Tag: IMF

Parliamentary reaction mixed as Majlis committee cuts MVR2.4billion from state budget

Opposition and government-aligned parties have given mixed reactions to a decision by Parliament’s Budget Review Committee to enact an almost 15 percent reduction to state expenditure proposed for 2013.

The government-aligned Dhivehi Rayyithunge Party (DRP) has claimed that cutting the budget to MVR 14.5 billion from a proposed MVR 16.9 billion would impact the provision of government services and functioning of independent institutions at a vital time.

The DRP added nonetheless that it has yet to make a decision on supporting the cuts when the reviewed budget is put to a vote on the Majlis floor.

The opposition Maldivian Democratic Party (MDP) meanwhile contended that the cuts would be made to “unnecessary” recurrent expenditure, such as transportations costs for 30-strong government delegations on overseas trips, as well as over MVR 400 million in office furniture and stationary.

While also hitting out at the “lousy” promises made by President Dr Mohamed Waheed Hassan for allegedly unrealistic development projects, the former ruling party also stressed that existing wage bills were not expected to be affected by the proposed cuts.

The comments were made after parliament’s cross-party Budget Review Committee yesterday announced that it had trimmed the proposed annual budget budget to MVR 14.5 billion from the previous figure of MVR 16.9 billion.

The committee opted to make cuts to the budget based on recommendations from both the International Monetary Fund (IMF) and Maldives Monetary Authority (MMA) Governor Fazeel Najeeb to ensure more manageable expenditure next year.

A recent mission from the International Monetary Fund (IMF) had urged the government to implement a raft of measures to raise revenues, advising that strengthening government finances was “the most pressing macroeconomic priority for the Maldives.”

Some senior finance figures within the country have confirmed to Minivan News under condition of anonymity that the reductions made by the budget committee were an “encouraging” development in trying to manage state expenditure and that the proposals were likely to receive Majlis support.

However, DRP Deputy Leader and MP Dr Abdullah Mausoom has said that despite the party’s own concerns, it would wait for the government to decide whether it could function during 2013 with a reduced budget of MVR14.5 billion, before deciding whether to back the changes.

“We need to know whether the government thinks it can manage to function with this MVR 14.5 billion. If it can then we would have no problem,” he told Minivan News today.

Mausoom said that considering the cross-party composition of the Budget Review Committee that approved the cuts, support for the amendments in the People’s Majlis could prove likely.

“Debatable: Chucking 15 percent of Maldives budget is a deliberate attempt by MDP and PPM [government-aligned Progressive Party of Maldives] to ‘choke’ government and institutions in 2013,” Dr Mausoom tweeted yesterday.

Mausoom contended today that the “drastic” nature of the proposed reductions had raised concerns about whether funding would be distributed “fairly and equally”, as well as having a detrimental impact on the running of the state.

“It is a shame that such drastic reductions have been made. We have had a very different year [in 2012] to other years with the change of government. With 2013 set to be a presidential election year should the budget be squeezed as a result of political rivalry,” he stated.

Mausoom said that of noticeable concern was how the budget cuts may potentially impact the work of independent institutions that he said would be increasingly vital over the course of a contentious general election next year. He added that a wide number of independent institutions in the country had already gone on record to address concerns about how the present budget would impact on their operations.

According to Mausoom, the MVR 16.9 billion budget presented to the Majlis by Finance Minister Abdullah Jihad earlier this month was already providing the “bare minimum” of funding needed to operate the state.

“There is a risk that when you cut into flesh you will go too far and touch bone. This nearly 15 percent reduction will impact services and independent institutions, we have to hear from government if it can manage with such finances,” he said.

With the budget amended by the committee now awaiting parliamentary approval, Mausoom added that the party had already been in general support of proposed measures to raise revenue.

State salaries

Amongst legislation considered by parliament ahead of approving the budget for 2013 has been the passing of a bill on state wage policy that will create a National Pay Commission tasked with determining salaries and allowances for the public sector.

In July, the Finance Ministry instructed all government offices to reduce their budgets by 15 percent, with only 14 of 35 offices complying by the given deadline.

However, in the same month the Finance Ministry decided to reimburse civil servants for the amount deducted from their salaries in 2010 as part of the previous government’s austerity measures.

The deducted amounts, totalling MVR 443.7 million (US$28.8 million), were to be paid back in monthly instalments starting in July.

The original budget proposal also included salary increases for military and police officers as well as plans to hire 800 new officers for the security services.

Combined with the transfer of about 5,400 employees in the health sector to the civil service, some MPs this month estimated that the state wage bill would shoot up by 37 percent.

When questioned on the government’s decision to reimburse civil servants and increase military expenditure for the current budget, Dr Mausoom said it was important for the country to prioritise rule of law in the country and respect the role police and military played in society.

He claimed that the biggest challenge on the budget was in fact dealing with what he claimed was years economic mismanagement, particularly during the administration of former President Mohamed Nasheed and the Maldivian Democratic Party (MDP) over the last three years.

Mausoom added that Nasheed government’s attitude towards privatisation had not helped with state expenditure, accusing the previous administration of staffing private corporations with political appointees to give the false impression the state had trimmed civil service employment.

