Posted by Ian Lienert
The Maldives has seen a dramatic deterioration in its public finances, resulting from the impact of the global recession on tourism revenues and from an unsustainable fiscal expansion after the 2004 tsunami in the run-up to the democratic transition in 2008. As a result, the fiscal deficit (excluding grants) exceeded 29 percent of GDP in 2009, and total public debt rose to 88½ percent of GDP. In this context, the new government requested financial assistance from the IMF and, at the same time (about a year ago), requested technical assistance for drafting a Fiscal Responsibility Law (FRL).
Could a FRL help achieve the fiscal consolidation efforts of the government? Should it adopt quantitative fiscal rules, in the way similar to that of its neighbors in India, Pakistan, and Sri Lanka? Can lessons be learnt from the successful Brazilian FRL, which is celebrating its 10th birthday? Or should the FRL include only broad objectives, expressed in qualitative terms and procedural rules? How can parliament become an active partner in achieving the fiscal stability, transparency, and accountability objectives to be embedded in such a law? These were some of the questions considered at a seminar on FRLs held in Malé, the capital of this Indian Ocean country of some 300,000 citizens.
On April 1, 2010, an IMF technical assistance mission led by Mr. Ricardo Velloso made a series of presentations to the Minister of Finance. Other officials who attended were: the Deputy Minister of Finance, staff from the Ministry of Finance and Treasury (MOFT), as well as other participants, including the Deputy Governor of the Maldives Monetary Authority and staff of the offices of the Attorney General and Auditor General. The mission also conducted a separate seminar on FRLs for parliamentarians at the People’s Majlis (parliament).
In my presentation, I first considered the main objectives of all FRLs: (1) fiscal stability—both short-term fiscal stabilization objectives (which, in some countries, are accompanied by numerical fiscal rules) and longer term objectives of achieving fiscal sustainability and reductions in the debt/GDP ratio; (2) fiscal transparency objectives—upfront announcements by the government of a medium-term fiscal strategy and an annual budget statement of the policies that help achieve the medium-term fiscal targets; and (3) accountability of the government to parliament, particularly the provision of regular in-year budget execution reports, a mid-year formal budget review, and consolidated financial statement (which, in Maldives, are being prepared for the first time, for fiscal year 2009).
There was some discussion on how these principles could cope with fiscal decentralization. This issue was raised since a draft decentralization bill is before parliament (the People’s Majlis). With the possible creation of seven regional administrations, there will be a need for the MOFT to monitor subnational debt and ensure that fiscal reporting from provinces takes place in a timely way.
Mr. Helio Tollini, who has worked in both the executive and legislative branches in Brazil, presented the experience of Brazil’s FRL that was adopted in 2000. It is one of the few successful FRLs in Latin America. Although Brazil’s FRL is much more detailed than the one likely to be adopted in Maldives – reflecting the more complex and multi-tiered administration of this large Latin American country – the relevance for many issues addressed in Brazil’s FRL are nonetheless relevant in Maldives. Indeed, at the seminar, there were a number of similar questions that the Maldives authorities are grappling with that Brazil was also struggling in the 1990s prior to adoption of the FRL. These include: how should the budgets of constitutionally “independent” bodies such as parliament, the judiciary, and the Auditor General’s office be forced to share the fiscal responsibility provisions that may be embedded in a FRL. Another issue discussed was the need to restrict borrowing by subnational government administrations.
On a lighter note, soccer happens to be the most popular sport in the Maldives, with Brazil being their favorites. Maldives won the South Asian Football Federation Cup in 2008, defeating India, but lost in the finals last year against India, which has more soccer players than the population of the entire country. Should Maldives challenge Brazil in soccer as well as in FRLs?
The country experiences of India, Pakistan, and Sri Lanka were presented by Mr. Yang Hyun Jin. All three countries adopted FRLs in 2003-05. These included quantitative targets on both the fiscal balance and government debt. Success has varied. Pakistan has already managed to reduce public debt to below 60 percent of GDP – its target for 2013, although the deficit target for 2009 was missed (see PFM Blog by Yang Hyun Jin posted on March 22. India’s record with its FRL has been mixed (full details of India’s national and State government FRLs and are provided in IMF Working Paper 09/175. Sri Lanka’s achievement of FRL targets specified has perhaps been the most disappointing of the three countries, with the objective of lowering the fiscal deficit to 5 percent of GDP being pushed back several times over recent years.
Overall lessons from the country cases are as follows:
· PFM systems need to be sufficiently developed for credible FRL implementation.
· Numerical targets in law do not guarantee success of fiscal policy targets.
· Independent monitoring and oversight is necessary.
· FRLs require broad political consensus, a commitment and advocacy by the executive, and support by parliament.
· Sanctions should be credible and enforceable and escape clauses should be clear and narrowly defined.
All three presentations of the seminar of April 1 are attached below.
 I am grateful to Mr. Ismail Ali Manik, of the Maldives MOFT, for providing this amazing story.
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