The Maldives Monetary Authority (MMA) on Thursday called on the government to urgently implement its economic reform agenda, warning that rising pressure on the rufiyaa is linked to years of excessive spending and debt monetisation.
The appeal from the central bank comes as the US dollar reached a record high in the black market, adding to economic uncertainty and placing further strain on households and businesses reliant on imports.
In a detailed press release, the MMA said that the surge in unofficial dollar rates is largely the result of macroeconomic imbalances created during the COVID-19 pandemic, when the government financed spending through debt monetisation and by overdrawing public accounts.
As a result, the banking system is now facing high levels of excess liquidity. According to the MMA, this figure stood at MVR 7 billion as of June this year, which is a 178 percent increase compared to 2020.
“Printing of money during the pandemic has significantly increased the amount of rufiyaa in the banking system,” the MMA said. The statement also noted that this rise in rufiyaa supply has led to a sharp increase in local currency lending, while foreign currency loans and deposits have declined.
This imbalance is currently undermining the stability of the exchange rate. The MMA said the increase in rufiyaa deposits and loans, alongside the slowdown in foreign currency deposits and loans, is having a negative effect on the value of the rufiyaa.
Although the depreciation of the local currency is affecting the prices of imported goods, the MMA said overall inflation remains within seasonal trends. It added that food inflation is also being driven by external factors, including global food prices, freight charges and supply chain disruptions.
The central bank reaffirmed its commitment to an exchange rate-based monetary policy in order to maintain price stability. It said the MMA is continuing to sell dollars and manage excess liquidity to stabilise the exchange rate.
The MMA also announced that it had resumed open market operations for the first time in years. On 23 July, the central bank withdrew MVR 2.1 billion through a reverse repurchase operation.
Concluding its statement, the MMA urged the government to implement fiscal reforms, including measures to reduce spending and increase revenue, in order to address the underlying causes of the current economic challenges.