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.
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.