Time for economic reforms

I have been following the Subprime Mortgage crisis from its very beginning in August 2007, partly because I love economics and partly because I’m doing a banking and international finance course. I watched what initially started as a mortgage crisis in USA turn into a financial crisis bringing down many well renowned Investment banks like Bear Stern and Laymen Brothers, before evolving into a full fledged economic crisis, threatening economies globally. I realized the gravity of the crisis by then and tried to bring the topic into the Maldivian blog sphere, but we were too deeply involved in politics. It seemed that nothing was more important than the political chaos in our country. So the efforts made by some few bloggers to bring the spot light on to the financial crisis and our economy went without a fruit.

Today, with the severe dollar shortage in our economy, topics concerning our economy have gained some leverage in Maldivian public forums. More articles conveying the global economic conditions are appearing on our daily newspapers and some local journalists have joined some few bloggers in reflecting upon these events with regards to our local economy.

For too long, we have been taking our economy for granted. Our Rufiyaa was pegged with US dollar under a fixed exchange rate regime and it has been serving us well as often acknowledged by international institutions like IMF. But we have forgotten the reasons why the peg with dollar was serving us well. So even when our economy significantly went out of alignment with the US economy still we are continuing to keep our faith in this exchange rate regime which served us so well in the past.

We have been building our economy on a highly concentrated industrial base, disregarding the fact that it can completely sabotage our economy in case of an external shock. We were too passionate in developing the tourism sector while other strategic industries like farming and fishing went down gradually. We could have found many other economically viable ways of using our uninhabited islands rather than building resorts on all of them, if we really gave a damn about it.

Even when the government is in the hands of a relatively conservative party, still there seems to be a very limited chance of seeing some Government Business Enterprises being privatised completely. Without more listed companies our Infant Stock market and securities trading will be heading nowhere.

We have seen major political reforms in our nation. So I think it’s time for us now, to think about our economy and bring some fundamental economic reforms.

EVALUATING THE CANDIDATES FOR MAJLIS ELECTION

Even though the date of the general election is yet to be determined, we are seeing many candidates announcing their interest to run in the election and actively campaigning in their respective constituencies. Some wealthy business entrepreneurs had long been preparing for the big showdown by sponsoring various social activities – especially sporting events organized by youths – and by being surprisingly generous in their philanthropic activities. Now it’s time for us – voters – to evaluate the candidates and decide who the most suitable candidate is.

From what I have observed so far, still only few people seriously think about what the elected representatives do in the majlis when they decide the candidate to vote for. Many sees Majlis membership as a reward to the wealthy people who had used their fat wallets to help them in times of need and to those who financially backed them in sporting events and other similar social activities. In my view such people’s thinking is not wrong to some extent as we have to acknowledge and appreciate such actions of wealthy people. However I think we are going too far when we think such actions of them alone deserves them our vote to be majlis members.

If these people are helping the society just out of their love and affection to the society or out of their commitment to the development of the islands, then they will keep on helping us even if they are not elected to the majlis. Under such circumstances they don’t need to be rewarded by giving the chance to represent us in the majlis.

So while agreeing that the material support from a candidate in the past to the society and to the development of the island should be considered while deciding who is the best candidate, I think we should not take that as the sole criteria in evaluating our candidates. First of all we should think about the nature of the work they do in the majlis and see which candidate is more capable of undertaking works of that nature. We are not trying to elect welfare officers. We are trying to elect our representatives to one of the most respectable institutions in our nation and to an important pillar in a true democracy.

Thoughts on raising resort lease period

The decision of the government to raise the lease period of existing resort leases to 50 years followed concerns and disagreements in some corners of the public and political sphere. One can find reasonable grounds for their concerns too. However this is not to say that increasing the maximum lease period of the resorts is not a good decision.

Of course, we need to increase the maximum lease period. If investors can get land elsewhere on 50 or 100 year leases, we will soon fall behind in attracting investors or large hotel chains into our country. Even if one believes it’s not important to have large hotel chains operating in our country, raising the lease limit is important for our local investors too. They need to have the same competitive edges enjoyed by their foreign counterparts. Otherwise it will be difficult to maintain the same level service quality and profitability as enjoyed by the investors in our neighboring countries or in rival markets.

So one can see the importance of raising the maximum lease period. In fact my concern is not about raising the period, but my concern is “how” they are going to do it.

The government is going to simply extend the lease period for the existing resort owners in return for a “stamp revenue”. As indicated by the treasurer government will receive a stamp revenue of more than Rf1 billion for extending the period of existing leases. What we have to remember here is that the so called “stamp revenue” is going to be a one off revenue for the government. The government budget is desperately in the need of more sustainable sources of income. So would it not be more appropriate for the government to increase the lease periods in a way that will guarantee a regular source of increased revenue in the form of higher bed rents and other taxes imposed on tourism sector?

My other question is that, wouldn’t it be unfair for the potential investors, if the government extends the lease periods for the existing owners without any bidding process? There might be investors who didn’t try to get those islands simply because the lease period was too short when the islands were initially leased. So these investors may now be interested in getting those islands for a 50 year period. Moreover bidding and bid evaluation process was not so transparent in the past. There are reasons to claim that most of those islands were not awarded to the existing resort owners through an independent bid evaluation process. So in my opinion, it’s very unfair to simply extend the resort lease periods for the existing resort owners.

