Governor: MVR-only policy can only work if other macroeconomic fundamentals are upheld

Central bank, Maldives Monetary Authority (MMA)’s Governor Ahmed Munawar, on Friday, stated that the country’s dollar shortage could be addressed by mandating and enforcing the use of the Maldivian Rufiyaa as the sole currency for domestic transactions, provided other macroeconomic fundamentals are upheld.

Sharing a news report on social media featuring former MMA Governor Ali Hashim, who asserted that the dollar shortage can only be resolved through decisive government action, Governor Munawar said a ‘Rufiyaa-only’ policy could succeed if the structural fundamentals of the economy are upheld.

"If other macroeconomic fundamentals are upheld, this issue can be addressed by transitioning to and enforcing the use of the Maldivian Rufiyaa exclusively for domestic transactions," the Governor stated, without providing further details.

Economic experts have suggested that resolving the US dollar shortage and successfully "de-dollarizing" the economy would require simultaneous stabilization of key macroeconomic indicators, supported by stringent fiscal policies.

Key measures include reducing recurrent expenditure and ending the practice of central bank money creation that can lead to excess Rufiyaa liquidity and increased demand for foreign currency. At the same time, monetary authorities would need to absorb excess liquidity, strengthen net foreign reserves, and strictly enforce requirements for major foreign currency earners, including tourist resorts, to repatriate their earnings.

Combining these measures with structural efforts to reduce reliance on imports and expand investment opportunities denominated in Rufiyaa could help establish the confidence and stability necessary for a local currency-based financial system.

In most countries, domestic transactions and salary payments are conducted almost entirely in the national currency. In the Maldives, however, US Dollars are frequently used for a range of transactions, including salary payments, taxi fares, and general business activities.

As an economy heavily reliant on imports, the Maldives has consistently faced high demand for US Dollars. The black market exchange rate for the dollar has recently approached MVR 23, reaching an unprecedented level in the country's history. The MMA believes that requiring domestic transactions to be conducted in Rufiyaa is an important step toward reducing this demand.

To address the dollar shortage, the Foreign Exchange Act, which came into effect on January 1 last year, requires a portion of tourism earnings to be converted and deposited with local banks. Under the current framework, Category A resorts are required to convert USD 500 per tourist or 20 percent of their total income. Category B establishments, including guesthouses and safari vessels, are required to convert USD 25 per tourist. These conversions must be completed by the 28th day of the third month following the month in which the income was received.

Governor Munawar has previously stressed that ensuring dollars generated by resorts circulate within the domestic economy would strengthen the country's overall financial system. MMA statistics indicate that these measures have already contributed to an increase in the country's foreign exchange reserves.

The MMA has also proposed amendments to Parliament that would require resorts to convert 20 percent of their total revenue, replacing the current fixed amount per tourist requirement. Meanwhile, Parliament has begun work on amendments to foreign exchange regulations that would introduce fines of up to MVR 1 million for black market currency trading and fines of up to MVR 500,000 for reporting black market exchange rates.