## Maldives — IMF staff report excerpt (content unit: 1mdvea2019002) ## Source details **Canonical URL:** [Maldives — IMF staff report excerpt (content unit: 1mdvea2019002)](https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1mdvea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1mdvea2019002.pdf.json) --- ### Growth and outlook - Real GDP growth: - 2018: 7.5 percent - 2019 (forecast): 6.5 percent - Medium-term projection 2020–23 (2019–2023 row): 6.0, 5.5, 5.5, 5.5 - Staff projects growth at 5.8 percent on average for 2019-23 (alternative statement in text). - Growth drivers: - Government infrastructure investment, tourism, and construction. - Ten new resorts opened in 2018; 20 more expected in 2019. - Inflation (CPI-Malé definition): - End-of-period: 2018: 0.5 percent; 2019 (forecast): 2.1 percent - Period average: 2018: 1.4 percent; 2019 (forecast): 1.5 percent - Other table: end-of-period 2018: 1.8 percent; 2017: 2.2 percent; projections 2020–23: 2.4, 2.5, 2.6, 2.6 ### External position and reserves - Current account and components (percent of GDP): - Current account: 2018: -23.9 percent; 2019 (forecast): -19.5 percent - Exports: 2018: 5.9 percent; 2019: 5.7 percent - Imports: 2018: -48.2 percent; 2019: -43.4 percent - Income (net): 2018: -7.7 percent; 2019: -9.8 percent - Current transfers: 2018: -9.5 percent; 2019: -9.2 percent - Tourism receipts (nonfactor services, net): 2018: 54.9 percent; 2019: 58.1 percent - Financing and capital flows: - Capital and financial account (including e&o): 2018: 27.1 percent of GDP; 2019: 16.4 percent - General government, net: 2018: 9.8 percent of GDP; 2019: 3.6 percent - Banks and other sectors, net: 2018: 0.7 percent of GDP; 2019: 2.8 percent - Gross international reserves (GIR): - End-2018: 754 (millions of US$; e.o.p.) - End-2019 (forecast): 576 (millions of US$; e.o.p.) - In months of GNFS imports: 2018: 2.4; 2019: 1.8 - Expanded series (Annex): 2016: 467; 2017: 586; 2018: 754; 2019: 576; 2020: 609; 2021: 725; 2022: 706; 2023: 913 - Reserve adequacy and vulnerabilities: - Staff assesses external sector substantially weaker than fundamentals imply. - CA-gap ~14.9 percent of GDP; EBA-lite suggests REER would need to depreciate by about 30 percent to close the CA-gap (elasticity -0.5). - Recommendation: target reserves of three months of import coverage given disaster risk and reliance on private external flows. ### Fiscal position and public debt - Central government finances (percent of GDP): - Revenue and grants: 2018: 26.5 percent; 2019 (forecast): 26.0 percent - Expenditure and net lending: 2018: 30.8 percent; 2019: 31.0 percent - Overall balance: 2018: -4.3 percent; 2019: -4.9 percent - Overall balance excl. grants: 2018: -4.8 percent; 2019: -5.6 percent - Financing: 2018: 4.3 percent; 2019: 4.9 percent - Foreign financing: 2018: 3.9 percent; 2019: 2.4 percent - Primary balance: 2018: -2.6 percent; 2019: -3.0 percent - Public and publicly guaranteed (PPG) debt: - 2018: 71.4 percent of GDP - 2019 (forecast): 76.8 percent of GDP - Medium-term path 2020–23: 80.7, 83.1, 81.5, 81.4 - Alternative projection in Annex IV (adjustment scenario) lowers PPG debt to 70.5 percent by 2023. - Fiscal outcome 2018: - Fiscal deficit (including grants): 4.3 percent of GDP; widened by 1.3 percent of GDP vs. 2017; exceeded budget target of 3 percent of GDP. - Current expenditures grew by 20 percent (equivalent to 2 percent of GDP); Aasandha spending increased by 0.6 percent of GDP; subsidy expenditures increased by 1 percent of GDP. - Capital spending was lower than budgeted. - Debt composition and recent developments: - Total PPG debt in 2018: around US$3.8 billion (~72 percent of GDP). - External PPG debt 2018: around US$1.9 billion (~35 percent of GDP); about 50 percent of external PPG debt owed to China; 43 percent of those China exposures guaranteed. - Domestic debt 2018: 37 percent of GDP; projected to rise to 45 percent by 2023 under medium-term projection. - Sovereign bond activity: US$250 million bond issued in 2017; sovereign bonds issued in 2017 and 2018 totaling US$350 million (6.6 percent of 2018 GDP). - Sovereign Development Fund (SDF) balances: US$124 million at end-February 2019; SDF intended to cover sovereign bond maturities (35 percent coverage noted). ### Key macro-financial developments and vulnerabilities - Credit and monetary indicators: - Broad money: 2018: 3.4 percent; 2019 (forecast): 8.6 percent - Domestic credit: 2018: 5.2 percent; 2019: 4.4 percent - Private sector credit averaged 11.8 percent over the past three years; private credit to GDP ratio: 28.7 percent. - Financial sector strengths and risks: - Banks: strong capital positions, high but volatile profitability, declining NPLs, nearly total provisioning for specific loan losses. - Currency risk limited due to foreign currency loans mainly to borrowers with foreign-currency income. - Risks: closing negative credit gap; banks are concentrated buyers of government securities amid rising global yields. - External financing in 2018: - External debt financing of the CAD: 10 percent of GDP in 2018, including a US$100 million sovereign bond privately placed with the United Arab Emirates and a US$250 million bond issued in 2017. - FDI financed private sector investment: 8.5 percent of GDP. - A 3-month, US$100 million RBI swap was availed in December. ### Executive Board assessment and staff recommendations - Board assessment: - Welcomed strong growth supported by tourism, commerce, and construction. - Noted high and growing public and external debt, moderate foreign reserves, and vulnerabilities to shocks. - Called for policies to reduce fiscal and external imbalances, build resilience (including natural disasters and climate change), and foster sustained and inclusive growth. - Fiscal policy recommendations: - Authorities’ commitment to fiscal consolidation welcomed. - Need combination of revenue and expenditure measures to achieve growth-friendly consolidation. - Introduce a personal income tax (PIT) as intended; strengthen tax administration. - Control current spending, prioritize investment spending, and continuously improve PFM and budget control. - Review public guarantees; strengthen oversight and institutional framework of SOE activities; strengthen debt management. - Monetary and external policy recommendations: - Tighten monetary policy