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IMF delegation surprised by resilience of Maldivian economy

A delegation from the International Monetary Fund (IMF) expressed surprise at the “resilience” of the Maldivian economy in a meeting with MPs on the parliament’s public finance committee yesterday.

Dr Koshy Mathai, resident representative to Sri Lanka and Maldives, told MPs that the IMF was surprised that the economy has stayed afloat for years despite longstanding fiscal imbalances.

“For a long time we’ve been saying that reserves at the MMA [Maldives Monetary Authority] are very low and that the fiscal deficit is quite difficult and we expect the economy to run into some problems. But somehow the economy has shown resilience, a lot of resilience, and we’ve been surprised – happily surprised but surprised nonetheless,” he said.

The IMF was interested in “carefully studying” how the domestic economy has remained resilient in the face of soaring public debt and persisting budget deficits, Mathai said.

“Imports are on the shelf. If you go into a shop, you’ll find a wide range of imported goods there. You see people with motor scooters and cars and smartphones. You see people going on travel. All these are available, are done, even while the level of reserves at the MMA is quite low,” he observed.

In attendance at yesterday’s meeting were the committee’s chair, MP Abdulla Jabir, and MPs Abdul Ghafoor Moosa and Mohamed ‘Colonel’ Nasheed.

As the IMF delegation currently in the Maldives was on “fact-finding” or “exploratory mode” ahead of the organisation’s article IV consultation later this year, Mathai told the MPs that the team did not have “comprehensive policy recommendations” to share.

Fiscal consolidation

“One area where we have more clear ideas is an area where we’ve had discussions in the past, and that’s the need for fiscal consolidation,” Mathai continued.

Noting that “fiscal problems have been at the root of so many crises” in countries large and small, Mathai said that the the Maldives had “a government budget envelop that is very difficult to finance.”

“The deficit is quite large. Financing is difficult to find. Banks are not that willing to subscribe to treasury bills. We see treasury bill yields rising quite sharply. MMA external financing is difficult to mobilise as you all know. We’re left then with MMA printing money in order to finance expenditures,” he explained.

A second option was “running up arrears, unpaid bills to domestic suppliers,” he added.

Both methods posed serious challenges, Mathai continued, as the government’s failure to pay its bills “creates ripples effects throughout the entire economy.”

Moreover, printing money to finance deficit spending “puts a lot of pressure on prices” and central bank reserves, he said.

“Because in a small country like the Maldives, when the MMA prints money, that is an injection of purchasing power into the economy, it means more people can import things,” Mathai said.

Printing money therefore “creates increased demand for dollars, increased imports, pressure on reserves,” he noted.

“As I said, the system seems to work. The parallel market somehow is letting the economy work,” he observed.

Solutions

As new sources of financing the budget were not available in the short-term, Mathai suggested targeting subsidies to the poor and increasing tourism taxes.

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

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

Mathai also argued that the rates of taxation in the tourism sector were “quite low” compared to other tourist destinations.

Mathai said he paid “north of 20 percent” in taxes at a hotel in Fiji while the Tourism Goods and Services Tax (T-GST) in the Maldives was only recently raised to 12 percent.

It would not be “a tax on business” that would slow down the economy, Mathai added.

“Rather it is saying people are coming and enjoying all that the Maldives has to offer, so let them pay something for it,” he said.

As 70 to 80 percent of the Maldivian economy was “driven by tourism,” Mathai said that it was “only natural that the [tourism industry is] contributing resources for the economy to operate.”

He added that “rates of return on Maldivian resorts are among the highest in the world” with profitable payback periods.

However, compared to other tourism-dependent economies, Mathai said that government expenditure in the Maldives was comparatively “very high” due to the geographic dispersion of the population and the large public sector wage bill.

In the medium-term, Mathai recommended taking measures to reform the civil service, improve delivery of public services and increase efficiency by economising.

“Ultimately we need to do a structural adjustment to the budget so that it’s more sustainable,” he concluded.

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Finance Ministry imposes cost cutting measures

The Ministry of Finance and Treasury last week instructed all government offices to enforce cost cutting measures in a bid to reduce recurrent expenditures and manage government cash flow.

