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Maldives and the IMF

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Public Information Notice (PIN) No. 04/ 73
July 23, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2004 Article IV Consultation with Maldives

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On May 24, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Maldives.1

Background

The Maldives has achieved impressive economic growth over the last decade, with per capita GDP ($2,440) almost doubling. Average growth rates of around 7.5 percent have been achieved, while inflation has been contained at an average 2 percent. This has led to general improvement in income levels and social indicators, although poverty is still significant in the outer atolls. The tourist related slowdown in 2001 highlighted the limited diversification of the economy and the Maldives' vulnerability to external shocks. The country is also at risk from rising sea levels due to global warming.

Economic activity rebounded in 2002 and 2003, with output growing about 6.5 and about 8.5 percent in these years. Liberalization and restructuring of the fisheries sector resulted in substantial increases in catches in 2002 and significant growth in exports in 2003. Tourism made a strong growth contribution with receipts up 15 percent in 2003. With the rufiyaa being pegged to the U.S. dollar, the depreciation of the dollar against the euro over the last two years has strengthened the Maldives' competitive position. Inflation remained subdued, and was negative in 2003, in part due to falling prices on locally produced food.

The external current account continued to show deficits in the last two years, but reserves improved. Strong growth in external receipts from tourism and fisheries were offset by high import growth, which generated a current account deficit of 6.5 percent of GDP in 2003. However, imports related to tourism and infrastructure investment were accompanied by external financing, which contributed to an increase in reserves to the equivalent of three-and-a-half months of imports of goods and services.

Strong revenue growth reduced the fiscal deficit in 2003, despite a continued expansion of current expenditure. The deficit was around 4 percent of GDP, and with continued foreign financing, domestic financing turned negative. As a result of the foreign financing in 2002 and 2003, external debt as a share of GDP has increased by 7 percentage points since 2001 to about 40.5 percent.

Broad money continued to expand in 2003, with a significant build up of net foreign assets in the banking system. Growth in credit to the private sector slowed to 7 percent in 2003 due to legal uncertainties regarding the use of land as collateral, while credit to the public sector fell with the lower deficit and shift toward foreign financing.

The structural reform agenda is extensive. Progress has been achieved in the fisheries sector, the government announced plans to allow private companies to participate in telecommunications, and there is increased competition in the financial sector. Privatization has been deferred pending work on broadening the revenue base to compensate for prospective lower profit transfers from state-owned enterprises that would result from privatization. Capital markets are still at an early stage of development.

Executive Board Assessment

Executive Directors welcomed the strong rebound in growth, improved balance of payments position, and buildup of foreign exchange reserves, while inflation remains subdued. Directors observed that despite the good economic performance, Maldives remains vulnerable as a small economy heavily reliant on tourism and fisheries, and they expressed concern that external debt continues to grow. Against this background, they stressed the need to maintain a prudent fiscal policy and to strengthen the economy's resilience against external shocks. Directors considered that concessional resources remain important for Maldives, but highlighted the need to prepare the economy for market-based financing and to encourage private inflows.

Directors considered that the peg of the national currency to the U.S. dollar remains appropriate. They welcomed the Maldives Monetary Authority's (MMA) renewed commitment to make foreign exchange available at the prevailing exchange rate, which will be essential to maintain the credibility of the exchange rate regime.

Directors noted that the viability of the peg depends on the continued pursuit of a supportive monetary policy. To this end, Directors urged the authorities to limit MMA financing of fiscal deficits, which could worsen the current account and erode official reserves. Directors supported plans to develop indirect instruments of monetary policy and to establish a more independent MMA, as envisaged in the draft revision of the MMA Act, and stressed the importance of a clear separation of the roles of Minister of Finance and Governor of the MMA.

Directors emphasized that fiscal policy must play a critical role in supporting the fixed exchange rate regime. In their view, this requires continuing fiscal prudence and a financing strategy consistent with debt sustainability. They recommended a broadening of the revenue base by introducing a business profits tax, and either a sales tax or value-added tax. Directors encouraged the authorities to reduce current expenditure as a share of GDP by limiting the expansion of government services and by rationalizing current government activities and employment, including through reform of the civil service. Directors cautioned against substantial new external borrowing, especially on commercial terms, and encouraged the authorities to avoid increases in public and external debt ratios by encouraging non-debt -creating foreign investments.

Directors recommended continued efforts to enhance the role of the private sector and broaden the productive base. They encouraged the authorities to strengthen the legal framework and invest in needed infrastructure, while withdrawing the state from areas of economic activity best left to the private sector. Directors welcomed the passage of an amended Land Act, which should help remove impediments to bank lending. They stressed the importance of ensuring a well functioning market for housing and commercial property to facilitate private sector development, including of the new island of Hulhumale. Directors commended the authorities for the progress made in strengthening the health and education systems, and welcomed their intention to undertake further reforms of the pension and social security system.

