Currency reserves in the Maldives have “dwindled to critical levels”, according to the World Bank’s bi-annual South Asia Economic Focus report.
The report highlighted that growth in South Asian countries – including the Maldives – is still below pre-economic crisis levels.
“Much of the recent slowdown in economic growth can be attributed to stagnating investment,” the World Bank stated in its findings. “Economic recovery could falter in the absence of a stronger investment climate.”
South Asian countries are “now more vulnerable” due to widening current account balances, slowing foreign direct investment, and persistently high inflation that has “limited the ability” of central banks to counter economic downturn via monetary policies.
Rising imports, and the Maldives dependency on those imports, also leaves the country more vulnerable to commodity price increases, argued the findings.
“Countries will need to improve their business climate to attract the private sector investment needed for these new entrants to find productive jobs, thereby reducing poverty and boosting shared prosperity,” said Martin Rama, Chief Economist for the South Asia Region at the World Bank.
Improving tax revenue collection and curbing energy subsidies are required for further progress to be achieved.
Maldives Monetary Authority (MMA) statistics released in January 2013 indicated that gross state reserves have shrunk to MVR 4.9 billion (US$317.7 million).
This is essentially only enough for one month of imports.
Between November and December 2012, reserves dropped 14 percent, or MVR 849.7 million (US$55 million). In comparison with the start of 2012 – when the State reserve was MVR 5.3 billion (US$343 million) – January 2013 had seen an eight percent decline.
MMA statistics explained that the reason for the downward slide at the end of 2012 was due to depletion of state funds in local and foreign banks, according to local media.
Finance Minister Abdulla Jihad told MPs in December 2012 that additional revenue was needed to finance the fiscal deficit and rein in soaring public debt, which was projected to reach MVR 31 billion (US$2 billion) or 82 percent of GDP by the end of 2013.
Despite parliament recently rejecting an increased airport service charge, legislation on fiscal responsibility submitted in 2011 by former President Mohamed Nasheed’s government was passed with 42 votes in favour and 10 against at a sitting of parliament on April 15.
If the bill is ratified, the government would be prohibited by law from obtaining loans after January 1, 2016, in order to finance recurrent expenditure or loan repayments.
The bill also sets limits on government spending and public debt based on the proportion of GDP, mandating the state to not allow public debt to exceed 60 percent of GDP.
Borrowing from the central bank or MMA should not exceed seven percent of the projected revenue for the year, while such loans would have to be paid back in a six-month period under additional finance conditions outlined under the recently approved legislation.
Moreover, a statement outlining the government’s mid-term fiscal policy must be submitted annually to parliament at the end of the financial year in July.
The current government has pointed the finger at the previous administration for the current budgetary issues, whilst simultaneously implementing a series of policies which have added to its financial obligations.
The government also chose to reintroduce MVR100 million (US$6.5 million) fishing subsidies and to reimburse MVR443.7 million (US$28.8 million) in civil servant salaries, reversing measures implemented during the previous government’s own austerity drive.
The 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.
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.
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.”
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.
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.”
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.”
President Mohamed Nasheed has met with the International Monetary Fund (IMF) mission to review the economic recovery programme yesterday afternoon at the president’s office.
Members of the IMF mission were reportedly “very pleased” with the government’s fiscal and monetary policies. They “hailed” the government’s efforts to keep the budget deficit under control without printing extra money.
The President thanked the IMF for their continued support for the economic recovery of the country. IMF Executive Board approved a loan of USD 92.5 million last December to assist the economic recovery programme.