Foreign Aid - Is it free?

Foreign aid has attracted a bit more attention lately, but it has, since its inception in 1950, been a controversial issue. Recently a book by William Easterly (Title: The White Man’s Burden: Why the West’s efforts to aid the rest have done so much ill and so little good. Publisher: Penguin Press, 2006) has set off a new round of discussions and questions and polemics. So I thought that I would join in.

I will concentrate on Official Development Assistance (ODA), essentially aid in the form of funds given by the rich countries to the low and middle GDP countries of the world. ODA is the largest of the various aid categories. I may try to discuss other categories, especially technical aid, in a later post.

Official Development Assistance has been of significant size. In the year 2006, for example, it amounted to $120 billion in current prices. (This is the world total.) This seems to me to be a sizeable figure, but it is a small proportion of the West’s Gross National Income, and it was spread over many countries, not necessarily on the basis of need or the ability of a country to use it productively.

This foreign aid of course is meant to provide a country with resources in addition to those of its own. Aid then is a supplement to domestic saving. Government can then do things it could not have done without the aid. This is obvious of course. Suppose a government is using its own resources effectively, and then gets some aid. It can then do more–can build more elementary schools, can improve or maintain more roads, can guarantee farmers a good price for their crops, and so on–than it could in the absence of aid. Aid obviously can be of great help in the development of a country. Why are there doubts?

There are several reasons that have been mentioned by opponents of aid. It breeds corruption, it is wasted on pet projects pushed by some government officials, it enables the continuation of harmful policies, it makes exchange rate management more complicated, it dampens pressure on domestic resources to seek productivity gains, donor countries often put damaging restrictions on the use of aid funds, and so on and on. These doubts are real and there are many examples that one could cite of their impact. At the same time there are many examples of aid having a very favorable effect on a country’s development effort. Botswana and Korea are examples of aid working in an effective way.

For aid to be effective the overall economic policy of a country must be in order. The country must understand how its economy functions. As noted above the aid receiving country must be using its own resources effectively and to appreciate how it can use additional resources in an equally effective way. This is not an easy thing to do. And it is not surprising that aid is often misused, not because of corruption or selfish government officials, but because the understanding of the aid receiver’s economy is so limited. Thus foreign aid is beneficial where those who manage the economy understand how their economy in fact works. Where the donor imposes conditions for its aid that the recipient believes to be inappropiate, aid must be rejected. Do not think because it is aid it is free, and doesn’t matter. The costs may be high. There is no such thing as free aid, as there is no such thing as a free lunch.

What the government and the civil servants need to understand on the issue of salaries

The government announced pay cuts for civil servants during the last quarter of 2009, and revealed plans for gradually reducing the number of civil servants. On various occasions, the president has tried to explain his strategic economic reforms, and overall macroeconomic policies adopted by the present government. He’s outlined the reasons for his drastic measures of reducing government recurrent expenditure on salaries, and increasing electricity tariffs and stop subsidizing the State Electric company.

The years following 2004 tsunami, the macroeconomic management can be best described as ‘stupid’, ‘politically-motivated’, and mostly unsustainable. Government’s current expenditure hiked to unsustainable levels, mostly through increasing salaries, and huge promotions. This was followed by formation of many independent commissions and institutions, again with huge salaries. Meanwhile, salaries of the Parliamentarians, and ministers also increased drastically. All these led to extremely high government budget deficit, that was financed through printing Rufiyaa. This led to increasing inflation, as equivalent goods and services were not produced, and the productivity in the economy did not improve.

International financial institutions like IMF, World Bank, and Asian Development Bank, all advocate reducing government deficit and stop printing Rufiyaa to finance the deficit. (http://www.imf.org/external/np/sec/pr/2010/pr1013.htm)The government expenditure has to be financed through revenue collected from taxation. Not by any means through printing Rufiyaa. Whenever we print Rufiyaa, we’re adding up to our problems, as it’d lead to higher inflation, and difficulties in obtaining US dollars. These financial institutions who provide assistance to us, have been advising us to reduce the redundant civil servants, stop subsidizing STELCO (by increasing the electricity prices), and reduce the government wage bill.

