Island Chic’s Babble

Maldivian government’s overly optimistic attitude towards ‘possible’ revenue from international donors and profit from tourism and fishery industry, government has allowed obscene spending, especially in the public sector.

As the current President Nasheed and Finance Minister Hashim proposed the new budget for the financial year 2009, all I could think of, were the reasons why the budget will push the country deeper and deeper into the deficit situation we are already in.

My outlook is hardly of quantitative nature. However I’d like to mention a few reasons why the budget may fail to address the existing fiscal and monetary situation in the Maldives.

1. Though it hasn’t affected the Maldives in a bad way yet, the global recession is going to reduce our tourism revenue to a significant extent

2. Government has already been overly optimistic regarding revenue from both tourism and fisheries sector performance and these may very well disappoint us

3. As the economies of our most important donors are headed towards recession, we may be unable to get the expected amounts as foreign aid

4. Due to the increasing deficit and distraught nature of our balance of payments, IMF and World Bank are going to be hesitant with their development assistance

5. Any more loans from commercial banks would be ‘applying salt on existing wounds’

6. Waiving off import duties on diesel, medical supplies, essential foods, though a much needed step in helping the Maldivian public, will adversely affect the financial situation

7. The government pension scheme for old people and the medical insurance for 1/3rd of the population will further disorient the revenue status

As we go through a transition period from one presidency to another as well as a different approach to the way we are governed, it is hard to expect a ready-made, short term solution to the vast array of economic issues we face today.

Any possible solution(s) will have to be thoroughly researched and the costs and benefits of policies explored. Similarly, a holistic and long-term approach towards the situation must be adopted at a national level with help of donors, development partners and consultants.

1. Imposing a Corporate Tax. This is no easy task given the need to enact appropriate laws regarding the tax, elite opposition towards such a tax and the lack of capacity within tax collecting authorities. However, this will eliminate the flat tourism bed tax and make it progressive, helping to reduce the existing income gap.

This will also broaden the existing tax base and bring into the tax net a variety of businesses and enterprises. However, deciding on a minimum threshold for the eligibility of tax should be chosen extremely carefully as to reduce the burden on Small and Medium Enterprises (SMEs).

2. Developing the private sector and stimulating growth within the sector to promote voluntary economic activity. As a huge sector of the society’s economically active population is complacent and sitting with low salary government jobs, we must create a trend towards transfer to the private sector. Making small business processes easy and government assistance (even if not direct financial assistance, making regulations which will encourage commercial banks to do so) can also stimulate more progressive private sector activity.

Another possibility is to use more opportunities created through diplomatic missions on people-to-people contact within neighboring countries. Retailers in Sri Lanka, Traders in Malaysia, Exporters in India, Travel Agents in China can contribute to a huge extent towards the development of our own private sector, if existing opportunities are fully utilized by the people, which currently do not work so ideally.

3. Moving to a performance oriented public sector. This is a much necessary step in reducing government expenditure on our disproportionately huge public service. Instead of forced downsizing, moving into a system of meritocracy and creating a culture of efficiency within the public sector will help reduce the number of staff. Rather than employing 5 people to do menial secretarial jobs, develop one skilled person who can do the job quicker (We all know that our civil service is highly oversized and we can afford to downsize, provided that people have better options available in the private sector)

4. Reducing government wastage. There are numerous areas we can apply this. Starting from over-paid high ranking government officials, extravagant national celebrations, overseas trips, over spending on diplomatic missions to unsupervised overtime allowances for government employees. This in no way reflects the need to complete cessation of the factors mentioned, I am merely indicating a need to control, downsize or reduction based on situations where the costs outweigh the benefits.

5. State owned enterprises like STO, MTCC and MTDC should not be owned by the state. The state should rather be a regulator and not both the regulator and shareholder. This should increase their level of performance (of course with favorable legislature and regulations). It will in turn help the government once the Corporate Tax is imposed.

6. Adopting non-conventional methods to raise revenue. Though this will not be a significant amount, it will be a positive step. Such methods would include a variety of fees, licenses, fines etc. I’ll only give a few examples.

o There are numbers of land plots lying idle, owned by citizens registered on islands but living in Male’. Government could take yearly fees on them.

o Fees could be taken on the use of public space for the purposes of construction, events etc.

o State owned-land utilized for economic activities generating little profit, can be evaluated and based on opportunity cost and leased/auctioned for the most profitable commercial use.

7. Stimulate economic activity within island communities (for e.g. Re-vitalizing industries like handicrafts, making souvenirs etc.). This is a very important step, as there are a significant number of economically active Maldivians sitting idle with nothing more than house hold work on the islands. Given proper opportunities to generate income, they could be an asset to our economy.

8. Reduce the money leaving the country through expatriate worke
rs. This is a major issue that need’s government’s urgent attention. Approximately 80,000 foreigners work in the Maldives at various levels of economic activity, taking away a considerable amount from our GDP. Leaving aside the social implications of such a huge number of foreign workers who are paid extremely well, especially at higher levels in the tourism sector, the financial and economic implications are many. Hence comprehensive policy measures must be taken to reduce the number of expatriate workers and to keep the money within our country.

These are only some of the problems we have and some of the ideas I think could help ease our economic problems in the long run. You opinion and ideas on these are most welcome and appreciated.