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Positive economic development requires “less destructive political climate”, says World Bank

Positive economic development requires “less destructive political climate”, says World Bank thumbnail

A strong rebound in tourism and government policy efforts to redress macroeconomic imbalances have stabilised the macroeconomic situation and spurred growth in 2010, but a fractious political environment and accelerating international commodity prices remain key challenges, according to a World Bank Economic Update Report published last week.

The report notes that fiscal consolidation – reigning in the ballooning budget deficit with austerity measures and the introduction of taxation on business profits – “remains the foremost challenge in the coming years”.

“A less destructive political climate” will be needed to maintain recent positive developments, the World Bank cautions.

“Despite having posted better-than-expected fiscal results in the first half of the year, the country will be hard-pressed to sustain this in the medium term,” it reads. “However, despite the challenges, the government remains steadfastly committed to fiscal consolidation.”

An internal report by the World Bank, obtained by Minivan News in May, revealed that the doubling of spending on state salaries in 2007-09 crippled the country’s economy, and left the Maldives “facing the most challenging macroeconomic situation of any democratic transitions that has occurred since 1956.”

Fiscal consolidation

While maintaining public sector pay cuts and other austerity measures introduced in October 2009 was “one of the government’s main achievements”, the most recent report notes that it is “highly likely that the forthcoming budget for 2011 will restore the civil service salaries to previous levels.”

With the restoration of civil service salaries in January 2011, salaries of police and army officers as well as political appointees will also be simultaneously restored – “thus completely reversing the pay cuts for all categories of public sector workers.”

The report flags slow progress on “rightsizing the public sector”, noting that planned layoffs “have not been carried out to a significant extent.”

Moreover, public sector workers transferred to corporatised entities – currently state-owned – “remain directly within the payroll of the government.”

In addition, the government’s pledge in May to the seven percent contribution from public sector employees to the pension fund “would likely result in an additional Rf94 million (or 0.5 percent of GDP) in expenditure over the remaining seven months of the year.”

The new structure of island and atoll councils is meanwhile expected to cost the government an extra Rf173 million (US$13.5 million).

However, the introduction of a tourist goods and services tax (TGST) and replacing resort leases with a land rent was a “positive fiscal development.”

As of July, the fiscal deficit was 15.5 percent of GDP “against a target for the year of 18.2 percent of GDP.”

Total expenditure during the first seven months of the year was meanwhile below the target of Rf6 billion at Rf5.25 billion “due largely to a cut-back of non-salary operating expenses and capital expenditure.”

However, total revenue as of July was 12 percent below budget as a result of marginal increases in import duty collection and tourism tax receipts.

While the budget for 2010 anticipated that parliament would pass legislation for Business Profit Tax in December 2009, the “earliest likely start date” for the tax is now expected to be the first quarter of 2011.

The report notes that continuing delays to passing the bill “will hurt the fiscal position.”

Transformation in monetary policy

The Maldives Monetary Authority (MMA) ceasing printing money to finance the budget deficit – deficit monetising – in September 2009 was “a transformation” of monetary policy in the Maldives.

The report notes that open market operations (OMO) commenced by the MMA in August 2009 “has been carried out successfully, draining much of the excess rufiyaa liquidity in the system.”

As a result of the successful OMO, “[net] credit outstanding to the government from the MMA has dropped, thereby reaching the target of the IMF program for end-August.”

The MMA has also been assisting the government to “broaden the base of the domestic T-bill [Treasury Bill] market”, augmenting the existing portfolio of government securities in July with the introduction of the 182-day T-bill.

In December 2009, the government issued US$100 million worth of T-bills to the State Bank of India, the first issuance of securities denominated in US dollars.

The report notes that despite a gradual recovery in global commodity prices, “national headline inflation remains benign and in single digits” at 6.3 year-on-year at August 2010, down from 6.9 percent in July.

In August inflation at the atolls dropped to just 4.4 percent, despite being traditionally higher than in the capital Male’.

Public sector credit (PSC) meanwhile continued to stagnate in 2010, contracting one percent by July.

“Business sentiment remains subdued, with work on resort construction having hit a snag, and the domestic banking system not showing enthusiasm for credit expansion,” it finds.

However, despite recording “the fastest growth in PSC for nearly 20 months – 1.5 percent –driven mainly by credit to the resort sector” in July, “it may be a while before the PSC shows a sustained sign of recovery, with the global conditions still weak.”

Widening current account deficit

While the Balance of Payments situation improved significantly in 2009 “with a faster contraction in imports relative to exports”, rising import prices have contributed to a widening trade deficit.

“During the first seven months of 2010, total import growth (12.3 percent) outstripped export growth (nearly 9 percent), and resulted in a widening of the trade deficit to US$ 506.5 million – 13 percent higher than in 2009,” it reads.

“If global commodity price growth does not accelerate, the trade deficit is likely to remain manageable during the rest of the year, and coupled with higher inflows from tourism,15 the overall current account deficit is expected to narrow further in 2010 to 27 percent of GDP.”

As the Maldives is “one of the most open economies in the world” with imports accounting for over 90 percent of GDP, the report warns that rising international food and fuel prices could worsen the trade deficit, put pressure on foreign exchange reserves and increase consumer price inflation.

“One positive aspect of the rising value of commodity imports is that fiscal outcomes could improve, if planned expenditure cuts are implemented, since 30 percent of government revenues come from import duties,” it concludes.

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2 Comments on "Positive economic development requires “less destructive political climate”, says World Bank"

  1. Positive for whom? on Wed, 8th Dec 2010 12:05 AM 

    The current political chaos is the result of bending laws to preserve the mega rich and the previously powerful. Where is this World Bank when resort owners extended the resort lease by corrupting the parliament..

    Mr. Worldbank. Who is suffering due to chaos and who are prospering due to chaos?. Clearly there is a method to all this.

    If big business think of long term good of the Maldives, would they even tolerate any chaos.. Surely not. But may be they only think of making some bucks while they can.. while the Wold Bank dances to their stories.. well done.

  2. Saleem on Wed, 8th Dec 2010 4:59 PM 

    Wonder what World Bank means by less destructive political climate. Isnt this the best political climate we’ve had for the past 32 years. Does the World bank mean that a democracy is worse than a dictatorship?

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