Blackmarket dollar crackdown won’t address demand, warn businesses, financial experts

Police today launched a crackdown on the blackmarket trading of dollars after President Mohamed Nasheed last night declared he would “put a policeman behind every dollar”.

The Maldives has been suffering a crippling dollar shortage for over a year, with most banks in the country sporadically refusing to trade dollars at the official pegged rate of Rf12.85.

Maldivians travelling outside the country and expatriate workers seeking to export their remittances are forced to rely on the unofficial black market, which trades dollars at up to Rf14. Panicked text messages appealing for dollars are circulated whenever emergency medical treatment is required overseas.

Until now authorities have turned a blind eye to the practice, as even many sizeable local businesses have been forced to obtain dollars from unofficial avenues.

Launching the operation, police accused the Maldives Monetary Authority (MMA) of failing to address the problem of foreign currency dealers violating their licenses.

“It has been noticed that the MMA has yet failed to take action, despite the exchange of US dollars in violation of policies, in order to regulate the exchange of US dollars,” police said in a statement.

“Information received as of now reveals that the receipt and reports that should be sent to MMA have not been sent, according to the policies of the MMA in effect. We have also received information that unlicensed dealers are exchanging US dollars against the policies devised by the MMA,” police said.

The first arrest was made today, after a man was arrested in a shop on the tourist strip of Chandhanee Magu for exchanging dollars at higher than the pegged rate.

“The shop was not licensed to carry out transactions related to foreign currency exchange,” Sub-Inspector Ahmed Shiyam told newspaper Haveeru.

The government has levelled blame at MMA Governor Fazeel Najeeb, and called for parliament to dismiss him for failing to respond to the President’s requests for counsel.

A letter from the President requesting Fazeel’s dismissal was read out in parliament today and the matter was sent to the Public Accounts Committee, which will make a recommendation to the floor. Debate on the subject today included proposed limits on carrying foreign currency out of the country.

Earlier this month following initial calls for Fazeel’s dismissal, leader of the opposition-allied People’s Alliance (PA) Abdulla Yameen appeared on Villa TV to defend the MMA governor, insisting that the dollar shortage was not reasonable grounds to dismiss Najeeb.

“The MMA is not responsible for solving the problem of the decreasing amount of dollars coming into Maldives,” he said. “The MMA has to maintain the value of dollars and rufiya… if there is a dollar shortage, what the MMA can do is use their open market operations to borrow from commercial banks and attempt to maintain the value of the dollar.”

If these efforts were unsuccessful, said Yameen, also former Trade Minister and former Chairman of the State Trading Organisation, the only other option would be to “officially devalue the rufiya.”

However, he added, the impact of such a move on the economy had to be carefully considered, or the rufiya would have to be devalued again after six months and the positive effects would be “nominal”.

“From what we can see now, [devaluation] will not be a solution for our structural problems,” he said. “Our biggest structural problem is that our fiscal policy is still recklessly expansionary, it is very much a spending policy without any control. Government expenses are very high and they are not trying to control it.”

Although the Maldives received a high amount of dollars as tourism revenue, “not all these transactions take place in the Maldives.”

“A lot of tour operators for example sell tour packages in Europe and send to the country only what has to be paid to the resort,” he explained.

The other major problem is investor confidence: “If the Maldivian economy is collapsing like this and the dollar shortage is reaching this level, private Maldivian investors will not want to keep their money in the Maldives. They don’t know when, under some law or regulation, the government will give them an IOU and take their money from the bank saying ‘in two years we’ll pay you back in dollars what we’re taking, but now we don’t have cash for foodstuff’ and convert it at the 12.85 rate after a decision by the cabinet – no investor or businessmen will have a guarantee that this won’t happen.”

MMA had not been able to solve the disparity between the rufiya and the dollars because devaluing the rufiya would only lead to spiraling inflation, he said.

An internal problem

Local economists and businesses badly affected by the dollar shortage, such as importers, dispute that the problem is either political or can be solved in such a manner.

A representative for a Dubai-based company supplying resorts in the Maldives explained to Minivan News that while he was required to pay suppliers in dollars and euros, “the resorts try their best to pay in rufiya. Their revenue is acquired in dollars, so they can [sell the dollars] on the open market and pocket the difference.”

