The Maldives is set to receive US$12m in World Bank funding in a bid to bolster its national pension scheme, according to regional news reports.
Haveeru, citing a report in the Colombo-based Daily Financial Times paper, said that the funding was unveiled last week by Diarietou Gaye, World Bank Country Director for Sri Lanka and the Maldives.
According to Gaye, the provision of the funding was approved on Thursday (June 2, 2011) as a means to supply additional finance to ensure national social protection measures were available to poorer sections of Maldivian society.
The report stated that funding was expected to be distributed over a four year period from August this year by the World Bank’s own lending body – the International Development Association (IDA).
The World Bank funding is reported to be part of a restructuring programme of the Maldives Pension and Social Protection Administration (PSPA), which has already been the subject of parliamentary amendments earlier this year relating to expatriate payments.
The Maldives has been ranked as one of the world’s most economically-repressed countries, in the 2011 Index of Economic Freedom report produced by the Wall Street Journal and Washington think-tank The Heritage Foundation.
The Maldives is ranked 154th out of the 183 countries ranked, a slight drop on last year but still significantly below the global and regional average, placing 34th out of 41 countries in the Asia Pacific region.
Economic freedom, as defined by the report, “is the fundamental right of every human to control his or her own labor and property.”
The Maldives scored well for several indices, including business, fiscal, trade and labour freedom, but scored poorly for government spending, corruption and property rights.
“The Maldives’ weaknesses include chronically high government spending, inefficiency of the outsized public sector, and widespread corruption,” the report observed.
The government’s role in the economy through state-owned enterprises – and employment of over a third of the country’s total labour force – was “crowding out private-sector activity.”
Furthermore, “public-sector graft remains a challenge for foreign firms operating in the Maldives”, while “bureaucracy can be non-transparent and prone to corruption. Dispute resolution can be slow, complicated, and burdensome.”
Minister of Economic Development Mahmoud Razee noted that with regard to corruption, “in the past the country has not had the institutions to monitor and provide transparency, but now the information is available. It’s the difference between having a dirty or a clean window – one lets you see inside to the full picture.”
Several companies investing in the Maldives – including Indian infrastructure giant GMR and Malaysian security technology firm Nexbis – have had their share prices become collateral in local political rivalries following accusations of corruption.
“It’s one thing to be accused of something,” Razee said. “I’m sure most companies think about this [problem], but we have not seen it become a huge issue.”
Development of the private sector was stymied by “costly credit and limited access to financial services” the report noted, and while labour regulations were flexible, “enforcement is not effective in the absence of a dynamic labor market.”
The International Monetary Fund (IMF) has consistently urged the Maldives to reduce the size of its bloated civil service wage spend, which ballooned 400 percent between 2004 and 2009.
“With the government borrowing at the rate it has, it reduces the amount of credit available to the private sector, and that constrains the ability of the private sector to provide jobs and employment,” leader of the Maldives IMF delegation, Rodrigo Cubero, said in November last year.
“That then constrains economic growth. Furthermore, by spending more than it earns, the government is putting pressure on imports and the exchange rate.”
Razee noted that the introduction of new tax regulation such as the GST and Business Profit Tax, “while not the panacea to everything, shows the government’s willingness to come to terms with [the country’s economic condition].”
“If you look at the level of companies interested and investing in the Maldives, it has not lessened,” he said.
On a positive note, the report observed the potential of the government’s mobile phone banking project, dubbed ‘Keesa’, to enhance development in the private sector. Keesa is being jointed developed by the Maldives Monetary Authority and Dhiraagu, with World Bank assistance.
Summarising, the report observed that higher levels of economic freedom “correlated strongly to a country’s overall well-being, taking into account factors such as health, education, security and personal freedom.”
Hong Kong and Singapore were ranked top, followed by Australia, New Zealand, Switzerland and Canada. North Korea, Zimbabwe and Cuba were ranked at the bottom.
The Maldives has appealed to the World Trade Organisation (WTO) to soften the impact of the country’s graduation from Least Developed Country (LDC) to middle income status.
The Maldives will graduate on January 1, 2011, and lose access to both concessional credit, certain trade concessions, and some of the foreign aid upon which aspects of the country – such as civil society – have historically depended on for both skills and financial support.
The country’s Permanent Representative to the WTO, Iruthisham Adam, told the organisation’s general council that while the Maldives welcome the graduation as a “positive
step in the country’s development”, the country would nonetheless “continue to require special treatment and support from international partners.”
