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.

If we want 2003’s taxes, we have to accept 2003’s spending

Back in 2003, our fiscal deficit was 2.5% of our GDP. We did not have the GST from the tourism sector, we did not have the income tax, or the corporate tax (except from banks). Our total expenditure for 2003 was Rf3.4 billion, which is more than what we spend only on wages. In 2011 we are spending more than Rf4 billion only on wages. In 2004, our deficit was only 1.2% of GDP.

In 2010, our expenditure was Rf9.7 billion, while the revenue collected was Rf6.6 billion, giving us a fiscal deficit of 12% of GDP.

So, we can still get away without more taxes, provided we accept to keep our spending at 2003 level. That way, we will be able to build our fiscal reserves. But now, with a cumulative debt of about Rf17 billion since 2003 (due to the cumulative deficits every year), we are spending about a billion even on debt repayments and interest payments. We still have the opportunity to remain a tax-free haven. But for that, we all have to accept our previous spending levels.

The Seychelles story....

Seychelles is a small country like Maldives, geographically very similar to us; with a group of small islands. Even their primary source of income is tourism, and fisheries. Their population is less than 90,000.

Back in 2008, while we were busy with the political reforms, and the first multi-party presidential election, Seychelles was going through an economic crisis. They had a huge imbalance in the balance of payments, and hence a huge imbalance in the foreign exchange market. They also had pegged exchange rate regime, where their Rupee was fixed to the US dollar at the rate of 8 Rupee per dollar. They had a huge external debt, much higher than ours in nominal terms. Due to years of government deficit financing through printing Rupees, there was a black market for dollars, and a shortage of dollars in the commercial banks. The black market rate was at Rp 12 per dollar.

Then, in November 2008, they floated the Rupee, together with many other economic reforms, and changes to the laws and regulations on foreign exchange. For five months, the exchange rate kept going up, reaching almost 17 per dollar. After that, it started coming down, to as low as Rp10.3 per dollar.

Economic liberalization; focusing on removing all sorts of market distortions, and moving towards market forces is the key message we get. Further, living within our means, sincerity and a commitment by everybody as a team, are all essential for the success.

Now, there is easy availability of dollars in the banks, there is no black market, and the exchange rate has stabilized.

Cause and effect

These are days, people say almost anything publicly, and try to convince people their point of view. These are days, people try to establish links or correlations between two or three things, and come up with their own set of theories. These are days some of us try to explain to the public, the reasons for the recent economic instability and the dollar crisis. These are days, people to try to talk about the causes of the increased crimes in our country. These are days people are very confused on the future direction of our country.

It is a dangerous thing, to talk about causes and effect of something, if we do not have the proper information or facts about the subject. For example; what could be the reason for the increase in crimes? We are hearing of killings, stabbings, theft, gang fights, and recently increased infanticide? Is it related to increased illegal drugs? Is it something to do with our education system? Is it because of the housing problems in Male’? Is it because of lack of proper entertainment? It is because of lack of religious faith? There could be all sorts of explanations. But, a proper study would be required before we come up with conclusions on the real cause of these issues. Without such studies and facts, it would be improper for anybody to explain about the problems in order to promote somebody’s agenda.

Performance audits

Since the start of reforms in the political structure of our county, we have been increasing and increasing the total costs of our state. First we established a human rights commission, and appointed five members, and approved huge salaries to them. Then we established an anti-corruption commission, again with five members. Then, a Supreme Court. This time with
Judges with salaries exceeding Rf50,000 per month. Along came a judicial service commission, a police integrity commission, a civil service commission, an elections commission, a media council, and a broadcasting commission. To make things worse, recently we have formed atoll councils and island councils.

Having all these independent institutions is one thing, but having five members with salaries exceeding Rf40,000? And then, the Constitution allows for appointment of political appointees, again with huge salaries. With decentralisation, islands managed by one island chief, has suddenly become an island with at least 5 councellors, earning at least Rf15,000. We also have atoll councellors (again more than 5 in each atoll), earning about Rf25,000.

We spent more than Rf15 million on the human rights commission last year, a Rf17 million on the anti-corruption commission, a Rf11 million on the judicial service commission, and a Rf95 million on the parliament. Has anybody asked about the performance and the output of all these institutions? If we are spending so much from the state budget on all these institutions, and by doing so sacrificing a lot of other services to people, like education and health, then at least we should conduct a performance audit of all these state institutions. Then only we can justify allocation of huge budgets, and paying huge salaries to all the members of these commissions.

Likewise, performance audits of individual ministries and departments are also needed, so that ministers and other political staffs' performance can also be assessed. Unless we can justify all these spending (especially since we are spending at a deficit), there is no point in continuing such spending. If such a performance audit reveals lack of output from the institutions and people, it would be enough reason for us to amend the laws in such a way to reduce the number of 'unwanted' members and staff in all such institutions. It would be a reason for us to review the existing salaries, and harmonize the salaries nation-wide.

