DTIS, Volume I - Enhanced Integrated Framework (EIF)

This relatively high proportion of foreign employment is mostly due to the shortage of
relevant skills among Maldivians and also to labour market rigidities related to cultural
and traditional norms, especially concerning women. For example, while in many
countries the garment industry is dominated by women, before the collapse of the
industry in the Maldives, the Maldivian work force was not able to adjust to an industrial
style working environment and most of the employment that was created went to
imported labour. Similarly, in the tourism sector, most hospitality related work is not
considered suitable for women for cultural and religious reasons.
The result is that employment opportunities are lost, accounting for levels of
unemployment and underemployment that are relatively high. To this extent, a key part
of the explanation of the unemployment problem among Maldivians is the effect of
labour market rigidities. High economic growth has been accompanied by relatively low
employment content as a significant proportion of the jobs created were taken up by
imported labour.
The fishery sector, traditionally a major employer, has also been in decline. While the
national labour force grew by 60 per cent between 1990 and 2000, the share of fishery
sector employment fell by 10 per cent.
III. Exchange Rate Regime
Since October 1994 the Maldives has maintained a de facto fixed exchange rate with the
Rufiyaa pegged (or anchored) to the U.S. dollar. 5 No exchange rate restrictions, such as
surrender requirements, exist. The Rufiyaa is fully convertible for current and capital
account transactions. Residents and non-residents can freely hold foreign currency
accounts. Investment proceeds can be fully repatriated, and offshore borrowings are
allowed. Commercial banks buy and sell foreign currencies without restriction.
However, the peg to the U.S. dollar has resulted in an appreciation of the Rufiyaa's real
effective exchange rate by around 35 per cent since 1995. This has affected the Maldives'
competitiveness, especially with regard to fishery and tourism, slowing export growth
and economic diversification. 6 During this period, the government's capital and current
expenditures increased imports and demand for foreign currency at the fixed exchange
rate, resulting in a foreign exchange shortage. External factors such as the adverse terms
of trade due to rising oil and falling fish prices as well as repayment of overseas
borrowings to finance the expansion of tourist resort facilities also contributed to the
5 The buying and selling margins around the central currency rate are set at a narrow band of plus or minus
5 laari i.e. currently from Rf 12.75 to Rf 12.85.
6 The negative effect of the appreciation of the currency on the tourism industry is on the demand side
rather than on the supply side. On the supply side, the industry imports most of its supplies and uses a high
proportion of expatriate labour paid in U.S. dollars. But on the demand side, the affect of currency
appreciation may be to reduce tourism income, which is mostly from Europe, Euro-zone and Asian
countries.
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