A policy of population consolidation together with effective measures to reduce the public sector wage bill is necessary to address continuing budget deficits, the Auditor General has advised parliament.
The recommendations were made in a report (Dhivehi) submitted to parliament with the Auditor General’s professional opinion on the proposed state budget for 2013.
Auditor General Niyaz Ibrahim observed that of the estimated MVR 12 billion (US$778 million) of recurrent expenditure, MVR 7 billion (US$453.9 million) would be spent on employees, including MVR 743 million (US$48 million) as pension payments.
Consequently, 59 percent of recurrent expenditure and 42 percent of the total budget would be spent on state employees.
“We note that the yearly increase in employees hired for state posts and jobs has been at a worrying level and that sound measures are needed,” the report stated. “It is unlikely that the budget deficit issue could be resolved without making big changes to the number of state employees as well as salaries and allowances to control state expenditure.”
The report noted that the bill on state wage policy recently passed by parliament would not address the issue as the legislation focused “mainly on reviewing salaries of state institutions.”
The Auditor General’s Office contended that “major changes” were needed to right-size the public sector and “control the salary of state employees and expenditure related to employees.”
The report observed that compared to 2012, the number of state employees is set to increase from 32,868 to 40,333 – resulting in MVR 1.3 billion (US$84.3 million) of additional expenditure in 2013.
This anticipated increase included 864 new staff to be hired by the Maldives Police Service (MPS) and Maldives National Defence Force (MNDF), the report noted.
In light of “existing inefficiencies” in the state, the Auditor General contended that hiring more staff for various independent institutions would be “a waste of public funds” as it would divert resources from service provision and development projects.
“Moreover, we note that increasing the number of employees would lead to an increase in office expenses and expenditure on employees’ retirement and pensions, decrease the number of people left to do productive work in the private sector (decrease the labour force), and slow the growth of the country’s economy,” the report stated.
Details of the state’s wage bill included in the report showed that MVR 187 million (US$12 million) was budgeted as salaries and allowances for 545 political appointees in 2012.
In addition, MVR 1.98 billion (US$128.4 million) was to be spent on 18,538 civil servants; MVR 999 million (US$64.7 million) on 6,244 police and army officers; MVR 362 million (US$23.4 million) on 1,455 elected representatives and attendant staff; MVR 485 million (US$31.4 million) on 3,372 employees of independent institutions; and MVR 345 million (US$22.3 million) on 2,714 contract staff.
In 2011, the Finance Ministry revealed that MVR 99 million (US$6.4 million) would be spent on 244 political appointees annually as salaries and allowances.
According to the weekly financial statement released by the Finance Ministry, recurrent expenditure as of December 20, 2012 has reached MVR 8.9 billion (US$577 million). Roughly half was spent on employees.
A report by the World Bank in May 2010 identified the dramatic growth of the public sector wage bill as the origin of the Maldives’ ongoing fiscal imbalances.
According to the report, increases to the salaries and allowances of government employees between 2006 and 2008 reached 66 percent, which was “by far the highest increase in compensation over a three year period to government employees of any country in the world.”
“Between 2004 and 2009, the average monthly salary of a government sector worker increased from MVR 3,223 (US$250) to MVR 11, 136 (US$866),” explained a UNDP paper on achieving debt sustainability in the Maldives published in December 2010.
Former President Maumoon Abdul Gayoom responded to growing calls for democratisation with “a substantial fiscal stimulus programme” of increased government spending, “much of which was not related to post-tsunami reconstruction efforts.”
“This strategy led to a large increase in the number of civil servants from around 26,000 in 2004 to around 34,000 by 2008 or 11 percent of the total population. Thus the government simultaneously increased the number of public sector workers as well as their salaries,” the paper noted.
Consequently, recurrent expenditure – wage bill and administrative costs – exceeded 82 percent of total government spending in 2010. Presenting the estimated budget for 2013, Finance Minister Abdulla Jihad noted that more than 70 percent was recurrent expenditure.
“As in other years, the highest portion of recurrent expenditure is expenditure on [salaries and allowances for government] employees,” Jihad explained. “That is 48 percent of total recurrent expenditure.”