stance to ensure compatibility with the exchange rate peg, help lower external imbalances and build reserves. - Consider moving to a basket exchange rate peg once operational prerequisites are met to increase resilience. - Increase TA to support Maldives Monetary Authority (MMA) modernization of monetary policy and FX operations. - Structural and governance recommendations: - Implement National Development Strategy (NDS) focusing on resilience and economic opportunities. - Strengthen rule of law, property rights, and regulatory environment to improve business climate and competitiveness. - Address supervisory data gaps and enhance financial inclusion. - Strengthen AML/CFT compliance and improve anti-corruption framework. ### Fiscal policy scenarios and adjustment package (Annex IV) - Baseline (select series, 2018–2023): - Real GDP growth (percent): 7.5 6.5 6.0 5.5 5.5 5.5 - Government revenue (percent of GDP): 26.0 25.4 25.4 25.3 25.3 25.4 - Fiscal balance (ex. grants, percent of GDP): -4.8 -5.6 -6.1 -5.7 -5.5 -5.0 - Primary balance (percent of GDP): -2.6 -3.0 -3.2 -2.6 -2.2 -1.8 - Current account balance (percent of GDP): -23.9 -19.5 -15.1 -13.4 -11.4 -9.8 - Public debt (percent of GDP): 71.4 76.8 80.7 83.1 81.5 81.4 - Alternative fiscal-adjustment scenario (deliver primary balance adjustment slightly over 3 percent of GDP by 2023): - Real GDP growth (percent): 7.5 6.5 6.5 5.2 5.3 5.4 - Government revenue (percent of GDP): 26.0 25.4 27.1 27.0 27.0 27.0 - Fiscal balance (ex. grants, percent of GDP): -4.8 -5.6 -3.8 -2.7 -2.2 -1.5 - Primary balance (percent of GDP): -2.6 -3.0 -0.8 0.3 0.8 1.4 - Current account balance (percent of GDP): -23.9 -19.5 -13.6 -10.7 -8.6 -6.8 - Public debt (percent of GDP): 71.4 76.8 78.6 78.2 73.6 70.5 - Adjustment measures (≈1½ percent of GDP revenue + 1½ percent of GDP spending): - Revenue measures: PIT introduction in 2020 (phased), increase G-GST from 6 to 7 percent, increase airport service charge from US$25 to US$50, user fee for Hulhumale bridge, moderate tax administration gains. - Spending measures: public service reform wage bill savings, subsidy reductions, Aasandha reforms, modest reduction in capital expenditures as percent of GDP, improved PIM. ### Risks (Annex II and text) - Risks tilted to the downside. - Domestic risks: - Slower CAD reduction if SOE investment tapering does not materialize and inadequate fiscal adjustment. - Elevated public debt limiting fiscal space for long-term challenges like climate change. - Higher credit growth increasing financial sector risks. - External risks: - Volatility in global oil prices. - Slower global growth due to trade tensions and policy uncertainty impacting travel and tourism. - Tighter financial conditions increasing borrowing costs. - Upside factors: - Stronger fiscal management, greater government spending efficiency, and improved investment laws. ### State-Owned Enterprises (Annex III) - SOEs active in housing, airport operations, banking, electricity, imports, fish export, air transport, ferry operations. - Many SOEs not profitable; continuous budgetary support; operational costs sometimes financed as capital injections. - Increased external borrowing by SOEs with large government guarantees created substantial fiscal risks. - Government three-pronged approach: - Improve SOE data reporting (PCB to publish annual and quarterly financial data for major SOEs). - Improve oversight and efficiency; implement 2016 PIMA recommendations. - Reassess SOE roles; consider divestiture and enhance private sector role under Privatization and Corporation Act of 2013. ### Exchange rate regime, FX controls, and MMA reforms - De jure arrangement: pegged exchange rate within horizontal bands; de facto stabilized exchange rate arrangement. - Since April 2011 float band 20 percent either side of Rf 12.85 per dollar; in practice virtually fixed at weaker end Rf 15.42 per dollar. - FX rationing to banks persists; FX rationing inconsistent with Article VIII; parallel market emerged. - Staff advises MMA to accept obligations of Article VIII as a measurable goal and not to seek approval of existing exchange restrictions/MCPs. - MMA Strategic Plan (2018–22) and TA focus: - Strengthen monetary policy operational framework, define interest rate corridor, reactivate OMOs when appropriate. - Develop functioning FX markets and a strategy for gradual de-dollarization and FX reserve accumulation. - Issue government securities via competitive bidding and lengthen debt maturity structure. - Reduce reliance on short-term swaps; build reserve buffers; normalize FX operations. ### Financial sector supervision, inclusion, and stability - Prudential actions and planned reforms: - Upgrading capital adequacy regulations for risk-weight calculations. - Plan to introduce liquidity regulation framework following Basel III in 2019. - Improve loan classification and provisioning rules to comply with IFRS by mid-2019. - Introduce crisis management and bank resolution framework; align lender of last resort policy. - Financial inclusion and infrastructure: - Payment system upgrades, financial literacy, NFIS formulation, Credit Information Bureau setup. - Plans to improve information frequency and quality. ### Data, technical assistance (TA), and surveillance (Annex VI) - TA providers: HQ, SARTTAC (Delhi), and coordinated country team. - TA priorities and support: - Fiscal: tax policy and administration, PIT introduction, MIRA capacity building. - Monetary and FX: support MMA Strategic Plan, governance, monetary and FX policy, de-dollarization, FX market development. - Financial sector: supervision, IFRS 9, internal audit, enterprise risk management. - Statistics: NA, CPI, BOP, GFS, move to GFSM 2014, NSDP publication. - Data adequacy: improved (Category B) but gaps remain in BOP, GFS, national accounts, IIP, and external debt reporting. ### Debt sustainability and risk assessment (DSA, Annexes and text) - Risk of external debt distress: High. - Overall risk of debt distress: High. - Composite Indicator (CI) score: 2.48 — “weak debt carrying capacity.” - PPG external debt-to-GDP: - 2018: around 35 percent - Projected to increase to 41 percent by 2021; decline to 33 percent by 2028. - Public sector debt: - 2018: ~72 percent of GDP - Projected to reach 83 percent of GDP in 2021 under current projections. - Debt service