Government finances “further deteriorated in first six months of 2013”: MMA Quarterly Economic Bulletin

Government finances “further deteriorated in the first six months of 2013” due to a sizeable shortfall in expected revenue coupled with a marked increase in recurrent expenditure, according to the Quarterly Economic Bulletin of the Maldives Monetary Authority (MMA) released last week.

The central bank observed that the government’s target of reducing the budget deficit to 3.6 percent of gross domestic product (GDP) this year from 12.6 percent in 2012 “now seems rather challenging.”

“These developments have resulted in a widening of the budget deficit as indicated by the large financing requirement of the government during the first six months of 2013. The difficulties in accessing long-term foreign funds to finance the budget deficit resulted in the government resorting to the Maldives Monetary Authority (MMA) and other domestic sources to finance its growing deficit,” the report stated.

The economic bulletin explained that around 15 percent of total revenue budgeted for 2013 – MVR1.8 billion (US$116.7 million ) – was to be raised from new revenue measures, “which so far have not materialised.”

The revenue raising measures proposed in the 2013 budget included hiking Tourism Goods and Services Tax (T-GST) to 15 percent from July 2013 onward, raising airport service charge to US$30, leasing 14 islands for resort development, raising tariffs on oil, introducing GST for telecom services, and “selectively” reversing import duty reductions.

In April, parliament rejected government-sponsored legislation to raise the departure tax on outgoing passengers, prompting Finance Minister Abdulla Jihad to seek parliamentary approval to divert MVR 650 million (US$42 million) allocated for infrastructure projects in the budget to cover recurrent expenditure.

The move followed a cabinet decision to delay implementation of new development projects financed out of the budget due to shortfalls in revenue.

The economic bulletin meanwhile revealed that total revenue in the first half of this year (MVR5.9 billion or US$382 million) increased by 22 percent compared to 2012 on the back of a 35 percent increase in tax revenue.

Tax revenue was “boosted by favourable receipts from GST [Goods and Service Tax] and Business Profit Tax (BPT).”

While GST receipts rose by 46 percent, “contributed by the increase in the rate of GST on the tourism sector (T-GST), from 6% to 8% on 1 January 2013,” BPT receipts increased by 83 percent.

The MMA report explained that BPT collection this year was “based on financial returns for the twelve months ending June 2012, while the BPT collections made in 2012 were based on the financial returns of for the six months ending August 2011.”

Growing government spending

The economic bulletin also revealed that the total government expenditure of MVR6.7 billion (US$435 million) in the first half of 2013 was 8 percent higher than the same period in 2012.

The growth of government spending was “entirely due to the 21 percent (MVR965.3 million) growth in recurrent expenditure, which was partly offset by the 26 percent (MVR440.6 million) decline in capital expenditure during the period.”

Capital expenditure declined due to the government’s decision to suspend infrastructure projects financed out of the budget “in the face of significant shortfalls in revenue due to the inability to implement new revenue measures.”

The increase of recurrent expenditure was meanwhile “driven by the increase in spending on wages and salaries and government pension contributions, both of which largely reflects the transfer of employees in health corporations to civil service commission and employees in Aviation Security Service to Ministry of Defence and National Security starting from January 2013.”

In its professional opinion on the budget proposed for 2013, the Auditor General’s Office had suggested “major changes” to right-size the public sector and “control the salary of state employees and expenditure related to employees” to rein in the budget deficit.

The Auditor General observed that, compared to 2012, the number of state employees was set to increase from 32,868 to 40,333 – resulting in MVR 1.3 billion (US$84.3 million) of additional expenditure in 2013.

This anticipated increase included 864 new staff to be hired by the Maldives Police Service (MPS) and Maldives National Defence Force (MNDF).

Deficit financing

The budget deficit forecast for 2013 was MVR 2.33 billion (US$149 million) – to be financed by MVR 1.15 billion (US$74.5 million) in foreign loans and MVR 1.17 billion (US$75.8 million) in domestic finance.

The MMA’s economic bulletin noted that the budget deficit was largely financed from domestic sources, including the issuance of treasury bills (T-bills) to banks and non-bank sectors.

“At the end of June 2013 the total outstanding debt stock of government securities (T-bills and T-bonds) rose to MVR11,702.3 million which reflects a net issuance of MVR586.9 million in the first half of 2013 compared with MVR615.8 million in the same period of 2012,” it stated.

“Meanwhile, with the increasing challenges faced by the government in financing its growing deficit through domestic sources, the government at times had to resort to the MMA, to finance its deficit. During the first six months of 2013, the change in MMA net credit to government increased to MVR781.0 million from MVR131.2 million in the first six months of 2012.”

The country’s trade deficit also widened in 2013 compared to the same period last year due to higher level of imports, which “reflects the increase in domestic demand driven by economic recovery and the increase in government expenditure.”