A circular issued by Finance Minister Abdulla Jihad instructed offices to limit overtime pay to no more than five percent of the office’s annual budget.

Other cost cutting measures included targeting subsidies, limiting allowances to 35 percent of an employees’ salary, and not covering phone expenses of senior officials – with the exception of cabinet ministers.

Moreover, offices were instructed not to hire speedboats for official travel in areas with a ferry service.

Finance Minister Jihad told local media this week that the government has also decided to reduce the MVR80 million (US$5 million) allocated in this year’s budget for civil servant’s salary bonus to MVR40 million (US$2.5 million).

Jihad said recurrent expenditure was too high for the government to “make ends meet.”

In December, parliament passed a record MVR17.5 billion (US$1.16 billion) budget for 2014, prompting President Abdulla Yameen to call upon the legislature to approve revenue raising measures proposed by the government.

On Sunday, parliament accepted with a 38-vote majority three bills submitted by the government to raise additional revenue.

The bills included an amendment to raise the Tourism Goods and Services Tax (T-GST) from eight to 12 percent as well as two amendments to the Tourism Act in order to reintroduce the discontinued flat US$8 bed tax and to require resort lease extension payments to be paid as a lump sum.

An 11-member subcommittee chaired by business tycoon Gasim Ibrahim – leader of the government-aligned Jumhooree Party – is currently in the process of reviewing the government-sponsored legislation.

The committee met representatives of the Maldives Association of Travel Agencies and Tour Operators (MATATO) and the Maldives Association of Tourism Industry (MATI) today to discuss the impact of the tax hikes on the sector.

Following the Majlis’s failure to extend the tourism bed tax before the end of last year, Jihad told local media that the resulting shortfall in revenue would be MVR100 million a month.

In an interview with Minivan News last week, Tourism Minister Ahmed Adeeb criticised parliament for going into recess without passing bills designed to generate income.

“This causes the budget to expand, but there’s no way for the government to earn enough to implement it. The T-GST matters even more to the state income. The state keeps expanding, the allowances and salaries keep increasing, but the income for all of this still depends on the 25,000 tourist beds. Unless we expand this, how can we increase what we earn? We can’t keep expanding the state, and then squeezing the existing tourism sector without expanding it,” Adeeb warned.

Recurrent expenditure

Shortly after assuming the presidency, Yameen announced that he would only draw half the presidential salary of MVR100,000 (US$6,500), and would reduce the number of political appointees at the President’s Office.

Submitting the 2014 annual budget to parliament last year, Jihad noted that recurrent expenditure (MVR12 billion) accounts for 73 percent of the total budget, with almost half spent on salaries and allowances for state employees in addition to administrative costs, interest payments and subsidies.

Jihad advised implementing a raft of austerity measures, contending that the “expensive” public management model adopted in the Maldives was inappropriate for a small island state.

Almost 50 percent of government income was spent on employees, Jihad observed, advising revision of the state pension system and reduction of the numbers of island and atoll councillors as well as members of independent institutions and boards of government-owned companies.

In its professional opinion on the 2013 budget, the Auditor General’s Office stated that a policy of population consolidation together with effective measures to reduce the public sector wage bill was necessary to rein in the continuing fiscal deficits.

When announcing his resignation at a press conference earlier this month, former Maldives Monetary Authority (MMA) Governor Dr Fazeel Najeeb contended that the structure of government was outsized for the Maldives and warned against printing money to cover the “far too hefty expenses of many state institutions.”

In November last year, Najeeb told parliament’s finance committee that the public bank account was overdrawn by MVR1.5 billion (US$97 million) as a result of having to finance government expenditure.

“When we have to accommodate every request by the government we are forced to act completely against the MMA law,” he said, referring to printing money.

Jihad explained to MPs on the committee that the government was forced to approach the MMA because foreign banks were refusing to buy or rollover treasury bills.

While MVR500 million (US$32 million) a month was needed to pay salaries and allowances for state employees, government income in some months was just MVR300 million (US$19 million), Jihad noted, leaving no option but turning to the central bank.

