Maldivian financial authorities are reportedly in negotiations with Sri Lanka to try and establish a currency swap mechanism in an effort to stabilise the value of the rufiya against the US dollar – a move opposition MPs claim is at best, a short-term relief.
Sources linked to the country’s financial sector have told Minivan News that a deal between the Maldives Monetary Authority (MMA) and the Central Bank of Sri Lanka was “in the pipeline” in order to try and create a system for a direct exchange between the rufiya and the Sri Lankan rupee.
Mahmood Razee, the Maldives’ Economic Development Minister, did confirm that talks were taking place over a possible exchange movement with Sri Lanka, reflecting the government’s intentions to try and stabilise the local currency against high demand for the dollar.
While claiming to welcome government initiatives for economic stabilisation, a spokesperson for the opposition Dhivehi Rayithunge Party (DRP) said that although a currency exchange may provide “short-term” relief for dollar demand, the government would be required to show shrewd financial management to maintain confidence in the rufiya in the long run.
Income aims
The currency swap is the latest development in the government’s plan to boost income of foreign money that has maintained a lucrative blackmarket for the US dollar in the country. Three months ago, the government began pursuing a controversial plan to devalue the rufiya. The local currency, which was pegged at an exchange rate of 12.85 to the dollar since July 2001, was this year amended to within 20 percent of this figure to try and bridge a limited national supply of foreign money in circulation.
The devaluation stance was welcomed at the time by the International Monetary Fund (IMF), yet was domestically met with derision by opposition politicians and a week of public protests across the capital during April over fears about the resultant rises in living costs.
Despite accusing certain opposition parliamentarians of manipulating protests and media coverage for their own political gain, financial authorities requested patience for three months for the dollar demand and supply to stabilise – a deadline that passes this month.
With local news reports claiming the local currency was trading at up to Rf16.5 to the dollar on the country’s black-market, Mahmood Razee said at the time that authorities could consider additional support measures such as currency exchanges if its stabilisation aims were not met.
While discussions are said to have been ongoing for sometime over trying to establish methods to exchange currencies with other nations, a report in the Pakistan Observer newspaper today cited Razee as claiming discussions were very much continuing between finance heads in Sri Lanka and the Maldives.
However, a source with knowledge of the discussions who wished to remain anonymous told Minivan News that “figures” at the very top level of the MMA were involved in ongoing talks with the Central Bank of Sri Lanka to provide a currency exchange system.
Talking to Minivan News today, Razee confirmed that talks were ongoing, though he said he was unsure as to what stage they had currently reached. The economic development minister claimed that although the currency exchange talks had begun before the decision to devalue the rufiya, he added that it did form part of the government’s response for trying to balance local dollar demand.
However, with the initial three-month target period to introduce economic stabilisation now passed, Razee said that he believed the finance ministry was limited at present in terms of additional support measures that could be introduced to the economy, particularly during the low-tourism season and its impact on government earnings.
“At present, I’m not so sure the Ministry of Finance will be able to undertake any urgent [new] measures to ensure stabilisation,” he said. “It would be more difficult at the moment to introduce these measures due to the low tourism season.”
Since January this year, the government had pledged to try and balance its books with a focus on generating direct revenue through the gradual introduction of taxation schemes. These schemes have included a Business Profit Tax scheduled to be launched this week for higher income enterprise and the tourism Goods and Services Tax (GST) introduced over the new year.
DRP Spokesperson Ibrahim ‘Mavota’ Shareef claimed that although the opposition party welcomed stabilisation measures from the government, it did not believe that longer-term measures had been successfully planned by authorities to bridge the dollar demand. However, Shareef said that the black market was testament to the fact that dollars did exist in the country, but that they required sufficient management to ensure they are finding their way into wider circulation.
“Any measures that encourage financial stabilisation we would welcome. This is more a national than political issue. But we do not see [stabilisation]happening yet,” he said. “If we are all spending more than we earn, especially the government, then we cannot balance the economy. These currency swaps are a short-term solution to achieve this.”
Claiming that the government had shown limited long-term measures to protect the economy, Shareef said he believed that there was a danger many local people would not want to keep savings in the form of rufiyaa as a result of “deceptive” government policy. “When the government said that three months of the [rufiyaa float] policy would bring stabilisation people believed them,” he said.
Yet with government earnings expected to increase on the back of taxation drives, Shareef said that there were reasons to believe stabilisation was possible and that the tourism industry was a strong example of where sufficient foreign currency revenue could be generated.
“This depends though if the market is well managed. When the government first decided to manage the ruifya float [devaluing the currency against the dollar] they should have calculated the availability of foreign currency,” he said. “Dollars are clearly available on the black market and it is the duty of the government to supply them to [society].”
As such, Shareef claimed that it was therefore the government’s responsibility to have managed the devaluation “properly”, alleging that it had instead hoped for a positive outcome for finance rather than ensuring correct measures were available.
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