rufiya – Minivan News

Inflation hits 15 percent: Department of Planning

The inflation rate in Male’ for August 2012 reached 15.04 percent, according to statistics from the Department of National Planning.

According to the department, tobacco prices increased 71 percent, fish products 68 percent, and restaurant and cafes by 32 percent. The rises were attributed to changes in the dollar, which is currently pegged to the rufiya within a 20 percent of MVR 12.85. In real terms, the rate has remained fixed at the maximum limit of MVR 15.42 and remains nonexchangeable, forcing importers to rely on inconsistent black market dollar exchanges of up to MVR 17-18.

Meanwhile, local business tycoon, media owner, MP, Jumhoree Party (JP) leader and member of the Judicial Services Commission (JSC), Gasim Ibrahim, has warned that the dollar exchange rate of the Maldivian rufiya may rise to MVR 20 by the end of the year – a 25 percent increase.

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Government pursues Sri Lanka currency exchange as devaluation deadline passes

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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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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Q&A: Finance Minister Ahmed Inaz

Finance Minister Ahmed Inaz was approved by parliament in late April 2011, replacing Ali Hashim who was among President Mohamed Nasheed’s cabinet ministers to be ousted by the opposition-majority parliament. He was approved just as the government implemented a managed float of the rufiya, and spoke to Minivan News about the recent and rapid changes to the country’s economy, the challenges it is facing and the future outlook.

JJ Robinson: An International Monetary Fund (IMF) mission is in town following the conclusion of the Article IV consultation last year. What is the current status of the government’s involvement with the IMF?

Ahmed Inaz: The IMF is discussing a new three program [with the government]. We are talking about structural adjustments that need to be brought in, and on the revenue side we are agreeing measures we foresee need to take in the next two years. We are trying to agree on the policy side.

They have their suggestions and recommendations and we have the policies the President is proposing, and we are trying to come a common agreement hopefully by the start of next week. I’m hopeful we will re-enter the program.

JJR: The IMF delayed the third tranche of funding in November last year citing “significant policy slippages” on behalf of the government. Did the third tranche get delivered?

AI: The question is not about that, the question is what can be practically done in this country. The new government came in with a new democratic setup, but not the budget to support that. The budget didn’t carry the cost of the new reforms.

It is not a matter of whether we can cut down expenditure – yes there are fat layers in the country, not only in the civil service, also in the judiciary and independent institutions. But the fundamental issue is that because of the democratic transition we have a state with recurrent expenditure higher than its revenue.

To make matters worse, the salaries of the state payroll are higher than our income. You can see where the problem lies.

What we foresee is that there are two ways in which we have to work to rectify this issue.

One is to trim the fat layer, by matching outputs with staff and increasing productivity.

The other thing is by increasing our revenue. We need to move from the current inefficient way of raising revenue – which bases revenue on import duties – to a more direct taxation policy.

We currently have the import duty which is a burden for businessmen, because they are taxed before they sell. We will abolish most duties, apart from those on items that are environmentally damaging, those that affect health, and other discouraged items.

The rest will be abolished and we will move into a direct taxation policy when the business profit tax starts in July. We have also started collecting revenue from a Tourism Goods and Services Tax (TGST), and we propose that we increase this as well as introducing a general GST for the public, and an income tax.

This would not be a payroll tax. It would be an income tax on people earning above Rf 30,000 (US$2300) per month. We think this is more justifiable.

Some may feel that this will collect only a very small amount of revenue – but this not just revenue from employment, but income from business dividends, house sales and so forth.

JJR: The former auditor general reported difficultly getting people to declare assets. Is this difficult with high net-worth individuals in the Maldives?

AI: One thing you have to understand is that this is a path other countries have walked. I remember when I was doing my graduate studies, even then we were talking about this. It was something the educated intellects were advocating. It never happened because there was no political willingness – willingness we now have.

I believe that once we start we will sort the rest of the issues. The TSGT is already being taken from big resorts as well as small guest houses on remote islands – very small businesses. They declare – amazingly, they declare.

I think this is something the country can take, and then we can move to rectify problems and perfect the system.

