The crystal ball repeatedly returning a 502-error code, this analysis will use the inductive method; – that of relying on the past to lay out the most probable scenario, for the fiscal landscape of 2025. For 2 decades, even more, we have smothered ourselves with an ever stretching, by now fully frayed, subsidy blanket while politicians continued to feed from the trough.
Reality on the ground reveal us as not being ready to enter the tough and bruising world of fiscal responsibility, at least voluntarily, so onward ho, it is.
The fiscal landscape for 2025 offered here, is therefore necessarily determined by past observations and the fact that politicians and the populace would rather wallow in familiar excesses and hope to ignore the consequences.
The fiscal landscape for 2025 offered here, is therefore necessarily determined by past observations and the fact that politicians and the populace would rather wallow in familiar excesses and hope to ignore the consequences.
Because statistics relating to the Covid years of 2020 and 2021 will skew the trend lines of income, expenditure, and other related categories, we shall largely restrict to the post Covid years of 2022-2024 to project to 2025.
1. Budget Deficit
The national budget for 2025 is sanctioned for a total revenue of MVR 39.7b for income, grants and aid to the state. The total expenditure figure is MVR 56.6b which includes re-payments of previous loans and capital contributions and investments. Fancy arithmetic, some of which used for the first time, allows the budget deficit for 2025 to be estimated to be MVR 9.3b.
As a nation we have proven to be highly proficient in repeatedly surpassing estimated expenditure targets for many years. Just in the last 3 years the expenditure budgets for 2022 to 2024 have been exceeded by MVR 5.9, 8.1 and 5.4b MVR respectively. In fact, the budget deficit for 2024 is now over MVR 14b, roundly beating the deficits of even the covid years.
It is important to note here that the extra expenditure have in fact been incurred, even while initial revenue estimates have been surpassed by 7.2b in 2022, 2.3b in 2023 and half a billion in 2024. Therefore, as in previous years, it is highly more likely that the budgeted expenditure for 2025 will only be visible in rear-mirror mode and that as a nation we will, once again, successfully overshoot expenditure estimates.
2. Financing the deficit
Following from the all too ‘reasonable’ prediction of overshooting expenditure estimates, it’s all too cogent to refer to the issues of financing the budget deficit.
During the past 3 years the state has been unable to attract the estimated figures for grants, external aid and external financing. However, instead of curtailing expenditure, which would have been more rationale, but culturally uncharacteristic for us, governments have laid the burden of financing the budget deficit on the local economy.
The local economy has been tasked with shouldering the majority of the financing burden with treasury bills bonds sold in the domestic economy to sum total of MVR 20b in the period 2022-2024 which is MVR 8.0b over budgeted figures for the period.
For 2025, the state has budgeted MVR 9.1b to be financed by foreign sources. However, with double scale backs from ratings agencies, and with extra vigilance that is now prevalent in the international market regarding the health of our economy, it is highly unlikely that financing will be available at affordable rates from the international market.
An MVR 5.0b of treasury bills and bonds and a transfer of MVR 2.0b from the sovereign fund are the identified local financing for 2025. However, based on the past, it is highly more likely that instead of curtailing expenditure when external funding fails to materialize, the government will in fact increase expenses and burden the local economy to fund the excesses of the state, resulting in additional crowding out of the private sector.
3. National Debt
Even while re-classification of expenses allowed for lower estimated budget deficits, the 2025 budget projects that the National Debt will increase from MVR 138.6b at the end of 2024 to MVR 150b; 114% of GDP at the end of 2025.
Large scale infrastructure projects that line the pockets of politicians and burden the people with huge unmanageable debt, are certainly not indigenous only here in the Maldives. Our politicians too, over time, have shown particular affinity to such white elephant projects.
The litany of the many promises and now reaffirmed, to build castles in the air, with non-existent resources, at costs the economy could ill afford continue unabated. Hence it is much more highly likely that we shall continue to be witness to additional white-elephant projects in 2025 too, and that our national debt figures will be higher than projected.
Additionally, already STO has borrowed $50m, with state guarantee at an effective rate of over 11, and the sovereign arrangements with RBI, while allowing for much required breathing space, need to be repaid with interest after a year. And it is highly more likely that such measures that will increase the debt will continue.
The litany of the many promises and now reaffirmed, to build castles in the air, with non-existent resources, at costs the economy could ill afford continue unabated. Hence it is much more highly likely that we shall continue to be witness to additional white-elephant projects in 2025 too, and that our national debt figures will be higher than projected.
