Govt plans tax hikes, policy reforms to improve ratings

The Maldives government announced crucial reforms for indirect taxes, with the primary aim of improving the country's fiscal sustainability and self-sufficiency.

In the Maldives Medium-Term Revenue Strategy for 2024 to 2028, the Ministry of Finance highlights that the state intends to reach and maintain a revenue to Nominal GDP ratio of at least 35.5 percent by the end of 2028.

It said that this strategy will aim to improve the fiscal sustainability and self-sufficiency in line with the principles specified in Fiscal Responsibility Act; enhance public welfare, economic competitiveness, and climate resilience; and increase tax neutrality and strengthen progressivity of the tax system.

To achieve the objectives of the strategy, the ministry has proposed significant policy reforms on indirect and direct taxes, and other revenues while place cross-cutting measures.

As such, the government is seeking to broaden the GST base and review its rates, while an excise tax regime will be formulated. Other indirect taxes that the government intends to review include airport taxes and fees, export duty and green tax regimes as well.

The ministry has also proposed reforms to improve revenue capacity, neutrality, and progressivity of income tax, and formulate a presumptive tax regime as well.

For other revenue streams, Maldives government intends to formulate an infrastructure fee, review tourism land rent regime, and introduce monetization of carbon credits.

For cross-cutting measures, the state is seeking to limit authority to grant discretionary tax expenditures, and mandate regular inclusion of tax expenditure cost-beneft analysis into the budgetary process.

The domestic revenue mobilization efforts will be strengthened through enhanced effectiveness of government revenue strategies outlined in the medium-term plan, the ministry said.

The ministry also said that key legislative revisions will be proposed as part the plan, including amendments to the Tax Administration Act, with the aim to enhance revenue generation efficiency and strengthening of the fiscal framework for sustainable economic growth.

Government's medium-term strategy has been revealed hot in the heels Fitch Ratings downgrading the Maldives' long-term foreign-currency Issuer Default Rating (IDR) from 'B-' to 'CCC+' in its recent review.

In response to Fitch Ratings' latest review, the Minister of Finance Dr. Mohamed Shafeeq on Wednesday evening said the implementation of medium-term fiscal reforms of the state will positively reflect on the country's credit rating.

Following the Fitch Ratings' review, the ministry in a statement said that this downgrade's primary reason is increased risks linked with external financing and liquidity. 

Adding that Fitch expects Maldives government to implement fiscal consolidation measures and reduce external financing requirements over the medium term, the ministry added that the state's commitment to reform was highlighted by the cabinet's endorsement of the fiscal reform agenda this week.

The ministry added that the reforms are aimed at "consolidating government expenditure and raising government revenue" to ensure fiscal and debt sustainability over the medium term.

The ministry further said that the government reaffirms its commitment to meeting all of its debt obligations, and remains confident that the robust economic outlook coupled with the successful implementation of the fiscal reform will reflect positively in future rating reviews.

Reflecting to the Fitch Ratings' downgrade, and reforms agenda of the Maldives government, Erdem Atas, the World Bank Country Economist and Resident Coordinator for Maldives said the economic vulnerabilities Maldives face now is a "combination of debt stock accumulation in the last 10 years".

Atas added that this vulnerability is also due to the "continuously high fiscal and current account deficits" over the same period.

He added economic growth or additional financing cannot resolve this, and said expenditure cuts are necessary to reduce fiscal and current account deficits. Atas said this would primarily support Maldives Monetary Authority (MMA) reserves and help improve the country's debt situation in the medium-term.

The Maldives' debt risks and vulnerability have been mounting, while World Bank in its most recent review warned the island nation of rising public debt, and recommended the urgent need for a comprehensive fiscal adjustment program.

In May this year, it was reported that the country's debt had risen to MVR 126 billion by the end of the 2024 first quarter.