Tag: IMF

IMF pursues government and parliament cost cutting with Maldives mission

The Maldives government has claimed it remains committed to working with the International Monetary Fund (IMF) in addressing its concerns on cutting state expenditure, following protests claimed to have been instigated as part of a “youth movement” concerned over rising living costs.

Press Secretary for the President Mohamed Zuhair told Minivan News that the IMF had travelled to the Maldives this week to meet with various organisations and individuals, including President Mohamed Nasheed and the Majlis’ Public Finance Committee as part of a mission to oversee a national economic recovery plan.

“They were visiting as part of a wider mission in the country including meeting with the president where they retread concerns over plans to reduce state expenditure,” he said.

The government’s fiscal policy has become a major national issue after a week of consecutive protests held earlier this month across Male’, which organisers claimed had been instigated initially by young Maldivians and supported by opposition politicians.

Protesters are said to have been particularly concerned with the government’s controversial decision to last month devalue its currency, allowing the rufiya to be traded within 20 percent of the pegged rate of Rf12.85 to the dollar – a move welcomed by the IMF.

Amidst the backdrop of perceived public and political dissatisfaction with government finances, Zuhair said that the IMF’s meeting with the Public Finance Committee had aimed to encourage parliament to consider government initiatives to try and increase direct state revenues to balance budget deficits.

“There are several bills on taxation currently under consideration in parliament and an amendment to the Tourism Goods and Services Tax (GST) – implemented in January this year on all services and goods purchased by tourists – from 3.5 percent to five percent,” he said. “I think it is interesting to note that there are many resort owners in parliament.”

While supporting initiatives to reduce costs that have led to ongoing public protests in the country, the Treasurer of The Maldives National Chamber of Commerce and Industry (MNCCI), Ahmed Adheeb Abdul Gafoor, said that the the planned addition of a minimum wage and a Goods and Services Tax (GST) on all businesses operating in the country needed to be gradually implemented.

Speaking earlier this month, Abdul Gafoor claimed that gradual introduction would be vital to ensure the nation’s fledgling economy can cope with any potential changes.

Alongside a parallel aim to try and create new job opportunities for young people, Zuhair claimed that the government had in general been closely following the recommendations of the IMF in trying to cut the state’s wage bill for political appointees and civil servants.

To this end, he said that the government had moved to try and reduce the wages of political appointees by 20 percent and civil servants by 15 percent.

“In enacting these cuts we were hoping that the Majlis would follow and also cut wages. The institution failed to do this as well as the judiciary,” he claimed. “The government as a result had to move to reinstate the wages it had cut.”

Zuhair claimed that the government had been working in line with IMF recommendations and had even tried to perform additional cuts unrequested by the finance body in areas such as reducing appointee wage spending.

Despite pushing ahead with its attempted financial reforms, the government has said that it has opted to meet with some of the youth figures said to be at the heart of organising protests seen in Male’ this month.

However, the session held yesterday was reportedly cut short when Finance Minister Ahmed Inaz walked out at the meeting claiming that the youth delegation included the leader of the opposition-allied People’s Alliance (PA) sports wing, and two others he claimed were “new political figures” created by senior party officials.

“I waited in the meeting until we could address the real issues, but they kept on criticising the government policy and some of the government projects,’’ Inaz told Minivan News. ‘’I did not want to have a heated political debate – we went there to negotiate with the youth regarding the dollar issues, not for a political debate.’’

Mohamed Ahsan, a spokesperson from the youth delegation, said the group was unable to clarify information it wanted from the Finance Ministry as the minister had left the meeting, though senior representatives of the Maldives Monetary Authority remained.

“The MMA officials were very cooperative,” he said. “We found out that the government have not been implementing the MMA’s suggestions to its full extent,’’ said Ahsan. “The MMA clarified almost all the information we required.”

He also said the finance minister “took it politically” because a PA member was present at the meeting.

‘’We have decided to recommence the protests, but due to exams we have temporarily delayed it,’’ he said. ‘’Once the examinations are over we will restart the protests.’’

A first round of negotiations held last week were described as “very upsetting” by the opposition’s Gayoom faction after the delegation accused President’s Office representative Shauna Aminath of stating that the “political solution” to the country’s economic woes was the arrest for the former President.

“We met with four people who claimed to represent youth,” Shauna said. “They presented a piece of paper they said was a youth proposal, but there was almost no discussion of what was on it.
“They talked a little about youth unemployment, and the rising price of milk, cooking oil and petrol. They said that young people did not have enough money to pay for coffees or petrol for their motorbikes.”

The group of four had “repeated the same messages being aired by [opposition] political parties: that the government had sold the airport to GMR, Dhiraggu to [Cable and Wireless], and that six people had control of the entire economy.

“Then they said they understood that the government’s [managed float of the rufiya] was necessary, but were concerned the government had not spoken about it beforehand.”

Back in March, MP for the People’s Alliance (PA) party and a member of the Majlis’ Public Finance Committee said that he believed current government policy was ultimately stifling economic development, claiming administrative costs within the civil service remained a notable problem.

“We have small percentage [of funds] to invest in the economy. We cannot move finances to a higher level though as the government doesn’t have the right policies to do this,” he claimed. “For instance, we need to reduce the number of [inhabited] islands by linking them and cutting the overall number of cost centres required for decentralisation.

