Winning hearts and minds

One thing is for sure. These local councils; the island councils and the atoll councils will definitely increase the state expenditure, as more than 1,000 councillors will suddenly start receiving huge salaries. Salaries that do not match their abilities, capabilities, and qualifications. I’m also not sure whether this change in administration will take us forward in development, or take us backwards. We’ve yet to see.

What I really want to talk about today is, about the lessons that MDP could learn from the results of the recent local elections. As we all know now, according to preliminary results, a lot of atoll councils and island councils have been won by the opposition party, DRP. Not that DRP spent millions, and had the best campaign strategy. Not that DRP had a strong leadership, and good plans for the future. In fact, nobody knew who the REAL leader of DRP is, when people were voting. Still, DRP got so many votes, and almost 500 seats in the elections. Why?

I’d say, MDP has to learn new tactics in winning the hearts and minds of the people in the atolls. If they are really serious about the next presidential elections, they gotta learn well and start winning the hearts and minds. The only reason why DRP has obtained success may simply be because of huge political mistakes made by the government.

Mistake number one: trying to legalize sale of alcohol in Male’. We all know that the people who oppose this clearly understand the invalidity of their argument. A safari boat anchored near Male’, and can sell alcohol, and there’s no problem with it, but, if alcohol is sold in a hotel in Male’, it’s a big problem. That was their argument, those who opposed it. We all know that. Even the government knew it. And so, by trying to allow the sale of alcohol in Male’, what was the government trying to achieve? Trying to explain logic to the people? It doesn’t work that way. In politics, when it comes to sensitive issues like religion or culture, common sense or logic doesn’t matter. The truth or reality doesn’t matter. Say what the ‘majority’ want to hear. Do what the majority want you to do.

Mistake number two: The president saying words like ‘.... nulafaa kan dhakkaalaanan’ (I will show my evilness). We, Maldivians do not expect such words from our President. We want our President to be role model for the young, old and the children. To choose his words, so that his words could appear in slogans, magazines and newspapers. Our president may be very kind-hearted, and a very forgiving. But hearing him say that, makes people start hating him and his government.

Mistake number three: Decision to build a flat on the Arabiyya School land, and having Arabiyya School built in Chandanee Magu. The civil engineers, architects, and the Education Minister may appear on TV, and justify that the new land is in no way smaller than the previous one, and that the location doesn’t matter. But will it repair the damage? The damage done by the opposition, using the media, saying that this government is anti-Islam in so many ways? Why give the opposition such opportunity. Do we need more flats in Male’? Why can’t we build flats in Hulhumale’ instead? As I said earlier, issues relating to religion are very sensitive. Don’t go for logic and common sense. Try winning hearts and minds instead.

I think I’ll stop here, without talking more about the mistakes. Maybe another time, I may continue with number four. I’m not trying to say that I’m an expert in political analysis, and political planning. But, the people who are advising the President and the government, are they any better?

Business Profit Tax - Does it make us better off?

Recently the Majlis has passed the Business Profit Tax Act, and it has come into effect on 18th January 2011. According to the Article 41 of this Act, the law has to be implemented within six months, (by July 18th 2011). This means, businesses in Maldives have to pay tax on business activities carried out after that date. I wonder how many firms or businesses actually are aware of this., and I wonder whether the relevant authorities are doing enough to make the public aware of this. Anyway, that is not the issue that I intend to cover here. I guess what's more interesting would be; how much does this Act reduce the gap between the rich and the poor (ie, make the distribution of income and wealth more even); and by how much does this Act raise the government's tax revenue. There are many other issues relating to taxation that we need to talk about, and I may talk about such issues in a later post. Issues like the efficiency of a tax; compared to the amount of tax revenue raised, the cost of raising such revenue must be minimized in order to make it more efficient.

