Maldives: ‘Currency float’ cause for political concern

A legislative deadlock involving the Executive and Parliament on the one hand, and the Executive and the Judiciary on the other, both leading to a serious and a series of constitutional crisis kept Maldivian politics and politicians on their toes for most of 2010. Now in the third year of its five-year term, the Government of President Mohammed Nasheed ‘Anni’ has tied itself down in a fiscal situation through an IMF-driven ‘managed float’ of rufiyaa, the local currency. The Government says that the consequent steep increase in prices was unavoidable but would stabilise within three months. A demoralised Opposition, even when remaining divided, is not making things easy for the Government. Their protest rallies drew crowds for a few days in a row with the police having to disperse them forcibly on nights (as is the wont in Male, the national capital for public protests). Though the Government blamed them on the Opposition, particularly the divided Dhivehii Rayyithunghe Party (DRP) founded by former President Maumoon Gayoom, sections of the local media said apolitical youth were seen in good numbers.

After cutting down on Government jobs, accounting for 10 per cent of the population and a much substantial number of dependent family members, and slicing 20 per cent of pay and perks temporarily in the past years, to shore up the Government’s finances in the aftermath of the global economic meltdown, the administration has now ‘devalued’ the currency by announcing a ‘managed float’ of the rufiyaa in a 20 per cent band. Accordingly, the exchange rate of the rufiyaa pegged for long at 12.85 to the US dollar has shot up by close to two three rupees, pushing up prices overnight. For an imports-dependent society, where almost everything of daily use has to come from outside the country, particularly the neighbouring India or Sri Lanka, the house-hold expenses have sky-rocketed. . As part of the continuing structural changes, the Government also plans to introduce a host of tax measures in July, including income-tax for those earning more than Rf 30,000 ($2,300) pm, and TGST (tourism goods and services tax) apart from substituting import duty with general sales tax. Together, such measures would have more than neutralised the family benefit accruing from the monthly pension of Rf 2000 for individuals above 65, granted since January 2011, after President Nasheed assumed office in November 2008. As part of the structural changes, the Government has also been corporatising public utilities like electricity and water supply, and with that introduced a steep hike in tariffs to help the new entities to breakeven at least in the foreseeable future. To be fair, the Government also introduced a subsidy scheme on power tariffs, so as to benefit the nation’s poor. A committee of the Opposition-controlled Parliament, despite problems with the Government otherwise, has devised a subsidy policy. The privatisation served another purpose, too. Fighting a legal battle with the Civil Services Commission (CVC), charged with Government employees’ recruitment, transfers and pay-related issues, the administration found in privatisation a route to side-step the constitutional entity. The latter, as may be recalled, had challenged the Finance Ministry’s unilateral decision to effect a 20-per cent interim salary-cut as part of the austerity measures, both officially and legally. Last week, the High Court upheld a civil court’s order, which ruled that the CVC was the ultimate authority on service conditions of Government employees. Both the Government and the CVC have since announced their intention to work together on the frozen pay-scales. They have also been working together on the voluntary retirement scheme that corporatisation had empowered the Government to effect without involving the CVC. For the record, the CVC too has said that it had no problem with any programme at retraining redundant employees and financing them to undertake private income-generating initiatives on their own.

A sound economic policy otherwise, President Nasheed’s initiatives are aimed at making the country self-sustaining on the one hand, but investor-dependent in reality. Coupled with the spiralling petro-product prices in the global market, over which a small country like Maldives has no control whatsoever, the Nasheed administration sees a combination of structural changes, investment opportunities and austerity measures as the only way for the nation’s economy to sustain, stabilise and then grow. If the Government has specific action plans that aim at attracting massive investments other than in the near-saturated tourism sector, it has not unfolded them, as yet. This would particularly be in relation to the possibility of greater job-creation, that too for the educated local youth, who after completing their Cambridge A-Level education have almost been walking into Government jobs for years now. On the flipside, however, in the tourism sector, the continuance of full repatriation facility for the foreign investors in island-resorts could remain a retrograde step in that direction. But the post-devaluation decision to have all local transactions only in rufiyaa, unlike in the past, is bound to play a supportive role, again only after a time. In the interim at the very least, the eternal shortage of dollars with local banks has always been a problem, more so now as close to 100,000 expatriate workers in a local population of close to 400,000 see/foresee restrictions in repatriation of their hard-earned salaries. The unanticipated spiralling of non-banking dollar rate along with the managed float has also contributed to the societal disquiet.

Coupled with the earlier 20-per cent pay-cut and the current price increases, the exchange rate floatation, however limited and however managed, could discourage expatriate workers from coming to Maldives to work the resorts and resort-construction, among others. Expatriates also man social services sectors like medical care and teaching in a big way, two areas Maldives can pride itself for the limited reach and success it has been able to achieve over the years. Initially the Government was shy of admitting that it was ‘devaluation’ of the rufiyaa and insisted that it was only a ‘managed float’ of the currency. However, now it admits that it was devaluation after all, with the hope that the managed fall in the value of the rufiyaa would encourage greater exports from the country and help improve foreign exchange reserves position. Considering that Maldives does not have much to export other than tuna, how the devaluation would help other than those resort investors and high-spending resort tourists, who are choice-specific and are not as much driven by exchange considerations. As such, the real benefits of the ‘managed rufiyaa’ too would be known only over a time, as indicated by the Government. It would also be then that individual economic schemes, particularly in terms of monetary policies, would have been tested for the Government to draw its lessons.

To be Contd.

ORF Exclusive:

N Sathiya Moorthy
(The writer is a Senior Research Fellow and

Director, Chennai

Chapter, at )

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