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Finance Ministry asks to transfer MVR650 million from development budget to pay government salaries

Finance Minister Abdulla Jihad sought authorisation from parliament yesterday (April 29) to divert MVR 650 million (US$42 million) allocated for infrastructure projects in the budget to cover recurrent expenditure.

Appealing for approval from parliament’s Finance Committee, Jihad revealed that by the end of the first quarter of 2013, offices have exhausted the yearly budget provided for recurrent expenditure, which includes salaries, allowances and administrative costs.

Jihad warned that government offices and independent institutions might be unable to pay wages or utility and phone bills if funds were not transferred from the MVR 1.8 billion (US$117 million) Public Sector Investment Program (PSIP).

“If not we will see people gathered and queuing outside the finance ministry,” Jihad was quoted as saying by newspaper Haveeru.

Responding to Jihad’s request, Finance Committee Chair MP Ahmed Nazim reportedly said he did not believe such a significant alteration to the budget could be approved at the Majlis committee level.

Parliament broke for a one-month recess yesterday at the conclusion of the first legislative session of 2013.

The Finance Ministry meanwhile issued a circular (Dhivehi) yesterday instructing government offices to cancel all overseas trips for the rest of the year with the exception of study tours, training courses and all-expenses covered trips funded by foreign parties.

The decision was approved by the cabinet as an austerity measure to reduce government expenditure, the circular stated.

Earlier this month, the cabinet decided to delay implementation of new development projects financed out of the state budget due to shortfalls in revenue.

Jihad told Minivan News at the time that infrastructure projects that have not yet started would be postponed in an attempt to ease cashflow issues.

The move followed parliament’s rejection of government-sponsored legislation to raise the airport service charge to US$30, which was among a raft of measures proposed by the Finance Ministry in the estimated 2013 budget to raise MVR 1.8 billion (US$116 million) in new income.

Other measures included hiking Tourism Goods and Services Tax (T-GST) to 15 percent from July 2013 onward, leasing 14 islands for resort development, raising tariffs on oil, introducing GST for telecom services, and “selectively” reversing import duty reductions.

Jihad told local media following the defeat of the bill to raise the departure tax on outgoing foreign passengers that the revenue raising measures were necessary to manage the state budget.

He confirmed to Minivan News at the time that the government was in the process of formulating a supplementary budget to be put before parliament.

Recurrent expenditure

Jihad meanwhile told MPs on the Finance Committee yesterday that the proposed transfer of funds out of the development budget was necessary before a supplementary budget could be submitted.

“If we do not do this we will not be able to manage the budget at all in the coming days,” he said.

Jihad contended that funds under the budget code for recurrent expenditure were running so low because parliament passed the proposed budget with large cuts to that item.

The Budget Review Committee headed by MP Gasim Ibrahim of the government-aligned Jumhooree Party (JP) approved omissions to reduce the budget from MVR 16.9 billion (US$1 billion) to MVR 15.3 billion (US$992 million).

The budget items that the committee made cuts to included overtime pay (50 percent), travel expenses (50 percent), purchases for office use (30 percent), office expenditure (35 percent), purchases for service provision (30 percent), training costs (30 percent), construction, maintenance and repair work (50 percent) and purchase of assets (35 percent).

The committee also instructed the Finance Ministry to reduce an additional MVR 605.7 million (US$39.2 million) from office budgets.

However, the committee added MVR 389 million (US$25.2 million) for infrastructure projects such as harbours, sewerage and water for islands.

Executive authority

Speaking at a function yesterday to inaugurate a Health Trust Fund, President Dr Mohamed Waheed suggested that the present financial constraints on the state was the result of Majlis allegedly abrogating executive powers.

President Waheed claimed that parliament had removed funds allocated for repair work in the budget.

“It has been cut [from the budget]. But equipment still has to be repaired even by transferring [funds] from another budget line. But the finance minister does not have the flexibility to do that as much as he used to have. It is done under the supervision of the Finance Committee,” he said.

The government was consequently facing difficulties in providing essential services to the public, Dr Waheed said.

The president and his cabinet were vested with the authority to run the government by both the constitution and voting public, he observed.

The present situation was however the result of “others trying to run the government” instead of the executive, he contended.

