External Affairs

To Pay GMR’s Dues, Maldives Turns to RBI to Shore Up Forex Reserves

The nation’s foreign currency reserves were depleted after it bought a $140 million bond to pay the GMR group $240 million as compensation for cancelling a contract.

A police officer stands guard in front of the Reserve Bank of India (RBI) head office in Mumbai. Credit: Reuters/Vivek Prakash/Files

A police officer stands guard in front of the Reserve Bank of India (RBI) head office in Mumbai. Credit: Reuters/Vivek Prakash/Files

New Delhi: In an ironic turn of affairs, the Maldives government has turned to India’s central bank for a currency swap deal after losing a bitter international arbitration battle with an Indian construction firm.

“We deposited $100 million in Maldivian rufiyaa. This facility has been availed under the SAARC mechanism,” Maldives’ ambassador to India, Ahmed Mohamed, told The Wire.

He was referring to RBI’s currency swap arrangement which was first offered to SAARC countries in November 2012. In its notification which extended the arrangement for two years, the RBI had said that the arrangement was to “meet any balance of payments and liquidity mismatches till longer term arrangements are made or if there is need for short-term liquidity due to market turbulence”.

Under this arrangement, the RBI offers a currency swap arrangement for up to $2 billion both in foreign currency and Indian rupees.

The Maldives Independent had first reported the government’s decision to reach a currency swap arrangement.

The Maldivian media group noted that the Indian ocean nation’s foreign currency reserves were depleted after the government bought a bond of $140 million from the state-run airport firm.

The bond was raised to generate funds to enable the government to pay $271 million to the GMR group after the government cancelled the group’s contract to develop and operate the Ibrahim Nasir International Airport in 2010. The compensation was ordered by a Singapore-based international arbitration court.  The arbitrary cancellation of the contract led to a period of strained ties with New Delhi but relations seem to be getting friendlier now.

According to Maldives Monetary Authority’s monthly economic review, there was a decline of 41% in its Gross International Reserves at the end of November 2016. “The decline was largely on account of an investment in a corporate bond of US$140.0 million issued by an SOE (state-owned enterprise) in the domestic market,” said the review published on December 11.

The Maldivian central bank noted that that since it was a foreign currency denominated domestic bond, it was not reflected in the usable reserves, but in the foreign currency reserves.

Mohamed confirmed that the currency swap arrangement with the RBI is a “short term measure” which will last for three months. He reiterated that it is not a loan, but just a currency swap agreement.

Maldives has to import most of its essential needs, including fuel, mainly from India and Sri Lanka.

In Delhi, the external affairs ministry referred queries about the currency swap agreement with Maldives to the finance ministry – indicating that it was not a political decision.

The improvement in bilateral relations is also reflected in India’s Budget.  Maldives received Rs 80 crore (revised budget) in aid from India for 2016-17, double the estimate of Rs 40 crore. This has been further raised exponentially to Rs 245 crore for the next financial year, 2017-18.

In a February 9 report by the parliamentary standing committee for external affairs, the panel noted that the MEA had stated that the decline in aid to Maldives to Rs 40 crore – which was 78.1% less than Budget estimates for 2015-16 – was “on account of fluid political situation in Maldives, along with lack of clarity of specific investment opportunities”.

The MEA also told the panel that the last tranche of the standby credit of $25 million, which was to be have been disbursed on the occasion of a VVIP visit in March 2015, has still not been released. The VVIP visit referred to a proposed visit by Prime Minister Narendra Modi to the Maldives as part of a trip to the Indian ocean region. However, Maldives was dropped at the last minute due to street protests by the opposition which was against the Maldivian government arresting former President Mohammed Nasheed and other leaders.