A. Introduction

1. The 2013 Fiscal Responsibility Act was adopted to set up a comprehensive fiscal responsibility framework. The Act’s aim was to ensure that fiscal policy actions were taken in an accountable and transparent manner, especially by imposing limits on various fiscal aggregates. To enhance the transparency of the Government’s medium-term fiscal strategy, the Act required new fiscal and debt reporting requirements. The FRA also contained provisions pertaining to local councils’ loans, guarantees, and debt.

2. The FRA included three main numerical fiscal rules, namely: (1) a debt to GDP fiscal rule, with the ratio not to exceed 60 percent; (2) a budget balance rule requiring that the overall deficit be reduced to a level of 3.5 percent of GDP and maintained at that level thereafter; and (3) a primary balance rule requiring a primary surplus from end-2016 onward. The Act also imposed limits on short-term borrowings by the government from the Maldives Monetary Authority (MMA); as from 6/5/2016 government borrowing was to be undertaken only to finance investment projects. The Act also included provisions for limiting guarantees and participation in state-owned enterprises (SOEs) and established a fiscal reserve.¹

3. The FRA was unsuccessful in achieving its numerical objectives, partly because of design issues. The FRA contains useful elements, including the principles of fiscal policy and reporting requirements, but it falls short of good practices in a number of respects (see paragraph 4). The targets and three-year timeframe for achieving the three fiscal targets by 2016 proved to be overly ambitious. After 2013, fiscal expansion was driven by significant public infrastructure investments; the government allocated an average of 9 percent of GDP to capital expenditures between 2013 and 2019. The external financing of infrastructure projects and SOEs’ large infrastructure projects contributed to the increase in public debt (Figure 1). However, the results of attempts to enhance revenue generation and curtail current expenditures were mixed. The government was unable to generate the primary surpluses as envisaged in 2013. As a result, the overall deficit, including grants, averaged 6 percent of GDP during 2013–19; total public and publicly guaranteed debt was estimated to reach 77 percent of GDP as of end-2019.

Maldives: Fiscal Developments

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

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Maldives: Fiscal Developments

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

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Maldives: Fiscal Developments

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

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B. Experience with the 2013 Fiscal Responsibility Act

4. The main strengths and weaknesses of the FRA are as follows:

Main Strengths

• The FRA’s main aim is laudable: to reduce rising public debt and maintain medium-term fiscal sustainability.

• The law is relatively concise.

• The FRA requires medium-term fiscal and debt strategies, which change the sole focus of policymakers from the new fiscal year. The multi-year consequences of revenue and expenditure policies, as well as the future trajectory of public debt, are made transparent.

• The FRA requires loan, debt and guarantee limits on local councils, to be established each year by the Minister of Finance in the annual budget.

• The FRA includes an escape clause that allows exceptions to the adherence to the fiscal rules in cases of a natural disaster or economic downturns, with the consent of, and for a period determined by, the Parliament.

Main Weaknesses

• The numerical fiscal rules on debt and fiscal deficits proved to be too ambitious within the three-year period, and the multiple fiscal rules were too rigid.

• The lack of respect for the numerical fiscal rules and the failure to implement of some of the FRA’s procedure rules also reflect the inadequate political buy-in to the FRA.

• The FRA does not include adequate accountability provisions requiring the Minister of Finance to put public finances back on a sound footing after a deviation from fiscal targets.

• The FRA does not include a requirement for a Final Budget Outcome Report, in which the Minister provides explanations of why the budget outturns differ from the annual budget aggregates.

• The FRA does not specify the timing of publication of the Fiscal and Debt Strategies.

• The FRA does not require a comprehensive annual Fiscal Risk Statement.

• The events triggering the activation of an escape clause are not clearly defined. The FRA also does not require the Minister of Finance to report on the implications of the activation of the escape clause and the adjustment path to revert to the rule; suggested improvements are included in the Box 1.

• Finally, some definitions are ambiguous, and some parts of the Act (for example, Chapter 8 on cash planning) do not belong in the FRA.

Performance Of Numerical Fiscal Rules Under The 2013 FRA

5. Few of the FRA’s numerical fiscal rules have been complied with. The fiscal deficit limits were not respected (except the overall deficit limit that was respected in 2017) , and the debt-to-GDP ratio rose above the 60 percent limit in 2016. However, until 2019, the “golden rule” was respected. Table 1 summarizes the extent of the noncompliance with the FRA’s quantitative limits.

^{Table 1.}

Performance of Legislated Fiscal Rules

¹The overall deficit reached 3.0% of GDP in 2017. Seehttp://statisticsmaldives.gov.mv/nsdp/upload/CGO_MDV.xlsx;

²The end-2020 Maldives Monetary Authority advances are estimated at 5.3 percent of GDP.

^{Table 1.}

Performance of Legislated Fiscal Rules

Chapter 10 of the Fiscal Responsibility Act, 2013
	Quantitative limits	Performance
Key fiscal aggregates
Public debt	Not to exceed 60% of GDP within 3 years from 1/1/2014	The debt limit was respected until end-2016; it has been violated since then.
Overall fiscal balance	Not to exceed 3.5% of GDP within 3 years from 1/1/2014	This criterion was not respected, except in 20171.
Primary balance	To be in surplus within 3 years from 1/1/2014	This criterion was never respected.
Various loan limits
“Golden rule”	Loans only for national development projects (= current balance > 0), as from 1/1/2016.	Respected until 2019; there was a strong breach of this limit in 2020.
Loan guarantees	Not to exceed the limit set by the Minister in the annual budget	Such a limit was not included in the annual budget.
Advances from MMA (to be repaid within 91 days)	Not to exceed 1% of 3-year average of GDP	This was respected until 2019; there was a strong breach of this limit in 20202.

¹The overall deficit reached 3.0% of GDP in 2017. Seehttp://statisticsmaldives.gov.mv/nsdp/upload/CGO_MDV.xlsx;

²The end-2020 Maldives Monetary Authority advances are estimated at 5.3 percent of GDP.

View Table

^{Table 1.}

Performance of Legislated Fiscal Rules

Chapter 10 of the Fiscal Responsibility Act, 2013
	Quantitative limits	Performance
Key fiscal aggregates
Public debt	Not to exceed 60% of GDP within 3 years from 1/1/2014	The debt limit was respected until end-2016; it has been violated since then.
Overall fiscal balance	Not to exceed 3.5% of GDP within 3 years from 1/1/2014	This criterion was not respected, except in 20171.
Primary balance	To be in surplus within 3 years from 1/1/2014	This criterion was never respected.
Various loan limits
“Golden rule”	Loans only for national development projects (= current balance > 0), as from 1/1/2016.	Respected until 2019; there was a strong breach of this limit in 2020.
Loan guarantees	Not to exceed the limit set by the Minister in the annual budget	Such a limit was not included in the annual budget.
Advances from MMA (to be repaid within 91 days)	Not to exceed 1% of 3-year average of GDP	This was respected until 2019; there was a strong breach of this limit in 20202.

¹The overall deficit reached 3.0% of GDP in 2017. Seehttp://statisticsmaldives.gov.mv/nsdp/upload/CGO_MDV.xlsx;

²The end-2020 Maldives Monetary Authority advances are estimated at 5.3 percent of GDP.

C. Context in Maldives for Amending the FRA

9. The current macro-fiscal outlook is very different than in 2013, the year the FRA was adopted. During 2013–19, strong growth in tourism and public infrastructure investment contributed in varying degrees to economic growth, but fiscal deficits and debt-to-GDP also grew.

10. The COVID-19 crisis has led to unprecedented fiscal imbalances. With sharp declines in tourist arrivals and economic growth in 2020, the overall fiscal deficit (including grants) is estimated to exceed 27.5 percent of GDP in 2020.² The 2021 budget envisages cuts in some spending; however, with revenues not recovering to pre-crisis levels, as well as larger capital expenditure, another large fiscal deficit is envisaged. Total public and publicly guaranteed debt will continue to rise, possibly exceeding 130 percent of GDP by end-2021. This level is substantially higher than the one used in the last performed Debt Sustainability Analyses (DSA) conducted by IMF and World Bank staff, which already highlighted high risks with respect to debt sustainability.³ To respond to challenges posed by COVID-19, the People’s Majlis approved the suspension of certain provisions of the FRA; these provisions include limitations on borrowing from the MMA and the requirement to borrow only for national development projects.⁴

11. There is much uncertainty over the medium-term outlook for economic growth, the fiscal deficit, and impacts on debt-to-GDP. While there is a need to reduce debt to a sustainable level by continuing fiscal consolidation efforts, there is also an ongoing need to support economic activity and limit the impact of the crisis on vulnerable social groups. There are fiscal policy trade-offs between (1) supporting infrastructure projects, while addressing environmental concerns, and (2) pursuing ambitious deficit-reduction plans to secure debt sustainability.