“It’s a huge issue for the entire country and makes it very difficult for anyone to import. We’re lucky in that we have a parent company to which we can transfer revenue and which pays centrally,” he said, adding that not all companies operating in the sector were as fortunate.

“We keep a local rufiya account which we use for pay customs payments and incidentals, otherwise the only way to exchange is on the grey market. There you’re looking at Rf14 to the dollar,” he said.

He speculated that the crackdown on the unofficial market could be positive, “as the resorts would lose the incentive to trade dollars into rufiya and any forex coming into the country would stay here.

“But the flip side is that you still can’t change money – it’s an incredible situation when you can’t go into a bank with your Rf12,850 and change it into US$1000. Imagine what would happen in the UK if you walked into RBS (Royal Bank of Scotland) and asked them to change £1000 pounds into dollars and they refused to do it.

“A crackdown on the black market also need laws guaranteeing dollar supplies for banks, with liquidity provided by the government,” he suggested.

“What bothers me is that there’s plenty of dollars coming into the country, but the people in control of the economy seem to be hiding it away.”

A local financial expert working in the private sector, Ahmed Adheeb, told Minivan News that while the crackdown would enforce existing monetary law, “the problem from the point of view of an economist is that the dollar flow is there but the exchange rate is not at the market rate. There have been a lot of dollar fluctuations since it was pegged.”

Adheeb emphasised that building confidence in the rufiya was now “more important than anything else”, and an internal problem innately linked to the country’s high budget deficit.

“We are producing a lot of rufiya to finance the deficit. If the inflow is greater but the exchange rate is not adjusted, that becomes a problem,” he said.

“The government is pumping more rufiya into the economy to finance the deficit than it is earning in dollars. The confidence in the rufiya is not there, and there is no incentive for people to keep their savings in rufiya.”

Adheeb predicted that while the crackdown would limit exchanges on the black market, “there will still be huge demand for dollars.”

“When the black market suffers shortages, we may find ourselves in a situation where we can’t find dollars at all. Even now if I am individual it is difficult to find dollars, because the banks are not supplying. The total solution is for banks to supply to demand.”

The banks, Adheeb said, had significant dollar reserves but found the rate of exchange unacceptable.

A pegged rate had been instrumental in building investor confidence in the tourism sector, Adheeb noted, however it had led to an internal problem that had left the currency vulnerable to global fluctuations in the dollar caused by events such as the Gulf Wars, 2008 recession, rising oil prices, “and now reconstruction in the wake of the Japanese tsunami”.

“If I have savings in dollars, why would I exchange if the rufiya is so volatile?” he asked. “At the same time why is the government raising oil prices? Because of international price increases.”

Foreign investors in the country were already concerned, he noted, because of the difficulty of repatriating profits to the home country.

“Dhiraagu, for instance, is probably having a lot of difficulties repatriating dividends to Cable&Wireless. This can lead to a fall in investor confidence. When that happens, foreign investors will either try to exit or stay away. We will only see foreign investment that earns dollars, such as resorts.”

The problem would soon lead to inflation and difficulties importing essentials such as fuel and medicines, he suggested, and could potentially have a major impact if the State Trading Organisation (the country’s primary importer) found itself unable to acquire foreign currency.

“There is no reason why this should be politicised – it is a national issue, like a tsunami. We need to get together and solve this. I believe the economic outlook for the Maldives is good – the tourism sector is continuing to grow. We can manage this, it should not be a major problem.”


26 thoughts on “Blackmarket dollar crackdown won’t address demand, warn businesses, financial experts”

  1. There's only one solution for all these black market dollar, gang violence, drug dealing etc. Arrest Yaameen.

  2. Crackdowns cannot bring the value of rufiyaa any higher. Value is created by voluntary transactions, not by force.

    This crackdown will affect the ordinary people most. Ofcourse, the political class will get all the dollars they want.

    Tonight on the news a bill was proposed to restrict how much foreign currency ordinary people take out of country when they go abroad. Who is government to tell what to take out?

  3. ... Does this mean that my personal holding safe, which currently has 139,000US$ is now a gualag for policemen?!

    I'm holding human beings who bleed, hurt and feel without charge or trial indefinitely?!