In light of this alleged financial mismanagement by the former government, Mausoom argued that while there was a need to further streamline state expenditure under the present government, such cuts should be made gradually rather than the drastic cuts he believed had been proposed by the Budget Review Committee.

However, MDP MP for Nolhivaram and fellow review committee member Mohamed ‘Colonel’ Nasheed said that the cuts would be made largely by reducing “unnecessary recurrent expenditures” within the budget.  As such, no civil service wages are expected to be touched by the cuts, he added.

Nasheed claimed that the committee had looked at specific areas of the budget where “fat” could be cut from state expenditure without directly impacting services.

“What we proposed was that there could be reductions to internal and external transport [for government employees],” he claimed. “We have big delegations going abroad at present. What we have called for is a 50 percent reduction of transport costs. It is not necessary to send 30 people abroad on trip. Five people could go for example.”

Another area Nasheed claimed cuts could be more easily made was in the purchase of new office furniture that could reduce spending by some MVR 451 million in line with the costs of supplies like stationary and paper. He claimed such expenses could be reduced through more effective online governance.

Cuts were also said to have to be made in the proposed provision of specific services to islands around the country, which Nasheed claimed had never been viable considering the current economic challenges facing the Maldives.

“The president has made many lousy promises on his tours of islands for developments that cannot be granted. We cannot work from a fantasy budget,”

Finance Minister Jihad, Economic Development Minister Ahmed Mohamed and head of the Parliamentary Financial Committee Ahmed Nazim were not responding to calls from Minivan News at the time of press.

Budget criticism

When delivered to the People’s Majlis earlier this month, the state budget for 2013 presented by Finance Minister Jihad came under heavy criticism from both opposition and government-aligned parties over the course of a 16-hour budget debate.

MP Ibrahim Mohamed Solih ‘Ibu’, MDP Parliamentary Group Leader contended at the time that the proposed budget could not be salvaged or improved through amendments.

Meanwhile, MP Abdulla Yameen, Parliamentary Group Leader of the Progressive Party of Maldives (PPM), said that the government’s objectives or policies could not be discerned from the proposed budget.

“These projects are very random or ad hoc. The government’s planning should be better than this,” he said.  Yameen was not today responding to calls.

While the debate over the budget regularly came to a halt due to frequent loss of quorum – most MPs complained of the lack of funds allocated for development projects in their constituencies. These projects included developments such as harbours, water and sanitation systems, additional classrooms and upgrades to health centres.

Earlier this month, State Minister for Environment and Energy Abdul Matheen Mohamed moved to play down reports that his department had slammed the proposed state budget for neglecting the “fundamental rights” of Maldivians, claiming there had been a “misunderstanding” with local media.

Environment Ministry Permanent Secretary Ahmed Saleem was quoted by the Sun Online news agency at the time as claiming that some 15 projects proposed by his department had been excluded from the budget. These projects were said to deal with issues including waste management, as well as supplying water and sewerage systems to more islands around the Maldives.

However, Matheen claimed that Saleem’s reported comments had been the result of a “misunderstanding” by its author.  He alleged that the journalist had focused on a few points of a long meeting with the committee.

Consolidation

Speaking to Minivan News earlier this week, Jihad reiterated that in trying to balance state spending with providing national developments, the government favoured a policy of population consolidation – relocating certain island populations to larger administrative areas.

He added that a strong focus had also been provided to amending revenue raising measures, while also trying to cut spending at government offices.

The Finance Ministry issued a circular at the beginning of the month to all government offices and state institutions with instructions to implement cost-cutting measures during the final month of the year that included cancelling all overseas trips.

However, Jihad maintained that the circular was not a long-term financial strategy, but rather a traditional measure imposed by the government during December.

“At the end of the year some offices have a habit of spending lavishly,” he said. “This is just a regular measure at this time of year to curb costs.”

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Parliament passes bill on state wage policy to create Pay Commission

Parliament yesterday passed a bill on the state wage policy to create a National Pay Commission tasked with determining salaries and allowances for the public sector.

The wage policy legislation was passed with 46 votes in favour, two against and two absentions. The bill was submitted by Independent MP for Haa Dhaal Kulhudhufushi Mohamed ‘Kutti’ Nasheed and sent to committee for further review on March 30, 2011.

If ratified, a five-member National Pay Commission will be instituted within 60 days with part-time members appointed by the president for a five-year term.

The commission would be chaired by the Finance Minister and would determine salaries and allowances for state employees and authorise pay raises.

The commission would also formulate standards and rules for determining the state’s pay scale or appropriate salaries based on qualifications and nature of employment.

The bill stipulates that the commission must consider the cost of living, inflation and the consumer price index in determining wages.

Moreover, salaries should incentivise government employees to work in islands with small populations.

The commission would also have to consider the state’s resources, public debt and social justice in approving salaries and allowances.

Once the law comes into force, articles in the Human Rights Commission Act, Civil Service Commission Act, Defence Forces Act, Police Act, Elections Commission Act, Prosecutor General’s Act, Anti-Corruption Commission Act, Judicial Service Commission Act, Broadcasting Act, Customs Act and the Civil Aviation Authority Act that allows the institutions to determine wages for officials and staff would be abolished.

