The central bank has decided to implement special measures to reduce the amount of currency circulating in the economy, with the Maldives Monterrey Authority announcing that the interventions were finalised after approval by its board of directors.
Two primary adjustments to monetary policy are being introduced, the authority reported. The initial adjustment obligates commercial banks to elevate minimum reserve requirements maintained with the central bank. Concurrently, the central bank has resolved to expand its ongoing open market operations, defined as activities conducted to withdraw circulating currency back into the central bank, to 10 basis points.
An average of USD 175.10 million of excess Maldivian Rufiyaa liquidity within the banking system was withdrawn through open market operations between their resumption in July of last year and July of this year, MMA announced. Short-term liquidity within the banking system, the central bank noted, has consequently contracted to USD 239.95 million from USD 421.53 million.
Central bank analyses indicate that the accumulation of circulating currency stems from the previous administration’s decision to suspend the National Fiscal Responsibility Act and commence debt monetisation. Statistics from the authority reveal that the former administration created USD 531.78 million through monetary financing over a three-year period. While the administration at the time asserted that debt monetisation in 2020 and 2021 was an absolute necessity due to Covid-19, the practice persisted across 2022 and 2023, expanding Maldivian Rufiyaa liquidity and driving up US dollar demand.