First of all, let me raise the question; why do we need taxes? Yes, to raise government revenue. Last year (2010), an estimated Rf3.0 billion was raised through taxation by the Government; mainly consisting of import tax, tourism bed tax, and bank profit tax. Through tax revenue, government is able to provide public goods, and provide benefits to the poor, hence, help in reducing the gap between the rich and the poor.

The existing tax system, however has done little in terms of addressing the issue of income distribution in the country. As import tax is paid on all goods imported and consumed, both the rich and the poor pay the same amount of tax. Making this a very regressive form of tax, as considering the income of the rich, the tax burden on them will be very small, compared to the poor. Even the bed tax from tourism industry is very regressive, as the same amount, $8 is paid by all resorts/hotels, irrespective of the room charge. In order to narrow the gap between the rich and the poor, taxes need to be more progressive in nature; meaning to collect a higher percentage of the rich people's income, and a smaller percentage from the poor.

Another objective of taxation is to discourage consumption of certain goods or services. For instance, import tax of certain goods like cigarettes can be increased, in order to discourage consumption.

So, how does the Business Profit Tax (BPT), reduce the income gap in Maldives? There are certain categories of businesses specified in the Act, and taxable incomes are specified. For example, Article 3 highlights on registered companies that are not partnerships, and Article 4 specifies businesses other than companies and partnerships. According to Article 7, all companies, partnerships and other businesses are required to pay 15% of the profits, provided that total profits exceed Rf500,000. If the profits do not reach Rf500,000, no tax has to be paid.
According the 2011 budget, an estimated Rf612 million is to be raised through BPT. This is highly unlikely, as the taxable period only starts from July of this year.

How does BPT help in narrowing the gap between the rich and the poor? Unlike the $8 bed tax, at least its not the same absolute amount that larger businesses and smaller businesses will be paying. A proportional tax rate of 15%, from all types and sizes of businesses in the Maldives may not be the ideal solution for evenly distribution of income.

Larger businesses if required to pay a higher percentage of tax, would make the tax system much progressive in nature. However, will it encourage further investments in Maldives? Will it attract more foreign investments in the country? One of the ways we can encourage businesses to innovate, and increase investments would be to reduce the direct tax on the income or proft, and move towards more indirect forms of taxation.

2011 - an year of higher inflation?

We have been seeing recovery in the tourism sector with tourist arrivals reaching 750,000 towards the end of 2010. Nominal GDP is expected to grow by 12.4 percent by the end of 2011, and real GDP is also expected to have a positive growth of 4 percent.

On the consumer front, government employees got good news with the new year, that their salaries will be revived from January. It is expected that there will be further boost in domestic demand with this increase in the salaries of more than 20,000 workers. As we import almost all of our consumption goods, imports are also expected to grow. The value of exports reached $1,221 million in 2008 when we had and inflation rate exceeding 12%. After that in 2009, value of imports was $851 million, and in 2010 from January-November it was at $990 million, and this year it is expected to reach $1,148 million. Meanwhile, inflation was at 4% in 2009, and 5.6% as at end October 2010, and could be above 6% by the end of 2011.

In such case, there will be further inflation expectations, and traders may tend to adjust their prices upwards, and workers may demand higher salaries to compensate the increase in prices. The situation may get very unpredictable close to 2013, when there is the presidential elections, and huge campaigns. We need to understand that if all our incomes increase, with no increase in production, all we get is high inflation. And high inflation is not good for economic growth.

the real issues

I guess we all keep forgetting about the real issues in our country. The politicians in the opposition keep fighting and spend all their energy and time on ways to remove the those in power from the government. The politicians in the government spend their energy and time on ways to defend their power, and ways to defame the opposition. In this battle, the citizens keep suffering, as the real issues are not well addressed.

The real issues like health care, education, drugs, crimes. Issues like respect for each other, caring for each other. Issues like work ethics, work productivity, and customer focus and customer satisfaction.