pressures: - Interest and amortization projected at nearly 5 percent of GDP per year over medium term; rise in 2022 to 9 percent of GDP due to US$250 million sovereign bond redemption. - SDF established; accumulated US$125 million as of end-2018; weekly revenue earmarking to support bond obligations. - Stress tests identify most extreme shocks: combination shock, exports shock, growth shock; gross financing needs and debt service indicators may breach thresholds under adverse scenarios. - Policy implication: ambitious fiscal adjustment, develop domestic debt market (longer tenors), be selective on externally-financed projects, seek concessional terms where possible. ### Selected indicator highlights (memorandum items and tourism) - GDP (in millions of rufiyaa): 2018: 82,101; 2019 (forecast): 89,158 - GDP (in millions of U.S. dollars): 2018: 5,328; 2019 (forecast): 5,789 - Tourism bednights (000'): 2018: 9,472; 2019 (forecast): 10,230 - Tourist arrivals (000'): 2018: 1,553; 2019 (forecast): 1,677 - Tourism bednights (% change): 2018: 10.2; 2019 (forecast): 8.0 - Tourist arrivals (% change): 2018: 12.0; 2019 (forecast): 8.0 - Dollarization ratio (FC deposits in percent of broad money): 2018: 48.8 *Source: Maldives — Staff Report for the 2019 Article IV Consultation (content unit: 1mdvea2019002).* ### 7.5 percent in 2018 and to remain strong at 6.5 percent in 2019, driven by government ### 7.5 percent in 2018 and to remain strong at 6.5 percent in 2019, driven by government ### Growth and outlook - Real GDP growth: - 2018: 7.5 percent - 2019 (forecast): 6.5 percent - Medium-term projection 2020–23: 6.0, 5.5, 5.5, 5.5 (2019–2023 row: 6.0 5.5 5.5 5.5) - Growth drivers: - Government infrastructure investment, tourism, and construction. - Ten new resorts opened in 2018. - Inflation: - Inflation (end-of-period): 2018: 0.5 percent; 2019 (forecast): 2.1 percent - Inflation (period average): 2018: 1.4 percent; 2019 (forecast): 1.5 percent - CPI-Malé definition noted. ### External position and reserves - Current account deficit and composition: - Current account: 2018: -23.9 percent of GDP; 2019 (forecast): -19.5 percent of GDP - Exports: 2018: 5.9 percent of GDP; 2019: 5.7 percent - Imports: 2018: -48.2 percent of GDP; 2019: -43.4 percent - Income (net): 2018: -7.7 percent of GDP; 2019: -9.8 percent - Current transfers: 2018: -9.5 percent of GDP; 2019: -9.2 percent - Tourism receipts (in nonfactor services, net): 2018: 54.9 percent of GDP; 2019: 58.1 percent - Financing and capital flows: - Capital and financial account (including e&o): 2018: 27.1 percent of GDP; 2019: 16.4 percent - General government, net: 2018: 9.8 percent of GDP; 2019: 3.6 percent - Banks and other sectors, net: 2018: 0.7 percent of GDP; 2019: 2.8 percent - Gross international reserves: - End-2018: 754 (in millions of US$; e.o.p.) - End-2019 (forecast): 576 (in millions of US$; e.o.p.) - In months of GNFS imports: 2018: 2.4; 2019: 1.8 ### Fiscal position and public debt - Central government finances (percent of GDP): - Revenue and grants: 2018: 26.5 percent; 2019 (forecast): 26.0 percent - Expenditure and net lending: 2018: 30.8 percent; 2019: 31.0 percent - Overall balance: 2018: -4.3 percent; 2019: -4.9 percent - Overall balance excl. grants: 2018: -4.8 percent; 2019: -5.6 percent - Financing: 2018: 4.3 percent; 2019: 4.9 percent - Foreign financing: 2018: 3.9 percent; 2019: 2.4 percent - Primary balance: 2018: -2.6 percent; 2019: -3.0 percent - Public and publicly guaranteed debt: - 2018: 71.4 percent of GDP - 2019 (forecast): 76.8 percent of GDP - Medium-term path 2020–23: 80.7, 83.1, 81.5, 81.4 (2020–2023) ### Key macro-financial developments and vulnerabilities - Credit and monetary indicators: - Broad money: 2018: 3.4 percent; 2019 (forecast): 8.6 percent - Domestic credit: 2018: 5.2 percent; 2019: 4.4 percent - Financial sector strengths and risks: - Banks: strong capital positions, high but volatile profitability, declining NPLs, nearly total provisioning for specific loan losses. - Currency risk limited because foreign currency loans are primarily to borrowers with foreign-currency income. - Risks: closing negative credit gap; banks concentrated as primary buyers of government securities amid rising global yields. - External financing in 2018: - External debt financing of the CAD amounted to 10 percent of GDP in 2018, including a US$100 million sovereign bond (privately placed with the United Arab Emirates) and a US$250 million bond issued in 2017. - Foreign direct investment (FDI) financed private sector investment: 8.5 percent of GDP. - A 3-month, US$100 million swap arrangement was availed in December from the Reserve Bank of India under SAARC. ### Executive Board and policy priorities - Board assessment: - Welcomed strong growth supported by tourism, commerce, and construction. - Noted high and growing public and external debt, moderate foreign reserves, and vulnerabilities to shocks. - Called for policies to reduce fiscal and external imbalances, build resilience to shocks (including natural disasters and climate change), and foster sustained and inclusive growth. - Fiscal policy recommendations: - Authorities’ commitment to fiscal consolidation welcomed. - Need for a combination of revenue and expenditure measures to achieve growth-friendly fiscal consolidation. - Authorities’ intention to introduce a personal income tax welcomed; emphasized strengthened tax administration. - Control current spending, prioritize investment spending, and continuously improve public financial management and budget control. - Review public guarantees and strengthen oversight and institutional framework of SOE activities; strengthen debt management. - Monetary and external policy recommendations: - Tighter monetary policy stance to ensure compatibility with the exchange rate peg and to help lower external imbalances and build reserves. - Consider moving to a basket exchange rate peg once operational prerequisites are met to increase resilience. - Increase technical assistance to support Maldives Monetary Authority modernization of monetary policy and foreign exchange operations framework. - Structural and governance reforms: - Implement National Development Strategy focusing on resilience and economic opportunities. - Strengthen rule of law, property rights, and the legal and regulatory environment to improve business climate and competitiveness. - Address supervisory data gaps and enhance financial inclusion. - Strengthen AML/CFT compliance and improve the anti-corruption framework. ### Selected indicator highlights (memorandum items and tourism) - GDP (in millions of rufiyaa): 2018: 82,101; 2019 (forecast): 89,158 - GDP (in millions of U.S. dollars): 2018: 5,328; 2019 (forecast): 5,789 - Tourism bednights (000'): 2018: 9,472; 2019 (forecast): 10,230 - Tourist arrivals (000'): 2018: 1,553; 2019 (forecast): 1,677 - Tourism bednights (% change): 2018: 10.2; 2019 (forecast): 8.0 - Tourist arrivals (% change): 2018: 12.0; 2019 (forecast): 8.0 - Dollarization ratio (FC deposits in percent of broad money): 2018: 48.8 *Source: Maldives — Staff Report for the 2019 Article IV Consultation.