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Budget deficit “substantially” underestimated while spending still unaddressed: IMF

The Maldives has “substantially understated” its budget deficit, the International Monetary Fund (IMF) has warned, by underestimating its spending and “probably” overestimating tax revenues.

“Moreover, not all of the financing for even the approved budget has been identified, and additional risks exist as well – including the need to clear reported unpaid bills carried over from 2011 and the possible loss of lease extension payments (Rf 700 million, or US$42.4 million) assumed in the budget,” the IMF’s mission chief for Maldives, Jonathan Dunn, told Minivan News.

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

“The financing gap for 2012 is thus at least 7.5 percent of GDP, or about US$160 million, and possibly substantially larger than this,” he added.

As a result, economic growth and stability in the Maldives were unlikely to be maintained “in the medium term” unless the government substantially cuts spending.

Meanwhile, government revenue for the first quarter of 2012 has fallen 15.5 percent below projections, the Maldives Inland Revenue Authority (MIRA) has reported.

Revenue from tourism land rents fell 18.6 percent on the previous quarter, however the largest contributor to the drop were the new government’s changes to resort lease extension payments, which saw a 76.1 percent drop in revenue below projected figures.

Inflation meanwhile spiked 13.4 percent in February, with the price of food increasing 28 percent.

Government revenues for the quarter has nevertheless increased 76.2 percent compared to the same period in 2011, “mainly because of the significant increase in Business Profit Tax (BPT) and Goods and Services Tax (GST) collections”, MIRA noted: Rf 361.7 million (US$23.4 million) and Rf 721.9 million (US$46.8 million) respectively.

However, Dunn warned that revenue collection by MIRA “does not provide a full picture of total revenue performance in the country.”

“Revenue from import duties – previously the single largest revenue – collected by Customs and is not reported by MIRA. Due to implementation of the 9th Amendment to the Maldives Export Import Act, revenue collection from import duties is expected to decline substantially in 2012, fully offsetting the increase in tax revenues from GST and BPT.”

Solutions?

Dunn observed that printing money would only facilitate the much-larger-than-expected 2012 fiscal deficit.

“This, in turn, would imply that national imports would be substantially larger than expected, because in the Maldives, where most goods are imported, almost any spending by either the government or the private sector turns, directly or indirectly, into import demand,” he noted.

As a result, the imbalance between the demand for dollars and the supply would become even larger, “and the MMA would likely have to supply dollars from its own reserves to meet the shortfall.”

“Usable reserves at the MMA are low, so if the fiscal gap this year is financed via money creation, it is likely that the MMA’s usable reserves would soon dry up,” he said.

Another option, Dunn suggested, was for the Maldives to borrow more money. However borrowing from domestic sources “will be difficult to achieve, as it is unclear whether the banks have much more appetite for buying treasury bills.”

Obtaining foreign grants “would be helpful but is probably not realistic.” Foreign loans, meanwhile, “would have to be considered carefully, given that Maldives already has a very high debt-GDP ratio, but they may be needed in the short run to avoid the consequences of printing money.”

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.

Furthermore, ongoing dollar shortage would not be resolved while the Maldives continued to substantially increase spending, Dunn added.

The foreign currency crisis – the bane of many of the country’s importers, who are forced to use unofficial channels outside the banking system to obtain currency necessary to purchase overseas – was exacerbated by the number of unrestricted foreign exchange licenses issued to resorts and other private businesses, “without the requirement that they hold substantial capital to back up that business.”

This practice allowed such nonfinancial businesses to conduct large-value foreign exchange operations outside the banking system, “an unusual arrangement and sustains the parallel foreign exchange market,” Dunn noted.

“In a more typical situation, nonfinancial businesses [such as resorts] would have licenses only for the exchange of small-value cash transactions and would be required to channel large-value foreign exchange transactions through the banking system. In the case of Maldives, this would substantially increase liquidity in the official foreign exchange market,” he suggested.

However, “as long as the government continues to inject substantial amounts of new spending into the economy, the foreign exchange situation in the country will not be resolved.”

Growing expenditure

Dunn emphasised that “fiscal imbalances in the Maldives have been present for many years and that fiscal adjustment remains necessary”.

