Request for Economic Support Funds for the Maldives

UNCLAS SECTION 01 OF 05 COLOMBO 001144 //CANCEL - WILL BE RESENT UNDER A NEW MRN /// STATE FOR F LESLEY ZIMAN STATE FOR USAID SIPDIS SENSITIVE E.O 12958: N/A TAGS: EAID ECON ETRD MV SUBJECT: Request for Economic Support Funds for the Maldives COLOMBO 00001144 001.4 OF 005 //ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR /// WILL BE RESENT UNDER A NEW MRN COLOMBO 00001144 002.6 OF 005 in a large amount of foreign currency leaving the Maldives. ¶8. (SBU) The global financial crisis in combination with the swelling government payroll has brought the Maldives to the brink of bankruptcy. The Gayoom Administration's profligate spending has left the Nasheed government in a tight economic bind (reftel C). The GOM employs an estimated 33,000 people -- more than 10% of the total population, 20% of the voting age population, and one third of the working population of Maldivian citizens. Government expenditures account for 61% of GDP, and the cost of government salaries has risen from 13% of GDP in 2004 to 21% of GDP in 2008. Prior to the 2008 Presidential elections, the former government raised salaries and benefits for government employees. The current Nasheed government raised salaries again in February 2009, in advance of the May 2009 Parliamentary elections. In addition the government's limited capacity for budget management has resulted in unsustainable levels of government expenditures over the past several years. ¶9. (SBU) The government projects a 7% government deficit in 2009, but this is utterly unrealistic since it includes the expectation that the GOM will receive 22% of GDP in revenue from privatizing state-owned enterprises, which has not occurred. Therefore the GOM government deficit for 2009 is likely to be well over 20% of GDP. The IMF program projects that the Maldives fiscal deficit will be a very high 33% of GDP in 2009. The Md the U.S. dollar. The overvalued currency makes Maldivian exports less competitive. ¶10. (SBU) The IMF board recently approved an agreement with the Maldives on a financial assistance package. By accepting the IMF recommendation, the Maldives will reduce the size of the government deficit from 33% of GDP in 2009 to 18% in 2010 and finally to 4.25% in 2011. The GOM has already started implementing several preconditions required by the IMF. The Maldives plans reforms such as changing their tax system from import duties to direct taxes (reftel D). The IMF also required the GOM to stop monetizing the �00A;deficit, i.e. using the Maldives Monetary Authority to print money for the government, and instead to move to selling government bonds on commercial markets. Under the proposed program, the GOM must transfer 3,200 civil servants to the private sector, apparently through privatization. Given its limited technical and managerial capacity, the Maldives will need technical assistance from donors to successfully implement the reforms detailed by the IMF. The Maldivian Environmental Crisis -------------- ¶11. (SBU) The Maldives is comprised of over 1,190 islands, of which 198 are inhabited and 94 are exclusive resort islands. More than 80% of the Maldives' land area is less than 1 meter above sea level. The Maldives is extremely vulnerable to global climate change, which will impact the two significant industries in the country: tourism and fisheries. Tourism could decline significantly, for example, if the Maldives' coral reefs are bleached due to increased water temperatures caused by climate change. The fishery catch has been falling, apparently due to over-fishing and environmental changes. ¶12. (SBU) The GOM, led by President Nasheed, has issued several clarion calls regarding the environmental risks faced by the Maldives. In October, the GOM conducted an underwater cabinet meeting to illustrate the future risks they face. This meeting received extensive international media attention. Last month, the Maldives hosted a climate change conference during which President Nasheed passionately called for additional funds to adapt to climate change and rising sea levels (reftel E). The GOM hopes to become the first carbon neutral country by 2012 by increasing dependence on renewable energy sources. Other Challenges -------------- ¶13. (SBU) There is a lack of Maldivian institutional capacity, and COLOMBO 00001144 003.6 OF 005 the GOM officials are not well trained in the functions they are expected to perform. As a result, there is a dearth of bureaucrats who can effectively formulate and implement policy. GOM employees are particularly weak on fiscal management and oversight. ¶14. (SBU) The youth constitute 20% of the population with a high population growth rate. At the same time, there is a very high rate of unemployment amoncreasing in this region and the drug traffickers are hard to intercept due to a weak coastal guard system. GOM - A Strong U.S. Partner -------------- ¶15. (SBU) President Nasheed has steered the Maldives toward close association with the United States. In addition to a pro-democracy orientation and pro-Western economic policies, the GOM has come through for the U.S. on difficult political steps: the Maldives has announced that it intends to establish diplomatic relations with Israel, (although it has not done so yet)(reftel F),and has taken positions at the United Nations that support U.S. priorities, on Kosovo recognition and human rights issues in Iran. The Maldives has also taken some politically difficult stands on votes in the United Nations (see reftels G and H). ¶16. (SBU) As a moderate Muslim country with an indigenous and successful - if fragile - democratic movement, the Maldives is a valuable symbol in the Muslim world. Government and business leaders are now concerned, however, that young Muslims, frustrated with poor employment prospects, could become radicalized. There are worrisome signs. President Nasheed has warned that 10 Maldivians were recently killed in Waziristan in Pakistan fighting for extremist movements, and 100 Maldivians are still fighting in Afghanistan and Pakistan. If severe political and economic turmoil develops in the Maldives, the youth could become disaffected and turn to extremism. Authoritarian Forces Could Topple the GOM -------------- ¶17. (SBU) The nascent democracy in the Maldives is at risk because the government is gridlocked. The party of former President Gayoom won a plurality of seats in the May 2009 Parliamentary elections - two more seats than President