## cr17357

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---

### Macroeconomic overview and recent developments
- Growth drivers and volatility:
  - Growth is volatile and driven primarily by a high-end tourism industry.
  - Economy improved marginally in 2016–17 on a recovery in tourism and construction.
  - Massive infrastructure expansion (international/regional airports, regional hub development, Greater Malé land connectivity, harbors, sewerage systems, desalination plants) could transform the economy but has added considerably to already elevated public debt and external financing risks.
  - Banks and other financial institutions have large exposures to the construction and government sectors.
- 2016 key outcomes:
  - Headline inflation (period average) declined to 0.8 percent in 2016 and is projected to remain low with some lift from the subsidy phase out.
  - Current account deficit widened sharply to 19.6 percent of GDP in 2016.
  - Monetary policy remained accommodative and private sector credit grew rapidly, led by housing and construction.

### Outlook and risks
- Short- and medium-term outlook:
  - Near-term strengthening recovery with low inflation and loose financial conditions.
  - Growth projected to recover in 2017 and stabilize over the medium term, benefitting from infrastructure scale up, continued recovery in Europe, and favorable tourism trends.
  - Fiscal and current account deficits projected to gradually decline over the medium term as infrastructure spending winds down.
- Main downside risks:
  - Fragile fiscal and external positions amid rapid debt buildup, widening current account deficit, and low international reserves.
  - Reduced policy space increases vulnerability to shocks (exports shock, one-time depreciation, reserve drawdown).

### Fiscal assessment and recommendations
- Fiscal priority:
  - Decisive fiscal adjustment to restore fiscal and debt sustainability and reduce external imbalances.
- Targets and strategy:
  - Staff recommends targeting a primary deficit of 4.4 percent of GDP in 2017 and gradual adjustment to reach a primary surplus in 2020.
  - Adjustment aims to bring public debt-to-GDP to the 60 percent target by 2022.
- Recommended policy mix:
  - Implement revenue measures; contain current spending; cut non-essential infrastructure spending; prioritize investment projects.
  - Strengthen medium-term fiscal framework and develop an annual borrowing plan as part of the Medium-Term Debt Strategy.
  - Rely more on concessional financing and preserve concessional financing for infrastructure and social projects.
- Specific revenue measures (estimated impact, percent of GDP):
  - Total revenue measures (2017–2025): 0.3, 1.0, 1.4, 1.7, 1.6, 1.6, 1.5, 1.5, 1.5
  - Recovery of tax arrears: 0.3 in 2017; tax arrears at end-2016 around 0.6 percent of GDP.
  - G-GST: remove qualifying threshold from 2018 and increase rate from 6 to 7 percent from 2019; G-GST contributions by year: 0.0, 0.5, 1.0, 1.3, 1.3, 1.2, 1.2, 1.2, 1.2
  - Business Profits Tax (BPT): abolish threshold from 2018—BPT contributions by year: 0.0, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2
  - User fees (bridge toll): Bridge toll contributions by year: 0.0, 0.0, 0.0, 0.1, 0.2, 0.2, 0.1, 0.1, 0.1
- Expenditure measures (estimated impact, percent of GDP):
  - Total expenditure measures (2017–2025): 1.0, 1.6, 0.9, 2.3, 2.3, 2.3, 2.4, 2.3, 2.3
  - Wages and allowances: annual values: 0.0, 0.0, 0.0, 1.2, 1.1, 1.1, 1.1, 1.1, 1.1 (target 10% reduction from 2020 relative to baseline).
  - Subsidy reforms and safety nets: annual savings: 0.0, 0.0, 0.0, 0.3, 0.3, 0.3, 0.3, 0.3, 0.3.
  - Curtailment of Aasandha & Social Welfare costs: series: 0.0, 0.6, 0.6, 0.8, 0.9, 0.9, 1.0, 0.9, 0.9 (staff recommends progressive measures from 2018 saving around 0.8 percent of GDP annually).
  - Curtailment of planned capital expenditure: cut capital expenditures by 1.0 percent of GDP in 2017-2018; series: 1.0, 1.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
- Aggregate fiscal paths (percent of GDP):
  - Total Adjustments (2017–2025): 1.3, 2.7, 2.3, 4.0, 3.9, 3.9, 3.9, 3.8, 3.8
  - Primary Balance for debt reduction (2017–2025): -6.0, -5.0, -2.5, 0.0, 2.5, 4.0, 5.0, 5.5, 5.5
- Debt reduction scenarios (percent of GDP):
  - Primary deficit paths (Baseline): -5.8, -4.7, -3.5, -2.7, -2.1, -1.0, -1.0, -1.0, -1.0 (2017–2025)
  - Primary deficit paths (Alternative): -4.4, -2.0, -1.2, 1.3, 1.9, 2.9, 2.9, 2.8, 2.7 (2017–2025)
  - Public Debt/GDP (baseline 2017–2025): 70.3, 73.8, 76.0, 77.5, 78.2, 77.9, 77.6, 77.3, 77.0
  - Public Debt/GDP (alternative 2017–2025): 68.7, 69.8, 69.8, 67.4, 64.3, 60.3, 56.3, 52.6, 49.0

### Monetary, external, and financial policy recommendations
- Exchange rate and reserves:
  - Stabilized exchange rate arrangement (peg) viewed as appropriate.
  - External position substantially weaker than implied by fundamentals and desirable policy settings.
  - Higher reserve coverage needed; staff recommends restoring reserve coverage to three months of imports minimum.
- Monetary policy stance:
  - Recommend gradual tightening to support reserve buildup and the peg while avoiding undue impediment to credit.
  - Specific measures: increase MRR and remuneration on rufiyaa deposits; restart market-based auctioning of liquidity; expand Treasury bond maturities to develop a yield curve.
  - Over time, move gradually toward an import-weighted currency composite to improve external competitiveness.
- Financial sector priorities:
  - Increase financial access and inclusion for households and SMEs.
  - Support financial inclusion via credit guarantee scheme for SMEs, mobile banking licenses, a credit information unit at MMA, and financial literacy efforts.
  - Strengthen insolvency and creditor rights framework and credit reporting to ease business credit standards.
  - Continue prudential regulatory strengthening, stress testing, and AML/CFT enhancements.

### Public investment, PIM efficiency, and structural reforms
- Public investment context:
  - Large infrastructure surge intended to close gaps in communications, electricity, and transportation but increases public debt and external financing risk.
  - Total public debt estimated at US$2.8 billion (65.7 percent of GDP) in 2016.
  - External disbursements estimated at US$1.4 billion over 2016-2021.
  - Sovereign guarantees liabilities amount to US$240 million (5.6 percent of 2016 GDP).
- PIM efficiency findings:
  - Efficiency gap between Maldives and most efficient countries is 50 percent (about half of public capital stock did not achieve full potential).
  - PIMA assessment: most public investment institutions at a basic stage of development.
- PIMA recommendations:
  - Strengthen strategic guidance and budget ceilings for public investment (earlier Fiscal Strategy Statement, binding PSIP ceilings).
  - Improve central oversight of SOEs and PPPs; publish guarantees and contractor-financed projects.
  - Improve commitment control and cash management (MM-PAS).
  - Develop standard methodology for project appraisal, a project pipeline, and ex-post evaluations.
  - Strengthen procurement competitiveness and PIM capacity building.

### Revised GDP and statistical issues
- GDP rebasing:
  - NBS rebased GDP to 2014; average rebased GDP between 2003 and 2015 is higher by around 11 percent annually compared to the 2003-based estimates.
  - Nominal GDP rebasing increased level by c. 25%.
  - Rebasing has materially impacted debt stock and fiscal variables as ratios of GDP.
- Statistical capacity and priorities:
  - Pass statistics law to provide data collection powers to MMA, MIRA and NBS.
  - Continue TA in external statistics, national accounts and fiscal areas.
  - Medium-term plan to improve GDP estimates and external statistics is key.
  - Data are broadly adequate for surveillance (Category B) but gaps remain in balance of payments, government finance, and national accounts.

### External sector and reserves
- Current account and tourism:
  - Current account: -3.2 (2014); -7.3 (2015); -19.6 (2016); projected -17.2 (2017), -17.0 (2018), -16.4 (2019), -14.3 (2020), -12.9 (2021), -10.3 (2022) (percent of GDP).
  - Tourism receipts (percent of GDP): 73.0 (2014); 63.9 (2015); 59.3 (2016); 59.3 (2017); 59.2 (2018); 59.1 (2019); 59.4 (2020); 59.7 (2021); 60.0 (2022).
  - Tourism bednights and arrivals projected to grow gradually (bednights % change: 4.5 in 2017; tourist arrivals % change: 5.5 in 2017).
- Reserves:
  - Gross international reserves (US$ millions, e.o.p.): 615 (2014); 546 (2015); 468 (2016); 564 (2017); 614 (2018); 645 (2019); 703 (2020); 751 (2021); 724 (2022).
  - Reserves in months of GNFS imports: 2.7 (2014); 2.4 (2015); 1.8 (2016); 1.9 (2017); 1.9 (2018); 1.9 (2019); 2.0 (2020); 2.0 (2021); 1.9 (2022).
  - Staff recommends rebuilding reserves and avoiding excessive non-concessional borrowing.

### Debt sustainability and DSA results
- Key debt figures and projections:
  - Total public debt: US$2.8 billion (65.7 percent of GDP) in 2016.
  - External loans signed between 2015 and June 2017: US$1,031 million (24.3 percent of 2016 GDP).
  - Sovereign bond issuance: US$200 million in June 2017 at 7 percent interest.
  - External disbursements (2016–2021): US$1.4 billion.
  - Public and publicly guaranteed debt (percent of GDP) series: 54.2 (2014); 56.9 (2015); 65.7 (2016); 69.4 (2017); 72.0 (2018); 73.5 (2019); 74.3 (2020); 74.3 (2021); 73.2 (2022).
- DSA outcomes and risks:
  - Maldives rated at “high risk of external debt distress.”
  - Under baseline, nominal PPG external debt rises to 51.3 percent of GDP over the medium term and falls to 49.7 percent by 2037.
  - PV of PPG external debt peaks at 25.6 percent of GDP (medium term) and falls to 20.8 percent by 2037.
  - PV of public debt: 61.3 percent of GDP in 2016; peaks at 67.7 percent in 2020; 62.9 percent of GDP by 2037.
  - Alternative scenario with guarantee calls worsens PV public debt-to-GDP by almost 10 percentage points.
- Policy implications:
  - Bring down debt ratios through fiscal consolidation, prioritize capital expenditures, improve PFM, seek concessional financing and lengthen maturities, and design guarantees to limit fiscal exposure.

### Financial sector soundness
- Banking sector metrics:
  - NPLs: absolute NPLs fell by 36 percent; NPLs as a share of total loans declined from 21 percent in 2012 to 11 percent in 2016.
  - Profitability: return on equity close to 15 percent.
  - Regulatory capital to risk-weighted assets and liquidity metrics improved.
- Credit and inclusion:
  - Credit to tourism constitutes 40 percent of private sector credit in 2016 but has fallen as construction credit rose.
  - Domestic credit (annual % change): 4.7 (2014); 15.7 (2015); 19.5 (2016); 7.1 (2017); 5.2 (2018); 5.3 (2019).
  - Broad money (annual % change): 14.7 (2014); 12.3 (2015); -0.2 (2016); 9.6 (2017); 9.7 (2018); 9.9 (2019).
  - Dollarization ratio (FC deposits in percent of broad money): 2014: 53.8; 2015: 50.6; 2016 Jan-Nov: 47.7.
- Staff recommendations:
  - Promote financial inclusion, develop credit reporting, rationalize SME credit programs, monitor exposures (including Maldives Pension Administration Office), and continue prudential strengthening and AML/CFT enhancements.

### Climate change, disaster risk, and data priorities
- Climate and adaptation:
  - Authorities signed their NDC and are developing plans to integrate climate change adaptation and mitigation into infrastructure plans; priority areas include coastal protection, waste management and drinking water.
  - Staff recommends integrating risk-reduction and disaster-response programs into the core budget and public investment planning.
- Data and statistics:
  - Prioritize passage of the statistics law to give data collection powers to MMA, MIRA, and NBS.
  - Continue TA in external statistics, national accounts and fiscal areas.
  - NBS completed rebasing of GDP; improved timeliness and accuracy of statistics is essential for reliable policy advice.

### Executive Board assessment and authorities’ views
- Executive Board summary:
  - Directors welcomed improvement supported by recovery in tourism and construction and a positive medium-term outlook.
  - Emphasized need to balance large infrastructure investment with risks of excessive debt, pursue strong fiscal adjustment, prioritize investment projects, strengthen PFM, tighten monetary stance, and build foreign reserves.
  - Supported financial inclusion and reliance on concessional financing.
- Authorities’ views:
  - Authorities view public debt risks as moderate and emphasize growth benefits from infrastructure.
  - Prefer adjustment focused on spending, SOE oversight, and PFM reforms; concerned about raising G-GST impact on SMEs.
  - Established a Sovereign Development Fund (SDF) and earmarked Airport Development Fee to the SDF.
  - MMA does not see immediate need for monetary tightening absent inflation and FX market pressures.

