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Cablegate: Maldives Budget Reduces Government Deficit

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UNCLAS SECTION 01 OF 03 COLOMBO 001130

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US TRADE REPRESENTATIVE - MICHAEL DELANEY AND VICTORIA KADEL

E.O. 12958: N/A
TAGS: ECON PGOV MV
SUBJECT: Maldives Budget Reduces Government Deficit

1. (SBU) Summary. The Government of the Maldives (GOM) proposed an
austere 2010 budget to its Parliament. The budget projects both
reduced spending and growing tax collection that would reduce the
government budget deficit from 29% of GDP in 2009 to 16% of GDP in
2010 and reaching a mere 3% of GDP in 2011. If the GOM meets these
projections they would fulfill the demanding targets of the IMF
program. However, the GOM is projecting substantial revenue from
taxes in 2010 which have not been approved by Parliament, so these
estimates are far from certain. The political opposition, which
controls the most seats in Parliament, has severely criticized the
proposed budget, although their Speaker told Poloff that he expected
that the budget would be approved. End Summary.

2. (U) The GOM presented its budget on November 24 in the national
language of Dhivehi, and an English translation of Finance Minister
Ali Hashim's speech and the GOM proposed budget is not available.
Post has based this report on official fiscal data received from the
Ministry of Finance, news reports of political opposition to the
budget, and Poloff contacts with the opposition. The GOM will
publish its final budget in English after the Maldivian Parliament
approved the budget. Parliament is currently debating the proposed
budget, and the GOM expects a vote on the budget before Christmas.


Ambitious Budget projects Declining Deficits

3. (SBU) Maldivian Minister of Finance Hashim argued that the 2010
budget fulfills the GOM small government pledge. Total expenditure
would decrease by 7 percent to 48 percent of GDP. Total revenue
would increase from 28 percent of GDP in the revised 2009 budget to
33 percent of GDP in 2010. The 2010 budget deficit (excluding
grants) is estimated to be $258 million or about 16 percent of GDP.
According to the medium term GOM budget framework, the deficit is
expected to decline to 3 percent of GDP in 2011 and post a small
surplus in 2012.

--------------------------------------------
Government of Maldives - Budget 2009-2010
--In millions of USD--
--------------------------------------------
2009
Revenue $414 (28% OF GDP)
Expenditure $851 (58% OF GDP)
--Current $617
--Capital $234
--Net lending 0
Budget deficit $430 (29%OF GDP)
Budget deficit
with grants $382 (26% OF GDP)

2010
Revenue $531 (33% OF GDP)
Expenditure $789 (48% OF GDP)
--Current $648
--Capital $156
--Net lending $16
Budget deficit $258 (16%OF GDP)
Budget deficit
with grants $234 (15%OF GDP)
---------------------------------------------
Notes: Expenditure includes interest on government debt but excludes
loan repayments. The budget was presented in Ruffiya but we
converted it to USD on the official exchange rate of 12.8Rf/$1 USD.
These estimates are based on data provided by the Ministry of
Finance, Maldives.


4. (SBU) The proposed 2010 budget contains optimistic revenue
forecasts. Revenue is expected to increase by a whopping 28 percent
to 33 percent of GDP in 2010. (Note: according to information
supplied by the Finance Ministry, Maldives enjoyed a revenue to GDP
ratio of over 30% in the last few years. The ratio increased to
over 40% in the post tsunami period of 2005-2008. End Note.) Tax
revenue is to increase by 35 percent and will contribute 50 percent
of total revenue. The balance will come from resort lease rentals,
state owned company dividends, worker permit fees and an assortment
of other charges. According to media reports, Minister Hashim

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revealed plans to introduce two new taxes in 2010. For the first
time, GOM plans to have a corporate income tax (business profits
tax) and a goods and services tax in the tourism sector. These two
taxes will contribute $51 million, or 10 percent of total revenue in
2010. Currently, Maldives tax structure contains import duty, a
bank profit tax, a tourism bed tax and licenses and fees.
Parliament must approve the two proposed taxes, and the GOM must
develop expertise to successfully implement the new taxes. The
corporate tax is designed to generate $23 million in 2010. The new
tourism tax is to be introduced in the fourth quarter of 2010 and is
expected to generate $28 million in 2010 and $125 million in 2011,
when it is fully operational. In addition, the budget also contains
a new airport tax.

