The pension fund workaround: the Maldives money printing controversy

The government needs money. So the Maldives Monetary Authority (MMA, the central bank) – whose governor was the finance minister when the current ruling party was last in power – is buying MVR 2.4 billion (US$ 155.5 million) worth of treasury bills held by the pension fund. The pension fund will then use that money to buy new government bonds.

Since the government cannot get a loan directly from the central bank – which is not allowed by law – the opposition says it's using the pension fund as a middleman: the MMA gives money to the pension fund, and the pension fund gives money to the government.

This is where things get a bit technical.

Real quantitative easing (QE) is when a central bank buys existing government bonds from the open market. When the US Federal Reserve or European Central Bank do QE, they're buying bonds from banks, pension funds, and other investors. Those investors then have cash to spend or invest elsewhere, which stimulates the economy.

Contrary to "money printing" – minting fresh currency and injecting it into circulation – QE is meant to serve temporary monetary policy goals like fighting deflation. There is no direct link between the central bank and government financing.

The key structural difference is the circular flow of money: Central bank → pension fund → new government bonds.

As Ahmed Saruvash Adam, who resigned from the Maldives Pension Administration Office's board in protest last week, wrote in his resignation letter, the outcome is "identical to the central bank directly lending to the government."

It's like asking your friend to borrow money from the bank for you.

Saruvash referred to a note sent from the finance ministry to the Pension Office, which stated that "one purpose of this transaction is to raise funds for the budget." 

He argued that the transaction was designed to circumvent the fiscal responsibility law, which restricts central bank financing of government spending. There was no legal opinion among the documents submitted to the board, he noted. 

Yes, and that's part of the problem. The MMA explained in August how printing money during the pandemic gradually worsened the mismatch between Rufiyaa and dollar supply. As of June this year, excess liquidity stood at MVR 7 billion, up a staggering 178 percent since 2020. 

But that was a genuine emergency. The government needed to support people when borders closed and tourism came to a standstill. 

Printing money to manage cash flow created more Rufiyaa chasing scarce dollars, forcing the central bank to draw down depleted reserves to defend the exchange rate peg at MVR 15.42. The consequences the economy is facing now include black market dollar rates above MVR 20, food inflation at five percent, and usable reserves of US$ 194 million in September, barely enough to cover 1.5 months of imports (international standards recommend 3.5 months).

Following Saruvash's resignation, government officials attacked his role as the former chief finance budget executive who "oversaw the printing and circulation of over MVR 8 billion" under the previous administration, contending that continued printing of MVR 2 billion annually in 2022 and 2023 "had no legal or economic justification."   

In June, the MMA commenced Open Market Operations to absorb the excess MVR 7 billion in circulation – the exact opposite of what it's doing now.

The sudden reversal from a contractionary to expansionary policy represents a sharp U-turn. It raises questions about political pressure and the independence of the central bank.

"If [the pension fund] transaction proceeds with central bank financing, it will necessarily involve increasing the Rufiyaa supply (essentially 'printing money') or converting dollars from official reserves," Saruvash explained, referring to the MMA's lack of reserves to finance such a massive outlay. Either approach will increase the Rufiyaa supply and stoke inflation, he warned.

When central banks print money to fund government spending during normal times, it typically leads to price hikes. Your money becomes worth less because there's more of it. Countries like Zimbabwe and Argentina tried this with catastrophic results.

The MVR 2.4 billion injection nearly equals the MMA's entire buffer for defending the Rufiyaa and preventing depreciation. When this money hits the economy and people rush to convert Rufiyaa to dollars, the MMA will have almost no firepower left to intervene and stabilise the exchange rate.

As Saruvash stressed in his letter, if inflation rises by more than 0.11 percent, it would completely wipe out the investment gains the pension fund expects from this transaction. Food prices, which have been elevated for years now, could rise further.

And more Rufiyaa chasing limited dollars could push up the black market rate beyond the current record highs. That will make imports – nearly everything consumed in the Maldives – more expensive. 

Rising inflation and depreciation of the Rufiyaa "would reduce both the asset value and future purchasing power of the pension fund," Suruvash warned. 

An unnamed finance ministry official told Mihaaru that the investment scheme was "not a form of monetisation or money printing" but rather "a financial transaction made on a market basis through the designated legal framework."

The MMA joining the secondary market was "a move to maintain financial stability" and "a common resource used internationally in managing liquidity as best as possible for the economy," the official insisted.

The minimum reserve requirements for commercial banks have also been raised from 10 percent to 11 percent, which the official said will "help oversee the MMA's Rufiyaa supply and bolster open market operations."

The government says the money is needed to clear about MVR 9 billion in unpaid bills to private contractors inherited from the previous administration. These unpaid bills have created a "heavy financial burden" with hundreds of businesses experiencing payment delays.

Speaking in Laamu Fonadhoo last week, President Dr Mohamed Muizzu pledged that "piled up" outstanding bills of MVR 2 billion will be settled over the next two weeks. "I am doing this while fulfilling the other pledge I made as well. That is to not print money. [We're doing it] without printing money," he said.

That's the underlying problem. After credit ratings agencies Moody's and Fitch downgraded the Maldives to "junk" status, the government has largely been shut out of international bond markets, where rates remain prohibitive for any external financing. 

President Muizzu has also abandoned planned reforms like targeting subsidies and downsizing bloated state-owned enterprises. As of mid-October, Aasandha spending stood at MVR 1.6 billion while subsidies reached MVR 2.5 billion. The wage bill ballooned to MVR 10.8 billion.

Yes, but the MVR 186.7 million surplus was achieved by slashing capital expenditure by 58 percent, down to MVR 4 billion from MVR 9.6 billion spent during the same period last year. Infrastructure projects have been postponed or contracted to government companies. In the meantime, loan repayments have more than doubled to MVR 4.4 billion, up from MVR 2 billion last year.

The "surplus" is an accounting illusion created by gutting capital investments while debt service costs spiral.

The Maldivian Democratic Party called the move "illegal" and "reckless" and accused Muizzu of breaking a key campaign promise.  

The MDP defended its own use of MMA advances or overdrafts during the Covid-19 pandemic, referring to the fiscal responsibility law's exceptions for natural disasters and major economic crises.

In contrast, the present scheme was the result of the government's failure to secure foreign assistance and the closure of alternative domestic funding sources, the party argued, blaming the "lack of sound policy and incompetence of those in charge."

The opposition warned that ordinary citizens will bear the brunt of what it described as the government's fiscal mismanagement devaluing the Rufiyaa, driving up foreign currency rates, and causing prices to surge.

In a detailed analysis, former finance minister Ibrahim Ameer predicted the government will "use the pension fund as cover to print more money" within a few months, which could scuttle efforts to refinance debt in order to avert a disastrous sovereign default.

When more than US$ 1 billion in debt payments come due in 2026, the Muizzu administration will have no other option but to draw on the Bank of Maldives' dollar deposits and the MMA's gross reserves, which stands at about US$ 850 million but includes US$ 400 million under a currency swap with India, Ameer wrote. The swap from India's Reserve Bank, which helped prevent reserves from hitting rock bottom last year, must be repaid next month. 

"Notwithstanding the grave impact of this route, the government also needs MVR to buy these dollars from the MMA and BML, funds that the public bank account does not seem to have (the government is already printing billions just to pay pending bills)," he argued.

"The [state-owned enterprises] are cash-strapped, banks have reached their exposure limits on government bonds. The only remaining option, therefore, is more money printing, which could amount to around MVR 7.7 billion by early next year."