Chapter 1: Title, Scope, and Definitions

Title

• 1. This law will be named “Fiscal Responsibility Act.”

Scope

• 2. The provisions of this Act apply to all ministries, agencies, and other entities of the Central Government. For the purposes of this Act, the Central Government includes:

  • (a) The Executive and all its ministries/agencies/entities, including autonomous agencies and funds established by law and under government control, with the exception of the Maldives Monetary Authority;

  • (b) The Legislature, the Peoples’ Majlis, and its agencies/entities;

  • (c) The Judiciary and its agencies/entities;

  • (d) Independent agencies/entities/funds/commissions established under the Constitution of Maldives and relevant laws, and which are under the control of Central Government.

In addition, the entities referred to in (e), (f) and (g) below are governed by the provisions of this Act when stipulated in specific provisions of the Act.

• (e) Local councils and agencies/entities under the jurisdiction of local councils now or to be established in the future;

• (f) State-owned enterprises;

• (g) Any other legal person or entity that receives or uses public funds.

Definitions

3. The definitions below aim to achieve the objectives of the law to the greatest extent. The following words and phrases will be given the following meanings.

• (a) “Cabinet of Ministers” refers to the collective body of Ministers appointed by the President of Maldives, in accordance with the Constitution.

• (b) “Minister” refers to the Minister appointed by the President to develop and implement the Government’s Fiscal Policy.

• (c) “The Government,” when referring to a decision-making body, refers to the Executive branch, of which the President of Maldives is the Head, in accordance with the Constitution.

• (d) “Local Council” means the City Councils, Island Councils, and Atoll Councils established under Law 7/2010 (Decentralization Act).

• (e) “State-owned enterprise” (SOE) refers to a commercial nonfinancial or financial enterprise established by law, in which the Government has controlling shares, which produces goods or services for the market, and which finances its operations largely on the basis of its own revenues. “Controlling shares” means the ability to exercise powers to govern the financial and operating policies of the entity in order to obtain maximum benefits from its activities.

• (f) “Fiscal policy” refers to the policies pertaining to revenues, expenditures, public debt, and other elements of the Government’s medium-term fiscal strategy and annual budget.

• (g) “Fiscal strategy” refers to the fiscal objectives and activities to be undertaken to implement a fiscal policy in the medium term, as well as the approach to be taken to implement fiscal activities.

• (h) “Medium term” refers to a period of three, four, or five consecutive years.

• (i) “Financial year” refers to the period from January 1 to December 3 1 , including the start date and end date.

• (j) “Public debt” refers to the gross debt of the Central Government, as defined in Clause 2 of this Act, and shall include bills, bonds, loans, advances, and overdrafts, denominated in domestic or foreign currency and owed to residents or nonresidents, as well as Central Government guarantees, including all guaranteed debt of local councils, SOEs, and private entities.

• (k) “Overall fiscal balance” refers to the balance after deducting total budget and nonbudget Central Government expenditures from total budget and nonbudget Central Government revenues, including grants.

• (l) “Grants” refers to transfers made in cash, goods, or services for which no repayment is required.

• (m) “Intergenerational equity” refers to the use of national resources in a sustainable manner, keeping in mind the interests of future generations.

• (n) “Fiscal risks” refer to the possibility of deviations of fiscal outcomes from what was expected at the time that the budget and other fiscal forecasts were approved.

• (o) “Tax expenditure” refers to a reduction in a tax liability compared with an established tax norm or benchmark. The revenue forgone from tax expenditures has the same impact on the overall fiscal balance as an increase in expenditure of the same amount.

• (p) “Contingency spending provision” refers to a small reserve of unallocated expenditure in the annual budget that the Government may be authorized to spend on unforeseen contingencies that arise during budget execution.

Chapter 2 Principles of Fiscal Policy and a Charter of Fiscal Responsibility

Chapter 3 Fiscal Strategy Report

Chapter 4 Annual Budget and Fiscal Strategy Report

Chapter 5 Final Budget Outcomes Report

Chapter 6 Responsibilities of the Auditor General and Minister

Chapter 7 Responsibilities of the Peoples’ Majlis

7. 1. The People’s Majlis, in fulfilling the roles and responsibilities set out in the Constitution, shall hold the Government accountable for fiscal policy and performance in accordance with the requirements of this Act, including by;

• (a) reviewing the reports referred to in this Act through the Committee of Public Accounts and other relevant committees; and

• (b) considering the recommendations of the Committee of Public Accounts and other relevant committees, and of the Auditor General, in discussing the reports referred to in this Act.

