A Think Tank Amidst The Vast Blue Sea
Posted by Suhas Joshi, Benoit Wiest and Ali Abdul-Raheem
The small island nation of Maldives was absolutely buzzing this July, as it celebrated its 50th year of independence, amid the bright lights, festive decorations, fireworks, parades and processions. The country’s transformation over the past half a century has been tremendous. From an economic backwater the country has become South Asia’s richest economy, with a per-capita income of US$ 8,625 in 2014. Growth has been driven by the Maldives’ now world-renowned tourism industry. Yet the country has experienced its fair share of development challenges: vast income inequalities, a chaotic political transformation, macroeconomic mismanagement, and the threat posed by climate change and rising sea levels, among others.
In his book, Pinto relates stories of emerging market experiences with managing debt and the challenges of fiscal sustainability from the early 1990’s to the mid-2000s. He weaves together these country experiences with theories of development to produce a cautionary tale for developing countries, ipso facto the emerging markets of the future.
The Think Tank Seminar focused attention on Pinto’s discussion of the fiscal space hypothesis. Proponents of this hypothesis argue that fiscal adjustment achieved through cuts in public infrastructure are likely to be suboptimal, resulting in slower growth and a worsening of the debt dynamics. But Pinto argues that the fiscal space hypothesis does not hold for debt intolerant countries. It is imperative in such countries to restore credit worthiness first, even if that requires cutting public infrastructure investment to raise the primary surplus and attain a healthy Government Inter-Temporal Budget Constraint (GIBC). Given that the latest IMF (2015) Debt Sustainability Analysis for the Maldives predicts that on current trends the public debt-to-GDP ratio could climb to 104% by 2034, such predictions naturally raise concerns for the Maldivian authorities. These concerns have been compounded by the substantial rise in interest rates on the domestic treasury bills market during the last few years.
The Seminar debated whether, as a country facing a potentially unsustainable debt dynamic, the Maldives should consider aggressive fiscal consolidation, including cutting infrastructure investment, as Brazil did during 2000-2003, or find some other way to ensure sustainability.
Participants agreed that the emerging market experiences presented in the book, and Pinto’s policy prescriptions, illustrated that orthodox economic theory still holds ground. Nevertheless, as is well known and as Pinto also explains, economic theory needs to have regard for country specific situations. Finding this balance between country specificity and economic theory is a delicate exercise, as is evident in the case of the domestic treasury bills market in Maldives where a very thin market determines outcomes. Discussants raised the question whether a country like Maldives was at a stage of development where lessons from large emerging markets applied fully, and whether the Pinto’s policy prescriptions based on emerging market experiences could be embraced fully. One discussant summarized this debate aptly with a quote from Tolstoy “Happy families are all alike, unhappy families are unhappy in their own way”.
Dr. Ashni Singh next shared the growth story of Guyana and his personal experiences as the former Minister of Finance. He began his talk by highlighting the many similarities between Maldives and Guyana. These similarities include a common colonial heritage, a location on the door step of big emerging markets (Brazil and India), together with similarity in geographical area, population size and the size of the economies. The two countries also share similar challenges in development: the dispersed nature of their populations, the concentration of population into a single urban center, and reliance on a limited number of industries for growth. He echoed many of the themes of Pinto’s book, including the need to ensure government debt sustainability. Dr. Ashni touched on Guyana’s experiences with unsustainable debt, with peak debt-to-GDP ratios of over 700% at one stage. He discussed the policies pursued by Guyana to bring the country back on a sustainable debt trajectory, which required reducing the debt-to-GDP ratio to 30%. Achieving debt sustainability and regaining creditworthiness had necessitated hard measures to boost revenues, introduce new tax measures and rationalize government expenditure, including infrastructure investment.
Yet, the reforms in Guyana called for a delicate balancing act between the demands from the constituencies and maintaining a credible GIBC. Dr. Singh noted that in addition to managing debt, structural reforms were also required, aimed at diversifying the drivers of growth, raising the quality of labor and reducing poverty. In conclusion, he emphasized that through his various engagements with the International Financial Institutions (IFIs) during his tenure as the Minister of Finance, he had tried to bring to the table the unique perspective of small states. He noted that a recent positive development on this front was the release of the “Staff Guidance Note on the Fund’s Engagement with Small Developing States” by the IMF.
The Think Tank Series is an excellent initiative which could contribute to deeper thinking at the policy level for Maldives. The inaugural lecture got off to a good start and gained from the presence of an FAD TA mission which was in country at the same time and contributed to the discussions.
IMF. (2015). Staff Report for the 2014 Article IV Consultation—Debt Sustainability Analysis. Washington D.C.: International Monetary Fund.
Pinto, Brian. (2014). How Does My Country Grow ? Economic Advice Through Story-Telling. Oxford: Oxford University Press.
 Suhas Joshi is the IMF’s Regional PFM Advisor for South-East Asia and the Pacific; Benoit Weist is a Technical Assistance Advisor in FAD’s PFM 1 Division; Ali Abdul-Raheem is an Assistant Director at the Ministry of Finance and Treasury of Maldives.
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