economy – Page 8 – Minivan News

Maldives’ oil spend spikes in line with world oil prices

Saudi Arabian oil exporter Aramco has expressed unease about the global economy as oil prices have continued to rise, as unrest drops the rate of production in Africa and the Middle East.

Prices reached US$124 a barrel yesterday, after peaking earlier this month at US$127. Worldwide output fell 700,000 barrels in March amid ongoing political turmoil in Libya, Yemen, Syria, Nigeria and the Ivory Coast.

CEO of Aramco Khalid al-Falih told an industry gathering in South Korea that “We are not comfortable with oil prices where they are today… I am concerned about the impact it could have on the global economy.”

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.

In Male’, the increase in price has compelled the State Electric Company Limited (STELCO) to increase the fuel surcharge component of its electricity prices, with Haveeru reporting a STELCO official as acknowledging an increase in complaints about the cost of their bills price. The fuel surcharge reached Rf 1.41 per kilowatt hour in March, dropping slightly to Rf 1.27 in April.

“The rise in fuel prices leads to an increase in the fuel surcharge, which eventually push the electricity charges up,” the official said.

The Maldives has meanwhile pledged to become carbon neutral by 2020, but little has been done to wean the country from the growing financial burden of its oil addiction.

In a previous interview with Minivan News, President Nasheed’s Energy Advisor Mike Mason suggested that spiralling oil costs could prove to be a strong argument for a return to sailing.

“I think there is a huge opportunity to take a knowledge of sail, wind and current – the thinking that has served the Maldives well for 2000 years – and apply modern technology such as solar to create a new transport paradigm. A sailing vessel with a modern hull, utilising modern technology can reach 30-40 knots, and would greatly reduce the reliance on diesel,” Mason said at the time.

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Civil servants to receive Rf150,000, scholarships, SME loans for voluntary redundancy

Cabinet yesterday launched a program to encourage civil servants to leave the government and enter the private sector or further their education.

Under the scheme, civil servants and government employees will be 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).

In addition, government employees above the age of 55 who retire voluntarily will be given the same benefits as those released by the Civil Service Commission (CSC) at the mandatory retirement age of 65.

The deadline to apply for the program with the Ministry of Finance is May 31, 2011.

The move is likely to win the government further favour with the International Monetary Fund (IMF), following its managed float of the rufiya and passing of several tax bills through parliament, including the tourism goods and services tax (TGST) and business profit tax.

However international financial organisations such as the World bank and International Monetary Fund (IMF) have regarded the country’s bloated public wage bill as the key contributor to its 20-21 percent budget deficit, arguing that the country must reduce its expenditure as well as increase its revenue.

The deficit exploded on the back of a 400 percent increase in the government’s wage bill between 2004 and 2009, with tremendous growth between 2007 and 2009. On paper, the government increased average salaries from Rf3000 to Rf11,000 and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country – doubling government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

Political maneuverings by the opposition last year forced the government to rescind pay cuts of 15 percent, leading the IMF to comment that “significant policy slippages” were threatening the country’s economic sustainability.

Several political skirmishes over pay cuts between the Finance Ministry and Civil Service Commission (CSC) ended in court last year, with permanent secretaries of Ministries at one stage submitting multiple wage forms in an effort to appease both sides.

Head of the CSC Mohamed Fahmy told Minivan News that the commission was “very positive” about the voluntary redundancy program.

“This is an opportunity particularly for young people to advance their studies and skills,” he suggested.

“We can’t yet say how people will react, but definitely the package for people 55 years and over is very good. I think this is positive encouragement – scholarships are hard to come by, and many parents are not in a position to fund their children’s education.”

The President’s Press Secretary Mohamed Zuhair claimed that the potential short term costs of the scheme “are not relatively high compared to the benefits in the long term.”

“We need to trim down the civil service to reduce state expenditure and have a healthier private sector,” he said. “Few other countries apart from North Korea employ such a high percentage of their population in government.”

Zuhair dismissed the possibility that such an incentive program would lead to a ministerial ‘brain drain’, as talented staff with prospects outside government rushed to leave the civil service.

