Maldives stops money printing; budgets still need fixing: IMF
The Maldives Monetary Authority (MMA), the archipelago's central bank has stopped printing money which was causing reserve losses, but the country still had to fix its budgets, the International Monetary Fund has said.
The IMF has given 92.5 million US dollars to shore up foreign reserves of the tourist paradise under two facilities. Maldives got 79.5 million US dollars from the IMF's classic bailout facility known as a standby arrangement (SBA).
Another 13.2 million US dollars came from an exogenous shock facility.
The Maldives government started heavy deficit spending after the 2004 tsunami, and later started to fill budget gaps by borrowing the domestic currency rufiyaa or printing money from the MMA.
The unbacked printed money (excess rufiyaa liquidity) causes 'foreign exchange shortages' and ultimately foreign reserve losses when the monetary authority tries to keep a fixed exchange rate peg by selling dollars.
The Maldives rufiyaa is pegged to the US dollar.
"The program aims to rebuild international reserves to prudent levels while preserving the current exchange rate peg to the U.S. dollar," IMF's deputy managing director Takashito Kato said in a statement.
"Monetary policy will support the fiscal adjustment efforts through a tightening of domestic currency liquidity."
IMF said "the monetization of the fiscal deficit" or borrowing from the MMA has been halted, government debt with the monetary authority has been converted to tradable securities, and open market operations have been introduced to absorb liquidity
The International Monetary Fund (IMF) has approved a US$92.5 million bailout package to aid the Maldives during the global economic downturn according to the multinational donor agency.
"The financing is designed to help smooth the country's adjustment to the fallout from the global crisis and support the authorities' strong policy program," the IMF said in a press statement on Friday.
The Maldivian economy is facing severe fiscal and external imbalances, the IMF said, adding that a rapid fiscal expansion began after the 2004 tsunami, including steep wage bill increases.
From mid-2008, the global crisis significantly exacerbated existing imbalances and severely weakened the country's balance of payments position.
"Tourism revenue has been badly affected by the global downturn, reducing fiscal and foreign exchange earnings and driving the economy into recession. Net capital inflows have also fallen sharply, as have goods exports. The loss in fiscal revenues, combined with the continued growth in public expenditures, led to a dramatic increase in the fiscal deficit in 2008-09, much of which has been monetized," it added.