Recently a lot has been talked about the economy in the media, discussion forums, and informal gatherings. We have been experiencing a prolonged imbalance in the foreign exchange market since September last year, and the situation has gotten worse now. The businessmen can’t get enough dollars at the official exchange rate of 12.85, while we depend on imports for almost hundred percent of our consumption. Obviously there’s a supply shortage in the market due to foreign exchange crisis, and as a result, prices are expected to increase further.
According to a recent conference, the foreign exchange reserves in the country is about 67 million dollars as at last week, and we would expect it to deplete it even further during the next month. Such depletion in the reserves would make it impossible for the central bank to defend its peg on the currency, meaning, if it was to abandon it, the price of US dollars could suddenly rise even further, making goods much more expensive in our markets.
There are several reasons for the crisis; the main root of the problem being, the incredible hike in the deficit of the government ever since Mr. Qasim assumed the post of finance minister. The deficit that has been financed domestically by printing Rufiyaa, has led to the rise in the money supply without any regard to the output growth in the economy. At the same time, the demand for dollars has been increasing with the increasing number of expatriates and their remittances, Maldivians travelling abroad, and our imports. Meanwhile, tourism receipts have declined by 10 percent, fish exports also have fallen, adding up to the current shortage.
The options available to the government; the main one, is to reduce its deficit, so that printing more Rufiyaa can be stopped. But how will it do that? According the governor or MMA, and even the president and the finance minister, the government is doing its best to reduce the expenditure. But why isn’t it going down? Major chunk of the government expenditure goes into the salaries of its employees. So, if we need to reduce expenditure, we definitely need to cut wages, or reduce the number of employees. It may not be politically such an easy thing to do, however, if we do not address this issue now, the president or the finance minister may not be able to save our economy. These economic measures may not be so ‘popular’ in the short run, politically, however, these are necessary ones, in order to keep our house in order.
Simultaneously, the government needs to collaborate with the parliament in order to make urgent and necessary adjustments to increase government’s revenue through changes to the existing tax system. For instance, increasing the bed tax, or expediting other new revenue measures proposed in the budget.
Public awareness need to be increased on the state of our economy, so that we could make people realize that postponing our travel plans abroad would be a wise thing to do at this moment. We also need to rely more on domestic produce, and focus on developing and increasing our domestic production.
Any foreign assistance that we get today would only postpone a major disaster in the short-run, if we do not address the fundamental problems in our economy. I hope that the parliamentarians and the government officials work together in the interest of the public, our economy, and our country.