Economy’s pigeons come home to roost

The stated cause of the opposition-led protests in Male’ – the party claims the rallies are “youth led”, however opposition politicians are a leading fixture at the demonstrations – is the increase in the cost of living due to the government’s recent decision to implement a managed float of the rufiya, within a 20 percent band of the pegged rate of Rf 12.85.

An ongoing dollar shortage, reluctance of banks to exchange local currency, and a flourishing blackmarket that reached Rf 14.2-14.8 to the dollar, culminated in mid-April with the government finally acknowledging that the rufiya was overvalued – after a short-lived attempt to crack down on ‘illegal’ exchanges.

High demand immediately led to most banks and companies dealing in dollar commodities – such as airline ticketing agents – to immediately raise their rate of exchange to the maximum permitted rate Rf15.42.

With the Maldives almost totally reliant on outside imports, including fuel and basic staples such as rice, the government’s decision has effectively led to a 20 percent increase in the cost of living for most ordinary Maldivians.

Moreover the Maldivian economy is dependent on oil to such an extent that is spends a quarter of its GDP on it – US$245 million – the vast majority on marine diesel, making imported energy one of the single largest drains on the country’s economy.

Customs documents obtained by Minivan News in January showed that Maldives was spending almost US$100,000 more per day more on fossil fuels than it was in the summer of 2010. At that time, oil was US$86 a barrel. By the same calculations but with today’s oil price, the Maldives is paying an additional US$450,000 per day for oil compared to summer prices last year.

Amidst rising commodity costs and external pressures, the country’s insistence on maintaining a fixed rate while increasing government spending had late last year begun to affect shop shelves and raise the ire of the International Monetary Fund (IMF), which delayed the third tranche of its funding due to “significant policy slippages” concerning the government’s failure to curtail spending. That amount in itself was not substantial, but the IMF is used as a financial bell-weather by most major donors.

The government’s unwillingness to face the political difficulties inherent in its budget deficit of 21 percent – the legacy of a 400 percent increase in civil service expenditure since 2002 and a hot printing press – was compounded by the addition of an extra layer of local government added to the state payroll, and the country’s graduation from the UN’s ‘Least Developed Country’ status to ‘Middle Income’, and the loss of concessional credit and certain trade concessions.

In an article for Minivan News, Director of Structured Finance at the Royal Bank of Scotland Ali Imraan observed that ‘growth’ in the domestic economy had been driven by the public sector and “paid for by printing Maldivian rufiya 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.”

Imraan pressed for the Maldives to invest in private sector revenue growth “rather than building airports on every island”, and implement a progressive taxation system targeting high earners in the interest of income equality. He also urged the Majlis to uphold the constitutional stipulation whereby MPs – such as those with business interest in the tourism sector – removed themselves from voting on issue in which they had a vested interest, and further suggested that the government resolve the matter of stalled tourism developments “awarded to parties with no money or track record.”

“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,” he said.

Imraan’s latter suggestion proved somewhat prescient when the Tourism Ministry renewed the lease for Hudhufushi in Lhaviyani Atoll, despite the resort island’s owner owing more than US$85 million in unpaid rent – most of it fines for non-payment.

The government’s decision to implement a managed float of the currency came as a least one local sales agent for international airlines operating in and out of the Maldives closed its doors to customers, blaming an inability to pay the airlines because of a lack of US dollars circulating within the economy.

Parallel economy

The Maldives’ profitable tourism industry is considered to be indirectly responsible for 70 percent of the country’s GDP, and certainly the vast majority of its foreign currency earnings.

However historically little of the industry’s financial success has reflected on the Maldives’ domestic economy, with the inflow of money limited to the flat rate bed tax, import duties and worker salaries – most of that in rufiya.

With the introduction this year of a 3.5 percent tourism goods and services tax, a business profit tax and a revision of the rents paid for resort islands, the government now has a number of economic levers it can pull to increase revenue in the future.

However it has struggled to explain that to people now paying 20 percent extra for basic commodities – an affront to the MDP’s pledge to reduce the cost of living – and seems have been caught unawares by this week’s populist protests.

Both factions of the opposition have meanwhile seized the political opportunity to take the focus off the party’s internal troubles, but have offered few alternatives beyond demanding the government “reduce commodity prices”.

“I believe a lot of people are very unhappy with rising prices. People are asking the government to bring down the prices,” opposition Dhivehi Rayyithunge Party spokesman Ibrahim ‘Mavota’ Shareef told Minivan News.

“It has been a sudden and tremendous jump and people were not prepared for it. This feeling is shared across party lines.”

Shareef accused the MDP of financial mismanagement and recklessly increasing spending, without investing “in productive resources that ensure future revenue for the country, and reducing expenditure in areas that do not affect the people – such as foreign missions.”

“They need not reduce the civil service, because these are the lowest paid government employees and reducing their numbers would have not tangible effect. But the top players in government – the political positions – and positions in the paper companies created by the government are many areas [that can be reduced],” Shareef claimed.

“Before the tsunami the country’s finances were very well managed, and even after the tsunami, given the circumstances, they were well managed. Tourism infrastructure was damaged, islands needed reconstruction and in some cases resettlement. We had to spend a lot of money, and increased the budget from Rf4 billion to Rf5.5-6 billion. It was still a manageable level, and although it was not the best option we had no choice at the time,” he claimed.

The opposition – and the Civil Service Commission (CSC) – for much of last year opposed the reductions in the 21,000-strong civil service demanded by the IMF, with the issue becoming mired in the court system.

The opposition contested that it is unfair to reduce the number of civil servants while increasing the number of political appointees. While the government now has only 170 political appointees on its books, Shareef claimed “they do not show up on paper because of the paper companies the government created in the name of corporatisation to try and fool the International Monetary Fund and the World Bank. I don’t think a country of this size – 350,000 people – needs to have so many political appointees.”

The government has since changed tactics, offering incentives to civil servants as young as 18 to leave the state payroll.

Under the scheme, the application deadline for which was May 31, civil servants and government employees are eligible for one of four retirement incentive packages: no assistance, a one time payment of Rf 150,000 (US$11,700), a payment of Rf 150,000 and priority in the small and medium enterprises loan scheme (for those 18-50 years of age), or a lump sum of Rf 200,000 (US$15,600) and priority in government training and scholarship programmes (for those 18-40 years of age).

The move to incentivise the departure of civil servants is likely to draw further support from the IMF, which has finished its Article IV consultation and may be weighing up the provision of further support.

Meanwhile, the government is unable to respond to demands from the constituency to reduce commodity prices without explaining the complexities of the situation it finds itself in. Yet neither is it realistic “to pin our hopes on some sort of tourism growth bonanza in the short term,” wrote Imraan. “We might as well play the Euro lottery every week if this is the only plan.

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