Maldives dollar crisis deepens amid rising oil prices and debt pressures

The severe dollar shortage has left importers struggling to make payments as the parallel market rate reached MVR 19.70 on Monday, forcing businesses to pay a premium of nearly 28 percent above the official exchange rate of MVR 15.42. 

"Over the last month, we have been buying US dollars at higher rates and now, even at this peak, we are not being able to get the required amount of foreign currency," one of the owners of a major fresh produce importer told the Maldives Independent.

"This month so far, we are not even close to securing the amount of dollars we need. It also doesn't look like we will be able to meet that amount. If we end up buying at higher rates, this is going to increase prices at a similar level," said the managing director of an electronics, home appliances and grocery retailer in Malé, who needs about US$ 2 million a month to cover imports.

Small and medium-sized enterprises are grappling with the same challenges, including garment importers, grocery chains and food and beverage suppliers, most of whom were affected by a Bank of Maldives decision last week to reduce dollar support for telegraphic transfers (TT) for importing goods to just five percent.

"We stopped trying to get anything converted from banks a long time ago. They do whatever they want. It is at their discretion. They might cover five percent or even less sometimes," one importer complained.

Despite a booming tourism industry that generated US$ 361 million in dollar-denominated sales tax revenue this year – up 10 percent from the same period in 2024 – the dollar shortage has persisted with rising debt service obligations and a high import bill for food, fuel and other essential commodities. 

Last week, Fitch maintained its CC credit rating for the Maldives at "junk" status, reflecting an assessment that a "default event of some sort remains probable". Attempts to shore up foreign currency reserves for US$ 1 billion in debt payments over the next year appear to have worsened the dollar shortage. 

"In April, we were buying at MVR 18.50 or MVR 18.60. Even in early May the rate was around the same. Around mid-June we had to hike it to MVR 19, because we were not getting enough US dollars. Now it is around MVR 19.30 to MVR 19.40. So the selling rate would be at least MVR 19.45 or higher," said a money exchanger based in Malé.

"Even at the hiked rates, we are still not getting even close enough to the demand we need to cater to," he said.

A foreign exchange trader observed that the parallel market rate was the highest since the coronavirus outbreak forced border closures in March 2020.

The acute dollar shortage could be attributed to the May to August low season for resorts and a new foreign exchange law that made it mandatory for tourism businesses to exchange a portion of foreign currency receipts with local banks, a fiscal policy expert explained.   

The new rules required resorts to convert either US$ 500 per tourist or 20 percent of monthly foreign currency receipts. A rate of $25 per tourist was set for smaller hotels and guesthouses on inhabited islands. 

"It's the low season for tourism and also during this period we have had people going on the Hajj pilgrimage, which is over 1,000 people trying to get foreign currency. On top of this, the new policy rules has had a significant impact. If the largest supplier of forex, the tourism industry, is now required to convert US$ 500 per tourist or 20 percent of revenue through banks, this reduces the supply available to the parallel market. When rates start going up, those holding US dollars might hoard anticipating a bigger payout," he told the Maldives Independent.

"This has all compounded the usual yearly impact of the low tourism period."

According to the International Monetary Fund, the tourism industry “appears to be a key supplier and driver” of the dollar black market, with the stable premium indicative of an oligopoly with “only a few large suppliers of foreign exchange who are able to adjust supply to the parallel foreign exchange market.” The previous 10 to 15 percent premium offered a compelling incentive for resorts that need to convert foreign currency income into Maldivian Rufiyaa to cover operational costs. 

After the conversion obligation came into force in January, several resorts that used to pay salaries in US dollars shifted to local currency. Some high-end resorts began paying service charges in Rufiyaa. Others continued paying both salaries and service charges in US dollars.

"With salary and service charges combined, during peak season pay is around US$ 1,500. I used to change more than half of that. Now we have been told we will get paid in Rufiyaa," a mid-level employee at a Kaafu atoll resort told the Maldives Independent.

With effect on May 20, banks were required to sell 90 percent of proceeds from tourism businesses to the central bank. Citing the rise from 60 percent, Universal Resorts, one of the country’s largest operators, informed staff last week that the monthly service charge will be paid in Rufiyaa starting next month.

“The effect of the recent revisions by the MMA [Maldives Monetary Authority] is that we now have no other option than to implement this change if we are to keep our resorts operating smoothly,” reads an internal memo obtained by the Maldives Independent.

Since the forex law applies to businesses with annual foreign currency receipts exceeding US$ 15 million as well, larger businesses such as domestic airlines, travel agencies and tour operators have also fully or partially switched to Rufiyaa wages, resulting in a steep decline in the amount of US dollars available in higher denominations.

"A large proportion of the dollars we buy come directly from large tourism companies who use the parallel market to convert currency to pay some vendors and local services. Over the last month, this amount has dropped significantly," a trading company owner said.

"If resorts are already changing 20 percent of their revenue, maybe there isn't much left. Especially not during the low season," he speculated.

Facing pushback from the tourism industry against the forex rules last year, President Dr Mohamed Muizzu touted the new policy as a long-term solution to the dollar shortage, suggesting that the entrenched parallel market's end was in sight. 

"State-owned enterprises also had to buy from the black market. We have managed to stop this to a large extent. By mid-year, SoEs won't buy from this so-called parallel market or black market. That will drop the rate by a big percentage. In the future the dollar exchange rates will drop," he said in his debut podcast in March.

In April, he suggested that it might take more time, but expressed confidence that the problem could be fixed over the next two years. "By 2027, we should be able to access dollars at the original bank rate," Muizzu told state media.

The conversion mandate has replenished the depleted reserve, he told the press in May. “The tourism sector has contributed US$ 214 million so far. If this trend continues, the benefits will reach the people,” he said.

Experts, however, do not share the president's optimism.

"The government's new policy is good to build up the foreign currency reserves. Reserves will improve but the banks are not supplying dollars to the private sector adequately," the fiscal policy expert said.

"The private sector has to rely on the parallel market, which has a supply issue because of the new rules. I do not think the situation in the US dollar parallel market will improve with the policies that are in place, without addressing the root cause."