The comments were made as the IMF claimed that the Maldives economy remained “unsustainable” even after cuts made to the annual 2011 budget, as it concluded its Article IV consultation earlier during the year.

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IMF praises managed float of rufiya, “unpredictable” and “high risk” warn local experts

The International Monetary Fund (IMF) has praised the Maldives’ decision to effectively devalue its currency, allowing the rufiya to be traded within 20 percent of the pegged rate of Rf12.85 to the dollar.

“Today’s bold step by the authorities represents an important move toward restoring external sustainability,” the IMF said in a statement. “IMF staff support this decision made by the authorities. We remain in close contact and are ready to offer any technical assistance that they may request.”

The Bank of Maldives was today trading the dollar at the maximum selling price of Rf15.42 and buying at Rf12.75 while the Bank of Ceylon was selling it at 13.80 and buying at Rf13.60.

At a press conference this afternoon, newly-appointed Finance Minister Ahmed Inaz explained that the government decided to change the fixed exchange rate to a “managed float” to shape government policy towards increasing the value of the rufiya and ultimately bring the exchange rate down to Rf10 – an oft-repeated pledge of President Mohamed Nasheed.

The worsening balance of payments deficit could not be plugged without allowing the market to set the exchange rate, Inaz continued, adding that through lowering the fiscal deficit and spurring private sector job growth “a path would open up for us to reach the lower band (Rf10.28).”

“My estimate is that it will take about three months for the market to stabilise and reach a balanced [exchange] rate,” he said.

MMA Deputy Governor Aishath Zahira acknowledged on state television last night that the fixed exchange rate in effect since July 2001 had been “artificial.”

Economic Development Minister Mahmoud Razee argued that as a result of the artificially fixed exchange rate, “we do not really know, based on the breadth of the domestic economy, what the value of the Maldivian rufiyaa is right now.”

The managed floating rate, said Razi, would allow the government to decide specific measures that would be needed to improve the exchange rate – such as the extent to which foreign exchange reserves should be increased.

State Minister for Finance Ahmed Assad told press that TGST (tourism goods and services) receipts in February had revealed that previous estimates of the amount of dollars that enter the country were well below the actual figure. The government now estimates a minimum annual income of US$2.5 billion.

Assad urged citizens to use banks to purchase and exchange dollars to avoid “becoming prey to [black market operators].”

A senior government source said the decision was made based on the government’s speculation “that people are hoarding dollars. We hope this will send a signal to the market. It also shows our commitment to a market economy.”

“High risk”

The government has struggled to cope with an exacerbating dollar shortage brought on by a high budget deficit – triggered by a spiralling public sector expenditure – in comparison with the foreign currency flowing into the country. Civil service expenditure has increased in real terms by 400 percent since 2002.

Banks subsequently demonstrated reluctance to sell dollars at the pegged rate, and high demand for travel, commodities and overseas medical treatment forced most institutions to ration their supply.

A watershed moment last week – a crackdown on the hitherto ignored blackmarket sale of dollars at rates of up to Rf14.5 – led to increasing desperation among the lower-paid of the country’s 100,000 expatriate workers, who found themselves blocked from trading currency and unable to remit money home to their families.

The government’s decision yesterday is effectively a ‘rose-tinted’ devaluation of the currency, at least in the short-term, but according to one financial expert could have unpredictable consequences once the market catches up in 4-6 weeks.

“Other countries have a maximum band of eight percent. I have not come across any countries with 20 percent. I think it’s too wide,” said Ahmed Adheeb, a local financial expert working in the private sector. “Why did the government overshoot the blackmarket rate of Rf14.5, and why did it take them two years to come to this decision?”

Adheeb predicted that the construction industry would be among the hardest-hit, “as ongoing projects will now face additional costs. In addition, smaller and medium-sized enterprises supplying resorts may find that their commission and profit is gone if their contracts are in rufiya.”

The public would also be impacted, Adheeb said, as importers passed on the rising cost of goods.

The devaluation came at the same time as the tourist season was winding down for the year, and pilgrims were searching for dollars for the upcoming Hajj. Pilgrims could be called on to make additional payments, Adheeb speculated, while Ramazan importers could face additional challenges this year.

The general public would be also be impacted as the cost of commodities rises to fill the new exchange rate, Adheeb said, while the government’s commitment to projects such as harbour construction could be delayed due to the risks of taking on even more debt.

“This will also affect business contracts, particularly [those concerning] foreign employment, and students studying overseas,” Adheeb said, predicting that “if the market does not stabilise then in three months time we will see a further devaluation. The government is taking a huge risk.”

Structural adjustments

The move will put the government on good terms with the IMF, which spent last year trying to encourage the government to make difficult political decisions for the sake of the economy, and just stopped short of calling for a devaluation of the currency on conclusion of its Article IV consultation.

The IMF, which has shown resounding disinterest in local politicking, in February 2011 criticised the government for “significant policy slippages” claiming that its failure to reduce its expenditure had undermined the country’s capacity to address its crippling budget deficit.

“On the expenditure side, there have been no net fiscal savings from public employment restructuring, public sector wages will be restored to their September 2009 levels earlier than expected, and the new Decentralisation and Disability Bills will lead to considerable spending increases,” the IMF stated. “Also, the Business Profit Tax will come on stream eighteen months later than planned.”

