Tag: public debt

Public debt to reach MVR31 billion by end of 2014, reveals finance minister

Public debt is expected to reach MVR31 billion (US$2 billion) or 67 percent of GDP at the end of 2014, Finance Minister Abdulla Jihad has revealed.

“Despite achieving economic progress, the Maldivian economy is fragile and the Maldives’ financial situation is not in the most appropriate state at present,” Jihad cautioned in his budget speech at parliament today.

“The main reason for this is the year on year increase of the budget deficit and the state’s debt because of expenditure being higher than state revenue in recent years,” he explained.

The country’s balance of payments worsened and foreign currency reserves dwindled as a result of both the persisting fiscal deficit as well as outflow of foreign currency, Jihad added.

He noted that the dramatic increase of expenditure on public sector wages, subsidies, and social security programmes was also responsible for the fiscal imbalances.

Expenditure on state employees in 2014 would reach MVR15.8 billion (US$1 billion), Jihad observed, while MVR3.2 billion (US$207 million) would have been spent on subsidies and social security benefits.

Out of every MVR100 collected as revenue or income, Jihad explained that MVR40 was spent on employees and MVR22 on social protection and subsidies.

Consequently, the government was facing serious difficulties in “managing the state’s cash flow and financing the budget” as well as securing loans for budget support, Jihad said.

The budget was mainly financed by selling and rolling over treasury bills (T-bills), he said, which involves repayment at high interest rates.

According to the central bank, the total outstanding stock of government securities was MVR13.6 billion (US$881 million) at the end of September.

“The growth in government securities was contributed by the increase in the amount of T-bills issued by the government to manage its cash flow requirements,” reads the Maldives Monetary Authority’s (MMA) latest monthly economic review.

Targeting subsidies

In May, Jihad continued, the government ceased obtaining funds from the central bank to finance the budget and the inflation rate has remained low as a result.

The government has also decided to freeze hiring new employees in 2015 in favour of conducting training programmes and optimising productivity. The defence minister last week criticised civil servants, saying they were providing “poor service” to the public.

Parliament needed to pass legislation on the state’s wage policy for a lasting solution to discrepancies in pay among state institutions, Jihad suggested.

He also revealed plans to revise the electricity subsidy, which he said currently benefits the affluent more than the needy.

Targeting the electricity subsidy to low-income families or households would save 40 percent of the government’s expenditure on the subsidy, Jihad explained.

The government was also working on revising the Aasandha health insurance programme – expanded by the current government – to ensure sustainability, he added, in addition to plans to target food subsidies in 2015.

In May, MMA Governor Dr Azeema Adam called for “bold decisions” to ensure macroeconomic stability by reducing expenditure – “especially the un-targeted subsidies” – and increasing revenue.

The MMA had previously warned that shortfalls in revenue and overruns in expenditure could jeopardise the country’s debt sustainability.

The International Monetary Fund (IMF) has also recommended targeting subsidies to the poor.

“The electricity subsidy is one that goes to even the richest strata of society. Basic food subsidies are being enjoyed now by the resorts, and never mind the resorts, are being enjoyed by wealthy foreign visitors who stay at the resorts,” Dr Koshy Mathai, resident representative to Sri Lanka and Maldives, told MPs on the public accounts committee in February.

“That to us seems like a totally unnecessary policy.”

He added that “substantial savings” could be made from the budget by targeting subsidies to those most in need of assistance.

Despite the cost-cutting measures, Jihad cautioned today that the government’s recurrent expenditure could not be reduced while people reside in 188 geographically dispersed islands.

Providing services to small populations was difficult and costly, he observed, stressing the importance of formulating and implementing a population consolidation policy.

On plans to tackle the high rate of unemployment, Jihad noted that MVR332 million (US$20 million) was allocated in the 2015 budget for higher education programmes, with special emphasis on training doctors and health sector professionals.

The implementation of the government’s economic policy – with the introduction of special economic zones – would spur job creation and attract foreign investment, he added.

Jihad appealed for support from MPs for the government’s proposed revenue raising measures, warning that public services could be disrupted if anticipated revenue is not realised.

