The Indian Ocean archipelago of Maldives will privatize its airport but could also sell down other state enterprises and bring private capital to a domestic bank, the International Monetary Fund has said.
“A central plank will be the privatization of the airport, but stakes in the telecommunications company have already been sold and other enterprises and services (such as electricity, water and sewage) could also be divested,” the IMF said in a report.
A stake in the telecoms firm has been sold for 40 million US dollars and “a majority stake in the airport is expected to be sold in the coming months”, the IMF said in a report issued after the economic watchdog’s annual consultations with the tourist paradise.
Difficult Times
The IMF has a program to rescue the economy and boost its foreign reserves after the islands ran into balance of payments troubles due to monetization of debt, which was worsened during the recent global economic downturn.
The government would also like to sell off its stake in the Bang of Maldives, which has been hit by bad loans. The bank also had less access to international credit lines unlike other banks which are part of foreign banks.
IMF said authorities had already replaced the management and the bank was on a loan recovery drive. In the future the bank may look for a strategic partner to get fresh capital.
Maldives hotels have been hit by the global economic slump which in turn has hurt government revenues, expanding the budget deficit.
The privatization drive was not a core part of the IMF backed rescue program (a structural benchmark) but would improve economic efficiency in the long term and boost revenues in the short term.
Expanding government expenses, partially due a higher public sector wage bill and falling revenues had increased the budget deficit which had been financed with central bank credit (printed money) causing foreign reserve losses.
Peg Woes
The Maldivian Monetary Authority, has a peg with the US dollar at 12.8 local units, called the rufiyaa. The IMF says the peg can be maintain if excess local money is withdrawn and the fiscal house set in order.
“Monetary policy has been constrained by fiscal dominance—the government had been able to borrow without limit from the MMA—and the fixed exchange rate regime,” the IMF report said.
“In the absence of open market operations (introduced only in August 2009), any excess money supply from deficit monetization had ultimately been reabsorbed via reserve losses.”
Direct deficit monetization has been stopped from September 2009 and existing government loans at the monetary authority would be converted and sold down to absorb excess liquidity.
Domestic deficit financing would be limited to Treasury bills sales to entities other than the central bank.
Global turmoil had brought the economy to the ‘brink of a crisis’ the IMF said. In 2009 the economy was expected to shrink by 4.0 percent but rebound to a 3.5 percent growth in 2010.
The program estimates a budget deficit of 28.8 percent for 2009 which will fall to 17.8 percent in 2010 with cuts in the public sector salary bill averaging 14 percent, staff reduction with some activities being converted to state corporations.