“The civil service will continue to provide benefits such as long term security and upward mobility – I don’t think there will be a rush,” he predicted.

Political appointees would also be eligible for the program, he added, however following the replacement of government-appointed island councillors by elected representatives, “there are not more than about 170 appointees”.

In comparison, the Civil Service Commission (CSC) has 21,000 staff under its mandate, including 19,000 permanent staff and 2000 contractors.

The remaining public sector employers fall under an assortment of 100 percent government-owned corporations, particularly prevalent in the medical, education and media sectors, a loophole that allows the government to hire-and-fire staff without being subject to the jurisdiction of the CSC.

“Staff of the corporations are no longer civil servants but are still uniformed servants of the state,” Zuhair explained.

Yesterday’s 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.

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Comment: The big picture, rethinking policies

In the past couple of weeks, we have seen several responses to the growing gang violence in the country with high level committees set up to look into the matter.

We also saw a national security seminar for the tourism industry in response to recurring raids on resorts which left a 19 year-old dead two weeks ago.

These are immediate and reactionary measures. We can only do so much to prosecute young criminals and fill up the already crowded jails. If we want real answers to these problems, we need to look at a bigger picture.

The same applies to the exchange rate situation. Beyond devaluation, there is much to do to fix the macro-economic situation. To me the key words are ‘long term’ and ‘priorities’. We need long term strategies and to identify the right priorities to solve our growing economic and social problems.

A long-term growth strategy

The economic section of the government’s manifesto ranges from pledges on cost of living, tourism, fisheries, agriculture, SMEs, water, sewerage, employment, environment and to date, implementation of these pledges appear to be ad-hoc and piecemeal. There is no overall direction to regain recovery and growth of the economy.

The government talks about diversification of the economy. The government also declared that Maldives is open for business and wants see increased investments and private sector role in as many sectors as possible. Fiscal adjustment measures have been initiated here and there and now there is a growing reference to market forces and a market based economy.

We need to look above all these plans and the long list of manifesto pledges and decide on what the economy should look like in the next 5 to 10 years, what the share of tourism would be, how growth can take off and what impact we want to see on incomes, on private sector and on job creation. Above everything we need a long-term economic growth strategy that is clear and consistent.

Setting the right priorities

The government’s manifesto and the five year development plan are overly ambitious with 5 key pledges and 20 odd other pledges. Many ministries are overwhelmed with new policies, projects and programmes everyday where there is only a limited pool of technical expertise and managerial staff to roll them out. In my opinion, political disillusionment and public frustrations are a result of too many promises. Investors, donors, private sector and the public are often confused, not knowing the real direction of the country’s economic and development agenda. To me, the priorities are simple and straightforward. We need to decide on growth sectors and growth hubs.

Growth sectors

We constantly talk about the high level of dependency on tourism and the vulnerability of the economy to external shocks. We are increasingly seeing a decline in fisheries and despite many efforts, share of agriculture is still negligible. The government often refers to plans to diversify tourism and fisheries. There are the long standing debates on our competitiveness in potential sectors such as ports services, off-shore financial services as in the Caribbean and Maldives specialising as a knowledge-based economy, as a hub for R&D on climate change, marine research and even to the extent of specialising on democratic and human rights research.

The reality is that as a small island nation we cannot do it all. We need to focus on one or two sectors and we need to prepare our labour force, our laws and institutions to specialise in these sectors and equip the private sector and gear donor assistance and foreign investments to develop these sectors.

Growth hubs

We have a tradition of not giving consideration to population and migration in development planning. The failure to predict and prepare for the explosion of school leaving population gave rise to joblessness and the related youth problems we see today. The failure to plan for an explosion of migration to Male’ from the atolls has caused over-crowding, harsh living conditions, congestion and pollution in Male’ which in turn causes crime and violence that keeps escalating. If we fail to plan for an ageing population in the next 15 years, the consequences could be worse.

