Rise in blackmarket exchange rate no setback for currency stability aims, claims Economic Development Minister

Two months after the government announced plans for greater economic stability by devaluing its currency against the US dollar, the Maldives’ Economic Development Minister has said increases in black market exchange rates are no setback to the country’s long-term financial aims.

Amidst local media reports that the value of the Maldivian rufiyaa – capped until April this year at Rf12.85 against the US dollar – was trading at Rf16.5 on the black market, Minister Mahmood Razee said that authorities would likely wait for an allotted three month-period to pass before considering any additional financial support measures.

Despite this approach, the Maldives National Chamber of Commerce and Industry (MNCCI) has claimed that local enterprise is not being supported by financial institutions like banks in terms its needs – particularly for importers reliant on foreign currency to bring in goods to the market.

However, sticking to earlier estimates that the managed float of the rufiyaa within 20 percent of the 12.85 exchange would require about three months to begin to bring stability, Razee claimed that it remained too early to say if additional support measures were needed from the government to bridge the dollar supply.

“I don’t see the black-market exchange rate as a setback as it is low [tourism] season right now, meaning we are earning fewer dollars,” he said. “Now it has been a couple of months since we changed the dollar rate. When [the currency float] was announced in April we said it will take around three months to see if the rate will stabilize. We do not know yet whether there is just a dip in [dollar] supply or something else.”

When addressing potential changes already bought about to the exchange rate since the dollar float was introduced, Razee said he believed it remained too early to speculate on what longer term impacts had taken place in regards to the availability of dollars.

The Economic Development Minister added that if there were no signs of stabilisation by next month, then he expected the Ministry of Finance to begin looking at additional measures to try and bring some market stability to the economy.

“I’m not privy to the exact information on what these measures could be right now,” he said. “What we have been doing is working with national authorities in markets like India to see what means of assistance there might be.”

The rufiyaa has sat at the maximum limit of Rf15.42 following the government’s managed float of the rufiyaa within a 20 percent band.

Treasurer of the Maldives National Chamber of Commerce and Industry (MNCCI), Ahmed Adheeb Abdul Gafoor, told Minivan News that he believed that the managed currency float had served only to exacerbate the difficulties facing local businesses that were being given little choice other than to rely on black market exchange rates.

“The banks are not providing dollars to businesses, especially for importer and traders who are the backbone of the economy and vital to distributing goods,” he claimed. “With Ramazan ahead, we have been told that the State Trading Organisation (STO) will be providing 27 goods and commodities at stable prices, but we will have to see if this is possible.”

Adheeb claimed that in the immediate term, banks had simply not been providing additional credit lines for businesses requiring foreign currency exchanges, a demand he said that was having to be satisfied through additional financial channels.

“The solution I believe is that banks will have to provide,” he said. “Credit card payments are being settled in rifuyaa, yet many importers are not being satisfied when it comes to their own needs.”

Speaking as a private citizen Adheeb said that more changes were needed in how banks dealt with business as well as how government were looking to encourage sustainable foreign finance.

“We have seen no encouraging signs [from the float] and I don’t think this is a good policy at this time,” he said.

The MNCCI treasurer said that he believed that alongside government talk of minimum wages, it would be wise to discuss maximum wages in certain cases to try and balance national; budget more effectively.

“I don’t understand why this is a policy not being discussed,” he added.


Devaluation marks failure of economic policy: Yameen

The government’s decision to devalue the rufiya and replace the fixed exchange rate with a managed float marks the failure of its economic policy, claims minority opposition People’s Alliance (PA) Leader Abdulla Yameen Abdul Gayoom.

Addressing supporters at the ‘Gayoom faction’ rally last night, MP Yameen, half-brother of former President Maumoon Abdul Gayoom and long-serving Trade Minister in his cabinet, argued that the only circumstance where devaluation was advisable was to make the country’s exports cheaper and more competitive.

“[But] if the country does not produce a lot of goods for export, there will be absolutely no benefit from devaluing the currency,” he said, adding that the decision to devalue was both “political” and “an admission of failure.”

Following its inability to deal with the dollar black market two years after the formation of a parallel market, “what the government did was arrange a mechanism to auction the dollars [that they believe is being hoarded].”

The decision to devalue was therefore “political” as opposed to based on sound economic reasons, he said.

Yameen added that he believed the exchange rate would never fall below the pegged rate of Rf12.85.

“Since the way to get a good price for a scarce commodity is through an auction, they had to do this out of necessity and as a last resort, because they have no other way,” argued the MP for Mulaku.

However, he continued, the changes would be to no avail unless the country’s ballooning fiscal deficit is substantially reduced as urged by the International Monetary Fund (IMF).

Yameen went on to lambast the government’s infrastructure projects as well as preparations for the upcoming South Asian Association for Regional Cooperation (SAARC) Summit to be held in Addu City as “unnecessary spending.”

Conceding that floating the rufiya could solve the black market problem, Yameen however argued that those who had dollars would hesitate to release it if they did not have confidence that the rufiya would not depreciate further.

As a consequence of devaluation, Yameen predicted, inflation would rise by 30 percent: “For a person who gets Rf1,000 [as income], the value of what he can spend is actually Rf600, because of inflation. So, for example, if a can of Nespray [powdered milk] is sold for Rf28 today, with the change in the price of the dollar, we are saying it is going to cost Rf38…the biggest burden will be borne by the poorest.”

To back his assertion, Yameen referred to GMR’s recent 50 percent hike of lease rents at the Male’ International Airport, a decision likely to lead to a corresponding increase in air fare for domestic travel.

President Mohamed Nasheed meanwhile insists that the economy would stabilise over the course of the next three months and that the managed float was necessary “to ensure long term stability and prosperity of the Maldives.”

MMA speaks

Breaking its long silence on the dollar shortage, the Maldives Monetary Authority (MMA) issued a statement Thursday estimating that allowing market forces to determine a price within the 20 percent band of fluctuation would “solve the present dollar shortage in the near future.”

“We would like to take this opportunity to inform the Maldivian people that the MMA has undertaken various different efforts to solve the foreign currency problem,” it reads, adding that the central bank was in the process of strengthening the legal framework for monetary policy.

The MMA statement reveals that the Maldives had a managed floating exchange rate between Rf8.50 and Rf11.50 from 1987 to 1994.

On April 10, 1994, the floating rate was replaced with a fixed peg, which was then increased by nine percent in April 2001.

While dollar shortages had been experienced “occasionally in the past” due to strong demand coinciding with the Hajj (pilgrimage) or school holiday season, the MMA explains, an expansionary fiscal policy since 2004 coupled with the global recession in 2009 led to the formation of the dollar black market.