Figures from the country’s central bank show that of the country’s 306 licensed money changers, 95 are resorts while 211 are private.
The present system allows resorts to exchange unlimited amounts of currency, weakening the flow of dollars into the official banking system and allowing resorts to manipulate the market, the source claimed.
“Small resorts are operating like private banks, trading in rufiya and using cheques to do so in any amount of money, with no oversight from the banks or the MMA,” he said.
As a consequence, the government’s recent decision to float the rufiya within 20 percent of the pegged rate of Rf12.85 was unlikely to stabilise the currency until the underlying demand for dollars was addressed.
“The black market rate for the dollar was Rf14-15 before [the government’s decision to devalue the currency]. The reasoning is that now the official rate is Rf15.42, there shouldn’t be a black market. The fact that the black market rate is now Rf16.5 suggests this is not a problem with the economic fundamentals, but a problem of people manipulating the market.”
The source suggested that even if the market was given free reign and the rufiya reached Rf20 to the dollar, “resorts would still have the power to set the parallel market at Rf22.”
The source revealed that during its recent visit to the Maldives, the International Monetary Fund (IMF) had recommended that resort money-changing licenses be limited to changing cash, making it physically impractical to manipulate the market with large sums of money.
The theory, the source explained, was to force resorts to use the local banking system for foreign exchange and increase the flow of dollars through the official economy.
Most resorts presently charge customers in dollars (mostly via credit cards). With most large resorts banking overseas in financial hubs such as Singapore, beyond a fee taken by a local credit card operator such as Cyprea or the Bank of Maldives, very little of this passes through the Maldivian economy – approximately US$13 for every US$100 spent in the country.
“No other country allows another currency to divide the market,” the source said, noting that resorts earned 80 percent of the country’s foreign exchange.
“The taxis at Colombo airport are not permitted by law to accept US dollars, but here every corner shop does. There is a need for exchange control – our monetary regulation is from the 1980s and fits on a single piece of paper. You can see the problem.”
The MMA recently announced the enforcement of legal tender – rufiya – which will require a foreign currency transaction at the point-of-sale. Were resorts restricted to exchanging money by the physical limits of cash, they would be effectively be obligated to feed dollars into the local banking system, thus increasing the availability of foreign currency and greatly reducing the dollar shortage, the source suggested.
The Seychelles encountered similar problems with its exchange rate in late 2008, the source said, providing an IMF document showing that the country’s official exchange rate of 8 rupees to the dollar in late 2008 competing against a black market exchange rate of almost 14.
Following the Seychelles’ decision to float its currency, the rupee shot up to almost 18 to the dollar, but plunged to 10 a year later before eventually settling at 12.
Were foreign exchange controls passed in parliament and enacted, the Maldives could expect the dollar situation to stabilise “in less than a month”, the source predicted.
“This is why ministers are claiming the rufiya can potentially reach Rf10 – although if that stimulates excessive imports it is not necessarily a good thing.”
Local economist in a private consultancy Ahmed Adheeb said the Maldives’ economic situation was as much a problem of over-expenditure and high budget deficit.
“Successive IMF reports have raised real problems with the country’s expenditure,” Adheeb said. “You cannot just blame the resorts for manipulating the market.”
Low confidence in both the rufiya and the local banking system was a major concern, he explained, and forcing businesses into it could have wider ramifications.
“We have to build confidence in the financial system, otherwise we will just see black market banks emerge. Businesses need to be confident that their accounts will be protected and confidential, and that this will not be abused for political reasons,” he said.
“For instance, nowhere does a country’s Auditor General state a bank client’s name and debts in [publicly available] audit reports.”
The limited number of cross-currency transactions in local banks showed there was no confidence in the country’s financial system, Adheeb said, as businesses that banked in rufiya could not be confident of receiving dollars when required.
“The Finance Minister needs to provide reassurance that our banks are protected and regulated, and give confidence to businesses that bank confidentiality will be respected. In a small society like this, we have to listen to the entrepreneurs.”
Secretary General of the Maldives Association of Tourism Industry (MATI), ‘Sim’ Mohamed Ibrahim, said all resorts needed a foreign exchange license, and questioned the practicality of both enforcement and restricting these trades to cash: “Even small resorts trade in high volumes,” he said.