Statement by an IMF Mission to MaldivesPress Release No. 11/197
May 25, 2011
An International Monetary Fund (IMF) mission led by Jonathan Dunn visited Maldives May 10–24 to hold discussions on a set of economic policies that could be supported by a new financial arrangement with the IMF. The mission met with President Mohamed Nasheed, Minister of Finance and Treasury Ahmed Inaz, Governor of the Maldives Monetary Authority Fazeel Najeeb, and other senior government officials. The team also met with members of the Majlis, and the private sector and donors.
Maldives’s economy is growing robustly on the back of strong tourist arrivals, but it continues to suffer from large fiscal and external imbalances. Maldives has recently faced challenges with respect to inflation, but there is no indication that inflationary momentum has risen. The introduction of the exchange rate band was a welcome step, but it needs support from a tightening of fiscal and monetary policies. The mission and the authorities agreed that such a tightening of policies would be important to promote fiscal and external sustainability, continued growth, and low inflation.
The authorities noted that their fiscal policy over the medium-term will aim to put public debt as a percent of GDP firmly on a downward path. This means reducing the deficit substantially, both through additional revenue measures—which would require the support and approval of members of Parliament (the Majlis)—and through expenditure restraint. This strategy would be complemented by measures to strengthen tax administration and public financial management, as well as measures to protect the most vulnerable parts of the population. Separately, the authorities have introduced an initial voluntary separation plan for government employees and are continuing their detailed analysis of the public service, with an eye toward right-sizing government over the medium term.
Monetary policy would be tightened to complement fiscal adjustment, counter inflation, improve confidence in the rufiyaa and support international reserves. Gradual accumulation of international reserves, along with the fiscal space created through debt reduction, would reduce Maldives’s vulnerability to external shocks. Financial sector reforms will support the soundness of the banking system and increase the depth of the foreign exchange and financial markets.
In sum, this package of proposed policy reforms will help stabilize and strengthen Maldives’s economy, and the mission thus reached a staff-level agreement with the Maldivian authorities on a three-year economic program that could be supported by a new IMF lending arrangement. The agreement reached, however, remains subject to review by IMF management and approval of the IMF’s Executive Board, which could consider a program request from Maldives in July. It is anticipated that an approved program would encourage key donors to contribute additional financial support.
The staff team thanks the Maldivian authorities for their close collaboration and the useful exchange of views during its stay in Malé.