Business head cautious over president’s cost-cutting plans

Beyond announcing that May 1 would now serve as a public holiday every year in celebration of International Labour Day, the president aso attempted to outline government plans for economic reform.

Speaking yesterday during a function to mark Labour Day, Nasheed unveiled plans to try and reduce costs for “everyday items” by between 10 to 15 percent by removing import duties, which the government estimates account for Rf2.3bn of budgeted state income during 2011.

The president said he believed these costs can be covered by tax reforms; both on the earnings of members of the public with a monthly wage of over Rf30,000 a month and increasing taxable income from the tourism industry.

“The reforms to our financial system involve creating a tax mechanism, like in other civilised societies, instead of depending solely on import duties,” he stated, while also pledging to introduce a minimum wage rate during the year.

Some prominent investment groups in the country, while supporting initiatives to reduce costs that have led to ongoing public protests in the country, say that the addition of a minimum wage and a Goods and Services Tax (GST) on all businesses operating in the country, needed to be gradually implemented to ensure the nation’s fledging economy can cope with any potential changes.

As part of his reforms, the president claimed that the government planned by next month to propose amendments that would remove import duties on basic items as of 2012.

According to Nasheed, these proposals would be backed by other amendments expected to be forwarded to parliament. This includes an increase in the Tourism GST, introduced on January 1 this year, to five percent from the 3.5 percent introductory rate, as well as implementing an entirely new GST of three percent on general trade outside of travel industry services.

“I have no doubt that these reforms will shift the government from its current sources of income to more sustainable income sources,” he claimed.

To try and counter the more pressing concerns of high costs that have allegedly led thousands of, mostly young, people taking to the streets in protest, the president claimed that it was purseuing a number of financial [instruments] to try and cut down on the impacts of higher living costs such as in establishing a minimum wage during 2011.

“This government came to power with hopes, to give a decent and an honourable life for Maldivians,” he said. The president said that the initiative was part of plans to promote employees rights as well as those of employers within the country through the establishment of “stronger labour relations frameworks.”

“Most political leaders are disinclined to restructure monetary systems, change wage limits, and reform tax regimes because they are pressured to consider the needs of few powerful people,” Nasheed claimed. “But I assure you that the leader you [Maldivian people] have elected is not like that.”

In addressing Nasheed’s plans, the Treasurer of The Maldives National Chamber of Commerce and Industry (MNCCI), Ahmed Adheeb Abdul Gafoor, said that he believed further development such as investment was needed to strengthen the Maldivian economy before taking on major reforms – at least in the short-term.

“Introducing these tax reforms and schemes like the minimum wage will be difficult over the next two years. The Maldives is at a disadvantage when it comes to economies of scale as it is,” he said. “What I would like to see is a transitional period rather than introducing these measures straight away.”

Adheeb claimed that with the planned introduction of the additional GST on general trade and corporate tax, the prospect of setting a minimum wage would need to be studied in terms of possible impact, particularly in the private sector.

“We [the private sector] could end up losing some of our competitive edge over other countries. What we need is some breathing space and for these reforms to be bought in gradually,” he said. “We have to build confidence in the economy especially with small and medium businesses. If the minimum wage is going to be introduced it should be set on an economic basis and not for short-term political benefit.”

Adheeb therefore urged the government to consult employers – especially in smaller and medium enterprises – before putting any initiatives like a minimum wage in place, adding that private enterprises had been a key component in the more successful developments of the Maldivian economy.

“The tourism industry here has been developed mainly by the private and not the public sector,” he said.