Comment: It’s the economy stupid!

There is only one thing on everyone’s mind – the dollar-rufiyaa exchange rate. In a country that imports everything from salt to the accountants that run its businesses, it is no wonder that everyone from the construction worker to the Maldives’ answer to Donald Trump (I’ll leave you to guess whom) is trying their hand at being an economist with a specialty in foreign exchange.

Whether you agree with the politics of it or not, the devaluation was needed. If anything it should have come sooner. The Maldives has been growing its rufiyaa-based economy at break-neck speed. Salary rises across the board, increased government spending and ever increasing infrastructure projects have become the norm over the past decade. By and large this ‘growth’ in the domestic economy has been driven by the public sector (government policy & the civil service) and paid for by printing Maldivian rufiyaa and clever manoeuvres with T-Bills (which the government has used since 2009 to be able conveniently sidestep the charge of printing money). In simple terms: successive governments printed/created money to drive domestic economic growth.

What it didn’t manage to do was increase it’s dollar receipts at the same speed (actually all foreign currency, but I’ll use dollar interchangeably in this article). Yes growth in the tourism industry increased the dollar receipts but nearly not enough to fund the increase of rufiyaa in circulation. The previous government had a spade of one-off dollar incomes by selling resorts, but by neglecting to make sure that these so called developers had the capacity to develop the properties and provide the country with a constant source of dollars, they missed a trick. The consequence: an imbalance in the amount of dollars the country has the capacity of earning and the amount of rufiyaa it is printing/creating and spending. If you increase the supply of rufiyaa without the corresponding increase in dollar receipts, it is inevitable that Maldivian rufiyaa will be worth less. It is simple demand and supply.

So the question is, where to from here? By creating a ceiling at Rf15.42, the government has effectively stopped a steep depreciation in the currency and has minimised the crippling effects of a severe shock to the economy – and it should be praised for that. There is however a cost. This will erode purchasing power in the short term and will hit people’s pockets (albeit tempered by the fact that the dollar was already trading at around Rf 14 in the black market despite the best efforts of the authorities). As always, it is the common ‘Mohanma’ on the street who will bear the highest burden. Prices will inevitably creep up and the inflation will put pressure on wages. Any subsequent wage increases which will lead to further effective devaluations. Let us not sugar coat this – it will be painful.

What the government needs to do is to come up with a credible plan to redress this imbalance and reassure the people that the pain is worth it. There are two fundamental way of doing this: i) reducing the rufiyaa in circulation, or ii) increasing the dollar revenue the country earns. In my mind there is no doubt the answer lies in a fiscal solution to get the economy back on an even keel. The dollar crisis is simply a symptom of deeper economic woes – not the problem itself.

Reducing rufiyaa in circulation

The main levers of doing this are a) reduce government spending – reducing wages and cutting unfunded government projects and/or b) increasing rufiyaa-based taxes.

Reducing government spending is an essential plank of what needs to be done to rebalance the books. This is the path that the UK and the EU (driven by Germany) are already following, and all indications are that the US will announce similar austerity measures after its Quantitative Easing splurge. Cutting too quick and too deep may the tip the economy into recession and that would be very painful – but not doing anything is simply not an option. The consequences are even graver.

The government also needs to ensure that it adopts a progressive taxation system on rufiyaa-based incomes. We need to ensure that the rich share ‘equitably’ in the pain of rebalancing our books. Equitably here means that they pay a much higher proportion of the cleanup costs – in practice this should be a combination of no taxes for the low income earners, close to 50 percent taxes for the ultra high income earners and a corporation tax system which exempts small local businesses.

Increase the dollar revenue

The most appealing of all options as it means no painful cuts. The catch is that this is largely out of the government’s control, at least in the short term. The only two significant sources of dollar income are through fisheries and tourism – and there are challenges in growing both sectors. Investment in fisheries is long over due, but ultimately the sector does not have the scale to solve the problem in the short to medium term – it is simply too small today.

Tourism, the great gold rush of this generation, is a much bigger challenge. Government types tell wonderful stories of 20 percent equity returns and 60 resorts waiting to be developed. The simple truth is that this represents close to US$3 billion of investment in a country where the nominal GDP is around £1.5 billion – an improbability to put it mildly. It is simply not realistic to pin our hopes on some sort of tourism growth bonanza in the short term – we might as well play the Euro lottery every week if this is the only plan.

The long term rebalance

In the long term, the structural solutions are through growth of our industries that translate into real economic growth underpinned by increases in our foreign currency receipts. The government needs to:

  1. Foster an environment where real growth can be achieved for our innovative companies in the fisheries sector (the next Big Fish, Horizon et al), and also create opportunities for Maldivian corporations and SMEs in other sectors to grow into the world market. Investing in revenue growth is more important that building airports on every island. Real growth in the economy driven by the private sector is the road to prosperity – not government spending based on printing money and clever manoeuvres with T-Bills.
  2. Move now to ensure a quick solution to all the tourism development projects stopped because they were awarded to parties with no money or track record. It is bizarre that they have been allowed to hang on to ‘their’ assets without fulfilling their obligations by cajoling the government and the banks. Moratoriums on lease payments or debt repayments may look innocuous enough, but they rob the country of vital growth opportunities and hence ultimately rob the people. We should not stand for it.
  3. Implement an equitable progressive taxation system. It is not fair that the low income people pay the same taxes as the highest earning group – through the flat import duty this means that the poor actually pay a larger percentage of their income as tax than the rich. And it is criminal that the resort owners are sitting in parliament legislating that they should not pay their fair share of taxes on the very substantial amounts they earn. This is a clear conflict of interest and something that needs to be addressed at a national level. The constitutional stipulation that Majlis members shall not vote on issues in which they have a personal vested interest must become more than just a nice idea on paper. The 3 percent tourism GST is simply not equitable enough!

