IMF Executive Board Concludes 2008 Article IV Consultation with the Maldives

Public Information Notice (PIN) No. 08/115
September 10, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 3, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Maldives.1


The Maldives continues to grow robustly, underpinned by a tourism sector that has rebounded strongly from the Asian tsunami. In 2007, rapid tourism growth, together with construction activities, has kept the headline growth rate in line with the pre-tsunami average despite an unusually low fish catch. Inflation has recently picked up sharply to nearly 15 percent year on year due to soaring food and oil prices.

The main challenge for the Maldives is to contain fiscal expenditures that have increased sharply following the tsunami. Expenditure has reached extraordinarily high levels by international and historical standards, with the majority of the increase in domestically financed expenditure unrelated to the tsunami. On the revenue side, there has been little progress with tax reforms. The government has been relying on extraordinary revenue measures, such as leasing out islands, to contain the fiscal deficit, and indeed has achieved its target of zero domestic financing in 2007.

The 2008 budget continues to entail a large increase in current expenditures in an election year financed by extraordinary revenue measures with significant implementation risks. An over 50 percent increase in the wage bill and quadrupled subsidies, mainly because of administered electricity prices, pushed up overall expenditure to nearly 70 percent of GDP. The government planned to achieve zero domestic financing with a large receipt (about 15 percent of GDP) from a transshipment port project, but when the project was delayed by a year, the authorities planned to fill the shortfall by leasing an additional 30 islands. The government now realizes that this is too ambitious and accordingly, has revised down the budget by cutting back on expenditure by 20 percent from August onward.

Dynamic private sector activities shaped the external sector. The current account deficit widened to 45 percent of GDP in 2007, driven by a surge in construction-related imports and rising commodity prices, notwithstanding the contribution from strong tourism earnings. The deficit was financed mainly through a large increase in private capital inflows, including foreign borrowing by commercial banks, which was then on-lend to resort developers. As a result, external debt increased sharply to near 70 percent of GDP in 2007.

The U.S. dollar peg has served the Maldives well and continues to be an appropriate exchange rate regime for the country. The Maldives appears to have adequate room to maintain competitiveness under the peg despite the recent rise in inflation, provided imported inflation is not exacerbated by fiscal slippages. Most of Maldives' exports are to euro-denominated areas, while the bulk of imports are dollar denominated. The real effective exchange rate has declined more than that of comparator tourism-based small economies.

There has been some notable progress with key legal reforms. A new central bank governor was appointed following the amendment to the Maldives Monetary Authority (MMA) act enshrining the separation of the positions of finance minister and governor. MMA was also empowered to set interest rates and put a ceiling on the amount the government can borrow through its Ways and Means Account. The Civil Service Bill and the Audit Act were passed and an independent civil service commissioner and an auditor general have been appointed.

Executive Board Assessment

Executive Directors were encouraged that Maldives' economy has rebounded strongly from the December 2004 tsunami, underpinned by a booming tourism sector and reconstruction activities. However, inflation has picked up markedly mainly due to high food and oil prices, and the economy remains vulnerable to external shocks.

Directors agreed that the main challenge for Maldives is to ensure that the broadly favorable growth prospects are not undermined by excessive fiscal spending and attendant macroeconomic instability. Government expenditures—in particular current expenditures unrelated to tsunami relief—have risen to extremely high levels. While welcoming the authorities' efforts to maintain their commitment to zero domestic financing of the budget, Directors cautioned that any revenue shortfall would put at risk these efforts, exacerbating already high inflation and increasing external vulnerabilities.

While the 2008 budget calls for zero domestic financing, Directors expressed concern that it accommodates a substantial rise in domestically financed expenditures with ad hoc revenues from the lease of additional island resorts, which might prove uncertain. They welcomed the authorities' intention to reduce the remaining 2008 budget allocation of line ministries by 20 percent, and encouraged the authorities to identify further contingent expenditure cuts if needed. Directors looked forward to early progress on steps to reduce subsidies to the state-owned electricity company by increasing electricity tariffs and to contain the civil service wage bill through civil service reform.

