Did the World Bank try to influence the Parliamentary vote on GST increase in the Maldives?

On the 15^th of November, at 12:53, Faris H. Hadad-Zervos, World Bank Country Director for Sri Lanka, Nepal and Maldives tweeted the following.

‘In #Maldives, World Bank analysis shows that government’s fiscal position and balance of payments have deteriorated due to rising global commodity prices. Urgent tax hikes are a meaningful step to increase revenue.’

On the following day, the 16^th of November, the Maldivian Parliament, after failing to table the tax vote for 2 consecutive days, 14^th and 15^th, finally tabled the vote and by a handsome margin of 55 to 26 voted to raise GST and TGST in the Maldives.

Did the World Bank, on the eve of the contentious Majlis vote on raising GST, attempt to influence the majlis vote, or was it mere coincidence?

The Maldivian Context

In the context of fast increasing government expenditure in excess of revenue, on the 17^th of August, the state submitted the bill to increase GST and TGST to the Maldivian Parliament- the Majlis.

With the government commanding a sizable majority in the Parliament, there was no doubt that the government would, with relative ease, pass the bill. However, discontent and disgruntlement to the tax hike slowly became vocal and grew in volume. The bill was being resisted not just by the modest minority (the governing coalition commanded a 75% super majority in Parliament), but a sizable grouping of steadfast and resolute members of the governing coalition too. The public too, protested the bill outside the Majlis and arrests were made.

While most agreed that taxes need to be raised, the disagreement arose out of

1. That the government was ignoring a significant component of the advice of IMF, World Bank and other commentators, who have been advising to reduce expenditure simultaneously with tax hikes.
2. The record 42 billion MVR budget, submitted in the middle of the tax debate, with 6 billion MVR of additional expenditure, a record deficit of 8 billion MVR and the highest number of political appointees on record. These were pointed out as evidence that the government was focused solely on raising income and not looking to curtail non-productive expenditure as advised by the IMF and World Bank
3. That GST is a highly regressive tax and that any GST hike would impact harshly on the less unfortunate in the society, especially in times of high inflation.
4. That the state should examine increasing other taxes, like income tax which are more progressive, instead of resorting by default to a GST hike.

How did the World Bank’s position change

In March of 22, World Bank issued the ‘Maldives Public Expenditure Review’ (PER), subtitled Restoring fiscal health’. In the 114 page report the World Bank offered a comprehensive essay of challenges and areas that need reform including, raising revenue, reforming SOEs, affordable housing, reforming the Public Sector Wage Bill and the Pensions Scheme among others.

Referring to the PER, on August 19^th, the good director had tweeted

‘While the #Maldives economy has rebounded from #COVID19, many challenges persist in areas like public housing, state-owned enterprises & public wages. Our new report proposes reforms to ensure public money is used in the most beneficial way for its people.’

The 19^th August tweet was linked to an article of August 9^th offering a summary of the March PER and its findings titled Maldives Public Expenditure Review: Charting a More Resilient and Prosperous Future (worldbank.org)

After starting the article with the gloomy tale of a Maldivian named Arshad seeking desperately for decent housing options, the report went on to state quite starkly that

… Even before the pandemic, the government was spending beyond its means. Although Maldives collected revenues comparable to its peers, the revenue-to-GDP ratio had begun to stagnate and was heavily reliant on tourism. Meanwhile, between 2014 and 2019, annual growth in public spending was nearly double the average growth in real GDP. As a result, Maldives ran much larger budget deficits than even its small island counterparts. To sustain this, the country borrowed heavily, leading debt to reach US$6.1 billion or an estimated 125 percent of GDP by the end of 2021.

Maldives Public Expenditure Review: Charting a More Resilient and Prosperous Future, World Bank, August 9, 2022

On the back of several important issues highlighted as above, the article and indeed the PER recommended that Maldives collect more revenues, especially from domestic sources and to accompany the tax hikes with other factors including strengthening the management of public debt, reforming SOEs, targeting subsidies, and more.

