Finance Minister Ahmed Munawar presented for parliamentary approval Tuesday an MVR26.7 billion (US$1.7 billion) budget for 2017, almost a billion less than this year’s record budget.
Along with an ambitious infrastructure scale-up, Munawar said the budget is geared towards bringing the Maldives’ growing debt on a sustainable footing with new policies to reduce the longstanding gap between spending and income.
“This budget will be one that fulfils the government’s pledges to the people,” he said.
“To this end, the state’s recurrent expenditure will be lowered and a large amount will be spent on projects to pave the way for the transformative changes the government wants to bring to the Maldivian economy.”
Of the total spending planned for 2017, Munawar said 38 percent will be spent on social development programmes, 13 percent on economic development, 27 percent on public service provision, and 22 percent of debt servicing and developing a sovereign development fund.
The forecast for revenue is MVR21.9 billion, which includes MVR14.1 billion in taxes, MVR4.8 billion in non-tax revenue, MVR876 million as grant aid, and MVR2 billion from new revenue-raising measures, the minister said.
The estimated budget deficit of MVR3 billion – 0.5 percent of GDP – will be plugged through the sale of sukuk (Islamic bonds) and bonds to foreign buyers as well as treasury bills to domestic buyers.
The government in 2017 will prioritise waste management projects, Munawwar said, along with developing reclaimed land with housing projects, relocating the Malé commercial harbour to the nearby Thilafushi island as a special economic zone, and developing the ‘iHavan’ transhipment port in the northernmost Haa Alif Atoll.
Other projects include a 25-storey hospital tower in Malé, developing four new domestic airports, establishing industrial food production facilities and a fish meal plant as well as mariculture projects, he said.
Some MVR13.2 billion is earmarked for capital expenditure, of which 60 percent will be spent on the Public Sector Investment Programme.
Of the MVR14 billion allocated for recurrent expenditure, 61 percent will be spent on salaries, allowances, and pension for state employees, 16 percent on service provision and administrative costs, and nine percent on subsidies.
Munnwar said the government will implement policy changes such as targeting subsidies to the needy to reduce recurrent expenditure by 11 percent compared to 2016.
Recurrent expenditure has increased by 300 percent over the past ten years, he observed, leading to ballooning deficits as government spending has persistently outstripped revenue.
“As the budget deficit grows with such expenditure, it poses obstacles to repaying debt and reduces space for productive capital spending,” he said, stressing that effective measures for sustainable spending are “absolutely necessary.”
In recent years, the government has been plugging revenue shortfalls through the sale of treasury bills and bonds. The bulk of deficit financing is met from domestic sources such as commercial banks, the pension fund, and private businesses.
Public debt is estimated to reach MVR36.9 billion or 64 percent of GDP at the end of 2016, Munawar said.
The International Monetary Fund 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 is entirely financed through external loans.
The government has planned “major changes” to deficit financing next year, he continued, such as converting short-term debt to long-term and securing funds for development projects from the international financial market.
“US dollar bonds and such new financial instruments will also be introduced,” Munawar said. “The state’s debt will be managed through these reforms and pave the way for reducing the cost of debt servicing.”
He stressed that the primary balance of the 2017 budget – the government’s fiscal balance after excluding interest payments – is a surplus of MVR1.1 billion.
The government has also decided to set up a fiscal reserve called the “sovereign development fund,” Munawar said, which will increase the confidence of lenders and “reduce the debt burden on future generations.”
The main income source for the fund will be proceeds from a new US$25 airport development charge, he said, which will be levied on all departing international and domestic passengers at the Ibrahim Nasir International Airport.
The government expects to collect MVR1.1 billion for the fund in 2017.
Munawar said large-scale projects such as the China-Maldives Friendship bridge and developing a youth city in the reclaimed artificial island of Hulhumalé will continue in 2017.
The development of a new city connected by a bridge to the congested capital is part of the government’s population consolidation policy, he said, referring to plans to settle 70 percent of the Maldives’ 338,000-strong population in Hulhumalé.