An economic analysis of the China-Maldives Free Trade Agreement (FTA), which was passed through parliament during the tenure of former President Abdulla Yameen, has unveiled potential repercussions for Maldives’ government revenue, according to a study by the Baani Centre.
The study, titled the “Economic Analysis of the China-Maldives Free Trade Agreement,” was released on September 9 2023, by the Baani Centre for International Policy, a Maldives-based think tank.
The China-Maldives FTA has marked a strategic shift in foreign policy towards China. Nevertheless, the FTA was never ratified, and enabling legislation was never passed by the parliament. When President Solih’s administration assumed office in 2018, they chose not to advance with it.
The nature of the FTA arose from the fact that the 1000+ page document was approved by the Majlis in just one hour during an emergency session of parliament. The parliamentary committee responsible for reviewing the document gave its approval in 10 minutes, with only 30 MPs voting in favour of the agreement.
Most MPs and government officials have never had the opportunity to scrutinise the FTA. The Baani Centre obtained a copy of the still unreleased FTA for the purposes of this study.
As the presidential election approaches, the FTA has regained relevance. Opposition candidate Mohamed Muizz’s manifesto indicates that, if elected, he intends to activate the FTA with China, ostensibly to boost Maldivian fish exports.
Impact on Government Revenue
The study reveals that import duty constitutes nearly 14 percent of all government revenue. Chinese import taxes contribute to approximately 19 percent of all import taxes. The study estimates that the China-Maldives FTA would result in an immediate loss of $41 million in tax revenue per year, equivalent to approximately 3% of all government revenue.
However, it is important to note that this is a conservative estimate. The actual lost revenue could be considerably higher, considering that the FTA not only eliminates tariffs on Chinese imports but also on goods originally made in China and imported from other countries.
This would result in a ‘substitution effect,’ where consumers opt for cheaper Chinese goods over those manufactured in other countries, further reducing government import duty.
Consumer Impact of the FTA
The study raises questions about whether consumers would benefit from the FTA, even in light of the potential loss in government revenue. By comparing data from pre-Covid and Covid months to assess how import duty burdens are shared between tourists and locals, the study reveals that nearly 50% of import tax costs are borne by tourists.
However, it is unlikely that the reduction in import taxes resulting from the FTA would
lower overall tourism prices or boost tourist arrivals, as other tourism-related costs, such as labour and capital, outweigh the savings from reduced import duty.