## _cr10137

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### Assessment scope and process
- Public Expenditure and Financial Accountability (PEFA) assessment for the Maldives using the PEFA methodology.
- Timeframe of focus: fiscal performance during 2005–08 and institutions/procedures in place during this period.
- Government participants: PEFA technical committee, MOFT, MMA, AGO, Anti-Corruption Commission, Civil Service Commission, PAC of the Peoples Majlis, sector ministries, and atoll/island officials.
- IMF team: headed by Eivind Tandberg; included Holger van Eden, Tej Prakash, and Suzanne Flynn. World Bank contributors: Manoj Jain, Leslie Kojima, and Dimitri de Pues.
- Draft reviews: government of the Maldives, the IMF, the WB, the PEFA Secretariat, and the Asian Development Bank (ADB).
- Final report presented at a workshop in Male on September 16, 2009.

### High-level summary assessment
- The Maldives faced a difficult economic and fiscal situation in recent years and requested IMF assistance in mid-2009; a stand-by arrangement was negotiated and expected to go to the IMF Board later in 2009.
- Assessment focuses on institutional weaknesses contributing to fiscal problems (does not address fiscal policies or international market conditions).
- Many reforms initiated in 2009 may affect PEFA indicators but are not covered in this assessment and should be reflected in future updates.

### Main findings — budget credibility and fiscal outcomes
- Aggregate assessment:
  - Overall budget credibility is weak; aggregate expenditure estimates reasonably accurate when corrected for concessional external financing, but allocation variations by ministry are significant.
  - Actual revenues fell well below estimates in each year except 2006.
  - Budget arrears appear limited but no systematic monitoring scheme exists.
- Key numerical outcomes and deviations (selected):
  - Total government spending increased from 31 percent of GDP in 1998 to 62 percent in 2008.
  - Budget deficit generally between 2–5 percent of GDP over most of the last 10 years; reached 12.6 percent in 2008.
  - Table (2006–2008, percent of GDP, 2008 preliminary):
    - 2006 2007 2008
    - Total revenue and grants 5356 49
    - - Total revenue 4548 45
    - - Grants 78 5
    - Total expenditure 6062 62
    - - Non-interest 5860 60
    - - Interest 22 2
    - Overall balance -7-5 -14
    - Primary balance -5-3 -12
    - Net financing 75 14
    - - Domestic 55 5
    - - External 20 9
    - Memo item: GDP (million MLRF) 11.71713.492 16.137
  - Annex III selected figures (MLRF, percent variances):
    - Total Expenditure (2005): Approved 4,979.9; Actual 6,025.3; Variance 1,045.4; 21.0%
    - Total Expenditure (2006): Approved 9,020.8; Actual 7,345.6; Variance -1,675.2; -19%
    - Total Expenditure (2007): Approved 12,343.8; Actual 8,725.1; Variance -3,618.7; -29%
    - Budget Expenditure excluding debt service and donor funded project expenditure (2007): Approved 7,970.3; Actual 6,917.2; Variance -1,053.1; -13.2%
    - Project Grants (2005): Approved 32.6; Actual 766.3; Variance 733.7; 2250.6%
    - Project Loans (2007): Approved 4,151.5; Actual 1,007.7; Variance -3,143.8; -76%
    - Of which concessional (2007): Approved 2,645.4; Actual 183.3; Variance -2,462.1; -93%

### Revenue performance and forecasting
- Observed revenue performance:
  - Domestic revenue realizations: 86.4 percent of budgeted estimates in 2005, 109.3 percent in 2006, and 91.7 percent in 2007.
  - Annex V domestic revenue projections vs actuals (selected):
    - Tax Revenue 2005 Proj 1,877,483,717 Actual 1,722,845,313
    - Tax Revenue 2006 Proj 2,114,935,000 Actual 2,370,414,282
    - Tax Revenue 2007 Proj 3,193,925,710 Actual 2,905,168,797
    - Nontax Revenue 2005 Proj 2,334,088,147 Actual 1,915,384,197
    - Total 2005 Proj 4,211,571,864 Actual 3,638,229,510
- Specific year drivers:
  - 2005: Tsunami aftermath hit nontax revenues (resort leases, land rent, royalties) and SOE profit transfers.
  - 2007: Shortfalls from lower-than-expected import duties, SOE transfers, and lease and land rents after a strong 2006.
- Capacity and options:
  - MOFT has some macro forecasting capacity but does not routinely use macroeconomic modeling.
  - Policy options include a policy-based SOE profit-retention framework and adjustments to nontax revenue treatment (for example foregoing capitalization of lease agreements) to stabilize flows.

### Comprehensiveness, transparency, and reporting
- Budget classification and documentation:
  - Budget coverage is very comprehensive; classification provides organizational, economic, and functional breakdowns consistent with GFSM 2001, but no subfunction or program classification until PAS.
  - Economic classification historically deviated from GFS (loan proceeds and amortization treated as revenue/expenditure); from 2009 economic classification presented to parliament broadly consistent with GFSM 1986 definitions.
  - PI–6: Comprehensiveness of budget documentation scored C (meets 4 of 9 benchmarks). Missing: fiscal deficit definition per GFS, deficit financing composition, debt stock details, financial assets, and full explanation of policy budget implications.
- Public access:
  - Annual budget documents published on MOFT website and in local language; English summary available.
  - MOFT does not publish in-year budget execution reports; no end-of-year financial statements until PAS-enabled statements.
  - PI–10 public access scored B (3 of 6 benchmarks met).
- Unreported operations and donor reporting:
  - Unreported extra-budgetary expenditure estimated below 5 percent of total expenditure; donor-funded projects generally reported (project expenditures were 22 percent of planned expenditures in 2008 draft budget).
  - Donor forecasting and reporting on project support rated D; only a minority of donor flows reported timely.

### Budget formulation, medium-term perspective, and oversight
- Budget process and participation:
  - Fixed budget calendar exists and is adhered to (PI–11 subrating A for calendar and for timely approval).
  - Guidance on budget submissions weak (PI–11 subrating D).
  - Legislature approves budget timely but parliamentary review procedures are underdeveloped (PI–27 overall D+).
- Multiyear planning:
  - No systematic multiyear fiscal forecasting historically; government had not undertaken a DSA (PI–12 overall D).
  - 2009 budget included base 2009 plus forecasts for 2010–11; government planning to develop MTEF from 2010.
- Legislative and external scrutiny:
  - AGO reformed early 2008; auditor general independence strengthened; AGO expanded scope to financial and performance audits (PI–26 overall D+ but timeliness of submission B).
  - Legislative scrutiny (PAC) has had visible impacts (ministerial resignations), but procedures and follow-up are inconsistent (PI–27 and PI–28 rated C/D+ levels).

### Predictability, cash and debt management, and arrears
- Cash management and predictability:
  - Treasury prepares 12-month cash forecasts based on seasonal patterns; forecasts not updated periodically (PI–16 cash forecasting C).
  - Reliability of in-year ceilings to MDAs weak (PI–16 scored D overall D+).
  - MOFT delays discretionary releases (investment, travel, scholarships) ad hoc; virements frequent.
- Cash balances, debt, and guarantees:
  - Cash balances fragmented across MMA and BML accounts; many atoll accounts outside treasury control (PI–17 consolidation scored D).
  - Debt recording: external and domestic recorded separately; domestic debt records not regularly reported (PI–17 debt data scored C).
  - Government guarantees not systematically disclosed; no annual or absolute ceiling for guarantees.
- Arrears:
  - Anecdotal evidence: stock of payment arrears generally below 2 percent of total expenditure; no reliable monitoring system (PI–4 availability dimension D+; overall D).
  - Under PAS, payment invoice and due dates will be recorded and arrears monitored centrally.

### Payroll, internal controls, internal audit, and procurement
- Payroll controls:
  - Partially decentralized payroll; reconciliation and integration between personnel records and payroll weak (PI–18 overall D+).
  - Approximately 30,000 staff on establishment; 6,000 temporary posts not captured; 16 percent of establishment on temporary contracts in some ministries.
  - PAS payroll module planned by end-2010.
- Internal controls and internal audit:
  - Commitment control systems largely absent; internal audit undeveloped (PI–20 and PI–21 overall D+).
  - PAS includes commitment control module and built-in internal controls; expectation of measurable gains after 2010.
- Procurement and grievance mechanisms:
  - Procurement rules prefer competition but data on actual use of open competition scarce (PI–19 overall D+).
  - Thresholds: values more than MLRF 25,000 require published invitations; for procurement above MLRF 1.5 million TES conducts procurement on behalf of agencies.
  - No independent procurement grievance mechanism; complaints handled by TEB which both studies complaints and approves awards — creating conflict of interest.
  - WB IDF grant supports procurement reform (regulatory, institutional, capacity, public awareness, preparatory e-procurement).

### PAS project, reforms, and expected impacts
- PAS design and components:
  - Integrated financial management information system (IFMIS) — PAS — with primary modules: general ledger, reporting, payments and banking, accounts payable, and budget funds availability checking; secondary modules: budget formulation, assets register, accounts receivable, payroll, project management.
  - PAS to centralize payments, consolidate more than 2,000 government bank accounts into a TSA at the MMA, and support improvements in classification, arrears monitoring, cash management, payroll controls, internal controls, and reporting.
- Implementation status and timeline:
  - Project experienced delays; decision to “go live” for general ledger and payment processing for Male-based MDAs on May 1, 2009.
  - Project about eight months behind planned milestones; target to complete roll-out of primary components for all Male agencies and some pilot atoll agencies by end-2009.
- Expected indicator improvements:
  - Anticipated improvements in PI-4, PI-5, PI-16, PI-17, PI-18, PI-20, PI-22 to PI-25, and potential benefits for PI-21 and PI-26–28.
- Risks to reform:
  - Key risks identified: limited stakeholder support, inadequate staffing/training, failure to upgrade business processes to utilize new systems.
  - MOFT committed to a comprehensive action plan with prioritization and timetables, building on IMF, WB, ADB and other inputs.

### Policy implications and priorities (as reflected in the assessment)
- Strengthen cash, debt, and guarantee management:
  - Centralize and consolidate cash balances into a Treasury Single Account (TSA).
  - Improve debt recording, reporting, and analysis (regular external and domestic debt reports; incorporate DSA results into borrowing policy).
- Implement and operationalize PAS promptly:
  - Roll out commitment control, arrears monitoring, payroll module, and central payments.
  - Upgrade cash planning and management capacity ahead of full PAS roll-out.
- Improve revenue forecasting and stabilize nontax flows:
  - Develop macro-modelling capacity and a policy-based SOE dividend framework.
  - Consider adjustments to treatment of lease capitalization to stabilize nontax receipts.
- Strengthen procurement and grievance mechanisms:
  - Establish independent procurement complaint/review mechanism and enhance transparency of contract awards (publication of awards above specified thresholds).
  - Implement WB-supported procurement modernization program and prepare for e-procurement.
- Develop medium-term fiscal frameworks and oversight:
  - Institutionalize MTEF and regular Debt Sustainability Analysis (DSA).
  - Strengthen legislature’s budget review capacity and formalize follow-up on AGO recommendations.
- Build internal audit and internal controls:
  - Create clear internal audit standards, expand IA coverage, and use PAS data for regular payroll and expenditure audits.

*Preface and Summary Assessment, PEFA assessment for the Republic of Maldives (assessment covering fiscal performance during 2005–08; final report presented September 16, 2009).*

### Preface.................................................................................................................

### _cr10137 - Preface.................................................................................................

### Assessment scope and process
- The assessment was a Public Expenditure and Financial Accountability (PEFA) assessment for the Maldives using the PEFA methodology.
- Timeframe of focus: fiscal performance during 2005–08 and institutions/procedures in place during this period.
- The government established a PEFA technical committee and engaged MOFT, MMA, AGO, Anti-Corruption Commission, Civil Service Commission, PAC of the Peoples Majlis, sector ministries, and atoll/island officials.
- The IMF team was headed by Eivind Tandberg and included Holger van Eden, Tej Prakash, and Suzanne Flynn. World Bank contributors: Manoj Jain, Leslie Kojima, and Dimitri de Pues.
- Draft report reviews: government of the Maldives, the IMF, the WB, the PEFA Secretariat, and the Asian Development Bank (ADB).
- Final report presentation: workshop with the finance minister and MOFT officials in Male on September 16, 2009.