IMF recommendation

At a press conference held upon conclusion of a visit by an International Monetary Fund (IMF) mission last month, head of the mission Koshy Mathai stressed the importance of instituting a Pay Commission to streamline the pay structure for government employees.

“We have a lot of independent institutions in this country and they are all on different pay scales,” he observed.

“There’s no harmonisation within the public service. There are radically different pay scales. And that has problems in terms of incentivising staff to belong to one institution versus the other. And it also implies a lot of cost for the government. So establishing a Pay Commission that can set up a rational system of compensation for the entire public service seems like a priority.”

According to a report by the World Bank in May 2010 which identified the dramatic growth of the public sector wage bill as the origin of the Maldives’ ongoing fiscal imbalances, 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.”

“Between 2004 and 2009, the average monthly salary of a government sector worker increased from MVR 3,223 (US$250) to MVR 11, 136 (US$866),” explained a UNDP paper on achieving debt sustainability in the Maldives published in December 2010.

Former President Maumoon Abdul Gayoom responded to growing calls for democratisation with “a substantial fiscal stimulus programme” of increased government spending, “much of which was not related to post-tsunami reconstruction efforts.”

“This strategy led to a large increase in the number of civil servants from around 26,000 in 2004 to around 34,000 by 2008 or 11 percent of the total population. Thus the government simultaneously increased the number of public sector workers as well as their salaries,” the paper noted.

Consequently, recurrent expenditure – wage bill and administrative costs – exceeded 82 percent of total government spending in 2010.

However, the new government’s efforts to enforce pay cuts of up to 20 percent and downsize the civil service – which employs a third of the country’s workforce – were met with “a severe political backlash from parliament,” the UNDP paper observed.

Recurrent expenditure

Presenting the 2013 budget to parliament earlier this month, Finance Minister Abdulla Jihad noted that of the proposed MVR 16.9 billion (US$1 billion) of government spending, more than 70 percent was recurrent expenditure.

“As in other years, the highest portion of recurrent expenditure is expenditure on [salaries and allowances for government] employees,” Jihad explained. “That is 48 percent of total recurrent expenditure.”

During the budget debate in parliament, Majority Leader MP Ibrahim Mohamed Solih ‘Ibu’ criticised Finance Minister Jihad for failing to mention budgeted salary increases for military and police officers as well as plans to hire 800 new officers for the security services.

Combined with the transfer of about 5,400 employees in the health sector to the civil service, Ibu explained that the wage bill would shoot up by 37 percent.

Echoing the concerns of the parliamentary group leader, Maldivian Democratic Party (MDP) MP Eva Abdulla revealed that MVR 6 million (US$ 389105) was added to the budget of the Maldives National Defence Force (MNDF) following the controversial transfer of presidential power on February 7.

Since the MDP government was ousted in the wake of a police mutiny on February 7, Eva said that the police and army have hired 250 and 350 new staff respectively.

Consequently, the institutions spent more than MVR 75 million (US$4.8 million) in addition to the approved budgets for 2012, she claimed.

The proposed budget of MVR 930.9 million (US$60.3 million) for defence expenditure in 2013 was meanwhile 14 percent higher than 2012.

Eva observed that the increase in the government’s wage bill of 37 percent was approximately MVR1.7 billion (US$110 million), which was also the amount allocated for harbour construction in the 2013 budget.

These funds should instead be spent for “harbours, education, sewerage and housing,” she argued.

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State Environment Minister plays down budget dispute, alleges media “misunderstanding”

State Minister for Environment and Energy Abdul Matheen Mohamed has played down a report that his department yesterday slammed the proposed state budget for neglecting the “fundamental rights” of Maldivians, claiming there had been a “misunderstanding” with local media.

The Sun Online news agency yesterday reported that senior environment ministry officials had raised fears before the Majlis’ National Development Committee that it had been allotted an insufficient budget for proposed water and sewerage projects needed across the country.

Environment Ministry Permanent Secretary Ahmed Saleem was quoted as claiming that some 15 projects proposed by his department had been excluded from the budget is being debated within parliament this week. These projects were said to deal with issues including waste management, as well as supplying water and sewerage systems to more islands around the Maldives.

Saleem was reported as saying that complaints over the matter had also been sent to Finance Minister Abdulla Jihad, who had in turn had responded that any amendments to the budget would have to be made through the Majlis with support of MPs.

Both finance chief  Jihad and Economic Development Minister Ahmed Mohamed were not responding to calls from Minivan News at the time of press.

Speaking following yesterday’s meeting with the National Development Committee, Permanent Secretary Matheen claimed that Saleem’s reported comments had been the result of a “misunderstanding” by its author.  He alleged that the journalist had focused on a few points of a long meeting with the committee.

While Matheen said that there were some “concerns” about the present status of the budget allocated to the Environment Ministry, he that alleged the article’s conclusions were “very misleading”.

“The budget issue is very sensitive right now, so i’m afraid I cannot make any comments about the matter at present,” he said. “The islands are all asking what they will have from the ministry.”

Matheen added that he was presently unable to comment on the exact nature of the “misunderstanding” contained within the Sun Online report due to the fact discussions on finalising the state budget were ongoing.

Jumhoree Party (JP) MP Hassan Adil, a member of the National Development Committee, was unavailable for comment when contacted on the challenges in trying to balance ministry expenditure in the current economic climate, asking Minivan News to call this evening. However, Adil was not answering calls at the time of press.