The Maldives ,said Ambassador Adam, remained ”acutely vulnerable at economic, commercial and environmental levels” and would therefore require “certain flexibilities”, particularly in regards to trade.
The UN had “ignored the issue of vulnerability” in its decision to graduate the Maldives from the list of LDC countries “on the basis of its strong socio-economic development over recent decades.”
She noted that the Maldives will be the first member of the WTO to graduate and suffer the deprivations attached to loss of LDC trade concessions.
A World Bank Economic Update Report released last month showed a per capita Gross Net Income (GNI) for the country of US$4090 for 2010, up from US$3690 last year.
However it noted that fiscal consolidation – reigning in the ballooning budget deficit with austerity measures and the introduction of taxation on business profits – “remains the foremost challenge in the coming years”.
“A less destructive political climate” will be needed to maintain recent positive developments, the World Bank cautions.
“Despite having posted better-than-expected fiscal results in the first half of the year, the country will be hard-pressed to sustain this in the medium term.”
Minivan News understands that the government will be announcing its plans later this week for mitigating the impact of the graduation.
State Minister for Finance Ahmed Assad has previously told Minivan News that while the government has included the graduation in its financial predictions, the Finance Ministry had banked on the Majlis passing the tax bill by June 2010.
“Some people say [the graduation] will increase borrowing capacity and give us more independence,” Assad said. “But like becoming an adult, it means taking on both freedom and responsibilities.”
An internal report by the World Bank, obtained by Minivan News in May, revealed that the doubling of spending on state salaries in 2007-09 crippled the country’s economy, and left the Maldives “facing the most challenging macroeconomic situation of any democratic transitions that has occurred since 1956.”
Corruption is rife in Male International Airport privatisation process, according to the Dhivehi Rayyithunge Party (DRP), the Peoples Alliance (PA), the Dhivehi Qaumee Party (DQP) and the Jumhooree Party (JP). The opposition parties have signed an agreement to work against the privatisation process.
The government’s haste in the bidding process, at a time when there is a bill pending in the Majlis which would regularise the process of selling public assets, is troubling and a case would be lodged with the anti-corruption commission, say the president of DQP, Dr. Hassan Saeed and the president of People’s Alliance, Abdulla Yameen.
Saeed also noted that the move comes at a time when public confidence in the government is at rock-bottom. The airport should be developed by the Maldives Airports Company (MAC), according to Saeed, and if the same provisions which the government is allowing for GMR were allowed for MAC, it would be able to develop the airport.
They also said that a Majlis amendment is necessary to raise the airport service charge from US$18 to US$25, which the government has promised to GMR.
Experts have said that privatisation of US airports was one reason which led to 9/11 attacks in US, said Yameen, and privatisation could cause loss of revenues to companies which operate through the airport, such as Island Aviation Services. GMR’s fuel charges, airport tax and charges for flights landing at the airport could cause tourist arrivals to decline, he said.
Because of the financial and economic crisis, this is not the best time to sell an asset like the airport, Yameen said, and in the bidding process, highest marks should not be given to the company which pays the largest amount upfront, but to the company which gives the most throughout the lease period.
The government has never requested money for the airport development from the Majlis, Yameen said.
GMR should consider the views of the people and the opposition parties before making a final decision, said Dr Hassan Saeed in response to a question from Miadhu Daily. “Even if they sign the agreement, and even if they take over management of the airport, we will do whatever we can to cancel the agreement. We will go to Court, and I have a guarantee that we can win this case.”
Haveeru Online reports the Bangalore-based GMR has proposed to pay US$78 million (almost Rf1 billion) upfront to the Maldivian government, one percent of the total profit in the first year (until 2014) and 10% of total profit from 2015 to 2035. The company also agreed to pay 15% of fuel trade revenues in the first four years and 27% from 2015 to 2035.
President Nasheed has said that with privatisation, “the government will be able to save over US$300 million in investments.” The government had launched the airport tender process in October 2009. The President said the International Financial Corporation, a member of the World Bank Group, worked with the government throughout the process, and he was “confident the tender process was transparent and ensured there was no room for corruption.”
The World Bank has granted more than Rf160,000 to two local NGOs for social projects, according to Haveeru Online.
The bank granted US$12,500 (Rf160,625) from its Civil Society Fund to the Live and Learn Environmental Education and the Maldives NGO Federation, during a function held at the Holiday Inn, Male, on Wednesday.