Chapter 8 Local Councils’ Fiscal Strategies and Debt Limits

Chapter 9 Miscellaneous

Schedule 1 Format of a Charter of Fiscal Responsibility

1. Statement of fiscal policy objectives

(a) The statement shall indicate the measurable objectives of Government fiscal policy in the medium term, which are consistent with the principles laid out in section 2.1 of this Act.

(b) The Charter shall specify quantified targets, by the use of ranges, ratios, or other means, of the Government’s intentions regarding each of the principles specified in Article 2.1(1) (a) to (c) of this Act. These three indicators may be referred to as the Government’s key fiscal targets.

© The Charter may specify quantified targets, by the use of ranges, ratios, or other means, of the Government’s intentions regarding each of the principles specified in Article 2.1(1) (d) to (f) of this Act, or of any other fiscal indicators judged necessary for attaining the fiscal objectives of this Act.

2. Methodology and data for assessing fiscal performance

(a) This shall indicate the methodology to be used to measure the performance of the Government against the objectives required under paragraph 1 of this Schedule.

(b) The sources of data shall include a debt sustainability analysis (DSA), the consolidated audited financial accounts of the Government, audited debt statements, and other relevant data.

3. Consistency of Charter for Fiscal Responsibility with the principles of this Act The Charter shall demonstrate how the Government’s fiscal objectives required under paragraph 1 of this Schedule are consistent with the principles in section 2.1 of the Act. The consistency shall be determined using macroeconomic and fiscal data, assumptions, and projections of the economy, as well as any financial and fiscal policy updates.

Schedule 2 Format for a Fiscal Strategy Report ³

1. Medium-Term Macroeconomic Forecast

The medium-term macroeconomic forecast shall indicate the actual, estimated, and projections covering the previous two financial years, the current financial year, and the next three financial years and shall indicate in respect of each financial year the following economic variables—

(a) the gross domestic product;

(b) the rate of inflation (average and year-end);

(c) the average and year-end exchange rate;

(d) a least one key indicative interest rate;

(e) tourism arrivals; and

(f) other relevant macroeconomic indicators.

2. Medium-Term Fiscal and Debt Framework

(a) Fiscal Strategy: This is a statement of the Government’s targets for the variables that are key fiscal objectives under Clause 2.1 of this Act. It shall explain the reasons if these targets have changed from the precious budget and/or Charter and how the government intends to restore compliance with objectives.

(b) Debt Strategy⁴: This shall include information about financing sources, summary of the Debt Sustainability Analysis, public debt projections, guarantees, and summary of the medium-term debt management strategy.

3. Medium-Term Fiscal and Debt Forecasts

The medium-term fiscal forecast shall cover the previous two financial years, the current financial year, and the next three financial years and shall indicate in respect of each financial year, the following economic variables—

(a) the revenue of Government with respect to:

• (i) tax revenue;

• (ii) non-tax revenue;

• (iii) external grants for the annual budget and for projects; and

• (iv) privatization receipts.

(b) the expenditure and net lending of Government for:

• (i) current expenditure;

• (ii) capital expenditure; and

• (iii) net lending;

(c) the overall balance of Government;

(d) financing of the overall balance including:

• (i) net external financing;

• (ii) net domestic financing, including changes in the balance of the Sovereign Development Fund; (e) total public debt, including:

• (i) total debt of the Central Government

• (ii) total debt of local councils, guaranteed and unguaranteed

• (iii) total debt of state-owned enterprises, guaranteed and unguaranteed

• (iv) other debt guaranteed by the Central Government.

(e) total public debt, including:

• (i) external debt

• (ii) domestic debt.

4. Operational targets and other fiscal indicators

Besides the overall balance required in subsection 3(c) above, the three-year projections shall indicate:

• (a) the primary balance, which is defined as the overall fiscal balance after deducting interest payments.

• (b) the current balance, which, in the case of a deficit, indicates the extent to which the Government is borrowing to finance current expenditure in addition to investment spending, and, in the case of the surplus, the extent to which resources are available for debt reduction or other uses.