We have all been talking about increasing government expenditure, and the increasing expenditure on the salaries and benefits to the employees in the government. At the same time, we have been talking about the low productivity in most government offices and authorities. We all know that many lack the necessary work ethics, still fight for better salaries, and more benefits. The same thing is seen in the private sector as well. Even if you visit a restaurant or a cafe', you'd hardly see the waiters or the managers genuinely trying or putting an effort to make the customer happy and satisfied. They dont seem too much customer focused. Mostly, you'd see the same kind of poor work ethics, and lack of enthusiasm in performing their duties. I guess these are the real issues in our country. We need to increase worker productivity in the private sector. We need to improve service delivery even in the government sector. Employment needs to be made competitive, so that people realize the importance of being employed in a job, and performing the duties, and most of all, to become a responsible citizen.

These are the kind of issues that politicians need to spend time on addressing. Thinking of ways to improve them.

Why democracy may not survive in Maldives

I have been continuously criticizing the Parliament, the Judiciary, and the government on various matters relating to our nation, and kept repeating that democratic reforms that we are trying to so forcefully implant is way too costly for us at this juncture. Its not only me, many have been talking about this, and expressed concern over this issue, and left us all wondering whether this so-called 'democracy' will survive in Maldives. Whether this democracy could die in a very painful death in its infant stage. I believe that there are many signs, and reasons to believe that we may be heading towards a situation where, people will in the end get 'fed up' with this democracy thing, and would prefer things to be a little bit 'un-democratic'.

Our society has become extremely polarized, and even within the opposition, there is persistent fight for power. Genuine efforts by the government top officials are not evident, to consolidate differences in opinion, and move the country towards prosperity. Enough is not done towards addressing the short-falls in the Laws and regulations, and on enforcing the existing ones. Sincerity is not apparent from the parliamentarians and most politicians.

Law and order is not maintained. Young teenagers are getting killed on the street. Gang fights have become so frequent. People have started losing faith and confidence in the Police. And recently, many have become frustrated on the way the government has been handling or managing the issues related to Islam.

Finally, what matters most if are to survive as a country. It's the economy, stupid. Our economy is facing huge fiscal imbalance due to the high government budget deficit in the last few years, and failure to address this issue. We are talking about a deficit which is over 20 percent of GDP, and the highest in the world. We have a current account deficit above $400 million in the past four years. We have an external debt of over $500 million which is borrowed by the government, and further $400 million borrowed by the banks from overseas. So in total an external debt exceeding $900 million, which is same as our GDP. With a budget deficit, and a current account deficit (twin deficit) and a huge a external debt, the economy becomes extremely vulnerable and un-attractive to international investors and aid-providers. The situation becomes worse when we do not see the required fiscal reforms, and lack of any hope for such reforms. There is every reason to believe that the current Constitution may not be able to save us from these problems. Hence, when we finally hit the 'rock-bottom', it is less likely that democracy can save us. In a time of such crisis, we may need to rely on a leader who is more autocratic, and people may feel that we need a leader who can solve our problems, and nothing else.

Are Most Parliamentarians fit to be in the Parliament?

Its been more than a week since a proper work has been done in the Parliament session. The Parliamentarians continue to draw Rf62,000 per month out of the State budget, do not care about the critical economic situation of the country, do not adequately address the growing social problems and crimes, and as the Human Rights Commission has recently highlighted, the Parliamentarians have neglected the rights of all Maldivians by not being engaged in making important laws needed for the country. And yet, nobody seems to be doing anything about this. The Constitution says that the "all powers of the State of Maldives are derived from, and remain with the citizens". Hence, even the Parliament and the Parliamentarians derive their powers from the people; and does that power still remain with the people? Is it the people's will, to halt the Majlis sessions, their representatives shout at each other, and delay passage of important laws? Is it the people's will, the Parliament do nothing to mend the economic, monetary, financial, social, and judicial problems in the country?

Well, I dont think most of the citizens in the respective constituencies have the power or influence over their member. If they don't, I'm sure its time, we start exercising that power, and pressure our Parliament members to act in good faith, to show sincerity towards the country's well-being. And also, to show respect towards each other, maintain discipline in the Majlis chamber and elsewhere.

