Comment: Fixing the economy will be painful

In my last article, I spoke about the seemingly intractable problems that our Maldivian economy faces – most notably the fact that we have spent far too much than is sustainable given our level of economic activity.

The theme here is to talk about how to deal with these problems and the challenges we face in doing so. No doubt explaining the problems – especially with the benefit of hindsight – is much easier than suggesting remedies. Moreover, given the extent of our past excess and misdeeds, the remedies required are likely to be both bitter and painful.

Our immediate problem is how to reduce our fiscal deficit. On a theoretical level – this is quite simple.

Approximately 50 percent of our expenditure is on paying government salaries and allowances – and we can cut down foreign travel, close down our embassies, turn off air conditioners at our offices – but ultimately unless we make some inroads into this important component of public spending – it will be impossible to do anything meaningful.

No doubt, all efforts must be made to reduce waste before we start slashing either incomes or jobs. The higher salary levels must take bigger cuts than the lower paid staff – as the government has already done so.

In reality however, this is both a political and a logistical nightmare. We all know members of family or friends struggling to make ends meet on the current civil service salaries. Laying off a large chunk of the population at a time of an economic crisis seems counterproductive to regenerating the economy.

Logistically, it is complicated because a system of voluntary first-come-first-serve resignations, particularly if the government is willing to forgive their education ‘bonds’, would mean that the most capable civil servants would depart first, leaving us with the least dynamic people actually running government. In an increasingly polarised community, it would be difficult to distinguish between people fired on the basis of professional incompetency or political allegiances.

Difficult though these policies may be, a country that has a third of its total work force working for the government is simply not sustainable. The key therefore becomes how to do this in a manner that has the least negative impact on our economy. For this – three broad initiatives are required.

First and foremost, significant opportunities for retraining must be made available. This must be combined with a public relations campaign on how retraining should be for anyone at any stage of their career. It must also be based on market requirements – with significant impact on developing skills necessary for our economy.

The tourism sector, foreign languages, technical skills, accountancy and business skills are just some of the options. More initiatives can be introduced to both existing and new private providers of training through public-private partnerships.

Other policies that must be pursued include the allocation of reduced rent or free land for private education providers, tax exemptions on educational material, as well as rebates of fees for those who successfully pass courses and find employment.

Secondly, access to credit for starting small businesses must be expanded. The key obstacles to this – particularly the high costs of borrowing from a narrow financial sector – must be addressed. The high costs of borrowing are partly due to the fact that the legal options for banks in the case of non-performance are uncertain.

Furthermore, without a credit information system, there is a significant missing component that makes people more disciplined when paying back their loans.

Last but not least, the fact that we realistically have one-and-a-half banks in the country (BML and to some extent SBI), the market mechanisms forcing these firms to be both efficient and customer orientated is missing. We need to encourage more banks to set up shop in the Maldives – and allow people access to a wide variety of banking products.

Finally, significant incentives must be provided for the private sector to start employing more Maldivians. This must be done first and foremost by revising our labour law. The existing legislation is overly burdensome and expensive for businesses – and more flexibility must be allowed.

With the coming of a new taxation mechanism, significant leeway must exist for the government to provide rebates and other incentives for those who employ more Maldivians. Start-up companies must also be provided with exemptions – particularly in strategic sectors deemed important for long-term growth.

However, even if we can introduce these policies – and this is a big ‘if’ given our intractable inability to get anything done within this political system – let us also not kid ourselves into thinking it would not involve a significant amount of hardship.

Even with countless retraining facilities, or access to credit or even benefits for private sector to employ locals – there will be a group of people simply unable to maintain their existing living conditions and as such their situation will no doubt deteriorate. One must assume that the current ‘pickiness’ of the local population to defer certain kinds of jobs to foreigners must also be revisited.

For those vulnerable groups, basic levels of protection – particularly in terms of access to healthcare and education – must be allowed. The current trajectory of the Government’s Madhanaa (health insurance) policy must therefore continue – and perhaps must be provided at subsidised rate to those unable to find jobs.

On a more fundamental level therefore, what we are looking at is a paradigm shift in the role of the state. If you take a long-term view of the Maldivian economy – it was effectively characterised by a system of subsistence fisheries and small scale agriculture – with the government earning revenue from trading of the excess products generated from these primary industries.

