document of the world bank...csc civil services commission . dpc development policy credit . dpl...

Document of The World Bank

Report No: ICR2507

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-46900)

ON A CREDIT

IN THE AMOUNT OF SDR 8.5 MILLION

INCLUDING SDR 1 MILLION IN PILOT CRISIS RESPONSE WINDOW RESOURCES (US$ 13.7 MILLION EQUIVALENT)

TO

THE REPUBLIC OF MALDIVES

FOR AN

ECONOMIC STABILIZATION AND RECOVERY PROGRAM

February 28, 2013

Poverty Reduction and Economic Management Department Maldives and Sri Lanka Country Department South Asia Region

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THE REPUBLIC OF MALDIVES

CURRENCY EQUIVALENTS (Exchange Rate Effective as of January 31, 2013

Currency Unit = Maldivian Rufiyaa 1.00 Rufiyaa = US$ 0.065 US$ 1.00 = 15.4 Rufiyaa

GOVERNMENT FISCAL YEAR January 1st – December 31st

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank BML Bank of Maldives BOP Balance of Payments BPT Business Profit Tax CAS Country Assistance Strategy CSC Civil Services Commission DPC Development Policy Credit DPL Development Policy Lending DRP Dhivehi Rayyithunge Party ERP Economic Recovery Program ESF Exogenous Shocks Facility EU European Union FM Financial Management GFC Gross Fixed Capital GGST General Goods & Services Tax GFS Government Finance Statistics GDP Gross domestic product GNI Gross National Income GoM Government of Maldives ICR Implementation Completion Report IDA International Development Association IFMIS Integrated Financial Management Information System IFC International Finance Corporation ILO International Labour Organization IMF International Monetary Fund MDP Maldivian Democratic Party

MECC Macro-Economic Coordinating Committee MMA Maldives Monetary Authority MoTF Ministry of Treasury and Finance MTDS Mid Term Debt Strategy O&M Operations and Maintenance PA People’s Alliance PAS Public Accounts System PER Public Expenditure Review PEFA Public Expenditure and Financial Accountability Assessment PFM Public Financial Management PPPs Public-private partnerships PSIP Public Sector Investment Program SAP Strategic Action Plan SBA Stand-By Arrangement SDR Special Drawing Rights SME Small- and medium-sized enterprises SOE State-owned enterprises SP Social Protection STELCO State Electric Company Ltd TA Technical Assistance TEB Tender Evaluation Board TGST Tourism Goods and Services Tax TOR Terms of Reference TSA Treasury Single Account UNICEF United Nations Children Fund VRS Voluntary Retirement Scheme

Vice President: Isabel M. Guerrero Country Director: Diarietou Gaye Sector Manager: Vinaya Swaroop

Task Team Leaders: Francis Rowe and Kirthisri Rajatha Wijeweera

ICR Team Leaders: Zahid Hussain and Susan Razzaz

THE REPUBLIC OF MALDIVES ECONOMIC STABILIZATION AND RECOVERY PROGRAM

Table of Contents

Data Sheet A. Basic Information .............................................................................................................. i B. Key Dates ........................................................................................................................... i C. Ratings Summary ............................................................................................................... i D. Sector and Theme Codes .................................................................................................. ii E. Bank Staff .......................................................................................................................... ii F. Results Framework Analysis ............................................................................................. ii G. Ratings of Program Performance in ISRs ........................................................................ iv

H. Restructuring (if any) ....................................................................................................... iv

1. Program Context, Development Objectives and Design ........................................ 1 1.1 Context at Appraisal .................................................................................................... 1 1.2 Original Program Development Objectives (PDO) and Key Indicators...................... 3 1.3 Revised PDO and Key Indicators ................................................................................ 4 1.4 Original Policy Areas Supported by the Program ....................................................... 4 1.5 Revised Policy Areas ................................................................................................... 5 1.6 Other Significant Changes ........................................................................................... 5

2. Key Factors Affecting Implementation and Outcomes .......................................... 6 2.1 Program Performance .................................................................................................. 6 2.2 Major Factors Affecting Implementation .................................................................. 12 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization ........... 14 2.4 Expected Next Phase/Follow-up Operation .............................................................. 14

3. Assessment of Outcomes ...................................................................................... 15 3.1 Relevance of Objectives, Design and Implementation .............................................. 15 3.2 Achievement of Program Development Objectives .................................................. 15 3.3 Justification of Overall Outcome Rating ................................................................... 16 3.4 Overarching Themes, Other Outcomes and Impacts ................................................. 16

4. Assessment of Risk to Development Outcome ..................................................... 17 5. Assessment of Bank and Borrower Performance ................................................. 18

5.1 Bank Performance ..................................................................................................... 18 5.2 Borrower Performance ............................................................................................... 19

6. Lessons Learned.................................................................................................... 20 Annex 1: Bank Lending and Implementation Support/Supervision Processes ............ 21

(a) Task Team members ................................................................................................... 21 (b) Staff Time and Cost .................................................................................................... 21

Annex 2: Economic Context ......................................................................................... 22 Annex 3: World Bank CAS, Other Donor Programs and overarching Government Program ......................................................................................................................... 25 Annex 4: Performance of the Government’s Overall Macroeconomic Reform Program....................................................................................................................................... 27 Annex 5: Borrower’s Comments .................................................................................. 33

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A. Basic Information

Country: Maldives Program Name: Development Policy Credit

Program ID: P114463 L/C/TF Number(s): IDA-46900 ICR Date: 02/27/2013 ICR Type: Core ICR

Lending Instrument: DPL Borrower: GOVERNMENT OF MALDIVES

Original Total Commitment:

XDR 8.50M Disbursed Amount: XDR 8.50M

Revised Amount: XDR 8.50M Implementing Agencies: Ministry of Finance and Treasury Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 10/09/2008 Effectiveness: 04/01/2010 Appraisal: 12/08/2009 Restructuring(s): Approval: 03/04/2010 Mid-term Review: Closing: 06/30/2010 06/30/2010 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Unsatisfactory Risk to Development Outcome: High Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Unsatisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Not Applicable

Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies: Not Applicable

Overall Bank Performance: Moderately Satisfactory Overall Borrower

Performance: Moderately

Unsatisfactory C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators QAG Assessments

(if any) Rating:

Potential Problem Program at any time

No Quality at Entry (QEA):

None

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C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments (if any) Rating:

(Yes/No): Problem Program at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Central government administration 100 100

Theme Code (as % of total Bank financing) Economic statistics, modeling and forecasting 25 25 Macroeconomic management 25 25 Public expenditure, financial management and procurement

50 50

E. Bank Staff

Positions At ICR At Approval Vice President: Isabel M. Guerrero Isabel M. Guerrero Country Director: Diarietou Gaye Naoko Ishii Sector Manager: Vinaya Swaroop Miria A. Pigato Program Team Leader: Zahid Hussain Robert Francis Rowe ICR Team Leader: Susan R. Razzaz ICR Primary Author: Zahid Hussain Susan R. Razzaz Kirthisri Rajatha Wijeweera F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The DPC, approved on March 4, 2010 aimed to underpin the Government's program, as articulated in the Strategic Action Plan, to bring about economic recovery while protecting the vulnerable. The Strategic Action Plan aims to redefine the role of the state in the economy to achieve upper-middle income status, ensure more equitable access to services and opportunities, improve service delivery, facilitate economic diversification, and support better environmental practices to sustain growth and adapt to global climate change. More specifically, the DPC operation supported reform efforts to address structural problems which constrained fiscal adjustment (in the areas of public financial

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management and public enterprises) and to develop the social protection system so it would be able to protect the vulnerable. Public Financial Management Objectives. In the area of Public Financial Management, the Program Development Objectives was to enhance the Government's ability to plan and deliver credible and sustainable budgets through development of tools for expenditure and revenue projections, budget presentation, in-year reporting and debt management. Public Enterprise Reform Objectives. In the area of Public Enterprise Reform, the Program Development Objective was to improve the effectiveness and transparency of public enterprise oversight and to establish mechanisms for publically beneficial Public Private Partnerships. Social Protection Objectives. In the area of Social Protection, the Program Development Objective was to support the Government's efforts to cushion the impact of rising prices on the vulnerable and to unify and improve the safety net programs. Revised Program Development Objectives (if any, as approved by original approving authority) (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : An economic growth rate of 3 percent in 2010 and 5 percent in 2011 Value (quantitative or Qualitative)

- 3.6 % 3% in 2010 and 5% in 2012 7.1% in 2010 and

7.0% in 2011

Date achieved 12/31/2009 12/31/2010 12/31/2010 Comments (incl. % achievement)

Indicator 2 : Key components of the Strategic Action Plan are fully costed

Value (quantitative or Qualitative)

No components of the Strategic Action Plan are costed and do not figure into the medium-term budget presented in 2009

Key components of the Strategic Action Plan .are fully costed

No progress made since DPC appraisal. Some elements were costed by the President's oOffice but with no verifiication from MoFT


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approval documents)

Formally Revised Target Values



Indicator 3 : Grater transparency in the presentation of the Government's annual budget


Greater transparency in the presentation of the Government's annual budget

There has been some progress in the clarity of presentation with the 2010, 2011 and 2012 budgets being presented in conformity with the GFS standard. The 2013 budget was not presented to Parliament in the GFS standard.


Indicator 4 : Increased coverage of the social safety net system


Increased coverage of the social safety net system

The number of individuals benefiting from social safety net programs increased dramatically since 2009.


Although the coverage of the social safety net system has increased dramatically, it has done so at a very high fiscal cost.

