Majority of dollar receipts spent on imports: MMA assistant governor

The majority of US dollar receipts to the Maldives are spent on importing goods to the country, Maldives Monetary Authority (MMA) Assistant Governor Dr Azeema Adam said yesterday at a ceremony to launch the central bank’s first Quarterly Business Survey.

Dr Adam – who was recently named by President Abdulla Yameen as his nominee for the vacant governor’s position – reportedly said that US$1.5 billion out of the approximately US$2 billion that enters the domestic economy was used to pay for imports.

As an island nation heavily dependent on imports, the MMA’s latest balance of payments projections estimate that the country’s current account deficit will widen to US$562.5 million in 2014, which is equal to 22 percent of GDP.

As a result, explained Adam yesterday, there is a shortage of dollars in circulation. The central bank’s chief economist recommended reducing the volume of imports and increasing productivity.

“We have to find ways to keep dollars [circulating] in the economy,” she said.

Securing foreign markets for Maldivian exports was also essential for alleviating the dollar shortage, she suggested.

As a large number of foreign workers reside in the country, Adam said, their remittances added to the dollar outflow.

The business survey meanwhile showed “an increase in the level of business activity” in the fourth quarter of 2013 (Q4-2013) compared to the third quarter (Q3-2013).

“Looking ahead, businesses expect a continuation of this improvement in business activity and volume of demand in Q1-2014 as well. With regard to the labour market, respondents in all sectors, except for the transport and communication sectors, indicated an increase in employment in Q4-2013 compared to Q3-2013,” the summary of the survey results stated.

All sectors surveyed also “anticipate an increase in hiring in Q1-2014 reflecting the expected increase in business activity in this quarter.”

“Pressure on business costs, which includes all labour related costs and other input prices, increased in Q4-2013 when compared to Q3-2013. Similarly, average prices charged by businesses also increased in Q4-2013, except for those businesses in the manufacturing and transport and communication sectors, which indicated no change,” the summary read.

“Going forward, the majority of respondents expect a further increase in their business costs compared to Q4-2013. Average selling prices are also expected to increase, except for transport and communication sectors, which anticipate a decrease in their selling prices.”

A delegation from the International Monetary Fund (IMF) expressed surprise at the “resilience” of the Maldivian economy in a meeting with MPs on the parliament’s public finance committee yesterday.

“Imports are on the shelf. If you go into a shop, you’ll find a wide range of imported goods there. You see people with motor scooters and cars and smartphones. You see people going on travel. All these are available, are done, even while the level of reserves at the MMA is quite low,” observed the IMF’s resident representative Dr Koshy Mathai.

The country’s current international reserves were US$345.7million in December, equating to just over two months worth of imports.

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Naifaru Court orders BML to issue dollars to Naifaru NGO

Naifaru Court has ordered the Bank of Maldives (BML)’s Naifaru Branch to issue an amount of dollars requested by the ‘Naifaru Juvenile’ NGO, after it sued the bank for declining to issue dollars because the NGO had deposited dollar cheques rather than physical cash.

Naifaru Court Judge Abdul Muhusin delivered the verdict yesterday and said that there was no legal grounds for the Bank of Maldives to withhold the money, and that all the dollars saved in the bank under Naifaru Juvenile’s name belonged to the NGO.

The judge also ruled that the bank had no authority to change the money into another currency when the owner requested it to be kept in the specific currency that the owner had deposited.

The money saved in Naifaru Juvenile’s account was money aid money from foreign parties to conduct different activities under agreements it had made, and if the money was not released, the foreign parties aiding the NGO might lose confidence in it, the judge said.

The judge also noted that its inability to draw on its funds could potentially lead to the NGO losing future agreements and aid from foreign parties.

BML and other banks in the Maldives are currently facing an ongoing major dollar shortage and have limited the amount of dollars they issue each day.

While the official exchange rate has been floated within 20 percent of the pegged rate of Rf12.85, it has sat for much of the year at the upper bracket of Rf15.42. The exchange rate on the black market is up to Rf20.

While dollars pour into the Maldives’ profitable tourism sector, much of this is swiftly banked overseas and little enters the local economy. The Maldives Monetary Authority (MMA) has never enforced regulations requiring use of the local currency and most tourism businesses continue to charge tourists in US dollars, greatly limiting demand for rufiya.

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Cabinet decides to only accept Maldivian rufiya as taxes

Cabinet has today decided that all fees and taxes payable to the government must be paid in local currency, in a bid to overcome the dollar shortage currently being experienced in the country.

The decision comes after President’s official visit to Seychelles, following which President Mohamed Nasheed met with the press and shared advice from the Seychelles Finance Ministry and Central Bank Governor to insist on the use of local currency as legal tender.

Speaking to the press, Nasheed said he met with the Governor of Seychelles Central Bank and Finance Ministry’s Principal Secretary for Finance and Trade Ahmed Afif.

‘’I had a long discussion with Mr Afif and Governor of Seychelles over this issue,’’ President Nasheed said. ‘’We are on the right path now, we can reform our economy better than Seychelles.’’

Nasheed said Afif continuously told him to use local currency as the legal tender to overcome the dollar shortage.

‘’They advised us to use local currency as the lead currency, so for example all taxes have to paid in Maldivian rufiya.’’

Nasheed explained that if the Maldivian rufiya was used as the lead currency, all resorts and individuals would have to change dollars into Maldivian ruffiya to pay the taxes and fees to the government.

