Speaker Nasheed calls to instate floating exchange rates

Former President and incumbent Parliament Speaker Mohamed Nasheed has advocated for a floating exchange rate.

In a tweet posted Monday, Nasheed urged to abolish fixed exchange, stating that this would completely eliminate the black market for US dollar.

Maldives has always used a fixed exchange rate, whereby the Maldivian Rufiyaa is pegged against the US dollar. This rate is set usually by the Central Bank. Exchange rates in unofficial markets vary when availability of the currency is limited.

A floating exchange rate is entirely dependent on market factors and as a result is unpredictable. The Central Bank has no role in setting the exchange rate.

When Nasheed served as President, dollar availability was severely limited, due to various factors. At the time, the administration had allowed the exchange rate to fluctuate by 20 percent above and below the official exchange rate. Prior to 2008, the dollar exchange rate was at MVR 12.85 for a dollar. When the administration made the change, Central Bank’s dollar exchange rate had increased to MVR 15.42 for a dollar. Black market rates were even higher, even after the change.

A floating exchange rate relies on the market to self-regulate. If a country suffers from a deficit in the balance of payments, then, other things being equal, the country’s currency should depreciate. This would make the country’s exports cheaper, thus increasing demand, while at the same time making imports expensive and decreasing demand. Additionally, theoretically, floating exchange rates should mean that three is hardly any need to maintain large reserves to develop the economy.

However, due to the very nature of a self-regulating mechanism, a floating exchange rate is prey to uncertainty and market speculation – both rising from a lack of fiscal discipline. Additionally, a floating exchange rate may discourage foreign investors bringing in business to the country.