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Cablegate: Imf Pressuring the Maldives to Immediately Reduce

VZCZCXRO5574
PP RUEHBI RUEHCI
DE RUEHLM #1002/01 3050621
ZNR UUUUU ZZH
P 010621Z NOV 09
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 0708
INFO RUEHKA/AMEMBASSY DHAKA PRIORITY 2001
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 9037
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 7275
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3427
RUEHCG/AMCONSUL CHENNAI PRIORITY 9600
RUEHKP/AMCONSUL KARACHI PRIORITY 2554
RUEHCI/AMCONSUL KOLKATA PRIORITY 0444
RUEHBI/AMCONSUL MUMBAI PRIORITY 6894
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 COLOMBO 001002

SENSITIVE
SIPDIS

DEPARTMENT FOR EEB JENNIFER PETERSON AND TANYA SPENCER
DEPARTMENT OF TREASURY FOR MALACHY NUGENT, ATTICUS WELLER
AND MARY BRENNAN
USTR FOR MICHAEL DELANEY AND VICTORIA KADER

E.O. 12958: N/A
TAGS: ECON EFIN MV PGOV
SUBJECT: IMF PRESSURING THE MALDIVES TO IMMEDIATELY REDUCE
GOVERNMENT PAYROLL EXPENSES

REF: COLOMBO 892


1. (SBU) Summary. The Government of the Maldives (GOM)
and the IMF agree that the GOM must drastically cut its
government payroll expenses, but they disagree how to do it.
The GOM has substantially increased its government salaries
over the last two years, which, in combination with reduced
foreign exchange earning from tourism and fishing, has
resulted in a serious balance of payments crisis. The IMF
favors a sharp and immediate cut in government salaries and
benefits, and increasing revenue through new taxes to get
the Maldives back on a sustainable fiscal path. The GOM
would prefer cutting government positions more slowly through
eliminating redundancies. The IMF realizes that the program
will be very difficult to implement politically and
technically. Post believes that the Maldives must move in
the right direction to reduce its budget deficit, and
appreciates the IMF's awareness of the implementation
difficulties for the Maldives. End Comment.

IMF Program Approval Delayed Due to Disagreement

2. (SBU) IMF Representative Rodrigo Cubero explained to
econoff that the presentation of the Maldives program to the
IMF board had slipped from October to November because the
GOM had not met an IMF requirement. According to Cubero, GOM
payroll expenses have dramatically increased in the last two
years due to generous new wage and benefit increases and some
additional payroll. As described in reftel, these wage
increases were pushed through by both the former
authoritarian government (which ruled for thirty years)
before Presidential elections, and by the new GOM before the
last Parliamentary elections. The GOM has 38,000 employees,
more than 12% of the total native population of the Maldives.
The IMF has pushed the GOM to substantially cut government
wages and benefits, but the GOM would rather reduce payroll,
a much longer process. The GOM plans to eventually cut the
government payroll by more than a third, but in the near term
they plan to eliminate 2,500 jobs in 2009 and 3,000 more in
2010 through redundant government positions and possible
privatizations. The IMF will examine the GOM 2010 budget,
which should be published soon, to see if the GOM is on track
to reduce its budget deficit.

3. (SBU) The IMF plans a three year program and will
focus on reducing the cost of the government payroll and new
tax systems. Under the IMF program, the GOM should reduce
the government budget deficit to 18% of GDP by 2010. Cubero
noted that the GOM plans to privatize the airport by early
2010, which will provide a one-time source of financing. The
GOM also plans to replace their current taxes, primarily
import duties, with an ad valorem tax, a sales tax, and a
business profits tax.

Difficult Implementation of the IMF Program

4. (SBU) According to Cubero, the IMF realizes that it
will be difficult for the GOM to implement the necessary
reforms. No legislation has passed since the Parliamentary
elections in May 2009, when the opposition won two more seats
than the government party. Cubero suggested that the
government could pass the revenue legislation by wooing some
independent legislators to create an ad hoc majority. Cubero
also recognized that it will be difficult for the GOM to
switch from collected taxes through import duties (which are
relatively easy to collect), to developing an entirely new
tax structure of income, sales taxes and a business profits
tax. The business profits tax will be the most difficult to
administer, since companies can use loopholes to hide their
true profits.

5. (SBU) Comment. The GOM has already lobbied Post for
more leeway on the IMF,s targeted government budget deficit.
The government was democratically elected after 30 years of
authoritarian rule, and they have sincere plans to reform

COLOMBO 00001002 002 OF 002


their economy (see reftel). Post has sought technical
assistance to help the GOM through the transition, and has
received an offer of technical assistance on tax reform.
However, given the magnitude of the democratic and economic
transition, at a difficult time for their critical tourism
industry, post urges flexibility on the IMF program, as long
as the GOM is implementing reforms to move to a sustainable
fiscal path. End Comment.
BUTENIS

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