Maldives hopes “global slowdown” will bolster rufiya

Although the Maldives’ economy expanded in October, higher food and transport costs combined with the depreciating rufiyaa has bloated inflation rates to 8.3 percent, a CARE Maldives report has shown.

“Inflation during the period was mostly influenced by food index owing to the increase in prices of both fish (41.6%) and other food items (11.19%) followed by the increase in the transportation costs,” states the report.

“But this is not singular for this economy as rising prices have been witnessed across the globe,” the report contends.

Quoting a “global slowdown” in economic activity, the report suggested that international commodity prices are due to fall in coming months. The drop could temper the Maldives’ rising prices.

The recently-implemented Goods and Services Tax (GST) caused many Maldivians to note a price hike with anxiety. However, the President assured the people that further reforms scheduled for January 2012 would temper the new rates.

CARE Maldives suggested that a drop in international commodity prices would also reverse the widening trade deficit and declining reserves of foreign currency. Gross international reserves declined by approximately US$27 million between December 2010 and September 2011.

Statistics show an increase of US$33.2 million in reserves to date compared with August 2010, the report claims.

CARE estimates that the fiscal deficit will remain at 11 percent of the GDP; total revenue is expected to increase from 23 percent of GDP to 29 percent by the end of the year.

Meanwhile, total expenditure continues to surpass revenue. Records indicate a four percent increase from 37 percent of GDP in 2010 to 41 percent in 2011, primarily due to growing government salaries.

“The increase in expenditure mainly reflects the restoration of wages of government employees to the levels prior to 2009. The government has however taken some steps in terms of rationalisation of manpower. The overall fiscal deficit is estimated to remain at 11 percent of GDP.”

Approximately ten percent of the Maldivian workforce is employed by the government, an ungainly figure that has been targeted as a key hemorrhage point in the government’s budget. The Finance Ministry recently asked government institutions to curb job creation and new hires.

Earlier this month, President Mohamed Nasheed said the government aimed to bring the fiscal deficit down to a single digit number.

“Government expenditure has been substantially reduced in a number of different areas. For this year, we forecast a budget deficit of 11 percent. We have noted now that it has been reduced by three or four points,” he said.

CARE Maldives summarized its report by criticising the growing inflation rate and trade deficit, but praised government policies that target these issues.

“The progressive policy measures taken by the government especially on the exchange rate combined with declining commodity prices globally would help to reverse these trends.”