Comment: It’s the economy stupid!

Whether you agree with the politics of it or not, the devaluation was needed. If anything it should have come sooner. The Maldives has been growing its rufiyaa-based economy at break-neck speed. Salary rises across the board, increased government spending and ever increasing infrastructure projects have become the norm over the past decade. By and large this ‘growth’ in the domestic economy has been driven by the public sector (government policy & the civil service) and paid for by printing Maldivian rufiyaa and clever manoeuvres with T-Bills (which the government has used since 2009 to be able conveniently sidestep the charge of printing money). In simple terms: successive governments printed/created money to drive domestic economic growth.

What it didn’t manage to do was increase it’s dollar receipts at the same speed (actually all foreign currency, but I’ll use dollar interchangeably in this article). Yes growth in the tourism industry increased the dollar receipts but nearly not enough to fund the increase of rufiyaa in circulation. The previous government had a spade of one-off dollar incomes by selling resorts, but by neglecting to make sure that these so called developers had the capacity to develop the properties and provide the country with a constant source of dollars, they missed a trick. The consequence: an imbalance in the amount of dollars the country has the capacity of earning and the amount of rufiyaa it is printing/creating and spending. If you increase the supply of rufiyaa without the corresponding increase in dollar receipts, it is inevitable that Maldivian rufiyaa will be worth less. It is simple demand and supply.

So the question is, where to from here? By creating a ceiling at Rf15.42, the government has effectively stopped a steep depreciation in the currency and has minimised the crippling effects of a severe shock to the economy – and it should be praised for that. There is however a cost. This will erode purchasing power in the short term and will hit people’s pockets (albeit tempered by the fact that the dollar was already trading at around Rf 14 in the black market despite the best efforts of the authorities). As always, it is the common ‘Mohanma’ on the street who will bear the highest burden. Prices will inevitably creep up and the inflation will put pressure on wages. Any subsequent wage increases which will lead to further effective devaluations. Let us not sugar coat this – it will be painful.