## Fiscal Responsibility Act reform — Maldives (content unit 1mdvea2022001) ## Source details **Canonical URL:** [Fiscal Responsibility Act reform — Maldives (content unit 1mdvea2022001)](https://www.imf.org/-/media/files/publications/cr/2022/english/1mdvea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1mdvea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1mdvea2022001.pdf.json) --- ### Mission, scope, and engagement - Capacity development mission (FAD) conducted remotely: November 1–November 30, 2020. - Mission led by Ms. Ozlem Aydin (FAD Economist). Team: Ms. Laura Doherty, Mr. Nabil Hamliri, Mr. Ian Lienert, Mr. José Miguel Ramos Carrasco (FAD). - Authorities requested: (1) review of the 2013 Fiscal Responsibility Act (FRA), (2) proposals for amending the law, and (3) preparation of a new FRA draft. Mission agreed to provide drafting suggestions consistent with report recommendations. - Key meetings: Hon. Ibrahim Ameer (Minister of Finance); Mr. Ismail Ali Manik (State Minister); MOF departmental heads; People’s Majlis leadership; Auditor General’s Office; Maldives Monetary Authority. - Acknowledgements: State Minister Ismail Ali Manik; Ms. Maryam Shawadhin Abdulla; Mr. Ali Abdul Raheem. *Source: PREFACE (1mdvea2022001) — IMF Fiscal Affairs Department mission report.* ### Background, performance, and macro-fiscal context - FRA (2013) aim: reduce rising public debt and achieve fiscal stability. - Historical debt and deficits: - Total public and publicly guaranteed debt: 52 percent of GDP in 2009 → approximately 77 percent of GDP in 2019. - FRA debt ceiling: 60 percent of GDP. - Government capital expenditures: averaged 9 percent of GDP during 2013–2019. - Overall deficit, including grants, averaged 6 percent of GDP during 2013–19. - Recent crisis and projections: - Overall fiscal deficit (including grants) is estimated to exceed 27.5 percent of GDP in 2020 (authorities’ 2021 budget document). - Total public and publicly guaranteed debt may exceed 130 percent of GDP by end-2021. - Maldives Monetary Authority advances at end-2020 are estimated at 5.3 percent of GDP. - FRA numeric targets and compliance: - Debt limit (60% of GDP) respected until end-2016; violated since then. - Overall fiscal balance requirement (not to exceed 3.5% of GDP within 3 years from 1/1/2014): not respected except 2017 (overall deficit reached 3.0% of GDP in 2017). - Primary balance requirement (surplus within 3 years): never respected. ### Failures, causes, and design weaknesses of the 2013 FRA - Design and implementation shortcomings: - Unrealistic and multiple fiscal targets with an overly ambitious three-year timeframe. - Unclear coverage of fiscal aggregates and ambiguous definitions. - Inadequate accountability provisions and lack of enforcement mechanisms. - Inadequate reporting on compliance/noncompliance. - Escape clause lacked clear trigger definitions and did not require Minister to report return-to-compliance steps. - No Final Budget Outcome Report requirement explaining annual fiscal outturns. - Fiscal expansion drivers: significant public infrastructure investments drove fiscal expansion post-2013. ### Principles-based framework: rationale and core features - Recommendation: adopt a principles-based FRA (do not embed numerical fiscal rules in the law). - Rationale: provides flexibility to respond to adverse macroeconomic developments while retaining quantified objectives in government documents. - Core design elements: - FRA specifies fiscal responsibility principles and a limited number of unquantified fiscal objectives (examples: sustainable public debt level; prudent overall fiscal balance over the medium term; prudent management of fiscal risks). - Charter of Fiscal Responsibility (government document): - Prepared by each incoming Government; quantifies key medium-term fiscal objectives over a five-year period. - Specifies key medium-term fiscal targets for public debt, the budget balance, and Government guarantees for the fifth year of an incoming Government’s five-year term. - Prepared by incoming Government; could be approved by Parliament (by Resolution). - Rolling three-year Fiscal Strategy Report (MTFF), updated annually, operationalizes five-year anchors in the Charter and provides fiscal developments and compliance details. - Numerical fiscal targets included in government documents endorsed by Parliament (not in the FRA); these documents can be updated without amending the FRA. - Credible DSA (10 or more years) to inform Charter anchors and updates. - Minister of Finance required to explain any departures from principles and quantified objectives. ### Charter, DSA, and operational linkages - Charter features and timing: - Charter sets five-year targets (key fiscal anchors for year five) and is operationalized annually via a three-year MTFF Fiscal Strategy Report. - Charter to be approved by Cabinet then submitted to People’s Majlis for review and approval by Resolution. - Compulsory mid-term (two-year) review of Charter; updates should trigger DSA updates. - Minister must explain reasons for deviations, approach to return to principles, and expected timeline. - Use of DSA: - Fiscal targets in the Charter should be informed by a credible DSA (IMF–World Bank framework recommended). - DSA to be updated when Charter targets are revised; initial DSA publication could come from IMF surveillance while MOF builds capacity. - DSA tenor recommended: 10 years or longer. ### Reporting, transparency, and publication requirements - Fiscal Strategy Report (MTFF) timing and contents: - Cabinet approval prior to draft annual budget; submitted to People’s Majlis within one week of Cabinet approval and no later than June 30 each year; published when submitted. - Updated Report to be submitted before end-October each year and included with annual budget documentation. - Minimum contents (Schedule 2): medium-term macroeconomic forecast; medium-term fiscal and debt framework; medium-term fiscal and debt forecasts (previous two years, current year, next three years); operational targets; statement of new policy measures; Fiscal Risks Statement; Tax Expenditures report; compliance with Charter. - Fiscal Risk Statement: - To be part of (or attached to) the Fiscal Strategy Report and submitted to Parliament with the budget by end-October. - Initially: broader qualitative explanations and simple sensitivity analysis (e.g., tourist arrivals, exchange rate). Later: quantified risk disclosures (SOE restructuring costs, disaster provisions, debt servicing increases). - Tax Expenditures and DSA: - Require full disclosure of tax expenditures in annual budget documents by end-October. - Publish DSA annually as part of the Fiscal Strategy Report and whenever Charter targets are revised. - Final Budget Outcome (ex-post report): - Minister to present Final Budget Outcomes to Cabinet within three months after fiscal year end; Cabinet to approve the report within 14 days. - Minister to submit the Final Budget Outcomes to the Auditor General within three months and 14 days after the end of the financial year. - Final Budget Outcomes to be tabled in People’s Majlis after submission to Auditor General and published before end-June of each year. - Final Budget Outcomes content: explain main differences between actual outcomes and adopted budget; show in-year adjustments; comparative information with preceding year; comprehensive discussion of public debt and components; explain data revisions and accounting changes; use same presentation format as budget. - Publication schedule recommendations: - Preliminary Fiscal Strategy Report: By end-June - Updated Fiscal Strategy Report: By end-October - Annual Budget: By end-October - Fiscal Risk Statement: By end-October - Tax Expenditures Report: By end-October - Final Budget Outcome: By end-June of the subsequent year ### Accountability, oversight, and sanctions - “Comply or explain” approach: - Minister accountable to Parliament for explaining updates to Charter, deviations from targets, and escape clause activations; required to appear before parliamentary committee to explain Final Budget Outcome and deviations. - Require written explanations for changes in key fiscal targets or temporary suspensions when escape clauses invoked, including corrective actions and timeline to return to targets. - Auditor General’s Office (AGO): - FRA to require AGO to audit whether the Minister complied with FRA-specific accountability requirements and prepare an annual compliance report. - Minister to submit a follow-up report to People’s Majlis on AGO recommendations and PAC considerations when tabling the Final Budget Outcomes of the following year. - Peoples’ Majlis role: - People’s Majlis (particularly the Public Accounts Committee) to monitor compliance with Charter and Fiscal Strategy Report; to discuss and approve Fiscal Strategy Report by Resolution; may request Minister and other ministers to explain deviations. - Sanctions: - Recommend reliance on reputational sanctions rather than personal or institutional automatic penalties, provided strong oversight and publication of ex-ante and ex-post reports are in place. ### Coverage, definitions, and institutional scope - Definitions and coverage recommendations: - Consolidate all definitions in a single Article; clarify institutional coverage of fiscal aggregates. - Define “public debt” as gross debt of the Central Government (budgetary and off-budget) and all Central Government guarantees (including those benefiting local councils, SOEs, and private entities). - Confine forward-looking fiscal strategy documents and ex-post reports pragmatically to Central Government; exclude local councils’ own revenues/expenditures and nonguaranteed SOE debt from Central Government fiscal aggregates, while monitoring them as fiscal risks. - Pension fund: exclude from fiscal aggregates in short term; plan for longer-term inclusion with transitional phase-in. - Local councils: pragmatically exclude from monitored fiscal aggregates initially; retain debt limits temporarily pending a Public Debt Act. - SOEs and contingent liabilities: - SOEs represent major fiscal risk. In 2019, SOEs’ unconsolidated liabilities represented 84 percent of GDP, of which 21 percent of GDP is government guaranteed debt and 12 percent of GDP direct loans and on-lending by Treasury. - Include all government guarantees in public debt aggregate to capture contingent liabilities. ### Numerical fiscal rules: options, escape clauses, and recommendations - Options assessed: - Do not include revised numerical debt and deficit targets in the FRA (recommended). - Option 2 (include only a long-term debt objective in the FRA): disadvantages outweigh advantages; do not include. - Option 3 (place numerical fiscal targets in government documents, i.e., Charter): recommended principles-based approach. - Escape clause design elements (Box 1 recommendations): - Legitimate trigger events (clearly defined): severe economic downturns; large natural disasters; public health pandemics; states of emergency. - Authority to request activation: Government; Minister of Finance communicates to Parliament/public. - Require publication of reports assessing implications, expected size and duration of deviation, and adjustment path to revert to the rule. - Return-to-rule procedures: timeline and procedures to be known to Parliament; Parliament to approve changes by Resolution. - Cautionary lessons: - Avoid near-term dates for achieving ambitious targets (example: three-year targets in 2013 FRA failed). - Multiple numerical rules can become complex and undermine credibility. - High uncertainty from COVID-19 argues against embedding numerical debt/deficit targets in FRA. ### Independent fiscal oversight and institutional capacity - IFI model options: - Standalone fiscal council; Parliamentary Budget Office (PBO); autonomous fiscal agency under executive. - Recommendations for Maldives: - Given small size and capacity constraints, prioritize strengthening existing oversight institutions (Parliament PAC, AGO) and MOF capacity first. - Short-term option: establish a small fiscal council or PBO with narrow remit if feasible; otherwise, enhance analytical, technical, and staffing capacity of Parliament and AGO. - FRA to require People’s Majlis to discuss and approve Charter and Fiscal Strategy Report by Resolution and require AGO to audit Minister’s compliance. - Minister to report annually to Parliament on actions taken to implement budget-related recommendations of parliamentary committees and AGO. ### Integration with PFM legal reform and transitional arrangements - Need for coherent PFM legal framework: FRA should align with Public Finance Act 3/2006 (amendments), Financial Regulations, Decentralization Law, and proposed Public Debt Law. - Suggested sequencing: - Ideally adopt amendments to Public Finance Act, new FRA, and Public Debt Act simultaneously to ensure consistency; alternatively adopt FRA in 2021 ahead of other bills. - Transitional provisions and phased implementation: - FRA should include transitional provisions to delay implementation of some requirements given macro-fiscal uncertainty and capacity constraints. - Possible deferrals: inclusion of specific off-budget Central Government units, inclusion of Pension Fund, preparation of fiscal risks and tax expenditures reports (though immediate preparation of the latter two is advocated). - Minister may defer full effect of sections relating to tax expenditures for up to [two] years and accrual accounting/performance reporting for one year after implementation. - Chapter 8 (cash flow planning) and Article 32(a) (advances from MMA) recommended to be transferred from FRA to Public Finance Act or Financial Regulations. ### Operational targets and Annex VI guidance - Key considerations for choosing operational targets: - Balance contribution to debt sustainability, countercyclicality, simplicity, political resilience, and monitoring feasibility. - Authorities face triple constraint: (1) link to debt sustainability; (2) promote short-term discipline; (3) protect spending for development and resilience. - Candidate operational targets and trade-offs: - Overall balance target: simple, direct link to fiscal discipline; may be procyclical. - Primary balance target: guides fiscal soundness; weaker link to debt sustainability. - Revenue targets: useful for mobilization but insufficient alone. - Expenditure ceilings (aggregate or by category): easy to monitor; risks of procyclicality and composition loss unless carefully designed. - Golden rule (current balance target) risks excluding growth-friendly current spending and may incentivize creative accounting. - Specific operational limit: cap on government guarantees to manage contingent liabilities. - Transitional arrangement: - In high debt/high deficit context, adopt realistic transitional operational rules with a clear adjustment path (example: three-year transition) to ensure immediate compliance and credibility. - Design recommendation: prefer a limited set of two to three operational targets (for example, an overall balance target plus a limit on government guarantees and a safeguard for priority spending such as health/education or capital expenditure ceilings). ### Key procedural steps to implement the principles-based FRA - Identify fiscal responsibility principles and a limited number of unquantified fiscal objectives in the FRA. - Formulate a Charter with quantified medium-term fiscal objectives over a five-year period, informed by a DSA. - Enhance the annual Fiscal Strategy Report (MTFF) to operationalize Charter anchors into quantified three-year operational targets and projections; submit by end-June and update by end-October. - Ensure the annual budget is consistent with the Charter anchors and Fiscal Strategy Report targets. - Require Minister of Finance to explain departures from principles and fiscal anchors/targets and appear before Parliament/PAC for explanations. *Source: 1mdvea2022001 — IMF mission report and draft FRA proposals.* ### PREFACE____________________________________________________________________________________________ 5 ### PREFACE ### Mission overview - A capacity development mission from the Fiscal Affairs Department (FAD) was conducted remotely during the period of November 1–November 30, 2020. - The mission responded to a request from the Ministry of Finance (MOF) of Maldives to assist authorities in revising the 2013 Fiscal Responsibility Act (FRA). ### Team composition - Mission led by Ms. Ozlem Aydin (FAD Economist). - Team members included: - Ms. Laura Doherty (FAD Senior Economist) - Mr. Nabil Hamliri (FAD Technical Assistance Advisor) - Mr. Ian Lienert (FAD expert) - Mr. José Miguel Ramos Carrasco (FAD expert) ### Scope and deliverables - Authorities requested the mission not to limit its scope to reviewing the 2013 FRA and proposals for amending the law but also to prepare a new FRA draft. - The mission agreed to provide drafting suggestions for a new FRA, consistent with the recommendations of this report. ### Engagement with authorities and stakeholders - Wrap-up meeting on key findings and recommendations held with: - Hon. Ibrahim Ameer, Minister of Finance - Mr. Ismail Ali Manik, State Minister of Finance - Heads of key departments in the MOF - Introductory and kick-off meetings: - Introductory meeting with the State Minister - Kick-off meeting with the Counterpart Group comprising senior officials of the MOF - Presentation and discussion of preliminary findings and recommendations with the Counterpart Group - Meetings at the MOF with: - Ms. Fathimath Razeena, Financial Controller - Mr. Ahmed Saruvash Adam, Head of Fiscal Affairs Department - Mr. Ashraf Rasheed, Senior Legal Counsel - Ms. Hawwa Safna, Head of Treasury and Public Accounts Department - Ms. Maryam Abdul Nasir, Head of Resource Mobilization & Debt Management Department - Mr. Mohamed Zaeem, Internal Auditor - Additional consultations with: - Hon. Mohammed Nasheed, speaker of the Majlis - Hon. Mohamed Nashiz, Chair of the Majlis Public Accounts Committee and their members - Ms. Nuha Mohamed Riza, Under Secretary - The President’s Office - Staff of the Auditor General’s Office - Staff of the Maldives Monetary Authority ### Acknowledgements - The mission thanked the Maldivian authorities for their cooperation during the course of the mission. - Special acknowledgements to: - State Minister Ismail Ali Manik for overall guidance - Ms. Maryam Shawadhin Abdulla and Mr. Ali Abdul Raheem for excellent organization of meetings and support throughout the mission *Source: PREFACE (1mdvea2022001) — IMF Fiscal Affairs Department mission report.