(b) Intermediate Outcome Indicator(s)



approval documents)

Formally Revised

Target Values



G. Ratings of Program Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

H. Restructuring (if any) Not Applicable

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1. Program Context, Development Objectives and Design

1.1 Context at Appraisal The Maldives Development Policy Credit (DPC) was designed in 2009, in the context of enormous challenges but also enormous opportunity. The global economic and financial crisis had hit the Maldivian economy hard, turning a long-standing fiscal problem into a fiscal and balance of payments crisis. But, it was also a time of enormous opportunity because the new, reform-minded government of President Nasheed had recently taken office following the first multi-party democratic elections in the country’s history. By the time the DPC Project Appraisal Document was completed, in February 2010, there were already signs that the economy was recovering. The adoption of a new constitution in August 2008, paved the way for the country’s first ever multi-party Presidential and Parliamentary elections. The hotly contested Presidential election in October 2008 saw the long standing President Maumoon Abdul Gayoom replaced by Mohammed Nasheed of the Maldives Democratic Party (MDP) in the second round run off. Nasheed was elected on a program of smaller government and stronger service delivery. The MDP’sStrategic Action Plan aimed to ensure that government expenditures would be based on sustainable revenues, and included fiscal consolidation, privatization and public private partnership (PPP) initiatives. The new government of President Nasheed inherited long-standing fiscal and external problems. Government spending had increased in the aftermath of the 2004 tsunami, and in the run up to the elections. A large part of the increase in expenditures was the public sector wage bill, with both the number of public sector employees and their wages increased.1 Fiscal imbalances were reflected in external imbalances. Imports reached over 90 percent of GDP in 2008 due to accelerating government expenditure, strong demand for resort-related construction materials and increases in food and fuel prices. As a result, the Current Account Deficit reached 53 percent of GDP in 2008, despite robust growth in tourism – the Maldives’ main industry. In addition to the macroeconomic problems, there were underlying structural problems – notably in public financial management and in public enterprises – that made it difficult for the Government to manage its fiscal affairs. In terms of public financial management, the problems were three-fold: (i) the budget planning process did not include the multi-year framework needed for fiscal sustainability; (ii) the in-year financial management system did not provide the Ministry of Finance the information needed to correct problems as they arose; and (iii) the public debt portfolio was both risky and high cost. In terms of public enterprises, contingent liabilities were accumulating due to government guarantees, and reform of the public enterprise system was constrained by the lack of an institutional framework. Moreover, the country’s safety net system was poorly targeted and inefficient. The global financial and economic situation turned the Maldives’ chronic problems into a crisis, exposing the unsustainable level of fiscal expenditures. The Government’s revenue base was narrow and volatile, driven mainly by the fortunes of the tourism sector and consisting largely of tourism receipts, resort lease rentals and import duties. The global economic crisis

1 Government spending increased from 36 percent of GDP in 2004 to 63 percent in 2008. The total pay package for public sector employees increased by over 150 percent during this same period and by 2008 the public sector employees were nearly one-third of the labor force.

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resulted in a 9 percent contraction in tourist arrivals and a 23 percent reduction in tourism revenues during the first nine months of 2009. And, as international markets slowed, the Maldives Monetary Authority (MMA) drew down foreign exchange reserves to cover the current account deficit.2 The new government of President Nasheed developed its Strategic Action Plan to address the macroeconomic imbalances and underlying structural problems and protect the poor during the recovery period. To address the macroeconomic imbalances the government implemented fiscal austerity measures, including a 15 percent cut in public sector salaries. These measures were supported by IMF Stand-By Arrangement and Exogenous Shocks Facility approved in December 2009. To give it the tools needed to responsibly manage its fiscal obligations, the Government proposed reforms to public financial management systems and development of mechanisms to address public enterprise issues. Furthermore, aware that the fiscal austerity measures would result in price increases, the Government also proposed improvements to the targeting and efficiency of the safety net system in order to cushion the impact on the vulnerable. By early 2010, when the DPC Project Appraisal Document was finalized, there were already initial signs of an economic recovery and evidence that the Government’s fiscal austerity measures were putting the fiscal deficit on a sustainable path. In addition to the improved expenditure situation, revenues had picked up in the last quarter of 2009 thanks to increased tourist arrivals and import duty receipts. The international community came together to provide budget support and technical advice to allow the nascent democratic government of President Nasheed the ability to make the needed changes while protecting the country’s vulnerable. In addition to the IMF program referred to above, the Asian Development Bank provided an Economic Recovery Program for USD 35 million, also in December of 2009. Based on our respective mandates, the IMF program (USD 92.5 million) focused on supporting the aspects of the government’s reform program related to short-term macroeconomic imbalances,3 while the smaller World Bank program (USD 8.5 million) focused on supporting the aspects of the government’s reform program related to the structural problems that constrained fiscal adjustment and protection of the vulnerable during the recovery. The use of Development Policy Credits was anticipated in the World Bank Country Assistance Strategy for FY08-12, approved by the Executive Directors in January 2008. The specific program supported by this DPC is part of Pillar 1: Economic and fiscal governance as well as Pillar 2: Human development and social protection.4 The DPC was the first of a two-operation programmatic series and was processed under the IDA Financial Crisis Response Fast-Track Facility. The operation also benefitted from an additional SDR 1 million allocation from IDA’s Crisis Response Window. The risks involved were assessed jointly by the IMF and World Bank teams and were articulated in the Project Appraisal Document. These risks included: (i) vulnerability to external shocks, in particular the possibility of a slow global economic recovery (which could result in low tourism-related revenue and inadequate access to international financial markets) or

2 For an in depth discussion of the macroeconomic situation at the time of DPC appraisal, please see Annex 2. 3 The IMF approved a 36-month combined Stand-By Arrangement and External Shocks Facility on December 4, 2009. The program centered on a strong fiscal adjustment to put public finances back on a sustainable medium-term path, complemented by monetary tightening and measures to strengthen the banking sector. 4 The third CAS pillar is Environmental Management. For an in-depth discussion of the World Bank CAS, other donor support to the Maldives as well as the Government’s Strategic Action Plan, please see Annex 3.

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high commodity prices; (ii) limited technical capacity in government; (iii) political risks associated with the Maldives’ lack of experience with democracy and the fact that party which holds the executive does not have a majority in parliament;5 and (iv) delays in implementation of the required fiscal adjustment, e.g. due to resistance from civil servants or the broader public. Despite the risks, the IMF and World Bank proceeded with their respective programs due to the urgent needs facing the country. The IMF and World Bank teams assessed the government’s program and determined that, if implemented as planned, it would place the fiscal deficit on a sustainable path, while protecting the vulnerable during the recovery period.

1.2 Original Program Development Objectives (PDO) and Key Indicators The DPC, approved on March 4, 2010 aimed to underpin the Government’s program, as articulated in the Strategic Action Plan, to bring about economic recovery while protecting the vulnerable. The Strategic Action Plan aims to redefine the role of the state in the economy to achieve upper-middle income status, ensure more equitable access to services and opportunities, improve service delivery, facilitate economic diversification, and support better environmental practices to sustain growth and adapt to global climate change. More specifically, the DPC operation supported reform efforts to address structural problems which constrained fiscal adjustment (in the areas of public financial management and public enterprises) and to develop the social protection system so it would be able to protect the vulnerable. Public Financial Management Objectives. In the area of Public Financial Management, the Program Development Objectives was to enhance the Government’s ability to plan and deliver credible and sustainable budgets through development of tools for expenditure and revenue projections, budget presentation, in-year reporting and debt management. Public Enterprise Reform Objectives. In the area of Public Enterprise Reform, the Program Development Objective was to improve the effectiveness and transparency of public enterprise oversight and to establish mechanisms for publically beneficial Public Private Partnerships. Social Protection Objectives. In the area of Social Protection, the Program Development Objective was to support the Government’s efforts to cushion the impact of rising prices on the vulnerable and to unify and improve the safety net programs. Key Outcome Indicators. The Key Outcome Indicators identified in the Project Appraisal Document are:

• An economic growth rate of 3 percent in 2010 and 5 percent in 2011 • Key elements of the Strategic Action Plan have been costed • Greater transparency in the presentation of the Government’s annual Budget, and • Increased coverage of the social safety net program

Key Results Indicators. The Key Results Indicators for each area as specified in the Project Appraisal Document are:

• Public Financial Management o Key components of the Strategic Action Plan are fully costed.

5 Following the Presidential elections in October 2008, Parliamentary elections were held in May 2009. In the Parliamentary elections, the Dhivehi Rayyithunge Party (DRP) of former president Gayoom, in coalition with the People’s Alliance (PA) emerged as the single largest block, holding 35 seats. President Nasheed’s Maldivian Democratic Party (MDP) obtained only 28 seats in the 77-seat parliament.

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o Reliable cash flow forecasting; improved cash management/reporting; and up-to-date within-year information on government expenditures

o Recourse to the ways and means account at the MMA is restricted for all of 2010/11 leading to a decline in the share of MMA credit to the GoM

o Cost and risk characteristics of the government’s public debt portfolio are more balanced

o Financial markets are deepened through the issuance of auction-based T-bills and bonds

o Domestic debt in the form of T-bills and T-bonds makes up a growing share of the government’s total public debt portfolio

• Public Enterprise Reform o Government issued guarantees are recorded and reported as part of public and

publically available debt statistics and are at or below 2 percent of GDP • Social Protection

o Government approves a new integrated social protection strategy that is well-targeted and fiscally sustainable.

1.3 Revised PDO and Key Indicators The PDO and Key Indicators were not revised.

1.4 Original Policy Areas Supported by the Program The Development Policy Credit sought to address two overarching problems. There were structural problems (in public financial management and public enterprise reform) that constrained the new Government’s ability to make fiscal adjustments. And there was no safety net system that could be used to cushion the impact of fiscal adjustment on the vulnerable. The World Bank’s Development Policy Credit was designed around those parts of the Government’s Strategic Action Plan which were specifically intended to address these overarching problems. In particular: Public Financial Management. In the area of public financial management, the Government lacked the tools it needed to plan and deliver credible and sustainable budgets. Specific problems existed in five areas: accuracy of budget projections, clarity of budget presentation, cost and riskiness of public debt, sufficiency of in-year reporting to allow prompt rectification of problems, and inadequate budget oversight.

• To improve accuracy of budget projections, the DPC supported a committee that would make use of a Medium Term Expenditure Framework (MTEF) as a policy instrument, development of the Public Sector Investment Program, and costing of the Strategic Action Plan.

• To improve clarity and transparency of budget presentation, the DPC supported use of standard Government Financial Statistics budget presentation, and inclusion of the 3-year MTEF.

• To reduce the cost and riskiness of public debt, the DPC supported diagnostic analysis of debt management, development of a debt management strategy, establishment of a committee to manage the debt, reduced reliance on the Maldives Monetary Authority for public debt, and use of auctioned T-bills and T-bonds.

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• To improve in-year budget reporting, the DPC supported implementation of the Public Accounting System, preparation of monthly revenue forecasts, development of an up-to date database of public employee compensation, and improvement of cash management.

• To improve budget oversight, the DPC supported the preparation and publication of audited government financial statements, and improved public sector accounting.

Public Enterprise Reform. The Government of President Nasheed sought to change the role of the state in the economy. Two objectives are particularly relevant to the DPC. Specifically, the Government sought to improve regulation and reduce financial dependence of public enterprises; and sought to develop a framework through which Government could contract with the private sector for provision of services.

• To improve regulation and reduce financial dependence of public enterprises, the DPC supported establishment of autonomous regulatory authorities for key utilities, preparation of guidelines for Government issued guarantees, and increased transparency and restraint in issuance of guarantees.

• To develop a framework through which Government could contract with the private sector for provision of services, the DPC supported preparation of a framework for Public Private Partnerships (PPPs), preparation of terms of reference for the committee which manages PPPs, and establishment of a technical unit which could analyze PPP proposals.

