The Maldives has been heading towards economic disaster for quite some time now. There are many factors, I am told by economists, which have contributed to this economic demise. I am not an economist, and I don’t understand their jargon half the time. So, I will just try to look at this from a common sense angle. I may be wrong, I may be right. I don’t really know. I hope those who know better than I do in this area will shed some light on these issues.
For a number of years, the Government had been spending more money than it earned. The Majlis would be fooled into believing that it was a balanced budget that they were passing, but at the end of the first quarter, the budget would already be in the deficit. “Short term loans” would be taken from the MMA Ways and Means account which invariably became permanent. What this effectively means, I suppose, is that the MMA would just print more and more bank notes to honour government cheques for which there was no substantial backing in kind. Inflation creeping in was the result, because the Rufiyaa could not hold its own against the dollar. Artificial control of Rufiyaa value meant a kind of a soap bubble was created for a time.
I could be way off the mark here. If so, somebody please point out and put us on the right track.
In the meantime, consumer confidence was at an all time high, and people just kept on spending and spending like there was no tomorrow. Credit cards were made more accessible to white collar workers, creating credit for consumption. But there was no real credit available for production. At the end of the day, if the fuels for consumption cannot be maintained, the bubble has to burst.
Government spending was hugely in the recurrent area and there was an ever burgeoning civil service. I remember, in 1994, when I was a civil servant, I was working on a World Bank Project, and the World Bank, the Asian Development Bank and the International Monetary Fund warned the Government to seriously cut back civil service employment. However, in the past 14 years since then, the civil service has grown out of all proportion. For the previous Government, employing more and more people in the civil service was a means of controlling them and their families, especially in the atolls, when it was time for elections. In the absence of formalized political parties, “government employees” constituted the ruling party.
It is claimed that there are close to 40,000 government and state employees. This, in a nation of 300,000 people. That means close to 40% of the working population are in government employment, which is mainly a consumption area. To offset this, foreign workers have to be brought for the production side, losing real foreign currency in the process. A labourer employed for a monthly salary of USD 150 sends home, on average USD 1,000 per month.
These are just some aspects. There are many more, I am sure. Whatever it is, I hope that the Nasheed Administration does not make the same mistakes that Qayyoom’s Administration made. Somewhere along the line, we will have to bite the bullet. Procrastinating facing the inevitable and hoping for a miracle will not help. The earlier we devalue the Rufiyaa the sooner it will start to recover. Drastic reduction in spending is necessary to try and generate some savings to address the national debt which has spiralled out of control. A time for austerity is here, and we had all better embrace it.
Government borrowings from abroad could be used to offset the deficit. But then again, the Government would have to borrow again from the MMA for day to day spending. The net result is more or less the same, with a little bit more external debt than before. The only option left would be to pump more notes into circulation, which in turn will bring up inflation, creating a greater momentum towards devaluation. Otherwise, the MMA would have no option but to dishonour Government cheques presented to them.
The financial crisis in the world has also at its roots lending and consuming beyond means. Banks have taken huge risks in lending without proper collateral. Age old, and tested standards of basic accounting has been ignored, putting financial markets at great risks.
The bottom line is what household wives have known for ages. You just can’t spend what you don’t have. One fine day, it will catch up with you, and you will have to pay. “Kanmathee Store” is a creation of living beyond the means, at a national level.
To my untrained and ignorant “economics mind”, I see certain steps that will have to be taken sooner or later. They are:
- We have to devise a way of retaining foreign currency that we earn
- We have to reduce consumption, particularly wasteful and luxury items
- More people have to be engaged in production than consumption related activities, i. e, the civil service has to be reduced, and the work force diverted to more productive areas
- Government sector has to be much, much, more efficient by reducing wasteful spending
- Stimulus has to be provided for not only big business, but also to small and medium businesses. SMEs are the hardest hit in these times, but they also generate more employment on the whole, and generally keep the whole economy running
- Allow the creativity of the private sector to take off, and stop thinking in “populist” terms
These are just some thoughts of an average person. Do forgive me for my ignorance in these matters. It is for the Government to devise policies and strategies to make these things work. I hope that a more down to earth approach will be adopted by the new government to address these issues.