* ### 8. The fiscal deficit widened in 2018, driven mainly by increased current spending. The ### 1mdvea2019002 - 8. The fiscal deficit widened in 2018, driven mainly by increased current spending. ### Fiscal outcome in 2018 - The 2018 fiscal deficit (including grants) is estimated at 4.3 percent of GDP. - The deficit widened by 1.3 percent of GDP compared to 2017 and exceeded the budget target of 3 percent of GDP. - Current expenditures grew by 20 percent (equivalent to 2 percent of GDP), driven by: - rapid growth in social welfare contributions, subsidies, health, and student loan scheme spending; - spending on health insurance (Aasandha) increased by 0.6 percent of GDP, reflecting payment of pending bills and delays in implementing efficiency measures; - subsidy expenditures increased by 1 percent of GDP, due to higher fuel prices and the reversal of the 2016 food subsidy reforms. - Capital spending was lower than budgeted, partly offsetting the rise in current spending. - Total tax revenues were less than budgeted despite strong tourism-related tax collection because: - lower dividends from state-owned enterprises (SOEs); - shortfalls in the General Goods and Services Tax (G-GST) and the Business Profit Tax (BPT) as originally-planned revenue measures were not implemented. ### Debt and reserves - Maldives remains at a high risk of debt distress. - Total PPG debt rose to 72 percent of GDP in 2018, driven by an increase in external debt guarantees. - External PPG debt stood at 35 percent of GDP in 2018, of which 11 percent is guaranteed debt. - About 50 percent of external PPG debt is owed to China, of which 43 percent is guaranteed. - External PPG debt is expected to rise to 40 percent of GDP by 2020 and fall to 33 percent of GDP in 2028. - Domestic debt was 37 percent of GDP in 2018 and is projected to rise to 45 percent of GDP by 2023, putting total PPG debt at 82 percent of GDP under the medium-term projection. - Gross international reserves (GIR) increased from US$586 million at end-2017 to US$756 million (or 2.4 months of imports) at end-January 2019, boosted in part by the US$100 million RBI swap. - The SDF balances reached US$124 million at end-February 2019, covering 35 percent of the maturing sovereign bonds. ### Outlook and key projections - Real GDP growth is estimated at 7.5 percent in 2018 and projected at 6.5 percent in 2019. - Staff projects growth at 5.8 percent on average for 2019-23, inflation at 2.4 percent, and the CAD to gradually adjust to just below 10 percent of GDP in 2023. - The CAD is projected to improve to 19.5 percent of GDP in 2019 as major infrastructure projects start to unwind. - Interest and amortization payments are projected at nearly 5 percent of GDP per year over the medium term, with a noted rise in 2022 to 9 percent of GDP, coinciding with the redemption of the maiden US$250 million sovereign bond. - Under the Fund staff’s baseline scenario: - the fiscal deficit is projected to increase to almost 5 percent in 2019 (½ percent of GDP higher than the 2019 Budget); - staff expects current spending to exceed the budgeted level by about 1 percent of GDP in 2019; - capital spending is projected to increase by 0.5 percent of GDP in 2019; - in 2020 the deficit is projected to widen further under unchanged policies. - Under current policies, staff projects the deficit to decline below 5 percent of GDP only by 2022, putting the PPG debt at 82 percent of GDP. - In a fiscal-adjustment scenario (revenue measures and recurrent expenditure savings) delivering a primary balance adjustment of slightly over 3 percent of GDP by 2023: - the fiscal deficit would decline to 1.5 percent of GDP over the medium term; - the primary balance would move to a surplus of 1.4 percent of GDP; - the PPG debt-to-GDP ratio would fall to 70 percent of GDP; - the CAD would be 3 percent lower than in the baseline. ### Risks - Risks are tilted to the downside. - Domestic risks include: - slower than projected CAD reduction if SOE investment tapering does not materialize and inadequate fiscal adjustment; - elevated public debt limiting fiscal space for long-term challenges like climate change; - higher credit growth increasing financial sector risks. - External risks include: - volatility in global oil prices; - slower global growth due to trade tensions and policy uncertainty in key European economies impacting travel and tourism revenues; - tighter financial conditions increasing borrowing costs. - Upside factors include stronger fiscal management, greater government spending efficiency, and improved investment laws. ### Authorities’ views (selected) - Authorities noted 2018 growth acceleration reflects robust growth in tourism, wholesale, retail, and construction. - They highlighted that reserves adequacy measured in months of imports may not be the most suitable metric alone for the Maldives given large capital imports. - They attributed the 2018 fiscal deficit increase to lower-than-budgeted revenues (planned reductions in GST and BPT thresholds were not implemented) and increased spending pressures (election-related spending and settlement of arrears). - Authorities expect real GDP growth to remain high over the medium term and stressed safeguarding the SDF to meet maturing sovereign debt obligations. - Authorities plan to introduce the PIT in 2020 and to strengthen tax administration but are not in favor of raising the G-GST rate or ASC. ### Policy recommendations — Macroeconomic and fiscal - Macro stance: - Address external imbalances and contain fiscal pressure while safeguarding financial stability. - Coordinate monetary and fiscal policies to support external stability. - Strengthen governance in core fiscal and regulatory institutions. - Fiscal consolidation: - Adopt a fiscal consolidation strategy to reduce the deficit by over 3 percent of GDP to stabilize public debt and rebuild fiscal buffers. - Any new spending initiatives should ensure debt sustainability and avoid reliance on concessional financing that may impair sustainability. - Three-pronged strategy to create fiscal space: 1. Tax policy measures and strengthening tax administration to increase budget revenues (including planned PIT, possible options: raising the G-GST rate, increasing the ASC, introducing user fees such as the bridge toll). 