It did however praise the government for getting much-needed business profit tax and tourism goods and services tax legislation through parliament, signalling that this was a major step towards long-term economic maturity. The bills had faced obstacles in parliament, which includes among its MPs some of the country’s wealthiest figures in the resort industry, and who were instrumental in increasing the budgets sent to parliament by the Finance Ministry.

Opposition Dhivehi Rayyithunge Party (DRP) MP Ali Waheed this morning proposed a motion without notice condemning the government’s decision to relax the dollar exchange rate.

Waheed said that he was prompted to submit the motion out of concern for the plight of Maldivian students in foreign institutions and patients who need to fly abroad for treatment.

The DRP MP for Thoddoo also accused the government of compromising the independence of the country’s central bank by trying to influence monetary policy.

In the ensuing one-hour debate, opposition MPs argued that the immediate consequence of the new floating exchange rate would be a 20 percent rise in inflation.

DRP Leader Ahmed Thasmeen Ali explained that government revenue from import duties would increase by 20 percent but the affected businesses would pass the cost to customers.

“We are in this state because the government increased the [amount of rufiya] in circulation by printing money and taking on credit,” said Thasmeen, in a statement likely to raise political hackles among the ruling party, considering that the IMF has stated that the economic crisis in the Maldives was triggered by “expansionary fiscal policies” from 2004 – under the former administration.

This left the country especially vulnerable to the decline in tourism during the 2008-2009 recession. However the financial 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.

While preliminary figures had pegged the 2010 fiscal deficit at 17.75 percent, “financing information points to a deficit of around 20-21 percent of GDP”, down from 29 percent in 2009, the IMF reported.

Adheeb said today that parliament, independent institutions, civil service and political appointees had continued to make salary demands on the state “but nobody is thinking about the economy.”

“Economic decisions are being politicised when the economy should be the first priority – we cannot survive without it. Only then can political stability be achieved,” he said.

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MP Nazim highlights decentralisation as budgetary concern on back of IMF findings

As the International Monetary Fund (IMF) this week released its latest update on the Maldives’ finances, prominent opposition MPs have criticised the government’s budget strategy in areas such as decentralisation, despite conceding the need for greater political cooperation from rival parties.

Ahmed Nazim, MP for the People’s Alliance (PA) party and a member of the Majlis’ Public Finance Committee, told Minivan News that he believed current government policy was ultimately stifling economic development, claiming administrative costs within the civil service remained a notable problem.

“We have small percentage [of funds] to invest in the economy.  We cannot move finances to a higher level though as the government doesn’t have the right policies to do this,” he claimed.  “For instance, we need to reduce the number of [inhabited] islands by linking them and cutting the overall number of cost centres required for decentralisation.”

The comments were made as the IMF claimed that the Maldives economy was currently “unsustainable” even after cuts made to the annual 2011 budget, as it concluded its Article IV consultation.

The IMF’s Mission Chief to the Maldives, Rodrigo Cubero, told Minivan News at the time, that while the government had introduced the core components of a modern tax regime that would begin generating revenue from this year, these achievements were offset by new spending on legislative reforms such as the decentralisation act.

Ultimately, the 2011 budget was passed on December 29, days ahead of a constitutionally-mandated New Year deadline, with 69 out of 77 MPs voting to pass the bill with five amendments.

Earlier during the same day, Mahmood Razee, acting Finance Minister of the time, said it would also be vital to try and ensure the predicted 2011 budget deficit remained at about 16 per cent, after coming under pressure institutions like the IMF to cut the 2010 figure of around 26.5 per cent.

While preliminary figures had pegged the 2010 fiscal deficit at 17.75 percent, “financing information points to a deficit of around 20-21 percent of GDP”, down from 29 percent in 2009, the IMF reported.

Ahmed Nazim, who was part of a multi-party evaluation of the draft 2011 State Budget before it was sent for Majlis approval, said that joint committee meetings to discuss the IMF’s findings were set for next week (9 March).

However, talking to Minivan News ahead of these consultations, the PA MP said that he believed one of the key concerns highlighted in the report was that of recurrent government expenditure.

According to Nazim, the costs, which he said resulted from use of electricity and other day-to-day needs, were accounting for about 17 percent of total government expenditure – charges, he claimed, that could have been cut further.

In line with these concerns, Nazim took the example of the number of decentralised administrative posts created through last month’s Local Council Elections as an example of unsustainable spending.

The PA MP claimed that present government policies based on building housing or harbours across a wide number of islands was creating further problems for future national cost cutting.  As a solution, Nazim, claimed that it would be important to consider depopulating and reducing the total number of inhabited islands by offering the population a choice of relocation possibilities.

“It [depopulation] is the only way to reduce the wage bill, otherwise every island will have to have services like health centres and councils,” he said.  “The only way to cut spending is to transfer small island populations to other habited islands of their choice.”

Nazim claimed that a government strategy of attempting to increase mobility of the population to find jobs and homes in other atolls and islands through an improved transport network had failed to achieve these goals so far.

However, the PA MP said that he believed some opposition groups such as the majority opposition the Dhivehi Rayyithunge Party (DRP) had been too “heavy handed” in their approach to working with government on decentralising the country.

“I was advocating that even now, we will work with the MDP to reduce the number of [island] councilors in small areas from five to three posts.  There is simply not enough work for all of them to do,” he said.  “Some opposition took a heavy handed approach meaning there was no need for compromise.  The DRP wanted it their way when it came to each of the wards.”

