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%. In recent years the currency has consistently grazed the weak edge of the exchange-rate band. The ongoing weakness in tourism receipts slowed the accumulation of the country's foreign-exchange reserves, although this has been partially offset by reduced imports. Debt relief, although welcome, has only been partial. This has rendered the peg relatively vulnerable, particularly given the scale of the country's other external liabilities.

Although there is a significant risk that the government will 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 as tourism receipts recover in 2021-22, 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.