Foreign currency reserves decline amid dollar shortage

Reserves at the Maldives Monetary Authority readily available for use in the foreign currency exchange market declined in July as the central bank took steps to alleviate a dollar shortage.

Usable reserve stood at US$207.9 million at the end of July, enough for 3.6 months of imports and down three percent from the previous month, according to the MMA’s latest monthly economic review.

A decline of five percent compared to July 2015 was “largely attributable to the increase in MMA’s foreign currency sales.”

Increasing the weekly sale of US dollars to commercial banks was among several measures taken in response to the dollar shortage, the MMA’s information officer Mansoor Zubair told the Maldives Independent.

According to local media, import businesses and Maldivians travelling overseas have been struggling to purchase dollars in recent weeks and the black market rate has now climbed above MVR17 per dollar.

The Maldives has a de facto fixed exchange rate of MVR15.42 per dollar.

Three-quarters of about US$2 billion that enters the domestic economy every year is used to pay for imports.

The MMA said the current shortage can be attributed to both demand and supply-side factors.

“From the supply side, the slow-down in tourism sector has reduced dollar revenue for the economy,” the information officer said.

The tourism industry has been underperforming due to low occupancy rates and a 12 percent decline in Chinese arrivals, which is offsetting moderate growth from European markets.

Zubair added: “Alongside this, increased government spending on large infrastructural projects, and recent seasonal hikes in demand such as holiday seasons have exacerbated the current situation in the domestic foreign exchange market.”

The MMA also hiked sale of dollars to meet increased demands from some 2,000 Maldivian pilgrims who left for Mecca last month.

“A total of US$3.17 million has been sold for Hajj purpose, out of this US$1.62 million has been sold to Hajj Groups to meet their foreign currency requirements in Saudi Arabia,” Zubair said. “And US$1.55 million has been sold to commercial banks to accommodate the Hajj pilgrims’ travel demands.”

The MMA meanwhile faced public criticism last month after Zubair told Sun Online that Maldivians should choose local destinations instead of travelling abroad for holidays, which he said was important to reduce the demand for dollars.

Zubair told The Maldives Independent that it was “an advice for the general public as a measure to reduce the leakages out of the country and to encourage contributing to the growth of domestic tourism.”

A survey conducted by the MMA found that 58 percent of Maldivians travel overseas to seek medical treatment, predominantly in neighbouring India and Sri Lanka.

The average duration of a visit to India for medical purposes was 14 days, during which the average expenditure was US$512 per person. A trip to Sri Lanka for medical purposes costs about US$515 per person with an average duration of stay of around 10 days.

Speaking at a ceremony held earlier this month to introduce CT scan services at the private ADK hospital, Home Minister Azleen Ahmed reportedly said that travelling overseas for quality healthcare is no longer necessary.

Azleen said many Maldivians travel to neighbouring countries to seek treatment now available in the Maldives, leading to “leakages of millions of dollars”.

In May 2013, banks were authorised to sell a maximum of US$500 per airline ticket from the US dollars sold by the MMA.

Last month, the MMA instructed banks to sell dollars only to the person who bought the ticket after reports that the special dispensation was being misused for sale in the black market.

Zubair said the MMA has also sent a number of cases of suspected unauthorised sale of US dollars to the police for further investigation.

“MMA has been requesting banks to be aware of and to be extra careful about transactions and activities that may indicate illegal USD purchases and sales conducted through the banking sector, and report to MMA of such suspected cases,” he said.

According to the International Monetary Fund, the Maldives has a long history of an active parallel foreign exchange market with a relatively stable premium.

“The tourist industry appears to be a key supplier and driver of the parallel market,” the IMF observed in a report earlier this year.

The stable black market premium, which fluctuated between two to six percent in 2015, reflects the oligopolistic nature of the market, the report suggested.

“There are only a few large suppliers of foreign exchange who are able to adjust supply to the parallel foreign exchange market—based on the observed premium and where marginal costs equal marginal revenue,” the IMF explained.

“There is a positive relationship between the premium and supply given the profit motive to benefit from an increased spread. If the suppliers of foreign exchange formed a cartel they could behave as monopolists and drive up the premium.

“But in practice, as each supplier’s total holdings of foreign currency (in Maldives and abroad) is large and the ability to supply foreign exchange to benefit from any change in the premium is high, the cartel appears unstable and the premium remains bounded within a narrow stability range but it is not arbitraged away.”