The country therefore had a system of governance that effectively involved a (selectively) benevolent state providing welfare for those that it deemed worthy – especially through jobs. Furthermore, the direct arm of the government – being mostly in Male – was felt on a smaller percentage of the people because the population of the country was more evenly distributed.

With the emergence of tourism however, we saw a dynamic private sector go on to take the driving seat of the economy. The state no longer has, or should have, the resources to provide direct employment to the people on such a large scale. No doubt, a basic level of protection to all must be provided – and what constitutes this basic level will continue to be debated for years to come. The role of the state must now become that of the regulator and the facilitator – allowing jobs, productivity and wealth to originate and be distributed according to forces of a dynamic market system.

All comment pieces are the sole view of the author and do not reflect the editorial policy of Minivan News. If you would like to write an opinion piece, please send proposals to [email protected]


16 thoughts on “Comment: Fixing the economy will be painful”

  1. The role of the state has not become that of the regulator and forces of a dynamic market system when government decided to exempt the rents to newly developing resort last year.

    The market forces have been applied when it comes to our poor fishermen.

    The fishing has been really bad for sometimes and prices of diesel has been sky rocketing. No subsidies of diesel for fishermen or easy payments of their loans to commercial banks.

  2. Well written,one of the best maldivian economics articles i have read.

  3. While training programs are important.
    Most times all we learn at universities and by simply experiencing other cultures goes to waste because your "boss" or higher ups doesn't want change.They are either happy with the system or afraid we might replace them. This discourage for change demotivates a lot of us.

  4. If you could write all that in easy english more people will understand and send their view on this my friend..

  5. Dear Mifzal, your article is well written and is exactly what we should be doing. But sad to say you as atop consultant in Invest Maldives and Economic Ministry I do not know how you twist your ownself when you sit in your office desk. I can well understand you are either getting frustrated and expressing what u need to do but you too have political boundaries. Being ignorant is different but knowing the facts and being there and not doing so is a criminal offence.

  6. It is not accurate to say “a country that has a third of its total work force working for the government is simply not sustainable.” Total work force should include expatriate work force too.

    For every Maldivian in the total work force, there is an expatriate worker legally or illegally working in the Maldives. No micro state except in the Maldives this kind of expatriates are employed and in no micro state its people are scattered in two hundred tiny islands with small internal markets separated by vast oceans.

    Nowhere in the small states, except in the Maldives civil servants have to manage an expatriate work force that has a third of its total population.

    Beside, these civil servants have to deal with over 6 hundred thousands tourists arrive Maldives annually at least on their arrivals and departure.

  7. Mr. Mifazal has made a good case with wise and insightful observations. If only the Governor of MMA can be so forthcoming and smart enough to tackle the obvious challenges.

  8. This is a very comprehensive article....but it really doesn't provide any new perspective to the problems our economy has been facing or any innovative solutions, other than what has been written about in Development Plans and UN reports. However I like the thinking behind this and would like to see a series of such articles focused on specific topics, rather than trying to deal with everything at once. And I really hope that the author will have the guts to explore the issues as they are and for what they are, even if he's related to MDP seniors. Let such writing not be a political promotion campaign, but an independent and daring analysis of the issues that plague our country.

  9. Mifzal, the repercussions that we face today is mainly due to the mismanagement of our largest employment industry - Tourism. Though, tourism is the largest income generator of the nation few people are deterred to work in the industry due to ineffective policies in human resource. People would be swayed to work in resorts if they could comeback to their families after work. But the government has not yet direct its policies in such a way. Community Based tourism is just a vision and not a reality. Even still most of the resorts are not willing to adopt effective measures to recruit Maldivians and all what I see again in this government is shaping the policies to fulfilling the wishes of resort owners.

    FHTS, the so-called leading training institute for Tourism needs qualified staffs and better resources to train qualified Maldivians which would also compelled the resorts managements to make attractive packages to Maldivians.