Budget discussion

Presenting the budget to parliament last week, Finance Minister Jihad explained that next year’s budget deficit was to be financed with MVR 971 million (US$62 million) as budget support and MVR 1.3 billion (US$84 million) from Treasury bill (T-bill) sales.

However, as debate on the budget commenced yesterday amidst, regularly coming to a halt due to frequent loss of quorum – most MPs complained of the lack of funds allocated for development projects in their constituencies.  these projects included developments such as harbours, water and sanitation systems, additional classrooms and upgrades to health centres.

Meanwhile,  it was revealed last week that the proposed budget for defence expenditure for 2013 was found to be 14 percent higher than the funds allocated during 2012.

A total of MVR 930.9 million (US$60.3 million) was proposed for defence expenditure, which amounts to 5.5 percent of the total budget.

Balance of payments

With the Majlis currently contemplating the 2013 budget, an International Monetary Fund (IMF) mission to the Maldives last month noted that a ballooning fiscal deficit had “implied a rise in the public debt ratio, which now stands at over 80 percent of GDP.

According to the organisation, these developments also helped to boost national imports, thus worsening dollar shortages in the economy and putting pressure on MMA (Maldives Monetary Authority) reserves.”

The IMF forecast for the current account deficit was “nearly 30 percent of GDP this year.”

“Gross international reserves at the MMA have been declining slowly, [and] now account for just one and a half months of imports, and could be more substantially pressured if major borrowings maturing in the next few months are not rolled over,” the IMF mission warned.

The mission recommended formulating “a realistic and prudent budget for 2013″ to rein in the fiscal deficit, suggesting hiking taxes and “selectively” reversing import duty reductions.

According to an overview of the economy presented by the Finance Ministry along with the state budget (Dhivehi) proposed to parliament last week, the current account deficit in 2012 was expected to be 27 percent of GDP.

Water shortages

Following water shortages that authorities said affected over 100 inhabited islands back in May, Addu City Mayor Abdulla Sodig at the time claimed financial support was the key challenge in ensuring sufficient supplies of drinking water to the public, even with the assistance of local resorts and the Maldives National Defence Force (MNDF).

Minivan News reported back in April that in the country’s southerly Addu Atoll, an estimated 90 percent of the local population were reliant on rainfall to bolster their drinking water supplies.

Numerous islands in the atoll are said to experience severe supply issues for drinking water annually as a result.

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India calls in debts of US$100 million; “not a major concern” says Finance Minister

Despite India requesting repayment of US$100 million in treasury bonds by February 2013, Finance Minister Abdulla Jihad has said his earlier fears that the Maldives would be unable to cover expenditure for the final months of 2012 were “no longer a concern”.

Jihad told Minivan News that India was also yet to provide a final US$25 million installment of a promised loan, one Jihad said just last month was vital to ensure the Maldives could cover its wage bill.

The Maldives is now required to pay US$50 million in T-bond payments to India by next month, with a second payment due in February, local media has reported.

The Finance Ministry said the debt would be repaid through state reserves, which Sun Online reported could fall to US$140 million (MVR2.2 billion) once the payments to India are settled.

Concerns over state reserves are shared by the International Monetary Fund (IMF), which earlier this month called on the Maldives to introduce a raft of new measures to try and raise revenue and cut spending to alleviate a ballooning fiscal deficit.

“The fiscal deficit is expected to rise in 2012 to 16 percent of GDP [Gross Domestic Product] in cash terms, and likely even higher if one accounts for the government’s unpaid bills, accumulated in an increasingly challenging environment for financing,” the IMF mission stated, following its visit to the Maldives.

Finance Minister Jihad said that as part of trying to balance the country’s expenditure, the Economic Ministry was attempting to secure private sector funding to make up any shortfalls in budget support resulting from a lack of funds anticipated from India. However, he did not give further details on the nature of the private sector groups presently being sought.

Jihad claimed that a “significant” part of the private sector focus would be through issuing treasury bills (T-bills) to the private sector as recommended earlier this year by the IMF.

“When we opened up treasury bills to the private sector initially there was no response,” he said. “However, there have now been consultations with private groups.”

T-bills, which are sold by governments all over the world, serve as a short-term debt obligation backed by sovereign states. In the Maldives, T-bills have a maximum maturity of six months, after which time they must be repaid.

Meanwhile, Jihad said the Finance Ministry had received no notice from Indian authorities regarding when it may receive the final US$25 million installment of a US$100 million loan agreed late last year.  The finance minster said his department had been given no ultimatum or conditions to be met by Indian authorities in order to receive the money.

“I don’t know why the delay [in receiving the funds] has happened. You would need to ask the Indian High Commission about that,” he said.

The  US$25 million was agreed as part of the $US100 million standby credit facility signed with Prime Minister Manmohan Singh in November 2011.

Diplomatic tension

Tensions between India and the Maldives has risen in recent months as divides within the coalition government of President Mohamed Waheed Hassan began to appear over opposition to a contract signed by the previous government, to develop and manage the country’s main airport with Indian infrastructure group GMR.