“The estimated budget for 2015 is a budget that lays the foundation to build the future of the current generation and future generations,” he said.

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World Bank provides US$6.5 million grant for public financial management system

The World Bank has approved a US$6.5 million International Development Association (IDA) grant to support the strengthening of the Public Financial Management (PFM) System of the Maldives, which would help “government institutions to make informed decisions on fiscal adjustments in an efficient manner”.

In a press release on Tuesday (July 15), the World Bank noted that “a high level of fiscal discipline” was needed for translating the current administration’s key policies and objectives into “a medium-term development strategy”.

“A key challenge for the country will be to ensure that the government’s social and economic goals are fully consistent with the urgent need for fiscal consolidation to restore fiscal and debt sustainability,” said Country Director for Sri Lanka and Maldives Francoise Clottes.

“We are happy to assist the government in this endeavour with both financial and technical support.”

According to the World Bank, “the project will help enhance budget credibility, transparency, and financial reporting of central government finances.”

“The entry points for intervention will be the Economic Policy Planning Section, National Budget Formulation and Analysis Section, Debt Management Division, Tender Evaluation Section, Secretariat of the Privatisation and Corporatisation Board, and Treasury and Public Accounts Division; internal audit sections; and line ministries.”

“The project design also includes support to strengthen the institutional framework of key Ministry of Finance and Treasury functions and to enhance knowledge transfer through on-the-job training by technical experts,” said Jiwanka Wickramasinghe, Task Team Leader of the Project.

The press statement noted that the proposed PFM Systems Strengthening Project would contribute to the government’s long-term and “overarching goal by addressing the most urgent PFM weaknesses.”

Macroeconomic challenges

In its annual global economic prospects report released last month, the World Bank had predicted a positive outlook for the Maldivian economy in 2014 with a projected GDP growth of 4.5 percent, “driven by strong tourist arrivals, particularly by robust growth in the Chinese tourist segment.”

The Maldives Monetary Authority (MMA) had also revealed earlier in June that economic activity expanded in the first quarter of 2014 “driven by the strong growth of the tourism sector during the ongoing high season of the industry.”

The central bank noted that the 10 percent annual increase in arrivals during the first quarter was “entirely driven by the significant increase (24 percent) in arrivals from the Chinese market.”

Meanwhile, in late May, a delegation from the World Bank led by the World Bank Vice President Philippe Le Houérou – in his first visit to the Maldives since assuming the post in July 2013 – met President Abdulla Yameen and agreed to work with the government in developing a national strategy for fostering growth and consolidating public finances.

The discussion focused on “the need to reduce fiscal deficits, create a favourable investment climate for the private sector and delivery of key public services,” according to a press release from the World Bank.

Le Houérou noted that the challenges faced by the Maldives includes “balancing public accounts while delivering public services on some 200 islands across hundreds of kilometres of the Indian Ocean.

The issue is how Maldives can make the most of its potential in order to achieve inclusive and sustainable development.”

In May, MMA Governor Dr Azeema Adam called for “bold decisions” to ensure macroeconomic stability by reducing expenditure – “especially the untargeted subsidies” – and increasing revenue.

In a report on macroeconomic developments in 2013, the MMA had warned that shortfalls in revenue or overruns in expenditure in 2014 “will undermine medium-term debt sustainability” and adversely affect the exchange rate and prices.

Despite a positive outlook for growth, “there is a considerable amount of uncertainty surrounding the 2014 budget. Overruns in current expenditure will most likely lead to financing difficulties for the government or further crowding out of the private sector,” the central bank warned.

“Any setback to fiscal consolidation either due to slippages in revenue or current expenditure will undermine medium-term debt sustainability and will have adverse implications for exchange rate and prices.”

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MDP will not respect separation of powers, says President Yameen

The Maldivian Democratic Party (MDP) did not respect separation of powers during its three years in government, President Abdulla Yameen has said, urging voters to consider the track record of former President Mohamed Nasheed’s administration before choosing parliamentary candidates.

