Tag: MMA

“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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Two ton shipment of new five rufiya notes “routine”, says MMA

A shipment of newly-printed five rufiya notes brought in last week is part of a “routine” process and not intended to finance either the fiscal deficit or government expenditure, the Maldives Monetary Authority (MMA) has said.

According to a press statement issued by the MMA yesterday, the stock of five rufiya notes was running low and the new notes would be stored at the state treasury.

“This is routine work, every now and then we print different notes when the stock runs low,” explained MMA Executive Director Abdul Hameed Mohamed. “We print notes as often as is necessary. We are surrounded by water, fishermen handle it, it gets lost and sometimes we have to replace these old notes.”

Abdul Hameed stressed that the new notes would have “no effect on circulation” as it will be stored in the treasury and that there would be “no increase in the money supply.”

“As you know, the central bank in any country always prints money to replace damaged notes,” he said. “Replacing notes is something we do daily.”

Local media reported today that the shipment of new notes was brought in 40 boxes weighing 2.4 tons on an Emirates flight that landed on the morning of September 13.

“The MMA has brought in newly printed money while President Mohamed Nasheed has signaled that money might have to printed if the reduced amounts from civil servants salaries had to be given back,” reads a report on Sun Online.

Abdul Hameed speculated that “the only reason this has become news is because of the President’s remarks.”

In late 2009, the current administration ceased deficit monetization – printing money to finance the fiscal deficit – and the MMA introduced open market operations to mop up excess liquidity.

MMA Governor Fazeel Najeeb told press in August 2009 that printing local currency in previous years had led to the current dollar shortage as “there is too much rufiya chasing too few dollars.”

Prior to 2009, the MMA printed new money to issue loans and overdrafts to plug the expanding budget deficit – stoking inflationary pressures due to excess local currency in circulation.

Meanwhile in lieu of printing money and accumulating domestic debt, in December 2009 the new government began issuing US dollar denominated treasury bills to finance the deficit.

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Public Accounts Committee to dismiss claims against governor

Parliament’s Public Accounts Committee has claimed that a motion of no-confidence against Maldives Monetary Authority (MMA) governor Fazeel Najeeb is baseless.

Haveeru reported that four out of five members of a sub-committee tasked with evaluating the motion had claimed there was no reason for it to go ahead.

President Mohamed Nasheed had sent a letter to the parliament claiming that the MMA was not executing its legal responsibilities, and neither was its governor.

“We didn’t notice anything significant from [the letter] at all to justify a motion of no confidence against him,” a member of the committee told Haveeru.

The committee will review the report from the sub-committee and make a decision next week.

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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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MMA to increase auction of dollars by 20 percent

The Maldives Monetary Authority (MMA) has increased the amount of dollars auctioned to local banks by 20 percent, after setting a dollar exchange reference price of Rf14.75.

The MMA has previously set a limit for the sale of dollars based on its reserve of foreign currency, when dollars could only be sold at the pegged rate of Rf12.85.

The managed float of the rufiya within a 20 percent band of that rate has increased competition among local banks selling dollars, with rates at some institutions dropping to Rf13.8. Prior to the managed float, the blackmarket was hovering between Rf14.2-Rf14.8.

However while the move has increased competition with banks, many companies dealing in dollar commodities such as air travel have increased their rates of exchange to the maximum permitted Rf15.42.

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Public Accounts Committee summon decision makers over dollar rate revamp

The parliamentary Public Accounts Committee has today summoned members of government and the Maldives Monetary Authority (MMA) to present the research behind a recent decision to amend the set US dollar exchange rate of Rf12.85 to within 20 percent of the figure.

Ahmed Nazim, MP for the People’s Alliance (PA) party and a member of the Majlis’ Public Finance Committee, has said it is scheduled to meet with members of the government and the MMA at 4.15pm this afternoon in order to get an insight into the research and statistical information that led to them taking the decision.

Nazim claimed that under its mandate, the Public Finance Committee was not in a position to call for any amendments to the president’s decision to amend the exchange rates, which have reportedly led to banks charging Rf15.42 a dollar to customers – a rate thought to have exceeded prices offered on the formerly institutionalised blackmarket.

The new exchange rates bought into effect as last week were claimed by President Mohamed Nasheed to ensure “longer term prosperity” in the Maldives.  The decision was praised from the International Money Fund (IMF) as being a “bold step” towards providing more sustainable finances.

Such praise came as the country’s Economic Development Minister, Mahmoud Razee, argued that the artificially fixed Rf12.85 exchange rate on the dollar has meant there was little certainty of the exact value of the Maldivian currency in the present market.

However, this so-called dollar float has also led to derision and protests from different factions representing the main opposition Dhivehi Rayyithunge Party (DRP) as well as criticisms from some private sector economists that the measures still fail to address the high levels of state expenditure that threaten to shatter any attempts to balance national finances.

Despite the committee itself not being able to propose any amendments to the national interest rate, Nazim said the meeting was needed to ensure the reasons for taking the decision to amend interest rates were just.

“We have been following this [exchange rate] decision and we knew what the situation was.  The committee just want to make sure the correct legal steps were followed,” he said.  “We just have to make sure that they have done good analysis and are aware of the fiscal impact of their decisions in the long term.”

Nazim added that relevant authorities had already responded to the committee ahead of a deadline set for midday yesterday (April 17) to supply data related to the exchange rate decision.