Nazim claimed that he still hoped to work with the Maldivian Democratic Party (MDP) on plans to reduce the number of posts on councils. He said this was particularly the case on smaller islands, boasting populations of less than 1000 people, which could be cut to just three council representatives instead of five.

State Minister for Finance Ahmed Assad said that he was ultimately encouraged by the role of parliament and political opposition in working to try and reduce the country’s budget deficit compared to last year.

“If we look back to the passing of the budget in 2010, this time parliament were much better [in evaluating the budget].  They just asked for some shuffling about of the figures,” he said.  “That tells us they tried to work within the framework and limits of the budget set by the treasury and finance ministry.”

However, in considering affordability of the overall budget and government financing in the year ahead, Assad claimed that he believed that cost cutting would have been easier with the support of legislative bodies and the judiciary.

As of January 1 2011, the government reinstated the wages of civil servants and political appointees to similar level before respective cuts of 15 per cent and 20 per cent were made back in 2009. The government claimed revenue expectations for the year would ensure the salaries were sustainable.

Addressing recent controversy, over issues such as a Privilege Bill for judges and parliamentary figures, Assad said that MPs and the judiciary also needed to bear the brunt of cost cutting.

“Civil servants understood the need for salary cuts, but at the same time why should only they have to face it.  It is a hardship everyone should share,” he added.  “It is a matter of sharing the responsibility.  The government was not followed by the judiciary on the issue of wages.”

While accepting that more cuts were needed to be made to the civil service in line with IMF expectations, Assad claimed that it was not possible to make redundancies in the civil service without creating additional jobs elsewhere.

“Obviously, we appreciate that we can’t just make lots of people unemployed from the civil service,” he said.  “But, we can’t go on like this.”

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Maldives one of the world’s most economically-repressed countries: report

The Maldives has been ranked as one of the world’s most economically-repressed countries, in the 2011 Index of Economic Freedom report produced by the Wall Street Journal and Washington think-tank The Heritage Foundation.

The Maldives is ranked 154th out of the 183 countries ranked, a slight drop on last year but still significantly below the global and regional average, placing 34th out of 41 countries in the Asia Pacific region.

Economic freedom, as defined by the report, “is the fundamental right of every human to control his or her own labor and property.”

The Maldives scored well for several indices, including business, fiscal, trade and labour freedom, but scored poorly for government spending, corruption and property rights.

“The Maldives’ weaknesses include chronically high government spending, inefficiency of the outsized public sector, and widespread corruption,” the report observed.

The government’s role in the economy through state-owned enterprises – and employment of over a third of the country’s total labour force – was “crowding out private-sector activity.”

Furthermore, “public-sector graft remains a challenge for foreign firms operating in the Maldives”, while “bureaucracy can be non-transparent and prone to corruption. Dispute resolution can be slow, complicated, and burdensome.”

Minister of Economic Development Mahmoud Razee noted that with regard to corruption, “in the past the country has not had the institutions to monitor and provide transparency, but now the information is available. It’s the difference between having a dirty or a clean window – one lets you see inside to the full picture.”

Several companies investing in the Maldives – including Indian infrastructure giant GMR and Malaysian security technology firm Nexbis – have had their share prices become collateral in local political rivalries following accusations of corruption.

“It’s one thing to be accused of something,” Razee said. “I’m sure most companies think about this [problem], but we have not seen it become a huge issue.”

Development of the private sector was stymied by “costly credit and limited access to financial services” the report noted, and while labour regulations were flexible, “enforcement is not effective in the absence of a dynamic labor market.”

The International Monetary Fund (IMF) has consistently urged the Maldives to reduce the size of its bloated civil service wage spend, which ballooned 400 percent between 2004 and 2009.

“With the government borrowing at the rate it has, it reduces the amount of credit available to the private sector, and that constrains the ability of the private sector to provide jobs and employment,” leader of the Maldives IMF delegation, Rodrigo Cubero, said in November last year.

“That then constrains economic growth. Furthermore, by spending more than it earns, the government is putting pressure on imports and the exchange rate.”

Razee noted that the introduction of new tax regulation such as the GST and Business Profit Tax, “while not the panacea to everything, shows the government’s willingness to come to terms with [the country’s economic condition].”

“If you look at the level of companies interested and investing in the Maldives, it has not lessened,” he said.

On a positive note, the report observed the potential of the government’s mobile phone banking project, dubbed ‘Keesa’, to enhance development in the private sector. Keesa is being jointed developed by the Maldives Monetary Authority and Dhiraagu, with World Bank assistance.

Summarising, the report observed that higher levels of economic freedom “correlated strongly to a country’s overall well-being, taking into account factors such as health, education, security and personal freedom.”

Hong Kong and Singapore were ranked top, followed by Australia, New Zealand, Switzerland and Canada. North Korea, Zimbabwe and Cuba were ranked at the bottom.

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Opinion divided over budget evaluation deadline

Acting Finance Minister Mahmood Razee has said progress is being made within an ongoing multi-party evaluation of the 2011 State Budget, despite claims by Ahmed Nazim, the Deputy Speaker of Parliament, that talks “have not gone well” due to a lack of details on planned state spending.

Opinion appears divided within the ongoing parliamentary joint committee evaluation, which is being overseen by members from both the country’s finance and economic committees, upon how near the budget is to being agreed upon by parliament before the deadline of the New Year.