Social Protection. In the area of Social Protection, there was no safety net system that could be used to cushion the impact of fiscal adjustment on the vulnerable. Although several safety net programs existed, they were small and fragmented. As part of the reform program, utility tariffs were increased and the Government initiated a temporary subsidy system, while simultaneously developing a unified and improved social protection system.

• To provide a temporary mechanism to protect the vulnerable, the DPC supported development of a targeting mechanism for utility subsidies, and an assessment of the targeting and fiscal performance of the temporary mechanism.

• To develop a unified and improved social protection system, the DPC supported development of a common database of beneficiaries of existing social protection systems, and the development and approval of a unified, well-targeted and fiscally sustainable social protection system.

1.5 Revised Policy Areas Not applicable. 1.6 Other Significant Changes Not applicable.

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2. Key Factors Affecting Implementation and Outcomes

2.1 Program Performance Program Actions. In addition to the four prior actions (which were achieved before project signing) two other actions (out of total of twenty-three) were achieved before the programmatic series lapsed:

• The preparation of a comprehensive diagnostic of debt management operations was achieved in October 2009.

• A debt management committee with representation from the MoFT, the MMA and National Planning was established in January 2011. Three meetings were held during February and March 2011, though no meetings have been held since then.

Some progress was made on four other actions before the programmatic series lapsed: • The Macroeconomic Coordinating Committee was reestablished. However, it was not

reestablished until after the 2010 budget was presented. And, although regular (quarterly) meetings were held in 2010, only one meeting was held in 2011. A new committee was established in 2012. No timetable of meetings or outputs has been made available to the Bank team.

• A unit (called the Office for Programs and Projects) was established in March 2010 that provides appraisal and implementation monitoring for public investment projects. The unit was initially within the MoFT , then moved to the Ministry of Housing. The planned Interministerial Committee has not been established.

• A medium-term debt management strategy document was prepared in 2011. It was approved by Cabinet in June 2012 (after the programmatic series lapsed). It has not yet been published on the MOFT website.

• Revised Public Finance regulations (including procurement) were issued in early 2011. An assessment of whether or not the regulations adhere to internationally accepted public sector accounting standards has not yet been made because the regulations are not yet available in English.

Because none of the eight triggers for DPC2 were achieved within the twenty-four month timeframe, the programmatic series is considered lapsed. Table 1 provides details about the status of the program actions. The program actions are taken directly from the Project Appraisal Document’s Policy Matrix. The actions in italics were the prior actions for DPC1. Triggers for DPC2 are indicated in brackets. All other actions are part of the program but were identified neither as prior actions for DPC1 nor as triggers for DPC2.

Table 1: Status of Program Actions

(prior conditions for DPC1 indicated in italics.) Triggers for DPC2 are indicated in brackets. PROGRAM ACTIONS

STATUS and COMMENTS

POLICY AREA 1: PUBLIC FINANCIAL MANAGEMENT

Revise the MECC committee ahead of the presentation of the 2010 budget, and establish a timetable for regular meetings and outputs.

The Macroeconomic Coordinating Committee was reestablished. However, it was not reestablished until after the 2010 budget was presented. And, although regular (quarterly) meetings were held in 2010, only one meeting was held in 2011. A new committee was established in 2012. No timetable of meetings or outputs has been made available to

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PROGRAM ACTIONS

STATUS and COMMENTS the Bank team.

Present the 2010 budget to Parliament on November 22, 2009 premised on a three (3) year rolling framework in conformity with the standard Government Finance Statistics (GFS 1986)

Achieved. In addition to the 2010 budget, the 2011 and 2012 budgets used a 3 year rolling framework and were presented in GFS format on a three year rolling framework. The 2013 budget, prepared after the change in government, used a 3 year rolling framework but was not in GFS format at the time it was presented to parliament. Although the three year rolling framework has been applied over the past several years, the projections do not have any analytical basis and are, therefore, of limited credibility.

Set up a PSIP project implementation unit within the MoFT that is supported by a Project Appraisal Committee that has representation from key line Ministries.

In March 2010, the Government established the Office for Programs and Projects (OPP). The OPP carries out initial appraisal/evaluations, regular monitoring and reporting functions for all domestically financed public investment projects. The OPP was initially housed at the Ministry of Finance, then moved to the Ministry of Housing in June 2011. The OPP does not have representation of other Ministries, though it does interact with relevant Ministries/Agencies. .

Unify the Public Sector Investment Program (PSIP) with the rest of capital and recurrent expenditure on a 3-year basis. [Trigger for DPC2]

No action taken.

Complete implementation of the second phase of the Public Accounting System project in each of – the President’s Office, Department of National Planning and Civil Service Commission.

Achieved. The second phase of implementation has been completed in all government agencies. However, the PAS is still not fully functional. Key modules of the PAS have not yet been implemented including the Budget Module, the MIS module, the HR module, the audit information system module and the accounts payable module. Although all agencies post transactions into the system, due to the absence of the budget and accounts payable modules, agencies are unable to compare actual amounts to budgeted amounts. This is still being done through a simple Excel-sheet system.

Prepare a forecasting methodology for monthly revenues that is updated monthly and presented to the Fiscal Affairs and Economic Policy Division of the Ministry of Finance

Achieved. Monthly forecasting is done, but the methodology has not been assessed. The quality of forecasts was reasonably good in 2010. However, the introduction of new taxes has complicated the forecasting process.

Establish a comprehensive database featuring consolidated data on all public sector employees, together with each employee’s pay package that can be updated semi-annually until the human resources module of the Public Accounts System is fully operational

Achieved. The database was established in 2009 but has not been updated. The MoFT has been unable to obtain required information from the key public sector institutions (e.g. Civil Service Commission, the independent commissions, the armed forces and the President’s Office).

Publish the first audited financial statements for government of Maldives for FY2009. [Trigger for DPC2]

No action taken. Although financial statements were prepared for the 2009, 2010 and 2011 fiscal years, they were not audited. Part of the delay in auditing was due to the impeachment of the incumbent Auditor General by the Parliament in 2010, and the fact that a successor was not appointed until late 2011.

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PROGRAM ACTIONS

STATUS and COMMENTS

Issue revised Public Finance regulations (including procurement regulations) to establish adherence to internationally accepted public sector accounting standards. [Trigger for DPC2]

Revised Public Finance regulations (including procurement) were issued in early 2011. However, an assessment of whether or not they adhere to internationally accepted public sector accounting standards has not yet been made because the regulations are not yet available in English.

Establish a cash management committee with a clearly defined TOR and a timetable for regular meetings.

No action taken.

Conduct a comprehensive diagnostic of debt management operations.

Achieved. The preparation of a comprehensive diagnostic of debt management operations was achieved in October 2009. Technical assistance was provided by the Commonwealth Secretariat and the World Bank.

Establish a debt management committee with representation from the MoFT, the MMA and National Planning

Achieved. The committee was established in January 2011. Three meetings were held during February and March 2011. No meetings have occurred since March 2011.

Draft a medium-term debt management strategy document, present MTDS to Cabinet and publish on MOTF website. [Trigger for DPC2]

A medium-term debt management strategy document was prepared in 2011. It was approved by Cabinet in June 2012 (after the programmatic series lapsed). It has not yet been published on the MOFT website. Technical assistance was provided by ADB.

Sign an agency agreement between the MMA and MoFT

No action taken.

POLICY AREA 2: PUBLIC ENTERPRISE REFORM

Produce PPP strategic framework paper and submit the report to the Cabinet for guidance.

No action taken

Prepare a terms of reference for the Privatization Committee which includes PPP work

No action taken.

Establish a dedicated PPP unit within the Ministry of Planning with a clear TOR and a business plan to undertake a value-for-money analysis for each PPP proposal.

No action taken

Establish an autonomous regulatory authority for key utilities. [Trigger for DPC2]

No action taken

Prepare operational guidelines for approval and issuance of guarantees. [Trigger for DPC2]

No action taken

POLICY AREA 3: SOCIAL PROTECTION

Develop a fiscally sustainable interim targeting mechanism for the new water and electricity subsidies.

In 2009, 400 beneficiaries received subsidies, using a means testing mechanism. Since September 2010, all applicants in the capital city have received the subsidy. Since January 2011, the electricity subsidy has also been available to residents outside of the capital. Currently 70-80% of residents of the capital and 100% of residents outside of the capital receive the subsidy. The subsidy is not fiscally sustainable.

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PROGRAM ACTIONS

STATUS and COMMENTS In 2012, the World Bank had a preliminary discussion with the National Social Protection Agency on potential application of Proxy Means Testing. A targeting mechanism was not developed for the water subsidy because the water subsidy was not implemented.

Complete an assessment of the targeting performance and fiscal implications of the electricity subsidy implemented 1 November 2009 and water subsidy. [Trigger for DPC2]

The National Social Protection Agency completed an assessment of targeting performance and fiscal implications of the electricity subsidy in 2012 (more than 24 months after project signing). The water subsidy program was not implemented so no assessment was needed.

Develop a common database for monitoring beneficiaries of SP programs. [Trigger for DPC2]

Work is currently in progress at the National Social Protection Agency.

Develop and submit to Cabinet a proposal for a unified social protection system

No action taken

Results Indicators. Two Results Indicators (out of eight) were achieved before the project series lapsed:

• Starting from 2009, Government access to the ways and means account at Maldives Monetary Authority was limited to use as an overdraft facility not to exceed 100 million Ruffia at the end of each month and which must be brought to zero by the end of each year. Total credit from Maldives Monetary Authority to the Government has declined from 52% of government’s domestic debt in 2008, 43% in 2009, 27% in 2010, 29% (estimated) in 2011, and 33% (estimated) in 2012.

• Domestic debt in the form of Treasury bills and Treasury bonds make up a growing share of the government total public debt portfolio. As of the end of 2011, Treasury bills and Treasury bonds comprised 54 percent of the central government’s total public debt portfolio.

In addition, progress has been made on one other Results Indicator: • Treasury bill auctions started in 2009. In 2012 there were 62 Treasury bill auctions with

31,511 million Ruffia accepted. Table 2 provides details about the status of the results indicators. The results indicators are taken directly from the Project Appraisal Document’s Policy Matrix.

Table 2: Status of Results Indicators RESULTS INDICATORS

STATUS and COMMENTS

POLICY AREA 1: PUBLIC FINANCIAL MANAGEMENT Key components of the Strategic Action Plan are fully costed. Benchmark: No components of the SAP are costed and do not figure into the medium-term budget presented in 2009

No progress made since DPC appraisal. Some elements were costed by the President’s Office but with no verification or substantiation from MoFT.

Reliable cash flow forecasting; improved cash No progress made since DPC appraisal.