The rationale is: we cannot continue paying higher salaries to many staff who do not add any value. In other words, we pay salaries to government employees in order to provide some services to the public. We need to reduce the number of government employees, so that redundant, or unnecessary staff are removed, so that they can get employed elsewhere. Regarding the salaries, it is common sense that anybody, even if it’s the government, cannot continue to pay higher salaries, if it cannot raise enough revenue to pay for that. So, reducing salaries would be the best option in order to reduce government expenditure and deficit. If not, deficit will have to be financed through borrowing or printing Rufiyaa, both options being bad for the economy.

Reducing salaries of civil servants, reducing the number of civil servants, and increasing electricity prices, are all political suicides for a president or a government. However, the current government was forced to take these steps, as it was recommended by the IMF, and many other donors. Further, the assistance package provided by IMF requires government to reduce the deficit levels to certain levels or targets, and for such conformity, these steps have become necessary. So obviously, the government’s policy and decisions are for the future benefit of our country.

But, why are the civil servants, and the civil service commission still protesting, and demanding higher pay? Answer is simple; although the government’s economic plan is prudent, and is necessary for the country, the sincerity of the government is being questioned by the civil servants and the public. Why do I say that?

If there were same principles applied to all employed staff of the state, including, civil servants, political appointees, staff of independent commissions, and parliamentarians, then, it is more likely that the civil servants would have accepted a lower pay even for the whole year. However, what we see is that political posts keep on increasing, and the salaries of parliamentarians and some of the independent institutions were not reduced.

The IMF and those institutions advise to reduce the total wage bill. The total wage bill includes the salaries of all political posts, parliamentarians, and civil servants. So, if we are talking about reducing the number of civil servants by laying off redundant workers, then the same principle needs to be applied to political appointees as well. Redundant political appointees need to be laid off. Just like civil service staff are hired and employed based on their performance, need, and productivity; even political appointees should be appointed and employed based on the need, their performance, and the productivity. The salaries of political appointees and the civil servants, and even the parliamentarians are paid by the same budget; the state budget. Hence, in order to show sincerity, and commitment to reducing government expenditure and deficit, government needs to apply same principles, and treat everybody impartially. Government needs to lead by example.

don't worry...be happy.. :-)

Recently I opened a poll to obtain an idea about how the readers of this blog feel about their life. Whether they are happy, not very happy, fairly happy, or not happy at all. An overall index closer to 4 would mean that our society is a fairly happy society. From the results of this short survey, the happinness index comes to 2.4. Ofcourse this is not a representative result of the whole society. In order to determine the happiness level of Maldivians, we would need to conduct a comprehensive survey, covering a significant sample of the population.

Talking about happiness, it could be the case that different people interpret happiness in different ways. For me, happiness means feeling good, enjoying life, and think to myself, “What a wonderful world”! Happiness has many dimensions; we feel different at different times of the day, when we are with different people, and when we are doing different things. A study done in 2003 by Kahneman et al, in which 1000 working women in Texas were asked how they felt at different times of the day. The results are reproduced here.

According to the results, Americans felt least happy while commuting, and the highest index is for sex. This could obviously vary for different societies, and I don’t know which activity makes Maldivians happier.

The same study determined, how happy they were spending time with different people, and showed that they were happiest while spending time with their friends (3.3), and least happy while with their boss (2.0).

Individual happiness levels, according to Layard of London School of Economics, depends to a large extent on how happy others are. If your neighbor earns twice your income, any income raise that you get may not make you happier, as still others’ incomes are much higher than yours. Well, incomes are only one of the factors that makes us happy.

Layard raises an interesting point, that people in the west have become much richer, work much less, have more holidays, travel more, live longer, are healthier, but, still they haven’t got happier. So what shall we do, to make us happier?

10 things I hate about MONEY

Money may come easily for some, but there are ways it can go easily as well. So, here are some things advised by experts on being rational or sensible about money.

1. Live within your means and monitor how you spend your money
2. Save a portion of your income before spending the balance. Aim to keep six months of income for emergencies
3. Make use of credit cards wisely and settle debts promptly to minimize interest charges
4. Gather information and shop around before buying any financial product
5. Buy a financial product only that you understand. Read the terms and conditions carefully before you buy any financial product.
6. Understand what your insurance policy covers. Pay attention to exclusions and other terms and conditions of your policy contract
7. Be careful about buying any financial product on impulse. Determine your need and buy what is suitable for you
8. Do not give into persistent sales tactics and learn to say ‘No’
9. Plan early for your retirement. The government pension scheme normally covers only the basic retirement needs
10. Invest wisely by spreading the money over different types of investments. A financial product that has a higher return usually comes with higher risks as well

Source: Singapore ‘Money Sense’ program, 2004

Three days left to vote!!