• (c) total government expenditure, including subtotals for current expenditure and capital expenditure,

• (d) any other fiscal indicators judged by the Minister to be useful for transparency and analytical purposes.

5. Statement of new policy measures

This is a statement of the impact of major new revenue and expenditure policies the Government is to introduce to ensure that the targets in paragraph 2 and the limits in paragraph 5 of this Schedule are respected.

6. Fiscal Risks Statement

This is a statement of the main sources of risk to the attainment of the fiscal objectives of Government and a quantified estimation of the fiscal impact of these risks, including:

(a) an alternate fiscal framework based on alternative realistic assumptions of the key macroeconomic variables; and

(b) a statement relating to the specific fiscal risks outlined in Schedule 3 and an estimate of the likely fiscal impact of risks should they materialize.

7. Tax Expenditures report

(a) This is a statement of the revenue foregone from tax expenditures, tax by tax, and in total.

(b) The tax expenditure report covers significant tax revenue losses arise from all of the following:

• i. Exemptions: exclusions from the tax base

• ii. Allowances: amounts deducted from the tax base before applying the tax rate(s)

• iii. Tax credits: amounts deducted from a tax liability

• iv. Tax rate relief: a reduced tax rate

• v. Tax deferral: a delay in paying the tax liability

8. Compliance with the Charter for Fiscal Responsibility

(a) This is a demonstration of how the fiscal targets and other fiscal indicators in the Medium-Term Fiscal Strategy are consistent with the objectives and targets set out in the Charter for Fiscal Responsibility.

(b) In cases where there are inconsistencies, the reasons for non-compliance shall be specified by the Minister, along with a statement of the new revenue and expenditure measure that shall be taken by the Government to reach compliance, and the duration until compliance is expected to be reached.

9. If the Fiscal Strategy Report does not include any of the information required by this Schedule, the Minister shall state in the Fiscal Strategy Report the reasons for any missing information and shall ensure that such information is available as soon as practicable for future Fiscal Strategy Reports.

Schedule 3 Fiscal Risk Statement

(See Appendix 3)

Chapter 1. Overview

• The Fiscal Strategy Report is a strategic document that sets out the main objectives of budget policy for the three coming years. It outlines the medium-term fiscal prospects and priorities for the budget and the Central Government over the period from 2022–24, provides the assumptions and forecasts of the main economic parameters that form the basis of the budget projections for the next fiscal year and projection period, and sets out the main parameters of the state budget.

• Main fiscal policy objectives over the medium-term (examples below):

  • Maintaining sustainable fiscal policy consistent with the Government’s fiscal targets, maintaining certain social protections, and providing for COVID-19-related additional health spending;

  • Delivering high quality public services through further improvements to the quality of educational institutions, health care services, etc.;

  • Promoting economic development by diversifying away from tourism through quality investments in public infrastructure, education, and health care, and through promoting innovation in selected industries;

  • Creating a more efficient tax system that increases competitiveness and creates incentives to promote economic activity;

  • Other issues could include ensuring the security of the State, fighting corruption, looking after the most vulnerable citizens, promoting long-term economic resilience (especially to climate change); these should be linked to the key initiatives underway and should be developed for the budget.

  • For 2022, the consolidated budget deficit is estimated to be x percent of GDP. Public debt is forecast to be x Rufiyaa (x percent of GDP), rising/falling to x percent of GDP by 2024.

^{Appendix Table 2.1.}

Summary of Consolidated Fiscal Aggregates

^{Appendix Table 2.1.}

Summary of Consolidated Fiscal Aggregates

	2021	2022	2023	2024
	Projected	Preliminary Budget	Objectives	Objectives
Budget Revenue
Budget Expenditure
Budget Balance
Central Government Revenue
Central Government Expenditure
Other General Government Entities
Revenues
Expenditures
Consolidated General Government Balance
Percent of GDP
General Government Debt
Percent of GDP

View Table

^{Appendix Table 2.1.}

Summary of Consolidated Fiscal Aggregates

	2021	2022	2023	2024
	Projected	Preliminary Budget	Objectives	Objectives
Budget Revenue
Budget Expenditure
Budget Balance
Central Government Revenue
Central Government Expenditure
Other General Government Entities
Revenues
Expenditures
Consolidated General Government Balance
Percent of GDP
General Government Debt
Percent of GDP

Chapter 2. Projections of Macroeconomic Indicators for the State Budget

2.1 Current situation: Economic conditions in 2020 and expected outcomes for 2021

• Describe recent developments in the global economy and domestic economy, including outcomes for GDP and prices.