5. (SBU) On the expenditure side, total expenditure will decrease by
7 percent due to a drastic cut in capital expenditure. Current
expenditures will actually increase. The number of government
employees will be reduced in 2010, although the documents did not
specify the number of reductions. According to news reports,
Minister Hashim said that the GOM has given consideration to
recommendations by the IMF, ADB and WB to introduce targeted
subsidies and transfer government debt owed to Maldives Monetary
Authority (MMA) into bonds.

6. (SBU) The GOM expects that the 2010 budget deficit of $258
million will be met by foreign grants and loans, privatization
receipts and sale of MMA bonds. The Maldives expects foreign grants
of $15 million and (net) foreign loans of approximately $8.5 million
to fill the budget gap in 2010. In addition, the GOM expects to
receive privatization receipts of $101 million. The GOM anticipates
raising $148 million from sales of government bonds.

Strong Political Opposition to the proposed Budget

7. (U) The main opposition, Dhivehi Rayyithunge Party (DRP), which
holds two more seats in the Parliament than the government (although
neither has a majority), has severely criticized the 2010 budget.
The DRP says the budget is a "deficit budget" because without
approval of new taxes will result in a government deficit of 40% of
the proposed expenditure and loan repayments (but not 40% of GDP).
Dr Abdulla Mausoom, Secretary General of the DRP, told post that the
DRP is concerned about the heavy reliance on two new taxes
(corporate tax and tourism tax) since these taxes must be approved
by Parliament. Further, the introduction of these taxes will
require a new tax administration law to be passed by the Parliament.
He doubts if the legislation could be passed in Parliament in a
timely manner and it will be very difficult to set up a tax
administration quickly. As a result, DRP expects tax incomes to
fall short of the forecast. The DRP also criticizes government
privatization plans. Mausoom says that as the government plans to
sell profit making companies, it will lose potential revenue
sources. For instance, the budget forecasts $42 million from
dividends of state companies in 2010, compared with $68 million in
2009. He stressed that DRP is not against foreign investment.
However, foreign investment should come from new investments and not
by selling existing government assets.

8. (U) According to Mausoom, the GOM budget is disappointing because
it does not meet the government's promises when they were elected.
Before coming into power, the governing party was very vocal about
people's needs. The proposed 2010 budget has a limited focus on
economic activity and it fails to deliver on the GOM development
pledges. Despite promises to reduce government staff, Mausoom
claims the government will continue to spend on political
appointees. Mausoon also complains that the budget does not provide
sufficient funds for independent commissions (i.e. Human Rights,
Civil Service, Elections, Anti Corruption) important for democracy
and tourism promotion as well as for health and education. These
activities would receive reduced funding in 2010 under the proposed
budget.

9. (SBU) Despite public opposition, the DRP may eventually support
the budget. The DRP Speaker of the Parliament told Poloff privately
that there will be a great deal of grandstanding for political
reasons, but he does not anticipate any problems passing the budget.
Although the Parliament has made some headway recently, passing two
bills, Parliament has only passed four bills this session, and only

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one of them - to raise the tourist tax - related to the economic
crisis.

10. (SBU) Comment. The GOM deserves credit for presenting a 2010
budget that meets the tough IMF budget deficit targets, but the road
ahead will be very difficult. Although the DRP Speaker said that
they would support the budget, it remains to be seen if they follow
through to support the government on austerity budgets and to lay
off government employees. Moreover, even if the legislation is
passed, it will be very hard to successfully implement these new
laws. The GOM has limited experience collecting direct taxes, since
they primarily relied on import duties before, and they will need
substantial technical assistance to successfully meet their revenue
goals. End Comment.

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