ECONOMYNEXT – The International Monetary Fund has approved a 28.9 million US dollar Rapid Credit Facility (RCF) for the Indian Ocean islands of Maldives with the country’s tourism sector badly hit by Coronavirus.
“The COVID-19 pandemic is having a pronounced negative impact on the Maldivian economy and is expected to cause a significant growth contraction,” Tao Zhang, Deputy Managing Director and Chair of the IMF said in a statement.
“Containment measures are adversely affecting domestic economic activity.
“The temporary stop of tourist arrivals, the main source of foreign earnings, has severely weakened the fiscal and external positions, giving rise to large financing gaps.”
“The IMF’s financial assistance will cover part of the financing gap, supporting fiscal rebalancing and the implementation of the anti-crisis plan. Additional support from the international community will be needed.”
The IMF said the country has acted fast to mitigate the impact of Coronavirus by boosting health spending and taking measures to contain the outbreak.
They have also responded with fiscal and monetary measures to minimize its economic impact, the IMF said.
“The temporary fiscal accommodation is appropriate,” Zhang said. “The authorities will reprioritize and cut capital expenditures, redirecting funds as needed to combat the pandemic and provide temporary and well-targeted support to the most vulnerable households and businesses, while maintaining high standards of transparency and governance.
“The central bank focuses on providing targeted liquidity support to banks and avoiding a credit freeze, through temporary and targeted financial macroprudential easing.”
While providing any real demand for cash or filling a liquidity shortage is appropriate countries that over-provide cash or tries to target a call money rate will end up in currency problems that may result in forex shortages and foreign debt default.
Sri Lanka’s currency is already under pressure due to liquidity injections and call money rate targeting.
Singapore, a country that does not print money and follows classical economic principles of the country’s first finance minister Goh Keng Swee, who went to the London School of Economics where Friederich von Hayek taught.
Any extra spending that cannot be funded through taxes will be funded by forex reserves, Goh had said.
Singapore will use its foreign reserves directly instead of printing money and altering reserve money, triggering a currency panic, scaring foreign investors, losing the ability of even private firms and banks to raise debt abroad.
“We have substantial overseas reserves which can serve this purpose,” Goh had said almost 20 years ago.
“Our economy was and is both small and open. Financing budget deficits through Central Bank credit creation appeared to us as an invitation to disaster.
“There was no effective way of exchange control in an open trading economy like ours to deal with the inevitable balance of payments troubles.”
Singapore President Halimah Yacob approved a 21 billion Singapore dollar draw down from forex reserves on April 09. (Colombo/Apr22/2020)