currency – Minivan News

China offers Maldives US$8.2 million in grant aid: President’s Office

The President’s Office (PO) has announced China will give the Maldives 50 million yuan (US$8.2 million) in grant aid “for the implementation of developmental projects and the advancement of public services.”

The announcement was made following a meeting between Foreign Minister Dunya Maumoon and President Abdulla Yameen with the Chinese Ambassador to the Maldives, Yu Hongyao.

The grant aid comes at a time the Maldives is facing dire economic circumstances, with the government unable to afford its huge recurrent expenditure on a bloated civil service and failing to pay millions of dollars owed to state-owned companies for services such as oil and electricity.

The State Trading Organisation (STO), the country’s main importer and wholesaler which brings in most of the Maldives’ basic commodities such as food and oil, warned of oil shortages in November after it was unable to pay a US$20 million debt to suppliers.

The central bank eventually bailed out the STO by drawing on the Maldives’ dwindling foreign currency reserves, but warned the country was on the verge of needing to print money, while state debt reached MVR 30 billion (US$1.9 billion).

The US$100 million fishing industry is about to be hit in 2014 by the decision of the country’s top export partner – Europe – refusing to extend the Maldives’ duty-free status due to its failure to ratify international conventions on freedom of religion and women’s rights.

The government this week said it would look to sell fish to the Arab and Malaysian markets by certifying Maldivian fish as ‘halal’.

The Maldives’ other major industry, tourism, meanwhile flat-lined in 2012 with the number of tourist bed nights falling 0.1 percent, even as annual arrivals continued to increase, this week topping one million.

The Tourism Ministry revealed that Chinese tourists now represented 30.8 percent of the total arrivals to the Maldives, the highest arrival from a single source market, however the Finance Ministry observed that this had not been matched with new revenue.

“As the most number of tourists to the country now come from China, we note that the low number of nights on average that a Chinese tourist spends in the Maldives has an adverse effect on the tourism sector’s GDP,” read the Finance Ministry’s ‘Fiscal and Economic Outlook: 2012 to 2016’ report.

The enthusiasm of the Maldives’ usual aid partners dwindled over two years of democratic uncertainty following President Mohamed Nasheed’s ousting by mutinying police in February 2012, while others – particularly Scandinavian countries lost interest once the Maldives graduated from ‘least developed’ to ‘middle income’ in 2011.

This was to some extent offset by extensive funding for climate change adaption and mitigation efforts across the country, ranging from waste management to desalination projects, that followed the Maldives’ grandstanding at international climate events.

President Yameen has pledged to tackle the Maldives’ economic woes by exploring and drilling for oil, as part of the Progressive Party of the Maldives (PPM) campaign pledges.

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Police arrest two suspects over US$1million counterfeit notes

Police arrested two suspects on Thursday after recovering counterfeit dollars worth nearly US$1 million.

The two suspects have been identified by the police as 34 year-old Umar Ahmedfulhu of Banbukeyogasdhoshuge from Madduvaree island in Raa Atoll, and 29 year-old Ahmed Munnavaru of Tharividhaage from Kolamaafushi island in Gaafu Alif atoll.

According to Superintendent of Police Mohamed Riyaz, police investigators recovered the nearly US$1 million believed to be smuggled into the country from abroad.

Riyaz said US$774,900 was recovered from a bag Ahmedfulhu was carrying when he was arrested at an unnamed bank in Male’ on Thursday afternoon.

The suspect was attempting to deposit the fake notes at the bank, Riyaz added.

The second suspect, Munnavaru, was arrested the same evening while sitting at a café in the south west harbor of Male’.

During a court-ordered search of Munnavaru’s residence, police seized counterfeit notes from a cardboard box labeled in Dhivehi as “smoked fish 13 kilos”, Riyaz revealed, adding that police recovered counterfeit dollars from Munnavaru’s wallet as well.

Though police did not specify if the two suspects are connected, Riyaz observed that all the counterfeit notes recovered from both suspects were US$ 100 bills, labeled with a four-digit serial number.

The police are further investigating the case.

The Maldives penal code states that “possession of a counterfeit coin or note knowing it to be counterfeit and to be used fraudulently or in circumstances that it may be likely to be used as fraudulently” is an offence which carries maximum five year imprisonment or exile, or a fine.

The delivery of counterfeit note or coin is also counted as an offence, with a sentence of maximum three years in exile or imprisonment while the person found guilty can also be subjected to a fine.

However, leniency is offered if the person found guilty did not have knowledge that the note or coin is counterfeit, prior to possession.

The counterfeit dollars bust coincides with the reports of increasing demand for US dollars in the black market, due to the crippling dollar shortage the Maldivian economy has been suffering.