Based on these factors, the only sensible solution for this is to open the islands for bids again, once the existing leases are expired. The islands can be re-leased for an extended period of time through a proper bidding process. The process should be independent and transparent. I’m sure that the new bidders will bid much higher rates of rent for the government than the existing lease holders. In this way the government can ensure a stable and a regular source of income instead of a one-off stamp revenue. This will also be a much fair option if not the most fair option for the potential investors and the general public too.

RECLAIMING THE LOST DECADES

Yesterday and last night, following the death of the former president Ibrahim Nasir, a number of reports appeared on Maldivian media. I have learnt a lot of new information and historical facts that I wasn’t aware of before. Black and white photos and videos from Nasir’s period were shown on TVM. Historical researchers were interviewed about Nasir’s years of ruling and his achievements. All those things made me wonder why they couldn’t do it before.

Why couldn’t TVM show those reports and videos before or during last 3 decades that has passed after Nasir’s era. Now only they are acknowledging that Nasir was the real founder of the modern Maldives. Three decades has passed and many younger generations of Maldivians has finished their official education without even learning a single fact mentioned on those reports or by the analysts who were interviewed yesterday. It’s my belief that two or three decades in our history were purposely ignored by the government that succeeded after Nasir.

According to the limited literature and information available on the public domain regarding Ibrahim Nasir and his years or ruling, one can truly understand that he laid the foundation of the modern Maldives. He was the head of the government when we gained independence in 1965. He undertook the construction of Hulhule’ airport, under those challenging circumstances. We had the number one shipping line in Asia when he was the president. As per my knowledge atoll councils and atoll chiefs were elected democratically during a particular period in his years as a president. Though I can’t mention all those things, the list goes so long and indicates that he initiated most of the things or developments we see today including tourism. He laid the foundation and started those things even though they were further developed by the government that came after him.

So we should give credit to him for these good things he had done for us. We should learn about this period in our history. It’s not when he is dead we have to talk about it. We should have been learning about these things in our social studies when we were in grade 6 and 7.

May Allah bless his soul with eternal paradise and grant patience and strength to his family.

ARE WE IMMUNE FROM THE CURRENT FINANCIAL CRISIS?

For the past few months, international media has been following the developments in the global financial market and their effects on the “credit crunch” or the current financial crisis. However it’s only very recently that our media got aware of the crisis and started paying attention on the twists of the crisis. In the past week and in this week I had seen some reports on the crisis and its effects on our country, published on some news papers. They even went on quoting some prominent business people in Maldives, about what they think of the crisis and its effects on our country. Cabinet has also discussed about the issue in its last sitting.

Background of the crisis:

According to some financial analysts, the build up to the crisis rooted back to late 90s and early 2000s. The risky mortgages (usually referred as subprime mortgages in financial contexts) that made by US lenders in late 90s and mostly in early 2000s, and the subsequent securitization of those loans led to the crisis.

For various reasons, lenders were encouraged to make high volume of subprime or risky loans to individuals without sound proofs of credit worthiness. These individuals were only delighted to take up those offers with their unstable employment and income flows. Unfortunately the economic conditions in US got worsened, and through mid-2004 to mid-2006, US Federal Reserve increased the interest rate repeatedly causing those borrowers to default on their loan repayments.

When those borrowers defaulted on their loans, it wasn’t only the initial lenders who got in trouble. Through securitization, the initial lenders transferred those loans to other investors in the first place. Investment banks, hedge funds, wealthy individuals etc invested heavily in those loans (actually they invested in asset backed securities issued through securitization process but the return on those securities depend on the repayment of the loans). Some financial institutions invested a relatively large proportion of their funds in those securities. So the default of the borrowers put those investors on the verge of collapse.

Ultimately in August 2007, the crisis broke up with the collapse of a major US investment bank. From then we have been seeing the crisis continuing with surprising twists. In recent weeks it got worse than before and resulted many large financial institutions and hedge funds being bankrupt in various countries. Merely a financial crisis at the start has turned into a real economic crisis posing concerns over economic growth, employment etc. It’s for this reason we can’t shut our eyes on the crisis saying it’s a problem to be dealt with developed countries and international community.

Implications of the crisis for our country:

Unlike the developed countries, financial institutions in developing countries don’t seem to have a significant exposure to those “bad” securities. Hence our local bank and overseas banks in Maldives are safe to some extent. However the crisis has made it really difficult to get credit or funds in the international financial markets. So the banks in our country may suffer because of the limited or no funding from overseas to finance their lending activities. Apart from this I can’t see a direct impact of the crisis on our banks.

However we may have some serious indirect consequences which can send our economy into a slump. As I said before the crisis has taken a new twist causing real danger for economic growth and jobs in developed countries. Any slowdown or problems in the economies of our major tourist markets will be a problem for us. Europe and Japan being our major tourist markets can’t continue sending tourists to our country if their economies keep on deteriorating. So the current financial crisis can have potential negative effects on our tourism sector. Any Maldivian can imagine what will happen if the tourism sector performs badly or its income goes down.

Secondly any negative impact on our main donors like Japan will reduce the amount of foreign aids we get in the future. More than those foreign aids, the foreign direct investments (FDI flows) into our country may get reduced. This will be very harmful to our economy, especially in a time when we are badly in need of those FDI flows to undertake large projects which can potentially create many jobs. These FDIs are also important to maintain our foreign exchange reserves.

These are the main implications I can think of now, but as the crisis continues it may pose new threats and concerns to our economy. I think it’s high time that the government and tourism sector start thinking about this and plan how to tackle the problems. And this again highlights the danger of not having a diversified industrial base in our economy and depending too heavily on tourism sector.