Headquarters of Maldives central bank, Maldives Monetary Authority.

Central bank slams proposed tax hike as 'not serving purpose'

MMA advice not to use TGST as a source of balancing government expenditure.

10 November 2022

By Ahmed Naif

Central bank, Maldives Monetary Authority (MMA), on Thursday expressed concern over the possibility that the proposed budget for 2023 may not achieve the objective of the government's proposal to increase GST and TGST.

MMA’s recommendation statement to the parliament regarding the MVR 42.6 billion budget presented by the government for the next year has raised concerns about some of the estimates in the budget in the form of revenue receipts and expenditure. 

MMA’s recommendations highlighted:

  • While the tax hike is aimed at reducing the budget deficit, the proposed budget fails to achieve this objective due to unchanged expenses

  • At a time when commodity prices are high and economies have slowed down, spending cuts should be preferred over tax hike

  • Concern over increase in TGST without taking into account the impact on tourism properly; advice not to use TGST as a source of balancing government expenditure

  • Higher taxes will push prices of commodities or inflation higher than forecast

  • Government's estimates of MVR 2.5 billion grant aid next year is unlikely to realise

  • Budget does not provide details on how to raise MVR 1.5 billion from grants

  • Without grants, budget debt or deficit likely to reach MVR 9.3 billion next fiscal

  • Recurrent expenditure may increase by MVR 2.4 billion next year as the amount allocated in the budget has increased every year

  • Aasandha and fuel subsidy spending likely to exceed budgetary allocations 

'New spending, projects need to be stalled'

MMA pointed out that the next year's revenue receipts will not cover recurring costs. Therefore, it is the MMA's main recommendation to be careful with expenses.

According to MMA’s recommendation, rising fuel prices are adversely impacting the state's reserves. The MMA also noted that in such a situation, there is a concern that if projects that do not meet foreign exchange, the reserves will have to allocate foreign funds for such projects.

MMA's recommends:

  • At present, only projects that will increase productivity that are essential to the economy should be implemented

  • Reducing the cost of PSIP or infrastructure projects next year

Another concern of MMA is that foreign borrowings are more likely to not be available next year. According to MMA recommendations, the budget does not receive as much money as is expected from foreign sources every year. The MMA also noted that the credit received is MVR 2.1 billion less than the estimated amount.

If that happens, MMA’s concern is that the amount of money that needs to be borrowed from within the country will reach MVR 6.5 billion next year.

  • Given the current economic situation and the financial condition of the banks, it is impossible to raise funds from within the country

  • The result will be a further widening budget deficit 

  • If foreign financing is less, the impact on the reserves will also be even higher 

'SOEs will find it difficult to raise foreign currency'

According to the recommendation, the MMA has sold an average of USD 506.6 million a year to state-owned companies after Covid-19. MMA says the amount of foreign exchange sold to companies is increasing year-on-year and is expected to increase next year as well.

The central bank said it would be difficult to deliver the required amount of dollars to the companies if they did not receive the USD 418 million allocated in the budget to be raised from abroad next year.

Hence, MMA recommends:

  • Reducing the cost of companies and reduce their foreign exchange expenses

  • To start the process of obtaining finances needed from abroad 

Concerns about sovereign fund too

The MMA has also raised serious concerns about the sovereign fund:

  • The budget says the government plans to pay a substantial portion of the bond amounts due in 2026 from the sovereign fund 

  • However, of the total amount of $326.3 million, the bulk of the fund has already been invested 

  • Government is yet to come up with a plan on how to recover the invested money before 2026

The MMA says that a robust policy is absolutely necessary so that the sovereign fund can recover the money due from its investments.

The MMA's suggestion is to introduce a special law on sovereign funds and speed up the way the funds can be used.