Speaking at the Progressive Coalition’s parliamentary campaign launching rally on Thursday night, President Yameen strongly criticised the opposition party’s campaign slogan – “Vote for the scale [of justice] for separation of powers” – contending that an MDP-controlled parliament would exert undue influence on other state institutions.

“Our rival opposition party is saying that they are coming to the People’s Majlis to separate powers. No doubt separation of powers is important in modern democratic systems. Separation of powers is a basis we all believe. But let us consider how responsibly and the extent to which powers were separated during the three years of the MDP government,” he said.

“We have to learn from past experience and they have shown very well, in much detail, during their three years how they want to separate powers in the future.”

The state of affairs that prevailed in the country at the end of the MDP’s three years in government should not have been what it was if the party had ruled democratically, Yameen argued.

Yameen said he “could not believe” that national debt could rise from MVR5 billion (US$324 million) to over MVR30 billion (US$1,195 million) during a democratic government.

MDP in office

President Yameen claimed that the MDP government attempted to merge the three powers of state during its time in office.

Yameen referred to the military’s controversial detention of Criminal Court Chief Judge Abdulla Mohamed in January 2012, which he contended was prompted by “verdicts or punishments not being delivered the way the president wanted.”

Moreover, the arrest of two opposition MPs in June 2010 “showed the extent to which political space was offered” to members of the People’s Majlis, Yameen said.

Following the en masse resignation of Nasheed’s cabinet on June 29, police arrested then-MP Yameen and MP Gasim Ibrahim over allegations of bribery and treason. Both MPs were subsequently released by Judge Abdulla.

Yameen also referred to the delayed appointment of the Anti-Corruption Commission’s (ACC) President Hassan Luthfy, who was eventually sworn in 24 months after parliament approved him for the post.

After President Nasheed recalled Luthfy’s name and proposed a substitute nominee in late 2009, parliament rejected the substitute and approved Luthfy to the commission.

The President’s Office delayed swearing-in the new commissioner as it sought a Supreme Court ruling. Yameen alleged that the appointment was held up to prevent the ACC from functioning.

MDP MPs have not shown “even a small example of separating powers,” Yameen continued, accusing opposition MPs of obstructing the government and blocking development projects.

“Dark clouds” on horizon, warns vice president

Yameen also accused the opposition party of refusing to cooperate with the government on confirming the appointment of a new prosecutor general.

“So I have to say that it might be that they are obstructing [the appointment] because there are cases involving [opposition MPs]. This is why I am saying they are not trying to separate powers. What we are seeing is the merging of powers,” he said.

In his speech at the rally, Vice President Dr Mohamed Jameel Ahmed contended that MDP MPs contesting the upcoming parliamentary elections endorsed former President Nasheed’s alleged “inhumane activities” and “insults” to Islam and the Prophet Mohamed (pbuh).

Voting or campaigning for such MPs was “without a doubt aiding and abetting sin and strife,” he said.

Repeatedly urging voters to consider the MDP’s track record before voting on March 22, Dr Jameel called on the public to vote for coalition candidates to empower citizens, defend the constitution and protect Islam.

Reiterating a central theme from last year’s presidential campaign, Dr Jameel insisted that the MDP would pursue an agenda to eradicate Islam from the Maldives.

The vice president also said he could see “dark clouds gathering” on the horizon, warning of arson in the capital Malé and judges “tied with rope and dragged through the streets.”

Former President Maumoon Abdul Gayoom – figurehead and leader of the ruling Progressive Party of Maldives – meanwhile praised the candidates fielded by the PPM and its coalition partners Jumhooree Party and the Maldives Development Alliance.

Gayoom stressed that the Progressive Coalition must “work together” in the parliamentary campaign to secure a majority in the People’s Majlis, adding that government supporters contesting as independents would split the vote and benefit the MDP.

“Our three parties are working together as one party. We are working towards one objective. So there is no doubt that candidates contesting from our parties will have the full support of the other two parties,” said Gayoom.

“That is why I am saying that the foundation of the efforts we are commencing is working together, helping one another, and cooperating with each other.”

