The World Bank has backed the government’s plan to raise the tourism sector goods and services tax (T-GST) from 12% to 16% next year and recommended further revenue-raising measures in order to sustainably finance the country’s development needs.
Echoing advice by the International Monetary Fund, a Public Expenditure Review by the World Bank suggested that the Maldives has a “small window of opportunity” to avoid a looming debt crisis. It estimated that raising both the General and Tourism GST rates could yield 2 to 3% of GDP in revenue.
“The World Bank welcomes the recent proposed GST reforms and stands ready to support the government to implement these and further reforms to achieve a more resilient and prosperous future for all Maldivians,” said Faris. H. Hadad-Zervos, the World Bank Country Director for Maldives, Nepal and Sri Lanka.
It also recommended other short-term options to raise an additional 2.7% of GDP in revenue: “(i) reducing the Personal Income Tax threshold, which is currently too high to be a meaningful source of income; (ii) introducing a presumptive tax regime at a rate of 2-3 percent of turnover for businesses below the GST threshold; (iii) rationalise Goods and Services tax exemptions and zero-ratings; (iv) abstain from introducing new tax incentives; and (v) extend GST to digital services and offshore booking accounts.”
But it cautioned that “parallel efforts in transparency, communication, and accountability on why taxes are being raised and what the revenues are being used for” would be necessary to achieve targets.
In addition to better management of public debt, policies recommended for reining in unsustainable government spending include “enacting the proposed reform on maximum retail prices for drugs reimbursed by the Aasandha health insurance scheme, better targeting of public housing support to the neediest groups, setting a wage bill target as a share of government revenues, strengthening incentives to contribute to the pensions scheme, and eliminating ‘double pensions’ for select groups of civil servants.”
In July, 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, he explained. Subsiding fuel has cost MVR910 million (US$59 million) so far this year, up from a total of MVR546 million in 2021.
Pui Shen Yoong, lead author of the Public Expenditure Review, said: “Maldives is not at immediate risk of a crisis, but it needs to raise revenues and implement several expenditure and debt reforms to avoid one in the future.”