Government announces austerity measures to rein in deficit

Government announces austerity measures to rein in deficit
September 25 22:19 2016

The finance ministry has slashed travel budgets, imposed a freeze on appointments, and ordered government offices to close by 2:30pm as it struggles to meet ambitious revenue targets.

The austerity measures, now an annual occurrence, were announced Thursday in a bid to “to reduce the budget deficit and ensure that important development projects proceed as planned,” the ministry said in an announcement.

Unlike previous years, development projects will not be put on hold, but all other capital expenses still require permission from the ministry.

The parliament, dominated by the ruling Progressive Party of the Maldives, passed a record budget of MVR27.5billion (US$1.7billion) for 2016. Some MVR22.8billion (US$1.47billion) was expected in revenue, of which MVR13.8billion (US$896million) was to be raised through taxes and MVR4billion (US$260million) through new revenue measures.

By the end of August, the tax authority had collected MVR10.28billion (US$667million) in taxes and lease of islands for tourism. While the figure does not meet revenue forecasts, it is a 6.6percent increase as compared to the same period last year.

The central bank meanwhile predicts a deficit of MVR3.4billion (US$220million) or 6 percent of GDP, but the World Bank believes the figure to be as high as 13.3 percent.

This may be because MVR1.5billion (US$100million) expected from lease of tax-free special economic zones is yet to be realised, while a tax on migrant worker remittances was only approved this month.

The government, however, has collected more revenue than projected from leasing islands and lagoons for tourism. It expected MVR462million (US$30million) from leases, but has already raised MVR733.6million (US$47.6million), according to figures by the tax authority.

A spokesman for the finance ministry denied financial troubles.

“There are no issues with revenue collection,” said Ahmed Aiman. “Every year at some point, we send this circular to decrease costs and manage our budget. Decreasing costs is part of our policy. We will be able to match forecasts. Everything is going according to the plan.”

But Ibrahim Ameer, a member of the opposition Maldivian Democratic Party, said the austerity measures were a sign of fiscal mismanagement.

“There is now a real fear that the government may not be able to pay salaries. [The measures] show that the government has serious issues with cash flows,” he said.

“The government’s fiscal policy has failed. It is worsening the dollar crisis. The government is using T-bills to bridge the deficit, which is having a negative impact on the private sector.”

Earlier this month, the Maldives Monetary Authority expressed concern over a dollar shortage, which the central bank said was driven by a slow-down in the tourism sector and high demand for dollars ahead of the annual pilgrimage to Mecca.

“All of this shows that the economy is not doing well,” Ameer added.

Although the government expects the economy to grow at 6percent this year, owing to by large infrastructure projects, the World Bank estimates the rate to be 3.5 percent.

The International Monetary Fund meanwhile warned earlier this year that the Maldives is now facing “a high risk of external debt distress” due to large increases in capital spending, which are wholly financed by external debt.

Ambitious projects such as the China-Maldives Friendship bridge and airport expansion could be transformative in the long-run, the IMF said, but poses financing risks due to persisting fiscal imbalances.

Tourism arrivals appear to be on the increase this year, showing a 2.3 percent growth at the end of July. At the end of that month, the Maldives had welcomed 730,353 tourists.

Figures for August have not been published yet, but Tourism Minister Moosa Zameer welcomed the Maldives’ 750,000th visitor, a Chinese national, on August 7. The government hopes to welcome 1.5million tourists this year.

 

Additional reporting by Shafaa Hameed