VZCZCXRO0407
RR RUEHBI RUEHCI
DE RUEHLM #0107/01 0411138
ZNR UUUUU ZZH
R 101138Z FEB 10
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 1290
INFO RUEHKA/AMEMBASSY DHAKA 2410
RUEHIL/AMEMBASSY ISLAMABAD 9432
RUEHKT/AMEMBASSY KATHMANDU 7687
RUEHNE/AMEMBASSY NEW DELHI 3848
RUEHCG/AMCONSUL CHENNAI 9992
RUEHKP/AMCONSUL KARACHI 2705
RUEHCI/AMCONSUL KOLKATA 0525
RUEHBI/AMCONSUL MUMBAI 7227
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 COLOMBO 000107 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EEB JENNIFER PETERSON AND TANYA SPENCER 
DEPARTMENT OF TREASURY FOR MALACHI NUGENT, ATTICUS WELLER 
AND MARY BRENNAN 
USTR FOR MICHAEL DELANEY AND MICHAEL FELDMAN 
 
E.O. 12958: N/A 
TAGS: CE EAID ECON ETRD PGOV SOCI
SUBJECT: IMF PROGRAM HITS ROUGH WATERS IN THE MALDIVES 
 
REF: A. 2009 COLOMBO 892 
     ¶B. 2009 COLOMBO 1002 
 
¶1. (SBU)SUMMARY: An IMF staff mission is currently in the 
Maldives reviewing progress toward IMF benchmarks before 
releasing the second tranche of funds.  The review will be 
difficult.  The IMF negotiated a very tough agreement with 
the Maldives with ambitious deficit-reduction targets.  The 
Government of the Maldives, in large part due to a difficult 
political situation, has been fighting to keep government 
wage reductions in place but has increased electricity rates. 
 There has been limited progress in other areas to reduce 
government positions and increase revenue through new taxes. 
Top government officials hope that the IMF will be tolerant 
with the Maldives.  Indeed, due to limited tax-collection 
expertise, the Maldives needs time to begin realizing 
revenue, even when (or if) the new taxes are approved by the 
Maldivian Parliament.  END SUMMARY. 
 
IMF Review Mission 
 
¶2. (SBU) An IMF staff mission is in the Maldives February 
9-22 to conduct its first review under the IMF program 
whether the Maldives is meeting its performance criteria, 
indicative targets, and structural benchmarks.  The results 
of the review will be completed by March for the IMF board to 
vote whether to release the second tranche of IMF funds.  The 
IMF has agreed to provide a readout of the staff mission to 
post. 
 
Tough Love from the IMF 
 
¶3. (SBU) The January 2010 IMF Staff report recounts how far 
the Maldives has gotten off track since 2004.  "Government 
expenditures almost doubled as a share of GDP between 2004 
and 2008 and, without adjustment, are on course to reach 69 
percent of GDP by end 2009.  A key driver has been the wage 
bill, stemming from large wage increases and a build-up in 
the number of public-sector employees ( public employment 
and the wage bill are now very high by international 
standards."  Indeed, the IMF projects that, without 
adjustments, the GOM budget deficit will be 33 percent of GDP 
in 2009, 28 percent in 2010, and stretch out to over 20 
percent deficit-to-GDP ratio through at least 2014. 
 
¶4. (SBU) The IMF negotiated a very tough adjustment program 
with the Maldives, which the IMF estimates will reduce 
government deficit to GDP ratios from 33 percent in 2009 to 
18 percent in 2010 and 4.25 percent in 2011. As a 
precondition to the IMF agreement, on October 1, 2009, the 
Civil Service Commission of the Maldives agreed to cut 
government salaries by an average of 14 percent.  Under the 
agreement, the pay rates will be restored when the GOM 
domestic revenue reaches 7 billion Rf (approximately 55 
million USD), which the IMF projected would occur in 2011. 
IMF Representative Dr. Koshy Mathai agreed that a wage cut 
was extraordinary for an IMF program, but the ballooning wage 
bill forced the IMF to require this precondition.   The GOM 
also agreed to reduce 9,000 'redundant' government employees 
(out of over 30,000 total) by the end of 2010.  The original 
IMF staff report estimated that wage and staff reductions 
would decrease the government's wage bill from 28 percent of 
GDP in 2009 to 17.5 percent in 2011. 
 
