Banks were encouraged to keep reserves at the Maldives Monetary Authority (MMA) as part of measures taken to maintain the controlled price of dollars, as printing money during Covid increased the amount of money circulating in the economy, MMA Governor Ali Hashim has said.
Hashim noted this in his defence to a parliamentary inquiry over his alleged dereliction of duty as governor. His alleged encouragement of banks to keep reserves at the MMA in order to indirectly limit loans to the public from banks and financial institutions was among the reasons proposed for advising the President to dismiss Hashim.
According to Deputy Speaker of Parliament Ahmed Nazim, who proposed the inquiry by the Public Accounts Committee, the governor’s action decreased the amount of money in circulation, halted economic activity and slowed down economic growth.
But the move was forced due to challenges faced in maintaining the exchange rate of MVR 15.42 per dollar as a result of high liquidity of the Dhivehi Rufiyaa, the governor said in his response, detailing the reasons for encouraging a restrained monetary policy.
“As there was space to overdraw from the PBA [public bank account] due to [suspending some provisions of the public finance law], the Rufiyaa liquidity circulating in the banking system increased very much. As a result of this, further challenges were faced in maintaining the band between MVR 10.28 and MVR 15.42 determined for the Dhivehi Ruifyaa’s exchange rate,” he said.
Liquidity of MVR 2.6 billion on average in 2019 rose to MVR 7.4 billion by the end of 2023, pre-pandemic and post-pandemic statistics shared by the MMA with the PAC showed. This was a 148 percent or MVR 4.8 billion increase in four years.
The central bank usually responds to high liquidity by conducting open market operations (OMO) and changing standing facilities and minimum reserve requirement (MRR) limits.
However, as conducting OMO requires state funds, the practice was stopped due to cashflow difficulties that started in 2014. Governor Hashim said the MMA now uses standing facilities such as the overnight deposit facility and overnight Lombard facility as well as the MRR limit.
Changes made to the MRR during Covid included reducing the Dhivehi Rufiyaa MRR to 7.5 percent on April 23, 2020 and raising it back to 10 percent on June 3, 2021 when the economic situation started to improve.
The MMA previously planned to raise the MRR to 12.5 percent in February this year, the governor said. However, the change was postponed after the Finance Minister noted that it would pose difficulties for managing cashflow at a time when the government was planning to implement fiscal reforms.
The MMA then decided to delay raising the Dhivehi Rufiyaa MRR to 12.5 percent to July 2024 followed by a hike to 15 percent next year. However, the rate hike has now been deferred indefinitely due to objections from the Finance Ministry, Hashim said.
The governor admitted to pursuing a restrained monetary policy but denied any effect on the issuance of loans by banks. The amount of money that would be taken out of the economy from raising the MRR would be MVR 747 million, which was a small portion of the surplus money supply, he said.
Banks follow internal exposure limits set on its own to issue loans, Hashim said. Therefore, despite an increase in the money supply in the banking system, issuing loans and investing in securities is done within a bank’s internal standards, he said.
Hashim also shared statistics on the issuance of loans in recent years to show that it has not been affected by the central bank’s policies.
According to the MMA’s figures, the total outstanding amount of loans issued to private parties by commercial banks was MVR 24.5 billion in 2019. The figure stood at MVR 31.7 billion last year and MVR 32.7 billion as of May this year.