12. In addition to fiscal policy trade-offs, there is also a trade-off between the credibility and flexibility of fiscal management. On the one hand, to be credible in debt reduction efforts, there is a need for firm targets for debt, fiscal deficits, and total expenditures. This approach could suggest firm numerical fiscal rules to bind the medium-term fiscal trajectory. On the other hand, the unusually high uncertainties concerning the medium-term fiscal outlook call for flexibility with respect to the trajectory. The Government is committed to continuing its debt-reduction efforts with firm and credible targets for debt and fiscal deficits; however, the country is also cognizant of the past experience of noncompliance with numerical fiscal rules and the current uncertainty over the macro-fiscal outlook arising from the COVID-19 crisis. The authorities aim to rebuild the credibility of the fiscal responsibility framework that establishes the key principles of fiscal responsibility without quantitative targets in the law itself. Instead, the law could define the process for how medium-term fiscal targets will be defined and monitored for compliance.

13. Against this backdrop, this report discusses options to revamp the 2013 FRA, taking into account the challenges posed by the current context. The report proposes to transition from a rules-based fiscal sustainability framework to a principles-based one.⁵ A draft new FRA is included in Appendix 1 to address the weaknesses of the 2013 FRA and to guide the authorities in formulating a new high-level legal framework for fiscal policymaking. Section II discusses the main objectives, as well as the definitional and coverage issues of the new FRA. Section III discusses several options, from embedding numerical medium-term fiscal targets in the law-such as the approach of the 2013 FRA—to the more flexible option of moving to a principles-based FRA. Sections IV and V discuss fiscal reporting and accountability provisions. Section VI looks at the role of external oversight institutions. Section VII discusses the importance of integrating the FRA into the ongoing public financial management (PFM) legal reform agenda. Appendices 2 to 6 supplement the main text of this report.

A. Main objectives of the FRA

14. The main purposes and objectives of an Act are typically set out at the beginning of the law. Several countries’ FRAs have a paragraph specifying the objectives of the Act before the first article.⁶ In a few countries, the first article provides a summary statement of the purposes of the Act. Maldives is in the second category: Article 1(a) summarizes the aim of the FRA. This report prefers the first option because it visibly highlights the law’s purpose.

15. It is important to clearly reformulate the main purpose of the FRA. The aim of the new FRA would no longer be “to state the limits (numerical targets) for fiscal actions” but to include principles of accountability, sustainability, prudence, and fiscal transparency. Clarity of purpose will make it easier for Members of Parliament and the public to understand the law. Although there is no unique formulation, Appendix 1 offers a possible wording.

B. Definitions

16. The terms used in the FRA should be defined clearly. In the 2013 FRA, some terms are not defined well, and others are ambiguous. For example, does the “overall balance” include or exclude grants? Do “national” budget policy and “national” debt (also translated as “total” debt in Article 40(k) of the FRA) cover only the Central Government, or do they include local councils and other public sector entities? Also, a variety of terminology is used interchangeably, such as “Total Debt,” “National Debt,” “Government Debt,” and “Total National Debt,” creating confusion for the coverage of fiscal rules. Subsection C provides guidance for the institutional coverage of fiscal aggregates in the new FRA.

17. All definitions of terms used in the FRA should be grouped in one Article. In the 2013 FRA, there are two separate lists of definitions: Chapter 2 (Articles 3 to 8) and Article 40 (a) to (n). Also, in the new FRA, terms that are not needed or difficult to measure—for example, “unemployment rate” and “balance of payments crisis”—could be eliminated. The mission’s draft new FRA in Appendix 1 proposes many definitions. To avoid ambiguity, these will need careful review, especially before the new draft law is finalized in Dhivehi.

C. Coverage

18. There are two separate coverage issues for the FRA: (1) the institutions and levels of government to which the law will apply (“legal coverage); and (2) the public sector entities included in the fiscal aggregates referred in the FRA. This subsection elaborates on these two issues, especially the second.

Coverage Of Fiscal Aggregates In The Fiscal Framework And FRA

21. The IMF’s Government Finance Statistics Manual (GFSM)⁷ provides a basis for categorizing components of the public sector. Figure 2 illustrates the five main components. In Maldives, the fiscal activities of budgetary Central Government and SOEs are dominant.

Possible “Universes” for the Coverage of the FRA

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

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Possible “Universes” for the Coverage of the FRA

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Possible “Universes” for the Coverage of the FRA

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22. Internationally, there is no uniformity in the coverage of fiscal aggregates for monitoring purposes. Some countries’ FRAs or PFM Acts solely cover the Central Government, inclusive of extrabudgetary funds. This is the case, for example, when local governments’ own revenues are small relative to the grants that they receive from the Central Government’s budget In contrast, European Union countries—whether small island countries like Malta or Cyprus or large federal countries like Germany—prepare medium-term fiscal frameworks (MTFFs) with a “General Government” coverage (third circle of Figure 2) to provide uniformity across countries.

23. Maldives has two levels of government and 32 SOEs. In addition to the Central Government, there are some 200 autonomous local councils, which were created in 2010 following the adoption of the Decentralization Act⁸ The number of budgetary and extrabudgetary Central Government units—including trust funds, the pension fund, and the sovereign development fund (SDF)—has recently been reviewed, with Government Finance Statistics (GFS) technical assistance by the South Asia Regional Training and Technical Assistance Center (SARTTAC).⁹ There are 31 SOEs (of which five are publicly listed), some of which are profit-making. Several loss-making SOEs receive government subsidies to cover operating costs.

24. In Maldives, the coverage of the fiscal aggregates targeted in the FRA could vary. This report proposes that the FRA’s “public debt” includes all Central Government debt, as well as all Central Government debt guarantees (those benefitting local councils, SOEs, and the private sector). In contrast, the main fiscal policy aggregates—total revenues, total expenditures, and the overall fiscal balance—could, for pragmatic reasons, be confined to those of the Central Government.

25. Public debt in the FRA could be based on debt instruments and debt-guarantees that are readily monitorable by the Central Government. The institutional coverage of public debt in the FRA could be identical to that of the DSA conducted by IMF and World Bank staff (see IMF 2020c). The DSA includes the major sources of debt-related risks¹⁰. SOE guarantees have increased in recent years, associated with large infrastructure projects. These are included in the DSAs prepared by IMF staff. Thus, apart from the Government’s direct external and domestic debt, debt guarantees should be included in the public debt aggregate monitored under the FRA, because SOE guarantees may pose a threat to debt sustainability.¹¹

26. The coverage of the public debt aggregate of the new FRA would not be identical to GFS’s public sector shown in Figure 2. This difference is mainly because: (1) direct debt contracted by SOEs and local councils is excluded; and (2) all Central Government guarantees are included (one-off debt guarantees are not debt instruments). SARTTAC (2020) identifies six categories of debt liabilities, to which this report proposes adding debt guarantees (off-balance sheet contingent liabilities).

27. Public debt would continue to be measured on a gross basis. This report does not propose adopting a net public debt definition, for example, by including the assets of the SDF.¹²

28. The FRA’s coverage of fiscal aggregates should aim for “consolidated Central Government.” The definition of fiscal aggregates should go beyond “budgetary Central Government” (the smallest circle of Figure 1) and include all off-budget activities and extrabudgetary funds controlled by the Government (the second circle of Figure 2). The FRA should require that the fiscal documents discussed in sections IV and V cover both budgetary and off-budget Central Government revenues, expenditures, and financing. Given that the categorization of extrabudgetary units is changing,¹³ it is recognized that this suggestion would be difficult to implement fully in the short-term.

29. In the FRA, the “pension fund” could be excluded from total revenues, total expenditures, and the overall fiscal balance, at least in the short-term. SARTTAC (2020) proposed a reclassification of the “pension fund”—the pension schemes administered the Maldives Pension Administration Office (MPAO).¹⁴ Instead of being a “social security fund,” the pension fund would be classified in GFS’s “public financial corporation” sector. However, given that MPAO administers government pension schemes, in the longer-term, the pension fund’s revenues, expenditures, balance, and net debt should be covered by the FRA’s fiscal and debt aggregates. The law’s “transitional issues” (see section VII.B) could envisage a longer-term phase-in.