Faced with increasing pressure from the IMF to lower expenditure after failed attempts in 2010 to cut the salaries of civil servants – a maneuver blocked by the Civil Services Commission (CSC) and backed the then opposition – former President Mohamed Nasheed’s administration insisted that increased revenue from the new taxes would match expenditure, and boasted that the 2012 budget was the first in many years to balance income and expenditure.

Following the police mutiny and controversial change of government in what the MDP contends was a coup d’état, spending by President Dr Mohamed Waheed’s administration has escalated as it seeks to shore up support in a fractious political environment.

Newly-announced expenditure in the last few months includes:

The promotion of 1000 police officers – approximately a third of the force – and plans to both recruit 200 new officers in 2012 and appoint four new Assistant Commissioners;
Lump sum payment of two years of allowances to military personnel;
An unspecified amount for an international public relations firm, to combat negative publicity and “rally an alliance of support” in the international media following the controversial change of power and coverage of police crackdowns;
Rf 100 million (US$6.5 million) in fishing subsidies;
A proposal to create two new ministries, including the Ministry of Gender, Family and Human Rights, and the Ministry of Environment and Energy;
The reimbursement of Rf 443.7 million (US$28.8 million) in civil servant salaries from July 1, following cuts by Nasheed’s administration in 2010. In addition, civil servant working hours have been reduced to 8am-3pm;
The doubling of the budget for the Maldives Marketing and Public Relations Corporation (MMPRC) to US$S4.5 million.

Lost income has also increased, with MIRA warning in March of unrealised revenue from the new government’s recent decision to accept resort island’s lease extension payments in installments, an amendment that former Tourism Minister Dr Mariyam Zulfa contends was pushed through by several local resort owners with vested interests, that immediately cost the treasury US$135 million.

In March, 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.

Meanwhile today the publicly-owned State Trading Organisation (STO) dropped legal attempts to reclaim a US$1.2 million debt owed by the Meridian Services owned by MP Abdulla Riyaz of the new ruling coalition. The STO justified the decision in a letter to the court, by stating that it did not have enough board members to meet quorum and make decisions.

In a bid to address spiralling costs, the government is reviewing the Aasandha universal health scheme introduced by Nasheed’s administration on January 1 this year, which “is and will always be completely financially unsustainable in a country such as the Maldives”, according to President Waheed’s Special Advisor, Dr Hassan Saeed, in an article for newspaper Haveeru.

“The introduction of unrestricted, universal free healthcare with no agreed regulation or management was an act of folly, recklessness and irresponsible political immaturity that rivals any of the actions of Mr Nasheed’s administration,” Dr Saeed contended.

“And what’s more he knew this but still went ahead with it. And the consequence is that we now have the IMF breathing down our necks and a budget deficit that threatens to derail all government social programmes,” Dr Saeed wrote.

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CSC announces intention to reimburse deducted wages

The Civil Service Commission (CSC) has announced today it is to reimburse money deducted from the earnings of government employees between January to December 2010.

The wage repayments, amounting to Rf443.7 million (US$28.8 million), will be disbursed in monthly instalments over twelve months from July 1 this year, the CSC confirmed in a press release. This money has not been accounted for in this year’s state budget, the deficit of which has already drawn concern from the International Monetary Fund.

This reduction in civil servant pay was introduced by the previous government in an attempt to manage a financial crisis back in 2009. The initial deduction, agreed between the Finance ministry and the CSC, was only due to last for three months until the government’s income had risen above Rf7billion (US$544 million).

However, after the Finance Ministry refused to restore wages to the previous level, the CSC took the case to the courts.

After the dispute between the government and the CSC was submitted to legal adjudication, the Civil Court ruled that the Finance Ministry did not have the authority to reduce the salaries, a cut of up to 20 percent in some cases. The CSC at the time interpreted this as a decision to restore the deducted salaries, a decision upheld by the High Court in May of last year.

“Hidden political agenda”

At the height of the discord between the two departments in February 2011, the Finance Ministry claimed that certain members of the CSC were using the issue as a cover to attain “a hidden political agenda.”

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

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

The Finance Minister Abdullah Jihad recently announced that he would return the budget for this year to parliament as the current rate of expenditure would leave a deficit of Rf2 billion. Jihad could not be contacted by Minivan News at the time of going to press regarding the impacts the reimbursement might have on state expenditure.