The government insists on extending services to all islands and on increasing accessibility of services through connectivity and transport. The reality is that service provision even with ferries to 200 islands is unrealistic. It is costly to not only invest but to maintain high quality education, healthcare, social services, security, utilities, harbours and not to mention airports. We cannot afford it if the government wants to achieve a balanced budget. We cannot afford it even otherwise given the limited human capital. Attempts to expand tourism to all parts of the country have not had a major impact on reversing migration or on local economic growth. The resorts run on a parallel economy and have not opened up economic opportunities for islands except for remittances of employees.

Additional flats on the islands is definitely no solution. Those who move to Male’ are looking for better education, healthcare and better job prospects. The government cannot guarantee all three services to every single island in the country. Villingili and Hulhumale’ have not relieved housing pressures and living conditions in Male’. These satellites islands are simply getting filled up with migrant families everyday and this trend will accelerate when additional flats are built in Hulhumale’ or in Gulhifalhu. Housing pressures, living costs, overcrowding in schools and hospitals will only worsen.

The government needs to decide on one or two growth hubs in different parts of the country based on population needs and migration patterns. The dispersed 200 inhabited islands will never have scale for commercial development and economic growth. The government should leverage investments, people, infrastructure and direct services to the growth hubs. It is the only option for improving quality of life of people in Male’ and outside of Male’.

Economic and social transformation

The real solution to gang violence, drugs and crime and the exchange rate situation is therefore a long term growth strategy that prioritises sectors for economic diversification and hubs for population concentration.

Thirty-odd election pledges on 200 islands is simply impossible. I echo Imran’s conclusions in an earlier article that we need a ‘bold government that shows leadership’. We need to acknowledge the big picture, give up reactionary and ad-hoc approaches, and show consistency and vision. The government should stop jumping on big ideas and take the national institutions, investors, donors and the public towards a focused and realistic recovery and growth path.

Without thinking long-term and without setting priorities, I don’t see how we can really solve the growing problem of dollars, drugs, crimes, violence, social disillusionment and even political frustrations that we see everyday across all parts of the country.

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]

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Devaluation marks failure of economic policy: Yameen

The government’s decision to devalue the rufiya and replace the fixed exchange rate with a managed float marks the failure of its economic policy, claims minority opposition People’s Alliance (PA) Leader Abdulla Yameen Abdul Gayoom.

Addressing supporters at the ‘Gayoom faction’ rally last night, MP Yameen, half-brother of former President Maumoon Abdul Gayoom and long-serving Trade Minister in his cabinet, argued that the only circumstance where devaluation was advisable was to make the country’s exports cheaper and more competitive.

“[But] if the country does not produce a lot of goods for export, there will be absolutely no benefit from devaluing the currency,” he said, adding that the decision to devalue was both “political” and “an admission of failure.”

Following its inability to deal with the dollar black market two years after the formation of a parallel market, “what the government did was arrange a mechanism to auction the dollars [that they believe is being hoarded].”

The decision to devalue was therefore “political” as opposed to based on sound economic reasons, he said.

Yameen added that he believed the exchange rate would never fall below the pegged rate of Rf12.85.

“Since the way to get a good price for a scarce commodity is through an auction, they had to do this out of necessity and as a last resort, because they have no other way,” argued the MP for Mulaku.

However, he continued, the changes would be to no avail unless the country’s ballooning fiscal deficit is substantially reduced as urged by the International Monetary Fund (IMF).

Yameen went on to lambast the government’s infrastructure projects as well as preparations for the upcoming South Asian Association for Regional Cooperation (SAARC) Summit to be held in Addu City as “unnecessary spending.”

Conceding that floating the rufiya could solve the black market problem, Yameen however argued that those who had dollars would hesitate to release it if they did not have confidence that the rufiya would not depreciate further.

As a consequence of devaluation, Yameen predicted, inflation would rise by 30 percent: “For a person who gets Rf1,000 [as income], the value of what he can spend is actually Rf600, because of inflation. So, for example, if a can of Nespray [powdered milk] is sold for Rf28 today, with the change in the price of the dollar, we are saying it is going to cost Rf38…the biggest burden will be borne by the poorest.”

To back his assertion, Yameen referred to GMR’s recent 50 percent hike of lease rents at the Male’ International Airport, a decision likely to lead to a corresponding increase in air fare for domestic travel.