¶5. (SBU) The IMF projects that its program will reduce the 
GOM budget deficit by 14.6  percent in 2010, 20.8  percent in 
2011, and 18.8 percent in 2012.  On the expenditure side, the 
IMF program counts on the wage reduction for 3.7 percent of 
GDP reduction in 2010, but by 2011 wages are to be restored. 
The IMF projects that cutting staff redundancies will 
contribute 4.2 percent of GDP and increasing electrical 
tariffs will chip in 2.5 percent of GDP.  On the revenue 
side, the IMF expects an airport tax and business profits tax 
to be implemented by year end 2009, an ad valorem tax on 
tourism by October 2010, and a general sales tax by 2011. 
The IMF is counting on the airport tax raising 0.9 percent of 
GDP, the business profits tax contributing 1.6 percent of GDP 
 
COLOMBO 00000107  002 OF 004 
 
 
in 2010 and 2.9 percent thereafter, the ad valorem tax 
increases revenue by 1.1 percent of GDP in 2010, and 
approximately 5 percent of GDP thereafter.  The general sales 
tax should start generating 2.3 percent of GDP revenue in 
¶2011. 
 
IMF Program Hits the Reality of the Maldivian Political System 
¶6. (SBU) The Government of the Maldives has been at a 
stand-off since parliamentary elections in May 2009, which 
resulted in the opposition party winning two more seats in 
parliament than President Nasheed's party.  President Nasheed 
sincerely wants to push through many market reforms, but most 
of his plans have been stymied by the opposition.  The 
parliament has only passed one bill related to the economic 
crisis since the 2009 parliamentary elections (to increase 
the airport departure tax). 
 
¶7. (SBU) Government salary reductions, an absolute 
precondition of the IMF program, have become embroiled in 
local politics.  Ahmed As-Ad, Minister of State for Finance 
and Treasury, told econoff that with the GOM proposed budget 
would have a 14.8 percent government deficit, but if the 
wages were restored, the deficit would increase to 19 percent 
of GDP.  The Civil Service Commission of the Maldives has 
claimed that the projected government revenues have reached 7 
billion Rf, so the wages should be restored immediately.  The 
Parliament also supports restoring the wages and did so in 
the budget.  The Ministry of Finance has held firm, insisting 
on the wage reductions, despite a demonstration outside the 
Ministry of Finance led by the Civil Service Commission. 
 
¶8. (SBU) The GOM has also hiked electricity rates by 33 
percent, which should account for a 2.3 percent reduction in 
the government deficit.  The GOM has a subsidy program, 
permitted under the IMF program, but consumers are clamoring 
for additional subsidies. 
 
¶9. (SBU) There appears to have been little progress in staff 
reductions, although the IMF expects 9,000 staff reductions 
by the end of 2010.  Ministry of Labor officials are 
developing a plan to offer staff different severance packages 
to leave government service, including substantial loans, 
long-term training, or help to establish a small enterprise. 
 The GOM hopes to receive donor assistance to finance the 
severance program, but Ministry of Finance officials said 
that the World Bank was reluctant to do so because they have 
had poor repayment rates for similar loans in other 
countries.  (NOTE: The GOM is holding a large donor's 
conference on March 28 in the Maldives to coordinate and seek 
assistance.  END NOTE.)  Therefore, GOM staff reductions are 
still very much in the planning stages.  As described in 
reftel, staff reductions will be very difficult politically 
when the GOM employs over 10 percent of the citizens of the 
Maldives, and a much higher percentage of the voting age 
population (see reftel B).  Vice President Mohamed Waheed 
commented that it would be very difficult for the private 
sector to absorb all of the excess government workers.  Other 
post contacts have pointed out that many government workers 
wwould be reluctant to leave their secure employment in 
air-conditioned offices in Male for work on the resort 
islands. 
 