- Selected baseline projections and key statistics (annual percent change or levels as reported)
  - Real GDP growth: 2014: 7.6; 2015: 3.3; 2016: 3.9; 2017: 4.6; 2018: 4.7; 2019: 4.8; 2020–22: 5.0, 5.0, 5.0
  - Inflation (period average, CPI-Male): 2014: 2.5; 2015: 1.4; 2016: 0.8; 2017: 2.5; 2018: 2.1; 2019: 2.2; 2020: 2.4; 2021: 2.4; 2022: 2.5
  - Current account (percent of GDP): 2014: -3.2; 2015: -7.3; 2016: -19.6; 2017: -17.2; 2018: -17.0; 2019: -16.4; 2020: -14.3; 2021: -12.9; 2022: -10.3
  - Gross international reserves (US$ millions, e.o.p.): 2014: 615; 2015: 546; 2016: 468; 2017: 564; 2018: 614; 2019: 645; 2020: 703; 2021: 751; 2022: 724
  - Public and publicly guaranteed debt (percent of GDP): 2014: 54.2; 2015: 56.9; 2016: 65.7; 2017: 69.4; 2018: 72.0; 2019: 73.5; 2020: 74.3; 2021: 74.3; 2022: 73.2
  - Tourist arrivals (000'): 2014: 1,205; 2015: 1,234; 2016: 1,286; 2017: 1,356; 2018: 1,417; 2019: 1,483; 2020: 1,564; 2021: 1,650; 2022: 1,741

_International Monetary Fund — Maldives, CR17357 (extracted chapter content)._

### 11.5 percentage points from 2014-16. Monetary policy remains accommodative and private

### cr17357 - 11.5 percentage points from 2014-16. Monetary policy remains accommodative and private

### Macroeconomic overview and recent developments
- Economic drivers and risks:
  - Growth is volatile and driven primarily by a high-end tourism industry.
  - The economy improved marginally in 2016–17 on a recovery in tourism and construction.
  - A massive infrastructure expansion (international/regional airports, regional hub development, Greater Malé land connectivity, harbors, sewerage systems, desalination plants) has the potential to transform the economy but has added considerably to already elevated public debt and external financing risks.
  - Banks and other financial institutions have large exposures to the construction and government sectors.
- Key developments in 2016:
  - Headline inflation (period average) continued to decline in 2016 and is projected to remain low with some lift from the subsidy phase out.
  - The current account deficit widened sharply to 19.6 percent of GDP in 2016 due to increased infrastructure-related imports, moderating tourism receipts, higher remittance outflows, and a large one-off court mandated payment.
  - Monetary policy remained accommodative and private sector credit grew rapidly, led by housing and construction.

### Outlook and risks
- Short- and medium-term outlook:
  - The near-term outlook is for a strengthening recovery with low inflation and loose financial conditions.
  - Growth is projected to recover in 2017 and stabilize over the medium term, benefitting from the infrastructure scale up, continued recovery in Europe, and favorable short-term and long-term tourism trends.
  - Both the fiscal and current account deficits are projected to gradually decline over the medium term, after widening in 2016, as infrastructure spending winds down.
- Main downside risks:
  - Fragile fiscal and external positions amid rapid debt buildup, widening current account deficit, and low international reserves.
  - Reduced policy space increases vulnerability to shocks.

### Policy recommendations — fiscal
- Priority: decisive fiscal adjustment to restore fiscal and debt sustainability and reduce external imbalances.
- Recommended measures:
  - Implement revenue measures.
  - Contain current spending.
  - Prioritize investment projects.
  - Strengthen the medium-term fiscal framework to contain fiscal risks.
  - Develop an annual borrowing plan as part of the approved medium-term debt strategy.
  - Rely more on concessional financing.
- Specific supportive actions noted:
  - Introduce user fees for key infrastructure.
  - Steps to recover tax arrears.

### Policy recommendations — monetary, financial, and external
- Exchange rate and reserves:
  - The stabilized exchange rate arrangement is viewed as appropriate.
  - The external position is substantially weaker than implied by medium-term fundamentals and desirable policy settings.
  - Higher reserve coverage is needed to guard against risks from slowing tourism receipts and increased non-concessional borrowing.
- Monetary policy stance:
  - Recommend a gradual tightening of the monetary stance to support reserve buildup and the peg while avoiding undue impediment to credit that supports growth.
  - Over time, move gradually toward an import-weighted currency composite to improve external competitiveness.
- Financial sector priorities:
  - Increase financial access and inclusion for households and SMEs.
  - Foster financial inclusion and improve the regulatory environment.

### Structural reforms and long-run resilience
- Investment and environment:
  - Expand investment in electricity generation, renewable energy, and waste management to support environmental sustainability, energy sufficiency, and climate-change adaptation.
  - Integrate risk-reduction and disaster-response programs into the core budget and public investment planning.
- Public financial management and statistics:
  - Strengthen public financial management.
  - Improve the accuracy and timeliness of national statistics.
- Other reforms:
  - Encourage economic diversification within a multi-year National Development Strategy (NDS) Plan.

### Executive Board assessment (summary)
- Directors welcomed improvement supported by recovery in tourism and construction and a positive medium-term outlook.
- Directors emphasized the need to:
  - Balance large infrastructure investment with risks of excessive debt.
  - Pursue strong fiscal adjustment, including revenue measures and containing current spending.
  - Prioritize investment projects and strengthen public financial management.
  - Combine fiscal consolidation with a tighter monetary stance and more flexibility in the pegged regime to better support the peg and build foreign reserves.
  - Support financial inclusion and regulatory improvements.
  - Encourage reliance on concessional financing.

### Key statistics and projections (selected figures from baseline scenario)
- Output and prices:
  - Real GDP growth: 2014: 7.6; 2015: 3.3; 2016: 3.9; 2017: 4.6; 2018: 4.7; 2019: 4.8; 2020–22: 5.0, 5.0, 5.0 (annual percentage change).
  - Inflation (period average, CPI-Male): 2014: 2.5; 2015: 1.4; 2016: 0.8; 2017: 2.5; 2018: 2.1; 2019: 2.2; 2020: 2.4; 2021: 2.4; 2022: 2.5.
- Central government finances (percent of GDP):
  - Revenue and grants: 2014: 26.7; 2015: 27.7; 2016: 28.4; 2017: 28.7; 2018: 28.6; 2019: 28.3; 2020: 28.4; 2021: 28.5; 2022: 28.6.
  - Expenditure and net lending: 2014: 34.1; 2015: 34.5; 2016: 38.7; 2017: 36.6; 2018: 35.7; 2019: 34.7; 2020: 34.3; 2021: 33.9; 2022: 32.9.
  - Overall balance: 2014: -7.4; 2015: -6.8; 2016: -10.3; 2017: -8.0; 2018: -7.1; 2019: -6.3; 2020: -6.0; 2021: -5.3; 2022: -4.3.
  - Public and publicly guaranteed debt: 2014: 54.2; 2015: 56.9; 2016: 65.7; 2017: 69.4; 2018: 72.0; 2019: 73.5; 2020: 74.3; 2021: 74.3; 2022: 73.2.
- Monetary accounts:
  - Broad money (annual % change): 2014: 14.7; 2015: 12.3; 2016: -0.2; 2017: 9.6; 2018: 9.7; 2019: 9.9; 2020: 10.5; 2021: 10.6; 2022: 10.6.
  - Domestic credit (annual % change): 2014: 4.7; 2015: 15.7; 2016: 19.5; 2017: 7.1; 2018: 5.2; 2019: 5.3; 2020: 7.1; 2021: 7.8; 2022: 7.8.
- Balance of payments (percent of GDP):
  - Current account: 2014: -3.2; 2015: -7.3; 2016: -19.6; 2017: -17.2; 2018: -17.0; 2019: -16.4; 2020: -14.3; 2021: -12.9; 2022: -10.3.
  - Tourism receipts (in nonfactor services, net): 2014: 73.0; 2015: 63.9; 2016: 59.3; 2017: 59.3; 2018: 59.2; 2019: 59.1; 2020: 59.4; 2021: 59.7; 2022: 60.0.
  - Gross international reserves (US$ millions, e.o.p.): 2014: 615; 2015: 546; 2016: 468; 2017: 564; 2018: 614; 2019: 645; 2020: 703; 2021: 751; 2022: 724.
  - Reserves in months of GNFS imports: 2014: 2.7; 2015: 2.4; 2016: 1.8; 2017: 1.9; 2018: 1.9; 2019: 1.9; 2020: 2.0; 2021: 2.0; 2022: 1.9.
- Memorandum items:
  - GDP (in millions of rufiyaa): 2014: 56,867; 2015: 61,869; 2016: 65,310; 2017: 69,648; 2018: 74,349; 2019: 79,488; 2020: 85,446; 2021: 91,932; 2022: 98,913.
  - GDP (in millions of U.S. dollars): 2014: 3,690; 2015: 4,015; 2016: 4,238; 2017: 4,520; 2018: 4,825; 2019: 5,162; 2020: 5,545; 2021: 5,966; 2022: 6,419.
  - Tourist arrivals (000'): 2014: 1,205; 2015: 1,234; 2016: 1,286; 2017: 1,356; 2018: 1,417; 2019: 1,483; 2020: 1,564; 2021: 1,650; 2022: 1,741.
  - Tourism bednights (000'): 2014: 7,290; 2015: 6,977; 2016: 7,138; 2017: 7,460; 2018: 7,795; 2019: 8,154; 2020: 8,602; 2021: 9,076; 2022: 9,575.
  - Dollarization ratio (FC deposits in percent of broad money): 2016 Jan-Nov: 47.7 (data series includes 2014: 53.8; 2015: 50.6; 2016: 47.7).
- Tourism dynamics:
  - Tourism bednights (% change): 2014: 3.3; 2015: -4.3; 2016: 2.3; 2017: 4.5; 2018: 4.5; 2019: 4.6; 2020: 5.5; 2021: 5.5; 2022: 5.5.
  - Tourist arrivals (% change): 2014: 7.1; 2015: 2.4; 2016: 4.2; 2017: 5.5; 2018: 4.5; 2019: 4.6; 2020: 5.5; 2021: 5.5; 2022: 5.5.

*MALDIVES STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION*

### 4. Revised historical GDP. The National Bureau of Statistics (NBS) has revised Maldives’

### 4. Revised historical GDP. The National Bureau of Statistics (NBS) has revised Maldives’

### Revised historical GDP
- The National Bureau of Statistics (NBS) revised Maldives’ national accounts for the period 2003-2015 based on 2014 benchmarked and rebased GDP estimates, with IMF assistance.
- The average rebased GDP between 2003 and 2015 is higher by around 11 percent annually, compared to the 2003-based GDP estimates.
- The rebasing has largely impacted the debt stock and fiscal variables as ratios of GDP.

### Real activity and inflation (2016)
- Real GDP growth rose to 3.9 percent in 2016 from 3.3 percent in 2015.
- Tourism: tourist arrivals rebounded since 2014 Q3 after a sharp decline; shorter stays and a shift towards lower-income groups lowered tourism receipts.
- Sectoral performance in 2016H1:
  - Construction grew strongly at around 15 percent.
  - Primary sector (agriculture and fisheries) contracted by over 7 percent.
- Average inflation declined in 2016 to 0.8 percent.
- Temporary upward pressure on inflation from:
  - Food and electricity subsidy reforms (October 2016).
  - Increase in import duties on cigarettes, soft and energy drinks (March 2017).
- Broader disinflationary forces: administered subsidized prices for key staple items, falling international commodities prices, and an appreciating U.S. dollar (currency peg).

### Fiscal outcome and public debt (2016)
- Staff and authorities estimate the overall fiscal deficit in 2016 at 10.3 percent of GDP, compared to the 2016 Budget projection of 5.2 percent of GDP.
- Main contributors to the larger deficit:
  - Lower Tourism-GST (T-GST), non-tax revenues, and grants.
  - Large arrear payments.
- Current spending was close to Budget: declines in subsidies, transfers and interest payments were offset by higher social welfare contributions.
- Capital spending was lower than Budget but remained high.
- Public debt rose in 2016 up nearly 11.5 percentage points over the past two years.
- The 2017 Budget aimed to reduce the deficit in line with the Fiscal Responsibility Act (FRA) and Fiscal Responsibility Law (FRL), including:
  - Continuation of the wage and hiring freeze since 2015.
  - Cost rationalization following the electricity and food subsidy reforms of 2016.
  - Revenue measures: a new Airport Development Fee (ADF), land sales to the public, and higher import duties on cigarettes and drink items.

### Monetary policy, FX market, and reserves
- Monetary policy stance: accommodative.
- The MMA kept the minimum reserve requirement (MRR) rate at 10 percent and administered yields on Treasury bills and bonds.
- Parallel market premium increased fourfold during 2015–16, reflecting 2015 monetary easing, moderating tourism receipts, and a sharp decline in FX reserves from a large one-off external payment.
- MMA interventions in late 2016:
  - Increased FX sales to banks and sold directly to the public; stabilized the premium at around 4 percent above the upper official rate.
- Starting in 2017, MMA increased allocations to commercial banks and U.S. dollar sales to SOEs.
- Reserve developments:
  - MMA entered into two swap arrangements totaling US$200 million (with the Reserve Bank of India and a locally based commercial bank); these swaps have been settled.
  - First ever sovereign bond issuance: US$200 million.
  - By end-July 2017: gross reserves at US$571 million (1.9 months of imports); usable reserves US$208 million (0.7 month of imports).