Therefore, the World Bank, until the tweet of the 15^th November, had been consistent in making a few points.

1. That Maldives had been spending beyond our means
2. That we need urgent tax hikes
3. That tax hikes need to be accompanied by urgent public sector reforms

However, the 15^th November tweet of the Regional Director was vastly different in tone and scope. For ease, let’s re-paste the tweet below.

‘In #Maldives, World Bank analysis shows that government’s fiscal position and balance of payments have deteriorated due to rising global commodity prices. Urgent tax hikes are a meaningful step to increase revenue.’

This tweet makes 2 very important points.

1. The government’s fiscal position have deteriorated due to rising global commodity prices
2. That Urgent tax hikes are now not a matter of choice.

Gone are the issues highlighted in innumerable World Bank reports about living beyond our means and urgent reforms in the form and format of public expenditure.

Attached to the very tweet was a 6^th October article on the bi-annual Development Update (MDU). However, even the article, attached to the tweet, referring to the MDU state that despite strong economic recovery in 2022, global commodity price hikes leading to inflation, sharp increases in subsidies, exposure to sovereign bond holdings, unprecedented levels of public debt and other fiscal vulnerabilities were areas of concern.

Yet the November 15^th tweet of the Director, somehow missed or otherwise mislaid

1. The substantial and worrying issues highlighted in very attachment to the tweet, other reports of the World Bank and the August 19^th tweet of the Director himself.
2. And concluded that the only thing to do now was to raise taxes

And yet, somehow, we note that November 15^th tweet had not run out of character spaces.

The Aftermath of the November 15^th Tweet.

Immediately, the news was carried by local media including the state funded Public Service Media (PSM) stating that the World Bank had asked for Urgent tax hikes to combat rising global commodity prices.

Local newspapers too, carried the news of the tweet, coming as it did, in the middle of the commotion about the hike in GST.

Some commentators in social media pointed out that the attachment report does make mention of several vulnerabilities and areas of concern. However, attention span and the dread for delving into lengthy issues being what it is, what was noticed and carried by the state funded PSM and aligned news papers was only the fact that the World Bank Regional Director had called for Urgent taxes increased due to vulnerabilities arising from global price hikes. Finis

On the 16^th of November, the tax bill was voted and passed handsomely.

Those are the facts without fancy.

So what was the intention of the Directors tweet.

The Regional Director of the World Bank for Maldives, Sri Lanka and Nepal, was appointed on the 1^st of July 2020. It would be proper, therefore to assume, that over the 2 plus years, he would have had a fair grounding of the economics and indeed the politics of the 3 countries he supervises.  

Therein lies the question(s). Not being a novice to the context, why did he conveniently forget all the areas of concern previously raised in World Bank reports and in his own tweets? Why did he only refer only to rising global commodity prices and call for Urgent (the Capital U is of his own making) tax hikes? Why did he tweet on the 2^nd day of the vote being not tabled?

Is this simply a misconstrued case of the fallacy of ‘post hoc ergo propter hoc’ the Greeks had warned us from around 300 BC or was there intended mischief? Was the Regional Director deliberately attempting to influence the Majlis vote or is this ‘much ado about nothing?’

POSTSCRIPT

1. Apart from changes to the last paragraph, this article was mailed to the World Bank office in Maldives for their comments at 9.38am on the 21^st of November. The email requested firstly, for the office to acknowledge the mail and then for a response to the article.
2. No response or acknowledgement has so far been forthcoming
3. However, it is also important to acknowledge that the Regional Director on the 21^st of November had tweeted thus

In #Maldives, GST & TGST rate hikes are necessary steps to increase revenue. Going forward, reforms to SOEs+subsidies+better public finance management are also key for building a sustainable & inclusive economy to realize the aspirations of all Maldivians.

This time, unlike his 15^th November tweet, also acknowledging the importance of the many structural reforms that need to happen simultaneously, in order to make the tax hikes meaningful and effective.