30. For pragmatic reasons, local councils could be excluded from the fiscal aggregates monitored under the FRA. Ideally, for reasons of transparency and completeness, local councils’ fiscal activities should be included. However, their weight in general government finances currently is quite small. For revenues, local councils depend heavily on grants from the Central Government’s budget. Accordingly, most local councils’ revenues are included in the Central Government’s medium-term fiscal projections. The local councils’ self-financed fiscal activities are small at present. Borrowing by local councils is currently nonexistent because it is conditional on legislated limits for borrowing and Central Government approval of their loans and loan guarantees. Although local councils would be excluded from having to provide inputs to the Government’s medium-term fiscal aggregates, they would not be excluded from fiscal risk analysis. Similarly, local councils should not be discouraged from drawing up their own MTFFs on a voluntary basis.

31. Local councils’ debt limits of the 2013 FRA could be maintained, pending a debt law. Chapter 7 of the 2013 FRA contains strong limitations on local councils’ debt, including: (1) for an individual local council, the debt (loans, PPP liabilities and guarantees issued) should not exceed one-third of the council’s revenues¹⁵ of the previous year; and (2) the total debt of all councils should not exceed the level announced by the Minister in the annual budget statement. Pending the adoption of a new Public Debt Act (see section VII) and a review of government guidelines on local council borrowing, these strong restrictions could remain in the new FRA temporarily.

D. Recommendations

• Ensure that all terms used in the new FRA are defined clearly in a single article.

• Specify clearly the institutional coverage of various fiscal aggregates mentioned in the FRA.

• Eliminate Article 2 of the 2013 FRA from the new FRA, since public sector entities are covered in some aspects of the law.

• Define, in the new FRA, “public debt” to be the gross debt of the Central Government (budgetary and off-budget) and all government guarantees.

• Limit the government’s forward-looking fiscal strategy documents and various ex-post budget reports to “Central Government,” by excluding local councils’ and commercial SOEs’ own revenues and expenditures, from “Central Government” fiscal aggregates.

A. Principles-Based and Rules-Based Approaches to Medium-Term Fiscal Management

33. There are two broad approaches for attaining medium-term (MT) fiscal objectives by use of a law (Figure 3).

• A principles-based law. Under this approach, the FRA sets out fiscal responsibility principles and the fiscal objectives, which are used to measure progress in achieving fiscal objectives relative to the FRA’s fiscal principles. The fiscal objectives are quantified in a separate government document, which can be changed or updated by the government without changing the law; or

• A rules-based law. Under this approach, the FRA includes numerical fiscal rules¹⁶—on debt, deficit, or total expenditure—as a means of constraining the fiscal policy decision-making.

Principle-based and other approaches to MTFF and annual budgeting

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

Source: IMF Team.

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Principle-based and other approaches to MTFF and annual budgeting

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

Source: IMF Team.

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Principle-based and other approaches to MTFF and annual budgeting

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

Source: IMF Team.

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34. Principles of sound fiscal management can be one starting point for MTFF formulation. A key advantage of this approach is flexibility. It allows the government to adjust fiscal policy to changing circumstances, such as increasing spending when there is an economic downturn. The credibility of the Government’s commitment to fiscal discipline is not undermined. The challenge under the principles-only approach is to accompany the quantified fiscal objectives with strong accountability and transparency mechanisms to ensure scrutiny of any changes in fiscal targets as and when they occur

35. An alternative approach is to begin with an analysis of key fiscal problems and address them by including one or more numerical fiscal rules in the FRA. To address fiscal sustainability and stability, many countries in Asia, the European Union, and Latin America have introduced fiscal rules in primary legislation (right hand side of Figure 3).

B. Accountability of the Minister of Finance

59. The FRA would require the Minister of Finance to be accountable to Parliament for any changes in the key fiscal targets. The FRA would require the Minister to explain any Government decisions to modify the key fiscal targets. In particular, the Minister would, when updating the Charter, explain the following to Parliament: (1) the reasons for deviating from previous fiscal targets; (2) how the new fiscal targets are consistent with the FRA’s principles of fiscal responsibility; and (3) any fiscal policy changes that the Government has taken, or intends to take, to ensure compliance with the new fiscal targets. The Minister would also be accountable for submitting key fiscal documents to Parliament, consistent with the Charter.

60. Escape clause provisions under the principles-based approach would be maintained. There may be exceptional circumstances that require a temporary suspension of moving toward the fiscal anchors. In this regard, the provisions of Article 36 on “Exceptions” are still needed in the FRA. Whereas this clause is broadly satisfactory, since it includes natural disasters and economic downturns as reasons for suspension, it should nevertheless be modified to align more completely with the good practices outlined in Box 1.

C. Specifying the Charter of Fiscal Responsibility

61. Various choices and steps are needed when moving to a principles-based FRA with strong accountability requirements. The key steps are summarized in the next section and in Figure 4:

Steps of a principles-based FRA

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

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Steps of a principles-based FRA

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Steps of a principles-based FRA

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62. Choices are needed as to which principles should be included in the FRA. Table 2 proposes three key fiscal principles and objectives (“key fiscal targets”) and five other principles and objectives. All are examples and should be tailored to the context in Maldives. As discussed, the numerical fiscal objectives would be specified in a Charter of Fiscal Responsibility.

^{Table 2.}

Fiscal Principles And Fiscal Objectives: Examples Of Different Documents

Source: IMF Team.

¹The authorities can also consider setting yearly targets in the MTFF to provide incentives to formulate a steady path of deficit reduction and avoid concentrating any needed fiscal adjustment on the final year.

^{Table 2.}

Fiscal Principles And Fiscal Objectives: Examples Of Different Documents

To be included in:
Fiscal Responsibility Act		Charter of Fiscal Responsibility	MTFF document (Fiscal Strategy Report)
Principles	Fiscal Objectives (qualitative)	Quantified Fiscal Objectives (“targets”) (the Charter and Fiscal Strategy Report would specify the chosen values of X)
1. Prudent debt level	Reduce total public debt as a % of GDP to a sustainable level, with low risk.	Reduce the level of total public debt to x% of GDP by [the 5th year beyond the current year]. This would the “debt anchor.”	Intermediate targets for public debt-to-GDP, with a few details on composition of debt: e.g., external/domestic
2. A sustainable budget balance	Achieve and maintain a sustainable budget balance as a % of GDP	Ensure that the overall budget balance (including grants) does not exceed x% of GDP by [the 5th year beyond the current year].	Year 3 objective for the Primary and Overall Fiscal Balances, total revenues, total primary expenditures, as a % of GDP1
3. Manage fiscal risks prudently	Limit fiscal risks arising from government guarantees as a % GDP	Limit new government guarantees to a maximum of x% of GDP (alternatively: reduce the stock of guarantees to x% of GDP)
Other principles(examples):			Other indicators
Macroeconomic stability	These could be included in the FRA if it is considered important that they should be.		Volatility of such factors as GDP, tourist arrivals, and inflation
Intergenerational equity			Examples: investment in infrastructure, depletion of resources, and living standards of age-specific cohorts
Low Inequality			Trend in Gini coefficient
Environmental sustainability			Various indicators, such as sea water levels and air/water quality
Value for money in the use public use of resources			Various indicators, for example, from program-based budgets

Source: IMF Team.

¹The authorities can also consider setting yearly targets in the MTFF to provide incentives to formulate a steady path of deficit reduction and avoid concentrating any needed fiscal adjustment on the final year.

View Table

^{Table 2.}

Fiscal Principles And Fiscal Objectives: Examples Of Different Documents

To be included in:
Fiscal Responsibility Act		Charter of Fiscal Responsibility	MTFF document (Fiscal Strategy Report)
Principles	Fiscal Objectives (qualitative)	Quantified Fiscal Objectives (“targets”) (the Charter and Fiscal Strategy Report would specify the chosen values of X)
1. Prudent debt level	Reduce total public debt as a % of GDP to a sustainable level, with low risk.	Reduce the level of total public debt to x% of GDP by [the 5th year beyond the current year]. This would the “debt anchor.”	Intermediate targets for public debt-to-GDP, with a few details on composition of debt: e.g., external/domestic
2. A sustainable budget balance	Achieve and maintain a sustainable budget balance as a % of GDP	Ensure that the overall budget balance (including grants) does not exceed x% of GDP by [the 5th year beyond the current year].	Year 3 objective for the Primary and Overall Fiscal Balances, total revenues, total primary expenditures, as a % of GDP1
3. Manage fiscal risks prudently	Limit fiscal risks arising from government guarantees as a % GDP	Limit new government guarantees to a maximum of x% of GDP (alternatively: reduce the stock of guarantees to x% of GDP)
Other principles(examples):			Other indicators
Macroeconomic stability	These could be included in the FRA if it is considered important that they should be.		Volatility of such factors as GDP, tourist arrivals, and inflation
Intergenerational equity			Examples: investment in infrastructure, depletion of resources, and living standards of age-specific cohorts
Low Inequality			Trend in Gini coefficient
Environmental sustainability			Various indicators, such as sea water levels and air/water quality
Value for money in the use public use of resources			Various indicators, for example, from program-based budgets

Source: IMF Team.