One of the flaws in the Constitution is that it assumes that the members of the Parliament will act in good faith, and make all decisions for the benefit of the society and the country. But the problem is, its a very dangerous and a wrong assumption. Some Parliamentarians understand very well, the dangers of having a huge fiscal deficit, and its impact on the macroeconomy. However, even this year, we saw a State Budget that was passed with so many amendments leading to further increases in the expenditure and the deficit. Some educated Parliamentarians understand the importance of increasing government revenue through taxation, however, not enough effort has been put to pass the necessary legislation.

And some Parliamentarians, simply do not understand at all. The consequences of their actions, their words, and their inactivity. Some of them do not fully understand their responsibilities, and their duties towards the people and the country. Some of them do not have the values and principles that are necessary and prerequisites to become a Parliamentarian. We can fix the country and the economy very easily, if we have a sincere, honest, and respectable bunch of Parliamentarians.

...And who really can??

We got a new Constitution. And yea, we've got separation of powers, with an independent Judiciary, a Parliament, and an Executive. With it comes huge expenditure and lots of jobs with big salaries. With it, huge Government expenditure. By 'Government', I mean the total expenditure of all the state entities, including the Parliament, Judiciary, Civil servants, Political appointees, independent commissions, and all entities with budgets provided by the Ministry of Finance.

The Annual Budget is prepared and presented to the Parliament by the Minister of Finance. The Minister can work very hard, and try to reduce the recurrent expenditure (except salaries) of all the government ministries, like the education, health, president's office, police, army, and all of them. When it comes to the salaries of all the civil servants in these government ministries, only the Civil Service Commission has the power to decide on them. The Minister of Finance can advise the President to reduce the salaries of the political appointees, and also to reduce the number of political appointees.

When it comes to the independent commissions like the Human Rights or the Anti-Corruption Commission, they can decide on the level of salaries they will provide to its employees, except their members. The members' salaries are decided by the Parliament. So, here we have newly formed independent institutions with separate budgets, and the autonomy to hire and fire people as they wish. But ultimately, all their expenses and salaries are paid out from the Government budget, and the Minister of Finance is responsible for the macroeconomic stability of the country through its fiscal policy. For that reason, in most countries, the Finance Minister is considered as the most powerful and influential minister in the cabinet. In the case of New Zealand, the Minister of Finance may veto any parliamentary bill which would have a significant impact on the government's budget plans. In the USA, it is the Finance minister (Treasury Secretary) who even signs on the Dollar notes. In England, the Governor of the central bank (Bank of England) has to report to the Finance Minister (Chancellor of Exchequer). In many countries, this is the case.

It used to be the case even in our country. In the very beginning, the President himself was the finance minister as well as the governor of MMA. Later on, we had a cabinet minister as the Finance minister, and he was also the Governor of MMA. This way, the fiscal and monetary policies were synchronized, and things were in order for some time. In 2008, with the Constitution was adopted, new institutions and commissions established, and salaries were raised. The expenditure of the government hiked, and the deficit of the government started escalating. Meanwhile, despite MMA being independent, deficit of the government was heavily financed by MMA through printing Rufiyaa (monetization). This put pressure on the exchange rate. The process continued until the August of 2009, when deficit monetization was halted by MMA. However, the process of increasing the government expenditure did not stop, and the total wage bill kept on increasing. We had a budget deficit of 29 percent of GDP by the end of 2009, and we expect it to be around 20 percent by the end of this year.

Where are we now? Nobody is in total control of the affairs of the economy. Not even the President nor the Finance Minister or the Governor of MMA, has the power to rectify the economy, and put the house in order. We need to reduce the deficit of the government, by reducing the wage bill, and recurrent expenditure. We need to reduce the number of civil servants, develop the private sector, and increase our reserves.