Local importers, Maldivians travelling outside the country and expatriate workers seeking to export their remittances are forced to rely on the unofficial black market, as they are unable to change the required amount into dollars at banks which strictly control the supply.

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Rufiya world’s second worst-performing currency: Bloomberg

International financial news agency Bloomberg has reported that the Maldivian rufiya is the world’s second worst-performing currency, after the Suriname dollar and above the Kenyan shilling.

The Maldives has been faced with a shortage of foreign currency for over a year due to a high budget deficit, spiralling state budget, economic disconnect from the high-earning tourism industry and political obstacles to reducing expenditure or implementing tax reform.

Earlier this year the government introduced a managed float of the currency within 20 percent of the pegged rate of Rf12.85 to the dollar, in a bid to overcome black market currency trading. The exchange rate shot to the maximum permitted Rf15.42, where it remains, and convertibility of the currency into dollars remains sporadic.

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MMA to increase auction of dollars by 20 percent

The Maldives Monetary Authority (MMA) has increased the amount of dollars auctioned to local banks by 20 percent, after setting a dollar exchange reference price of Rf14.75.

The MMA has previously set a limit for the sale of dollars based on its reserve of foreign currency, when dollars could only be sold at the pegged rate of Rf12.85.

The managed float of the rufiya within a 20 percent band of that rate has increased competition among local banks selling dollars, with rates at some institutions dropping to Rf13.8. Prior to the managed float, the blackmarket was hovering between Rf14.2-Rf14.8.

However while the move has increased competition with banks, many companies dealing in dollar commodities such as air travel have increased their rates of exchange to the maximum permitted Rf15.42.

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Public Accounts Committee summon decision makers over dollar rate revamp

The parliamentary Public Accounts Committee has today summoned members of government and the Maldives Monetary Authority (MMA) to present the research behind a recent decision to amend the set US dollar exchange rate of Rf12.85 to within 20 percent of the figure.

Ahmed Nazim, MP for the People’s Alliance (PA) party and a member of the Majlis’ Public Finance Committee, has said it is scheduled to meet with members of the government and the MMA at 4.15pm this afternoon in order to get an insight into the research and statistical information that led to them taking the decision.

Nazim claimed that under its mandate, the Public Finance Committee was not in a position to call for any amendments to the president’s decision to amend the exchange rates, which have reportedly led to banks charging Rf15.42 a dollar to customers – a rate thought to have exceeded prices offered on the formerly institutionalised blackmarket.

The new exchange rates bought into effect as last week were claimed by President Mohamed Nasheed to ensure “longer term prosperity” in the Maldives. The decision was praised from the International Money Fund (IMF) as being a “bold step” towards providing more sustainable finances.

Such praise came as the country’s Economic Development Minister, Mahmoud Razee, argued that the artificially fixed Rf12.85 exchange rate on the dollar has meant there was little certainty of the exact value of the Maldivian currency in the present market.

However, this so-called dollar float has also led to derision and protests from different factions representing the main opposition Dhivehi Rayyithunge Party (DRP) as well as criticisms from some private sector economists that the measures still fail to address the high levels of state expenditure that threaten to shatter any attempts to balance national finances.

Despite the committee itself not being able to propose any amendments to the national interest rate, Nazim said the meeting was needed to ensure the reasons for taking the decision to amend interest rates were just.

“We have been following this [exchange rate] decision and we knew what the situation was. The committee just want to make sure the correct legal steps were followed,” he said. “We just have to make sure that they have done good analysis and are aware of the fiscal impact of their decisions in the long term.”

Nazim added that relevant authorities had already responded to the committee ahead of a deadline set for midday yesterday (April 17) to supply data related to the exchange rate decision.

In an article for Minivan News last 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 other countries.

“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.

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New exchange rate vital for long-term economic prosperity: President

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.”

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.

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Comment: It’s the economy stupid!

There is only one thing on everyone’s mind – the dollar-rufiyaa exchange rate. In a country that imports everything from salt to the accountants that run its businesses, it is no wonder that everyone from the construction worker to the Maldives’ answer to Donald Trump (I’ll leave you to guess whom) is trying their hand at being an economist with a specialty in foreign exchange.

Whether you agree with the politics of it or not, the devaluation was needed. If anything it should have come sooner. The Maldives has been growing its rufiyaa-based economy at break-neck speed. Salary rises across the board, increased government spending and ever increasing infrastructure projects have become the norm over the past decade. By and large this ‘growth’ in the domestic economy has been driven by the public sector (government policy & the civil service) and paid for by printing Maldivian rufiyaa 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.

