Last week, US-based investment firm JPMorgan warned of economic shocks to Maldives. By end of 2023, Maldives and seven other countries were at risk of reserve depletion by the end of 2023, signaling high default risks. More acute balance of payment pressures and larger fiscal deficits are now compounding problems for heavily-indebted countries that import most of their energy and food.
The administration was quick to response, when this report was widely discussed in local papers. Finance Minister Ibrahim Ameer held a closed-door meeting with government-allied media houses. His observation was entirely at odds with JPMorgan’s assessment. He said that the JPMorgan report had not officially said that Maldives would be bankrupt.
The findings, he said, were not formally endorsed by the investment bank, but rather the opinion of one researcher at the bank.
Minister Ameer was dealt with another bolt of reality, when Bank of Maldives’ CEO Tim Sawyer warned that Maldives could face the same fate as Sri Lanka. Speaking at BML’s AGM, Sawyer said that the world is showing signs of economic crisis and that some countries are already beginning to experience such signs. Winter is truly coming.
All experts single out rising debts, unchecked government expenditure, and depleting national reserves as key indicators of impending economic doom.
The government is quick to assure that all is well and that there would be no difficulties in paying debts. However, a quick price check delivers a reality check that belies the administration’s rosy outlook.
There are several reasons prices for goods and services increases in an economy. One of the reasons is an excess amount of cash in the economy that is not underscored by productivity. Due to covid-19, the country’s economy tanked to extreme low levels. In spite of this, the government had printed money on several occasions. On April 16, 2020 the Government suspended the implementation of Clause 32 (a), (d), and (e) of the Fiscal Responsibility Act for a year, allowing government to print more money. It was extended up to end of December 2023, earlier this year.
While the government touted this as a win, average prices has increased. While the government’s official statistics do not show this shift, the financial pressures on the average citizen have increased.
Price changes on the daily
A middle-aged person spoke to TMJ on the issue. He said that he purchases food items as required, and mostly on a daily basis. As such, he said that when he went shopping last Monday, prices had shifted from just a day back.
“When I went to shop [on Monday], price of a Coast milk can had increased by MVR 20 (US$ 1.30). Eggs and vegetables are pricier now,” he said.
The most notable price hikes came within the past two days. Government owned Maldives Industrial Fisheries Company Ltd (MIFCO) and Hajj Corporation have jacked up their prices. Both corporations are fully owned by the state and ripple effects from these are spilling over to other businesses.
Price increases in basic items is not a good sign for the economy.
More Rufiyaa devaluation expected
Unchecked expenses and zero efforts to increase sources of income are hallmarks of this administration. The government recently announced salary increases for teachers and principals. This adds in an extra MVR 500 million (US$ 32.4 million), annually. This, the government revealed, is to be financed by cash printing – adding to the millions already in circulation, further devaluing the currency more.
Dollar prices hinge on the amount of Maldivian Rufiyaa in the market. An increase in Rufiyaa circulation, would devalue the currency. Dollar purchases become more expensive. An equilibrium is achieved when dollars entering the market in maintained.
Maldives Monetary Authority (MMA) does play a role in this. To meet domestic demand and to stabilize Rufiyaa. However, at a time, when the country as a whole is finding it difficult to get US dollars in, there is a very high chance that continuing to print money and flooding the market would result in exhausting the usable and total reserves. This was the situation that faced Sri Lanka.
At this point, there are two options – limit printing or formally increase dollar exchange rates. This was the option Nasheed went with in the latter stages of his administration.
We’re still experiencing the effects of this. Another move like this would also have the same results.
What’s the solution?
Maldives does not exist in a vacuum. Global market changes, increasing prices, and other similar factors will impact Maldives as well. A coherent economic strategy seeks to minimize the impact of these external factors on the local economy and increase economic resilience.
Speaking to TMJ, an economist said that at the least, the government needs to significantly curb non-essential expenses. Limiting travel to essential trips, putting a cap on creating political appointments, and reducing salaries of political appointees were on top of his list.
“Halt all non-essential projects. Government needs strict austerity measures,” he said.
The economist also highlighted on how borrowing to cover recurrent expenses had further derailed the economy. He said the Government had used proceeds form Sukuk sales to foreign parties to cover recurrent costs in the past few months.
Handling the economy requires a delicate balancing act, with a long-term vision in focus. Economic resiliency, capacity, money supply, productivity should not be compromised for short-term political gain. If the government is hell bent on rejecting all the warning signs, given by local and international partners, the burden of that would have to be taken by citizens.