Tag: IMF

Economic growth relatively strong, but public debt ratio high: IMF

Economic growth in the Maldives is expected to remain “relatively strong in the near term,” but persistent fiscal deficits have driven up the public debt ratio to a high level, the International Monetary Fund (IMF) has said.

In a press statement last week following its executive board’s 2014 Article IV consultation with the Maldives, the IMF noted that growth is estimated to have reached five percent last year on the back of strong tourism activity, low inflation levels, and reduction in the current account deficit.

“However, persistent and growing fiscal deficits have driven up the public debt ratio to a high level,” the IMF observed.

“The fiscal deficit increased to an estimated 7.8 percent of GDP in 2013 and, following increases in recurrent spending, the deficit is likely to have widened further in 2014. Sustained primary deficits have led to an increase in the public debt level from 52 percent in 2009 to 75 percent of GDP in 2014.”

However, presenting the 2015 state budget to parliament in November, Finance Minister Abdulla Jihad said public debt was expected to reach MVR31 billion (US$2 billion) or 67 percent of GDP at the end of 2014.

Moreover, Jihad said the estimate for economic growth in 2014 was 8.5 percent, significantly higher than the IMF estimate.

In its monthly economic review for January, the Maldives Monetary Authority (MMA) revealed that the “total outstanding stock of government securities, which includes Treasury bills (T-bills) and Treasury bonds (T-bonds), rose by 53 percent in annual terms and reached MVR17.6 billion [US$1.1 billion] at the end of January 2015.”

“The annual increase in T-bonds reflects the conversion of a short term loan extended to the government by the MMA to T-bonds,” the central bank explained.

While the government’s forecast for economic growth in 2015 was 10.5 percent, the IMF expects growth to be around 5 percent this year.

Growth in 2014 was driven by “a rapid expansion from Asian markets and a tepid recovery from Europe,” the IMF noted.

“Higher tourism exports and subdued global food and fuel inflation have helped reduce the current account deficit to around 8.4 percent of GDP in 2014; and following significant data revisions, the current account is now substantially smaller than previously estimated. Lower oil prices have improved the outlook for the current account and inflation in 2015,” the IMF explained.

“Gross official reserves have risen to around $614 mn (2.8 months imports). Financial soundness indicators are slowly improving, monetary conditions are loose, but credit growth is subdued at just 0.5 percent year on year to November 2014.”

Reining in the fiscal deficit

The IMF welcomed the government’s cost-cutting and revenue raising measures for 2015 – intended to rein in the fiscal deficit -including imposing a green tax, acquiring fees from Special Economic Zones (SEZs), raising import duties, a public employment freeze, and better targeting of subsidies.

“However, further fiscal adjustment measures would be needed to place debt ratios firmly on a downward path,” the IMF cautioned.

Moreover, the IMF noted that “the fiscal adjustment envisaged in the 2015 budget will have a mildly negative effect on growth.”

“There is also some upside potential if lower oil prices are sustained. However, with limited policy buffers, the economy is vulnerable to fiscal slippages and inward spillovers. In the event of large fiscal overruns relative to the authorities’ targets, borrowing costs and monetization could increase, which would weaken the external position,” the press release stated.

In addition to the proposed revenue raising – which it suggested would “only have a temporary effect” – the IMF advised that “durable fiscal adjustment, with a focus on expenditure restraint, will be needed to place the public debt-to-GDP ratio on a downward path over the medium term, consistent with the Fiscal Responsibility Law.”

The IMF executive board also welcomed “the authorities’ commitment to avoiding the monetization of the fiscal deficit, which will help direct monetary policy at supporting the exchange rate regime and build buffers.”

The directors “supported plans to make greater use of market-based financing for government debt, including by developing the government securities market” and welcomed “the improvement in financial soundness indicators, and called for continued efforts to strengthen financial supervision, including measures to ensure uniform high standards for institutions that decide to operate in special economic zones.”

The IMF also suggested the stabilised exchange rate regime was “appropriate for Maldives,” welcomed “the increase in official reserves, and recommended continued strengthening of the official reserves position.”

On key medium-term objectives, the IMF recommended public service delivery and economic diversification and welcomed “proposals for establishing regional hubs and improving inter-island connectivity.”

