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No other way but scaling back and cutting costs: World Bank

Maldives needs to scale back and implement cost reducing measures as soon as possible ahead of 2026 which is the deadline by when the country needs to repay USD 500 million in debt.

Ameera Osmanagic
21 May 2024, MVT 16:53
[File] Panel discussion held by World Bank to discuss the current economic status of Maldives -- Photo: Mihaaru
Ameera Osmanagic
21 May 2024, MVT 16:53

The solution to revive Maldives' economy is to scale back and find ways to cut costs, said World Bank's Country Economist and Resident Coordinator for Maldives Erdam Atas as he concluded his presentation on the bank's 'Scaling Back and Rebuilding Buffers' report.

Detailing in his presentation, Atas said that despite the implementation of economic reforms by the government, World Bank forecasts Maldives' budget deficits to hike up in the middle term by around 11 percent, with a chance of further increase should the government increase the subsidies it offers. This is indicative of the ned for more reforms, he said.

He also added that the country's current account deficit is also expected to increase, which also requires reform to change the course of the country's economy and obtain the funds needed for the budget.

Atas went on to explain that a significant expense would need to be incurred to pay off 2026's debt and that external debt and financial constraints are the biggest challenges Maldives faces at the moment. He highlighted that while roughly USD 250-300 million was spend on repaying debts, this needs to be increased to USD 500 million from this year on, given the debt balance is at USD 1.1 billion.

He also warned that with huge debts still pending, an unfortunate disaster could further exacerbate the country's present situation, going on to point out that the increasing costs of state-owned-enterprises and growing expenditure on these companies by the state, along with increased projects being implemented put further strain on the government financially.

Speaking at the panel discussion held by World Bank, Deputy Minister of Maldives' Finance Ministry Ahmed Saaid Mustafa also reiterated that Maldives needs to take a step back and focus on holding back on expenses.

"This is the time to take a step back. [We] need to review how the economy has evolved over the past five or so years. The economy fell by 34 percent during Covid. It was the aggressive policies implemented by the then government hiked the economy back up by 37 percent. However, the policies used to attain that bounce back were very disastrous," he said.

As of the past five years, Maldives' debt has escalated by MVR 68 billion (USD 4.41 billion). Addressing this and the previous administration's policies on economic reform, Saaid added that along with debt, the country's Sovereign Development Fund (SDF) also depleted significantly. The reason, he explained, was converting the US Dollars in the fund to Maldivian Rufiyaa. He went on to say that this was done at a time when the USD 200 million 'Sunny Side' bond taken in 2017 was due, which meant that despite the fund having USD 250 million, the state was unable to pay the bond, ending up having to resort to taking on an additional sukuk.

"Those decisions made back then have resulted in us now having to think about having to pay the USD 500 million (MVR 7.7 billion) sukuk in 2026," he said.

Saaid also blamed the former government's decisions made in 2021 for the downfall of the country's economy, detailing that spending the USD 500 million borrowed at the time on the state's budget deficit has presented the country's economy with dangerous risks and cash flow issues.

He said that the main issue is increasing the budget deficit, given that about MVR 17 billion is needed to make up for the budget deficit even this year. Saaid also referred to International Monetary Fund (IMF)'s comment about Maldives being a champion for PSIP projects, but said that with 12 percent of the budget being directed towards PSIPs, the budget is simply not able to cater to the needs of these projects when not even three percent of them are income generating projects.

World Bank's Economist Arvind Nair also talked about the country's growing PSIP project list in the past 10 years and pointed out that it needs to be decreased. However, he highlighted that the current administration accepts and is ready to implement the reforms the public wants.

Those most in need will not be disregarded

Saaid, addressing the need for reforms also said that it is not only to reduce costs but also to better help those in need.

"Today subsidies are most used by the rich. Aasandha and NSPA are given to those who are well connected with the government," he said.

He said the government would reform subsidies to make it easier than now for the poor to get government assistance, and assured that this would be a top priority for the government in bringing about reform.

This year's budget has MVR 600 million allocated in subsidy reform, specially dedicated to provide subsidies for those who need it the most.

Saaid underscored that despite these measures, the government will find ways to support those who are generally well off, but have run into financial difficulties due to circumstances and need additional assistance.

Opening a debt management office

As a reform measure, a debt management office will be established in the Maldives with the main goal of managing the country's debt repayment system better, said Saaid. In order to empower the office with legal powers, a debt management bill with clearer policies for sustainable debt repayment and SDF protection will also be forwarded to the parliament, he explained.

This law will be implemented with transparency and will also mandate all administrations to disclose reform changes to the public, he said.

By the end of the session, all speakers unanimously agreed upon the fact that Maldives needs to reduce costs to revive its economy, and to temporarily pause projects to retain money in the country.

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