Money printing will trigger inflation crisis, warns ex-central bank governor

“We are running out of money, we have bills due. We are tight on money for the day-to-day expenses. This is a drastic move, the last card in one sense, to raise money,” Hashim told the Maldives Independent.

Last week, the central bank decided to purchase a 22-hectare plot of land from the Housing Development Corporation to develop a financial centre in Hulhumalé. According to the opposition, the MMA’s board was forced to approve the deal to “use HDC as a cover to raise money from the domestic market after the government's financing plan failed."

The state-owned company would invest proceeds from the sale in treasury bills or pay dividends, taxes and debt to the finance ministry, which would use the money to fund budget expenditure, the main opposition Maldivian Democratic Party alleged earlier this week.

Hashim joined the chorus of concern from economists who have raised the alarm. Over the past week, a consensus emerged that the transaction would be tantamount to printing money as the central bank lacks the funds for such a massive investment. 

Despite the resignation of two MMA board members and the ruling party seeking the dismissal of the deputy governor, the MMA and the government have been tightlipped about the plan. 

Speaking to the Maldives Independent, Deputy Speaker Ahmed Nazim said parliament has yet to be informed about “making arrangements for the purchase of a land for a  financial centre by MMA.”

The ruling People’s National Congress lawmaker, who sits on the public accounts oversight committee, said all major decisions would be deliberated and tabled for debate in the Majlis. “We would like the process to be transparent and for the public to have the correct information,” he added.

He disputed the MDP’s “incorrect” figure of MVR 15 billion. 

“There is no way that the economy can bear an injection of such a large amount of money. It also contradicts with the commitments we have given to IMF and World Bank,” he said, echoing concerns about increasing the money supply and driving up the US dollar exchange rate beyond the current elevated rate of MVR 19 in the black market.

“Be assured that no injections will be made without creating the fiscal space, fiscal space that will be created by paying off internal and external debt,” Nazim said, referring to repayment of loans taken for budget support and infrastructure development.

Nazim indicated that funds raised through the MMA land purchase could be used to pay down government debt held by the central bank. 

“No government has attended to the historical debt owed to MMA. President Dr [Mohamed] Muizzu’s aim is to pay at least MVR 6 billion of the debt owed to MMA through various arrangements,” he said.

“We will proceed on a sound footing, in accordance with Maldives’ medium term fiscal goals and requirements.”

Nazim suggested that the government would also be able to pay billions worth of unpaid bills owed to small businesses and local contractors.

“When due bills of companies are paid, there will be more money available for spending, which in turn will stimulate economic activity and growth," he said.

But Hashim, the former central bank governor, was skeptical.

“When MMA pays HDC, HDC is sure to spend on bonds and investments. The money will one way or the other end up on the streets. An inflationary impact is unavoidable. Any growth stimulated by the move will likely be wiped out by inflation,” he said.

“This is money that is not in the balance sheets.”

Experts have questioned the MMA's choice of land as an investment vehicle. The central bank's financial instruments should be easily convertible to cash in order to quickly adjust the money supply when the need arises, they said. But unlike securities or gold, land cannot be quickly sold. 

As real estate falls outside the MMA's mandate, concerns have also been raised about the central bank venturing beyond its core objective of controlling inflation. 

The consequences of such a dramatic rise in the supply of local currency could be dire for an import-dependent small island state. 

When more money enters circulation without a corresponding increase in economic productivity or foreign currency reserves, the value of the Rufiyaa relative to other currencies would fall. 

Importers would need more Rufiyaa to purchase the same amount of foreign currency needed to pay international suppliers for essential items such as food, fuel and medicine. The higher costs would be passed on to consumers. Price hikes in dollar-denominated goods such as petroleum products and electronics could be immediate. 

With food inflation at eight percent in January, further price increases would disproportionately affect lower and middle-income households.  

The cost of servicing foreign debt would be significantly higher as well since the government would need more Rufiyaa to purchase the same amount of foreign currency for loan repayments.

The perception of political interference with the independent monetary authority could meanwhile undermine confidence in the financial system. A further downgrade by credit rating agencies would make it near impossible for the government to borrow money from international markets. 

In December, Moody’s maintained a negative outlook for the Maldives despite a bailout from India and new foreign exchange controls, casting doubt over the ability to repay looming external debt payments, including more than US$ 1 billion next year.

“In the absence of a comprehensive financing package or very drastic policy adjustments, wide twin deficits and FX imbalances point to significant downside risks with an increasing probability of default,” the agency concluded.

At the heart of the seemingly desperate monetisation plan lies the evident failure of the government’s financing plan. The MMA’s money printing operation could help plug 73 percent of this year’s projected budget deficit of MVR 19 billion. 

According to grim figures shared by ostracised ruling party lawmaker Ahmed Azaan, the 2025 budget cash flow plan anticipated MVR 9.1 billion in revenue by February. 

“However, actual revenue stood at only MVR 5.5 billion, reflecting a massive shortfall of MVR 3.6 billion (39.5 percent below projections),” the MP for Central Hithadhoo tweeted last night. 

The situation with foreign funding sources was even more dire. The government expected grants of MVR 408 million. But only MVR 40 million materialised (a 90 percent shortfall). Of MVR 664 million in foreign loans that the government planned to obtain, only MVR 0.3 million was secured – 99.95 percent below projections. 

“As proposed in budget 2025 and recommended by the IMF, reform programs need to be implemented in a timely manner,” Azaan advised. 

In late February, the IMF reiterated calls for an “urgent policy adjustment” to rein in deficit spending and manage crippling public debt that reached 133 percent of GDP last year.

“The Maldives is navigating a pivotal moment to urgently restoring macroeconomic stability and debt sustainability,” an IMF staff mission observed after annual consultations in February, repeating stark warnings relayed to lawmakers, and advising “swift implementation” of the “homegrown fiscal reform agenda” outlined in the budget. 

But the government appears to lack the political will for painful cuts that would impact the public, including streamlining the Aasandha health insurance scheme, reducing the bloated workforce of inefficient state-owned enterprises, and phasing out blanket subsidies for food, electricity and fuel in favour of targeted assistance for the poor. 

Last month, the ruling party supermajority in parliament advised against a 10 percent pay cut sought by the president. 

In lieu of belt-tightening, the government has been trying to squeeze more revenue out of the tourism industry. On Wednesday, MP Ibrahim Nazil from the MDP criticised amendments proposed to the tourism law that offered resort lease period extensions for US$ 5 million if the payment is made within six months.

"This is an effort to earn money by offering a 50 percent discount for six months, like a street market approach because Ramadan is coming. Where the state could receive US $10 million, it's being reduced to US $5 million,” the minority leader contended.

Echoing the sentiment earlier this week, former attorney general Dr Ahmed Ali Sawad called on the government and central bank to “share with the people the calculations made considering macro and microeconomic implications,” characterising the failure to do so as “major negligence” if the cost of living worsens in the immediate future. 

"Allowing the people to be exposed to such a dangerous situation, believing that the state will not intentionally make mistakes, is a major economic crime,” he said.