The new governor of the central bank has expressed concern with the Maldives’ vulnerability to external shocks, such as oil price hikes and reduced tourist arrivals, due to a depleted foreign currency reserve.
“Although the growth rate is likely to exceed expectations in the short term, substantial downside risks continue to cloud the medium-term and long-term growth prospects of the Maldivian economy,” Ahmed Naseer said in a statement Friday at the annual meeting of the International Monetary Fund and World Bank in Washington DC.
The trade deficit “deteriorated significantly” in 2016, he explained, due to a surge in imports, higher overseas payments, and a one-off payment of US$271 million to an Indian developer for the cancellation of its contract to develop the main international airport.
As a result, the Maldives Monetary Authority was forced to intervene “to prevent any shocks in the foreign exchange market.” In November 2016, the MMA dipped into the official reserve to buy a US$140 million bond from the state-owned airport company to help compensate GMR.
The country’s usable reserve – the funds readily available for use in the foreign currency exchange market – fell to US$110 million, enough to pay for about a month of imports.
To shore up the depleted reserve, the MMA secured a currency swap deal worth US$100 million from the Indian central bank.
“Although the swap agreements were paid back on maturity during the first half of 2017, the proceeds from the very first sovereign bond issued by the government in the international market helped to restore reserves to an adequate level,” Naseer said.
Some US$200 million was raised in June from the country’s debut sovereign bond issue.
Contrary to Naseer’s remarks, the government previously claimed that its aim was to raise finances for infrastructure projects. The opposition called the foray into the global bond market “bad economics.”
The government also borrowed MVR800 million (US$51.8 million) from the Bank of Maldives in March to settle unpaid bills and “to manage the state’s cash flow in the short-term.”
Naseer went on to say that the current administration’s unprecedented infrastructure scale-up could be “transformational” but warned that “higher imports related to these capital investments are expected to further deteriorate the current account deficit in the medium term.”
He added: “This leaves the country with low reserve position and vulnerable to external shocks.”
Calling for “holistic measures” to boost reserves and stabilise the foreign exchange market, he recommended transitioning to a renewable-based energy system and continuing efforts to streamline government expenditure and bring down debt.
Growing fuel imports have been putting pressure on the reserves, he noted, “which makes the country more vulnerable to global oil shocks.”
Naseer took up the governor’s post in late August after the MMA’s former governor, Dr Azeema Adam, stepped down to relocate to New York with her husband, the new permanent representative to the United Nations and ambassador to the United States.