Razee, who was allowed to present the budget this month despite ongoing battles in the Majlis over cabinet appointments, said he was confident the government could still meet its aims to cut the country’s budget deficit to about 16 per cent, despite allowing for concessions requested by opposition MPs.

The government is under considerable pressure from the International Monetary Fund (IMF) to reduce the deficit, which President Mohamed Nasheed last month said was around 26.5 per cent.

Speaking to Minivan News today, Razee claimed that the parliamentary joint committee was generally “committed” to trying to find an agreement that would allow for reductions of the budget deficit. He therefore hoped to have the evaluation completed by Sunday, December 27.

“The basic principles [of the budget] remain the same, the budget deficit needs to be reduced and this is accepted by most parties,” said Razee. “We maybe will need to make some adjustments during the evaluation. A budget deficit of 16 per cent is what we are targeting given the current circumstances.”

Ahmed Nazim conceded that a need to meet a looming New Year deadline to approve the 2011 budget would require members within the parliamentary committee to put aside their political differences and “let bygones be bygones”.

However, the parliament Deputy Speaker claimed that the finance Ministry has “not been communicating” with the Majlis on the budget, a situation he said that was reflected within the evaluation process.

Nazim cadded that anticipated delays in providing information on the budget could make the discussions “go right to the wire” in terms of meeting an evaluation deadline of December 30.

“We are not looking for concessions, the government has a mandate to pursue its own economic policies,” he said. “But there are so many problems with the budget, which is lacking details regarding a number of projects and figures.”

As the evaluation process has continued, Nazim claimed that Information had been arriving “in bits and pieces” to help provide greater detail on budgetary spending, however he said expected that the evaluation process will ultimately take a “long time” to complete.

“We are looking for a reasonable budget,” said Nazim. “Reasonable, like for example, with housing funds, where the government is looking to sell land in Male’, but where is the land that can be sold? They have gone on to say it will actually be land in Huhlumale’ and other islands.”

Due to the levels of cost involved, the Deputy Speaker added that the evaluation committee has “asked for breakdowns” regarding individual expenditure – pointing to an apparent lack of funding in the budget for the Maldives National Broadcasting Corperation (MNBC), despite the government admitting it will be providing money.

“There is no budget [for MNBC], yet they have given Rf54 million [to the broadcaster],” claimed Nazim.

Mohamed ‘Kutti’ Nasheed, an independent MP who is not involved with the evaluation committee, said that despite holding some preliminary concerns over spending allocation, particularly in areas such as decentralisation, he believes the budget will be completed within its New Year deadline.

“I think it will be done, there is willingness,” he said.

However, Nasheed claimed that he had been concerned that the initial budget had failed to outline any finance plans for local councils once they are expected to be formed following February’s elections.

IMF concerns

Beyond trying to outline funding of the state for the year of the ahead, the passing of the annual budget within a constitutionally mandated deadline of the end of the calendar year is also being seen as vital to groups such as the IMF.

Back in November the IMF delayed its third disbursement to the country because of the government’s inaction on the matter of the budget deficit during 2010, pending the release of the 2011 budget.

While the IMF program itself is worth US$92.5 million, other foreign donors and investors consider the IMF’s opinion of a country’s fiscal policies when making decisions.

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Half of Rf12.37 billion state budget to be spent on employees

The Finance Ministry has unveiled a state budget of Rf12.37 billion (US$962.6 million) for 2011 with a target of reducing the deficit to 15.3 percent of GDP in the coming year, down from 26.25 percent in 2009.

The Fiscal and Economic Outlook 2009 to 2013 published alongside the budget on the Ministry’s website this week states that the main objective of the government’s fiscal policy is to bring expenditure in line with revenue and maintain the deficit within a sustainable range.

The Finance Ministry reveals that while capital investment amounts to 21 percent of the budget, 49 percent of expenditure in 2011 will be on salaries and allowances for government employees.

“If the cost of health insurance to employees is included, half of the state budget is spent on employees,” reads the budget summary.

Foreign loan assistance along with Rf1.4 million (US$108,949) in income from privatisation and Rf1.3 million (US$101,167) expected from the sale of treasury bills was proposed to plug the budget deficit.

In November, the International Monetary Fund (IMF) delayed its third disbursement under a US$92.5 million program pending the approval by parliament of significant austerity measures in the budget.

In its Country Report for the Maldives published in June, the IMF warned that as a result of the failure to enforce pay cuts and the injection of an additional US$62.2 million in spending by parliament, “the annual deficit targets for 2010 and 2011 will be missed on current policies.”

An internal World Bank report produced for the donor conference in May identified dramatic growth in the public sector wage bill as the source of the ballooning budget deficit.

A 66 percent increase to 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,” the report noted.

The deficit in 2010 is now expected to be at 16.4 percent of GDP, above forecasts of 14.8 percent in the 2010 budget.

While the economy grew by 4.8 percent in 2010 after a 2.3 percent contraction in 2009, nominal GDP, which accounts for a 5.5 percent inflation rate, grew by 12.2 percent this year.

Revenue and expenditure

Government income fell by 23 percent in 2009 in the wake of the global financial crisis, which saw tourist arrivals decline by 4 percent and revenue from import duties down by 25 percent over the previous year.

Offering resorts under development that were facing difficulties with financing an additional year to pay rent contributed to the decline in government income, resulting in a 36 percent decrease in revenue from resort rent in 2009.

