Expert Speak Raisina Debates
Published on Nov 17, 2022
Global downturns have made it tricky for the Maldivian government to keep debt financing in check
Maldives: Achieving debt sustainability might prove difficult At a time when the nation is limping back to normalcy after two long years of COVID-imposed economic downturn the world over, Maldives has begun with an MVR 42.7-billion budget for 2023 with fuel subsidy. As per the budget proposals, MVR 40.1 billion goes towards expenditure, MVR 32.1 billion receipts, with MVR 10 billion deficit. Debt-projections total MVR 113 billion, of which internal borrowings are MVR 62 billion, up from MVR 57 billion, and external borrowings are MVR 40 billion, from MVR 35 billion.

The Election Commission (EC) has said that the budget allocation for the department was inadequate to conduct two rounds of presidential polls.

Finance Minister Ibrahim Ameer told Parliament that at 108 percent of the GDP, ‘debt sustainability is the biggest target’ of his budget in the new fiscal, beginning in January. In reality, balancing the debt is challenging, especially because the presidential election is due in the last quarter of 2023. Apart from unanticipated expenses that could not be put off as always, in popular democracy, demands from various sections, both within Parliament and outside, will entail additional allocations. For instance, the Election Commission (EC) has said that the budget allocation for the department was inadequate to conduct two rounds of presidential polls. It has worked out an MVR 120-million expenditure for the presidential poll. This compares with the budget projections for fiscal 2022 (MVR 24.3 billion revenue and MVR 34.1 billion in expenditure) but with less than budgeted receipts, which stood at MVR 16.6 billion in tax-collections until September. With the Parliament passing new GST and TGST rates, MVR 3.7 billion is shown as the projected income in the new fiscal, in an expected total tax revenue of MVR 23.5 billion, with MVR 6.4 billion as non-tax revenue. But behind the new GST-TGST Bills were internal feuds within the ruling Maldivian Democratic Party (MDP). With preparation for the presidential poll in the last quarter of 2023 beginning, a section of the ruling party MPs, identified with Parliament Speaker Mohammed Nasheed who is also the MDP president, voted against the Bill. In a House of 87 members, where the MDP alone has 65 members, the Bill was passed, 55-26. Incidentally, this is the second time that ruling party MPs were voting with the Opposition PPM-PNC combine in recent times. Last fortnight, many MDP parliamentarians helped pass the Opposition’s ‘emergency motion’ to discuss the ‘Chagos crisis’. The Opposition had charged President Ibrahim Solih with compromising/trading national interests by withdrawing claims to the Chagos archipelago, which they said was violative of the Constitution.

With preparation for the presidential poll in the last quarter of 2023 beginning, a section of the ruling party MPs, identified with Parliament Speaker Mohammed Nasheed who is also the MDP president, voted against the Bill.

Minimising budget deficit 

Minister Ameer told Parliament that the government was currently working to minimise the budget deficit, which was huge in 2020. The deficit-to-GDP ratio was 13.8 percent in 2021 and 14.3 percent in 2022. The idea is to bring it down drastically to 8.1 percent in 2023. It is a tall order. However, the debt-to-GDP ratio for 2023 is estimated to be at 108 percent, going up to 111 percent by the end of the year. The ministry’s fiscal strategy is to bring it down to 102 percent by 2025, but it is not saying a lot, regardless of comes to power after the presidential polls. And when the national debt reaches the estimate of MVR 113 billion, the per capita debt of individual Maldivians (population: 540,000) would be MVR 210,555—which, of course, is only a figure for the statistician. The urban middle class in Maldives has been following neighbouring Sri Lanka’s mistakes on the debt and forex fronts, but is unsure if the government of President Ibrahim Solih has learnt its lessons and has a fool-proof strategy to avoid such a situation now or later. This does not mean that they would be all right with tight-belting had the government come up with proposals, but the plight of the common people, whether in urban centres like capital Malé or in the islands, is what seems to have driven the budget’s philosophy.

Silver lining 

Independent of the COVID-induced economic crisis, MDP governments, now headed by Solih and once earlier by Mohammed Nasheed (2008-12) are seen as more ‘populist’, at times bordering on profligate-spending, compared to the rival leaderships of President Maumoon Abdul Gayoom (1978-2008) and his now-estranged half-brother, Abdulla Yameen (2013-18). Both had kept debt under relative check. Yameen even created an MVR 5-billion Sovereign Development Fund (SDF) for exigency-spending, to which the Solih government managed to add MVR 627.9 million recently, after it became a political issue.

The Maldivian currency rates had remained mostly unaltered throughout the COVID crisis and later, whereas the dollar value of neighbourhood currencies have suffered in recent months, with the Sri Lankan rupee taking the biggest hits, possibly for any currency anywhere in the world.