The divides have threatened to spill into a major diplomatic incident in recent weeks, after the President’s Office issued a release distancing itself from the comments of its own spokesperson, Abbas Adil Riza, who had accused India’s representative in the Maldives of being “an enemy and a traitor to the Maldivian people”.

The dispute between the government and GMR – currently being heard in an arbitration case at Singapore’s High Court – has become increasingly acrimonious with ongoing demonstrations across Male’ and even the water ways surrounding the airport.

The demonstrations have been backed by certain parties within President Waheed’s coalition government, who have set him an ultimatum of reneging on the contract by the end of the month.

While the GMR contract is not implicitly backed by other coalition parties, several senior party figures have opted against plans to “take to the streets” in calling for the airport to be “renationalised” or acting in a manner that could potentially damage future foreign investment in the country.

The GMR contract, which was overseen by a number of organisations including the International Finance Corporation (IFC) – a member of the World Bank group – represents the largest ever foreign investment in the Maldives. President Waheed himself told Indian media that his government was committed to protecting foreign investments in the Maldives, despite questioning elements of the deal.

Foreign borrowing

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

“I will not try to run the government by securing huge loans from foreign parties. We are trying to spend from what we earn,” he was reported to have told the people of Nilandhoo.

“The Maldivian economy is fine. Don’t listen to whatever people say. We don’t have to [worry] about the Maldivian economy being in a slump,” he was quoted as saying at the time during a rally in Meedhoo.

Despite Waheed’s reassurances, October saw a number of state owned institutions face disconnection from the capital’s power grid as bills amounting to around MVR 150 million (US$9.7 million) were owed to the State Electricity Company (STELCO).

Responding to the institutions’ blaming of his ministry, Jihad at the time told Sun that the finances were simply not there.

“We are not receiving foreign aid as was included in the budget. How can we spend more than we receive? That’s why those bills are unpaid. We can’t spend money we don’t have,” he told the paper.

Since coming to power in February, the government has committed to reimbursing civil servants for wage reductions made during the austerity measures of the previous government, amounting to Rf443.7 million (US$28.8 million), to be disbursed in monthly installments over 12 months from July.

A MVR 100million (US$6.4 million) fuel subsidy for the fishing industry was also approved by the Majlis Finance Committee, with the hope of stimulating the ailing sector.

The overall deficit for government expenditure has already reached over MVR2billion (US$129million). Jihad has told the Majlis’ Finance Committee that he expected this figure to rise to MVR 6 billion (US$387 million) by year’s end – 28 percent of GDP – alleging that the previous government left unpaid bills equal to over one third of this anticipated deficit.

Former Minister of Economic Development Mahmood Razee has previously told Minivan News that this increased expenditure in the face of a pre-existing deficit represented the government “ignoring reality.”

“If they don’t get the loan, they will have to cut travel expenses, stop certain programs – take drastic measures or get another loan,” said Razee, claiming that the only alternative would be to sell treasury bills.

Following reports in August that the government was attempting to raise funds through the sale of treasury bills, former Finance Minister Ahmed Inaz claimed such a measure would not address IMF concerns about state spending, prolonging economic uncertainty.

In August, the current Finance Ministry announced its own austerity measures intended to wipe over MVR2.2billion (US$143 million) from this year’s budget deficit though few of these propositions have as yet been followed through.

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Finance Ministry proposes drastic austerity measures to Parliament

Parliament’s Finance Committee last week received a proposal from the Finance Ministry which, if accepted, would save MVR2.2billion (US$143million).

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.

If successfully carried out the Ministry’s proposals would halve this year’s budget deficit, currently projected to reach MVR9.1billion (US$590million).

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, the revised figures provided by the Finance Ministry have shown that revenue will only be MVR8.4billion (US$545million) for this year with actual expenditure rising to around MVR18 billion. The ensuing deficit would represent around 28 percent of the nominal GDP for 2012, which was predicted to be MVR31.7billion (US$2billion).

This ballooning deficit has alerted the IMF which has expressed concerns that without raising revenue and cutting expenditures the country risked exhausting its international reserves and sparking an economic crisis.

The Maldives Monetary Authority’s (MMA) most recent statistics show that the country’s gross international reserves had decreased by 2 percent in the 11 months up to May before dropping by a further 6 percent between May and June this year.

The MMA’s data shows this figure to represents around ten weeks worth of imports in the Maldives, a country which relies heavily on imports, spending around two thirds of its real GDP on foreign goods each year.

The current government has pointed the finger at the previous administration for the current budgetary issues whilst simultaneously implementing a series of policies which have added to its financial obligations.

These deficit expanding policies have included promoting 1000 police officers,  doubling of the budget of the Maldives Marketing and Public Relations Corporation (MMPRC) to MVR69.3million (US$4.5 million), hiring of 110 new police officers, and a reinterpretation of the legal provision for the payment of resort island lease extensions which had cost the government MVR92.4million (US$6million) already in comparison with the same point last year.

The government also chose to reintroduce a MVR100 million (US$6.5 million) fishing subsidies and to reimburse MVR443.7 million (US$28.8 million) in civil servant salaries, reversing measures implemented during the previous government’s own austerity drive.

The raft of measures currently being considered by the Finance Committee represent the most comprehensive effort thus far to reign in the deficit.