JJR: The general popularity of the idea seems quite sour with members of the opposition. How do you propose getting this tax through the opposition-majority parliament?

AI: All the businessmen I have met – all the reasonable businessmen I have met – believe that the country has to move to a much more structured, predictable and more coherent system of governance. And to do that we need an economic system that supports social change, and supports the change we have brought politically.

To sustain their businesses it is important that they have social and political stability. It would be a grave mistake if one stands up and says they don’t support [income tax], because that will bring instability to the country and harm businesses.

The other thing is that once you have a system of redistributing wealth through direct tax, such as we are proposing, this is spent on infrastructure, welfare, education, transport – all of these things that directly benefit wealthy businessmen, because they don’t have to pay for it on an individual basis. So the cost of doing business will be lowered.

I believe MPs, businessmen and business-MPs will support this. Those I have met have given their full support – they just want to be consulted first.

JJR: Don’t you think that as a potentially populist issue this may become a victim of the country’s adversarial politics?

AI: I think the opposition is very mature. When we were in the opposition, then the opposition was very mature. I think they will choose the best for the country. We are doing the tough job here – by 2013 the game will be easier. We are laying the foundation for the country, not only by changing the political scenario but bringing huge economic changes. I think they will support it.

JJR: Back to the IMF. A theme in their reports last year – and also those of the World Bank – was that while the Maldives’ income might be increased gradually, the country’s immediate problem was the inflated state budget, leading to a high deficit, while the country was at the same time insisting on a pegged currency. The government’s attempt to introduce cuts last year were scuttled – in your mind what were the reasons for this?

AI: One thing was that the business profit tax was delayed in parliament – for reasons I don’t think I have to elaborate. The TGST we proposed was higher than what are getting now, and that has also had an impact on us.

Also we have to remember that the redundancy of the civil service is not an easy thing – the country’s employment has been totally dependent on the government. It is a very big change, and we have said we want the government to be a policy maker, a regulator, but not doing business, so jobs are created in the private sector.

I’m happy to say our redundancy program – with assistance from the Asia Development Bank (ADB) – has to this date enrolled 800 people and already some of them have already been paid and moved out of the civil service. We hope over the next few weeks we will achieve our target of 1300 – the idea is that they will retrained and not return to the government for at least three years.

JJR: A key criticism of the government’s economic policy from the opposition is its spending on political appointees.

AI: Out of total government expenditure, 75 percent is paying the payroll. The political appointees are three percent of that payroll.

I believe that any appointee, whether political, civil service or judicial – any unproductive appointee – is a burden on our system and we should make them redundant.

JJR: Enmity between the Finance Ministry and the Civil Service Commission (CSC) last year led to the ministry filing charges with police against the CSC, just as the cuts issue entered the court system. What is the relationship like now between the Ministry and the CSC?

AI: We are working very closely with them and they have been very cooperative on the redundancy issue.

JJR: A number of private sector businesses have expressed concern that while the Maldives Monetary Authority (MMA)’s decision to enforce the use of the rufiya for all transactions is fine when you have a freely-convertable currency, it presents a serious problem when the banks refuse to sell dollars to them.

AI: The government doesn’t print dollars, and the government doesn’t earn dollars, except for fees and taxes, which is a very small percentage of the total demand for dollars in the country. The dollars are earned primarily by the resorts and fish exporters.

What we want is a system where the foreign exchange system operates as a market. We have introduced a banded float [within 20 percent of the pegged Rf12.85 to the dollar]. What we want is that the dollar earners will sell this to the market, and within the next three months an equilibrium will be achieved.

I don’t mean a low rate – I mean an equilibrium. Once that is set and the speculation and market adjustment has competed, we will have addressed the fundamental reason as to why the black-market existed.

Firstly, because the existing laws and regulations were not enforced, and existing legislation relating to money changers legislation was not being enforced – we cannot have 220 money changers in the country. I have not seen this in other countries. They have to be proper money changers who have invested a certain amount of capital, just like the banks.

I emphasise this but I still don’t get the commitment I need from stakeholders to address it.

