Friday, June 26, 2009

Reducing import tariffs: Will it bring down prices?

The government has recently sent to the Parliament a bill that proposes reductions in import tariffs on certain items like vegetables, fruits, diesel and cooking gas. Many have been asking whether this would reduce the prices of goods and services in our local economy. In fact, it is believed that the intention of sending this bill by the government is to reduce the domestic prices, and tackle the increasing inflation in Maldives. As it is one of the pledges of the current government; to bring the prices down, making it more affordable to an average household.

Will it bring the prices down? I don’t think so. The high inflationary pressure that we are experiencing in our economy has less to do with the costs of our imports; instead it has more to do with the demand. This is very obvious when we consider the last year’s statistics. The oil price peaked a $147 per barrel in July, and started its nose dive afterwards. So did many other commodities that we import to Maldives. During the last half of 2008, our import prices in fact went down. But did our inflation come down? No, it didn’t. At the end of 2008, inflation in Maldives was greater than 12%, because the domestic demand was very high.

Inflation in Maldives has more to do with the boost in the domestic demand, fuelled by the increased monetization by the central bank of Maldives. As one of the bloggers has recently outlined (, there were series of salary increases starting from January 2008 to the civil servants, independent commissions, judges, and the parliamentarians. This has led to an unsustainable hike in the domestic demand, and as a result, the businesses have increased their price tags.

Unless, something is done to address the domestic demand, any reductions in the import tariffs will not bring down inflation, but, will only lead to an increase in the profit margins of the importers and the retailers. Hence, at the end of the day, even if the bill was passed by the Parliament, it would have simply meant a reduction in government tax revenue, without any benefit to the consumers in the form of lower prices.

What can be done to address this demand? A good start would be to cut down on government expenses, so that the deficit doesn’t need to be financed through printing more money. Government could embark on reducing the salaries or allowances of all state employees, across the board and save millions every month. The moment you stop the ‘printing machine’, it’s amazing how soon you can see the positive results of it.

Friday, June 12, 2009

The deteriorating social capital

The famous production function in economics is often applied to economic growth of countries, and assumes that increasing physical capital, and productivity of human capital lead to higher growth. According to the Solow growth model, countries can achieve higher economic growth through accumulating physical capital (increasing the capital stock), and improving the quality of human capital through education and better health services.
Maldives also has achieved economic growth in the past few decades through increased investments in tourism and few other industries (accumulation of capital), and increased proportion of population with secondary education. Compared to 20 years ago, even the health standards have improved, and the life expectancy is reported to have increased too.

The concept of social capital is also important to the development of a country. According to some of the newer versions of growth theories, the social capital tends to directly influence the total production of a country. For instance, other things remaining unchanged, a country with a rich culture that promotes better work ethics, taking responsibilities, honesty, and/or self-reliance will tend to have a higher probability of achieving higher economic growth, compared to a country with no such values, and where people tend to be generally laid-back.

As we go along the path of democratic, economic, and social reforms, it is vital that we focus policies and societal thinking towards development of our social capital. It is disheartening to hear almost every day, cases of pedophiles, murder, drug abuse, and many more. The most depressing aspect of all this, is the fact that proper punishments are not being given to these dangerous criminals. There is a greater role to be played by the government, the court system, civil society, and the people in general to address these issues. We need stronger measures to deal with such people, so that they are not released back to the society without being given harsh punishments.

The legal professionals and the parliamentarians have a greater role to play on this. I wish parliamentarians better utilize their time discussing regulations and ways to strengthen the legal system so that pedophiles could get harsh punishments. Instead we see them ‘wasting’ most of the sessions in a battle of two political parties. Some want to address the issue of reducing the presidential powers, others want to make Theemuge as the presidential palace, and others want to discuss what the attorney general has said the other day. There are more important and urgent issues to be addressed in this country. If we cannot stop or reduce these serious social problems today, we may not be able to save our country.

Thursday, June 11, 2009

Fiscal Discipline

The employees of the Department of Penitentiary and Rehabilitation (DPRS) working at the Maafushi prison have submitted a petition to the Civil Service Commission, complaining about not getting some of their allowances. Most of these staff are required to work on Fridays, Saturdays, and many other holidays, hence are eligible to receive the ‘bandhu dhuvahuge allowance’ according to them. The staff of Maafushi prison are said to be planning a protest by not reporting to work, and present their case to the courts, if the civil service commission or the ministry of finance is unable to solve this problem.