Nasheed's party. The parliament is largely stalemated, as each side scrambles for the independent legislators to form ad hoc majorities. The GOM has only passed four minor laws with the new parliament, that do not address the pressing challenges (reftel I). ¶18. (SBU) With the GOM unsuccessful thus far in effectively addressing the Maldives' economic crisis, the government's popularity is falling and it faces serious efforts to topple it from power. There has been growing tension between the supporters of President Nasheed and former President Gayoom over a corruption probe by a Presidential Commission questioning the former President. In November, the opposition Gayoom party brought a motion of no confidence against Foreign Minister Sheheed, one of the GOM'sf layoffs for a third to one half of these employees. This economic reality, though needed, is dangerous for the government, especially with the authoritarian opposition party seeking to destabilize the government and return to power. Action Request: Interagency Assessment Team -------------- ¶19. (SBU) The Maldives requires substantial and sustained U.S. engagement and assistance to address its myriad of political, economic and environmental challenges. Post requests that an interagency team visit the Maldives to explore the opportunities to assist the Maldives. Post's preliminary proposals for Economic COLOMBO 00001144 004.6 OF 005 Donor Coordination -------------- ¶20. (SBU) Post will canvass other donors to avoid costly duplication of efforts. The GOM has compiled a list of donor programs, which post is in the process of verifying. The GOM plans to convene a donors' conference in January or February to seek additional resources, and Post will meet with donors in mid December to coordinate efforts (reftel J). ¶21. (U) Other donor activities include the United Nations Development Program (UNDP),which has $43.6 million in projects in the Maldives, with assistance concentrated on reconstruction from the 2004 tsunami ($40.3 million) and the Global Fund for AIDS, Tuberculosis and Malaria ($2.4 million). Additionally, the World Bank is initiating an anti-corruption program in the Maldives. Strategy for Cost Containment -------------- ¶22. (SBU) Post will maximize use of the Economic Support Funds (ESF) to address the Maldives' myriad needs. Since international NGO advisors can be very expensive, Post suggests using interagency USG personnel or third country nationals - such as from within South Asia - as technical advisors to cut costs. In addition, the Maldives is a small island country which can ill afford a large government superstructure. The Maldives only has 300,000 citizens, so it cannot hope to replicate the government bureaucracies of large developed nations. Post suggests looking to other small island countries with efficient governments as models. ¶23. (SBU) Post is also exploring means other than ESF monies to address Maldivian needs. Other avenues of funding from DOD and the State Department will be used to expand assistance to the GOM in areas of border security, interdiction of narcotics traffic and transnational crime by providing assessments, training and equipment to law enforcement and security agencies. Post has also requested $3.4 million in 1206 Funds from DOD for the Maldives. Additionally, to advance counter-extremism efforts, Post is utilizing Civil Military Support Element (CMSE) and Military Information Support Team (MIST) personnel. Post is working with the Treasury Department on a counter-terrorism financing conference, and DEA is conducting specialized training. Thus, any ESF programs would complement, rather than duplicate, other USG efforts already underway. Action Request: ESF Funding for Technical Assistance -------------- -------------- Political and Governance Reform Assistance ¶24. (SBU) Building an effective democratic system that efficiently delivers government services is a critical political need for the Maldives. Lack of capacity at all levels is a tremendous obstacle. Post suggests that in collaboration with USAID technical assistance programs be developed in key areas including: 1) drafting legislation; 2) judicial training; 3) building capacity of local government officials, and [4) creating awareness of democratic systems. Post requests $10 million in ESF funds over three years for this component. Economic Growth Assistance ¶25. (U) Post proposes developing an Economic Governance and Growth Initiative in collaboration with USAID for the Maldives. We propose that an expert team design a technical assistance and capacity building project to address the following illustrative areas: (1) valuation and privatization; (2) sale of government bonds; (3) tax policy; (4) tax administration particularly, excise and large taxpayer unit and customs; (5) private sector competitiveness; (6) information technology security; (7) external debt management; (8) legal and regulatory reform; (9) workforce development; and (10) COLOMBO 00001144 005.2 OF 005 budget control and expenditure framework. These programs will provide the Maldives invaluable assistance in implementing the potential IMF program. Post requests $10 million in Economic Support Funds over three years in this sector. Environmental Protection Assistance ¶26. (SBU) The rising sea levels poses a major threat to the very existence of the countrr endangered coral reefs; 5) improved rainwater harvesting and sewerage issues; and 6) protection for utilities and key infrastructure. In addition, the GOM has requested a marine research island, which merits further review. Post does not currently have in-house expertise in this sector and would need to bring technical expertise on board to assess and define program needs. Post anticipates initial support requirements of $8 million in ESF funds over three years for environmental protection. ¶27. (SBU) Post is also requesting a 10-day National Oceanic and Atmospheric Administration (NOAA) course entitled "Planning for Climate Change in the Coastal and Marine Environment" (reftel K). Social Protection Assistance ¶28. (SBU) The Maldives has a serious drug issue, which some ascribe to Western influence. To complement the DEA efforts mentioned above, post requests assistance to strengthen drug rehabilitation centers. Currently the Maldives has one such center, which could greatly benefit from more sustained U.S. engagement and support. Post anticipates the need for $2 million over three years in initial ESF support in this sector. BUTENIS