“Directors stressed that strict ring-fencing of tax exemptions for special economic zones will be necessary to preserve the tax base. They also emphasized that scaling up infrastructure investment should be implemented efficiently in order to boost growth potential,” the press release stated in conclusion.

“Directors welcomed the significant recent improvements in macroeconomic statistics, and encouraged the authorities to continue to strengthen data quality and availability, including adopting a statistics law to enhance data provision, to assist policy decisions.”

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Maldives economy “relatively buoyant” but fiscal imbalances continue to grow: IMF

While the Maldivian economy is performing well, fiscal indiscipline remains a problem as budget deficits continue to grow says the International Monetary Fund (IMF).

“We see that the economy is relatively buoyant,” said the IMF delegation in a statement given to the media today.

“However, despite the improvement in the real economy, the fiscal deficit has continued to widen and this is because of very high public expenditure and public debt is very high, so we think the fiscal position does need to be addressed.”

Parliamentary debate on the record MVR24.3 billion (US$1.5 billion) state budget for 2015 concluded this week, with opposition MPs expressing doubts over whether the MVR21.5 billion revenue forecast could be realised.

Regarding the recently introduced special economic zones (SEZs), the IMF delegation noted today the importance of a “transparent and even handed” regulatory framework and that any exemptions to tax are “clearly ring-fenced and limited”.

Meanwhile, it was noted that revisions to estimates of the current account deficit had indicated greater stability in the economy than previously thought.

During the IMF’s last visit to the country in February this year, the delegation expressed surprise at the resilience of the economy, admitting that it was still studying how the domestic economy has remained afloat in the face of soaring public debt and persistent budget deficits.

Maldives Monetary Authority estimates of the final current account deficits for 2014 fell from US$562.5 million in April to US$269.9 million in a macroeconomic report released in May.

The latter report,however, contained warnings against “slippages in revenue or current expenditure” which were echoed by the IMF today.

“The 2015 budget includes both revenue and spending measures to tackle the fiscal deficit and we think it’s very important that these measures are fully implemented,” explained the delegation today.

The IMF – which has previously urged greater taxation of the lucrative tourist industry – said today that it supported the recently announced green tax, as well as pushing for more efficient subsidies.

The delegation noted that measures to target electricity subsidies to areas where they are most needed had been included in next year’s budget.

MVR3.4 billion (US$220 million) – or 14 percent of the budget – is anticipated from new revenue raising measures which includes revisions of import duty rates from July onward, fees from investments to the SEZs, income from the home ownership programme, and leasing 10 islands for resort development.

Minister of Finance Abdulla Jihad noted in August that spiralling expenditure and revenue shortfalls could see the budget deficit balloon MVR4 billion (US$259 million), although he gave the Majlis a revised figure of MVR1.6 billion (US$103 million) when presenting budget this month.

While the World Bank recently predicted that the Maldives economy would grow by 4.5 percent this year, Jihad has said public debt is expected to reach MVR31 billion (US$2 billion) or 67 percent of GDP at the end of 2014.

“Despite achieving economic progress, the Maldivian economy is fragile and the Maldives’ financial situation is not in the most appropriate state at present,” Jihad told the Majlis.



Related to this story

Parliamentary budget debate concludes

Finance minister presents record MVR24.3 billion state budget to parliament

Slippages in revenue or expenditure will undermine debt sustainability: MMA macroeconomic report

IMF delegation surprised by resilience of Maldivian economy

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Finance minister fears spiralling deficit will leave civil servants without pay

Finance Minister Abdulla Jihad has expressed fear that the ballooning budget deficit will affect the government’s ability to pay civil servants.

“We can’t hold on like this for long, we must acknowledge that this is a very serious problem,” Jihad told atoll council leaders in Malé today.

Jihad explained that shortfalls in revenue of MVR1.5 billion would see the deficit increase to MVR4 billion – equal to 10.6 percent of GDP.

“Expenses keep on increasing, even as we don’t receive any revenue. We did not get the expected revenue this year either. Because of this, we are facing great difficulty in managing the budget deficit,” said Jihad.

Upon being elected last year, President Abdulla Yameen promised to prioritise reducing state expenditure, acknowledging that the Maldives was in a “deep economic pit”.

The government currently employs just under 25,000 civil servants, representing over 7 percent of the population. This high figure has long been identified as one of the causes of country’s fiscal imbalances.

Haveeru reported Jihad as saying today that his ministry was facing pressure every month when salaries are due.