If you have not voted yet, here's your last chance to take part in this survey. The survey will end in three days!

IMF Executive Board Concludes Article IV Consultation with Maldives

http://www.imf.org/external/np/sec/pn/2009/pn09142.htm

Determine the happiness level of Maldivians., the survey continues..

Please take part in this survey, and tell me whether you're happy with your life.

Are you happy with your life? Take part in the survey

Please take part in this survey, an effort to obtain an idea about the happinness level of Maldivians. There are several factors that determine the average happiness level of a population / community. Some of the factors include, their income levels, how often you get access to paid holidays, the level of health sector development, the food and nutrition standards, and family values or family ties.

The survey will be open till January 15th 2010.

Thank you

Sea level Raees

Our president has done a great job obtaining the attention of both international and local media through his campaign on environmental issues. The underwater cabinet meeting was telecast on many well known international tv channels, and reported on many newspapers. His speeches, and media interviews also cover the impact of environmental change to the Maldives. Particularly, that sea level rise will result in Maldives being submerged in water, and that all Maldivians are gonna ‘die’.

Having the attention of the international media is one thing. A president repeatedly advertising the death of its country, while at the same time participating in seminars/forums attracting foreign investments and aid, is yet something of great concern.
I’m sure the president shows admirable character; through his articulate skills, entertains and convinces huge groups of people on different issues. My guess is that as he used to be a journalist, it seems that he’s a firm believer in ‘letting the truth out’, no matter what. So, Indian tv channel got the story about Maldivian terrorists fighting in Pakistan.
Many of my friends who are in regular contact with foreign investors have told stories of some huge investors being a bit uneasy about the president’s remarks regarding the fate of Maldives. I’ve also seen some of the e-mails sent by such investors on the subject.
I guess there are serious issues that need to be brought to the attention of the government, and the president.

For a start, president Nasheed needs to rethink his real objectives, and give priority to the welfare and future of the nation instead of promoting his personal fame in the international forefront. His recent remarks and speeches in the international media has had un-measurable damages to the Maldivian economy. Foreign investors are scared and reluctant to make new investments in Maldives, as the president appears on TV and other media interviews to announce that the country’s going under water pretty soon, and also, that the country has a stock of terrorists who are being trained from Pakistan.

Existing investors are also in a state of confusion, and may in the near future leave the country after selling off their investments.

I’m not suggesting that we stay in denial, by just ignoring the harmful effects of climate change and sea level rise. We need to work out plans and put in place adaptive measures to tackle environmental disasters. We need to reduce our carbon emissions, and call other countries to do the same. At the same time, we need to keep living instead of giving up on everything, saying that we all gonna die soon. We need to attract foreign investors to come and set up their businesses here. Especially, when the government’s main policy on economic reform is to privatize existing state owned enterprises, and where possible rely on public private partnerships for provision most of the public goods and services.

Random thoughts on 2010 government budget

I’m still not very much convinced that we’ve formed all these independent institutions with their fat salaries, at the right time. I know, we need political reforms, we need to protect human rights, we need to maintain police integrity, all this and that. But first of all, we should be able to afford all this. Looking at the 2010 budget, we are spending about Rf 12 million on human rights commission, Rf 14 million on anti-corruption commission, and a combined Rf 10 million on police integrity commission and the employment tribunal. A grand total of Rf 463 million for the budget of all the independent institutions. On the other hand, a mere Rf 14 million for teacher training faculty, Rf10 million for training nurses, Rf 5 million for faculty of tourism.

From an economic point of view, the latter expenses will definitely directly contribute to the productivity of the labor force, and GDP of the country. What we spend on teacher training, nurse training, and even training for tourism personnel are future investments with high economic returns. But, Rf 12 million for human rights commission?? I’d like someone to explain to me, or justify why we should spend that much money on that institution. And Rf 14 million on anti-corruption? I’d definitely would like to conduct a study to find out how corruption is decreasing in our country, and how much corruption money is ‘saved’ as a result of the efforts of this commission. Then it’d be easier for us to justify spending that money.

