Dollar shortage

The Maldives has recently been faced with an acute dollar shortage. There are people queuing near Bank of Maldives the largest bank in the country for hours.It is argued that this is due to the higher supply of Rufiyya in the market. So that the dollar demand is higher than the supply of dollar being held by the central bank.This leads to the domestic banks to come knocking on the doors of the central bank.However even the central bank is not able to supply the dollar to meet the demand.This problem can be solved by increasing the foreign reserves of the country. It is very difficult to do so because of the depleting foreign reserves in the country.Recently in a press conference the Maldives Monetary Authority announced that the net foreign reserve is US$ 67 million. Which is not even enough to cover the imports of three months.Another way to increase the foreign reserves is to obtain loans and aid from abroad.However due to the international recession it is very difficult task to obtain funding from other countries.The only option left for the government is to cut spending until we come out of this recession. The main sector we earn hard foreign currency is from tourism and fisheries. So if we are to increase investments in these two sectors we can increase the foreign currency which flows into the country. Some businessman have argued that we need to implement some controls on capital outflows. This however can be detrimental for an open economy like Maldives which relies heavily on international trade. If we are to introduce capital controls foreign investors will think twice before coming to Maldives.Sometimes if the government intervene it can have the effect of worsening the problem.According to many economists minimal intervention by the government is necessary for economic growth.One of the campaign promise of President Mohamed Nasheed was to raise USD300 million from abroad.This has not been realized so the government has to find other ways to raise this money.The government has been able to raise USD100 million from India which is a good start. Recently the government has an agreement with the Indian government to open a credit facility. This measure will alleviate the dollar shortage to some extent.Recently Bank of Maldives has also reduced the daily amount of cash taken from its POS systems linked to foreign banks from US$3000 to US$300 for Visa Debit cards. These measures are likely to reduce the problems of dollar shortage, but to bring a long term solution the government has to increase the foreign reserves of the country and attract grants and foreign direct investment into the country.

Economic Development

There are considerable challenges to the development of the Maldives. The main issue is the disparity which exists between the outer atolls and Male’. In the atolls there is a lack of infrastructure, education and health care services. As a consequence the economic development is hindered. This has resulted in mass migration to the capital. It has lead to congestion in the capital and difficulty in providing housing. In order to reduce congestion and provide housing the government has embarked on a project to build flats and sell land in the reclaimed island Hulhumale. However the project has been difficult to implement due to unavailability of finance for the public company Hulhumale Development Corporation.
The incomes are also low in the atolls compared with Male’ due to fishing being the main economic activity in most of the islands. There are many tourist resorts, however they are not all distributed evenly. In order to ensure that there is a more equitable distribution of income the government has created a public company Maldives Tourism Development Corporation. This company has also not been very effective in building resorts in the atolls. The leasing of islands for developing of tourist resorts involves a high advance rent and this is also one of factors which discourage firms. As, there is no transport system in the atolls, the costs are high for firms. This can be achieved through building a regional airport in every atoll and having a regular inter-atoll ferry system.
One of the key aspects of development is to increase the standard of living and achieve sustainable growth. In the outer atolls access to health services, education, in particular secondary and higher education, safe water and sanitation is a problem, especially for some of the more remote atolls. In the Maldives absolute poverty and severe malnutrition do not exist. However, there are about 22 percent of the populations estimated to live below the income poverty line of Rf 10 per person day (US$0.85). In Male’, the incidence of poverty for both income poverty lines is half of what is found in the outer atolls. The main poverty problem is caused by the disparity in living conditions between people living in the capital and those living in remote atolls. Also, the development of the Maldives has been impeded by a critical skills shortage. The country has to rely on the services of a large number of expatriates, which takes a heavy toll on the limited foreign currency available to the Maldives. Addressing this critical skills shortage is essential for the sustainable development of the Maldives economy. The economy is also vulnerable to external shocks because of heavy dependence on tourism and fisheries sector. This requires diversification of the economy and developing new sectors. Potential sectors which can be developed are Port and Logistics Services, Information and Communication Technology, and Offshore Banking and Financial Centers.