The storm ahead

The economic woes of the country – a looming budget crisis, an impending tourism downturn, dwindling reserves, a seemingly overdue devaluation, – doesn’t deter our president. He has instead set ambitions targets for his country - building up a reserve of USD 800 million and keeping a market determined rufiyaa exchange rate at Rf 10 at the end of his five year term. Meanwhile the President’s office has announced plans to open more banks in the Maldives as a means to remedy the dollar crisis. The President himself believes “the registration of 3 new banks will immediately relieve the dollar crisis”.

The leading economists in the country, on the other hand, appear be towing a totally different line. Central Bank Governor Fazeel Najeeb claims to have “heard from media” that this country has a hard currency crisis; thinks devaluation isn’t going to help the economy; and is on a quest to find out what happens to “70 percent of the hard currency inflows into the country”, – about which he is absolutely clueless. And he goes on to offer his good, albeit impractical, counsel to the Government to “reduce expenditure and increase revenue”.

Abdulla Yamin, Gayoom’s trade minister for almost 15 years, takes the opportunity to lambast President Nasheed’s government for its alleged “lack of an economic plan” and talks of something Miadhu reports as President’s “ignorance of economical matters”. Ex-Governor of MMA and former Finance Minister Jihad doesn’t appear to be too enthusiastic to offer his wisdom. Instead, he seizes a media opportunity to talk about his impeccable track record on T-bills and abstinence from MMA borrowing .

Amidst all this hodge-podge of wisdom and economic doctrines from the pundits, I am confused. So, utterly baffled. I’m sure I’m not alone. Thousands of other average men and women must be trying to make sense out of this.

President’s rather ambitious plan on reserves and exchange rate might not be all that outlandish. But I, as an average Maldivian, is yet to find any clue as to how the president hopes to achieve this. What I know for sure, though, is that if the president doesn’t have a solid plan to do this, it would be rather foolhardy of him to make a pledge as audacious as this. The only strategy he has talked about so far - licensing 3 new banks - doesn’t seem to be all that promising. Every Ali, Ibrahim and Ahmed in this country is well aware of the two necessary, albeit not sufficient, conditions that could help alleviate the pressure on the rufiyaa - either the greenback will have to fall substantially in the international market or large inflow of hard currency will have to come into our reserves.

The possibility of a sudden fall in the greenback, in spite of the grim US economic outlook, seems very remote. Why? Contrary to popular belief G-8 is intervening, for geopolitical reasons, to set dollar values. Why are they doing this? Firstly, a large number of them have large outstanding exposures to dollar related assets. Secondly, at a time when economies are going moribund one after the other, higher oil prices are the last thing they would want to see. As oil is priced by OPEC in dollars, letting the dollar appreciate makes oil cheaper. Despite the unprecedented supply cuts by OPEC, oil is still hovering around $ 40. So, the chances of a sustained decline in the value of greenback in the international market, adequate to relieve the pressure on rufiyaa, are virtually nonexistent.

With economies literally going belly-up throughout the world, the second eventuality i.e. realizing a large inflow of hard currency looks equally grim. The USD 300million that the president confirmed to the media as had been received from India earlier, is yet to physically flow into the treasury. And even if it eventually does, it’s not going to solve our problem. If we continue with our current policy of pumping in our meager stock of hard currency, to maintain a grossly overvalued value of rufiyaa, the reserves will drain out in no time.

Governor Najeeb, of course, is right about the 12.85 dollar peg serving us well in the past. But what he didn’t say was why the peg was so effective. That was because the dollar was literally on the ventilator for almost five years. And, what saved us last year was nothing but the unprecedented advance lease rentals Government collected from the resort leases which increased our reserves to $300million – this had little do with either Governor Jihad’s ingenuity or the peg working miracles for us while we slept. So, the big question is what now? Are we going to wait and hope our good old ‘peg’ will work miracles for us again while the country runs out of funds to import even the very basic staple food?

The answer to this question is indescribably painful - not just for the politicians but more so for the common man. But we can’t go on draping a grim reality with complex economic jargon. So, let’s face the naked truth: rufiyaa is grossly overvalued. It will take nothing short of a miracle to save rufiyaa. A devaluation looks inevitable now. The mother of all storms is building up right ahead. So, let’s just brace ourselves for the tough times ahead. It’s going to be painful. Very painful, indeed.