MALDIVES 2009 BUDGET PRESENTED; 2008 DEFICIT INCREASES

UNCLAS SECTION 01 OF 02 COLOMBO 001075 SIPDIS STATE FOR SCA/INS AND EEB/IFD/OMA TREASURY FOR LESLIE HULL E.O 12958: N/A TAGS: ECON EFIN EAID MV SUBJECT: MALDIVES 2009 BUDGET PRESENTED; 2008 DEFICIT INCREASES REF: COLOMBO 133 ¶1. (SBU) On November 25, Ali Hashim, Maldives Minister of Finance and Treasury, presented the GORM budget for 2009, proposing a total expenditure of Rf 13.6 billion (approx. USD 1.1 billion). Revenue is estimated at Rf 7.9 billion (USD 0.6 billion),resulting in a deficit of about Rf 5.8 billion (USD 0.45 billion) -- or 32% of GDP. This is the first budget of the government of President Mohamed "Anni" Nasheed, who was elected to office on November 11. However, the budget is based, as MOF sources confirm, nearly entirely on estimates provided by the previous administration because MOF had merely twelve days to prepare before presentation to Parliament. ¶2. (U) The new government had hoped to present an interim budget to cover the first quarter of 2009; however, the constitution did not allow interim budgets. As a result, Hashim has asked parliament to approve the current budget and give him permission to present a revised budget in approximately three months time. He underscored to parliament that his current budget proposal is not sustainable and that revenue projections are too optimistic. He stressed the need for a smaller budget with a smaller deficit. According to MOF sources, one obvious line savings will be government ministries. The new government has already reduced the number of ministries from 21 to 14. ¶3. (U) While detailed information on the budget is not yet available to post, press reports indicate that Hashim is proposing a new corporate tax aimed at raising Rf 225 million (USD 17.5 million). He would also like to extend the resort lease period by 15 years to 50 years, which is expected to raise an additional Rf 1.2 billion (USD 94 million). These two proposals will require new legislation. In keeping with President Nasheed's election promises to relieve the people of the high cost of living, the budget reportedly also proposes to waive duties on essential foods, diesel (used primarily for fishing boats) and medicines. These proposals will cost the government Rf 430 million (USD 34 million). ¶4. (U) The request for a revised budget in 2009 notwithstanding, the government faces a deficit of Rf 5.8 billion (USD 453 million). In addition to funding from extended resort leases and corporate taxes, Hashim plans to finance the remaining Rf 4.4 billion (USD 340 million) via foreign borrowing. The government expects that pledges by international donors for loans and grants following the establishment of a democratic Maldives will materialize and will also contribute to financing the deficit; however, they have not been included in the budget. 2008 deficit increases to Rf 2.5 billion (USD 22 million) -------------- ¶5. (SBU) Meanwhile, according to the MOF, the budget deficit in 2008 will increase to Rf 2.5 billion (USD 193 million, 16% of GDP) by year's end from the 2008 budget estimate of Rf 1.5 billion (USD 117 million, 10% of GDP). This is a result of several large projects, and their resulting fees, failing to materialize due to delays. (Note: The revenue from these projects had been built into the 2008 budget.) In order to reduce expenditures, in August the previous administration asked ministries to cutback expenses by 20%, which many did by reducing electricity usage, cancelling international travel, and other general cut-backs. On November 25, the new government directed ministries not to incur any expenses in the coming weeks other than for salaries and essential expenses. While there had been expenditure savings, it has not been enough. Ever-increasing government expenditures, nearly 70% of GDP in 2008, as outlined below must be reduced if the government is to ensure macroeconomic stability. 2007 2008 2008 2009 est Rev. est In million of Rufiyaa Revenue 7.7 9.7 8.2 7.8 Expenditure 8.7 11.3 10.8 13.6 Deficit 1.0 1.5 2.5 5.8(a) Deficit as a % of GDP 7.9 10.2 16.0 32.0 COLOMBO 00001075 002 OF 002 -------------- GDP growth rate 6.6% 9.5% 5.7% 4.5% Inflation 7.4% NA 12.4% 5.5% (a) Financing requirement excluding revenue from new revenue proposals is about Rf 4.3 billion ($340 million). ¶6. (U) Post will report additional information on the 2009 Maldives budget as available.