### High-level summary assessment
- The Maldives faced a difficult economic and fiscal situation in recent years and requested IMF assistance towards the middle of 2009; a stand-by arrangement was negotiated and expected to go to the IMF Board later in 2009.
- The assessment does not address fiscal policies or international market conditions; it focuses on institutional weaknesses contributing to fiscal problems.
- Many reforms initiated in 2009 may affect PEFA indicators but are not covered in this assessment and should be reflected in future updates.

### Main findings: strengths and weaknesses
- Budget credibility
  - Overall budget credibility is weak.
  - When corrected for concessional, external financing, aggregate expenditure estimates are reasonably accurate.
  - Significant variations exist in allocation of expenditures by ministry.
  - Actual revenues fell well below estimates in each year except 2006.
  - Budget arrears appear limited, but no systematic monitoring scheme exists to document arrears.
- Comprehensiveness and transparency
  - Budget coverage is very comprehensive.
  - Budget classification can provide data consistent with GFSM 2001, but no subfunction or program classification exists.
  - Reporting of foreign-funded projects in the budget is based on ad hoc procedures.
  - Budget documents provide basic fiscal policy information, including key macroeconomic assumptions and deficit financing.
  - Unreported government operations are insignificant; no subnational government sector before 2009.
  - Public access to important fiscal information exists (budget documents, AGO reports, resources allocated to service delivery units).
  - No comprehensive statement on government fiscal risks despite systematic monitoring of fiscal risks related to public enterprises (PE).
- Policy-based budgeting and medium-term perspective
  - Budget documents do not provide clear linkages between budget figures and underlying policies.
  - Annual budget process is stable year-to-year but lacked an explicit multi-year perspective before 2009.
  - Explanations of fiscal implications of specific policies are usually absent.
- Predictability and control in budget execution
  - Significant shortfalls in predictability and control, especially on the expenditure side and in cash, debt, and guarantees management.
  - Taxpayer obligations are transparent; limited discretion in applying tax rules.
  - Coordination between taxpayer databases for different taxes is inadequate.
  - Tax arrears are limited due to tax simplicity and current collection practices.
  - Funds for discretionary spending (including domestically-financed capital spending and travel) are released on an ad hoc basis, impairing planning.
  - Critical weaknesses: fragmented management and limited public reporting of government cash, debt, and guarantees; absence of systematic disclosure of sizable risks.
  - Internal control procedures are not fully defined; no systematic internal audit function.
- Procurement and grievance mechanisms
  - Lack of data relating to procurement below MLRF 1.5 million at ministerial/agency level; unknown share of high-value contracts in total procurement.
  - Procurement rules prefer competition, but data are insufficient to assess use of less competitive methods and their justification.
  - No independent procurement grievance mechanism; complaints go to the Tender Evaluation Board (TEB), which both studies complaints and approves contract awards, creating an apparent conflict of interest.
- Accounting, recording, and reporting
  - Need to develop accounting, recording, and reporting within government.
  - Consolidated financial statements have not been prepared and therefore not audited.
  - The Public Accounting System (PAS) under implementation is expected to enable preparation of full-fledged financial statements in line with acceptable international standards with effect from the 2009 fiscal year.
- External scrutiny and legislative oversight
  - Establishment of an independent Auditor General’s Office (AGO) in early 2008 led to significant improvements in external audit.
  - AGO aims to cover all government sectors annually and applies risk-based sampling, but absence of a comprehensive government accounting system has inhibited financial audits.
  - Legislative oversight has been weak, though many AGO audit reports have had highly visible impacts.
- Donor practices
  - Donors often do not follow established good practices for donor funds.
  - The Maldives did not receive significant direct budget support before 2009.
  - Only a few donors provide reliable estimates for project support for the next budget year; reporting on actual disbursement is somewhat better.
  - Donor funds are generally managed through donor procedures.

### Analysis of fiscal risk and budget process efficacy
- The level of fiscal risk in the Maldives is high and the existing PFM system is insufficient to ensure effective control of fiscal aggregates.
- Some fluctuations in fiscal outcomes are due to external events (Tsunami in late 2004; global financial crisis in the latter part of 2008).
- Positive factors reducing fiscal risk: comprehensive budget coverage, absence of subnational government borrowing before 2009, and a strengthened AGO.
- However, weaknesses in PFM (reliance on uncommitted external project financing, fragmented cash and debt management, lack of transparency on guarantees, ad hoc budget release and commitment controls, unreliable in-year reporting especially in the atolls) add substantial uncertainty and undermine the budget as a planning tool.
- Deviations between planned and actual ministry-level allocations indicate the budget process is not an effective instrument for allocating resources to priority sectors.
- Availability of information on resources allocated to many service delivery units in health and education provides some assurance on micro-level allocation.

### Service delivery and performance orientation
- Efficient service delivery has not been a prominent priority in PFM.
- The budget process is input-focused with limited attention to outputs and outcomes.
- National development plans and sector strategies identify outputs/outcomes but are not costed and linkages to the budget are unclear.
- Recurrent cost implications of public investments are often not fully taken into account, leading to maintenance gaps.
- Financial reporting systems are inadequate and there is no systematic monitoring and reporting on performance indicators.
- Weaknesses in procurement and internal control undermine expenditure efficiency.

### Government PFM reform agenda and outlook
- Political changes (new Constitution, Presidential elections in 2008, first fully open parliamentary elections in May 2009) and increased openness are creating demand for improved transparency, efficiency, and accountability.
- The AGO’s reformation in early 2008 is catalyzing greater external scrutiny.
- Government actions underway:
  - Implementation and successful completion of PAS to improve budget execution, internal control, cash management, accounting, and fiscal reporting (starting effect from the 2009 fiscal year).
  - Efforts to improve public procurement.
  - Requesting line ministries to base sector strategies and budget submissions explicitly on national priorities and to ensure realistic costing.
  - Preparation of audited financial statements to enable the Peoples’ Majlis to strengthen oversight, supported by planned amendments to the legislature’s internal rules.
- The MOFT is committed to developing a comprehensive action plan for PFM improvements, including prioritization and timetables, and building on inputs from the IMF, the WB, the ADB and other development partners, while reflecting government priorities.
- This PEFA assessment is intended as a baseline for monitoring impacts of ongoing PFM reforms; successful implementation should lead to improvements on many PEFA indicators.

*Preface and Summary Assessment, PEFA assessment for the Republic of Maldives (assessment covering fiscal performance during 2005–08; final report presented September 16, 2009).*

### 1.      The purpose of this PEFA assessment is to help the Maldives ensure that its

### The purpose of this PEFA assessment is to help the Maldives ensure that its public financial management systems promote effectiveness, efficiency and transparency.

### Purpose, scope, and process
- Purpose:
  - Help the Maldives ensure that its public financial management (PFM) systems promote effectiveness, efficiency and transparency.
  - Help authorities define a coherent and consistent PFM reform strategy, with clear prioritization and sequencing.
  - Provide a basis for identifying reform areas for development partner assistance and for ensuring that this assistance is well coordinated.
  - Provide a starting-point for monitoring progress in PFM reform; regular updates (for instance every three years) will allow government to measure and evaluate reform impacts.
- Preparation and validation:
  - Assessment prepared jointly by the authorities, IMF and World Bank staff.
  - IMF task team leader visited the Maldives in February 2009 to agree arrangements.
  - February–April: Maldives PEFA technical committee prepared initial self-assessments.
  - April/May: IMF and WB mission reviewed and discussed self-assessments, producing a joint draft PFM Performance Report.
  - Final report presented at a workshop in Male in September 2009; workshop discussed impacts on PFM reform strategy and contributions of development partners.
- Scope:
  - Focuses on the central government sector in the Maldives.
  - During 2005–08 there were no subnational governments, no major extra-budgetary funds and no autonomous agencies; public enterprises (PE) were generally separated from regular government activities.
  - Scope coincides with the GFSM 2001 definition of general government.
- Data sources and limitations:
  - Assessments generally based on publicly available documents, particularly annual budget documents for 2005–08, plus supplementary material from ministries and agencies.
  - Information cross-checked across sources where possible.
  - Several official documents only in local language; assessment relied on informal translations where necessary.

### Country background — Economic situation and strategy
- Economic indicators and context:
  - Maldives is a middle-income country following a long period of rapid economic growth.
  - GDP/capita increased from about US$ 2,000 in 2000 to US$ 4,000 in 2008, largely driven by expanding tourism.
  - Period saw rapid reduction in poverty and improvements in social indicators.
  - Exchange rate pegged at MLRF 12.8 to the U.S. dollar since 2001.
- Government strategy (post-October 2008 government coalition Manifesto adopted as national development strategy):
  - Priorities highlighted:
    - Nationwide transport system
    - Affordable living costs
    - Affordable housing
    - Affordable and quality health care for all
    - Prevention of narcotics abuse and trafficking
  - Emphasis on governance and public administration improvements; pledge to:
    - “immediately stop wasteful expenditure, base government spending on realistic assessments of revenue, and ensure spending on sustainable constructive causes,”
    - “appoint an independent PAC to ensure government expenditure is transparent and accountable,” and
    - “plan economic development and government expenditure at sustainable levels in accordance with the country’s resources.”
  - Initial steps included centralizing payments in the MOFT and integrating current and capital budget processes in the MOFT.
  - Additional objectives:
    - Provide good quality, responsible services to ensure social justice, sustainable development and to guarantee equitable distribution of wealth.
    - Introduce decentralized governance based on seven administrative and economic centers.
    - Ensure the government is cost-efficient and its services are reliable, speedy and of high standards.
    - Ensure all government services are responsible, relevant to public needs and utilize current technology.

### Budgetary outcomes (2005–08 focus; tables summarize key fiscal indicators)
- Trends and fiscal impact:
  - Government spending outpaced GDP growth over the last 10 years, particularly after the Tsunami in 2005.
  - Total government spending increased from 31 percent of GDP in 1998 to 62 percent in 2008.
  - Revenue grew over the period but at a slower pace.
  - Global financial crisis starting in 2008 had major impacts, notably reduced tourism arrivals.
  - Budget deficit generally between 2–5 percent of GDP over most of the last 10 years; deteriorated sharply in 2005 and 2006 after the Tsunami, and again in 2008 when it reached 12.6 percent.
- Table 1. Central Government Budget (In percent of GDP) — data for 2006–2008 (2008 preliminary)
  - 2006 2007 2008
  - Total revenue and grants 5356 49
  - - Total revenue 4548 45
  - - Grants 78 5
  - Total expenditure 6062 62
  - - Non-interest 5860 60
  - - Interest 22 2
  - Overall balance -7-5 -14
  - Primary balance -5-3 -12
  - Net financing 75 14
  - - Domestic 55 5
  - - External 20 9
  - Memo item: GDP (million MLRF) 11.71713.492 16.137
  - Source: Maldives fiscal and economic outlook 2009–11, Budget 2008, staff estimates.
- 2009 outlook:
  - Budget deficit projected to increase further in 2009.
  - Midyear estimates indicated a 2009 deficit of 33 percent of GDP, limited to about 28 in subsequent estimates.
  - Authorities plan reductions in the deficit for 2010 and 2011.
- Functional composition of spending (Table 2; percent of total expenditures; 2008 preliminary)
  - 2006 2007 2008
  - Public services 34 37 37
  - Social services 5253 52
  - Economic services 127 8
  - Interest 33 3
  - Memo item: Total expenditures 7.066 8.325 10.317
  - Source: Maldives fiscal and economic outlook 2009–11.
- Economic classification of budget expenditures (Table 3; percent of total expenditures; 2008 preliminary)
  - 2006 2007 2008
  - Current expenditures 79 79 80
  - - Salaries and wages 2726 33
  - - Other current 2221 21
  - - Social assistance 2527 19
  - - Subsidies and transfers 22 4
  - - Interest payments 33 3
  - Capital expenditures 2121 20
  - Memo item: Total expenditures 7.066 8.325 9.963
  - Source: Maldives fiscal and economic outlook 2009–11, staff estimates.
- Observations:
  - Aggregate sector spending allocations fairly stable over last 10 years; modest increase in allocations to social services.
  - Public services share in 2008 about same as 1998.
  - Reduction in economic services share.
  - Capital spending decreased from 39 percent of total expenditures in 1998 to 20 percent in 2008.
  - Within current expenditures, wages and salaries declined relatively in 2005–07 (due to increased social assistance after the Tsunami) and rebounded after 2007.
  - Other current expenditure (operational and maintenance) steadily declined for several years.