2. Tight expenditure control supported by reforms of major spending programs to keep recurrent spending growth under control (better-targeted food and energy subsidies; reform Aasandha in 2020; rationalize the public-sector wage bill). 3. Continued improvement in public financial management (PFM) and budget control to increase efficiency of public service delivery. - Strengthen tax administration: - Further capacity building in risk management and international taxation for MIRA and a tax administration diagnostic assessment is recommended. - Public investment and SOE oversight: - Improve project appraisal, selection, and implementation capacity (IMF TA to MNPI on project appraisal guidelines). - Limit public guarantees and improve oversight and governance of SOEs to reduce contingent liability risks. - Monetary and exchange rate management: - Tighten the monetary policy stance to ensure compatibility with the exchange rate peg. - Monitor private credit expansion and excess liquidity; maintain reserves consistent with the fixed exchange rate. - Reduce reliance on short-term currency swaps and build reserve buffers; support de-dollarization and strengthen FX market operations. *Source: IMF staff report content provided.* ### 31. The MMA has maintained tight controls on the availability and use of foreign ### 1mdvea2019002 - 31. The MMA has maintained tight controls on the availability and use of foreign ### Exchange rate regime, FX controls, and FX market functioning - The MMA has maintained tight controls on the availability and use of foreign exchange (FX). - FX rationing to banks, despite some recent easing, involves measures inconsistent with Article VIII of the IMF Articles of Agreement. - The FX shortage has impacted banks’ FX intermediation and led to the emergence of the parallel market. - Staff does not recommend approval of existing exchange rate restrictions and multiple currency practices (MCPs) and advises the MMA to accept the obligations of Article VIII as a measurable goal of its Strategic Plan. - Staff sees merit in shifting the exchange rate target to a composite basket peg from the current peg to the US dollar to increase resilience to exogenous shocks; further technical work is needed on the design and composition of a basket and a careful communication policy strategy will be required. (Footnote: In calibrating the basket, consider effects on raising the Rufiyaa cost of debt repayments and on agents’ (unhedged) balance sheets.) ### Monetary policy framework and Strategic Plan implementation - Authorities are implementing a broad range of reforms to monetary and exchange rate policies. - The Fund supports the implementation of the MMA’s Strategic Plan through a multi-year TA program aiming to: - (i) strengthen the monetary policy and operational framework, including defining an interest rate corridor and directing interbank interest rates inside it, through re-activating open market operations (OMOs) at an appropriate time; - (ii) develop functioning FX markets; - (iii) review the current exchange rate regime to support resilience and implement a strategy for partial and gradual de-dollarization and FX reserve accumulation; and - (iv) issue government securities based on competitive bidding and lengthen the maturity structure of public debt to reduce rollover risks. - A sustained MMA strategy to build reserves aims at normalizing FX operations, redirecting FX receipts from the parallel market, and reviewing FX allocation to SOEs, beyond relying on currency swaps for emergency liquidity assistance. ### External sector position, reserves, and current account adjustment - The medium-term current account deficit (CAD) adjustment under the baseline is subject to large risks, particularly if waning SOE investment fails to materialize. - The current exchange rate peg has been shored up by sustained exchange rate restrictions. - Low reserves: the authorities’ measure of freely usable reserves covers only one month of imports. - Staff assesses the external sector position to be substantially weaker than suggested by medium-term fundamentals and desirable policies (Annex V). - The CAD was substantially weaker than the norm in 2018 by around 15 percent of GDP (or an exchange rate more appreciated from its equilibrium by around 30 percent). - The CA-gap is likely to remain wide under high oil prices and infrastructure spending, but completion of large infrastructure projects and structural reforms would help mostly close the CA-gap over the medium term. - If envisioned adjustment mechanisms do not materialize, risks to external stability would increase, calling for either additional fiscal adjustment (such as in staff’s proposed fiscal adjustment scenario) or an adjustment in the exchange rate level. ### Financial stability, credit, and inclusion - Current credit growth should not raise concerns about financial sector vulnerability, but staff recommends continued vigilance as the credit gap has closed recently. - Credit to the private sector has averaged 11.8 percent over the past three years, bringing Maldives private sector credit to GDP ratio to 28.7 percent. - Following prudential guidelines, bank lending is not highly concentrated, NPLs are low, and banks require large collateral with sufficient down payment. - Staff recommends ratcheting up monitoring and specific sector-related prudential measures if sharp increases in housing loans and exposure of pension savings for some households occur. - Authorities have tightened macroprudential tools, including upgrading capital adequacy regulations for risk-weight