“I think that suffices for what I have to say,” Dr Waheed said.

Meanwhile, MP Abdulla Yameen, presidential candidate of the Progressive Party of Maldives (PPM) – the largest party in Dr Waheed’s ruling coalition – reportedly said at a ceremony last night that it would be difficult to accomodate the government’s request to reallocate MVR 650 million for recurrent expenditure.

Professional opinions

In December 2012, the Auditor General’s Office and the Maldives Monetary Authority (MMA) submitted professional opinions on the US$1 billion budget proposed by the Finance Ministry.

The central bank warned that the projected deficit in the 2013 budget was likely to adversely affect the foreign exchange market and foreign currency reserves while the Auditor General’s Office expressed concern with formulating the PSIP without either a national development plan or population consolidation policy..

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 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 was 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.

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Parliament’s Finance Committee revises pay scheme for senior state officials

Parliament today passed revisions to the pay scheme approved by the Finance Committee for senior officials in the executive, judiciary and independent institutions.

The revisions included a MVR 5,000 (US$324) pay raise for board members of the Maldives Inland Revenue Authority (MIRA).

Article 102 of the constitution states, “The President, Vice President, members of the Cabinet, members of the People’s Majlis, including the Speaker and Deputy Speaker, members of the Judiciary, and members of the Independent Commissions and Independent Offices shall be paid such salary and allowances as determined by the People’s Majlis.”

The task of determining salaries and allowances is entrusted to the Finance Committee under section 100(a) of the parliamentary rules of procedures.

Among the changes brought by the committee to the pay structure passed on December 28, 2010 was a monthly phone allowance of MVR 1,000 (US$65) for MPs, ministers, judges of the High Court and Supreme Court, members of independent commissions, the Prosecutor General, the Attorney General and the Governor of the Maldives Monetary Authority.

If the phone bill exceeds MVR 1000, the officials would be allowed to claim compensation for the cost of phone calls made for official purposes.

The Finance Committee also decided to discontinue monthly salaries for drivers of cabinet minister’s cars (MVR 7,500) as well as an allowance for petrol cost (MVR 1,000). Ministers would be instructed to settle the expenses out of their salaries from April 2013 onward.

However, the committee did not terminate similar expenses for other officials provided state cars.

The committee meanwhile approved raising monthly salaries of Maldives Inland Revenue Authority (MIRA) board members by MVR 5,000 (US$324) and the health insurance premium for judges and their parents from MVR 4,500 (US$292) to MVR 7,000 (US$454).

MIRA board members would now receive a monthly pay of MVR 15,500 (US$1,005).

Followings its review of the pay scheme and consideration of requests, the Finance Committee however decided not to increase the salaries of Maldives Broadcasting Corporation (MBC) board members.

The committee also decided against making any changes to the remuneration of MPs.

Moreover, requests by the Judicial Service Commission (JSC) for a committee allowance as well as an additional allowance for Criminal Court judges ruling on extension of detention for criminal suspects were denied.

The revised pay scheme was passed with 38 votes in favour, two against and five abstentions.

Presenting the Finance Committee report (Dhivehi) to the floor, MP Mohamed ‘Colonel’ Nasheed said the change to phone allowance was made in light of issues raised by the Auditor General’s Office in various audit reports regarding the waste of public funds and phone credit transfers.

The decision was made to impose one rule and limit for all institutions and reduce costs, the Maldivian Democratic Party (MDP) MP for Nolhivaram said.

As a recommendation to reduce state expenditure, the Finance Committee also decided to advise the government to merge the Customs Integrity Commission and the Police Integrity Commission to form a “National Integrity Commission” with oversight over all state institutions, Nasheed said.

Nasheed added that eliminating salary for minister’s drivers and fuel allowance would save 89 percent from the budget item.

Meanwhile, on December 23, the Finance Ministry issued a circular instructing government offices to arrange a medical insurance scheme for ministers, their spouses and children under 18 years of age to receive medical treatment in the Maldives as well as overseas in SAARC and ASEAN nations.

The offices were asked to make arrangements from their budgets for the health insurance scheme from the Allied Insurance Company with an annual premium of MVR 12,500 (US$810).

