Friday, August 10, 2012

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. 

13 comments:

  1. Now I know why inflation problem could not be controlled while you were a state minister. You don't have a clue how the local market operates and assumes market forces are only those ones mentioned in the text book. Try to get a real picture of the local market. Like demand and supply, there are many other factors in our economy like businessman's greed for high profit, lack of good alternatives, poor maintenance of stock, foreign exchange rate controlled by a few businessmen, logistical difficulties at ports, huge rentals, etc. Even those commodities for which price is elastic elsewhere in here they are still inelastic due to lack of substitutes and small market size.

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  2. get realistic naseer. it doesnt always have to be what the text book says!

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  3. @Heyoverikan, AnonymousAugust 12, 2012 12:21 PM:
    Textbooks do talk about businessman's greed for high profit, lack of good alternatives, poor maintenance of stock, foreign exchange rate controlled by a few businessmen, logistical difficulties at ports, huge rentals, etc.
    FYI, textbooks are written after extensive research of many different countries, and also years and years of studies.
    I think what we need to do is to return to textbook basics. Spend what you have. Balance the expenditure with revenue, and if you cannot, borrow at sustainable levels.

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    Replies
    1. greetings... pls can u tel me, ways to control or reduce the inflation rate in Maldives

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