Tag: Former Finance Minister Ahmed Inaz

Maldives strategically unprepared for SEZs, argues former Finance Minister Inaz

The Maldives is strategically unprepared for the negative consequences of creating special economic zones (SEZs), former Finance Minister Ahmed Inaz has warned.

In an opinion piece published on newspaper Haveeru last week, Inaz argued that SEZs could worsen income inequality, deprive local councils of sources of revenue, and lead to a large influx of foreign labour.

“If [the government] wants to create special economic zones, it should prioritise solving problems in the judiciary that the entire country is concerned about as well as the budget deficit,” he wrote.

Policies concerning the SEZs should be formulated with a long term plan that looks ahead 10 to 20 years into the future, Inaz advised.

Investor confidence should be secured, he continued, for which laws needed to be reviewed through political dialogue.

Speaking at a forum on SEZs last week, Maldives Monetary Authority Governor Dr Azeema Adam also cautioned that political consensus was necessary for SEZs to be successful and stressed the importance of a long term strategic plan.

President Abdulla Yameen ratified the SEZ Act on September 1, which he has said would “transform” the economy through diversification, whilst relaxed regulations and tax concessions were necessary to attract foreign investors and launch ‘mega projects’ to mitigate the reliance on the tourism industry.

Inaz meanwhile predicted that a population of foreign workers many times the size of the local population would be created with the development of SEZs.

“Problems (social, political and economic) as well as opportunities that could arise as a result of the [expatriate] population should be weighed academically and discussed and debated,” he advised.

Inaz served as finance minister during the administration of former President Mohamed Nasheed and oversaw the enactment of tax reforms in 2011.

After leaving the Maldivian Democratic Party in February 2012, Inaz told Minivan News he would “always remain independent and serving the national interest.”

Consequences of SEZs

Unlike China and other East Asian countries where SEZs were created about 50 years ago, Inaz observed that the Maldives has never been a “closed economy.”

A large and cheap labour force and rich natural resources contributed to China’s economic success, he noted.

However, he added, social scientists believe that industrial development came at the cost of social cohesion.

Moreover, large multinational companies exert undue influence over decision-making in China and other East Asian nations, Inaz suggested.

While a free market economic policy has always been pursued in the Maldives, “with the designation of separate economic zones, other regions of the Maldives would be closed economically,” Inaz wrote.

Inaz argued that policies enacted in China to integrate its economy with a globalised world were unsuited to the Maldives.

In addition to establishing infrastructure such as airports, utilities and transport networks, Inaz observed that China trained skilled workers such as engineers, accountants, and lawyers years in advance.

“The question is whether there are nearly enough Maldivians with good work ethics who would be inexpensive (compared to neighbouring countries)?” he asked.

Social and economic problems created as a result of not regulating migrant workers during the past 15 years could increase manifold with SEZs, Inaz warned.

If Maldivians were unprepared for new jobs, Inaz predicted that wages could also be adversely affected in the domestic job market.

Inequality

One of the biggest challenges facing the Maldives was income inequality and the small size of the middle class, Inaz continued, which was most evident in the regional disparities between the capital and outer atolls.

Inaz stressed that empowering local councils to generate income by utilising land and lagoons was necessary to reduce disparities.

While social security benefits reduces the income gap, Inaz warned of the negative impact on government revenue of tax exemptions for investors in SEZs.

China and Singapore created SEZs after putting the state’s fiscal affairs on a sustainable footing, he noted.

The value of the Maldivian currency deteriorated as a result of persistent budget deficits since 2004, Inaz observed, which forced the state to print money to finance deficit spending.

Consequently, the interest rate on treasury bills was now nine percent, he noted, which restricts opportunities for local businesses to partner with foreign investors in the SEZs.

“It would be unwise to establish [SEZs] without easing the burden placed on Maldivian businesses by the budget deficit and T-bill rates,” he advised.

If SEZs are created with the fiscal status quo unchanged, Inaz suggested that the government would lose sources of revenue from taxes and lease rent.

The government’s position in negotiations with potential investors would also be weak, he contended.

Inaz further argued that successive governments had been unable to improve provision of services due to a weak system of governance.

“With this reality and serious challenges, what high ground would we climb for safety from the big waves formed by opening up the whole country through a special economic zones law?” he asked.