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Parliament passes MVR 15.3 billion budget for 2013

Parliament today passed a MVR 15.3 billion (US$992 million) state budget for 2013, reduced by more than MVR 1 billion (US$64.8 million) from the MVR 16.9 billion (US$1 billion) proposal submitted by Finance Minister Abdulla Jihad last month.

The budget was passed with 41 votes in favour, 28 against and no abstentions. MPs of the formerly ruling Maldivian Democratic Party (MDP) voted against the budget.

In addition to changes imposed by the Budget Review Committee, the estimated budget was passed with eight amendments approved at today’s sitting.

Among the amendments voted through included the scrapping of plans to revise import duties on oil, fuel, diesel and staple foodstuffs, as well as any item with import duty presently at zero percent.

An amendment instructing the government to conduct performance audits of the Human Rights Commission and Police Integrity Commission and submit the findings to parliament was passed with 53 votes in favour, ten against and four abstentions.

Amendments proposed by MDP MP Ali Waheed to shift MVR 100 million (US$6.5 million) to be issued as fuel subsidies for fishermen and MVR 50 million (US$3.2 million) as agriculture subsidies from the Finance Ministry’s contingency budget was passed with 68 votes in favour.

A proposal by Dhivehi Rayyithunge Party (DRP) MP Dr Abdulla Maussom to add MVR 10 million (US$648,508) to the budget to be provided as financial assistance to civil society organisations was passed with 57 votes in favour and three against.

Budget review

Presenting the budget report (Dhivehi) at Tuesday’s sitting, Budget Review Committee Chair MP Gasim Ibrahim said the committee held 31 meetings, spent 45 hours studying the proposed budget and met senior officials from 27 ministries and state institutions.

The omissions approved by the committee to reduce the budget from MVR 16.9 billion to MVR 15.3 billion were largely made from recurrent expenditure, the Jumhooree Party (JP) Leader said.

While Finance Minister Abdulla Jihad had agreed to MVR 1 billion in cuts, the committee decided to trim the budget “by a little bit more than that,” according to Gasim.

The committee approved cuts amounting to a total of MVR 1.6 billion (US$103.7 million).

However, he added, the committee added MVR 389 million (US$25.2 million) for infrastructure projects such as harbours, sewerage and water for islands.

The committee estimated that the cuts to recurrent expenditure would amount to MVR 1 billion (US$64.8 million) in savings.

The committee also instructed the Finance Ministry to reduce an additional MVR 605.7 million (US$39.2 million) from office budgets.

On the measures proposed by the Finance Committee to raise revenue, the committee approved revising import duties, raising the Tourism Goods and Service Tax (T-GST) from eight percent to 12 percent in July 2013, increasing airport service charge from US$18 to US$25, leasing 14 islands for resort development and imposing GST on telecom services.

The Finance Ministry had however proposed hiking T-GST from 8 to 15 percent in July 2013 and raising airport service charge or departure tax from US$18 to US$30.

The committee also decided to limit loans obtained in 2013 to finance the budget to MVR 2 billion (US$129.7 million) and prohibit the government from taking loans for development projects with an interest rate higher than seven percent.

The government has meanwhile been asked to provide details of the loans and guarantees planned for 2013 for parliamentary approval as required by amendments brought to the Public Finance Act in 2010.

Professional opinion from MMA and Auditor General’s Office

According to the Budget Review Committee report, the Maldives Authority Authority (MMA) advised the committee to reduce total expenditure to MVR 15 billion and attempt to reduce public debt.

The central bank warned that the projected deficit in the 2013 budget was likely to adversely affect the foreign exchange market and foreign currency reserves.

The MMA also advised the committee to pass a budget that would “facilitate” the Maldives joining the International Monetary Fund’s (IMF’s) “Staff Monitoring Programme.”

The programme would provide access to loans from the international debt capital market, the MMA said.

Speaking to press at the conclusion of a visit by an IMF mission last month, head of the delegation Koshy Mathai explained that the requested “Staff Monitoring Programme” would not involve disbursement of funds from the IMF.