### External position and current account (2016)
- Current account deficit widened sharply from 7.3 to 19.6 percent of GDP between 2015 and 2016.
- Drivers of the widening CA deficit:
  - Increased infrastructure-related imports.
  - Moderating tourism receipts.
  - Higher remittance outflows.
  - A large one-off court mandated payment made later in the year.
- Fisheries (largest goods export) fell in value terms due to a large decline in global prices.
- Financing of the deficit: net FDI inflow, new debt, and reserve drawdown.
- Real exchange rate (RER) assessed to be well above the norm at end-2016; current account (CA) assessed to be well below.
- Reserve coverage declined from 2.4 to 1.8 months of imports between 2015 and 2016.

### Banking sector and financial soundness
- Banks’ capital position remains strong; asset quality improved.
- Non-performing loans (NPLs):
  - Absolute NPLs fell by 36 percent.
  - NPLs as a share of total loans declined from 21 percent in 2012 to 11 percent in 2016.
- Profitability: return on equity close to 15 percent.
- Credit composition:
  - Credit to tourism constitutes 40 percent of private sector credit but has fallen as construction credit rose.
  - Banks’ linkages to public infrastructure projects are limited as projects are mainly financed externally.

### Authorities’ views (summarized)
- Inflation drivers: main drivers are food and oil prices; food price increases attributed to subsidy cuts on staples in late 2016; vegetable price falls partly offset food inflation.
- Authorities do not view accommodative monetary policy as contributing to BOP pressures; attribute 2016 CA deterioration to one-off external payment and increased public infrastructure imports.
- On reserves: authorities argue months-of-imports may be an inappropriate adequacy measure given large capital imports and a structurally high import bill due to tourism demands.
- Authorities cite lower-than-expected revenues and high infrastructure spending for larger-than-budgeted fiscal deficits in 2016 but expect overall expenditure to be contained at budgeted levels for 2017.
- Authorities expect real GDP growth close to 5 percent in the near-term and stronger medium-term growth than staff projections, citing large spillovers from public investment and the Sovereign Development Fund (SDF) role in meeting obligations.

### Outlook (baseline) and fiscal projections (2017–19)
- Baseline: modest near-term recovery, low inflation, loose financial conditions, with significant downside risks from fragile fiscal and external positions.
- GDP growth projections:
  - Projected to recover to 4.6 percent in 2017 and stabilize at close to 5 percent over the medium term.
  - Under favorable long-term tourism forecasts, medium-term growth could rise to 5 percent.
- Fiscal deficit trajectory:
  - Headline fiscal deficit peaked at 10.3 percent of GDP in 2016.
  - Staff projects the headline deficit to decline gradually to 6.5 percent in 2019 as infrastructure spending winds down.
  - Staff’s 2017 deficit projection is significantly higher than the authorities’ Budget (which aims to keep the deficit below 3.5 percent of GDP and a primary surplus).
- Key fiscal projections (percent of GDP) — Authorities and Staff (2016–2019):
  - Total Revenue incl grants: 28.4 (2016 Auth), 28.4 (2016 Staff), 31.3 (2017 Auth), 28.7 (2017 Staff), 29.7 (2018 Auth), 28.6 (2018 Staff), 29.2 (2019 Auth), 28.3 (2019 Staff).
  - Tax Revenue: 20.2, 20.2, 20.5, 20.9, 20.1, 20.8, 20.0, 20.4.
  - Non-tax Revenue: 7.9, 7.8, 9.5, 7.4, 8.4, 7.5, 8.0, 7.6.
  - Total Expenditure & net lending: 38.6, 38.7, 33.5, 36.6, 32.3, 35.8, 28.7, 34.7.
  - Current Expenditure: 24.9, 24.9, 19.5, 24.3, 19.0, 25.1, 18.1, 26.5.
  - Wages Costs: 10.6, 10.7, 9.8, 10.3, 9.2, 10.0, 8.6, 9.6.
  - Interest Costs: 1.8, 2.0, 2.0, 2.2, 2.2, 2.5, 2.1, 3.0.
  - Social Welfare Contributions: 3.5, 3.3, 1.5, 3.1, 1.4, 3.2, 1.3, 3.2.
  - Subsidies & Transfers: 2.5, 2.5, 1.7, 2.0, 1.9, 1.9, 1.9, 1.8.
  - Capital Expenditure 1/: 13.2, 13.2, 14.1, 12.4, 13.4, 10.7, 10.7, 8.3.
  - Primary Balance: (8.5), (8.3), (0.3), (5.8), (0.4), (4.7), 2.6, (3.5).
  - Overall Balance: (10.3), (10.3), (2.3), (8.0), (2.5), (7.2), 0.5, (6.5).
  - Public Debt 2/: 63.6, 65.7, 65.5, 69.4, 63.9, 72.2, 61.5, 74.0.
  - Note: 1/ Capital expenditures inclusive of contributions to the sovereign development fund (SDF). 2/ Based on Authorities' preliminary estimates and own nominal GDP (Macroeconomics Outlook, Spring 2017).
- Public debt and guarantees:
  - Sizeable primary deficits will add significantly to public debt.
  - Public debt projected to rise during 2017–2021, then fall to 69.8 percent of GDP by 2037.
  - Outstanding sovereign guarantees amount to US$240 million (5.3 percent of GDP), of which US$75 million has been included in the fiscal accounts.
- External debt and reserves:
  - CA deficit projected to average 15 percent of GDP over 2017–22.
  - External debt projected to reach 51.2 percent in 2021 up from 34.7 percent in 2016.
  - PPG external debt service payments will average over US$92 million annually during 2017–21; sovereign bond repayment due in 2022.

### Risks (2017 outlook)
- Downside risks increased compared to a year earlier.
- External risks:
  - Persistent lower tourism receipts due to a secular shift to more price-elastic tourists, shorter stays, and emergence of lower-end hotels/guest houses.
  - Lower external demand, a stronger U.S. dollar, and a tightening of global financial conditions could impact FX reserves, competitiveness, and funding conditions.
  - Exchange rate depreciation shock with low reserve coverage poses significant external debt servicing risk.
- Domestic risks:
  - Continued high fiscal deficits and rising debt, including from government guarantees and arrears, threaten fiscal sustainability.
  - Fiscal risks from the 2018 Presidential election, climate change mitigation costs, and increased non-concessional financing.
  - Shallow financial system concentrated in tourism and dominated by state-owned banks amplifies cross-sector risks.
  - Political and domestic security risks remain elevated.
- Upside scenarios:
  - Stronger global growth boosting tourism, BOP, and reserves.
  - Stronger fiscal management, careful appraisal and selection of capital projects, realistic revenue targets, and faster arrear clearance could improve confidence and outlook.

### Fragility and institutional context
- Maldives classified as a fragile state by the IMF based on two successive weak CPIA ratings bringing three-year averages below the 3.20 threshold.
- Decline in scores for business regulatory environment and quality of budgetary and financial management from 2014 to 2016 cited as main reasons.
- Authorities investing heavily to close infrastructure gaps to boost tourism and domestic demand, increasing external financing risks and elevated public debt.
- Staff recommended faster adjustment and implementation of a medium-term debt framework; introduced ‘Climate Change Policy Assessment’ pilot; ongoing TA to strengthen public financial management (PFM), financial market development, and banking supervision.

*International Monetary Fund — Maldives, CR17357 (extracted chapter content).*

### 18. Fiscal consolidation is urgently needed to restore fiscal sustainability. Staff recommends

### 18. Fiscal consolidation is urgently needed to restore fiscal sustainability. Staff recommends

### Fiscal targets and overall strategy
- Staff recommends targeting a primary deficit of 4.4 percent of GDP in 2017, achievable under strengthened tax-arrears recovery by MIRA and more realistic execution of prioritized capital spending.
- Over the medium-term, staff recommends a gradual but steady adjustment to reach a primary surplus in 2020.
- The adjustment aims to bring the public debt-to-GDP ratio to the 60 percent target by 2022.
- The adjustment is assessed to be consistent with the fiscal structure and capacity constraints while accommodating priority capital spending.

### Recommended policy mix
- Implement revenue measures, contain current spending, and cut non-essential infrastructure spending.
- Rely on strengthening a well-administered tax system and leveraging the small number of broad-based taxes.
- Preserve concessional financing for infrastructure and social projects; avoid premature tapping of capital markets.
- Implement the Medium-Term Debt Strategy framework to better manage risks and avoid commercial-term borrowing.
- Strengthen Public Financial Management (PFM) and public investment efficiency (see PIMA and PFM TA recommendations).

### Revenue measures (estimated impact, percent of GDP)
- Total revenue measures (2017–2025): 0.3, 1.0, 1.4, 1.7, 1.6, 1.6, 1.5, 1.5, 1.5
- Recovery of tax arrears: 0.3 in 2017; estimate of tax arrears at end-2016 around 0.6 percent of GDP. Recommended legal/administrative action (e.g., freezing bank accounts); improve taxpayer register, reporting, and shorten filing times; utilize Public Accounting System (PAS) for business intelligence.
- G-GST: remove qualifying threshold (MVR1 million annually) from 2018 and increase rate from 6 to 7 percent from 2019. Estimated additional annual revenues: 1.3 percent of GDP. (G-GST contributions by year: 0.0, 0.5, 1.0, 1.3, 1.3, 1.2, 1.2, 1.2, 1.2)
- Business Profits Tax (BPT): abolish qualifying threshold of MVR500,000 from 2018 could raise MVR160 million (0.2 percent of GDP) annually. (BPT contributions by year: 0.0, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2)
- User fees: introduce bridge toll on Malé--Hulhulé--Hulumalé link road from 2018; potential revenue: 0.1 percent of GDP. (Bridge toll contributions by year: 0.0, 0.0, 0.0, 0.1, 0.2, 0.2, 0.1, 0.1, 0.1)

### Expenditure measures (estimated impact, percent of GDP)
- Total expenditure measures (2017–2025): 1.0, 1.6, 0.9, 2.3, 2.3, 2.3, 2.4, 2.3, 2.3
- Wages and allowances: series shows modest savings building to a target 10% reduction from 2020 relative to baseline; annual values: 0.0, 0.0, 0.0, 1.2, 1.1, 1.1, 1.1, 1.1, 1.1
- Subsidy reforms and safety nets: annual savings estimated at 0.0, 0.0, 0.0, 0.3, 0.3, 0.3, 0.3, 0.3, 0.3
- Curtailment of Aasandha & Social Welfare costs: phased savings starting 2018; series: 0.0, 0.6, 0.6, 0.8, 0.9, 0.9, 1.0, 0.9, 0.9 — staff recommends progressive measures introduced from 2018 saving around 0.8 percent of GDP annually.
- Curtailment of planned capital expenditure: cut capital expenditures by 1.0 percent of GDP in 2017-2018 (targeting non-priority and non-essential projects); series: 1.0, 1.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0

### Aggregate adjustment and fiscal paths (percent of GDP)
- Total Adjustments (Revenue + Expenditure): 1.3, 2.7, 2.3, 4.0, 3.9, 3.9, 3.9, 3.8, 3.8 (2017–2025)
- Required Adjustment (top-->down): -0.2, -0.3, 1.0, 4.7, 7.6, 8.5, 9.5, 9.5, 9.5
- Primary Balance for debt reduction: -6.0, -5.0, -2.5, 0.0, 2.5, 4.0, 5.0, 5.5, 5.5
- Contribution for SDF fiscal reserve: 0.0, 0.0, 0.0, 0.2, 0.3, 0.3, 0.3, 0.3, 0.0
- Required Primary Balance: -6.0, -5.0, -2.5, 2.0, 5.5, 7.5, 8.5, 8.5, 8.5

### Primary deficit scenarios and debt projections (percent of GDP)
- Primary Deficit Paths:
  - Baseline: -5.8, -4.7, -3.5, -2.7, -2.1, -1.0, -1.0, -1.0, -1.0 (2017–2025)
  - Alternative Scenario: -4.4, -2.0, -1.2, 1.3, 1.9, 2.9, 2.9, 2.8, 2.7 (2017–2025)
- Public Debt/GDP (baseline): 70.3, 73.8, 76.0, 77.5, 78.2, 77.9, 77.6, 77.3, 77.0 (2017–2025)
- Public Debt/GDP (alternative): 68.7, 69.8, 69.8, 67.4, 64.3, 60.3, 56.3, 52.6, 49.0 (2017–2025)
- Note: Debt path approximate values using simple debt dynamics tool with D(t)= D(t-1)*(1+r)/(1+g)-PB(t); r and g set to average long term values in the projection period.

### Expenditure prioritization and savings areas
- Reduce subsidies and other costs: 2016 reforms significantly lowered food subsidies and virtually eliminated electricity subsidies. Proxy-means tested targeting scheme could be fully implemented beginning 2019 with annual cost savings around 0.3 percent of GDP.
- Welfare and Aasandha reforms: localize service provision, introduce generic medicines and co-payments; staff recommends progressive measures from 2018 saving around 0.8 percent of GDP annually.
- Public sector reforms: rationalize pay structures and staffing; Civil Services Commission HR audits and National Pay Commission review could generate savings of around 1.1 percent of GDP annually starting 2020.
- Sovereign guarantees: include guarantees as contingent items in official debt figures; limit call risk via risk sharing with banks and building a fiscal reserve through the SDF; authorize guarantees only after independent auditing of project viability and borrower repayment ability.
- Capital spending: curtail planned capital expenditure by around 1 percentage point of GDP over 2017-2018, targeting non-priority and non-essential projects.