Ahmed Nazim, head of the Parliamentary Financial Committee, was also unavailable for comment.

Concerns over the level of spending on civil servants in the Maldives are well documented. A 2010 World Bank report entitled “how did the Maldives get into this situation?” noted that “the origin of the crisis is very clear… the wage bill for public sector employees grew dramatically in a very short time.”

Increases to the salaries and allowances of government employees between 2006 and 2008 reached 66 percent, “by far the highest increase in compensation over a three year period to government employees of any country in the world,” the report noted. The report showed spending on civil servants’ salaries rising from Rf2billion to nearly Rf5billion between 2007 and 2009.

Pay cuts for civil servants were just one of the many deficit reduction measures suggested by the IMF during its meetings with the government of President Mohamed Waheed Hassan earlier this month.

“The expenditure has not been under control since 2009. It has been rising, and we have been [issuing] warnings since then,” Haveeru reported the Chief of the IMF mission in the Maldives, Jonathan Dunn, as telling parliament at the time.

The governments attempts to reduce spending have seen a Finance Committee investigation into the Aasandha health care scheme which accounts for around ten percent of the government’s budget. It has been described by it’s chairman, Ahmed Nazim, as a “hole in the pocket of the government.”

The Maldives Inland Revenue Authority (MIRA) recently released its figures for March, attributing a significant loss of funds to the goverment’s decision to change the way island lease payments are made. The system changed from a lump sum payment to an instalment method for lease renewals, costing the government around Rf350 million (US $23million) that month. The IMF noted that the current budget figures had not accounted for this loss of revenue.

The government also recently announced significant number of benefits and promotions being awarded within the secuity forces.

The IMF predicted dire consequences if the government’s budgetary imbalances were to cause it to exhaust its foreign reserves.

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IMF predicts dire consequences if deficit reduction fails

The IMF yesterday warned the People’s Majlis that if the country does not reduce its expenditure, it risks running out of reserves and miring the country in poverty.

Previously highlighting “significant policy slippages”, in particular the government’s failure to curtail spending, the IMF felt it necessary to delay the third tranche of funding in 2010. Nasheed’s government contended that it had tried to impose austerity measures, in particular pay cuts for civil servants, but had been blocked by the Civil Service Commission (CSC) and then-opposition majority parliament for political reasons.

Dunn recommended against printing money or obtaining loans from other countries, given the current economic frailty of the Maldives.

His suggestions for expenditure reduction included revising civil servants’ salaries and allowances, increasing the Goods and Services Tax (GST) from 6 percent to 15 percent, re-introducing import duties, and increasing bed tax by 50 percent, from US$8 to $12.

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

Originally, it was foreseen that the shortfall from import duties was to be covered by Rf2 billion in tourism goods and services tax (T-GST) and Rf 1 billion as general goods and services tax (GST) revenue.

The IMF representative also noted that budget figures they studied did not represent the change in the way lease extensions for resorts were now being received.

The new government recently revised the policy on lease extension payments for resort islands, making the sums payable in instalments rather than lump sums. Former Tourism Minister Mariyam Zulfa has argued that this policy is largely responsible for the current budget deficit, instantly creating a US$135 million hole in the budget for the short-term financial benefit of several influential Maldivian resort owners.

Detailed national income statistics are now published monthly by the Maldives Inland Revenue Authority (MIRA). Total revenue collected in March was Rf 648.7 million (US$42.1 million), more than triple the amount received in March 2010.

However, “revenue received [in March 2012] is 37.9 percent lower than the projected revenue, mainly due to the unrealised revenue from Lease Period Extension,” MIRA observed.

Total revenue collected during the first quarter of 2012 represents a 113.9 percent increase on the same period last year. Half of the revenue collected during this period was attributable to the Business Profit Tax (BPT) and GST, introduced during Nasheed’s government.

Head of the Majlis’s Financial Committee, Deputy Speaker and People’s Alliance (PA) MP Ahmed Nazim, met with the IMF last week and said their main concern was that the 2012 budget “may not be realised.”

“The IMF feels there is a big hole in the forecast revenue,” said Nazim.