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Background and context - The Fiscal Responsibility Act (FRA) came into effect in 2013 to reduce rising public debt and achieve fiscal stability. - Maldives experienced rapid public debt accumulation over the past decade. - The FRA establishes objectives for maintaining debt at a sustainable level and reducing the overall fiscal balance, sets minimum standards for fiscal transparency and accountability, and requires the Government to prepare and publish medium-term fiscal and debt strategy reports. - The government has not met the FRA’s numerical targets for fiscal deficits and public debt. - Total public and publicly guaranteed debt increased from 52 percent of GDP in 2009 to approximately 77 percent of GDP in 2019. - The FRA stipulated a debt ceiling of 60 percent of GDP, three numerical fiscal targets (debt-to-GDP, budget balance, primary balance) with a three-year timeframe to achieve them, and included an escape clause that can be activated with Parliament’s consent. ### Failures and causes under the 2013 FRA - The debt limit has been breached since 2016; fiscal deficit limits were never respected (with the exception of the overall deficit limit in 2017). - The Act’s fiscal rules were breached without consequences. - Design weaknesses and political economy/implementation shortcomings identified: - Unrealistic and multiple fiscal targets within an overly ambitious three-year timeframe. - Unclear coverage of fiscal aggregates and ambiguous definitions. - Inadequate accountability provisions and lack of enforcement mechanisms. - Inadequate reporting on compliance or noncompliance with the fiscal rules. - Escape clause lacked clear definitions of trigger events and did not require the Minister of Finance to report on steps to return to compliance. - FRA did not require a Final Budget Outcome Report explaining annual fiscal outturns. - Fiscal expansion post-2013 was driven by significant public infrastructure investments: the government allocated an average of 9 percent of GDP to capital expenditures between 2013 and 2019. - Overall deficit, including grants, averaged 6 percent of GDP during 2013–19. - Total public and publicly guaranteed debt was estimated to reach 77 percent of GDP as of end-2019. ### A principles-based framework: rationale and core features - Recommendation: the new FRA should be principles-based and not include numerical fiscal rules in the law. - The principles-based approach would provide flexibility to respond to adverse macroeconomic developments while retaining quantified key fiscal objectives in government documents. - Key design elements proposed: - The FRA specifies fiscal responsibility principles and a limited number of unquantified fiscal objectives (for example: achievement and maintenance of public debt at a sustainable level, maintenance of the overall fiscal balance at a prudent level over the medium term, and prudent management of fiscal risks). - A Charter of Fiscal Responsibility (intermediate Government fiscal document), prepared by each incoming Government, would quantify key medium-term fiscal objectives over a five-year period. The Charter would: - Specify key medium-term fiscal targets for public debt, the budget balance, and Government guarantees for the fifth year of an incoming Government’s five-year term. - Be prepared by the incoming Government and could be approved by Parliament (by Resolution). - A rolling three-year, medium-term Fiscal Strategy Report, updated annually, would operationalize the five-year anchors in the Charter and provide fiscal developments and compliance details. - Numerical fiscal targets would be included in government documents endorsed by Parliament rather than embedded in the FRA; these documents could be updated without amending the FRA. - A credible Debt Sustainability Analysis (DSA), covering 10 or more years, would assist in deciding the values of debt, fiscal deficit, and Government guarantee anchors in the Charter and its updates. - The Minister of Finance must explain any departures from fiscal responsibility principles and quantified fiscal objectives (anchors/targets). ### Accountability, transparency, and oversight - Under a “comply or explain” approach, the Minister would be accountable for ensuring fiscal reports meet Act requirements and would: - Explain to Parliament or its committees updates to the Charter and deviations from stated fiscal objectives and key fiscal targets. - Provide written explanations for changes in key fiscal targets or temporary suspensions when escape clauses are invoked, including planned corrective actions and a timeline to return to the targets. - Appear before a parliamentary committee to explain the contents of a Final Budget Outcome document, particularly why annual budget outcomes differ from initial budget projections. - Fiscal transparency enhancements proposed (to be required by the FRA and published on the MOF website): - Improve the Fiscal Strategy Report to include multi-year fiscal and debt targets consistent with the Charter; require submission to Parliament by end of June with an update in October as part of annual budget documentation. - Prepare a Fiscal Risks Statement and a Statement of Tax Expenditures and submit them to Parliament in October with budget documentation. - Require publishing/updating a DSA annually as part of the Fiscal Strategy Report and whenever Charter targets are revised. - Require a Final Budget Outcome (inclusive of annual financial statements) to explain deviations from the submitted budget and Fiscal Strategy Report. - Fiscal oversight roles to be clarified and strengthened: - Require the Auditor General to audit whether the Minister has complied with the FRA’s specific accountability requirements. - Require the Peoples’ Majlis (particularly the Public Accounts Committee) to monitor compliance with the Charter and Fiscal Strategy Report. - Require the Minister to report annually to Parliament on actions to implement budget-related recommendations of parliamentary committees and the Auditor General. - Enhance technical and staffing capacity of the MOF, the Auditor General’s Office, and relevant parliamentary committees. ### Coherency with PFM legal reform and transitional arrangements - A clear and consistent PFM legal framework is prerequisite for a credible fiscal responsibility framework. - A first draft of a new FRA (Appendix 1 in the report) was provided to guide legislative drafting; the authorities should continue to refine the draft and integrate it with existing PFM laws and the ongoing PFM legal reform agenda. - The new FRA should include transitional provisions to delay implementation of some provisions given uncertain macro-fiscal circumstances and capacity constraints. ### Steps of a principles-based framework (procedural elements) - Identify fiscal responsibility principles and a limited number of unquantified fiscal objectives in the FRA. - Formulate a Charter with quantified medium-term fiscal objectives over a five-year period; use a DSA to inform these values. - Enhance the annual Fiscal Strategy Report by operationalizing medium-term objectives into quantified operational targets and fiscal and debt projections for three years, consistent with five-year Charter anchors. - Ensure the annual budget is consistent with the Charter’s fiscal anchors and the Fiscal Strategy Report’s targets. - Require the Minister of Finance to explain departures from principles and fiscal anchors/targets. ### Key recommendations (selected and organized) Objectives, Definitions, and Coverage - Ensure all terms used in the new FRA are defined clearly in a single Article, especially clarifying institutional coverage of fiscal aggregates. - Clarify that public debt is the gross debt of the Central Government and all Central Government guarantees (including guarantees to local councils, SOEs, and private entities). - Limit coverage of Government fiscal strategy documents and ex-post budget reports to Central Government entities; exclude local councils’ own revenues, expenditures, fiscal balances, and nonguaranteed debt from fiscal aggregates. Moving from rules-based FRA to principles-based law - Adopt a principles-based FRA that articulates fiscal responsibility principles to guide fiscal policy. - Include fiscal responsibility principles and unquantified key fiscal objectives in the FRA; develop a principles-based Charter with quantified fiscal objectives and enhance the Fiscal Strategy Report to operationalize objectives. - Require the Minister of Finance of an incoming Government to present to Parliament a Charter specifying numerical values for key fiscal objectives (targets) consistent with FRA principles, notably the debt-to-GDP target, based on a comprehensive DSA; Parliament would approve the Charter by Resolution. - Consider quantifying three key fiscal objectives in the Charter for the fifth year of the government’s term: a total public debt objective as an “anchor,” an overall fiscal deficit objective, and a debt guarantee limit; convert these into year-by-year operational targets in the Fiscal Strategy Report (for three years). - Require a compulsory review of the Charter after two years and allow temporary departures via enumerated escape clauses. - Require the Minister, when modifying the Charter, to explain reasons for deviations, intended approaches, and the time period to return to fiscal responsibility principles. - Use a DSA to determine feasible and realistic values of key fiscal objectives for the five years beyond the present fiscal year. Improving reporting of Government fiscal intentions - Require the Minister to table a Fiscal Strategy Report before Parliament by end-June, with the Peoples’ Majlis approving it by Resolution. - Update the Fiscal Strategy Report in October as part of the annual budget documentation. - Specify minimum contents for the Fiscal Strategy Report in a schedule to the FRA. - Require in the FRA: (1) a fiscal risk statement, (2) an annual statement on tax expenditures, and (3) a DSA; submit the first two with the annual budget by end-October; prepare the DSA once MOF capacity is available. Ex-post reporting - Require a Final Budget Outcome to accompany submission of annual financial statements to Parliament before end-June, consistent with the Public Finance Act. - Require the Minister to appear before a parliamentary committee to explain: (1) contents of the Final Budget Outcome document, (2) reasons for deviations from approved revenues and expenditures, and (3) whether outcomes will result in departures from Charter targets and Fiscal Strategy Report operational targets. - Require publication of key fiscal reports once approved by the Cabinet at the time of submission to Parliament. Fiscal oversight institutions - Require the Peoples’ Majlis to discuss the Government’s Charter and Fiscal Strategy Report and approve them by Resolution. - Enhance analytical, technical, and staffing capacity of the MOF, the Auditor General’s Office (AGO), and Parliamentary Committees. - Require the Auditor General’s Office to audit whether the Minister complied with the FRA’s specific accountability requirements. - Require the Minister to report annually to Parliament on actions taken to implement budget-related recommendations of parliamentary committees and the Auditor General. Transitional provisions - Decide which provisions of the draft FRA need to be delayed, given uncertain macro-fiscal circumstances and capacity constraints in the MOF, the AGO, and Parliament. Other recommendations - Ensure consistency in the PFM legal reform agenda and consider adopting the FRA and the Public Debt Act in the same parliamentary session in 2021. - Consider changes needed in the Public Finance Act and Financial Regulations and prepare appropriate draft amendment proposals. - Remove all cash flow planning provisions (chapter 8) from the 2013 FRA and transfer relevant provisions to the Public Finance Act or financial regulations. - Consider transferring Article 32(a) of the 2013 FRA—restrictions on advances to the government from the Maldives Monetary Authority (MMA)—to the Public Finance Act. *Source: 1mdvea2022001 - EXECUTIVE SUMMARY* ### Chapter 10 of the Fiscal Responsibility Act, 2013 ### Chapter 10 of the Fiscal Responsibility Act, 2013 ### Quantitative limits — Performance - Key fiscal aggregates - Public debt - Requirement: Not to exceed 60% of GDP within 3 years from 1/1/2014 - Performance: The debt limit was respected until end-2016; it has been violated since then. - Overall fiscal balance - Requirement: Not to exceed 3.5% of GDP within 3 years from 1/1/2014 - Performance: This criterion was not respected, except in 2017. - Footnote: The overall deficit reached 3.0% of GDP in 2017. See http://statisticsmaldives.gov.mv/nsdp/upload/CGO_MDV.xlsx; - Primary balance - Requirement: To be in surplus within 3 years from 1/1/2014 - Performance: This criterion was never respected. - Various loan limits - “Golden rule” - Requirement: Loans only for national development projects (= current balance > 0), as from 1/1/2016. - Performance: Respected until 2019; there was a strong breach of this limit in 2020. - Loan guarantees - Requirement: Not to exceed the limit set by the Minister in the annual budget - Performance: Such a limit was not included in the annual budget. - Advances from MMA (to be repaid within 91 days) - Requirement: Not to exceed 1% of 3-year average of GDP - Performance: This was respected until 2019; there was a strong breach of this limit in 2020. - Footnote: The end-2020 Maldives Monetary Authority advances are estimated at 5.3 percent of GDP. ### The FRA’s Fiscal Reporting Requirements - The 2013 FRA contains positive fiscal reporting features, namely, three forward-looking documents. The FRA requires the Minister of Finance to submit the following to the People’s Majlis: - A Medium-Term Fiscal Strategy document before end-July of each year. - A Budget Position Paper after the submission to the People’s Majlis and before preliminary discussions on the annual budget. *Source: Chapter 10 of the Fiscal Responsibility Act, 2013 (1mdvea2022001 - Chapter 10 of the Fiscal Responsibility Act, 2013).