• Detail expected outcomes for 2021 and how the situation and forecasts may have changed from the 2020 budget, with particular reference to the impacts of the COVID-19 pandemic and necessary health responses to the domestic economy

2.2 Macroeconomic projections for 2022–24

• Global economic outlook (discussion of global GDP projections and developments in major trading partners; it can be useful to include a table with world GDP projections and those of major trading partners, either based on IMF, World Bank, Asian Development Bank, or your own).

• GDP growth forecasts for the budget year, with particular reference to recovery assumptions from the COVID-19 pandemic, as well as trend forecasts over the medium term

• Discussion of the main components of GDP growth to explain what is driving the forecasts (often this is by household consumption, business investment, public sector, and exports, but this could be done by sector including tourism).

• Discussion of employment expectations.

• Discussion of inflation and wages forecasts.

^{Appendix Table 2.2.}

Key Macroeconomic Indicators and Projections

^{Appendix Table 2.2.}

Key Macroeconomic Indicators and Projections

		2019 Actual	2020 Actual	2021 Projected	2022 Projected	2023 Projected	2024 Projected
Nominal GDP Growth (percent on previous year)
Gross Domestic Prices (nominal value)
Real GDP Growth (percent on previous year)
	Components of GDP Growth
Tourism Arrivals
Consumer Price Index (change from previous year)
Unemployment Rate
Employment Growth
Private Sector Wage Growth

View Table

^{Appendix Table 2.2.}

Key Macroeconomic Indicators and Projections

		2019 Actual	2020 Actual	2021 Projected	2022 Projected	2023 Projected	2024 Projected
Nominal GDP Growth (percent on previous year)
Gross Domestic Prices (nominal value)
Real GDP Growth (percent on previous year)
	Components of GDP Growth
Tourism Arrivals
Consumer Price Index (change from previous year)
Unemployment Rate
Employment Growth
Private Sector Wage Growth

Assumptions: These can either be a note to the table that is included in the table, or can be discussed in the text (for example, what is assumed for the exchange rate and interest rates?).

Chapter 3. Fiscal Strategy

• Statement of medium-term fiscal policy targets (limits on debt and the deficit).

• If they have changed from the previous budget and/or Charter, explain why.

• Note whether expected outcomes for 2020 and medium term are consistent with these targets. If not, it should explain why not, and provide the explanation of how the Government intends to restore compliance with the objectives.

Chapter 4. Fiscal Results for 2020 and Expected Outcomes for 2021

4.1 Outcomes for the consolidated budget

• The consolidated budget deficit was x Rufiyaa (x percent of GDP) in 2019, which is higher/lower than in the approved budget. This reflects (higher/lower) revenues and expenditures.

• For 2020, the consolidated budget deficit is expected to be x Rufiyaa (x percent of GDP) in 2020, which is higher/lower than the approved budget due to…

4.2 Fiscal outcomes for 2020 compared with the approved budget

• Outcomes for revenue

• Outcomes for expenditure

4.3 Expected outcomes for 2021, compared with the approved budget

• Revenue performance and comparison to forecast in the 2021 budget

  • Main policies introduced after the budget that impact revenue

  • Economic developments that impact revenue

4.4 Expenditure outcomes

• Expenditure performance and comparison to approved levels in the 2021 budget

• Main policies introduced after the budget that impact expenditures

Chapter 5: Medium-Term Fiscal Projections and Spending Priorities for 2022–24

5.1 Spending priorities

• Spending priorities by key spending areas (subheadings for each sector)

5.2 Medium-term expenditure plans

• Indicative aggregate expenditure ceilings

• Expenditure ceilings for the budget year by administrative units (for discussion)

• Table on expenditure by function (Classification of the functions of government- COFOG) 5.3 Tax policy and revenue projections

• Summary of revenue projections

• Policy measures that have been announced and are being introduced

• Factors driving forecasts (stronger than expected growth, etc.)