What it didn’t manage to do was increase it’s dollar receipts at the same speed (actually all foreign currency, but I’ll use dollar interchangeably in this article). Yes growth in the tourism industry increased the dollar receipts but nearly not enough to fund the increase of rufiyaa in circulation. The previous government had a spade of one-off dollar incomes by selling resorts, but by neglecting to make sure that these so called developers had the capacity to develop the properties and provide the country with a constant source of dollars, they missed a trick. The consequence: an imbalance in the amount of dollars the country has the capacity of earning and the amount of rufiyaa it is printing/creating and spending. If you increase the supply of rufiyaa without the corresponding increase in dollar receipts, it is inevitable that Maldivian rufiyaa will be worth less. It is simple demand and supply.

So the question is, where to from here? By creating a ceiling at Rf15.42, the government has effectively stopped a steep depreciation in the currency and has minimised the crippling effects of a severe shock to the economy – and it should be praised for that. There is however a cost. This will erode purchasing power in the short term and will hit people’s pockets (albeit tempered by the fact that the dollar was already trading at around Rf 14 in the black market despite the best efforts of the authorities). As always, it is the common ‘Mohanma’ on the street who will bear the highest burden. Prices will inevitably creep up and the inflation will put pressure on wages. Any subsequent wage increases which will lead to further effective devaluations. Let us not sugar coat this – it will be painful.

What the government needs to do is to come up with a credible plan to redress this imbalance and reassure the people that the pain is worth it. There are two fundamental way of doing this: i) reducing the rufiyaa in circulation, or ii) increasing the dollar revenue the country earns. In my mind there is no doubt the answer lies in a fiscal solution to get the economy back on an even keel. The dollar crisis is simply a symptom of deeper economic woes – not the problem itself.

Reducing rufiyaa in circulation

The main levers of doing this are a) reduce government spending – reducing wages and cutting unfunded government projects and/or b) increasing rufiyaa-based taxes.

Reducing government spending is an essential plank of what needs to be done to rebalance the books. This is the path that the UK and the EU (driven by Germany) are already following, and all indications are that the US will announce similar austerity measures after its Quantitative Easing splurge. Cutting too quick and too deep may the tip the economy into recession and that would be very painful – but not doing anything is simply not an option. The consequences are even graver.

The government also needs to ensure that it adopts a progressive taxation system on rufiyaa-based incomes. We need to ensure that the rich share ‘equitably’ in the pain of rebalancing our books. Equitably here means that they pay a much higher proportion of the cleanup costs – in practice this should be a combination of no taxes for the low income earners, close to 50 percent taxes for the ultra high income earners and a corporation tax system which exempts small local businesses.

Increase the dollar revenue

The most appealing of all options as it means no painful cuts. The catch is that this is largely out of the government’s control, at least in the short term. The only two significant sources of dollar income are through fisheries and tourism – and there are challenges in growing both sectors. Investment in fisheries is long over due, but ultimately the sector does not have the scale to solve the problem in the short to medium term – it is simply too small today.

Tourism, the great gold rush of this generation, is a much bigger challenge. Government types tell wonderful stories of 20 percent equity returns and 60 resorts waiting to be developed. The simple truth is that this represents close to US$3 billion of investment in a country where the nominal GDP is around £1.5 billion – an improbability to put it mildly. It is simply not realistic to pin our hopes on some sort of tourism growth bonanza in the short term – we might as well play the Euro lottery every week if this is the only plan.

The long term rebalance

In the long term, the structural solutions are through growth of our industries that translate into real economic growth underpinned by increases in our foreign currency receipts. The government needs to:

Foster an environment where real growth can be achieved for our innovative companies in the fisheries sector (the next Big Fish, Horizon et al), and also create opportunities for Maldivian corporations and SMEs in other sectors to grow into the world market. Investing in revenue growth is more important that building airports on every island. Real growth in the economy driven by the private sector is the road to prosperity – not government spending based on printing money and clever manoeuvres with T-Bills.
Move now to ensure a quick solution to all the tourism development projects stopped because they were awarded to parties with no money or track record. It is bizarre that they have been allowed to hang on to ‘their’ assets without fulfilling their obligations by cajoling the government and the banks. 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.
Implement an equitable progressive taxation system. It is not fair that the low income people pay the same taxes as the highest earning group – through the flat import duty this means that the poor actually pay a larger percentage of their income as tax than the rich. And it is criminal that the resort owners are sitting in parliament legislating that they should not pay their fair share of taxes on the very substantial amounts they earn. This is a clear conflict of interest and something that needs to be addressed at a national level. The constitutional stipulation that Majlis members shall not vote on issues in which they have a personal vested interest must become more than just a nice idea on paper. The 3 percent tourism GST is simply not equitable enough!

