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Opinion on the 2025 budget
Table of Contents
Ahmed As'ad, Ahmed Mohamed, Ahmed Saruvash Adam,
Ali Hashim & Ibrahim Athif Shakoor
Although the state’s 2025 budget of MVR 56.6 billion does not manifest major revenue obstacles, it does not appear likely that it can be comprehensively implemented.
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Below, we examine some of the critical issues and raise concerns about increasing reliance on a single sector, focus on non-growth-generating capital projects, high recurrent costs, challenges in financing the national debt, high inflation and reduction in subsidies, all the while salaries and other state expenses are being increased and as capital contributions to SOEs continue.
Increasing dependence on tourism revenue
Revenue target for 2025 is MVR 39.8 billion which is 16.5% higher than revenue in 2023 and 2024.
While the sudden, sharp increase in tobacco tax is expected to contribute an additional MVR 1 billion of import duty to state revenue, as in previous years the largest share of revenue is from the tourism industry.​​
Revenue target for 2025 is MVR 39.8 billion which is 16.5% higher than revenue in 2023 and 2024.​ While the sudden, sharp increase in tobacco tax is expected to contribute an additional MVR 1 billion of import duty to state revenue, as in previous years the largest share of revenue is from the tourism industry.​​
Acceleration of debt because of expenditure surges
The entrenched culture of spending more than we earn has been a facet of the national budget for quite some years. Consequently the national debt is increasing rapidly year after year.
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The 2025 budget shows a 37% increase for staff expenses over the 2023 budget and 20% increase over the revised figures for 2024. Administrative budget for office operating expenses, including office supplies, and service costs, are increased by 15% over 2023 and 5 percent over 2024, respectively.​
​Total government direct debt and public guaranteed debt is projected to reach MVR 149.9 billion in 2025, which is more than three times the national debt of MVR 43 billion in 2017. As a result interest payable on debt has risen to be equal to 10 percent of the total budget. This is 32% higher than 2023 and 7% higher than 2024.
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Moreover, the debt ratio for 2025 is 124.8% of GDP. This is more than twice the 60% advocated for prudency reasons, indicating that like previous administrations this government too, does not have a sound national debt policy. If immediate measures are delayed to maintain public debt at an affordable and sustainable level, the fiscal context of the country can only worsen.
Deficit Financing and crowding out the private sector
The projected deficit will, as expected, be financed both locally and through the global financial market.
It is important to note that, as a strategic move, the government has introduced a change in the 2025 budget to re-classify transactions related to public financial assets. Consequently, capital and loans to state companies have been removed from the expenditure section and transferred to the financing section.
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With these changes, the official budget deficit is MVR 9.4 billion. If expenditure is classified according to the previous method, the 2025 deficit is MVR 13.0 billion. Moreover, this change does not affect the financing requirement and the amount of debt to be borrowed. The financial burdens faced by the country remain the same.
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A total of MVR 19 billion is required to finance the projected deficit of the 2025 budget. In 2025, the target for foreign finance is MVR 11.8 billion. This includes budget support loans and a large share of foreign loans for development projects.
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​The 2025 budget is designed to raise MVR 7.2 billion from local financial institutions. This includes MVR 5 billion planned to be raised through the sale of Treasury bills and bonds, MVR 2 billion transferred by Sovereign Development and MVR 135 million anticipated as repayments from subsidiary loans.
As in the previous two years it is unlikely that the estimated external financing targets will be met. Of special concern is the budgeted figures of MVR 6.7 billion to be raised by commercial banks as budget support. At the same time, budget figures indicate a borrowing cost of an average of 2.8%, which given the current international financial climate and a time when our credit ratings have been downgraded, seem to be implausible.
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In addition, the amount of financing required is likely to exceed if revenue generation measures are not fully effective and because of delays in implementing budgeted expenditure reductions. If planned cost-cutting measures are delayed, (as has happened in the past years) required deficit funding will increase. Similarly, if the budgeted $120 million in cash grants is not received (as has not happened in previous years) financing challenges will intensify.
