Fine the rate or float it? The band the market left in 2011

The black market rate now stands at MVR22.85, more than 48 per cent above the official rate of MVR15.42. On Wednesday, ruling party lawmakers proposed making it an offence to publicise it. 

The public accounts committee approved changes that would make selling foreign currency above the central bank's rate punishable by fines of MVR25,000 (US$1,620) to MVR1 million. Advertising or promoting such sales would carry fines of MVR25,000 to MVR500,000. If a legal entity or registered business is involved, the fine would rise to between MVR100,000 and MVR5 million. Advertising and promoting are defined as publishing, disseminating, repeating or providing information about rates outside the official band through digital means, platforms or any other means. 

The civil administrative action does not preclude criminal prosecution under the penal code or other laws, states a separate provision.

The committee voted through the changes at a meeting called to re-examine government-sponsored amendments to the Foreign Currency Act, which seeks to remove the option for resorts to exchange US$500 per tourist and require the conversion of a fixed 20 per cent of gross revenue. The bill had been returned to the committee on Tuesday after MPs from the ruling People's National Congress argued the law needed to be "stricter." 

Opposition lawmakers on the committee cried foul. insisted MP Ahmed Shamheed warned that businesses could be locked out of accessing dollars to pay suppliers, resulting in bankruptcy, halted imports and hyperinflation. Banks only allocate a portion of what importers need for telegraphic transfers at the official rate. Cracking down on the parallel market would criminalise the only way of covering the shortfall. 

"You can't tape our mouths shut. 'The price of the dollar in the country today is MVR23, MVR25, it's not available at any rate other than that' – we should be able to say that," the Maldivian Democratic Party MP for Hulhumalé South said.

Shamheed questioned whether the changes would be tantamount to a "gag order" that bars the media from reporting the black market rate.

That was how the Maldives Journalists Association and Transparency Maldives interpreted the new provisions. The civil society groups condemned them and urged parliament to reject the bill, warning that it would obstruct the media's role in holding policymakers to account and prohibit reporting what is happening in the economy. 

Before opting for the hefty fines, the government considered prison sentences for journalists who report the parallel market rate, Adhadhu reported, citing reliable sources.

The Maldives Monetary Authority Act already prohibits the purchase or sale of foreign currency above the official rate. It also prohibits collecting commissions or other benefits from foreign exchange transactions and authorises the MMA to impose fines of up to MVR1 million.

The proposed introduction of specific penalties for the advertisement and promotion of parallel market rates comes after Economic Minister Mohamed Saeed attributed the rising black market premium in part to newspaper headlines and statements by opposition leaders, alleging deliberate efforts to damage the economy by inciting panic, spreading "fake news" and manipulating the market.

The official exchange rate of MVR15.42 is the ossified ceiling of a floating band introduced in April 2011. The rufiyaa was allowed to move by 20 per cent either side of MVR12.85 with a floor of MVR10.28. The rate has remained at the ceiling since then.

Former MMA governor Ali Hashim, who served as finance minister from November 2008 to December 2010, opposed floating the rufiyaa at the time. 

"But I'm now more of the opinion that we are ready now to loosen the market, allow it to really float. What type of float you can then decide how much control you want," he told the Maldives Independent. "But it's time now. The market is ready. People are ready. Why didn't we do it earlier? Because people like me were also afraid that a few market suppliers will have control of this, and MMA was too small. It didn't have its pool of dollars to intervene properly." 

The IMF's assessment a decade ago was that the parallel market behaves like an oligopoly. The tourism industry “appears to be a key supplier and driver” with the stable premium indicative of “only a few large suppliers of foreign exchange who are able to adjust supply".

But the same oligopoly of six or seven players no longer exists, Hashim said. He argued that the market has broadened with more foreign brands whose concern for compliance makes them likely to follow the MMA's rules. The IMF now ask why the rate is not adjusted upward, he noted.

The float should happen in tandem with efforts to spur demand for the rufiyaa, Hashim advised. Collecting taxes in rufiyaa, mandating resort transactions in rufiyaa and enforcing its use would drive up its value, he argued. 

Ahmed Inaz, who succeeded Hashim as finance minister, recalled advising the president to let the market determine the price of foreign exchange. 

He estimated that more than half of transactions in the Maldivian economy do not happen in the local currency. "Because if you go to any resort, none of the transactions happen in rufiyaa, and we know that directly and indirectly almost 70 to 80 per cent of the economy is the tourism sector, including transport, construction, wholesale – all of that directly feeds into tourism," he told the Maldives Independent. 

The parallel market persists because the growing demand for dollars is "not backed by what the economy creates annually," he explained. But the rufiyaa's value would go up if all transactions are moved into local currency and releasing the price would impose "discipline" upon the government, currency traders and the regular person ordering items on Temu. 

"I was arguing back even then that the we should actually de-dollarise, which means that we still get time to work on [it], we would be able to push down the pressure on the rufiyaa, which means the rufiyaa doesn't have to necessarily be devalued," Inaz said. 

De-dollarisation does not entail seizing and converting a resort's income at a local bank as operators might fear, he stressed. "We shouldn't be controlling what they earn. We should incentivise so that they keep the money in the country," he said, pointing to how foreign income is handled in jurisdictions such as London. 

