The rufiyaa is pegged to the US dollar. The midpoint of the exchange rate is Rf12.85:US$1, and the rate is permitted to fluctuate within a band of 20% either side of this level. In recent years, the currency has consistently grazed the weak edge of the exchange-rate band. As tourism receipts have plummeted in the wake of the pandemic, gross international reserves have fallen to US$705m as at end-September 2020, providing just 0.2 months of import cover (based on 2019 data). This has rendered the peg relatively vulnerable, particularly given the scale of the country's other external liabilities.

While there is a significant risk that the government could be forced to weaken the currency if the reserves remain under pressure over a prolonged period, our core forecast is that the peg will be maintained over the forecast period, but that the currency will continue to test the weaker edge of the band. To maintain exchange-rate stability, the MMA activated a US$150m swap with the Reserve Bank of India (RBI, the Indian central bank) in May 2020. The MMA also began shrinking the monetary base in tandem with falling reserves by reducing its liabilities to other depository corporations. Furthermore, we expect imports to remain below 2019 levels in 2021-22, in line with our forecast of a gradual economic recovery, reducing pressure on the peg.