He also felt the investigation of the expenditure on the Aasandha health insurance scheme to be relevant, as it represents more than 10 percent of the budget.

Although he described the scheme’s future as assured, he expressed grave concerns over the sustainability of the scheme as currently practiced.

“It is a hole in the pocket of the government. It seems odd that half of the population has used it, there is no epidemic, and yet it has used Rf 3 million (US$195,000) a day on medicine,” said Nazim.

Nazim also mentioned the shortfall of over Rf 500 million from the failure to privatise Maldives Post Ltd, Island Aviation and Maldives In-flight catering.

Tourism Revenues

Due to the country’s reliance on imports, the waning of reserves was described as very dangerous, with the IMF comparing the situation with that of the Seychelles in 2008.

The Seychelles secured a US$26 million Stand-By Arrangement from the IMF after a balance of payments crisis saw the country default on international loans. In exchange, the Seychelles, whose economy also relies heavily on tourism, undertook stringent cuts, including shedding 12.5% of the government workforce.

The Seychelles crisis was partly attributed to a fall in the tourism trade damaging the country’s finances. Concerns have been raised regarding the effect of the current political crisis on the current Maldives’ government, with some figures suggesting numbers were down as a result.

Dunn anticipated that the tourism figures were likely to affect the amount of the GST that would be received, which he argued could not replace the income forfeited by suspending many import duties. Both measures were introduced with cross party support at the start of the year under the previous government.

The Maldives Association of Tourism Industry (MATI) had previously warned that the industry stands to lose as much as US$100 million in the next six months due to widespread media coverage of the country’s political unrest.

More recently, however, the Tourism Ministry declared its confidence that this year’s arrivals will break all previous records. Maldives Association of Travel and Tour Operators (MATATO) yesterday revealed plans to specifically target certain markets with specially assigned staff members to help achieve those aims.

Deputy Minister of Tourism Mohamed Maleeh Jamaal said that the Tourism Ministry did not forecast that the decline would continue.

“The Chinese market is improving. Our [predictions] do not show that the Chinese market will decline to the extent the IMF has said, and we had a positive growth in the last three months,” he said.

Concluding his presentation, Dunn pressed home the harsh reality of the economic climate.

“These are tough steps to take. It requires your [MPs’] cooperation. It is your responsibility as well. This is necessary for the nation. Immediate steps have to be taken. This is the reality, we have to face it.”

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IMF will work with us to reduce expenditure, says President’s Office

Government spokesman Abbas Adil Riza said today that the IMF is willing to work closely with the government, after a delegation from the organisation arrived in Male’.

Abbas said that as the government’s current policy is to reduce expenditure, it will require assistance from the IMF.

“The IMF wants to re-engage with the Maldives. The main reason the Maldives was suspended from receiving the funds that were destined for the country was because the former administration could not meet the requirements of the IMF,” Abbas was reported as saying in local media.

“The result of the discussions held with the IMF and this government would be an acquirement of extra $20 million from the IMF. It will be settled in a month or so,” he said.

Abbas denied that the meeting was initiated by the government: “Given that the Maldives is a member of the IMF meetings may be held at any time, so they’re not here due to an initiative taken by the government.”

The previous government’s discussions with the IMF became deadlocked after the government was unable to comply with the group’s borrowing requirements conditions concerning deficit reduction.

During his recent inaugural address to the People’s Majlis, President Dr Mohamed Waheed Hassan commented on the current state of the economy.

“Estimates for 2012 indicate that the debt component of the current account in our Balance of Payments will increase by 11 per cent as compared to 2011,” stated the president. “With respect to GDP, debt of our current account will go up to 28 per cent. This figure in 2011 was 26 per cent. The main reason for this rise is the expectation that imports will increase, resulting in an increase in expenditure for these imports.”

Government expenditure outstripped revenue by 20 percent between January and September last year, claimed the Ministry of Finance and Treasury.

The budget deficit, which stood at just 1.9 percent of the economy in 2004, expanded to 7.3 percent in 2006 and ballooned to 23.9 percent in 2007, according to the IMF.

The fiscal deficit exploded on the back of a 400 percent increase in the government’s wage bill between 2004 and 2009, with tremendous growth between 2007 and 2009.