Austerity Measures

The proposed measures for reducing state expenditure were published in local newspaper Haveeru. They include discontinuing electricity subsidies in Male’ City which, where around one third of the nation’s population live, saving MVR135million (US$8.7million).

Reducing the state’s offices budget by up to 15 percent is expected to save MVR1.5billion (US$97million) and was first suggested by Finance Minister Abdulla Jihad in May. Jihad mentioned at the time that a pay review board would be convened in order to “harmonise” the pay of government appointees.

The document received by Haveeru revealed details that this pay review body will seek to restructure pay schemes in order to save MVR100million (US$6.5 million). It also emerged that MVR300million (US$19.5million) could be saved by introducing a recruitment freeze in the civil service.

The austerity plan also includes a reform of the Aasandha national health care scheme, the cost of which promised surged ahead of its MVR720million (US$46.7million) budgeted allowance shortly after its introduction in January. After discussions with the government, the Aasandha company has decided to share the costs of private treatments with patients.

The Finance Ministry predicts that reform of the Aasandha scheme can save the government MVR200million (US$12.9million).

Revenue raising

Proposed revenue raising measures include raising the import duty on oil, upon which the country relies heavily for fuel, to three percent. MMA figures show that the price of crude oil has decreased 15 percent in the 12 months leading up to June whilst the domestic price had remained the same with the exception of diesel which increased in price by 2 percent.

Import duties are also to be raised on items whose value exceeds MVR6.4million (US$41million) as well as on liquor imports. The duty on both of these items had been raised as part of the amended Export Import Act in December of last year which saw duties on pork and alcohol products, used exclusively by the resorts, go up by 42 percent.

The tourist industry will be similarly hard-hit by the proposals to raise Tourism Goods and Services Tax (TGST) to 15 percent.  The IMF had previously urged the government to double the 6 percent tax levied on all goods and services sold in resorts with Tourism Minister Ahmed Adheeb announcing his intention in May to consult the tourism industry.

Minivan News discussed the potential increase with several resort managers at the time, and was told that an increase would have  “serious ramifications” for certain sections of the market. One manager said that the fixed term contracts many resorts have with operators meant that increases to T-GST would have to be absorbed from revenue, resulting in potential cutbacks to staff or services.

Visitors to the Maldives could also be affected by the proposed increase in the Airport Service Charge from US$18 (MVR277) to US$30 (MVR462).

Further rises to the tax levied on luxury items would be accompanied by the introduction of taxes to the sale of flats and on telecoms service in the Finance Ministry’s plan.

The visa fee paid by foreigners working in the Maldives is also slated to see be increased by MVR150 (US$10). Estimates of expatriate workers are be as high as 110,000 although the same estimates suppose that around half to be undocumented.

Despite the recent suspension of sittings of the full Majlis, the Finance Committee continues to hold meetings as normal.

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Business bill under review after government raises “socio-economic” concerns

Parliament’s Economic Affairs Committee has this week begun a review of the Business Registration Bill returned to the People’s Majlis by President Dr Mohamed Waheed Hassan, after it was originally approved in April.

The President’s Office told Minivan News that the bill, initially proposed under the previous government, had been returned over fears about the impacts it could have on the country’s economy at the present time.

Official government figures indicated that inflation had risen to an annual rate of 16.53 percent in April. Earlier in the year, the Finance Committee estimated that the current budget deficit would reach 27 percent of GDP, or  Rf9.1 billion (US$590 million).

The government meanwhile announced this week that it had already been issued with a Rf300million (US$19.5 million) government loan from the Bank of Maldives (BML), despite questions being raised over whether the deal needed Majlis approval.

The government had previously asked for parliamentary approval for the budget support loan in place of an existing $65 million (Rf1 billion) loan that had been approved for the 2012 budget.  The President’s Office claimed the funding, devised as part of a “mop up” operation, would help “reduce the circular flow of rufiya in the economy” adding it would not exacerbate the current national spending shortfall.

While unfamiliar with the latest amendments being proposed to the Business Registration Bill, a former Economic Development Minister who served under the previous government claimed the legislation had originally been devised in an attempt to simplify the registration of foreign investors.

However, President’s Office Spokesperson Abbas Adil Riza said that the bill was deemed by the present government to represent the implementation of a new tax regime in the country – a decision he suggested was unreasonable considering the current economic climate.

“At a time where as I’m sure you are aware, the economy is beginning to improve, the president and the cabinet has agreed that the time is simply not right to introduce new taxes,” he said.

According to local newspaper Haveeru, President Waheed’s concerns regarding the bill were said to include “Article 3 (e)”, which relates to services provided for islands beyond the capital of Male’. The report said that the nature of these services was believed to be unclear in the original drafting of the bill.

The president was also reported to have raised an issue with a perceived failure in the bill to specify a “process” required for the registration of a foreign branch of a company in the Maldives. The government therefore requested the removal of “Article 5 (b)” as well as a number of amendments relating to the registration of a branch of a foreign company in the Maldives, raising concern over a lack of specifics related to the use of the term “foreigners”.

When questioned by Minivan News, Abbas did not specify the exact nature of the potential “legal and socio-economic ramifications” that had concerned the government about the Business Registration Bill.

