Maldives' reserves under strain: How did we get here?
Currency swaps, typically used to bolster reserve figures or for external investments, have been partly deployed domestically this time.
Maldives Monetary Authority (MMA) has reported that the nation’s official reserves reached $616.2 million as of November 24, a significant increase due to the $400 million currency swap agreement signed with the Reserve Bank of India (RBI) in October. This swap became necessary as reserves dwindled to $371 million in September. Without this external infusion, the Maldives' reserves would have plunged to below $250 million, raising concerns over the country’s ability to meet financial obligations.
Currency swaps, typically used to bolster reserve figures or for external investments, have been partly deployed domestically this time. According to MMA data:
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$120.2 million was allocated in October.
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$125.7 million was allocated as of November.
Unlike in the past, a portion of the swap funds has been invested in local banks or issued to facilitate trade, deviating from the traditional strategy of holding them unused.
MMA has adjusted the calculation method for "usable reserves" to include swap funds invested in banks. Without including these funds, the Maldives’ net reserves or usable reserves were negative $82.3 million in November. By incorporating the swaps, the usable reserves were reported at $45.8 million.
Despite this adjustment, the reserves remain insufficient to meet the country’s monthly import requirements of $70 million. This marks the lowest reserve level in nine years, with reserves previously covering at least three months' worth of imports.
Financial experts have expressed concerns over the risks of using swap funds to bolster reserves and facilitate domestic trade. These funds must be repaid within the agreed timeframe, necessitating the availability of dollars for repayment.
A financial official noted that deploying swap funds through banks into government instruments or other areas has not eased the foreign exchange market.
To mitigate risks, the MMA has pressured the tourism sector to exchange dollars, ensuring additional foreign currency inflows. This policy aims to stabilise reserves, but its long-term sustainability remains uncertain.