On paper, the government increased average salaries from Rf3000 to Rf11,000 and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country – doubling government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

In a 2010 World Bank report headed ‘How did the Maldives get into this situation?’, it was noted that “the origin of the crisis is very clear… the wage bill for public sector employees grew dramatically in a very short time.”

After declaring “significant policy slippages”, in particular the government’s failure to curtail spending,the IMF felt it necessary to delay some the Maldives’ funding in 2010.

After the Nasheed government struggled to reduce expenditure due to political constraints, in particular the Civil Service Commission, it introduced a tourism goods and services tax (TGST) in order for the local economy to benefit from the lucrative but often removed tourism economy.

The World Bank’s annual ‘Doing Business’ report for 2010 saw the Maldives’ ‘ease of doing business’ ranking fall from 71 to 87, and identified no ‘business-friendly’ reforms.

The Ministry of Education has recently announced a freeze on all Public Private Partnership (PPP), which were originally intended to remove financial burdens from the government, after raising questions over the legality of the tender processes.

Following the recent inaugural speech of President Waheed, his spokesman Abbas Adil Riza told Minivan News that the current government would not be looking to increase the Tourism Goods and Services Tax (TGST) but pledged that the government would seek to “live within in its own means.”

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“Democratisation has its costs”: Maldives comes to terms with tax reform

The Maldives is coming to terms with a reformed tax system, following the introduction of a General Goods and Services tax this week.

Finance Minister Ahmed Inaz said the new system, which has raised the eyebrows of businesses, consumers and politicians alike, is a natural consequence of recent political changes and requires everyone’s support to function sufficiently.

“I think anybody could see that after the 2005 democratic reform, costs increased. These costs had to be met by additional revenue, but they weren’t,” he said.

Currently, the Maldives’ has a state deficit of Rf1.3 billion (US$85 million). Since democratisation, the Maldivian government has surpassed other national governments’ employment rates by employing 10 percent of the national work force. One third of government spending goes to state employees, and nearly half of the 2011 budget was spent on salaries and allowances.

The Goods and Services Tax (GST), which became operative on October 2, has raised a 3.5 percent tax on certain items. Contrary to an earlier tax which was paid for at the point of import and effectively invisible to the customer, the GST requires most businesses to charge an additional 3.5 percent directly to the customer at point of sale.

Certain items are tax exempt, a detail which has allegedly made it difficult to implement at stores selling a variety of products.

Inaz is optimistic that new tax reform system will cut costs and improve business operations. He said many businesses are compliant with the new measures, and are trying “their level best to be sure that this happens.”

“Business owners will have to crunch the numbers, and that will show them more about what is happening in their businesses. They will be able to better see how things operate.”

The GST is part of a larger tax reform system described in “a package of policy reforms that will help stabilise and strengthen the Maldives’ economy” agreed to by the Maldives and the International Monetary Fund (IMF) in May.

The policy reforms include raising the Tourism Goods and Services Tax (TGST) from 3.5 percent to 6 percent from January 2012, and to 10 percent in January 2013. Tourism is one of the Maldives’ leading economic contributors.

Inaz stressed that the tax was a step towards self-sufficiency for the Maldives.

“The international community will not give us the money required to balance our deficit, it is us who have to raise that money and that’s everyone’s responsibility. We have to make sure we can stand on our own feet.”

Meanwhile, opposition party Dhivehi Rayyithunge (DRP) has expressed concern over the tax. After supporting its initial pass through Parliament, DRP released a booklet titled “DRP’s response to the government’s economic nuisance package.” The booklet said businesses were not sufficiently prepared for the transition, and requested a six month delay.

Noting “administrative confusion” and the country’s heavy reliance on imports, the DRP also suggested levying a customs duty at the entry point to the country as a more effective means of raising revenue.

“We believe the GST is a regressive expense. The government doesn’t have the infrastructure to support it, implementation of GST means it will have hire a lot of people.”

DRP Spokesperson Ibrahim ‘Mavota’ Shareef said today that the tax system had not been implemented prematurely, but that it would only benefit large businesses while harming smaller ones.

“The government is doing the opposite of what it preaches,” he said. “Our main problem with the bill is that the government has decreased the tax burden on the very rich, especially in the tourism sector. We want to see the current tax system overhauled and replaced with a modern one.”

