MMA hints open market operations to resolve dollar exchange issues

Maldives Monetary Authority (MMA) has hinted it may be required to launch open market operations to reduce the negative impact on US dollar exchange rates, if the government moves for a decision to print additional money.

The Senior Research Analyst of MMA Mohamed Imthinan, while giving a presentation advising on the 2024 state budget, noted the present difficulties in securing finances from external and domestic lenders to adjust state expenditure.

The budget book states the government has planned against additional overdraft from Public Bank Accounts (PBA) effective December 2023.

Imthinan noted that the demand for foreign currencies will rise once the government begins overdrawing if the current financial conditions change in future.

"MMA will be forced to launch open market operations to reduce the ill impact on foreign currency exchanges if the government decides to overdraw for state expenditure adjustments in the future," he said.

Imthinan further stressed it was not a sustainable practice for the government to overdraw from the central bank towards expense adjustment, adding this is not recommended by international financial authorities as well as the MMA.

The budget advisory by MMA highlighted the importance of maintaining the national reserve at a specific level as well as external financing to extend foreign currency to state-owned enterprises (SOEs).

The central bank also emphasized the necessity of securing the expected USD 200 million financing in November and December.

With a projected external financing of USD 550 million included in the 2024 state budget, the central bank stressed it was imperative that the government acquire a portion of this amount at the early months of next year.

"If the state fails to acquire the external financing, it would pose a negative impact on foreign exchange rates which would drive up inflation, which is why we recommend expediting all efforts to secure external financing to limit these risks," Imthinan said.

MMA further warned that the government may not receive the projected MVR 1.3 billion in foreign aid next year, and recommended to place austerity measures for expense reduction as a counter measure.