President Mohamed Nasheed meanwhile insists that the economy would stabilise over the course of the next three months and that the managed float was necessary “to ensure long term stability and prosperity of the Maldives.”

MMA speaks

Breaking its long silence on the dollar shortage, the Maldives Monetary Authority (MMA) issued a statement Thursday estimating that allowing market forces to determine a price within the 20 percent band of fluctuation would “solve the present dollar shortage in the near future.”

“We would like to take this opportunity to inform the Maldivian people that the MMA has undertaken various different efforts to solve the foreign currency problem,” it reads, adding that the central bank was in the process of strengthening the legal framework for monetary policy.

The MMA statement reveals that the Maldives had a managed floating exchange rate between Rf8.50 and Rf11.50 from 1987 to 1994.

On April 10, 1994, the floating rate was replaced with a fixed peg, which was then increased by nine percent in April 2001.

While dollar shortages had been experienced “occasionally in the past” due to strong demand coinciding with the Hajj (pilgrimage) or school holiday season, the MMA explains, an expansionary fiscal policy since 2004 coupled with the global recession in 2009 led to the formation of the dollar black market.

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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:

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.
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.
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]

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IMF praises managed float of rufiya, “unpredictable” and “high risk” warn local experts

The International Monetary Fund (IMF) has praised the Maldives’ decision to effectively devalue its currency, allowing the rufiya to be traded within 20 percent of the pegged rate of Rf12.85 to the dollar.

“Today’s bold step by the authorities represents an important move toward restoring external sustainability,” the IMF said in a statement. “IMF staff support this decision made by the authorities. We remain in close contact and are ready to offer any technical assistance that they may request.”

The Bank of Maldives was today trading the dollar at the maximum selling price of Rf15.42 and buying at Rf12.75 while the Bank of Ceylon was selling it at 13.80 and buying at Rf13.60.

At a press conference this afternoon, newly-appointed Finance Minister Ahmed Inaz explained that the government decided to change the fixed exchange rate to a “managed float” to shape government policy towards increasing the value of the rufiya and ultimately bring the exchange rate down to Rf10 – an oft-repeated pledge of President Mohamed Nasheed.

The worsening balance of payments deficit could not be plugged without allowing the market to set the exchange rate, Inaz continued, adding that through lowering the fiscal deficit and spurring private sector job growth “a path would open up for us to reach the lower band (Rf10.28).”

“My estimate is that it will take about three months for the market to stabilise and reach a balanced [exchange] rate,” he said.

MMA Deputy Governor Aishath Zahira acknowledged on state television last night that the fixed exchange rate in effect since July 2001 had been “artificial.”

Economic Development Minister Mahmoud Razee argued that as a result of the artificially fixed exchange rate, “we do not really know, based on the breadth of the domestic economy, what the value of the Maldivian rufiyaa is right now.”

The managed floating rate, said Razi, would allow the government to decide specific measures that would be needed to improve the exchange rate – such as the extent to which foreign exchange reserves should be increased.

State Minister for Finance Ahmed Assad told press that TGST (tourism goods and services) receipts in February had revealed that previous estimates of the amount of dollars that enter the country were well below the actual figure. The government now estimates a minimum annual income of US$2.5 billion.

Assad urged citizens to use banks to purchase and exchange dollars to avoid “becoming prey to [black market operators].”

A senior government source said the decision was made based on the government’s speculation “that people are hoarding dollars. We hope this will send a signal to the market. It also shows our commitment to a market economy.”

“High risk”

The government has struggled to cope with an exacerbating dollar shortage brought on by a high budget deficit – triggered by a spiralling public sector expenditure – in comparison with the foreign currency flowing into the country. Civil service expenditure has increased in real terms by 400 percent since 2002.

Banks subsequently demonstrated reluctance to sell dollars at the pegged rate, and high demand for travel, commodities and overseas medical treatment forced most institutions to ration their supply.

A watershed moment last week – a crackdown on the hitherto ignored blackmarket sale of dollars at rates of up to Rf14.5 – led to increasing desperation among the lower-paid of the country’s 100,000 expatriate workers, who found themselves blocked from trading currency and unable to remit money home to their families.

