Maldives is one of the few countries in the South East Asia region with a steady supply of foreign currency. Due to the prevalence of tourism, a large amount of the foreign currency, especially US dollars, circulates in the economy. Nevertheless, an extensive black market for dollars is prevalent in the country. But, according to local businesses, the dollar black market has shrunk. The question to ask next is whether this market can be completely eliminated?
"There is one single source of dollar revenue for the country - tourism. Dollar availability became severely diminished as no new major projects were run. But now we have easier access to dollars," Lily Shipping Chairman Ahmed Nasir (Mallaa Naabe) said.
This is the sentiment of a businessman.
Even though there had always been an influx of dollars to the market, Maldivians has had a long complicated history with dollar purchase. Maldivians going abroad for various purposes had to overcome many issues in buying dollars. From 2014, measures were placed to grant easy access to dollars. That year, Central Bank, Maldives Monetary Authority (MMA) began selling dollars to other banks in operation. Additionally, fliers can provide their tickets to purchase US$ 500 per person. But, is this model the most sustainable model?
MMA Governor Dr. Azeema Adam says the agency sells US$ 4.7 million per week.
"Dollar demand is high. When our supply to BML reaches the limit, BML sells their own reserves. This year alone BML sold an additional US$ 3 million," Dr. Azeema said in the Parliament session, speaking about the dollar black market.
The dollar demand has been further inflated with the demand from state owned and state affiliated companies. The companies have begun to expand their operations, thus fueling demand. MMA statistics show that in 2013, MMA had sold US$ 43 million to such companies. The figure jumped to US$ 80 million the next year, while in 2015, the figure was at US$ 148 million.
Dollar band removal?
Five years back, there was a black market for dollars, but it was a limited one. The break came in 2008, when the dollar exchange rates were changed from the fixed MVR 10.28 rate. At the time, dollar exchange rate was allowed to float between MVR 10.28 and MVR 15.42. The change was brought in to completely eliminate the dollar black market. However, mere hours after the change, the rate lifted to MVR 16 and MVR 17 in the black. The sharp rise in rates, pushed average markets up.
"This was the time when the black market actually kicked off. But the rates in the black market is lower. The market will drop when the economy stabilizes," a business owner said to avas on the condition of anonymity.
Then there is the question of the biggest dollar source to the market; over 100 resorts operate in the country. Maldives Inland Revenue Authority (MIRA) statistics show that in the first quarter of this year alone, dollar revenues topped US$ 180 million. This is from tourism taxes and fees. The key question to ask now is why this and the additional dollar revenues are not secured or reserved in the country? Why are large sums of dollar revenues exported or deposited in offshore bank accounts? Is this one of the core reasons for the thriving black market?
Managing Director of Crown Company, Adam Saleem, says the company enforces a strict policy of reserving their dollar earnings in the country. He said if other companies adopted this policy, then the black market would be significantly reduced.
"Our group policy is if we need rufiyaa, we exchange from the bank. This is the right thing to do and will reduce the black market. Nevertheless, there will always be a black market in every country," Saleem said.
The investors into the local tourism sector have a solid presence in the global stock exchange markets, trading on a daily basis. Based on these aspects, we can say that it would still be sometime before those investors begin trading in Maldivian stock markets. This, experts say, is one of the reasons for not reserving dollars in the country. The other reason is linked to the lack of trust.
Dr. Azeema said one preventative measure is to enforce a policy whereby resort dollar earnings are sold to banks.
"Dollar demand is high. The solution is to bring in more rufiyaa transactions. Export dollars will enter the bank, proceed through banks. If the resorts sold the dollars directly to the bank, instead of an individual, importers will not have to bring in 20 - 25 percent. Importers will have to go with rufiyaa," Azeema said.
Governor said the introduction of a market mechanism will create a positive impact, further noting that lack of financial facilities was also a significant challenge.
"Control measures are probably not the best way forward. Investments are key. Dollar investment products need to be introduced. Capital markets need to be developed," Azeema said.
Personal dollar accounts: right move?
Maldives is also one of the few countries with the least restrictions placed on opening private dollar accounts. Any one can easily open a dollar account. As a result, when dollar demand rises, black markets enjoy a healthy surge. But in many other countries, dollar accounts can only be opened for businesses. This is in part to prevent inflated sales of dollars. Can this be implemented in the country?
The dollar demand rapidly rises during school holidays and hajj season. Can the black market rising from this demand be stopped?