### Legal and institutional framework for PFM
- Public sector composition for PEFA:
  - Public sector consists of central government and public enterprises.
  - Until 2009 there were no independent subnational governments; current government committed to establishing such entities.
  - Central government comprises 14 ministries, President’s office, parliament, judiciary, seven independent offices/commissions (elections, civil service, human rights, anticorruption, auditor general, prosecutor general, police integrity) appointed by parliament and financed through separate budget lines, and approximately 230 other government spending units.
  - Many spending units have separate budget lines but are consolidated with parent ministry for planning.
  - No significant extrabudgetary funds in the Maldives.
- MOFT structure and responsibilities:
  - MOFT comprises four main directorates, three agencies (with separate budget lines) and two boards.
  - Directorates: corporate affairs; treasury and public accounts; fiscal affairs and economic policy; External resources.
  - Agencies: national planning; inland revenue; customs.
  - Boards: tender evaluation board (internal and external members); Public Enterprises Monitoring and Evaluation Board (PEMEB) has no separate board despite name.
  - MOFT responsibilities: budget preparation and execution, tax policy and management, oversight of PE, handling large public procurement processes.
  - Ministry of Planning incorporated into MOFT in late 2008.
  - AGO previously independent under the president, became separate organization in early 2008.
  - MMA acts as fiscal agent: sells treasury bills and involved in management of government cash reserves.
- Recent PFM shifts and regulatory framework:
  - PFM shifted from decentralized to more centralized approach in late 2008: centralization of payments in MOFT and consolidation into a Treasury Single Account (TSA) in MMA; process incomplete with considerable funds still outside central treasury account.
  - Primary governance instruments: public finance law of 2006 and government financial regulations of 2002.
  - Public finance law included provision for president to defer implementation of some provisions for up to three years; since January 2009 all provisions in force.
  - New requirement to produce an annual financial statement is a major change; first annual statement expected in 2010 for the 2009 budget year.
  - Government financial regulations issued by AGO; supplementary regulation added procurement chapter in 2007.
  - Regulations do not reflect move to centralized payments in late 2008 or planned changes under new PAS; MOFT developing new financial regulations to incorporate changes.
- Parliamentary oversight:
  - Parliament will play an increasingly important role in overseeing PFM.
  - First fully open parliamentary elections held in May 2009.
  - PAC intends to closely monitor PFM developments, drawing on increasing body of AGO audit reports.

### Assessment of PFM systems — Budget credibility (PI-1, PI-2, PI-3)
- PI–1. Aggregate expenditure out-turn compared to original approved budget (Scoring method M1)
  - Score: B
  - Finding:
    - Actual primary expenditure deviated from budget estimates by more than 10 percent in one of the three years considered.
    - Deviations: 5.9 percent in 2005, -5.8 percent in 2006, and -13.2 percent in 2007.
  - Method notes:
    - Debt service and externally financed project expenditure were excluded from calculations as required by PEFA guidance.
    - Nonconcessionally funded capital projects contributed to underestimation difficulty; excluding nonconcessionally funded capital expenditure would yield an A but inclusion resulted in B.
- PI–2. Composition of expenditure out-turn compared to original approved budget (Scoring method M1)
  - Score: D
  - Finding:
    - Variance in expenditure composition exceeded overall deviation in primary expenditure by more than 10 percent in two of the last three years.
    - Differences: 13.5 percent in 2005, 6.8 percent in 2006, and 12.2 percent in 2007.
  - Method notes and interpretation:
    - Calculation used absolute variances of the 20 largest expenditure headers on an expenditure-weighted basis, with remaining expenditure grouped as a separate header; debt service and donor-funded project expenditure excluded.
    - Budget prepared and approved on allocations per header (and subheader); 2007 budget had 42 headers, of which 14 were line ministries.
    - Weak performance points to problems estimating capital expenditure and potential budget preparation issues (poor information gathering through budget circular, poor cost estimation by MDAs, frequency of in-year budget changes).
- PI–3. Aggregate revenue out-turn compared to original approved budget (Scoring method M1)
  - Score: D
  - Finding:
    - Domestic revenue collections were below 92 percent of budgeted estimates for two of the last three years reviewed.
    - Domestic revenue realizations: 86.4 percent of budgeted estimates in 2005, 109.3 percent in 2006, and 91.7 percent in 2007.
  - Data and recording:
    - Revenue figures reported by the treasury based on monthly transfers by customs, department of inland revenue, and various MDAs to MOFT’s main account at the MMA.
    - Data reconciled with accounting statements of collecting entities monthly.
    - Domestic revenue data contains modest amounts of loan repayments from government to entities (e.g., SOEs) due to chart of accounts setup up to end-2008.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10137.pdf*

### 24.      Revenue collections in 2005 and 2007 were lower for a variety of reasons.

### _cr10137 - 24.      Revenue collections in 2005 and 2007 were lower for a variety of reasons.

### Revenue performance in 2005 and 2007
- 2005: Revenue collections were severely affected by the aftermath of the Tsunami disaster.
  - Especially nontax revenues suffered as resort leases, land rent, and royalties were substantially lower than expected.
  - SOEs also provided lower profit transfers.
- 2007: Both tax and nontax revenues were substantially lower than forecast, after a very strong performance in 2006.
  - Sources of shortfall: lower-than-expected import duties, SOE transfers, and lease and land rents.

### Revenue forecasting capacity and policy options
- MOFT capacity and practices:
  - MOFT seems to have some capacity in macro forecasting, but macroeconomic modeling is not really used.
  - Forecasting of revenues could be further explored given the relative simplicity of existing taxes.
- Nontax revenue framework options:
  - A more policy-based framework for SOE profit retention could help stabilize revenue flows.
  - Cash flow needs appear to influence profit transfers; this seems also to be the case for the MMA’s profit transfer.
  - Adapting the framework for nontax revenues collection (for example foregoing capitalization of lease agreements) could also stabilize revenue intake.

### PI–4. Stock and monitoring of expenditure payment arrears
- Scoring (Scoring methodology M1):
  - (1) Stock of expenditure payment arrears (as a percentage of actual total expenditure for the corresponding fiscal year) and any recent change in the stock: A
  - (ii) Availability of data for monitoring the stock payment arrears: D+
  - D (overall for availability dimension)
- Key findings:
  - Information indicates the stock of arrears has generally been very low (below 2 percent of total expenditure).
  - Typical supplier payment terms:
    - Goods and services: 14 days.
    - Capital expenditure: 45 days.
  - No government regulatory limit on payment term; internationally 30 days is quite common.
  - Regulation provides for personal penalties on financial officers who do not respect payment terms, but little evidence the fine is ever imposed.
  - Exception: period at the end of last year when central government faced serious liquidity constraints; a centralized payment system was set up and had some limited delays/“teething” problems.
- Data and monitoring limitations:
  - No reliable data on the stock of arrears due to lack of a monitoring system; ad hoc surveys have not taken place.
  - Neither MDAs under the previous decentralized payment system, nor the treasury presently under the centralized payment system (limited to Male-based government institutions) record accounts payable or payments past due dates — only the payment date itself is recorded in accounts.
  - No surveys by MOFT or auditor general on the stock of arrears.
  - Monitoring of arrears dimension scored D.
- Reforms underway:
  - New automated PAS being developed will record payment invoice and due dates; arrears will be monitored and reported centrally.
  - New PAS will introduce centralized commitment controls, making contracting without budget authorization impossible and reducing likelihood of payment arrears even under tight liquidity conditions.
  - Presently expenditure control relies on decentralized controls at the MDA level and budget release policies of the budget office for discretionary categories.

### Comprehensiveness and transparency — Budget classification (PI–5)
- Score (Scoring method M1): B
- Structure and classification:
  - Domestically-financed budget presented according to organizational, economic, and functional classifications; no subfunction or program classification currently.
  - Organizational classification is very detailed, providing allocations down to several (but not all) individual service delivery units such as schools and health centers.
- Treatment of externally funded projects:
  - Projects funded by external grants and loans are presented according to funding source and included in aggregate economic and functional break-down.
  - In the draft budget for 2008 they amounted to 22 percent of planned expenditures.
  - English summary: project expenditures included as two lump sums in the organizational break-down and not explicitly linked to organizational entities; local language budget documents provide a list of projects by implementing ministry or agency.
  - Economic break-down of foreign-funded project expenditures prepared ad hoc by MOFT budget section and not based on detailed project budgets or accounting data, leading to misclassification (including some current spending in capital spending estimates).
- Historical deviations and reforms:
  - Before 2009, economic classification deviated from GFS standards: loan proceeds and loan amortization were included under revenue and expenditure, not as financing items, leading to underestimation of the budget deficit.
  - From the 2009 budget, economic classification presented to parliament is broadly consistent with GFSM 1986 definitions; loan receipts and amortizations are now treated below the line.
  - PAS project includes a new chart of accounts and provides for a program classification, but no concrete plans yet for application.

### Comprehensiveness of budget documentation (PI–6)
- Score (Scoring method M1): C (Recent budget documentation fulfils 4 of the 9 information benchmarks)
- Included and missing items (Table highlights preserved):
  - 1 Macroeconomic assumptions (including aggregate growth, inflation, exchange rate): Yes. In Part II of the budget documentation and the Medium-Term Expenditure Framework (MTEF) 2009–11.
  - 2 Fiscal deficit, defined according to GFS, or other internationally recognized standard: No. Part VI of the budget in statistics in English includes this information but it is not presented to parliament.
  - 3 Deficit financing, describing anticipated composition: No. Included in Part VII of the budget documents but not presented to parliament.
  - 4 Debt stock, including details at least for the beginning of the current year: No. Disbursements in the year are published, but the debt stock is not detailed.
  - 5 Financial Assets, including details at least for the beginning of the current year in a timely manner: No. Financial assets are not detailed.
  - 6 Prior year’s budget outturn, presented in the same format as the budget proposal: Yes.
  - 7 Current year’s budget (revised budget or estimated outturn), presented in same format as the budget proposal: Yes.
  - 8 Summarized budget data for both revenue and expenditure according to main heads of classifications used, including data for current and previous year: Yes.
  - 9 Explanation of budget implications of new policy initiatives, with estimates of budgetary impact of all major revenue policy changes and/or some major changes to expenditure programs: No. Some explanation of revenue measures but no explanation of expenditure measures.
- Additional documents:
  - MOFT produces “the budget in statistics,” a summarized version available in English that includes an overview of the budget system and processes, highlights, economic and fiscal outlook, detailed expenditure breakdown by MDA, tax revenue by source, and nontax revenue by type. Statistical tables detailing the deficit and financing in the IMF/COFOG classification are included but are not part of the budget documentation presented to parliament.

### Extent of unreported government operations (PI–7)
- Scores (Scoring method M1):
  - (i) Level of unreported extra-budgetary expenditure (other than donor funded projects which is unreported): B
  - (ii) Income/expenditure information on donor funded projects which is included in fiscal reports: B+
  - (overall) A
- Key points:
  - Little unreported extra-budgetary expenditure; likely related to trust fund accounts.
  - Trust fund accounts constitute less than 5 percent of total expenditure; any unreported spending through these accounts assumed to be considerably below 5 percent (threshold for a B rating).
  - Budget organizations have sizable balances in various MMA accounts outside their budget accounts (fund accounts, office accounts, nonbudget revenue accounts). Agencies are required to budget and account for spending through these accounts, but MOFT does not systematically check that all trust funds are budgeted and accounted for.
  - Donor funded projects (grants and loans) are reported in the budget. Income data on donor funded projects (excluding in-kind inputs) is readily available and presented in a table in the budget document.
  - External resources are managed centrally in MOFT (External Resources Management Department) using CSDRMS for loan data and a separate system for grants.
  - Local counterpart funds for donor funded projects are included within the budget of individual MDA and are not separately identifiable in the English version of the budget.

### Transparency of inter-government fiscal relations (PI–8)
- Scores (Scoring method M2):
  - (i) Transparency and objectivity in the horizontal allocation among Subnational governments: N/A
  - (ii) Timeliness of reliable information to Sub National governments on their allocations: N/A
  - (iii) Extent of consolidation of fiscal data for general government according to sectoral categories: N/A
- Context:
  - There is currently no subnational government in the Maldives. Central government is responsible for local public services, including schools and health centers.
  - Capital Male is a municipality and there are community administrations in the atolls with limited functions and no financial independence; they cannot incur debt or take on liability.
  - Parliament is considering a draft law on administrative decentralization to establish seven regions with elected assemblies and officials; as an interim step some regions are being established with appointed officials.

