The President attacks the Central Bank

The President attacked the central bank of the country, MMA, in a press briefing on Monday, saying that MMA is delaying the process of granting license to three commercial banks to be established in Maldives. His exact words were like “I don’t know why it would take so long to put a stamp on a registry”. However, according to MMA only one bank has so far formally applied for a license as at today (http://www.minivannews.com/news_detail.php?id=5948). What we gather from the minivannews article is that although several banks have expressed interest and had meetings with MMA officials, there have been no applications so far other than the Russian bank. The President has with his harsh words, attacked the central bank of the country and in the process either he lied or did not have the correct information.

The President also declared that with the opening of new commercial banks, the US dollar shortage in the Maldivian market will be resolved. There was also a promise of revaluing Rufiyaa to Rf 10 per US dollar within the next five years.

The present shortage in the US dollar and the parallel (black) market is not a new phenomenon in the Maldives foreign exchange market. There has always been a mismatch between what we earn and the outflow of foreign currency in our economy, and this mismatch has grown alarmingly since 2004. However, the pressure to our exchange rate was disguised after tsunami when we had huge inflows of US dollars through international grants and loans. The existing commercial banks also borrowed from overseas and made US dollar loans to the private sector. All these factors helped in defending the current peg of 12.75.

Unfortunately in the last quarter of 2008, the overseas borrowings from the commercial banks and the injection of US dollars by these banks into the Maldives economy almost stopped. This is believed to be mainly due to the financial difficulties facing the global markets. The crisis has been in a way, a blessing in disguise, as external borrowings by the private sector and the government are all temporary solutions to the mismatch between the foreign currency that earn and spend. As long as we don’t increase the foreign currency revenue, there’ll always be pressure on our exchange rate and shortage of US dollars in the market. Hence, opening new branches of foreign commercial banks may not provide a solution to the problem.

Maldives economy is facing an economic slowdown, problems in the exchange rate, and high inflation. Many of the world economies are in a recession with low inflation. The exchange rate pressure and the high inflation is mostly a problem of our own making. It has less to do with the global economic recession.
The years of economic mismanagement and the financing of the government debt through increasing the money supply of Rufiyaa, has led to a boost in the domestic demand, and an increase in the domestic prices (inflation). While Europe and most other economies had below 5% inflation rates, our economy had 12% inflation in 2008. This inflation differential has put pressure on the real value of Rufiyaa in terms of other currencies.

It's times like these that a new President needs to work closely with the Finance Minister and the Governor of central bank in order to restore confidence. It's times like these, we need to show coordination between different economic agents in the country. But what do we see? The President attacking the central bank, as if the central bank belongs to the opposition party.