The Maldives’ cabinet of ministers has approved a plan to dollarize a portion of the country’s government revenues, including income tax, customs duties, and pension contributions, according to a media report. This new policy will apply to businesses that generate income in foreign currency.
The decision comes as the Maldives faces a shortage of foreign exchange due to excess rufiyaa liquidity, which has impacted the currency’s ability to be used for cross-border transactions. This issue stems from a monetary policy that is misaligned with the exchange rate, resulting in lost forex reserves as local liquidity expands.
To address the situation, amendments will be made to the Pension Act, Income Tax Act, and MIRA Act, allowing the government to collect taxes and pension contributions in US dollars. Attorney General Ahmed Usham confirmed that the changes are aimed at stabilizing the country’s financial system.
The move to dollarize revenue collection will reduce the need for converting rufiyaa into dollars and prevent further pressure on the domestic reserve money base. It also aims to curb black market dollar sales, which have emerged as businesses struggle to meet government payment obligations.
The Maldives already has a significant level of dollarization in its banking deposits, and this policy shift is expected to help maintain the country’s currency peg and avoid further forex shortages. Analysts suggest that allowing foreign currency usage can mitigate the central bank’s role in driving forex shortages through excessive liquidity injections.
By dollarizing key government revenues, the Maldives aims to maintain economic stability and restore confidence in its cross-border exchange system without reducing economic activity.