### Oversight of aggregate fiscal risk from other public sector entities (PI–9)
- Scores (Scoring method M1):
  - Extent of central government monitoring of autonomous government agencies and PE: C
  - Extent of central government monitoring of subnational governments’ fiscal position: C (N/A for subnational given current arrangements)
- Oversight arrangements and practices:
  - PEMEB is responsible for overseeing SOEs and currently oversees about 37 enterprises (including all major PEs except the telecommunications company).
  - No separate legislation for oversight of PE; many enterprises’ articles of incorporation specify reporting arrangements to government.
  - PEMEB tasks: safeguard government ownership interests, monitor and evaluate financial performance, forecast dividends/subsidies/capital injections from the budget, ensure dividends are collected timely.
  - Most public enterprises provide extensive information to PEMEB: draft budgets and business plans, midyear updates, monthly cash flow statements, quarterly financial statements.
  - Four enterprises, including the BML, are publicly listed and must provide the same financial information to all shareholders; all PE provide audited annual financial statements to PEMEB (audited by private licensed auditors and the auditor general).
  - Before 2009 there was no separate level of subnational government or autonomous government agencies; local bodies are financed directly from central budget and cannot incur debt.
  - Budget document provides a cursory summary statement of fiscal risk and does not comment on risks related to public enterprises.
  - PEMEB produces an extensive annual report on PE risks and prospects for the president’s office, but this report is not publicly available and is not shared with parliament.
- Risks from planned privatization and other exposures:
  - Government plans to privatize many public enterprises which may change the risk profile.
  - Stated policy: natural monopolies and potential externalities handled through regulation, not ownership.
  - For many enterprises the government plans to retain a minority share and will continue to be exposed to risks.
  - Government guarantees and public-private partnership agreements may also pose considerable risks.

*Source: _cr10137 - 24.      Revenue collections in 2005 and 2007 were lower for a variety of reasons.*

### 47.      Parliament is currently considering a draft law on administrative

### _cr10137 - 47.      Parliament is currently considering a draft law on administrative

### Administrative decentralization: draft law under consideration
- Parliament is currently considering a draft law on administrative decentralization, which would establish a subnational government level in the Maldives.
- The country would be divided into seven regions, which would have elected assemblies and officials, and gradually take over fiscal responsibilities.
- These regions are likely to create fiscal risks for the central government in the future, but there is no basis to assess the magnitude of these risks at the moment.

### PI–10. Public Access to key fiscal information (Dimension: Scoring method M1)
- Recent budget documentation fulfils 3 of the 6 information benchmarks B
- Findings:
  - Annual budget documents are published on the website of the MOFT in late November, at the time of presentation to the parliament.
  - Budget documentation published in great detail in the local language (Dhivehi) and a summary version is made available in the local language and translated into English.
  - Budget documents now comprise three volumes of detailed budgetary information.
  - The budget is lodged in the National Library; budget speech is widely published and available on the MOFT’s website.
  - Over a hundred copies of the three volume budget books are printed and made available to the People’s Majlis, the President’s Office, and MDAs.
  - The budget is widely discussed in the media.
  - The MOFT does not publish in-year budget execution reports. Expenditure outturns are sent monthly by all budget spending agencies but are not consolidated at the detailed level and a financial report of execution of the budget is not produced or published.
  - The government does not produce end-of-year financial statements. Annual expenditure and revenue information for the prior fiscal year is published as outturn data at the time of publication of the following year’s budget.
  - Each audit report produced by the auditor general is published on the auditor general’s website; 21 audit reports are published (2 in English and 19 in the local language).
  - Contract awards over US$ 100,000 are not systematically published; no requirement in Chapter 8 of the government Financial Regulations for publication of contracts awarded.
  - Resources made available to individual service delivery units are partially published:
    - Individual schools or health centers that are separate budget entities are detailed in budget documents.
    - Smaller schools (which represent 48 percent of expenditure on schools) are grouped together in geographical zones and detailed information for these grouped schools is not published.
    - Hospitals and some health centers (63 percent of expenditure on individual hospitals and health centers plus medical services) are identified as separate budget accounts; remaining hospitals and health centers are budgeted under one line item (medical services) and entity budgets are not published.
    - At atoll level, some offices publish amounts received on notice boards, although this is not a requirement.
- Table 5. Access to Fiscal Information (availability summary from source):
  - 1 Annual Budget Documentation: Yes. Available on the MOFT website www.finance.gov.mv
  - 2 In-year execution reports: No. Not applicable
  - 3 Year-end financial statements 6 months after end of fiscal year: No. Not applicable
  - 4 External audit reports: Yes. The external audit reports are available on the Auditor General Offices’ website www.audit.gov.mv
  - 5 Contract awards: No. Contract awards are not required to be published and they are not.
  - 6 Resources available to primary service units: Yes. Budget documentation

### PI–11. Orderliness and participation in the annual budget process (Dimension: Scoring method M2)
- Scores:
  - (i) Existence and adherence to a fixed budget calendar A
  - (ii) Guidance on the preparation of budget submissions D
  - (iii) Timely budget approval by the legislature A
- Findings:
  - A clear annual budget calendar exists and is published in the budget documentation.
  - Calendar allows MDAs seven to eight weeks from receipt of the budget circular to presentation of estimates to MOFT.
  - Deadlines: July 31 for recurrent expenditures and August 31 for capital expenditures.
  - The budget circular effectively allows budget agencies an extra month for recurrent by stating that if submission is not received by August 31, the MOFT will prepare the budget for the MDA.
  - Vast majority of MDAs comply with the later deadline, with only one or two occasional offenders.
  - The budget circular has been issued to MDAs in early June for the past four years: 2009 dispatched by fax on June 8, 2008 on June 4, and 2007 on June 5.
  - The last circular included expenditure guidelines constraining expenditure increases to 5 percent over last year’s budget for both capital and recurrent expenditures; most units do not comply and propose budgets much higher than the limit.
  - Budget estimates are reviewed and approved by cabinet only after completion in detail by MDAs, constraining cabinet’s ability to make adjustments.
  - The legislature has approved the budget before the start of the fiscal year during the last three years; Section 78 of the constitution and section 32a of the Public Finance Law require submission at least one month before the financial year and this deadline has been complied with in each of the past three years.

### PI–12. Multiyear perspective in fiscal planning, expenditure policy, and budgeting (Dimension: Scoring method M2)
- Scores:
  - (i) Multiyear fiscal forecasts and functional allocations D
  - (ii) Scope and frequency of debt sustainability analysis D
  - (iii) Existence of costed sector strategies D
  - (iv) Linkages between investment budgets and forward expenditure estimates D
  - Overall: D
- Findings:
  - For the past two fiscal years, no forward estimates of fiscal aggregates have been undertaken; the government has never itself undertaken a Debt Sustainability Analysis (DSA).
  - DSAs were undertaken by the IMF (2008 Article IV Consultation) and the ADB in 2006 using government data without direct involvement of MOFT External Resources Management Department staff; results are not used to influence policy on medium term borrowings.
  - GoM acknowledges relevance of DSA and plans to undertake the analysis in the future with TA.
  - Sector strategies or master plans exist for major sectors (education, health, tourism) but none have substantially complete costing of investments and recurrent expenditure.
  - Plans under the new medium-term budget and new government manifesto (replacing the 2006-11 seventh national development plan) to develop costed sector strategies consistent with fiscal forecasts; the 2009 budget was not based upon costed sector strategies.
  - Budgeting for investment and recurrent expenditure for the 2009 budget were separate processes with weak linkages:
    - Investment budget preparation had been undertaken by the ministry of planning; recurrent budget by MOFT.
    - Planning guidelines required ministries to state recurrent implications of capital programs, but this was not routinely complied with or systematically enforced.
    - In late 2008, planning function transferred to MOFT as a National Planning Department; capital estimates to be prepared by the budget department of MOFT from 2009.
    - Full integration of capital and recurrent budgeting did not occur for the preparation of the 2009 budget.
  - Government is working towards development of a MTEF:
    - Budget estimates for 2009–11 were approved by parliament, including base budget for 2009 and forecasts for the next two years at a detailed level.
    - From 2010 onwards forward estimates will be prepared for three years with links between the budget and the multiyear estimates. Annual budget ceilings will be clearly set out.

### PI–13–PI–15. Predictability and control in budget execution; tax transparency and collection
- PI–13. Transparency of taxpayer obligations and liabilities (Dimensions: Scoring methodology M2)
  - Scores:
    - (i) Clarity and comprehensiveness of tax liabilities B
    - (ii) Taxpayers’ access to information on tax liabilities and administrative procedures B
    - (iii) Existence and functioning of a tax appeals mechanism D
  - Findings:
    - Main taxes (import duty, tourism tax, bank profit tax) are clearly defined, relatively simple, with little scope for discretion.
    - Tourism tax is a simple “bed tax,” calculated on the number of overnight stays per resort.
    - Bank profit tax is limited to the domestic banking sector; could potentially be more comprehensive.
    - All three taxes are collected on the basis of self-assessment; customs still performs full documentary and physical inspections of all imports and does not yet rely on ex post audit (which it does perform).
    - Main discretionary power: President can waive import duties for any designated importer; in practice exemptions for foreign investors, tourism industry and government offices (mostly on construction material).
    - Customs keeps track of import duties waived on a monthly basis.
    - Tax laws are accessible but not in one place and not always user-friendly; published in part on respective tax administrators’ websites or available freely on request.
    - Administration:
      - Customs administers import duty and has a website with relevant information.
      - Department of Inland Revenue (DIR) administers the bank profit tax and shares responsibilities with the ministry of tourism on the tourism tax.
      - DIR also shares responsibilities for a number of smaller taxes and many fees/charges with sectoral ministries, potentially confusing taxpayers.
      - Information from customs and ministry of tourism is provided mostly in the local language.
    - Appeals:
      - None of the existing taxes has a clearly defined, formal appeals mechanism.
      - Taxpayers can complain to tax administrators but there is no clearly regulated response mechanism.
      - No independent tax appeals tribunal; customs has an internal tribunal not regulated by law and has included foreign experts in its commission on valuation disputes.
      - Recourse is the regular court system, which is long and protracted.
    - Legislative reforms:
      - New tax administration law submitted to the People’s Majlis would establish an independent revenue authority, enhance powers (taxpayer audit, fines), and establish a formal independent appeals tribunal. Timing of enactment is uncertain.
      - New customs law submitted to parliament aims to bring customs valuation and clearance procedures up to international standards and treaty obligations and to establish an independent customs tribunal.
- PI–14. Effectiveness of measures for taxpayer registration and assessment (Dimensions: Scoring methodology M2)
  - Scores:
    - (i) Controls in the taxpayer registration system C
    - (ii) Effectiveness of penalties for non-compliance with registration and declaration obligations C
    - (iii) Planning and monitoring of tax audit and fraud investigation programs B
    - Overall: C+
  - Findings:
    - Taxpayer databases exist for major taxes but are not linked to each other or to other government databases.
    - DIR has unique taxpayer identification numbers for taxpayers and taxes it administers; not linked to business license registrations by the ministry of economy and trade.
    - Customs has its own registration system not linked to the ministry of economy and trade’s trade license registration system.
    - Penalties for noncompliance are limited and not always imposed; customs faces a large number of declaration errors (reportedly on 20 percent of the total).
    - Penalties imposed only if intent to defraud is provable; administrative penalties hardly imposed for tourism tax; penalties are generally quite low and not related to value of transgression.
    - Tax audits:
      - Customs conducts substantive audits; has a unit of 14 staff performing ex post audit controls on cleared transactions and some performance audits on internal processes; audits are planned, risk-based, and reports are shared with the auditor general.
      - DIR mostly limits itself to desk checks and does not perform ex post audits with regularity.
      - New legislation would increase powers of customs and inland revenue to perform audits on taxpayers’ premises and inspect accounts and financial statements.
- PI–15. Effectiveness in collection of tax payments (Dimensions: Scoring methodology M1)
  - Scores:
    - (i) Collection ratio for gross tax arrears (average of the last two fiscal years), and/or significance of total amount of tax arrears A
    - (ii) Effectiveness of transfer of tax collections to the treasury by the revenue administration C
    - (iii) Frequency of complete accounts reconciliation between tax assessments, collections, arrears records, and receipts by the treasury A
  - Findings:
    - Customs practice and the dominance of customs revenues underpin stronger performance on audit and collection measures, while weaknesses remain in transfer effectiveness and reconciliation processes for some administrators.

