The big budget and the current account deficits – Report by estandardforum.org

After expanding by 7.6 percent in 2007, the IMF is forecasting the economy will advance by 6.5 percent for both 2008 and 2009. Inflation (annual average) meanwhile is expected to jump to 15 percent from 7.4 percent rise in 2007. In 2009, it is projected to decelerate to 4.0 percent in response to lower oil and food prices.

The IMF’s growth forecasts are likely to prove to be too optimistic as the Maldives will not be immune to the global economic downturn. The tourist sector will be particularly undermined as most tourists are from Western Europe, where a recession is highly likely. The economy’s vulnerability to declining tourist arrivals was highlighted in 2005 when there was a huge fall off in tourism following the Pacific tsunami at the end of 2004. Tourist arrivals slumped by 35.9 percent and the economy contracted by 4.6 percent. Tourism will also be impacted by the recent surge in the value of the dollar, which the rufiyaa is tied to. As a result, vacations in Maldives for European tourists will become much more expensive.

Another serious problem that must be addressed are the large budget and current account deficits which are unsustainable. In its Article IV consultation report, the IMF highlighted the dangers of the large budget shortfall. It said, “On the revenue side, there has been little progress with tax reforms. The government has been relying on extraordinary revenue measures, such as leasing out islands, to contain the fiscal deficit.” It noted that the government stepped up spending in 2008 in response to the elections. There was “an over 50 percent increase in the wage bill and quadrupled subsidies, mainly because of administered electricity prices”. As a result, public expenditures were 68.3 percent of GDP. This was almost double the 36.0 percent of GDP level in 2004. The government planned to cover the 2008 budget deficit with revenue from a transhipment port project. The delay of the project though prompted the government to enact measures to slash spending by 20 percent in August for the rest of the year. The IMF has projected a budget deficit of 9.4 percent of GDP for 2008. To lower the budget gap, the IMF has urged the government to introduce corporate and tourist taxes.

The current account deficit has ballooned sharply in response to higher food and fuel prices and higher construction related imports. For 2008, the IMF is predicting a deficit of 46 percent of GDP, up from 40.1 percent in 2007 and 33 percent in 2006. The widening shortfall has been financed by foreign borrowings, principally by the banking sector. As a result, the external debt has soared. The IMF forecasts it will rise to $1,070.6 million by the end of 2008 from $736.3 million in 2007 and will be equal to 82.6 percent of GDP.