The government’s decision yesterday is effectively a ‘rose-tinted’ devaluation of the currency, at least in the short-term, but according to one financial expert could have unpredictable consequences once the market catches up in 4-6 weeks.

“Other countries have a maximum band of eight percent. I have not come across any countries with 20 percent. I think it’s too wide,” said Ahmed Adheeb, a local financial expert working in the private sector. “Why did the government overshoot the blackmarket rate of Rf14.5, and why did it take them two years to come to this decision?”

Adheeb predicted that the construction industry would be among the hardest-hit, “as ongoing projects will now face additional costs. In addition, smaller and medium-sized enterprises supplying resorts may find that their commission and profit is gone if their contracts are in rufiya.”

The public would also be impacted, Adheeb said, as importers passed on the rising cost of goods.

The devaluation came at the same time as the tourist season was winding down for the year, and pilgrims were searching for dollars for the upcoming Hajj. Pilgrims could be called on to make additional payments, Adheeb speculated, while Ramazan importers could face additional challenges this year.

The general public would be also be impacted as the cost of commodities rises to fill the new exchange rate, Adheeb said, while the government’s commitment to projects such as harbour construction could be delayed due to the risks of taking on even more debt.

“This will also affect business contracts, particularly [those concerning] foreign employment, and students studying overseas,” Adheeb said, predicting that “if the market does not stabilise then in three months time we will see a further devaluation. The government is taking a huge risk.”

Structural adjustments

The move will put the government on good terms with the IMF, which spent last year trying to encourage the government to make difficult political decisions for the sake of the economy, and just stopped short of calling for a devaluation of the currency on conclusion of its Article IV consultation.

The IMF, which has shown resounding disinterest in local politicking, in February 2011 criticised the government for “significant policy slippages” claiming that its failure to reduce its expenditure had undermined the country’s capacity to address its crippling budget deficit.

“On the expenditure side, there have been no net fiscal savings from public employment restructuring, public sector wages will be restored to their September 2009 levels earlier than expected, and the new Decentralisation and Disability Bills will lead to considerable spending increases,” the IMF stated. “Also, the Business Profit Tax will come on stream eighteen months later than planned.”

It did however praise the government for getting much-needed business profit tax and tourism goods and services tax legislation through parliament, signalling that this was a major step towards long-term economic maturity. The bills had faced obstacles in parliament, which includes among its MPs some of the country’s wealthiest figures in the resort industry, and who were instrumental in increasing the budgets sent to parliament by the Finance Ministry.

Opposition Dhivehi Rayyithunge Party (DRP) MP Ali Waheed this morning proposed a motion without notice condemning the government’s decision to relax the dollar exchange rate.

Waheed said that he was prompted to submit the motion out of concern for the plight of Maldivian students in foreign institutions and patients who need to fly abroad for treatment.

The DRP MP for Thoddoo also accused the government of compromising the independence of the country’s central bank by trying to influence monetary policy.

In the ensuing one-hour debate, opposition MPs argued that the immediate consequence of the new floating exchange rate would be a 20 percent rise in inflation.

DRP Leader Ahmed Thasmeen Ali explained that government revenue from import duties would increase by 20 percent but the affected businesses would pass the cost to customers.

“We are in this state because the government increased the [amount of rufiya] in circulation by printing money and taking on credit,” said Thasmeen, in a statement likely to raise political hackles among the ruling party, considering that the IMF has stated that the economic crisis in the Maldives was triggered by “expansionary fiscal policies” from 2004 – under the former administration.

This left the country especially vulnerable to the decline in tourism during the 2008-2009 recession. However the financial deficit exploded on the back of a 400 percent increase in the government’s wage bill between 2004 and 2009, with tremendous growth between 2007 and 2009.

On paper, the government increased average salaries from Rf3000 to Rf11,000 and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country – doubling government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

While preliminary figures had pegged the 2010 fiscal deficit at 17.75 percent, “financing information points to a deficit of around 20-21 percent of GDP”, down from 29 percent in 2009, the IMF reported.