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RESULTS INDICATORS

STATUS and COMMENTS

management/reporting; and up-to-date within-year information on government expenditures. Benchmark: no timely within year expenditure data, over 1,200 government accounts, unreliable revenue forecasts Recourse to the ways and means account at the MMA is restricted for all of 2010/11 leading to a decline in the share of MMA credit to the GOM Benchmark: 75 percent of the central government’s domestic debt percentage was MMA credit to the GOM in 2008

Achieved. Starting from 2009, Government access to the ways and means account at Maldives Monetary Authority was limited to use as an overdraft facility not to exceed 100 million Ruffia at the end of each month and which must be brought to zero by the end of each year. Total credit from Maldives Monetary Authority to the Government has declined from 52% of government’s domestic debt in 2008, 43% in 2009, 27% in 2010, 29% (estimated) in 2011, and 33% (estimated) in 2012.

Credit and risk characteristics of the government’s public debt portfolio are more balanced.

No progress made since DPC appraisal.

Financial markets are deepened through the issuance of auction-based T-bills and bonds. Benchmark: no T-bills or bonds issued by auction for open market operations

A Treasury Bill auction system was introduced in 2009 (prior to singing the DPC). In 2009, there was one T-bill auction with 51mn Ruffia accepted. In 2010, there were 53 T-bill auctions with 17,887 mn Ruffia accepted. In 2011 there were 56 T-bill auctions with 21,793 mn Ruffia accepted. In 2012 there were 62 T-bill auctions with 31,511 mn Ruffia accepted. There have been no T-bond auctions to date.

Domestic debt in the form of T-bills and T-bonds makes up a growing share of the government’s total public debt portfolio. Benchmark: 25 percent of the central government’s domestic debt percentage was T-bills and bonds in 2008

As of the end of 2011, Treasury bills and Treasury bonds comprised 54 percent of the central government’s total public debt portfolio.

POLICY AREA 2: PUBLIC ENTERPRISE REFORM

Government issued guarantees are recorded and reported as part of public and publically guaranteed debt statistics and are at or below 2 percent of GDP. Benchmark: guarantees are not recorded and reported by the External Resource Mobilization Department of the MoFT in a timely or comprehensive fashion

Records of Government-issued guarantees are recorded and reported to the Budget section of the Ministry of Finance. As of the end of 2012, government-issued guarantees were 12 percent of GDP.

POLICY AREA 3: SOCIAL PROTECTION

Government approves a new integrated social protection strategy that is well-targeted and fiscally sustainable.

No progress made since DPC appraisal.

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RESULTS INDICATORS

STATUS and COMMENTS

Benchmark: Electricity subsidy implemented in November 2009, no database or monitoring of beneficiaries of current SP programs.

Outcome Indicators. Two of the four Outcome Indicators have been achieved. Specifically:

• GDP growth was over 7 percent in 2010 and 2011, exceeding the outcome indicator target of 3 percent for 2010 and 5 percent for 2011.

• Coverage of the social safety net system has increased dramatically, primarily as a result of the introduction of new, very generous programs. Currently, 66% of the population receive benefits from the new health insurance scheme and over 70% of the population receive benefits from the electricity subsidy scheme.6

There has been some progress on one of the Outcome Indicators: • Presentation of the budget has improved in that it is now available in a 3-year rolling

framework and in GFS format. There has been no progress, however, on the quality of the information in the budget or its usefulness for policy making.

Table 3 provides details about the status of the outcome indicators. The outcome indicators are taken from the Credit and Program Summary of the Project Appraisal Document.

Table 3: Status of Outcome Indicators OUTCOME INDICATORS

STATUS and COMMENTS

Economic growth rate of 3 percent in 2010 and 5 percent in 2011

Achieved. GDP growth was 7.1 percent in 2010, 7.0 percent in 2011, and is estimated at 3.5 percent in 2012.

Key components of the Strategic Action Plan are fully costed. Benchmark: No components of the SAP are costed and do not figure into the medium-term budget presented in 2009

No progress made since DPC appraisal. Some elements were costed by the President’s Office but with no verification or substantiation from MoFT.

Greater transparency in the presentation of the Government’s annual budget.

The budget has always been transparent in the sense of being made publically available promptly after presentation to Parliament. There has been some progress in the clarity of presentation with the 2010, 2011 and 2012 budgets being presented in conformity with the GFS standard. The 2013 budget was not presented to Parliament in the GFS standard, but is now available in GFS standard. In terms of quality of the information in the budget, a three year rolling framework has been used in all budgets starting with 2010, although the projections have not been based on quantitative analysis. There has been no progress on the quality of information on future debt, future revenue streams or contingent liabilities.

Increased coverage of the social safety net system. Achieved. The number of individuals benefiting

6 For a discussion of the appropriateness of this indicator, please see sections 3.1 and 3.2

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OUTCOME INDICATORS

STATUS and COMMENTS

from social safety net programs increased dramatically since 2009. Several new systems were introduced during this period, with the electricity subsidy and health insurance system among the largest. In 2009, 400 beneficiaries received electricity subsidies. Since September 2010, all applicants in the capital city have received the subsidy. Since January 2011, the electricity subsidy has also been available to residents outside of the capital. Currently 70-80% of residents of the capital and 100% of residents outside of the capital receive the subsidy. One of the largest was the health insurance system, Aasandha, which was introduced in January 2012. Eighty-eight percent of the population is registered in the system and 66 percent of the population received benefits in 2012. Although the coverage of the social safety net system has increased dramatically, it has done so at a very high fiscal cost.

2.2 Major Factors Affecting Implementation Assessment of Project Design and Soundness of Background Analysis. Several aspects of the DPC’s design were helpful in implementation. Fist, the fact that the operation was organized around areas and actions that were part of the Government’s own program, gave the operation the maximum chance for success. Second, close coordination with the IMF and ADB ensured complementarity in our operations and allowed the institutions to collaborate closely during implementation – both in terms of supervision of the operations and coordination on technical assistance. Third, the design and implementation benefitted from fitting in well with other parts of the World Bank program. Availability of recent, high quality analytical work in all three areas was a key factor in the operation’s design.7 Technical assistance during DPC implementation was provided through AAA activities and through the Pension and Social Protection Administration Project, as well as through the ongoing economic dialogue activity. On the other hand, and in retrospect, the operation’s design was overly complex and ambitious for the very limited political and technical capacity of the new and inexperienced Government. Given the Government’s focus on urgent macroeconomic issues, little attention remained to deal

7 In particular, the public financial management area was informed by the Bank-Fund PEFA, the Debt management Performance Assessment and recent technical assistance in the area of public service reform. The public enterprise area was informed by diagnosis of the public private partnership arrangements. The social protection area built on a World Bank report Social Protection in the Maldives: Options for Reforming Pensions and Safety Nets. In addition, the macroeconomic analysis was based on analytical work done in preparation for the World Bank Group/ Government Country Assistance Strategy Retreat (held in September 2009), the Bank’s periodic macroeconomic monitoring reports and IMF analysis during the course of joint missions and preparation for their Stand-By Arrangement.

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with the structural and social protection issues of the DPC. Furthermore, the Public Accounting System was more sophisticated to implement than could be handled given the limited technical capacity available.8 The monitoring and evaluation plan was generally appropriate. However, several of the Outcome Indicators were problematic. In particular (i) economic growth is too far removed from the DPC program to be a useful indicator, and (ii) coverage of the safety net is not a good measure of the appropriateness of the safety net system and may contradict the objective of developing a social protection system which is efficient and fiscally sustainable. The Project Appraisal Document accurately assessed the risks, and attempted to mitigate the risks in several ways. The overall risks were mitigated by dividing the program (and disbursements) into two DPCs, rather than including the entire program under a single DPC. The external shocks were mitigated by the IMF and ADB programs which included revenue enhancement measures. Risks associated with limited capacity were mitigated through project design. Furthermore, the risks were to be monitored during implementation by participating in the IMF’s quarterly review missions. Despite these efforts, the bulk of the risk could not be mitigated. Assessment of Risks and Adequacy of Government’s Commitment Commitment to the program had been expressed at the highest levels during design of the DPC. The development objectives, results indicators and planned actions were all part of the Government’s own reform program. Several meetings were held during preparation in which President Nasheed himself expressed his commitment. The key interlocutors for the DPC reform program were the State Minister of Finance and the Deputy Minister of Finance. By mid-2010, however, several of the risks identified in the Project Appraisal Document materialized.9 Most importantly, the Government lacked the political capacity to convince key stakeholders of the need for reform actions. As a result, the Government’s overall reform program went off track. This is clearly seen in terms of the macroeconomic program, and resulted in the IMF program stalling after the First Review in mid-2010. On the expenditure side, the public sector wage cuts announced by the President in October 2009, were reversed by the independent Civil Service Commission and Parliament in January 2010.10 In fact, several new programs have been introduced in the past two years that have considerably increased expenditures. These include the Decentralization Bill of July 2010 (expanding the wage bill to cover the additional layer of government) and the Health Insurance Bill (which introduced an extremely generous package of health care to the population). On the revenue side, there have been some successes. The Government and Parliament were able to agree on introduction of a General Sales Tax, a Tourism GST, and a Business Profits Tax. However, Government and Parliament have not been able to agree on the Personal Income Tax. The conflict between the

8 The Public Accounting System may also be more sophisticated than required for the needs of a country the size of the Maldives. 9 In addition to the political and capacity risks discussed above, the external risks identified in the Project Appraisal Document also materialized in terms of a slow global recovery and high commodity prices. Tourism rebound in 2010 and the resorts successfully diversified to include the Chinese market. Later, however, arrivals fell from both the European segment and the Chinese segment. High oil prices have continued throughout the period, with a negative impact on both the Current Account Deficit and the Fiscal Deficit (due to Government subsidies of energy products). The Current Account Deficit was 19.7% in 2011 and 28.6% in 2012. After declining from 43.1% of GDP in 2009 to 39.6% in 2010, expenditure to GDP went back above 42% in 2011 and 2012. 10 The Nasheed Government continued to pay the lower salaries throughout 2010. The Supreme Court was asked to determine if it owed staff arrears for that year. The case was still not resolved when Nasheed left office in February 2012. The transitional Government withdrew the Supreme Court case, with the implication that the Government will pay the 2010 arrears.

