ECONOMYNEXT – The International Monetary Fund has urged Maldives not to print money and to tighten monetary policy further protect its exchange rate peg and stop balance of payments deficits.
The Maldives Monetary Authority uses the exchange rate as external anchor but monetary stability is threatened when it prints money for the government or engages in aggressive open market operations.
“Directors advised that the Maldives Monetary Authority (MMA) advances to the government should be gradually phased out to lower pressures on international reserves and prices,” the IMF said in a statement after annual Article IV consultations.
“MMA should stand ready to further tighten monetary policy should inflationary pressures increase and/or the elevated parallel market premium widen further.”
Though Sri Lanka is advised by the IMF to depreciated the currency to make up for mis-targeting of interest rates,
While the Maldives is allowed to maintain its peg and policy consistent with maintaining the exchange is advised.
“Under the current monetary policy framework, the exchange rate peg with the US dollar is used as the intermediate target to achieve price stability and the liquidity position of the banking system serves as the operational target, in order to maintain the domestic money supply consistent with economic activities,” according to the MMA.
Most of the best performing East Asian export powerhouses operate similar regimes, though any attempt to enforce a policy rate through aggressive open market operations, when the economy recovers is likely to lead to a fall in reserves and pressure on the exchange rate.
Maldives GDP contracted 33.5 percent in 2020 as the Coronavirus pandemic evaporated tourism revenues, but the 15.4 rufiyaa to US dollar peg held.
In 2022 real GDP is expected to grow 37 percent.
As the economy recovered in 2021, Maldives foreign reserves had fallen from 985 million US dollars to 806 million US dollars. In 2022 forex reserves are expected to fall to 695 million dollars.
Attempts to keep interest rates down after selling reserve to maintain the peg by printing money, makes the monetary authority effectively shift to a reserve money targeting framework instead of the exchange rate, further boosting domestic credit and loss of reserves.
Domestic credit growth was 20.8 percent in 2022 according to IMF data, up from 8.8 percent in 2021.
For Sri Lanka when the rupee comes under pressure from domestic credit, the rupee is urged to be depreciated with the exchange rate as the ‘first line of defence’ panicking importers and exporters.
Such ‘first line of defence’ currency collapses in 2018 and 2020 earned Sri Lanka two downgrades on the road to eventual default.
A large section of Sri Lanka’s population is now struggling to feed itself and rice is going abegging as the real value do the rupee and their salaries have fallen.
The Maldives government revenues and grants are expected to improve to 28.9 percent of GDP in 2022 from 26.6- percent in 2021 and to 29.6 percent in 2023.
As expenditure went up the deficit remained at 14.3 percent of GDP. The deficit is expected to fall to 9.9 percent in 2023. Without grants the revenue is expected to fall to 11.4 percent of GDP from 15.4 percent.
Amid the strong economic recovery and the peg, debt to GDP had fallen to 127 percent of GDP from 154 percent.
In sharp contrast, Sri Lanka which has a fully fledged central bank with aggressive open market operations to maintain its policy rate saw its rupee collapse from 200 to 360 to the US dollar.
As other countries recovered from the Coronavirus crises, Sri Lanka’s economy is to contract almost 8.7 percent.
Both the rupee and rufiyaa are derived from the Indian silver (later gold) rupee at 4.70 to the US dollar and 13.6 to the Sterling.
But the IMF warned that the Maldives was still at debt distress.
Since 2009 the MMA had learned how to do open market operation and it also raised civil service salaries amid a popular vote. It also started borrowing from China for infrastructure. (Colombo/Dec21/2022)