While Rf6.8 billion (US$529 million) in revenue in 2010 was forecast at the end of last year, current estimates place the figure at Rf6 billion (US$467 million)  – an 11 percent  shortfall the Finance Ministry attributes to parliament’s failure to pass legislation on corporate profit taxation as well as delays in implementing a goods and services tax (GST).

Moreover, as only three out of 13 resorts expected to open in 2010 began operations this year, estimates of Rf1.7 billion (US$132 million) in revenue have been lowered to Rf1.1 billion (US$85 million).

However, income from state-owned enterprises is now expected to be higher than originally forecast at over Rf1 billion (US$77.8 million) by the end of the year.

Revenue in 2011 is projected to be Rf8.7 billion (US$677 million), a 44 percent increase from 2010 expected to be driven by the introduction on business profit taxes, GST and extension of resort leases.

Income from taxation is projected to account for 59 percent of government income in 2011, with Rf612.5 million expected from business profit taxes.

The Finance Ministry notes that delays in passing taxation legislation is “the biggest obstacle” to continued assistance from international agencies.

Main industries

The seven-year trend of decline in fisheries is expected to continue in 2011, with the industry expected to have contracted by 5.8 percent by the end of 2010.

After a 29 percent decrease in the construction industry in 2009, the industry is expected to have registered growth of 2.6 percent in 2010.

With nine new resorts under development next year, the industry is projected to grow by 9.7 percent in 2011.

A strong rebound by the tourism industry – which accounts for 27 percent of GDP – saw revenue in 2010 14 percent higher than projected in 2009.

While tourist arrivals increased by 13 percent in the first nine months of 2010 compared to the same period last year, arrivals are expected to have increased 20 percent by the end of the year.

Moreover, a 70 percent decline in occupancy in 2009 was followed by a 74 percent increase in 2010 – with 131,107 more visitors than 2009 recorded in 2010.

Nominal GDP per capita in 2010 is calculated to be at US$4,628 and is projected to climb to US$5,114 in 2011.

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Budget 2011 will drop fiscal deficit to 10-15 percent, President tells media

President Mohamed Nasheed has said the country’s crippling budget deficit of 26.5 percent will drop to 15 percent in the upcoming 2011 state budget, and potentially 10 percent by the end of the year.

The government’s aim had been 18 percent, Haveeru reported the President as saying following the laying of the foundation stone for 1000 flats in Hulhumale’ last week.

Nasheed noted that when the present government came to power in 2008, “the deficit was 44 percent compared to net national productivity.”

The government is under considerable pressure from the International Monetary Fund (IMF) to reduce the deficit, and earlier this month delayed its third disbursement to the country because of the government’s inaction on the matter this year, pending the release of the 2011 budget.

While the IMF program itself is worth US$92.5 million, other foreign donors and investors consider the IMF’s opinion of a country’s fiscal policies when making decisions.

While acknowledging the political pressures faced by the government during 2010, particularly regarding its ability to cut a crippling public sector wage bill which increased 400 percent between 2004 and 2009, the IMF has stated throughout 2011 that the country is “living beyond its means.”

In June 2010, the IMF published its Country Report for the Maldives, and calculated that if the government continued to pursue economic reform at its current pace and policy, the country’s fiscal deficit would increase by one percent of GDP in 2010 and 4.5 percent of GDP in 2011.

Attempts to increase revenue by passing a Business Profit Tax bill has been obstructed in parliament by vested business interests, while the Civil Service Commission has taken the Finance Ministry to court over its refusal to restore a 15 percent salary cut.

The forthcoming 2011 budget, explained leader of the Maldives IMF delegation Rodrigo Cubero, was “a crucial opportunity for the government to implement the austerity measures much needed. At the moment, the current policy stance is not sustainable.”

The government has not yet revealed how the 2011 budget intends to reduce the deficit by such a margin as stated by the President.

Last year, parliament’s Finance Committee, headed by the opposition-aligned People’s Alliance MP Ahmed Nazim, amended the budget to include an additional Rf 800 million (US$62 million) in order to aid the restoration of civil servant salaries following a 15 percent pay cut, and subsidies for sectors ranging from fishing and agriculture to private media.

Finance Minister Ali Hashim had not responded to Minivan News at time of press.

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IMF ‘delays’ third payment as Maldives makes “little progress” addressing deficit

The International Monetary Fund (IMF) has described as “absolutely false” claims made this week by opposition-aligned People’s Alliance (PA) MP Ahmed Nazim, that the institution had suspended its support of the Maldives because its program was not being followed.

MP Nazim, who is Deputy Speaker and also Chair of Parliament’s Finance Committee, told Minivan News yesterday that the leader of the Maldives IMF delegation, Rodrigo Cubero, “said so in a meeting on November 4.”

“I think [the suspension] will make it difficult for other international financial institutions and donors to entertain the requests of the Maldivian government in the future,” Nazim said.

“Even though the amount of the IMF program is only US$92.5 million, adherence to the IMF program would have led to comfort letters from the IMF to other donors assuring them of the sound fiscal policies of the government.”

“Absolutely false”

At a press conference held in the Maldives Monetary Authority (MMA) on Monday, Cubero stated that media reports based on the claims were “absolutely false. That is not the position of the IMF. What we have said is that the disbursement under the second review of the program has been delayed. We have not suspended our program or our relations with the country, and we continue strongly engage with the authorities to complete the second review, and put policies in place to restore fiscal sustainability and economic prosperity in the Maldives.”