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Hence, the burden of financing the budget deficit, like in previous years, will likely fall again on the local financial market. In 2022 and 2023, an additional MVR 15.3 billion, for a total of MVR 24.1 billion, was financed from the local economy. An additional MVR 6.9 billion, for a total of MVR 12.1 billion, will be financed from the local market in 2024. It appears inevitable that in 2025 too, the local market will have to bear a significantly higher burden than the MVR 5 billion currently estimated in the budget.
Raising such considerable amounts from the domestic financial market to finance the budget deficit prevents the private sector from accessing limited development funds in the local banking industry, thereby crowding out the private sector severely. Such crowding out limits the opportunities for the private sector to expand and grow. Therefore, in 2025 too private sector businesses will face increased difficulties, compounding the adverse impact on the Maldivian economy.
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While budgets are notoriously easy to present and pass in our local context, financing the budget deficit will be a colossal challenge.
Changes to Aasandha, Subsidy mechanism and Pension payments
As in the previous two years, the 2025 budget is designed to reform the Aasandha mechanism and by shifting to direct subsidies to the needy.
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These measures include a reduction of MVR 2.4 billion from the subsidies formerly allocated to fuel, electricity and food.
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In addition, Aasandha system will require pre-pay and co-pay for services received from pharmacies and government hospitals. A pre-pay amount will also be required for those earning more than MVR 60,000 a month, from April 2025 to access Aasandha services all designed to save a total of MVR 434 million from health service expenditures.
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In addition, MVR 272 million has been earmarked to be reduced from the pension fund budget with the intention of limiting the basic pension; offered from the age of 65, to only low-income earners.
If the implementation of subsidy reform starts next year as planned, it will be a strong step to improve the fiscal health of the country. However, multilateral institutions commenting on our local economy, repeatedly urging the implementation of financial reforms, did not single out our subsidy system. They have, with equal vigor and urgency, advised reducing state operating costs and reforming state-owned companies.
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The 2025 budget plans to cut subsidies of MVR 2.9 billion from the medical expenses, introduce pre-pay and co-pay for Aasandha, make basic pensions available only to the poor. While these measures are necessary, they will significantly increase the financial burden on the general public. What is of concern is that simultaneously, salaries and allowances to state employees have been increased by MVR 2.3 billion. Capital and deficit support to government-owned companies too is budgeted to continue with MVR 803.5 million in 2025.
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Therefore, while the reform and stabilization of the subsidy regime is set to begin, the budget does not reflect any intention to reduce other expenditures, especially salaries and other administrative expenditures, indicating flaws in targeting the budget towards robust fiscal reforms.
Recurrent and capital expenditure targets
Recurrent expenditure accounts for 63 percent of the total state budget and only 37 percent is identified for capital expenditures and contingencies. The excess of recurrent expenditure over capital expenditure indicates that the budget does not adequately accommodate expenditure for growth inducing economic projects.
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Capital outlays should prioritize growth inducing investments which will subsequently increase revenue and employment.
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Budgeted capital investments include MVR 4.1 billion for dredging and construction and MVR 7.1 billion for infrastructure construction, for a total of MVR 11.3 billion. Of the capital expenditure, the MVR 378 million categorized as 'Expenditure for Economic Benefit' is allocated for providing capital to government-owned companies and for funding participation in multilateral agencies and similar entities.
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It is important to note here that unlike former years, the specific islands where these projects will be implemented have been removed from the budget.
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Unless a considerable percentage of capital expenditure is targeted for growth inducing activities, present expenditure on PSIP will, as has ensued in the past, result in increasing recurrent expenditure to repair, refurbish, maintain and staff the facilities built with the capital expenditures of the previous years.
Lack of priority to promote fishery and diversify the economy
2024 has proved to be an adverse year for the fishing industry. M.M.A. figures show that companies purchased 68,000 mts of fish till September 2023, while this year they purchased 41 percent less, just 40,000 mts, total exports too have declined over this period.