  4. Everyone knows that Yaameen is responsible for this whole mess!!! He would not have it any other way!

  5. Yamin woud have been a hero if he joined md but now he is. Gang star, oil dealer, drug dealer, money laundry guy. Just because
    he tells the truth,

  6. Maldivian MPs have their personal business interest and are unable to pass effective laws. Some very simple effective laws could be; Tourism sector wages and salaries should be paid in Dollars should any employee wants. Likewise payments to local parties should be made in US dollars by resorts or business that makes revenue in foreign currency. Pass the laws and enforce it if the government and parliament have a genuine commitment without the influence of business people who have interests there personal interest in this issue.

  7. A President who does just the opposite of what it takes to solve a problem!

    My three year old dotis acts on better instincts, I guess?

  8. A dizzyingly complex interaction of factors determine how much one currency is worth in terms of another. It is clearly wrong and simplistic to base the country's forex policies on the assumption that the dollar shortage is caused by hoarding. Why would anyone want to hoard something that is freely available? The scheme is the wrong medicine and it may turn out that the proposed cure is worse than the disease.

    It is wrong to peg the rufiyaa artificially to the dollar. The determination of the price point for any transaction between willing and able parties must be without compulsion, if private trade is to succeed. If the government claims to promote private trade, why does it want to compel us to sell or buy the US dollar at an artificially cooked up price, plucked out of thin air, as it were, and that has no economic or commercial basis? What is so magical about 12.75? Why does it want to have it at 12.75 when everything that is happening around us tell us that it is not 12.75? Why not 19.23, or perhaps a more politically satisfying 7.58? Can the government provide a rationale for why it is at 12.75? How does the government reconcile their claim to promote free trade when it cannot apply the same principle to the most basic of commodities, our currency?

    The rufiyaa and the dollar has been joined at the hips for over a decade. The inflation rate in Maldives is 9 to 12% per year, while in the U.S it has been 2 to 3% over the decade? How, for God's sake, can the two currencies continue to have a fixed exchange rate when one has been devaluing at 10% and the other at 2% for more than 10 years?

    The government seems to take the view that the US dollar shortage can be resolved by brute force, and is taking a shotgun to the crisis. Such an approach will only make for more crimes, and the black market to grow deeper. What will come about will be more politically painful than what the government is bargaining for. You cannot quell demand or put a lid on the power of market forces by making something illegal or policing it more. It will only go further underground and will only spawn a new breed of crimes. Economics 101.

  9. Yes, black-market crackdown will not address demand just as crackdown on illegal drugs would not stop the demand for drugs.

    If that is the excuse not to enforce the exiting foreign exchange regulations, should each any every type of a black-market situation be allowed.

    Simple fact is that the country gets more dollars than it needs - Shouldn't there be some creativity and leadership on the part of the MMA Governor instead of relaying 100 percent on IMF to run the policy..

  10. Maybe I should start selling my extra dollars at a 12.90Rf rate just to spite the backward idiots in charge of policy making.

    That 0.05 is the transport cost.

  11. I support the crackdown on the USD black-market. However it will not solve the problem until USD becomes available from banks and legal money changers. We shud look to trading Indian rupees and Sri lankan rupees on the market too.

  12. @samad:

    I fully agree with you.

    @all black:
    black-markets are created precisely because of excessive government controls on transactions that people would otherwise engage freely. Be it food, currency, oil, cigarettes, drugs or anything.
    Value of something is not created by force of law, but by demand and supply among voluntary transactions.

    In the case of drugs, criminalization and harsh penalties over the last half century has not solved the drug problems anywhere in the world. A big part of the world is now rethinking, and moving away from harsh penalties to decriminalisation and legalisation.
    Its a fallacy to think that governments can solve the drug problem by making it illegal. It creates the black market, and the top echelons of the gangs are in the government and police. This is true of maldives and other countries. It is the criminalisation that actually helps create gangs and their related crimes. The gang-boys are just mere pawns in a game of huge money, who are in need of socio-medical help. Penalizing them is no justice at all.

    "Simple fact is that the country gets more dollars than it needs..."
    Who determines how much one needs? The needs of people are reflected in the demand placed on the dollar. This is reflected in higher price (relative to rufiya). So it is NOT a simple fact.

  13. Make a simple rule saying that all European travel agents to register in Maldives and maintain their accounts in local banks if they want to do do business in Maldives.

