Maldives to stop money printing under IMF deal

Aug 21, 2009 (LBO) - The Indian Ocean tourist paradise of Maldives will stop printing money to finance its budget deficit and cut state sector wages to stabilize its economy, International Monetary Fund has said.

The IMF said it reached a staff level deal for 60 million US dollars (41 million special drawing rights) under a 30-month bailout.

The Maldives rufiyaa peg with the US dollar has come under pressure due to excessive money printing (central bank credit) by the Maldives Monetary Authority (MMA) to bridge the budget deficit.

The IMF said monetary policy would be tightened and "financing from the Maldives Monetary Authority to the central government" or money printing would be halted.

To help prevent money printing, government expenses including civil service salaries would be cut.

A country that wants to keep a peg cannot print money, and the domestic money supply (and interest rates) has to adjust according to the changes in the balance of payments.

Though the Maldives peg to the dollar has broken several times MMA monetary policy had in general been better than countries like Sri Lanka where inflation in general been much higher and balance of payments crises more frequent.

When money is printed domestically, there are 'foreign exchange shortages' and the price in the black or 'kerb market' for dollars goes above the official rate.

"Maldives is facing a difficult economic and fiscal situation," IMF mission chief to the archipelago said in a statement.

"The global economic crisis has hit the Maldives’ key tourism and tourism-related industries hard.

"As a result, the economy is in recession and fiscal revenue has fallen sharply.

"Exacerbated by very large increases in public expenditure, there has been a severe deterioration in the country’s fiscal and external accounts since 2004."

IMF said the government had a strong commitment to fix the budget while the poor, health and education would be protected.

The budget would be brought back on line by "restructuring of wages, allowances, and the government payroll," and cuts in other expenses.

Stopping money printing, which is a type of quantity easing, hardens a dollar peg, making exchange and foreign exchange policy consistent. Pegs break when monetary and exchange rate policy go in opposite directions.