President Mohamed Nasheed has said that the government’s decision to implement a managed float of the rufiya was necessary “to ensure the long term stability and prosperity of the Maldives.”
The government announced last week that it was allowing the rufiya to be exchanged for the dollar within 20 percent of the pegged rate of Rf12.85. Many businesses dealing in imported goods and several banks, including the Bank of Maldives (BML), immediately raised their rate exchange to the maximum permitted rate of Rf 15.42, exceeding the average Rf14.2 rate of the formerly institutionalised blackmarket.
Speaking during his weekly radio address, President Nasheed thanked the public and local businesses “for their patience and faith”, and predicted that the economy would show positive signs of stabilising in three months’ time.
“Changing the exchange rate mechanism [and] maintaining the value of rufiya is linked to finding a permanent solution for the constraints on our economic development,” he said, explaining that the decision would allow the government to “finance budget deficit, increase productivity, and increase export of goods and services.”
The President suggested that the financial shake-up caused by the move would not be as significant as many feared, because most importing businesses had been calculating the value of the dollar as higher than the government’s previously pegged rate.
“The government is confident of an expeditious fall in the prices of goods and services as the exchange rate stabilises,” said the President’s Office, in a statement.
A crackdown on the illegal sale of dollars on the blackmarket the previous week – following a speech in which the President promised to “put a policeman behind every dollar” – failed to address the high demand for foreign currency particuarly among the country’s expatriate population, who had relied on blackmarket dollars for remittances.
Many of the country’s 100,000 foreign workers, particularly a large percentage of labourers from Bangladesh, are paid in Maldivian rufiya by their employers and became increasingly desperate as paranoia following the crackdown limited blackmarket exchanges.
Meanwhile protests organised by the various opposition factions this week in response to the managed the managed float attracted a surprisingly low turnout, given the potential for the government’s decision to raise the cost of living by up to 20 percent in the short-term.
While the move drew praise from the International Monetary Fund (IMF), which described it as a “bold step toward restoring external sustainability,” a number of Maldivian economists in the private sector remain convinced that the government’s effective devaluing of the currency will only temporarily ward off economic catastrophe in the face of crippling over-expenditure.
In an article for Minivan News this week, Director of Structured Finance at the Royal Bank of Scotland, Ali Imraan, observed that ‘growth’ in the domestic economy had been driven by the public sector and “paid for by printing Maldivian rufiya and clever manoeuvres with T-Bills, which the government has used since 2009 to be able conveniently sidestep the charge of printing money. In simple terms: successive governments printed/created money to drive domestic economic growth.”
Imraan pressed for the Maldives to invest in private sector revenue growth “rather than building airports on every island”, and implement a progressive taxation system targeting high earners in the interest of income equality. He also urged the Majlis to uphold the constitutional stipulation whereby MPs – such as those with business interest in the tourism sector – removed themselves from voting on issue in which they had a vested interest, and further suggested that the government resolve the matter of stalled tourism developments “awarded to parties with no money or track record.”
“Moratoriums on lease payments or debt repayments may look innocuous enough, but they rob the country of vital growth opportunities and hence ultimately rob the people. We should not stand for it,” he said.
Imraan’s latter suggestion proved somewhat prescient when the Tourism Ministry renewed the lease for Hudhufushi in Lhaviyani Atoll, despite the resort island’s owner owing more than US$85 million in unpaid rent – most of it fines for non-payment.
The government’s decision to implement a managed float of the currency came as a least one local sales agent for international airlines operating in and out of the Maldives closed its doors to customers, blaming an inability to pay the airlines because of a lack of US dollars circulating within the economy.
A local financial expert working in the private sector, Ahmed Adheeb, had also warned that a shortage of foreign currency would reduce the prospect of foreign investment, 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,” Adeeb said. “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.
Following the devaluation Adheeb warned that the impacts would be felt strongly in sectors such as construction, as dollars were already becoming scarcer as tourism wound down for off-season and Hajj pilgrims searched for dollars.
The general public would be also be impacted as the cost of commodities rose to fill the new exchange rate, 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.”
Announcing the decision this week, Economic Development Minister Mahmoud Razee candidly stated 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 rufiya is right now.”
Given Nasheed’s radio address yesterday, the government has three months to find out.