Directors considered that continued efforts to develop the financial sector will be essential to support private sector activity. They welcomed recent measures to enhance competition in the banking sector and to promote a domestic stock market. Directors stressed that banking supervision should be strengthened by on-site inspections and cooperation with home-country supervisors of foreign banks, and that banks should be encouraged to improve risk management practices. They encouraged the authorities to continue their efforts to strengthen the legal framework to combat money laundering and the financing of terrorism.

Directors urged the authorities to further liberalize trade by narrowing the dispersion of tariffs, eliminating nontariff barriers, and reducing the number of exemptions in the current system. They appreciated the authorities' efforts to enhance the statistical base, but noted that data could be improved in many areas that are important for effective policy design and evaluation. They encouraged the authorities to continue to devote resources to build statistical capacity.


Maldives: Selected Economic Indicators, 1999-2003


1999

2000

2001

2002

2003

Est.


 

 

 

 

 

 

 

(Annual percentage change)

Growth and prices

Real GDP

7.2

4.8

3.5

6.5

8.4

Consumer prices (period average)

3.0

-1.2

0.7

0.9

-2.8

Consumer prices (end period)

...

...

...

-5.0

-1.5

(Percent of GDP)

Central government

Revenue and grants

32.1

32.3

33.0

33.1

34.4

Of which: Grants

2.3

2.3

2.8

1.6

1.4

Expenditure and net lending

36.1

36.7

37.7

38.0

38.5

Of which: Capital spending

13.7

11.8

12.3

12.5

13.0

Overall balance

-4.1

-4.4

-4.7

-4.9

-4.1

Overall balance, excluding grants

-6.4

-6.6

-7.5

-6.5

-5.5

Financing

Domestic

3.2

4.3

2.8

0.4

-1.2

Foreign

0.8

0.0

1.9

4.5

5.3

(Percentage change)

Money and credit

Domestic credit

8.0

14.5

19.4

11.5

-6.5

Public sector

14.1

23.3

7.0

6.5

-27.4

Central government (net) 1/

12.9

30.9

8.4

5.1

-21.8

Private sector

4.0

8.0

29.9

15.0

6.8

Broad money

3.6

4.1

9.0

19.3

14.6

(In millions of U.S. dollars)

Balance of payments

Exports, including reexports

91.5

108.7

110.1

132.3

151.9

Imports

-353.9

-342.0

-346.3

-344.7

-407.2

Trade balance

-262.4

-233.3

-236.1

-212.4

-255.2

Nonfactor services (net)

234.6

238.8

244.2

251.7

295.6

Current account balance

-78.9

-51.5

-58.8

-35.7

-45.4

(In percent of GDP)

-13.4

-8.2

-9.4

-5.6

-6.5

Official capital (net)

5.2

-1.9

7.8

26.8

33.8

Private capital (net)

42.9

25.6

24.3

33.9

56.8

Errors and omissions (net)

23.6

19.9

5.2

14.9

29.0

Overall balance

-7.2

-7.9

-21.4

39.8

74.2

Gross official reserves (year-end)

128.5

124.1

94.3

134.6

161.0

(In months of following year's imports of GNFS) 2/

3.4

3.3

2.5

3.1

3.4

(In percent of short-term external debt)

308.4

252.2

209.3

252.5

419.7

External debt (year-end)

212.9

211.6

209.8

259.0

280.9

(In percent of GDP)

36.1

33.9

33.6

40.4

40.4

Debt service

19.0

22.1

22.0

22.9

22.7

(In percent of domestic exports of GNFS) 3/

4.7

5.2

5.1

5.0

4.3

Exchange rate

Rufiyaa per US$ (period average)

11.8

11.8

12.2

12.8

12.8

Nominal effective exchange rate (percentage change)

0.5

6.7

0.8

-6.4

-9.4

Real effective exchange rate (percentage change)

2.6

3.4

-0.6

-6.6

-14.5

Memorandum item:

Nominal GDP (millions of rufiyaa)

6,935.4

7,348.4

7,650.8

8,201.0

8,905.8

 

 

 

 

 

 

 


Sources: Data provided by the Maldivian authorities; and IMF Staff estimates.

1/ Differs from data reported by MMA due to classification differences.

2/ GNFS = Goods and nonfactor services.

3/ Domestic exports are defined as merchandise exports net of reexports.





1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.




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