### PFM, fiscal risks, and recommendations
- Strengthening PFM is critical: IMF TA on PIMA and PFM recommends (i) improve efficiency via credible budget process; (ii) strengthen medium-term sustainability anchors and realistic budget envelope; (iii) develop action plan to settle arrears; (iv) streamline tax incentives ahead of SEZ licensing.
- Improve SOE oversight and promote renewable energy to generate sizable savings in transport, communications, and utilities.
- Build fiscal reserve via SDF and ensure risk management of guarantees.
- Results from the Debt Investment Growth (DIG) Model calibrated for Maldives show higher growth effects of capital spending can be obtained by raising investment efficiency through enhanced PFM measures.

### Exchange rate, monetary, and financial policy links
- Stabilized arrangement (peg) remains appropriate given Maldives’ small scale, high openness, dollarized nature, and volatile export revenue; peg anchors inflation and hedges tourism sector receipts.
- Risks: low reserve coverage and rising public debt undermining peg stability; strong fiscal adjustment and tighter monetary stance needed to support peg and build foreign reserves.
- Monetary policy recommendations: tighten gradually via increase in MRR and remuneration on rufiyaa deposits; replenish FX reserves through sustained net inflows; restore reserve coverage to three months of imports minimum; pace tightening to avoid impeding credit.
- Restart market-based auctioning of liquidity and expand Treasury bond maturities to develop a yield curve while weighing higher debt-service risks.

### Financial sector and structural reforms
- Financial system concentrated in tourism; limited competition, high net interest margins, and limited credit information constrain credit to households and SMEs.
- Risks from rapid private credit growth led by housing and construction; banks require 150 percent of collateral and 20–25 percent down payment; exposure of Maldives Pension Administration Office (MPAO) warrants careful monitoring.
- Support financial inclusion: credit guarantee scheme for SMEs, mobile banking licenses, credit information unit at MMA, financial literacy efforts; rationalize SME credit programs and adopt coherent M&E.
- Strengthen insolvency and creditor rights framework and credit reporting to ease business credit standards.
- MMA efforts: improved prudential regulations (introduced 2015), stress testing, strengthened AML/CFT framework, expanded Financial Intelligence Unit resources.

### Authorities’ views highlighted
- Authorities viewed public debt risks as moderate; argued infrastructure investment will benefit economy and help alleviate financing pressures.
- Stated fiscal consolidation underway but recognized room for more; emphasized medium-term growth benefits of infrastructure.
- SDF designed to help pay off maturing debt; contributions estimated at 4.4 percent of GDP over 2017-19 and 1 percent of GDP in the long run.
- Authorities preferred adjustment focused on spending, SOE oversight, and accelerated PFM reforms; expressed concern about raising G-GST impact on SMEs and favored arrears collection.
- MMA did not see immediate need for monetary tightening absent inflation and FX market pressures; noted challenges in developing domestic bond market under current financial infrastructure.

*Source: IMF staff estimates in Table B and accompanying text.*

### 39. Integrating risk-reduction and disaster-response programs into the core budget,

### 39. Integrating risk-reduction and disaster-response programs into the core budget,

### Climate change integration and public investment
- Authorities have signed their Nationally Determined Contribution (NDC) under the Paris Agreement and are developing a plan to integrate climate change adaptation and mitigation measures as part of their infrastructure plans.
- The NDC has highlighted coastal protection, waste management and access to drinking water as key areas needing immediate attention.
- Integrating risk-reduction and disaster-response programs into the core budget, public investment planning, and debt management frameworks would help address better climate change.
- The Fund’s pilot on the ‘Climate Change Policy Assessment for Small States’ can help integrate climate change impact and policy responses into a holistic macro framework.
- Over the medium term, addressing climate change, enhancing sustainable and more inclusive growth and promoting diversification are key challenges.
- Staff welcomes ongoing measures in areas of infrastructure and investment as well as labor markets and competition in promoting environmental sustainability and energy sufficiency and economic diversification.

### Data, statistics, and institutional capacity
- Data collection needs to be stepped up.
- Priority should be given to pass the statistics law that provides data collection powers to the MMA, MIRA and NBS.
- Continued support through TA in the areas of external statistics, national accounts and fiscal areas is a high priority.
- The MMA Board has approved and enacted statistical regulations on July 11, 2017 to be sent for publication.
- The NBS has just completed a rebasing of GDP (Annex I).
- Timely and accurate statistics should continue to be strengthened in supporting reliable policy advice.
- A medium-term plan to improve GDP estimates and external statistics is key with the passage of the statistics law helpful in ensuring a timely release of data.

### Macroeconomic outlook and inflation
- GDP growth is projected to rise gradually in the medium-term and inflation to remain stable.
- Growth in 2017 is set to recover but is expected to remain below longer-term potential growth.
- Inflation is projected to remain low with some lift from the subsidy phase out on staple food items and electricity.

### Fiscal position, public debt, and policy priorities
- The large infrastructure scale up has the potential of transforming the economy but also of creating risks from high public debt.
- Expansion and development of airports, a major regional hub, and land connectivity in the Greater Malé area are set to increase tourism and demand for ancillary services but will add significantly to the already high level of public debt.
- Prospective large external borrowing continues to indicate a high risk of debt distress.
- A rapid debt buildup, along with a widening current account deficit, and low international reserves call for urgent corrective policy measures.
- To address large and rising vulnerabilities under a reduced policy space, priorities should focus on reducing fiscal and external deficits, build adequate FX reserves, develop the financial sector and enhance longer-term growth potential through structural reforms.
- Fiscal consolidation is urgently needed to restore debt sustainability.
- Staff recommends targeting a gradual but steady adjustment to reach a primary surplus in 2020 and bring debt-to-GDP to the 60 percent target by 2022.
- Durable increases in revenues include indirect and corporate tax base broadening and higher rates, user fees for key infrastructure facilities, and collection of outstanding tax arrears.
- Non-essential infrastructure spending in 2017–18 should be reduced, subsidy reforms completed and welfare and public sector reforms pursued to improve efficiency in healthcare spending and contain the wage bill.
- Strengthening PFM, including establishing a credible budget process and a clear medium-term fiscal strategy is needed.

### External position, exchange rate, reserves, and monetary policy
- The external position has worsened and is assessed to be substantially weaker than fundamentals and desirable policy settings.
- The CA deficit has widened sharply and is projected to remain large financed by a modest increase in FDI and large external borrowing.
- The real exchange rate continued to appreciate and reserves remained low relative to adequacy metrics.
- A tighter fiscal policy stance along with more flexibility in the pegged regime would improve the external position.
- Monetary and fiscal tightening would support the buildup of reserves and the stabilized arrangement.
- Over time, a gradual move toward an import-weighted currency composite would also improve external competitiveness.
- Financial policies should focus on promoting financial inclusion, strengthening the regulatory environment and ensuring financial system stability.

*Source: cr17357 - 39. Integrating risk-reduction and disaster-response programs into the core budget,*

### 49. It is recommended that the next Article IV consultation be held on the standard 12-

### It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Tourism and External Sector: recent performance and pressures
- Tourism sector recovered from its contraction in 2015, but performance remains subpar.
- Tourist arrivals (Year-on-year percent change) series shown for Maldives and Average of Comparator Countries (countries include Mauritius, Seychelles, Bahamas and Barbados).
- Tourism receipts remain a dominant external sector item: Tourism receipts (in nonfactor services, net) reported as 73.0, 63.9, 59.3, 59.3, 59.2, 59.1, 59.4, 59.7, 60.0 (percent of GDP for 2014–22 in Table 1).
- Exchange rate: the real exchange rate continues to appreciate; Nominal Effective Exchange Rate and REER series plotted (Jan 2006 = 100).
- Current account weakened further in 2016 and is projected to remain large in 2017: Current account (in percent of GDP) reported as -3.2, -7.3, -19.6, -17.2, -17.0, -16.4, -14.3, -12.9, -10.3 for 2014–22 (Table 1).
- Contributions to current account (2011–2017): Merchandise Trade, Services Trade, Secondary Income Balance, Primary Income Balance, Current Account (chart).
- Gross international reserves (stock; e.o.p.) reported as 615, 564, 468, 564, 614, 645, 703, 751, 724 (in millions of US$ for 2014–22, Table 1 and Table 4).
- Gross Reserves / GNFS Imports (Months) projections: 0.0–3.5 series shown; specific values in Table 1: In months of GNFS imports for 2014–22 are 2.7, 2.4, 1.8, 1.9, 1.9, 1.9, 2.0, 2.0, 1.9.

### Fiscal developments, drivers, and projections
- Government revenue remains strong – a relative high performer among peers.
- Government expenditures are higher – partly because of sizeable non-discretionary component; resulting in untenable fiscal deficits.
- Tourism GST remains a key driver of revenue performance – but at a relatively lower rate compared to peers.
- Central government finances (Table 2a, Table 2b):
  - Total revenue and grants (percent of GDP): 26.7, 27.7, 27.7, 34.8, 28.4, 28.4, 31.3, 28.7, 28.6, 28.3, 28.4, 28.5, 28.6 (2014–22).
  - Expenditure and net lending (percent of GDP): 34.1, 34.5, 34.5, 40.0, 38.6, 38.7, 33.5, 36.6, 35.7, 34.7, 34.3, 33.9, 32.9 (2014–22).
  - Overall balance (percent of GDP): -7.4, -6.8, -10.3, -8.0, -7.1, -6.3, -6.0, -5.3, -4.3 (Table 1, projected 2016–22).
  - Overall balance (rufiyaa, Table 2a): -4,202; -4,204; -4,204; -3,372; -6,673; -6,716; -1,589; -5,538; -5,286; -5,013; -5,095; -4,906; -4,220 (2014–22 Auth./Est./Proj. series).
  - Primary balance (percent of GDP): -5.1, -4.6, -8.2, -5.8, -4.6, -3.3, -2.6, -1.9, -0.9 (2014–22, Table 1).
  - Public and publicly guaranteed debt (percent of GDP): 54.2, 56.9, 65.7, 69.4, 72.0, 73.5, 74.3, 74.3, 73.2 (2014–22, Table 2b).
- Fiscal composition and measures:
  - Subsidy and social welfare costs are declining to provide fiscal space; electricity and food subsidy reforms reduced subsidy cost substantially.
  - Spending structure: large rigid component of expenditure and high capital spending on account of infrastructure scale-up; capital expenditure (percent of GDP) reported as 4.5, 7.6, 7.6, 15.1, 13.2, 13.2, 14.1, 12.4, 10.7 (2014–22, Table 2b).
  - Major tax and non-tax receipts (percent of GDP) include Tourism-GST (5.3, 6.7, 6.7, 6.9, 6.0, 6.0, 6.2, 6.4, 6.5 across years) and General GST (2.7, 3.1, 3.1, 3.2, 3.6, 3.6, 3.5, 3.6, 3.6).

### Money, credit, and inflation
- Broad money growth sharply declined mainly due to decline in non-financial public enterprises’ deposits.
  - Broad money (annual percent change): 14.7, 12.3, -0.2, 9.6, 9.7, 9.9, 10.5, 10.6, 10.6 (2014–22, Table 3).
  - Narrow money (annual percent change): 7.5, 19.1, 1.0, 9.6, 9.7, 9.9, 10.5, 10.6, 10.6.
- Credit growth remained robust though private credit remains low compared to economies at similar income level.
  - Domestic credit, net (annual percent change): 4.7, 15.7, 19.5, 7.1, 5.2, 5.3, 7.1, 7.8, 7.8 (Table 3).
  - Private sector credit (percent of total credit, sectoral composition 2016): Tourism 39.2, Commerce 18.1, Construction 17.2, Real estate 12.5, Other loans 5.8, Transport & communication 3.4, Fishing 2.8, Manufacturing 0.9, Electricity, gas, water 0.1, Agriculture 0.0 (Figure 5).
- Inflation remained contained but subsidy reform plus rising global commodity prices likely to introduce new inflationary pressures.
  - Inflation (end-of-period, CPI-Male definition) Table 1: 1.2, 1.2, 1.8, 2.1, 2.2, 2.2, 2.4, 2.4, 2.6 (2014–22).

### Financial system and business environment
- System-wide NPLs and capital adequacy have significantly improved.
  - Regulatory capital to risk-weighted assets: 15.4, 21.0, 24.7, 28.9, 30.3, 35.8, 34.0, 44.5, 37.2, 40.1, 42.9, 42.0, 44.5, 41.3, 41.8 (2007–2017 quarterly series, Table 5).
  - Nonperforming loans (gross) to total loans (gross): 1.7, 8.9, 12.7, 17, 19.4, 21, 16.7, 17.4, 14.1, 12.1, 11.1, 10.5, 10.6, 10.7, 9.6 (2007–2017Q2).
- Banks maintain high level of profitability: Return on assets and Return on equity series reported (e.g., Return on assets 5.3, 3.4, 2.2, 2.0, 2.6, 2.4, 5.1, 4.6, 4.5, 1.54, 2.6, 2.6, 3.42, 3.64, 3.54).
- Liquidity metrics improved: Liquid assets to total assets and liquid assets to short-term liabilities series (Table 5).
- Offshore deposits and cross-border lending:
  - Ratio of offshore banks deposits to domestic bank deposits remains below long-term average (chart).
  - Loans from non-resident banks to GDP continue to decline (chart).
- Doing Business indicators remain weak: Maldives ranking compared with Tourism Economies across Starting a Business, Getting Credit, Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, Getting Credit metrics (2016 Doing Business Ranking figure).