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Government and Parliament ultimately led major Cabinet change in July 2011 and the President’s resignation under pressure in February 2012. The transitional Government under Mohammed Waheed has not made a formal statement outlining its policy priorities and the changes have led to a further loss of accumulated expertise. Although the macroeconomic conflicts were not directly tied to the DPC program, they became the focus of the Government’s efforts and soured the relationship with parliament such that the DPC actions were also impacted. Moreover, the Minister of Finance changed three times during the two years following project signing. Two examples are worth highlighting. First, implementation of the Public Accounting System was compromised by the high turnover in technical staff. (The skills acquired during training for the system was highly sought after by the private sector. As a result, many of the staff quit soon after receiving training.) Second, Ministry of Finance staff were unable to update the public sector employee database due to lack of cooperation from the various public agencies. (The largest agency, the Civil Service Commission, was in a law suit with the Government over the wage reduction.) 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The Project Appraisal Document set out qualitative and quantitative benchmarks and targets for 2010 and 2011, which were to be monitored quarterly in close collaboration with the IMF. For the most part, these indicators were found to be highly relevant to the team during supervision. Because most of the indicators related to Government actions, they were easy to verify. In the area of public enterprise reform, however, the indicator related to government issued guarantees has been difficult to monitor because the information is not recorded in an accessible fashion. Eight supervision missions were conducted during the 24 months following project signing. The team also participated in IMF missions, which allowed data cross-checking. 2.4 Expected Next Phase/Follow-up Operation The programmatic series is off track and the second DPC is not expected to happen. However, the World Bank continues to provide technical assistance (as part of its AAA work program) in the areas of revenue forecasting and social protection. An IDF grant to support the Audit General has been approved and will begin implementation soon. The World Bank is planning an operation to support development of the public financial management system, including support for the full implementation of the Public Accounting System.

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3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation The original Program Development Objectives remain largely relevant. The public financial management system remains weak and unable to support the Government manage its fiscal affairs. In particular, budget preparation does not include accurate information on future revenues, program costs, debt service or contingent liabilities; in-year reporting is insufficient to allow problems to be corrected in a timely fashion; and public debt portfolio remains risky and high cost. The social protection system remains poorly targeted, inefficient and ad hoc, and therefore unable to protect the vulnerable in a sustainable manner. The oversight of Public Enterprises remains ineffective and non-transparent and the mechanisms for Public Private Partnerships have not yet been established. It should be noted, however, that the new Government has not yet articulated its view on Public Private Partnerships.

The original DPC design remains largely relevant as well. The actions identified in the Project Appraisal Document (including both DPC1 and DPC2), would still be considered necessary to achievement of the Program Development Objectives. However, even where actions were achieved, they were not sufficient to have the expected impact on the Results Indicators, Outcome Indicators or PDOs. (See section 3.2, below). Furthermore, as mentioned above, the specific design of the Public Accounting System may be overly complex for the capacity or needs of the Maldives. 3.2 Achievement of Program Development Objectives As described in section 2.1, the prior actions for DPC1 were achieved and there was some follow up on several those actions, which can allow for their future use in policy making in the future. Two additional actions were achieved and progress was made on four others before the programmatic series lapsed. However, even where actions were completed, lack of follow up has meant that the actions have not had the expected impact on Project Development Objectives (PDOs). For example, related to the PDO of improving the accuracy of budgets and budget implementation:

• Although 3 year projections are included in budget presentation, these projections are not made on the basis of credible analysis and are, therefore of limited use to policy makers;

• Although phase 2 of the Public Accounting System was implemented, many essential modules have not been implemented. As a result, the system cannot be used to compare actuals to budget amounts;

• Although revenue forecasts are made on a monthly basis, the methodology for the forecasts has not been assessed.

• Although a database of civil servants was prepared, it has not been kept up to date, and is therefore of limited use.

• Although the preparation of a comprehensive diagnosis of debt management operations was achieved, it has not been of limited use.

Two of the Results Indicators were achieved and progress was made on one other before the programmatic series lapsed. Two of the Outcome Indicators were achieved before the programmatic series lapsed. Specifically, GDP growth rates have exceeded the target rates for 2010 and 2011; and coverage of the safety net system has increased dramatically. The achievement of GDP growth rate targets is welcome, although it has only very tenuous links to the DPC program. In retrospect, “increased

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coverage of the safety net system” was a poor choice of Outcome Indicator. Increased coverage was achieved, but at a very high fiscal cost, which significantly detracted from the DPC’s Program Development Objective of sustainable budgeting. 3.3 Justification of Overall Outcome Rating Rating: Moderately unsatisfactory The DPC was appropriately designed to address the structural problems constraining fiscal adjustment and to protect the vulnerable during the recovery period. These same problems still exist and are still relevant today. The DPC’s objectives were not met, however, because several of the risks identified in the Project Appraisal Document materialized. Most importantly, the Government lacked the political capacity to convince stakeholders of the need for reforms and the technical capacity to follow through on the program’s actions. 3.4 Overarching Themes, Other Outcomes and Impacts Although capacity building was not among the objectives of the DPC, several important training activities were initiated during implementation in order to address constraints that emerged. In particular, training activities have been conducted on tourism revenue forecasting and safety net targeting methods.

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4. Assessment of Risk to Development Outcome Rating: High The risks identified at the time of appraisal remain the key risks to the Program Development Objectives going forward. In particular, achievement of the PDOs would require political and technical capacity within Government. Both of these are limited and likely to remain limited in the future. In terms of political capacity, no new actions are likely to be taken by the transitional government, and are therefore likely to be delayed until after the parliamentary elections in 2014. As described in previous sections, implementation of prior actions continue in several areas (i.e. presentation of the budget, use of the PAS and revenue forecasting). It is likely that these will continue and can be built upon in the future. In the case of the civil servant database, although it was set up, it has not been updated and would need to be completely started from scratch. In the area of social protection, efforts (identified as part of DPC2) to develop the targeting mechanism and prepare the database of beneficiaries are ongoing. Slow but steady progress is likely to continue in the future.

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5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory Bank performance in ensuring quality at entry is assessed as marginally satisfactory. There were several very positive aspects of project design and appraisal. In particular:

• The Bank team provided timely response to the urgent need of the newly elected Government. Total time for project design and appraisal was only 2 months.

• Despite the short time for design and appraisal, the process was rigorous. The process included three joint missions with the IMF team and thorough use of the available analytical products, as well as following the normal internal Bank processes. (The DPC was processed under the IDA Financial Crisis Response Fast Track Facility.)

• The DPC design was based on the Government’s own reform program. It was designed to complement the already ongoing IMF and ADB programs, with a focus on the areas of Bank comparative advantage – structural reforms (in the areas of public financial management and public enterprises) and protection of the vulnerable.

• The Project Appraisal Document realistically assessed the risks to the operation. In retrospect, a few aspects of project design and appraisal could have been done better. In particular:

• The program of reforms was overly ambitious and complex, given the limited political capacity (that is, the need for senior leaders to focus on other priorities) and the limited technical capacity.

• Insufficient attention was paid to risk mitigation. For example, it would have been useful for the Project Appraisal Document to identify specific means for building or retaining capacity.

• As explained in section 2.2, some of the Key Outcome Indicators were poorly defined and had limited linkages to the policy actions supported by the DPC.

. (b) Quality of Supervision Rating: Moderately Satisfactory A total of eight supervision missions were conducted during the time of the first tranche disbursement and the project closure – spanning 24 months.11 The Bank team had a harmonious and cordial relationship with the government both at policy level and at the technical level, which made possible regular exchange of information, especially on monitorable indicators. In addition to monitoring the Government’s progress on the program actions, supervision missions were used to identify technical assistance needs which were either handled by the project team (as in the case of tourism revenue projections) or through separately arranged training activities (as in the case of safety net targeting methods).

11 Supervision missions were held May 3-7, 2010; July 27-30, 2010; November 22-25, 2010; February 20-22, 2011, March 19-22, 2011; May 1-5, 2011; June 18-21, 2011; and September 19-22, 2011.

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(c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory A satisfactory rating is justified on the basis of the text in parts (a) and (b) above. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Unsatisfactory Government commitment to the DPC-supported reforms was initially strong and at the level of the President. Promptly upon taking office, the President and Cabinet developed an overall reform program to address the urgent macroeconomic imbalances (supported by the IMF program) as well as the underlying structural problems (in public financial management and public enterprises) and to protect the vulnerable during the economic recovery. However, as described in section 2.2 above, the Government lacked both political and technical capacity to implement the overall reform program. In terms of fiscal austerity measures, the Government was unable to convince Parliament to support key proposals. Although the conflicts with Parliament were not directly tied to the DPC program, they became the focus of Government efforts, absorbing what little capacity existed. Further, during the DPC implementation period, staffing changes at both political and technical levels, reduced accumulated knowledge and expertise on DPC-supported reforms. (b) Implementing Agency or Agencies Performance Implementing agency was the Ministry of Finance and is discussed in (a) above. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Unsatisfactory A marginally unsatisfactory rating is justified on the basis of the text in part (a) above.

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6. Lessons Learned Constraints to political capacity can derail even a non-controversial program of reforms. In the case of the Maldives, the nascent democracy and inexperienced government had limited political capacity to convince stakeholders (i.e. Parliament) of the need for difficult reforms. In such cases, limiting the scope of reforms to only the most urgent and essential may be necessary. Even where (as in the case of the DPC) the program’s reforms are not politically contentious, the senior government leaders may have little time to motivate and guide technical staff. Constraints to technical capacity need to be realistically assessed and addressed. It may be useful to explicitly build technical assistance into the program. In the case of the DPC, technical assistance needs were identified during supervision and generally met, though sometimes with a lag as funding needed to be identified. Explicitly including technical assistance may be useful to ensure resources are readily available when needed. It should also be noted that, even if sufficient resources are devoted to technical assistance, absorptive capacity may be a constraint. In the case of the DPC, frequent changes in staffing (at all levels) meant that capacity was not retained even where training was provided. In future operations in similar contexts, it might be helpful to include components that directly address underlying problems behind retaining qualified staff 12 or to anticipate the need to provide multiple rounds of training whenever new staff come on board. The sustainability of outcomes depends largely on further support for reforms. The fact that the civil service database was set up, but it has not been updated since and doing so would require starting from scratch, is a good example of how without continuous support for these reforms the sustainability of the outcomes could be compromised.

12 In the case of the Maldives, the staff retention issue was tied to poorly managed voluntary retirement program as well as to the broader civil service compensation program.

