MMA Governor Ali Hashim gave technical advice to the Budget Committee on the national budget for 2023. Photo/Dhauru

MMA relaxes stance on T-GST hike

According to the central bank, T-GST hike will boost state revenue from foreign exchange

13 November 2022

By Ahmed Naif

Maldives Monetary Authority (MMA) said on Sunday that it is a good thing to hike T-GST as it will make it easier to manage the change in foreign exchange buying rate, in a break from the central bank's written advice issued three days back.

Sharing MMA’s technical advice on the upcoming budget presented to the budget committee, MMA's senior research analyst Mohamed Imthinan said that some of the policies in the upcoming budget will also have a positive impact on inflation and exchange rate.

Here's what he pointed out:

  • T-GST hike will boost state revenue from foreign exchange

  • It will have a positive impact on the reserves

  • Overdrawing of public bank accounts makes it easier to manage exchange rate change

  • Bulk and simultaneous purchase of medicines and supplies for the health sector will help reduce the cost 

"The increase in T-GST will increase the foreign exchange entering the reserves and provide an opportunity to increase the MMA-run intervention. This will make it easier to relieve the pressure on the exchange rate," Imthinan said.

In a written recommendation to the budget committee last week, the MMA had said that the central bank did not favour hiking TGST or GST at this point, and that it is time to manage the budget by cutting costs. It also raised concerns that raising TGST does not seem to be a good policy every time the government has to meet its expenses.

No support for general GST hike

MMA pointed out in the budget committee that some of the policies proposed in the budget to be implemented by the government will lead to higher inflation of commodities in the country next year.

Here are some of the things Imthinan pointed out:

  • If the general GST is hiked, there will be a change in commodity prices 

  • Proposed change to fuel subsidy

  • Increase in public bank account overdrawing, which in turn leads to higher foreign exchange value

With all these factors and the changes in the global economy, MMA expects inflation to be at 5.4% next year, according to Imthinan.

'This time is not the best time to raise taxes'

Questions from members on the MMA's recommendation that they did not support a hike in taxes were thrown repeatedly. Governor Ali Hashim, who went into the details in explanation, said: 

  • MMA's overall recommendation is that the tax hike should be done keeping in mind its impact on the economy as a whole

  • The impact on the private sector, in particular, needs to be carefully examined

  • Even if some taxes are raised in the Maldives, the impact is less compared to the rest of the world

  • So, there is a possibility of hiking taxes.

"Then when we looked at it, it seemed that the timing was wrong [to raise taxes]. Overall, we agree that revenue should be increased when the state develops. The country's tax incidence [the impact of tax increases] is less in comparison to other countries. The room is still there to increase revenue," Ali Hashim said.

The governor said that due to overdrawing of public bank accounts, more measures are planned next year to reduce the amount of local currency flowing within the economy in comparison to foreign currency. He assured that action would be taken if inflation goes too high.

"We expect that if inflation continues to rise, we will have to try to reduce excess liquidity," Ali Hashim said.

'Some numbers not realistic'

One of the major concerns raised in MMA’s presentation was that the budget's estimate of grants and credit figures from abroad may not be practical, or feasible. Here are some of the highlights:

  • 2.5 billion is unlikely to be received in grants

  • Recurring costs to rise to MVR 28.6 billion; increases by an average of MVR 2.4 billion each year

  • If Aasanda's spending rises next year and MVR 1 billion can't be saved from fuel subsidies, budget deficit likely to widen next year

  • It's important to focus on cutting costs over raising taxes right now and implement that

  • If Blue Bonds are not sold, MVR 7 billion may have to be borrowed from local markets

  • There is not enough liquidity in the country's banks to raise that money; only MVR 6 billion in banks 

  • With the government borrowing money from the country's domestic market, the money meant for general businesses has reduced and crowded

  • Measures to reduce the increase in local currency from PBA ever draw will make it difficult for the government to borrow from the domestic market 

'Direct subsidies should be given'

When asked by a member about the subsidies for fishermen being given to MIFCO, MMA Governor Ali Hashim pointed out that subsidies should be given to the targeted and the needy. Therefore, the MMA advises the revision of the subsidy policy by making it accessible to the needy, he said.

As per the upcoming budget:

  • MVR 250 million to be given to state-run fish company MIFCO as subsidy for fishermen 

  • According to the government, the money is being given to cover the losses incurred by MIFCO for procuring fish at a higher market price

  • MVR 180 million to be provided as sanitation subsidy for running and maintaining drains in rural areas 

  • The two new subsidies will cost a total of MVR 430 million