IMF approves three year programme as Maldives commits to new tax regime
26 May 2011, 7:07 PM
JJ Robinson
The International Monetary Fund (IMF) has given preliminary approval for a three year economic programme in the Maldives, after the government agreed to “a package of policy reforms that will help stabilise and strengthen the Maldives’ economy.”
The IMF has spent two weeks in the Maldives meeting with President Mohamed Nasheed, Minister of Finance and Treasury Ahmed Inaz, Governor of the Maldives Monetary Authority Fazeel Najeeb, senior government officials, donors and the Majlis.
“The Maldives’ economy is growing robustly on the back of strong tourist arrivals, but it continues to suffer from large fiscal and external imbalances,” the IMF observed in a statement.
“The Maldives has recently faced challenges with respect to inflation, but there is no indication that inflationary momentum has risen. The introduction of the exchange rate band was a welcome step, but it needs support from a tightening of fiscal and monetary policies. The mission and the authorities agreed that such a tightening of policies would be important to promote fiscal and external sustainability, continued growth, and low inflation.”
The IMF agreed to a “medium-term” policy from the government to reduce its budget deficit “substantially”, “both through additional revenue measures – which would require the support and approval of the Majlis – and through expenditure restraint.“
“The authorities have introduced an initial voluntary separation plan for government employees and are continuing their detailed analysis of the public service, with an eye toward right-sizing government over the medium term,” the IMF noted.
“Monetary policy would be tightened to complement fiscal adjustment, counter inflation, improve confidence in the rufiya, and support international reserves. Gradual accumulation of international reserves, along with the fiscal space created through debt reduction, would reduce Maldives’s vulnerability to external shocks. Financial sector reforms will support the soundness of the banking system and increase the depth of the foreign exchange and financial markets.”
The IMF observed that if approved by the IMF’s Executive Board, the Maldives’ subscription to the program would likely encourage other key donors to contribute further financial support.
Speaking at a joint press conference held by the Finance Ministry and the Maldives Monetary Authority (MMA), Finance Minister Ahmed Inaz acknowledged that previous concessions made by the government with the IMF – such as reducing the public sector wage bill, “didn’t materialise because some of them were not politically possible in the country at the time.”
“But given the current situation we are hopefully the proposed medium-term measures we are proposing will be possible when [parliament] sessions resume.”
According to Inaz, under the new IMF program the Maldives has committed to:
Raise import duties on pork, tobacco, alcohol and plastic products by August 2011 (requires Majlis approval);
Introduce a general goods and services tax (GST) of 5 percent applicable to all sectors other than tourism, electricity, health and water (requires Majlis approval);
Raise the Tourism Goods and Services Tax (TGST) from 3.5 percent to 6 percent from January 2012, and to 10 percent in January 2013 (requires Majlis approval);
Pass an income tax bill in the Majlis by no later than January 2012;
Ensure existing bed tax of US$8 dollars a night remains until end of 2013;
Reduce import duties on certain products from January 2011;
Freeze public sector wages and allowances until end of 2012;
Lower capital spending by 5 percent
“This is not about how much we get from IMF or donor agencies, this is something we been advocating, even if we have not been heard,” said Inaz. “We have always been saying that the deficit should be balanced with additional revenue measures.”
Cutting the deficit by sacking state employees – current 75 percent of the state budget – was not possible at the moment, he said, “although we are trying our best with redundancy payments.”
“Hopefully 1350 [voluntary redundancies will bring us Rf101 million in savings next year, but that not enough. State revenue has to increase with the new constitution. We hope the Majlis will approve these bills, and we hope much of the burden of the deficit will be released in 2012.”
Governor of the MMA Fazeel Najeeb acknowledged that “there will be some eyebrows raised and some reservations on the measures – this is inevitable in any country changing its taxation regime.”
“There are instabilities and I hope these will be short term. But I think what we are doing is in the interest of the economy and will bring it out of the mess it is in. I think it is necessary that we act together now,” Najeeb said.
The IMF package, he noted, represented “a joint commitment by the Ministry of Finance and the central bank: a state affair in the interests of the economy and the country.”
“Everybody in the country realises and recognises that there needs to be a change in the status quo. The status quo is a fiscal stance that is unmanageable.”
Asked whether he felt the new taxes were likely to be passed by parliament, “I think when it comes down to the details of what and how the legislation takes shape, that should be left to Majlis. What I can say is that status quo needs to change, and I don’t think this can be only reduction [in expenditure]. There needs to be a considerable amount of income increase. A combination of revenue as well as expenditure.”
Until recently the government was publicly calling for Najeeb’s dismissal by the Majlis due to a perceived lack of cooperation on tackling the currency crisis facing the country.
Asked if the IMF deal represented a new era of cooperation, Najeeb said the MMA “is always willing to cooperate with the government. There are issues on which we professionally disagree, but that shouldn’t be interpreted as lack of cooperation.
“We will continue to cooperate as we have done before, and whenever we are called upon to participate in press conferences such as this one, we will do it. We will leave it at that.”
State Minster for Finance Ahmed Assad said that despite media efforts “to sensationalise” the relationship between the MMA and the government, “we are not going to fight in public. Any fight will be within the walls of the MMA, or the Ministry of Finance. Because these are technical policy issues on which we don’t agree.”
“The MMA is not elected by the people and is not responsible [for the economy] – it is the President who heads the government and therefore the responsibility falls on the government to point the economy in the right path,” Assad said.
“Therefore whatever we do, the MMA is there to support us. If we’re wrong they’re there to criticise us. If we choose the right path their sole goal is to assist us. There are times that we disagree but that is purely professional. We should not have a hostile attitude towards this.”
Assad observed that even with the new taxes proposed by the government, the Maldives was still had the most generous tax system in the region – even compared with other island nations, and neighbouring countries such as India and Sri Lanka.
“We can’t say taxes are exorbitantly high and will bring total destruction to the industry,” he suggested.
The President’s Press Secretary Mohamed Zuhair meanwhile said the agreement with the IMF represented “a vote of confidence” in the government’s handling of the economy.
“We inherited huge amounts of debt and millions of dollars in unpaid bills from the former administration but have nevertheless managed to cut the budget deficit in half, bring down inflation and raise government income to put our economy on a steady path to prosperity,” Zuhair said.