Press Release No. 12/439

Press Release 12/439
November 14, 2012

A mission led by Mr. Koshy Mathai visited Malé during October 30–November 12 for discussions on the 2012 Article IV Consultation, the IMF’s regular exchange of economic views with member countries. The team met with President Waheed, Vice President Deen, Minister of Finance Jihad, Maldives Monetary Authority (MMA) Governor Najeeb, members of the People’s Majlis, and other Cabinet ministers and senior officials, as well as representatives of civil society and the private sector. The team expresses its appreciation to the authorities and other stakeholders for the frank and constructive discussions. It issued the following statement today at the conclusion of its visit:

“Economic growth is expected to slow to 3½ percent in 2012, as depressed tourist arrivals earlier in the year and weak global conditions have been only partially offset by strong performance in construction and fisheries-related manufacturing. A modest recovery is forecast for 2013 and beyond. Inflation is currently elevated on account of increases in the general GST and international food prices but is expected to slow to under 6 percent next year and decline further thereafter. The balance of payments continues to be weak, with the current account deficit forecast at nearly 30 percent of GDP this year. Gross international reserves at the MMA have been declining slowly, now account for just 1½ months of imports, and could be more substantially pressured if major borrowings maturing in the next few months are not rolled over.

“The most pressing macroeconomic priority for Maldives is strengthening government finances, which have been weak for many years. The fiscal deficit is expected to rise in 2012 to 16 percent of GDP in cash terms, and likely even higher if one accounts for the government’s unpaid bills, accumulated in an increasingly challenging environment for financing. The large deficit has implied a rise in the public debt ratio, which now stands at over 80 percent of GDP, and has also helped to boost national imports, thus worsening dollar shortages in the economy and putting pressure on MMA reserves.

“It will be very important to design a realistic and prudent budget for 2013. While Maldives has relatively strong revenues overall, there is scope to increase tourism taxation and selectively reverse recent duty reductions. On the expenditure side, electricity subsidies can be better targeted to the needy, costs of the health program Aasandha can be further rationalized and reduced, wages should be controlled, including through the establishment of a Pay Commission, and a plan could be laid out for medium-term civil service reform. This last element could take place in the context of the government’s plans for voluntary and incentive-based population consolidation, and for economic diversification and private-sector job creation.

“Tighter monetary policy would help to support the exchange rate and the needed external adjustment. Higher Treasury bill yields, in conjunction with some technical changes to the monetary operations framework, may also help to ease the government’s financing difficulties. Financial supervision could be strengthened and recent regulatory forbearance relating to provisioning requirements reversed. Finally, resorts’ foreign-exchange licenses could be restricted to small-value amounts to help channel dollars through the formal banking system.”

The mission will be preparing a report that the IMF’s Executive Board will discuss in January 2013. The authorities have expressed interest in a Staff Monitored Program and further discussions will be held.