    That should solve the dollar problem.

    Also that will bring more business to Maldives in terms of office operations, staff, etc.. The tourism industry should come closer to Maldives instead of operating from Europe..

  14. Obviously the government is under lot of pressure to do something about the chronic shortage of dollars. President has time and again promised to solve the problem including a promise to bring down the rate to 10 rf per dollar. Neither his policies nor that of MMA are not having any affect insofar as addressing the the dollar issue. This measure to crack down on the black market more to show that actions are being taken against it, than actually solving the problem. The crackdown further creates circumstances for individuals and companies get nominalized as the crime infested country is in need for more. The police have better things to put their efforts to.

    Government's spending has gone way beyond its means. Depending to service more than half of the entire bidet through expensive methods which in turn make the process unsustainable even in short term. Selling T bills, borrowing from commercial banks at hight interest rates and selling high valued national assets to finance the budget short falls are all measures that will lead the country to default on loans and eventual bankruptcy.

    With this local government thing we have seen that even if Councillors are in place, none of Katheebs is sacked and the staff have not been reduced. Neither legislators nor politicians have the will to come up with solution for the sake of the nations.

    coming back to dollar issue, it has to be said that market price for the dollar is much higher that the official 12.85. This factor has been accounted in the economy for many years. all the goods and services have been priced accordingly.

    Too many Rifiyaa are chasing the dollars. Too many rufiyaas will be in circulation as long as government puts its acts together and have courage to sacrifice even it may be unpopular politically.

  15. Believe me current Dollar Issue is purely speculative and Politically motivated individuals like shameless Champa Brothers who runs Dhitv and DhiFM ( propaganda machine) at a loss just to protect the ill gotten money from tourism sector! The real dictators are these handful of shameless businessmen who wants to control the democracy for their pleasure! So called MATI is formal terrorist organisation of these dictator's and their spoke person is SIM, and shamelessly uses the tourism minister's car for his purpose, while this (SIM) openly accuse falsely government to having an agenda to push out the tourism lobbyist! While on the contrary Tourism Lobbyist like Champa , Universal, Gasim..etc were the chief advisers and still President Nasheed accept unquestioned opinion given by these bunch including some fresh lobbyist like AAA group! The issue here is these B****Ds always want to protect their vested interest (thats no problem) at the expense of public and government revenues and still try to paralyze the president!! LOOK AT THAT MAJLIS!! FULL OF TOURISM LOBBYIST AND BUSINESSMEN THEMSELFS LIKE SUN TRAVEL SHIYAM, GASIM!! SHAMELESS!! SHAMELESS!!! AGE OF STUPIDITY!! the funny thing is Yameen who is the master mind is laughing at all these cases when president make mistake of listening to these tourism lobbyist who have placed their agent in the cabinet (Zulfa) who is good for nothing!

  16. So here's a question:

    Assume I have USD 10,000. I make a payment to my friend (for consultancy services for my business) of USD 10,000. Two days later he makes me a payment for consultancy services to his business for MRF 135,000.

    Given that we have no law forcing us to declare income or even be registered to do one or another kind of business - on what legal ground can the government crackdown on this. Its just two very separate business transactions, but one that practically becomes a black market dollar transaction!

  17. and so the house of cards falls down. the pawns have bought the fortress and the Jack of Hearts finds his crown slipping.

    a crack of the whip here and a lash over there will only make the donkeys dig their hooves in deeper.

  18. what is the official and unofficial exchange rates for the UK pound ?

  19. It is important that we use substitutes for dollar, like Euro or pound. I agree this is a National issue.

  20. For all those who are lazy and jeolous.

    Champa Hussain Afeef is widely hailed as one of the pioneers of the Maldives' tourism industry, but even when pushed, he refuses to boast about the success of his vast empire or the role he played kick-starting tourism in the country. "It's not for me to feel like that," he says as we sit in his offices in the capital, Male'. "It's for others to feel that this man has done something."

    Thirty-seven years ago, aged just 21, Afeef became part of a venture that would transform both his own life as well as the future of the Indian Ocean coral archipelago. Along with Mohamed Umar Maniku and Ahmed Naseem, he were responsible for bringing the first tourists to the Maldives.