Shareef said DRP supports other progressive taxes, and was in favor of the recently announced plan to decrease import duties starting in January 2012.

President Mohamed Nasheed yesterday said a policy to reduce import duties would bring prices down starting early next year.

The President’s Office Press Secretary Mohamed Zuhair told Minivan News that the waiving of certain import duties would be significant.

“Once the new tax system is fully operating, all will fall into place. Prices will drop to even lower than originally,” Zuhair said.

A bill to finalise the tax system is currently before the Majlis, and is expected to take another two or three months to be properly processed.

During the President’s tour of retail, grocery, and supermarket stores on October 3, Zuhair said that operations were “running smoothly”.

“The only issue was that many businesses had a shortage of coins. Maldivians have a habit of rounding up to avoid coin transfers, but in a successful economy coins are important. Maldives Inland Revenue Authority (MIRA) has been doing a commendatory job in distributing coins, and the Maldives Monetary Authority (MMA) foresaw the issue and has a distribution system in place,” he said.

When asked about the DRP’s opposition to the GST, Zuhair alleged that the party’s motives were political.

“They made their case to the President, but the President was advised by his advisors and economic experts that a taxation system needed to be implemented,” said Zuhair.

“It is true that the very rich have not been taxed appropriately as per their earnings,” he acknowledged. “Once the tax system is fully in place, things should stabilise.”

Shareef did not accept that there were political motivations behind the DRP’s objections. “It’s an economic and social issue, concerning the distribution of wealth,” he said.

Inaz did not wish to comment on the matter. “This is an economic issue,” he said.

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

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“No new significance” in Sri Lankan money laundering busts, say local police

Sri Lankan police are investigating a large-scale money laundering case based in Colombo, that reportedly extends to the Maldives.

Local police representatives say no significant case has been filed with Maldivian authorities so far.

According to local media, money was being transferred from the Maldives to various illegal money transfer agents in neighboring Sri Lanka. The money is suspected to be used for such criminal activities as purchasing and distributing narcotics and other contraband.

Last week, Rs. 81.76 million (Rf11.4 million) was seized at Sri Lanka Customs, the largest amount of foreign currency to be detected at Bandaranaike International Airport (BIA). Haveeru reports that dollars from Australia, Canada and the US, as well as sterling pounds, Kuwaiti dinars, UAE Dirhams, Saudi Riyals, Swiss Francs and Euros were included in the stash.

Local police reported no case being lodged regarding the money laundering circuit in Colombo, and cautioned that the information that was given to local media regarding the transport of finances from the Maldives might not be reliable.

Officials did say that money laundering has been a problem in the Maldives. Police Sub-Inspector Ahmed Shiyam said that “the issue of money laundering in the Maldives is growing, and credit cards are being abused more.”

An official from the Fraud and Financial Branch said there have been suspicions of money laundering, but charges can not be pressed for that alone. “Individuals have been charged for drug possession, which might be related to money laundering, but we are currently unable to prosecute someone for money laundering alone. We plan to work on that in the future,” he said.

International Monetary Fund (IMF) reports state that money laundering became a bigger concern internationally post-9/11, when it became heavily linked to terrorism. Although many countries have since adopted IMF anti-money laundering (AML) policies, few have developed legislation to enforce these guidelines.

The latest IMF review of Sri Lanka, dated 2008, indicated that AML standards were adopted by signature but that legislation was not in place. A 2011 review of the IMF program found that international organizations were cooperative, but did not indicate that individual governments and banks had adopted AML procedures.

Sri Lankan police have conducted raids on unauthorized money transfer agencies in the past few weeks, reports Haveeru. Earlier this month the Colombo Fraud Bureau, an arm of the Sri Lankan police force, arrested several suspects and seized approximately Rs. 9 million (Rf1.25 million) in foreign currency, Haveeru reports.

Four key Maldivian narcotics peddlers who were busted by Maldivian authorities in June for their involvement in the smuggling of narcotics via Colombo to Male since 2005 had allegedly used a prominent money transfer agency in Colombo, reports Haveeru.

