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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