The Live and Learn grant will be used for a project to manufacture chilli sauce from locally grown chillies, and the NGO Federation grant will develop two video units in Fuvahmulah (Gnaviyani) and Addu (Seenu) atolls.
Executive Director of World Bank Group Dr Mirza Hassan said the bank’s aim was to foster a close relationship with Maldivian civil society. “This is the first time such aid has been provided to Maldivian NGOs. It has been decided to provide such aid to other local NGOs as well,” said Dr Hassan.
A report in major US newspaper The New York Times has claimed that the Maldives government is seeking to seize US$400 million allegedly stolen by the former government, assisted in its recovery efforts by the Stolen Asset Recovery Initiative (StAR).
StAR is a joint initiative of the World Bank and the United Nations, which claims to have recovered US$5 billion over the past 16 years. It estimates conservatively that between US$20-40 billion is stolen annually from developing countries “through bribery, misappropriation and corruption – about 15 percent to 30 percent of aid to the developing world.”
In the Maldives, a number of politically-connected figures, including former President Maumoon Abdul Gayoom, had now become the targets of “increasingly coordinated efforts to repatriate misappropriated funds,” the NYT report said.
“Results to date have been encouraging, but much more can be done,” the NYT said, citing “officials and development experts.”
Representatives of the former government have steadfastly denied the existence of stolen funds. Gayoom’s assistant and former chief government spokesperson Mohamed Hussain Shareef (Mundhu) told Minivan News in December that “there is no evidence to link Gayoom to corruption”, and urged accusers “to show us the evidence.”
“If you have the details make them public, instead of repeating allegations,” he said. “[The former president] has said, ‘go ahead and take a look, and if you find anything make it public.’”
Friday’s report in the NYT described the Auditor General’s report, published in 2009, as “a guidebook on self-enrichment.”
“An estimated US$9.5 million was spent buying and delivering a luxury yacht from Germany for the president; $17 million was spent on renovations of the presidential palace and family houses. Mr Gayoom built a saltwater swimming pool, a badminton court and a gymnasium, and he bought 11 speed boats and at least 55 cars — including the country’s only Mercedes-Benz,” the NYT noted.
“And the list goes on, from Loro Piana suits and trousers to watches and hefty bills for medical services in Singapore for ‘important people and their families. There was a US$70,000 trip to Dubai by the first lady in 2007, a US$20,000 bill for a member of the family of the former president to stay a week at the Grand Hyatt in Singapore. On one occasion, diapers were sent to the islands by airfreight from Britain for Mr Gayoom’s grandson.”
The Auditor General Ibrahim Naeem was dismissed in late March by an opposition-controlled parliament (Majlis) following a no-confidence motion and allegations of corruption.
Naeem, who was himself appointed by the former president and a then-ruling party majority Majlis, claimed at the time that the charges were an attempt to discredit his office and prevent him from reclaiming the government’s money stored in overseas bank accounts.
“A lot of the government’s money was taken through corrupt [means] and saved in the banks of England, Switzerland, Singapore and Malaysia,” Naeem said in March, during his first press conference in eight months.
The Maldives government has meanwhile “begun the paper chase”, Friday’s NYT report claimed, “but it lacks the resources to unravel a complex trail that it assumes runs through the British Channel Islands, Singapore and Malaysia.”
“Much of the looted money ends up in complex corporate structures and bank accounts held by associates offshore, making it hard to identify the beneficial owners. This raises the issue of tightening regulation of service providers and of the legal firms that create front companies that invest in assets like real estate and art,” the report noted.
However, “large banks now recognise the issue” and were increasingly willing to cooperate with international financial investigators.
“Eleven leading lenders, including UBS and HSBC, have formed the Wolfsberg Group, an association to develop standards to counter money laundering and terrorist financing,” the NYT said, adding that governments were being urged to provided lists of “politically exposed persons, those potentially subject to corruption because of their jobs.”
The NYT spoke to Finance Minister Ali Hashim, who said that “the banks and other institutions came from abroad, and lowered their standards to the standards that were in the country.”
Foreign bank managers were given free holidays on luxury tourist resorts, Hashim told the NYT, which might have made it “hard for those managers to subsequently turn down risky or inappropriate credit requests.”
Hashim said the government now needed the money to offset a decline in tourism and plug the country’s 34 percent budget deficit.
“What we are asking the World Bank is, help us get this back,” Hashim told the NYT. “Then we won’t need to have that much foreign aid.”