### Impact of GDP rebasing
- Nominal GDP rebasing increased level by c. 25% (chart caption).
- Revisions shown include:
  - Nominal GDP (level in millions of rufiyaa) Before/After series.
  - Real GDP (Year-year Change, In percent) Before/After series.
  - Revised GDP deflator and comparison with CPI (Year-year change, In percent).
  - Revisions to sectoral growth (Cumulative Real Growth 2013–2015, In percent).
  - Revisions to fiscal and external positions: Overall Balance, Primary Balance, PPG Debt, CAB, External Debt changes shown (Before/After charts).

### Projections and baseline scenario highlights (selected figures from tables)
- Population (in 1,000; 2015): 348.
- GDP per capita (in U.S. dollars; 2015): 11,544.
- Quota (in million SDRs, Feb 2016): 21.2.
- Real GDP (annual percent change) projected: 7.6, 3.3, 3.9, 4.6, 4.7, 4.8, 5.0, 5.0, 5.0 for 2014–22 (Table 1 series).
- Current account (in millions of U.S. dollars, Table 4): -118, -295, -831, -779, -818, -847, -792, -771, -663 for 2014–22.
- Trade and tourism details (Table 4):
  - Trade balance (millions of US$): -1,660; -1,655; -1,840; -2,088; -2,277; -2,371; -2,440; -2,556; -2,553 (2014–22).
  - Travel receipts (millions of US$): 2,696; 2,567; 2,515; 2,681; 2,857; 3,049; 3,293; 3,561; 3,851 (2014–22).
- External debt (in percent of GDP, Table 4 memorandum): 28.9, 27.2, 34.7, 38.9, 42.8, 46.4, 49.1, 51.2, 49.3 (2014–22).

*Source: Maldives — IMF staff estimates and projections as presented in the provided document.*

### Annex I. Revised GDP Data

### Annex I. Revised GDP Data

### Overview
- The Maldives’s National Bureau of Statistics (NBS) has been working to revise the national accounts for the period 2003-2015.
- South Asia Regional Training and Technical Assistance Center (SARTTAC) conducted a TA mission to the Maldives in March 2017 to assist the NBS finalize the GDP benchmarking and rebasing.
- The IMF Statistics Department has also provided extensive TA to NBS in support of this effort.
- Prior to the release of the revised time series, staff has used the 2003-based GDP data and its own estimates.
- A follow-up SARTTAC TA mission in August has helped NBS finalize the new GDP estimates, approved by the government and reflected in the Staff Report.

### Key procedural change
- NBS revision has changed the base year from 2003 to 2014.
- The revised estimates reflect statistical, conceptual, and methodological revisions.
- Statistical revisions focused on incorporating new data sources from the financial statements of corporate enterprises from the MOFT and the Ministry of Economic Development (MED); as a result, double deflation methods have been used to estimate five economic activities, lessening the need to rely on extrapolating benchmark values.
- GDP will be presented at purchasers’ prices as data on taxes on products are now available; prior to the benchmark, GDP was presented at basic prices.

### Conceptual and Methodological Revisions Incorporated in the 2014 Benchmark (selected)
- FISIM (Financial Intermediation Services Indirectly Measured)
  - Pre-benchmark: Estimates based on the 1993 SNA; service not assigned to using industries.
  - Treatment: Estimates based on the 2008 SNA; service assigned to using industries.
  - Impact: Upward revisions
- Insurance
  - Pre-benchmark: Estimates based on the 1993 SNA.
  - Treatment: Estimates based on the 2008 SNA.
  - Impact: Upward revisions
- Fisheries; Electricity; Water; FISIM; insurance and financial auxiliaries
  - Pre-benchmark: Gross value added (GVA) for non-benchmark periods based on single-deflation method.
  - Treatment: GVA for non-benchmark periods based on double-deflation method.
  - Impact: Upward revisions
- Accommodations, food and beverage services
  - Pre-benchmark: Estimates derived for: (i) resorts and safari vessels; and (ii) other hotels, restaurants, and guest houses.
  - Treatment: Estimates derived for: (i) resorts; (ii) safaris; (iii) hotels; (iv) guest houses; and (v) food and beverage.
  - Impact: Upward revisions
- Education services
  - Pre-benchmark: Estimates derived for one unified category.
  - Treatment: Estimates derived separately for government and private sector.
  - Impact: Upward revisions
- Human health and social care services
  - Pre-benchmark: Estimates derived for one unified category.
  - Treatment: Estimates derived separately for government and private sector.
  - Impact: Upward revisions

*Source: IMF staff report annex text.*

### Annex VI. Public Investment Trends and Efficiency in the

### Annex VI. Public Investment Trends and Efficiency in the Maldives: Performance, Challenges, and Strategy Going Forward

### Context and Drivers of Public Investment
- Economy heavily dependent on tourism; has over two decades developed a profitable high tourism sector.
- High exposure to climate change; the 2004 Tsunami highlighted the vulnerability to climate events.
- Political environment impacted by recent democratization; new constitution in 2008 and subsequent multi-party political tensions.

### Importance of Public Investment Efficiency
- Economic and social impact of public investment critically depends on its ‘efficiency’.
- The most efficient public investors get twice the growth “bang” for their public investment “buck” than the least efficient.

### Measured Investment Efficiency Gap
- Indicator for physical access to infrastructure signals relatively low efficiency in public investment (Figure 2.B—FAD PIMA Report, 2016).
- The resulting ‘efficiency gap’ between Maldives and the most efficient countries is 50 percent, suggesting about half of the public capital stock did not achieve its full potential.
- Comparative gaps:
  - Wider than the Emerging Market Economies region (EME) average and that of all countries (41 percent).
  - Comparable to the average gap of Emerging and Developing Asia region (EDA) countries (50 percent, Figure 2.C).
- PIMA assessment used a framework based on the three phases of the PIM cycle: planning, allocation, and implementation, and on 15 key institutions involved in the PIM cycle.
- Most public investment institutions in Maldives are at a basic stage of development and implementation when compared to EME and all countries.

### PIMA Recommendations and Strategy Going Forward (FAD TA Report)
- Strengthen strategic guidance and budget ceilings for public investment:
  - Revise the budget calendar to prepare and to circulate the Fiscal Strategy Statement earlier (e.g. in April) to enable it to drive the budget process.
  - Approve realistic aggregate expenditure ceilings (for recurrent and public investment) at the start of the budget process.
  - Establish a ceiling for the PSIP budget at the start of the budget process based on a binding resource envelope and include PSIP ceilings in the budget circular.
  - Better integrate capital and recurrent budget preparation, including capital project selection.
- Improve central oversight of SOEs and PPPs:
  - Enhance oversight of public investment undertaken by non-budgetary institutions, including SOEs, PPPs, and contractor-based financing.
  - Maintain in a database the number and value of public investments undertaken by SOEs.
  - Publish a list of guarantees and contractor-financed projects in the budget.
- Improve commitment control and cash management:
  - Release allocations to enable Ministries, Departments and Agencies’ (MDAs) purchasing to take place following authorization by MOFT (for on-going projects and new projects) in the material management (MM-PAS) module.
- Improve institutions for project appraisal, selection, and management:
  - Develop a standard methodology for project appraisal, publish this methodology and verify consistent application by line ministries.
  - Develop better targeted selection and prioritization criteria and processes for project selection in the budget.
  - Develop a project pipeline to improve the medium-term focus of project identification, appraisal, selection and approval.
- Improve competitiveness and transparency of procurement:
  - Prescribe that all SOEs use standard National Tender Board (NTB) guidelines and procedures.
  - Strengthen the project management and monitoring framework and ensure implementation in all MDAs and SOEs.
- Develop a framework for ex-post evaluations and ensure lessons learned from past projects are incorporated in revised guidelines and practices.
- Strengthen capacities of all actors involved in PIM:
  - Develop and implement a PIM capacity building plan for project managers, supervising officers, operational officers, and MOFT (see Appendix 2 of the FAD PIMA Report).
  - Note: Implementation requires institutional and legal change and is heavily dependent on building additional capacity within the public sector which takes time.

### Other Relevant Observations from the Surrounding Annexes (contextual links)
- Maldives introduced mobile banking for the first time following authorities’ decision to grant mobile banking licenses to two telecommunications providers.
- Household outstanding loans value stood at just 11 percent of GDP in 2015.
- Geographic dispersion increases costs of physical infrastructure, making Maldives particularly suited to technological solutions (mobile money, online banking and mobile banking) alongside low-tech solutions such as boats and agent banking.
- PIM institutional improvements recommended by PIMA align with broader FAD TA and Public Financial Management Reform Plan activities noted elsewhere in the report.

*Source: cr17357 - Annex VI. Public Investment Trends and Efficiency in the Maldives: Performance, Challenges, and Strategy Going Forward*

### 2014. A Public Investment Management Assessment (PIMA) was conducted by FAD in December 2016.

### cr17357 - 2014. A Public Investment Management Assessment (PIMA) was conducted by FAD in December 2016.

### Public Investment Management Assessment (PIMA)
- Purpose: to identify, and propose improvements in, PFM practices that are associated with efficient public investment.
- A joint Public Investment Management Assessment (PIMA) mission took place in December 2016 and its recommendations will be integrated into the World Bank Public Financial Management Systems strengthening project for FY 15-20.

### Legal (LEG) technical assistance chronology and topics
- October 2003: provided technical assistance on the revision of the Maldives Monetary Authority Act (MMA Act).
- March and September 2005, April 2006: missions to revamp the banking law.
- August 2009: mission provided assistance on the MMA Act (jointly with MCM).
- February 2011: follow-up mission focused on payments law.
- October 2010: AML/CFT assessment.
- May 2012: desk-based review of the draft AML/CFT law.
- 2014 and 2015: advice on the Special Economic Zones Law, offshore banking legislation and deposit insurance.

### Monetary and Capital Markets (MCM) technical assistance chronology and topics
- 2006: two missions on monetary operations, financial market development, and banking issues.
- 2007: TA on debt management, monetary policy and financial supervision.
- 2008: three missions on monetary operations and liquidity management, monetary policy and financial supervision issues.
- November 2008 and March/May/August 2009: TA on research capacity building, banking supervision, monetary policy and reviewing of the MMA Act with recommendations.
- Two missions (dates not specified): advice on monetary operations, liquidity management, and development of a crisis management framework.
- December 2010: TA mission on crisis preparedness and management, bank restructuring, and monetary operations.
- May and September 2011: TA on development of debt markets and on-site banking supervision.
- February 2012: TA on assessing the foreign exchange operations framework.
- First half of 2014: continued TA delivery on banking supervision; joint MCM-APD mission on developing foreign exchange market.
- 2014: advice on deposit insurance schemes.
- 2015: banking supervision (March) and foreign exchange reserve management (September) remained priority areas with follow-up TA missions.
- March 2016: further TA on foreign exchange and monetary policy operations.
- May 2016: follow-up mission on banking supervision with a focus on operational risk.
- FY2017 (so far): four TA missions: two HQ-staffed missions covering accounting and auditing framework for MMA, and two SARTTAC-initiated missions establishing the work plan for monetary operations and banking supervision.

### Statistics (STA) technical assistance chronology and topics
- May 2007: mission on money and banking statistics.
- February and April 2011: TA on balance of payments statistics, government financial statistics (GFS), monetary and financial statistics (MFS) and national accounts.
- June and September 2011: TA on improving price statistics and on the General Data Dissemination System (GDDS).
- February, May, and October 2012: continued TA on improving price statistics.
- April 2012: TA on improving national accounts covering constructing GDP from the expenditure side and compiling quarterly national accounts.
- November 2012, January and July 2014, and April 2015 (the latter jointly with APD): further advice on improving GDP and developing quarterly GDP.
- Maldives attended a workshop for the ICP-SNA project covering both national accounts and price statistics.
- March 2013 to January 2016: STA fielded eight TA missions on balance of payments statistics and two on government finance statistics, in the context of a project funded by the Government of Japan.
- February 05-16 2017: a final TA mission was conducted.

### Safeguards Assessment of the Maldives Monetary Authority (MMA)
- Assessment concluded: March 2010.
- Actions taken in response:
  - MMA appointed an external auditor.
  - Strengthened controls over foreign payments through automation of the authorization process.
  - A Chief Internal Auditor has been appointed; capacity in internal audit function continues to be improved.
  - Amendments to the MMA Act were drafted in 2011 in consultation with the Fund; the MMA Act was amended in 2015.
- Outstanding safeguards recommendations not incorporated into the 2015 MMA Act amendments:
  - Establishment of an Audit Committee.
  - Limits on credit to government.
  - Safeguards for personal autonomy of Board members.

