Maldives breaks peg, floats currency in 20-pct band

Apr 11, 2011 (LBO) – Maldives has broken its peg at 12.85 to the US dollar effectively allowing the currency to depreciate over 15 rufiya to the US dollar under a 20 percent band within which the currency will be allowed to float. The International Monetary Fund said the move will help stabilize the external payments of the country.

“IMF staff supports this decision made by the authorities,” the watchdog which has a program with the tourism paradise said in a statement.

“We remain in close contact with the authorities and are ready to offer any technical assistance that they may request.”

Media reports said the rufiya was trading as low as 16 to the US dollar in the black market.

Maldives has a massive budget deficit close to 20 percent of gross domestic product and any rufiyaa printed by the local monetary authority to finance the deficit can pressure the peg.

The Maldives also started active open market operations recently, ostensibly to mop up excess liquidity, but it can make it almost impossible to maintain a peg.

A well functioning open market operations system automatically sterilizes interventions by a central bank (dollars sales by the monetary authority) with injections of local money fo