The bill was one of three pieces of legislation related to economic reform returned to parliament for revision last month on the basis of issues raised by Attorney General Azima Shukoor.

The exact nature of these concerns was not detailed by the President’s Office at the time, while the attorney general was also not responding to calls today about the nature of the government’s decision to return the bill.

Finance Minister Abdulla Jihad meanwhile forwarded Minivan News to the Ministry of Economic Development concerning an enquiry on the Business Registration Bill.  Economic Development Minister Ahmed Mohamed was not responding to calls.

Reform package

Although unfamiliar with the latest proposals for amendments to the Business Registration Bill, Mahmoud Razee, Economic Development Minister under the previous government, said the legislation was original proposed as part of a wider economic reform package championed by Nasheed’s administration.

The reforms, introduced under the previous government, were further revised following consultations with the International Monetary Fund (IMF) over how to strengthen and stabilise the economy.

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

Razee stressed that registration bill was intended specifically to provide a “clearer means” for facilitating foreign investment within the Maldives’ business sector.

“We were trying to make it easier to register foreign shareholders here,” he said.

Taking the retail sector as an example, Razee said that the retail sector was quite “restrictive” in terms of encouraging foreign investment.

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Revenues grow, but not enough for budget deficit to shrink

The Maldives’ Inland Revenue Authority (MIRA) has released its figures for May, showing an increase of 9.5 percent in government revenue compared with the corresponding month in 2011.

The total revenue collected in the month of May is reported to have been Rf389.6 million (US$25.3million).

The report states that 35.6 percent of income came from the T-GST, a levy charged on all goods and services sold in the tourism sector, which itself has risen more than 119 percent compared with the corresponding period in 2011.

The yearly revenue collected by MIRA is now reported to be 74.2 percent more than at the same point in 2011.

The MIRA statistics do not, however, account for the loss of government revenue from import duties after amendments were made to the import-export act in November 2011. Import duties did not appear on MIRA’s books, even before these changes.

The changes to import duties were anticipated to reduce government import fees by Rf491.7million (US$31.9million) in 2012, according to the Maldives Monetary Authorities (MMA) projected figures.

This shortfall was expected to be more than matched by the introduction of the newly introduced Goods and Service Tax (GST) and an increase in T-GST to 6 percent starting from January 2012.

The MIRA figures show that the loss of the Rf491.7million in import duties has indeed been more than compensated for by an increased revenue of Rf418 million (US$27million) from new GST, and Rf429.1million (US$27.8million) from the raised T-GST.

While the MIRA figures show its own revenue growing exponentially, the wider budgetary picture shows the government is failing drastically to offset its budgetary commitments.

Governor of the MMA Dr Fazeel Najeeb was recently reported as saying that the Maldives was “now in a dangerous economic situation never before seen in recent history.”

The International Monetary Fund (IMF) has expressed its concern over the country’s dire balance of payments situation which has been estimated by the Majlis’s Financial Committee to be 27 percent of GDP this year.

The 2012 budget was initially estimated to be around 9.7 percent of GDP, but in May was revealed to be much larger after significantly reduced expenditure and increased expenditure was taken into account.

The deficit is now predicted to be Rf9.1 billion (US$590 million)this year. An extrapolation of MIRA’s figures for the whole year suggest that the increased revenue from the changes to the point at which goods are taxed could amount to just over Rf850 million in additional government revenue.

The IMF has suggested the government further raise T-GST from 6 to 12 percent as part of its efforts to plug the financial gap.

The Financial Committee have said added that the government’s deficit may get worse before it gets better with additional spending commitments yet to be made.

Head of the Financial Committee Ahmed Nazim has listed these expenses as including food subsidies worth Rf270 million (US$17.5 million), electricity subsidies worth Rf250 million (US$16.2 million), capital expenditure by government institutions Rf735 million (US$47.6 million) and an allocation of Rf200 million (US$12.9) to the Aasandha Health Insurance scheme’s budget.

President’s Office Spokesman Abbas Adil Riza has claimed that the previous administration left Rf3-4 billion in expenses hidden from the public accounts.

The policies of the current government have also resulted in losses, including  around Rf123.2 million a quarter (US$8 million) a quarter in airport concession fees due to a Civil Court ruling blocking the levying of an airport development charge as well as up to Rf2 billion (US$135 million) in land lease payments due to policy reinterpretation.

MIRA’s figures are starting to give a better indication of the revenue being lost through this change in the land lease arrangements as this month’s figures show a 25.9 percent reduction in this area when compared with the same period last year, amounting to Rf59million (US$3.8million).

Current government spending for the year has meanwhile increased by almost 24 percent, to a total of US$1.13 billion. Spending unaccounted for in the 2012 budget following the controversial change of government of February 7 has included the promotion of a third of the police force, lump sum payments to military personnel, Rf100 million (US$6.5 million) in fishing subsidies, reimbursement of Rf443 million (US$28.8 million) in civil servant salaries following cuts by the previous administration, the creation of two new ministries, and the hiring of international PR firms to counter negative publicity.

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“Dire economic outlook” as budget deficit estimated to reach 27 percent of GDP

Parliament’s Financial Committee has projected that the Maldives budget deficit will reach  27 percent of the GDP by the end of year 2012, a 175 percent increase on earlier forecasts.