### IMF-World Bank Joint Management Action Plan (As of July 2017)
- Strategic objectives of the Country Partnership Framework (CPF) FY16-19 (relying heavily on the World Bank Group Systematic Country Diagnostic (SCD) (2015)):
  1. enhancing employability and economic opportunities for Maldivians;
  2. strengthening natural resource management and climate resilience;
  3. improving the efficacy of public finance management and policy making.
- CPF cross-cutting themes: youth, gender and governance.
- World Bank support:
  - Public Financial Management Systems strengthening project for FY 15-20: objective to enhance budget credibility, transparency, and financial reporting of central government finances; focus on strengthening the medium-term fiscal framework, debt and cash management, and budget execution. PIMA recommendations from December 2016 will be integrated into this project.
  - Separate Bank-funded project supporting the office of the Auditor General: updating the audit law, conducting performance audit pilots and training staff on auditing the consolidated financial statements using international audit standards.
- Bank-led initiatives for improving targeting of universal subsidies and reforming social protection:
  - Health: technical support focuses on achieving operational savings for Aasandha; substantial capacity building of the National Social Protection Agency (NSPA) needed.
  - Poverty: Poverty and Shared Prosperity Project assisted in design of a new Household Income and Expenditure Survey (HIES). The poverty team will assist the National Bureau of Statistics (NBS) in estimating a new official national poverty line and a set of poverty and inequality estimates. Preliminary results are expected by the end of 2017.
  - Proxy Means Testing (PMT): Bank helped NSPA develop a targeting mechanism based on both means and PMT methods to target the electricity subsidy and other social safety net programs; PMT formula will be updated once new HIES data is available; NSPA staff will be trained to conduct updates independently.

### Joint products and coordination
- IMF and World Bank teams: will continue to hold joint missions and regular briefing meetings on macroeconomic developments.
- Public financial management: identified as a key area of collaboration.
- Joint Bank-Fund Debt Sustainability Analysis: listed as a joint product with expected delivery date FY 18.

### Asian Development Bank (ADB) relations (As of July, 2017)
- ADB country operations business plan (COBP), 2018–2020 prepared with government; extends the validity of the CPS 2007−2011 until a new CPS is in place.
- April 2016: government requested ADB to shift assistance focus to developing the Greater Malé Region; analytical study expected to be completed by the end of 2017 to inform ADB’s CPS. New national development plan to be prepared following presidential elections in September 2018.
- Maldives classification and resources:
  - Maldives, a group A developing member country, is eligible for Asian Development Fund (ADF) grants.
  - Indicative ADF grant resource allocation available for commitment for 2018–2020: $37.34 million.
  - 2016 debt distress classification: high risk of debt distress.
  - Under ADF grants framework: country to receive 100% of its country allocation in grants in 2017, subject to a 20 percent volume discount on the grant portion of the country allocation.
- Lending and nonlending program highlights:
  - Lending program total for 2018–2020: $52.27 million, of which $49.77 million will be from ADF grant resource allocation for 2017–2020; balance sourced from the regional pool allocation.
  - Non-lending program during the period: $2.30 million.
  - Greater Malé Connectivity Improvement Project (programmed for 2019) was dropped due to unconfirmed economic viability.
  - Greater Malé Environmental Improvement and Waste Management Project:
    - ADF grant allocation increased from $25.29 million to $49.77 million.
    - Shift from a single project to phased implementation: Phase 1 scheduled for 2018 for $24.85 million, Phase 2 scheduled for 2019 for $24.92 million contingent on availability of suitable land funded by the government.
    - Sector reclassification from energy to water and other urban infrastructure and services.
  - South Asia Sub-Regional Economic Cooperation (SASEC) National Single Window Project:
    - Programmed as a standby project for 2018 and as a firm project for 2019.
    - Indicative cost in Table A2.1: $6.00 million total; ADF Grants $2.50 million; Government co-finance $1.00 million; remainder from other sources.
  - Two nonlending programs retained for 2018:
    - transaction TA for $2 million to help government develop capacity to implement the Greater Malé Environmental Improvement and Waste Management Project (of the $2 million: $1 million from the Technical Assistance Special Fund and $1 million from other sources yet to be determined);
    - knowledge and support TA for $300,000 for Capacity Building for Portfolio Management.
- Constraints to non-sovereign operations and private sector investments:
  - lack of effective convertibility of the rufiyaa;
  - generally weak capacity of the private sector in financial management and accounting;
  - lack of a skilled workforce.
- Key country development outcomes and indicative resource allocations (2018–2020):
  1. Water and Other Urban Infrastructure and Services:
     - Grants: Amount: $49.77 million (ADF). Share of COBP envelope: 95%.
     - TA: Amount: $1 million (TASF) and $1 million (cofinancing, source to be determined).
     - Change from last COBP: ADF grant allocation increased from $25.29 million to $49.77 million; phased implementation adopted; sector classification changed from energy to water and other urban infrastructure and services.
  2. Industry and Trade:
     - Grants: Amount: $2.5 million (ADF) and $2.5 million (cofinancing, source to be determined). Share of COBP envelope: 5%.
     - Change from last COBP: South Asia Sub-Regional Economic Cooperation (SASEC) National Single Window Project added in 2018 (standby) and 2019 (firm).
- Table A2.1 (Lending Products, 2018-2020) highlights:
  - 2018 Firm: Greater Malé Environmental Improvement and Waste Management Project (Phase 1): Total ADF Grants $24.85 million.
  - 2018 Standby: SASEC National Single Window Project: Total cost $6.00 million; ADF Grants $2.50 million.
  - 2019 Firm: Greater Malé Environmental Improvement and Waste Management Project (Phase 2): Total ADF Grants $24.92 million; SASEC National Single Window Project: ADF Grants $2.50 million.
  - Notes: TBD = to be determined; many items list TBD for certain funding or government co-finance.

*Italic: IMF staff report content provided in the supplied PDF (cr17357).*

### Appendix II. Indicative Assistance Pipeline

### Appendix II. Indicative Assistance Pipeline

### Nonlending Products and Services, 2018
- Greater Malé Environmental Improvement and Waste Management Project
  - Sector: WUS
  - Division: SAUW
  - Assistance Type: TRTA
  - Source: TASF
  - Amount ($'000): 1,000.00
  - Others Source: TBD
  - Others Amount ($'000): 1,000.00
  - Total ($'000): 2,000.00
- Capacity Building for Portfolio Management
  - Sector: PSM
  - Division: SARC
  - Assistance Type: KSTA
  - Source: TASF
  - Amount ($'000): 300.00
  - Others Source: 0.00
  - Others Amount ($'000): 0.00
  - Total ($'000): 300.00
- Totals for 2018
  - ADB Amount ($'000): 1,300.00
  - Others Amount ($'000): 1,000.00
  - Total ($'000): 2,300.00

- Acronyms as presented:
  - ADB = Asian Development Bank
  - KSTA = knowledge and support technical assistance
  - PSM = public sector management
  - SARC = Regional Cooperation and Operations Coordination Division, South Asia Department
  - SAUW = Urban Development and Water Division, South Asia Department
  - TASF = Technical Assistance Special Fund
  - TBD = to be determined
  - TRTA = transaction technical assistance
  - WUS = water and other urban infrastructure and services
- Source noted in table: Asian Development Bank

### Nonlending Products and Services, 2017
- Greater Malé Environmental Improvement and Waste Management Project
  - Sector: WUS
  - Division: SAUW
  - Assistance Type: TRTA
  - Source: TASF
  - Amount ($’000): 600.0
  - Others Amount ($’000): 0.00
  - Total ($’000): 600.00
- Total for 2017
  - ADB Amount ($’000): 600.00
  - Others Amount ($’000): 0.00
  - Total ($’000): 600.00
- Acronyms as presented:
  - SAUW = Urban Development and Water Division, South Asia Department
  - TASF = Technical Assistance Special Fund
  - TRTA = transaction technical assistance
  - WUS = water and other urban infrastructure services
- Source noted in table: Asian Development Bank

### Lending Products, 2017
- Summary of lending commitments (selected fields shown as presented)
  - Cost ($ million): None reported (all entries shown as 0.00)
  - Strategic Agendas / Year / ADB Project/Program Name / Sector / Poverty Targeting and Drivers of Change / Division / TRTA/PDA / Total / Regular OCR / COL / ADF Grants / Total / Gov’t / Co-finance: all numeric fields reported as 0.00
- Note in table: Investment lending accounted for 100% of sovereign lending commitments during 2014-2016.
- Acronyms as presented:
  - ADB = Asian Development Bank
  - ADF = Asian Development Fund
  - gov’t = government
  - OCR = ordinary capital resources
  - PDA = project design advance
  - TRTA = transaction technical assistance
- Source noted in table: Asian Development Bank

### Knowledge Publications and Events for 2018 (selected entries)
- Asian Development Bank and Maldives: Fact Sheet 2017
  - Subject: ADB administration and governance
  - Type: Publication and documentation
  - Department/Group: DER
  - Funding: Administrative core budget (staff)
- Asian Development Outlook 2018
  - Subject: Capacity development, economics, governance and public sector management
  - Type: Publication and documentation
  - Department/Group: ERCD
  - Funding: Administrative core budget (staff)
- Key Indicators for Asia and the Pacific 2018
  - Subject: Capacity development, economics, governance and public sector management
  - Type: Publication and documentation
  - Department/Group: ERCD
  - Funding: Administrative core budget (staff)
- Asian Economic Integration Report 2018
  - Subject: Capacity development, economics, governance and public sector management, industry and trade, regional cooperation and integration
  - Type: Publication and documentation: flagship study
  - Department/Group: ERCD
  - Funding: Administrative core budget (staff)
- The Economic Effects of Participating in Global Value Chains: Country and Sector Level Analysis
  - Subject: Capacity development, economics, governance and public sector management
  - Type: Publication and documentation
  - Department/Group: ERCD
  - Funding: TA 8779
- Road Safety Campaign in Malé
  - Subject: Transport
  - Type: Publication and documentation
  - Department/Group: SARD (SATC)
  - Funding: Administrative core budget (staff)
- ADB’s Contribution to Urban Development in South Asia: Two-Decade Journey
  - Subject: Water, urban development
  - Type: Publication and documentation: flagship study
  - Department/Group: SARD
  - Funding: Administrative core budget (staff)
- South–South Learning
  - Subject: Knowledge management
  - Type: Publication and documentation: technical study
  - Department/Group: SARD
  - Funding: TA 7997

*Source: cr17357 - Appendix II. Indicative Assistance Pipeline (PDF).*

### Appendix IV. Indicative Knowledge Publications and Events

### Appendix IV. Indicative Knowledge Publications and Events

### Indicative knowledge publications and events (overview)
- Total number of publications = 9 (first table excerpt).
- Total number of events = 2 (first table excerpt).
- Table A4.2 — Additional Knowledge Publications and Events Delivered in 2017:
  - Total number of publications = 19.
  - (Multiple listed publications and technical studies delivered in 2017; departments involved include DER, SARD, ERCD, OGC, SDCC, and others; many items supported by TA numbers such as TA 7997, TA 8838, TA 9238, TA 7507, TA 8435, TA 8797, TA 6512, TA 7491, TA 9231.)
- Table A4.3 — Innovation, Advanced Technology, and Pilot Initiatives to be Implemented in 2018:
  - Total number of innovation, advanced technology, and pilot initiatives = 1.
  - Item: Use of high-level technology through waste-to-energy
    - Nature: Advanced technology
    - Project Number: 51077-002
    - Sector or Theme: Environment
    - Division: SAUW (Urban Development and Water Division, South Asia Department)

### Selected publications and thematic focus (from tables)
- Urban Health in South Asia
  - Subject: Health, urban development
  - Type: Publication and documentation
  - Department: SDCC (Health Sector Group)
  - Funding: Sector group, thematic group budget, administrative core budget (staff)
- Asian Development Bank and Maldives: Fact Sheet 2016
  - Subject: ADB administration and governance
  - Type: Publication and documentation
  - Department: DER, SARD
  - Funding: Administrative core budget (staff)
- ADB Economics Working Paper Series No. 507: Impacts of Sea Level Rise on Economic Growth in Developing Asia
  - Subject: Climate change
  - Type: Publication and documentation
  - Department: ERCD
  - Funding: Administrative core budget (staff)
- Key Indicators for Asia and the Pacific 2017
  - Type: Publication and documentation: flagship study
  - Department: ERCD
  - Funding: Administrative core budget (staff)
- Asian Economic Integration Report 2017
  - Type: Publication and documentation: flagship study
  - Department: ERCD
  - Funding: Administrative core budget (staff)
- Assessment of Power Sector Reforms in South Asia; Cross-border Power Generation, Transmission and Trading – A Way Forward for South Asia
  - Subject: Energy
  - Type: Publication and documentation
  - Department: SARD, SDCC
  - TA: TA 7997
- Road Map for National Single Window in Maldives; Risk Management in Maldives: Action Plan and Recommendations; Fast-Track Reform: Lessons from Maldives
  - Subjects: Trade facilitation, customs valuation, taxation
  - Department: SARD (SARC), SARD (SAPF)
  - TA: TA 7997

