Budget cut to keep Maldives away from U.N. climate talks

The Maldives on Wednesday said a budget crisis will keep its president from attending landmark U.N. climate talks, the results of which could have a huge effect on the future of the low-lying archipelago.

Famed mostly for its high-end luxury resorts and white-sand atolls, the Maldives has also made a name for itself as an advocate for mitigating climate change -- because rising sea levels are forecast to submerge most of its islands by 2100.

President Mohamed Nasheed has canceled his trip to the talks in Copenhagen in December as a measure to cut government expenditure and reduce a yawning budget deficit worsened by low tourist numbers during the global downturn.

"We will engage with Copenhagen as much as possible without the president traveling there," presidential spokesman Mohamed Zuhair said.

The Maldives' $850 million economy, based almost entirely on fishing and tourism, saw its budget deficit nearly triple to 14 percent of GDP last year, due to substantial increase in government spending, figures from the Maldives Monetary Authority showed.

The global downturn has also cut into tourist arrivals.

Nasheed drew global attention shortly after his election last year when he said the Maldives would start looking to buy land in other countries to resettle people once the seas rose, but later acknowledged it was not financially feasible.

This year, Nasheed said the Indian Ocean islands would swap fossil fuels for wind and solar power over the next decade, and buy and destroy EU carbon credits to offset emissions from tourists flying in to visit its luxury vacation resorts.

In 2007, a U.N. climate change panel predicted an increase in sea levels of 58 cm, which would submerge many of the Maldives' 1,192 islands by 2100.

U.N. scientists have warned global warming caused by high atmospheric levels of carbon dioxide (CO2) will lead to rising seas, big storms, mass heatwaves and droughts.

The current climate pact, the Kyoto Protocol, expires in 2012 and countries are scrambling to negotiate a follow-up deal that many hope will include the United States and commit developing nations such as China and India to cut greenhouse gases.

Negotiators in Bali agreed to start two years of talks to be concluded with the signing of a new treaty at the U.N.'s 2009 climate talks in Copenhagen, Denmark.

Nasheed last year unseated Asia's longest-serving ruler, 30-year incumbent President Maumoon Abdul Gayoom, in the islands' first multi-party presidential election. Gayoom has become a vocal advocate for mitigating climate change.

Source: in.reuters.com

Gasim Dismisses IMF Concerns

Finance Minister Gasim Ibrahim has dismissed the annual report of the International Monetary Fund, which predicted the Maldives will fail to raise the $1.4 billion required to balance its record breaking 2007 budget.

“With certainty I can say we will be able to raise the additional revenue by the end of this year,” Gasim told journalists.

He was addressing a press conference hastily arranged after extensive coverage of the IMF warnings in the Maldives' weekend press.

And in a patriotic appeal, Gasim told journalists, “not to write just anything that comes along,” urging them to support the budget, “which is for the benefit of the people.”

Domestic Boom

Gasim’s 2007 budget accounts for 80% of the Maldives’ anticipated income for 2007.

The IMF warned of an "overly ambitious resort development schedule," and questioned whether “optimistic revenue assumptions” will materialise.

Gasim responded by promising domestic revenue for 2007 will double to over 7.1 billion Ruffiya (550 million dollars), through the development of regional airports, hotels and resorts, and by doubling customs surcharges from $2 to $4.

”We generated this domestic revenue. Within one and a half years much has been achieved.” the Finance Minister said.

”Horror Movie”

But as analysts continue to absorb the figures published by the IMF, one Sri Lankan pundit has said, “from the outside this is like watching some horror movie.”

Concerns stretch far beyond this year’s budget to fundamentals, such as whether the fixed exchange rate of 12.8 Ruffiya to the dollar is sustainable.

The IMF predicts the Maldives’ foreign currency reserves will fall to 208 million dollars by the end of the year, equivalent to only two months of the Maldives’ import bill. The IMF urges spending cuts, or currency devaluation, once foreign reserves slip below three months.

Some IMF Directors believe there is “a fundamental misalignment” between the Ruffiya and dollar, leading some economist analysts to predict a currency collapse, unless the Ruffiya is devalued.

Any devaluation of the Ruffiya would increase the cost of imports, leading to rapid inflation.