So, in order to do these, the Parliament members need to understand all this, and act sincerely and in good faith. They need to pass necessary legislature that can enable somebody to reduce the wage bill and the reduce the deficit and the debt of the country.

Can the finance minister save our economy?

I don’t think so. Here’s why.

The new Constitution requires us to form so many ‘independent’ commissions and institutions, and an ‘independent’ civil service. The Minister of Finance no longer has the power to control their salaries and expenses. The salaries of the Parliamentarians are decided by themselves. The salaries of Judges and the Judiciary are decided by the Parliament. The salaries of most independent commissions and institutions are decided by themselves, and the salaries of the commission members and the heads are nominated by the Parliament. Any new revenue measure has to be first approved and passed by the Parliament. The annual government budget is obviously passed by the Parliament. Most of the time, the Parliament passes the budget with many amendments that increase the expenditure further.

What is the role of the Finance Minister then? Just pay all the salaries, and budgets, and then record all the numbers? It’s pretty obvious that the Finance Minister cannot save our economy. So who can?

Everything in MALE'???? still??

In case the President and the government officials are not aware of the facts:
1. Male' has a population of over 100,000 people. Official number in 2006 indicates 103,693 living in Male'.
2. Congestion in Male' is so severe, it is difficult to walk around, drive or ride in Male'.
3. Housing conditions are very poor and families live in small rooms less than 120 square feet, and it is among the cities with the highest population density in the world.

The list goes on...bottom line is, Male' is not at all suitable for anyone who wants a decent living, raise a family, and live a peaceful life. The reason, is OVER-POPULATION! How we have got here, is a very long story. Long story short, mainly due to policies that attracted people, and these policies were for political reasons.

We all had very high hopes and expectations when the present government came to power. I was happy to see a President talk about important economic reforms needed for the country. He was ready to take, and took drastic measures in 2009, in order to address the macro economic imbalances. The government made political hard decisions, for the benefit of the broader economic well-being. And that's something we need to applaud.

However, some of the recent events have made me think, that the present government doesnt want the population of Male' to be reduced. The President doesnt want the outer atolls to be developed? Recently, he has inaugurated the building of a flat for teachers in MALE'. He has repeatedly talked about construction of flats in Majeedhee Magu, MALE'. And also in another location in MALE'. A military hospital in MALE'. New Dhiraagu Building, in MALE'. All this, when we have enough barren land in Hulhumale', and if all these projects were diverted to Hulhumale', at least there will be no additional inflow to Male', and will lead to settlement and development of Hulhumale'. At least people living in those flats and buildings can have a better decent living.

The Agony of Reform

Maldives embarked on ambitious political reforms, and adopted a new Constitution two years back. Under the new Constitution, we’ve been ensured separation of powers, with an ‘omnipotent’ Parliament, an independent Judiciary, and a ‘helpless’ Executive. The Constitution guarantees the citizens so many rights, so that the Courts cannot convict us so easily, as was a our current President convicted for stealing from Velaanaage.

An independent Civil Service Commission is formed, replacing the Public Service Division inside the President’s Office. There are five members with huge salaries heading this commission. Apart from this commission, there are many other commissions and institutions that were formed since then. Following is a list:

1. Human Rights Commission

2. Judicial Service Commission

3. Police Integrity Commission

4. Prosecutor General’s Office

5. Elections Commission

6. Anti-Corruption Commission

7. Employment Tribunal

8. Maldives Media Council

9. Maldives Inland Revenue Authority

10. Local Government Authority

11. The Supreme Court

Most of these commissions have at least five members, earning almost the same remuneration as a cabinet minister. The newly elected Parliament has 77 members, also earning a fortune. The Supreme Court – with 7 Judges!

We’re not done yet. Soon, there’ll be at least 5 Councilors governing every inhabited island. At least 5 Atoll Councilors in each atoll. In order to support the salaries of all these people, the civil servants, and the politicians, our country will be spending almost Rf5 billion every year, while the government revenue reaches almost only Rf7 billion! The situation gets worse with the increased number of political appointees, and the promises of the politicians to increase the salaries of the civil servants.