¹The authorities can also consider setting yearly targets in the MTFF to provide incentives to formulate a steady path of deficit reduction and avoid concentrating any needed fiscal adjustment on the final year.

63. Once the principles and key fiscal objectives are decided, there is a need to quantify the key fiscal objectives for inclusion in the Charter. The public debt anchor and operational targets would be decided simultaneously and derived from the DSA. Medium-term fiscal anchors would be complemented with short-term operational targets. Medium-term fiscal targets are not fully sufficient to guide fiscal policy choices in the short term, because they are not always under the direct control of policymakers. Short-term operational targets provide direct links with the medium-term targets. Debt-to-GDP, a key fiscal target, can be linked, directly or indirectly, with fiscal aggregates such as the overall balance, the primary balance, total expenditures and total revenues.

64. Operational targets need to be simple to monitor and enforce, yet effective in contributing to meeting the public debt anchor. They must take into account country specific factors and priorities. Appendix 6 provides guidance on the choice of operational targets.

65. The Fiscal Strategy Report—the MTFF document—would include quantified values for the key objectives and could include operational targets. The Fiscal Strategy Report, which covers a three-year period, would be updated once a year under the proposals discussed in section IV. The Charter would specify the operational targets for close monitoring in the Fiscal Strategy Report. All pertinent fiscal aggregates, accompanied by narrative on their expected developments, would be included in the Report presented to Parliament.

66. Countries with principles-based FRAs have different approaches to including these details in the law. Australia and New Zealand include principles and, to varying degrees, the fiscal objectives and other important details in their FRAs (Table 3). In contrast, the United Kingdom’s primary statute requires the government to prepare a Charter of Budget Responsibility. The Charter, rather than the law, lays out the key fiscal objectives and other narrative for the duration of the Charter. Uganda adopted the United Kingdom’s approach; however, its 2015 Public Finance Act has several fiscal principles and other important details that are elaborated further in a Schedule to the Act (which the Minister can modify).

^{Table 3.}

Are Medium-Term Fiscal Principles, Objectives, And Frameworks Included In Law?

Notes: 1. The content of Australia’s and New Zealand’s laws differ significantly in some areas. 2. In Australia and New Zealand, net worth is one fiscal objective, consistent with their accrual-based budgeting systems. Sources: Relevant laws of each country; Charters of Budget Responsibility for Uganda and the United Kingdom.

^{Table 3.}

Are Medium-Term Fiscal Principles, Objectives, And Frameworks Included In Law?

	Australia and New Zealand	United Kingdom	Uganda
Are the following included in their FRA-equivalent laws?
Fiscal principles	Yes	No	Yes
Medium-term fiscal objectives	Yes	No	No
Quantified fiscal objectives	No	No	No
Medium-term fiscal framework
Content of medium-term fiscal policy strategy	Yes	No	Yes
Fiscal risk statement	Yes	No	Yes
Tax expenditures	Yes	No	Yes
Medium-term debt strategy	Yes	No	Yes

Notes: 1. The content of Australia’s and New Zealand’s laws differ significantly in some areas. 2. In Australia and New Zealand, net worth is one fiscal objective, consistent with their accrual-based budgeting systems. Sources: Relevant laws of each country; Charters of Budget Responsibility for Uganda and the United Kingdom.

View Table

^{Table 3.}

Are Medium-Term Fiscal Principles, Objectives, And Frameworks Included In Law?

	Australia and New Zealand	United Kingdom	Uganda
Are the following included in their FRA-equivalent laws?
Fiscal principles	Yes	No	Yes
Medium-term fiscal objectives	Yes	No	No
Quantified fiscal objectives	No	No	No
Medium-term fiscal framework
Content of medium-term fiscal policy strategy	Yes	No	Yes
Fiscal risk statement	Yes	No	Yes
Tax expenditures	Yes	No	Yes
Medium-term debt strategy	Yes	No	Yes

Notes: 1. The content of Australia’s and New Zealand’s laws differ significantly in some areas. 2. In Australia and New Zealand, net worth is one fiscal objective, consistent with their accrual-based budgeting systems. Sources: Relevant laws of each country; Charters of Budget Responsibility for Uganda and the United Kingdom.

67. Targets for public debt and debt guarantees would be established in the proposed Charter of Fiscal Responsibility. Consistent with the discussion in Section II on the coverage of fiscal aggregates, the public debt aggregate should include all Government guarantees. Placing quantitative limits on government guarantees in the Charter would be an important, although incomplete, way of “managing fiscal risks prudently”—the third principle shown in Table 2 (Fiscal risks are discussed in Section IV and Appendix 3).

68. Fiscal principles and key fiscal objectives could be included in the main text of the Act. A schedule²² of the new FRA (or a government regulation) could specify the format of the proposed Charter.

D. Recommendations

• Adopt a principles-only FRA to replace the rules-based approach. Quantified key fiscal targets, notably, the debt-to-GDP target for achieving fiscal sustainability, would be specified in government documents, rather than in the FRA.

• Identify the fiscal responsibility principles and key fiscal objectives (see Table 2) and associated operational targets (Appendix 6) to be included in the new FRA.

• Specify three key fiscal objectives in the FRA: a total public debt objective, an overall fiscal deficit objective, and a debt guarantee limit—all of which would be quantified in the proposed Charter of Fiscal Responsibility (for example, for the 5^th year) and in the Fiscal Strategy Report (year-by-year for three years) (see Section IV) but not in the FRA itself.

• Consider introducing a requirement in the FRA for the Minister of Finance of an incoming Government to present to Parliament (after approval by the Cabinet of Ministers) a Charter of Fiscal Responsibility that includes numerical values for key fiscal objectives (“targets”).

• Include a compulsory mid-term review of the Charter after two years, in which new key fiscal targets could be adopted for the 5^th year beyond the update year.

• Allow, in the FRA, temporary departures from the principles of fiscal responsibility for specific events enumerated in the FRA’s escape clauses.

• Require the Minister of Finance, when updating the Charter, to explain the following to Parliament: (1) the reasons for deviating from previous fiscal targets; (2) how the new fiscal targets are consistent with the FRA’s principles of fiscal responsibility; and (3) any fiscal policy changes designed to attain the new fiscal targets.

• Determine, using a debt sustainability analysis as proposed in Appendix 5, feasible and realistic values of the key fiscal objectives for year five beyond the present fiscal year.

• Strengthen the capacity in the MOF to conduct full-fledged DSAs, using the IMF’s publicly available DSA framework, for inclusion in the yearly Fiscal Strategy Report.

A. Clarifying the FRA’s Requirements for Fiscal and Debt Strategy Reports

70. The 2013 FRA requires the MOF to prepare and submit to the Parliament a statement of fiscal strategy and a report on the national debt strategy. The Act also specifies the strategy’s main contents.: (1) a description of fiscal policy and the steps being taken by the Government to achieve the fiscal policy; (2) the proposals by the Government on how to reduce the national debt to a sustainable level during the period referred to in the statement; (3) and in cases of deviation, the reasons for the noncompliance and the steps that the Government would take to achieve compliance.

71. In practice, the MOF only started to publish Medium-Term Fiscal Strategy (MTFS) and the Medium-Term Debt Management Strategy (MTDMS) in 2018.²³ The MTFS includes a mid-year update of the economic situation for the current budget year, a review of budget outturns and execution in the first six months of the current budget year, the medium-term projections for economic indicators, and the revenues and expenditures for the next budget year plus two outer years. The MTDMS presents the details of the aggregate outstanding total debt (in nominal terms and as a percentage of GDP) for a three-year period and includes a debt strategy.

72. There have been recent improvements in 2019 and 2020 Fiscal Strategy Reports.

• Estimates of all proposed changes in revenues and expenditures are now incorporated into the fiscal strategy.

• The 2020 Fiscal Strategy includes a section on achieving the targets of the FRA and provides annexes on measures proposed to increase revenue and reduce expenditure in the medium term.