Adheeb said today that parliament, independent institutions, civil service and political appointees had continued to make salary demands on the state “but nobody is thinking about the economy.”

“Economic decisions are being politicised when the economy should be the first priority – we cannot survive without it. Only then can political stability be achieved,” he said.

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Economic stability threatened by “significant policy slippages”, warns IMF

The Maldives has suffered “significant policy slippages” that have undermined the country’s capacity to address its crippling budget deficit in 2011 and beyond, the International Monetary Fund (IMF) has warned, in a statement concluding its Article IV consultation with the Maldives.

The IMF warned that the Maldives economy was presently unsustainable, on the back of “expansionary fiscal policies” from 2004 which left the country especially vulnerable to the decline in tourism during the 2008-2009 recession.

The country’s financial deficit exploded on the back of a 400 percent increase in the government’s wage bill between 2004 and 2009, with tremendous growth between 2007 and 2009. On paper, the government increased average salaries from Rf3000 to Rf11,000 and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country – doubling government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

The IMF said that while it recognised “the difficult political situation facing the authorities”, “decisive and comprehensive adjustment measures” were required to stabilise the economy, allow sustainable growth and reduce poverty. In particular, it raised concern about the “lack of significant progress in public employment restructuring.”

“Efforts to strengthen the financial sector and improve the business climate will also be critical,” the IMF said, noting that private sector credit had all but stalled. However it generously conceded that the pace of adjustment “should take into account political constraints.”

The IMF’s Mission Chief to the Maldives, Rodrigo Cubero, told Minivan News that while the government had introduced the core components of a modern tax regime that would begin generating revenue from this year, these achievements were offset by new spending on legislative reforms such as the decentralisation act.

“We see bringing the fiscal deficit down as the key macroeconomic priority for the Maldives,” Cubero said. “A large fiscal deficit pushes up interest rates, thereby undermining private investment and growth, and also drives up imports, putting pressure on the exchange rate and inflation, all of which hurts the Maldivian people, particularly the poor.”

“Further efforts are still needed to reduce the fiscal deficit. Those efforts should comprise further tax reforms as well as measures to reduce expenditure and to improve the channelling of social expenditures to the needy.”

He would not be drawn into the politics of the Maldives’ economic situation, “but what we can say with confidence is that broad political support will clearly be needed both to design an economic programme and to carry it out as planned. That is why we also support as broad a spectrum of consultations with different stakeholders as possible.”

Graduation impact

The Maldives graduated in January 2011 from the UN’s ‘Less Developed Country’ designation to ‘Middle Income’, a move which reduces its access to certain concessional credit and donor aid.

Cubero said that as far as the IMF was concerned, “the Maldives remains eligible to the IMF’s concessional financing under the Poverty Reduction and Growth Trust (PRGT). The IMF follows its own rules and procedures to determine PRGT eligibility; the criteria include income per capita, market access, and short-term vulnerabilities.”

The Maldives had, he said, “made significant economic progress in recent decades, allowing it to reach middle-income status. However, given the large public debt and still very large fiscal deficit, it is very important that the financing terms for the Maldives’ public borrowing remain as favourable as possible. While reducing the fiscal deficit is imperative to maintain debt sustainability, favourable financing conditions would also help keep debt manageable.”

Confidence

In its report, the IMF was broadly confident that the Maldives could stabilise its economy in the medium term, due to the tight monetary policy of the Maldives Monetary Authority (MMA) in mopping up excess liquidity, as well as the passing of the Business Profit Tax and a Tourism Goods and Service Tax.

The economy had rebounded strongly after shrinking 2.25 percent in 2009, and GDP growth for 2010 was an estimated 4.75 percent, the IMF said, with an expected inflation rate of five percent in 2010.

As for the ongoing dollar shortage, while the IMF did not actively advocate a revision of the pegged exchange rate, it did call for “continued discussions between the authorities and the staff on this issue while being mindful of the risks involved and the impact on the poor.”

“The MMA continues to ration the supply of foreign exchange to banks, while fully meeting the demand from the central government and some state-owned enterprises,” the IMF stated. “Dollar shortages persist, and the parallel market premium has increased somewhat.”

