Tuesday, March 29, 2011

The Dollar Shortage

It has been widely recognized that Maldives is facing a 'shortage' of US Dollars. The official pegged rate of MVR 12.85 to the dollar has been there for quite a while. However, it has become very difficult to buy USD for 12.85 anymore, atleast in significant quantities (if you call 500 dollars significant).

Ordinary citizens have to queue at BML to obtain USD at $100 per person per day (at $1 or $10 denominations). This is in no way adequate for most people. Ofcourse, there is a different class of people who do get thousands in $100 denominations from the same bank. The only alternative to ordinary people and businesses is to find another seller. Sure we could get USD for 12.85, but usually the going rate is 13 or even above 14 rf for the dollar.

Now the government has started cracking down on people who sell US Dollars at a rate higher than MVR 12.85. Unfortunately, this will result in even more shortage of dollars and will affect the ordinary people most. Government is shutting down the only other avenue available for ordinary people to get USD. Those who have good connections can get plenty even now.

As I mentioned in an earlier post, shortages are created precisely by price fixing. No harsh penalties or crackdowns can fundamentally solve the problem. People go to blackmarket and buy at high prices not because they like it, but because thats their only choice.

If the argument is that there is enough dollars, and that the resort owners are hoarding it, then what makes sure that they will sell even now? How is government going to force them to sell at 12.85? How does penalizing ordinary people engaging in voluntary trade help to solve the problem at all?

Even worse, from what I hear, it will become illegal to trade foreign currency if you are not licensed. This means I cannot sell say $200 to a friend of mine even at 12.85! How ridiculous is that? Isn't that curtailing economic freedom?


opposeanni said...

unfixing the dollar rate will jeopardize the Maldivian economy. cracking on the seller in the black market is not a good either unless you take other measures together with it such as discussed at opposeanni.blogspot.com

meekaaku said...

Pegging a currency is risky business if the central bank cannot maintain it. The fact is, inflation rate in Maldives over the last few years have been much higher than that of dollar. So this currency marriage could not be maintained. The monetary policy of Maldives was not consistent with the fixed peg.

So in short, the central bank has failed to keep the peg that they promised to keep. The consequences are suffered by ordinary people.

It is in no way different than the government trying to keep the price of clothing, oil or any other commodity fixed. To the extent that govmnt is able to keep the peg (by hitting to inventory/reserves, or buying back), then there is no problem. The problem comes when it fails to keep up.

I just read your first article in your blog. You do raise some important points. However, ultimately, if we cannot maintain the peg, we have to devalue or float it. There is no other way.

Anonymous said...

You mentioned: "Ofcourse, there is a different class of people who do get thousands in $100 denominations from the same bank."

Can you elaborate on this?

Mariyam said...
This comment has been removed by the author.
meekaaku said...


Thats the political/business class who have got connections.

Mohamed said...

Very true the measures taken by police limits the economic freedom in the country.We need to research do a research on the issue, to see what is wrong. Now this issue is not a just a economic issue its a National issue.

Winnowed said...

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