Minister of Finance Ibrahim Ameer on Tuesday presented to Parliament the national budget proposed for 2024. The budget, originally submitted on 30 October, is largely based on extensive consultations and tabulations within the outgoing Ibrahim Mohamed Solih administration.

While the incoming Mohamed Muizzu administration has had little time to exhaustively shape its outlook, given that budgets have to be approved almost as soon as they take office, they have, through the transition process, ensured key projects have been accounted. However, the incoming administration has still largely inherited a budget that was engineered by the outgoing administration.

Realistic and Credible?

The Ministry submitted a total budget of MVR 49.6 billion for 2024, of which total expenditure is estimated at MVR47.316 billion. The balance is composed of domestic loan repayments of MVR233 million, foreign loan repayments of MVR1.98 billion, and capital contributions to foreign financial institutions of MVR30 million.

Total revenue and grants are estimated at 33.5 billion, of which MVR32.3 billion is domestic revenue, and MVR1.3 billion as grants.  This results in an overall deficit of MVR13.8 billion and a primary deficit of MVR8.5 billion after deducting interest payments of MVR5.2 billion. Of note is that the budget deficit initially estimated for 2023 of MVR8.6 billion has now been revised up to MVR14.6 billion, close to a 70% increase.

To finance the overall deficit of the 2024 budget, the Ministry has proposed foreign loan financing of MVR4.663 billion, budget financing of MVR6.939 billion, and issuing a green or blue bond of MVR771 million, totalling MVR10.404 billion, as well as raising MVR3.365 billion from domestic sources.

The Ministry has said that the objectives of the 2024 budget are to reduce the fiscal risks posed by changes in the global and local economy, along with the fiscal steps the government had to implement with the Covid-19 pandemic, to ensure fiscal and debt sustainability. 

From an economic and fiscal perspective, the budget proposed for 2024 raise several difficult and interesting challenges for an incoming administration.

Subsidy reform

One of the measures proposed by the Ministry to move along a sustainable fiscal path is to reform the government’s current subsidies and welfare schemes. The government currently subsidises fuel, staples which include rice, flour and sugar, and electricity, along with a host of other welfare payments.

The Ministry has proposed introducing a targeted subsidy policy, starting July 2024, as well as revising Aasandha, the national health insurance scheme, which is expected to result in a fiscal consolidation of 3.8% of Gross Domestic Product (GDP) or MVR4 billion. It estimates that implementing these reforms will result in a saving on MVR2.7 billion in 2024 (2.4% of GDP) and MVR4.5 billion in 2025. These reforms are estimated to increase inflation to 3.9% in 2024, whereas it would remain at 1% if these reforms are not carried through.

Reforming the government’s subsidies program and Aasandha have been included in previous budgets as far back as 2011. With these reforms proposed, expenditure budgeted for these programs are usually scaled back in proposed budgets, as can be seen from the chart below.

With the failure to implement proposed reforms, usually for political reasons, the actual expenditure on these codes tends to be higher. With the budget proposed for 2024, although the government has estimated major savings and hence a return to the path of fiscal sustainability, this does not appear to be reflected in the numbers estimated for 2024 at MVR9.4 billion compared to the revised number for 2023 at MVR9.7 billion.

One reason may be the inclusion of a number of new or increased subsidies, such as that for fishermen, a transport subsidy, sanitation networks subsidy and housing subsidies. It also remains to be seen whether the new administration will have the political will to implement the reforms, especially with a major election due in March/April, as well as the council elections slated for 2025.

 Without the political will to implement the reforms, expenditure on this budget code will continue to balloon especially with the new subsidies to be introduced in 2024, leading to an increase in expenditure and hence the deficit, as in recent years.

Rationalising salaries and wages

Salaries and wages of public sector employees is estimated at 24% of total expenditure in 2024, an increase of over MvR1.9 billion compared to 2023. While the Ministry of Finance, in its budget proposal, has indicated that rationalisation of salaries and wages are expected to contribute to expenditure consolidation, these savings are yet to be seen from the numbers.

President Ibrahim Mohamed Solih, in the run up to the presidential election in 2023, had announced increases in the salaries for the health, education and various other sectors, which may perhaps explain the increase.

Rationalisation for other sectors, based on this, as well as previous experiences with such reforms, are also likely to further increase, rather than result in a decline, in the expenditure on this segment.

Grant estimates with no identified source

A further area of concern is that of estimates for revenue and grants proposed for 2024. Similar to the budget proposed for 2023, the Ministry has estimated that the country will receive cash grants (grants not allocated to any specific project) at MVR780 million, of which the donors for MVR771 million are yet to be identified. While this is much lower than the MVR1.542 billion estimated for 2023, it is still a considerable amount given that revised grant receipts for the year 2023 are now estimated at MVR17.2 million. The Ministry has also noted that financing is now estimated to be 66% more than was earlier estimated for 2023. 

Not realising these grants in 2024, without a corresponding cut in expenditure will require financing to be raised to meet this expenditure, either locally or through foreign sources, negating the stated objectives of fiscal sustainability. 

Debt and debt servicing

With total debt to be availed in 2024 at MVR17.2 billion, the Ministry estimates that 71.8% of this will come from foreign sources. Of note however, is that a whopping MVR7.6 billion is to come from as yet unidentified sources. The revised estimates for 2023 also indicate that “other sources” are to account for MVR4.6 billion in debt financing, while in 2022, the amount raised from these “other sources” was at a significantly lower MVR1.95 billion. 

A further MVR771 million is also to be sought through either a green or blue bond, leaving a major portion of financing to be sourced from “yet to be identified” sources. 

Total debt is estimated to each 114.3% of GDP in 2024, which may likely increase with the increase in deficit from the current estimate of 12% of GDP, resulting from the failure to implement the proposed fiscal consolidation measures plus the large grants component included in revenue estimates. 

It is also likely that the government may have to resort to more expensive sources of financing in contrast to the concessional foreign financing it has said it will focus on in order to reduce expenditure on interest payments, should these “other sources” not come through.  

A budget proposed to parliament is a plan of how the government proposes to better the lives of its people, grow the economy and ensure prosperity. It must be credible and realistic. However, on the face of it, the budget proposed for 2024 continues to be, similar to previous budgets, full of platitudes and plans, and reforms that have been proposed, and failed, for decades, in order for it to be perceived as one that is on the right fiscal and sustainable path. The new administration has a herculean effort in front of it.