Tag: adheeb

MMA’s enforcement of legal tender for all transactions “absurd”, says private sector

The private sector has expressed concern at the Maldives Monetary Authority (MMA)’s announcement last week that it it intends to enforce the use of rufiya for all transactions conducted in the country.

The move effectively outlaws dollar transactions in the Maldives, with the intention of funneling foreign currency through the local banking system in a bid to combat the country’s dollar shortage.

President Mohamed Nasheed backed the central bank’s move, and the prohibition of the use of any currency other than rufiya for payments including remuneration for work, services, fees or rent.

The ‘grey’ dollar economy has existed in parallel to the local currency, and has insulated businesses such as resorts from the inflation of the rufiya, pegged at 12.85 to the dollar for almost a decade despite the global economic recession, printing of currency and issuing of T-bills.

“This regulation has existed since 1987,” observed Ahmed Adheeb, a local financial expert working in the private sector, adding that the lack of enforcement had protected the private sector from the country’s monstrous deficit and spend-happy state budget.

The MMA’s announcement came at time when “the convertibility of rufiya [into dollars] is in question because of the deficit, and the pumping of rufiya into the system.”

“Is this the right time to enforce this regulation?” Adheeb asked. “We met with the government and told them clearly that that our industry will face a lot of consequences if this happens.”

Local travel agents were one example of businesses that would be affected, Adheeb said.

“They [earn dollars] and contribute a large inflow of dollars into the economy. If they have to pay resorts in rufiya, they will lose their competitive advantage.”

The enforcement would take “the openness and flexibility of out of the economy, when the real issue lies with the state budget,” he said. “This will make business so difficult – it is very dangerous to the economy for the government to start sorting out industry before the state budget. And what of the practicality of it?

“The government needs to address the deficit and cut down its expenditure. State income will increase gradually, but if we keep spending like this we are headed for disaster.”

Minivan News spoke to the manager of one import business, who relies on resort customers paying in dollars to be able to buy stock from overseas.

The MMA’s decision, he claimed, was “absolutely absurd.”

“They can do what they like – but does this mean resorts must pay in rufiya? At a time when there’s no currency stability? Will resorts have to post rufiya prices in tourist brochures? If the objective is to drive foreign investment out of the Maldives with a raft of new taxes and a confused and bizarre monetary policy, then they’re being quite successful,” he said.

Another manager of a commodity import business Minivan News spoke to bluntly stated that she would be unable to comply with the regulation “because we trade in dollars.”

She added that  her business, which banks locally and was sorely hit by the dollar shortage and the reluctance of banks to convert local currency, had improved following the government’s decision implement a managed float of the rufiya.

“We found resorts were more willing to pay in dollars once we set our rate at Rf15.42,” she explained. “But unless the banks are going to exchange rufiya to dollars consistently and at a sensible rate, this is going to cause absolute uproar. And how on earth are they going to police things like payment of rent?”

Economic Development Minister Mahmoud Razee told Minivan News that the government was “trying to make sure that foreign currency goes through the banking system, by enforcing the legal tender.”

“The reason we are doing this is so importers can go to the bank and request dollars from the banking system,” he said. “This will not stop people having a dollar account, it will just stop transactions not in the legal tender.”

Every restaurant at tourist resorts would be obliged to change its menu to rufiya prices, he acknowledged, “but almost every resort and hotel already has a money changer.”

“The MMA will be able to take action if there is a transaction that does not take place in legal tender, and take [the parties] to court,” he said.

The MMA’s announcement came days after the government announced exchange control regulation on the salary of expatriates, legally limiting their ability to transfer money outside the country.

“We don’t want a lot of illegal workers sending foreign currency out of the country, working on the side and taking jobs from locals,” Razee said, explaining that expatriate workers would be obliged to prove they were working in the country legally at the point of transfer, and be restricted in the amount they could send overseas.

“The Ministry of Finance will set a percentage, say 90 percent, of the salary that can be remitted,” he said.

