On May 13, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Maldives.

After outperforming its peers for several years, Maldives economy slowed sharply in 2015 to 1.5 percent from 6.5 percent the previous year, as tourism arrivals decelerated. The fiscal deficit narrowed following measures in the 2015 Budget and a sustained strong revenue performance, although public debt remains high and on a rising trajectory. The monetary policy stance was eased in 2015 and credit to the private sector began to pickup. Inflation remains contained and further pass through from lower oil prices is expected. The current account deficit widened to 8.8 percent of GDP in 2015, despite a positive terms of trade shock from the decline in oil prices.

Growth is expected to pick up but the outlook is clouded by the risks of less robust growth in Asia and uncertain returns from large-scale infrastructure scaling up. Staff expects real GDP growth to rise to 3.5 percent in 2016 supported by a modest recovery in tourism. A substantial infrastructure scale up is planned by the authorities comprising three mega projects—airport expansion, Hulhumalé island development and bridge, and port enlargement—which are aimed at supporting further development of the key tourism sector and improving resilience to climate change. The authorities plan a doubling of capital spending in the next three years and are raising external debt to finance these projects.

Executive Board Assessment²

Executive Directors commended Maldives’s considerable progress in reaching middle income status on the back of rapid tourism development over the past two decades. Directors noted, however, that important challenges remain ahead. In particular, the planned infrastructure scale up could be transformational for the economy, adding to growth and helping to build resilience to climate change, but it could also bring with it external financing risks if not implemented appropriately, as the projects require significant external financing that would add to already elevated public debt. Against this backdrop, Directors encouraged the authorities to pursue the development strategy while preserving fiscal and external sustainability.

Directors agreed that a durable fiscal adjustment is needed to ensure that public debt is placed on a sustainable trajectory. This should include prioritizing overall capital expenditures, leveraging the well administered tax system to generate higher revenues (including user fees for new infrastructure and broadening the tax base), and strengthening controls on current spending. Enhanced public financial management, with a particular focus on public investment management, would also be key for successful fiscal adjustment.

Directors viewed the stabilized exchange rate regime as appropriate. They generally noted, however, the staff’s assessment that the external position is moderately weak while the real effective exchange rate appears moderately overvalued. In this regard, Directors concurred that a tighter fiscal policy stance would help improve the external position and support the exchange rate. They also noted that support from monetary and financial policies would be important to help stabilize the external position. In particular, small step increases in administered rates and the minimum reserve requirement may be called for if capital outflow pressures emerge. Directors welcomed the Maldives Monetary Authority’s focus on further strengthening banking supervision beyond credit risk.

Directors commended Maldives’ success in overcoming logistical challenges to provide near universal access to basic services across all the inhabited islands. Looking forward, they encourage the authorities to further build resilience to climate change, reduce the cost of public service delivery, invest in human capital, and promote economic diversification. Directors welcomed Maldives’ early ratification of the Paris Agreement. They supported the authorities’ initiatives to establish regional hubs and improve inter-island connectivity, and recommended establishing a more detailed national development strategic plan to aid coordination and bring about the expected growth dividends. Directors stressed that strict ring fencing of tax exemptions for special economic zones will be necessary to preserve the tax base.