I think we need an effective system that can measure, or determine the productivity or the effectiveness of all these independent institutions. At the moment, it seems that most of these institutions are just a means of providing employment, with ‘fat’ salaries and allowances. The end result is that we end up with a wage bill of almost Rf 4 billion for 2010.

Recurrent Expenditure

Even the 2010 budget has an extremely high percentage of recurrent expenditure (70 percent), just like the past years. Tragedy is, out of the Rf 11.9 billion budget proposed for 2010, Rf 4.6 billion would be the deficit, that has to be financed mostly through loans. Which means, our children will pay for our salaries, as these debts will be repaid in the days to come. I say, if we are taking loans, or incurring debt now, such funds should be spend on capital investments that will be beneficial even for our children, especially if we are asking them to pay part of it. Our recurrent expenditures should be financed through the revenue that we earn now.

Dhiraagu shares

The shares we own in dhiraagu, I’m sure it’s a capital investment, as we earn dividends every year. And the company pays well. Last year, the company paid the government over Rf392 million as dividends, this year we expect it to be over Rf 447 million. However, according the proposed budget numbers, in 2010 we are expecting only Rf 166 million. Meaning, Rf 280 million less than this year. I’m sure that this is partly because the government has sold part of its shares recently for a sum of $40 million. By selling these shares, we’ve reduced our share of future dividends. If so, I’d like to find out, HOW DID THEY SPEND THAT $40 MILLION?? If this $40 million is also spent on recurrent expenditure, then it’s a pretty stupid thing hu? But, if we invest that $40m on something productive, its completely a different story.

Revenue estimates

It’s a good move by the government to go towards business profit taxation and having an ad valorem tax on the tourism sector. That’s the ultimate and the most sustainable form of government revenue. But the Rf 300 million revenue from business profit tax in 2010,, I don’t know how realistic it is, as there are many legal and administrative pre-requisites for it to become a reality.

The Rf 1.3 billion to be raised from privatization; I would want to know the details of how they plan to obtain it.

Final thoughts

Government needs to figure out ways to reduce its recurrent expenditure, including those of the independent institutions. And these recurrent expenditures have to be covered only through the revenue that is earned. Definitely not through selling shares of revenue earning corporations.

So many mistakes have been made in the past; like collecting advance lease payments from resorts, and they have been spent on recurrent expenditure. In order to avoid reliance on ‘once-off’ extra ordinary revenues, a good tax system needs to be put in place. Working towards introducing business profit tax, and having a GST on tourism is also a good thing.

Government sells T-Bonds

On 3rd December, the government of Maldives launched Treasury Bonds (T-Bonds) for the first time in the history of the country. It is also the first time a government security denominated in US Dollars is issued.

Since 2006, the government has been issuing Treasury Bills (T-Bills) with maturities of one month and three months. However, with the introduction of T-Bonds (with has a longer maturity; exceeding one year), government would be able to obtain finance for a longer period. The introduction of T-Bonds and the halt of reliance on the Central Bank for deficit financing is an important step towards an independent monetary policy, without the fiscal dominance that we’ve been used to in the previous years.

T-Bonds also enable the development of the capital market, and these securities can be traded in the secondary market. With the auctioning of the existing T-Bills, there would be further development of our capital market, as it would provide opportunities for private individuals to invest their savings on government securities.

However, in order to effectively establish a securities market, there are certain prerequisites; including a credible and a stable government; sound fiscal and monetary policies; a good regulatory infrastructure; smooth and secure settlement arrangements; and liberalized financial system with competing intermediaries. Hence, we still have a long way to go.

The negative side: With the government borrowing from the commercial banks, and paying high interest rates, will crowd-out private investments. There will be fewer funds available for private investments, and lower investments now would mean lower economic growth.
One thing is sure, with no more printing of Rufiyaa to finance the budget deficit, the pressure on inflation will be eliminated; and the pressure on the exchange rate will be eased. The next big challenge is to strengthen the fiscal discipline, as the finance comes at a huge cost.

Ramal'an Mubarik to all

I extend all my good wishes and greetings of the holy month of Ramal'an to all bloggers and all muslims across the world.
Let this month be full of good deeds, and enhancement of all our ties with our family and friends.
God bless you, and God bless Maldives.

The state of our economy: will we survive this crisis?

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.