Maldives ditches subsidy reforms, bets on SOE efficiency for budget savings

The president announced the policy reversal on May 3, claiming the move will generate equivalent savings without cutting public benefits.

“Instead of cutting programmes that support the people in order to make savings, we plan to make savings by running projects through this new model. That is our plan,” Muizzu said at his record-breaking press conference on World Press Freedom Day. 

Phasing out indirect subsidies for food, fuel and electricity, and targeting assistance to low-income households – a longstanding recommendation of the World Bank and the International Monetary Fund – was a key target of the “homegrown fiscal reform agenda,” a cost-cutting plan devised to avert a ruinous debt default. 

Reducing waste in the Aasandha health insurance scheme was still part of the plan, “but we are not going to do the other things,” the president said. The new plan seeks to carry out projects at cost and to put the bloated workforces of state companies to work. “We can achieve the cost-cutting planned under the reform programme by delivering infrastructure projects cheaply,” Muizzu told the press.

The government has yet to reveal any further details. The President’s Office was unavailable for comment.

Experts who spoke to the Maldives Independent were skeptical. They stressed the lack of information or projections on estimated savings to make any judgments. But they questioned the scheme of utilising redundant workforces without experience in specialised construction work.

“The key question is: What projects are we talking about and what type of work is it? Even with redundant workforces being utilised, do they possess the necessary skills? Simply having a surplus of workers does not cut it – technical expertise is essential,” a senior investment planning expert told the Maldives Independent.

According to President Muizzu, up to MVR 20 million (US$ 1.2 million) could be saved from an MVR 50 million harbour project, “if we are able to carry out that project at cost, or nearly at cost.”

Ahmed Mohamed, a former economic minister, said it was hard to see how costs could be brought down. 

“We need to be clear about what kind of projects are being discussed. What sort of specialised skills do these jobs actually require? You cannot just move someone from a state-owned company and expect them to build a wall, lay tiles, or wire a building,” he told the Maldives Independent. 

“These are skilled professions. Not everyone can be a mason, a tiler, or an electrician. It takes training. It takes hands-on experience. I honestly don’t see how a so-called redundant workforce is expected to simply step in and get it done.”

Over the next two years, most government projects will be carried out by “four or five SOEs” with weekly payments from the finance ministry, Muizzu said, describing it as a “special operation.” The State Trading Organisation will procure construction material in bulk, he said. 

Some projects will still be handed out to private contractors that rely on government work, Muizzu said. But experts have raised concerns over the impact on the private construction sector, to whom the government already owes unpaid bills worth MVR 2 billion.

“The private sector is under strain. Many contractors and suppliers are still waiting to be paid. Passing more work to state-owned companies will not fix that. It is the private sector that creates real jobs and moves the economy forward. That is where support is needed,” said Ahmed, who has served on several SOE boards.

“Capital investments in the form of government contracts and projects is a large part of what rolls the economy. This creates the multiplier effect. That has now been sharply reduced,” economist Athif Shakoor told the Maldives Independent in March.

Throughout the year, the government has maintained a budget surplus – which stood at MVR 1.9 billion by May – by drastically cutting back on capital investment. Capital expenditure has been down to eight percent of budget outlays compared to 21 percent in the same period last year.  

In contrast, recurrent expenditure shows no signs of belt-tightening. The wage bill was up by MVR 352 million. Despite touted reforms such as capping medicine prices, Aasandha expenses increased by MVR 78 million. The cost of debt servicing was MVR 2.5 billion. 

Since March, the government has awarded numerous projects to SOEs, chiefly Fenaka, the Road Development Corporation and the Maldives Transport and Contracting Company. 

“From what we have been told, Fenaka is not going to get paid beyond the running and administrative costs already paid through the budget. We will get construction material through STO and the instruction is to utilise our workforce for the construction projects,” a senior manager at Fenaka told the Maldives Independent.

The state-owned utility company has perennially been on the brink of bankruptcy. By 2022, Fenaka's short-term liabilities of MVR 2.2 billion outstripped assets valued at MVR 780 million. Fenaka's debt reached MVR 4.3 billion in 2024, the Muizzu government announced.

A new audit laid bare hiring sprees of recent election cycles – 1,501 new staff before the 2023 presidential election and 1,468 staff before the 2024 parliamentary elections with no new projects initiated. These hires were "solely to create new employment opportunities" rather than for operational needs, the audit concluded.

Contracting projects to Fenaka also represents a reversal of previous policy. In November 2024, the government canceled Fenaka’s water and sanitation projects on 19 islands. Fenaka "is a service provider and not a contractor capable of contract work,” Construction Minister Abdulla Muththalib told parliament in August 2024.

The pattern of policy reversals represent a failure to communicate, Ahmed Mohamed suggested.

“Every decision has consequences. The outcome might not be positive at first. It could even create political pressure. But that is exactly why the government needs to speak openly. People deserve to know what the plan is,” he said. 

“Will this help in the long run? Will it solve future challenges? These things need to be explained clearly. That kind of honest conversation has been missing for a long time. Government after government has struggled to speak plainly about cost-cutting.”

Successive administrations have paid lip service to reining in unsustainable spending, he said. “What is missing is the courage to follow through. And of course, people will react. That is part of the process. But too often, once the public pressure fades, the government quietly takes a U-turn. We have seen this happen with Aasandha, with pension changes, and with other fiscal reforms,” Ahmed said.

“If we want real change, then the government has to stay the course. But it also has to tell people why it matters. Without that, there is no trust,” he said.