“We try to make regular salary payments even if we have to take loans in order to do so. We haven’t, as of yet, received any salary issues this year. We are trying to make the salary payments through any means possible,” he was reported as saying.

Revenue gaps

Last month’s figures from the Maldives Monetary Authority (MMA) show the salary and allowances expenditure to account for 33 percent of spending, while the finance ministry has not published monthly expenditure reports since March.

The MMA’s latest figures also show the original estimated deficit of MVR1.3 billion – agreed upon last December as part of a record MVR17.96 billion budget.

The budget was inclusive of proposed revenue raising measures – many of which had failed to materialise during the previous administration – amounting to MVR3.4 billion, or 19 percent of the budget.

Despite some measures – including a rise in tourism taxes – passing the Majlis in February, Jihad predicted at the time that compromises would mean the full MVR3.4 billion would not be realised.

Both the outgoing and incoming governors of the MMA have this year called on the state to reduce expenditure alongside increased revenue.

The MMA’s 2013 Macroeconomic Development report said that shortfalls in revenue and overruns in expenditure could jeopardise the country’s debt sustainability – currently 81 percent of GDP.

The report – released in May – noted “there is a considerable amount of uncertainty surrounding the 2014 budget”.

The World Bank’s Maldives Development Update October 2013 described the country as “spending beyond its means,” risking serious damage to the economy,

Expenditure

Despite the government’s persistent promises to focus on the economy, subsequent policies have focused more on infrastructure development than fiscal consolidation.

Initial moves to reduce the salaries of political appointees were soon followed by promises to raise pension payments by 54 percent and the removal of the cap on the Aasandha health insurance scheme.

More recently, the government is facing the prospect of a potentially crippling payout to infrastructure giant GMR after a Singapore court of arbitration ruled in favour of the Indian company in a dispute over the premature termination of its airport concession deal.

Economic development plans have focused largely of large infrastructure projects and special economic zones to attract foreign investment – though no major deals have as yet been signed.

An IMF delegation visiting the country in February, however, expressed surprise at the economy’s continuing resilience.

“For a long time we’ve been saying that reserves at the MMA are very low and that the fiscal deficit is quite difficult and we expect the economy to run into some problems,” said resident representative Dr Koshy Mathai.

“But somehow the economy has shown resilience, a lot of resilience, and we’ve been surprised – happily surprised but surprised nonetheless.”

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TEAM fears resort workers’ income may be indirectly affected by T-GST rise

The Tourism Employees Association of Maldives (TEAM) has expressed concern that certain resorts are planning to reduce service charges in the wake of the proposed increase to the Tourism Goods and Service Tax (T-GST).

“While the decision to increase Tourism General Services Tax (T-GST) is going to increase the government’s income, some resorts are trying to reduce the percentage of service charge collected from tourist for the resort workers; this is very concerning and unacceptable for our association,” read a TEAM press release today.

Earlier this month the People’s Majlis agreed to revenue raising measures which involved increasing T-GST to 12 percent in order to help finance the government’s record MVR17.95 billion budget.

“Even now, in most resorts, the services charge collected from tourists are not distributed according to law, and they are sometimes spent by the companies; the Tourism Employees Association of Maldives is very concerned about this as well,” said TEAM.

An employee of one of the country’s top resorts explained that current legislation mandated that 10 percent of service charge must be taken for staff, and one percent used for additional staff costs.

“But the current legislation doesn’t specify that the service charge has to be distributed equally,” said the employee – who preferred to remain anonymous. “There are a lot of loopholes.”

The trade union today called for the government to establish a comprehensive legal framework that regulates the payment and disbursal of service charges.

“Service charges and monthly wages and other allowances are privileges that should be sustained through bargaining through an agreement between the employer and and the employed,” said the union.

Workers at the Sheraton Full Moon resort went on strike last month, citing low service charge as one of the reasons. Local reports suggested that Sheraton’s staff were being paid less than one third of the amount made by fellow-workers in similar resorts from service charge.

One general manager, however,  told Minivan News that he felt TEAM’s fears were unfounded, suggesting that comparison with other resorts was a major reason for keeping staff benefits competitive.

“We need to keep staff happy in order to have happy guests. It’s highly uncommon for a resort to do this – it’s just not worth it. We want to attract and keep the best staff.”