The IMF is predicting inflation will double during 2007 to reach 7% by the end of the year, even without a devaluation of the Ruffiya.

”I give you my word”

“I give you my word the Maldivian Rufiyaa will not be devalued,” Gasim told journalists in response to these concerns.

The Maldives Monetary Authority says the country’s foreign reserves stand at around 250 million dollars, far higher than the IMF estimate. And Gasim says there are sufficient reserves to buy three months of imports.

“We realise inflation is growing to some extent,” the Finance Minister conceded, “But not to the extent quoted by IMF. I believe it will not grow beyond 5%.”

“I don’t know what they are talking about,” he concluded on the IMF figures.

Deputy Minister Sharif was more understanding of the IMF. “They look at our predictions conservatively,” he said.

“But as a conservative technocrat myself, I am confident growth will be between 7 and 12 percent. It is already guaranteed to be higher than the 5 percent predicted by the IMF.”

”The Maldivian people”

The press conference was triggered by an alarmist headline in Haveeru claiming the IMF had predicted the Maldivian economy would contract by 350% this year.

But Gasim urged journalists to back the budget.

"When a nation is developing the expenditure geared towards providing basic services is something we have to undertake. It is for the comfort and benefit of the Maldivian people,” he said.

Source: Minivan News

IMF warns Maldives against money printing as budget deficit skyrockets

The International Monetary Fund warned the Indian Ocean tourist paradise of Maldives against money printing and dangers of a currency collapse as the country heads for a record budget deficit in 2007.

The Maldives contracted in 2004 following the tsunami but the economy recovered to grow by 19 percent in 2006.

Ballooning Deficit

But the budget deficit which was just 1.9 percent of the economy in 2004 had expanded to 7.3 percent in 2006 and is set balloon to 23.9 percent in 2007.

The IMF warned the island nation should stop printing money to finance the expanding deficit and welcomed a recent law that gave the Monetary Authority of Maldives more independence.

Inflation which was at 3.7 percent in 2006 is now expected to nearly double to 7.0 percent this year.

IMF said it hoped that the recent launch of treasury bills "would help eliminate the practice of automatic central bank financing of fiscal deficits", and asked for further development of the markets.

The Fund said spending was rising too fast and projections of revenue were over-estimated.

Expenditure was expected to rocket up by 45 percent while domestic financing was expected to rise by 31 percent.

Compared with the economy expenditure would rise from 46 percent to 54 percent in 2007

"The 2007 budget carries risks of a significant deficit as the large spending program is based on optimistic revenue assumptions," the IMF said in a public information notice following its annual review of the islands known as Article IV consultations.

External Pressure

IMF said so far inflation had been low due to the openness of the economy, but the balance of payments was showing the strain of deficit spending.

"Higher fiscal deficits have, however, resulted in sizable external current account deficits," IMF noted.

"The current account deficit widened from 36 percent of GDP (Gross Domestic Product) in 2005 to 41 percent in 2006.

"External debt has risen from 43 percent of GDP in 2004 to about 65 percent in 2006, while the debt service ratio has increased from 5.1 percent to 8.8 percent."

IMF warned that the atoll's foreign reserves and the currency which had been pegged to the US dollar with good results up to now may be hit by the ballooning budget deficit.

Its Executive Directors who reviewed the staff report called on the Maldivian government to cut the deficit as expected revenue, based on an "overly ambitious resort development schedule", may not come.

Currency Peg

"They stressed the need to keep expenditures in line with a realistic resource envelope, in order to contain inflation, strengthen private investment and growth, and safeguard the external position," the IMF statement said.

"They cautioned that in a small, open economy like that of Maldives, fiscal slippages tend to magnify external vulnerabilities and could cause the already low level of international reserves to fall rapidly."

IMF said there was not enough information to say whether the Maldivian Rufiya was technically overvalued against the US dollar, particularly as the Euro has been rising.

The Fund said the peg to the US dollar could be kept on as long as budget deficits were low.

"They were concerned, however, that with unchanged fiscal policies, the resulting sharp fall in reserves would undermine the dollar peg," the IMF statement said.

In the last ten years Maldives had doubled per capita income and now has the highest per capita income in South Asia.

Until 2004 when budget deficits started to rise the Maldives had low inflation and high economic growth and has been a net importer of labour from the South Asian region.

Source: LBO