IMF Executive Board Concludes Article IV Consultation with Maldives

Public Information Notice (PIN) No. 09/142
December 30, 2009

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 December 4, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Maldives.1


The Maldivian economy rebounded strongly from the 2004 tsunami disaster on the back of high tourism-related investment and large increases in public spending. However, the global financial crisis hit Maldives hard through steep declines in tourism (tourist arrivals fell by 8¾ percent in the year to August 2009), exports of goods, and the availability of external financing. As a result, real GDP is expected to fall by about 4 percent in 2009.

Import prices, particularly for food and fuel, have been driving inflation. After picking up sharply to 8½ percent year-on-year (y/y) in 2008 due to soaring commodity prices, inflation has declined rapidly in the first half of 2009, to 3 percent y/y in August, but is expected to rebound somewhat in the latter part of the year.

The fiscal deficit rose to 13¾ percent of GDP in 2008, reflecting rapid increases in current expenditures, particularly in the wage bill, combined with a fall in tourism-related revenue in the second half of 2008, driven by the global downturn. In 2009, additional increases in salaries and wages have driven up spending, while revenues have weakened further as the global crisis unfolded. Without policy action, the fiscal deficit would have reached 33 percent of GDP in 2009.

In 2008, the rapid fiscal expansion, soaring import prices, and lower earnings from tourism led Maldives’ external current account deficit to widen to 51½ percent of GDP in 2008. In 2009, the reduced availability of foreign financing has led to continued reserve losses, prompting the MMA to ration foreign exchange. Combined with the domestic slowdown and lower import prices, these factors have resulted in a very sharp import contraction, more than offsetting the decline in tourism inflows. The current account is thus expected to narrow significantly in 2009, to about 30 percent of GDP.

The fixed exchange rate regime has provided a clear and effective nominal anchor. The real effective exchange rate has appreciated recently, but remains below historical averages, and its trajectory has actually remained below that of the indices for relevant competitors. Excess money supply from deficit monetization and the decline of capital inflows have resulted in reserve losses and the rationing of foreign exchange supplied by the Maldives Monetary Authority to the banking system. As a result, a parallel market has emerged with a small premium over the official peg, and gross international reserves stood at 2¼ months of imports at end-September, 2009. The introduction, in August 2009, of open market operations, and the cessation of deficit monetization, will help reduce excess liquidity and alleviate pressures on the exchange rate.

The banking system has been hit by the reduced availability of external financing and the domestic economic slowdown. Non-performing loans have increased significantly, as banks have a high exposure to the tourism sector. Banks have ample domestic liquidity and long net open positions in foreign exchange. However, they are still vulnerable to dollar liquidity shocks. The difficult economic and financing conditions, and the deteriorating portfolio, have led y/y private sector credit growth to shrink by 2 percent in August 2009, after several years of very high growth rates.

Executive Board Assessment

Executive Directors noted that the Maldivian economy has been severely hit by the global crisis through a fall in tourism inflows, external financing, and exports. Coming atop a period of unsustainable fiscal expansion—partly reflecting post-tsunami reconstruction efforts—these shocks exacerbated the fiscal and external imbalances, weakened the reserve position, and pushed the economy into recession. They also put considerable stress on the banking sector. While economic activity and fiscal revenues are expected to improve in the next few years, the external economic environment remains fragile. Against this background, Directors supported the authorities’ program, aimed at restoring macroeconomic stability and medium-term sustainability through fiscal and monetary tightening, shoring up reserves, and strengthening the banking sector. They welcomed the significant steps recently taken by the new government.

Directors underscored that determined fiscal consolidation is critical to the success of the program. They supported the authorities’ commitment to restore fiscal sustainability through a very significant adjustment. In light of already high public debt levels, it will be crucial to reduce the central government’s deficit decisively—including by pressing ahead with the program’s expenditure and revenue measures and saving most of any revenue over-performance. Directors welcomed the emphasis on adjustments in remuneration and staffing levels, which are necessary to unwind part of the large wage increases in recent years and to streamline the civil service. They also welcomed the increase in electricity tariffs in line with a new cost-based formula. Directors supported the authorities’ commitment to protecting social spending and improving the targeting of subsidies, including the replacement of across-the-board electricity subsidies with targeted relief for the poor. On the revenue side, they encouraged the authorities to move expeditiously to pass the needed tax reforms. Continued improvements in public financial management are also essential.

To complement fiscal consolidation and stem reserve losses, Directors stressed the need to tighten monetary policy. They welcomed the authorities’ considerable progress in this area, including the cessation of deficit monetization, the conversion of the government’s debt with the Maldives Monetary Authority into negotiable securities, and the introduction of open market operations to absorb excess rufiyaa liquidity.

Directors generally agreed that the fixed exchange rate regime has served as a nominal anchor for the Maldivian economy. They stressed that external sustainability and the sustainability of the current level of the peg are conditional on the implementation of the fiscal adjustment under the program and on continued progress on monetary tightening. Directors supported the authorities’ commitment to building up foreign exchange reserves and phasing out the rationing of foreign exchange as conditions improve.