* ### 3. A National Debt Strategy before end-July of each year. ### 3. A National Debt Strategy before end-July of each year. ### Publication practice and legal gaps - The FRA does not make the publication of Fiscal and Debt Strategies mandatory nor specify their timing; the publication decision is given by the Cabinet prior to submission to Parliament (Article 30). - The Act only requires that the Budget Position Paper be published in the Government Gazette (Article 14c), but the publication date is not specified. - Since 2018, the Government has been publishing more documents on the MOF website; a single Fiscal and Debt Strategy Report was published in 2018 and has become more analytical over time (macroeconomic outlook, composition of revenues and expenditures, medium-term fiscal projections, quantified impact of new revenue/expenditure measures). - The Government publishes a “Budget in Statistics” document (in English) following the approval of the annual budget by the People’s Majlis. - Sections IV and V of the report discuss fiscal reporting issues and improvements in more detail. ### Macro-fiscal context and COVID-19 impact - During 2013–19, strong growth in tourism and public infrastructure investment contributed to economic growth, while fiscal deficits and debt-to-GDP also grew. - The COVID-19 crisis led to unprecedented fiscal imbalances: - The overall fiscal deficit (including grants) is estimated to exceed 27.5 percent of GDP in 2020 (according to the authorities’ 2021 budget document). - The 2021 budget envisages cuts in some spending, but with revenues not recovering to pre-crisis levels and larger capital expenditure, another large fiscal deficit is envisaged. - Total public and publicly guaranteed debt will continue to rise, possibly exceeding 130 percent of GDP by end-2021. - These debt levels are substantially higher than those used in the last Debt Sustainability Analyses (DSA) by IMF and World Bank staff, which already highlighted high risks to debt sustainability. - People’s Majlis approved suspension of certain FRA provisions to respond to COVID-19, including limitations on borrowing from the MMA and the requirement to borrow only for national development projects; it is unclear whether the Minister of Finance activated the FRA’s escape clause for this suspension. - Trade-offs in fiscal policy: - Supporting infrastructure projects while addressing environmental concerns. - Pursuing ambitious deficit-reduction plans to secure debt sustainability. - Credibility versus flexibility in fiscal management: need for firm targets to build credibility, but high uncertainty from COVID-19 calls for flexibility. ### Transitioning the FRA: principles-based vs rules-based - Report proposes transitioning from a rules-based fiscal sustainability framework to a principles-based one. - Rationale: - Past noncompliance with numerical fiscal rules and current uncertainty argue for a framework that establishes key principles of fiscal responsibility without embedding quantitative targets in the law. - The law should define a process for how medium-term fiscal targets will be defined and monitored for compliance; quantitative targets can be set in a separate government document (e.g., a Charter of Fiscal Responsibility). - Two broad approaches described: - Principles-based law: sets fiscal responsibility principles; quantified fiscal objectives are contained in a separate government document that can be updated without changing the law. Advantage: flexibility to adjust to changing circumstances; challenge: need strong accountability and transparency mechanisms. - Rules-based law: embeds numerical fiscal rules (debt, deficit, total expenditure) in primary legislation to constrain fiscal decision-making. ### Objectives, definitions, and coverage for a new FRA - Main objective: reformulate the FRA’s purpose to include principles of accountability, sustainability, prudence, and fiscal transparency rather than only stating numerical limits. - Recommendations on definitions: - Ensure all terms used in the new FRA are defined clearly in a single Article (current 2013 FRA definitions are split across Chapter 2 (Articles 3 to 8) and Article 40(a) to (n)). - Eliminate terms that are not needed or difficult to measure (e.g., “unemployment rate” and “balance of payments crisis” in their current vague definitions). - Proposed draft definitions (in Appendix 1) will require careful review, especially prior to finalization in Dhivehi. - Institutional and fiscal coverage: - Two coverage questions: (1) legal/institutional coverage (which levels/entities the law applies to); (2) which public sector entities are included in fiscal aggregates. - Institutional coverage should apply to the whole of Maldives, but the FRA’s focus is the Central Government and the Minister of Finance; some provisions apply to local councils and SOEs because they report to the Government. - Article 2 of the 2013 FRA limits applicability to “all institutions run on a government budget”; the report recommends eliminating Article 2 as unnecessarily restrictive. - The FRA’s “public debt” should include all Central Government debt (budgetary and off-budget) and all Central Government debt guarantees (those benefiting local councils, SOEs, and the private sector). - Main fiscal policy aggregates (total revenues, total expenditures, overall fiscal balance) could be pragmatically confined to Central Government. - Public debt aggregate for the FRA would: - Exclude direct debt contracted by SOEs and local councils. - Include all Central Government guarantees. - Be measured on a gross basis (no proposal to adopt a net public debt definition, e.g., by netting assets of the SDF). - FRA should aim for “consolidated Central Government” coverage—budgetary and off-budget Central Government revenues, expenditures, and financing—to the extent practicable, recognizing implementation challenges in the short term. - Treatment of specific entities: - Pension fund: could be excluded from total revenues, total expenditures, and overall fiscal balance in the short term; in the longer term, pension fund’s fiscal flows and net debt should be covered by the FRA, with transitional phase-in envisaged. - Local councils: for pragmatic reasons, could be excluded from the fiscal aggregates monitored under the FRA because their fiscal weight is currently small; they should remain subject to fiscal risk analysis and not discouraged from preparing MTFFs voluntarily. - Local council debt limits in the 2013 FRA could be maintained temporarily pending a new Public Debt Act; Chapter 7 provisions include (1) individual local council debt (loans, PPP liabilities and guarantees) not to exceed one-third of the council’s revenues of the previous year; and (2) total debt of all councils capped at the level announced by the Minister in the annual budget statement. ### Coverage specifics and public sector scope - The IMF’s Government Finance Statistics Manual (GFSM) provides a basis for categorizing public sector components; Figure 2 in the report illustrates five components. - Maldives institutional facts and recent reviews: - Maldives has two levels of government and 32 SOEs. - There are some 200 autonomous local councils created following the Decentralization Act (2010). - The number of budgetary and extrabudgetary Central Government units (trust funds, pension fund, Sovereign Development Fund) has been reviewed with GFS technical assistance by SARTTAC. - SARTTAC (2019) listed 26 trust funds, the Sovereign Development Fund, three other funds, and 13 corporations (SOEs) not charging economically significant prices; this tentative list was reviewed and shortened (SARTTAC 2020). - At a later point the report states: There are 31 SOEs (of which five are publicly listed), some profit-making and several loss-making SOEs receive government subsidies. - Rationale to include guarantees: - SOE guarantees have increased with large infrastructure projects and are included in DSAs prepared by IMF staff; debt guarantees pose a threat to debt sustainability and therefore should be included in the FRA’s public debt aggregate. - SARTTAC (2020) identifies six categories of debt liabilities; the report proposes adding debt guarantees (off-balance sheet contingent liabilities). - SOEs as fiscal risk: - SOEs are a major source of fiscal risk because they rely excessively on government support. - In 2019, SOEs’ unconsolidated liabilities represented 84 percent of GDP, of which 21 percent of GDP is government guaranteed debt and 12 percent of GDP direct loans and on-lending by Treasury (Staff Report for the 2019 Article IV Consultation and the Fiscal Transparency Evaluation, April 2021). ### Explicit recommendations (from the report) - Ensure that all terms used in the new FRA are defined clearly in a single article. - Specify clearly the institutional coverage of various fiscal aggregates mentioned in the FRA. - Eliminate Article 2 of the 2013 FRA from the new FRA, since public sector entities are covered in some aspects of the law. - Define, in the new FRA, “public debt” to be the gross debt of the Central Government (budgetary and off-budget) and all government guarantees. - Limit the government’s forward-looking fiscal strategy documents and various ex-post budget reports to “Central Government,” by excluding local councils’ and commercial SOEs’ own revenues and expenditures from “Central Government” fiscal aggregates. ### Numerical fiscal rules: options and assessment - Historical performance and issues: - The 2013 FRA’s numerical fiscal limits did not produce intended results: fiscal deficit targets were not met (with the exception of 2017) and the debt target was breached from 2016 onward. - Noncompliance was mainly due to a poorly designed framework, unrealistic/overly ambitious targets, weaknesses in transparency and accountability, and insufficient government commitment. - Policy implications: - Merely embedding numerical fiscal rules in law does not guarantee success. - Reviving numerical targets in an amended FRA is unlikely to strengthen the fiscal framework given past failures and current uncertainty. - Escape clauses: - Maldives’ 2013 FRA allows suspension of rules in cases of natural disaster (where 15 percent of the population suffers damages), economic downturn (GDP growth below 0 percent for two consecutive quarters), financial or systemic banking crisis, and balance of payments crisis; however, the FRA does not clearly identify these trigger events and delays in quarterly National Accounts hinder the use of the economic downturn definition. - The report provides guidance for strengthening the escape clause specified in Article 36 (Box 1 referenced). - Section III conclusion: - After reviewing options, the report recommends excluding numerical fiscal rules on public debt and the fiscal deficit from the FRA, and instead including quantitative fiscal targets in a separate government document—the Charter of Fiscal Responsibility. *1mdvea2022001 - 3. A National Debt Strategy before end-July of each year.* ### Box 1. Escape clauses in fiscal responsibility acts ### Box 1. Escape clauses in fiscal responsibility acts ### Escape clauses: design elements - Escape clauses allow temporary suspension of fiscal rules when exceptional events occur that would otherwise make rule compliance a constraint on appropriate responses and/or too costly for the economy. - A well-defined escape clause should specify: - A limited and clearly defined set of events triggering the operation of the clause - The authority to request and activate it - The timeline and procedures to revert to the rule - An effective control mechanism - A good communication strategy - Such provisions need be included in a new FRA, but they should not be extensively elaborated so as to allow some discretion for implementing the spirit of the law. ### Application in the proposed Maldives FRA: recommended elements - Legitimate trigger events (provided they are clearly defined): - Severe economic downturns - Large natural disasters - Public health pandemics - States of emergency - Authority and communication: - The authority to request activation would reside in the Government. - The Minister of Finance would communicate the change to Parliament and the public. - The FRA should require publication of reports assessing the implications of activation of escape clauses, the expected size and duration of the deviation, and the adjustment path to revert to the rule. - Return-to-rule procedures: - Depending on other FRA provisions—notably those requiring updates of the medium-term fiscal strategy—the timeline and procedures to return to compliance would be made known to Parliament, which would approve changes by means of a Resolution. ### Lessons from experience and cautions - Near-term dates for achieving ambitious fiscal targets should not be included in the FRA: - India, Pakistan, and Sri Lanka tried this approach and did not succeed. - Maldives’ 2013 FRA included debt and deficit targets that should have been attained “within three years” and were too ambitious given infrastructure spending priorities. - The fiscal framework loses credibility when a government continuously returns to Parliament to modify overly ambitious dates. - Multiple fiscal rules can become complex when noncompliance is recurring: - Example: European Union’s Maastricht criteria (limits on headline deficits: 3 percent of GDP; gross debt: 60 percent of GDP) were later supplemented with a “balanced budget over the cycle” criterion, total expenditure rules, and strengthened compliance conditions; complexity did not prevent ongoing noncompliance in some countries. - By 2019 it was recognized that the European Union’s fiscal rule system was too complex and needed simplification. - Current uncertainty argues against embedding revised numerical debt and deficit targets in the FRA: - There is considerable uncertainty concerning timing of return to previous levels of GDP growth, tourist arrivals, tax revenues, remittances, and the appropriate level and composition of public investment. - Until the COVID-19 health crisis is over, the macro-fiscal situation is highly volatile and achieving longer-term targets for public debt and fiscal deficits is uncertain. - Spending to contain the current crisis mitigates the speed by which public debt could be reduced. - Conclusion: Option 1 (introducing revised numerical targets for debt and deficits in the FRA) should be eschewed. ### Choices on numerical targets: Options assessed - Option 2: Include Only A Long-Term Debt Objective In The FRA - Arguments in favor: - A clear signal of government commitment to fiscal sustainability. - Keeps policymakers attentive to long-term deficit and debt developments while allowing short-term support. - Embedding the debt anchor would make it difficult for incoming governments to change the objective. - Debt interacts closely with other fiscal aggregates; a debt anchor implicitly constrains deficits. - Arguments against: - Without a firm terminal date, the long-term debt anchor could become a far-off wish. - Credibility would be undermined if there is no progress or very slow progress. - Not binding on annual or medium-term budget decisions because policymakers are myopic. - If legislated, the limit can be modified by Parliament relatively easily. - Determining a single realistic sustainable debt value is difficult, especially in current circumstances; anchoring expectations on a single value could be too rigid. - Enforcing a single visible debt anchor could encourage higher recourse to contingent liabilities or higher SOE indebtedness to fund public investment and quasi-fiscal activities. - Mission conclusion: disadvantages outweigh advantages; do not include a long-term debt objective in the FRA. - Option 3: Include Numerical Fiscal Targets In Government Documents, Not In The FRA - Principles-based approach preserves need for medium- and long-term fiscal and debt projections and quantified objectives, but places numerical rules in a government document rather than in law. - Examples of countries without numerical fiscal rules in FRAs or PFM acts: Australia, Canada, Kenya, New Zealand, Sweden, Uganda, United Kingdom. - Emphasis is on legislating transparency and accountability while leaving flexibility for successive governments to alter key fiscal objectives, subject to justification and strong parliamentary/media oversight. - Many FRAs with numerical targets in law have been abrogated or amended over time; in contrast, some principles-based FRAs (e.g., Australia, New Zealand) have been long-lasting commitment devices over 20–30 years. - Recommendation for Maldives: - Reliance on a flexible principles-based approach appears appropriate, especially in the short-term (2021–22) given high uncertainty from COVID-19. - The FRA should list specific events allowing government deviation from key fiscal objectives, provided the Minister of Finance justifies deviations in writing and explains the return path. ### Proposal: Charter of Fiscal Responsibility - Purpose and scope: - A government document laying out each incoming government’s principal fiscal objectives, focusing on key fiscal aggregate targets to be reached by the fifth and final year of the government’s term. - Not a detailed five-year macroeconomic and fiscal framework for revenues, expenditures, deficit financing, and public debt; rather it sets overarching targets (debt, fiscal deficit, government guarantees). - Relationship with other documents and timelines: - Charter is intermediate between the FRA and a rolling three-year MTFF document. - Charter would be approved first by the Cabinet of Ministers, then submitted to the People’s Majlis for review and approval by Resolution. - The Charter would be operationalized by a yearly three-year MTFF document, updated with every budget submission. - The Charter could be reviewed as a matter of course after two years; any update should trigger a DSA update. - If not updated during the five-year term, the third-year values of the key fiscal targets in the MTFF projections would become fiscal anchors for remaining years. - Basis and analytical support: - Fiscal targets in the Charter should be based on a credible and viable DSA. - The IMF and World Bank debt sustainability framework is recommended. - The April 2020 DSA needs updating to reflect current developments and the 2021 budget approved by Parliament in November. - Updated DSA should move public debt to a sustainable level and include feasible yearly fiscal deficit adjustments, taking into account fiscal risks and external shocks with conservative assumptions. - MOF capacity: - MOF already has capacity for fiscal and debt projections over a five-year period. - MOF should reinforce capacities to use complete DSA tools and develop in-house capacity to propose numerical values of a debt anchor consistent with the FRA’s principles. - Appendix 5 provides further guidance on a DSA tool that could inform fiscal targets of the proposed Charter. ### Accountability of the Minister of Finance and procedural safeguards - Minister’s obligations: - The FRA would require the Minister of Finance to be accountable to Parliament for any changes in the key fiscal targets. - When updating the Charter, the Minister must explain to Parliament: 1. The reasons for deviating from previous fiscal targets; 2. How the new fiscal targets are consistent with the FRA’s principles of fiscal responsibility; 3. Any fiscal policy changes taken or intended to ensure compliance with new fiscal targets. - The Minister is accountable for submitting key fiscal documents to Parliament consistent with the Charter. - Escape clauses under a principles-based approach: - Temporary departures from the FRA’s principles could be allowed only for specific events: an unanticipated severe economic shock—including a health pandemic, a natural disaster, or another significant unforeseen event that cannot be funded from the unallocated contingency spending provision of the annual budget. - A schedule to the FRA or equivalent could elaborate on conditions and authority for activating triggering events (see Box 1). - Article 36 on “Exceptions” should be modified to align more completely with good practices outlined in Box 1. - Parliamentary role: - When Charter key targets need modification or temporary suspension, the Minister would first seek Cabinet approval and then submit the modified Charter to Parliament for review and approval by Resolution. ### Operational guidance and implementation steps - Key implementation steps summarized (see Figure 4 in source): - Identify fiscal responsibility principles and key unquantified fiscal objectives to include in the FRA. - Specify numerical values for key fiscal objectives (“targets”) consistent with the principles. - Incorporate quantified fiscal targets for 5 years in a Charter of Fiscal Responsibility compatible with a viable DSA. - Specify medium-term fiscal objectives, operational targets, and fiscal and debt projections in the Fiscal Strategy Report (MTFF). - Ensure Annual Budget is guided by the Charter’s fiscal anchor and the Fiscal Strategy Report’s intermediate targets. - Require the Minister of Finance to explain any departures from fiscal responsibility principles and quantified fiscal objectives. - Examples of proposed principles and targets structure (to be tailored for Maldives): - Three key fiscal principles and objectives (examples): 1. Prudent debt level — Reduce total public debt as a % of GDP to a sustainable level, with low risk. - Quantified example: Reduce the level of total public debt to x% of GDP by [the 5th year beyond the current year]. This would be the “debt anchor.” - Include intermediate targets and composition details (external/domestic). 