calculations, planning the introduction of the liquidity regulation framework following Basel III in 2019, and improving banks’ loan classification and provisioning rules to comply with the International Financial Reporting Standards by mid-2019. - Staff encourages addressing supervision data gaps and introducing a comprehensive crisis management framework by operationalizing a bank resolution framework and aligning the MMA’s lender of last resort policy. - The authorities plan to amend FX regulations in 2020, with stricter requirements for licensed exchange bureaus. - Progress in financial inclusion: upgrade of the payment system, financial literacy, formulation of the NFIS, setup of the Credit Information Bureau, and plans to improve information frequency and quality. ### Growth, diversification, and structural policies - The new government’s National Development Strategy (NDS) aims for time-bound, multi-year sectoral plans linked to the budget to prioritize resource allocations and increase competitiveness. - Diversification priorities include agriculture linked to tourism, investment in fisheries to increase export value added, support for SMEs, promotion of gender equality in SME participation, targeted social protection and housing affordability programs, improved transportation links and women’s safety, improved energy reliability across atolls, skills development via education and technical and vocational training, adoption of financial technology, and fiscal policies shifting tax policies toward more progressive revenue sources. - Staff endorses MED efforts to align foreign investment legal framework with international best practices and to have a one-stop-shop for investors in 2020. ### Data, TA, and surveillance - Timely and reliable data are a priority: more frequent publication of fiscal and debt outturns and implementation of the enhanced General Dissemination System via a National Summary Data Page. - Scope for improving national accounts (NA), CPI, external accounts, and government finance statistics (GFS), including transitioning to GFSM 2014, supported by IMF TA. - Surveillance agenda, supported by extensive TA, will deepen monetary and exchange rate analysis and reforms, strengthen PFM, support tax policy analysis and modernize tax administration, and integrate surveillance with TA (Annex VI). ### Governance, anti-corruption, and AML/CFT - Steps to strengthen anti-corruption measures are within the government’s strategic priorities. Staff supports enhancing the budgetary and operational independence of the Anti-Corruption Commission (ACC) and its investigative powers. - Significant governance vulnerabilities exist in fiscal governance, the regulatory framework, the rule of law, and Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). - Staff emphasizes preventing proceeds of corruption from entering the financial sector, confiscating such proceeds, criminalizing acts of corruption in line with the United Nations Convention Against Corruption (UNCAC), and facilitating international cooperation against corrupt officials and their assets. - Amendment of the AML Act is a priority to align the revised Act with the Financial Action Task Force (FATF) 2012 Standard. ### Staff appraisal and principal recommendations - Economic outlook and risks: Growth has been strong but is expected to moderate over the medium term; headline inflation is contained. Significant downside risks include lack of fiscal adjustment leaving public debt high and buffers low, contingent liabilities from SOE external borrowing guaranteed by the government, and external risks from tighter global financial conditions and weaker global growth hurting tourism. - Debt sustainability: The risk of external and overall debt distress is high in the Maldives. Staff recommends fiscal consolidation to put public debt on a downward path, developing the domestic debt market to allow longer tenors, and ensuring selectivity about externally-financed projects. - External imbalances: The external position is substantially weaker than levels consistent with fundamentals and desirable policies; international reserves remain at low levels with limited resilience. Urgent action is called for to sustain macro stability. - Fiscal policy recommendation: A balanced fiscal adjustment relying on revenue measures and tighter current spending control to reduce fiscal deficits and put the debt-to-GDP ratio on a clear downward path; safeguard fiscal sustainability, create fiscal space for productive investment and shocks, and support external stability. Complementary measures include continued PFM reforms and proper management of contingent liabilities, limiting sovereign guarantees, and tackling SOE-related budgetary pressures. - Macro-financial policy recommendation: Maintain vigilance despite broadly appropriate financial sector oversight and welcome steps already taken to safeguard financial stability. - Monetary and exchange rate policy recommendation: A tighter monetary setting is called for; together with fiscal consolidation, it would contribute to narrowing the CAD and preserving foreign reserves. Staff supports a well-sequenced implementation of the 2018-2022 Strategic Plan, supported by Fund TA, and sees merit in eventually shifting the exchange rate target to a composite basket peg from the current US dollar peg to increase resilience to exogenous shocks. *IMF staff report excerpt.