ECONOMYNEXT – Maldives should not print money if they wanted to maintain their rufiyaa peg at 15.4 to the US dollar and try to raise funds from bonds and curtail capital spending, the International Monetary Fund has said as Sri Lanka struggles.
Maldives, which is dependent on tourism revenues was badly hit by Coronavirus and their economy contracted 32 percent in 2020, but is expected to grow by 18.9 percent in 2021.
However with the pandemic, the Central Bank had bought Treasury bills, triggering a parallel exchange rate from the demand created.
IMF’s Executive Directors “cautioned against central bank financing of the government and encouraged developing a comprehensive debt management strategy, coupled with public financial management reforms, to manage the risks from large infrastructure projects and state-owned enterprises.
“Directors agreed that a tighter monetary policy stance may be needed to ensure compatibility with the exchange rate peg, lower external imbalances and build up reserves.”
Sri Lanka has been printing money from around the third quarter of 2014 and has only had stability in the external sector in 2017 and up to around July 2019 in the last 7 years contributing to a sharp rise in market debt and possible sovereign default.
Maldives was a stable country until highly volatile income tax replaced a previous stable bed tax and civil service salaries were raised for vote buying with the demise of Mahathir Mohammed.
He had the benefit of the Maldives Monetary Authority which does not usually print money and has no “modernized ” open market operations to bust the peg and has the strongest currency on an absolute basis in South Asia and the country has the highest per capita income.
IMF usually descends into Mercantilism and encourages ‘competitive’ exchange rates and the attendant high inflation and social unrest for central banks with active open market operations and inflating currencies.
Tourism has started to recover with growth projected at 19 percent in 2021. Inflation is expected to be 1.4 percent and set to increase to 2.3 percent in 2022 with high commodity and food prices.
Washington has been pushing countries to adopt income tax for years and Western agencies have been also pushing GCC countries and targeting tax havens through which large volumes of money were channeled as foreign direct investments.
This week a deal was reached for a 15 percent minimum corporate tax rate as a group journalists, who have been periodically targeting tax havens, released the latest findings.
But now it is trying hard to avoid sovereign default.
In addition to the income tax problem, the Maldives had taken large loans including from China to build infrastructure and also has a 200 million dollar international sovereign bond, which has been re-financed with a Sukuk.
“Nonetheless, fiscal and external positions are projected to remain weak over the medium term, underpinned by capital expenditure plans,” the statement said.
“The Maldives remains at a high risk of external debt distress and a high overall risk of debt distress.
“The total public and publicly guaranteed (PPG) debt-to-GDP ratio increased from 78 percent in 2019 to 146 percent in 2020, reflecting mostly the contraction in nominal GDP, but also an expansion in nominal debt.
“PPG debt is projected at 123 percent of GDP in 2026.” (Colombo/Oct08/2021)