Tag: private sector

MMA’s enforcement of legal tender for all transactions “absurd”, says private sector

The private sector has expressed concern at the Maldives Monetary Authority (MMA)’s announcement last week that it it intends to enforce the use of rufiya for all transactions conducted in the country.

The move effectively outlaws dollar transactions in the Maldives, with the intention of funneling foreign currency through the local banking system in a bid to combat the country’s dollar shortage.

President Mohamed Nasheed backed the central bank’s move, and the prohibition of the use of any currency other than rufiya for payments including remuneration for work, services, fees or rent.

The ‘grey’ dollar economy has existed in parallel to the local currency, and has insulated businesses such as resorts from the inflation of the rufiya, pegged at 12.85 to the dollar for almost a decade despite the global economic recession, printing of currency and issuing of T-bills.

“This regulation has existed since 1987,” observed Ahmed Adheeb, a local financial expert working in the private sector, adding that the lack of enforcement had protected the private sector from the country’s monstrous deficit and spend-happy state budget.

The MMA’s announcement came at time when “the convertibility of rufiya [into dollars] is in question because of the deficit, and the pumping of rufiya into the system.”

“Is this the right time to enforce this regulation?” Adheeb asked. “We met with the government and told them clearly that that our industry will face a lot of consequences if this happens.”

Local travel agents were one example of businesses that would be affected, Adheeb said.

“They [earn dollars] and contribute a large inflow of dollars into the economy. If they have to pay resorts in rufiya, they will lose their competitive advantage.”

The enforcement would take “the openness and flexibility of out of the economy, when the real issue lies with the state budget,” he said. “This will make business so difficult – it is very dangerous to the economy for the government to start sorting out industry before the state budget. And what of the practicality of it?

“The government needs to address the deficit and cut down its expenditure. State income will increase gradually, but if we keep spending like this we are headed for disaster.”

Minivan News spoke to the manager of one import business, who relies on resort customers paying in dollars to be able to buy stock from overseas.

The MMA’s decision, he claimed, was “absolutely absurd.”

“They can do what they like – but does this mean resorts must pay in rufiya? At a time when there’s no currency stability? Will resorts have to post rufiya prices in tourist brochures? If the objective is to drive foreign investment out of the Maldives with a raft of new taxes and a confused and bizarre monetary policy, then they’re being quite successful,” he said.

Another manager of a commodity import business Minivan News spoke to bluntly stated that she would be unable to comply with the regulation “because we trade in dollars.”

She added that  her business, which banks locally and was sorely hit by the dollar shortage and the reluctance of banks to convert local currency, had improved following the government’s decision implement a managed float of the rufiya.

“We found resorts were more willing to pay in dollars once we set our rate at Rf15.42,” she explained. “But unless the banks are going to exchange rufiya to dollars consistently and at a sensible rate, this is going to cause absolute uproar. And how on earth are they going to police things like payment of rent?”

Economic Development Minister Mahmoud Razee told Minivan News that the government was “trying to make sure that foreign currency goes through the banking system, by enforcing the legal tender.”

“The reason we are doing this is so importers can go to the bank and request dollars from the banking system,” he said. “This will not stop people having a dollar account, it will just stop transactions not in the legal tender.”

Every restaurant at tourist resorts would be obliged to change its menu to rufiya prices, he acknowledged, “but almost every resort and hotel already has a money changer.”

“The MMA will be able to take action if there is a transaction that does not take place in legal tender, and take [the parties] to court,” he said.

The MMA’s announcement came days after the government announced exchange control regulation on the salary of expatriates, legally limiting their ability to transfer money outside the country.

“We don’t want a lot of illegal workers sending foreign currency out of the country, working on the side and taking jobs from locals,” Razee said, explaining that expatriate workers would be obliged to prove they were working in the country legally at the point of transfer, and be restricted in the amount they could send overseas.

“The Ministry of Finance will set a percentage, say 90 percent, of the salary that can be remitted,” he said.

Adheeb was critical of the decision, suggesting that the government had chosen a critical time to impose exchange control.

“We have said it is not going to work as we have a small population and we need foreigners to work here,” he said. “[Issues concerning] non-skilled labour are a problem of regulation, but importing skilled labour gives us a competitive advantage at a time when there are issues converting the rufiya,” he said.

“I question the practicality off this – the banks are currently struggling to deliver services to their existing customers. How will they know if an expat is an illegal expat? This will just create a blackmarket for illegal banking transactions.”

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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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