MMA reduces foreign exchange reserve requirement to 5%

The Maldives Monetary Authority (MMA), the nation's central bank, has lowered the Minimum Reserve Requirement (MRR) for foreign currency deposits from 7.5% to 5%. This change was implemented on Thursday.

An MMA official said the change was only for foreign currency deposits. Therefore, the reserve requirement of the Maldivian Rufiyaa will be maintained at 10 percent.

This is the first change in the MMR since it was reduced from 10 percent to 7.5 percent last October.

The reserve requirement is a monetary policy tool utilized by central banks to manage liquidity within the banking system. Commercial banks are obligated to maintain a predetermined level of reserves with the central bank.

Therefore, the MMR is the amount of reserves that commercial banks are required to keep in the MMA out of their total domestic or foreign currency deposits.

The change was made to further ease foreign exchange liquidity constraints, the MMA said. The change will increase the liquidity of foreign currency in circulation in the banking system and facilitate the issuance of foreign currency loans, the MMA said. Banks will immediately receive about 45 million US dollars for loans, the MMA said.

Beyond the MMR, MMA uses various monetary policy instruments to manage currency, curb inflation, ensure macroeconomic stability, and foster sustainable economic growth. This adaptable approach allows for flexible responses to economic shifts, stabilizing the financial system and the national currency's purchasing power.

Such tools include open market operations, policy rate changes and targeted influence on the foreign exchange market.

The MMA has recently decided to increase the proportion of US dollars issued to Maldivian banks for commercial purposes including telegraphic transfers (TT) and letters of credit (LC) payments.

The change is expected to increase foreign currency availability for commercial transactions by up to 40 percent, thereby boosting the supply of dollars to businesses. 

According to MMA data, with the amendment to the Foreign Exchange Act, the percentage of US dollars sold through banks to small and medium enterprises will now be 30 percent. However, the central bank aims to increase the amount through banks to 50 percent.