Meanwhile, the Auditor General’s report noted that the government planned to carry out 406 projects under the public sector investment programme (PSIP) at a cost of MVR 3 billion (US$194 million).
The Auditor General however contended that the projects were formulated “without a national development plan” and that there was “no relation between the PSIP’s purpose and the proposed projects.”
While the stated purpose and policy of the government was population consolidation, the report stated that the harbour, sewerage, land reclamation, housing, coastal protection and other projects were included in the budget “without a plan” for integrating island populations in urban centres.
The Auditor General’s Office therefore advised against carrying out the projects planned for 2013 in the absence of a plan for population consolidation.
The report observed that “the main reason the state’s recurrent expenditure has increased” was developing 200 inhabited islands “as single units” and attempting to provide healthcare, education, social, administrative and legal services to small island populations.
The report stated that pursuing a policy of population consolidation was “essential”.
It added that the return on the investment for relocating populations of small islands would be seen in savings from the state’s budget for providing services to geographically dispersed islands.
While implementing such a policy could prove difficult, the Auditor General’s Office believed that “a national consensus” could be reached on the need for consolidating population.
Moreover, a glance at the state’s expenditure showed that continuing fiscal imbalances or budget deficits were “inevitable” if such a policy was not formulated, the report stated.
The Auditor General explained that the fiscal deficit in 2012 was MVR 1.5 billion (US$97.2 million) more than forecast because of a shortfall in projected revenue from taxes and import duties as well as higher than budgeted expenditure on government companies and subsidies.
However, while revenue from Goods and Services Tax (GST), import duties and tourism land rent was lower than budgeted estimates, income from Business Profit Tax was more than expected at MVR 613.3 million (US$39.7 million).
The government also spent MVR 862.3 million (US$55.9 million) from the 2012 budget to settle bills outsanding from the previous year, the report noted
The Auditor General’s Office observed that revenue from the newly introduced GST was not enough to offset lost income from reducing and eliminating import duties.
“As a result of the change to the state’s taxation system, income to the state declined by MVR 495 million (US$32 million),” the report noted.
As reducing import duties had not resulted in a noticeable drop in prices, the Auditor General recommended reviewing the changes in consultation with the relevant authorities and amending the tax laws.
The 2013 budget
The Auditor General observed that the budget proposed for 2013 was 2.7 percent higher than 2012 and 19 percent higher than 2011.
An estimated budget deficit of MVR 2.33 billion (US$149 million) was to be financed by MVR 1.15 billion (US$74.5 million) in foreign loans and MVR 1.17 billion (US$75.8 million) in domestic finance.
Echoing a concern expressed by MPs during the recent budget debate, the Auditor General noted that projected revenue included MVR 1.8 billion (US$116 million) expected from new revenue raising measures that require parliamentary approval.
A recent mission from the International Monetary Fund (IMF) had urged the government to implement a raft of measures to raise revenues, advising that strengthening government finances was “the most pressing macroeconomic priority for the Maldives.”
The measures proposed by the Finance Ministry included revising import duties, hiking T-GST from 8 to 15 percent in July 2013, raising airport service charge or departure tax from US$18 to US$30, introducing GST for telecom services and leasing 14 new islands for resort development.
On the last proposal, the Auditor General advised that the islands should not be leased without consulting the tourism industry and studying the impact of the decision in consideration of the tourism master plan.
The Auditor General concluded that it was “unlikely” that the new revenue would be collected in 2013.
Consequently, if there was a significant shortfall in income, the Auditor General warned that government revenue would not be enough to cover recurrent expenditure.
“Therefore, we note that it is very likely that MVR 509.9 million (US$33 million) would have to taken as loans to cover recurrent expenditure,” the Auditor General stated, advising that it was “necessary” to reduce recurrent expenditure by that amount before the budget is passed.
As a result of financing budget deficits with loans for the past six years, the Finance Ministry revealed earlier this month that government spending on loan repayment and interest payments was expected to reach MVR 3.1 billion (US$201 million) in 2012.
Moreover, the total public debt would stand at MVR 27 billion (US$1.7 billion) in 2012 and MVR 31 billion (US$2 billion) in 2013 – 82 percent of GDP.