### Events (selected)
- Asia Clean Energy Forum 2018
  - Subject: Energy, environment, finance, regional cooperation and integration
  - Type: Flagship event
  - Department: SDCC (Energy Sector Group)
  - TA: TA 8953
- Asia Solar Energy Forum 12th Meeting
  - Subject: Capacity development, climate change, energy, environment, finance
  - Type: Flagship event
  - Department: SDCC (Energy Sector Group)
  - TA: TA 8953
- Regional Technical Evaluation and Training Workshop on International Comparison Program
  - Type: Capacity development event for DMCs
  - Department: ERCD
  - TA: TA 7507
- 2nd Conference on the Development of Supply and Use Tables (SUT) in Asia and the Pacific; Writeshop: Compendium of SUTs in Asia and the Pacific; Training on Time Series/Annual SUT Updating/Estimation
  - Type: Capacity development events for DMCs
  - Department: ERCD
  - TA: TA 8838
- SASEC Finance Ministers’ Meeting; SASEC Trade Facilitation and Transport Working Group Meeting; Maldives: National Consultation on Sanitary/Phytosanitary and Technical Barriers to Trade Diagnostic Study
  - Type: Event organization
  - Department: SARD
  - TA: TA 9231; TA 7491; TA 6512

### Statistical issues — data adequacy for surveillance (As of July 11, 2017)
- General assessment:
  - Macroeconomic statistics have improved with TA from STA and the Asian Development Bank (AsDB).
  - Data are broadly adequate for surveillance (Category B) but significant data gaps remain affecting balance of payments, government finance, and national accounts statistics.
- Real sector:
  - Annual and quarterly GDP estimates available with a considerable lag.
  - GDP estimates rebased to 2014; revised annual and quarterly GDP estimates from 2003 to 2016 will be released at the end of 2017.
  - CPI rebased to June 2012=100; weights based on the 2012 household income and expenditure survey.
  - Authorities plan independent estimates of GDP by expenditure and to compare with GDP by economic activity.
- Fiscal sector:
  - General government data reported for publication in the GFS Yearbook; latest published data are for 2014.
  - Monthly revenue and expenditure data available but reporting system is new and reliability needs improvement.
  - Data on external debt require reconciliation; operations of state enterprises are limited.
- Financial sector:
  - APD receives an electronic report on monetary statistics every two weeks covering balance sheets of the MMA and commercial banks.
  - Summary data published in MMA’s Monthly Statistics, QEB, and AR.
  - Integrated monetary database is operational to meet needs of MMA, STA, and APD.
  - MMA provides financial soundness indicators (FSIs) to STA quarterly; all core FSIs and two encouraged FSIs for deposit takers (capital to assets, large exposures to capital) are reported. MMA could improve reporting to include the remaining encouraged FSIs.
- External sector:
  - MMA compiles balance of payments data annually; coverage improved but still limited in some areas.
  - Estimation of travel credits should be improved; a new survey should capture the ongoing construction boom.
  - DI survey results yet to be fully exploited for IIP compilation and participation in the IMF`s Coordinated Direct Investment Survey (CDIS).
  - MMA is not reporting any IIP data to STA and has difficulty assembling consistent financial transactions and IIP.
  - Quarterly data on external debt and debt service are available for government and monetary authority; no reporting to the World Bank Quarterly External Debt Statistics database.
  - Official reserve assets reported every two weeks with a (variable) one-week lag.
  - High staff turnover is hindering progress in compilation and dissemination of IIP and External Debt data.

### Table of Common Indicators Required for Surveillance (As of Oct, 3, 2017) — selected entries
- Exchange Rates
  - Date of Latest Observation: Jul 2017
  - Date Received: Aug 2017
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of Latest Observation: Aug 2017
  - Date Received: Sep 2017
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- Reserve/Base Money; Broad Money; Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System; Interest Rates; Consumer Price Index
  - Date of Latest Observation: Aug 2017 (or Jul 2017 for CPI)
  - Date Received: Sep 2017
  - Frequency of Data: W (Reserve/Base Money, Broad Money, Central Bank Balance Sheet, Consolidated Banking Balance Sheet, Interest Rates); W for CPI noted as W in table
  - Frequency of Reporting: W
  - Frequency of Publication: M
- Revenue, Expenditure, Balance and Composition of Financing – General Government; Central Government; Stocks of Central Government and Central Government-Guaranteed Debt
  - Date of Latest Observation: 2014
  - Date Received: 11/30/2015
  - Frequency of Data: A
  - Frequency of Reporting: M
  - Frequency of Publication: M
- External Current Account Balance
  - Date of Latest Observation: 2016
  - Date Received: Jun 2017
  - Frequency of Data: A
  - Frequency of Reporting: M
  - Frequency of Publication: M
- GDP/GNP
  - Date of Latest Observation: 2015
  - Date Received: 01/18/2017
  - Frequency of Data: A
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Gross External Debt
  - Date of Latest Observation: 2014
  - Date Received: 10/30/2015
  - Frequency of Data: A
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Notes on frequencies: D = Daily; W = Weekly; M = Monthly; Q = Quarterly; A = Annually; I = Irregular; NA = Not Available.

### Debt Sustainability Analysis (DSA) — staff report highlights
- DSA updates the May 2016 DSA.
- Risk rating:
  - Maldives’ risk rating continues to be rated at “high risk of external debt distress” (based on assessment of public external debt and rebased GDP figures).
  - Maldives continues to maintain a heightened overall risk of debt distress.
- Fiscal and macro context:
  - Current government continuing massive scaling up of infrastructure investment to achieve sustainable and inclusive economic growth and diversify the economy; this scaling up carries risks.
  - Slowdown in tourism receipts in 2015 and 2016 and rise in recurrent and capital spending have weakened public finances.
  - Challenges: rising debt levels, greater reliance on external financing, tighter limits on capacity to repay.
- Fiscal measures and outlook:
  - In 2016, authorities eliminated electricity subsidies and significantly scaled down food subsidies (a saving of 2 percent of GDP).
  - Authorities continue to improve targeting of key welfare programs.
  - Revenue measures are expected to generate additional receipts of 2.9 and 1.8 percent of GDP in 2017 and 2018 by government estimates.
  - Staff baseline reflects these efforts only in part; fiscal policy slippages and shocks to tourism exports and capital expenditures remain key risks.
  - Stabilizing and reducing public debt ratios will require strengthening the medium-term fiscal framework to improve the external position and sustain confidence in fiscal sustainability.
- Institutional notes:
  - The IMF provided TA to the National Bureau of Statistics (NBS) on compiling 2014-benchmarked and rebased GDP estimates; this DSA is based on the results of the rebased GDP estimates, to be released in October 2017.
  - Maldives continues to be PRGT-eligible to date though it meets the PRGT income criterion by a large margin; short-term macroeconomic vulnerabilities and alignment with IDA practices are factors.

*Source: Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA), October 6, 2017; and Asian Development Bank (as indicated in the source content).*

### 1.      The Maldives is embarking on large infrastructure investment to ease structural constraints and

### 1.      The Maldives is embarking on large infrastructure investment to ease structural constraints and

### Overview
- The Maldives is undertaking large infrastructure investment to close gaps in communications, electricity and transportation, including expansion of international and regional airports, resorts, hotel and guest house developments, a road bridge connecting the airport to the capital, new housing developments, relocation and expansion of the sea port, and major regional hub development and land connectivity in the Greater Malé area.
- The investment surge is expected to increase tourism capacity and demand for ancillary services, support population resettlement, reduce government service costs, and ease congestion, but has added considerably to already elevated public debt and external financing risks.

### Public debt stock and composition
- Total public debt is estimated at about US$2.8 billion (65.7 percent of GDP) in 2016.
- Public debt definition: debt of the non-financial public sector comprising central government, including loans on-lent to State Owned Enterprises (SOEs), sovereign guarantees issued to SOEs and domestic payable arrears which have accumulated since 2012.
- Public debt is held mainly by domestic banks, pension funds, the Maldives Monetary Authority (MMA) and official multilateral and bilateral creditors.
- Private sector external debt data is estimated to be around US$0.6 billion but is subject to large errors and further revisions.
- Sovereign guarantees liabilities amount to US$240 million (5.6 percent of 2016 GDP).
- Recourse to direct monetization was banned under the Fiscal Responsibility Act (FRA), enacted in 2014.
- Public debt remains above the 60 percent limit specified in the Fiscal Responsibility Act (FRA).

### External debt and financing
- Total external disbursements are estimated to be US$1.4 billion over 2016-2021, including megaprojects noted above.
- Major external creditors include China, Saudi Arabia, Abu Dhabi and the OPEC Fund with lending at interest rates of 2 to 5 percent and maturities close to 20 years or longer.
- The government issued a sovereign bond of US$200 million in June 2017 at 7 percent interest and shorter maturity, contrasting with semi-concessional creditor terms.
- Between 2015 and June 2017 Maldives signed US$1,031 million (24.3 percent of 2016 GDP) in external loans on non-concessional terms including the sovereign bond.
- Sovereign guarantees: a 2017 guarantee scheme under which the government partly underwrites eligible loans at rates not exceeding 4 percent; estimated sovereign guarantees around 0.4 percent of GDP from the scheme.
- New guarantees assumed in scenarios amount to US$110 million (alternative scenario assumptions).

### Macroeconomic assumptions (baseline)
- The baseline scenario is built on current policies, including staff’s assessment of the 2017 Budget; staff’s baseline is more cautious on revenue estimates (e.g., SEZs, SOE income).
- Real GDP growth assumptions:
  - Growth expected to recover to 4.6 percent in 2017 and 4.7 percent in 2018.
  - Projected to average around 5.0 percent in the long term.
- Inflation:
  - CPI inflation projected to pick up in 2017 due to subsidy reforms and increased import duties.
  - Expected to stabilize around 2.5 percent in the medium- to long-term.
- Current account:
  - Current account deficit widened sharply to 19.6 percent of GDP in 2016.
  - Current account deficit stabilizes around 9.5 percent of GDP on average over 2022–2037 in the baseline.
- Fiscal balance:
  - Primary balance expected to deteriorate in 2017 before improving as capital spending winds down and new revenues materialize.
  - Primary fiscal balance (current estimates) in percent of GDP:
    - 2017: -5.8
    - 2018: -4.6
    - 2019: -3.3
    - 2020: -2.6
    - 2021: -1.9
    - 2022: -0.9
- Real GDP growth (previous vs current) presented:
  - Previous: 3.9 (2017), 4.6 (2018), 4.7 (2019), 4.8 (2020), 4.7 (2021), 4.7 (2022)
  - Current: 4.6 (2017), 4.7 (2018), 4.8 (2019), 5.0 (2020), 5.0 (2021), 5.0 (2022)
- Inflation (previous vs current) presented:
  - Previous: 2.5 (2017), 2.8 (2018), 3.0 (2019), 3.2 (2020), 3.2 (2021), 3.2 (2022)
  - Current: 2.0 (2017), 2.0 (2018), 2.0 (2019), 2.4 (2020), 2.5 (2021), 2.5 (2022)
- Current account balance (previous vs current) in percent of GDP:
  - Previous: -14.7 (2017), -17.3 (2018), -14.1 (2019), -10.9 (2020), -10.6 (2021), -10.4 (2022)
  - Current: -17.2 (2017), -17.0 (2018), -16.4 (2019), -14.3 (2020), -12.9 (2021), -10.3 (2022)
- Financing and domestic debt market:
  - Domestic auction system replaced mid-2014 by a ‘tap system’ with administered interest rates in a range of 3.5–4.6 percent across maturities 28 to 364 days.
  - Staff assumes domestic yields will tighten over the forecast horizon; authorities plan to lengthen maturity structure of domestic debt.

### Debt sustainability results (DSA)
- External debt sustainability:
  - Under the baseline, nominal PPG external debt rises to 51.3 percent of GDP over the medium term and falls slightly to 49.7 percent of GDP by 2037.
  - The PV of PPG external debt peaks at 25.6 percent of GDP over the medium term and falls to 20.8 percent by end-2037.
  - The PPG external debt service-to-revenue ratio spikes in 2022 due to bond redemption, remains below but extremely close to the threshold under the baseline and is vulnerable to exports, combination and depreciation shocks.
  - The external debt path is especially sensitive to an exports shock, highlighting tourism slowdown risk.
- Public debt sustainability:
  - PV of public debt rises from 61.3 percent of GDP in 2016, peaks at 67.7 percent in 2020, then falls to 62.9 percent of GDP by 2037.
  - Under the baseline, public debt is projected to decline starting in 2022, reaching around 69.8 percent of GDP by 2037 in an earlier statement (text contains both 62.9 percent by 2037 for PV of public debt and "around 69.8 percent of GDP by 2037" for public debt under baseline — both figures reported as presented in the source).
- Debt thresholds revised due to CPIA downgrade:
  - New thresholds for PV of PPG external debt indicators: 30 percent as ratio to GDP (down from 40); 100 percent as ratio to exports (down from 150); and 200 percent as ratio to revenue (down from 250).
  - Debt service indicator thresholds changed from 20 to 15 percent as ratio to exports, and from 20 to 18 percent as ratio to revenue.
- Sovereign ratings:
  - Moody’s: B2.
  - Fitch: B+.

