Thursday 9th Dec 2021
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State Debt

MVR 50 Billion In Debt — The Cost Of The Solih Fiscal Policy

The State’s budget for 2022 was proposed to the Citizen’s Majlis this past week. As the MVR37 billion budget meets the Maldivian people in the middle of President Ibrahim Mohamed Solih’s presidency, it is worthwhile to review the Solih administration’s fiscal policies as well as what is in store for the nation as a result of those policies.

The Proposed Budget For 2022

The MVR 37 billion budget submitted by Ibrahim Ameer, Minister of Finance, to the Majlis was the fourth budget by the Solih administration. The budget; with its consideration of President Solih’s various pledges; proposes a total deficit of MVR 9.7 billion. From all of the budgets proposed by a government, this current proposal contains the third-highest deficit. Remarkably, the first (the revised 2020 budget) and the second (2021 budget) in that list had been produced by the Solih administration.
The economic crisis that unfolded as a result of the COVID-19 pandemic may have been cause for the Solih administration to run such a high deficit (except for 2019). A perusal of the last two years’ budgets shows that the government had attempted to justify its decision to spend and borrow more as being motivated by its reaction to the pandemic.
While austerity measures are neither desired nor expected, there is much room for questioning the wisdom of the Solih government’s fiscal policies with regards to the nation’s best interests in the long term.
In the midst of the declining economy during the pandemic, there had been no hint of slowing down work on infrastructural projects or cutting down on non-essential recurrent costs; such as spending on political appointees; in any meaningful way.
The Solih administration’s decision to ignore; and in some cases, challenge; the warnings issued by Moody’s International and other financial institutions was also cause for concern and criticism.
In the middle of President Solih’s term, what is apparent is that running high deficits and debt have come to characterize his administration’s fiscal policy.
As per this year’s estimates, as government spending is expected to increase by 6.3%, government revenue can only be expected to rise by 4.7% per annum; a 1.6% increase per year in the total deficit.
The Yameen administration had, in comparison, spent at 14.4% per annum, but had matched it with a government revenue of 13.3% per year; a total deficit rate of 1.1% per year.
The Yameen administration had also not received as much foreign aid as the current government and had also presided over several large infrastructural projects.

High Deficit—What Else?

A deficit means that a government would need to secure funds; from domestic and international sources; to fill the gap. An increasing deficit would mean that the government may have to take on more and more debt.
This has been one negative outcome of an imprecisely-constructed fiscal policy.
The Maldivian government has maintained a high budget deficit in the past 10-15 years, particularly under the administration of Presidents Yameen and Solih. It must be noted that these two presidential terms had seen unprecedented infrastructural development in the country.
One major goal of President Solih’s fiscal policy is to bring about development. Airport projects and the installation of sewage and water purification systems are ongoing throughout the Maldives, in spite of the economic difficulties incurred by the pandemic. Necessary recurrent expenditures such as Aasandha, salaries for government workers, and the like have continued uninterrupted, as they have under his predecessors. The Solih government has taken on more expenditures: income support, vaccine procurement, and relief loans.
And as the Maldives recovers from the pandemic, the social and economic outlook for the country may begin to look brighter once again. At least, this is the message that President Solih’s policymakers want to get across.
What seems to be missed between the lines is the huge debt that would be incurred by the State with this idealistic approach to managing the economy.
As per the proposed budget, the State would accrue additional total debt of MVR49.8 billion. By the end of President Solih’s term, the national debt to GDP ratio would be at 105%.
This is a matter of concern and a cause for thoroughly questioning the wisdom of President Solih’s fiscal policies.

Presidents Yameen And Solih’s Fiscal Policies

Both Presidents Yameen and Solih had one goal in common during their respective terms: development. Both Presidents had set high standards and had pursued large infrastructural projects funded by debt.
How both Presidents differ is by their approach to sustainable development and their fiscal discipline.
As per the budget proposal, the Solih administration would accrue an additional debt of MVR49.8 billion. This is double the amount of debt incurred by the Yameen administration during its entire five-year term; MVR22.6 billion.
President Yameen’s administration had presided over very ambitious infrastructural projects. It begs the question if President Solih’s heavy debts had the same cause.
As per the proposed budget, the Public Sector Investment Programme (PSIP) is set to receive MVR29.2 billion. The Yameen administration had spent MVR24.9 billion on PSIP, giving President Solih a lead of MVR4.3 billion. However, this would imply that the MVR20.6 billion that remains of the MVR49.5 billion is going to be spent in ways that would not significantly benefit the economy or the national GDP.
The Yameen administration had spent a total of MVR24.9 billion on PSIP, MVR22.6 billion had been funded by debt and the remaining MVR2.3 billion had been funded by government revenue.

President Solih’s Fiscal Policy In Recent History

The Maldives’ total debt within 1968-2018 had been MVR48.2 billion (internal and external debt, combined). President Solih’s has planned to accrue more debt in one year than the State has seen since the end of the sultanate. The Ministry of Finance estimates that by end of the Solih administration on November 2023, the State would have accrued a total debt of MVR98 billion.
The Maldives has a nation, undergone much in that half-century: poverty, a terrorist ground invasion in 1988, the Asian Tsunami of 2003, the Great Recession. That President Solih has chosen to take on more debt in 5 years than the State has in the past 50 years is a cause for concern.
President Solih’s profligacy is preceded by the leader of his party, the Maldivian Democratic Party (MDP), President Nasheed (2008-2012). Combined, both Presidents have; as of this writing; accrued MVR65.4 billion. In perspective, President Maumoon in 30 years, President Dr Mohamed Waheed in 2 years, and President Yameen in 5 years had only accrued half that amount; MVR32.6 billion.
It may be understood that the MDP’s fiscal policies are designed to be as burdensome for the State as they are. The State accrues MVR252 for every second that the MDP remains in power.
However, President Solih has personally taken a stand to reduce government borrowing. During a campaign rally on 8 September 2018, he had pledged to not be one to burden the citizens with debt.