• Revenue shares, state and local

^{Appendix Table 2.3.}

Expenditure Ceilings

^{Appendix Table 2.3.}

Expenditure Ceilings

			2019 Actual	2020 Actual	2021 Outlook	2022 Objective	2023 Objective	2024 Objective
Budget Expenditure
		By ministry
		By economic classification
General Government
	By entity
Consolidated General Government Expenditure

View Table

^{Appendix Table 2.3.}

Expenditure Ceilings

			2019 Actual	2020 Actual	2021 Outlook	2022 Objective	2023 Objective	2024 Objective
Budget Expenditure
		By ministry
		By economic classification
General Government
	By entity
Consolidated General Government Expenditure

^{Appendix Table 2.4.}

Revised Revenue Table (short version)

^{Appendix Table 2.4.}

Revised Revenue Table (short version)

			2019 Actual	2020 Actual	2021 Outlook	2022 Objective	2023 Objective	2024 Objective
Budget Revenue
		Tax revenue
		Nontax revenue
	Of which: repayment of policy lending
Central Government Revenue
Consolidated General Government Budget Revenue

View Table

^{Appendix Table 2.4.}

Revised Revenue Table (short version)

			2019 Actual	2020 Actual	2021 Outlook	2022 Objective	2023 Objective	2024 Objective
Budget Revenue
		Tax revenue
		Nontax revenue
	Of which: repayment of policy lending
Central Government Revenue
Consolidated General Government Budget Revenue

^{Appendix Table 2.5.}

State Budget Revenue, by Detailed Component (economic classification)

^{Appendix Table 2.5.}

State Budget Revenue, by Detailed Component (economic classification)

			2019 Actual	2020 Actual	2021 Outlook	2022 Objective	2023 Objective	2024 Objective
Total Revenues
Tax Revenues
	Taxes on income and profits
	Personal income tax
	Company income tax
Taxes on goods and services and trade
		Excise tax
		Customs duties
		Other
Taxes on property and resources
Other taxes
Nontax Revenues
	Grants
	Interest
	Dividends
	Sale of goods and services
	Other

View Table

^{Appendix Table 2.5.}

State Budget Revenue, by Detailed Component (economic classification)

			2019 Actual	2020 Actual	2021 Outlook	2022 Objective	2023 Objective	2024 Objective
Total Revenues
Tax Revenues
	Taxes on income and profits
	Personal income tax
	Company income tax
Taxes on goods and services and trade
		Excise tax
		Customs duties
		Other
Taxes on property and resources
Other taxes
Nontax Revenues
	Grants
	Interest
	Dividends
	Sale of goods and services
	Other

Chapter 6. Deficit Financing and Medium-Term Debt Strategy

• Financing sources 2022–24 (for example, drawing on bilateral loans or market)

• Summary of DSA

• Public debt projections: Central Government debt, including on-lent loans to SOEs

• Guarantees (maximum ceiling, with a breakdown by main beneficiaries, SOEs, local councils, etc.)

• Summary of the medium-term debt management strategy (high level objectives for managing the external and domestic debt portfolios), when developed as a separate document

Chapter 7. Fiscal Risks [summary; refer to the separate Fiscal Risk Statement

• Discussion of how alternative macroeconomic parameters would impact the fiscal projections (with a possible table showing sensitivity analysis)

• Information on Government guarantees, outstanding and by entity

• Discussion of the fiscal risks related to the SOE and PPPs sector, with brief reference to any reform plans to strengthen oversight

Chapter 8. Tax Expenditure

• This statement shall be included in the updated Fiscal Strategy Report submitted to the Peoples’ Majlis before end-October of each year. This is a statement of the revenue forgone from tax expenditures, tax by tax, and in total. The tax expenditure report covers significant tax revenue losses arising from all of the following:

  • Exemptions: exclusions from the tax base

  • Allowances: amounts deducted from the tax base before applying the tax rate(s)

  • Tax credits: amounts deducted from a tax liability

  • Tax rate relief: reduced tax rate

  • Tax deferral: delay in paying the tax liability

Chapter 9. Public Financial Management Reforms

• Reference to medium term PFM reform strategy and brief summary of some of the major elements

Introduction

• Medium-term macroeconomic and fiscal projections presented in the budget are formulated, taking into account the expected developments in the domestic and global economy, based on information available at the time of their preparation.