2. A sustainable budget balance — Achieve and maintain a sustainable budget balance as a % of GDP. - Quantified example: Ensure that the overall budget balance (including grants) does not exceed x% of GDP by [the 5th year beyond the current year]. - Year 3 objective for Primary and Overall Fiscal Balances, total revenues, total primary expenditures, as a % of GDP. 3. Manage fiscal risks prudently — Limit fiscal risks arising from government guarantees as a % GDP. - Quantified example: Limit new government guarantees to a maximum of x% of GDP (or reduce stock of guarantees to x% of GDP). - Other illustrative principles (examples): macroeconomic stability (volatility of GDP, tourist arrivals, inflation), intergenerational equity, low inequality (Gini), environmental sustainability (sea water levels, air/water quality), value for money in public spending. - Operational targets and monitoring: - Operational targets should be simple to monitor and enforce, country-specific, and effective in contributing to the public debt anchor. - Medium-term fiscal anchors should be complemented with short-term operational targets linked to fiscal aggregates (overall balance, primary balance, total expenditures, total revenues). - The Fiscal Strategy Report (MTFF) would include quantified values for key objectives and operational targets, updated annually. *Source: IMF 2020b.* ### 1. The content of Australia’s and New Zealand’s laws differ significantly in some areas. ### 1. The content of Australia’s and New Zealand’s laws differ significantly in some areas. ### Fiscal objectives, net worth, and the proposed Charter of Fiscal Responsibility - In Australia and New Zealand, net worth is one fiscal objective, consistent with their accrual-based budgeting systems. - Targets for public debt and debt guarantees would be established in the proposed Charter of Fiscal Responsibility. - The public debt aggregate should include all Government guarantees (consistent with the discussion in Section II on the coverage of fiscal aggregates). - Placing quantitative limits on government guarantees in the Charter would be an important, although incomplete, way of “managing fiscal risks prudently”—the third principle shown in Table 2 (Fiscal risks are discussed in Section IV and Appendix 3). - Fiscal principles and key fiscal objectives could be included in the main text of the Act. A schedule22 of the new FRA (or a government regulation) could specify the format of the proposed Charter. - 22: In some countries, annexing schedules to an Act is a common legal practice. The Act would authorize the Minister to change the schedule. This may be done by an order subject to the affirmative resolution of Parliament. If the legislative drafting style does not allow a schedule to the Act, the minimum context of the fiscal reports could be included in the government regulation. ### Recommendations (FRA design and operational arrangements) - Adopt a principles-only FRA to replace the rules-based approach. Quantified key fiscal targets, notably, the debt-to-GDP target for achieving fiscal sustainability, would be specified in government documents, rather than in the FRA. - Identify the fiscal responsibility principles and key fiscal objectives (see Table 2) and associated operational targets (Appendix 6) to be included in the new FRA. - Specify three key fiscal objectives in the FRA: a total public debt objective, an overall fiscal deficit objective, and a debt guarantee limit—all of which would be quantified in the proposed Charter of Fiscal Responsibility (for example, for the 5th year) and in the Fiscal Strategy Report (year-by-year for three years) (see Section IV) but not in the FRA itself. - Consider introducing a requirement in the FRA for the Minister of Finance of an incoming Government to present to Parliament (after approval by the Cabinet of Ministers) a Charter of Fiscal Responsibility that includes numerical values for key fiscal objectives (“targets”). - Include a compulsory mid-term review of the Charter after two years, in which new key fiscal targets could be adopted for the 5th year beyond the update year. - Allow, in the FRA, temporary departures from the principles of fiscal responsibility for specific events enumerated in the FRA’s escape clauses. - Require the Minister of Finance, when updating the Charter, to explain the following to Parliament: - (1) the reasons for deviating from previous fiscal targets; - (2) how the new fiscal targets are consistent with the FRA’s principles of fiscal responsibility; and - (3) any fiscal policy changes designed to attain the new fiscal targets. - Determine, using a debt sustainability analysis as proposed in Appendix 5, feasible and realistic values of the key fiscal objectives for year five beyond the present fiscal year. - Strengthen the capacity in the MOF to conduct full-fledged DSAs, using the IMF’s publicly available DSA framework, for inclusion in the yearly Fiscal Strategy Report. ### Improving the reporting of fiscal policy intentions (clarifying FRA requirements and the Fiscal Strategy Report) - It is good practice to specify reporting requirements in the FRA, with key reports to be published according to a defined schedule consistent with the annual budget preparation calendar. - Reliable and timely budget execution data are needed to prevent sizeable revisions. - The 2013 FRA requires the MOF to prepare and submit to the Parliament a statement of fiscal strategy and a report on the national debt strategy. The Act specifies the strategy’s main contents: - (1) a description of fiscal policy and the steps being taken by the Government to achieve the fiscal policy; - (2) the proposals by the Government on how to reduce the national debt to a sustainable level during the period referred to in the statement; - (3) and in cases of deviation, the reasons for the noncompliance and the steps that the Government would take to achieve compliance. - In practice, the MOF only started to publish Medium-Term Fiscal Strategy (MTFS) and the Medium-Term Debt Management Strategy (MTDMS) in 2018.23 - 23: The MOF published in 2018 a single report called “Fiscal and Debt Strategy Report” containing both the MTFS and the MTDMS and covering a three-year period. In 2019 and 2020, the MOF published the MTFS and MTDMS separately. - The MTFS includes: - a mid-year update of the economic situation for the current budget year, - a review of budget outturns and execution in the first six months of the current budget year, - the medium-term projections for economic indicators, and - the revenues and expenditures for the next budget year plus two outer years. - The MTDMS presents: - details of the aggregate outstanding total debt (in nominal terms and as a percentage of GDP) for a three-year period, and - a debt strategy. - Recent improvements in the 2019 and 2020 Fiscal Strategy Reports: - Estimates of all proposed changes in revenues and expenditures are now incorporated into the fiscal strategy. - The 2020 Fiscal Strategy includes a section on achieving the targets of the FRA and provides annexes on measures proposed to increase revenue and reduce expenditure in the medium term. - There is a section with qualitative discussion of potential fiscal risks; however, this information should be further improved by a greater focus on identifying a broader range of risks (rather than only macroeconomic risks) and also on quantifying potential risks. - The Ministry of Finance decided in 2020 to annually study the progress made against the fiscal strategy published during the previous year, and it included a chapter comparing the 2019 Fiscal Strategy and approved 2020 budget for the first time in the 2020 Fiscal Strategy Report. - The mission endorses preparation of the fiscal strategy and debt strategy in a single report. Henceforth, this document is referred to as the “Fiscal Strategy Report,” even though it includes the debt strategy provisions. ### Role, content, and institutional use of the Fiscal Strategy Report - The Fiscal Strategy Report should translate the fiscal objectives into fiscal policy targets for the budget plus two years. - The Charter of Fiscal Responsibility would set numerical values for key fiscal objectives for the five coming years (medium-term debt anchor and operational targets) for close monitoring. - The Fiscal Strategy Report translates the objectives from the Charter into three-year fiscal policy targets, which guide annual budget preparation (Figure 5). - The revised Fiscal Strategy Report would include a medium-term debt strategy (MTDS). Section 6 of Appendix 2 proposes a “chapter” on a debt management strategy that would link deficit financing (external and domestic), debt projections, and ceilings on debt guarantees. - Projections in the MTDS would be fully consistent with the DSA; the MTDS would serve as an input to the DSA and would be adjusted to reflect DSA constraints. - If a new Public Debt Act is adopted, the high-level summary of the MTDS could be elaborated further in a separate MTDS document. - The Fiscal Strategy Report should be developed to provide multi-year fiscal planning to guide annual budget formulation and to facilitate public scrutiny and accountability. - A strategy setting phase should prepare the Fiscal Strategy Report to set the aggregate expenditure envelope for the upcoming budget and subsequent years (that is, the two-year expenditure ceilings for both current and capital spending on top of the ceilings in the annual budget). - The Report should explain any changes to expenditure estimates between the second year of the last medium-term budget projections and the first year of the current medium-term budget projections at the aggregate level. ### Key features required for the Fiscal Strategy Report to be effective - Medium-term macroeconomic framework that includes main macroeconomic forecasts and assumptions underlying the projections - Explanation of the government’s medium-term and annual fiscal and debt strategy and how they are consistent with the fiscal policy objectives contained in the Charter of Fiscal Responsibility and the underlying DSA - Short- and medium-term fiscal targets and progress in achieving them - Aggregate expenditure envelopes for the upcoming budget and subsequent year for both current and capital spending that will then inform the expenditure ceilings for the Budget Call Circular - Yearly updated DSA that is consistent with the targets shown in the Fiscal Strategy Report - Statement on compliance with the FRA and Charter of Fiscal Responsibility, including fiscal objectives and reporting and accountability requirements - Performance against the previous year’s fiscal targets and how the targets and projections have changed, if relevant, between updates - Examination of the fiscal risks to achieving the fiscal and debt targets *Source: 1mdvea2022001 — https://www.imf.org/-/media/files/publications/cr/2022/english/1mdvea2022001.pdf* ### Appendix 2 suggests a detailed outline for a revised Fiscal Strategy Report. A Schedule of ### 1mdvea2022001 - Appendix 2 suggests a detailed outline for a revised Fiscal Strategy Report. A Schedule of ### Extending the FRA’s documentation requirements — Fiscal Risk Statement - Purpose and scope: - To manage fiscal risks that cause fiscal outcomes to differ from expectations by identifying, monitoring, disclosing, mitigating avoidable risks, and developing the ability to absorb unavoidable risks. - Recognizes that some risks are borne by the government budget, others shared or borne by private/public sector entities. - Current practice and gaps: - The 2021–23 Fiscal Strategy Report includes a “Sensitivity analysis” with qualitative discussion and sensitivity analysis of impacts on debt and required amounts of debt financing from increases/decreases to revenue and expenditure. - A key fiscal risk in Maldives is from SOEs; they place high demands on the budget but fiscal oversight of SOEs is weak. - Other sources of risk: government guarantees, concessions and other PPPs; other natural disasters; manmade environmental risks. - The government committed to producing and publishing a Fiscal Risk Statement in 2021; a Fiscal Risk Statement was published in May 2021. - Recommended FRA requirements for the Fiscal Risk Statement: - Require the Fiscal Risk Statement to be part of (or an attachment to) the Fiscal Strategy Report and submitted to Parliament as part of the budget documentation in October. - Include assessments of main macroeconomic risks around the forecasts: - Simple approach: sensitivity analysis and publish rule-of-thumb estimates of fiscal impact from varying key assumptions (e.g., tourist arrivals and the exchange rate). - More complex approach: one or two alternative economic scenarios illustrating how varying a wider set of macroeconomic factors flows through to the budget (example: a low GDP growth scenario requiring adjustments to inflation and external balance of payments assumptions). - Develop identification, monitoring, and mitigation of specific fiscal risks that translate into explicit or implicit contingent payments (guarantees, SOEs, PPPs, natural disasters). - Initially provide broader qualitative explanations of nature and potential impact of main fiscal risks to medium-term projections; later move to explicit disclosures and provisions for specific fiscal risks in medium-term estimates. - Examples of items to reflect in risk statements as capability develops: - expected cost of SOE restructuring; - public sector wage negotiations; - provision for expected annual costs of natural disasters; - possible increases in debt servicing from rising interest rates; - impact of exchange rate changes on foreign debt; - budget contingency reserve. - Require inclusion of risks from local councils and PPPs, and ensure MOF receives appropriate financial information from local councils to monitor their fiscal positions. ### Extending the FRA’s documentation requirements — Other reports - Tax expenditures: - FRA could require full disclosure of tax expenditures in annual budget documents. - Rationale: tax expenditures can be a source of leakage; monitoring and control protect consolidation plans. - Given a currently narrow tax base in Maldives, listing and quantifying existing tax expenditures in the annual budget should be relatively easy. - Debt sustainability analysis (DSA): - Recommend including a requirement to publish the DSA as part of the yearly Fiscal Strategy Report. - DSA to include debt projections over a 10-year period or longer. - An updated DSA to be published every time targets in the Charter are revised. - Short-term: DSA could come from IMF surveillance reports while MOF builds in-house capacity to undertake the DSA. - Minimum contents of the Fiscal Strategy Report (to be stated in a schedule to the FRA or government regulation): - Underlying macroeconomic assumptions and DSA, - Discussion of fiscal policy actions to be implemented, - Explanations of how expected medium-term fiscal trajectory aligns with targets in the Charter of Fiscal Responsibility. - Parliamentary role: - Parliament to approve the Fiscal Strategy Report by resolution. ### Timing and publication of the Fiscal Strategy Report - Current FRA timing and issues: - 2013 FRA requires presentation annually to Parliament before end-July. - Cabinet discusses budget strategy in May when baseline budget ceilings are determined; July timing is late to guide binding ceilings. - Fiscal Strategy Reports of past three years submitted to Parliament in June, complying with end-July