• There is a section with qualitative discussion of potential fiscal risks; however, this information should be further improved by a greater focus on identifying a broader range of risks (rather than only macroeconomic risks) and also on quantifying potential risks.

• The Ministry of Finance also decided in 2020 to annually study the progress made against the fiscal strategy published during the previous year, and it included a chapter on the comparison of 2019 Fiscal Strategy and approved 2020 budget for the first time in the 2020 Fiscal Strategy Report.

73. The mission endorses the preparation of the fiscal strategy and debt strategy in a single report. Henceforth, this report (and the draft new FRA in Appendix 1) refers to this document as the “Fiscal Strategy Report,” even though it includes the debt strategy provisions.

74. The Fiscal Strategy Report should translate the fiscal objectives into fiscal policy targets for the budget plus two years. The Charter of Fiscal Responsibility (as proposed in Section III) would set numerical values for key fiscal objectives for the five coming years (medium-term debt anchor and operational targets) for close monitoring. As shown in Figure 5, the role of the Fiscal Strategy Report is to translate the objectives from the Charter into three-year fiscal policy targets, which, in turn, are used to guide the annual budget preparation.

Role Of The Fiscal Strategy Report

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

Source: IMF Team.

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Role Of The Fiscal Strategy Report

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

Source: IMF Team.

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Role Of The Fiscal Strategy Report

Citation: IMF Staff Country Reports 2022, 010; 10.5089/9781616359713.002.A001

Source: IMF Team.

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75. The revised Fiscal Strategy Report would include a medium-term debt strategy (MTDS). Section 6 of Appendix 2 proposes a “chapter” on a debt management strategy. This subsection would include links among deficit financing (external and domestic), debt projections (details to be decided), and ceilings on debt guarantees (as discussed in section III). The projections outlined in the MTDS would be fully consistent with the DSA, and both documents would be developed hand-in-hand: the MTDS would serve as an input to the DSA and would, in turn, be adjusted to take into account the constraints of a sustainable DSA. If a new Public Debt Act is adopted, this high-level summary of the medium-term debt management strategy could be elaborated further in a separate MTDS document.

76. The Fiscal Strategy Report should be developed in a way that provides multi-year fiscal planning to guide annual budget formulation and to facilitate public scrutiny and accountability. A strategy setting phase should entail the preparation of the Fiscal Strategy Report that sets the aggregate expenditure envelope for the upcoming budget and subsequent years (that is, the two-year expenditure ceilings for both current and capital spending on top of the ceilings in the annual budget). The Report should explain any changes to expenditure estimates between the second year of the last medium-term budget projections and the first year of the current medium-term budget projections at the aggregate level.

77. Compliance with the FRA should not be interpreted as simply publishing the required reports if sufficient context and documentation are not provided. For the Fiscal Strategy Report to play an effective role in the promoting fiscal responsibility, it should be formalized with the following key features:

• Medium-term macroeconomic framework that includes main macroeconomic forecasts and assumptions underlying the projections

• Explanation of the government’s medium-term and annual fiscal and debt strategy and how they are consistent with the fiscal policy objectives contained in the Charter of Fiscal Responsibility and the underlying DSA

• Short- and medium-term fiscal targets and progress in achieving them

• Aggregate expenditure envelopes for the upcoming budget and subsequent year for both current and capital spending that will then inform the expenditure ceilings for the Budget Call Circular

• Yearly updated DSA that is consistent with the targets shown in the Fiscal Strategy Report

• Statement on compliance with the FRA and Charter of Fiscal Responsibility, including fiscal objectives and reporting and accountability requirements

• Performance against the previous year’s fiscal targets and how the targets and projections have changed, if relevant, between updates

• Examination of the fiscal risks to achieving the fiscal and debt targets.

Appendix 2 suggests a detailed outline for a revised Fiscal Strategy Report. A Schedule of the new FRA could specify the minimum format of the Fiscal Strategy Report. ²⁴

B. Extending the FRA’s Documentation Requirements

78. Other forward-looking reports could be considered for inclusion as requirements by the FRA (ex-post reports are discussed in Section V).

C. Timing and Publication of the Fiscal Strategy Report

89. Under the current 2013 FRA, the Fiscal Strategy Report should be presented annually to the Parliament before the end of July. The Reports of the past three years were submitted to Parliament in June, in compliance with the FRA’s end-July deadline.²⁸ However, the July timing in the FRA is late in the budget calendar; the Cabinet of Ministers discusses budget strategy for the following year in May, when baseline budget ceilings are determined (Table 4). The Fiscal Strategy Report needs to be prepared and submitted to the Cabinet before its May discussions to enable the Fiscal Strategy Report to guide the budget process through binding ceilings; it could be submitted to Parliament for discussion by end-June. After a parliamentary committee discusses it to ensure that the medium-term fiscal framework is sound, Parliament could issue a Resolution approving the government’s MTFS.

^{Table 4.}

Current Budget Calendar

Source: MOF.

^{Table 4.}

Current Budget Calendar

Activity	Planned Date	Responsible Agency
Prepare economic and fiscal outlook	February 1–April 31	Ministry of Finance
Baseline budget: Technical meetings	April 15–May 15	Ministry of Finance
Forecast revenue, establish baseline expenditure, propose a summary budget (Fiscal Strategy)	April 1–30	Ministry of Finance
Recommendation of the Cabinet for the Fiscal Strategy	May 1–31	President’s Office/Cabinet
Determine baseline budget ceilings	May 15–31	Ministry of Finance
Budget Circular 1 (new program proposals)	April 10–June 30	Ministry of Finance
Budget Circular 2 (baseline budget)	June 1–July 15	Ministry of Finance
Evaluate new program proposals and send to Cabinet	July 1–31	Ministry of Finance, Ministry of National Planning and Infrastructure
Cabinet decisions on new program proposals	August 1–15	President’s Office/Cabinet
Compile and evaluate submitted budgets	16th July–August 31	Ministry of Finance
Recommendation to the Cabinet on the budget	September 1–30	President’s Office/Cabinet/ Ministry of Finance
Submit budget to Parliament	October 15–31	Ministry of Finance
Parliament’s approval of the Budget	November 1–30	Parliament

Source: MOF.

View Table

^{Table 4.}

Current Budget Calendar

Activity	Planned Date	Responsible Agency
Prepare economic and fiscal outlook	February 1–April 31	Ministry of Finance
Baseline budget: Technical meetings	April 15–May 15	Ministry of Finance
Forecast revenue, establish baseline expenditure, propose a summary budget (Fiscal Strategy)	April 1–30	Ministry of Finance
Recommendation of the Cabinet for the Fiscal Strategy	May 1–31	President’s Office/Cabinet
Determine baseline budget ceilings	May 15–31	Ministry of Finance
Budget Circular 1 (new program proposals)	April 10–June 30	Ministry of Finance
Budget Circular 2 (baseline budget)	June 1–July 15	Ministry of Finance
Evaluate new program proposals and send to Cabinet	July 1–31	Ministry of Finance, Ministry of National Planning and Infrastructure
Cabinet decisions on new program proposals	August 1–15	President’s Office/Cabinet
Compile and evaluate submitted budgets	16th July–August 31	Ministry of Finance
Recommendation to the Cabinet on the budget	September 1–30	President’s Office/Cabinet/ Ministry of Finance
Submit budget to Parliament	October 15–31	Ministry of Finance
Parliament’s approval of the Budget	November 1–30	Parliament

Source: MOF.

90. The 2013 FRA requires the publication of the Fiscal Strategy Report by end-July through the Government Gazette. As required in the 2013 FRA, the Report is submitted to the Cabinet, which decides on the publication of the Report before it is sent to the Financial Committee of the Parliament The Fiscal and Debt Strategy Reports are submitted to the Parliament before end-July, but in practice they are published on the MOF’s website at a much later date.²⁹ In 2020, it was not published until November in conjunction with the budget

91. The new FRA should specify the publication date of the Fiscal Strategy Report. Since the Fiscal Strategy Report should be approved by the Cabinet before the first budget circular is issued (that is, by end-April), it should be published shortly after and tabled in Parliament by end-June. The Fiscal Strategy—and more detailed fiscal projections— should be updated in August-September to reflect the most recent economic and fiscal developments and further new policy decisions by the Cabinet It then should be resubmitted to Parliament with the budget documentation and published on the MOF website.

