MMA stops circulation of MVR 2.1B to uphold value of Maldivian currency

Central bank, Maldives Monetary Authority (MMA) has stopped the circulation of MVR 2.1 billion in excess liquidity in the banking system as part of special measures to ensure no further increase in the exchange rate as the value of Maldivian Rufiyaa continues to fall.

MMA, on Thursday, unveiled policy measures implemented by the central bank in the past year to maintain inflation at an appropriate level for sustainable economic growth.

According to the central bank, the amount of money circulating in the banking system had increased after former president Ibrahim Mohamed Solih’s administration printed money over the financial challenges faced during the COVID-19 pandemic. In this regard, MMA detailed that the liquidity rate of Maldivian Rufiyaa circulating in the economy had increased by 178 percent compared to 2020.

The central bank said there was a spike in the number of Maldivian Rufiyaa being deposited to banks upon printing money, which is still on the rise, with year-on-year increase as of June standing at 18 percent.

“However, the number of foreign currency being deposited had dropped significantly since 2022,” MMA noted.

“Moreover, among the loans issued by banks, Maldivian Rufiyaa loans saw a significant rise, while foreign currency loans had declined. The increase in deposits, loans and excess liquidity of Maldivian Rufiyaa, accompanied by the slowdown in the level of foreign currency deposits and loan issuance, is having a negative impact on the exchange rate of Maldivian Rufiyaa,” the central bank added.

Addressing concerns regarding Maldives’ low foreign reserves, MMA noted that although the tourism sector was severely affected during the COVID-19 pandemic—causing a shortage of US dollars—the steady recovery and current growth of tourism have led to an increase in foreign currency inflows. However, this rise has not translated into higher foreign reserves due to several reasons. They are:

The increased expenses to import oil since 2022. In this regard, from 2017 to 2021, expenditure to import oil accounted for an average of 33 percent of MMA’s foreign exchange sales under its intervention policy. The figure rose to 49 percent on average between 2022 and 2024

An increase in MMA’s foreign currency sales via banks to the government and state-owned companies to meet their debt obligations, and to the private sector and general public 

The huge spike in Maldies’ debt-to-GDP ratio which has posed difficulties to the government in securing financing from foreign parties

Although the official exchange rate for the US dollar in the Maldives is currently MVR 15.42, people are forced to purchase dollars on the black market at rates exceeding MVR 20 due to limitations through official channels in line of the dollar shortage.

MMA said they launched reverse repurchase operations under open market operations on July 23^rd to reduce the liquidity of Maldivian Rufiyaa in circulation within the banking system.

“MVR 2.1 billion in excess liquidity has been removed from the banking system under the first such reserve repurchase operation,” the bank added.

What are reserve repurchase operations?

Central banks carry out reserve repurchase operations by selling securities to qualified counterparties under an agreement to buy them back later, thereby reducing liquidity in the banking system.

The USD exchange rate reached its most favorable level under the current administration in February of last year. At that time, the government claimed that the rate would continue to decline and would not rise again. In April, President Dr. Mohamed Muizzu announced that the Maldives' USD shortage would be resolved by 2027, ensuring availability of USD at the bank rate. The President reiterated USD rate would continue to decline and would not rise again.