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Monday 30 Dec 2024
LOCAL EDITION
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LOCAL EDITION
US dollar bills. (File Photo/Sun/Mohamed Afrah)
Maldives, a diminutive nation with an abundance of natural resources – majority of which are still in pristine condition – is no stranger to the world of tourism. A four-time winner of the World’s Leading Destination accolade at the World Travel Awards (WTA), the Maldives has etched its name into the annals of the history of global tourism; and one might say, quite rightfully so.
Despite the oddities it faced, some 50 years back at the inception of the hospitality industry, including strong naysayers gunning for the inevitable downfall of the said industry, the Maldives has braved through rather rocky waters in the next five decades, to become a staple in the global tourism scene.
As of November 2024, Maldives is already home to over 170 tourist resorts, more than 900 guesthouses, and a combined total of over 160 other tourist establishments including hotels and safaris. In fact, according to the most recent reports, the combined operational bed capacity of the tourism industry is a little over 62,000.
With over 1,200 tourist establishments in the Maldives – already operational – there is no doubt that the country’s tourism industry strong magnet for foreign currencies. The technicalities of how this works is no longer a tale shrouded in mystery as it had been discussed in extensive fashion across multiple tourism promotion events, roadshow panels, and such. It is no longer a secret that the Maldives’ tourism industry is a billion-dollar, if not a trillion-dollar industry.
Just last year alone, the Maldives tourism industry’s annual revenue reached USD 4.5 billion according to President Dr. Mohamed Muizzu, who revealed this at a recent ceremony held to commemorate the one-year anniversary of the current government. This was also the instance where the Maldives head of state affirmed that the government will not rescind its recent regulation on foreign exchange.
This particular regulation in question, has since attracted significant heat from the relevant stakeholders, financial experts, and almost the entirety of the tourism industry (since this relates to the hospitality industry the most as it is the strongest foreign currency puller).
To begin any discourse on the topic, and any subsequent attempts that follow in providing any exposition to the issue, first require an exploration of what the law stipulates on the subject matter.
Regulation No.: R-91/2024 (Foreign Currency Regulation)
Under Section/Chapter Three of this regulation, entitled “Depositing and exchanging revenue earned in foreign currency”, Article 8(a) stipulates the following;
“The owner of Category A tourist establishments, shall exchange the total revenue earned from total arrivals for one calendar month, at the rate of USD 500 per tourist, to the bank on or before the 28th day of the third month following the month of arrival.”
Under the same section/chapter, Article 8(b) states that for Category B tourist establishments, the rate is USD 25 per tourist. The rest of the particulars is the same as that of Article 8(a).
Although Articles 8(a) and (b) are setting out a minimum amount for tourist establishments under both categories by way of a base rate, the regulation allows for these establishments to seek lower minimum exchangeable rates by reporting to the relevant authority with the following items – that must indicate that said tourist properties do will not possess the financial capabilities for an exchange as prescribed in Articles 8(a) and (b).
The relevant authority in question here is the Maldives Monetary Authority (MMA) as provided by Article 3(h) of the regulation.
In laymen terms; it simply means that if a tourist establishment lacks foreign currency revenue to be able to exchange it to the banks as per the rates provided in the regulation, then it is to report to the relevant government authority.
These establishments must produce the following documents to MMA, to provide sufficient evidence as to their lack of foreign currency earning;
So, the law is clear as to which are the stakeholder parties that are mandated to exchange foreign currency to local banks.
Such a crucial law, regardless of whether it had been aptly discussed prior to its drafting and subsequent enactment, would have obvious and inevitable implications on the country’s economy – some, may not be so desirable for the various actors in said economy. In this case, many of the tourism industry pioneers and entrepreneurs have been raising alarms as to the negative implications such a law would pose.
There is also argument that the government cannot force private corporations to exchange their retained profits to commercial banks – even if it is for virtuous ends.
But before any arguments, in favour or otherwise, can be made about the regulation and the various actors to whom it is associated to, it is vital to analyse if similar regulations exist outside of the Maldives.
Some key examples include China, Argentina and Nigeria, of which China – being the close ally, and socio-economic partner it is, to the Maldives – is a more appropriate example to analyse.
When In China
China’s foreign exchange regulations are designed in a manner, that aims to maintain control over the flow of capital, stabilize the renminbi (RMB) and ensure economic stability. These regulations are overseen by the State Administration of Foreign Exchange (SAFE), which operates under the People’s Bank of China (PBOC).
