MMA governor says majority of tourism dollars remain outside banking system

Maldives Monetary Authority (MMA) Governor Ahmed Munawwar has said that control of the country's foreign currency market remains largely outside the central bank, with billions of dollars in tourism earnings continuing to circulate beyond the banking system.

Speaking at a parliamentary committee meeting on Wednesday to examine the proposed 2027 state budget, Munawwar said the Maldives receives approximately USD 5.9 billion annually from tourism, but only 65%, or USD 3.8 billion, enters the banking system.

He said the remaining USD 2.1 billion circulates outside the formal banking system.

"MP Shamheed would also know what happens to the remaining USD 2.1 billion, as he is involved in the sector. Everyone knows what happens to it," Munawwar said.

He said the MMA's objective was to ensure that every dollar entering the Maldives passes through the banking system.

To achieve this, the central bank has increased its monitoring of foreign currency transactions. Munawwar said resorts have been instructed to open dedicated accounts to deposit their foreign currency earnings.

Munawwar also raised concerns about tax compliance in the tourism sector, saying that only 50 resorts pay income tax, while the remaining resorts do not.

He questioned whether resorts reporting no taxable income were operating without profits or whether their financial records accurately reflected their earnings.

The Governor said the Maldives Inland Revenue Authority (MIRA) should prioritise auditing resorts to determine whether their accounts and tax declarations were accurate.

"MIRA should not be going after small shops. MIRA should be auditing resorts and checking whether their accounts are accurate," he said.

Addressing the exchange rate, Munawwar said the MMA would not support allowing the rufiyaa to float against the US dollar until the country's official reserves reach USD 1 billion.

He said the exchange rate was under pressure from the conflict in the Middle East, while noting that the Maldives had historically adjusted its exchange rate approximately once every 10 years.

Munawwar explained that the central bank maintains the rufiyaa's peg to the US dollar to contain price increases and protect consumers from the effects of exchange rate fluctuations.

He said allowing the market to determine the dollar's value while foreign currency transactions remained largely outside the central bank's control could lead to further price increases.

"Otherwise, prices will rise, and the difficulties faced by the public will become much greater," he said.

The Governor said discussions were under way to develop a roadmap to increase official reserves to USD 1 billion.

Munawwar said foreign currency transactions in the informal market had increased following the COVID-19 pandemic, reducing the amount of dollars circulating through banks.

He said money exchange businesses had been handling more foreign currency transactions than banks.

However, he noted that the introduction of foreign currency legislation, developed with advice from the International Monetary Fund (IMF) in 2019, had increased the amount of dollars entering the banking system.

The legislation requires resorts to convert a portion of their foreign currency earnings into rufiyaa.

Munawwar said the central bank had already increased the amount of foreign currency supplied to banks several times.

He added that a substantial share of the additional 20% of resort earnings now subject to currency conversion would also be allocated to banks.

"The intervention provided to banks will increase once the additional conversion requirements begin generating foreign currency," he said.

The Governor also outlined monetary measures introduced to reduce pressure on the dollar by withdrawing excess rufiyaa liquidity from the economy.

He said the MMA had withdrawn an average of MVR 3.1 billion during the year through mop-up operations designed to absorb excess liquidity from the banking system.

However, he noted that approximately MVR 2.3 billion in excess liquidity remained in the market.

Munawwar said the central bank had also increased the minimum reserve requirement (MRR) for rufiyaa deposits held by banks to 11%.

The reserve requirement for foreign currency deposits has been adjusted to between 5% and 7%, he said, adding that discussions were under way on further increases.

The Governor said these measures were intended to reduce excess rufiyaa liquidity, ease pressure on foreign currency demand and increase the availability of dollars through the banking system.