The Governor of the Maldives Monetary Authority (MMA) Fazeel Najeeb has criticised the proposed 2014 state budget for containing tenuous revenue-raising measures, expressing concern that the MMA may have to print money should the government fail to realise expected revenue.
The Ministry of Finance and Treasury has proposed a record MVR 17.5 billion (US$ 1.1 billion) budget for 2014 with a projected deficit of 2.2 percent of GDP. The government expects MVR8.5 billion (US$ 552 million) from taxation and a further MVR3.5 billion (US$ 224 million) from new revenue raising measures.
These measures include hiking Tourism Goods and Services Tax (T-GST) from 8 to 12 percent, revising import duties, a continuation of the tourism bed tax, raising airport departure charge for foreign passengers from US$18 to US$25, leasing 12 islands for resort development, introducing GST for telecommunication services and charging resort operators in advance for resort lease extensions.
The Majlis must amend existing legislation to realize the additional MVR 3.5 billion.
Najeeb told the People’s Majlis Budget Committee last night the government must not proceed with new development projects unless and until the revenue is realized.
“If not, ultimately the government will come to the MMA to find the cash to proceed with those projects. And then again we have more rufiyaa in the economy to chase after the few dollars,” Najeeb said.
Najeeb noted the proposed measures relied heavily on taxing the tourism sector and said adding new taxes to a nascent tax system introduced in 2010 may create problems. He further said that making resort owners pay lease extension fees upfront was robbing the state of future revenue for a “temporary benefit.”
The government had also proposed revising import duties and increasing departure charges to finance the 2013 budget, Najeeb said. However, the Majlis had failed to approve them, resulting in the MMA having to print the money, he added.
According to MMA figures, the central bank has printed over MVR1.7 billion (US$ 109,677,419) this year alone. Najeeb claimed the MMA had been forced to print the money so that the government could pay overdue bills.
The World Bank has criticized the measure in a new report and said monetisation poses “macro-risks” including the devaluation of the rufiyaa.
The report also notes that the government is increasingly relying on short-term commercial borrowing in the form of selling treasury bills (T-bills) to the banking, private sector, and high net worth individuals at steep interest rates.
Speaking on the matter, Najeeb said the Maldives was accumulating debt “without stop” due to short term T-bill sales. He suggested capping T-bill sales and obtaining Majlis approval to sell T-bills beyond the capped amount.
According to the MMA’s figures, the government has accumulated MVR8.5 billion in T-bill debt at the end of November.
Najeeb said the short-term debt had become a “burden” on the state and suggested negotiations with creditors to change short-term debt to long-term debt. Noting that the economic growth is not keeping pace with state expenditure, Najeeb stressed the need for economic diversification and reduction of the government size.
President Abdulla Yameen had pledged to reduce state expenditure on assuming office but has so far only made modest cuts limited to halving the presidential salary and reducing salaries of state and deputy ministers.
Foreign reserves are critically low at US$341.8 million, or approximately 2.5 months of imports, while public debt stands at 81 percent of GDP, the World Bank has said. Debt is projected to rise further to about 96 percent by 2015.
“This debt path is unsustainable and suggests there is little room for additional borrowing,” the World Bank has warned.