*Source: _cr10137 - 47.      Parliament is currently considering a draft law on administrative (IMF staff report excerpt).*

### 70.      Tax arrears are, reportedly, less than 2 percent of annual tax collection, and

### _cr10137 - 70.      Tax arrears are, reportedly, less than 2 percent of annual tax collection, and

### Tax arrears, collections, and reconciliation
- Tax arrears are, reportedly, less than 2 percent of annual tax collection, and collections of liabilities take place within a relatively short time-span.
- Reasons cited:
  - Main taxes have clear and simple tax bases, leading to few disputes over assessment.
  - Import duties are cleared only after payment is received; bounced checks lead to immediate blacklisting of the importer.
  - Bank profit tax targets a very small and professional group of five domestic banks.
  - Tourism sector is limited in number, professional, and licenses can be revoked if taxes are due.
- Scoring:
  - Tax arrears dimension: A.
  - Reconciliation of tax assessments, collections, arrears, and transfers: monthly reconciliation reportedly within 15 days of the end of the month; reconciliation dimension: A.
- Systems:
  - Customs process supported by the ASYCUDA software package.

### PI–16. Predictability in the availability of funds for commitment of expenditure
- Dimension scores (Scoring methodology M1):
  - (i) Extent to which cash flows are forecast and monitored: C.
  - (ii) Reliability and horizon of periodic in-year information to MDAs on ceilings for expenditure commitment: D.
  - (iii) Frequency and transparency of adjustments to budget allocations, which are decided above the level of management of MDAs: B.
  - Overall reported score: D+.
- Findings on cash forecasting and monitoring:
  - Treasury makes 12-month cash in- and outflow forecasts based on past seasonal patterns; forecasts are annual and not updated periodically.
  - Treasury does not use expenditure planning information from line ministries.
  - Treasury produces a monthly cash flow (and balance) report.
  - The MMA (government’s banker) has accommodated cash flow shortages via T-bill tap issuance, access to an overdraft facility (the ways & means account), and direct short term loans.
  - Treasury does not provide in-year cash flow updates to the MMA; in-year liquidity forecasting left to the central bank.
  - Scoring for cash flow forecasting and monitoring: C.
- Expenditure control and release practices:
  - MOFT can delay MDA spending when the treasury approaches its agreed overdraft limit at the MMA.
  - Budget is released in full for non-discretionary expenditure; substantial part of discretionary expenditure released only after budget office approval.
  - Commonly frozen expenditure categories: investment projects, capital expenditure, travel, scholarships.
  - Reliability and horizon for expenditure commitments scored: D.
- In-year adjustments:
  - Virements requested by MDAs are very frequent; virements imposed by MOFT or cabinet infrequent.
  - Only 2005 and 2008 had in-year budget adjustments imposed by the center of government (2005 supplementary budget after the Tsunami; 2008 sizeable reduction in mostly discretionary spending agreed in cabinet and via bilateral negotiations without parliamentary notification or approval).
  - Transparency on such cut-backs could be improved. Frequency/transparency dimension scored: B.
- Planned improvements:
  - Budget release policy to become more transparent and predictable under the new PAS.
  - Quarterly disbursement of budget authorization has been discussed.
  - Full roll-out of PAS will take time; MOFT advised to start upgrading cash planning and management capacities prior to full PAS implementation.

### PI–17. Recording and management of cash balances, debt, and guarantees
- Dimension scores (Scoring methodology M2):
  - (i) Quality of debt data recording and reporting: C.
  - (ii) Extent of consolidation of the government’s cash balances: D.
  - (iii) Systems for contracting loans and issuance of guarantees: C.
  - Overall reported score: D+.
- Debt recording and management:
  - Domestic and foreign debt recorded and managed separately.
  - External debt consists solely of project-related foreign currency loans, both concessional and nonconcessional.
  - MOFT carries out back-office debt management; line ministries and the president’s office play substantial roles in debt contracting and project definition.
  - Minister of finance signs or co-signs all loan agreements.
  - Middle office (strategy, planning, analysis) appears underdeveloped.
  - External debt reported and reconciled on an as-needed basis, but at least annually; external debt reports contain little analysis.
  - Summary information on external debt indicators is produced in the budget.
- Institutional arrangements and systems:
  - External Resources Management Department (EMRD) within MOFT responsible for external debt and external grant management; Treasury responsible for domestic debt.
  - EMRD planning to start producing quarterly external debt reports this year.
  - EMRD uses the CSDRMS software package.
  - Domestic debt records nominally the responsibility of the treasury but maintained in practice by the MMA; domestic debt is not reported on.
  - Debt recording and reporting dimension scored: C.
- Consolidation of cash balances and cash accounts:
  - Treasury operates a main payment and overdraft account and various trust fund accounts at the MMA.
  - EMRD monitors project accounts for loan disbursements and donor grants.
  - Treasury keeps track of MOFT accounts and major revenue accounts held by the DIR and customs service.
  - Revenue accounts settled with the main treasury account monthly; monthly cash report produced for internal purposes; cash figures not published publicly.
  - Historically most other cash balances of government departments and atoll offices were not monitored by the treasury.
  - Government institutions in Male keep accounts in the MMA and maintain budget accounts used for decentralized budget execution; these were zero-balanced with the payment and overdraft account daily.
  - Expenditure and trust fund accounts have accumulated considerable liquidity over the years.
  - Atoll offices and other entities outside Male hold bank accounts at the Bank of Maldives Ltd (BML), a domestic commercial bank 51 percent owned by government.
  - Treasury does not keep track of transactions through accounts outside Male and does not require reporting when they are opened.
  - Budget advances to outside Male entities were in the past made quarterly; MOFT did not verify actual use of advances although monthly expenditure reports were submitted.
  - Both on- and outside-Male entities have largely ignored regulation requiring unspent budget funds to be returned to the treasury’s main account after the end of the budget year.
  - Recent centralization of payments: check books of budget, expenditure and trust fund accounts of MDAs on Male transferred to the treasury; accounts not yet closed and cash accounts not swept into the main government account; atoll based accounts remain outside treasury control.
  - Monitoring and consolidation of cash balances scored: D.
- On-lending and guarantees:
  - On-lending and issuance of guarantees managed by MOFT; PEMEB within MOFT processes on-lending and nondomestic guarantees to SOEs; domestic currency guarantees handled by the treasury.
  - Process of on-lending and guarantee issuance well-regulated but no clearly specified policy or criteria defining when on-lending or guarantees are appropriate.
  - No annual or absolute ceiling set for on-lending or guarantees.
  - On-lending is reported as expenditure in the budget; government guarantees are not reported on.
  - Systems for contracting loans and issuance of guarantees scored: C.
- Expected improvements:
  - Cash monitoring expected to improve substantially once the new PAS is fully rolled out.
  - PAS will route all payments to the treasury and effectuate payment from a central payment account; implementation expected to coincide with bringing remaining MDA and atoll accounts under treasury control and integrating them into a TSA structure.
  - A first step in activating PAS was taken on May 1, 2009; it has effectively integrated all budget accounts into the TSA and advances to atolls are being provided on a monthly basis.
  - Centralization of payments since December this year of Male MDA spending has made it impossible for departments to further transfer liquidity from their budget accounts to their expenditure accounts.

### PI–18. Effectiveness of payroll controls
- Dimension scores (Scoring method M1):
  - (i) Degree of integration and reconciliation between personnel records and payroll data: D.
  - (ii) Timeliness of changes to personnel records and the payroll: B.
  - (iii) Internal controls of changes to personnel records and the payroll: C.
  - (iv) Existence of payroll audits to identify control weaknesses and/or ghost workers: C.
  - Overall reported score: D+.
- Payroll system and processes:
  - Partially decentralized payroll system: MDAs prepare staff budgets, compile salary lists and allowance requests, and process payroll for their employees.
  - Each MDA keeps its own personnel and payroll records; treasury checks payment voucher (salary sheet) and sends a request to the MMA to transfer payments to individual bank accounts.
  - Salary payments typically by bank transfer; where banks are not present payments made in cash via local accounts.
  - For atoll offices and non-Male staff, treasury sends a lump sum check to BML to credit the entity’s account; entity draws the check and pays staff.
  - MDA staff lists are sent to MOFT for budget preparation; reconciliation between establishment list, MDA list and payroll is undertaken annually before budget preparation.
- Timeliness and coverage:
  - Personnel records generally updated monthly; updates can take up to three months in some cases.
  - Reports of salary delays since introduction of central payments for MDAs in Male due to rejection of payments by treasury and late receipt of requests from some atolls.
  - In ministries of health and education, relocation of doctors and teachers between islands and atolls leads to delays in amending records and payment schedules, particularly for staff on temporary contracts, representing 16 percent of the establishment; no quantification of extent of these delays provided.
- Controls and audits:
  - Auditor General audits MDAs based on an annual audit plan; service delivery units audited on a sample basis.
  - Within each audit a sample of 30 payees on the payroll will be tested; further samples tested if irregularities found.
  - No issues related to ghost workers reported; major weakness reported relates to inflated overtime claims indicating lack of control at MDA or facility level.
  - A higher score would require regular audits of the payroll function.
- Personnel systems and coverage:
  - Civil Service Commission (CSC) formed February 2009; responsible for endorsement of appointment, recruitment, promotion, demotion, and retirement of staff (except autonomous agencies).
  - Approximately 30,000 staff on the establishment.
  - Detailed central personnel records kept on a database with controlled access and procedures manual for changes.
  - In principle each employee has a post number and unique record number; MOFT received reports that post numbers have been duplicated.
  - 6,000 temporary posts on the establishment are not currently captured, representing a control weakness.
  - “Uniformed services” (military and police) are not included in the database.
  - Around 250 political appointees managed through the president’s office.
  - Shortfalls in coverage of payments made, particularly allowances, which may be a very substantial part of total remuneration.
- Systems development:
  - PAS system has a payroll module planned to be rolled out to MDAs by the end of 2010; will allow greater controls of transactions between MDAs and treasury.
  - Unclear whether CSC will use PAS functionality to capture and store establishment data.

### PI–19. Competition and value for money in procurement controls
- Dimension scores (Scoring method M1):
  - (i) Use of open competition for award of contracts that exceed the nationally established monetary threshold for small purchases: D.
  - (ii) Justification for use of less competitive procurement methods: C.
  - (iii) Existence and operation of procurement complaints mechanism: C.
  - Overall reported score: D+.
- Procurement thresholds and procedures (as per chapter 8 of the financial regulations):
  - Small purchases threshold: tenders below MLRF 1,000.
  - Values below MLRF 1,000: can be bought from the market directly without competition.
  - Values between MLRF 1,000 and MLRF 25,000: at least three quotations or three proposals are to be received/invited before final selection.
  - Values more than MLRF 25,000: invitations should be published, proper evaluations conducted, and records kept; contract award will be published.
  - For all procurement below MLRF 1.5 million: procurement is carried out by line agencies and ministries themselves.
  - For all procurement above MLRF 1.5 million: the Tender Evaluation Section (TES) of the MOFT conducts procurement on behalf of spending agencies/ministries.
- Assessment:
  - The regulations pave the way for open competition as the preferred option for all procurement above the small purchases threshold.

*Source: _cr10137 - 70.      Tax arrears are, reportedly, less than 2 percent of annual tax collection, and*

### 94.      As TES does not carry out a monitoring function of the government

### _cr10137 - 94.      As TES does not carry out a monitoring function of the government

### Procurement practices and use of open competition
- TES does not carry out a monitoring function of government procurement; data is insufficient to estimate the number or the percentage of contracts awarded on an open competition basis with certitude.
- Complaints received by TES indicate open competition is not always effectively used by procurement performed at the agency level.
- All government procurements of higher value tenders above the MLRF 1.5 million threshold go through the Tender Evaluation Board (TEB), appointed by the president; MOFT acts as the administrator to TEB.
- TES of the MOFT carries out procurement functions for the government and uses open competition as the basis for awarding contracts.
- Publication of invitations:
  - Previously published in three daily local newspapers, broadcast by national radio, and web-hosted on the MOFT website.
  - Due to budgetary constraints, invitations are no longer published in newspapers; invitation is now published on the MOFT website and placed on the MOFT notice board.
  - For international tenders, invitations are also sent to Maldivian embassies located in foreign countries; it is not clear through which media the foreign embassies publish these invitations.
- Bidding periods:
  - Domestic bidding: 30–45 days.
  - International bidding: 45–60 days.
- Pre-bid meetings are regularly conducted; tenders are publicly opened in the presence of bidders, client and observers.
- Shortened durations permitted for items such as medical consumables and life-saving items justified by clause 8.06 of chapter 8 of the new financial regulation.
- Selection methods: least-cost selection for goods and works; QCBS commonly used for consultancy.

