Budget 2013

The Government has submitted yet another huge budget for 2013, with an estimated deficit exceeding Rf4 billion, amounting to 6% of GDP. This estimate is based on many changes to the revenue component of the government. Some of the major changes proposed include, revising the import duties, and revision to the GST rate for tourism sector, leading to an increase up to 15% from the tourism sector.

As it has always been said in various forums and writings, we are as a nation living beyond our means. The most basic structural issue with our budget is that over 70% is spent on recurrent expenditure, and from that most goes to the salary and allowances. We have the highest percentage of the population as state employees from the whole world, and the CSC will always justify this. Fact is, last year and this year we have spent/will spend more than Rf4.1 billion only on salary and allowances. It alarming, when the 2013 budget has planned to spend Rf5.7 billion for this component!

As for the financing of the deficit, there's an external borrowing of Rf 771 million, and domestic borrowing of Rf 1.25 billion. This is at a time when we have to spend about $73 million for debt repayments within next year and at a time when our external debt will exceed 40% of GDP by the end of 2013.  This is also at  a time when our domestic market has almost reached its maximum in terms of lending to the government at the huge cost of crowding out the private sector investments, and at a time when outstanding treasury bills exceed Rf5 billion, and the interest rate exceeds 7.8%.

The government has an outstanding debt to MMA of about Rf3.7 billion, and recently MMA has paid $50 million on behalf of the government to SBI for the repayment of US Dollar bonds issued to the government. The equivalent Rufiya amount of 771 million, if government has not yet paid to MMA, the outstanding debt already would have reached Rf4.4 billion. Assuming the remaining $50 million is repaid by MMA in February 2013, it would reach Rf5.2 billion.If nothing is done to repay this debt to MMA, this will be direct monetization.

We will only be able to manage our macro economy on a sustainable path, by rectifying this major structural issue of state employment, and other current expenditures. As and when we increase salaries and government expenditure, the total Rufiyaa expenses in the economy increases, and prices of goods and services go up, without actually increasing the real value of money. In the end, even with so much Rufiyaa in our hands, we are able to buy less. Politicians will never understand this.

Inflation

Maldives economy, as we all know, is a very much import-based economy. We have been importing all our basic necessities, and luxuries. Our main income earner, the tourism industry, also heavily depends on the imported food items, and imported fuel to run the business. The local economy also is heavily dependent on the import prices of commodities, and most important of all, the price of oil. Hence, our inflation has also fluctuated based on such factors as the world oil price and world commodity prices. Of course, the demand side also plays a major part in these fluctuations. There hasn't been a recent published study yet on the actual determinants of inflation in Maldives, so, we wouldn't know how much contribution is from the demand side, or what would be the 'core' inflation in Maldives.

We've had relatively low inflation in 2006 at 3.5%, at a time when world oil price was below $64 per barrel. It was also an year when we had a government deficit of 4.8% of GDP. The following year, in 2007, inflation rose to 7.4%, interestingly when our budget deficit fell to 3.6%, and when world oil prices remained below $50 per barrel. Inflation hiked in 2008 to 12.3%, at a time when the world oil price reached above $137. Our fiscal deficit also hiked to 11.2% during the same year.

Year 2009. Oil price fell to as low as about $30 per barrel, while our fiscal deficit reached a record high of 21% of GDP. Our inflation rate: at a modest 4%. This was also a time when US Dollars was traded in the black market above the official rate.
Fiscal deficit followed a declining path in 2010 and 2011, while oil price had a rising trend, and so did our inflation rate. We also had a devaluation of Rufiyaa, adding on to the inflation in 2011, when it reached 12.8%.

Based on the above observations, it is rather difficult to conclude the actual determinants of inflation, or the factors that contribute most for inflation. Obviously, world oil price plays a major role, and then again, the budget deficit, and how it is financed matters too.

But one this is for sure. The aggregate demand in the economy does play a major role in higher inflation. And this demand mainly comes from the purchasing power of the people in terms of local currency. When the Rufiyaa circulation increases in the economy, people demand more goods and services, and thus leads to higher prices. This being said, the easiest and the simplest way to curb inflation would be to control the increasing rate of Rufiyaa circulation. 

I'm back!

I know. It's been a long long time, I haven't been able to regularly write on this blog, or rather, I haven't been blogging. But, I have been busy writing elsewhere. Writing reports, papers, and now even a book. Since April last year, I have been too busy in the government, and because of the nature of work, was not able to blog much. After that, again been too involved in personal business, and other matters.

Anyways, from the experiences in the past 4 years on the professional, and personal front, there are many lessons and experiences that can be shared., (and some that cannot be shared publicly, ofcourse).

After completing my masters education, I started work with much enthusiasm at MMA, and worked really hard in order to achieve my work objectives, as well as serving the national interests. There, somehow I was told that 'by doing nothing - we are doing something'., but I did not buy that. I continued with my determination.

After life at MMA, it started getting too exciting, and challenging. Was fortunate enough to see, and experience the inside of our country's public office. Got the opportunity to meet, talk and discuss national issues with many intellectuals, politicians, and other public figures. I intend to share some of these experiences, and also continue with my blogging as time permits.

AN.

Best wishes for a new year

First of all, let me wish you all, the best wishes for the year 2012. I hope this year will bring further prosperity to our country.

As we welcome the year, one thing we need to understand is that in many other countries, people are trying different ways to bridge their racial, religious and language differences to bring forward their national interests and prosper as a nation. And what are we doing? We need to put forward our national interests too. We are one.