Soaring Food Prices Again Threaten to Push Millions of Asians into Poverty -ADB

MANILA, PHILIPPINES - Resurgent global food prices, which posted record increases in the first two months of 2011, are again threatening to push millions of people in developing Asia into extreme poverty, says a new report from the Asian Development Bank (ADB) titled 'Global Food Price Inflation and Developing Asia'.

Food prices had been expected to continue a gradual ascent in the wake of the sharp spike in 2008. The report says that fast and persistent increases in the cost of many Asian food staples since the middle of last year, coupled with crude oil reaching a 31-month high in March, are a serious setback for the region which has rebounded rapidly and strongly from the global economic crisis.

Domestic food inflation in many regional economies in Asia has averaged 10% in early 2011. The ADB study finds that a 10% rise in domestic food prices in developing Asia, home to 3.3 billion people, could push an additional 64 million people into extreme poverty based on the $1.25 a day poverty line.

"For poor families in developing Asia, who already spend more than 60% of their income on food, higher food prices further reduce their ability to pay for medical care and their children's education," said ADB Chief Economist Changyong Rhee. "Left unchecked, the food crisis will badly undermine recent gains in poverty reduction made in Asia."

The report adds that if the global food and oil price hikes seen in early 2011 persist for the remainder of the year, economic growth in the region could be reduced by up to 1.5 percentage points.

In the short term, the pattern of higher and more volatile food prices is likely to continue the report says, noting that grain stocks have fallen. Adding to this are structural and cyclical factors that were at play during the 2007 to 2008 crisis including rising demand for food from more populous and wealthier developing countries, competing uses for food grains, shrinking available agricultural land, and stagnant or declining crop yields.

The report notes that production shortfalls caused by bad weather along with the weak US dollar, high oil prices and subsequent export bans by several key food producing countries have caused much of the upward global price pressure since last June, with double digit increases seen in the price of wheat, corn, sugar, edible oils, dairy products and meat. Rice prices are likely to continue their uptrend as the effects of La Niña persist, prompting consumers to seek less costly and less nutritious substitutes.

"To avert this looming crisis it is important for countries to refrain from imposing export bans on food items, while strengthening social safety nets," said Dr. Rhee. "Efforts to stabilize food production should take center stage, with greater investments in agricultural infrastructure to increase crop production and expand storage facilities, to better ensure grain produce is not wasted."

Asian governments have already taken many short term measures to cushion the harsh impacts of food price inflation, including measures to stabilize prices. However rising demand for food from developing Asia and low food productivity mean policymakers must also focus on long term solutions to avert a future crisis, the report says.

The report says there is also a need to calm speculative activities in food markets. It recommends enhanced market integration, and the elimination of policy distortions that create hurdles in transferring food from surplus to deficit regions.

It also notes that cooperation between Asian nations can help better secure food supply for the region's people. The ASEAN Integrated Food Security Framework, under which the 10 member ASEAN group of countries has agreed to establish an emergency regional rice reserve system, is a positive step in that direction.

Is Maldives heading towards a failed state? Can we get out of the vicious cycle?

The recent events of unrest in Egypt, Libya, and Bahrain remind us of so many things; which are frightening and exciting too. It seems that some form of democracy is preferred in all countries. Hence, to change an existing autocratic regime, most times require social turmoil, involving deaths and destructions to property. It’s not necessary that change occur after some form of turmoil. The main reason why political instability and elicit widespread action for change is triggered is that people become too ‘unhappy’. This unhappiness most of the time comes through tough, hardship life circumstances, in other words, through high unemployment, higher prices, high inequality, and overt corruption. Widespread distrust and feelings of hopelessness by large segments of the population, leads to uprisings. Seem familiar?

When Maldives embraced many political and governance reforms during 2007-2008, and a significant proportion of the population wanted a regime change, people, or at least I had high hopes for the country. We’d hoped that our judiciary and other institutions will be freed from corruption, and break away from the vicious cycle that we were in for the last 30 years. The reason we were trapped in a vicious cycle was that there was uneven distribution of economic power. The natural resources were unfairly controlled by very few families in the country. In such a situation, in order to protect their property and wealth, they obtained the political power to even influence the judicial system in the country. Hence, an environment that enables constraining the powerful emerges only when a significant share of the population has economic power through their property holdings or their human capital. When there are many (instead of a few), with properties and wealth, there can be a collective power to advocate for an effective police force and an impartial judicial system. We can have a failed state, and stay failed if we do not have an even distribution of economic power.

