41 percent in 2011, primarily due to growing government salaries.

“The increase in expenditure mainly reflects the restoration of wages of government employees to the levels prior to 2009. The government has however taken some steps in terms of rationalisation of manpower. The overall fiscal deficit is estimated to remain at 11 percent of GDP.”

Approximately ten percent of the Maldivian workforce is employed by the government, an ungainly figure that has been targeted as a key hemorrhage point in the government’s budget. The Finance Ministry recently asked government institutions to curb job creation and new hires.

Earlier this month, President Mohamed Nasheed said the government aimed to bring the fiscal deficit down to a single digit number.

“Government expenditure has been substantially reduced in a number of different areas. For this year, we forecast a budget deficit of 11 percent. We have noted now that it has been reduced by three or four points,” he said.

CARE Maldives summarized its report by criticising the growing inflation rate and trade deficit, but praised government policies that target these issues.

“The progressive policy measures taken by the government especially on the exchange rate combined with declining commodity prices globally would help to reverse these trends.”

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