D. Recommendations

• Include the following reporting requirements in the FRA:

• A Fiscal Strategy Report, to be tabled in Parliament by end-June, updated with recent economic and fiscal developments, and resubmitted to Parliament in October with the annual budget documentation

  • The minimum contents for the Fiscal Strategy Report should be stated in a schedule to the FRA (or in a government regulation); it should include the underlying macroeconomic assumptions and DSA,³⁰ a discussion of the fiscal policy actions to be implemented, and the explanations of how the expected medium-term fiscal trajectory would be aligned with the fiscal targets in the Charter of Fiscal Responsibility.

  • Parliament to approve the Fiscal Strategy Report by resolution.

• A fiscal risk statement, to be submitted to Parliament with the Fiscal Strategy Report and annual budget by end-October.

• An annual report on tax expenditures, also part of annual budget documentation

• A debt sustainability analysis in the Fiscal Strategy Report and in updates of the Charter of Fiscal Responsibility.

A. Importance Of Ex-Post Compliance Reports

92. Although a fiscal strategy report is developed annually, no report is prepared by the government on the progress made against its fiscal strategy. The Auditor General’s annual audit of the government’s financial statements includes an assessment of compliance under the FRA. However, the interpretation of compliance has been limited to confirming that the documents identified in the FRA have been submitted to the Parliament There is no assessment of the outcomes against the stated objectives, in part because there is no requirement for the Government to report on performance with respect to the Fiscal Strategy (see Section VI for further discussion of the role of the Auditor General).

93. In order for the government to be accountable for its fiscal policy targets, there should be an ex-post report focused on fiscal policy aggregates, a Final Budget Outcome. This report should identify and explain any deviations through the budget year from the submitted budget and Fiscal Strategy Report, particularly those that impact the fiscal aggregates and progress in achieving the government’s fiscal objectives, as identified in the proposed Charter of Fiscal Responsibility.

94. The FRA could require the Minister to appear before a parliamentary committee to explain the contents of the Final Budget Outcome document, The final budget outcome report could accompany the unaudited annual financial statements that, under the Public Finance Act 3/2006, should be presented to the Cabinet of Ministers by the Minister within three months after the end of the financial year. After the audit of the financial statements, the Final Budget Outcome report could be published and tabled in Parliament by end-June.

95. The Final Budget Outcome report would provide further information about and context to the annual financial statements. Appendix 4 outlines the key elements of the Final Budget Outcome report, citing OECD best practices that could be simplified in some cases for Maldives. The Minister would explain any departures from fiscal responsibility principles, any modifications in the Charter (notably, the targets for total public debt and the fiscal deficit) and/or in the Fiscal Strategy Report, and the reason why budget outcomes differ from the approved annual budget forecasts of revenues and expenditures.

96. It is essential that the Final Budget Outcome report is presented on the same basis as the budget. The budget outcome report and the financial statements are both needed to hold the government accountable for the execution of the approved budget. This task is simpler when budgeting and reporting are presented in the same format. As Maldives prepares to move to program-based budgeting (and eventually to accrual accounting), the Government should ensure that classifications and presentations of budget estimates and actual outcomes remain aligned, that is, the fiscal strategy, budget, and Final Budget Outcome documents should present economic and fiscal information on a consistent basis.

B. Sanctions

97. Sanctions can promote the effectiveness of the FRA by ensuring that the cost of breaking the law is higher than the benefit of adhering to the FRA’s requirements. Sanctions can promote compliance when all levels involved in budget policymaking and budget execution follow strict procedures. However, sanctions require an effective third-party enforcer. Formal sanctions are generally difficult to implement for FRA-type legislation.

98. Sanctions can be personal, institutional, or reputational.

• Personal sanctions can include criminal proceedings for specified alleged breaches, disciplinary procedures that lead to pay reductions or dismissal, and personal liability for financial consequences of specified breaches proved through due process proceedings.³¹ Institutional sanctions are typically directed at subnational governments that do not comply with their rules. They can include (1) the suspension of budget payments to other spending authorities until the breach situation is rectified, (2) the denial of rights to borrow or issue guarantees, or (3) the requirement to follow an adjustment program that is automatically triggered by specified breaches of fiscal rules.³²

• Reputational sanctions involve the obligation to publicly explain deviations for fiscal rules and to publish the violation in an official journal or on an official website. In Australia, Colombia, and the United Kingdom, for example, the reasons for deviations are published and commented on. Poor performance, not adequately explained, adversely affects the credibility of the Government.

99. The main sanction for countries using fiscal principles in law without fiscal rules are reputational sanctions. These FRAs require that the disclosure of deviations from fiscal responsibility principles and the government’s planned response to be included in reports that are tabled in Parliament and published. The examination of fiscal performance by parliamentary select committees and/or by a fiscal council also adds to the reputational pressure on the government (see section VI).

100. Relying on reputational sanctions would be an appropriate approach in Maldives, provided there is strong oversight. Under the “comply or explain” approach of the new FRA, the Minister would be held accountable for explaining to Parliament and its committees all updates to the fiscal strategy, providing a full explanation of any deviations and any changes in key fiscal targets. This approach depends on fully implementing and publishing the various ex-ante and ex-post budget documents discussed in this report; it also depends on active oversight by parliamentary committees and the Auditor General’s Office on the Minister’s reporting responsibilities. It also requires the Government to address the recommendations from these bodies.

C. Introducing New Reporting Requirements

101. The FRA should also include requirements for other ex-post reporting. It appears that good practices exist for in-year fiscal reporting and for the preparation of annual financial statements. However, challenges remain regarding the classification and additional transactions after statements are sent to the Auditor General. There is also capacity constraint in the AGO regarding timeliness of audits.

• In-year reporting: The Research and Publication unit in FAD produces and publishes weekly, monthly, and quarterly fiscal developments reports. These reports provide details on the aggregate revenue and expenditure figures, year-to date and for the respective time period; they also include corresponding figures of the preceding years for comparison. These reports are prepared as a practice. However, they could be made explicit requirements of the Public Finance Act and cross-referenced in the FRA.

• Audited annual financial statements. Articles 38–40 of the Public Finance Act 3/2006 require the MOF to prepare the annual consolidated financial statements and submit them to the AGO within three months (and 14 days) of the end of the year. Some challenges were reported regarding the consistent classification of transactions; the chart of accounts needs updating, and the capacity of line ministries to classify transactions needs improvement.

102. The FRA should mention these reports and cross-reference the corresponding legislation, rather than be their basis. These issues should not be addressed through the FRA. The relevant legal framework exists for in-year reporting of the annual financial statements in the Public Finance Act and the Audit Act, respectively. Therefore, recommendations are not provided to address the challenges identified; however, they should be addressed to improve the quality of fiscal reporting.

103. All ex-ante and ex-post fiscal reports should be published when submitted to Parliament. Sections III, IV, and V of this report have discussed a Charter of Fiscal Responsibility, a Fiscal Strategy Report (twice a year), annual budget documents, and a Final Budget Outcome Report. To enhance fiscal transparency, all fiscal reports prepared by the Government should be published on the MOF website immediately following their approval by the Cabinet of Ministers and President’s Office, at the time of submission of the documents to Parliament; a calendar of annual publications could also be included in the FRA (Table 5).

^{Table 5.}

Calendar of publication for annual FRA documents

Source: IMF team.

^{Table 5.}

Calendar of publication for annual FRA documents

Publication	Suggested annual timing
Preliminary Fiscal Strategy Report	By end-June
Updated Fiscal Strategy Report	By end-October
Annual Budget	By end-October
Fiscal Risk Statement	By end-October
Tax Expenditures Report	By end-October
Final Budget Outcome	By end-June of the subsequent year

Source: IMF team.

View Table

^{Table 5.}

Calendar of publication for annual FRA documents

Publication	Suggested annual timing
Preliminary Fiscal Strategy Report	By end-June
Updated Fiscal Strategy Report	By end-October
Annual Budget	By end-October
Fiscal Risk Statement	By end-October
Tax Expenditures Report	By end-October
Final Budget Outcome	By end-June of the subsequent year

Source: IMF team.

D. Recommendations

• Include in the FRA a requirement for a Final Budget Outcome report, to be tabled in Parliament before end-June, which identifies and explains the reasons for any deviations from the revenues and expenditures of the approved budget and Fiscal Strategy Report

• Include in the FRA cross-references to ex-post reporting requirements for in-year reports and annual financial statements that are outlined in other PFM legislation.

