Finance Minister Ali Hashim has determined our budget for the next year to be Rf13 billion. In spite of axing Rf9billion from the budget planned under Gayoom for 2009, our government is still the biggest spender in the world in relation to the size of the economy – even the highest spending governments like that of Iraq and Cuba have government expenditures at around 80 percent of their GDP.
While most of us fully understand the reasons why the new government, at least over the short term, is unable to make good on the pre-election promises to reduce government expenditure, I could not help doing a quick search on what the ideal size of government spending should be. Economist Gerald Scully’s research shows that government spending beyond the ‘optimum’ level of about 23 percent of GDP, generally results in government becoming a net drain on the economy. Empirical evidence shows that up to this ‘optimum’ level, every dollar government spends provides more than a dollar's worth of economic growth. I know it would be inappropriate to generalize this ‘optimum’ level to countries such as the
- Low budget revenue and inadequate tax receipts - The revenue base is far too narrow and comprises mainly of import duties, tourism taxes, resort lease rents and profits from SoEs.
- Wasteful public expenditures - Government expenditures, particularly the current expenditures have increased steadily over the years owing largely to our disproportionately large public sector.
- Burgeoning deficits - Although the government has presented, over the years, what it calls ‘balanced budgets’ to the parliament, the budget deficits have ballooned to unsustainable levels, leaving a huge stock of domestic debt of about RF2 billion.
- Inappropriate means of deficit Financing – our budget deficits are financed either through monetization (a fancy term for printing money!) or from external sources – mostly through borrowings. This has not only created a huge domestic debt (because MMA prints money and lends to Finance Ministry) but an increasingly burdensome external debt position. More worrying is the fact the government, in the recent years, has resorted increasingly to commercial borrowings as a means to finance budget deficits.
We are yet to know how the new government plans to finance the budget. With our stock of external borrowings reaching over a half of GDP coupled with the financial meltdown and the global economic downturn, it looks like the new government is left with few options. So, the big question now is how our new government is going to finance the costs of providing health insurance to 100,000 people and waiving off import duties on essential foods, drugs and diesel.
12 comments:
Naimbe, kaley kanthah mihaaru maa bodee ey ingey.
ebunee thedeh. kamakaa fcuk veetha maabodah? ke ke ke
now we know how the govt plans to raise the funds
http://haveeru.com.mv/?page=details&id=76391
You must understand the Maldivian government is a welfare system for thousands of children who have never grown up despite higher education.
These are valid issues that we as a country need to tackle soon or face grave consequences.
I know its near impossible to happen but the government needs to take a strong stand on the economy and put away its populist policies in order to do what's really needed to be done. The govt has to educate the public that the policies that are seen to be popular isnt going to get us out of economic woes.
As outlined in the article the main issue is the narrow revenue base. The policy to cut of tax from medicine, specific food and diesel are good in its intention. But a straight out abolishing of the full tax on these goods without significant expansion of revenue isn't a step in the right direction.
Next is the issue to extend the lease of resorts to 50 years. If this is to be done we need to get a return from this huge benefit to the most lucrative industry in the country already. A business tax (which has yet to be passed) isnt going to be enough. We need to significantly increase the bed tax rate or more preferably establish a GST on tourism sales, this would be in addition to the business tax since a GST would be an indirect tax passed onto the customers.
Second, the public sector needs to be streamlined and made more efficient. Again this isnt going to be easy and popular task but to really tackle issues we need to do this.
Now once the govt has identified and taken solid steps to streamline expenditure and widen its revenues thereby bringing down its huge budget levels, then it can look into the option of selling its shares in the SOE's in order to pay off our debts and commercial borrowings, this also has to be carried out under independent and expert body formed for this purpose.
Well that's just my two cents
My first concern is that, the expected sources to finance the nearly Rf5 billion worth of deficit are not certain. They include having a corporate tax and stamp revenue from lengthening the resort leases. The thing is laws has to be passed through the majlis for both of these. If government controls the majority of the majlis, passing these bills may not be a problem, but it will certainly take time.
Another point of concern is that we will have to reduce the level of administrative expenditure in proportion with the whole budget. At the current level, nearly 3 quarters of the budget is on recurrent expenses or administrative expenses. This should be the other way around - 1 quarter for recurrent expenses.
naimbe. what are your thoughts on increasing resort lease period to 50 years? isn't the government doing this under the influence of the wealthy resort owners?
naimbey. this is good. but i have one coment. the problem with you is you are you always talking about problems. we know there are problems but why not talk about the solutions. how do u think we can solve these problems?
dhivehi dhariyeh, dhicritic and anonymous 7:40 and 4:29 – thanks for your comments.
1. Some of us might not like it, but populist ideas would continue to be an integral part of the political game. Doing away with import duties on medicine, foodstuff and diesel without having adequate safeguards of the revenue side are examples of this type of politics. Dhivehi dhariyeh, as you say educating the public is one way of ensuring that we don’t have to heed to populist calls at the expense of the economy.
2. Dhicritic, reducing the proportion of current expenditure, as you have very rightly pointed out, is the other challenge. Financing is not the issue here, it is rather a symptom of the actual problem ie the size of the government machinery is disproportionately large, in relation to the size of the country.
3. Anonymous 7:40 – has any government anywhere in the world been able to stay away from the oligarchs? As for the extension of resort leases, I don’t see much of a problem with that. On the contrary, I think, this is a must if we are to remain competitive both as a lucrative investment destination and as an attractive tourist destination. I don’t have any ownership stakes in any resort but I’m saying this as someone who has had the privilege of having extensive discussions with a number of potential investors. But while we work out the strategy to extend lease it is imperative that our people also benefit from this. As ‘Dhivehi dhariyeh’ suggested, this could be done by increasing the lease rentals or bed tax or through a GST on tourism sales. I recently read an article somewhere that says that over 80 out of the 97 odd resorts currently in operation, still have USD4000 or less as annual lease rentals when the going market rate at the more recent rounds of bidding are over USD20,000 per bed per year.
hey katheeb naim, i finally found your blog :-)
and surprise surprise, there's you talking about budget deficits! but why worry? we are soon going to be living in aneh dhivehi raajje in rural victoria....
Dear Naimbe
I read your article with interest. its really alarming to note that this elitist government has no qualms about borrowing from our children and grand children conviniently to suit their political promises, rather than a sustainable wealth creating budget.
I doubt that the ordinary folks of this country are able to disect and quantify these issues. there must be a way for these issues to be communicated and channeld to other influential sections of community.
Meanwhile can you get an economic 'fathwa' on this by economists of Maldives, and make it public on diffrent fora
Hasandi
The simple truth about binary options which many of us do not know is the fact that it is mainly based on predictions. Without proper knowledge of what next can happen to the stock market, you are sure to lose your funds. That is why it is important to be tutored or mentored by a professional trader in binary options. During the few days of being mentored by Mrs Doris Ashley I've learnt much and also succeeding in trades and have been doing successful withdrawals and was able to recover all my lost funds. Feel free to contact her on Dorisashley52@gmail. com or whatsapp her +1 (516 218 6889 for positive results
Post a Comment