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. On the back of weak tourism receipts, gross international reserves had fallen to US$629m by end-November 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 govern-ment could be forced to weaken the currency if foreign-exchange 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. The US$150m swap-line between the MMA and the Reserve Bank of India (RBI, that country's central bank) will also reduce pressure on the peg.