The worsening public finances

For the last 27 years, without any exception, successive governments ran deficits. For the most part government finances are spent on the salaries and wages of the public sector; those who work for the state; the executive branch, the judiciary, the parliament and the independent institutions. In other words, a significant amount of wealth from the productive sector of the economy is being transferred to the government sector through taxes, without a corresponding benefit to the productive sector of the economy.

In this article, I attempt to make a case that the worsening public finances are mainly because of the ever-increasing government sector (the executive branch, the judiciary, the parliament, independent institutions, welfare programs and state-sector pensions and gratuities) and its continued intervention in the operations of the free markets.

The growth of Government

We began the process of implementing representative form of government with the 1932 constitution, which led to the replacement of the then over eight century old monarchy. Since then, the government sector continued to grow. 

Successive governments continued to run deficits, In the preceding 11 years prior to Covid, the deficit averaged over MVR 3.7 billion per year. During Covid, the budget deficit made a new record of over MVR 13.5 billion and has remained in such territory since then.

An independent tax authority was established in 2010, marking a significant change in how government is financed. In 2011 taxes on goods and services as well as on profits and incomes were introduced. Since the introduction of the tax system, the government revenue grew at 13% (CAGR). According to the 2025 budget, the government’s expected revenue is MVR 37 billion. (excl. grants) 

The most recent significant political development in the Maldives is the Constitution of 2008. I cannot tell what will happen in future and judge its merits in the longer term. But I can observe its devastating trail and trend on public finances and comfortably assume that the public finances will never improve any time soon without an overhaul of the constitution and the institutional structure of the country. 

The year of its introduction alone resulted in more than MVR 2 billion in deficit. Prior to this, the deficits averaged MVR 250 per annum during the preceding 11 years (excluding Tsunami related expenditure hikes).

The year of its introduction alone resulted in more than MVR 2 billion in deficit. Prior to this, the deficits averaged MVR 250 per annum during the preceding 11 years (excluding Tsunami related expenditure hikes).

Size breeds Inefficiency

The new constitution and its public institutions, have yet to achieve significant progress or responsible governance. The best legislative safeguard against the government’s irresponsible use of public finances, the Fiscal Responsibility Act remained dormant for most of its life since its ratification in 2013. Today, this act has been replaced by another act, which for most part introduced  substantial procedural details rather than improved prudential fiscal safeguards. 

The state has been so far, unable to recover anything from the famous MMPRC scandal of 2014/15 involving the embezzlement of over USD 90 (USD 220 according to some estimates) billion from the state. The compensation payments because of scandals involving government officials were made from state coffers, from taxes paid by hard working productive class of society, while officials walk free, remain free.

The continued budget deficits have continued to balloon the country’s debt stock. Today, the country owes more than the size of its economy. Over USD1 billion debt stock matures in 2026, in just 1 year.

The continued budget deficits have continued to balloon the country’s debt stock. Today, the country owes more than the size of its economy. Over USD1 billion debt stock matures in 2026, in just 1 year.

The consequence of the continued mismanagement of public finances is now spilling into the private sector. Private enterprises are finding it increasingly hard to obtain finance at reasonable costs due to adverse country credit ratings. The deteriorating fiscal health has also led to the expansion of the money supply and crowding out the local financial market.

Political Influence on Free Markets

The executive branch owns and controls many State-owned enterprises (SOEs). The idea of state-owned enterprises would have emerged because of lack of private enterprise/capital in the country.

However, with the growth of the private sector, the formation of private capital and even with significant constitutional changes, the executive branch still owns and control commercial activities which can be more efficiently run through the market mechanism. The President has powers to establish commercial SOEs by decree, even though it contradicts with the very nature of the republican form of government and democracy.  

The government’s continued direct involvement in the operations of commercial activities has distorted both the labor and financial markets.

One manifestation of the government’s power and authority is the way in which governments have been able to finance successive deficits at government determined interest rates from domestic markets. As governments find it difficult to obtain foreign funds to finance the deficits, the trend has been that governments are increasingly relying on the domestic financial markets to finance its deficit.

The Government’s domestic debt stood at over MVR 74 billion by the first half of 2024 and the government continue to obtain domestic finance at rates determined by itself.

Ownership of government domestic debt

	2024 (July)
Central bank	19.53%
Commercial banks	39.79%
Other financial corporations	37.43%
Public nonfinancial corporations	3.09%
Private sector	0.16%
Total	100.00%

By 2024 July, commercial banks hold close to 40% of the government’s domestic debt, a significant holding would be represented by the Bank of Maldives, a state-owned enterprise. Other financial corporations include insurance companies, HDFC and the Pension Fund. The largest insurance company is Allied Insurance, another SOE. The public non-financial corporations would entirely comprise of SOEs.

Maldives Monetary Authority holds over 19.5% of government’s domestic debt. It is interesting to note that the private sector only holds less than 1% of the government’s domestic debt.

The government could not have been able to finance its continued fiscal deficits in a free market. The only reason why the government can do so is simply because the buyers are SOEs and other institutions under their direct and indirect control.

The government should completely withdraw from intervening in the markets and only when government securities are fairly priced the government become responsible in the management of public finances.

The government should completely withdraw from intervening in the markets and only when government securities are fairly priced the government become responsible in the management of public finances.

The government’s continued practice of intervening in the functioning of the free markets through its control over SOEs and other public sector bodies have exacerbated the debt situation.

One of the justifications for larger government sectors is the lack of employment opportunities in the private sector. This is a myth rather than a reality. The labor market distortion is a result of the growth in the government sector mostly for the purpose of consolidation of political power by one political party over the other.

The growth of the government and its continued influence in the free markets has made the government sector a rent-seeking entity. Unless the public opinion shifts towards smaller government, self-reliance, voluntary arrangements, any meaningful reform of public finance is hard to come by.

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Maldives Economy Today | Vol. 1, Issue 3