The country’s economic troubles require a bold government that can show leadership and is honest with the Maldivian people about the tough choices ahead. Equally it needs a responsible opposition which accepts the reality of the problem and challenges the government on the merits of its economic policies by proposing viable alternatives. For their trials and tribulations, the Maldivian people deserve it. Whether they are lucky enough to have either, only time will tell.

Ali Imraan is the Director of Structured Finance at the Royal Bank of Scotland. The views expressed here are his own personal views and opinions and do not represent those of the Royal Bank of Scotland and should not be construed to do so in any way, shape or form.

All comment pieces are the sole view of the author and do not reflect the editorial policy of Minivan News. If you would like to write an opinion piece, please send proposals to [email protected]

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President relaxes exchange rate crackdown

The government has relaxed a blackmarket crackdown on the illegal exchange of dollars into rufiya, announcing today that the currency could be traded at a rate within 20 percent of the pegged 12.85 to the dollar.

The announcement effectively defangs the police crackdown by allowing trade of the rufiya up to Rf15.42, at a time when the supply of dollars sits below demand and banks are refusing to exchange the local currency.

Haveeru reported that President Nasheed had sent a letter to MMA Governor Fazeel Najeeb requesting he announce the new exchange rate. The government has criticised Najeeb for not addressing the dollar shortage and for lack of response to requests for advice and assistance, and has requested the MDP parliamentary group to press for his dismissal.

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BML to block foreign account holders from using debit cards overseas

Expatriates holding local accounts with the Bank of Maldives (BML) will be prevented from spending money overseas using their debit cards, as the dollar shortage worsens.

A statement from the BML, written in Dhivehi, stated that from November 1 foreigners with debit cards will be unable to conduct transactions of any amount from either the ATMs of other banks or point-of-sale machines in shops.

At the same time, the overseas spending limit for Maldivians has risen from US$200 a day to US$600.

The move, blamed by BML on the worsening dollar crisis, will particularly impact the many foreign teachers and other professionals such as doctors working in the country who bank locally, particularly those based outside Male’ who need to send money home.

One such doctor explains on his personal blog that it is common practice for foreign doctors to transfer money home by opening a BML account at a branch in the atoll capital, and then give an international visa debit card to relatives in his/her home country.

“Now no one has any idea about how to send money to their country without visiting Male’,” he writes. “If you keep the money with you, there is no guarantee that you will not be robbed of it.”

“The gynecologist of our hospital was robbed after he got his salary three months back. The next day, someone opened the house with a [spare] key and cut open the suitcase where he kept his money.”

In August an Indian pediatrician working at Kudahuvadhoo Hospital in Dhaal Atoll was stabbed in his home by a group of masked men.

The attack occurred on 10 minutes after the doctor arrived home from the hospital, when the group forced in his door. The doctor was stabbed in the arm and leg when he was unable to give the men any money.

Moreover, after October 15, BML will only allow foreigners to transact overseas from a US dollar account.

“Debit card for rufiya accounts can only be issued to foreigners for ‘local’ use at the the Bank of Maldives ATMs and POS terminals,” the announcement reads.

Several foreign commodity importers based in the Maldives also warned that their businesses were under threat after local banks began refusing to trade freely in rufiya.

“Our overseas suppliers have to be paid in dollars, and local buyers pay us in rufiya. Our bank has now stopped allowing us to transfer this into our US dollar account,” the manager of one enterprise told Minivan News recently. “How are you meant to run a business in this place? Surely they can’t go on like this?”

Press Secretary for the President Mohamed Zuhair told Minivan News that the end of the off-peak tourist season had combined with “a concurrence of other factors” to exacerbate the foreign currency crisis.

“There are currently two groups of people who need dollars – the first is the group of pilgrims about to go on the Hajj – the whole exercise usually costs US$30 million. Unfortunately it’s also the school holidays, and many teachers going on holiday will also need the money. That’s why there’s going to be shortages,” he said.

He acknowledged that the dollar situation was affecting investor confidence and making the Maldives a less appealing destination in which to conduct business.

“Foreigners can bank with foreign banks such as the State Bank of India,” he noted. “We also have a commitment from [Indian infrastructure giant] GMR that they will pay their first down payment on Male’ International Airport by the end of November – it was initially the end of December. Income from the donor conference should also reach US$90 million by the end of the year,” he said.

“It’s just unfortunate that the Hajj is slightly ahead of these debts. [Investor] confidence is a big problem, and the government is talking to the Maldives Monetary Authority. But there are no quick fixes.”

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