The Central bank, Maldives Monetary Authority (MMA) has predicted that Maldivian Rufiyaa will lose value, due to monetization by the government in 2023.
Debt monetization or monetary financing is the practice of a government borrowing money from the central bank to finance public spending.
In an advisory letter sent by MMA to the parliament, regarding the budget proposed for 2023, MMA noted that the government will monetize almost MVR 4.4 billion to satisfy the budget.
The parliament had extended the approved Public Bank Account (PBA) overdraw period, on the government’s request, from 2022, until 2023.
MMA argued that overdraw history of the government suggests that the government will make an overdraw of the maximum limits allowed by law; MVR 4.4 billion, next year as both internal and external financing, along with foreign aid prospects get sparse.
MMA noted that while the monetized debt has to be repaid by the government to the state central bank, MVR 2.5 billion of the owed money has been transferred into a bond agreement, terms to repay it in 50 years with minimal interest. MMA asserted that such agreements cannot be sustainable.
MMA stated that printing money or borrowing internally, each time the government has to settle state budgets will lead to excess money circulation within the economy, causing a greater need for foreign currencies and ultimately resulting in the devaluation of Maldivian Rufiyaa.
Highlighting MMA’s Open Market Operations (OMO), to minimize disadvantage to MVR, MMA stated that commencing OMO causes banks to hold investment in T-Bills and the government will eventually lose credibility in the Maldivian market and face challenges in acquiring funding.
The proposed budget for next year has a budget deficit of MVR 8.4 billion, where the government requires additional MVR 11 billion to adequately settle state accounts. At least MVR 4 billion is proposed to be supplied through domestic economic channels.