While the 2012 budget put the deficit at less than 9.8 percent of Gross Domestic Product (GDP),  the figures revealed by the committee last week shows that the amount will increase up to a staggering 27 percent.

These figures confirm the International Monetary Fund (IMF)’s earlier warnings that the Maldives had “substantially understated” its budget deficit, by underestimating its spending and “probably” overestimating tax revenues.

Head of the Majlis’s Financial Committee, Deputy Speaker and People’s Alliance (PA) MP Ahmed Nazim, revealed to the reporters that government revenue for 2012 will be Rf2.6 billion (US$168.6 million) less than the projected amount of Rf10.87 billion (US$704 million) – a 23 percent plunge.

Meanwhile, government spending in 2012 is expected to increase by almost 24 percent, reaching Rf17.45 billion (US$1.13 billion) at the end of the 2012.

With the shortfall of revenue and increased government spending, Nazim observed that the budget deficit will exceed from Rf 3.9 billion (US$ 252 million) to Rf9.1 billion this year (US$590 million), amounting to 27 percent of the country’s GDP.

“The information shared by the Finance Minister Abdullah Jihad shows a dire economic outlook for the Maldives,” he warned, echoing the IMF’s recent predictions on the Maldives’ economic frailty.

Chief of the IMF mission in the Maldives, Jonathan Dunn, warned parliament in April  that if the country does not reduce its expenditure, it risks running out of reserves and miring the country in poverty.

Although 2012 budget put the deficit at less than 10 percent of GDP, Dunn told Minivan News that “the IMF team sees the figure as more likely to be 17.5 percent of GDP, and perhaps larger than this.”

As a result of this, he warned that the economic growth and stability in the Maldives were unlikely to be maintained “in the medium term” unless the government substantially cut spending.

Dunn emphasised that the only sustainable solution was for relevant parties to rationalise the budget by boosting revenues and cutting expenditure, despite the political difficulties.

“These may be politically difficult measures, but the consequences of not reducing the budget deficit are likely to be even more difficult,” he warned.

New government increases spending

Despite urgent calls to reduce spending to curb widening deficits, parliament’s finance committee projects the government spending will have to be increased to cover additional costs which were not included in 2012 projections.

These expenses include food subsidies worth Rf270 million (US$17.5 million), electricity subsidies worth Rf250 million (US$16.2 million), capital expenditure by government institutions Rf735 million (US$47.6 million) and an allocation of Rf200 million (US$12.9) to the Aasandha Health Insurance  scheme’s budget, according to Nazim.

Visiting Hirimaradhoo island last weekend, President Waheed said he would allocate Rf 30 million (US$1.9 million) in the 2013 state budget for development.

A total of Rf3.4 million (US$220,500) is also said to be allocated as benefits to former President Mohamed Nasheed of Maldivian Democratic Party (MDP) which alleges that Nasheed was ousted in a coup on February 7.

However, committee member and MDP MP for Kulhudhufushi, Abdul Ghafoor Moosa, told reporters that unplanned spending on police and military personnel and  planned reimbursement of civil servants pay cuts  in 2010, are both significant causes for rising costs to the government.

He observed that the largest shortfall in revenue is a direct result of the US$135 million pulled out from the budget with new government’s recently revised policy on lease extension payments for resort islands.

Maldives Inland Revenue Authority (MIRA) anticipated receiving a total of Rf375 million (US$ 24 million) for lease extensions, however the income received dropped to Rf23 million (US$1.5 million) as a result of the decision to accept the lease extension fees in an annual installment instead of a lump sum as decided by former  administration.

The loss of concession fees from Ibrahim Nasir International Airport (INIA), the result of a successful Civil Court case to block the Airport Development Charge (ADC) filed by the Dhivehi Qaumee Party (DQP) while it was in opposition, also saw the government receive only US$525,355 from the airport for the quarter, compared to the US$8.7 million it was expecting.

The government-aligned PA’s Deputy Leader Nazim however contended that the the 23 percent drop in government income was caused by unrealised revenue from privatisation schemes and a shortfall of Rf 166.7 million and Rf435 million (US$28 million) from the projected dividends of Dhiraagu and import duties respectively.

He noted that the committee has decided to increase the treasury bond limit up to Rf1 billion following a request by the  Finance Ministry to increase the limit from Rf727 million to Rf 1.5 billion. The ministry says that all monetary transactions will be halted if the limit is not extended, according to Nazim.

The IMF’s Dunn has however stated that further domestic borrowing “will be difficult to achieve, as it is unclear whether the banks have much more appetite for buying treasury bills.”

Meanwhile,  in a bid to address spiraling costs, the committee is reviewing the Aasandha universal health scheme to block the Rf200 million extension of its budget, cut the budget of all institutions by 10 percent to save nearly Rf 1.5 billion, and save a further Rf300 million by issuing a moratorium of the further employment of staff.  These measures will reduce state costs by Rf 2.2 billion (US$142 million), Nazim estimated.

However, recently released figures from Finance Ministry show that between January 1 to April 26, state expenditure exceeded over Rf 4 billion (US$259 million) while the income remained at Rf 2.10 billion (US$136 million), a deficit of Rf 1.5 billion (US$100 million).

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