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!