The Maldives faced the worst economic situation of any country undergoing democratic transition, according to World Bank statistics for the last 50 years, President Mohamed Nasheed has said.
In his address at the 16th SAARC Summit last week, President Nasheed said the global recession hit the domestic economy hard at a time when the country was “still adjusting to the recent shift from authoritarianism to democracy”.
While the transition has been “smooth, secure and stable” in the first 18 months of democratic governance, said Nasheed, the new administration inherited “an economy in crisis”.
“In the years leading up to the 2008 presidential elections, the former administration went on a spending spree that almost bankrupted the country. Public expenditure was at a peak of 64% of GDP in 2008,” he said. “We took over a budget where 70% of government revenue was spent on public sector wages. Our administration inherited a huge national debt. Our deficit in 2009 was set to be at 33% of GDP.”
But, he added, the deficit was reduced to 28 per cent of GDP through austerity measures introduced last year, including controversial and unpopular pay cuts for civil servants.
Among other measures taken by the government to alleviate the budget deficit were cutbacks on foreign travel and a freeze on non-essential expenditure.
In addition, the new government was “bequeathed millions of dollars of unpaid bills”.
While the Maldives continue to face serious budgetary shortfalls, the government was determined to “implement structural reforms that will set the economy on a straight course”.
The president’s remarks were lampooned at the opposition Dhivehi Rayyithunge Party (DRP) rally last week as “humiliating” the country in the international arena.
Moreover, opposition parties have strongly condemned the government for disregarding campaign pledges by enforcing pay cuts and hiking electricity tariffs.
The Asian Development’s Banks annual flagship economic publication, the Asian Development Outlook 2010, released last month noted that reckless fiscal expansion and a recession-induced drop in tourism “have taken the economy to the brink of crisis”.
The fiscal expansion of the past few years was “excessive”, the report notes, as it included large increases both in public sector wages and subsidies.
“It pushed budget expenditure to 63% of GDP by 2008 and the overall deficit to 17% of GDP,” it reads.
Meanwhile, the deficit spending led to “a marked balance-of-payments deterioration”, which, coupled with the impact of the global recession, threatened macroeconomic stability.
Consequently, GDP tumbled in 2009 by nine percentage points due to contractions in the tourism, construction and fisheries industries.
While GDP is projected to grow by 3 per cent this yyear, the report notes that economic outlook depends on the performance of tourism and fisheries “as well as the government’s ability to push through its reform measures”.
Apart from cuts in spending, the economic reform programme initiated by the current government includes broadening the revenue base by raising airport service charges, introducing a business profit tax and transforming the tourism bed tax into a goods and services tax.
“In order to align expenditures with revenues, the government is streamlining administrative machinery by downsizing the civil service, reducing electricity subsidies, and linking power tariff adjustments to cost of inputs twice a year,” it reads. “The government also plans to privatize parts of the extensive network of state-owned enterprises.”
In December 2009, the International Monetary Fund (IMF) approved a US$79.3 million standby arrangement US$13.2 million under a program to deal with external shocks.
As the role of monetary policy was limited with the currency pegged to the US dollar, the report advises that fiscal policy has to “play the greater role in demand management and economic stabilization”.
Weak institutions and human resource deficiencies, including “the fragmented structure of government”, were identified as major constraints to economic growth.
Moreover, the report notes that the government’s policy of grouping atolls into seven provinces to develop regional administration and economic centres was “a tall order” as the government “aims to reduce the cost to itself at the same time”.
In his radio address on Friday, the president said he received a text message from a resident of an “isolated island”.
The person observed that the president was “always abroad” and implied that he was neglecting domestic affairs.
The president arrived in China yesterday to open the Maldives pavilion at the Shanghai Expo 2010.
Addressing the concerns in his radio address, the president said he would leave “no stone unturned” in his efforts to secure aid and assistance for development projects.
“I have to go to all these places. I have to talk to a lot of people. I have to do a considerable amount of work to secure financial support, projects and assistance for the country,” he said, adding that he did not enjoy travelling.
Meanwhile, in his speech at the summit, Nasheed said he was under “tremendous pressure” to prosecute members of the former regime accused of corruption and torture.
He added that it was “understandable” for people who had been wronged in the past to seek justice and reparations.
“It is particularly difficult to forgive people, when they refuse to say sorry for the hurt they have caused,” he said. “But I am loath to act against the former regime. If we took action against everyone implicated in corruption and torture, we would end up arresting most of the opposition. I do not believe that arresting the opposition, is the best way to build a healthy democracy.”