4. Trimming of subsidies
Budget papers state that 43% of state subsidies are in effect received and consumed by the top 40 percentile of the richest households with 13% being consumed by richest 10% of households. A fact known for some time leading to governments have in successive years, budgeting to trim down subsidies and offer direct assistance to those in need. Each year we have failed majestically to do so.
Health insurance was budgeted at MVR 730.92m in the 2022 budget but ended at MVR 1.637b in 2022. Similarly, the budgeted health insurance figure of MVR 1.045b increased to MVR 2.286b at the end of 2023. In the same vein the MVR 1.998b figure budgeted for health insurance in 2024 is now projected to be MVR 2.287b. A combined total of MVR 2.437b of extra expenditure over the budgeted figures for health insurance alone in the 2022-2024 period.
The 2025 budget was submitted with a stated intention to reduce MVR 2.4b from subsidies relating to fuel, electricity and food and an additional 434m from the health insurance scheme, a grand total of MVR 2.9b to be reduced from the subsidy budget.
As a country we have an excellent record of smothering the populace with blanket subsides and the repeated all too familiar intention to revert to direct subsidies to the needful, in 2025 too, is more likely to result in wasted ink and paper on the budget book and fodder for historians.
In 2024 we were witness to considerable social media discontent about the restrictions imposed on Aasandha and NSPA which in and by itself could have been construed as an indication that discipline, even if they be misguided, are perhaps being attempted. However, Finance Ministry statistics published for as of 26th December show that the MVR 1.998b for Aasandha budgeted for 2024 ended up with an expenditure of MVR 2.147b, higher than the 2023 amount.
Meanwhile, the executive has publicly committed to maintaining and in fact further expanding the already frayed blanket of state subsidies.
As a country we have an excellent record of smothering the populace with blanket subsides and the repeated all too familiar intention to revert to direct subsidies to the needful, in 2025 too, is more likely to result in wasted ink and paper on the budget book and fodder for historians.
5. Inflation
The elimination of universal subsidies to the tune of a minimum of MVR 2.9b and moving to direct subsidies of MVR 1.572b, the state posits would result in a 3.9% inflation rate in 2025, a record for the country.
However, other aspects of the budget as well as developments on the ground, make it highly possible that inflation numbers for 2025 would be higher than predicted.
Meanwhile due to the largely unnecessary and definitely unhelpful tension created between the state and the tourism investors, the local currency is losing value in the local economy with the dollar gaining 25% by year end. As an import dependent currency, the pressure on the dollar will result in inflation in goods and services sold in the economy.
While subsidies are scheduled to be trimmed by a minimum MVR 2.9b, state salaries and allowances are set to increase by MVR 2.3b. Capital expenses too are budgeted to be increased by MVR 1.8b to an all time high of MVR 20.725b in 2025. These moneys when expended, will add to the pressure on the local currency.
Meanwhile due to the largely unnecessary and definitely unhelpful tension created between the state and the tourism investors, the local currency is losing value in the local economy with the dollar gaining 25% by year end. As an import dependent currency, the pressure on the dollar will result in inflation in goods and services sold in the economy.
Additionally, the considerably large capital expenses and the increase in salaries and allowances will, without productivity gains, further add to the inflation on the ground.
6. Conclusion
As stated at the outset, this is an inductive scenario constructed from the records of the past and the reality of today. Therefore, the depicted landscape is borne from the available color palette and contains mostly darker hues.
However, there’s been no seismic shift in our body politic. While both ends of the political spectrum agree that matters are dire, we are more contended to blame each other rather than taking concrete steps to reverse course and chart the ship of state to calmer fiscal waters. The populace remains constant in their demand for the continuity of free subsidies and in fact vent for more.
As a nation we have been acutely aware of the urgent need for acute fiscal reform, especially from 2022. Even if local voices for caution remained ignored at the executive level, multi-lateral development agencies had made sure that our leaders were fully briefed on the urgent need for change and the real dangers of not reforming and reigning in our excesses.
While the antics of promising more, much, much more than the nation can afford, might perhaps be construed to be permissible during political campaigning, it is absolutely necessary that we face reality today.
Hence, it is entirely possible that the government, with no elections in 2025 may in fact chart a course of reform and start on the road of fiscal sanity.
Therefore, even while the conclusions reached above are gloomy in their nature, unfortunately it is more likely that during 2025 too, we shall continue on the same course that will lead us ever so closer to a fiscal chasm.
This is one instance I would really love to be proven wrong.