    The trio cooked, cleaned and guided the first guests around the Male' and neighbouring islands and it was not long before Maniku and Naseem opened up the first resort: Kurumba. Afeef's description of some the early resorts, the Cajan-style huts, camping beds, oil lamps and shared bathroom is a million miles away from the upper-luxurious resorts of today, famed for luring honeymooners, divers and A-list celebrities to their shores.

    "There was one common toilet for guests to use which was built outside and water was brought from nearby islands from a well that had good water," says Afeef. "We brought it to the island and hand-pumped the water out of a barrel into a bucket and then somebody would be up on the water tank to pull the bucket of water up and pour it into the overhead tank and that's how we managed tourism for so long."

    The challenges faced in those days were endless: exchange rates were guessed and communication between islands was conducted through messages on boats; there were no phones or fax machines, he says. But the biggest hurdle of all was the lack of transport in the country.

    When another of his shareholding resorts, Kuredhoo, was under construction in the late eighties, Afeef tells me he and his partners would sit atop bags of cement in a boat leaving at 6am and arrive 12 hours later. "We once transported guests on an oil tanker," he says with a distinctly breathy chuckle. "And next thing we knew, we were being sued in Europe!" But, he says resolutely, he has never let himself become discouraged when faced with obstacles: "Like I always say, you have a target, you believe in it and you work for it."

    Hard graft, it soon becomes apparent, is Afeef's philosophy and he tuts disapproval at the lackadaisical attitude of newcomers to the tourism industry who, he says, are just after a quick buck. They either lease out their island to avoid work or wait for someone to buy it at a higher price, he says. "Working hard systematically to achieve something, I don't think you see so much of that anymore," he adds. "We are the ones who toiled and sweated."

  21. The m-dives was/is in the best position to learn from other countrys mistakes, so they choose a debt based money system - the worst, (see 'money as debt' on youtube) and a political system that doesnt believe in 'separation of powers' (see world history). While your bureaucrats and officials DEMAND second best, what can you expect?? the definition of INSANITY is making the same mistakes and expecting a different result. The Rufiyya should be scrapped completely as it cannot be converted either in or out of the country. The money and Political processes in m-dives make it a true 'banana republic'...... if you want to know if the money system works,,,, just ask some Bangladeshis....j

  22. @meekaaku

    its easy to determines how much dollars (or forex) is needed... just look at the import values because that is what dollars are mainly needed for..

    Also your argument on decriminalizing drugs is absurd.

  23. Maldivains have been fed this story of tourism development by Afeef, Maniku Naseem, over and over again.. Is that an excuse for MATI to toy with this country.

    Without a solid economy and a democracy, their party may not even last. If MATI is a responsible guardian, most of the 300,000 people in Maldives would not live under less than a dollar a day.

    If MATI is responsible organization, Maldives tourism would not be a show of Europeans and Sri Lanks.

    If MATI has any sense of duty, the country would not be so poor. Yet their evil schemes of manipulating the country continues..

    Do not believe what they say in this link.

  24. @all-black:
    "just look at the import values because that is what dollars are mainly needed for"

    But how does one determine 12.85 will suffice? why not 12.97? or 10.24? or 3.14?

    Then what about people going for medicals? or hajj or other trips that they go abroad?

    "Also your argument on decriminalizing drugs is absurd."

    Yes it is absurd that the gangs are financed by 'respected' statesmen. It is absurd that gangs has infiltrated the police. It is absurd that government is making sure that these gang-leaders are filthy rich by giving them a virtual monopoly. It is absurd that government is protecting the cartel.
    All this happens not because people in government are bad people, they are good people. Its just that the policies are well intentioned, but its effects are the reverse of whats intended.

  25. Government and Parliament has had a fair enough time to solve this issue. Now that businesses who rely on importing from overseas are begining to break its back from this dollar crises, the govt feels its time to admit that this crises is not solved yet. I do not believe that everyone in government is to blame. But there are many in Parliament as well who could have solved this issue if they really wanted. Voters want results fast. I remember all the big news about getting dollars from foreign governments and injecting into the local market. Was it all big headlines only or was it a short term plan? If so, who did the plan and why did it fail? Has he been sacked or changed to a different ministry which he/she can be made used of better? When politicians make big promises and fail to deliver, than it is their own fault. Dont talk big and make promises if you cannot deliver. It only lowers your name amongst the community and country.


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