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Annex 1: Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending

Robert Francis Rowe Senior Economist SASEP Co-Task Team Leader

Kirthisri Rajatha Wijeweera Economist SASEP Co-Task Team Leader

Manoj Jain Lead Financial Management Specialist SARFM Team Member

Ranjana Mukherjee Country Program Coordinator MNCA4 Team Member Puja Vasudeva Dutta Senior Economist SASSP Team Member Richard Damania Lead Economist AFTSN Team Member

John F. Speakman Lead Private Sector Development Spec. SASFP Team Member

Miriam Witana Procurement Specialist EASRI Team Member Nobuo Yoshida Senior Economist PRMPR Team Member Shahnaz Sultana Ahmed Program Assistant SASEP Team Member Rita Soni Program Assistant SASEP Team Member Zeenath Marikar Program Assistant SASEP Team Member

Supervision

Francis Rowe Senior Economist SASEP Co-Task Team Leader

Kirthisri Rajatha Wijeweera Economist SASEP Co-Task Team Leader

Daminda Eymard Fonseka Research Analyst SASEP Team Member Mehar Akhter Khan Office Administrator SASEP Team Member (b) Staff Time and Cost

Stage Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY10 30.08 184,758.43

Total: 30.08 184,758.43

Supervision/ICR FY13 11.25 27,577.57

Total: 41.33 212,336.00

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Annex 2: Economic Context The global financial crisis in 2008 exposed the macroeconomic vulnerabilities of the Maldivian economy. While GDP grew by 12.2 percent in 2008, it declined by 3.6 percent in 2009 (Table-1).13 General level of inflation has been high leading up to the operation with the Maldives suffering from global food price hike that preceded the economic crisis. Average CPI inflation reached 12 percent in 200814 before receding thereafter in face of the global crisis. Maldives has seen its fiscal position deteriorate significantly. Government spending increased in the immediate aftermath of the 2004 Asian Tsunami, rising further thereafter on areas unrelated to the Tsunami. The public sector wage bill was a primary source of the increase in recurrent expenditures, as both the number of public sector employees and their wages increased. The public sector workforce swelled to nearly one-third of the labor force between 2004 and 2008, with wages increasing by over 150 percent during this period. The global financial crisis exposed the unsustainable level of fiscal expenditures. Tourism-related revenues declined with the global crisis and the fiscal deficit jumped from around 11.2 percent of GDP (including grants) in 2008 to 20.5 percent in 2009.

Table 1. Maldives: Key Social and Economic Indicators

13 These figures are based on the new national accounts series. Maldives rebased its national accounts series to reflect the most recent developments in the economy. The new series based on the 2003 prices replaced the previous series of 1995 prices. The new series captures the key structural changes in the Maldivian economy. For example, new resorts opened recently are mostly targeted at the higher end of the market and as such the tourism sector was not adequately represented in the 1995 series. In both the series, the contribution of tourism to GDP remains almost same in the year 2003 and by 2010 the variation is almost 7 percentage points. The higher contribution to GDP from tourism in the 2003 results in a higher GDP growth as well.

14 From around 7 percent in 2007.

2007 2008 2009 2010 2011 2012EPopulation 303,539 307,632 311,739 315,885 320,081 323,282 Life expectancy, years 75.4 75.8 76.2 76.6 76.9 77.4 Maternal mortality, per 100,000 live births .. .. .. 60 .. ..Malnutrition prevalence, weight for age (% of children under 5) .. .. 3.5 .. .. ..Poverty (% below national poverty line), Republic 21.0 21.0 15.0 15.0 15.0 15.0 Poverty (% below USD 1.25/day), Republic 9.0 9.0 8.0 8.0 8.0 8.0 Unemployment, %, ILO definition 5.0 5.0 12.0 12.0 12.0 12.0 GDP, Current, Maldives rufiyaa Mn 19,737 24,213 25,403 27,316 31,447 34,012 GDP, Current, USD Mn 1,542 1,892 1,985 2,134 2,132 2,209 GDP per capita (ppp), Current International $ 5,080 6,150 6,368 6,756 6,661 6,833 GDP real growth rate, % 10.6 12.2 (3.6) 7.1 7.0 3.5 Inflation, period average, % 6.8 12.0 4.5 6.1 11.3 12.3 Current Account Balance, % of GDP (14.7) (32.4) (11.1) (9.2) (20.5) (26.5) Overall Balance, % of GDP 4.9 (3.6) 1.0 4.2 (0.7) (1.4) Gross International Reserves, US$ Mn, end period 308 241 261 350 335 305 Gross International Reserves (months of imports) 2.3 1.4 2.1 2.5 1.8 1.6 Exchange rate, end period, Maldives rufiyaa/US$ 12.8 12.8 12.8 12.8 15.4 15.4 Government Revenue and grants, % of GDP 38.4 30.8 22.6 23.9 31.0 28.9 Government total expenditure, % of GDP 42.0 42.0 43.1 39.6 42.3 42.3 Fiscal deficit, % of GDP (3.6) (11.2) (20.5) (15.7) (11.3) (13.4) Financing 3.6 11.2 20.5 15.7 11.3 13.4 Privatization, % of GDP 0.2 0.2 2.0 4.5 1.2 - External Debt, % of GDP 3.5 3.1 3.4 3.1 3.8 7.7 Domestic Debt, % of GDP (0.1) 7.9 15.1 8.1 6.3 5.7

y

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External imbalances mirrored fiscal imbalances. Given the island’s heavy import dependence, large fiscal deficits quickly translated into balance of payments difficulties, which were exacerbated by a decline in tourism as global conditions weakened. Accelerating government expenditure since 2004 played a role in driving up imports to over 87 percent of GDP in 2008. The multi-year boom in food and fuel prices and strong demand for resort-related construction materials prior to the onset of the global crisis also contributed to the exceptional import growth at the time. The pace of import growth far outstripped the robust growth in export of services (especially tourism) prior to the crisis. Large and growing current account deficit resulted, reaching 32.4 percent of GDP in 2008. As the currency peg was maintained, reserves at the Maldives Monetary Authority fell sharply. With the sharp decline in commodity prices in the first half of 2009 and extensive foreign exchange rationing, pressures on the import bill eased and the deficit fell to 11.1 percent of GDP in 2009. Financing the external current account deficit became increasingly difficult. Deficits were mainly financed through private capital inflows, foreign borrowing by commercial banks and official financing (multilateral and bilateral) until mid-2008. But since then, private capital inflows slowed and foreign banks cut credit facilities to domestic branches during the financial crisis. The Maldives Monetary Authority (MMA) relied on drawing down foreign exchange reserves to cover the balance. Gross official reserves were bolstered in mid-March, 2009 with the disbursement of US$50 million of a US$l00 million loan from the Indian Government. However, reserves quickly fell back from a peak of US$267 million. Gross reserves fluctuated below 3 months of imports throughout 2009. Low and declining foreign exchange reserves risked undermining the exchange rate peg. The rufiyaa had been pegged to the US dollar at a rate of MVR12.8 since 2001. The low reserve cover meant that the MMA was rationing foreign exchange in the economy. The real effective exchange rate appreciated 12 percent since mid-2008, but remained below levels reached in 2005. The depreciation of the US dollar against major international currencies was also helping to contain real exchange rate appreciation pressures. Macroeconomic imbalances and the global crisis also stressed the banking system. Expansionary fiscal policy and high budget deficits led to dramatic public sector credit expansion in 2008 and the first half of 2009. In the absence of an effective non-bank sector, much of the domestic financing requirement fell on the banking sector. This public sector credit expansion was crowding out private sector credit and putting the banks' balance sheets at risk. Foreign exchange rationing was also exposing banks to dollar liquidity shocks. These stresses were compounded by the bank's high exposure to tourism, the concentration of loans to a few borrowers, and limited financing options (e.g., lines of credit, parent financing) since the onset of the global financial crisis. Consequently, the risk of growing non-performing loans was rising. The state-owned Bank of Maldives (BML), which accounted for about 40 percent of commercial bank assets, saw its non-performing-loans ratio increase significantly in 2008. More broadly, the net foreign asset position of the banking sector had been negative since July 2008, leaving the banks susceptible to a possible depreciation of the rufiyaa. The Government of Maldives put together a comprehensive adjustment program in 2009 to address severe fiscal and external imbalances. This was necessitated as the earlier attempts by the government to muddle through the crisis fell with the non-materialization of the planned privatization of the Male International Airport. The budget for 2009 anticipated a very ambitious US$ 234Mn from the privatization of the airport which was a major means of financing the deficit for the year15. However, with no takers coming forward to take over the airport, the

15 The privatization proceeds were expected to finance nearly ½ of the total deficit in 2009.

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government had no option but to pursue some serious fiscal reforms. A Fund-supported plan, approved in December 2009, centered on a strong fiscal adjustment to put public finances back on a sustainable medium-term path, complemented by monetary tightening and measures to strengthen the banking sector. The authorities took significant initial adjustment measures in the second half of 2009, including cuts in central government nominal wages by 10-20 percent (see Box 1, page 13); an increase in electricity tariffs by 40-60 percent16; reduction in public sector work force17 – through a combination of transferring some to corporatized entities18 and direct redundancies, the cessation of deficit monetization; and an active monetary policy tightening. The government was also making headway in introducing an ad-valorem tax on tourism and a broad based business profits tax19 (BPT) to augment and strengthen revenues.

16 Up until that time, electricity tariffs have not been revised since 2004 –despite a significant escalation in generation costs – with Maldives almost exclusively dependent on thermal power.

17 Which at the time numbered close to 35,000 and a wage bill amounting to nearly 18.7 percent of GDP 18 Whose staff were outside of the public sector pay-roll 19 Till the introduction of the BPT, the only form of Corporate Taxation in the Maldives was the Bank

Profits Tax – which was paid only by the banks.

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Annex 3: World Bank CAS, Other Donor Programs and overarching Government Program The World Bank and its private sector arm, the International Finance Corporation jointly prepared the Maldives Country Assistance Strategy (CAS) to support the government’s Strategic Action Plan (SAP) primarily through policy lending, advisory services, and IFC investments for the duration of the CAS period. In its SAP, the government identified five priority areas:

• Macroeconomic Reform - to bring about macro/fiscal stability and support private sector-led economic growth. It entailed reducing the role of the state in the economy - a core component of the SAP - and facilitating conditions for growth in tourism and fisheries;

• Public-sector reform - a key pillar of the structural adjustment program. The public sector was being streamlined to make it more efficient and effective in the delivery of quality government services;

• Good governance - entailed strengthening democratic institutions and processes as a priority to ensure that the new democracy is entrenched;

• Social development – focuses on developing the human resources of Maldives in order to effectively deliver on all social development pledges, and

• Climate change and adaptation - an existential threat to the Maldives. The government proposed a series of mitigation and adaptation measures that required substantial funding.