### Alternative scenario: sovereign guarantees and contingent liabilities
- Scenario assumptions:
  - 2017 sovereign guarantee scheme: government partly underwrites eligible loans at rates not exceeding 4 percent; sovereign guarantees estimated at around 0.4 percent of GDP (portfolio growth-based estimate).
  - Alternative scenario assumes: all uncalled guarantees will be called and new guarantees of US$110 million will be issued and called.
  - Costing assumptions for private sector/SOE guarantee calls: (i) only 30 percent of all loans qualify; (ii) 30 percent probability of default on guaranteed loans; (iii) fiscal cost to government of 50 percent of default value.
- Assessment under alternative scenario:
  - PV of PPG external debt-to-GDP ratio and PV of public debt-to-GDP ratio are worse than the baseline.
  - PV of public debt-to-GDP ratio deteriorates by almost 10 percentage points of GDP under this scenario.
  - The scenario demonstrates substantial vulnerability from possible guarantee calls and strengthens the case for tightening fiscal policy and scrutinizing borrowing and guarantee plans.

### Policy recommendations and assessment
- The DSA highlights the need to:
  - Bring down debt ratios through additional fiscal consolidation measures.
  - Prioritize overall capital expenditures more tightly.
  - Improve public financial management practices.
  - Reduce risk in the debt portfolio (lengthen maturities, seek concessional terms).
  - Design guarantees to avoid unnecessarily exposing the government to fiscal risk and stringently monitor guarantees.
  - Strengthen practices and institutions to appraise and manage projects and implement them at an adequate pace.
- Authorities’ actions:
  - Implementing fiscal measures and project public debt on a downward path.
  - Approved a Medium-Term Debt Management Strategy 2018-20 aiming to increase the maturity of domestic debt and reduce refinancing risk; an annual borrowing plan needs to be developed to implement it.
  - Committed to seeking external loans on the most concessional terms possible and to request IDA Board approval for ceilings when non-concessional borrowing is necessary for high-return projects.

### Key statistics (as reported)
- Total public debt: US$2.8 billion (65.7 percent of GDP) in 2016.
- Private sector external debt (estimated): US$0.6 billion.
- External disbursements (2016-2021): US$1.4 billion.
- Sovereign bond issuance: US$200 million (June 2017) at 7 percent interest.
- External loans signed between 2015 and June 2017: US$1,031 million (24.3 percent of 2016 GDP).
- Sovereign guarantees liabilities: US$240 million (5.6 percent of 2016 GDP).
- CPIA three-year average (2014–16): 3.18 (down from 3.20 for 2013–15).
- Current account deficit: 19.6 percent of GDP in 2016.
- Projected long-term real GDP growth average: around 5.0 percent.
- Projected medium- to long-term inflation: around 2.5 percent.
- Primary fiscal balance (current baseline, percent of GDP): 2017 -5.8; 2018 -4.6; 2019 -3.3; 2020 -2.6; 2021 -1.9; 2022 -0.9.
- PV of PPG external debt (peaks and end period): peak 25.6 percent of GDP (medium term); 20.8 percent of GDP by 2037.
- Nominal PPG external debt: 51.3 percent of GDP (medium term peak); 49.7 percent of GDP by 2037.
- PV of public debt: 61.3 percent of GDP in 2016; peaks at 67.7 percent in 2020; 62.9 percent of GDP by 2037.
- Estimated arrears: around 2.5 percent of GDP as of end-2016.
- Sovereign credit ratings: Moody’s B2; Fitch B+.

*Source: IMF staff report content (as provided).*

### CONCLUSION

### CONCLUSION

### Risk assessment and macro-fiscal outlook
- Main policy challenge: balance a surge in infrastructure investment with continuing risks from high and rising public debt, the bond redemption in 2022, and the short maturity of domestic debt.
- GDP rebasing effect:
  - The GDP rebasing suggests the capacity to service the debt is higher than previously estimated.
  - The improvement in the external debt path below relevant thresholds is due entirely to the rebasing of GDP as opposed to an improvement in economic and policy fundamentals.
- Downside vulnerabilities and shocks:
  - A widening current account deficit, low international reserves, pipeline of guarantees, and rapid debt buildup continue to skew the risks to the downside.
  - The country is vulnerable to standard shocks, particularly a one-time depreciation and an exports shock.
  - Stress-test results: the most extreme stress tests on key external debt indicators are driven by an Exports shock in several panels and by a One-time depreciation shock in at least one panel.
- Debt distress assessment:
  - The public debt path is substantially above the prudential benchmark throughout the projection period, underscoring a heightened overall risk of debt distress.
  - Based on this, it is assessed that the external risk rating for the Maldives continues to be rated as “high” risk of external debt distress.

### Authorities’ views and policy actions
- Authorities’ perspective on debt and investment:
  - Authorities recognized that while the level of debt was high, it has been invested mainly in growth-enhancing infrastructure.
  - They pointed out that the IMF estimates do not fully capture the future growth impacts from the borrowing.
  - They expect significant economic benefits and faster economic growth from the infrastructure scale-up and improved connectivity in the Greater Malé region.
- Fiscal and financing policy measures:
  - In anticipation of impending future debt service, the government has established a Sovereign Development Fund aimed at helping pay maturing debt in the future and contingencies under sovereign guarantees.
  - Authorities noted that obtaining loans on concessional terms has become increasingly challenging.

### Stress tests, scenarios, and indicators (summary)
- Stress testing framework:
  - Figures report indicators of Public and Publicly Guaranteed external debt and public debt under baseline, historical scenario, and most extreme shock for 2017–2037.
  - The most extreme stress test is defined as the test that yields the highest ratio on or before 2027.
  - In figure panels b–e the most extreme shock corresponds to an Exports shock; in at least one panel it corresponds to a One-time depreciation shock.
- Key projection features highlighted in figures and tables:
  - Public and publicly guaranteed external debt and public-sector debt indicators are presented under alternative scenarios for 2017–2037, showing vulnerability across PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, and debt service-to-revenue metrics.
  - Public debt is noted to remain substantially above prudential benchmarks throughout the projection period.

*Source: cr17357 - CONCLUSION*

### 1.      The Maldives economy has undergone a remarkable transformation over the past

### 1.      The Maldives economy has undergone a remarkable transformation over the past

### Transformation, drivers, and infrastructure scale-up
- Per capita income rose from US $275 in 1980 to US $11,544 in 2015, driven by a dynamic high-end tourism sector.
- Authorities launched large infrastructure investment projects to:
  - Expand international and regional airports.
  - Develop major regional hubs and land connectivity in the greater Malé area.
  - Invest in harbors, sewage systems, and desalination plants.
- Objectives of projects:
  - Achieve high sustainable and inclusive growth.
  - Diversify the economy.
  - Consolidate population in a widely-dispersed island economy.
  - Close gaps in communications, electricity, and transportation.
  - Mitigate climate change impacts, protect inhabitants and physical infrastructure, and increase demand for tourism and ancillary services.
- Authorities accept temporary widening of fiscal and external deficits associated with the investment scale-up, viewing expansion as necessary to expand growth potential over the medium term.

### Fiscal policies and reforms
- Geographic and demographic fiscal challenge:
  - 1,192 small coral islands and a widely-dispersed population of over 341,000 across about 190 distant islands.
- Recent fiscal measures and outcomes:
  - 2016 budget included expenditure-reduction measures: continuation of the wage and hiring freeze introduced in 2015; initiatives to eliminate electricity subsidies and significantly scale down food subsidies.
  - Despite measures, the fiscal deficit widened in 2016 relative to the budget due to lower revenue, high infrastructure spending, and larger spending on the health insurance scheme.
  - 2017 budget actions: continued wage and hiring freeze; reduced operational cost and improved efficiency of key welfare programs, notably health care; new revenue measures including an Airport Development Fee, land sales to the public, and higher import duties on cigarettes, soft and energy drinks.
- Authorities’ fiscal strategy and priorities:
  - Agree that further fiscal consolidation is needed to restore fiscal sustainability.
  - Concerned about regressive nature of the General Sales Tax and do not favor increasing it.
  - Prefer fiscal adjustment focused on spending, including better oversight over State-Owned Enterprises (SOEs), and strengthening Public Financial Management (PFM).
- PFM and public sector reforms:
  - Steps taken: strengthened budget preparation, better commitment control and cash management.
  - Priority on arrear collection: plan to collect non-tax resort lease payments estimated at MVR 3.2 billion.
  - Establishing a Presidential Commission on state asset recovery in collaboration with the Auditor General’s office and the Anti-Corruption Commission of Maldives. (The Presidential Commission estimates that total missing state assets amount to MVR 13.5 billion.)
  - Civil Services Commission conducting human resources audits of line ministries; National Pay Commission reviewing pay and cadre structure to institutionalize a fair and structured compensation system.
  - Approved a Medium-Term Debt Management Strategy for 2018-20 aimed at increasing the maturity of domestic debt and anticipating and securing sufficient resources against refinancing risk.

### Public debt, DSA assessments, and sovereign guarantees
- Authorities’ position on debt:
  - Consider risks from public debt buildup to be moderate.
  - Emphasize that debt financed growth-enhancing infrastructure.
  - Note baseline macroeconomic assumptions under the updated Debt Sustainability Analysis (DSA) are more favorable in the near-term than previous DSA.
  - Disagree with staff’s assessment that the investment scale-up would add only 0.1 percent of GDP to GDP growth in 2018 and 2019, with no increase in the outer years; expect significant medium-term benefits and faster growth from infrastructure scale-up and improved connectivity in Greater Malé.
  - Argue the DSA framework should consider special circumstances of small states dependent on external financing to close infrastructure gaps.
  - View staff’s assessment that Maldives continues to be rated at high risk of external debt distress and maintains a heightened overall risk of debt distress as based on overly conservative assumptions, and worry such ratings may unsettle markets after the government issued its first international sovereign bond in June 2017.
- Sovereign guarantees and buffer mechanisms:
  - Do not share staff’s concern that sovereign guarantees may compound fiscal vulnerabilities.
  - Established the Sovereign Development Fund (SDF) targeted to reach U.S.$500 million in the medium term to help pay for maturing loan obligations and contingencies under sovereign guarantees.
  - Potential SDF funding sources: contributions from the Airport Development Fee, the green tax, dividends from SOEs and other non-tax sources.
  - In 2017, the Airport Development Fee has been fully earmarked to the SDF.

### Monetary and financial sector policies
- Exchange rate regime and reserves:
  - Authorities concur that the current peg to the U.S. dollar remains appropriate given the country’s small scale, high openness, dollarized nature, and volatile export revenue.
  - Peg has helped anchor inflation and provided a natural hedge for the tourism sector where income and imports are in U.S. dollars.
  - Strong and durable fiscal adjustment would better support the peg and help build foreign reserves.
  - MMA does not see the need for monetary policy tightening to support the peg in the absence of inflation and foreign exchange market pressures.
  - MMA increased foreign exchange sales to banks in 2016 and sells directly to the public; increased foreign exchange allocation to commercial banks and U.S. dollar sales to SOEs starting in 2017.
  - MMA stands ready to activate alternative monetary instruments based on open market operations if pressure on the peg emerges.
  - MMA believes months of imports may not be an appropriate reserve adequacy metric due to large temporary capital imports for infrastructure and a high structural import bill from tourism; encourages considering other reserve adequacy metrics.
- Monetary stance and credit:
  - MMA maintained an accommodative stance by keeping the minimum reserve requirement rate at 10 percent.
  - Effects: helped reduce borrowing costs, boost private credit, and lengthen maturities on sovereign bonds.
  - Despite easing, broad money growth declined sharply in recent months mainly due to the decline in non-financial public enterprise deposits.
  - Credit growth is robust, but private credit remains low compared to economies at similar income level.
  - MMA attributes balance of payments pressures to one-off external payments in 2016 and increased public infrastructure-related imports, not to accommodating monetary policy.
- Financial sector resilience and inclusiveness:
  - Banks’ capital position remains strong and asset quality has improved.
  - MMA introduced new stress testing methods and solicited international auditing companies to evaluate banks’ operational risks.
  - Financial inclusion measures: 2016 credit guarantee scheme to facilitate SMEs’ access to finance; credit information unit to collect and disseminate credit information.
  - AML measures: issued regulation on AML-related customer due diligence and increased resources for the independent Financial Intelligence Unit.

### Climate change and adaptation
- Climate risk:
  - According to the World Bank, rising sea levels could cause the entire country to be submerged before the end of the century as 80 percent of land is less than one meter above sea level.
- Policy framework and adaptation measures:
  - Authorities shared the Maldives Climate Change Policy Framework with staff in the 2016 Article IV Consultation.
  - Current adaptation investments include food and water security, infrastructure resilience, public health, coastal protection, fishing industry, waste management, and renewable energy.
  - Government promoting long voluntary resettlement to regional hubs and improving transport connectivity.
  - Authorities agree there is scope to integrate risk-reduction and disaster-response programs into the core budget and to carry out public investment planning and debt management frameworks to help address climate change.

### Conclusion and IMF engagement
- Authorities welcome open exchange with IMF staff and appreciate the Fund’s technical assistance and support from the Resident Representative Office based in Sri Lanka.
- Request consideration for employing a Maldivian national in the Resident Representative Office to provide dedicated local coverage of Maldives issues.
- Authorities welcome IMF’s increased focus on issues of relevance to small states under the leadership of Deputy Managing Director Zhang.

*Source: cr17357 - 1.      The Maldives economy has undergone a remarkable transformation over the past*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17357.pdf_