IMF Directors say the budget “carries risks of a significant deficit.” And that it is based on “optimistic revenue assumptions,” which “may fail to materialise.”
Record Spending
In December Finance Minister Gasim Ibrahim proposed a $940 million budget, equal to eighty percent of the Maldives’ expected GDP [Gross Domestic Product or total income] for 2007.
For the first time domestic expenditure is expected to account for over half of the country’s income.
But the IMF warns the budget, “is mostly unrelated to post-tsunami rehabilitation.”
And questions whether anticipated revenue from an, “overly ambitious resort development schedule,” will materialise.
Debt And Deficit
The rapidly rising government spending is leading to a growing fiscal deficit.
The budget deficit, which was just 1.9 percent of the economy in 2004, has expanded to 7.3 percent in 2006 and is set balloon to 23.9 percent in 2007.
And, without domestic income guarantees, the government is increasingly looking abroad to finance spending.
“External debt has risen from 43 percent of GDP in 2004 to about 65 percent in 2006,” and it is expected to hit 80 percent of the country’s income in 2007.
For the fist time more than 10 percent of the county’s income will be spent on paying interest on foreign loans.
This is putting pressure on the fixed exchange rate between the US dollar and Maldivian Ruffiya.
The IMF annual statement is based on the report of a survey team dispatched to the Maldives in July. The survey team concluded, the “Maldives is in a situation of fundamental misalignment,” with the dollar. And “some Directors concurred with the staff's assessment.”
Money-Printing
Inflation, an increasingly political issue as Maldivians complain of the rising cost of fish, fuel and basic commodities, “has remained relatively subdued,” according to the IMF.
But it is projected to reach 7% by the end of 2007, almost double the 2006 rate, and compared to a pre-tsunami average of 2.5 percent.
The IMF has warned against the “practice of automatic central bank financing of fiscal deficits,” which adds to the supply of money in the country.
It commended the passage of the Maldives Monetary Authority Act to establish the independence of the central bank.
And welcomed the MMA move towards private sector financing of the deficit through the sale of Treasury Bills.
Policy Change
But IMF directors called on the government to, “prioritize expenditures;” effectively to postpone portions of the budget.
And to “develop a medium-term expenditure framework” to restrict “development spending within the available resource envelope.”
The government is “commended,” for “identifying several state-owned enterprises for divestment of shares.”
But with majority state-owned companies occupying privileged positions in the tourism, energy, fisheries and import sectors, the Directors called for further privatisation.
Growing Consensus
The IMF is the second international economic body to caution the government on excessive spending this year.
In June the World Bank said it was “very concerned by the highly expansionary path of fiscal policy.” And called for “an immediate change in course.”
Courtesy: Minivan News
| < Prev | Next > |
|---|