While gross international reserves increased in the first six months of 2013 due to the “accumulation of foreign assets by the commercial banks,” the bulletin noted that, “in terms of import cover, gross reserves remained unchanged at 2.5 months in June 2013 reflecting the acceleration in import growth.”


Maldives economy “seriously damaged and destroyed”: former President Gayoom

Former President Maumoon Abdul Gayoom has expressed concern that the Maldivian economy has been “seriously damaged and destroyed”.

Speaking during a campaign rally on the island of Kudahuvadhoo in Dhaalu Atoll, Progressive Party of Maldives (PPM) Leader Gayoom was quoted by Sun Online expressing concern at the “serious economic problems” presently facing the country.

Gayoom argued that PPM presidential candidate Abdulla Yameen was the most capable person to save the country’s economy based on his previous government experience.

The PPM, which has the second highest number of MPs behind the opposition Maldivian Democratic Party (MDP), is part of the current coalition government of President Dr Mohamed Waheed that came to power after the controversial transfer of power on February 7, 2012.

The former President’s concerns were raised as the Maldives Monetary Authority (MMA) this month criticised current levels of government expenditure as being “beyond appropriate”.

However, Finance Minister Abdulla Jihad responded at the time that efforts had been successful over the last twelve months to curb recurrent government expenditure, while state borrowing had remained consistent.


Government debt reaches $553 million, a third of GDP

President Mohamed Nasheed has highlighted the financial problems the government is facing, mainly foreign debt and a gaping budget deficit.

In his speech President Nasheed reminded the Majlis of his address last year, when he said his “administration was prepared to provide equitable services to all citizens and to be accountable for the people.”

The president noted his administration had made “satisfactory progress in these endeavours,” but also mentioned some startling figures regarding budget deficit and debt.

In 2009 the government’s debt to foreign financial agencies and banks stood at US$553.8 million (Rf7 billion), which amounted to 37.6% of the country’s GDP. The government’s total expenditure for the same year was US$617.2 million (Rf7.9 billion).

The estimated government expenditure for 2010 is of US$648.4 million (Rf8.3 billion). The People’s Majlis approved a total of US$710.9 million (Rf9.1 billion) to be allocated for government spending.

The estimated revenue for 2010 is of US$781.2 million (Rf10 billion) and the estimated deficit for this year is of US$429.7 million (Rf5.5 billion).

Mr Rodrigo Cubero, IMF mission chief for Maldives, said in a press release issued in January 2010: “The Maldivian economy continues to face serious challenges. In particular, addressing the very large fiscal deficit is of paramount importance to secure a stable economy, equitable growth, and lasting poverty reduction.”

The government has said it plans to minimise the deficit by reducing government expenditure, including by cutting down the number of public servants and decentralising several government agencies. Both measures have encountered heavy opposition.

On this subject, President Nasheed said “the government will continue to make every possible effort to bring about a positive change to the salaries of civil servants and government employees.”

The government will also “include processes to increase revenues of the state.” This includes the proposed taxation bills—the bill on administration of taxation, the bill on business profit tax, and a newly submitted bill on taxing from sales of tourism service providers.

The president said he was “confident that this Majlis will work to ensure that these…bills are passed as soon as possible.”

Permanent Secretary for the Finance Ministry Ismail Shafeeq explained that most of the debt was owed to “loans from foreign institutions, banks and other agencies” as well as foreign and domestic borrowings, most of which are being used in the economic development of the Maldives.

“The loans will take a long time to pay back, some of them are for 40 years,” said Shafeeq, but added that the government is making the payments on time.

“The deficit is a problem. It means a shortage – the government has spent so much.”

The Ministry of Foreign Affairs, in partnership with the UNDP, will be hosting the IV Maldives Partnership Forum, also known as the Donor’s Conference, later this month. The forum seeks to find foreign investment for their development plans, which would help significantly in lowering government expenditure.

“Reducing expenditure and restricting unnecessary spending” are key to solving the country’s financial debt, according to Shafeeq.

The government is also following recommendations from the IMF and ADB, both of whom have given out significant loans to the government for the economic development program.

In a press release produced by the IMF in December 2009 Deputy Managing Director and Acting Chair of the IMF, Mr Takakoshi Kato, said:

“The authorities’ program, while subject to considerable risks, is strong, comprehensive, and well-focused, and deserves strong support of the international community. If fully implemented, it will put the Maldivian economy back on a path of macroeconomic stability and set the conditions for sustained economic growth and poverty reduction.”

President Nasheed said in his speech that “the government has embraced the advice of international financial agencies and begun the implementation of some of the measures suggested by these agencies. We have started enjoying the benefits of these measures.”

The IMF allocated a loan of US$92.5 million last December to go towards the economic recovery program.

The ADB has assisted with two loans, one of US$\1.5 million and one of US$3 million. Both are to go towards the economic recovery programme.

The Ministry of Finance could not provide Minivan News with the estimated debt for 2010 at time of publication.