Monday, January 5, 2009
Procrastination
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Very true, Ibra. You just can’t go on spending money that you don’t have. If you plan to live your entire life beyond your means you will crash. That’s a sure bet. Sometimes we try to drape this reality with sophisticated economic and financial jargon. The other day I was watching Greenspan speak on CNN about the recession and the sub-prime crisis. Greenspan, being the Demigod he is, I thought would offer some erudite analysis that would be beyond the capacity of an average mind like mine. But on the contrary, he said something so simple and clear-cut that even a fifth grader would fully understand it. The problem, he said, started because the banks broke the ‘golden rule of banking’. And that ‘golden rule of banking’, he said, is that you don’t lend money to anyone who does not have the capacity to repay.
ReplyDelete@naimbé :
ReplyDeleteI did not get the chance to see that particular programme. But that was exactly what I was trying to say too when I wrote " Banks have taken huge risks in lending without proper collateral. Age old, and tested standards of basic accounting has been ignored, putting financial markets at great risks."
You can draw certain parallels with the first law of Thermodynamics here :" The increase in the internal energy of a system is equal to the amount of energy added by heating the system, minus the amount lost as a result of the work done by the system on its surroundings." A corollary of this is that energy can neither be created nor destroyed. As a student of physics, I can see the following consquence . That perpetual motion machines can only work if they deliver no energy to their surroundings, and that devices that produce more energy than is put into them are impossible to sustain.
Applying to the economic realm, the truism still holds if you equate productive resources in the system to energy. The total remains constant in the absence of inflow or outflow. You can redistribute, but generation of wealth will depend on inputs, and maintaining wealth will depend on preventing outflow. As Leibniz (a physicist/mathematician) said, the vis viva or living force remains constant.
In our case, outflow is greater than inflow. Simple as that!
You parliamentarians keep on increasing your salary without even thinking about the effects if would have on the economy.
ReplyDeleteAnd here you are talking about the need to cut back the civil service employment. What possible effect would it have if you people keep on increasing the salaries whenever you want.
The net effect is that the state has to pay the same amount of money to a reduced civil service force as it was paying to a bigger civil service force.
Yes drastic action needs to be taken, but don't go on preaching cosmetic changes.
You are very right Ibra. Just my thoughts on your points:
ReplyDelete- Production has to be increased, but this also means there should be someone to consume as well. Without the demand production will stop. So we cannot stop consuming and start producing. It doesnt make sense.
- A sudden layoff in the civil service sector is not good as there will be lots of working class people who are looking for jobs. The industry/private sector has to develop much further to be able to trim down civil service. It should be done slowly.
- I dont think we (as in Maldives) has come to a stage where we require stimulus packages like the ones happening in US et al. And those bail outs are actually going to the big banks who created the mess in the first place. Yes Maldives will be affected but my gut feeling is that it wont be much as we dont have that much of a credit economy.
@naimbe:
Greenspan is the last person on earth who would shed some real analysis about the crisis. He is very much so in this game with his banking friends in creating the real estate bubble, and letting the banks go loose without proper regulation. And now the banks are getting trillions in bail out. Privatise the profit and socialise the loss.
Maldives position is that it has to run its economy differently, Maldives cannot hope to avoid a trade deficit, but the extent of this deficit is too huge, way too many more imports than exports. I think, Maldives has to work toward becoming more self sufficient. Abdul-Rahman
ReplyDeleteI am not in Maldives, and I ache to be back there with a stinging hunger every day but I can not as it has become impractical economically. So, I hope that these economic issues can be resolved so we can return.
ReplyDeleteIts the same problem through out the world. Spending more than you earn. Look at the results in US!
ReplyDeleteDoesnt seem like the economy is in any crisis, with all the state ministers added and all these official trips.
ReplyDeleteGood post Ibra!
ReplyDeleteWe need thought provoking articles like and ponder on these issues, rather than spending time on useless issues such as banning discos, debating Maumoons benefits etc. First economy, health, security, education, researches so on so forth.
hey ibra,
ReplyDeletefilibustering could be said to be a form of procastination.
@Anonymous (Jan 8, 5:39) :
ReplyDeleteYes, could be. The difference is one is deliberate, with a deliberate end in mind, the other is due to indecisiveness, lack of vision or bewilderedness.
Ibra,
ReplyDeleteThat's a very good article highlighting the problems that our economy is facing today. The world economy is way towards a deep recession, while in Maldives political appintees keep on increasing, with it, the government fiscal expenditure and the deficit. Parliamentarians and other politicias are playing 'politics' regarding the parliamentary elections. Please understand that our country cannot afford this at this moment in time.
