MVR2.3 billion is estimated to be received as grants from 'friendly countries' without any details, or whether these are confirmed and realisable grants. Failure to realise this large amount may increase deficit by at least 2 percentage points.
On 31 October, the Minister of Finance submitted the national budget for 2022 to parliament. Total revenue and grants to be received in 2022 is estimated at MVR24.28 billion, with tax revenue estimated at MVR15.3 billion, non-tax revenue at MVR6.4 billion and grants at MVR2.9 billion. As a percentage of total, tax revenue is estimated to contribute 63 percent, non-tax revenue 26 percent and grants 12 percent.
The Maldives' taxation regime underwent a major change in 2011, with the introduction of a Tourism Goods and Service Tax (T-GST) in January 2011 and a Business Profit Tax (BPT) in July 2011. A Goods and Services Tax, introduced in October 2011, brought the T-GST under the same law. The current GST rate is 6 percent, while for the tourism sector, the rate is at 12 percent. An income tax was also introduced in 2019, under which incomes are taxed progressively, and includes a non-resident withholding tax. Banks are taxed at 25 percent of profits. Under a Business Profit Tax introduced in 2011, businesses are taxed at 15 percent, profit from sources outside the Maldives at 5 percent and withholding tax at 10 percent.
As with all aspects of the Maldivian economy, tax revenue is also dependent to a large extent on the tourism sector. This was largely demonstrated in 2020, when, with the COVID-19 pandemic and the resultant decline in tourist arrivals, and the subsequent reduction in imports, total tax revenue showed a large decline for the year. Business and property taxes show the same trend, lower in 2021, since the tax is dependent on business profits made in 2020. Tax revenues are estimated to increase from 2021 onwards, in line with recovery expectations, and the increasingly positive prospects for the tourism industry, with vaccine rollouts and eases in travel restrictions in tourism markets.
The largest contributors to non-tax reveue for 2022 are estimated to come from fees and charges, property income and interest, profit and dividend payments. Fees and charges are expected to increase in 2022 with the expected uptick of tourist arrivals which will see an increase in receipts for the airport development fee. The government has also made provisions for the receipt of MVR338.4 million from expatriate quota fees.
Under revenue from property income, a major increase has been projected as reciepts from land acquision and conversion fees, estimated to increase from MVR18.8 million to MVR448 million. This is expected from the development of islands for real estate tourism, which had also been slated for 2021 but had not been realized.
Interest, profit and dividend payments are payments received by the government as interest on subsidiary loans issued by the government and dividends from wholly or partly government owned companies. Maldives Ports Limited, Maldives Airports Company Limited and the Maldives Water and Sewerage Company are all slated to post an increase in dividends for 2022, while the Bank of Maldives, is expected to pay MVR52 million less in 2022 compared to what it had paid in 2021. Surprisingly (or not), Dhiraagu, in 2022 is expected to pay dividends of just MVR5 million over the dividends it paid in 2021 and MVR86 million LESS than the dividends it had paid pre-pandemic in 2019, based on 2018 profits. It is also interesting to note a MVR228 million increase in dividends from unspecified SOEs in 2022, whereas in 2021, only MVR26 million is now estimated will be received from these SOEs, and nothing was received in 2019.
Grants are expected to contribute 12 percent or MVR2.9 billion to total revenue in 2022, whereas revised estimates indicate MVR1.1 billion will be received in 2021. Delving deeper into these numbers however show that of the cash grants estimated for 2022, MVR2.3 billion is slated to be received from 'friendly countries.' It is estimated that India, which it can be assumed is the 'friendliest' country for the current government, will provide MVR120 million in 2022, raising questions as to where the government is hoping to avail this MVR2.3 billion or USD150 million during the year. This is more worrying given the historical trends of how much in cash grants that the Maldives has received to date.
Breakdown of grants, 2019 – 2024.
Source: Ministry of Finance
In the event that these grants are not realized, and if this financing is not tied to specific projects, this will result in a major funding gap and a widening of the deficit. Assuming that all other factors remain constant, removing this MVR2.3 billion will result in an overall balance of approximately MVR12.1 billion or 13.8 percent of GDP, compared to current government estimates of MVR9.7 billion or 11 percent of GDP.
If expenditure is not cut back in line with these grants not being realized and the deficit increases, the government may be looking at raising debt financing to fund these expenditures. Given the country's current public debt situation, which the Minister of Finance has estimated to be 117 percent of GDP by end 2022, this will further worsen the situation. This also brings into question the credibility of the budget proposed by the government and that of its medium-term fiscal framework, as well as the government's overall sincerity towards the well-being of the country.