### Justification for use of less competitive procurement methods (chapter 8 of financial regulation)
- Low-value purchases (clause 8.09):
  - If purchase value < MLRF 1,000 the items could be bought from the market.
  - If purchase value > MLRF 1,000 and < MLRF 25,000 three quotations should be taken and the items bought from the lowest bidder.
- Procurement of goods and services (clause 8.14):
  - If value of the work > MLRF 25,000 minimum three parties required to submit bidding documents; project awarded to the most competitive bidder.
  - A record must be maintained explaining criteria and basis on which the bidder was selected.
- Emergency and immediate works (clauses 8.06 and 8.21):
  - Clause 8.06: an item not in the budget can be procured only when not having such item would affect a person’s life, or will have dampening impact on the basic service provided to the general public.
  - Clause 8.21: immediate works contract may be entered into without delay when necessary due to the nature of the work; quality and satisfaction of both parties must be ascertained.
- Chapter 8 is limited in describing scenarios such as direct contracting or single sourcing; more elaboration is required to address less competitive procurement methods.
- Due to lack of data it is not possible to ascertain whether justifications have always been given for choosing less competitive methods of procurement; a score of C is given to this dimension.

### Existence and operation of procurement complaints mechanism
- There is no independent complaint mechanism for bidders to submit complaints regarding procurement issues.
- Absence of procurement legislation makes interpretation of procurement rules and understanding practices difficult.
- Contractual disputes during implementation are not properly addressed due to lack of an effective mechanism; lack of incentive for compliance or proper implementation.
- Common practice: bidders submit complaints to tender evaluation section, which are then taken to TEB; most complaints have gone through TEB and have been resolved.
- Conflict of interest: TEB both awards contracts (based on TES recommendations) and reviews/decides logged complaints — no independent review mechanism exists.
- This procurement complaints dimension is graded C.

### PI–20. Effectiveness of internal controls for non-salary expenditure
- Dimension (Scoring method M1) and Scores:
  - (i) Effectiveness of expenditure commitment controls: D
  - (ii) Comprehensiveness, relevance, and understanding of other internal control rules and procedures: C
  - (iii) Degree of compliance with rules for processing and recording transactions: D
  - Overall (stated): D+
- Key facts and timeline:
  - Financial regulations published by the audit office in 2002; amended with additional procedures for procurement and payments in 2007.
  - Full implementation of the Public Finance Act (Law No 3/2006) in January 2009 necessitated further amendments issued by the minister of finance in February 2009 (applicable at time of assessment).
  - Amendments include provisions for centralized payments system introduced in November 2008.
  - Assessment based on the 2007 amended version (latest English version not available at time of assessment).
- Weaknesses in regulations:
  - Weak on specifying levels of approval and authorities; segregation of duties discussed in principle but clear roles/responsibilities not framed.
  - No authority specified for sale of government assets apart from “discussions with” the president’s office; no guidance as to accounting for such assets.
  - No mention of controls over IT systems (relevant as PAS is rolled out).
- Commitment control and monitoring:
  - No formal commitment control system that records, reports, monitors, or controls spending commitments against approved budgets and cash availability.
  - MDAs required to control expenditure within individual budgets (s8.04 of the Financial Regulations) but no central monitoring; anecdotal evidence that virement authorization from MOFT is sometimes sought retrospectively.
- Monitoring adherence weak due to lack of internal audit; assessment largely based on anecdotal evidence.
- Auditor General reports a low level of compliance with rules or circumvention of regulations; partly due to over-bureaucratization and use of “emergency measures” for advantage.
- PAS rollout:
  - Computerized PAS transaction processing at the treasury using central payments and general ledger modules commenced in May 2009.
  - System to be rolled out on a phased basis beginning with MOFT.
  - PAS has built-in internal controls including a commitment control module; expectation of measurable increase in this indicator after 2010.

### PI–21. Effectiveness of internal audit
- Dimensions (Scoring methodology M1) and Scores:
  - (i) Coverage and quality of internal audit function: D
  - (ii) Frequency and distribution of reports: D
  - (iii) Extent of management response to internal audit findings: C
  - Overall (stated): D+
- Observations:
  - Internal Audit (IA) is undeveloped in the Maldives; no IA legislation or standards exist.
  - Treasury has an embryonic IA unit that investigated processes in the DIR and MOFT’s relations with SOEs; staff largely used for pre-audit checks of payment orders as managers left for other employment.
  - Some larger line ministries (e.g., education) have internal audit units resembling inspection activities.
  - Customs service has the most developed IA capacity with a unit of around 14 staff performing ex post audit checks and system reviews; customs IA shares reports with the auditor general.
  - IA reports are infrequent but have some impact in customs (retraining of staff, changes to business processes).
  - Limited use of IA across government results in low scores.

### E. Accounting, Recording, and Reporting — PI–22. Timeliness and regularity of accounts reconciliation
- Dimensions (Scoring method M2) and Scores:
  - (i) Regularity of bank reconciliations: B
  - (ii) Regularity of reconciliation and clearance of suspense accounts and advances: D
  - Overall indicator rating: C (as stated)
- Requirements and practices:
  - Financial regulations require ministries and departments to reconcile their books and the balance of the related MMA account on a monthly basis.
  - There are 1,623 government bank accounts in the central bank and a significant, but unknown, number in various other banks.
  - Government bank accounts categories: budget accounts (used by MDAs in Male to execute the budget), expenditure (office), revenue, trust fund, and other accounts.
  - Entities in Male hold all accounts in MMA; most entities outside Male have no budget accounts at MMA and only hold expenditure, revenue, trust fund, and other accounts at the BML.
- Changes since November 2008:
  - New government implemented centralized payment processing in MOFT by withdrawing check signing rights of spending agencies based in Male; this added significantly to public finance division workload and disrupted accounting and reconciliation early in the year.
  - Prior to November 2008, budget and revenue accounts at MMA were generally reconciled monthly; funds were withheld from spending agencies that did not submit monthly reconciliations with monthly expenditure statements.
- Single-entry accounting limitations prior to PAS:
  - Single entry system limited reconciliation effectiveness; absence of self-balancing ledger system created uncertainty over appropriate recording.
  - Transfers from budget accounts to other accounts were registered as expenditure; reconciliation of nonbudget spending accounts generally did not occur except in principle at year end.
- Reconciliation practices:
  - Reconciliation and clearance of suspense accounts generally do not take place in practice.
  - Atoll-based government entities generally report expenditure monthly but do not reconcile all accounts they hold; MDAs in Male have tended not to reconcile expenditure/office or trust fund accounts.
- Subratings and conclusions:
  - i. Bank reconciliation for all budget-funded bank accounts take place on a monthly basis. Subrating B.
  - ii. Reconciliation and clearances of suspense accounts and advances generally does not take place as required. Advances to atoll-based entities are treated as expenditures. Subrating D.
  - Overall indicator rated C according to the framework.

### PI–23. Availability of information on resources received by service delivery units
- Dimension (Scoring method M1) and Score:
  - (i) Collection and processing of information to demonstrate resources actually received by most common front-line service delivery units: A
- Findings:
  - Resources received by individual health centers and schools are published in the budget in the majority of cases.
  - Fifty-two percent of schools expenditure is available for individual schools in the budget; remaining schools expenditure is clustered on a zonal basis in the budget.
  - Health centers and hospitals are either budgeted separately (in 63 percent of cases in the 2008 budget) or appear under the line medical service in the budget.
  - Ministries can make detailed information available for each school or health center since each reports monthly directly to the respective “parent” ministry (ministries of health and education) to the audit office as required by the public finance law.
  - Revenues collected locally are reported as trust fund revenues.

### PI–24. Quality and timeliness of in-year budget reports
- Dimensions (Scoring method M1) and Scores:
  - (i) Scope of reports in terms of coverage and compatibility with budget estimates: C
  - (ii) Timeliness of the issue of reports: A
  - (iii) Quality of information: C
  - Overall rating: C+
- Reporting requirements and practice:
  - Each budget organization required to send monthly expenditure report within 15 days of month end.
  - Budget entities not submitting monthly expenditure reports on time do not get the next tranche of release, ensuring prompt reporting by the finance department.
  - Reports usually cover month’s expenditure, year-to-date expenditure, and net available budget balance; consolidated and a month-end budget-to-actual report with cash flow statement sent to the president’s office, usually within four weeks of the end of the month being reported.
  - Compiling monthly expenditure reports is manual and laborious; quality issues arise due to manual interventions.
  - Under PAS, consolidation of monthly budget-to-actual expenditure reports intended to be fully computerized.
  - Monthly expenditure reports prepared according to economic classification but do not provide program or project details.
  - Implementation of PAS and new budget chart of accounts (put into practice for the first time in FY 2009) will enable data accounting to spending unit, organization, economic classification, and program/project classification.
- Subrating details:
  - i. Classification allows direct comparison to the original budget but at a very aggregate level; expenditure covered at payment stage only. Subrating C.
  - ii. Reports prepared monthly and issued within four weeks of end of period. Subrating A.
  - iii. Spending agencies that do not submit reports within 30 days are left uncovered in the report; this is not highlighted in the overall consolidated report. In-year budget reports do not provide program and/or project classification of expenditures. Subrating C.

### PI–25. Quality and timeliness of annual financial statements
- Dimensions (Scoring method M1) and Scores:
  - (i) Completeness of the financial statements: D
  - (ii) Timeliness of submission of the financial statements: D
  - (iii) Accounting standards used: D
  - Overall (stated): D
- Findings:
  - Fully fledged government financial statements were not prepared and published in Maldives until now.
  - The Annual Budget presented to the Peoples Majlis each year presents a “budget to actual” utilization report, usually within 12 months of the end of the fiscal year; this cannot be considered formal government financial statements but rather spending estimates due to anomalies:
    - (i) Keeping the budget year open for a period as long as nine months (in cases of capital expenditures) after the close of the fiscal year.
    - (ii) Adjustments made by the budget department while consolidating spending units’ annual expenditure reports without making adjustments in the books maintained by spending agencies.
    - (iii) The “budget to actual” report is not submitted to the audit office for audit.
  - There were no specific accounting standards for government budget reports.

*Source: _cr10137 - 94.      As TES does not carry out a monitoring function of the government*

### 119.     The Law on Public Finance 2006, which became effective from FY 2009,

### _cr10137 - 119.     The Law on Public Finance 2006, which became effective from FY 2009,

### Financial reporting and audit timetables (PI-25)
- The Law on Public Finance 2006 (effective from FY 2009) requires:
  - Accountable officers to prepare and submit agencies’ overall financial statements to the auditor general within three months after the end of the financial year.
  - The financial controller to prepare and submit the State’s financial statements within the same three-month timeframe.
  - The auditor general to audit the financial statements and submit his report to the accountable officer/financial controller within two months from the date of receiving the report.
  - Audited statements to be submitted to the parliament and the president within 14 days of receiving the auditor general’s report.
- Implementation status:
  - A comprehensive accounting software package procured with WB assistance; system going live in phases starting from May 2009 and targeted to be fully operational in FY 2010.
  - First fully fledged financial statements to be prepared for FY 2009 as required under the 2006 law.
- PI-25 subratings and overall:
  - (i) A consolidated government statement is currently not prepared, but will be prepared for FY 2009 as required under the 2006 public finance law. Subrating D.
  - (ii) These financial statements will be submitted for audit for first time for FY 2009, as required under the 2006 public finance law and the 2007 public audit law. Subrating D.
  - (iii) Before 2009, there were no specific accounting standards for government budget reports. Subrating D.
  - Overall rating assigned: D.