Mandatory Conversion of Foreign Exchange Earnings
Businesses in China, especially the ones engaged in exporting goods and services, are required to repatriate their foreign currency earnings and convert a specified portion into RMB through authorized banks.
Historically, these businesses needed to convert a substantial percentage of their foreign currency earnings, but in more recent years, this percentage has fluctuated owing to economic policies aiming to balance market flexibility and control – but it has not been abolished.
The regulation helps the Chinese government to manage its foreign exchange reserves and regulate the supply of foreign currency in the domestic economy, which in turn supports the value of the RMB.
Centralized Monitoring by SAFE
Businesses are required to open foreign currency accounts that are monitored by SAFE. The movement of funds in and out of these accounts is scrutinized to prevent unauthorized capital flight and ensure compliance with foreign exchange rules.
Additionally, companies are also required to report foreign exchange transactions, including capital inflows and outflows to SAFE, which enables the authority to monitor foreign exchange liquidity and ensure foreign earnings are properly declared and converted where mandated.
Approval for Large Transactions
For larger sums of foreign currency, these businesses require approval from SAFE or authorized banks – and there is no other way about it. This comes to play when capital transactions, such as foreign investments or large-scale imports are in the equation. These approval and monitoring measures are in place so that the government can prevent rapid outflows of foreign currency that could destabilize the Chinese economy and also, deplete the foreign exchange reserves (something, that the Maldives tend to run into every now and then, though majority of the time, is sorted before the worse could happen).
Regulations for Foreign Investment and Repatriation
Foreign investors looking to bring funds into China are required to comply with foreign exchange regulations and more often than not, require approval from SAFE or any other regulatory body.
Additionally, foreign businesses – that have operations in China – must also go through regulated processes in repatriating their profits. These profits are subject to tax verification, and repatriation is monitored to ensure compliance with currency controls.
In more recent years, China’s policies have shifted towards attracting foreign investment and integration of its businesses into the global market. To achieve this, a lot of their currency policies have the key objective of “liberalizing foreign exchange”. Moreover, certain Free Trade Zones (FTZs) in China have also allowed more relaxed foreign exchange regulations to encourage foreign direct investments (FDI) and financial innovation. Businesses within these zones may also experience fewer restrictions when conducting international transactions.
As for the companies that do not comply with China’s foreign exchange policies, they could face fines and restrictions on future transactions among other penalties. In severe cases, owing to persistent violations, companies could also face being blacklisted by the Chinese government, which in turn, could limit its ability to conduct cross-border transactions or even access to foreign currency services through domestic banks.
China’s foreign exchange regulations aim to maintain tight controls, and shield the country’s economy from speculative attacks and large-scale capital flight that could disrupt its financial markets. Moreover, by ensuring that foreign exchange is channelled through the country’s central banking system, China aims to stabilize its local currency and its value.
Moreover, these policies also ensure proper management of foreign exchange inflows and outflows in China, which in turn helps the country to maintain robust foreign currency reserves – something that is pivotal for economic resilience.
In the Maldivian Context
According to the Maldives Association of Tourism Industry (MATI), this regulation will have significant (negative) impact on the revenues of tourist establishments. MATI said that the regulation was formulated without factoring in the concerns raised by relevant stakeholders during the discussion stage.
MATI said that during its meeting with MMA, the association was displeased with the proposals presented by the central bank for inclusion in the regulation.
“We note that when the regulation was gazetted, none of the concerns raised by this association were addressed by the MMA,” the association said in its statement. Despite this, MATI had provided assurance of cooperating in “any matter that the country faces.”
While there has been an industry-wide concern regarding the said regulation, the government’s stance remains undeterred. Recently, President Dr. Mohamed Muizzu said that the regulation will remain as it is without any revisions, and adherence to it was mandatory for all concerned and relevant parties.
Moreover, the central bank, which had pushed this regulation, noted this new law would pave away for the government to facilitate substantial loans required to further develop the tourism sector.
The economic impact, or the implications of this specific regulation have yet to be observed. It is evident, this is not a welcome change by all relevant actors of the Maldives economy, but have been made to adhere to it regardless. There are active and ongoing concerns about such a regulation granting more autocratic authority to the government; by way of allowing the state to dictate what private companies must do with its own profits.
The future is a mystery, and for us all living in the present, all we can do is utilize the present data to paint a forecast of the future. While some say that this regulation is a stepping stone for the Maldives with regards to a stronger and more robust financial system, others are of the opinion that it could be regressive on the economy itself.
Time will tell.
