With the recently submitted Budget 2023 and the supplementary budget 2022 to the Parliament, the Minister of Finance and the Government have put the public financial management system at high risk of losing credibility and confidence.
Some MPs, including the Speaker of Parliament, have raised concern about the legality of the actions of the Minister of Finance, as the law requires Parliament’s approval of the government’s budget before any expenditure can be incurred.
The whole process and the point of approving a budget has been questioned, as the government has suddenly submitted a supplementary budget for 2022 which exceeds MVR 5.9 billion. This was submitted along with the 2023 budget.
The Parliament in 2021 passed a budget of MVR 36.9 billion for 2022, which includes total expenditure of MVR 34 billion. However, as it turns out, this year, government will be spending over MVR 5.9 billion more than what has been approved by the Parliament, totaling the expenditure to MVR 39.99 billion. This is despite significant increase in total revenue - MVR 4.4 billion more than forecasted for 2022.
One of the key pillars of effective public finance management is achieving credibility of the budget, that can be enhanced through legislature. Improving the medium term macro fiscal framework is also an important aspect for achieving credibility of the budgeting process. However, a deep-dive into the proposed budget and the revised estimates submitted to the Parliament raises a lot of ‘suspicious’ questions on the credibility of the whole process.
The total budgeted and approved for loan repayment in 2022 was MVR 2.9 billion, which is now revised at MVR 3.2 billion (MVR319 million increase).
The overall budget balance for 2022 is now estimated at over MVR 13.6 billion, compared to what has been approved at MVR 9.7 billion. This means that almost MVR 4 billion additional financing or debt will be required to meet the expenditure obligations of this year.
Total government debt, as a result will be now at MVR 105.7 billion as opposed to MVR 102.9 billion what was initially projected in the approved 2022 budget.
It seems that the strategy of the Minister of Finance to reduce Debt to GDP and the deficit as a percentage of GDP is only by inflating the estimated nominal GDP - which will definitely be increasing with the rising inflation – instead of actually reducing the debt or the deficit.
The estimated nominal GDP for 2023 is at MVR 104 billion, while total debt is estimated to reach MVR 113 billion by the end of 2023 – which is 109 percent of GDP. This is an 8 percent increase in absolute terms, however a 2 percent reduction in debt to GDP compared to 2022.
Macro economic stability
Proper public financial management is also crucial for overall macroeconomic stability and growth of the economy.
Budget should be formulated through a medium term fiscal framework that reflects the internal and external conditions that may impact the key assumptions and the revenue projections. If properly done, it must be robust enough to prevent uncontrolled ‘additional’ financing over and above what has been planned in the budget, and approved by the Parliament.
For such reasons, in most countries, including the Maldives, have laws that govern and bind the government into specific fiscal behavior and prevent discretionary spending. These laws have limits or guidelines for debt levels, expenditures and deficits.
However, with the ‘super majority’ of the Parliament for the Government, laws such as Fiscal Responsibility Act and the Public Finance Act, appears to be ‘suspended’ for the time being.
How the government deficit is financed also matters for overall macro stability of the country. The initial estimates for 2022 made last year, projected MVR 5 billion to be financed through external borrowings, and MVR 4.7 billion from domestic borrowings.
The revised estimates are such that only MVR 2.5 billion could be financed from external sources, leaving a staggering MVR 11 billion to be financed domestically. This would have serious implications, and funds in the banking sector will be diverted to the government in the form of treasury bills and bonds, leaving less or crowding-out the private sector investments.
This could also mean government tapping more into state pension funds, making the pension fund also more vulnerable.
As a former official at the Ministry of Finance commented, there is reason to expect total deficit in 2023 to reach double digits (more than MVR 10 billion), despite the MVR 8.4 billion projected in the budget.