Reserve decline worrisome?
By combining proceeds from bond sales, the amount of money in the current usable reserves will go up to USD 202.1 million.
By
Ahmed Naif
One of the biggest concerns about the country's economy right now is that the national reserves have fallen to an all-time low. As a result, there is a growing concern that the country might not have basic commodities made available. However, finance minister Ibrahim Ameer's assurance is that even if the reserves are low, things will not go wrong for the country. The only thing the government has to give to the people for their concerns is an assurance.
The question that the public asks is, what is actually happening to the reserve? What could that mean for the country? Is it not worrisome?
$102 million in usable reserves
According to MMA data released this month:
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The country's total reserves fell to $496.6 million at the end of October
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Therefore, the total reserves are down by $40.7 million compared to September
Of the total reserves, the amount of money or usable reserves that can be used in a timely manner is calculated by deducting short-term debt:
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Short-term debt recorded at $394.5 million in October
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Total reserves deduct those debts, and the useable reserves stood at $102.1 million
According to customs data:
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The country needs an average of $65.9 million a month to import basic commodities such as food, medical supplies and fuel
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At present, there is only enough money in the reserves to import essential goods for 46 days or 1 month and 16 days.
The country's reserves usually have enough money to import basic goods for three months. The current decline in usable reserves is the first time in the last five years that the country's usable reserves have reduced so much.
Usable Reserve over the years:
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1-
2017 – $200 million
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2-
2018 - $180.6 million
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3-
2019 - $314.9 million
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4-
2020 - $173 million
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5-
2021 - $412.6 million
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6-
as on October 2022 - $102.1 million
What are the concerns about depleting reserves?
An economist, who spoke on condition of anonymity, said that in an import-dependent country like the Maldives, the main concern of the decline in reserves is that we are in a situation where we don't have the money to import basic goods. In particular, when fuel and food items are entirely imported by a government company, the central bank has to supply the bulk of the foreign currency needed to buy them, he said.
"The central bank issues dollars from the reserves and since there are not enough dollars in the reserve to pay with dollars, it will be difficult for STO to get foreign funds to buy them. Then, if STO hits the black market, the dollar will fall in the market and the black market rate will increase. The value of the local currency will further fall," said the man, who has also worked in MMA in the past.
He believes that MMA’s failure to formulate usable reserves is problematic. In a country with low domestic production like the Maldives, the reserves used are an important indicator of the country's financial capabilities, he said. Therefore, that standard needs to be observed, he said.
"The usable reserve is important for the country. It is the only way to ensure that we have enough financial capacity to meet basic needs," he said.
However, MMA Governor Ali Hashim recently said that such a shocking change has not been observed in the reserve. That doesn't mean the MMA doesn't have any concern about the fall in reserves. This means that the current decline in reserves has been forecast by the MMA.
The same is happening in countries around the world.
Why are reserves falling?
According to MMA statistics:
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Since July, the country's reserves have been declining sharply
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Reserves at $753.4 million at the start of the year have fallen to USD 499.6 million now
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That is a reduction of $253.8 million
The decline in reserves is mainly due to the steep rise in the cost of importing crude oil:
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Monthly fuel import expenses have increased by MVR 200 million
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Rising global food prices due to inflation and higher import costs are also the reasons for the decline in reserves
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MMA's quarterly bulletin shows that import costs have increased from $2.4 billion to $3.2 billion
The increase in dollar payments to state-owned companies is also a reason for the decline in reserves.
State-run companies are also provided with the required dollars by MMA. On an average, MMA releases $506.6 million annually to state-owned companies. Therefore, in its recommendation for the upcoming budget, MMA has also suggested that the foreign exchange expenditure be reduced by state-run companies next year.
MMA’s concern is that if the $418 million it plans to borrow from abroad next year is not received, it could further impact the reserves. There is a small relief for MMA with the increase in TGST, which will lead to more foreign exchange revenues.
Temporary solution, hope for next year
Since then, the government has sold $100 million worth of bonds to India's SBI. The proceeds from the bonds would be used for any purpose of budgetary support, and was granted by the bank through the government of India.
It is expected that the $100 million raised from the bonds will be used to find a temporary solution to the fall in reserves. It is about spending the foreign money needed to buy basic food out of the proceeds from the sale of the bond.
By combining proceeds from bond sales, the amount of money in the current usable reserves will go up to $202.1 million. Therefore, the reserve funds for three months have gone up for the time being.
The MMA's quarterly bulletin report also noted:
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Decline in reserves likely to be corrected next year
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The reason is the prediction that global crude oil prices are assumed to remain the same next year
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If tourism in the country continues to be at its ongoing trend next year, it will be able to maintain the same amount of foreign exchange and the reserve