The country’s economic troubles require a bold government that can show leadership and is honest with the Maldivian people about the tough choices ahead. Equally it needs a responsible opposition which accepts the reality of the problem and challenges the government on the merits of its economic policies by proposing viable alternatives. For their trials and tribulations, the Maldivian people deserve it. Whether they are lucky enough to have either, only time will tell.

Ali Imraan is the Director of Structured Finance at the Royal Bank of Scotland. The views expressed here are his own personal views and opinions and do not represent those of the Royal Bank of Scotland and should not be construed to do so in any way, shape or form.

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]


66 thoughts on “Comment: It’s the economy stupid!”

  1. @truth: I believe we should all thank you for your two lines worth, too. Thank you.

    I am sure the extent of the conversation that has been initiated by by Imran - whether he lied about his posting at RBS, is thus far the most educational on the subject. It is sad that those like you can only ridicule people, hiding behind a false identity. Shame!

    I feel Minivan News should at least clarify this wild accusation.

  2. v good article. Some points i would like to clarify

    1. You talk of reducing the amount of rf in circulation. Do u mean to say reducing rate of money growth or did u mean monetary deflation (as in contraction of money supply)? If so wontbther be a danger of a recession?

    2. You said about taxes on rufiya incomes. What about dollar incomes? And what if the goverment spends the new tax revenue on wages and pet projects?

    3. Tbills is a problem when the central banks becomes the sole or main buyer of tbills, which buys them with newly created money (out of thin air i might add), is it not? What if tbills are sold to locals (or foreign investors) and upon maturity the debt paid out of normal government revenue without resorting to printing?

    4. You give horizon and bigfish as examples of innovative companies. I dont know the specifics of these companies, but to foster a suitable environment u don't mean to say to create oligopolies like how it already is in the tuna export in maldives, do u? I know we have to advance beyond the hunter-gather level, which is where aquaculture comes in.

  3. to be fair mdp govmnt did try to do somethings like the article said namely,
    1. it did try to reduce the public sector.they could not do it politically n could not convince the public.

    2. it talked of abolishing the tuna export cartel n give more ppl the opportunity to earn foreign currency. not sure how far this has gone.

    3. introducing midrange tourism so that more people earn foreign curency. not sure of the success yet.

    what it did against is going ahead with multimillion dollar projects. most were conceiled with a thin veil of environmental stewardship. and public falls for it. maybe they will be beneficial in the future.

    it had been lot of good talk. not sure of their honesty n sure is far behind in delivery.

  4. as for those who stick by the equation "interest = riba = haram". this article will atleast open ur eyes that money changes value over time. interest is the manifestation of this changing value of money over time (plus many other factors).

    ask a scholar but they will quickly tell u that equation is true always. but they dont know jack about modern money.

  5. @egon, you are totally right in saying that those who criticize should also suggest solutions.

    Here is the best economic formula for Maldives and I challenge anyone to come with a better one.
    1. Pass a law banning any IMF expert entering into the territory of Maldives with immediate effect.
    2. Get a conductor to orchestrate the work of all economic Ministries. Doesn't matter if it is a musician - but an economist is better.
    3. Coordinate /orchestrate the contents of all shelved economic reports into action.
    4. Look at what China does.
    5. Cut/slash tourism to its proper size - they crowd out all investments.
    6. Remember that no country in world history developed by by passing industrialization.
    7. Cut the bull on tree hugging stuff, environment etc..

  6. Did you guys think that this Ali Imran was a Maldivian. Here is his facebook page, make friends and learn more about Maldivian economy.

  7. Er, yes there's an Ali Imran at RBS:

    However, he is in Kazakhstan:

    Ali Imran

    Head of Retail & Commercial Banking - RBS Kazakhstan

  8. if u all don't know who he is pls don't speculate. as someone who knows him he does work at rbs and quite a senior position. not sure of exact magaam.

    worked at Citibank before. he is son of Dr. farzana n almahroom Dr. waheed (ENT doctor)

  9. "Reducing rufiyaa in circulation"

  10. Some ideas i heard of, that might help.

    1. CLOSE DOWN ALL USD ACCOUNTS NOW and start licensing.

    All resort owners and employees, will have to exchange the money into rufiyaa. This would need to be coupled with limits on transfer of USD abroad.

    USD accounts will need to be licensed. Nobody should be able to save in USD, the dollars need to be exchanged, and thus, available for buyers.


    If you cant pay in USD, you need to sell it to the bank to get some rufiyaas, making it available again for buyers.


    Bottom line: All USD in the economy must get exchanged and passed through the bank.

  11. Maj,
    Gud one.

    Really those are the measures that would help instead of floating @ 20 % cap.
    All $ received in resorts are not going to come to the banks unless its a payment for shipment or salary.
    The point is $ willonly be easily available if it is traded fairly. How can any one justify MMA auctioning $ to banks..and those banks who could'nt get the $ did not transact them that day. So the big fish always get what they want. And the poorer will always get poorer. Countries like UAE and Malaysia with pegged rate did survive the recession.
    Don't float it but rather peg it to its true value every 3 years would have been a better solution.
    Think.... Maldives is different so approach Maldives differently.

  12. @herd of sheep

    Just like some Maldivians. So full of themselves. Thinking they know everything. You say the article is "Utter rubbish". Now whom should we believe, someone with a masters degree from one of the best universities in UK and who has worked nearly 10 years at Citigroup London and at the RBS or some troll who probably googled "economics" before commenting. hmmm. I think i will go with the former on this one.


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