The International Monetary Fund (IMF) has backed the government’s plan to reform subsidies and raise the tourism sector goods and services tax (T-GST) from 12% to 16% next year as “welcome and important initial steps” to secure fiscal and debt sustainability.
The recovery of the Maldives economy driven by a strong rebound in tourism offers a “window of opportunity” to implement revenue-raising and other measures such as targeting subsidies and limiting non-concessional borrowing, an IMF staff mission advised after a visit to the Maldives.
“Considering increased external financing costs, a swift implementation of these reforms will help lower fiscal financing needs and contain pressures on the fragile reserve buffers,” said head of mission Tidiane Kinda.
The finance minister announced tax hikes as “corrective measures” in anticipation of a large 2023 fiscal deficit that would be difficult to finance. The cost of borrowing in the international finance market is expected to be unaffordable with higher interest rates amid a global economic downturn.
Elevated oil, commodity and food prices as well as persistent supply chain constraints have pushed up government spending beyond budgeted levels. Subsiding fuel has cost MVR910 million (US$59 million) so far this year, up from a total of MVR546 million in 2021.
According to the IMF, the fiscal deficit will “widen and remain in double digits in 2022, on the back of sustained high infrastructure spending and emerging spending pressures from rising subsidies, increased interest costs, and reforms of the wage bill.”
But the IMF predicted “solid growth” of 8.7% for 2022 as strong arrivals from traditional European markets offset the decline in Russian holidaymakers.
The IMF previously recommended GST hikes as the Maldives has one of the lowest rates among small island developing states and demand for the country’s high-end tourism is relatively inelastic.
“The unique tourist experience in the Maldives likely generates economic rents that suppliers of tourism services will try to capture through higher prices. In theory, taxes can be imposed on these economic rents without impacting the supply of the services, providing an opportunity for governments to increase tourism’s benefits to residents,” the IMF observed.
But the Maldives Association of Travel Agents and Tour Operators (MATATO) expressed concern with the T-GST hike, warning that it could adversely affect the tourism industry’s competitiveness as other beach destinations have reopened borders. Guesthouses, safari vessels and budget resorts could bear the brunt, MATATO contended, appealing for “a sufficient grace period” before raising the sales tax.