“TEAM’s logic doesn’t make sense,” said the GM, who wished to remain anonymous. “I don’t know of any resort that does anything wrong with the service charge.”

Asked about the potential impact of the scheduled changes to tourism charges – which include the reintroduction of that flat-rate bed tax until November, alongside the T-GST increase in the same month – the GM said that it was the top resorts that would be worst affected.

“Higher end resorts will be experience more of a problem after higher T-GST replaces the bed tax, and it’s these resorts which normally charge a higher service rate,” he said.

Earlier this week, IMF representatives told a Majlis committee that – even at twelve percent – the rates of taxation in the tourism sector were “quite low” compared to other tourist destinations.

Dr Koshy Mathai, resident representative to Sri Lanka and Maldives, said he had paid “north of 20 percent” in taxes at a hotel in Fiji and that, as 70 to 80 percent of the Maldivian economy was “driven by tourism”, Mathai said that it was “only natural that the [tourism industry is] contributing resources for the economy to operate.”

He added that “rates of return on Maldivian resorts are among the highest in the world”.

“The people who come here are people with more wherewithal, more financial resources, who are more likely to be price insensitive,” said Mathai.

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IMF delegation surprised by resilience of Maldivian economy

A delegation from the International Monetary Fund (IMF) expressed surprise at the “resilience” of the Maldivian economy in a meeting with MPs on the parliament’s public finance committee yesterday.

Dr Koshy Mathai, resident representative to Sri Lanka and Maldives, told MPs that the IMF was surprised that the economy has stayed afloat for years despite longstanding fiscal imbalances.

“For a long time we’ve been saying that reserves at the MMA [Maldives Monetary Authority] are very low and that the fiscal deficit is quite difficult and we expect the economy to run into some problems. But somehow the economy has shown resilience, a lot of resilience, and we’ve been surprised – happily surprised but surprised nonetheless,” he said.

The IMF was interested in “carefully studying” how the domestic economy has remained resilient in the face of soaring public debt and persisting budget deficits, Mathai said.

“Imports are on the shelf. If you go into a shop, you’ll find a wide range of imported goods there. You see people with motor scooters and cars and smartphones. You see people going on travel. All these are available, are done, even while the level of reserves at the MMA is quite low,” he observed.

In attendance at yesterday’s meeting were the committee’s chair, MP Abdulla Jabir, and MPs Abdul Ghafoor Moosa and Mohamed ‘Colonel’ Nasheed.

As the IMF delegation currently in the Maldives was on “fact-finding” or “exploratory mode” ahead of the organisation’s article IV consultation later this year, Mathai told the MPs that the team did not have “comprehensive policy recommendations” to share.

Fiscal consolidation

“One area where we have more clear ideas is an area where we’ve had discussions in the past, and that’s the need for fiscal consolidation,” Mathai continued.

Noting that “fiscal problems have been at the root of so many crises” in countries large and small, Mathai said that the the Maldives had “a government budget envelop that is very difficult to finance.”

“The deficit is quite large. Financing is difficult to find. Banks are not that willing to subscribe to treasury bills. We see treasury bill yields rising quite sharply. MMA external financing is difficult to mobilise as you all know. We’re left then with MMA printing money in order to finance expenditures,” he explained.

A second option was “running up arrears, unpaid bills to domestic suppliers,” he added.

Both methods posed serious challenges, Mathai continued, as the government’s failure to pay its bills “creates ripples effects throughout the entire economy.”

Moreover, printing money to finance deficit spending “puts a lot of pressure on prices” and central bank reserves, he said.

“Because in a small country like the Maldives, when the MMA prints money, that is an injection of purchasing power into the economy, it means more people can import things,” Mathai said.

Printing money therefore “creates increased demand for dollars, increased imports, pressure on reserves,” he noted.

“As I said, the system seems to work. The parallel market somehow is letting the economy work,” he observed.

Solutions

As new sources of financing the budget were not available in the short-term, Mathai suggested targeting subsidies to the poor and increasing tourism taxes.

“The electricity subsidy is one that goes to even the richest strata of society. Basic food subsidies are being enjoyed now by the resorts, and never mind the resorts, are being enjoyed by wealthy foreign visitors who stay at the resorts. That to us seems like a totally unnecessary policy,” he said.

He added that “substantial savings” could be made from the budget by targeting subsidies to those most in need of assistance.

