Ibrahim Athif Shakoor
Design failures in the 2024 budget make it highly unlikely that it can be faithfully executed.
Beginning of economic recovery in 2022.
Maldives was one of the few countries that achieved a V shaped recovery from the Covid pandemic lockdowns. We re-opened our borders in July of 2020, allowing for a quick recovery of our industries through 2021. In spite of global uncertainties arising from logistic-related global inflation and the Russian invasion of Ukraine, our inflation has been under control and by 2022 our economy was poised for recovery.
‘The Maldivian economy prospered in 2022, with real GDP growth estimated at 13.9% and exceeding pre-pandemic levels by the end of the year. …. The year also witnessed the recovery of the construction sector with sectoral growth accelerating owing to the resumption of large-scale development projects, while the growth of the fisheries sector also improved during the year.’
Governor’s Statement, Annual Report 2022, MMA
In 2022 the economic landscape, therefore, certainly created the opportunity for prudent fiscal policies aimed at recovering from the ‘harm and injury’ of the Covid lockdowns. Expenditure towards prioritizing income generating investments and restraining other expenses, all leading to reducing national debt were significant priorities.
The 2023 budget
The 2023 budget was certainly presented as a prudent exercise. As advised by World Bank and IMF, expenses would be curtailed leading to debt reform. Subsidies would be targeted and SOEs would be brought under control.
However, similar to 2022, in 2023 too, even while actual revenue increased by 2.3 billion, the sharp increase in spending meant that the government had to resort to an additional 6.1b of deficit financing over budgeted numbers. (Table 1)
Table 1
Like the 2022 budget, the 2023 budget too, had explicit passages of reforming the subsidy mechanism by targeting subsidies and reforming the national health insurance scheme- Aasandha. However, yearend projections are for an extra spending of 3.1b over budgeted figures for subsidies. (Table 2)
Table 2
Reforms to rein in the SOE’s too, had not been attended to with capital contributions to SOE’s being 67.1% over 2023 projections. And capital expenditure in non-income generating investments in 2023 were 37% over budget.
Considering the unbudgeted income collection, it is important to dissect the offered reasons for the sharp increases on the Expense side in the 2023 budget.
a. Covid recovery
Covid recovery is the most recurring feature for the unexpected variances. However, the country opened in Jule 2021 and as stated before, Maldives was on the road recovery in 2022.
Even otherwise, an economy in recovery would have been more susceptible to shortfalls in tax collection. However, in 2022 and 2023, revenue had been far in excess of forecasts with an additional 7.1b realized in 2022 and extra 2.3b in 2023. It is the extra, unbudgeted heavy spending that is of concern.
b. Cost hikes due to global conditions
Russia, had been amassing soldiers and arms along the Ukraine border since mid-2021, and world powers, especially US and UK had been vocal about the intentions of Russia. After having denied these rumours for quite a while, Russia invaded Ukraine on the 24th February 2022.
This invasion into the breadbasket of Europe and the consequent embargoes led to record high prices in the grain and oil markets. These high costs led to unexpected and unforeseen costs for fuel and grains, both of which are heavily subsidized in the Maldives.
However, by April, Russians had realized that a quick victory was not in the offing and the situation had descended to a brutal, prolonged war. One with no easy end, nor any inevitable victor at hand.
It is entirely possible not to have envisaged the Russian invasion and its consequential increase in fuel and grain prices in the 2022 budget. However, grain and oil prices had, by mid-2022, settled to the ground reality, and had not witnessed dramatic changes even with the on-going massacre in Palestine.
Therefore, it is perhaps logical to assume that the 2023 budget would have factored in global commodity prices and its impact on the national budget. However, the 2023 budget for subsidies too, had been exceeded by 3.1b.
c. An unforeseen presidential election
Expenses because of the Presidential Election of 2023 has been pointed out as one of the biggest reasons for the excess expenditure. However, the 5-year term would end on November 17, 2023. That was never in doubt.
All governments predictably formulate expansionary budgets towards major elections. That is entirely expected and not unusual in the real world. However, for the architects of the proposed 2023 budget, the Presidential election and the accompanying activities were quite unforeseen, and had been apparently, a shock and a surprise.
What then of the proposed 2024 budget?
Like the proposed 2023 budget, the proposed budget for 2024 again, is a model of restraint and caution. While Income is projected to grow, expenses are projected to grow only by a meagre 33m from 2023 revised figures. All of which resulting to an actual reduction of Financing costs next year. (Table 3)
Table 3
Additionally, the 2024 budget again, speak of wholesale reform of the subsidy regime. It also alludes specifically to the critical importance of reforming the SOEs and curtailing non-productive investment projects.
But the 2024 budget, like the proposed 2023 budget, has failed to account for political reality. For 2024 is also an election year. The term of the present Parliamentary will expire and new MP’s (with 6 additional members this time) will be elected and take their seats by mid-2024.
Our governance model, even though officially a Presidential system, vests considerable powers to the Parliament. It is difficult, almost impossible, for a President to govern, unless with the consent of the Parliament.
Yet, the 2024 budget does not manifest the realities of an election year. It is not an expansionary budget. State expenses are only budgeted to increase by a meagre 33m in 2024.
Given the political reality, it is highly unlikely that billions of indirect subsidies; now in effect for more than a decade, will be reformed during 2024. It is also improbable that capital investments in PSIP projects will be curtailed or that SOEs will be brought under strict fiscal constraints during the period.
Therefore, even if is entirely desirable, unfortunately it is quite unlikely that the 2024 budget can be faithfully executed. Rather, much like the 2023 budget, it is highly more improbable that the 2024 budget can meet expenditure reduction targets.