Adheeb was critical of the decision, suggesting that the government had chosen a critical time to impose exchange control.

“We have said it is not going to work as we have a small population and we need foreigners to work here,” he said. “[Issues concerning] non-skilled labour are a problem of regulation, but importing skilled labour gives us a competitive advantage at a time when there are issues converting the rufiya,” he said.

“I question the practicality off this – the banks are currently struggling to deliver services to their existing customers. How will they know if an expat is an illegal expat? This will just create a blackmarket for illegal banking transactions.”

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IMF praises managed float of rufiya, “unpredictable” and “high risk” warn local experts

The International Monetary Fund (IMF) has praised the Maldives’ decision to effectively devalue its currency, allowing the rufiya to be traded within 20 percent of the pegged rate of Rf12.85 to the dollar.

“Today’s bold step by the authorities represents an important move toward restoring external sustainability,” the IMF said in a statement. “IMF staff support this decision made by the authorities. We remain in close contact and are ready to offer any technical assistance that they may request.”

The Bank of Maldives was today trading the dollar at the maximum selling price of Rf15.42 and buying at Rf12.75 while the Bank of Ceylon was selling it at 13.80 and buying at Rf13.60.

At a press conference this afternoon, newly-appointed Finance Minister Ahmed Inaz explained that the government decided to change the fixed exchange rate to a “managed float” to shape government policy towards increasing the value of the rufiya and ultimately bring the exchange rate down to Rf10 – an oft-repeated pledge of President Mohamed Nasheed.

The worsening balance of payments deficit could not be plugged without allowing the market to set the exchange rate, Inaz continued, adding that through lowering the fiscal deficit and spurring private sector job growth “a path would open up for us to reach the lower band (Rf10.28).”

“My estimate is that it will take about three months for the market to stabilise and reach a balanced [exchange] rate,” he said.

MMA Deputy Governor Aishath Zahira acknowledged on state television last night that the fixed exchange rate in effect since July 2001 had been “artificial.”

Economic Development Minister Mahmoud Razee argued that as a result of the artificially fixed exchange rate, “we do not really know, based on the breadth of the domestic economy, what the value of the Maldivian rufiyaa is right now.”

The managed floating rate, said Razi, would allow the government to decide specific measures that would be needed to improve the exchange rate – such as the extent to which foreign exchange reserves should be increased.

State Minister for Finance Ahmed Assad told press that TGST (tourism goods and services) receipts in February had revealed that previous estimates of the amount of dollars that enter the country were well below the actual figure. The government now estimates a minimum annual income of US$2.5 billion.

Assad urged citizens to use banks to purchase and exchange dollars to avoid “becoming prey to [black market operators].”

A senior government source said the decision was made based on the government’s speculation “that people are hoarding dollars. We hope this will send a signal to the market. It also shows our commitment to a market economy.”

“High risk”

The government has struggled to cope with an exacerbating dollar shortage brought on by a high budget deficit – triggered by a spiralling public sector expenditure – in comparison with the foreign currency flowing into the country. Civil service expenditure has increased in real terms by 400 percent since 2002.

Banks subsequently demonstrated reluctance to sell dollars at the pegged rate, and high demand for travel, commodities and overseas medical treatment forced most institutions to ration their supply.

A watershed moment last week – a crackdown on the hitherto ignored blackmarket sale of dollars at rates of up to Rf14.5 – led to increasing desperation among the lower-paid of the country’s 100,000 expatriate workers, who found themselves blocked from trading currency and unable to remit money home to their families.

The government’s decision yesterday is effectively a ‘rose-tinted’ devaluation of the currency, at least in the short-term, but according to one financial expert could have unpredictable consequences once the market catches up in 4-6 weeks.

“Other countries have a maximum band of eight percent. I have not come across any countries with 20 percent. I think it’s too wide,” said Ahmed Adheeb, a local financial expert working in the private sector. “Why did the government overshoot the blackmarket rate of Rf14.5, and why did it take them two years to come to this decision?”