Secondly, the monetary regulation states that rufiya is the legal tender for all transactions, with the exception of the government’s collection of taxes and fees. I think we should enforce this irrespective of the sector. We should have rufiya prices – what other country has prices in another country’s currency?

You can still pay in dollars – but this is the exchange rate. For [the customer] it may still seem as though you are paying in dollars, but the transactions are actually happening in rufiya. In Colombo you pay in local currency, even if you use your credit card. We need to have that enforcement irrespective of the sector.

In the medium term we need to address the budget deficit, especially recurrent spending, which has to be matched with income. A state cannot be operated without matching recurrent expenditure to its income – that is madness. A state has to have a prudent economic system – capital expenditure can still be borrowed, because future returns are there.

We working with the ministries to streamline and reduce the deficit in the budget. Next year we are hoping to have a balanced budget.

JJR: The opposition-majority parliament has substantially added to the last two budgets submitted by the government, and the President has been compelled to ratify these. How do you deal with this?

AI: We are trying to work on the legal side as well as the practical, and make sure this is enforced – at least that recurrent expenditure and income is matched, and that any additional bill passed during that particular year is supported with a revenue measure.

They can’t just simply tell us to pass a budget, and then pass bills giving us additional expenditure – every bill comes at a cost. What we propose is that they think about this and rectify it – this is very important.

The third long term goal is increasing productivity and exports, to make sure that whichever government is in power, our manifesto continues and the country can move forward. We need exports to be increased, and earn dollars. Long term, that is the only solution to counter this [economic situation]. In the long run there should be a regulatory framework that supports this.

JJR: Speaking of the regulator, where does the Maldives Monetary Authority (MMA) fit into this? It was only recently that the government was calling for the resignation of MMA Governor Fazeel Najeeb for failing to help address the situation.

AI: I don’t want to dwell on that. For me the governor – whoever is there – I should work with them. What I want is the regulations to be there. For example, the devaluation of the currency within this 20 percent band – that has to be supported.

Once we make a decision, such as the devaluation, we cannot go back. The fundamental health of the economy told us that we had to do this. The President met with the MMA Board, which advised, and a decision was made. It is not time for us to affect the confidence of the economy – an economy cannot survive without confidence. That is the crucial factor an economy needs – and state institutions need to ensure that confidence is there.

JJR: If the government was convinced that the value of the rufiya was going to fall somewhere within that band, why not float the currency altogether?

AI: The reason what that if we float the currency it would have short-term consequences and immediate jumps. A band means the government will defend that band – that is what we are doing with the weekly auction of dollars to the banks.

Secondly we have numbers from the TGST income that suggest we have been underestimating our economy. By having our policies in place – productivity increasing policies and growing additional exports – we are confident we can pull the value of the rufiya down to 10 in the long term – that is our aim. It is not a joke.

JJR: There is a lot of concern, particularly in resort circles, that the new policy restricting expatriate remittances will reduce the willingness of people to work in the Maldives. What was the logic behind that decision?

AI: We understand that expatriate employees are very important. We will never hurt them and we will ensure that their interests are protected. The regulation that the Ministry and MMA are working on will only limit repatriation of what they earn legally under their contract. If they remit more, obviously they will have been earning illegally.

They are living and spending in the Maldives as well – but they can still repatriate up to what they earn. What we are trying to do is limit illegal workers [remitting dollars out of the country].

JJR: If at the same time you are enforcing use of the rufiya when there is some doubt as to whether you can walk into a bank and exchange that into dollars to remit it overseas – does that not impact confidence in the economy?

AI: We believe the market is currently unstable because of the changes we have brought, and that these changes will take three months for the various variables to work. In that period the government will work with the MMA to ensure that stability exists.

There will be a lot of low confidence and instability, and that will not only be felt by the expatriates. All our imports and consumables, medicine, education – is imported. But we are confident we can get through this.

JJR: Potential foreign investors looking at the economy and observing the recent changes may be unsettled by this instability. How do you address this concern?

AI: The current government is a centre-right government, and we are opening our doors to an unimaginable level for foreign investment.