“We would basically see how the government is doing against its own targets – it would set targets for itself for performance of these different economic areas – and then if the track record is built up and things are going well, then maybe later we could discuss having a programme where money is disbursed,” Mathai said.

Meanwhile, in its professional opinion on the budget, the Auditor General’s Office expressed concern with the public sector investment programme (PSIP) being formulated without either a national development plan or population consolidation policy.

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Population consolidation, rightsizing public sector essential to address budget deficit: Auditor General

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.

Consequently, 59 percent of recurrent expenditure and 42 percent of the total budget would be spent on state employees.

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.

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 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.

Fiscal imbalance

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.”

Population consolidation

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.

Deficit

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.

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Parliament passes bill on state wage policy to create Pay Commission

Parliament yesterday passed a bill on the state wage policy to create a National Pay Commission tasked with determining salaries and allowances for the public sector.

The wage policy legislation was passed with 46 votes in favour, two against and two absentions. The bill was submitted by Independent MP for Haa Dhaal Kulhudhufushi Mohamed ‘Kutti’ Nasheed and sent to committee for further review on March 30, 2011.

If ratified, a five-member National Pay Commission will be instituted within 60 days with part-time members appointed by the president for a five-year term.

The commission would be chaired by the Finance Minister and would determine salaries and allowances for state employees and authorise pay raises.

The commission would also formulate standards and rules for determining the state’s pay scale or appropriate salaries based on qualifications and nature of employment.

The bill stipulates that the commission must consider the cost of living, inflation and the consumer price index in determining wages.

Moreover, salaries should incentivise government employees to work in islands with small populations.

The commission would also have to consider the state’s resources, public debt and social justice in approving salaries and allowances.

Once the law comes into force, articles in the Human Rights Commission Act, Civil Service Commission Act, Defence Forces Act, Police Act, Elections Commission Act, Prosecutor General’s Act, Anti-Corruption Commission Act, Judicial Service Commission Act, Broadcasting Act, Customs Act and the Civil Aviation Authority Act that allows the institutions to determine wages for officials and staff would be abolished.

IMF recommendation

At a press conference held upon conclusion of a visit by an International Monetary Fund (IMF) mission last month, head of the mission Koshy Mathai stressed the importance of instituting a Pay Commission to streamline the pay structure for government employees.

“We have a lot of independent institutions in this country and they are all on different pay scales,” he observed.

“There’s no harmonisation within the public service. There are radically different pay scales. And that has problems in terms of incentivising staff to belong to one institution versus the other. And it also implies a lot of cost for the government. So establishing a Pay Commission that can set up a rational system of compensation for the entire public service seems like a priority.”

According to a report by the World Bank in May 2010 which identified the dramatic growth of the public sector wage bill as the origin of the Maldives’ ongoing fiscal imbalances, 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.”

Consequently, recurrent expenditure – wage bill and administrative costs – exceeded 82 percent of total government spending in 2010.

However, the new government’s efforts to enforce pay cuts of up to 20 percent and downsize the civil service – which employs a third of the country’s workforce – were met with “a severe political backlash from parliament,” the UNDP paper observed.

Recurrent expenditure

Presenting the 2013 budget to parliament earlier this month, Finance Minister Abdulla Jihad noted that of the proposed MVR 16.9 billion (US$1 billion) of government spending, more than 70 percent was recurrent expenditure.

During the budget debate in parliament, Majority Leader MP Ibrahim Mohamed Solih ‘Ibu’ 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.

Echoing the concerns of the parliamentary group leader, Maldivian Democratic Party (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.

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Deputy Minister paid salary with no record of attendance, Tourism Ministry audit report reveals

A Deputy Minister at the Ministry of Tourism, Arts and Culture was paid salary and allowances from April 2011 to January 2012 with no official records of attendance, the ministry’s audit report for 2011 has revealed.

The audit report (Dhivehi) made public on Tuesday stated that a total of MVR 343,351 (US$22,267) was paid to the senior official for 10 months while there was no documentation to show that he “ever attended either the ministry or any office functioning under the ministry.”

The Auditor General recommended recovering the funds and taking action against the responsible staff at the ministry.

While there was no specific regulation governing attendance of political appointees at the time, the Auditor General contended that paying salaries without attendance records was against “the spirit of the public finance regulations.”