Directors called on the authorities to remain vigilant to developments in the banking system. They welcomed the authorities’ resolve to improve financial sector regulation and supervision, including by passing the needed legislative reforms, and to strengthen the financial position of the banking system. Directors encouraged the authorities to enforce the implementation of recent regulatory changes on provisioning and asset classification, and to adopt regulations to limit banks’ open foreign currency positions.

Directors encouraged the authorities to improve the quality and timeliness of data reporting to the Fund, with Fund technical assistance.

Directors stressed that the significant risks to the program—including those related to the implementation of the very large fiscal adjustment—heighten the importance of strong ownership, consensus building, and resolute policy implementation by the authorities. Close collaboration with the Fund, including through continued technical assistance, as well as strong support by the international community will also be important to ensure the success of the authorities’ ambitious policy efforts. Directors emphasized the need to consider contingency measures to allow for prompt remedial action should any risks materialize.

Maldives: Selected Economic and Vulnerability Indicators, 2004-12


Population (in 1,000; 2008 est.)


GDP per capita (in U.S. dollars; 2008 est.):


Quota (in million SDRs):

  2004 2005 2006 2007 2008   2009 2010 2011 2012
          Est.   Prog.


(Annual percentage change)

Real GDP

9.5 -4.6 18.0 7.2 5.8   -4.0 3.4 3.7 4.1

Inflation (end-of-period)

10.1 2.9 3.9 10.4 8.6   6.7 4.7 6.3 3.5

Inflation (period average)

6.3 2.5 3.6 7.6 11.9   5.5 4.5 6.3 3.5

GDP deflator

2.4 1.2 3.5 7.4 13.0   11.0 4.0 6.3 3.5


(In percent of GDP)

Revenue and grants

34.2 47.7 52.1 55.8 49.0   36.3 37.0 43.4 44.2

Expenditure and net lending

36.0 59.0 59.3 60.8 62.8   65.0 54.8 47.5 47.9

Overall balance

-1.8 -11.3 -7.2 -4.9 -13.8   -28.8 -17.8 -4.2 -3.6

Overall balance excl. grants

-2.5 -19.8 -14.6 -12.7 -18.5   -33.6 -18.9 -5.2 -4.6


1.8 11.3 7.2 4.9 13.8   28.8 17.8 4.2 3.6


4.1 2.4 4.5 4.6 3.8   12.7 4.2 2.0 2.6


-2.3 8.8 2.7 0.4 10.0   16.1 13.6 2.2 1.1

Public and publicly guaranteed debt

55.2 64.9 62.9 66.4 68.6   91.6 96.0 87.9 82.5


15.1 23.6 23.4 26.5 31.2   46.8 54.5 50.4 47.0

External (excl. IMF and currency swaps by MMA)

40.1 41.3 39.6 39.8 37.4   44.8 41.5 37.5 35.5


(Annual percentage change, unless otherwise indicated)

Broad money

32.8 11.7 20.6 23.7 23.6   9.4 6.7

Domestic credit

32.6 63.2 37.6 45.8 43.4   5.7 7.5

Of which: To private sector

57.6 54.5 49.5 49.2 33.0   -4.1 -2.1


(In percent of GDP, unless otherwise indicated)

Current account

-15.8 -36.4 -33.0 -41.5 -51.4   -29.6 -23.4 -13.1 -11.1

Of which:



23.3 21.6 24.6 21.6 26.2   16.1 17.7 17.7 17.8


-72.7 -87.4 -89.1 -91.5 -96.8   -58.2 -58.8 -55.9 -55.9

Nonfactor services, net

45.1 14.6 35.0 36.0 29.4   22.0 28.4 33.0 36.3

Capital and financial account (incl. e&o)

21.4 34.1 37.9 48.8 46.0   30.5 20.6 11.1 12.5

Of which:


General government, net

3.2 2.5 4.2 3.4 5.3   8.4 -1.9 -1.2 0.6

Banks and other sectors, net

14.6 30.6 26.0 37.1 33.3   14.6 20.4 10.3 11.1

Overall balance

5.7 -2.3 4.9 7.3 -5.4   0.9 -2.8 -2.0 1.4

Gross international reserves
(in millions of US$; e.o.p.) 1/

204 187 232 310 241   277 291 305 347

In months of GNFS imports

3.4 2.6 2.7 3.0 1.8   3.2 3.1 3.1 3.4

In percent of short-term debt at remaining maturity

585 261 168 121 80   81 88 118 143

External debt 2/

43 53 63 80 77   82 80 71 65

Medium- and long-term

42 48 53 63 60   67 68 60 56


1 5 10 17 17   15 13 10 8

External debt service (in percent of domestic GNFS exports)

5 9 9 12 12   17 24 22 15



GDP (in millions of rufyiaa)

9,939 9,596 11,717 13,493 16,137   17,192 18,480 20,354 21,935

Sources: Maldivian authorities, and IMF staff estimates and projections.

1/ MMA liabilities, include SDR allocation of SDR 7.4 million, equivalent to US$11.7 million, made available in Q3 2009,

see These are treated as long term liabilities of the MMA.

2/ Includes IMF but excludes domestic foreign-currency denominated debt. 

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. An explanation of any qualifiers used in summings up can be found here:


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