The U.S. dollar peg has served the Maldives well and continues to be an appropriate exchange rate regime for the country. The Maldives appears to have adequate room to maintain competitiveness under the peg despite the recent rise in inflation, provided imported inflation is not exacerbated by fiscal slippages. Most of Maldives' exports are to euro-denominated areas, while the bulk of imports are dollar denominated. The real effective exchange rate has declined more than that of comparator tourism-based small economies....
Directors agreed that the main challenge for Maldives is to ensure that the broadly favorable growth prospects are not undermined by excessive fiscal spending and attendant macroeconomic instability. Government expenditures—in particular current expenditures unrelated to tsunami relief—have risen to extremely high levels. While welcoming the authorities' efforts to maintain their commitment to zero domestic financing of the budget, Directors cautioned that any revenue shortfall would put at risk these efforts, exacerbating already high inflation and increasing external vulnerabilities.
Mauritius: A Competitiveness Assessment
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