Update Country Report Maldives 30 Apr 2020

Event

The Maldivian Monetary Authority (MMA, the central bank) has received US$150m from its Indian counterpart, the Reserve Bank of India (RBI), through a foreign currency swap arrangement.

Analysis

The swap facility has been extended under a US$400m foreign currency swap agreement signed between the two central banks in July 2019, which was part of a wider US$1.4bn financial assistance package that India announced for the Maldives in December 2018. The currency swap deal was activated as the Maldives is seeking financial assistance to mitigate the economic impact of the coronavirus (Covid-19) outbreak. Tourism activity-the primary driver of economic growth in the Maldives and the largest source of foreign exchange-is at a near-standstill and is unlikely to pick up in the upcoming months.

Earlier, on April 22nd, in fulfilment of the Maldivian government's request, the IMF sanctioned the release of SDR21.2m (roughly equivalent to US$28.9m) to the Maldives. The disbursement was made under the Fund's rapid credit facility to help the archipelago to manage its foreign-exchange needs while combating the coronavirus.

In addition to providing much-needed foreign currency for the import of essential healthcare and medical supplies, the inflow of foreign exchange will also help to keep the peg between the rufiyaa and the US dollar stable, as international reserves are replenished. However, the size of the financial assistance might not be enough to counter the sharp decline in foreign-currency earnings; tourism receipts stood at US$2bn in 2017. The level of gross international reserves is already relatively low compared with the monetary base, and the peg could become more vulnerable if reserves decline further. Once economic activity restarts, there is a significant risk that the government could look to revise the peg, with a view to weakening the currency, which would boost the attractiveness of the country as a tourist destination.