• There are multiple factors and various risks that, if they were to materialize, could cause budget outcomes differing from those presented. The most significant of these would result from unanticipated macroeconomic developments that adversely impact revenues and the budget position. The IMF classification outlines three types of risks:

  • Macroeconomic risks: risks related to deteriorated macroeconomic parameters, such as terms of trade, inflation, exchange rate, global/regional growth, and domestic growth

  • Specific risks: explicit or implicit public liabilities whose realization is contingent on a specific event (such as risks related to SOEs, PPPs, and natural disasters)

  • Institutional risks: risks that include policy implementation and governance risks

Macroeconomic Risks

• Fiscal risk statements would usually include some sensitivity analysis to illustrate how variations in key economic assumptions could affect the budget aggregates.

• An alternative and more technically demanding approach is to construct alternative macroeconomic scenarios, which involves (1) allowing economic parameters to vary at once (in a consistent way) and (2) presenting the fiscal position associated with each scenario.

^{Appendix Table 3.1.}

Sensitivity of Fiscal Position to Changes in Various Economic Parameters

^{Appendix Table 3.1.}

Sensitivity of Fiscal Position to Changes in Various Economic Parameters

Economic Assumption	Estimated Variation in Overall Balance
	Rufiyaa	Percent of GDP
Real GDP growth is 1 percent lower than forecast
Inflation is 1 percent higher than forecast
Prices for key commodities fall by 10 percent
Rufiyaa-US$ exchange rate depreciates by 10 percent
Tourist arrivals decline by 10 percent
Corporate profits decline by 10 percent

View Table

^{Appendix Table 3.1.}

Sensitivity of Fiscal Position to Changes in Various Economic Parameters

Economic Assumption	Estimated Variation in Overall Balance
	Rufiyaa	Percent of GDP
Real GDP growth is 1 percent lower than forecast
Inflation is 1 percent higher than forecast
Prices for key commodities fall by 10 percent
Rufiyaa-US$ exchange rate depreciates by 10 percent
Tourist arrivals decline by 10 percent
Corporate profits decline by 10 percent

Government Debt

• Fiscal risk statements would usually include summary indicators on public debt, even if these are published as part of a separate debt statement These indicators would generally include domestic versus foreign, elaborating upon the specific foreign currency exposures, short versus long term debt, fixed versus variable interest rates, and the value of debt maturing within a year. These elements would need to be consistent with the MTDS and DSA.

• Some discussion of the possible impact of movements in the currency and market interest rates is warranted to illustrate the sensitivity of the debt estimates to such changes.

Government Guarantees

• One of the main specific risks faced by Governments relates to their guarantees of other public sector entities’ debt.

• It is standard practice in fiscal risk statements to publish a table listing the total value of outstanding guarantees, by beneficiary. This might also be done through a debt statement.

• For SOEs, a summary analysis of the key financial risks may be included to give a sense of the probability that a guarantee may be called in the future.

• More sophisticated analysis would involve an assessment of the expected exposure from the portfolio of guarantees, which would combine the probability of individual guarantees being called and the loss given default.

Major Project Risks and PPPs

• Large public infrastructure projects usually present significant risks in terms of the ability to deliver them on time and on budget.

• It could be useful to include an assessment of such risks for major projects in the Public Sector Investment Program (PSIP), and to consider the performance of the PSIP as a whole.

• A specialized approach to risk assessment and monitoring of PPPs is warranted because the exposures of government are not always obvious, and may crystallize beyond the budget year. As a first step, it would be useful to disclose the main contractual arrangements that could translate into fiscal risks for the government down the road.

Other Contingent Liabilities

• Governments often are exposed through other forms of indemnities, such as those granted to statutory office holders and those that can manifest as future legal claims against the state.

• Contributions to international financial institutions are often in the form of callable capital, and such exposures should be reported.

• There may also be large future claims against the government, whose timing and magnitude are uncertain (for example, backpay arrangements for public sector salaries and unfunded pension liabilities). These should be discussed and quantified, where possible.

Financial Sector Exposures

• Governments can face (1) explicit fiscal risks through their ownership of financial institutions or (2) implicit risks through the fact that they are responsible for regulating the financial system.

• Fiscal risk statements often include a summary of the Financial Soundness Indicators prepared by the regulatory authorities, and some discussion of residual exposures (for example, a discussion of deposit insurance arrangements and the extent to which such schemes are fully funded).