Mathai also argued that the rates of taxation in the tourism sector were “quite low” compared to other tourist destinations.

Mathai said he paid “north of 20 percent” in taxes at a hotel in Fiji while the Tourism Goods and Services Tax (T-GST) in the Maldives was only recently raised to 12 percent.

It would not be “a tax on business” that would slow down the economy, Mathai added.

“Rather it is saying people are coming and enjoying all that the Maldives has to offer, so let them pay something for it,” he said.

As 70 to 80 percent of the Maldivian economy was “driven by tourism,” Mathai said that it was “only natural that the [tourism industry is] contributing resources for the economy to operate.”

He added that “rates of return on Maldivian resorts are among the highest in the world” with profitable payback periods.

However, compared to other tourism-dependent economies, Mathai said that government expenditure in the Maldives was comparatively “very high” due to the geographic dispersion of the population and the large public sector wage bill.

In the medium-term, Mathai recommended taking measures to reform the civil service, improve delivery of public services and increase efficiency by economising.

“Ultimately we need to do a structural adjustment to the budget so that it’s more sustainable,” he concluded.

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President meets with Chief of IMF Mission to the Maldives

President Abdulla Yameen Abdul Gayoom met with International Monetary Fund’s (IMF) Chief of Mission to the Maldives Dr Koshy Mathai today.

According to the President’s Office, Yameen briefed Mathai on the new administration’s economic policies and discussed ways to promote sustainable economic development in the country.

Yameen has warned Maldives’ economy “is in a deep pit” and pledged to reduce state expenditure.

In November 2012, the IMF called on the government to strengthen government finances by reducing the fiscal deficit, better target electricity subsidies, reduce and rationalize government’s health program Aasandha and control the high public sector wage bill.

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State developments to recommence by 2014 after Nasheed administration’s bills settled: President Waheed

President Dr Mohamed Waheed has claimed the country will be in a position to restart development projects next year as a result of his government repaying millions of US Dollars in bills incurred through the previous administration’s borrowing.

The government announced it would be suspending state-financed development projects in April after exhausting its annual budget for recurrent expenditure (including salaries, allowances and administration costs) in the first quarter of 2013.

The current government has continued throughout the last year to try and establish loan and credit facilities with foreign nations and banks for the stated purpose of “budget support”.

However, speaking during a campaign rally in Noonu Atoll this weekend, President Waheed was quoted by Sun Online as claiming that unpaid bills arising from the government of former President Mohamed Nasheed had now been settled, with no expense expected to be carried over to the 2014 budget as result.

“We have been through a very difficult time over the past two years. We could not do several things, not because we didn’t want to do them. The previous government left the country bankrupt,” he said during the rally.

“The money necessary to buy medicine for our children, the money necessary to repair the school building, the money necessary to repair the harbour of this island – all this money had to be repaid, the unpaid bills for work done by citizens, had to be paid.”

Finance Minister Abdulla Jihad and Minister of Economic Development Ahmed Mohamed were not responding to calls today, while Minivan News was awaiting a response from President Waheed’s Senior Advisor Teresa Wells at time of press.

Former administration’s borrowings

Ahmed Nazim, head of the Parliamentary Financial Committee and MP for the government-aligned Progressive Party of Maldives (PPM), said that former President Nasheed has undertaken “short-term borrowings” during his time in office.

He added that this borrowing included “US$200 million bond” sold to the Indian government with a maturity of one year that was later extended to 24 months.

Nasheed controversially resigned from office on February 7, 2012, following a mutiny by sections of the police and military.

Following the change in government, Nazim said that the Waheed administration had paid US$100 million and “settled the full payment” after Indian authorities requested the country be reimbursed by February 2013.

“Since this was a substantial component of the total foreign debt, [foreign borrowing] has come down because of this,” he said.

Asked whether the committee believed President Waheed had managed to reduce total state borrowing and spending since coming to power, Nazim said he would respond by tomorrow ( August 18 ) after having time to study relevant statistics.

In 2012, President Waheed reportedly said he would not resort to borrowing from foreign governments in order to finance government activities.

However, the government has since sought a number of foreign loans to supplement the state budget.

Earlier this month, the state requested parliament approve a US$29.4 million loan from the Bank of Ceylon to finance the 2013 budget approved by parliament.

