The Maldives’ reliance on imports for essential goods has made exchange rate stability a vital factor in managing domestic inflation. With the Maldivian rufiyaa pegged to the US dollar since 2011, the country has largely maintained stable prices. However, mounting pressures on the currency have raised concerns about the long-term sustainability of this arrangement.
The Maldives’ Exchange Rate Policy and Recent Challenges
The Maldivian rufiyaa (MVR) is pegged to the US dollar at a central rate of MVR 12.85 per USD, with an allowed fluctuation range of ±20%. In practice, the rufiyaa has remained close to the weaker end of the band at around MVR 15.40 per USD for over a decade. This effective fixed rate has offered stability, particularly for trade and tourism transactions.
Maintaining the currency peg requires robust foreign reserves. By the end of 2023, gross international reserves had declined to USD 589 million, covering only about 1.4 months of imports. Usable reserves were even lower, raising concerns about the country’s ability to meet debt payments and finance imports. As a result, the Maldives enacted new foreign currency regulations in late 2024, requiring tourism establishments to convert a portion of their US dollar earnings into the local banking system. This measure was designed to channel more foreign currency into official reserves.
The Maldives also secured bilateral financial support, including a USD 400 million currency swap line from India to boost reserves. Additionally, the Maldives Monetary Authority (MMA) collaborated with the government to improve fiscal-monetary coordination, halting direct central bank financing of deficits to ease pressure on the rufiyaa.
Despite these efforts, the country’s reliance on imports and high public debt levels — estimated at 119% of GDP in 2023 — continue to weigh on the economy. The balance of payments remains vulnerable, and further financial reforms may be necessary to sustain the peg.
Economic Growth and Inflation Trends
The Maldives experienced strong economic growth following the COVID-19 pandemic, with GDP surging by 37.3% in 2021 and 13.9% in 2022 as tourism recovered. Growth slowed to around 4–5% in 2023 as post-pandemic activity stabilised.
Despite rising global inflation in recent years, the Maldives managed to contain consumer prices through subsidies and exchange rate stability. Inflation was 1.9% at the end of 2023, with an annual average of 2.9% for the year. These relatively low figures were aided by stable global oil prices, government subsidies, and a strong US dollar.
However, inflation pressures increased in late 2024, with consumer prices rising 4.8% year-on-year in December and 5.3% by January 2025. Food prices were notably affected, climbing 6.7% due to import costs and reduced subsidies. Tobacco prices surged by 98% following a hike in import duties, and restaurant prices rose by approximately 15%, partly linked to GST increases in 2023. Transportation costs also increased as global fuel prices stabilised at higher levels.
Sectoral Impact of Exchange Rate and Price Changes
Tourism Sector:
The tourism sector benefits from exchange rate stability, as resorts and hotels primarily operate in US dollars. This reduces currency risk for businesses and ensures predictability in earnings. However, a strong US dollar has made the Maldives more expensive for visitors from Europe and Asia, where local currencies weakened. Conversely, a rufiyaa devaluation would offer limited gains for the sector, as most prices are already quoted in USD.
The tourism sector’s role in supplying foreign currency is vital for defending the currency peg. To ensure consistent inflows, the government’s foreign currency law now requires tourism establishments to convert part of their revenue into rufiyaa.
Imported Food and Consumer Goods:
The Maldives’ dependence on imported food means that exchange rate stability is critical to managing food prices. The country’s decision to subsidise staple goods like rice, flour, and sugar has protected consumers from international price volatility. When global food prices spiked in 2022, subsidies helped prevent domestic inflation from surging. However, as subsidies were gradually reduced, food inflation climbed to 6–7% in 2024.
If the rufiyaa were to weaken, import prices would rise directly. A 10% devaluation, for instance, would result in a similar increase in prices for essentials like rice and cooking oil. Given that low-income households spend a larger share of their income on such items, the risk of hardship would be significant.
Energy and Transport:
The Maldives imports nearly all its fuel, making domestic energy costs sensitive to both global oil prices and the exchange rate. Government subsidies have kept fuel prices relatively stable, but rising costs in 2024 pushed up transportation fares by over 5% in November.
Should the rufiyaa depreciate, authorities would face a difficult decision — either allow fuel prices to climb, adding to inflation, or expand subsidies at the risk of worsening the budget deficit. Additionally, construction and infrastructure projects reliant on imported materials would become costlier, potentially delaying developments.
Fisheries and Exports:
As one of the country’s few export industries, fisheries play a unique role in the economy. A weaker rufiyaa would increase the local currency value of export earnings, potentially boosting incomes for fishermen. However, since the fishing industry relies heavily on imported fuel and equipment, those costs would also rise, eroding some of the gains.
In early 2025, fish prices accounted for about 0.6 percentage points of overall inflation, with higher export demand driving up local prices.
Construction and Infrastructure:
Major infrastructure projects in the Maldives are typically financed by foreign loans and rely on imported materials. The currency peg has helped ensure cost predictability for these developments. A devaluation would increase the rufiyaa value of debt repayments, creating additional fiscal pressure. In response to financial concerns, the Maldives reduced capital spending by 47% in the first half of 2024, slowing several projects to ease pressure on reserves.
The Outlook for Maldives’ Exchange Rate and Inflation
As of March 2025, the Maldives’ exchange rate peg remains intact. This has allowed the country to manage inflation at moderate levels of around 4–5%. Consumer price rises have primarily stemmed from tax increases, commodity prices, and reduced subsidies rather than currency fluctuations.
However, sustaining this stability depends heavily on continued financial reforms and reserve-building measures. The Maldives’ recent fiscal changes — including GST hikes and reductions in public spending — have helped to ease pressure on the currency. Nevertheless, the IMF and World Bank have urged further reforms, particularly the gradual replacement of blanket subsidies with targeted assistance to reduce budget strain without harming low-income households.
On the external front, strengthening foreign exchange reserves remains crucial. The Maldives has relied on tourism growth and financial support from partners like India to stabilise reserves. Further steps to attract investment, diversify exports, and improve fiscal management will be necessary to maintain long-term stability.
The Maldives’ fixed exchange rate has played a crucial role in keeping inflation relatively stable, shielding consumers from extreme price volatility. However, maintaining this stability has come at the cost of rising fiscal pressures and declining reserves. As the country navigates ongoing economic challenges, policymakers must carefully balance reforms with efforts to protect vulnerable groups from sudden price shocks. While the rufiyaa peg has so far prevented inflation from spiralling, the risk of a devaluation — and its significant consequences for consumer prices — remains a pressing concern.
