Abdul Haleem Abdul Latheef
This article is part of Covid 19: Stimuli and Beyond edition of the Journal of the Maldives Economic Review, Volume 1, Issue 3, March 2020
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 will 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 a number of concessions to help people and businesses at these trying times. Our expectations have to be reasonable. 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 recognise that there are limited fiscal and monetary policy options available to government to fully recover from 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 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 requirement 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 billion worth of goods. Food and energy imports are expected to be in the order of USD 1 billion. In addition to this, foreign transfers in the form of investment income and employment remittance is 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.
USD Revenue, 2019: Total USD 653.3
Although there is a silver lining with the Chinese and Russians having an early lead in controlling the Covid-19 pandemic, a revival of the European market during the year is highly unlikely. Under the circumstances, a 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 billon for year the can be postponed because of limited employment creation and flow of funds at 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 workforce in this sector will account for the youngest cohort in employment. There will be spillover effect in the private sector as 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 labor participation and productivity in the economy. The conditions may include mandatary engagement in productive work like fishing, farming and home-based businesses. In addition, the 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 debt obligations of the state. For 2020, MVR 1.1 billion is expected to be used to pay off foreign borrowing. The government plans to raise USD 300 million through sale of Samurai Bonds this year as well. The first of Maldives Government 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 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 the 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 2004 tsunami where we lost 62% of 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!
About the author Mr Abdul Haleem Abdul Latheef was the former CFO at the National Pension Office. He joined the office in 2009 as an accountant. He has extensive experience in accounting systems, controls and financial reporting. He led the finance team at the National Pension Office and established its investment management, investment operations and financial management functions. He is a chartered management accountant with membership of CIMA (UK).
Earlier he held the position of Head of Department of Accounting and Finance at Faculty of Management and Computing of the Maldives National University. He engages in private consulting and teaching.