Directors stressed that ensuring fiscal sustainability over the medium term will require revenue-enhancing reforms, including the introduction of corporate taxation, a broad-based sales tax, and an ad valorem tourism tax. They called on the authorities to press ahead with their plans to develop a realistic medium-term expenditure framework to prioritize spending within the available resource envelope.

Directors agreed that external vulnerabilities will need to be monitored carefully, given the recent rise in external debt and debt service. While the rise in debt is attributable mainly to private sector activity, risks to the banking sector should be carefully monitored.

Directors generally acknowledged that Maldives' U.S. dollar peg exchange rate regime and the level of the exchange rate appear appropriate. The dollar's decline against the euro has enhanced the country's competitiveness in recent years, providing a cushion against any erosion in competitiveness arising from high imported inflation. At the same time, Directors emphasized that it will remain crucially important that the peg be supported by prudent fiscal policies.

Directors commended the authorities for implementing the Maldives Monetary Authority Act by appointing an independent Governor. They also welcomed the appointment of an independent Civil Service Commission and Auditor General. Directors encouraged early passage of the pending Banking Act and Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) legislation.

Maldives: Selected Economic Indicators, 2003-08

          Est Proj.


2003 2004 2005 2006 2007 2008

  (Annual percentage change)

Growth and prices


Real GDP

8.5 9.5 -4.6 18.0 7.6 6.5

Inflation (period average)

-2.8 6.3 3.3 3.5 7.4 15.0

Central government


Revenue and grants

34.8 34.5 48.1 52.5 58.0 58.8

Of which: Grants

1.4 0.7 8.6 7.4 8.7 4.9

Expenditure and net lending

38.2 36.0 59.0 59.3 65.8 68.3

Of which: Domestic spending

34.0 33.2 49.1 48.4 49.4 55.8

Overall balance

-3.4 -1.6 -10.9 -6.8 -7.8 -9.4

Overall balance, excluding grants

-4.8 -2.3 -19.5 -14.2 -16.6 -14.3




-1.3 -2.5 8.4 2.3 -0.7 0.7


4.7 4.1 2.4 4.5 8.6 8.7
  (In millions of U.S. dollars)

Balance of payments


Exports, including re-exports

152.0 181.0 161.6 225.2 228.0 344.2


-414.3 -564.8 -655.5 -815.3 -964.7 -1,213.5

Nonfactor services (net)

311.1 352.4 118.8 320.7 357.6 401.6

Current account balance

-31.8 -125.8 -268.8 -302.0 -424.5 -596.7

(In percent of GDP)

-4.6 -16.2 -35.9 -33.0 -40.1 -46.0

Official capital (net)

29.9 25.0 18.6 42.1 39.2 128.3

Private capital (net)

70.3 140.1 145.8 147.8 212.7 295.0

Errors and omissions (net)

5.3 13.3 -10.9 52.9 56.2 0.0

Overall balance

26.5 44.2 -17.3 45.1 76.9 32.6

Gross official reserves (year-end)

160.3 204.4 187.1 232.2 309.1 341.7

(In months of following year's imports of GNFS) 1/

2.7 2.9 2.1 2.3 2.5 2.7

External Debt

289.5 331.8 429.5 449.2 736.3 1,070.6

(In percent of GDP)

41.8 42.7 57.3 49.1 69.6 82.6

Public External Debt 2/

272.9 311.6 309.9 361.8 523.7 652.0

(In percent of GDP)

39.4 40.1 44.1 40.7 38.9 41.7

Debt service

22.0 32.3 43.1 43.3 66.9 96.9

Exchange rate


Rufiyaa per U.S. dollar (period average)

12.8 12.8 12.8 12.8 12.8 12.8

Memorandum item:


Nominal GDP (in millions of rufiyaa)

8,863.2 9,938.7 9,596.6 11,722.0 13,543.0 16,586.8

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

1/ GNFS = Goods and nonfactor services.

2/ Public sector debt, including government debt and government-guaranteed debt.

3/ Domestic exports are defined as merchandise exports net of re-exports.

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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