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PP RUEHBI RUEHCI
DE RUEHLM #0805/01 2251107
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P 131107Z AUG 09
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RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 COLOMBO 000805 
 
SIPDIS 
 
DEPARTMENT FOR SCA/INSB, AND EEB/IFD/OIA 
DEPARTMENT PASS TO TREASURY 
 
E.O. 12958: N/A 
TAGS: EFIN EAID EINV PREL MV
SUBJECT: MALDIVES ON THE BRINK OF BANKRUPTCY 
 
¶1.  (SBU) Severe balance of payments imbalances, crushing government 
debt, and a decline in revenue have brought the economy of Maldives 
to the brink of collapse.  In meetings with the Charge, Maldivian 
Foreign Minister Ahmed Shaheed, Vice President Mohamed Waheed, and 
former opposition Quamee party leader and former Attorney-General 
Hassan Saeed highlighted the economic turmoil the country has been 
experiencing over the last year.  Foreign Minister Shaheed said that 
an IMF team would be arriving in Male the week of August 10 to 
conduct an assessment and determine how much money would be needed to 
stabilize the economy. The Foreign Minister expressed concern about 
the loan, noting that the government had no experience dealing with 
the IMF.  He was unsure how the Cabinet would react to a loan. 
According to Hassan Saeed, the Central Bank had USD 67 million, or 
ten days, of foreign reserves.  Vice President Waheed described the 
monetary situation as (begin quote) desperate (end quote). 
 
Maldives: The Long Decline 
-------------------------- 
 
¶2.  (SBU) There have been signs for last year that the financial 
situation in Maldives was worsening.  Opposition leader Saeed told 
PolOff that the IMF called the country's economy the most precarious 
of any in the world.  Press reported that, in an attempt to control 
spending, President Nasheed asked cabinet ministers in June to 
institute a 20 percent pay cut and also to stop renting private 
properties for government offices.  A long-term foreign currency 
shortage has gotten more severe; government officials attribute the 
cause to the large budget deficit left by the previous 
administration.  The private sector is also feeling the effects of 
the crisis; an attorney active in civil society told the PolOff that 
there is a USD 100 limit on daily withdrawals from banks, limiting 
Maldivians' local access to foreign currency. 
 
¶3.  The new administration came to power in November 2008 when 
President Gayoom was voted out of office after a rule of 30 years. 
Gayoom's administration spent freely on projects intended to foster 
growth and development.  Projects worth USD 117 million were awarded 
to contractors in 2008 alone, but only USD 10.2 million of the money 
owed has been paid to date.  The current 2009 budget deficit is at 
USD 109 million.  Total debt has reached USD 445 million, or almost 
60 percent of GDP, making it one of the world's most debt-laden 
countries. 
 
New Government Unable to Stop Downward Economic Spiral 
--------------------------------------------- --------- 
 
¶4. (SBU) While the Nasheed administration had no control over the 
spending of the previous government, it did little to improve 
Maldives' financial situation when it first came to power. 
Government salaries and employee rolls were increased throughout the 
administration, resulting in additional payments of USD 78 million. 
Rather than tighten spending or increase revenue, the government 
borrowed USD 187.5 million from the Central Bank, the equivalent of 
printing money, increasing inflationary pressure. 
 
¶4. (SBU) The poor condition of the government's finances was 
exacerbated by the economic crisis.  The IMF predicted a 4.5 percent 
decline in GDP.  According to Vice President Waheed, there has been a 
10-12 percent decline in tourist booking rates and fisheries' catches 
have been low.  Construction, the third major source of government 
revenue, is also down. 
 
¶5. (SBU) There have been some sources of relief for the government. 
In December 2008 India pledged over USD 100 million in aid through 
interest-free loans.  It was the largest amount of aid given by India 
to the Maldives in the last 40 years.  The government is hoping to 
begin increasing revenue by doubling the lease period for resorts 
from 25 to 50 years, which officials hope will generate USD 93 
million.  New taxes aimed at increasing revenue have been 
implemented.  However, both the change in lease periods and new taxes 
will take time to generate revenue.  The government also hopes to 
increase the amount of money it receives from tourist resorts. 
Currently, for a hotel room that ranges from USD 200 to USD 500 a 
night, the government only earns USD 8 in revenue. 
 
Comment 
------- 
 
¶6. (SBU) Many of the economic problems that Maldives is facing are a 
result of poor financial decision-making on the part of the previous 
administration.  It took the current administration several months to 
 
COLOMBO 00000805  002 OF 002 
 
 
understand the severity of the crisis.  Once it did, officials 
requested aid from the IMF.  The government has been assiduous in 
implementing IMF recommendations like the 20 percent reduction in 
public sector wages. 
 
¶7. (SBU) Maldives has been a consistent ally of the United States and 
has been forward leaning in supporting USG initiatives.  We should do 
what we can to support the new, democratically elected government in 
improving the country's fiscal situation and strengthening the 
economy. 
 
MOORE