Dominance of Tourism in Maldivian Economy

The Maldives is best known to the world for its beaches and underwater beauty. So it is no surprise that tourism is dominating the Maldivian economy. But dominance of the tourism industry in the Maldivian economy is alarming.

It constitutes around one third of the country’s GDP for the past two decades. Income from tourism (travel receipts) accounted for 91 percent of the country’s services income in the balance of payments. Income from tourism (e.g.: - bed tax) accounted for almost a quarter of government revenue in 2005.

Furthermore, tourism is an industry which is very much dependent on global stability. September 11 attacks and December 26th Tsunami affected the economy very badly.

The September 11 attacks affected the global economy and tourism of many countries. The Maldives economic growth in 2001 was positive but it was far less than the progress of previous years. The contribution of tourism to GDP in 2001 was nil and GDP growth was witnessed only on account of the progress in other minor industries.

The tsunami of December 2004 affected the Maldivian economy so badly that the country’s GDP declined by more than 5 percent in 2005. Maldives Monetary Authority indicates that the main reasons for a weak macroeconomic situation in 2005 is the tsunami.

The dependence of the economy on tourism is scary in terms of lost output when there is a global economic shock. We need to diversify our economy by expanding potential industries for a stable economy.

References
Quarterly Economic Bulletin June 2006, Maldives monetary Authority
Monthly Statistics November 2006, Maldives Monetary Authority

Central Bank Independence

As the Maldivian new constitution is being drafted in the parliament, numerous economic and business issues have been raised in the parliament. One of these issues is the rejection of an independent central bank in the Maldives.

Central bank independence is a widely approved issue among many economists. The central bank is given legal independence to peruse some specified goals drawn by the parliament through an act. Some independent central banks perform multiple roles such as keeping a stable currency, maintaining (or working towards) full employment and achieving economic prosperity and welfare. Independent central banks do not have independence in setting their own goals but they have independence in using various measures to achieve those goals. In other words, an independent central bank would have “instrument independence”1/.

Why should a country have an independent central bank?

Firstly, to escape from short-termism of politicians. Politicians usually seek public support in any way they can, sometimes using economic measures. Higher growth rates are attractive but might be harmful in the long run. Excessive growth rates would expand the economy beyond its long run economic potential and this eventually would lead to higher inflation. This might not be the case for the Maldives as no one would be able to determine the definite long run potential of the economy. But deficit budgets and high growth rates witnessed in recent years could be depicting a picture similar to this scenario. We need to learn that what is attractive for short term might not be the best for long term.

Secondly, central banks which are departments of governments use power of the central bank to finance budget deficits. In simple terms, a government might print money and increase money supply to finance budget deficits. This kind of act would have adverse effects on the economy by increasing inflation as a result of higher money supply. More than 40% of the revenue to the Maldivian budget of 2007 comes from foreign donors and loans. I am not sure how these become revenue but my question is what if the government is not able to get all these aid and loans fully. It is difficult to get even already pledged funds and hence it is unlikely for the government to meet the expenditure using mentioned loans and aid mentioned in the budget. So how is the Maldivian government going to meet its expenditure? An independent central bank compels a government to meet its expenditure by more legitimate means such as taxing or borrowing from banks etc.

There is also empirical evidence that an independent central bank would lead to more stable prices as policy economic decisions could be made independent of political motivations.

An economy would be best managed by an independent central bank. An independent central bank would also increase the accountability of the bank. When a central bank is regulated by an act, it has to answer for actions. For example, in UK if the inflation creeps outside the inflation target, the exchequer has to explain the reasons to the parliament. An independent central bank provides the opportunity to find the best policy actions for various problems.

There are also arguments against central bank independence such as an independent central bank does not bring out same outcomes for developed and developing countries. It is more applicable to developed countries rather than developing countries.

But it will be a shame if the purpose behind the move by the parliament is based on political motivations. I believe that the Maldives should have an independent central bank to increase accountability and keep the Maldivian central bank ahead, ready for future changes. In a foreseeable future the Maldives would witness the need for a wider usage of monetary policy and other instruments to manage the economy as the business and financial sector is growing rapidly in the country.

References
1/ Fraser, B.W. (1994), Reserve Bank Bulletin December 1994, Australia

Extending resort lease period - sensible?

Finance Minister has recently unveiled a plan to amend the law to extend resort lease periods from 25 years to 50. A perfect plan it seems, for all those seeking to invest in the sector. However, one question looms around. Is this truly designed to attract capital investment into the tourism sector or is it mere dirty play to keep away the new entrants from the market?

I don’t have a clear answer to this question but I suppose, I do have reasonable grounds to go for the latter.

We all know that such a move would deter competition in the industry and disrupt the working of market forces. The forces which many economists like Adam Smith and Milton Friedman believe are vital for efficient functioning of the economy. So why such a compromise? Isn’t 25 years pretty long enough to cover the investment and make a decent return? I think so. I think the Maldivian hen which “lays golden eggs” do not take 50 years to push one. If so please consider rejecting this popular quotation.

Come on! If the government wants to attract investors into the sector, why don’t they pursue other policies which will lead to the same track? Why is that the advance payment of the lease soaring up? Isn’t it a hurdle to the investors? Why are the bid forms getting so expensive? Why don’t we have much supporting infrastructure up to now? Don’t we need more airports, harbours, etc to support the expansion of the industry? Do we have a properly laid out system to train staff? Does the government give a damn thought about the fact that more than 40% of the workforce in the sector is comprised of expatriates? How about the financing options available for the investors? Did they ever think of an investment bank or an alternative? Believe me, the only door available for public fundraising (MTDC) is on its way to be used as a vehicle to divert profits to big players. It only evades public eye and achieves the wealthy men’s objectives through much easier means.

I believe the above factors boldly stand for something. Something firm and vivid. Yes, we have a shield built around the tourism sector to shun away new entrants, and I believe the government’s attempt to extend the lease period serves the same purpose. After all, there is no complexity in understanding this concept. Self interest is where we start from. Look into the heads that enact these laws. Quite a large number of people involved are wealthy partners in resort business or has got strong connections with those in business. Their vote to pass the legislation, would much, be motivated by their self interest rather than the interest of the general community that they represent.

Now, what would happen to the long term lease that the resort owners have to pay? Currently, when the lease term is over, investors compete each other to get their hands on the investment. The biggest tool used is the bidding price. This would no longer be the case in the recommended system. Finance Minister’s plan, as briefed in parliament session, is to introduce a clause which compulsorily requires the bidders to accept periodic changes in lease amount adopted by government. I would say this is a pretty lousy plan which would not have the strength of the free market forces. Firstly, the Maldivian government’s motivation to raise the additional revenue in this course would be much lower than its motivation to get votes through wealthy business men. Secondly, this would change the scenario of the lobbying process. Currently it is a battle between the government and individual resort owners. Each resort owner lobbies to lower his resort lease payment. However, if the lease period is extended, all big players with strong foothold of the market would join together to minimize the periodic increase in lease payment. Since there would be few players in the market, the easier it would be to collude. More importantly the government would not have a proper bench mark to assess the lease amount.

All benefits from the proposed change would flow to the existing investors. Nothing for the prospective investors. Ordinary people ……. higher taxes, of course!

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Picture: Baros Resort

http://www.southtravels.com/asia/maldives/barosholiday/gifs/baros-resort.jpg
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