The ‘delay’, Cubero explained, was due to the “fiscal slippages” caused by insufficient progress  towards reducing the wage bill and passing tax legislation – most significantly, the Business Profit Tax.

Civil Service without a smile

The country’s financial deficit has 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 Rf 3000 to Rf 11,000 and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country, almost triple that of a comparative island nation such as the Caribbean.

Both these measures – salary increases and civil service hires – doubled government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

Nonetheless, despite the fourfold increase in salaries, a legal scrap this year between the Civil Service Commission (CSC) and the Finance Ministry following a 15 percent cut to civil servant salaries has effectively immobilised the government’s ability to reduce the wage bill.

For its part, the CSC does not contest the crippling state of the economy, but argues that cuts must be distributed fairly. The Ministry of Finance meanwhile accused the CSC of hiding “a political agenda”, and in February filed a case with the police asking them to investigate it on suspicion of trying to topple the government “and plunge the Maldives into chaos.”

State Finance Minister Ahmed Assad explained that the President last year issued an executive order to bring the salaries down, but had been blocked by the opposition-majority parliament.

“The Majlis stood against it,” he said. The government had initiated discussion with the Civil Service Commission, “but it has taken us nowhere and there’s been little progress this last year.”

The disagreement over salary restoration culminated in the Permanent Secretaries of Ministries being ordered to submit differing wage sheets by both the Finance Ministry and the CSC.

Meanwhile, the country’s financial deficit has grown to 26.5 percent of GDP, among the highest of any country in the world, placing the Maldives at risk of economic catastrophe. The IMF refused financing to Sri Lanka because the country’s fiscal deficit reached 10.5 percent.

Budget for austerity in 2011, or else: IMF

The forthcoming 2011 budget, explained Cubero, was “a crucial opportunity for the government to implement the austerity measures much needed. We will return to Washington and wait for the the numbers to be finalised. At the moment, the current policy stance is not sustainable.”

He acknowledged that the government faced “enormous difficulties, political and legal, in implementing its policy decisions”, but reiterated that the entire country was “living beyond its means.”

“With the government borrowing at the rate it has, it reduces the amount of credit available to the private sector, and that constrains the ability of the private sector to provide jobs and employment,” Cubero explained. “That then constrains economic growth. Furthermore, by spending more than it earns, the government is putting pressure on imports and the exchange rate.”

“This is in reality a simple thing. Think of an individual – if a family is consuming more than it earns, the only way to finance that is by accumulating debt. At some point the banks or creditors may not be willing to finance your debt. “

Continued growth of the deficit would impact the population as a whole, Cubero predicted. “We do hope the gravity of situation prevails and a reasonably constrained 2011 budget is passed.”

Last year parliament’s finance committee, headed by Nazim, amended the budget to include an additional Rf 800 million (US$62 million), including the restoration of civil servant salaries following the 15 percent pay cut, and subsidies for sectors ranging from fishing and agriculture to private media.

Media subsidies, when they arrived, were also allocated by the Finance Committee with 50 percent of the Rf 4 million total going to the two wealthiest private TV stations.

The government took a dim view of the ‘extras’:  “It has to be kept in mind that the budget is made up of numbers; it is a mathematical transaction. If things are done for political reasons, the numbers won’t add up,” said President Nasheed in December 2009.

His remarks were met with outrage from members of the Majlis, who interpreted his comments as an attempt to undermine parliament’s role in the governance of the country.

Cubero said the IMF had presented its views of the economic situation to parliament and the opposition, and had held “a frank discussion”.

“We explained that there had a been delay with the third tranche pending completion of the second review. It was a very good and positive discussion, and I sense they have the commitment to do what is needed. They have very good opportunity to contribute to passing a tight 2011 budget, and needed tax reforms such as the business profit tax. Their support and the  support of all stakeholders will be crucial.

“Otherwise,” Cubero stated, “the implications will be negative for everyone. We hope austerity prevails.”

The Maldives fiscal deficit of 26.5 percent is among the highest in the world, says the IMF

Playing politics with the economy

The IMF’s announcement came not without ample warning. In January 2010 it warned that: “Measures that substantially raise the budget deficit, such as a reversal of previously announced wage adjustments, [will put] put the program off track, jeopardising prospects for multilateral and bilateral international financing.”

Asked to comment on that warning at the time, Spokesperson of the CSC Mohamed Fahmy Hassan insisted that according to Maldivian law, the finance ministry had to pay the increased salary that month. In response, Assad pointed out that the IMF only gave economic advice, and was indifferent to a country’s law.

In June 2010, the IMF published its Country Report for the Maldives, which calculated that if the government continued to pursue economic reform at current pace and policy, the country’s fiscal deficit would increase by one percent of GDP in 2010 and 4.5 percent of GDP in 2011.

Meanwhile, the IMF observed in June, parliament passed the 2010 budget “with amendments totaling a seven percent (4.25 percent of GDP) increase over the government’s proposed budget.”

As a consequence, the report stated, “the annual deficit targets for 2010 and 2011 will be missed on current policies.”