Adheeb predicted that the construction industry would be among the hardest-hit, “as ongoing projects will now face additional costs. In addition, smaller and medium-sized enterprises supplying resorts may find that their commission and profit is gone if their contracts are in rufiya.”

The public would also be impacted, Adheeb said, as importers passed on the rising cost of goods.

The devaluation came at the same time as the tourist season was winding down for the year, and pilgrims were searching for dollars for the upcoming Hajj. Pilgrims could be called on to make additional payments, Adheeb speculated, while Ramazan importers could face additional challenges this year.

The general public would be also be impacted as the cost of commodities rises to fill the new exchange rate, Adheeb said, while the government’s commitment to projects such as harbour construction could be delayed due to the risks of taking on even more debt.

“This will also affect business contracts, particularly [those concerning] foreign employment, and students studying overseas,” Adheeb said, predicting that “if the market does not stabilise then in three months time we will see a further devaluation. The government is taking a huge risk.”

Structural adjustments

The move will put the government on good terms with the IMF, which spent last year trying to encourage the government to make difficult political decisions for the sake of the economy, and just stopped short of calling for a devaluation of the currency on conclusion of its Article IV consultation.

The IMF, which has shown resounding disinterest in local politicking, in February 2011 criticised the government for “significant policy slippages” claiming that its failure to reduce its expenditure had undermined the country’s capacity to address its crippling budget deficit.

“On the expenditure side, there have been no net fiscal savings from public employment restructuring, public sector wages will be restored to their September 2009 levels earlier than expected, and the new Decentralisation and Disability Bills will lead to considerable spending increases,” the IMF stated. “Also, the Business Profit Tax will come on stream eighteen months later than planned.”

It did however praise the government for getting much-needed business profit tax and tourism goods and services tax legislation through parliament, signalling that this was a major step towards long-term economic maturity. The bills had faced obstacles in parliament, which includes among its MPs some of the country’s wealthiest figures in the resort industry, and who were instrumental in increasing the budgets sent to parliament by the Finance Ministry.

Opposition Dhivehi Rayyithunge Party (DRP) MP Ali Waheed this morning proposed a motion without notice condemning the government’s decision to relax the dollar exchange rate.

Waheed said that he was prompted to submit the motion out of concern for the plight of Maldivian students in foreign institutions and patients who need to fly abroad for treatment.

The DRP MP for Thoddoo also accused the government of compromising the independence of the country’s central bank by trying to influence monetary policy.

In the ensuing one-hour debate, opposition MPs argued that the immediate consequence of the new floating exchange rate would be a 20 percent rise in inflation.

DRP Leader Ahmed Thasmeen Ali explained that government revenue from import duties would increase by 20 percent but the affected businesses would pass the cost to customers.

“We are in this state because the government increased the [amount of rufiya] in circulation by printing money and taking on credit,” said Thasmeen, in a statement likely to raise political hackles among the ruling party, considering that the IMF has stated that the economic crisis in the Maldives was triggered by “expansionary fiscal policies” from 2004 – under the former administration.

This left the country especially vulnerable to the decline in tourism during the 2008-2009 recession. However the financial deficit exploded on the back of a 400 percent increase in the government’s wage bill between 2004 and 2009, with tremendous growth between 2007 and 2009.

On paper, the government increased average salaries from Rf3000 to Rf11,000 and boosted the size of the civil service from 24,000 to 32,000 people – 11 percent of the total population of the country – doubling government spending from 35 percent of GDP to 60 percent from 2004 to 2006.

While preliminary figures had pegged the 2010 fiscal deficit at 17.75 percent, “financing information points to a deficit of around 20-21 percent of GDP”, down from 29 percent in 2009, the IMF reported.

Adheeb said today that parliament, independent institutions, civil service and political appointees had continued to make salary demands on the state “but nobody is thinking about the economy.”

“Economic decisions are being politicised when the economy should be the first priority – we cannot survive without it. Only then can political stability be achieved,” he said.

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