There is a saying that Tourism and Fishing are the main veins of our economy. The two main sectors pumping revenue into our economy. Like an IV transfusing blood, tourism is the main source of US Dollar inflow to the Maldives.
During Q1 of 2020, USD coming into the country had stopped along with flights full of tourists. For importers, families with children abroad to study, and others who required USD regularly, this news hit no lighter than a tornado.
Birth of the Storm
A country with an impressive 100% literacy rate and life expectancy of over 78 years, the Maldives is vulnerable to mainly two things. One, rising sea levels, and two, overdependence on tourism and imports. This means that we are heavily reliant on tourism to get the dollar, so we can use to it import everything we need. A simple and dangerous cycle.
In March 2020, Maldives reported its first case of coronavirus and went into a full lockdown. For the first time in its history, the country recorded 0 tourist arrivals, seeing the biggest downturn in tourism. With only fish exports (mainly) left to supply dollars, there was a huge dollar shortage and the rate in the black market shot up. At one point, you could have sold this green note for a ridiculous MVR 20, while the set market rate by MMA is MVR 15.42.
There are two key players in this whole dollar issue: The central bank, the Maldives Monetary Authority (MMA), and the national bank, Bank of Maldives (BML). The MMA regularly monitors the foreign exchange market and intervenes in the market to stabilize the exchange rate by making weekly dollar allocations to commercial banks. On the other hand, BML is a full-service bank, the leading financial institution in the Maldives.
Since 2014, the MMA actively maintains the foreign exchange reserves at a level that is conducive to exchange rate stability. In simple words, these are dollars held by MMA to control the exchange rate. It’s like the marketing manipulation of diamonds: lower the supply, higher the price. An increase in reserve would reduce the supply of dollars in the economy, thus helping to prevent the appreciation of MVR in terms of USD and vice-versa. Foreign currency collected as tax and fees from the tourism industry is the largest addition to Maldives’ national reserve.
From the Gross International Reserves, there are usable reserves: physical dollars available for use by MMA, such as to import goods into the country. Statistics revealed by MMA show a steady and concerning decrease in the usable reserves in 2020, with USD 311.3 million in January and USD 122.3 million by the end of August. In September 2020, MMA increased the amount of USD issued to banks, as part of the efforts to control the inflation rate amid the pandemic.
Then there is the Minimum Reserve Requirement: the proportion of deposits that the banks are required to keep in the form of balances with the central bank. This is one of the main policy instruments used by the MMA to control the money supply and credit expansion. In 2020, MRR for foreign currency deposits was lowered from 10% to 5% to address the dollar liquidity issues faced by commercial banks. There’s a significant difference in the functions and authority of a commercial bank and a central bank.
BML’s new limits on foreign transactions amidst the dollar shortage led to a lot of criticism. So did many of the announcements made during September last year. MMA had increased the foreign exchange restriction for three months and stated that USD will be issued strictly on a need basis (to import necessities such as food and medical supplies).
Further that month, BML introduced a new temporary limit of USD 250 per month, per card (from USD 600 earlier) for all BML debit and credit cards for use on foreign transactions. The Bank set an increased limit of USD 750 per month for Maldivians living abroad. “While new lower limits have been introduced, the Bank will support all medical and education payments through cards with temporary changes to the limits. The change will not impact 95% of the Bank’s customers.” These limits only apply to foreign transactions for cards linked to MVR accounts. BML customers with USD accounts as their primary account for their card are allowed to proceed with transactions upwards of USD 3,000 monthly. BML also blocked some foreign currency digital wallets including Skrill and TransferWise which are used for FOREX trading. Moreover, BML slashed remittance fees for transactions below USD 500. While there were a lot of pointing fingers at this stage, one question many people ignored is how a bank like BML is supposed to increase its dollar supply in such a situation.
Being helpless within our borders, the Maldives took help from overseas. India had provided a USD 150 million foreign currency swap facility under the USD 400 million currency swap agreement signed between Maldives and India in 2019. Later, the Maldives thanked its close ally for further USD 250 million financial assistance.
However, this further exposed our woes of being dependent on one source and one ally during each administration.
It could be argued that the whole situation could have been managed better if the authorities had anticipated and prepared for it by learning from history.
The years 2008 and 2009 were known as “The Great Recession”. This was the largest global financial crisis since the Great Depression of the 1930s. While its impact was directly on developed countries, its indirect impacts on developing economies like the Maldives were as severe. This, and the Asian Financial Crisis of 1997–1998, as well as the Indian Ocean tsunami of 2004, all demonstrated how the Maldives’ heavy dependence on tourism creates vulnerabilities.
The economy contracted by 3.6% in 2009 due to a decline in tourism, capital inflows, and exports. Amidst this, a severe dollar shortage crisis and falling reserves, the dollar rate in the black market had reached MVR 19.50. In 2019, the nation’s gross international reserves increased to USD 753.3 million, of which USD 315.8 were useable reserves. Due to this, the dollar exchange price had finally dropped below MVR 17.
This isn’t the first time the Maldives has faced a severe dollar shortage. Moreover, this isn’t even the first time BML introduced such restrictions. During 2012-2016, similar limits were imposed on withdrawals amid a dollar shortage. It has been a recurring issue throughout our history and one that is yet to be solved.
After the reopening of borders in July 2020, the tourism industry and aviation have kicked off and the economy is in the recovery stage. Maldives’ gross international reserve increased by a whopping 56% between November 2020 and December 2020- just within a month! We had a pretty good conclusion to the year, with over 500,000 tourist arrivals and over 78,000 within January 2021.
While these are hopeful numbers, the journey to financial and economic recovery seems (very) long for this island nation. We are still susceptible to another crisis and more effort needs to be made to develop other sectors within the country.