In July, the President’s Office confirmed discussions had been held with Saudi Arabia, seeking a long-term, low interest credit facility of US$300 million to help overcome “fiscal problems” facing the nation.

Supplementary finance plans

Finance Minister Jihad claimed back in December 2012 that the MVR 15.3 billion (US$992 million) state budget approved by parliament might not last until the end of 2013 – requiring supplementary finance for the state.

In April 2013, Jihad sought authorisation from parliament to divert MVR 650 million (US$42 million) allocated for infrastructure projects in the budget to cover recurrent expenditures.

Jihad warned that government offices and independent institutions might be unable to pay salaries or electricity and phone bills if funds were not transferred from the MVR 1.8 billion (US$117 million) Public Sector Investment Programme (PSIP).

“Reckless financial management”: MDP

In July, Maldivian Democratic Party (MDP) MP and Spokesperson Hamid Abdul Ghafoor said that the heavily partisan parliament now effectively controlled state finances as a result of former opposition politicians – now part of President Waheed’s government – imposing tighter spending restrictions on former President Mohamed Nasheed’s administration.

The opposition party also accused the current government of reckless financial management, pointing to a potential US$1.4 billion compensation bill facing the state after it decided last year to abruptly terminate a US$511 million airport development contract agreed with infrastructure group GMR.

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Hiking airport service charge to US$30 narrowly rejected at parliament

Legislation proposed by the government to raise the airport service charge from departing international passengers to MVR460 (US$30) was narrowly rejected by parliament today.

The amendment bill submitted by government-aligned MP Riyaz Rasheed was rejected with 28 votes against, 27 in favour and two abstentions.

At the parliamentary debate on the bill yesterday (April 15), MPs of the opposition Maldivian Democratic Party (MDP) and government-aligned Progressive Party of Maldives (PPM) opposed the proposed hike.

MPs of both the majority and minority parties alleged that President Dr Mohamed Waheed planned to use an expected MVR185 million (US$12 million) from raising the departure tax to finance his presidential campaign.

The 1978 law imposing the airport service charge on departing passengers was first amended under the previous administration and raised to US$18.5 for foreigners.

The imposition of a similar Airport Development Charge (ADC) of US$25 by Indian infrastructure group GMR was previously a major point of contention for the Waheed administration, which terminated the concession agreement with the GMR-led consortium to modernise the airport in December 2012.

Hiking the airport service charge from US$18 to US$30 was among a raft of measures proposed by the Finance Ministry within the estimated 2013 budget to raise MVR 1.8 billion (US$116 million) in new income.

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.

On January 29 this year, the cabinet decided to impose austerity measures to manage the budget following revenue shortfalls.

“Members of the cabinet noted that, by late this year, the country might have to face enormous challenges unless strict budgetary control measures were not implemented,” the President’s Office said at the time.

During the budget debate in December 2012, Majority Leader MP Ibrahim Mohamed Solih warned that the additional revenue projected in the budget was unlikely to materialise.

The MDP parliamentary group leader noted that most of the proposed measures – such as hiking the Tourism Goods and Services Tax (T-GST) to 15 percent, introducing GST for telecom services, and “selectively” reversing import duty reductions – required parliamentary approval.

Acting Finance Minister Ahmed Mohamed was unavailable for comment today on the impact to government finances from the loss of projected revenue.

Fiscal responsibility

Meanwhile, legislation on fiscal responsibility submitted in 2011 by the previous government was passed with 42 votes in favour and 10 against at a sitting of parliament on Monday (April 15).

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

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

Borrowing from the central bank or Maldives Monetary Authority (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.

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.

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Finance Minister aims to “rearrange” ministerial, independent institution spending

Finance Minister Abdulla Jihad will hold discussions over the next week with government departments, independent institutions and the Maldives judiciary to try and reorganise their respective spending allocated within the 2013 budget.

Jihad has told Minivan News this week that he would be meeting with all state departments and various institutions to ascertain the likely financial difficulties they expect to face over the next year after after the proposed 2013 budget was cut by over MVR 1 billion (US$65 million). He stressed that efforts to reorganise funds would not impact the amount of spending assigned to each ministry, but rather how existing money was being spent.

The comments were made after the proposed MVR 16.9 billion (US$1 billion) forwarded to the People’s Majlis was reduced to MVR 15.3 billion (US$992 million) before gaining approval last month.