The bank operation supported the Government’s efforts to bring about economic recovery and stability, while protecting the vulnerable. At the same time, it supported the Government in achieving its development objectives set out in the Strategic Action Plan (SAP). The SAP redefined the role of the state in the economy to achieve upper-middle income status, ensure more equitable access to services and opportunities, improve service delivery, facilitate economic diversification, and support better environmental practices to sustain growth and adapt to global climate change. Much of the plan was to be implemented through the private sector where possible or public-private partnerships (PPPs) with the aim to minimizing fiscal impact given the weak fiscal position. The operation was also consistent with the Maldives Country Assistance Strategy (CAS) FY2008- 12 designed to support government efforts to better manage the economy and public finances. The CAS called for a possible Development Policy Credit in FY2010. At the time of approval, both the IMF and the ADB were moving forward with policy loan operations aimed at addressing macro-fiscal imbalances in light of the 2008 global financial crisis. The IMF’s Stand-By Arrangement (SBA) and Exogenous Shocks Facility (ESF) blend arrangement was approved in December 2009 and supported fiscal measures to restore the sustainability of the country’s external position. The ESF covered two years of assistance of amount SDR 8.2 million and the SBA -- a 3-year arrangement of amount SDR 49.2 million. The IMF justified its involvement on the basis that with the global crisis and ensuing decline in tourism, investments and other capital flows, Maldives encountered a serious fiscal and BoP crisis. Thus the Fund program advocated strong fiscal adjustment to contain aggregate demand and put public finances back on a sustainable medium-term path (complemented by monetary tightening and measures to strengthen the banking sector). Also approved in December 2009, the ADB’s Economic Recovery Program (ERP) which aimed to support short term fiscal measures to curtail expenditures and diversify the revenue base. With a loan and technical assistance package totaling $39.5 million, the focus was greater on the revenue side, but also looked into privatization of state-owned enterprises, internal audit and debt management issues. The total financing from the IMF, World Bank, and ADB was projected at US$81 million for 2009–10.

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Multilateral financing seemed critical at the time to support adjustment efforts and to meet the residual balance of payments needs.

These operations, as well as the Bank’s Development Policy Credit, all shared the underlying objective of bringing public finances on a sustainable path over the medium term -- but subject to high risk. While the policy actions were complementary across all three programs, they all identified the possibility of delaying the implementation of the fiscal adjustment measures a high source of risk. In the IMF’s program document this high risk was attributed to: “Resistance from civil servants or the broader public, and political opposition [that] could undermine the very large budget correction as well as the tax reforms that are key to the program’s success. This risk is heightened by the government’s lack of parliamentary majority.” Further, in the ADB ERP program document, implementing fiscal measures was considered under high risk due to: “…the political front, [where] there have been difficulties in obtaining agreement on policy reforms, particularly on fiscal management and, specifically, expenditure cutbacks.” In particular, the ADB identified as a Major risk” the: “Inability of the Government to deepen civil service reforms (to trim the wage bill).”

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Annex 4: Performance of the Government’s Overall Macroeconomic Reform Program The economy rebounded strongly in 2010, driven by recovery in tourism, but slowed again subsequently. According to the Government’s revised numbers, real GDP growth is estimated to have been 7.1 percent in 2010. With recovery in the global economy, tourism picked up which fueled a strong recovery in economic activity. Growth in 2011 fell slightly – but to a still robust 7 percent, resulting from sustained tourism sector growth. With the growing significance of tourist arrivals from China, Maldives tourism experienced fewer seasonal fluctuations as Chinese arrivals began filling the gap left during the European summer season20. However, with the onset of the most recent global slowdown in wake of the European debt crisis, arrivals from both segments slowed down in 2012. The political crisis in February and the resulting unrest also had an impact on tourism particularly in wake of the adverse travel advisories. This was particularly evident in the Chinese segment21. Consequently the economy slowed to an estimated 3.5 percent growth. While overall tourism disappointed, construction, fishing, and fisheries related manufacturing performed well. Inflation has remained high since 2009. Driven by international commodity prices as well as local fish prices, inflation increased from 4.5 percent (period average) to 6.2 percent in 2010 and jumped to 11.3 percent in 2012. Inflation was elevated on account of not just high commodity prices but also currency devaluation and tax increases. Maldives’ currency peg has historically kept it from significant inflation problems. The April 2011 devaluation was passed through to domestic prices almost fully. While the devaluation effect was no longer in play in 2012, the introduction of the general goods and services tax in October 2011 and a rate increase in January 2012, together with high commodity prices, kept headline inflation high. As these one-off effects disappear, inflation is expected to stabilize. Although reserves held up better than expected, external imbalances remained. The economic recovery and higher commodity prices pushed up imports, offsetting the tourism rebound. After declining to 9.7 percent of GDP in 2010, the current account deficit increased to 19.7 percent in 2011 and further to an estimated 28.6 percent in 2012. The large current account deficit appears to reflect loose fiscal policy more than exogenously overheated private sector. Government spending has direct import content, but the indirect channels such as consumption of imports by public servants or reduction in private sector’s capacity to consume and import due to higher taxes seem to be more important. There is little evidence that the private sector has been overheating. The MMA continued to ration the supply of foreign exchange to banks, while fully meeting the demand from the central government and some SOEs. The overall BOP deficit exceeded $260 million in 2012, but reserves fell by much less as the parallel market met some dollar demand at a modest premium of around 10 percent. A 20 percent devaluation in April 2011, accompanied by monetary tightening, helped stave off problems but did not provide a lasting solution. An anticipated $25 million budget support from India was never received and the State Bank of India did not roll over its $50 million government bond that fell due in December, 2012.

20 The European segment – taken as one block is still the largest source market for Maldives Tourism accounting for just over 52 percent of arrivals. Arrivals from China account to about 25 percent of total – being the largest single source market.

21 In 2012, the growth in the European segment was a negative 3.7 percent (compared to a growth of 6.4 percent in 2011. In comparison, arrivals from China slowed to 15.6 percent growth compared to 67 percent growth recorded in 2011.

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The real effective exchange rate has continued to move with the US dollar, and has appreciated since mid-2008. Progress on tax reforms was laudable. There were a number of tax reforms introduced by the then government. On the taxation side, the government introduced: (i) GST on tourism (TGST) (ii) a Business Profits Tax (BPT) (iii) a general GST (GGST). On non-tax, the key measure was the replacement of the existing resort lease system with the land rent. All of the measures however, were delayed in varying degrees -- with the longest delay encountered on account of the BPT. The TGST was passed by the Majlis in August 2010 and made law in September. It came into effect in January, 2011. The second amendment to the Tourism Act which changed the resort rent system was also passed in August 2010. The BPT was finally passed in December 2010 (after a delay of almost a year), but came into effect only in July 2011. The GGST law was passed in August 2011 and was implemented quickly from October 2011. The only tax law yet to be ratified is the income tax law which has been languishing in the Majlis now close to 2 years.

However, despite the revenue efforts there had been significant fiscal slippages and slow consolidation. The authorities presented the FY2010-12 budget in late December, projecting a fiscal deficit of 17.8 percent of GDP in 2010, 4.1 percent in 2011 and a near-balanced budget in 2012. The fiscal deficit is estimated to have fallen to 15.6 percent of GDP in 2010, from 20.5

Box 1: GoM – Wage and Salaries Reduction – October 2009

The wage cuts came into effect from October 2009. Initially, all categories of the public sector which in the case of Maldives comprises of the Civil Service (the largest component); the political appointees; the staff of the independent commissions and the armed forces were forced into taking salary cuts ranging from 10-20 percent. However, at the passage of the 2010 budget the Majlis restored salaries of the independent commissions (from January 2010) which the government had to adhere. Then independently, the Civil Services Commission (CSC) of Maldives also determined (in December 2009) that all Civil Services salaries should be reversed starting January 2010 based on apparent agreement they struck with Finance Ministry earlier that if projected revenues exceed Rfy 7 billion then salaries will have to be restored. However, in the budget for 2010, the Ministry did in fact show revenues in excess of Rfy 7 billion. The Ministry then argued that the agreement stipulated “when revenue exceeded 7 billion” implying when its actually met and that salaries cannot be revised based on budget expectations. The CSC took the government to court on this and in mid-2010 the Civil court of Maldives ruled in favor of the CSC. The government then appealed the verdict to the Supreme Court and this case dragged on. In the meantime, for the entirety of 2010 the government paid lower salary scales to the public sector (except the independent commissions). At the time of the 2011 budget, the government was firmly above the Rfy 7 billion revenue levels which compelled them to revert salaries back to the original (precut) scales from 2011. This was done for the entire (remaining) public sector. However, one outstanding issue remained--the salary arrears for 2010. The Supreme Court was yet to take a decision on the status of 2010 salaries. Then in February 2012 the government changed. The new government which came to power withdrew the Supreme Court case, effectively bringing upon itself to pay the salary arrears. They agreed with the CSC to pay this off in stages from July 2012 to June 2013. The amounts involved are Rfy 446 million.

29

percent in 200922. However, the IMF program was delayed for almost a year because expenditure restraint had been less than programmed and the outlook for fiscal consolidation remained weak after the delivery of the 2011 budget. Fiscal deficit narrowed further to 11.3 percent of GDP in 2011. A much improved revenue turnout largely supported by the new tax measures helped the fiscal position. However, overall fiscal policy has continued to remain loose. The 2012 deficit is likely to have exceeded the 9 percent of GDP budget target, to reach around 13.5 percent of GDP in cash terms. It could be higher if unpaid bills are accounted for23. The financing climate has been tight, with weak Treasury bills subscriptions and the government accumulating arrears (3 percent of GDP24). The 2013 budget adopts important adjustment measures, including increasing TGST by 12 percent25, broadening GGST base slightly16, and increasing the airport departure charge. However, while the budget shows a decline in deficit, it is most likely to stay flat or even rise if arrears clearance is accounted for. Austerity in public expenditures could not be sustained. After declining from 43.1 percent of GDP in 2009 to 39.6 percent in 2010, the expenditure to GDP ratio increased back to 42.3 percent of GDP in 2011 and remained at this level in 2012. The salary cuts were almost immediately reversed by the country’s civil services commission starting from 2010. Other slippages occurred as well, such as delays in the implementation of key tax reforms and lack of progress on public employment restructuring. Total recurrent expenditure recorded a 20.7 percent growth in 2011. The full restoration of public sector salaries (to its pre-crisis levels in November 2009) increased the total remuneration bill by 8.8 percent. The net effect of a much publicized Voluntary Retirement Scheme (VRS) announced in mid-2011was minimal and overall cost savings from the scheme amounted to less than 1 percent of GDP (see Box-2 for more details). The scheme induced the exit of around 1,300 public sector staff with the concurrent abolishing of the posts. However, around 300 posts remained un-abolished given the nature of the job. Fresh recruitments were made for these posts. Government interest bill increased by 7.9 percent – on back of rising treasury yield -- while total capital expenditure rose 46.7 percent in 2011 with the commissioning of a number of land reclamation and housing projects. There was no net fiscal savings from public sector restructuring. Wage cuts evoked stiff resistance from vested interests. The wage cuts came into effect from October 2009. Initially, all categories of the public sector which in the case of Maldives comprises of the Civil Service (the largest component); the political appointees; largest component); the staff of the independent commissions; and the armed forces were forced into taking salary cuts ranging from 10-20 percent. Wages were restored to their September 2009 levels from January 2011. The political economy behind this reversal is detailed in Box-1. The new Decentralization and Disability Bills lead to considerable spending increases. The Decentralization Bill passed by the House in July 2010 resulted in an additional layer of government, incurring additional expenditure. The law established about 800 new island and atoll councilors with administrative and executive responsibilities forming part of the broader public service. Earlier, it was estimated that the new structure will cost the government an additional Rfy 173 million in expenditure. However, this figure is likely to have been higher. The cost of the disability act was around 0.7 percent of GDP. There were other policy developments, including health insurance and electricity subsidies that had negative effects on fiscal adjustment. These developments essentially were driven by the will

22 Difficulties in producing reliable expenditure and revenue data in the Ministry of Treasury and Finance (MoTF) suggest that this figure may be an underestimate of the real outcome.