Why do you think we are all faced with increased in crimes in the form of killings, rapes, stabbing, overt corruption, and many more in our country? It is because we have a judiciary without the appropriate distribution of power backing them. In simple words, majority of the population are not able (or do not have the power) to pressure the judiciary to become impartial, majority of the people do not have the political power to pressure the government to enforce the court sentences. In the case of protecting properties; and ordinary citizen does not have the power to do so, while a powerful businessman has his own private ‘gangs’ to protect his property. They don’t need an effective fair court or a helpful policeman. However, if there are numerous ‘businessmen’ with the enough resources and wealth, when they come well-organized, collectively they can have the political and economical might to make sure the institutions work.

What I’m trying to say is that, having the control of our country’s resources in the hands of only a few people, is inimical to the broader protection of property, because either way, the large powerful owners can protect their interests even without a fair and objective judicial system, hence they have no interest developing the system. In fact, for them it would be better if the judicial system does not develop, so that their privileged violations can be continued.

Just like ownership of property or resources, increasing the widespread distribution of improved human capital also plays an important role in bringing about the balance of power. Hence, broadening access to education, and skill acquisition offers another route to spreading economic power in a country.

So, we will be heading towards a failed state, if our country’s wealth continues to be controlled by the strongest businessmen, who effectively also runs (or influence) the government. In the end, we will be in the same situation as the last 30 years, as we were under a dictatorship.

The economics of politics in Maldives

Back in 2008, the majority of Maldivians voted against the incumbent autocratic ruler, who had ruled Maldives for 30 years. Even at that time there were about 40% of the voters who supported that President, Maumoon, making the 2008 election very competitive; and increasing the polarization in the country. What was evident during that time, as an observer, is that there were some businessmen who wanted to protect the Maumoon regime, as it ensured the protection of their own business interests. Likewise, there were a huge percentage of ordinary citizens who wanted to protect the Maumoon regime, for reasons they would better understand.

Anyhow, then there was the MDP, who was the opposition at that time. There were many loyalists of this reform movement, people who joined the party simply because they had a genuine belief that the state of the country has to change. There were many people who sincerely supported MDP because they cared for the country, they wanted the drugs problem to be solved. They wanted the housing problems in Male' to be solved. They wanted prices to come down, and they wanted more social protection, and economic well-being. The PR campaigns and the pledges of MDP were also very smart; addressing those issues that grass-root ordinary citizens felt for. Maumoon, the judiciary, police, and the parliament was portrayed as 'wicked', 'corrupt', and exploiters of the country's wealth. Maumoon was blamed for almost anything and everything bad that ever happened in the country during those last few years.

Maumoon was smart, and removed his 'old guards', and replaced them with young blood, like Hasan Saeed, Nasheed, Shaheed, Aisha, Jameel, Shaugy, and others. There was a young, energetic cabinet, who publicly showed sincerity in bringing reforms to the country. However, just when it was about time for the presidential election, Hasan Saeed together with Jameel, and later Shaheed got out of the government, and blamed Maumoon for many short-comings in the reform process. Later, Hasan contested in the presidential election, and came third. Qasim also resigned from the post of Finance Minister, just in time for the election, contested, and lost in the first round. In the second round, Hasan and Qasim backed the current President, Nasheed who came up second in the first round. As Nasheed defeated Maumoon in the second round, and became the first democratically elected President in the country, there were many who had high hopes, and high expectations for the future of this country.

So, two years after the change in the government, are the people happier, now that their hopes and expectations are being met? With the fall of the dictatorship, is the country better off? Well these are difficult questions to answer using the appropriate statistics. For one thing, it might not be appropriate to compare the two Presidents or the two governments, as the new President has a new Constitution to abide; the current government has to face new independent institutions, and an independent judiciary, and a highly-powerful parliament. That brings me to the main 'gist' of my story.

The political economy of our country is still the same; as there are few 'very rich' families who control almost all the affairs of the country. It has been the case even 5 - 10 years back in this country. It is so even now. The Parliament has bunch of 'millionaire' businessmen, who would do anything to protect their own business interests, and to make sure that new and young people do not emerge in their area of business, so that they wont have enough competition. Most of these businessmen want to keep the poor under their control, by providing them with small favors; like donating a ticket to India for medicals, or few dollars as charity. These businessmen have in their control families who are directly employed in their businesses, and they would fight for their last breath to protect their businesses. It will be very difficult to pass legislation that would raise import tariffs, business profit taxes, tourism lease rents, and other forms of taxes. At the same time, these Parliamentarians will do everything they can to increase the government expenditure so that they could get re-elected, as their constituents would support any additional spending on them.

Those huge businessmen who supported and spent on campaigns of Maumoon is today supporting the campaigns of Nasheed, and in turn, the current government is expected to make sure that the interests of these businessmen are well-protected. It doesn't seem that there is anybody in the country who is protecting the interests of the poor, the ordinary citizens of the country. It doesn't seem that anybody is sincerely trying to protect the interests of the nation.

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?