Cablegate: Maldives On the Brink of Bankruptcy
PP RUEHBI RUEHCI
DE RUEHLM #0805/01 2251107
ZNR UUUUU ZZH
P 131107Z AUG 09
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 0393
INFO RUEHKA/AMEMBASSY DHAKA PRIORITY 1843
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 8863
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 7102
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3236
RUEHKP/AMCONSUL KARACHI PRIORITY 2510
RUEHCG/AMCONSUL CHENNAI PRIORITY 9447
RUEHBI/AMCONSUL MUMBAI PRIORITY 6748
RUEHCI/AMCONSUL KOLKATA PRIORITY 0403
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 COLOMBO 000805
DEPARTMENT FOR SCA/INSB, AND EEB/IFD/OIA
DEPARTMENT PASS TO TREASURY
E.O. 12958: N/A
TAGS: EFIN EAID EINV PREL MV
SUBJECT: MALDIVES ON THE BRINK OF BANKRUPTCY
1. (SBU) Severe balance of payments imbalances, crushing government
debt, and a decline in revenue have brought the economy of Maldives
to the brink of collapse. In meetings with the Charge, Maldivian
Foreign Minister Ahmed Shaheed, Vice President Mohamed Waheed, and
former opposition Quamee party leader and former Attorney-General
Hassan Saeed highlighted the economic turmoil the country has been
experiencing over the last year. Foreign Minister Shaheed said that
an IMF team would be arriving in Male the week of August 10 to
conduct an assessment and determine how much money would be needed to
stabilize the economy. The Foreign Minister expressed concern about
the loan, noting that the government had no experience dealing with
the IMF. He was unsure how the Cabinet would react to a loan.
According to Hassan Saeed, the Central Bank had USD 67 million, or
ten days, of foreign reserves. Vice President Waheed described the
monetary situation as (begin quote) desperate (end quote).
Maldives: The Long Decline
2. (SBU) There have been signs for last year that the financial
situation in Maldives was worsening. Opposition leader Saeed told
PolOff that the IMF called the country's economy the most precarious
of any in the world. Press reported that, in an attempt to control
spending, President Nasheed asked cabinet ministers in June to
institute a 20 percent pay cut and also to stop renting private
properties for government offices. A long-term foreign currency
shortage has gotten more severe; government officials attribute the
cause to the large budget deficit left by the previous
administration. The private sector is also feeling the effects of
the crisis; an attorney active in civil society told the PolOff that
there is a USD 100 limit on daily withdrawals from banks, limiting
Maldivians' local access to foreign currency.
3. The new administration came to power in November 2008 when
President Gayoom was voted out of office after a rule of 30 years.
Gayoom's administration spent freely on projects intended to foster
growth and development. Projects worth USD 117 million were awarded
to contractors in 2008 alone, but only USD 10.2 million of the money
owed has been paid to date. The current 2009 budget deficit is at
USD 109 million. Total debt has reached USD 445 million, or almost
60 percent of GDP, making it one of the world's most debt-laden
New Government Unable to Stop Downward Economic Spiral
4. (SBU) While the Nasheed administration had no control over the
spending of the previous government, it did little to improve
Maldives' financial situation when it first came to power.
Government salaries and employee rolls were increased throughout the
administration, resulting in additional payments of USD 78 million.
Rather than tighten spending or increase revenue, the government
borrowed USD 187.5 million from the Central Bank, the equivalent of
printing money, increasing inflationary pressure.
4. (SBU) The poor condition of the government's finances was
exacerbated by the economic crisis. The IMF predicted a 4.5 percent
decline in GDP. According to Vice President Waheed, there has been a
10-12 percent decline in tourist booking rates and fisheries' catches
have been low. Construction, the third major source of government
revenue, is also down.
5. (SBU) There have been some sources of relief for the government.
In December 2008 India pledged over USD 100 million in aid through
interest-free loans. It was the largest amount of aid given by India
to the Maldives in the last 40 years. The government is hoping to
begin increasing revenue by doubling the lease period for resorts
from 25 to 50 years, which officials hope will generate USD 93
million. New taxes aimed at increasing revenue have been
implemented. However, both the change in lease periods and new taxes
will take time to generate revenue. The government also hopes to
increase the amount of money it receives from tourist resorts.
Currently, for a hotel room that ranges from USD 200 to USD 500 a
night, the government only earns USD 8 in revenue.
6. (SBU) Many of the economic problems that Maldives is facing are a
result of poor financial decision-making on the part of the previous
administration. It took the current administration several months to
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understand the severity of the crisis. Once it did, officials
requested aid from the IMF. The government has been assiduous in
implementing IMF recommendations like the 20 percent reduction in
public sector wages.
7. (SBU) Maldives has been a consistent ally of the United States and
has been forward leaning in supporting USG initiatives. We should do
what we can to support the new, democratically elected government in
improving the country's fiscal situation and strengthening the