Ibra,
ReplyDeleteTalking about the political economy, Parliamentarians should not be the people who hinders the development of the country. At a time when the economy is so vulnerable, and heading towards a recession, a few seem to be concerned.
@ Naseer :
ReplyDeleteTrue,Parliament should not hinder development. I don't understand it when you say "few seem to be concerned". I have certainly heard a lot of concern being expressed about the economy, both on the floor of the Majlis and in the corridors of parliament.
It is a serious allegation to say that "Parliament hindrs development of the country". I would be interested in knowing your reaons to believe as such.
its actually hillarious to see kutti nasheed whining over parliment reccess. in dhivehi we call it emeehaku feyhunu illoshigadu vannaany emeehege lolalashey.
ReplyDeletethey were 200 percent sure drp will win this election and its to their own benefit that to extend the parliment because it has 8 appointed members and president maumoon will have the majority in parliment.so at that time they were not in a hurry to send the bills to parliment. destiny works in strange ways.
there is an interesting peiece of news in that article saying he was involved in forming supreme court, no wonder it has judges who are puppets of drp and politics.
The procrastinating attitude exists for a few reasons. The first reason has to do with the traditional power structure. Maldivians, for many years, had been utterly dependant on the benevolence of a Sultan or his family (Be'fulhu) for permission to trade or work. The Sultan would take his time to grant requests in order to demonstrate his power, to show things got done when he wanted it to get done, not when someone else wanted it to get done. This way, it demonstrated that he, as the Sultan, was too powerful to be moved by the desires of the people, and therefore it rendered the masses feeling helpless to be able to control the Sultan. It was a display of power thought by the Sultan to be necessary for order. People would sit below the Be'Fulhu like kneeling pets, debasing themselves till an ear was granted. The sense of fatalism it birthed in the masses was of course reinforced by the sense that Allah is sovereign, and no matter how hard you do or don't push the Sultan to do something it is all in Allah's will and you can't push Allah. The religion was the anthropomorphic projection of the will to power of the Sultan.
ReplyDeleteOf course, many resisted that by showing that they too could take their time to grant the requests of the Sultan. Procrastination is a kind of a cultural stubborness developed to assert your own dependance from slavery. Notice how Maldivians seem to swing from slavish dependance on authority, to the point of appearing defeated or depressed, to aggressively asserting their freedom in a hostile manner, all within the span of one week? Procrastination has become the way to assert your freedom, to show you are not a slave. It is an act of passive agression. Do you agree, Ibra? Abdul-Rahman
Islam can inspire productivity, if you break it away from the formal Islam used as state control and learn Islam on a deeper level. Jahada (struggle from which Jihad is derived - not to be confused with Shahada) stems from the Mercy of Allah. If you study the etymological route of Rahman (Mercy) you will see that Rahman comes from the word for the womb, the womb of a Mother. If we think of the struggle, the suffering and pain a woman goes through to have, to protect and to care for a baby, we begin to sense the ontological essence of being itself, Mercy is action, it is struggle. The mind can be the slave of Allah, or Allah can be the mind's thrust for freedom. Allah is usually the projection of the will to power of the oppressed, religion can never be contained by any oppressive elite, as history shows.
ReplyDeleteFor procrastination to be eradicated, their has to be acculturation into the new free equitable Maldives. Religion is the most influential force in Maldives that is why I talk about it as the main source of behaviour. Of course I am aware that peoples perception of the absolute will always be conditioned by other factors, but I think, to create change you have to start somewhere, so I start with religious thinking but it would be just as effective to start elsewhere. By the way, Ibra, where do you get your quotes (Bronte etc...) they are most interesting. Abdul-Rahman
@Abdul-Rahman :
ReplyDeleteTry TheFreeDictionary.com for the quotes. I think I found it there, or blogspot gadgets.
Ibra,
ReplyDeleteYou've said that you've "heard lot of concerns being expressed about the economy" in the Majlis floor and the corridors. Well, when the budget was passed, those concerns were translated into 14 amendments that only increased the government expenditure further! None of the amendments had any revenue measures in it.
The current economic and liquidity issues that we are facing in our economy is mainly due to the increased government fiscal expenditure and the deficit.
The proposed budget for 2009 also had 'new revenue measures', that needed laws to be implemented.
Right now, there's this 'fight' or struggle, between politicians over the parlimentary elections. Don't you seriously think that there are no economic costs associated with such power games? The world is in a deep recession, our economy is in big trouble due to last three years of economic mismanagement. But what we see is continuous fight between politicians.