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President ratifies fiscal responsibility bill to limit govt spending and public debt

President Dr Mohamed Waheed Hassan Manik ratified the fiscal responsibility bill on Monday (May 6) and issued a decree to delay the enforcement of 22 provisions that require specific guidelines for implementation.

The legislation submitted in 2011 by the previous administration was passed 42-10 by parliament on April 15 this year.

“The Act ensures accountable, transparent and sustainable government implementation of the state fiscal policy,” according to the President’s Office website.

Following ratification and publication of the Act in the government gazette, President Waheed issued a decree in accordance with article 39 of the Act (Dhivehi), which authorises the president to delay enforcement of any provision of the law by one year if it requires rules or a mechanism to be set up before implementation.

The executive decree issued on Monday delayed the enforcement of articles 10 to 28 and 32 to 34 of the Act.

The new law sets limits on government spending and public debt based on proportion of GDP, stipulating that public debt must not exceed 60 percent of GDP from January 1, 2014.

Moreover, borrowing from the central bank or Maldives Monetary Authority (MMA) to manage the government’s cash flow should not exceed one percent of the average revenue for the past three years, while such loans would have to be paid back in 91 days at the market interest rate.

The provision was however among the 22 postponed for the next 12 months, which also included sections requiring the government to submit statements or reports to parliament outlining its fiscal strategy, debt repayment plans and budget position.

The ratification of a law on fiscal responsibility comes amidst concern over soaring levels of public debt, which is projected to reach MVR 31 billion (US$2 billion) or 82 percent of GDP by the end of 2013.

Nominal GDP in 2012 was MVR 34 billion (US$2.2 billion).

Economic growth in 2013 is meanwhile forecast at 4.3 percent, down from 7.1 percent growth in 2010 and 7 percent in 2011.

An International Monetary Fund (IMF) mission in November 2012 explained in a statement that economic growth slowed to 3.5 percent last year on the back of “depressed tourist arrivals earlier in the year and weak global conditions,” which have been “only partially offset by strong performance in construction and fisheries-related manufacturing.”

The original forecast for economic growth in 2012 was 5.5 percent.

Debt

According to figures revealed by the Finance Ministry in December 2012, nominal GDP in 2011 was MVR31,447 million (US$2 billion) while the estimate for 2012 was MVR34,148 million (US$2.2 billion).

Real GDP in 2011 was MVR20,461 million (US$1.3 billion). Nominal GDP per capita in 2012 was estimated to be MVR 80,260 (US$5,206) per annum.

Real GDP measures the value of all goods and services produced in a country expressed in the prices of a base year – 2003 in the Maldives.

The Finance Ministry also revealed that the ‘total external public and public guaranteed debt’ was estimated to reach MVR 13.7 billion (US$888 million) in 2012.

Of the MVR 4.1 billion (US$330 million) of the loan assistance spent in 2012, more than 50 percent was from multilateral financial institutions and 28 percent from bilateral donors.

A total of MVR 1.9 billion (US$123 million) from loan assistance has been spent for various projects in 2012 while the rest was spent for budget support.

As of September 2012, MVR 561 million (US$36.4 million) was received as budget support – US$16 million from the Asian Development Bank and US$20 million from a standby credit facility extended by the Indian government.

Moreover, the government spent more than MVR 1 billion (US$64.8 million) in 2011 and MVR 1.1 billion (US$71.3 million) in 2012 to service foreign debts as interest and repayments.

The figure was expected to remain the same in 2013.

In addition, the government spent MVR 660.5 million (US$42.8 million) in 2011 and MVR 2 billion (US$129.7 million) in 2012 to service domestic debts.

Government spending on loan repayment and interest payments was expected to reach MVR 3.1 billion (US$201 million) in 2012.

Including an estimated MVR 13 billion (US$843 million) in domestic debt, the total public debt is expected to reach MVR 27 billion (US$1.7 billion) in 2012 and MVR 31 billion (US$2 billion) in 2013 – 82 percent of GDP.

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Proposed budget faces cross-party criticism

The state budget for 2013 submitted to parliament by Finance Minister Abdulla Jihad has come under heavy criticism from both opposition and government-aligned parties during last week’s 16-hour budget debate.

