Central Bank Raises Reserve Requirements to Combat Excess Currency Liquidity

The Maldives Monetary Authority (MMA) has announced a series of special measures to reduce the volume of currency circulating within the economy. The central bank's board of directors approved these interventions as part of a broader effort to stabilize the monetary system and curb liquidity. To achieve this, the MMA is introducing two primary policy adjustments. First, commercial banks will be required to increase the minimum reserve requirements they maintain with the central bank. Second, the authority will expand its open market operations—the process of withdrawing excess currency from the system—by 10 basis points. These moves follow a year of aggressive liquidity management. Between July of last year and July of this year, the MMA withdrew an average of USD 175.10 million in excess Maldivian Rufiyaa through open market operations. As a result, short-term liquidity within the banking system has contracted significantly, dropping from USD 421.53 million to USD 239.95 million. According to MMA analysis, the current surplus of circulating currency is a legacy of the previous administration's fiscal policies. The authority noted that the prior government suspended the National Fiscal Responsibility Act and engaged in debt monetisation—effectively printing money to fund government spending. Statistics reveal that the former administration created USD 531.78 million through monetary financing over a three-year period. While the government at the time argued that debt monetisation in 2020 and 2021 was an essential response to the Covid-19 pandemic, the MMA highlighted that the practice continued through 2022 and 2023. This prolonged expansion of Maldivian Rufiyaa liquidity is cited as a primary driver behind the increased demand for US dollars, putting further pressure on the nation's foreign exchange stability.