An internal World Bank bank report produced for the donor’s conference, called ‘Placing the Macro Challenge Facing the Maldives in Context’ has revealed the full extent of the economic challenge facing the country.
“The Maldives faces the most challenging macroeconomic situation of all democratic transitions that have occurred since 1956,” the report claims, noting that the full level of financial strife “may not be fully appreciated.”
In terms of GDP growth rate the Maldives is in the lowest 10 percent of the distribution of all transitions, and in terms of public sector deficit, the Maldives faces the worst situation of all previous democratic transitions.
Under the heading ‘How did the Maldives get into this situation?’, the World Bank report notes that “the origin of the crisis is very clear… the wage bill for public sector employees grew dramatically in a very short time.”
An accompanying graph of the country’s total spending on ‘salaries and allowances’ shows a doubling of expenditure between 2003 and 2007, and a sharp increase between 2007 and 2009 as spending more than doubles yet again from Rf2 billion to almost Rf5 billion. Revenues meanwhile plummet steadily during 2008.
Inflated spending on salaries in 2007 sparked an economic crisis
“Even before government revenues fell and when government revenues were at an all time high in 2008, the ratio of the wage bill to revenues at 46.5 percent was also at an all-time high (46.5 percent compared to an average of 38.1 percent between 2000 and 2007). When revenues plummeted in 2009, the share of the wage bill to revenues rose an astronomical 89 percent,” the report explains.
“While part of the increase was due to hiring more workers, the major part of the increase was due to the increase in compensation,” it said.
Increases to the salaries and allowances of government employees between 2006 and 2008 reached 66 percent, “by far the highest increase in compensation over a three year period to government employees of any country in the world,” the report noted.
Spokesman for the Civil Service Commission (CSC) Mohamed Fahmy said the increases needed to be considered in the context of “the total budget situation”, and were in line with government expenditure during the period.
“We have a tradition of salary increases every other year,” he said, rather than an annual increase based on inflation.
Those paid by the government included not only civil servants, “but political appointees, commissions, the judiciary”, he emphasised.
“Our case all long has been that everyone employed by the government has to be treated equally,” Fahmy said.
“If the government does not have the money to pay in full, then whatever it does have has to be paid out in an equitable manner that upholds the constitution. Everybody has to be treated equally – it is very important to make that distinction.”
World’s greatest tax haven
Meanwhile, the World Bank’s annual ‘Doing Business’ report for 2010 saw the Maldives’ ‘ease of doing business’ ranking fall from 71 to 87, and identified no ‘business-friendly’ reforms. The report acknowledges the Maldives as the world’s number one tax haven, although this could soon change if a pending bill on taxation is passed by Parliament.
Countries with successful business reforms “follow a longer-term agenda aimed at increasing the competitiveness of their firms and economy,” the report noted.
“But while successful reformers follow a clear direction in their policy agenda, they do not hesitate to respond to new economic realities,” it said. “Mauritius, the top-ranked economy in Sub-Saharan Africa, just announced a new insolvency act ‘to maintain the viability of the commercial system in the country.'”
The top countries in which to do business are Singapore, New Zealand and Hong Kong, the report noted.
Correction: An earlier version of this story described Mohamed Fahmy as a member of the ‘Civil Service Association(CSC)’. Fahmy is a member of the Civil Service Commission (CSC).
The World Bank has issued a report saying the Maldives was on the verge of economic collapse in 2008 when President Mohamed Nasheed’s government was elected, reports Miadhu.
According to the report, before the 2009 presidential elections, the Maldives was headed towards an economic crisis similar to that of Zimbabwe. The World Bank said the economic difficulties the country was facing was due to the previous government’s reckless fiscal discipline.
In late 2008 the country’s Gross Domestic Product (GDP) fell by almost 5 percent, while the government’s expenditure rose to almost 30 percent of the country’s income.
Adding to the previous administration’s increase in spending in their last two years in government, 50 percent of the state’s wage bill was going to civil servant salaries.
When the new government took over, the country’s debt stood at 110 percent of GDP according to Minister of Foreign Affairs Dr Ahmed Shaheed.
The International Monetary Fund (IMF) and the World Bank have made recommendations to President Nasheed’s administration on how to reduce the debt in a responsible manner, and the government has been implementing these recommendations.
The European Union has contributed EU€6.5 million (US$8.8 million) to the newly created Climate Change Trust Fund which aims to help the government of the Maldives in its bid to become carbon-neutral by 2020.