### External scrutiny and audit (PI-26, PI-27, PI-28)
- PI–26: Scope, nature, and follow-up of external audit — Dimensions and scores:
  - (i) Scope/nature of the audit performed (including adherence to auditing standards): C
  - (ii) Timeliness of submission of audit reports to legislature: B
  - (iii) Evidence of follow-up on audit recommendations: D
  - Overall score presented: D+
- Institutional changes and independence:
  - Until April 2007, the AGO reported to the president; auditor general appointed by the president and served at pleasure of the president.
  - Audit act of April 2007 and subsequent constitutional amendments established AGO as the supreme audit institution:
    - Auditor general appointed on the advice of the People’s Majlis.
    - Fixed term of seven years, renewable for a single term of not more than five years.
    - Removal only by majority vote of the People’s Majlis.
    - Auditor general empowered to independently hire, fire, promote, set pay scales for staff, and set budget and annual work plans to be submitted to the PAC 90 days prior to the beginning of each fiscal year.
  - First independent auditor general appointed on January 16, 2008.
- Audit scope and activity after reformation:
  - New strategic audit plan included all government MDAs, the president’s office, president’s palace, police, parliament, courts of law, funds provided to political parties, high commissions, atolls offices, schools, hospitals, special projects, statutory authorities, independent commissions, and all 25 SOEs — totaling some 37 separate central government audit entities in the first strategic audit plan.
  - For each of the 62 audit entities identified in the strategic audit plan, high-level risk areas were identified and performance audits were carried out.
  - Nature of audit expanded from transactions-level compliance audits to include performance audits.
- Outputs, publicity, and follow-up:
  - By the first week of May 2009, 17 audit reports had been issued.
  - All audit reports were posted on the AGO website as soon as they were tabled in the People’s Majlis.
  - Auditor general held two press conferences in October 2008 to explain AGO’s role.
  - Formal responses to audit reports have not routinely or consistently been made to date, but audit reports had considerable impact:
    - Three government ministers resigned following PAC enquiries into a June 2008 auditor general report disclosing their role in presenting an unrealistic and misleading budget estimate.
    - An audit report on a share offering by Maldives Tourism Development Corporation led to referrals to the anti-corruption commission.
    - Other recommendations (e.g., strengthen the TEB and procurement procedures) expected to take longer to show impact.
  - For the year ending December 31, 2009, the law requires unaudited financial statements to be presented to the auditor general within three months of the end of the fiscal (calendar) year; the auditor general shall submit his audit report within two months of receipt.
- PI–27: Legislative scrutiny of the annual budget law — Dimensions and scores:
  - (i) Scope of the legislature’s scrutiny: B
  - (ii) Extent to which the legislature’s procedures are well-established and respected: C
  - (iii) Adequacy of time for the legislature to provide a response to budget proposals both the detailed estimates and, where applicable, for proposals on macro-fiscal aggregates earlier in the budget preparations cycle: C
  - (iv) Rules for in-year amendments to the budget without ex ante approval by the legislature: D+
- Key procedural features and practices:
  - In each of the three most recent years, the minister of finance presented the annual appropriation bill in the last week of November for the fiscal year commencing January 1, providing the legislature with approximately one month to respond.
  - No standing committee of the People’s Majlis reviews the budget; an ad hoc Budget Review Committee (recently 15 members) is elected each year when the appropriation bill is tabled.
  - No formalized procedures for review of the budget estimates, no expert research support for the committee, and no mechanism for public consultations on the budget.
  - The People’s Majlis debates and may modify a budget estimate without introducing a question of confidence in the government.
  - The People’s Majlis provides authorization for an aggregate budget, allowing the ministry of finance to make reallocations during the year without ex ante approval by the legislature; MDAs must obtain prior MOF approval for any adjustments to their budgets.
  - MOF is unclear in practice about when to present supplemental budget estimates; revised budget estimates have not been routinely presented to the legislature.
- PI–28: Legislative scrutiny of external audit reports — Dimensions and scores:
  - Timeliness of examination of audit reports by the legislature: D
  - Extent of hearing on key findings undertaken by the legislature: C
  - Issuance of the recommended actions by the legislature and implementation by the executive: D+
- Historical PAC engagement and outcomes:
  - In 2007, PAC provided AGO with four days’ notice to review audited financial statements of the national shipping line; AGO prepared a draft PAC report; PAC report discussed in the People’s Majlis for approximately 30 minutes and recommended restructuring; the company’s debt was restructured later.
  - Two June 2008 audit reports were the subject of PAC hearings the same month; auditor general provided expert testimony and three cabinet ministers were summoned; PAC prepared a report that was discussed in the Majlis for approximately 30 minutes; three cabinet ministers resigned following the PAC hearings.
  - These instances, while timely and effective, represented scrutiny of only three audit reports.

### Donor practices (D-1, D-2, D-3)
- D–1: Predictability of direct budget support — Dimensions and scores:
  - (i) Annual deviation of actual budget support from the forecast provided by the donor agencies at least six weeks prior to the government submitting its budget proposals to the legislature: N/A
  - (ii) In-year timeliness of donor disbursements: N/A
- Recent donor support:
  - Maldives did not receive any significant budget support before 2009, with one minor exception in 2005 when the government of India provided a grant of US$ 2.4 million.
  - In 2009, the government of India will provide a loan of US$ 100 million; half of this will be for budget support, whereas the other half will finance imports from India. According to the Maldives authorities, the budget support portion of this loan was disbursed as planned.
- D–2: Financial information provided by donors for budgeting and reporting on project and program aid — Dimensions and scores:
  - (i) Completeness and timeliness of budget estimates by donors for project support: D
  - (ii) Frequency and coverage of reporting by donors on actual donors flows for project support: D
- Donor forecasting and reporting performance:
  - The six largest donors (grants and noncommercial loans) during 2006-08 were the European Investment Bank, the Islamic Development Bank, the ADB, the WB, Japan, and Saudi Arabia.
  - Not all major donors provide forecasts on a timely basis; some smaller donors fail to provide forecasts.
  - A rating better than “D” would require that all the five largest donors provide complete budget estimates at least three months before the fiscal year; this is not the case.
  - Reporting on disbursements: lending institutions generally provide reports on project loans; reporting on project grants is variable. ADB and the WB reports are available online; others provide data electronically or by mail; a number of small donors do not provide regular reporting.
  - Over 2006–08, regular and timely reports were received for projects amounting to 25 percent of total disbursements in 2006, 30 percent in 2007 and 35 percent in 2008.
- D–3: Proportion of aid that is managed by use of national procedures — Dimension and score:
  - (i) Overall proportion of aid funds to central government that are managed through national procedures: D
  - External grants and loans are generally managed through donor procedures; the government lacks mechanisms meeting donors’ requirements for managing projects through national procedures. A score better than “D” would require at least 50 percent of aid funds managed through national procedures.

### Government reform process and the PAS project
- Recent PFM reforms underway:
  - Modernizing budget management, public accounting, fiscal reporting and cash management via an integrated financial management information system (IFMIS) — the PAS project — guided by WB-funded consultants and an IMF treasury advisor.
  - WB project upgrading AGO processes and institutional structure.
  - Budget office introducing medium-term fiscal and budgetary projections.
  - Modernization of laws on public finance and the auditor general.
  - Capacity building and modernization of the customs service; new laws on customs and tax administration to widen structural reform scope.
- Expected impacts of the PAS project:
  - Improvements anticipated in arrears monitoring (PI-4), classification of the budget (PI-5), predictability in the availability of funds for commitment of expenditure (PI-16), recording and management of cash balances, debt and guarantees (PI-16), effectiveness of payroll controls (PI-17), effectiveness of internal control on nonsalary expenditure (PI-20), and accounting, recording, and reporting indicators (PI-22-25).
  - Will support external audit and potentially internal audit (PI-26-28) and PI-21.
- PAS system design and components:
  - PAS expected to develop a modern public accounting and financial management information system automating virtually all aspects of government accounting and budget management functionality.
  - Enhancements include quality and timeliness of fiscal reporting, centralization of more than 2,000 government bank accounts in a TSA structure at the MMA, and potential medium- to long-term support for MTEF, performance budgeting, and accrual accounting.
  - Primary components: general ledger, reporting, payments and banking systems, accounts payable, and budget funds availability checking.
  - Secondary modules: budget formulation, assets register, accounts receivable, payroll, and project management.
- Project implementation timeline and status:
  - Project implementation ran into early delays (personnel issues, hardware delivery); temporarily put on hold following a decision in November 2008 to use the government PAS team to run centralized payments processing.
  - On May 1, 2009, the project team and consultants decided the system could “go live” with respect to general ledger and payment processing for Male-based MDAs.
  - Overall project about eight months behind planned milestones, but plan is to reach completion of roll-out of all primary components for all Male agencies and some pilot atoll agencies by end-2009.
  - From that point, the overall project will be taken over by a MOFT-led government team.

*Source: _cr10137 - 119.     The Law on Public Finance 2006, which became effective from FY 2009,*

### 141.     Under the new automated PAS payment invoice and due dates will be recorded

### _cr10137 - 141.     Under the new automated PAS payment invoice and due dates will be recorded

### Public Accounting System (PAS) automation and commitment controls
- Under the new automated PAS payment invoice and due dates will be recorded and arrears will be monitored and reported on centrally.
- The new PAS will introduce centralized commitment controls, making contracting without budget authorization impossible.
- Expected effect: development of payment arrears will be less likely even under tight liquidity conditions.
- Presently, expenditure control relies on decentralized controls at the MDA level and on budget release approval policies of the budget office for a number of discretionary spending categories.

### Budget release policy, cash planning, and cash management
- Budget release policy is planned to become more transparent and predictable under the new PAS.
- A quarterly disbursement of budget authorization has been discussed at the technical level.
- Creation of more expenditure planning certainty requires enhanced cash planning and management, as the budget can only be released if there is reasonable certainty on cash availability.
- Budget and cash releases are often discussed within ministries of finance by a joint committee of the budget office and treasury.
- Recommendation implied: MOFT should start upgrading its capacities in cash planning and management ahead of full PAS roll-out.

### Cash monitoring, centralization of payments, and treasury control
- Cash monitoring is expected to improve substantially once the new PAS has been fully rolled out.
- The PAS will route all payments to the treasury and effectuate payment from a central payment account.
- PAS implementation is expected to coincide with bringing remaining MDA and atoll accounts gradually under treasury control.
- Advances to atolls are now provided on a monthly basis and are already being better controlled to some extent.
- Centralization of payments since December this year of Male MDA spending has made it impossible for departments to further transfer liquidity from their budget accounts to their expenditure accounts.

### Tax administration and customs legislation
- New tax administration and customs legislation is to strengthen and provide more safeguards to the tax administration processes; this should improve the score on tax related indicators.
- The new tax administration law is to establish an independent revenue authority, with a more effective organizational structure and enhanced powers, especially regarding taxpayer audit and the possibility of imposing fines.
- The law would also establish a formal, independent appeals tribunal.
- The new law has been submitted to the People’s Majlis, but it is uncertain when it will be enacted.
- A new customs law has been submitted to parliament; its main goal is to bring customs valuation and clearance procedures up to international standards and treaty obligations and to establish an independent customs tribunal.
- The new legislation will increase the powers of customs and inland revenue to perform audits on taxpayers’ premises and inspect their accounts and financial statements.
- Planned improvements would affect:
  - PI-13 on transparency on taxpayer obligations,
  - PI-14 on effectiveness of taxpayer registration and assessment, and
  - PI-15 on effectiveness of tax collection.

### Procurement reform supported by WB IDF grant
- A WB IDF grant supports GoM efforts to evaluate existing procurement arrangements and develop and implement an action plan for modernization and improvement of a sustainable country procurement system.
- Overall activities under the grant:
  - Regulatory and Institutional Reform;
  - Capacity Development;
  - Public Awareness;
  - Preparatory Work for Introduction of e-Procurement.
- Purpose: build upon the existing national system and structures to develop a procurement system consistent with international best practice and that would enable donors to rely on the country procurement system.
- Key system objectives:
  - Achieve economy and efficiency in procurement;
  - Guarantee transparency and fairness of the process leading to improved competition;
  - Provide clear lines of responsibility and accountability;
  - Demonstrate a high degree of integrity with rapid and effective redress for bidder complaints.
- Expected impact: Successful completion should have substantial impacts on indicator 19.

### Risks to PFM reform and mitigation priorities
- Government-identified key risks:
  - Initiation of reforms that have limited support among key stakeholders.
  - Inadequate staffing of new and modernized functions, or inadequate training of staff to perform new functions.
  - Failure to upgrade business processes to benefit from new information systems and capacities.
- Government action: developing a comprehensive action plan for improvements in PFM that will:
  - Provide clear prioritization of necessary actions and specific timetable for different steps;
  - Incorporate ongoing reform processes;
  - Build on inputs from the IMF, the WB, the ADB and other development partners while being based on government priorities.