deadline. - In practice, publication on MOF website occurs much later; in 2020 it was not published until November in conjunction with the budget. - Recommended timing under new FRA: - Fiscal Strategy Report should be approved by the Cabinet before the first budget circular is issued (that is, by end-April) and published shortly after. - Table in Parliament by end-June, updated in August-September to reflect recent developments and Cabinet decisions, then resubmitted to Parliament with the budget documentation and published on the MOF website. - Current budget calendar (selected entries, as specified): - Prepare economic and fiscal outlook: February 1–April 31 — Ministry of Finance - Baseline budget: Technical meetings: April 15–May 15 — Ministry of Finance - Forecast revenue, establish baseline expenditure, propose a summary budget (Fiscal Strategy): April 1–30 — Ministry of Finance - Recommendation of the Cabinet for the Fiscal Strategy: May 1–31 — President’s Office/Cabinet - Determine baseline budget ceilings: May 15–31 — Ministry of Finance - Budget Circular 1 (new program proposals): April 10–June 30 — Ministry of Finance - Budget Circular 2 (baseline budget): June 1–July 15 — Ministry of Finance - Evaluate new program proposals and send to Cabinet: July 1–31 — Ministry of Finance, Ministry of National Planning and Infrastructure - Cabinet decisions on new program proposals: August 1–15 — President’s Office/Cabinet - Compile and evaluate submitted budgets: 16th July–August 31 — Ministry of Finance - Recommendation to the Cabinet on the budget: September 1–30 — President’s Office/Cabinet/Ministry of Finance - Submit budget to Parliament: October 15–31 — Ministry of Finance - Parliament’s approval of the Budget: November 1–30 — Parliament - Suggested publication schedule (Table 5): - Preliminary Fiscal Strategy Report: By end-June - Updated Fiscal Strategy Report: By end-October - Annual Budget: By end-October - Fiscal Risk Statement: By end-October - Tax Expenditures Report: By end-October - Final Budget Outcome: By end-June of the subsequent year ### Recommendations (from Sections IV and related text) - Include the following reporting requirements in the FRA: - A Fiscal Strategy Report, to be tabled in Parliament by end-June, updated with recent economic and fiscal developments, and resubmitted to Parliament in October with the annual budget documentation. - The minimum contents for the Fiscal Strategy Report should be stated in a schedule to the FRA (or in a government regulation); it should include the underlying macroeconomic assumptions and DSA, a discussion of the fiscal policy actions to be implemented, and explanations of how the expected medium-term fiscal trajectory would be aligned with the fiscal targets in the Charter of Fiscal Responsibility. - Parliament to approve the Fiscal Strategy Report by resolution. - A fiscal risk statement, to be submitted to Parliament with the Fiscal Strategy Report and annual budget by end-October. - An annual report on tax expenditures, also part of annual budget documentation. - A debt sustainability analysis in the Fiscal Strategy Report and in updates of the Charter of Fiscal Responsibility. --- ### V. Improving accountability and ex-post fiscal reporting — Importance of ex-post compliance reports - Current gap: - No government report on progress made against its fiscal strategy; Auditor General’s annual audit includes assessment of compliance under the FRA but limited to confirming documents were submitted to Parliament without assessing outcomes vs objectives. - Recommended Final Budget Outcome: - FRA could require an ex-post Final Budget Outcome report focused on fiscal policy aggregates, identifying and explaining deviations during the budget year from the submitted budget and Fiscal Strategy Report, particularly those that impact fiscal aggregates and progress toward Charter targets. - The Minister should appear before a parliamentary committee to explain contents of the Final Budget Outcome. - Timing: Final Budget Outcome could accompany unaudited annual financial statements (to be presented to the Cabinet within three months after the end of the financial year) and, after audit, be published and tabled in Parliament by end-June. - Final Budget Outcome should be presented on the same basis as the budget to ensure alignment of classifications and presentations as Maldives moves to program-based budgeting and eventually accrual accounting. - Appendix reference: - Appendix 4 outlines key elements of the Final Budget Outcome report, citing OECD best practices that could be simplified for Maldives. ### V. Improving accountability and ex-post fiscal reporting — Sanctions - Types of sanctions discussed: - Personal sanctions: criminal proceedings, disciplinary procedures (pay reductions or dismissal), personal liability for financial consequences of specified breaches proved through due process. - Institutional sanctions: suspension of budget payments, denial of rights to borrow or issue guarantees, requirement to follow an adjustment program automatically triggered by specified breaches. - Reputational sanctions: obligation to publicly explain deviations and publish the violation in an official journal or on an official website. - Appropriate approach for Maldives: - Rely on reputational sanctions under a “comply or explain” approach, provided there is strong oversight (active parliamentary committees and Auditor General’s Office). - Minister accountable for explaining updates to fiscal strategy, full explanation of deviations and changes in key fiscal targets when escape clauses are invoked. - Dependence on full implementation and publication of ex-ante and ex-post budget documents and on governmental response to recommendations from oversight bodies. ### V. Improving accountability and ex-post fiscal reporting — Introducing new reporting requirements - In-year reporting: - Research and Publication unit in FAD produces and publishes weekly, monthly, and quarterly fiscal developments reports (aggregate revenue and expenditure figures, year-to-date and for respective time period, with preceding years for comparison). - These could be made explicit requirements of the Public Finance Act and cross-referenced in the FRA. - Audited annual financial statements: - Articles 38–40 of the Public Finance Act 3/2006 require MOF to prepare annual consolidated financial statements and submit them to the AGO within three months (and 14 days) of year-end. - Challenges: consistent classification of transactions, need to update chart of accounts, capacity of line ministries to classify transactions. - FRA role and publication: - FRA should mention these reports and cross-reference corresponding legislation rather than be their legal basis. - All ex-ante and ex-post fiscal reports should be published when submitted to Parliament. - Recommendation: require all fiscal reports described in sections IV and V to be published on the MOF website once approved by the Cabinet of Ministers, at time of submission to Parliament; a calendar of annual publications could be included in the FRA. - Additional recommendations: - Include in the FRA a requirement for a Final Budget Outcome report, to be tabled in Parliament before end-June, identifying and explaining deviations from approved budget and Fiscal Strategy Report. - Include in the FRA cross-references to ex-post reporting requirements for in-year reports and annual financial statements outlined in other PFM legislation. - Require publication on MOF website of all fiscal reports at the time of submission to Parliament. - Require the Minister to appear before a parliamentary committee to explain Final Budget Outcome, departures from fiscal responsibility principles, modifications in Charter targets, or deviations in annual budget outcomes. --- ### VI. Enhancing fiscal oversight institutions — The People’s Majlis and its committees - Current role and limitations: - People’s Majlis is de facto primary fiscal oversight body with constitutional powers to question ministers. - FRA requires MOF to prepare and submit a statement of fiscal strategy and a report on debt strategy to the Public Accounts Committee (PAC). - Weaknesses in PFM systems hinder Majlis oversight: lack of a formal Appropriation Act (Majlis only approves overall expenditure envelope) leading to substantial intra-year reallocations and affecting budget credibility. - PAC was not provided with a report on actual spending compared with initial budget spending by ministries and AGAs. - A Virements and Appropriations Procedure was included in the MOF Gazette and applied beginning with the 2020 budget. - Recommended Majlis role: - Fiscal reporting should be timely and of good quality to improve oversight. - Majlis to play key role in promoting compliance with Charter and Fiscal Strategy Report by calling the Minister to account and monitoring deviations. - PAC can request the Minister to elaborate reasons for deviations and government plans to revert to targets within acceptable timing; Majlis can question other ministers as needed. - Majlis could discuss the Charter and Fiscal Strategy Report in committee and approve it by Resolution; this requires building committee capacity. ### VI. Enhancing fiscal oversight institutions — Auditor General’s Office (AGO) - Legal powers and current challenges: - Auditor General has legal power to conduct compliance and performance audits for all government institutions and government’s compliance with the FRA. - AGO is finalizing its Public Debt Audit Report of 2018. - Credibility of external audit requires AGO independence and unrestricted access to information. - Main challenge: auditing consolidated accounts; no audit reports for annual financial statements for 2016 and 2017; audit report for 2018 was submitted to Parliament in January 2020. - No effective system for AGO to monitor or follow-up on implementation of audit recommendations; Minister of Finance should be required to respond to AGO recommendations in a timely manner. - AGO capacity constraints limit its ability to audit all mandated institutions (government, SOEs, local councils). - FRA clarity and recommended AGO role: - 2013 FRA is unclear about AGO’s role in auditing FRA-specified reports (Article 30(d) requires Auditor General to prepare a report once he has audited the reports prepared and presented by the Minister under this law). - FRA does not include an endorsed audit framework, does not require AGO to submit audit reports on FRA compliance to the PAC or to publish them. - Going forward, AGO could be assigned specific roles for auditing government performance under new FRA; Minister must state reasons for changes in key fiscal targets or suspension when escape clauses are invoked. *Italic: Source: 1mdvea2022001 - Appendix 2 suggests a detailed outline for a revised Fiscal Strategy Report. A Schedule of (canonical PDF content supplied).* ### Box 1). In the final Budget Outcomes Report, the Minister must explain the reasons why annual ### Box 1). In the final Budget Outcomes Report, the Minister must explain the reasons why annual ### Independent Fiscal Oversight: rationale and models - Purpose: strengthen compliance with the Fiscal Responsibility Act (FRA) by enhancing fiscal oversight to monitor and audit whether the Minister of Finance has complied with the FRA’s specific requirements. - Current Maldives institutions: Parliament and the Auditor General’s Office (AGO). An Independent Fiscal Institution (IFI) would complement, not substitute, these bodies. - Three main IFI models described: - Standalone fiscal councils (examples given: France, Ireland, Portugal, Sweden). Can be small academic decision-making bodies or larger councils with diverse nominations. - Parliamentary Budget Offices (PBOs) (examples: Australia, Canada, Korea, Philippines, Uganda, United States). Integral to Parliament; may include costing fiscal policies. - Autonomous fiscal agencies under the executive (examples: Belgium, Netherlands, United Kingdom). Mandate can include preparing government baseline MTFF projections and strict independence guarantees. - Suggested modest mandate for Maldives IFI: review and assess government macroeconomic and fiscal forecasts under the Charter and the three-year rolling Fiscal Strategy document; assess compliance with medium-term fiscal targets. ### Options and recommendations on independent oversight - Options for Maldives: - Establish immediately a small fiscal council or PBO with a narrow remit, with independence annexed to the new FRA (Ireland and Portugal cited as examples). - Strengthen existing oversight bodies by increasing staff and technical capacity in Parliament and the AGO; possibly establish an independent research office under Parliament. - Combine both approaches. - Considerations specific to Maldives: - Given Maldives’ small size, limited capacity, and difficulty finding independent staff, establishing an IFI in the near term may not be highest priority. - Preference to strengthen current institutions (Parliament and AGO) first, with new follow-up mechanisms and improved technical capacity. - Explicit recommendations: - Require in the FRA the Peoples’ Majlis to discuss the government’s Charter and Fiscal Strategy report and approve it by Resolution. - Gradually enhance analytical, technical, and staffing capacity of parliamentary committees and the AGO to assess medium-term fiscal strategy and annual budget outcomes. - Include in the FRA a requirement for the AGO to audit whether the Minister of Finance has complied with the FRA’s specific accountability requirements. - Require in the FRA the Minister of Finance to report annually to Parliament on actions taken to implement budget-related recommendations of parliamentary committees and the AGO. - Consider whether establishing an IFI would be unrealistic at present given urgent need to enhance analytical capacity in the MOF, AGO, and Parliament. ### Integrating the FRA into the PFM legal reform agenda - FRA scope: limited-scope law focused on fiscal transparency and accountability to Parliament for fiscal strategy and outcome reports and for fiscal performance (public debt and fiscal balances). - FRA should be part of a coherent Public Financial Management (PFM) legal framework alongside the Public Finance Act 2006 and financial regulations, the Decentralization Law, and a proposed Public Debt Law. - Ongoing initiatives (at varying stages): - Amendments to the 2006 Public Finance Act (requiring modification of government financial regulations). - A draft public debt law. - A national planning act. - Need for harmonization to reduce inconsistencies in Maldives’ fragmented PFM legal framework. ### Specific PFM areas recommended for the Public Finance Act or financial regulations - Parliament’s budget amendment rights: clarify role in approving multiannual, top-down expenditure ceilings; some PFM laws restrain Parliament from increasing revenue estimates or total expenditures. - Structure of annual budget appropriations: specify administrative classification and whether appropriations are by economic classification or by program if shifting to program/performance budgeting. - Performance budgeting: SAP aims to shift to results-based or program budgeting during 2019–23; appropriation structure must change by “program”; Public Finance Act should elaborate performance reporting responsibilities. - Virement rules: revise Virements and Appropriations Procedure Gazette (May 2019) and specify restrictions on swapping expenditures without parliamentary approval. - Duration of appropriations and carryover provisions: invoices can be paid up to 30 days after fiscal year end under current Act; to accelerate closing accounts, consider shortening carryover and enable multi-annual capital appropriations. - Reversionary budgets: specify execution of new fiscal year budget if Parliament does not approve by December 31. - Cash management: FRA should focus on medium-term and annual strategy; in-year cash planning belongs in Public Finance Act/financial regulations; Chapter 8 of the FRA on cash flow plans could be transferred. - Advances from central bank: Article 32(a) of the 2013 FRA restricts government borrowing from the Maldives Monetary Authority (MMA); recommend transferring this restriction to the Public Finance Act rather than treating it as a macro-fiscal indicator in the FRA. - Accrual accounting: Public Finance Regulation refers to IPSAS (cash-basis standard cited); Public Finance Act should establish legislative basis for planned transition to accrual accounting and institutional arrangements for government accounting standards. ### Public Debt Law: roles and interaction with FRA - A draft Public Debt Law under review; a debt law typically provides: - Requirement for a medium-term debt strategy, possibly with numerical limits and a DSA. - Specific debt management issues and functions of a debt management office. - Overlap with FRA: FRA requires Minister to prepare medium-term fiscal and debt strategy; Chapter 7 of 2013 FRA includes local council debt provisions. - Recommended division of responsibilities: - FRA should remain primary law for establishing debt limits and medium-term developments for key aggregates (total debt, Central Government debt, guaranteed debt, local council debt). - Public Debt Law could elaborate operational debt management details and institutional arrangements and outline requirements for a detailed medium-term debt strategy to complement the Fiscal Strategy Report. ### Timing, sequencing, and