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2014 budget should be decided after election, says former finance minister

Former Finance Minister Ahmed Inaz has questioned the timing of a decision to present cabinet with the projected 2014 state budget less than 10 days before the scheduled re-run of the presidential election.

With the constitution requiring a new president be sworn into office by November 11, 2013, Inaz has told Minivan News that the budget should be decided by a democratically elected government immediately following the election, rather than by the outgoing administration of President Dr Mohamed Waheed.

The claims were made after the Supreme Court last month suspended the run off vote between Maldivian Democratic Party (MDP) candidate Mohamed Nasheed and Progressive Party of Maldives (PPM) rival MP Abdulla Yameen that had been scheduled for September 28.

The country’s apex court later annulled the first round, ruling that 5,600 ineligible votes had been cast.

With a re-scheduled poll just under a week away, the President’s Office has announced that Finance Minister Abdulla Jihad had presented the projected 2014 budget to the cabinet on October 8.

Whilst Jihad was not responding to requests for information, local media – citing unnamed Finance Ministry sources – have reported that the proposed budget is expected to total MVR16.5 billion.

The project spending plan come as the Maldives Monetary Authority (MMA) warned in its latest Quarterly Economic Bulletin that government finances have “further deteriorated in the first six months of 2013” due to a sizeable shortfall in expected revenue coupled with a marked increase in recurrent expenditure.

The economic bulletin revealed that the total government expenditure of MVR6.7 billion (US$435 million) in the first half of 2013 was 8 percent higher than the same period in 2012.

The growth of government spending was “entirely due to the 21 percent (MVR965.3 million) growth in recurrent expenditure, which was partly offset by the 26 percent (MVR440.6 million) decline in capital expenditure during the period”, the report stated.

While the present government had previously anticipated the need for for a supplementary budget after state offices were found to have exhausted their entire annual recurrent expenditure for 2013 by April, the Finance Ministry has instead relied on short-term treasury bills (T-bills) to carry over its debts.

Former Finance Minister Inaz said the present government’s reliance on the sale of T-bills was only delaying moves to address the problems with state spending, while ensuring the cost of lending for both public and private enterprise goes up.

Inaz argued that it should be for the newly elected administration to outline how state spending would be handled to find an “agreeable solution” backed by parliament.

“What I mean by agreeable solution is that in the current political climate, I do not believe there will be a clear parliament majority, so we must learn to talk [between political parties],” he said.

“If we delay, this will only prolong the deficit and kill the tax system completely.”

Long term co-operation needed

The former minister said that during the administration of former President Nasheed – under which he himself served – there had been “reluctance” to talk with the country’s opposition.

He added that the same opposition had for their part worked to try and stymie financial measures such as proposed tax reforms that he said had nonetheless been partially introduced by the MDP in the form of the Tourism Goods and Services Tax (T-GST) and general GST.

Having spoken with the current presidential candidates, Inaz argued that there was a shared interest in finding a solution to current concerns over the size of the country’s budget deficit, but argued against what he called the short and medium-term revenue raising measures previously suggested by the current government.

“It will take long-term strategies rather than looking for short-term solutions to try and increase revenue. We must push more cash into the economy and take less money from banks,” he said.

“We cannot increase taxes much more at present, so I believe the smartest way forward would be on focusing to increase productivity. For instance, the revenues in 2011 [from taxation] were way above what we had expected at the time.”

While Inaz said he backed greater efficiency within the civil service and private sector as a key means of boosting revenue, he claimed that significant cuts to recurrent expenditure was not realistic at present.

He took the example of the previous MDP government’s attempts to reduce state wage bills, which he said had required redundancy packages that would not be affordable in the current financial climate.

However, Inaz claimed that any potential government should instead consider freezing current civil service numbers and not hiring any more public sector workers unless a vacancy arose, something he claimed had again been started by the MDP in 2012 before the controversial change in government in early February of the same year.

Former Economic Development Minister Mahmood Razee – another significant figure in the former MDP government – said that it was vital that parliament agree to implement a complete and comprehensive reform of the current taxation system.

Razee argued that the previous government had predicted that once its tax reform plans had been fully implemented to include measures such as income tax, there would not be any need to increase taxes like GST and T-GST as the Majlis previously had this year.

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