23 Significant cost overruns in the newly introduced Aasandha scheme and the electricity subsidies largely financed through the build-up of arrears in face of a serious cash flow shortage underlined the fiscal situation in 2012.

24 Which is a conservative estimate. 25 See discussion in the following paragraph.

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of the Majlis. In late 2010, the Majlis also passed an amendment to the Public Finance Act, mandating the government to seek its concurrence in all financial transactions of the government – in government borrowings, sale of assets and other financing means.26 This had the effect of effectively crippling the government in its funding activities. In each of these events, bitter political rivalry underlined the passage of bills. Rightsizing the public sector proved to be very difficult. At the time of the DPC the government was contemplating two actions in relation to right sizing the public sector: (i) transferring some public servants to the newly formed corporatized entities (with expectations that these entities will be able to fund salaries from their own income) and (ii) outright redundancies which were not well thought through. While the transfer of employees to corporatized entities did make some progress, the planned (direct) redundancies did not materialize to any significant extent. On the former, even though associated public sector workers were transferred to the corporatized entities, they remained indirectly within the payroll of the government (through budgetary transfers) as these entities (who remained as government owned entities) did not generate sufficient revenues from their activities. A broad based voluntary retirement scheme (VRS) for the public sector in 2011 cost the government roughly Rfy 250 million but resulted in insubstantial cost reduction subsequently. The reason for this was that for some of the redundancies, the government had to hire back (for example teachers) for service delivery considerations making the redundancy rather irrelevant. Also while people left the public sector through VRS they entered back through increased recruitment to local government bodies. The overall cost savings from the scheme was less than 1 percent of GDP. The scheme also resulted in some good public servants (in effect irreplaceable) leaving the public sector making use of the generous package. This undermined the quality of the public service in the country (see Box 2).

26 This legislation was adopted just after the award of the concession agreement to GMR to develop the Male International Airport.

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Lack of political plurality undermined the timing of fiscal adjustment. On the taxation front, it was clear that there will be strong resistance to increased taxes given the considerable influence wielded by the resort owners and the corporate sector on the country’s Majlis. Further, the public sector downsizing and wage reductions were politically unpalatable. Soon after the implementation of salary reductions, its sustainability came under increased pressure (Box 1). However, notwithstanding the pressure the government at the time remained steadfastly committed to the implementation of the reforms agenda. The relevant tax bills for the introduction of new taxes were developed fairly quickly and presented to the Majlis at the earliest opportunity. The government fought hard the CSC determination in late 2009 to reverse public sector wage reduction – appealing against the decision first to the High Court of Maldives and then to the Supreme Court. All these actions demonstrated a strong will on part of the government to adhere to fiscal discipline and bring about stabilization of the untenable fiscal situation. Such circumstances led to the disbursement of budget support facilities from both the ADB and the WB – with the IMF program providing an overall framework for macro fiscal adjustment going into the medium term. From mid-2010, after the first programmatic disbursement from the Bank27 several of the risk factors began to materialize together with increased signs of government wilting under pressure. On revenue measures, and as expected, there were delays in passing the relevant legislation. However, much of the anticipated revenue measures ended up being passed by the

27 As well as the ADB who disbursed its first tranche a few months after the bank in June.

Box 2. Voluntary Retirement Scheme of GoM Mid 2011 The Government of Maldives (GoM) introduced a voluntary retirement scheme for Government staff in mid-2011. The VRS offered the following four options for staff in government service to leave the service: • Option 1: Leave the service without any cash benefits.

• Option 2: Leave the service with a lump sum payment of Rfs 150,000.

• Option 3: Leave the service with a lump sum payment of Rfs 150,000, and priority for the Government implemented SME loan scheme. This was only open to staff between ages 18-50 years who meet the criterion for getting the SME loan.

• Option 4: Leave the service with a lump sum payment of Rfs 200,000, and a priority for selection in Government scholarship programs. This was only open to staffs between 18 and 40 years, who meet the criterion for getting the scholarship to study.

There are two important features of the scheme. (i) Once a staff accepts the VRS package, he/she is not allowed to enter Government service (including public enterprises) for three years. (ii) Once a staff leaves Government service, his position is abolished. This is sought to be achieved by requiring the Permanent Secretary to reorganize the work of the vacated post within the functional area. The majority of applicants for the VRS scheme opted for option 4 exhausting the funds quite rapidly. Further despite provision (ii) above, in some of the posts vacated the government had to recruit back on service delivery considerations.

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House eventually. The Tourism GST28 was passed by the House in August 2010, and the tax came into effect in January 2011. The BPT was passed in December 2010 and was made effective from July 2011. The government also brought in a General GST – introducing a core form of taxation on the domestic sector for the very first time. Legislation in this regard was prepared fairly quickly -- during 2Q/3Q 2010 and passed by the House in December 2010. All these measures resulted in establishing a very strong tax backbone in the country. The passage of the taxation bills was done in a backdrop of government being able to muster sufficient support in the Majlis with the help of some cross-overs as well as garnering support from some independent MP’s. The Fund recommended expediting completion of the PEFA assessment recommendations, including on budget execution and expenditure control and managing fiscal risks; migrating foreign-financed expenditure data to the public accounts system; improving budget preparation and planning (including cost benefit analyses for domestically-financed capital expenditures); moving to medium-term budgeting; and adopting a fiscal responsibility framework, in line with the recommendations of FAD TA. In addition, the Fund recommended generating monthly fiscal outturn reports and creating a policy unit at the Ministry of Finance and Treasury charged with monitoring fiscal developments and analyzing the impact of alternative fiscal policies. The timing and magnitude of structural fiscal reforms were affected by political realities, including the local government elections in February 2011 and the government’s lack of an outright parliamentary majority. Continued policy slippages and the lack of timely monitoring and reporting of fiscal data hindered fiscal adjustment efforts. The basic problem was in relation to implementation of the PAS. What has been achieved thus far under the PAS is a mere automation of a manual process with no accompanying business process re-organization or re-engineering. In effect the system has become messier than before; now for example a spending unit cannot figure out what their cumulative expenditure is relative to the budget with the result that these spending units can keep passing expenditures without knowing the cumulative. These only get caught in much delayed internal audit process. To circumvent the issue most spending agencies maintain parallel EXCEL sheets to track the cumulative. The situation is also partly responsible for the buildup of huge arrears payments in the system (estimated at anywhere between 3-6 percent of GDP). The reason is spending agencies approve payments and send to treasury for payments but treasury not having cash to pay.

28 Which was the ad-valorem tax on the tourism.

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Annex 5: Borrower’s Comments

MINISTRY OF FINANCE AND TREASURY Male’

Republic of Maldives Borrower’s Statement The program was designed at a time when the country was facing severe macroeconomic imbalances and close collaboration and efforts by the Bank and the government team resulted in readiness of the project towards appraisal in December 2009, followed immediately by negotiations. The program had set out ambitious targets for reforms leading to economic recovery, despite the risks identified by both the Bank and the IMF. The program was well designed with clear objectives, appropriately targeted towards addressing the constraints facing the government. Though the key outputs were not fully achieved, the operation had led to reform and improvements in areas including budget presentation, cash and debt management practices. Dialogue continued with concerned departments of the Bank with frequent missions focusing on technical assistance, capacity building programs and studies/consultations. Bank’s continued presence had helped keep the momentum which could otherwise have lapsed easily given challenging political and economic situation. Lack of close coordination among the ministry’s divisions is seen as a failure on the part of the Borrower. Efforts have however been made by the staff to overcome weaknesses with the support of the Bank teams and missions. High staff turnover and the replacement of almost all key political heads in the Ministry affected the performance of the Borrower. The Public Financial Reforms and social protection reforms are being continued with assistance of the World Bank without being deviated significantly from the original envisaged plans. A comprehensive plan to address the organisational challenges facing MoFT is being developed with assistance from multilateral aid agencies.

THILADHUNMATHIUTHURUBURI

THILADHUNMATHIDHEKUNUBURI

MILADHUNMADULUUTHURUBURI

MILADHUNMADULUDHEKUNUBURI

MAALHOSMADULUUTHURUBURI

MAALHOSMADULUDHEKUNUBURI

FAADHIPPOLHU

MALÉATOLL

ARI ATHOLHUUTHURUGOFI

ARI ATHOLHUDHEKUNUGOFI

FELIDHE ATOLL

MULAKU ATOLL

NORTH NILANDHEATOLL

SOUTH NILANDHEATOLL

KOLHUMADULU

HADHDHUNMATHI

HUVADHU ATHOLHUUTHURUBURI

HUVADHU ATOLLDHEKUNUBURI

FOAMULAKUATOLLADDU ATOLL

HAA ALIFU

HAA DHAALU

RAA

SHAVIYANI

NOONU

LHAVIYANI

KAAFU

VAAVU

MEEMU

BAA

ALIFUALIFU

ALIFUDHAALU

FAAFU

DHAALU

THAA

LAAMU

GAAFU ALIFU

GAAFUDHAALU

GNAVIYANISEENU

Dhidhdhoo

Kulhudhuffushi

Funadhoo

ManadhooUgoofaaru

Naifaru

Eydhafushi

Thulusdhoo

Mahibadhoo

Fulidhoo

Magoodhoo

Muli

Kudahuvadhoo

Veymandoo

Fonadhoo

Viligili

Thinadhoo

Foamulaku

Hithadhoo

Rasdhoo

MALÉ

I N D I A N

O C E A N

One and Half Degree Channel

Equatorial Channel

KardivaChannel

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MALDIVES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

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JANUARY 2005

MALDIVES

ATOLL ADMINISTRATIVE CAPITALS

NATIONAL CAPITAL

ATOLL ADMINISTRATIVEBOUNDARIES*

*Local Atoll Names shown in green; Official Atoll Names shown in white.

document of the world bank...csc civil services commission . dpc development policy credit . dpl...

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