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 (http://abdullahwaheedsblog.blogspot.com/2009/06/on-brink-of-budget-crisis.html), 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.