The government’s decision to devalue the rufiya and replace the fixed exchange rate with a managed float marks the failure of its economic policy, claims minority opposition People’s Alliance (PA) Leader Abdulla Yameen Abdul Gayoom.
Addressing supporters at the ‘Gayoom faction’ rally last night, MP Yameen, half-brother of former President Maumoon Abdul Gayoom and long-serving Trade Minister in his cabinet, argued that the only circumstance where devaluation was advisable was to make the country’s exports cheaper and more competitive.
“[But] if the country does not produce a lot of goods for export, there will be absolutely no benefit from devaluing the currency,” he said, adding that the decision to devalue was both “political” and “an admission of failure.”
Following its inability to deal with the dollar black market two years after the formation of a parallel market, “what the government did was arrange a mechanism to auction the dollars [that they believe is being hoarded].”
The decision to devalue was therefore “political” as opposed to based on sound economic reasons, he said.
Yameen added that he believed the exchange rate would never fall below the pegged rate of Rf12.85.
“Since the way to get a good price for a scarce commodity is through an auction, they had to do this out of necessity and as a last resort, because they have no other way,” argued the MP for Mulaku.
However, he continued, the changes would be to no avail unless the country’s ballooning fiscal deficit is substantially reduced as urged by the International Monetary Fund (IMF).
Yameen went on to lambast the government’s infrastructure projects as well as preparations for the upcoming South Asian Association for Regional Cooperation (SAARC) Summit to be held in Addu City as “unnecessary spending.”
Conceding that floating the rufiya could solve the black market problem, Yameen however argued that those who had dollars would hesitate to release it if they did not have confidence that the rufiya would not depreciate further.
As a consequence of devaluation, Yameen predicted, inflation would rise by 30 percent: “For a person who gets Rf1,000 [as income], the value of what he can spend is actually Rf600, because of inflation. So, for example, if a can of Nespray [powdered milk] is sold for Rf28 today, with the change in the price of the dollar, we are saying it is going to cost Rf38…the biggest burden will be borne by the poorest.”
To back his assertion, Yameen referred to GMR’s recent 50 percent hike of lease rents at the Male’ International Airport, a decision likely to lead to a corresponding increase in air fare for domestic travel.
President Mohamed Nasheed meanwhile insists that the economy would stabilise over the course of the next three months and that the managed float was necessary “to ensure long term stability and prosperity of the Maldives.”
Breaking its long silence on the dollar shortage, the Maldives Monetary Authority (MMA) issued a statement Thursday estimating that allowing market forces to determine a price within the 20 percent band of fluctuation would “solve the present dollar shortage in the near future.”
“We would like to take this opportunity to inform the Maldivian people that the MMA has undertaken various different efforts to solve the foreign currency problem,” it reads, adding that the central bank was in the process of strengthening the legal framework for monetary policy.
The MMA statement reveals that the Maldives had a managed floating exchange rate between Rf8.50 and Rf11.50 from 1987 to 1994.
On April 10, 1994, the floating rate was replaced with a fixed peg, which was then increased by nine percent in April 2001.
While dollar shortages had been experienced “occasionally in the past” due to strong demand coinciding with the Hajj (pilgrimage) or school holiday season, the MMA explains, an expansionary fiscal policy since 2004 coupled with the global recession in 2009 led to the formation of the dollar black market.