In her doctoral thesis from January 2012,, Azeema Adam, who went on to serve as central bank governor, concluded that dollarisation would remain high as long as tourism dominates the economy, which makes a fixed exchange rate more suitable. However, she found that the economy's reliance on dollars grows with tighter controls on foreign currency. Controls create shortages and difficulties in accessing one's own dollars in the bank. It then leads to the appearance of a black market and triggers money moving overseas. She pointed to the requirement for tourism taxes to be paid in dollars as one reason Maldivian businesspeople hold dollars in the first place. 

Requiring taxes and payments to be settled in rufiyaa, phasing out foreign currency exemptions and moving to a more flexible exchange rate are among long-term reforms envisioned by the central bank. Aside from eliminating the US$500 per tourist option – which is estimated to bring an additional US$100 million a year through the banks – the MMA has proposed requiring resorts to deposit all US dollar revenues into accounts with local banks and to exclusively use POS terminals linked to Maldivian banking institutions.

Hashim, the former MMA governor, recounted a resort owner asking him what he would do with rufiyaa. Dollars kept abroad earn considerably more than the three to five per cent that rufiyaa deposits pay. Moreover, when resort developers – who are unable to raise investment from local banks – borrow from European banks, the lenders require banking there in order to see the cashflow, he said.

Local banks do not have dollars to lend to resorts that need to finance repairs and maintenance, Inaz noted. Resorts get the funds instead through advance payments from foreign operators. 

A separate bill currently before parliament seeks to levy the tourism goods and services tax on offshore booking platforms, foreign tour operators and travel agents. According to the MMA, only US$3.2 billion out of US$5.6 billion in annual tourism receipts entered the domestic banking system last year.

Last week, the MMA increased the dollars it releases to commercial banks by 51 per cent for the next three weeks, taking the weekly allocation from about US$5 million to about US$7 million. It said the change would make foreign currency easier to obtain through the banking system and ease pressure on importers. Earlier in the month, the MMA's board approved an increase in the Minimum Reserve Requirement of banks from 10.5 per cent to 11 per cent. The board decided to gradually raise it to 13 per cent by December 2027. It also increased the Open Market Operations policy rate by 10 basis points.

"This is too little, too late. It's very late to do something. And what's being done is very small," former President Abdulla Yameen argued at a meeting of his People's National Front last week, referring to the MMA's efforts to mop up excess liquidity, and predicting "difficult days" ahead for the economy with rising inflation. 

He opposed removing the US$500 per tourist option. Most resorts are not that profitable and many are yet to finish paying off construction loans, Yameen said. Former President Mohamed Nasheed concurred. Speaking at an MDP protest on 13 August, Nasheed said no resort's profit was 20 percent. Mandatory exchange at that level would grievously harm the industry, he argued, warning that it could prompt investors to flee.

On Monday night, Yameen said the existence of the black market reflects the government's incompetence. The MMA lacks the capacity to draw a significant amount of rufiyaa out of circulation, he argued. "MMA can't say, going on like this, 'keep 50 per cent of the reserve of commercial banks with us.' At that point, foreign banks will stop [operations] here and leave," he said.

"So what they've done is ineffective. But they want to show they're doing something." 

Like Yameen, Economic Minister Saeed blames the rufiyaa's deterioration on excess rufiyaa chasing scarce dollars, pinning it on the MDP government printing money during the Covid-19 crisis. He said banks are now releasing an average of US$81.2 million a month to importers, up from US$36.9 million in 2021. 

Economists appearing on a joint Sangu TV-Adhadhu forum last week blamed the government's failure to secure foreign financing through any of the three available channels: capital markets (where the Maldives lost access after two credit rating downgrades), bilateral partners (where foreign policy failures left the government unable to secure budget support or project funding) and multilateral institutions (where no reform programme was agreed). Former chief budget executive Ahmed Saruvash said the government was left drawing down reserves and the Sovereign Development Fund to service debts, including the US$524.68 million sukuk repayment made in April, leaving insufficient dollars for domestic needs.

The apparent ban on reporting the black market rate meanwhile drew mockery, criticism and comparisons with countries like Zimbabwe and Venezuela that attempted to suppress unofficial rates. 

Authoritarian laws and policies cannot control the foreign exchange market, Inaz tweeted, advising President Dr Mohamed Muizzu not to "challenge market fundamentals".

"Parallel FX markets are a symptom, not the disease. They emerge when demand for dollars at the official rate exceeds formal supply and intervention capacity is limited," Saruvash explained on X. "Hiding the price will not create dollars, reduce import needs or end the search for scarce currency."

In a column published on the Maldives Economy journal on Wednesday, former economic minister Ahmed Mohamed flagged the legal uncertainty over the rate a licensed money changer must follow. The regulations allow money changers to "determine their own buying and selling rates based on prevailing market conditions, with a commercial spread." The rates must be displayed. But the exception is where the MMA has fixed the price and prohibited dealing at higher rates. 

He questioned whether the 20 per cent band constitutes the central bank having fixed a price: "If YES; can an MMA-licensed money changer legally buy or sell US dollars outside that band? If NO; what precisely is the legal and regulatory significance of the published band, and what purpose does it serve?" 

He distinguished between a normal spread, within which banks and dealers operate, from a black market rate more than 40 per cent above the ceiling, characterising it as a problem of regulatory credibility. 

"MMA determines and implements exchange-rate policy while also licensing and supervising money-changing businesses. Businesses should know what the law permits. Consumers should know whether the market in which they transact is lawful. Regulators should apply the rules consistently. And where the law establishes prohibitions and penalties, the relevant authorities have a responsibility to ensure they are observed," he argued.

"If transactions outside the official USD band are lawful, the regulatory basis should be clear. If they are not lawful, the question becomes one of enforcement."