Fiscal sustainability: 2022 and beyond

Minister of Finance Ibrahim Ameer on 31 October submitted a MVR36.925 billion budget to the parliament. The minister said that although the Maldivian economy is recovering strongly, with the measures put in place against the COVID-19 pandemic, the country faces major financial challenges in the year ahead. As such, the budget is aimed at overcoming these challenges and with a view to achieving fiscal and debt sustainability. Room is also provided in the budget for the government to achieve its pledges and objectives of its strategic plans. 

Growth prospects

The Maldivian economy, which saw robust growth until 2019, experienced a severe decline of 33.5 percent in 2020 due to the pandemic and the subsequent border closures. With tourism the biggest contributor to growth, the border closures and various measures against the pandemic across the world saw extremely low tourist arrival levels in mid-2020. Arrivals have however increased since the border was reopened, mainly due to the well-thought out measures put in place by the current government, the fast rollout of vaccinations, and growth prospects and reopening of borders in some of the country's main markets. The Ministry of Finance, based on a moderate case scenario on tourist arrivals for 2022, has estimated that the economy will see a 12 percent growth. 

Fiscal prospects

The Minister of Finance, in presenting the budget to parliament, said that the focus in 2021 had been to sustain government expenditure, even if it meant increasing debt, instead of cutting back on expenditure and letting the economy contract further. This is seen in the revised estimates for 2021 submitted by the government, showing a MVR2.245 billion increase compared to the budget initially proposed for 2021. The Minister of Finance has said that the major contributor to this increase was the decision to repay a "Sunny Side" bond issued by the government in 2017, as part of a liability management exercise.

Given the contraction in revenue and grants from the proposed MVR21.129 billion to revised receipt estimates of MVR19.679 billion, indicates that the government did resort to borrowings to cover this decline in revenue as well as increase in expenditure. The government availed a variety of both domestic and foreign borrowings, including a whopping MVR8.103 billon in domestic securities and loans, compared to estimates of MVR3.282 billion. 

For 2022, the government has estimated revenue receipts of MVR24.280 billion, compared to estimated expenditures of MVR34.028 billion, resulting in an overall deficit of MVR9.748 billion. It proposes to again avail a variety of debt, both domestic and foreign, including sukuks and bonds, as well as USD50 million as budget support financing, and the same amount as proceeds from privatization receipts. 

Overall deficit in terms of GDP is estimated at 11.1 percent for 2022, while it has been revised upwards to 16.6 percent for 2021, compared to the earlier estimate of 18.5 percent. In line with this reduction in deficit, total debt as a percentage of GDP is also estimated to decline from 150 percent in 2022, to 120 percent in 2021 and 117 percent in 2022.

Sustainability measures

The Ministry has proposed three measures to ensure fiscal and debt sustainability under its medium-term fiscal strategy. These are to reduce direct debt of the government, meaning without including guaranteed debt, to 105 percent of GDP by the end of 2023, reduce the primary budget deficit to 5 percent of GDP by 2023, and ensure a year-on-year decline in the budget deficit and public debt. 

Although the government proposes budgets on a medium-term basis, previous budgets proposed along these lines have been discarded every year by all governments and fresh medium-term budgets appear to have been submitted each year. For instance, the deficit estimated for 2023 in the budget proposed for 2021 had been 11.7 percent, compared to the current estimate of 8.3 percent. Similarly, the deficit estimate for 2022 had been estimated at 18.5 percent, compared to the current estimate of 11.1 percent.

Such large deviations question the robustness of the government's medium-term fiscal and debt frameworks, and lends credibility to criticism by those who claim that these are just numbers plugged into a framework as a façade for international financial institutions that look at such measures.

It is also interesting to note that the medium-term estimate for the primary deficit is 4.9 percent of GDP, compared to the stated objective of reducing it to 5 percent by 2023, but surprisingly increases to 6.2 percent the following year. 

The Minister also stated that in order to prepare for a future economic and financial crisis, it is important to manage the country's debt in a responsible manner and strengthen its fiscal position. It will be interesting to consider this statement in 2022 as the budget for 2023 is proposed, especially keeping in mind that 2023 is an election year. 

It is our fervent hope that the budget proposed for 2022 is, as stated by the Minister, is one that shapes the future of our economy, and ensures that the fiscal and debt situation of the country is maintained along robust sustainable policies. One that, as environed by the Minister, "overcomes the losses sustained due to the COVID-19 pandemic, increases economic growth and diversifies the economy. One that improves the quality of basic services, decentralizes public services and fosters regional growth. One that paves the way for the people to attain prosperous lives."