Sunday, December 28, 2008

Global Economic Recession: Maldives government heading towards insolvency?

The World Bank estimates GDP growth of developing countries to fall to 4.5% in 2009, compared to 7.9% in 2007. Private capital flows are expected to decline from $1 trillion in 2007 to only $530 billion in 2009.

The financial crisis that started in America in 2007 has resulted in failure of many investment banks, insurance companies and now the auto-giants. The World Bank and IMF estimates 2009 as a recession, and there is reason to believe that this could be the worst recession since the Great Depression of 1929-30.

Maldives has an economy which is very much dependent on the revenue from the tourism industry. As major European economies are hit by the economic recession, decline in tourist arrivals is expected. We would also expect a significant drop in tourists’ expenditure in Maldives. All these factors will lead to a fall in foreign exchange earnings, and our GDP.

Are we prepared for such consequences?

Our economy has a relatively huge government expenditure component, with huge government-employed labor force, and major spending on infrastructure development projects. The economic down-turn has unfortunately coincided with the first multi-party election and the change in government for the first time in the last three decades. With this come promises and pledges announced during the campaign. Are these politicians aware of the economic consequences of their various policies, especially those in relation to reducing prices, establishing a transportation network, and decentralization.

The price of oil reached a peak of above $140 in July 2008, with it increased price of many other commodities and services as the costs of production suddenly increased. We also witnessed the surge in global food prices within this year. However, as we end 2008, oil price has declined to as low as $37 a barrel, and America is facing the problem of deflation as the economy is facing a declining demand.

Do we need policies and additional measure to combat increasing commodity prices in Maldives? As the world is headed to a recession and falling demand, we would expect prices of goods to fall anyway. The price of oil has already fallen from $140 to $37, without any action by the government of Maldives. As price of oil and gas falls, commodities and services also will face reductions in prices.

The macro-economic management of Maldives: The recently formulated budget for 2009 by the Ministry of Finance incorporates over 70% as current expenditure. The estimated deficit is Rf5.7 billion. Government has borrowed Rf203 million from the country’s central bank in order to cover a temporary cash flow shortage. Further, media headlines are strongly vocal on government securing some $100 million from the Indian government; part of if being debt finance.

The present government has been talking continuously about securing finance from foreign sources for its expenditure. In other words, borrowing from foreign governments and banks, leading to further increase in government external debt and making its debt unsustainable. Most alarming factor is: we are borrowing money in order to cover current expenditures that do not provide any direct economic return! An expansionary fiscal policy during an economic down turn may be justified, as the increased spending will give a boost to the economy. However, in our case, we’ve had a series of budget deficits in the last five years, and fiscal mismanagement during the last three years, leading to unsustainable levels of government debt, and undesirable level of inflation. Further increase in government debt may lead to government insolvency, and in the end international creditors reluctant to lend us any money. We may be forced to revert back to the most traditional way of living. The solution to all this, at a time like this: Spend only what you earn!

1 comment:

  1. I have been following the global financial crisis very closely n have been wondering about its impact to the Maldives. As my profession and background is very much in the financial and management side, I often wonder what can our government do to minimize the impacts of this recession the world is facing. I guess without a doubt we will be highly exposed to this recession come 2009. The points you have posed are absolutely correct and the best part is that you have shown me that atleast there are some people in Maldives that are fearing about the impact of this crisis.

    It is rather sad realizing that our country is a victim of a new epidemic that’s spreading viciously from island to island, community to community, family to family and inviduals to indivudals. What I am talking about is politics. Media headlines is all about Politics and nothing makes headlines if it is not politics. This is a sad dose of reality and I wish sooner rather than later we change this and start realizing that there are better things to life than just politics. Anyways, I am not here to talk about politics, and funnily enough my new year resolution is about totally stop talking about politics!

    I would like to mention couple of solutions that our government could start taking to help minimize the impact of this financial/ecomic meltdown. What I am about to highlight is twofold. One is actioning through spending and the other actioning through earnings. Both related to the dollars or foreign reserves!

    When it comes to spending, we have to aknowledge that Maldivians are lavish spenders. Going to Colombo, Bangkok, Dubai, or India is more like visiting a next door neighbor. What we don’t realize is that the sum total of these spendings in any given year could reach to a significant amount of foreign exchanges leaving our own reserves and damaging the economy. Every dollar that leaves our nation is an outflow of foreign exchange reserves and these are more like just wasting our wealth! I think we need to educate us (the individuals) in stopping from spending lavishly on these unwanted trips! Individuals can make a difference, and these individuals firstly needs to be taught of the consequences of their decisions.

    When it comes to earnings, I am highlighting the fact that we need to show our exporters (mainly MIFCO), the right way of doing things. I believe and I know this as well, MIFCO is renowned to be run very inefficiently! This is where we could generate huge cost savings (by finding ways of running as efficiently and effectively as possible) and ultimately pass those savings in terms of more effective and competitive pricings.

    Promoting our local stocks is another way of moving forward especially knowing that we rely so heavily on imported goods. If MIFCO could be run efficiently, why not all Maldivians rely on their produce? If our fishermen can catch fish, why not we buy fish instead of chicken? If Srilanka can sell eggs, why not we start doing this in large scale locally? If we can sell eggs, why not we start selling poultry? My point is, we are capable of these things! My point is generating demands for local produce can help our economy big time and we will be able to minimize this risk that’s daunting our shores! Availability of fruits and veggies, kaashi and the baraboas, can also be done. Those farmers needs a little bit of a pat on their backs, and the full governmental support! These are the times in which our economic saviours will not be wearing a suit and sitting in the parliament wondering about what next to do with the thousands of irrational incomes they would receive at the end of the month! These are times where the economic saviours will be YOU and ME, the common man, or should I say that everyday fisherman or farmer that you picture wearing a sarong, a torn apart shirt, a funny hat, and lots of reddish nuts in their mouth!

    I also believe we need to do something about every dollar that leaves our economy via the remittances made by the expats. Our workforce has a huge percentage of expats and every dollar that leaves our shores is a wound that our economy suffers. Its impact can only be realized in tough times and as we move into such an era, I guess our governments needs to come up with some creative means of holding on to these dollars. Cutting back on the expats could be one approach, but I don’t believe that’s the only approach either. We could easily devise a short term plan in which the banks could play a role in holding on to those dollars (maybe by way of a special expat saving scheme – or something!)!!!

    Anyways, as Naseer had highlighted, we are moving into some tough times, and I guess tough times calls on to tough measures. I wish to add just one word to Naseers final statement – Spend only what you earn WISELY!