‘’To get Maldivian ruffiya they will have to go to the banks, which will increase the amount of dollars that the banks will have,’’ Nasheed added.

The President also noted that the inflation rate of Maldives was low compared to neighboring countries.

‘’I did check the price of diesel and rice and flour, it is still cheaper in the Maldives,’’ he said.

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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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MMA Governor meets Finance Minister to discuss dollar shortage

Maldives Monetary Authority (MMA) Governor Fazeel Najeeb met Finance Minister Ahmed Inaz last week to discuss the policy measures taken to alleviate the dollar shortage and determine what additional efforts could be undertaken to resolve the problem.

According to an MMA press statement on Thursday, Najeeb and Inaz agreed that given the continuing scarcity of dollars, “the problem of partiality by some to transactions with dollars instead of rufiyaa is tied to the dollar shortage.”

“It was therefore decided to go forward by consulting the business community about the issue,” it adds.

Deputy Governor Aishath Zahira, State Minister Ahmed Naseer and MMA technical staff also participated in the meeting.

Local media meanwhile reported a sharp rise in the wholesale prices of a number of commodities last week, ranging from powdered milk to areca nuts. Following the government’s decision earlier this month to replace the fixed exchanged rate with a managed float of the rufiya within a band of 20 percent of the 12.85 peg, newly-appointed Finance Minister Inaz told press that he expected the economy to stabilise within three months.

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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]gmail.com

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DRP factions plan concurrent protest marches against managed float of rufiya

Rival factions of the main opposition Dhivehi Rayyithunge Party (DRP) have announced concurrent protest marches in Male’ tonight to demonstrate against the government’s decision to allow the rufiya to be traded within 20 percent of the pegged rate of Rf12.85 to the dollar.

Mohamed Hussein Shareef “Mundhu”, spokesman for former President Maumoon Abdul Gayoom, told press yesterday that the ‘Gayoom faction’ will choose a different route to DRP Leader Ahmed Thasmeen Ali’s faction to avoid possible clashes. The largest opposition party has been engulfed in factional strife following its dismissal of Deputy Leader Umar Naseer.

The march will begin at the tsunami memorial area at 9:00pm, “and we are consulting with police to determine the roads we’ll take,” Mundhu said.

At a rally last night to launch “DRP’s Main Office” near the artificial beach, dismissed Deputy Leader Umar Naseer echoed Mundhu’s appeal earlier in the day for opposition supporters not to join Thasmeen faction’s march.

Both Mundhu and Umar dismissed the rival faction’s planned protest as “a walk by Thasmeen’s family.”

Mundhu further claimed that Thasmeen had refused to authorise DRP protests in the past.

Unlike previous protests, said Umar, tonight’s “peaceful march” would not involve gathering outside presidential residence Muleeage or the Maldives National Defence Force (MNDF) headquarters, both restricted areas under freedom of assembly regulations and which have previously resulted in violent clashes between authorities and opposition supporters.

Rival rallies

Addressing supporters at last night’s rally, Umar accused the DRP Leader of splitting the party, claiming that DRP members were behind former President Gayoom and calling on “everyone working with Thasmeen to get behind Zaeem [Maumoon].”

If DRP members shun activities planned by the Thasmeen faction, Umar said that support for the embattled leader would “wither away.”

Deputy Leader Ilham Ahmed argued that if the party’s presidential candidate for 2013 had been chosen through a primary during the DRP’s third congress in March 2010 the current split could have been avoided.

“If it had been done through a primary we wouldn’t have this dissatisfaction among us,” said the Gemanafushi MP. “Therefore, I would say, even if some people are unhappy, we will have a primary. God willing, we will do that before too long.”

Vowing to “cut them down to size,” Ilham alleged that senior DRP members were “making secret deals with the government.”

Thasmeen and his allies should be “ashamed” to talk about the dollar shortage, said Ilham, as a deal had been stuck to raise the value of the dollar “inside [Speaker] Abdulla Shahid’s chambers” when the 2011 budget was passed.

Thasmeen faction’s concurrent rally was announced at press conference yesterday by Deputy Leader Ali Waheed.

While Gayoom factions members have been boycotting its meetings, the DRP Council reportedly passed a resolution last night to require the party’s secretariat approval before using the DRP logo or official seal.

However a defiant Ilham has since told local media that the council did not have the authority to ban a practice not explicitly forbidden in the party charter.

“I am a Deputy Leader elected by ordinary members of the party,” he said. “There is nothing in the party’s charter that says a Deputy Leader can’t use the party’s logo and seal.”

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Fixed peg can only be maintain by no deficit monetisation: Lanka Business Online

The currency peg allowed the Maldives to have some of the highest living standards in South Asia by preventing excessive deficit spending, reports Lanka Business Online.

“Currency debasement and inflation are key to expanding the state at the expense of the larger society.

The Maldives also started active open market operations recently, ostensibly to mop up excess liquidity, but it can make it almost impossible to maintain a peg.

A well functioning open market operations system automatically sterilises interventions by a central bank (dollars sales by the monetary authority) with injections of local money forcing a balance of payments crisis, even in the absence of excessive deficit spending.

In 1997 many East Asian nations which had good fiscal management ran into currency crises due to sterilized interventions by central banks.

A fixed peg can only be maintained with unsterilized interventions and no deficit monetisation.

One of the triggers of Maldives current troubles was a large increase in the salaries of state workers. However the archipelago was also hit by a tsunami in 2004 and also suffered a downturn in tourism, a key source of state revenue, amid a global recession.”

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