RBI Provides $400 Million Support in India-Maldives Currency Swap Agreement
India has expressed satisfaction over the recent improvement in the Maldives’ foreign exchange reserves, attributing a significant portion of this progress to a $400 million currency swap agreement between the Reserve Bank of India (RBI) and the Maldives Monetary Authority (MMA). This arrangement, activated in October 2024, has played a crucial role in alleviating the island nation’s external liquidity challenges. The Indian High Commission in Male highlighted the positive impact of this financial support, which has been acknowledged in a recent credit rating report by Fitch Ratings.
Currency Swap’s Impact on Maldives’ Economy
The currency swap agreement between India and the Maldives has been instrumental in stabilizing the latter’s foreign exchange reserves. The Indian High Commission noted that the increase in reserves was prominently featured in a recent sovereign credit rating report. The $400 million drawdown from the RBI-MMA currency swap arrangement has significantly eased the Maldives’ external liquidity pressures. This financial support has been crucial in addressing immediate economic challenges faced by the island nation.
Fitch Ratings, a global credit rating agency, affirmed the Maldives’ long-term foreign-currency issuer default rating at ‘CC’ and acknowledged India’s role in bolstering the country’s reserves. The agency pointed out that the reserve buildup is not solely due to the currency swap but also results from strong tourism receipts and the implementation of a new Foreign Currency Act. This act mandates that 20% of tourism-linked foreign exchange earnings be exchanged, further contributing to the improvement in reserves.
Challenges Ahead for the Maldives
Despite the positive developments in foreign exchange reserves, the Maldives continues to grapple with significant fiscal and external challenges. Fitch Ratings has projected that the country’s fiscal deficit will widen to 14.5% of GDP in 2025, up from 14% in 2024. This increase is attributed to high recurrent spending, particularly in public sector wages, and delays in implementing necessary reforms related to subsidies and healthcare expenditure.
The agency has also raised concerns about the Maldives’ vulnerabilities, which could complicate the refinancing of its substantial external debt obligations in the near future. These challenges highlight the need for ongoing economic reforms and prudent fiscal management to ensure long-term stability and growth for the Maldives.
India-Maldives Relations and Economic Cooperation
The currency swap support provided by India is part of a broader strategy to assist the Maldives in navigating its macroeconomic difficulties. This arrangement, established under the South Asian Association for Regional Cooperation (SAARC) framework, aims to stabilize short-term dollar liquidity in the region. India’s financial assistance underscores the importance of economic cooperation between the two nations, even amid political frictions.
The acknowledgment of the currency swap’s impact by Indian authorities reflects the evolving relationship between India and the Maldives. Economic collaboration remains a cornerstone of their ties, as both countries work together to address pressing challenges and foster stability in the region. As the Maldives continues to recover from economic strains, the support from India is likely to play a vital role in its ongoing efforts to enhance financial resilience.
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