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Maldives can learn from Seychelles economic recovery, says President Nasheed

The Maldives can learn from the economic and fiscal reform of the Seychelles in reforming its own stricken economy, President Mohamed Nasheed has said during his visit to the neighbouring island nation.

“Our fishing industry is worth about US$500 million a year. We want to see how we will be able to work with Seychelles on improving on its productivity,” said President Nasheed, following the meeting with his Seychelles counterpart President James Michel.

President Michel said small island states shared many similar challenges, “such as economic development, climate changes, fisheries, tourism, and piracy. We have many commonalities and we share the same ocean. We must do more to improve our regional trade and share our expertise, especially as we are both focused on fisheries and tourism, and in this way develop sustainable solutions to regional challenges,” he said.

The two countries have discussed developing a maritime company in the Maldives, and the possibility of developing a joint airline corporation.

During the delegation’s visit, President Nasheed was briefed by the Governor of the Central Bank of Seychelles, Pierre Laporte, on the economic reform strategies adopted in the Seychelles.

Not far from home

The Seychelles is an upper middle-income country that, like the Maldives, has enjoyed rapid growth led by a tourism sector that, after emerging rise in the 70s, now provides 70 percent of the country’s foreign currency earnings and 30 percent of its employment.

In 2006, the government of the Seychelles allowed its rupee to depreciate after years of allowing it to be overvalued – a similar situation to the Maldives, which earlier this year launched a managed float of the rufiya, within 20 percent of a 12.85 peg, which saw it rocket to the maximum 15.42 where it now remains.

The value of the Seychelles rupee plunged 10 percent in the first nine months of 2007, and the country was subsequently hit by the economic recession and a foreign exchange shortage – another problem familiar to the Maldives. This culminated in a debt crisis in 2008 that threatened the country’s comparatively high standard of living.

The International Monetary Fund (IMF) in its country report on the Seychelles (published in January 2011) commented that in the years following 2008, the Seychelles had “achieved a remarkable turnaround of economic policies, including foreign exchange market liberalisation and floating of the rupee” – achievements, the IMF noted, that were “all the more remarkable since the Seychelles had to confront at the same time a global crisis that lowered tourism receipts”.

The IMF’s 2011 report documents the remarkable economic recovery of a small island nation, during a recession affecting its core business. In particular, the report praised the Seychelles for renewing the confidence of private investors, “which translated into increased foreign direct investment to develop the islands’ exceptional tourism potential”, the stabilisation of the exchange rate, price stability, and the rebuilding of reserves “which offer room for more expansionary policies.”

Prior to 2008, the Seychelle’s overall deficit had reached 9.8 percent and the country was facing “an acute balance of payments” as public debt was predicted to rise a further 20 percent in two years. Ratings agency Standard & Poor – which this week lowered the credit rating of the US for the first time in history – had downgraded the Seychelles to “selective default”.

Several attempts to increase the value of the rupee against the US dollar had been unsuccessful, and did little to address the country’s foreign currency shortage – at the beginning of 2007, the rupee was officially valued at 6 to the US dollar, while the blackmarket exchange rate sat at almost double.

In late 2007 the government of the Seychelles devalued the rupee, setting the official exchange rate to 8 rupees to the US dollar. As in the Maldives following the government’s effective devaluation of the rufiyaa from 12.85 to 15.42 to the US dollar via a ‘managed’ float, the blackmarket in the Seychelles simply adjusted for the increase, settling at 13-14 rupees to the dollar.

In November 2008, the government of the Seychelles dropped its peg and floated the rupee against the US dollar. The rupee immediately leapt to almost 18, and remained substantially volatile for much of the next year. By late 2009 it had plunged to 10 rupees against the dollar, and a year later had settled around 12, where it remains.

Despite several concerns about the lack of diversification of the economy and the impact of piracy – the Seychelles coastguard rescued 27 hostages in March last year after firing 10,000 12.7mm rounds at the engine of the pirate vessel – the IMF describes the outlook for the Seychelles as favourable and predicts medium term growth of five percent as the country’s tourism industry expands and promotes itself outside traditional markets.

“The Seychelles’s stabilisation success offers perspectives for a less painful path toward fiscal sustainability, but caution is needed to maintain external stability and growth prospects,” the IMF noted.