Speaking during Thursday’s sitting, Majority Leader MP Ibrahim Mohamed Solih ‘Ibu’, parliamentary group leader of the formerly ruling Maldivian Democratic Party (MDP), contended that the proposed budget could not be salvaged or improved through amendments.

Ibu suggested that parliament should “set this aside” and approve enough funds for the state to function in the first three months of 2013.

“After that, appeal [to the government] to propose a budget that is beneficial to the whole nation and represents all constituencies. I don’t believe we can implement this budget any other way,” the majority leader said.

Ibu argued that the estimated revenue of MVR 12.9 billion (US$836 million) was unlikely to materialise.

“This [projected income] includes MVR 1.8 billion (US$116 million) in new revenue. [But] this will not be received,” Ibu asserted.

The MDP MP for Lhaviyani Hinnavaru explained that parliamentary approval would be required for the new revenue raising measures, such as reversing reduced or eliminated import duties, hiking T-GST to 15 percent, raising the airport service charge from US$18 to US$30 and introducing GST for telecom services.

Ibu claimed that the import duty revision to raise tariffs on oil “will not be passed in this Majlis,” calling on the budget review committee to scrap the estimated revenue forecast from import duties.

The MDP would not support increasing T-GST without consultation with the tourism industry, he added.

Predicting that the revenue in 2013 would reach “only MVR 11 billion at most,” Ibu warned that income would not be enough to meet recurrent expenditures on salaries and administrative costs.

Moreover, the fiscal deficit would be considerably higher than the forecast of six percent of GDP, he contended.

“The Finance Minister said the budget deficit in 2013 would be MVR 2.3 billion, that is MVR 2 billion less than the current year. This, too, is a serious deception,” he said, adding that the figure would be closer to MVR 5.9 billion (US$382.6 million) or higher than 10 percent of GDP.

Ibu also noted that while US$50 million was to be taken as foreign loans at an interest rate of 10 percent for budget support, the Finance Ministry did not include any information of the supposed lender.

“The [budget] document says we don’t yet know where the money is going to come from,” he said.

With a public debt-to-GDP ratio of 85 percent at the end of 2013, Ibu said international financial institutions would declare the Maldives “bankrupt.”

The majority leader also criticised Finance Minister Jihad for failing to mention budgeted salary increases for military and police officers as well as plans to hire 800 new officers for the security services.

Combined with the transfer of about 5,400 employees in the health sector to the civil service, Ibu explained that the wage bill would shoot up by 37 percent.

Ibu further questioned whether funds would be available to implement the proposed public sector investment programme (PSIP) of MVR 3.1 billion (US$201 million).

“I am saying that not even 25 percent of this MVR 3 billion PSIP can be implemented next year,” he said, adding that details of lenders for the proposed loans were not provided.

Ibu also protested that the only project for Hinnavaru in 2013, the sixth largest population in the country, was a youth centre worth MVR750,000 (US$48,638).

Echoing the concerns of the parliamentary group leader, MDP MP Eva Abdulla revealed that MVR 6 million (US$ 389105) was added to the budget of the Maldives National Defence Force (MNDF) following the controversial transfer of presidential power on February 7.

Since the MDP government was ousted in the wake of a police mutiny on February 7, Eva said that the police and army have hired 250 and 350 new staff respectively.

Consequently, the institutions spent more than MVR 75 million (US$4.8 million) in addition to the approved budgets for 2012, she claimed.

The proposed budget of MVR 930.9 million (US$60.3 million) for defence expenditure in 2013 was meanwhile 14 percent higher than 2012.

Eva observed that the increase in the government’s wage bill of 37 percent was approximately MVR1.7 billion (US$110 million), which was also the amount allocated for harbour construction in the 2013 budget.

These funds should instead be spent for “harbours, education, sewerage and housing,” she argued.

“I know that the coming year is an election year. But what we know from the experience of [the presidential election in] 2008 is that the election cannot be won by adding employees to the government,” she said.

Coalition partners

Meanwhile, minority leader MP Abdulla Yameen, parliamentary group leader of the Progressive Party of Maldives (PPM), said that the government’s objectives or policies could not be discerned from the proposed budget.