Almost a year after the first warning, the generosity of the donor community and an uncharacteristically patient IMF – it has a reputation for being ruthlessly pragmatic with regard to local politics – have so far insulated the average Maldivian from the impact of the horrendous deficit. Consumer spending is booming and mobiles and mopeds abound, although indirect effects such as rising electricity costs and the resurgent dollar shortage have bitten the public.

But the IMF’s announcement today is a ‘shot across the bow’ that leaves the government in a decidedly unpleasant position, trapped between the source of its income – other donors do rely on the IMF’s assurances – and a parliament seemingly unwilling or unable to grasp the full extent of the problem as it closes its doors for the third week running.

Expenditure-wise, the government does not want to endure the loss of votes and most likely, unemployment, that will come with the degree of cuts demanded by the IMF.

As for revenue, vested business interests in parliament are unlikely to see the IMF’s vaunted Business Profit Tax passed unless the ruling Maldivian Democratic Party (MDP) were to gain a majority. The leaked audio recordings in early July added weight to the suspicions of many, as MPs were heard to negotiate the ceasing “of all work on the tax bills submitted by the government to the Majlis” until, among other things, a no-confidence motion was tabled against Finance Minister Ali Hashim. Nasheed’s cabinet resigned in protest against parliament “scorched earth politics” before this came to fruition.

The IMF did offer some good news. Despite the country’s twin problems of a crippling wage bill and inability to pass tax legislation through a suspiciously disinterested parliament, the country’s core economic base is sound, with a 5-6 percent increase this year on the back of a strong rebound in tourist arrivals.

But the IMF’s ‘delay’ in opening the purse strings for the third tranche ups the pressure and signals an impatience with the ‘business as usual’ approach taken by all parties involved.

So far the MMA’s efforts to drain excess rufiya from circulation have kept inflation under control, but worrying economic signals such as bank restrictions on the free flow of currency and repression of remittances from foreigners’ accounts have been mounting up. Minivan News has now spoken to the managers of several foreign businesses with offices in Male’, employing dozens of people, who say they are being forced to reevaluate the viability of operating in the Maldives.

These problems are are unlikely to be resolved in the long term by the US$78 million fee paid by Indian infrastructure giant GMR for Male’ International Airport, or yet more donor aid, as the government has implied. Aid is a moot point, as in January 2011 the UN graduates the Maldives to a ‘middle income’ country, severing the umbilical cord to both concessional credit and a degree of international aid funding.

Assad insists the government has included this graduation in its predictions, although he notes that the Finance Ministry had banked on the Majlis passing the tax bill by June.

“Some people say [the graduation] will increase borrowing capacity and give us more independence,” Assad said. “But like becoming an adult, it means taking on both freedom and responsibilities.”

And, most likely, severe growing pains.

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Comment: IMF stabilisation program threatened if Majlis ignores tax bills

The current majority of members in the Maldives Majlis have been cynically irresponsible in their handling of financial legislation.

Though they have found the energy to pass detailed amendments to the Finance Act which threatens to create administrative chaos and undermine the constitutional powers of the executive, they have ignored two tax bills – the Tourism Goods and Services Tax, and the Business Profits Tax.

These two bills are a vital part of the IMF program that stabilises the economy and keeps the country from bankruptcy.

The tax bills have been buried in the ‘Whole of Majlis’ committee for around a year, and it is obvious the members are not interested in passing them.

The sensational phone recordings released this week featured Majlis member Mohamed ‘Kutti’ Nasheed reading out a plan to ‘fast process’ the Financial Act Amendments bill and no-confidence motions, and  “cease all work on the tax bills submitted by the government to the Majlis”.

It is unlikely the IMF and international banking groups will tolerate this situation for much longer without a downgrading of the country’s credit rating, especially now the tax bills’ delay has become associated with high levels of corruption in the Majlis.

The IMF is not a benign charity. It is a hard-nosed organisation quite capable of taking action against countries that take its money and fail to keep their promises and obligations.

Unless a better taxation system is established in the Maldives, international bankers may pull the loan plug, and the public sector and lower income groups in the population will both experience job losses and extreme financial hardship.

The blame for this potential economic disaster will rest squarely on the Majlis members who the people elected in 2009.

The latest IMF report for Maldives criticises the high public sector wage bill that is “very high by international standards”, and the low tax rate for its tourism sector, which the IMF says “remains well below international standards”.

Maldives’ hotel tax rate is one of the world’s lowest, well behind India, Sri Lanka, Philippines, Indonesia, and other comparable tourist destinations such as Dominica, Fiji, Barbados, Mauritius, Costa Rica, Vanuatu, Bahamas, Seychelles, Tahiti, and Jamaica.

Most of the profits from the tourism sector go to wealthy men and families who are often members of the Majlis and/or owners of media companies. The dreaded word ‘tax’ is rarely heard in the political discussion programs that dominate Maldives’ radio and television. Print and internet website news organisations also avoid the subject of tax. Serious informative articles on economics and business are impossible to find.

Significant government tax revenues will undermine the present system of patronage and corruption that permeates Maldivian society. People’s loyalties would shift away from wealthy men towards the government, which will be able to provide pensions, subsidies, adequate salaries and health care. These are the foundations of a just and fair society.

The Majlis majority who are refusing to pass tax legislation are acting against the best interests of the people and threatening the independence and national security of the country.

All comment pieces are the sole view of the author and do not reflect the editorial policy of Minivan News. If you would like to write an opinion piece, please send proposals to [email protected]

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