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DE RUEHLM #0902/01 2660348
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O 230348Z SEP 09
FM AMEMBASSY COLOMBO
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INFO RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 8945
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 7183
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3322
RUEHCG/AMCONSUL CHENNAI PRIORITY 9510
RUEHKP/AMCONSUL KARACHI PRIORITY 2525
RUEHCI/AMCONSUL KOLKATA PRIORITY 0417
RUEHBI/AMCONSUL MUMBAI PRIORITY 6811
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 COLOMBO 000902 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EEB JENNIFER PETERSON AND TANYA SPENCER 
DEPARTMENT PLEASE PASS TO DEPARTMENT OF TREASURY MALACHY 
NUGENT/ATTICUS WELLER 
DEPARTMENT PLEASE PASS TO USTR MICHAEL DELANEY/VICTORIA 
KADER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB PGOV
SUBJECT: MALDIVES STILL FACES SERIOUS ECONOMIC CHALLENGES 
WITH AN IMF AGREEMENT 
 
REF: COLOMBO 805 
 
 
¶1.     (SBU)  Summary.  Although the Government of the 
Maldives (GOM) has reached a staff level agreement for an IMF 
loan package, the GOM still faces serious fiscal and balance 
of payments issues in the near term.  President Nasheed, who 
has been in office for under a year, appears to be in 
complete accord with standard IMF medicine.  The Nasheed 
administration already had extremely ambitious plans to 
drastically downsize the civil service, privatize state owned 
enterprises, and reform taxes.  Several private sector 
contacts reported that the government sets great goals but 
there is little implementation to meet these targets.  The 
GOM has fixed its exchange rate to the U.S. dollar, resulting 
in an overvalued local currency, exacerbating the balance of 
payments problem.  Finally, the GOM requests USG technical 
assistance on areas such as designing privatization programs, 
selling government bonds, and implementing direct taxes. 
Post endorses these requests.  End Summary. 
 
Political Background: A New Government Faces Stiff Challenges 
 
¶2.    (SBU)  President Nasheed came into office in November 
2008 after former President Gayoom had ruled the Maldives for 
30 years.  Outside contacts agree that President Nasheed and 
his cabinet are generally well educated and sincerely believe 
in their ambitious reforms.  Minister of Economic Development 
Mohamed Rasheed told econoff that the GOM plans to reduce the 
government civil service (currently the Maldives largest 
employer) from 33,000 to 18,000 employees.  In addition, 
Minister of Finance and the Treasury Ali Hashim proudly 
stated that the GOM wants to get out of the business of the 
private sector by privatizing all state owned enterprises, 
including the airport, electricity, water and others.   These 
proposed reforms are currently before the Parliament.  The 
government has passed a new labor law regulating hours, 
workplace safety and permitting unions,  which never existed 
before. 
 
¶3.     (SBU)  President Nasheed faces a difficult domestic 
political environment.  After 30 years of autocratic rule, 
the Maldivian institutions are weak and politicized.  Despite 
raising government salaries prior to the May 2009 
Parliamentary elections (see reftel), the opposition party 
led by former President Gayoom won the most seats, and the 
opposition now controls the Parliament.  A third country 
diplomat noted that aside from a few appointments, President 
Nasheed has not been able to pass any bills through the new 
Parliament. 
 
Serious Economic Situation Remains 
 
¶4.    (SBU)  The Maldives still has a serious balance of 
payments crisis, as described in reftel, with less than one 
month foreign exchange of import cover.  According to the 
Maldives Monetary Authority (MMA) the GOM holds $43 million 
USD in foreign exchange reserves, which has declined 
recently.  The government budget deficit continues to rise, 
as government expenditures have increased 25% in 2009, while 
government revenue has fallen 22%.  The GOM is financing 70% 
of the deficit through domestic financing, primarily 
monetization as the MMA provides money to GOM.  The 
government external debt will increase to 45% of GDP by the 
end of 2009, and debt payments have grown from 5% of 
Maldivian exports of goods and services in 2007 to a 
projected 10% in 2009.  The MMA projects that the government 
deficit for 2009 will fall to 7% of GDP in 2009, despite a 
projected 21% drop in revenue, and 16% growth in 
expenditures, since the government is counting  on 
substantial income  from the privatization of state owned 
enterprises. 
 
¶5.     (U)  The Maldives sources of foreign exchange are also 
coming up short.  In the critical tourism sector, tourist 
arrivals fell by 10% in the first six months of the year 
 
COLOMBO 00000902  002 OF 003 
 
 
compared to 2008, although the decline appears to be slowing. 
 MMA experts thought that tourist spending has declined 
further, since the resorts attracted tourists with special 
discount packages.  The second most important industry is 
fishing, but the fish catch is down, apparently due to 
climate changes, as revenue from fish exports has fallen by 
45% in 2009.  The Maldives has at least 70,000 expatriate 
workers, so there are net remittance outflows of $10 million 
per year, further draining scarce foreign exchange. 
 
Strong Medicine from the IMF 
 
¶6.    (SBU)  The Maldives has reached a staff level agreement 
for $60 million, which could rise to as much as $78 million. 
Note.  Despite press reports that the IMF assistance package 
could reach $100 million, MMA officials report that the IMF 
said that only $78 million could be provided at most.  End 
Note. The IMF program is for 30 months, although it could be 
extended.  The IMF board will vote whether to approve the 
Maldives assistance package in late October, and approval is 
expected. 
 