  10. Mifzal

    What you have said here is nothing new..its been repeated in the form of reports and interviews by many from opposition and independents (both MDP and DRP). Your Oxford degree and two masters and the work at IDB( as boosted by aunt MP Maria last week on Dhitv) should do better than this! There are qualified true economist such as Arif Hilmy, Maizan Adam and Jaleel(MJ) who knows in and out of this economy (mind you..I leave previous MMA governor Jihaad and Fazeel Najeeb as they know nothing about this matter and they are responsible partly for the ills) and they did advice Gayoom on the economic reform and like Anni Gayoom didn't listen and took advice of "Yes Minister" characters such as you and blew the window of opportunity for power consolidation! This government is also failing bring true reform, as Anni cannot say NO to his political elites around him such as your Aunt MP Maria and her family and many others!
    "some gets muscled up with hot gas and its just hot gas that could blow away anytime" I wonder when.

  11. I don't think this is about fixing the economy - but this is about cutting Maldives to suite someone's coat size.

    Result will be Maldives Incorporated Pvt.Ltd.

  12. Thank you all for your comments.

    The purpose of this article is not to push a political agenda - but to explore the economic issues facing the country today.

    The message that I have to present is that in order for the country to get back on a more sustainable developmental vector of growth - we need to roll back the state and improve the dynamism of the private sector.

    I believe this is the cornerstone of the current administration's policy. It is not without its risks and it is not 100% guaranteed to succeed. It is also not the only option we have. Alternative philosophies of development, such as a state-led "Asian values" policy followed in Singapore, have known to deliver economic development. China for example have followed another pattern and policies. Dubai - for all its faults - yet another.

    The true purpose of me writing these articles is to generate an intellectual debate on the CONTENT of government economic policy. It is also to hear real criticism - based on evidence and logic rather than heresay and rumours - so that we can change our policies to better suit our people. I remain hopeful, that despite the political infighting of this country, there remain level headed people among us on both sides of the political divide who will listen to reason rather than rhetoric.

  13. Paradigm shift indeed. The last three paragraphs summed up the root causes with which we begin with. Mifzal is merely suggesting remedies in hindsight and we should respect his efforts and give him a fair hearing. It would be difficult to approach such "structural" issues in a politically conservative and probably, therefore a frustrated frame of mind in a pre-adolescent frenzy, incapable of abstract thought. Take it easy Gas Bag!...after all you are now able to rage over your frustrations therapeutically freely....thank God! So why don't we just get on with it! All Gas.

  14. Mifzal,

    You may not like this, as your aunt (Maria) will not go along with this. But it would be helpful to you if you can bring country's best ecnonomists like Arif, Jaleel (MJ) Maizan Adam Manik and get their ideas on how to fix this getting worse economy.

  15. Mifzal...

    Indeed, you have identified a laundry list of outstanding issues that need be rectified to get the economy going. You have also made some suggestions how that can be achieved.

    But how realistic are your remedies? Can they be achieved? But how and by when?

    I;d like you to get into the bottom of this Mifzal...

    1) The constitution is not an economically feasible constitution... do we need 3 Generals to run the country? Auditor, Attorney and Prosecutor?

    2) Do we need to restructure the economy? How? what new activities are there that could be feasible?

    3) Manpower?

    4) Capital?

  16. Mifzal.

    I think the issues that face us today were not unknown in the past either, there were attempts to address some of them, while others were left unaddressed for whatever reason, and here we are today. I agree with you that we can no longer go ahead without undertaking that paradigm shift, and I applaud the government for taking difficult steps that have been avoided in the past. At the same time, the issue of unemployment and stalling of growth are worrisome for many and I think many have issues with the sequencing of some of the initiatives and the lack of transparency. There are also many who doubt the intentions of the government given that on the one hand there is downsizing of the civil service, while on the other hand new political appointments and foreign postings are announced. The fact that the opposition also spreads various conflicting stories does not help at a national level. It is understandable that in a political transition like we are having in Maldives, there will be issues with loyalties and mindsets, and hence some necessity of obtaining the loyalty of those who are employed to implement the policies of a new government. How this is done is of utmost importance in facilitating a smooth transition. Civil service reform by nature is a sensitive issue, and with politicians on both sides of the fence seemingly playing games, it gives leeway for the negative perceptions of those affected and of the sceptics to get cemented. At the same time, a lack of transparency and questions about due process also create questions for reform minded people.

    Your effort at creating debate is much appreciated. It would be so very useful if there could be non-defensive, unbiased and rational dialogue on policy initiatives and issues of national interest, especially at this critical point in our move towards economic reform and democracy.


Comments are closed.