We will not be treating foreign investors different from local businesses. We will not put in unreasonable controls on the economy, and we will make sure foreign investors are consulted, as with the locals.

We have not done this in the past.because we have been very tightly focused on politics as well as the economy, and haven’t been able to communicate as much in English perhaps as we should have.

I believe [foreign investors] have confidence in our economy, and we will ensure their investments are protected in this country, and that wel continue to have policies to encourage further investment. This country does not have a solid financial sector so we need foreign investors very much. That is understood by the current government, and the policy is to attract foreign investors.

JJR: So economy before politics from here on in?

AI: Yes. Until the next election!

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Police clash with protesters in crowded street injures “dozens”

A large crowd of mostly young people last night held a protest in Male’ against the rising cost of living, following a spike in import costs brought on by the government’s managed float of the rufiya – a decision which has led to a cost increase for dollar commodities of up to 20 percent.

Although the protest was led by opposition leaders, Minivan News observed many unfamiliar faces not identified as members of either major party.

The protest’s leadership consisted mostly of those from the ‘Z-DRP’ faction of the opposition loyal to former President Maumoon Abdul Gayoom, including MPs Ahmed Mahlouf, Ilham Ahmed and dismissed Deputy Leader Umar Naseer, Dhivehi Qaumee Party (DQP) MP Riyaz Rasheed, Jumhoory Party (JP) MP Ibrahim Muthalib and other opposition allies were also present at the protest.

The group gathered near the artificial beach last night around 9:00pm and marched towards the tourist street of Chandhanee Magu, occupying the intersection with the main road of Majeedhee Magu. Minivan News observed many protesters sitting or lying down in the intersection, some having coffee.

Riot police initially blocked off vehicle access to the area, and waited without taking any action.

However at around 3:30am early on Sunday morning, police advised protesters to leave the area or otherwise they would use force to disperse the crowd.

The protesters declined to leave the area and continued protesting, whereupon police issued several warnings before throwing tear gas canisters into the crowd camped in the narrow and congested intersection, and moving in with shields and batons.

Male and female protesters were injured in the incident after being attacked with batons, while police claimed officers were injured in the effort after bricks were thrown. Protesters also pelted police with empty water bottles, empty cans and other such materials.

“One female officer was hit in the chest with a pavement stone, she is still hospitalised,’’ said Police Sub-Inspector Ahmed Shiyam.

While police were attempting to disperse the crowd, a motorbike in the area was destroyed by fire and the glass window of a nearby shop was broken.

After the violent attacks, police failed to completely disperse the crowd as the protesters continued to return to the area and gathering.

Local media SunFM and Haveeru News also reported that police used excessive force on their journalists taking coverage of the area.

Haveeru, which described the incident as a “deadly clash”, reported that its journalists were arrested after they refused to leave the area were told by a police spokesperson that even journalists wearing press identification could not stay in the area.

The protest lasted until 9:00am this morning, lasting a total of 12 hours.

Residents living in the densely-populated urban area surrounding the intersection have complained of women and children being affected by tear gas used by police used to control the riot.

News agency Associated Press reported Gayoom’s spokesperson, Mohamed Hussain ‘Mundhu’ Shareef, as saying that dozens were hospitalised in the demonstration consisting of 5000 people rallying against “economic hardship, alleged government mismanagement and wasteful spending”, but was unable to raise a response from the Maldivian government. News of the incident quickly went international, appearing on the Washington Post and other major newspapers.

This afternoon the President’s Office released a statement condemning the violent protest as orchestrated by supporters of the former President.

“Scores of people were injured and shops and private property were damaged when protesters hurled bricks and other projectiles at the police. The police responded to the unprovoked assault with tear gas and made several arrests,” the statement said.

“The protest was orchestrated by the Z-DRP, a faction of the main opposition Dhivehi Rayyithunge Party, which is under the control of former President Gayoom.”

