May 26, 2011 (LBO) – The International Monetary Fund and the Indian Ocean tourist paradise of Maldives had reached a new 3-year deal to fix government finance and stabilize the country and its currency. Maldives is struggling with a large budget deficit partly due to large civil service salary bill, which it was unable to cut under its existing deal, which was then suspended.
“Monetary policy would be tightened to complement fiscal adjustment, counter inflation, improve confidence in the rufiyaa and support international reserves,” the IMF said in a statement after a mission to the country led a new 3-year deal.
“Gradual accumulation of international reserves, along with the fiscal space created through debt reduction, would reduce Maldives’s vulnerability to external shocks.”
Money printing to finance the deficit eventually ended in a devaluation of the domestic currency rufiyaa and higher inflation.
In countries like Greece, which cannot devalue without moving out of the Euro zone, the civil service was asked to take cut in their benefits to remain in the currency union and protect ordinary citizens from higher prices. A devaluation pushes up prices in the economy in domestic c