Meanwhile, the government expenditure is still on the rise, and the overall fiscal deficit is expected to reach an alarming 28 percent of GDP at the end of this year. Looking at the statistics, before the tsunami in 2004, the government deficit was mostly below 5 percent of the GDP, and it reached 11 percent in 2005, later came down a little bit in 2006 and 2007. Again in 2008 it reached 12 percent of GDP. The expected 28 percent for this year may lead to unfavorable consequences if it is to be financed through the central bank, as it will lead to higher inflation.

Adding on to the problem, the tourism revenue is on the down side due to reduction in tourist arrivals, and the government revenue is declining significantly, thus increasing the dangers of the possibility of the government not being able to meet all its expenditure obligations. The end result: the protests of the prison staff may be just a start, which could be followed by others, if the ministry of finance is not able to make the payments on time.

The point is, it is time that the government makes drastic structural changes in order to reduce the fiscal expenditure. A good start could be reducing the number of political appointees, and advise the parliament on reducing the salaries of the various independent commissions and the parliamentarians, and even the political posts. That way we would be able to save millions every month. Further, reducing recurrent expenditures of all government ministries and departments is essential.

In a previous post, I’ve stated the amount that we are spending on all the political posts, independent commissions, and the parliamentarians. Hence, the importance of reducing the number of posts and their salaries. For example, the Ministry of Home Affairs has eight state ministers, the Ministry of Fisheries and Agriculture has three, the President’s Office has nine state minister equivalent posts, and the Ministry of Housing, Transport and Environment has also three.

Talking about bringing structural reforms, the government could also seek help and technical assistance from international institutions like the IMF, World Bank, and others to bring about these changes, and work out a strategic plan for the next 3-5 years.

The root cause of the most of our major economic problems facing today is the high budget expenditure and the high deficit that was domestically financed. The global economic recession just added on to that problem in 2008. In order to address this problem, what we need is fiscal discipline!

Monday, June 1, 2009

Civil Servants and Politicians

I remember one of my colleagues, who used to belong to MDP, which was the main opposition party at that time, talking about the frustrations due to the government actions at that time. A few days later, he defected to the ruling party, DRP and was given a high post in one of the ministries, along with the board membership of a government owned enterprise.

This was a common story back then, when all government employees were administered through the public service division of the president’s office. We all got the ‘chit’ from the president back then. Higher posts were given at the government level to favorite people in the ruling party. Many government employees working at different levels even registered themselves as DRP members.

Then came the Civil Service Act. Deputy ministers, state ministers and ministers suddenly became political posts. An independent civil service commission was formed, and all government employees became ‘civil servants’ apart from those who worked in independent commissions. Permanent Secretaries were appointed in each ministry; he or she was declared as the head of the ministry from the civil service. When this sudden change occurred in our country, there were many among the deputy ministers or, even as ministers who belonged to the group of technocrats, or those who did not have a strong political affiliation to any party. Most of them were being promoted through the ranks of that particular ministry of office, and with a track record of service to the government. So, the change did not immediately affect the daily functioning of the ministries. And then, in November 2008, there was a new government.

With the new government, came new ministers, state ministers, deputy ministers, advisors, political secretaries, consultants, councilors, and so on. Some of the new ministers, state ministers, and deputy ministers were completely new to the public administration system, or some of them have not worked in the government for a very long time. Some of the political post holders were not having the relevant technical background, or know-how to perform the job duties. Very soon, conflicts started arising between the politicians and the civil servants. The politicians have started publicly accusing the civil servants of not performing their job duties, or declining to cooperate with the politicians. The civil servants complain that most politicians do not have the necessary qualifications of the skills for the job. There’s this on going fight between the civil servants and the politicians.

It was announced earlier that the present government wants to have a smaller government, or a few civil servants, and reduce the government expenditure as much as possible. As far as I know, the civil service commission wants to hire as few as possible, and the government also wants to have a smaller civil service.

Let’s look at the situation that we have now, and the resulting costs of it. If a minister (or a state minister) wants to achieve some targets, the civil servants wouldn’t do it. The politician hires a person as an advisor or a consultant (a political post), to achive that target after blaming the civil servants. After blaming the civil service commission for failing to provide enough and efficient staff. What is the end result? That political advisor or the consultant is paid a higher salary than the civil servant, and the irony of it, is that the advisor is also paid by state’s budget. From the same budget from which the civil servants are paid. Three civil servants could be hired for the salary given to the political advisor, however, political posts are created in order to ‘by-pass’ the civil service commission!