So, what have we achieved since the reforms began? I see, mostly ‘rent-seeking’ activities, whereby people in powerful positions and high bargaining power, trying to maximize their personal gains, and trying the control as many poor, helpless people in the society. The society has become so polarized, the objective of the people in the opposition being toppling the government at any cost, even if it means destroying the society at large.

On the macro front, the economy has become extremely vulnerable, and the country is spending about Rf 900 billion on imports of goods every month. When we take into account the outflow of dollars from Maldivians traveling abroad, and other expenditures, we are spending more than we earn, at every level of the economy. Meaning, the government expenditure is greater than its revenue. The dollar outflow is greater than the inflow. At the end of the day, the country is faced with a twin deficit – a budget deficit and a current account deficit. Meanwhile, the IMF has stated that Asia will be engine of growth in 2010 and 2011, with high economic growth in China, India, and other South East Asian economies. Our closest neighbor, Sri Lanka, expanded its economy by 8.5 percent in the three months to end June from a year earlier (Bloomberg). Its economy is expected to grow at 8 percent this year according to the Central Bank of Sri Lanka.

Bottom line is, we are paying a very high price for the reforms that we began few years ago. Hey, I’m not saying that we go back to the old days, or to amend the Constitution like the Sri Lankans did.

Our capital Male' - making the place livable

Osaka, Japan is on the top 6 of the most expensive places in the world, compiled by CNBC (http://www.cnbc.com/id/37996537?slide=6). In Osaka, a luxury two bedroom costs $2,218 as rent. In Male', Maldives, it is $1,400. Likewise, comparing few other things:

	Osaka	Male'
2 room apt rent	2,218.00	1,400.78
cup of coffee	6.10	2.72
gasoline liter	1.41	0.70
fast food meal	7.21	7.00

(In US Dollars)


Male' has become such an expensive city, as cost of living has increased dramatically over the last six years, and it is still on the rise. What led to the sudden transformation of Male'; migration of many from the atolls in search of jobs, better health care and better education. As the population increase, it creates a bigger market for the businesses, and hence, more jobs are being created. This led to attraction of more people to settle in Male'. So, it is a vicious cycle of increasing urbanisation. The 2004 tsunami was a shock that intensified the situation, after which the rent prices in Male' hiked alarmingly as there was a sudden flow of migrants from the atolls, thus, boosting demand.

It makes economic sense to have a large population, and there are many commercial benefits of it. However, not at the expense of the deteriorating social fabric of the society, and the low quality of life as more than hundred thousand people live on the small island of Male'. Large families live in small rooms, husband and wife do not get their privacy, children do not have enough space to study and run around, youth do not have enough entertainment opportunities, and the list goes on.

Another drawback is the extremely high rent prices in Male', eating up a high proportion of the income of many workers. Hence, teachers, doctors and other civil servants have no choice, but demand higher salaries. These huge salaries again lead to further increasing prices of goods and services, together with rent prices.

In order to prevent further migration, and to reduce the population of Male', other atolls, or other city centers with bigger land space need to be developed. Places like Hulhumale', and other big islands like those in the South. An immediate and urgent attention has to be given to this matter, and what's most important is the political will to do so. If housing units can be developed in Hulhumale', and attractive financing packages arranged, government can easily afford to reduce the salaries of the civil servants. If the teachers and other civil servants are given cheap accommodation, they should be willing to accept even a lower salary than their present one.

It is extremely important that government policies are geared in that direction rather than developing further infrastructure in Male'. However, the government has recently announced that 1,300 housing units will be built in Male', and has identified the location/sites for these developments. This will again lead to further inflow, and deteriorating the 'livability' in the island. We can easily divert these funds to Hulhumale' or any other atoll, so that social conditions in Male' will improve.