In November 2010 the IMF delayed a disbursement under the second review of its program with the Maldives, ahead of the 2011 budget.

The delay, Cubero explained at the time, was due to the “fiscal slippages” caused by insufficient progress towards reducing the wage bill and passing tax legislation – most significantly, the Business Profit Tax.

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Social protection injects money into island economies, says President

Social protection programmes have had a positive impact on many islands, ensuring access to essential services while injecting money into island economies, President Mohamed Nasheed has said during a tour of Kelaa in North Thiladhunmathi Atoll yesterday.

Money injected into Kelaa’s economy every month in the form of social security payments were instrumental in revitalising and sustaining the island’s economy following the tsunami and the economic downturn in 2009, President Nasheed said.

The President added that 368 Kelaa residents were registered in the government’s Madhana social health insurance programme, while 123 residents received the old age pension of Rf 2000 (US$155).

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Maldives one of the world’s most economically-repressed countries: report

The Maldives has been ranked as one of the world’s most economically-repressed countries, in the 2011 Index of Economic Freedom report produced by the Wall Street Journal and Washington think-tank The Heritage Foundation.

The Maldives is ranked 154th out of the 183 countries ranked, a slight drop on last year but still significantly below the global and regional average, placing 34th out of 41 countries in the Asia Pacific region.

Economic freedom, as defined by the report, “is the fundamental right of every human to control his or her own labor and property.”

The Maldives scored well for several indices, including business, fiscal, trade and labour freedom, but scored poorly for government spending, corruption and property rights.

“The Maldives’ weaknesses include chronically high government spending, inefficiency of the outsized public sector, and widespread corruption,” the report observed.

The government’s role in the economy through state-owned enterprises – and employment of over a third of the country’s total labour force – was “crowding out private-sector activity.”

Furthermore, “public-sector graft remains a challenge for foreign firms operating in the Maldives”, while “bureaucracy can be non-transparent and prone to corruption. Dispute resolution can be slow, complicated, and burdensome.”

Minister of Economic Development Mahmoud Razee noted that with regard to corruption, “in the past the country has not had the institutions to monitor and provide transparency, but now the information is available. It’s the difference between having a dirty or a clean window – one lets you see inside to the full picture.”

Several companies investing in the Maldives – including Indian infrastructure giant GMR and Malaysian security technology firm Nexbis – have had their share prices become collateral in local political rivalries following accusations of corruption.

“It’s one thing to be accused of something,” Razee said. “I’m sure most companies think about this [problem], but we have not seen it become a huge issue.”

Development of the private sector was stymied by “costly credit and limited access to financial services” the report noted, and while labour regulations were flexible, “enforcement is not effective in the absence of a dynamic labor market.”

The International Monetary Fund (IMF) has consistently urged the Maldives to reduce the size of its bloated civil service wage spend, which ballooned 400 percent between 2004 and 2009.

“With the government borrowing at the rate it has, it reduces the amount of credit available to the private sector, and that constrains the ability of the private sector to provide jobs and employment,” leader of the Maldives IMF delegation, Rodrigo Cubero, said in November last year.

“That then constrains economic growth. Furthermore, by spending more than it earns, the government is putting pressure on imports and the exchange rate.”

Razee noted that the introduction of new tax regulation such as the GST and Business Profit Tax, “while not the panacea to everything, shows the government’s willingness to come to terms with [the country’s economic condition].”

“If you look at the level of companies interested and investing in the Maldives, it has not lessened,” he said.

On a positive note, the report observed the potential of the government’s mobile phone banking project, dubbed ‘Keesa’, to enhance development in the private sector. Keesa is being jointed developed by the Maldives Monetary Authority and Dhiraagu, with World Bank assistance.

Summarising, the report observed that higher levels of economic freedom “correlated strongly to a country’s overall well-being, taking into account factors such as health, education, security and personal freedom.”

Hong Kong and Singapore were ranked top, followed by Australia, New Zealand, Switzerland and Canada. North Korea, Zimbabwe and Cuba were ranked at the bottom.

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