President Mohamed Nasheed’s spokesperson, Mohamed Zuhair, added that “peaceful political activity, such as the right to protest, is legal – and indeed welcome – in the Maldives’ new democracy. But there can be no excuse for needlessly causing violence in the streets. We have numerous peaceful political rallies, protests, petitions and other forms of legitimate democratic activity throughout the year, which is a healthy part of our democracy. However, whenever Mr Gayoom’s supporters take to the streets, it always seems to end in violence and bloodshed,” Zuhair added.

Dhivehi Rayyithunge Party (DRP) MP Dr Abdulla Mausoom told Minivan News that he believed the protests, which he described as a “youth movement” rather than an opposition political gathering, had been building for some time amidst concerns regarding the government’s commitment to democracy and increased living costs.

“We feel the protests are overdue, the Maldivian Democratic Party (MDP) is not championing democracy like it promised,” he said.

Mausoom claimed that the prime areas where he believed the government had failed to bring about democratic reforms – a key policy area for the governing MDP party – were in freedom of expression and allowing protesters to demonstrate peacefully.

Although opposition parties like the DRP and the recently formed spin-off faction the Z-DRP were present at the protest, Mausoom said that they had been invited by local young people to support their concerns.

“This has been organised by young people [of the Maldives]. Opposition parties joined in support only after being invited. This was not a political movement, but a youth movement,” he claimed. “The protests were in themselves largely peaceful and we feel the police response was inappropriate.”

Mausoom added that he believed that the protesters should have been given the right to air their concerns and called on the government to address areas such as spending on political advertising and cutting living costs.

The opposition DRP has recently been split by infighting and violence between supporters of Gayoom and those of the party’s leader, Ahmed Thasmeen Ali, triggered by the expulsion last year of Deputy Leader Umar Naseer from the party for organising protests without sanction from the DRP Council.

Both sides claimed the animosity within the party was cause it to “disintegrate“, and there was speculation that Gayoom’s supporters would form a spin-off opposition party. However last Thursday, two days before the protest, Gayoom’s faction officially announced that it was “commencing work” as the Zaeem-DRP (Z-DRP), a separate branch of the main opposition Dhivehi Rayyithunge Party (DRP).

The Zaeem-DRP (Z-DRP) faction today announced that it has officially commenced its work as a separate branch of the main opposition Dhivehi Rayyithunge Party (DRP).

An earlier protest on April 12 against the government’s currency decision ended peacefully, with both factions conducting separate rallies around Male’.

A currency in crisis

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 of Rf 12.85, and high demand for travel, commodities and overseas medical treatment forced most institutions to ration their supply or turn to the flourishing blackmarket.

After a short-lived attempt to crack down on the illegal exchange of dollars, the government floated the rufiya within a 20 percent band, effectively allowing it to be sold at up to Rf 15.42 to the dollar.

The International Monetary Fund (IMF), which has been critical of the government’s growing expenditure despite a large budget deficit, praised the decision as a step towards a mature and sustainable economy.

“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.”

However many companies dealing in dollar commodities immediately raised their exchange rates to Rf 15.42, along with the Bank of Maldives.

The government’s move, while broadly unpopular, acknowledges the devaluation of the rufiya in the wake of increased expenditure and its own inability to overcome the political obstacles inherent in reducing spending on the country’s bloated civil service.

Yet as Maldives relies almost entirely on imported goods and fuel, and many ordinary citizens have found themselves harshly affected by short-term spike in prices of up to 20 percent as the rufiya settles.

“We do not really know, based on the breadth of the domestic economy, what the value of the Maldivian rufiyaa is right now,” Economic Development Minister Mahmoud Razee admitted at a recent press conference.

The government has said it hopes the rufiya will stabilise within three months.

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MMA launches dollar reference at Rf 14.75

The Maldives Monetary Authority (MMA) has published a dollar reference exchange rate of Rf 14.75, in an effort to give an approximate determination of the value of the currency.

Currency exchangers are permitted to sell dollars within a 20 percent band of the pegged rate of Rf 12.85, after the government launched a managed float of the rufiya earlier this month. Rf 14.75 is roughly the value of exchange on the black market prior to the managed float.

Banks are required to submit their daily rates to the MMA.

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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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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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