¶10. (SBU) Aside from the airport tax, the GOM has promised to 
implement a business profits tax and an ad valorem tax on 
tourists.  The GOM has implemented the airport tax, which is 
designed to provide 0.8 percent of GDP in additional revenue. 
 According to the IMF schedule, the GOM was to have enacted 
the business profits tax by year end 2009, and it should 
contribute 1.6 percent of GDP in 2010.  The Asian Development 
Bank helped draft a business profits tax law in 2004, but the 
new tax has never been approved by the parliament.   Minister 
of State for Finance and the Treasury As-Ad noted that the 
parliament is in recess until February 28, but he hopes that 
parliament will pass the Business Profits Tax bill soon. 
As-Ad hopes that the GOM can begin to collect the business 
profits tax revenue for the last half of 2010, even if they 
did not get the full year.  A private sector contact was much 
 
COLOMBO 00000107  003 OF 004 
 
 
more skeptical when the business profits tax would be 
approved or when real revenue could be collected.  The IMF 
plans for the GOM to implement the ad valorem tax on tourism 
by October 2010, but this seems much further off.  The GOM 
currently charges an 8 USD per night bed tax, which is easy 
to calculate and collect, regardless of whether the hotel 
costs 50 or 5,000 USD per night.  A senior GOM official told 
econoff that it would be difficult for the GOM to approve any 
new taxes in 2010 and the ad valorem tax was "unlikely to 
happen." 
 
¶11. (SBU) The GOM is counting on substantial income from 
privatization, but it is unclear when or if additional 
government projects can be privatized.  The GOM successfully 
sold a stake in the telecommunications company for 40 million 
USD in October 2009 and hopes to privatize the airport in 
¶2010.  Mathai of the IMF stated that the 2010 Maldives budget 
assumes revenue of 1.3 billion Rf from privatizations (100 
million USD or 7 percent of GDP) in privatization revenue. 
The GOM included a similar amount of privatization revenue in 
their 2009 budget, but only received the telecommunications 
revenue. 
 
Technical Constraints Will Limit New Tax Collections 
¶12. (SBU) The GOM will need to improve its technical capacity 
to collect the business profits tax and ad valorem tax, which 
will take time to develop.  The Maldives currently collects 
import duties (65 percent of revenue), the flat 8 USD bed tax 
on tourist (20 percent of revenue), and assorted other taxes 
such as lease payments for resort islands, royalties on 
foreign direct investment and foreign businesses, and a bank 
profits tax.  Maldivian companies, such as traders and 
restaurants, do not pay any taxes, other than import duties 
which are already included in the local prices.  An advisor 
for the US Treasury found that the Maldives Department of 
Inland Revenue primarily has a cashier function, collecting 
fixed amounts, rather than auditing businesses.  The banks 
profits tax is analogous to the business profits tax, but 
there are only six banks in the Maldives, and it is unclear 
how thoroughly they are audited.  For example, at one point 
the Department of Inland Revenue realized that they were six 
years behind in auditing the banks for the bank-profits tax. 
The DIR caught up in four to six weeks, raising the question 
of the level of their audit.  The US Treasury advisor thought 
that there were capable people in the DIR, but they were not 
trained to do proper audits.  The Asian Development Bank 
plans to provide technical assistance to train the DIR, but 
the Treasury advisor thought that it would be useful to phase 
in the tax, giving the DIR and the Maldivian private sector 
time to comply, since local businesses and the DIR had 
limited expertise to date.  Although this suggestion makes 
sense from a tax collection angle, it would introduce another 
delay into the IMF schedule. 
 
The IMF Changes its Tune 
 
¶13. (SBU) Post previously reported how difficult it would be 
for the Maldives to meet the proposed IMF targets (see reftel 
B).  IMF representative Mathai now realizes that it would be 
very challenging, since although the GOM had good intentions, 
given the political circumstances it would be very hard for a 
new democracy to make these types of budget and employment 
cuts.  Mathai asked whether the USG had any budget-support 
funding to ease the transition.  Econoff explained that no 
USG funds had been allocated for this purpose. 
 
COMMENT 
 
¶14. (SBU) Minister of State for Finance and Treasury As-Ad 
realizes that the Maldives is behind schedule, and he pleaded 
that the IMF should "show some tolerance" for the GOM in its 
efforts to meet the very difficult targets.  The GOM is 
already facing heat for complying with the preconditions on 
the wage rollback and the increasing electricity prices, and 
it has yet to face the real pain of the IMF program 
adjustments.  Although the GOM clearly has to make radical 
adjustments in its government spending, the IMF does need to 
 
COLOMBO 00000107  004 OF 004 
 
 
show some tolerance as the GOM tries to implement this 
demanding IMF program. 
 
FOWLER 
FOWLER