Maldives Reserves - What is the adequate level?

The Gross International Reserves (GIR) of Maldives, held at Maldives Monetary Authority (MMA) stood at USD 938 million as at February 2019. This is a USD 228 million increase (32%) compared to the level in February last year.

What is Gross International Reserves? What does it consist of? For a small, open economy like the Maldives, what is the adequate level of foreign currency reserves?

The GIR held at MMA consists of reserve assets that are in control of MMA as the central bank, and can be readily used in order to meet the financing needs of the balance of payments. The main, and most significant component of the GIR is the total foreign currency deposits of MMA, and the government. Part of GIR also consists of foreign currency reserves of commercial banks held at MMA.


With Maldives Rufiya pegged to the US dollar, we have an exchange rate with an upper band of
MVR 15.42 per US dollar. If any central bank or a monetary authority has a fixed official rate, such authority must be at all times, willing to accept and supply foreign currency at the said rate. Otherwise, whenever there is a shortage of USD in the market,there will emerge a parallel market where trading may occur outside the official rate. Hence, the central bank will need to intervene in the market to ensure that the market is cleared. That is when, the level of reserves becomes important.

The GIR held at MMA by the end of February 2017 was at $516 mil, and increased by 37% by the end of February 2018. Like it was highlighted in the beginning, a further 32% increase by February 2019, with a total GIR of $938 million. What does this mean? Of course the total reserves has increased in absolute terms in the past two years. But the important piece of information that we need is the source of such increase. Whether this is a result of an increased foreign currency revenue of our country? We may easily show an artificial, temporary boost in total reserves even by incurring huge foreign currency debts. We may also enter into temporary currency swap arrangements, and as a result, show a higher level of gross reserves. The important factor is that we should be gradually accumulating reserves from our revenue, and in that way obtain a sustainable balance that could benefit the balance of payments.

When conditions in the economy improves, in terms of increasing foreign currency revenues, and by maintaining a sustainable level total spending, we will be in a position where there will be positive impact on the existing exchange rate. Just like when the conditions worsen we are forced to devalue the currency, when the conditions improve, we should also be able to allow an appreciation of our currency.