Why Rufiyaa is falling as black market dollar rate crosses MVR 22

The US dollar has risen above MVR 22 on the Maldives’ informal foreign exchange market, compared with rates of around MVR 16 to MVR 17 previously, as an increase in rufiyaa liquidity coincides with pressure on the country’s supply of foreign currency.

The black market rate has been increasing by about 20 to 30 laari on some days, prompting debate over the factors behind the movement.

Economic and financial data point to several factors occurring at the same time: an increase in rufiyaa liquidity, government borrowing from the domestic market, demand for foreign currency for card transactions, changes in where currency traders place their dollars, external debt payments and a decline in tourism receipts.

The latest increase in the dollar rate began less than a week after reports that a MVR 2.4 billion transaction involving government securities held by the Maldives Pension Administration Office had been completed.

Under the transaction, the Maldives Monetary Authority (MMA) repurchased MVR 2.4 billion in government Treasury bills held by the Pension Fund. The Pension Fund then used the funds to purchase a government bond.

The transaction has been described as a quantitative easing operation because the central bank's purchase of the securities releases rufiyaa liquidity that can be used to finance government expenditure.

The timing of the transaction also contributed to expectations in the foreign exchange market that the supply of rufiyaa would increase.

According to economists, some foreign currency traders responded to expectations of a further rise in the dollar rate by withholding dollars or reducing sales in the informal market.

This created a combination of more rufiyaa seeking foreign currency and fewer dollars being offered for sale.

Market speculation is estimated to account for about 5.3 per cent of the increase in the exchange rate.

Changes in bank card limits have also increased demand for foreign currency.

Bank of Maldives (BML) data shows that customers spent $226 million through foreign card transactions during the first six months of this year, an increase of 29 per cent from the same period last year.

The increase followed changes to foreign transaction limits on debit and credit cards.

At the same time, the tourism off-season reduced the flow of foreign currency into the banking system.

BML introduced an investment scheme offering returns on dollar deposits as part of efforts to attract foreign currency. Currency traders who previously supplied dollars to the informal market have also placed funds in the scheme.

This has shifted part of the available dollar supply from the informal market into the banking system.

A portion of the dollars collected by the bank is then required to meet customers’ overseas card transactions, limiting the amount available for other uses.

Government expenditure and domestic borrowing are another source of pressure on the exchange rate.

Ministry of Finance debt statistics show that domestic government debt increased by about MVR 5 billion, or 5 per cent, between the first and second quarters of this year.

MMA statistics show that commercial bank exposure to the government has reached about MVR 54 billion, exceeding bank lending to private businesses.

As the government borrows from domestic financial institutions and spends the funds, rufiyaa moves into circulation.

The effect is also linked to monetary financing undertaken in previous years. Around MVR 8 billion was created during the previous administration, although part of that liquidity was subsequently absorbed through instruments such as the MMA's Overnight Deposit Facility.

With government expenditure continuing and external budget financing constrained, reliance on domestic financing has increased.

MMA figures indicate that active money supply has expanded by about 22 per cent.

The central bank has also provided about MVR 3.7 billion in liquidity facilities to commercial banks. The additional liquidity gives banks more capacity to extend financing, including through purchases of government Treasury bills.

The result is an increase in the amount of rufiyaa in the economy at a time when dollar availability has come under pressure.

The foreign exchange situation has also been affected by external debt servicing.

Finance Ministry figures show that the Maldives has spent close to $1 billion on external debt payments this year.

Such payments require foreign currency to leave the country’s reserves and financial system.

At the same time, tourism, which generates most of the Maldives’ foreign currency earnings, has faced a decline linked to conflict in the Middle East.

The downturn has been estimated at between 18 and 21 per cent, with the resulting loss in tourism receipts estimated at about $500 million.

This means the Maldives has faced two pressures at the same time: demand for foreign currency to meet external obligations and a reduction in the flow of dollars from tourism.

Taken together, the indicators point to an imbalance between the supply of rufiyaa and the availability of foreign currency.

Government borrowing and expenditure have increased rufiyaa liquidity, while higher overseas card spending has added to demand for dollars. Meanwhile, debt servicing, lower tourism receipts and changes in where currency traders place their dollars have reduced the foreign currency available in parts of the market.

Expectations of further depreciation can add another layer of pressure. When traders expect the dollar to rise, they may delay selling dollars, reducing supply and contributing to further increases in the market rate.

The result has been a widening gap between the official US dollar rate of MVR 15.42 and the rate available on the informal market, which has now moved above MVR 22.