Exposure to Other Public Sector Entities

• Fiscal risk statements are a good place to publish summary information on the overall performance and health of entities outside of the general Government sector.

• Beyond individual debt guarantees, the Government may face other exposures to public sector entities, including volatility in their dividend and tax payments; and from the occasional need to assist with refinancing nonguaranteed debt and facilitate major industry restructuring or to temporarily increase subsidies.

• Where such challenges are known, a fiscal risk statement would outline the situation and estimated exposures. Where such exposures are frequent, it may also be appropriate to make some provision for the average annual cost in the medium-term estimates.

Natural Disasters

• Natural disasters can have profound impacts on public finances through affecting economic output and revenue, and in requiring a substantial increase in public expenditure to provide income support and to repair major infrastructure.

• Although the timing and cost of such events can never be known in advance, fiscal risk statements can help to illustrate the average costs of such events and help governments to make an appropriate financial provision for them as part of the medium-term estimates.

OECD Best Practices Budget Transparency for Year-End Report

• The year-end report is the government’s key accountability document It should be audited by the Supreme Audit Institution and should be released within six months of the end of the fiscal year.

• The year-end report shows compliance with the level of revenue and expenditures authorized by Parliament in the budget Any in-year adjustments to the original budget should be shown separately. The presentation format of the year-end report should mirror the presentation format of the budget.

• The year-end report, or related documents, should provide nonfinancial performance information, including a comparison of performance targets and actual results achieved, where practicable.

• Comparative information on the level of revenue and expenditure during the preceding year should be provided. Similar comparative information should be shown for any nonfinancial performance data.

• Expenditure should be presented in gross terms. Earmarked revenue and user charges should be clearly accounted for separately.

• Expenditure should be classified by administrative unit (for example, ministry or agency). Supplementary information classifying expenditure by economic and functional categories could also be presented.

• The year-end report should contain a comprehensive discussion of the government’s financial assets and financial liabilities, nonfinancial assets, employee pension obligations, and contingent liabilities.

Applicability of the LIC-DSF Framework to Maldives

The debt sustainability framework analyzes both liquidity and solvency issues. Liquidity risks refer to the ability of the country to service its debt in the short run, while solvency risks refer to the ability of the country to repay its debt altogether in the long term. The framework is based on five ratios:

• - For public debt: (1) public and publicly guaranteed debt as a percentage of GDP

• - For public external debt:

  • Solvency (stock) metrics: (2) External debt as a percentage of GDP, and (3) external debt as a percentage of exports

  • Liquidity (debt service) metrics: (4) External debt service as a percentage of exports, and (5) external debt service as a percentage of revenues.

The framework also recognizes that the debt-carrying capacity of a country cannot be dissociated from country-specific institutional and macroeconomic factors. The risk thresholds for the five ratios for a country have to comply with an aggregate risk rating composite indicator, CI), which is a weighted average of the country’s CPIA score, real GDP growth, import cover, global growth, and remittances. The CI yields for each country a rating of weak/medium/strong and measures a country’s debt-carrying capacity. Public and external debt benchmarks are lower for a country with weak debt-carrying capacity than for a country with strong debt-carrying capacity.

Debt carrying capacity (Cl classification)	PV of PPG external debt in percent of		PPG external debt service in percent of
	GDP	Exports	Exports	Revenue
Weak	30	140	10	14
Medium	40	180	15	18
Strong	55	240	21	23

Debt carrying capacity (Cl classification)	PV of total public debt
	GDP
Weak	35
Medium	55
Strong	70

View Table

Debt carrying capacity (Cl classification)	PV of PPG external debt in percent of		PPG external debt service in percent of
	GDP	Exports	Exports	Revenue
Weak	30	140	10	14
Medium	40	180	15	18
Strong	55	240	21	23

Debt carrying capacity (Cl classification)	PV of total public debt
	GDP
Weak	35
Medium	55
Strong	70

The debt sustainability analysis is based on a long-term yearly projection of the evolution of the five ratios under realistic assumptions, as well as under comprehensive shock scenarios. Baseline projections are based on assumptions on the projected fiscal stance (captured by the primary balance) and on parameters affecting debt (including cost of debt, FX projections, and market access risks). When formulating the projections, the realism of the baseline scenario is critical. Baseline assumptions are examined in the light of four realism tools: (1) drivers of debt dynamics; (2) realism of planned fiscal adjustments; (3) fiscal adjustment-growth relationship; and (4) public investment-growth relationship. Shock scenarios take the form of six standardized stress-tests (for example, shock on real growth, primary balance, exports, depreciation, contingent liabilities, other shocks such as natural disasters, endogenous shocks such as fiscal slippages, and combined shocks).

