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Maldives: IMF Executive Board Concludes 2014 Article IV Consultation

Press Release No. 15/92 March 4, 2015

On February 11, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Maldives.

The Maldives real economy has picked up. Growth is estimated to have reached 5 percent in 2014 with stronger tourism activity driven by a rapid expansion from Asian markets and a tepid recovery from Europe. Staff expects growth to be around 5 percent in 2015. Weaker import prices have pushed down inflation to low levels (1.1 percent in November 2014). Higher tourism exports and subdued global food and fuel inflation have helped reduce the current account deficit to around 8.4 percent of GDP in 2014; and following significant data revisions, the current account is now substantially smaller than previously estimated. Lower oil prices have improved the outlook for the current account and inflation in 2015. Gross official reserves have risen to around $614mn (2.8 months imports). Financial soundness indicators are slowly improving, monetary conditions are loose, but credit growth is subdued at just 0.5 percent year on year to November 2014.

However, persistent and growing fiscal deficits have driven up the public debt ratio to a high level. The fiscal deficit increased to an estimated 7.8 percent of GDP in 2013 and, following increases in recurrent spending, the deficit is likely to have widened further in 2014. Sustained primary deficits have led to an increase in the public debt level from 52 percent in 2009 to 75 percent of GDP in 2014.

The 2015 budget includes a number of important measures to rein in the fiscal deficit through revenue raising measures (imposing a green tax, acquiring fees from Special Economic Zones and raising import duties) and expenditure restraint through a public employment freeze and better targeting of subsidies. However, further fiscal adjustment measures would be needed to place debt ratios firmly on a downward path.

Growth is expected to remain relatively strong in the near term, though the fiscal adjustment envisaged in the 2015 Budget will have a mildly negative effect on growth. There is also some upside potential if lower oil prices are sustained. However, with limited policy buffers, the economy is vulnerable to fiscal slippages and inward spillovers. In the event of large fiscal overruns relative to the authorities’ targets, borrowing costs and monetization could increase, which would weaken the external position.

Over the medium term, while the tourism sector is expected to remain the locomotive for growth in Maldives, economic diversification to reduce youth unemployment, and improving the efficiency of public service provision remain key issues. The government has several long run strategies: (i) developing regional hubs and improving transport connectivity which could also encourage voluntary resettlement, and would enable higher quality service provision (though such a change will take many years); (ii) developing Special Economic Zones to diversify jobs into off-port shipping services, IT, financial services industries and tourism-support activities such as traditional fisheries and small-scale agriculture; (iii) undertaking infrastructure development, in particular of the airport, to add to capacity; and (iv) reducing the environmental impact of tourism and reliance on oil imports by developing renewable energy.

Executive Board Assessment2

Executive Directors welcomed that Maldives has reached middle-income status, with a pickup in the real economy driven by tourism activity, a moderation in inflation, a marked lowering of the fiscal deficit from its peak in 2009 aided by tax measures, and a stronger reserves position. Although Maldives’s outlook is favorable, it shares many of the challenges of other small states, and risks remain, particularly in the fiscal sector.

Directors welcomed the authorities’ commitment to fiscal consolidation and the plans contained in the 2015 budget, including raising revenues, improving the targeting of subsidies, and a temporary halt in public sector hiring. Nevertheless, they noted that some of these measures will have only a temporary effect, and that further, durable fiscal adjustment, with a focus on expenditure restraint, will be needed to place the public debt-to-GDP ratio on a downward path over the medium term, consistent with the Fiscal Responsibility Law.

Improvements in public financial management and addressing domestic arrears need to support the fiscal consolidation efforts.

Directors welcomed the improvements to the external sector statistics, in line with IMF technical assistance recommendations, which point to significantly smaller current account deficits than previously estimated. They considered the stabilized exchange rate regime as appropriate for Maldives. Directors welcomed the increase in official reserves, and recommended continued strengthening of the official reserves position.

Directors welcomed the authorities’ commitment to avoiding the monetization of the fiscal deficit, which will help direct monetary policy at supporting the exchange rate regime and build buffers. They supported plans to make greater use of market-based financing for government debt, including by developing the government securities market. Directors welcomed the improvement in financial soundness indicators, and called for continued efforts to strengthen financial supervision, including measures to ensure uniform high standards for institutions that decide to operate in special economic zones.

Directors agreed that public service delivery and economic diversification are key medium-term objectives. They welcomed the proposals for establishing regional hubs and improving inter-island connectivity. Directors stressed that strict ring-fencing of tax exemptions for special economic zones will be necessary to preserve the tax base. They also emphasized that scaling up infrastructure investment should be implemented efficiently in order to boost growth potential.

Directors welcomed the significant recent improvements in macroeconomic statistics, and encouraged the authorities to continue to strengthen data quality and availability, including adopting a statistics law to enhance data provision, to assist policy decisions.