In an article for Minivan News last week, Director of Structured Finance at the Royal Bank of Scotland, Ali Imraan, observed that ‘growth’ in the domestic economy had been driven by the public sector  and “paid for by printing Maldivian rufiya and clever manoeuvres with T-Bills, which the government has used since 2009 to be able conveniently sidestep the charge of printing money. In simple terms: successive governments printed/created money to drive domestic economic growth.”

Imraan pressed for the Maldives to invest in private sector revenue growth “rather than building airports on every island”, and implement a progressive taxation system targeting high earners in the interest of income equality. He also urged the Majlis to uphold the constitutional stipulation whereby MPs – such as those with business interest in the tourism sector – removed themselves from voting on issue in which they had a vested interest, and further suggested that the government resolve the matter of stalled tourism developments “awarded to parties with no money or track record.”

Imraan pressed for the Maldives to invest in private sector revenue growth “rather than building airports on every island”, and implement a progressive taxation system targeting high earners in the interest of income equality. He also urged the Majlis to uphold the constitutional stipulation whereby MPs – such as those with business interest in the tourism sector – removed themselves from voting on issue in which they had a vested interest, and further suggested that the government resolve the matter of stalled tourism developments “awarded to parties with no money or track record.”

“Moratoriums on lease payments or debt repayments may look innocuous enough, but they rob the country of vital growth opportunities and hence ultimately rob the people. We should not stand for it,” he said.

Imraan’s latter suggestion proved somewhat prescient when the Tourism Ministry renewed the lease for Hudhufushi in Lhaviyani Atoll, despite the resort island’s owner owing more than US$85 million in unpaid rent – most of it fines for non-payment.

The government’s decision to implement a managed float of the currency came as a least one local sales agent for international airlines operating in and out of the Maldives closed its doors to customers, blaming an inability to pay the airlines because of a lack of US dollars circulating within the economy.

A local financial expert working in the private sector, Ahmed Adheeb, had also warned that a shortage of foreign currency would reduce the prospect of foreign investment, because of the difficulty of repatriating profits to other countries.

“Dhiraagu, for instance, is probably having a lot of difficulties repatriating dividends to Cable&Wireless,” Adeeb said. “This can lead to a fall in investor confidence. When that happens, foreign investors will either try to exit or stay away. We will only see foreign investment that earns dollars, such as resorts.”

The problem would soon lead to inflation and difficulties importing essentials such as fuel and medicines, he suggested, and could potentially have a major impact if the State Trading Organisation (the country’s primary importer) found itself unable to acquire foreign currency.

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Treasury Bills debt stands at over a third of annual budget: report

Government debt accrued through the sale of Treasury Bills to banks and commercial enterprises in the country is estimated to be equivalent to more than a third of this year’s Rf12bn national budget, according to Maldives Monetary Authority (MMA) figures.

Haveeru has reported that at present, Rf5bn of debt has been generated through the MMA’s sale of T-Bills, which are sold frequently to national businesses at interest rates recently set around 4.57 percent, 5.34 percent and 5.53 percent.

According to the report, Treasury Bills have been sold by the government since September 2006 initially as a short-term attempt to settle outstanding national debt.  An estimated Rf1.3bn is expected to be raised through the sale of T-Bills under the current national budget.

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MDP Parliamentary Group calls for dismissal of MMA Governor

The Maldivian Democratic Party (MDP) Parliamentary Group has called on the President to remove the Governor of the Maldives Monetary Authority (MMA) Fazeel Najeeb from his position, accusing him of irresponsibility and “repeatedly failing to fulfill his legal obligations”.

In a statement, the Party said that the MMA Governor was legally required to not pursue any work other than that required of his role in the MMA.

”However because he is currently studying he spends most of the time out of the country,” said the MDP in a statement. ”Although the laws on MMA obligate the Governor to council the President on the financial condition of the country, the instruction and council is not being given to the president.”

The party claimed that Fazeel was not cooperating with the government to find a solution for the difficulty in bringing foreign currency to the country.

The statement explained that the Governor of the MMA is appointed and dismissed by the President with the council of the parliament, according to MMA Act, Act No 81/6 article 6 [3].

On 10 November last year, MDP Parliamentary group said the Finance Ministry had written to the Governor asking for steps the MMA would recommend be taken to resolve the foreign currency issue.

”But he never responded to the letter. The Finance Ministry wrote to the Governor again on January 16 of this year and he responded to the letter on 10 February,” claimed the MDP Parliamentary group, “but he did not mention how the issue might be solved.”

The parliamentary group further accused Fazeel of using the MMA’s credit card “for his own purposes.”

Minivan News attempted to contact Fazeel to respond to the MDP’s allegations, however his phone was switched off. Spokesperson for the MMA Ahmed Naseer told Minivan News that Fazeel was currently not in the Maldives and was unavailable for comment.

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Banks given permission for small dollar commission

Banks have been given authorisation by the Maldives Monetary Authority (MMA) to place a one percent commission on one and five US dollar bills to try and encourage greater exports of the currency.

Haveeru reported that the MMA had conceded to requests from banks for permission to charge commission on the notes as a result of the high cost and “risk” involved in exporting dollars.

“Banks need to export the dollar bills of small value being collected as a result of the low public demand,” the MMA reportedly said.

Any institutions with a licence allowing the exchange of foreign currency will be able to charge the commission, under the MMA ruling.

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