* ### 55. Structural reforms. To enhance productivity growth, the authorities should accelerate ### 1mdvea2019002 - 55. Structural reforms. To enhance productivity growth, the authorities should accelerate ### Structural reforms: objectives and priorities - Objective: enhance productivity growth by accelerating implementation of reforms aimed at enhancing the role of private sector, diversifying the economy, boosting competitiveness while supporting inclusive growth, including by exploring options for small business finance. - Priorities: - enhancing transportation links - addressing skills gaps - better targeting social protection policies - strengthening the legal and regulatory environment to improve the business climate, encourage investment, and reduce informality ### Governance and corruption: fiscal governance and institutions - Fiscal governance measures recommended: - modernizing revenue administration - PFM and procurement reforms focused on increasing spending efficiency, improving transparency, and reducing opportunities for corruption - Broader institutional reforms recommended: - improving the regulatory environment - strengthening the rule of law and property rights to improve private sector efficiency through higher investment - Anti-corruption and AML/CFT: - renewed momentum on tackling corruption is commendable but further advances are needed to improve the anti-corruption framework and institutions and strengthen AML/CFT compliance ### Timing of consultations - It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. ### Key macroeconomic and sectoral highlights (selected figures from source) - Tourism and growth: - Tourism bednights (000'): 7,771 (2016); 8,596 (2017); 9,472 (2018); 10,230 (2019); 11,048 (2020); 11,932 (2021); 12,887 (2022); 13,917 (2023) - Tourist arrivals (000'): 1,286 (2016); 1,386 (2017); 1,553 (2018); 1,677 (2019); 1,811 (2020); 1,956 (2021); 2,113 (2022); 2,282 (2023) - Tourism receipts (in nonfactor services, net; percent of GDP): 56.9 (2016); 56.4 (2017); 54.9 (2018); 58.1 (2019); 59.2 (2020); 60.6 (2021); 62.0 (2022); 57.4 (2023) - External sector and reserves: - Current account (percent of GDP): -23.2 (2016); -21.9 (2017); -23.9 (2018); -19.5 (2019); -15.1 (2020); -13.4 (2021); -11.4 (2022); -9.8 (2023) - Gross international reserves (in millions of US$; e.o.p.): 467 (2016); 586 (2017); 754 (2018); 576 (2019); 609 (2020); 725 (2021); 706 (2022); 913 (2023) - In months of GNFS imports: 1.8 (2016); 2.0 (2017); 2.4 (2018); 1.8 (2019); 1.9 (2020); 2.1 (2021); 1.9 (2022); 2.4 (2023) - Fiscal indicators (central government, percent of GDP): - Total revenue and grants: 27.3 (2016); 27.1 (2017); 26.5 (2018); 25.9 (2019); 26.0 (2020); 26.0 (2021); 25.8 (2022); 25.8 (2023) - Expenditure and net lending: 36.6 (2016); 30.1 (2017); 30.8 (2018); 31.0 (2019); 31.5 (2020); 31.0 (2021); 30.7 (2022); 30.4 (2023) - Overall balance: -9.3 (2016); -3.0 (2017); -4.3 (2018); -4.9 (2019); -5.5 (2020); -5.2 (2021); -4.9 (2022); -4.6 (2023) - Public and publicly guaranteed debt (percent of GDP): 59.4 (2016); 61.6 (2017); 71.4 (2018); 76.8 (2019); 80.7 (2020); 83.1 (2021); 81.5 (2022); 81.4 (2023) - Real sector and prices: - Real GDP (annual percent change): 7.3 (2016); 6.9 (2017); 7.5 (2018); 6.5 (2019); 6.0 (2020); 5.5 (2021); 5.5 (2022); 5.5 (2023) - Inflation (end-of-period, CPI-Male definition): 1.8 (2016); 2.2 (2017); 0.5 (2018); 2.1 (2019); 2.4 (2020); 2.5 (2021); 2.6 (2022); 2.6 (2023) *International Monetary Fund — Maldives country report excerpt (content unit: 1mdvea2019002).* ### Annex I. 2017 Article IV Recommendations and ### Annex I. 2017 Article IV Recommendations and Related Policy Actions ### Fiscal Policy - Recommendation: Growth-friendly fiscal adjustment based on revenue measures and spending containment to keep the primary deficit at 4.4 percent of GDP in 2017 and achieve primary surplus by 2020, with public debt at 60 percent of GDP by 2022. - Related policy actions and outcomes: - Primary deficit in 2017 fell to 1.5 percent of GDP, reflecting lower current and capital expenditure. - No revenue measures were implemented and the spending cutback was partly reversed in 2018, with the overall deficit rising again and primary deficit projected at 3 percent of GDP deficit in 2020. - Need to strengthen PFM, have realistic budget envelope and clear sustainability anchors and fiscal strategy. - Progress: Significant number of the 2016 PIMA recommendations implemented. The new Ministry of National Planning and Infrastructure is aiming to further improve public investment management. ### Monetary and Exchange Rate Policy - Recommendation: Tighten monetary policy through gradual increase in MRR and in remuneration rate on rufiyaa deposits to mitigate pressures on the peg. Re-start the market-based auctioning of liquidity. - Related policy actions and outcomes: - No changes have been made to monetary policy stance. The MMA sees the stance as appropriate, with low inflation, absence of FX market pressure and relatively moderate credit growth. - As part of its 2018-22 Strategic Plan, the MMA is modernizing monetary policy framework, including the re-introduction of open market operations to manage liquidity. - Recommendation: Gradually move towards an import-weighted currency composite to support the buildup of reserves. - With IMF TA support, the authorities are reviewing the current exchange rate regime in order to maintain exchange rate stability. - Recommendation: Develop a market-based yield curve for government securities and encourage the development of a secondary market. - No progress achieved thus far. Implementation of the MMA Strategic Plan should create conditions for progress. ### Financial Stability and Structural Reforms - Recommendation: Carefully monitor rapid private credit growth to housing and construction, with the support of prudential measures on housing. - Outcome: Credit growth is not raising concerns about financial sector vulnerability and following MMA prudential guidelines, bank lending has not been concentrated in specific sectors. - Recommendation: Continue supporting financial inclusion and rationalize the SME credit program to address fiscal risks. - Outcome: Further progress in improving financial inclusion has been achieved, following the upgrade of the payment system and financial literacy improvement. National Financial Inclusion Strategy has been formulated. ### Climate Change and Data - Recommendation: Integrate risk-reduction and disaster-response programs into the core budget. - Outcome: Authorities is considering participating in the Climate Change Assessment Program that can help integrate climate change impact and policy responses in the budget and the macro framework. - Recommendation: Improve data collection. - Outcome: With the help of IMF TA, several initiatives have improved data availability in national accounts and government statistics including GFSM 2014 reporting, improved CPI, PPI, and GSP statistics. *Source: Annex I. 2017 Article IV Recommendations and Related Policy Actions* --- ### Annex II. Risk Assessment Matrix (RAM) — key risks, impacts, and recommended policy actions - Note on likelihood scale: “L” (low) = probability below 10 percent; “M” (medium) = probability between 10 percent