The thresholds are indicative bounds above which the risk of debt distress is considered high. Compliance is assessed under the baseline scenario and under the most extreme shock scenario. The risk level is determined as follows:

• Low risk of external debt distress if none of the indicators breach the thresholds under the baseline and the most extreme shock scenarios.

• Moderate risk of debt distress if none of the indicators breach the thresholds under the baseline but at least one indicator breached the threshold under the most extreme shock.

• High risk of debt distress if any of the indicator breaches its thresholds under the baseline.

The framework provides a final rating of the risk of debt distress for both total and external public debt. It also concludes whether debt is sustainable or not, based on the existence of space to absorb further shocks without having its rating under the methodology downgraded. In assessing the risk level, IMF can also carry out adjustments, based on reasonable judgment, to assess the gravity of threshold breaches (notably, in terms of timeframe of the breaches) and country-specific factors before producing a final risk rating.

The latest Maldives DSA (April 2020) rates the country as being in a high risk of debt distress, even though its debt is assessed as sustainable. In the baseline scenario, debt is currently well in excess of the 30 percent threshold in PV for external debt and above the 35 percent threshold in PV for total debt. The only threshold that is not breached is the one on debt to exports. According to the DSA, key shocks that may cause further upward debt deviations include natural disasters, contingent liabilities (most notably, nonguaranteed SOE debt), and the availability of market financing. Nevertheless, debt ratios display a medium-term downward trend that needs to be accelerated. On this basis, IMF assessed debt as sustainable provided that the authorities comply with their stated ambitious fiscal adjustment strategy in the context of 2020 Rapid Credit Facility outright loan.

Source: IMF DSA April 2020.

Maldives Joint Bank-Fund Debt Sustainability Analysis
Risk of external debt distress:	High
Overall risk of debt distress:	High
Granularity in the risk rating:	Sustainable
Application of judgement:	No

Source: IMF DSA April 2020.

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Maldives Joint Bank-Fund Debt Sustainability Analysis
Risk of external debt distress:	High
Overall risk of debt distress:	High
Granularity in the risk rating:	Sustainable
Application of judgement:	No

Source: IMF DSA April 2020.

Moving from the Debt Sustainability Analysis to a Five-Year Total Debt Objective

In practice, the debt anchor and operational targets that would be included in the Charter of Fiscal Responsibility and the three-year Fiscal Strategy/MTFF would be directly taken from the updated DSA. The debt-to-GDP target would be taken from the fifth year (or more if a transitional arrangement is in place, for example, the eighth year) of the baseline scenario DSA and converted from a present value level to a nominal value level for the sake of simplicity. The number could also be rounded up by a reasonable amount (for example, by 5 percent of GDP) to take into account the possible materialization of future fiscal risks and provide a safety buffer. The overall balance target would also be taken from the DSA by summing up the fifth-year primary balance target and the expected debt interest servicing. Other operational targets (for example, expenditures targets) would have to be compatible with the primary balance path under the updated DSA.

In being included in the Charter and the MTFF, the debt and operational targets would be submitted to Parliament as the government’s targets, although Parliament would not have to formally approve them. The Charter of Fiscal Responsibility commits the Government to a defined medium-term fiscal stance and includes the five-year objectives taken from the DSA. The three-year Fiscal Strategy/MTFF would be formulated on a yearly rolling basis, along with the annual budget and will need to be consistent with the targets set in the Charter.

Any deviations from the defined fiscal stance would have to be properly justified and would lead automatically to an update of the DSA projections. In case of intra-year fiscal deviations, any supplementary budget would need to include an updated MTFF. Any long-lasting substantial deviation would lead to an update of the Charter. In any case, an updated DSA will need to be attached to any update of the MTFF or the Charter; deviations will have to be justified, especially if they lead to a situation where debt could become unsustainable. The existence of an escape clause would constrain the cases where deviations are possible and acceptable.