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Foreign investors need “one-stop shop” to navigate Maldives bureaucracy: MNCCI

Local trade authorities must do more to simplify foreign investment procedures in the country as they attempt to increase income of dollar revenue, the Maldives National Chamber of Commerce and Industries (MNCCI) has claimed.

Ahmed Adheeb, an MNCCI member and Chief Operating Officer of the Millennium Capital Management (MCM) investment group, said he believed the country was failing to follow in the footsteps of markets like Sri Lanka by establishing a board of investment to help foreign companies navigate the complexities of local business culture.

“In order for the Maldives to build investor confidence I believe that firstly we need a board of investment like they have in Sri Lanka,” he said. “The Maldives has many different ministries that must be navigated to get licenses [to operate businesses]. We need a one-stop shop [for foreign business] if we are to bring international investors into different areas.”

Adheeb’s comments were made after members of the MNCCI recently met with their Pakistani counterparts in Male’ to discuss business and investment opportunities across the Maldives. Although no specific areas of interest for local investment were raised as yet during the meetings, Adheeb claimed that recommendations were made regarding potential opportunities for putting money into smaller and medium size tourism developments like guesthouses and safari boats.

The MNCCI said that it also acknowledged requests from the Pakistani representatives to host a single country forum here in Maldives to promote bringing certain food and pharmaceutical products to local markets.

With growing fears over the lack US dollars currently being circulated in the Maldives, generating additional foreign currency revenues has been identified as a key part of the government’s economic stabilisation strategy.

While calling for simplified investment procedures for businesses coming to the Maldives, Adheeb claimed that he hoped to see protection measures for local small and medium enterprises in the country. One such example was in potentially setting caps on the minimum size of investments that could be made by foreign parties in the country.

“We should try to ensure that we are not endangering existing local small and medium enterprises,” he added.

However, amidst ongoing attempts by the government to try and devalue the rufiya to try and stabilise the Maldivian economy – under pressure from bodies such as the International Monetary Fund (IMF) – Economic Development Minister Mahmoud Razee claimed that recent financial uncertainties has not significantly impacted potential foreign investment in the Maldives.

“Generally the interest is still there. In the development of Hanimaadhoo for example we have seen 19 groups expressing interest in the project. Ten of these [parties] were foreign investors,” he said.

Razee claimed that he did not believe that recent financial upheaval in the country including fears over a shortage of US dollars finding their way into the local economy had not led to cases of “specific hesitation” from enterprises looking to invest in the country.

“Obviously [the country’s finances] are something investors will be looking into, but we believe this is not a significant setback as a result,” he added.

Razee said that the government had expressed interest in working with foreign business to develop national agriculture and aquaculture, as well as transport infrastructure.

President Mohamed Nasheed had stated last year that private sector investment was expected to bring US$1 billion to the local economy between 2010 and 2013.

However, aside from issues of financial stability, a former Australian Supreme Court Justice who spent several weeks in the Maldives this year analysing the functioning and impartiality of the country’s judiciary said that he believed legal reform had a key impact on economic performance.

After reporting that the Judicial Services Commission (JSC) – designed to serve as a legal watchdog – was compromising its accountability and obstructing the creation of an independent judiciary, Murray Kellam claimed that an impartial judicial system was a key factor in encouraging foreign investment.

Kellam said that Singapore was a perfect example of the long-term financial transformations possible with focused and impartial legal reform.

“[Singapore] understood the value of a civil system that is incorruptible and competent. They spent a lot of money on their judiciary and Transparency International now rates their civil legal system as one of the best in the world,” he told Minivan News in March this year.

“Singapore realised that one of the best ways to attract investment was to have a system whereby international investors knew they would get a fair go in domestic courts. If you look at the circumstances in other parts of the world where investors have no confidence in the judiciary, that deters investment and takes it offshore. They’ll go somewhere else.”

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

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

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

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

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

The IMF agreed to a “medium-term” policy from the government to reduce its budget deficit “substantially”, “both through additional revenue measures – which would require the support and approval of the Majlis – and through expenditure restraint.“

“The authorities have introduced an initial voluntary separation plan for government employees and are continuing their detailed analysis of the public service, with an eye toward right-sizing government over the medium term,” the IMF noted.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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