The MDV economy is highly dollarized. The Financial sector small and dominated by banks with an estimated total asset base of MVR 56 billion. Last three years our usable reserve averaged USD 235 Million. Along with huge current account deficits and subsequent budget deficits over the years, one has to recognize that there are limited fiscal and monetary policy options available to the government to fully recover a shock of this magnitude too soon.
With uncertainly looming over the economy, it is important to keep our hopes and dreams alive. The priority should be to ensure the food and energy security, providing a basic income for people and sovereign debt management, and weather the storm caused by Covid-19. here is an article I wrote on MER Special Issue on Covid-19
Whether the Storm, Lets Built Better, Together!
The 2020 budget expected GDP to grow by 7.5% to MVR 97 Billion, generate income of MVR 30 Billion, of which 60% to be from tax revenue. Following the Covid-19 pandemic, it is expected that significant revisions to be made to the budget 2020 as it could have little relevance as the country awakens to a totally new reality just like the rest of the world.
The Government has already promised a stimulus package and number of concessions to help people and businesses at these trying times. Our expectations have to be reasonable. The Maldives is a country in transition in so many ways. The economy is highly dollarized. The financial sector small and dominated by banks with an estimated total asset base of MVR 56 billion. Last three years our usable reserve averaged USD 235 Million. Along with huge current account deficits and subsequent budget deficits over the years, one has to recognize that there are limited fiscal and monetary policy options available to the government to fully recover a shock of this magnitude too soon.
With uncertainly looming over economy. it is important to keep our hopes and dreams alive. The priority should be to ensure the food and energy security, providing a basic income for people and sovereign debt management, and weather the storm caused by COVID- 19.
Ensuring Food and Energy Security
It is expected that the foreign currency demand to support import requirements will be reduced due to decline is tourisms industry and lower oil prices. Nevertheless, as a matter of prudence, it is important to ensure that the stock of foreign currency is maintained.
During last year Maldives imported over USD 2.9 worth of goods. Food and energy imports are expected to be in the order of USD I billion. In addition to this, foreign transfers in the form of investment income and employment remittance are over USD 1 Billion.
According to MIRA the Government received USD 653.3 Million in 2019 (MVR 10 Billon) as USD revenue, 99% of which is related to tourism and travel. Tourism GST alone is 49% of total foreign currency revenue to the Government.
Although there is a silver lining with the Chinese and Russians having an early lead in controlling the Covide- 19 pandemics, a revival of the European market during the year is highly unlikely.
Under the circumstances, constant monitoring of foreign currency movement in the economy would be paramount. The policy on repatriation of funds may have to be adjusted in line with developing circumstances. More restrict measures may become a necessity.
The planned development expenditure of MVR 15 billion for the can be postponed because of limited employment creation and flow of funds at the local level. This would also reduce the pressure on foreign currency demand, leaving foreign currency available for most urgent needs such as food, energy and debt repayment.
Providing Conditional Basic Income
The tourism and travel sector will be hardest hit. It can also be expected that the workforce in this sector will account for the youngest cohort in employment. There will be a spillover effect in the private sector as the tourism sector recedes.
In the event that several people will be out of work. provision of basic income would become a necessity as workers laid off may not find work under the circumstances.
However. the basic income must be conditional to encourage labour participation and productivity in the economy. The conditions may include mandatory engagement in productive work like fishing, farming and home-based businesses. In addition, universal health insurance can be tied to work rather than free for all so that it is more equitable, fair and sustainable.
There are a number of ways this can be funded and sustained;
- Budget funded pensions and gratuity payments which is estimated to be in the order of MVR 1 .4 Billion can be paid to those who are unemployed,
- Further injections can be in the form of social protection grants from the Maldives Retirement Pension Fund.
- The funding can be provided for each household rather than for each individual
Debt Management
It is important to avoid any debt default. In addition to the financing, the imports. foreign currency is required to service the debt obligations of the state.
For 2020, MVR 1. I billion is expected to be used to pay off foreign borrowing. The government’s plan to raise USD 300 million through the sale of Samurai Bonds this year as well.
The first of Maldives Government’s sovereign bond sale took place in 2017 (with the sale of USD 250 million 7% fixed coupon 5-year maturity conventional bond which is listed in the Singapore Stock Exchange). The second bond, issued in April 2017 is a USD 100 million 5.5% fixed coupon 5-year maturity conventional bond listed in the Abu Dhabi Stock Exchange. privately placed with the Abu Dhabi Fund for Development.
As raising finance from overseas markets will be challenging. it is important to take proactive measures to meet these and other debt obligations to avoid adverse country credit rating and jeopardize future borrowing capacity.
Let’s Build Better, Together!
The economic consequences of Covid- 19 will be bitter, there is no doubt about it. It would be the biggest hit on our economy, far greater than the economic loss caused by the 2004 tsunami where we lost our GDP.
The Maldives was a success story even then. It took no time for us to rebuild our economy and build better our infrastructure.
We have to be even more resolute to become a success story again. Together we can build better and together we overcome the hesitancy to question the economic and social policy of successive governments over the years meant for us as a country.
But first, let’s weather the storm together!
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