¶7.    (SBU)  The IMF staff agreement imposes very strict 
medicine.  The IMF targets include: 1) the MMA must 
immediately stop monetizing the government deficit by 
providing money directly to the government, and the 
government must finance its deficit on commercial terms.  The 
GOM plans  to sell government bonds to close the deficit for 
September; 2) the government must privatize state owned 
enterprises such as the airport, and utilities such as 
electricity and water; 3) the GOM should reduce the 
government civil service by 5,000 employees; 4) the GOM must 
approve a banking act by December 2010.  The government owns 
75% of the Bank of the Maldives, and there are also five 
foreign banks present in the Maldives.  The level of 
non-performing loans has increased from an average of 2% in 
2007 to 20% for the Bank of the Maldives and a 7% average for 
the other banks; and 5) amend the law governing the MMA to 
provide more independence for the MMA. 
 
Achieving the IMF Targets Will Be Very Difficult 
 
¶8.    (SBU)  The most pressing challenge for the GOM is 
financing government operations for September, since they can 
no longer borrow from the MMA.  Minister of Finance and the 
Treasury Hashim told Econoff that he has an approximate $8 
million budget gap for September.  The Bank of the Maldives 
may fill the immediate gap by purchasing government bonds on 
"commercial terms".   Minister Hashim has stopped GOM capital 
spending and has sought large reductions in government 
salaries and benefits.  Minister Hashim stated  that if he 
could make it through September he would be ok.  In the 
medium term, the GOM plans to increase the tourist tax from 
$15 to $45 per head (this is called a "green tax:" and 80% of 
the revenue is for environmental programs), and initiating a 
business profits tax and a value added tax, all by 2010. 
 
¶9.    (SBU)  The second greatest challenge is implementing 
privatization of state owned enterprises (SOE).  Last year 
the government offered to privatize the airport, but there 
were no bidders.  It does appear that the GOM will privatize 
the telecommunications service, since the international bank 
HSBC has agreed to act as an underwriter and apparently the 
GOM has a bidder.  However, privatization of  the SOEs will 
be difficult, both because the government has little or no 
experience in these complex financial transactions, and the 
global financial crisis has greatly reduced the available 
capital for investment. 
 
¶10.   (SBU)  The head of the local chamber of Commerce and 
several government officials also worry that new taxes will 
impose substantial new costs, harming the private sector. 
The GOM,s new labor law has increased employers wage costs 
by more than 20%, since the law now regulates hours and 
requires overtime for work in excess of 48 hours per week. 
In addition, the government has passed a new pension program 
 
COLOMBO 00000902  003 OF 003 
 
 
to move from a defined benefit plan to a defined 
contribution.  The pension plan increases taxes by 14% of the 
employee,s salary (7% paid by the employee and 7% by the 
employer (both the government and the private sector). 
 
¶11.    (SBU) Our private sector contacts strongly support the 
overall goals of the government, but they see grave 
deficiencies in planning and implementation.  For example, 
the government provided large wage increases to government 
employees before the Parliamentary elections but never 
bothered to determine the total cost.  Similarly, the 
government wants to substantially reduce government salaries 
and benefits, but a GOM official noted that under the new 
labor law the government could violate labor contracts by 
unilaterally reducing government wages and benefits. The new 
labor law also provides the right to strike, which could 
create problems if the government substantially retrenches 
its work force or privatizes the SOEs.  Finally, a private 
sector contact noted that despite all the talk of retrenching 
the public service, the number of public employees has 
actually grown. 
 
An Underlying Problem: The Fixed Exchange Rate 
 
¶12.   (SBU)  The GOM has fixed its exchange rate to the U.S. 
dollar ($1/12.8 Rufiyaa) since 2001, and the currency appears 
to be substantially overvalued.  Although the GOM has little 
trade with the U.S., the GOM chose to peg its currency to the 
dollar because  international commodities such as oil are 
priced in dollars and their European tourists understand 
prices in fixed dollar terms.  The MMA thought that the fixed 
peg had worked well to promote tourism, and they were loath 
to change it, although they understand that it was a factor 
in deteriorating foreign exchange reserves.  In addition, the 
GOM foreign debt is denominated in dollars, so if the GOM 
devalued its currency it would substantially increase its 
foreign debt in rufiyaa terms. 
 
Many Requests for USG Government Assistance 
 
¶13.   (SBU)  The GOM ministries requested USG technical 
assistance in virtually all of their meetings with econoff. 
The most critical needs appear to be help implementing 
privatization of SOEs, the sale of government bonds, and 
increasing tax revenue through new taxes.  Government 
officials, particularly lower down in the bureaucracy, have 
little expertise in these areas. 
 
¶14.    (SBU)  Comment.  The GOM is facing enormous challenges 
with a new democracy, weak institutions,  opposition control 
of the Parliament, downturns in their primary tourism and 
fishing industries, and the difficulty in attracting 
investment capital to privatize SOEs.  Although a number of 
these problems were created by the GOM, Post believes that 
USG technical assistance could be very helpful for the GOM as 
they attempt these ambitious reforms.  The GOM is trying to 
do the right thing, but right now they do not appear to have 
the necessary technical abilities to pull it off.  End 
Comment. 
BUTENIS