Fiscal Discipline - Ali Hashim's predicament

A finance minister is perhaps the last person to win a popularity contest during a recession. When Alistair Darling proposed his budget it was derided by media as a "fantasy Budget". A writer on the Economist dubbed the budget as “a dishonest piece of pre-election politicking”. Meanwhile, in our small make-believe microcosm of the UK, our finance chief Ali Hashim is faced with a similar predicament. His only consolation is that there are no malicious financial journalists to deride him in his country. The few so-called professional journalists in the country have long given up on any interest to graze in their country’s arid financial landscape - thanks to the greener pastures offered by a highly polarized political landscape.

Ali Hashim’s eye-watering Rf 12.6 billion budget didn’t come as a surprise to me. Big budget numbers have become very much the norm for us. Over the last few years our government has in fact been the biggest spender in the world in relation to the size of the economy. The highest spending governments like that of Cuba, by comparison, have government expenditures at around 80 percent of their GDP.

Is Ali Hashim to be blamed? It appears that he has largely done what he could - trying to trim current and capital expenditures which were largely vestiges of the previous regime. It is the structural problems in the public sector, the disproportionately large civil service, low budget revenues and inadequate tax receipts that engendered the tradition of “fantasy budgets”, in the Maldives. The budget, particularly the revenue projection, as described by G.A Member Jabir, is a “fantasy”. This fantasy, quite ironically is spawned by nothing but the greed and the insatiable demands of powerful political figures in the parliament and government. These are the people that have, for political expediency, shut their eyes to the financial black hole this country is headed to. The Finance Ministers, at least the last three of them, were left with no option but to curry favour to their demands. And much to the amusement of their political masters, each one of these finance ministers soon morphed into someone akin to a Paris-Hilton-inspired wastrel, armed with a credit card.

Another question that begs to be asked is why President Nasheed’s government is unable to break this tradition of “fantasy budgets”? The simple answer to this complicated question is that while most of the powerful figures within the government view any spending cuts as something tantamount to political masochism, the opposition MP’s are crying foul over the budget not “adequately addressing” the concerns of their electorate. Amidst the on-going political bickering and skullduggery ahead of the parliamentary elections, both the Government and opposition MPs seem to be united in humming the tune of spend, baby, spend!

I am no expert in public finance. But I don’t think it takes anything more than commonsense to figure out that if you keep on spending money you don’t have, you are invariably on a path to bankruptcy. Incidentally, a fellow blogger has highlighted some facts and raised interesting questions on the cost of our political reforms. Fiscal restraint and broadening the revenue base remain the only short-run macroeconomic policy variables that are available to Finance Minister Hashim. And given the desperate times, draconian measures are needed to address his Herculean task. A man entrusted with the task to introduce fiscal discipline to a country that has been so much used to there’s-no-tomorrow spending sprees would not be a popular man. The stakes are indeed high for Ali Hashim. The efficacy of his fiscal reforms and his very own survival now hinge on his ability to say no to the pig-headed men and women warming the all too important seats of the government, Majlis and the judiciary. The indications are that Ali Hashim has the nerves to flex his muscles to enforce fiscal discipline. The premature graying, after all, isn’t the only thing that Ali Hashim and Alistair Darling have in common. ;-)

The question of ‘rich pickings’ in the Maldives

Last week the Economist ran an interesting online debate. The question was on whether the time has come to tax the rich more.

Perhaps owing to a somewhat idiosyncratic resentment towards what the Economist terms “undeserving rich”, like many other thousands of followers of this debate, my immediate knee-jerk reaction, given the dire state of economic conditions and public finances throughout the world, was to be inclined towards Professor Piketty’s arguments that was in favour of taxing the rich more. But as the debate progressed, I found my dogmatic conviction waning in no time. And by the end of the debate I was confused, to say the least.

Arguments on income disparity have been one of the most frequently used populist political tools throughout the world. And the Maldives certainly is no exception. During the political upheaval of the last four years, the phenomenon was particularly widespread. On the one hand Gayoom and his supporters espoused arguments attributing the country’s relatively high per capita income to the government’s policies. At the same time they were quick to vehemently brush aside any criticism by the then opposition MDP, on issues such as the high incidence of poverty and skewed income distribution, as an inevitable price the country had to pay for economic growth and entrepreneurial dynamism.

Much of the criticism during this period was buttressed on the findings of the first VPA of 1998 which put a staggering 45 percent of the population below the poverty line (based on a poverty line of Rf 15 per person per day). However, by the second VPA of 2004, the figure was down to 19 percent. The Gini coefficient – a measure of inequality in income distribution expressed as a ratio between 0-1, with lower values indicating more equal distribution – in the meantime, improved from 0.39 to 0.33 in Male and 0.40 to 0.36 in the atolls during the same period. Contrary to popular belief, this makes our Gini coefficient comparable even to developed countries like the UK and the US.

It has been four years since the second VPA was published. Gayoom’s extravagance and the populist backlash catapulted Mohamed Nasheed to the highest office in the country late last year. It is a little too early to say how President Nasheed’s government’s policies are going to shape, over the long term, the stubbornly perverse affairs of the malefactors of the great resort-wealth and the multifaceted dynamics of the question of inequality. However, with stories like that of the alleged failure of the government to safeguard the interests of 23,000 individual shareholders of MTDC rife, the early indications are that establishing dominion over the all-powerful, party-hopping robber barons are easier said than done.

400 percent increase in pay??!!

The biggest economies in the world - US, Japan and Europe are in their first simultaneous recession since World War II. In spite of the trillions of dollars Governments around the world have pumped in to prevent their economies from going belly-up, the challenges seem increasingly intractable.

Perhaps oblivious to what is happening in the outside world, for many in this tiny Indian Ocean state of Maldives, their country seems to be totally insulated from the world’s problems. So insulated are we that even the bearers of the beacon of justice in this country found it a very a propitious and fitting moment to demand a whopping 400 percent increase in their pay. Their willful myopia and make-believe state of opulence seem to be completely draping the grim realities of their economy which is literally on the ventilator. I am clueless as to what fuels these frivolous demands. Ignorance? Greed?

Let me quote a story a good friend of mine told me sometime ago about the state of affairs of our small country. With their bellies full, he says, most of the lions, albeit halfheartedly, were forced to retreat into their dens last year. A few more, still, are on the prowl. The hyenas are now going on a rampage over what is left of the carcass. The vultures, waiting for their turn to scrape the bones of what is left of the little meat on the carcass, are ominously circling in the sky. The men and women wielding the sticks to shoo away the beasts have long become nonchalant and blithely shielded their eyes from the events unfolding in front of them.

When is this madness going to stop? I don’t enjoy crying wolf. But what I know for sure is that somebody’s got to do something to tame these wild animals and perhaps put some sense into the thick skulls of the men and women warming the all too important seats of the government, Majlis and the judiciary, if we are to stay afloat. Finance Minister, sir. Ahem, ahem! ;-)