• Include in the FRA a requirement that all fiscal reports described in sections IV and V of this report be published on the MOF website once they are approved by the Cabinet of Ministers, at the time of submission of the documents to Parliament

• Include in the FRA, a requirement for the Minister to appear before a parliamentary committee to explain the contents of the Final Budget Outcome document, any departures from fiscal responsibility principles, any modifications in the Charter of Fiscal Responsibility (notably, the targets for total public debt and the fiscal deficit) or in the Fiscal Strategy Report, as well as deviations in annual budget outcomes.

A. The People’s Majlis And Its Committees

104. The People’s Majlis is de facto the primary fiscal oversight body in the country. The Constitution grants the Parliament unlimited powers to question ministers and members of the Government The FRA requires the MOF to prepare and submit a statement of fiscal strategy and a report on debt strategy to the Public Accounts Committee (PAC).³³

105. However, the fiscal oversight role of the Majlis remains hindered by weaknesses in the PFM systems. The lack of a formal Appropriation Act for expenditures, with the Majlis only approving the overall expenditures envelope, has led to substantial intra-year reallocations among spending categories that adversely affect budget credibility. The PAC was not provided with a report on actual spending compared with initial budget spending by ministries and other accountable government agencies (AGAs). However, in 2019, the MOF Gazette included a new Virements and Appropriations Procedure, which was applied beginning with the 2020 budget.

106. It is important that fiscal reporting facilitates accountability. The ex-ante and ex-post reports recommended in this Report should be timely and of good quality to improve the effectiveness of the oversight by Parliament and the public.³⁴ In practice, the Majlis has unlimited power to amend the draft budget, without being guided by any MTFF or fiscal responsibility document. The Fiscal and Debt Strategy Report is not submitted early enough to guide the budget process.

107. The Majlis would have a key role to play in promoting compliance with the proposed Charter and Fiscal Strategy Report. The Majlis’ role in calling the Minister to account and monitoring deviations from the government’s declared medium-term fiscal objectives will be crucial. By asking questions—written or oral—the PAC can request the Minister to elaborate on the reasons for deviations from fiscal targets, as well as on the government’s plan to revert to achieving targets within an acceptable timing. Parliament could also use its powers to question other government ministers to justify budget outcomes. The Majlis’ role will become particularly important when a performance-based budget system is introduced—as is planned. Questioning and auditioning raises the costs associated with noncompliance and promotes higher fiscal transparency.

108. The Peoples’ Majlis could discuss the government’s Charter and Fiscal Strategy Report in a committee and then approve it by Resolution. This oversight role would require building further capacity within the various committees to discuss the Charter and Fiscal Strategy report and ensure that the subsequent budget discussions do not compromise the attainment of the medium-term fiscal targets.

B. Auditor General’s Office

109. The Auditor General has the legal power to conduct compliance and performance audits for all government institutions, as well as the government’s compliance with the FRA. The AGO is currently finalizing its Public Debt Audit Report of 2018. The credibility of an external audit requires that the Auditor General and its staff be independent of the government units being audited and to have unrestricted access to required information.

110. The Public Finance Act 3/2006 specifies the procedures for auditing annual financial statements. The main challenge has been to audit the consolidated accounts. There are no audit reports on the annual financial statements for 2016 and 2017. The audit report on the financial statements of 2018 was submitted to Parliament in January 2020. Further, there is no effective system for AGO to monitor and/or follow-up on the implementation of the audit recommendations. The Minister of Finance should be required to respond to the AGO’s recommendations in a timely manner.

111. The effectiveness of the AGO is limited by capacity constraints. The office does not have sufficient capacity to conduct audits of all institutions under its broad mandate, which include the government, SOEs, and local councils.

112. The 2013 FRA is unclear with respect to the AGO’s role in auditing the reports specified in the FRA. Article 30(d) of the FRA requires “The Auditor General should prepare a report once he has audited the reports prepared and presented by the Minister under this law.” The FRA does not include any endorsed framework on the tasks to be performed during the audits. Moreover, the FRA does not require the Auditor General to submit its audit reports on FRA compliance to the Public Accounts Committee or to publish them.

113. Going forward, the Auditor General could be assigned specific roles for auditing the government’s performance under the new FRA. The proposed Charter will contain a set of fiscal targets. In the new FRA, the Minister of Finance must state the reasons for changes in the key fiscal targets or for the temporary suspension of them when escape clauses are invoked (see Box 1). In the final Budget Outcomes Report, the Minister must explain the reasons why annual budget outcomes differ from initial budget projections. The FRA could require the AGO to audit – report on whether the Minister has complied with the FRA’s specific accountability requirements. These audits would be published and submitted to Parliament in a systematic way.

C. An Independent Fiscal Institution?

114. To improve compliance with the fiscal responsibility framework, an increasing number of countries has established an Independent Fiscal Institution (IFI). Since this report proposes greater flexibility for the Government in its fiscal management, it is important to also enhance the role of fiscal oversight agencies to monitor and audit whether the Minister of Finance has complied with the FRA’s specific requirements. There are three main types of IFIs that are becoming increasingly popular around the world. These are an independent standalone fiscal council, a parliamentary budget office (PBO), or an autonomous fiscal agency under the executive (Box 2).

115. In Maldives, there are currently two fiscal oversight bodies: Parliament and the AGO. An IFI could complement, rather than substitute for, these two oversight bodies. An IFI’s mandate could be limited to reviewing and assessing the government’s macroeconomic and fiscal forecasts under the Charter and the three-year rolling Fiscal Strategy document, and to assessing compliance with the government’s medium-term fiscal targets.

116. There are three main options relating to independent oversight of the budget:

• Establish immediately a small fiscal council or PBO. Its remit could be limited to a few key assessment functions. Its narrow mandate and its independence could be annexed to the new FRA; Ireland and Portugal provide two examples of countries that follow this approach.

• Enhance fiscal oversight bodies by strengthening Parliament and the AGO. For example, more staff could be provided to the AGO or Parliament, and an independent research office could be established under Parliament with functions wider than budget policy analysis.

• Both of the above.

117. Given Maldives’ small size, limited capacity, and challenges of finding independent staff, the establishment of an IFI in the near future may not be the highest priority. The mission considers that, at this stage of economic development—and also for budgetary reasons—it would be preferable to strengthen current institutions. Parliament and the AGO could focus on assessing the ex-ante and ex-post reports. New follow-up mechanisms and improved technical capacity are needed. The FRA could require the MOF to report annually on how the government has implemented the budget-related recommendations of parliamentary committees and the AGO.

D. Recommendations

• Require in the FRA the Peoples’ Majlis to discuss the government’s Charter and Fiscal Strategy report and approve it by Resolution.

• Gradually enhance the analytical, technical, and staffing capacity of parliamentary committees and the Auditor General’s Office to enable them to assess the government’s medium-term fiscal strategy and annual budget outcomes, and to hold the government to account.

• Include in the FRA a requirement for the AGO to audit whether the Minister of Finance has complied with the FRA’s specific accountability requirements.

• Require in the FRA the Minister of Finance to report annually to Parliament on the actions taken by the government to implement the budget-related recommendations of parliamentary committees and of the Auditor General.

• Consider whether the establishment of an independent fiscal institution would be unrealistic at the present, given the more urgent need to enhance the analytical capacity in the MOF, the AGO, and Parliament.

A. Integrating the New FRA Into the Ongoing PFM Legal Reform Agenda

118. Given that the FRA is a limited-scope law, other laws should include provisions outside the scope of the FRA. The FRA is focused on fiscal transparency and the accountability of the Minister and the government to Parliament for the submission of the fiscal strategy and outcome reports, as well as for fiscal performance, especially with respect to attaining the objectives for public debt and fiscal balances. The FRA is part of the wider PFM legal framework, for which the Public Finance Act 2006 and its accompanying financial regulations provide coverage, including for annual budget preparation, execution, and reporting. Many countries have not adopted an FRA; instead, their PFM Acts cover fiscal responsibility issues.³⁵

119. Several initiatives are underway to introduce new Acts or amend existing ones. The mission is aware of the following proposals, which are at varying stages of development:

• Amendments to the 2006 Public Finance Act, which would subsequently require modifying the government’s financial regulations

• A draft public debt law

• A national planning act

120. Coherency in the PFM legal reform agenda is needed. A credible fiscal responsibility framework requires a clear and robust legal framework that ensures consistency within the entire framework, including the Constitution and other PFM-related laws. Harmonization of PFM laws (especially the Public Finance Law, the Decentralization Law, the FRA, and the Debt Law) is needed to reduce the risk of inconsistencies within Maldives’ fragmented PFM legal framework.