### PFM-PR Summary Table — selected indicator findings and scores
- PI–1. Aggregate expenditure out-turn compared to original approved budget: B
  - Explanation: Actual total primary expenditure exceeded budgeted total primary expenditure with more than 10 percentage points in no more than one of three years.
- PI–2. Composition of expenditure out-turn compared to original approved budget: D
  - Explanation: Variance in expenditure composition exceeded overall deviation in primary expenditure by 10 percentage points in 2 of the last 3 years.
- PI–3. Aggregate revenue out-turn compared to original approved budget: D
  - Explanation: Actual domestic revenue collection was below 92 percent of budgeted domestic revenue estimates in 2 of the last 3 years.
- PI–4. Stock and monitoring of expenditure payment arrears: D+
  - Explanation: Anecdotal evidence suggests that the stock of arrears is low (below 2 percent of expenditure), but there is no reliable data due to lack of arrears monitoring or ad hoc surveys.
- PI–5. Classification of the budget: B
- PI–6. Comprehensiveness of information included in budget documentation: C
  - Explanation: Omits a definition of the fiscal deficit according to GFS; deficit financing including domestic and foreign financing; debt stock, and an explanation of budget implications of new policy initiatives.
- PI–7. Extent of unreported government operations: B+
  - Explanation: Unreported extra-budgetary expenditure estimated to be less than 5 percent of total expenditure. Over 90 percent of donor funded projects are included in the budget reports.
- PI–10. Public access to key fiscal information: B
  - Explanation: Government publishes the annual budget on the MOFT website at the time of presentation to parliament. External audit reports are posted on the website as they are presented to parliament.
- PI–12. Multiyear perspective in fiscal planning, expenditure policy, and budgeting: D
  - Explanation: There is no medium-term fiscal planning. A 3-year budget was prepared for 2009-11.
- PI–13. Transparency of taxpayer obligations and liabilities: C+
  - Explanation: Main taxes are clear and reasonably comprehensive; information available on websites or on demand, but not always in English; no formal appeals mechanism established.
- PI–14. Effectiveness of measures for taxpayer registration and tax assessment: C+
  - Explanation: Separate tax databases are maintained, but not linked to other government databases; penalties for non-compliance are low and often not imposed.
- PI–15. Effectiveness in collection of tax payments: C+
  - Explanation: Tax arrears are negligible. Revenues are transferred to the treasury on a monthly basis. Reconciliation takes place on a monthly basis within 15 days of the end of the year.
- PI–16. Predictability in the availability of funds for commitment of expenditures: D+
  - Explanation: Cash flow forecasts are made at the start of the year only. MDAs are not informed on commitment ceilings for discretionary spending. Significant in–year budget amendments take place only once or twice a year.
- PI–17. Recording and management of cash balances, debt, and guarantees: D+
- PI–18. Effectiveness of payroll controls: D+
- PI–19. Competition, value for money and controls in procurement: D+
  - Explanation: Lack of data on whether procurements above the minimum threshold were based on open competition; no independent grievance mechanism.
- PI–20. Effectiveness of internal controls for nonsalary expenditure: D+
- PI–21. Effectiveness of internal audit: D+
- PI–22. Timeliness and regularity of accounts reconciliation: C
  - Explanation: Bank accounts that receive budget funds are reconciled on a monthly basis within 4 weeks (B), suspense accounts and advances generally only fully reconciled at the end of the year (C).
- PI–23. Availability of information on resources received by service delivery units: A
- PI–24. Quality and timeliness of in-year budget reports: C+
  - Explanation: In-year budget-to-actuals reports are prepared on a monthly basis providing cash flow and economic classification of expenditures. Commitment accounting is not in place.
- PI–25. Quality and timeliness of annual financial statements: D
  - Explanation: Currently no annual financial statements are prepared in the Maldives.
- PI–26. Scope, nature, and follow-up of external audit: D+
- PI–27. Legislative scrutiny of the annual budget law: D+
- PI–28. Legislative scrutiny of external audit reports: D+

### Selected numerical budget and expenditure data (Annex III highlights)
- Total Expenditure (2005): Approved 4,979.9; Actual 6,025.3; Variance 1,045.4; 21.0%
- Total Expenditure (2006): Approved 9,020.8; Actual 7,345.6; Variance -1,675.2; -19%
- Total Expenditure (2007): Approved 12,343.8; Actual 8,725.1; Variance -3,618.7; -29%
- Budget Expenditure excluding debt service and donor funded project expenditure (2005): Approved 4,186.6; Actual 4,435.7; Variance 249.1; 5.9%
- Budget Expenditure excluding debt service and donor funded project expenditure (2006): Approved 6,006.6; Actual 5,660.7; Variance -345.9; -5.8%
- Budget Expenditure excluding debt service and donor funded project expenditure (2007): Approved 7,970.3; Actual 6,917.2; Variance -1,053.1; -13.2%
- Debt Servicing (2005): Approved 373.2; Actual 387.2; Variance 14.0; 3.8%
- Debt Servicing (2006): Approved 505.7; Actual 475.7; Variance -30.0; -6%
- Debt Servicing (2007): Approved 768.0; Actual 627.0; Variance -141.0; -18%
- Cash Grants (2005): Approved 50.0; Actual 49.7; Variance -0.3; -0.6%
- Cash Grants (2006): Approved 55.1; Actual 60.7; Variance 5.6; 10%
- Cash Grants (2007): Approved 54.6; Actual 61.7; Variance 7.1; 13%
- Project Grants (2005): Approved 32.6; Actual 766.3; Variance 733.7; 2250.6%
- Project Grants (2006): Approved 1,643.8; Actual 793.2; Variance -850.6; -52%
- Project Grants (2007): Approved 905.5; Actual 935.9; Variance 30.4; 3%
- Project Loans (2005): Approved 640.8; Actual 467.3; Variance -173.5; -27.1%
- Project Loans (2006): Approved 1,408.5; Actual 806.1; Variance -602.4; -43%
- Project Loans (2007): Approved 4,151.5; Actual 1,007.7; Variance -3,143.8; -76%
- Of which concessional (2005): Approved 337.5; Actual 386.4; Variance 48.9; 14.5%
- Of which concessional (2006): Approved 809.6; Actual 355.3; Variance -454.3; -56%
- Of which concessional (2007): Approved 2,645.4; Actual 183.3; Variance -2,462.1; -93%

*Source: _cr10137 - 141.     Under the new automated PAS payment invoice and due dates will be recorded*

### 1. Non-concessionally funded capital expenditure598.9450.8-148.1     148.124.7%

### _cr10137 - 1. Non-concessionally funded capital expenditure598.9450.8-148.1     148.124.7%

### 2006 Functional Head Budget–Actuals (selected line items and variances)
- 1. Non-concessionally funded capital expenditure 598.9 450.8-148.1     148.1 24.7%
- 2. Ministry of Education                                                           937.6  828.6-109                                                           109   11.6%
- 3. Ministry of Finance and Treasury                                        816.1  657.6-158.5                                        158.5   19.4%
- 4. Ministry of Defense and National Security 418.8 43314.2 14.2 3.4%
- 5. Ministry of Health 677.4 667-10.4 10.4 1.5%
- 6. Ministry of Home Affairs                                                      440.9  500.1 59.2                                                      59.2   13.4%
- 7. Ministry of Atolls Development                                            464.4  411.2-53.2                                            53.2   11.5%
- 8. Ministry of Higher Education, Employment and Social Security 212.9  190.4-22.5       22.5   10.6%
- 9. Presidential Palace 143 161 18 18   12.6%
- 10. Ministry of Information and Arts 118.2  117.3-0.9 0.9 0.8%
- 11. Supreme Council of Islamic Affairs 82.5 83.8 1.3 1.3 1.6%
- 12. Ministry of Foreign Affairs                                                   77.4 94.9 17.5                                                   17.5   22.6%
- 13. President's Office 116.8 92.2-24.6 24.6   21.1%
- 14. Ministry of Tourism and Civil Aviation 112.1  105.6-6.5 6.5 5.8%
- 15. Ministry of Transport and Civil Aviation 125.2  110.2-15 15   12.0%
- 16. Ministry of Environment, Energy and Water 64 82.8 18.8 18.8   29.4%
- 17. Ministry of Justice 77.7 75.7-2 22.6%
- 18. Ministry of Fisheries, Agriculture & Marine Resources 61.6 90.9 29.3 29.3   47.6%
- 19. Ministry of Youth & Sports 72.8 74.1 1.3 1.3 1.8%
- 20. People's Majilis 44.2 43.8-0.4 0.4 0.9%
- 21. Sum of rest 344.1 389.7 45.6 45.6 13.3%
- Total Expenditure Deviation 6006.6 5660.7-345.9 345.9 5.8%
- Composition Variance 6006.6 5660.7  756.3 12.6%

### 2007 Functional Head Budget–Actuals (selected line items and variances)
- 1. Non-concessionally funded capital expenditure 1506.1 824.4-681.7     681.7     45.3%
- 2. Ministry of Education                                                        978.1 1143.1 165 165 16.9%
- 3. Ministry of Finance and Treasury 973.6  645.6-328 328   33.7%
- 4. Ministry of Defense and National Security 755.3 622.9-132.4 132.4 17.5%
- 5. Ministry of Health                                                              728.1 893.2 165.1                                                              165.1                                                              22.7%
- 6. Ministry of Home Affairs                                                   625.4 71084.6                                                   84.6                                                   13.5%
- 7. Ministry of Atolls Development                                         378.2 358.8-19.4                                         19.4                                         5.1%
- 8. Ministry of Higher Education, Employment and Social Security 307.8 307.8 0 0.0%
- 9. Presidential Palace 177.3 176.5-0.8 0.8 0.5%
- 10. Ministry of Information and Arts 143.0 123.3-19.7 19.7 13.8%
- 11. Supreme Council of Islamic Affairs 135.6 115.3-20.3 20.3 15.0%
- 12. Ministry of Foreign Affairs                                               132.6 104.9-27.7                                               27.7                                               20.9%
- 13. President's Office 122.3 111.1-11.2 11.2 9.2%
- 14. Ministry of Tourism and Civil Aviation 117.2 117.2 0 0.0%
- 15. Ministry of Transport and Civil Aviation 108.3 45.6-62.7 62.7 57.9%
- 16. Ministry of Environment, Energy and Water 98.3 98.3 0 0.0%
- 17. Ministry of Justice 93.5 94.3 0.8 0.8 0.9%
- 18. Ministry of Fisheries, Agriculture & Marine Resources 87.4 110.1 22.7 22.7 26.0%
- 19. Ministry of Youth & Sports 83.0 129.3 46.3 46.3 55.8%
- 20. People's Majilis 63.5 63.5 0 0.0%
- 21. Sum of rest 355.7 122.0-233.7 233.7 65.7%
- Total Expenditure Deviation 7970.3 6917.2-1053.1 1053.1 13.2%
- Composition Variance 7970.3 6917.2  2022.1 25.4%

### Results Matrix (Table 11)
- Year 2005: For PI-1 Total Exp. Deviation 5.9%; For PI-2 Total Exp. Variance 19.5%; Variance in Excess 13.5%
- Year 2006: For PI-1 Total Exp. Deviation 5.8%; For PI-2 Total Exp. Variance 12.6%; Variance in Excess 6.8%
- Year 2007: For PI-1 Total Exp. Deviation 13.2%; For PI-2 Total Exp. Variance 25.4%; Variance in Excess 12.2%

### Annex V — Domestic Revenue: Projections and Actuals, 2005–07 (selected rows)
- Tax Revenue
  - 2005 Proj 1,877,483,717 Actual 1,722,845,313
  - 2006 Proj 2,114,935,000 Actual 2,370,414,282
  - 2007 Proj 3,193,925,710 Actual 2,905,168,797
- Nontax Revenue
  - 2005 Proj 2,334,088,147 Actual 1,915,384,197
  - 2006 Proj 2,762,023,000 Actual 2,957,916,339
  - 2007 Proj 3,971,686,000 Actual 3,662,279,054
- Total
  - 2005 Proj 4,211,571,864 Actual 3,638,229,510
  - 2006 Proj 4,876,958,000 Actual 5,328,330,621
  - 2007 Proj 7,165,611,710 Actual 6,567,447,851
- Comparison (MLRF %)
  - Tax Revenue: -154,638,404 -8.2; 255,479,282 12.1; -288,756,913 -9.0
  - Nontax Revenue: -418,703,950 -17.9; 195,893,339 7.1; -309,406,946 -7.8
  - Total: -573,342,354 -13.6; 451,372,621 9.3; -598,163,859 -8.3
- Domestic Revenue Actuals as percent of Projections: 86.4  109.3  91.7

*Source: _cr10137 (tables and annexes as provided in the supplied content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10137.pdf_