transitional issues - Ideal sequencing: adopt Public Finance Act amendments, new FRA, and Public Debt law simultaneously to ensure consistency; alternatively, FRA could be adopted in 2021 ahead of other bills. - Report assumption: FRA will be adopted in the first parliamentary session of 2021. - Transitional flexibility: - Default: implement all FRA provisions soon after adoption and Gazette publication. - If necessary, allow delaying proposals relating to the Charter of Fiscal Responsibility until the next incoming government to align with presidential elections and government formation. - Interim anchor: use the fifth year of the DSA, updated annually as part of the IMF’s Article IV surveillance, as the “debt anchor” and overall fiscal balance targets until 2023. - Possible delays justified by capacity constraints (examples of proposals that could be delayed): - Inclusion of specific Central Government off-budget institutional units in fiscal aggregates. - Inclusion of the Pension Fund in fiscal and debt aggregates. - Preparation of the fiscal risks report. - Preparation of a report on tax expenditures. - However, for the fiscal risks report and tax expenditures report, the report advocates immediate preparation even if incomplete. ### Recommendations on legal reform and FRA provisions - Ensure consistency in the PFM legal reform agenda and consider adopting the FRA and the Public Debt Act in the same parliamentary session in 2021. - Note the report’s assumption of early FRA adoption in 2021 ahead of a new Public Debt Act. - Consider and draft amendments to the Public Finance Act and financial regulations on: budget amendment rights, budget appropriations, program performance reporting, virement, budget carryover, cash management, and accrual accounting. - Remove cash flow planning provisions (Chapter 8) from the FRA and transfer them to the Public Finance Act or financial regulations. - Consider transferring Article 32(a) of the 2013 FRA (restrictions on advances from the MMA) to the Public Finance Act. - Identify FRA provisions that may need to be delayed given uncertain macro-fiscal circumstances and draft appropriate transitional provisions. ### Annex I: Draft New FRA Proposal (high-level contents) - Draft Law No. xx/2021 Fiscal Responsibility Act - Table of Contents (for information only) includes Chapters 1–9 and Schedules 1–2: - Chapter 1: Title, Scope, and Definitions - Chapter 2: Principles of Fiscal Policy and a Charter of Fiscal Responsibility - Chapter 3: Fiscal Strategy Report - Chapter 4: Annual Budget and Fiscal Strategy Report - Chapter 5: Final Budget Outcomes Report - Chapter 6: Responsibilities of the Auditor General - Chapter 7: Responsibilities of the Peoples’ Majlis - Chapter 8: Local Councils’ Fiscal Strategies and Debt Limits - Chapter 9: Miscellaneous - Schedule 1: Format of a Charter of Fiscal Responsibility - Schedule 2: Format for a Fiscal Strategy Report - High-level stated purpose of the Act: achieve and maintain fiscal discipline, transparency, and accountability by (1) specifying principles, objectives, and procedures; (2) establishing requirements for formulating, adopting, and reporting the Government’s medium-term fiscal strategy, including public debt; and (3) facilitating parliamentary scrutiny by requiring the Minister of Finance to report and justify fiscal and public debt outcomes. - Chapter 1 excerpt: Law will be named “Fiscal Responsibility Act.” *Source: Excerpt from PDF content unit 1mdvea2022001 (Box 1 and surrounding sections).* ### 2. The provisions of this Act apply to all ministries, agencies, and other entities of ### 1mdvea2022001 - 2. The provisions of this Act apply to all ministries, agencies, and other entities of ### Scope and application - The provisions apply to all ministries, agencies, and other entities of the Central Government. - For the purposes of this Act, the Central Government includes: - (a) The Executive and all its ministries/agencies/entities, including autonomous agencies and funds established by law and under government control, with the exception of the Maldives Monetary Authority; - (b) The Legislature, the Peoples’ Majlis, and its agencies/entities; - (c) The Judiciary and its agencies/entities; - (d) Independent agencies/entities/funds/commissions established under the Constitution of Maldives and relevant laws, and which are under the control of Central Government. - Entities governed by the Act when stipulated in specific provisions: - (e) Local councils and agencies/entities under the jurisdiction of local councils now or to be established in the future; - (f) State-owned enterprises; - (g) Any other legal person or entity that receives or uses public funds. ### Key definitions - (a) “Cabinet of Ministers” — collective body of Ministers appointed by the President of Maldives, in accordance with the Constitution. - (b) “Minister” — the Minister appointed by the President to develop and implement the Government’s Fiscal Policy. - (c) “The Government” — when referring to a decision-making body, the Executive branch, of which the President of Maldives is the Head, in accordance with the Constitution. - (d) “Local Council” — City Councils, Island Councils, and Atoll Councils established under Law 7/2010 (Decentralization Act). - (e) “State-owned enterprise” (SOE) — a commercial nonfinancial or financial enterprise established by law, in which the Government has controlling shares, which produces goods or services for the market, and which finances its operations largely on the basis of its own revenues. “Controlling shares” means the ability to exercise powers to govern the financial and operating policies of the entity in order to obtain maximum benefits from its activities. - (f) “Fiscal policy” — policies pertaining to revenues, expenditures, public debt, and other elements of the Government’s medium-term fiscal strategy and annual budget. - (g) “Fiscal strategy” — fiscal objectives and activities to be undertaken to implement a fiscal policy in the medium term, as well as the approach to be taken to implement fiscal activities. - (h) “Medium term” — a period of three, four, or five consecutive years. - (i) “Financial year” — period from January 1 to December 31, including the start date and end date. - (j) “Public debt” — gross debt of the Central Government, and shall include bills, bonds, loans, advances, and overdrafts, denominated in domestic or foreign currency and owed to residents or nonresidents, as well as Central Government guarantees, including all guaranteed debt of local councils, SOEs, and private entities. - (k) “Overall fiscal balance” — balance after deducting total budget and nonbudget Central Government expenditures from total budget and nonbudget Central Government revenues, including grants. - (l) “Grants” — transfers made in cash, goods, or services for which no repayment is required. - (m) “Intergenerational equity” — use of national resources in a sustainable manner, keeping in mind the interests of future generations. - (n) “Fiscal risks” — possibility of deviations of fiscal outcomes from what was expected at the time that the budget and other fiscal forecasts were approved. - (o) “Tax expenditure” — reduction in a tax liability compared with an established tax norm or benchmark; the revenue forgone has the same impact on the overall fiscal balance as an increase in expenditure of the same amount. - (p) “Contingency spending provision” — a small reserve of unallocated expenditure in the annual budget that the Government may be authorized to spend on unforeseen contingencies that arise during budget execution. ### Principles of fiscal policy and Charter of Fiscal Responsibility - Cabinet shall seek to adhere to key principles when setting fiscal policy objectives within the medium-term macroeconomic and fiscal framework: - (a) achievement and maintenance of public debt at a sustainable level, with low risks; - (b) maintenance of the overall fiscal balance at a prudent level over the medium term; - (c) management of fiscal risks in a prudent manner. - Additional principles Cabinet may consider: - (d) adequate revenue mobilization to contribute to financing Government expenditure programs and investment projects; - (e) value for money in government expenditure; - (f) intergenerational equity; - (g) environmental sustainability. - Measurable fiscal policy objectives: - Clause 2.2: The Minister shall set measurable fiscal policy objectives for principles (a) to (c) in a [Charter for Fiscal Responsibility]. - Approval and timing: - Following a general election of the People’s Majlis, the Minister shall prepare a draft Charter of Responsibility. - (a) The Charter is a government document for which the Government is accountable to the Peoples’ Majlis. - (b) The Cabinet of Ministers shall approve the Charter of Fiscal Responsibility. - (c) The Minister shall, no later than [three] months after the beginning of the first session of the People’s Majlis after the presidential elections, submit the Charter to the People’s Majlis for parliamentary review and approval by issuing a Resolution. - Contents required in the Charter (Clause 2.4): - (a) statement indicating measurable objectives for fiscal policy consistent with Clause 2.1; - (b) measurable fiscal objectives, known as “targets,” during a period not less than the new five-year term of the Government; - (c) explanation of methodology and data to measure Government performance against fiscal policy targets; - (d) demonstration—using macroeconomic and fiscal data, assumptions, and projections—of how fiscal targets are consistent with principles in Clause 2.1; - (e) include the minimum context provided in [Schedule 1]. - Publication and updates: - Minister shall publish the Charter when submitted to the People’s Majlis. - Clause 2.7(a): Minister shall review the Charter two years after adoption of the initial Charter of its five-year term; review may modify fiscal targets. - Clause 2.7(b): Minister may temporarily depart from principles and modify targets only when Maldives experiences: - (i) a natural disaster, - (ii) an unanticipated severe economic shock, or - (iii) another significant unforeseen event that cannot be funded from the unallocated contingency spending provision of the annual budget or by fiscal policy adjustments. - Revised Charter must indicate reasons for revisions, approach to align with principles, and expected period before consistency is restored. - Minister shall, no later than one week after Cabinet approval of a revised Charter, submit it to the People’s Majlis for review and adoption by Resolution. - If Cabinet modifies the Charter following Peoples’ Majlis review, the Minister shall publish the updated Charter within one week following the Resolution. - Each update must include a written statement of compliance with subsection (c). ### Fiscal Strategy Report (Chapter 3) - Approval and submission (3.1): - (a) A Fiscal Strategy Report shall be approved by the Cabinet of Ministers prior to preparation of the Government’s draft detailed annual budget. - (b) The Report shall be submitted to the People’s Majlis within one week of Cabinet approval and no later than June 30 of each year. - (c) The Report shall be published when submitted to the People’s Majlis before end-June. - (d) The Peoples’ Majlis shall approve the Fiscal Strategy Report by issuing a Resolution. - Purpose (3.2): - (a) Elaborate how, over the forthcoming three-year period, the Government intends to achieve key fiscal targets in the Charter of Fiscal Responsibility (Clauses 2.2 and 2.4). - (b) Act as a prebudget document, providing fiscal policy orientations several months prior to submission of the detailed annual budget. - Format and minimum content: - Government’s medium-term Fiscal Strategy shall include the minimum context provided in [Schedule 2]. - Information to be included (3.4): - (a) Key fiscal policy targets of the Charter and Government’s view on orientations to achieve targets over upcoming three-year period. - (b) Policy orientations including: - (i) new revenue policies or changes in existing revenue policies; - (ii) priorities for current spending and investment project spending; - (iii) priorities for managing public debt, including debt guarantees. - (c) Medium-term macroeconomic, fiscal, and debt projections, and operational targets, as laid out in Schedule 2, sections (2) to (4). - (d) Compliance with the Charter for Fiscal Responsibility, as laid out in Schedule 2, section (9); Minister shall demonstrate consistency of projections with Charter objectives. - Updates (3.5 and 3.6): - (a) Minister shall update the Fiscal Strategy Report once a year. - Updated Report, after Cabinet approval, shall be submitted to the People’s Majlis to complement the annual budget in conformity with Clause 32 of the Public Finance Act 3/2006, as amended. - Updated Report to be submitted before end-October each year and shall include: - (a) timing and impact of new revenue and expenditure policies taken to achieve key fiscal policy objectives (as in Charter and Schedule 2, section (5)); - (b)(i) information relating to Fiscal risks as laid out in section (6) of Schedule 2, and Schedule 3; - (b)(ii) Tax expenditures as laid out in section (7) of Schedule 2; - (c) explanations of impact on fiscal projections due to any changes in historical data, including coverage and accounting policies. ### Annual budget consistency (Chapter 4) - Minister shall ensure the annual budget presented to Parliament: - (a) is consistent with fiscal targets of the Fiscal Strategy Report, notably the overall fiscal balance target and operational fiscal targets referred to in Schedule 2; - (b) contains a total expenditure ceiling, a gross borrowing limit for Government, and a guarantee limit for the next financial year, consistent with the fiscal targets of the Charter and operational targets of the Fiscal Strategy Report as laid out in Schedule 2. ### Final Budget Outcomes Report (Chapter 5) - Approval and timing (5.1): - (a) Minister shall present a Final Budget Outcomes report to the Cabinet within three months after the end of the financial year. - (b) Cabinet shall approve the report within 14 days. - (c) Minister shall submit the Final Budget Outcomes to the Auditor General within three months and 14 days after the end of the financial year, consistent with Clause 38 (c) of the Public Finance Act 3/2006. - Content requirements (5.2): - (a) identify and explain main differences between actual outcomes and the annual budget adopted by the Peoples’ Majlis for the same financial year; - (b) show separately any in-year adjustments to the original budget; - (c) provide comparative information on revenues and expenditures of the preceding year; - (d) use the same presentation format as the annual budget; - (e) contain a comprehensive discussion of public debt and its components; - (f) identify and explain main differences between actual outcomes for Government borrowing, total public debt, guaranteed debt, and other contingent liabilities, using the same level of detail as in the updated Fiscal Strategy Report that accompanied the previous year’s annual budget; - (g) explain how any data revisions or changes in accounting practices or standards have impacted reported fiscal outcomes; - (h) explain main differences between projected financial assets and actual outcomes, once accrual-based accounting replaces cash-based accounting; - (i) include comparative information for any nonfinancial performance data, once a performance-oriented budget is formally adopted. - Submission and publication (5.3): - (a) Minister shall table the Final Budget Outcomes report in the Peoples’ Majlis at its session that begins after submission to the Auditor General per Clause 5.1(c). - (b) Minister shall publish the Final Budget Outcomes report before the end of June of each year. ### Auditor General and Minister responsibilities (Chapter 6) - Auditor General: - Clause 6.1: In addition to auditing Government’s annual financial statements under Clause 39 of the Public Finance Act 3/2006, the Auditor General shall prepare an annual report on the Government’s compliance with this Act. - Auditor General’s compliance scope (6.2): - The compliance report shall relate to the Minister’s responsibilities concerning: - (a) the Charter of Fiscal Responsibility (content, submission, publication, updates, escape clauses) as per chapter 2; - (b) the Fiscal Strategy Report (content, compliance with key fiscal targets, submission, publication) as per chapter 3; - (c) Local councils (procedures in chapter 8 relating to establishing local councils’ debt limits); - (d) the Final Budget Outcomes report (content, explanations of deviations, publication, submission) as per chapter 5. - Minister’s follow-up (6.3): - (a) Minister shall submit a report to the Peoples’ Majlis following its consideration of the Auditor General’s report as per Clause 40 of the Public Finance Act 3/2006. - (b) Minister’s report shall indicate measures taken by Government to implement recommendations of the Public Accounts Committee of Parliament with respect to the Auditor General’s report of the preceding financial year. - (c) The report in (a) and (b) shall, at the latest, be submitted to the Peoples’ Majlis at the same time as the Final Budget Outcomes report of the following year is tabled before the Peoples’ Majlis, as laid out in Clause 5.3. ### Responsibilities of the Peoples’ Majlis (Chapter 7) - Peoples’ Majlis shall hold the Government accountable for fiscal policy and performance in accordance with this Act by: - (a) reviewing the reports referred to in this Act through the Committee of Public Accounts and other relevant committees; - (b) considering recommendations of the Committee of Public Accounts and other relevant committees, and of the Auditor General, in discussing the reports referred to in this Act. ### Local councils’ fiscal strategies and debt limits (Chapter 8) - Exclusion from Fiscal Strategy Report requirements (8.1): - (a) Local councils established under law number 7/2010 (Decentralization Act) are not required to prepare medium-term Fiscal Strategy Reports similar to those applicable to the Government (clauses 3.1 to 3.6). - (b) Local councils may prepare their own medium-term Fiscal Strategy Reports for planning and budget purposes if useful. - Loans and debt (8.2–8.3): - 8.2: Loans taken by local councils shall be according to the policies set out in this law. - 8.3(a): Total debt of local councils and debt guarantees issued by the Government to local councils shall be maintained at levels set by the Minister, consistent with total public debt and debt guarantee objectives of the Charter of Fiscal Responsibility and total public debt projections of the Fiscal Strategy Report. - 8.3(b): These levels shall be included in total public debt targets of the Charter of Fiscal Responsibilities and in the same three years of the Fiscal Strategy Report. - 8.3(c): Local councils’ debt and debt guarantee limits shall be communicated to the Councils by the Minister as soon as possible following Cabinet approval of the limits. - 8.3(d): Procedures to maintain total debt at the Minister-determined level shall be set by the Minister in the Financial Regulations under the Public Finance Act 3/2006. *Source: 1mdvea2022001 - 2. The provisions of this Act apply to all ministries, agencies, and other entities of (PDF).