“These projects are very random or ad hoc. The government’s planning should be better than this,” he said.

While continuing deficit spending and accumulating high levels of public debt was a serious concern, “a good thing about this budget is that it hasn’t considered taking funds from the MMA’s [Maldives Monetary Authority’s] ways and means account, or in common language printing money, to finance this MVR 4 billion (US$259 million) [deficit].”

Financing the deficit with loans from the central bank leads to depreciation of the rufiyaa and rising inflation, Yameen said.

Securing commercial or concessional loans to plug the deficit was however “fine in itself if it can be repaid,” he added.

While President Dr Mohamed Waheed Hassan Manik has noted the high salaries paid by institutions such as the People’s Majlis as “a serious problem,” Yameen said he could not see “any kind of sign” of reducing recurrent expenditure or salaries and allowances for government employees.

In his budget speech last month, Finance Minister Jihad noted that almost half of recurrent expenditure was paying salaries and allowances.

On the proposed revenue raising measures, Yameen said PPM could not support introducing GST for telecom services.

“I believe there should be ways to raise income for the government without taking this tax. Therefore, we, our party, cannot support trying to get MVR 200 million (US$12 million) in additional income through imposing GST on telecommunications,” he said.

Concurring with the MDP parliamentary group leader, Yameen called on the government to consult the Maldives Association of Tourism Industry (MATI) to determine whether the sector would be adversely affected by the proposed T-GST hike from 8 to 15 percent.

Government-aligned Jumhooree Party (JP) Leader MP Gasim Ibrahim, business magnate and chair of the budget review committee, said that parliament should consider the economic and social impact “at the micro-level” of the proposed revenue raising measures.

Gasim urged MPs on the budget committee to assess the costs and benefits of the proposed measures, noting that increasing import duties would lead to higher prices.

The MP for Alif Dhaal Maamigili appealed against proposing “unrealistic and empty documents” with the budget and pledging infrastructure projects that could not be delivered.

“The budget we passed for this year was in reality higher than MVR 16 billion (US$1 billion). But coming to year’s end we know from the revised budget that we achieved about MVR 12 billion or MVR 13 billion. So we are actually showing a dream to the public. We are intoxicating them with hopeful fantasies,” he said.

MP Visam Ali of the government-aligned Dhivehi Rayyithunge Party (DRP) meanwhile said it was regrettable that a sizeable portion of the population did not have access to “basic services” such as sewerage, water and electricity while the GDP per capita was forecast to exceed US$5,500 in 2013.

With public debt projected to reach 82 percent of GDP next year, Visam said immediate steps were needed to avoid “bankruptcy”.

She added that it was questionable whether the proposed revenue raising measures could be approved next year as the government had yet to submit any of the amendments or bills required for its implementation.

Visam also expressed concern with administrative costs for government offices increasing by more than MVR 500 million (US$32.4 million) in 2013 compared to this year, noting that it diverts funds away from the public sector investment programme.

In a recurrent complaint of most MPs who spoke during the budget debate, Visam said the two islands in her constituency were neglected in terms of development projects in 2013.

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Cabinet discuss debt reduction

The cabinet discussed reducing the level of public debt at its weekly meeting yesterday, exchanging views on debt repayment.

On August 10, Finance Minister Ahmed Inaz told parliament that the current administration inherited a dispersed outstanding debt of US$446.5 million owed to local and foreign banks. The new government obtained loans amounting to US$196.4 million as of April 30, 2011, of which US$5.1 million had been paid back.

The government meanwhile proposed a fiscal responsibility bill to parliament last month to impose limits on government spending and debt accumulation as part of its 18-bill economic reform package.

A UNDP paper on achieving debt sustainability in the Maldives published in December 2010 observed that “as a percentage of GDP, public debt levels have almost doubled from 55 percent in 2004 to an estimated 97 percent in 2010.”

“Public debt service as a percent of government revenues will more than double between 2006 and 2010 from under 15 percent to over 30 percent,” it continued. “The IMF recently classified the country as ‘at high risk’ of debt distress.”

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