121. Since amendments to the 2006 Public Finance Act are being discussed, this report has not addressed several important PFM issues. The success of the FRA is partly dependent on having a well-functioning budget and PFM system that are clearly defined in law and regulations. The mission has identified several areas of PFM that would be better addressed in the Public Finance Act; in some cases, details would be elaborated in the financial regulations or MOF Circulars. These include the following:

• Parliament’s budget amendment rights. Some countries’ PFM laws restrain Parliament from making amendments to annual budget revenues (for example, preventing Parliament from increasing revenue estimates to finance more expenditures) or to total expenditures (for example, allowing Parliament to change the composition of spending but not to change the total expenditure).³⁶ In this context, the Public Finance Act could specify Parliament’s role in approving multiannual, top-down expenditure ceilings.

• Structure of annual budget appropriations of expenditures. Most PFM laws specify the structure of annual spending within each ministry and accountable government agencies (in the “administrative classification”). For each ministry or agency, Parliament may approve the annual budget expenditure by economic classification, for example, current (salary and non-salary) expending and capital spending on projects. Currently, there is a legal void in this area; the MOF’s Virement and Appropriation framework needs to be incorporated in the Public Finance Act.

• Performance Budgeting. The SAP states that “it is the Government’s aim to shift towards full-fledged results-based budgeting or program budgeting during this term” (2019–23). If this aim is to be realized successfully, the appropriation structure of expenditure will need to change by “program,” rather than by economic classification. The Public Finance Act would also need to elaborate on performance reporting to Parliament and the responsibilities of budget program managers.

• Virement rules. If the government proposes an annual program-based budget to Parliament, the Virements and Appropriations Procedure Gazette published by the MOF in May 2019 would need to be revised. Also, the Public Finance Act is the appropriate legal instrument for specifying the restrictions on the government’s powers to swap between types of expenditure within programs and, possibly, between programs, without parliamentary approval.

• Duration of appropriations and carryover provisions. Articles of the Public Finance Act allow invoices to be paid up to 30 days after the end of the financial year. To accelerate the closing of annual accounts and meeting the Act’s timetable for presenting audited financial statements to Parliament, this carryover requirement should be shortened. However, the Public Finance Act does not appear to allow for multi-annual budget appropriations for capital expenditures.

• Reversionary budgets. PFM laws typically specify how the government would execute the annual budget of a new fiscal year in the event that Parliament does not approve it by December 31.

• Cash management. Parliament’s focus in the FRA should be on the medium-term and annual budget strategy. The in-year disbursement plans of the annual budget and the in-year revisions to the cash plans are matters for the Public Finance Act and, especially, the financial regulations. In this context, the FRA is not the appropriate law for elaborating any provisions on cash flow planning. Chapter 8 of the FRA on cash flow plans being presented to the Minister of Finance could be transferred elsewhere.

• Advances from the central bank. Article 32(a) of the 2013 FRA has proven useful as a way of restricting government borrowing from the Maldives Monetary Authority. However, this restriction is not a macro-fiscal indicator to be retained in the FRA. It could be transferred to the Public Finance Act.

• Accrual accounting. PFM laws do not extensively specify the details of government accounting arrangements, which are embodied in the Generally Accepting Accounting Principles (GAAP) of a country, with the chart of accounts aligned to the accounting system.

  In Maldives, the Public Finance Regulation refers to the International Public Sector Accounting Standards (IPSAS) basis.³⁷ However, the Public Finance Act may lay out a few provisions relating to GAAP and also institutional arrangements for establishing government accounting standards (some countries have independent boards outside of the MOF). In view of the planned transition to accrual accounting in Maldives, the legislative basis of the accounting system needs to be established.

122. A draft public debt law is under review. A public debt law provides the legal basis for all aspects of debt management. A debt law can lay out: (1) a requirement for a medium-term debt strategy, possibly with numerical limits on different categories of debt, and a DSA; and (2) specific debt management issues, such as for developing external and domestic debt markets, or for laying out the functions of a debt management office. Several external partners are providing technical assistance in these areas, and a well-advanced draft Public Debt Law is under review.

123. The strategic issues of the draft public debt law overlap significantly with the FRA. In particular, the FRA requires the Minister to prepare a medium-term fiscal and debt strategy. Also, besides numerical limits on national debt, Chapter 7 of the 2013 FRA contains provisions pertaining to local council debt.

124. The medium-term fiscal strategy, the medium-term debt strategy, and fiscal and debt targets are intimately linked. Realistic, non-arbitrary debt targets cannot be established in isolation of a feasible medium-term fiscal strategy, since deficit financing—new net borrowing-feeds directly into the stock of outstanding public debt. For this reason, the FRA should continue to be the primary law for the establishment of debt limits and medium-term debt developments of key debt aggregates (total debt, Central Government debt, guaranteed debt, and local council debt). A Public Debt Law could elaborate the details specific to operational debt management and institutional arrangements, and it could outline the requirements for a detailed medium-term debt strategy to complement those included in the Fiscal Strategy Report (see especially chapter 6 of Appendix 2).

125. Ideally, the Public Finance Act amendments, the new FRA, and the Public Debt law would be adopted by Parliament simultaneously. Doing this would facilitate full consistency among all three laws. However, since the FRA is a standalone piece of legislation, it could be adopted in 2021 in advance of the other bills. Alternatively, the FRA and Public Debt bills could be presented to Parliament and adopted in the same parliamentary session.

126. This report assumes that the FRA will be adopted in the first parliamentary session of 2021. The medium-term debt strategy provisions of the draft FRA presented in Appendix 1 are considered adequate to ensure consistency with the nondebt provisions of the medium-term fiscal strategy. This implies that the other laws, especially the new Public Debt law, would either have to fit in to the FRA’s provisions or that certain provisions of the FRA would need to be amended or repealed when the Public Debt law is adopted.

127. The adoption of the FRA may have implications for other existing laws. New reporting requirements for the Auditor General’s Office in the FRA will need to be consistent with the Audit Act of 2007. Any new provisions for local councils fiscal and debt management need to be consistent with the Decentralization Act and the proposed Public Debt Act.

128. Finally, if five-year planning is institutionalized, a new National Planning law may be needed. Although the eventual enactment of a National Planning Act is mentioned in the government’s SAP, this would need to be preceded by substantive discussion on the integration of five-year Strategic Action Plans, which mainly lists possible projects in 33 subsectors, with the Medium-Term Fiscal and Debt Strategies discussed in this report.

B. Transitional Issues

129. Given the uncertainty of the macroeconomic and fiscal outlook in 2021, it may be judicious to delay implementing some provisions of the FRA. The default option should be to implement all of the provisions of the new FRA soon after its adoption by Parliament and publication in the Gazette. However, should the authorities judge it to be necessary, the proposals relating to the Charter of Fiscal Responsibility could wait until the next incoming government. This would allow time to discuss how the timing of the introduction of the proposed Charter would best fit with the timing of presidential elections and the formation of a new government. In the interim, the fifth year of the DSA, updated annually as part of the IMF’s Article IV surveillance, could provide the “debt anchor” and overall fiscal balance targets until 2023.

130. Implementation of some specific proposals of this report could be delayed. Examples include: (1) the inclusion, in fiscal aggregates, of specific Central Government institutional units that are currently off-budget; (2) the inclusion of the Pension Fund in fiscal and debt aggregates; (3) the fiscal risks report; and (4) a report on tax expenditures. All of these will take some time to prepare, given the capacity constraints in the MOF. The MOF is best placed to make a judgment on these and other issues. For (3) and (4), however, this report advocates the immediate preparation of the reports, even if incomplete, rather than waiting for full reporting capacity.

C. Recommendations

• Ensure consistency in the PFM legal reform agenda and consider the merits of adopting the FRA and the Public Debt Act in the same parliamentary session in 2021.

• Note that this report assumes the early adoption of the FRA in 2021, in a advance of the adoption of a new Public Debt Act

• Consider the areas where changes are needed in the Public Finance Act and financial regulations, in line with the preceding discussion (on budget amendment rights, budget appropriations, program performance reporting, virement, budget carryover, cash management, and accrual accounting), and make appropriate draft amendment proposals for Parliament’s consideration (Public Finance Act) or the Cabinet of Ministers (financial regulations).

• Remove all cash flow planning provisions (chapter 8) from the FRA, and transfer relevant provisions to the Public Finance Act or to the financial regulations.

• Consider transferring Article 32(a) of the 2013 FRA—restrictions on advances to the Government from the MMA—to the Public Finance Act.

• Consider which provisions of the draft FRA need to be delayed in the present uncertain macro-fiscal circumstance, and draft appropriate transitional issues in the FRA.