ECONOMYNEXT – An International Monetary Fund mission has urged Maldives to cut spending, better direct subsidies to manage the deficit for debt sustainability and tighten monetary policy to prevent a fall of the currency.
“In addition to the revenue mobilization measures enacted by the government, there is the need for more urgent and stronger fiscal consolidation,” an IMF mission said after visiting the tourist paradise.
“Holistic expenditure rationalization is necessary to restrain excessive spending, while improving spending efficiency and protecting priority social spending.”
The IMF said “is navigating a pivotal moment to urgently restore macroeconomic stability and debt sustainability with Maldives has started a “homegrown fiscal reform agenda.”
Maldives has announced a 10 percent public sector wage cut including state enterprises according to media reports as well as hikes in taxes and import duties.
Questions have been raised whether a steep hike in tobacco taxes may have led to reduced revenues due to the commencement of smuggling.
The IMF mission said under the measures taken was the discontinuation of exceptional use of Maldives Monetary Authority (MMA) advances,” which is like an overdraft of printed rufiyaa.
If the budget deficit is high, interest rates have to go up and private investments have to be curbed to finance the government from available domestic savings.
Any attempt to suppress interest rates through open market operations (monetary policy), or resorting to direct sales of Treasuries to the Maldives Monetary Authority will lead to further forex shortages and a collapse of the peg with attendant policy and social risks, analysts say.
The MMA acquired large volumes of Treasury bonds during a pandemic and lost foreign reserves later as economic activity picked up after the pandemic.
Any cuts in the deficit would reduce the need to borrow and pushing up rates and also the total debt.
“Subsidy reforms, which phase out untargeted subsidies and roll out well-targeted direct income transfers to vulnerable households, should be introduced as envisaged in the 2025 Budget,” the IMF statement said.
“The reprioritization and rationalization of public sector investment program (PSIP) is critically necessary to address immediate fiscal challenges. Building on recent progress, the reforms of state-owned enterprises (SOEs) and Aasandha-healthcare reforms should be continued.
“Strengthening the public financial framework is critical to enhance fiscal policy credibility and effectiveness. A comprehensive debt strategy would also help restore debt sustainability and improve debt management.”
Unlike the rest of South Asia, the Maldives for many years had no aggressive monetary policy allowing the country to grow steadily and achieve the highest per capita income and foreign investment into hotels in particular with a fixed exchange rate peg that rarely broke.
“Prudent foreign exchange reserve management, alongside the necessary macroeconomic adjustments that include substantial and immediate fiscal adjustments as well as stricter monetary and macroprudential policies to address economic imbalances effectively, would help safeguard the exchange rate peg,” the IMF statement said.
“A coordinated tightening of the policy mix would effectively help address macroeconomic vulnerabilities.
“The MMA’s commitment to resume active monetary operations is a welcome step in this regard. Should inflationary or external pressures intensify, the MMA should stand ready to further tighten monetary policy.”
The IMF did not specify what the ‘active monetary operations’ are. If monetary operations are deflationary (repo or outright sales of MMA held securities to banks and the public) the exchange rate would be strong and reserves would go up.
If monetary operations are inflationary (reverse repo) and to operate a fixed interest rate, the peg would collapse.
The Maldives had also allowed more dollarization, which would also help reduce the ability of ‘monetary policy’ to hurt the country and reduce external risks, analysts say.
RELATED Maldives to dollarize tax revenues pensions amid forex shortages from excess rufiyaa
Maldives was a indirect tax based nation without open market operations (2009) and high growth. Deficits started to widen with Chinese financed projects and easy money after US quantity easing.
(Colombo/Feb19/2025)
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