Statement at the Conclusion of the IMF Staff Mission to MaldivesPress Release No. 10/421
November 8, 2010
An staff team from the International Monetary Fund (IMF), led by Rodrigo Cubero, visited Malé during October 27-November 8 for the 2010 Article IV Consultation s—a periodic surveillance exercise that the IMF undertakes with its member countries to diagnose key economic challenges and discuss possible policy solutions—and to continue discussions on performance and policies under the combined Exogenous Shocks Facility (ESF) and Stand-By Arrangement (SBA), approved on December 4, 2009. The mission met with President Mohamed Nasheed, Minister of Finance and Treasury Ali Hashim, Governor of the Maldives Monetary Authority (MMA) Fazeel Najeeb, other senior public officials, members of Parliament (the Majlis), and representatives of civil society and the private sector.
The mission issued the following statement today in Malé at the conclusion of its visit:
“Following a 3-percent contraction in 2009, when tourist arrivals and capital flows plunged in the wake of the global financial crisis, the Maldivian economy is now recovering. It is expected to grow by 5 or 6 percent this year on the back of a strong rebound in tourist arrivals. At the same time, the tight monetary policy run by the MMA has helped drain excess liquidity and thus reduce pressures on the currency peg and keep inflation moderate.
“Despite these positive developments, fundamental imbalances continue to plague the economy, and dollar shortages have reemerged in recent months. At the root of these problems lies the country’s weak fiscal position. As a result of the increase in hiring and of large wage increases, the central government’s wage bill rose considerably after 2004, and particularly between 2007 and 2009. This led to a rapid expansion of the government deficit, which reached 26½ percent of GDP in 2009. Such a deficit—one of the highest in the world—demands large amounts of financing, which limits the access of the private sector to bank credit and could put upward pressure on interest rates. The large deficit also translates into higher imports, increased demand for scarce dollars, and pressures on the exchange rate. Moreover, it has led to a large public debt, which will grow unsustainably in the absence of serious measures to rein in the deficit.
“The government last year undertook decisive initial measures, including wage cuts for central government employees. These, however, have been challenged in court. Moreover, despite ambitious plans to reduce staffing levels in the central government, there has been little progress on that front. Furthermore, the Decentralization Bill passed earlier this year is expected to lead to a significant increase in the wage bill. Passage of the business profits tax, another measure planned by the authorities, has been delayed. The tourism General Sales Tax, recently passed by the Majlis, is welcome, but it will not be sufficient to restore fiscal sustainability.
“In order to safeguard economic stability, keep the economy growing, and prevent a surge in borrowing costs and the cost of living, it is imperative that the government prepare, and the Majlis pass, a 2011 budget that brings the deficit down sharply. In addition, revenue measures, including the business profits tax, as well as credible steps to control the wage bill, should be passed promptly to ensure that deficits continue to trend down in 2012 and beyond. The successful implementation of the much needed fiscal adjustment will require broad political support and cooperation between the Government, the Majlis, the independent commissions, and civil society. It is to be hoped that all stakeholders realize the gravity of the fiscal situation and its negative consequences for stability and prosperity, and come together to restore economic sustainability in the best interests of the Maldivian population.
“The IMF made its first disbursement to Maldives on approval of the program in December 2009, and released a second tranche on completion of the first review of the economic program under the ESF and SBA in March 2010. Since then, the IMF and the government have remained actively engaged in policy dialogue, but completion of the second review has been delayed by the fiscal slippages that have emerged from insufficient progress in reducing the wage bill and delays in passage of tax measures. Following this latest round of productive discussions, the staff team will consult with IMF management and continue to work with the authorities toward completing the second review.”