In addition, the audit discovered that the ministry gave a temporary license or authorisation to a private company to operate a tourist hotel at the Laamu atoll Kadhdhoo airport in violation of the Tourism Act.

The audit found that the permission was given despite an inspection report finding that the facility did not meet the criteria for a tourist guesthouse in terms of quality of service.

A tourist hotel is ranked higher than a guesthouse, the audit report noted.

Under articles 4, 18 and 19 of the tourism law, the report explained, a tourist hotel could not be operated on the plot at the regional airport.

The hotel was however operated from May 24, 2011 to December 25, 2011 before official permission or a permanent license was sought, the audit report noted.

Local media reported yesterday (November 28) that the guesthouse or hotel was operated by Heavy Load Maldives, a family business of MP ‘Reeko’ Moosa Manik, chairperson of the formerly ruling Maldivian Democratic Party (MDP).

The Auditor General recommended submitting the case to the Anti-Corruption Commission (ACC) for further investigation.

Minivan News is seeking comment from former Tourism Minister Dr Mariyam Zulfa.

The audit report also noted that temporary authorisation or licenses for operating guesthouses were renewed “some times for over a year” while the facilities did not meet the requisite criteria.

Moreover, registration and licenses were provided to some dive centres and guesthouses without collecting registration and licensing fees.

In other cases highlighted in the report, the audit noted that documentation was not properly maintained for equipment such as camera and mobile phones purchased in 2010.

As a result, equipment provided for use by staff was not recovered when the employees left the office.

In addition, the Tourism Ministry did not maintain a detailed income registry with reference numbers and dates as required by the public finance regulations. The regulations require that the registry must be routinely shared with the Finance Ministry.

“However, inquiries for the Ministry of Tourism’s 2011 audit revealed that such a record [of income] was not prepared and maintained,” the audit report stated. “As a result, we note that it could not be confirmed whether the incomes due to the ministry was received in full.”

Offices and departments under the Tourism Ministry

The audit report noted that the Tourism Ministry’s audit for 2011 was conducted without any documentations or financial records from the Department of Information (DOI) operating under the ministry.

Repeated requests for documents from the department went unheeded, the report stated, adding that the financial statement of the DOI was not provided for the 2010 audit either.

On Monday (November 26), the President’s Office announced that the DOI has been abolished as new institutions formed by the 2008 constitutions carries out the functions previously performed by the department.

“Following this change, registration of media; formulating policies and facilitating the development of local media; creating the official Maldives’ calendar; maintaining the registry of journalists and writers; and, representing the Maldives internationally in the press field will be carried out by the Ministry of Tourism, Arts and Culture. Information to international media on local events will be given by the Ministry of Foreign Affairs,” the President’s Office stated.

Meanwhile, concerning the other offices operating under the ministry, the audit found that employees of the Maldives Tourism Promotion Board (MTPB) were paid overtime salaries in violation of the civil service regulations for calculating overtime.

The audit also noted that clothing allowance was paid to all employees in January 2011 in anticipation of overseas trips to attend tourism fairs. However, the allowance was not recovered from two staff at MTPB who did not travel abroad during the year.

An audit of the National Centre for the Arts (NCA) meanwhile revealed that MVR 24,735 (US$1,604) was spent out of the budget on tickets for a lecturer and his family for a “one-day creative writing workshop” on November 19, 2011.

However, an official agreement was not signed between the lecturer and the NCA and there was no documentation at the centre regarding the workshop.

The NCA also spent MVR 33,000 (US$2,140) during a ten-day period on food for 20 staff working on a “Male’ Art Festival” in excess of the approved rate in the public finance regulations. Catering was also arranged without a public announcement after seeking quotations from only two parties, the audit found.

A total of MVR 19,750 (US$1,280) was spent on catering for seven events organised by the NCA in 2010 without seeking quotations from more than one party.

The catering contract was awarded to a particular party at a rate of MVR 50 per person while the public finance regulations specify a rate of MVR 40 per person.

Aside from a note from NCA and catering bills, the audit report noted that no other documentation for the transactions could be found at the NCA.

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