The parliamentary committee that had reviewed the budget at the time had originally recommended MVR2.4billion (US$156 million) worth of cuts that some of its members claimed could be made largely by reducing “unnecessary recurrent expenditures” within the budget.

The Budget Review Committee’s proposal for a MVR 14.5 billion (US$947 million) budget – in line with recommendations by groups like the International Monetary Fund (IMF) – was met with mixed reactions from opposition and government-aligned parties at the time.

With the budget now passed, Finance Minister Jihad said that his department intended  to look at the entire amount of state financing allocated this year on a department-by-department basis to identify the most significant spending shortfalls.

The finance minister said the review would allow his department to rearrange the budget within each ministry, as well as independent institutions and the courts to better cover spending needs over concerns the state may face “some difficulties” in future.

Jihad claimed that the proposed “rearranging” of state financing would not require parliamentary approval as the allocated overall spending for each body and institution would remain the same.

However, despite the efforts to reallocate monies within each ministry, Jihad maintained claims that the present budget was likely to be insufficient to cover costs over the next year.

“We will have to submit a supplementary budget this year,” he contended.

People’s Aliance (PA) party MP and Finance Committee Chair Ahmed Nazim was not responding to calls today. Fellow Finance Committee member MP Riyaz Rasheed was also not available for comment at time of press.

Supplementary

Finance Minister Jihad has previously told local media that with services being provided by the government expected to double during the coming year, it would become more difficult for the state to manage its budget.

“Because the budget is reduced, it will become difficult to manage expenses at a certain point. We think that a supplementary budget has to be introduced,” he was quoted as telling the Sun Online new service.

According to the Finance Minister, talks have already taken place with various offices to reduce their budgets.

Budget amendments

The estimated MVR 15.3 million budget was passed by parliament with eight additional amendments on December 27.

Amendments voted through included the scrapping of plans to revise import duties on oil, fuel, diesel and staple foodstuffs, as well as any item with import duty presently at zero percent.

An amendment instructing the government to conduct performance audits of the Human Rights Commission and Police Integrity Commission and submit the findings to parliament was passed with 53 votes in favour, ten against and four abstentions.

Amendments proposed by opposition Maldivian Democratic Party (MDP) MP Ali Waheed to shift MVR 100 million (US$6.5 million) to be issued as fuel subsidies for fishermen and MVR 50 million (US$3.2 million) as agriculture subsidies from the Finance Ministry’s contingency budget was passed with 68 votes in favour.

A proposal by Dhivehi Rayyithunge Party (DRP) MP Dr Abdulla Mausoom to add MVR 10 million (US$648,508) to the budget to be provided as financial assistance to civil society organisations was passed with 57 votes in favour and three against.

Revenue measures

Of the measures proposed by the Finance Ministry to raise revenue, revisions to import duties, raising the Tourism Goods and Service Tax (T-GST) from eight percent to 12 percent in July 2013, increasing airport service charge from US$18 to US$25, leasing 14 islands for resort development and imposing GST on telecom services were approved within parliament.

The Finance Ministry had however proposed hiking T-GST from 8 to 15 percent in July 2013 and raising airport service charge or departure tax from US$18 to US$30.

Rightsizing the public sector to reduce deficit

Amidst proposals to balance state spending during 2013, recommendations to reduce the public sector wage were made by the auditor general and submitted to parliament prior to the budget being passed.

Auditor General Niyaz Ibrahim observed that of the estimated MVR 12 billion (US$778 million) of recurrent expenditure, MVR 7 billion (US$453.9 million) would be spent on employees, including MVR 743 million (US$48 million) as pension payments.

Consequently, 59 percent of recurrent expenditure and 42 percent of the total budget would be spent on state employees.

“We note that the yearly increase in employees hired for state posts and jobs has been at a worrying level and that sound measures are needed,” the report stated. “It is unlikely that the budget deficit issue could be resolved without making big changes to the number of state employees as well as salaries and allowances to control state expenditure.”

Following the report, the The Budget Review Committee made cuts to overtime pay (50 percent), travel expenses (50 percent), purchases for office use (30 percent), office expenditure (35 percent), purchases for service provision (30 percent), training costs (30 percent), construction, maintenance and repair work (50 percent) and purchase of assets (35 percent).

The committee estimated that the cuts to recurrent expenditure would amount to MVR 1 billion (US$64.8 million) in savings.

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