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Inconsistent and unviable state policy over many years have caused injury and harm to the long-term health of the fishery industry. Over the past few years, governments and state-owned companies have and continue to offer highly paid land-based jobs, giving additional incentive to the youth to stay away from the more challenging life at sea. The prospects for the fishery industry, therefore, has been grim resulting in closure of private sector processing factories, and with many dhonis being anchored in harbors.
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Although today the primary harvesting effort contributes less than 2 percent to GDP, fishing is part of the Maldivian way of life and our source of nutrition.
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The fishery industry sustained us and was the single source of foreign currency income until the advent of tourism in the early 1970s and have continued to sustain and nourish us on a regular basis. The industry has proved additionally crucial at times when the tourism industry is negatively impacted by external shocks, including the Covid-19 pandemic, when tourism was brought to a halt. In such moments it is the fishery industry that sustains and continually nourishes us.
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In addition, the fishing industry is the second largest foreign exchange earner of the Maldives.
Therefore, as governments though misaligned policy decisions continue to offer incentive for fisherfolk to stay on land and as fishery harvest show a marked decline, it is imperative that we organize state policy to sustain and grow the industry.
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Yet, the PSIP budget of MVR 12.4 billion, (which allocates MVR 1 billion for housing loans and another MVR 1.8 billion for housing development projects) only MVR 122 million; less than 1% of the PSIP budget, has been allocated for the fishery sector.
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In addition, the national economy is being increasingly converted to a tourism dependent economy, an industry that is highly susceptible to external shocks beyond our control.
The decline in the sustainability and development of fisheries, coupled with the lack of progress in diversifying the economy is a major threat to the country's future and needs to be addressed now.
Inflation and the rising prices of goods and services
Papers accompanying the 2025 budget indicate that the proposed 56.6 billion budget is expected to have an unfavorable impact on inflation, which is projected to reach a record high of 3.9%.This was mostly attributable to the reduction of MVR 2.4 billion of universal subsidies on fuel, electricity and food prices.
​Yet today we are also witnessing tension between the state and the tourism industry which has resulted in a quick surge in the dollar rate moving close to highs of the Covid lockdown period. Unless this tension is resolved, the dollar could surpass the MVR 20 mark and will further inflate the cost of goods and services, that are already witnessing highs.
Concluding Remarks
While the move towards direct subsidies is a worthy beginning, other areas, especially salaries and service delivery costs have been projected to increase. The will to impose discipline on the considerable high loss-making state companies is also not visible.
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As in other years, one of the biggest challenges for the budget will be the lack of funds from external sources and the failure to reduce expenditure as planned, which would again result in the submission of yet another supplementary budget, to seek spending funds towards the end of 2025.
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Our financial market, therefore, will again be called to offer funds to the state thereby further hampering the growth of the private sector and adversely affecting the economy.
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When state funding is constrained, bills from the private sector are delayed, and the private sector faces tough and turbulent times with consequential effect on the whole economy
Although the budget has proposed major policy changes to reduce subsidy and Aasandha costs, there are realistic complications for successful achievement. Of additional concern is that other aspects of government spending, seem to be moving in the opposite direction, with budgeted high spending in staff salaries and expenses on non-growth inducing projects.
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The 2025 budget therefore, does not fully reflect the fiscal challenges faced by the state.
The national budget should be based on economic realities and offer a strong realistic plan to overcome the challenges of the day, requiring fresh thinking. The budget process should start by laying out the objectives it wants to achieve and not just as a means to fund the spending wish list of governments, as is being practiced in the country.
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The 2025 budget does not lay out concrete spelled out steps towards increasing growth, controlling inflation, creating jobs, bringing debt to affordable levels, developing the fishery and diversifying the economy. Instead, it is, as normal, a plan towards fulfilling election promises regardless of the costs.
If the plan is to move towards safer shores, the objectives of the budget will need to be decided on and formally stated at the outset, and the income, spending and investment components designed to move towards the stated objective.