* ### Chapter 9 ### Chapter 9 — Miscellaneous ### Entry into Force - 9.1.(a) "This Law shall come into force, at the latest, within one year from the date this Act is adopted by the Peoples’ Majlis, ratified, and published in the Government Gazette." - 9.1.(b) "The Government, in implementing the provisions of this Act relating to the Charter of Fiscal Responsibility, may choose to establish the key fiscal targets mention in Clause 2.4 of the Act for a period 5 years beyond the year in which this Act enters into force." ### Transitional Provisions - 9.2. "The Minister shall have the power to defer giving full effect to the sections of this law pertaining to:" - (a) "the provisions in the Fiscal Strategy relating to tax expenditures and [others?}, which shall enter into force within [two] years following the adoption of this Act by the Peoples’ Majlis;" - (b) "Accrual accounting and performance-oriented budget, the reporting requirements of which, as outlined in clauses 5.2 (h) and (i) shall enter into force within one year following their respective implementation for a given financial year." ### Regulations and Amendment of Schedules - 9.3.(a) "The Minister may make regulations generally as may appear to the Minister to be necessary and expedient for the proper implementation of the intent and objectives of this Act." - 9.3.(b) "Any regulations made pursuant to subsection (a) shall be laid in the Peoples’ Majlis." - 9.4.(a) "The Minister may, by order [with the approval of Cabinet], amend the Schedules to this Act." - 9.4.(b) "Any amendments to the Schedules shall come into force after it is laid before the Peoples’ Majlis." - Note (footnote): "The Minister may use a statutory instrument (such as an order) to amend the schedules. This could be approved by Cabinet and submitted to the Majlis. If this is not a common legal practice in Maldives, the format of the fiscal reports mentioned in the new FRA can be set out in a Government Regulation." ### Conflicts - 9.5. "In the event of any conflict or inconsistency between the provisions of this Act and the provisions of any other written law, the provisions of this Act shall prevail." ### SCHEDULE 1 — Format of a Charter of Fiscal Responsibility - 1. Statement of fiscal policy objectives - (a) "The statement shall indicate the measurable objectives of Government fiscal policy in the medium term, which are consistent with the principles laid out in section 2.1 of this Act." - (b) "The Charter shall specify quantified targets, by the use of ranges, ratios, or other means, of the Government's intentions regarding each of the principles specified in Article 2.1(1) (a) to (c) of this Act. These three indicators may be referred to as the Government’s key fiscal targets." - (c) "The Charter may specify quantified targets, by the use of ranges, ratios, or other means, of the Government's intentions regarding each of the principles specified in Article 2.1(1) (d) to (f) of this Act, or of any other fiscal indicators judged necessary for attaining the fiscal objectives of this Act." - 2. Methodology and data for assessing fiscal performance - (a) "This shall indicate the methodology to be used to measure the performance of the Government against the objectives required under paragraph 1 of this Schedule." - (b) "The sources of data shall include a debt sustainability analysis (DSA), the consolidated audited financial accounts of the Government, audited debt statements, and other relevant data." - 3. Consistency of Charter for Fiscal Responsibility with the principles of this Act - "The Charter shall demonstrate how the Government’s fiscal objectives required under paragraph 1 of this Schedule are consistent with the principles in section 2.1 of the Act. The consistency shall be determined using macroeconomic and fiscal data, assumptions, and projections of the economy, as well as any financial and fiscal policy updates." ### SCHEDULE 2 — Format for a Fiscal Strategy Report - 1. Medium-Term Macroeconomic Forecast - "The medium-term macroeconomic forecast shall indicate the actual, estimated, and projections covering the previous two financial years, the current financial year, and the next three financial years and shall indicate in respect of each financial year the following economic variables—" - (a) "the gross domestic product;" - (b) "the rate of inflation (average and year-end);" - (c) "the average and year-end exchange rate;" - (d) "a least one key indicative interest rate;" - (e) "tourism arrivals; and" - (f) "other relevant macroeconomic indicators." - 2. Medium-Term Fiscal and Debt Framework - (a) Fiscal Strategy: "statement of the Government’s targets for the variables that are key fiscal objectives under Clause 2.1 of this Act. It shall explain the reasons if these targets have changed from the precious budget and/or Charter and how the government intends to restore compliance with objectives." - (b) Debt Strategy: "This shall include information about financing sources, summary of the Debt Sustainability Analysis, public debt projections, guarantees, and summary of the medium-term debt management strategy." - 3. Medium-Term Fiscal and Debt Forecasts - "The medium-term fiscal forecast shall cover the previous two financial years, the current financial year, and the next three financial years and shall indicate in respect of each financial year, the following economic variables—" - (a) "the revenue of Government with respect to:" - (i) "tax revenue;" - (ii) "non-tax revenue;" - (iii) "external grants for the annual budget and for projects; and" - (iv) "privatization receipts." - (b) "the expenditure and net lending of Government for:" - (i) "current expenditure;" - (ii) "capital expenditure; and" - (iii) "net lending;" - (c) "the overall balance of Government;" - (d) "financing of the overall balance including:" - (i) "net external financing;" - (ii) "net domestic financing, including changes in the balance of the Sovereign Development Fund;" - (e) "total public debt, including:" - (i) "total debt of the Central Government" - (ii) "total debt of local councils, guaranteed and unguaranteed" - (iii) "total debt of state-owned enterprises, guaranteed and unguaranteed" - (iv) "other debt guaranteed by the Central Government." - (e) (continued) "total public debt, including:" - (i) "external debt" - (ii) "domestic debt." - 4. Operational targets and other fiscal indicators - "Besides the overall balance required in subsection 3(c) above, the three-year projections shall indicate:" - (a) "the primary balance, which is defined as the overall fiscal balance after deducting interest payments." - (b) "the current balance, which, in the case of a deficit, indicates the extent to which the Government is borrowing to finance current expenditure in addition to investment spending, and, in the case of the surplus, the extent to which resources are available for debt reduction or other uses." - (c) "total government expenditure, including subtotals for current expenditure and capital expenditure," - (d) "any other fiscal indicators judged by the Minister to be useful for transparency and analytical purposes." - 5. Statement of new policy measures - "This is a statement of the impact of major new revenue and expenditure policies the Government is to introduce to ensure that the targets in paragraph 2 and the limits in paragraph 5 of this Schedule are respected." - 6. Fiscal Risks Statement - "This is a statement of the main sources of risk to the attainment of the fiscal objectives of Government and a quantified estimation of the fiscal impact of these risks, including:" - (a) "an alternate fiscal framework based on alternative realistic assumptions of the key macroeconomic variables; and" - (b) "a statement relating to the specific fiscal risks outlined in Schedule 3 and an estimate of the likely fiscal impact of risks should they materialize." - 7. Tax Expenditures report - (a) "This is a statement of the revenue foregone from tax expenditures, tax by tax, and in total." - (b) "The tax expenditure report covers significant tax revenue losses arise from all of the following:" - i. "Exemptions: exclusions from the tax base" - ii. "Allowances: amounts deducted from the tax base before applying the tax rate(s)" - iii. "Tax credits: amounts deducted from a tax liability" - iv. "Tax rate relief: a reduced tax rate" - v. "Tax deferral: a delay in paying the tax liability" - 8. Compliance with the Charter for Fiscal Responsibility - (a) "This is a demonstration of how the fiscal targets and other fiscal indicators in the Medium-Term Fiscal Strategy are consistent with the objectives and targets set out in the Charter for Fiscal Responsibility." - (b) "In cases where there are inconsistencies, the reasons for non-compliance shall be specified by the Minister, along with a statement of the new revenue and expenditure measure that shall be taken by the Government to reach compliance, and the duration until compliance is expected to be reached." - 9. "If the Fiscal Strategy Report does not include any of the information required by this Schedule, the Minister shall state in the Fiscal Strategy Report the reasons for any missing information and shall ensure that such information is available as soon as practicable for future Fiscal Strategy Reports." ### SCHEDULE 3 — Fiscal Risk Statement - "Fiscal Risk Statement (See Appendix 3)." ### Annex II — Fiscal Strategy Report Outline (Illustrative) - Purpose and timing - "The Fiscal Strategy Report is a strategic document that sets out the main objectives of budget policy for the three coming years." - "The Fiscal Strategy Report should be issued early in the budget formulation and preparation calendar, and it should be updated prior to the submission of the draft budget to Parliament by end-October." - Chapter structure suggestions (high-level) - Chapter 1. Overview - Main fiscal policy objectives (examples include maintaining sustainable fiscal policy consistent with the Government’s fiscal targets; delivering high quality public services; promoting economic development by diversifying away from tourism; creating a more efficient tax system; ensuring the security of the State; fighting corruption; looking after the most vulnerable citizens; promoting long-term economic resilience) - Illustrative 2022 consolidated budget line: "For 2022, the consolidated budget deficit is estimated to be x percent of GDP. Public debt is forecast to be x Rufiyaa (x percent of GDP), rising/falling to x percent of GDP by 2024." - Appendix Table 2.1. Summary of Consolidated Fiscal Aggregates (columns for 2021, 2022, 2023, 2024 with rows for Budget Revenue, Budget Expenditure, Budget Balance, etc.) - Chapter 2. Projections of Macroeconomic Indicators for the State Budget - 2.1 Current situation: Economic conditions in 2020 and expected outcomes for 2021 - 2.2 Macroeconomic projections for 2022–24 (including world and trading partner outlooks, GDP growth forecasts, components of GDP growth, employment, inflation and wages) - Appendix Table 2.2. Key Macroeconomic Indicators and Projections (columns for 2019 Actual, 2020 Actual, 2021 Projected, 2022 Projected, 2023 Projected, 2024 Projected with indicators such as Nominal GDP Growth, Real GDP Growth, Tourism Arrivals, CPI change, Unemployment Rate, Employment Growth, Private Sector Wage Growth) - Chapter 3. Fiscal Strategy - "Statement of medium-term fiscal policy targets (limits on debt and the deficit). If they have changed from the previous budget and/or Charter, explain why." - Chapter 4. Fiscal Results for 2020 and Expected Outcomes for 2021 - 4.1 Outcomes for the consolidated budget (example format: "The consolidated budget deficit was x Rufiyaa (x percent of GDP) in 2019...") - 4.2 Fiscal outcomes for 2020 compared with the approved budget - 4.3 Expected outcomes for 2021, compared with the approved budget - 4.4 Expenditure outcomes - Chapter 5. Medium-Term Fiscal Projections and Spending Priorities for 2022–24 - 5.1 Spending priorities - 5.2 Medium-term expenditure plans (Appendix Table 2.3. Expenditure Ceilings across 2019–2024) - 5.3 Tax policy and revenue projections (Appendix Table 2.4. Revised Revenue Table; Appendix Table 2.5. State Budget Revenue, by Detailed Component) - Chapter 6. Deficit Financing and Medium-Term Debt Strategy - "Financing sources 2022–24; Summary of DSA; Public debt projections; Guarantees; Summary of the medium-term debt management strategy." - Chapter 7. Fiscal Risks - "Discussion of how alternative macroeconomic parameters would impact the fiscal projections; Information on Government guarantees; Discussion of fiscal risks related to the SOE and PPPs sector." - Chapter 8. Tax Expenditure - "This statement shall be included in the updated Fiscal Strategy Report submitted to the Peoples’ Majlis before end-October of each year. This is a statement of the revenue forgone from tax expenditures, tax by tax, and in total." - Tax expenditure categories: Exemptions; Allowances; Tax credits; Tax rate relief; Tax deferral. *Source: Chapter 9, 1mdvea2022001* ### Chapter 9. Public Financial Management Reforms ### Chapter 9. Public Financial Management Reforms ### Introduction - Medium-term macroeconomic and fiscal projections presented in the budget are formulated taking into account expected developments in the domestic and global economy, based on information available at the time of their preparation. - Multiple factors and various risks could cause budget outcomes to differ from projections; the most significant arise from unanticipated macroeconomic developments that adversely impact revenues and the budget position. - IMF classification of risks: - Macroeconomic risks: risks related to deteriorated macroeconomic parameters, such as terms of trade, inflation, exchange rate, global/regional growth, and domestic growth - Specific risks: explicit or implicit public liabilities whose realization is contingent on a specific event (such as risks related to SOEs, PPPs, and natural disasters) - Institutional risks: risks that include policy implementation and governance risks ### Macroeconomic Risks - Fiscal risk statements would usually include sensitivity analysis to illustrate how variations in key economic assumptions could affect the budget aggregates. - Appendix Table 3.1. Sensitivity of Fiscal Position to Changes in Various Economic Parameters (presented as headings in source): - Economic Assumption — Estimated Variation in Overall Balance - Rufiyaa — Percent of GDP - Real GDP growth is 1 percent lower than forecast - Inflation is 1 percent higher than forecast - Prices for key commodities fall by 10 percent - Rufiyaa-US$ exchange rate depreciates by 10 percent - Tourist arrivals decline by 10 percent - Corporate profits decline by 10 percent - Alternative approach: construct alternative macroeconomic scenarios by (1) allowing economic parameters to vary at once (in a consistent way) and (2) presenting the fiscal position associated with each scenario. ### Government Debt - Fiscal risk statements usually include summary indicators on public debt, even if published separately as a debt statement. - Typical indicators to include: - domestic versus foreign debt, elaborating specific foreign currency exposures - short versus long term debt - fixed versus variable interest rates - value of debt maturing within a year - These elements should be consistent with the MTDS and DSA. - Discussion of the possible impact of movements in the currency and market interest rates is warranted to illustrate sensitivity of debt estimates. ### Government Guarantees - One of the main specific risks relates to government guarantees of other public sector entities’ debt. - Standard practice: publish a table listing the total value of outstanding guarantees, by beneficiary (this might also be done through a debt statement). - For SOEs, include a summary analysis of key financial risks to indicate the probability that a guarantee may be called. - More sophisticated analysis: assess expected exposure from the portfolio of guarantees by combining probability of individual guarantees being called and loss given default. ### Major Project Risks and PPPs - Large public infrastructure projects present significant risks regarding delivery on time and on budget. - Useful practices: - include an assessment of such risks for major projects in the Public Sector Investment Program (PSIP) - consider performance of the PSIP as a whole - PPPs require specialized risk assessment and monitoring because government exposures are not always obvious and may crystallize beyond the budget year. - As a first step for PPPs, disclose the main contractual arrangements that could translate into fiscal risks. ### Other Contingent Liabilities - Governments are exposed through indemnities (for statutory office holders) and potential future legal claims against the state. - Contributions to international financial institutions often take the form of callable capital; such exposures should be reported. - Large future claims with uncertain timing and magnitude (for example, backpay arrangements for public sector salaries and unfunded pension liabilities) should be discussed and quantified where possible. ### Financial Sector Exposures - Governments face: - explicit fiscal risks through ownership of financial institutions - implicit risks through responsibility for regulating the financial system - Fiscal risk statements often include a summary of the Financial Soundness Indicators prepared by regulatory authorities and discussion of residual exposures (for example, deposit insurance arrangements and extent to which such schemes are fully funded). ### Exposure to Other Public Sector Entities - Fiscal risk statements are a good place to publish summary information on the performance and health of entities outside the general Government sector. - Beyond guarantees, government exposures can include volatility in dividend and tax payments from entities, occasional need to assist refinancing nonguaranteed debt, facilitating major industry restructuring, or temporarily increasing subsidies. - Where such challenges are known, a fiscal risk statement should outline the situation and estimated exposures; where frequent, consider making a provision for the average annual cost in the medium-term estimates. ### Natural Disasters - Natural disasters can profoundly impact public finances by affecting economic output and revenue and requiring substantial increases in public expenditure to provide income support and repair major infrastructure. - Although timing and cost cannot be known in advance, fiscal risk statements can illustrate average costs of such events and help governments make appropriate financial provision as part of medium-term estimates. ### Key Elements of a Final Budget Outcome (Annex IV) - Year-end report is the government’s key accountability document; it should be audited by the Supreme Audit Institution and released within six months of the end of the fiscal year. - Year-end report should: - show compliance with revenue and expenditure levels authorized by Parliament; show any in-year adjustments separately - mirror the presentation format of the budget - provide nonfinancial performance information, including comparison of performance targets and actual results where practicable - provide comparative information for the preceding year for fiscal and nonfinancial performance data - present expenditure in gross terms; earmarked revenue and user charges should be accounted for separately - classify expenditure by administrative unit (for example, ministry or agency); supplementary classification by economic and functional categories could also be presented - contain a comprehensive discussion of government’s financial assets and financial liabilities, nonfinancial assets, employee pension obligations, and contingent liabilities - Appendix Box 4.1. Examples: - Australia: Final Budget Outcome published within three months of the end of the financial year; prepared on the same basis as the budget and midyear update; provides direct comparison of outcome to budgeted amounts for flows and stocks with major deviations explained; fiscal information largely in line with GFSM 2001. - New Zealand: Audited annual report produced three months after the end of the financial year; provides detailed comparison of budgeted amounts and outturns, brief analysis of major variations, and description of progress in implementing fiscal strategy; budgets and forecasts prepared on the same accounting basis (mainly IPSAS) as accounts; forecasts comply with accounting standard requiring assumptions be “reasonable and supportable,” internally consistent, and published. ### Using a Debt Sustainability Analysis to Inform Medium-Term Fiscal Objectives (Annex V) - Many countries anchor fiscal policy on public debt-to-GDP ratio as a visible, communicable metric linked to long-term fiscal objectives (sustainability, intergenerational equity, resilience). - Coverage of debt varies across countries (Central Government, general government, public sector); targeted thresholds differ. - LIC-DSF (World Bank-IMF Debt Sustainability Framework for Low-Income Countries): - assesses risk of debt distress based on debt-carrying capacity and projected debt burden under baseline and adverse shock scenarios - analyzes total public debt and public external debt; uses broad coverage of public sector debt (beyond Central Government, including general government and SOEs) - accounts for concessionality in low-income countries by calculating debt ratios in present value terms (discounted at a standard discount rate of 5 percent) - The framework analyzes both liquidity and solvency issues: - Liquidity risks: ability to service debt in the short run - Solvency risks: ability to repay debt in the long term - The framework is based on five ratios: - For public debt: (1) public and publicly guaranteed debt as a percentage of GDP - For public external debt: - Solvency (stock) metrics: (2) External debt as a percentage of GDP, and (3) external debt as a percentage of exports - Liquidity (debt service) metrics: (4) External debt service as a percentage of exports, and (5) external debt service as a percentage of revenues - Debt-carrying capacity depends on country-specific institutional and macroeconomic factors; thresholds are adjusted by a composite indicator (CI) that weights CPIA score, real GDP growth, import cover, global growth, and remittances to rate capacity as weak/medium/strong. - DSA projections: - based on long-term yearly projection of five ratios under realistic baseline assumptions and comprehensive shock scenarios - baseline assumptions examined with four realism tools: (1) drivers of debt dynamics; (2) realism of planned fiscal adjustments; (3) fiscal adjustment-growth relationship; (4) public investment-growth relationship - shock scenarios: six standardized stress-tests (for example, shocks on real growth, primary balance, exports, depreciation, contingent liabilities, other shocks such as natural disasters, endogenous shocks such as fiscal slippages, and combined shocks) - Risk level determination: - Low risk of external debt distress if none of the indicators breach thresholds under the baseline and the most extreme shock scenarios. - Moderate risk if none breach under the baseline but at least one breaches under the most extreme shock. - High risk if any indicator breaches its thresholds under the baseline. - The framework provides a final rating of risk of debt distress for both total and external public debt and concludes whether debt is sustainable based on space to absorb further shocks without downgrade. - IMF may apply judgmental adjustments considering timeframe and country-specific factors before final rating. - Maldives case (latest DSA April 2020): - rated as being in a high risk of debt distress, although debt is assessed as sustainable - in the baseline scenario, debt is currently well in excess of the 30 percent threshold in PV for external debt and above the 35 percent threshold in PV for total debt - the only threshold not breached is that on debt to exports - key shocks that may cause further upward debt deviations include natural disasters, contingent liabilities (notably, nonguaranteed SOE debt), and availability of market financing - debt ratios display a medium-term downward trend that needs to be accelerated - IMF assessed debt as sustainable provided authorities comply with their stated ambitious fiscal adjustment strategy in the context of 2020 Rapid Credit Facility outright loan - Source of DSA: IMF DSA April 2020. ### Moving from the Debt Sustainability Analysis to a Five-Year Total Debt Objective - In practice, the debt anchor and operational targets in the Charter of Fiscal Responsibility and the three-year Fiscal Strategy/MTFF would be directly taken from the updated DSA. - Conversion and adjustments: - debt-to-GDP target taken from the fifth year (or later if transitional arrangement exists) of the baseline scenario DSA and converted from a present value level to a nominal value level - number could be rounded up by a reasonable amount (for example, by 5 percent of GDP) to account for possible materialization of future fiscal risks and provide a safety buffer - overall balance target taken from the DSA by summing the fifth-year primary balance target and expected debt interest servicing - other operational targets (for example, expenditures targets) must be compatible with the primary balance path under the updated DSA - Institutional incorporation: - debt and operational targets included in the Charter and the MTFF would be submitted to Parliament as government targets (Parliament would not have to formally approve them) - Charter of Fiscal Responsibility commits Government to a defined medium-term fiscal stance and includes five-year objectives from the DSA - three-year Fiscal Strategy/MTFF formulated on a yearly rolling basis along with the annual budget and must be consistent with Charter targets - Deviations and updates: - any deviations from the defined fiscal stance must be properly justified and lead automatically to an update of DSA projections - intra-year fiscal deviations require any supplementary budget to include an updated MTFF - long-lasting substantial deviations lead to an update of the Charter - an updated DSA must be attached to any update of the MTFF or the Charter; deviations must be justified, especially if they risk debt becoming unsustainable - existence of an escape clause would constrain allowable cases for deviations and acceptance *Source: Chapter 9. Public Financial Management Reforms (1mdvea2022001).* ### Annex VI. Choosing Operational Targets in Maldives ### Annex VI. Choosing Operational Targets in Maldives ### Context and key elements to consider - Strong macroeconomic volatility as a small open economy; tourism revenues and tourist arrivals were considerably reduced by the global health crisis. - Large development needs, evidenced by an ambitious capital investment program in the past five years and a five-year Strategic Action Plan with medium-term investment priorities; continued spending in health and education is important. - Susceptibility to long-term natural risk factors: rising threats associated with climate change increase urgency of climate-related adaptation spending and imply significant short-term reconstruction costs after climate events. - Limited additional revenue generation: fiscal revenues have been stable as a share of GDP in recent years; further diversification of revenues would be useful. - Difficulty controlling spending pressures: substantial investment needs drive pressures, and current expenditures have proven difficult to compress in past times. - Current debt structure and high debt distress: a substantial share of public debt raised at concessional terms linked to investment projects; limited market access constrains fiscal possibilities and amplifies negative consequences of high debt distress. - Exchange rate policy: Maldives maintains a de facto peg to the US dollar, which has provided a useful anchor; maintaining the peg requires maintaining prudent levels of central bank reserves. ### Assessment of common operational targets (advantages and drawbacks) - Budget balance targets - Advantages: based on a quantifiable fiscal variable under direct control of policymakers; simplicity and ease of implementation; can promote fiscal discipline by directly linking expenditures to revenues; generally expressed as a percentage of GDP. - Design notes: coverage may be adapted to include one-off items and interest payments (primary balance rule), though including interest payments may weaken the link between the rule and a medium-term debt anchor. - Drawbacks: may lead to a procyclical fiscal stance, requiring spending cuts in economic crises; may reduce quality of spending by encouraging cuts in investment spending for development and climate resilience. - Current balance targets (“golden rules”) - Objective: limit the balance of revenues and current expenditures to preserve investment spending from short-term cuts and allow debt to finance capital expenditures. - Drawbacks: excludes growth-friendly current expenditures such as health and education; can lower investment quality by reducing incentives for cost-benefit analyses; must be associated with a sound public investment management framework to preserve link with debt sustainability; can promote unorthodox reallocations between current and capital expenditures (creative accounting). - Revenue targets - Form: set floors or ceilings on government revenues. - Purpose: revenue floors aim to boost revenue collection. - Drawbacks: may be procyclical if they encourage higher tax receipts in crisis times; do not ensure fiscal sustainability on their own and must be associated with rules on expenditures and/or fiscal balances. - Expenditures targets - Form: limits on aggregate level of spending or on specific categories (current, primary, capital); can be set in level (nominal or percentage of GDP) or in growth terms. - Advantages: generally easy to understand, monitor, and enforce as they target an aggregate under government control. - Drawbacks: when linked to real GDP growth or set as a percentage of GDP, they tend to be procyclical unless countercyclical automatic stabilizers are excluded; do not guide composition of consolidation and may reduce incentive to maintain capital spending. - Design options: can be limited to categories (e.g., current expenditures) or include separate ceilings on current and capital expenditures. - Measurement note: expenditure ceilings are typically expressed as a percentage of GDP but can also be expressed as a percentage of revenues (or of recurrent revenues) to avoid measurement issues associated with GDP forecasts. - Footnote observation: expenditures rules can have a stabilizing role if the level of expenditures growth is set in real terms at the level of potential output growth; this requires a steady fiscal state and poses important measurement challenges. ### Design recommendations and practical guidance - Operational targets should balance: (1) contribution to fiscal/debt sustainability, (2) stabilizing the economy and promoting countercyclicality, (3) simplicity and public understandability, (4) resilience to political and economic cycles, and (5) ease of translation into annual budget guidance and of monitoring and enforcement. - Authorities face a triple constraint when choosing targets: - (1) choose rules directly linked to debt sustainability; - (2) promote short-term fiscal discipline; - (3) maintain target level and composition of spending for development objectives and resilience. - Prefer a limited set of targets: a set of two to three operational targets could allow authorities to meet objectives. - An overall balance target provides operational guidance for debt sustainability and fiscal discipline. - A primary balance target provides guidance on fiscal soundness but has a weaker link to debt sustainability. - Revenue targets, if adequately calibrated, can track progress on revenue mobilization. - Maintain spending mix through separate targets or ceilings on current and capital expenditures; ceilings could exclude priority spending in health and education. - Expenditure ceilings can be expressed as percentage of GDP or as percentage of revenues (or recurrent revenues) to mitigate GDP forecast measurement issues. - Fiscal risks: adopt specific operational targets such as a limit on government guarantees to address fiscal risks. ### Transitional arrangement in the context of high debt and high fiscal deficits - Rationale: in the current context of high debt and high fiscal deficits, fiscal discipline could be enhanced through a transitional arrangement. - Design guidance: operational rules must remain realistic to ensure immediate compliance. - Compliance path: rules can be complemented with a path to compliance that clearly lays out an adjustment path of expenditure and deficit levels leading up to full compliance after a transition period of three years, for example. *Source: Annex VI. Choosing Operational Targets in Maldives* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mdvea2022001.pdf_