There is, however, a silver-lining, though not in terms of deficit and debt-to-GDP ratio. The Maldivian rufiyya trades at Rf 15.38 (appx) to the US dollar. Because people need to travel overseas, especially India and Sri Lanka, for education, medical care and purchases, the American greenback is in eternal demand, with the widely-acknowledged informal market rate hovering around MVR 17.20 (appx). According to market sources, the Maldivian currency rates had remained mostly unaltered throughout the COVID crisis and later, whereas the dollar value of neighbourhood currencies have suffered in recent months, with the Sri Lankan rupee taking the biggest hits, possibly for any currency anywhere in the world. The dollar trades at LKR 360-plus, while it is INR 80.82 (appx), up from INR 82-83 recently, still higher than the figure some weeks and months back. Even the Malaysian ringgit (MYR) (another country from where Maldivians import goods) hit the lowest in 24 years and has since rallied to some extent. This means that the import cost of goods is favourable for Maldivians, which was not always the case during global downturns in the past. The main concern in this regard is the unpredictability of fuel prices and availability, especially after the Ukraine War, which has also affected tourist inflows from that region.

Crippling the common man 

There are also concerns about governments continuing to raise taxes to meet its increasing recurring expenditure in terms of salaries, perks, and other administrative expenses. A media analysis has claimed that the higher the GST on small businesses, the higher the inflation. Likewise, ever-increasing import duties impact food and livestock prices, which again is paid for indirectly by the common man. The analysis also pointed out how just as how the government revenue has taken a hit because of COVID lockdowns world-wide, small businesses and other family incomes suffered even more, in relative terms. By increasing taxes and duties, the government only ended up making poor people poorer, though unintended. The question is if it will have political and electoral consequences, though left unmentioned and unexpressed otherwise?

Under pressure from Speaker Mohammed Nasheed and Deputy Speaker Eva Abdulla, both belonging to President Solih’s ruling MDP, the MMA ended up publicising the highly sensitive document this year.

At the macro-level, there is acknowledged recovery of the mainstay tourism economy, which is expected to reach pre-COVID levels in the new fiscal. While caution is required about further fallouts from the continuing Ukraine War, both in terms of oil prices and fewer tourists from the two warring nations, there are hidden apprehensions and open predictions that West Europe’s home economy especially would go haywire without Russia’s natural gas for winter heating. In turn, this could impact tourist arrivals more than anticipated.

No threat of bankruptcy 

In its advice-note to Parliament on the 2023 budget, the Maldives Monetary Authority (MMA), the nation’s central bank, has since predicted that the cost of goods and services will surpass the government estimates when GST and TGST (tourism GST) are increased. In the normal course, the MMA’s advisory is ‘confidential’ for members of Parliament’s Budget Committee. Under pressure from Speaker Mohammed Nasheed and Deputy Speaker Eva Abdulla, both belonging to President Solih’s ruling MDP, the MMA ended up publicising the highly sensitive document this year. The MMA said that the rufiyaa will lose value, going by the history of the government’s debt-monetisation or monetary financing, to the permitted threshold of MVR 4.4 billion. Going by the experience of past governments, too, the chances are that the deficit would go up when Parliament members, individually and collectively, come up with specific demands for funds allocation. In an election year, especially, the government cannot take a firm stand, not that the Solih government had done it in the past, thanks mainly to the COVID crisis, but that was not always the only reason. The central bank has also cautioned that the ‘usable forex reserves’ of US $105 million, in a total reserve of US $499.6 million, as of end-October, was ‘just enough to meet one month’s imports’. Though the government promptly denied it, J.P. Morgan, one of the largest investment banks in the world, had predicted complete depletion of the national reserve by 2023, pushing the country into ‘sovereign default’. Pre-budget, the national bank, Bank of Maldives, too drew an emerging likeness to a Sri Lanka-like situation. Against this background, the central bank called upon the government to reduce state expenses/expenditure, rather than increasing taxes, as the latter does not help reduce the budget deficit, as claimed.

Pre-budget, the national bank, Bank of Maldives, too drew an emerging likeness to a Sri Lanka-like situation.

However, in his annual Republic Day address since, President Solih declared that there was no truth to the Opposition’s claims that the nation was headed towards ‘bankruptcy’—a term that sends shivers down the Maldivian spines, thanks to the continuing Sri Lankan ordeal in the immediate neighbourhood. Instead, despite the recent downturn faced by global events (COVID and the Ukraine War), the country’s economic outlook was promising, he added.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.

Contributor

N. Sathiya Moorthy

N. Sathiya Moorthy

N. Sathiya Moorthy is a policy analyst and commentator based in Chennai.

Read More +