Minister of Finance Ali Hashim signed the tripartite Memorandum of Understanding (MoU) on behalf of the Maldivian government at a “little ceremony” held at the President’s Office this morning.
World Bank Country Director for Sri Lanka and the Maldives, Naoko Ishii, signed on behalf of the World Bank, and Ambassador of the European Union to Sri Lanka and the Maldives, Bernard Savage, on behalf of the EU.
The ceremony was attended by President Mohamed Nasheed, Vice President Dr Mohamed Waheed, Minister of Foreign Affairs Dr Ahmed Shaheed and State Minister of Foreign Affairs Ahmed Naseem, Minister of Health and Family Dr Aminath Jameel, members of the Danish delegation and other senior members of government.
Climate change trust fund
The trust fund will be administered by the World Bank for a period of three and a half years, with the majority of resources being used by the government to conduct their projects relating to climate change adaptation and mitigation.
The World Bank will offer security for donors and hopes more countries will add to the fund to help the Maldives break its dependency on fossil fuels.
The government intends to use the trust fund to “strengthen knowledge and leadership” in the government, build “adaptive capacity” through pilot programmes, develop renewable energy through low-carbon options and Public Private Partnerships (PPPs) and “improve policy and institutional capacities” in both public and private sectors to deal with adaptation and mitigation of climate change.
The trust fund will also be used to strengthen coastal protection, biodiversity conservation, tourism, fisheries industry, solid waste management and energy solution.
A Climate Change Advisory Council will be established and will include members from the government and will “provide strategic direction to the climate change activities under the trust fund.”
There will also be a Technical Committee composed of experts from the government, private sector and civil society. This committee will be responsible for reviewing and recommending project proposals for financing and monitoring the progress of the trust fund programme.
EU on climate change and the Copenhagen Accord
The European Union is the first to donate to the Maldives’ Climate Change Trust Fund and is paving the way for other countries and financial institutions to do the same.
President Nasheed and Connie Hedegaard
After the last international climate change summit in Copenhagen last year, President Nasheed proved himself to be an influential figure in the fight against climate change.
According to the CIA World Fact Book, the Maldives has the 174th largest population in the world out of 237 countries, but despite its small population and current status as a Least Developed Country (LDC), it has shown unmatched initiative in combating climate change.
Conversely, China and India, who are the two largest populations in the world and according to the New York Times are “among the largest and fastest-growing sources of greenhouse gas emissions in the world,” had not agreed to join the Copenhagen Accord until March 2010.
President Nasheed’s urge to “move into the Green Age” has made the Maldives a global voice on the issue.
The creation of the trust fund coincides with the EU’s newly appointed Commissioner of Climate Action, Danish national Connie Hedegaard, who is in the Maldives for two days to see the impacts of climate change in the country and oversee climate change adaptation programmes.
Hedegaard is currently running the EU’s climate change policy and will be departing for India after her visit to the Maldives.
Signing ceremony
Minister Hashim said this MoU showed the government is “making progress” on climate change adaptation, and noted that this was one of the promises the government made before they came to power and one of the “key elements…that we will deliver to the people.”
Ambassador Savage noted he was the very first European commissioner to visit the Maldives and found it “very appropriate” that he is the commissioner in charge for climate change action, “the very subject of the MoU that were are signing here today.”
He said climate change mitigation “demands urgent, cooperative and shared responsibility” and the “EU welcomes the opportunity to assist the government of the Maldives” to fulfil their pledge of carbon neutrality.
“The EU is and has always been a real friend of the Maldives,” Savage said, “so this MoU is a further indication of that friendship and also a recognition by the EU of the priorities set for the country’s development as it moves through this democratic change and into the future.”
He said the EU “recognises, shares and participates in the priorities set by the government of the Maldives and we wish to further cement that partnership as we move forward.”
Savage added that signing the MoU “in such distinguished company” showed the importance of climate change to both the Maldives and the EU.
Naoko Ishii said the World Bank thought the government’s bid to be carbon-neutral by 2020 was “a very ambitious goal but it’s not impossible to achieve.”
She said the World Bank was inspired by the government’s way of dealing with this challenge and hoped the trust fund “will really help you achieve your vision.”
“It’s crucial for Maldives to build a climate resilient economy and society through adaptation,” she said.
Ishii said “this could be a real opportunity for other donors to come in and help the government,” and was “so pleased to see there is an actual instrument to realise [the] dream [of carbon neutrality].”
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