Exchange rate buckles as Maldives central bank fights losing battle

Twin deficits drive economy toward possible default.

Artwork: Dosain

11 Aug, 11:11 PM

Days after the governor asked for a closed session to brief MPs, the central bank broke its silence last Thursday with a detailed public explanation for the deteriorating value of the Maldivian Rufiyaa.

Warning signs have been evident. Importers struggle to pay suppliers as the black market rate for dollars record highs of MVR 20.20. Reflecting the parallel market premium, the Bank of Maldives a 30 percent fee on Chinese shopping sites. Food prices remain elevated. A citywide power outage across Malé and Hulhumalé on Saturday – the second major blackout in three months amid several isolated outages in Greater Malé – was reportedly the result of the State Electricity Company’s inability to pay fuel bills.

In its 12-page statement, the Maldives Monetary Authority highlighted the consequences of printing money to manage cash flow during the Covid-19 crisis. The debt-fuelled stimulus gradually worsened "mismatches between demand and supply in the foreign exchange market," a structural imbalance in the small and import-dependent economy. As of June, excess liquidity of MVR 7 billion (US$ 453 million) was up a whopping 178 percent from 2020, stoking inflation as more Rufiyaa chases scarce dollars, and forcing the central bank to draw down depleted reserves to defend the exchange rate peg.

In an escalating series of interventions, the MMA announced reverse repurchase operations, absorbing MVR 2.1 billion since late July. Earlier this year, the foreign exchange regulations were overhauled for the first time since 1987, making it mandatory for resort operators to convert a portion of foreign currency receipts through domestic banks, which must sell 60 percent of weekly collections to the MMA (in addition to a 30 percent redistribution mechanism for banks to "more equitably" serve import businesses). Reserve requirements for banks were also slashed to five percent, freeing up US$ 45 million in lending capacity.

However, the emergency toolkit generated a modest US$ 247 million against outflows exceeding US$ 700 million in seven months.

The MMA's analysis avoided criticising fiscal policy but acknowledged government overspending at the heart of the crisis. New money has been entering circulation as successive administrations plugged budget deficits by borrowing from domestic sources (selling treasuries and bonds).

The statement concluded with a warning about looming debt obligations that will test the country's financial stability.

Credit ratings agencies have downgraded the Maldives to "junk" status over the ability to repay US$ 688 million this year and more than US$ 1 billion due in 2026, including a critical US$ 500 million Islamic bond that must be refinanced or repaid by April. "A default event remains probable," Fitch assessed, as Moody's warned of "significant downside risks with an increasing probability of default." Despite a US$ 400 million bailout from India last year, reserves cover barely 1.5 months of imports, below international standards that recommend 3.5 months, the agencies observed.

But as the dollar surrender requirement has since eased debt repayment, some observers suggested that the "possibility of an external debt default has faded."

Despite a positive growth outlook, the MMA warned that any external shock that reduces tourist arrivals would pose "further challenges in refinancing debt" and advised implementation of overdue fiscal reforms.

In May, President Dr Mohamed Muizzu politically unpalatable reforms such as eliminating blanket subsidies in favour of redirecting infrastructure to state-owned companies. After running up a MVR 14 billion deficit in 2024 – in excess of the pandemic years – the government has maintained a budget surplus through July. But the overall balance of MVR 314.3 million largely stems from as projects have been postponed. Conversely, the wage bill increased by MVR 547.8 million compared to last year. Far from planned reforms of health insurance costs and bloated state-owned enterprises, Aasandha expenditure rose to MVR 1.13 billion and an additional MVR 700 million was allocated to government companies beyond budget.

Loan repayments more than doubled from MVR 1.55 billion to MVR 3.53 billion. Outstanding government securities stood at a massive MVR 94.5 billion.

The MMA analysis provided details on the health of the economy:

Inflation

National inflation at 3.8 percent (June 2025), food inflation averaging 5.5 percent in first half of 2025

Food inflation runs higher than headline due to heavy reliance on imports that makes the country vulnerable to global price shocks

In March 2023, food inflation of 8.2 percent was double headline inflation

Inflation rising since October 2024 "primarily due to increased taxes and duties on tobacco products"

Vicious cycle of excess Rufiyaa → dollar demand → exchange rate pressure → higher import costs → more inflation

Foreign currency reserves

Reserves fell to record low US$ 371.2 million in September 2024

Recovered only due to US$ 400 million currency swap with India's Reserve Bank (rolled over for a further six months)

US $212.6 million spent for foreign debt service this year (60 percent increase)

US$ 274.3 million to STO for essential imports

US$ 217 million for private sector and individual needs

30 percent increase in foreign currency income from tourism taxes and fees from January to July 2025

But reserves face ongoing strain from high current account deficits, substantial external debt service, and MMA interventions to support the currency peg

Fuel import costs averaged 33 percent of foreign exchange sales from 2017 to 2021

This jumped to an average of 49 percent after the Ukraine war in 2022

Economic outlook

GDP growth forecast between 4.5 percent to 5.6 percent for 2025, driven by tourism

2.2 million tourists projected for 2025, 2.4 million for 2026 benefiting from new Velana Airport terminal

Tourist arrivals increased 9.1 percent in first half of 2025 to 1.108 million visitors

Current account deficit expected to improve from US$ 1.3 billion (18.1 percent GDP) in 2024 to US$ 972.3 million (13.2 percent of GDP) in 2025

Imports at US$ 1.7 billion in first half of 2025 (1.7 percent decrease), exports up 39 percent to US$ 79.4 million

Growth projections assume continued political stability and global economic health

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Exchange rate buckles as Maldives central bank fights losing battle

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