and 30 percent; “H” (high) = probability of 30 percent or more. - Failure to reduce fiscal deficits, continued debt accumulation and reserve drawdown - Location of source: Domestic - Relative Likelihood: M - Time Horizon: ST, MT - Expected Impact: M – H - Main impacts and recommended policy actions: - High deficit and increasing debt would call into question fiscal sustainability. - Recommendation: Moderate growth-friendly fiscal adjustment to bring the fiscal deficit and public debt to GDP ratio down over the medium term. Fiscal adjustment should also contribute to faster current account deficit reduction. - Sharp tightening of global financial conditions - Location of source: External - Relative Likelihood: M - Time Horizon: ST - Expected Impact: M – H - Main impacts and recommended policy actions: - Higher cost of financing, weaker balance of payments and possible depreciation pressures, weaker consumption. - Recommendation: Tighten fiscal policy while protecting pro-growth and pro-poor spending. Tighten monetary policy to support the exchange rate peg and protect the foreign reserves. - Rising protectionism and retreat from multilateralism - Location of source: External - Relative Likelihood: H - Time Horizon: ST, MT - Expected Impact: M - Main impacts and recommended policy actions: - Slower export growth and tourism and FDI inflows, leading to weaker current account balance and lower growth potential. - Recommendation: Accelerate productivity-enhancing structural reforms and diversification of the economy, reduce barriers to trade and inward FDIs. - Slowdown in growth in China and Europe - Location of source: External - Relative Likelihood: M- H - Time Horizon: ST, MT - Expected Impact: M – H - Main impacts and recommended policy actions: - Weaker tourism revenues and adverse impact on tax revenues and growth. - Recommendation: Promote diversification of tourism and the economy more generally. - Improved efficiency of public investment - Location of source: Domestic - Relative Likelihood: M - Time Horizon: MT, LT - Expected Impact: M - Main impacts and recommended policy actions: - According to PIMA assessment, Maldives is lagging in public investment efficiency due to problems with project selection, implementation and assessment. - Recommendation: Progress in improving public investment efficiency could provide a boost to growth in the medium term. *Source: Annex II. Risk Assessment Matrix* --- ### Annex III. State-Owned Enterprises (SOEs) - Role and scope: - SOEs (full or partial Government of Maldives ownership) are active in housing development, airport operations, banking, electricity generation and distribution, imports of goods, export of fish, air transport, and operation of the ferry system. - Geographic justification: archipelago of dispersed islands with high per capita costs of delivering public services. - Financial performance and reform history: - Many SOEs have not generated profits, requiring continuous budgetary support. - Early 2010s reform plan categorized enterprises: (i) privatize; (ii) close; (iii) restructure and retain. Only one SOE (Dhiraagu Telecom Company) was privatized in 2011; subsequent privatization efforts were abandoned. - Current challenges and fiscal risks: - SOE inefficiencies have placed a significant burden on limited budgetary resources; financing of operational costs such as wages often disguised as capital injections. - Increased enterprise external borrowing with large government guarantees has created substantial fiscal risks. - Government’s three-pronged approach to improve SOE outcomes: - (1) Improve data reporting on SOE activities (public investment undertaken, external borrowing, debt repayment). The Privatization and Corporation Board (PCB) at MOF seeks to improve monitoring by publishing annual and quarter financial data for major SOEs. - (2) Improve oversight and efficiency of SOEs. The 2016 PIMA report provided key recommendations, including strengthening oversight of public investment undertaken by SOEs. - (3) Reassess the role of SOEs with possible divesture of some and enhancing the private sector role, based on the Privatization and Corporation Act of 2013 framework for SOE privatization. - Charted data point (from figure): PPG External Debt (in millions of USD) shows Direct and Guaranteed components for years 2009–2018 (visual source: Data from authorities). *Source: Annex III. State-Owned Enterprises* --- ### Annex IV. Fiscal Adjustment Scenario — baseline vs. alternative adjustment - Context: - Under staff’s baseline fiscal projections, the fiscal deficit declines only moderately to around 5 percent of GDP in the medium term, and the public and publicly guaranteed (PPG) debt-to-GDP ratio remains above 80 percent of GDP. - Staff recommends a fiscal adjustment scenario to reduce the deficit and put the debt ratio on a declining path while preserving productive infrastructure investment. - Adjustment scenario outcomes (summary): - Fiscal deficit declines from a projected 5.6 percent of GDP in 2018 to 1.5 percent of GDP by 2023. - Primary balance reaches a 1.4 percent of GDP surplus by 2023. - PPG debt declines from 77 percent of GDP projected in 2019 to 70 percent of GDP in 2023. - Adjustment measures: - Revenue measures (around 1½ percent of GDP): - Introduction of the PIT in 2020 (full revenue impact phased in over two years). - Increase in the G-GST rate from 6 to 7 percent. - Increase in the airport service charge from US$25 to US$50 per traveler. - Introduction of a user fee for the new Hulhumale bridge. - Assumes moderate gains from improved tax administration. - Spending measures (1½ percent of GDP): - Public service reform resulting in wage bill savings. - Reduction of subsidies. - Continued reform of the health insurance system (Aasandha) resulting in lower government spending on healthcare. - Modest reduction in capital expenditures as percent of GDP, though capital spending continues to grow moderately in nominal terms. - Reform of public investment management expected to increase investment efficiency and boost productivity. - Impact on current account: - Compared to baseline, the adjustment scenario produces an improvement of the current account balance by about 3 percent of GDP. - Table 1. Baseline and Adjustment Scenarios (select series; values preserved exactly) - Real GDP growth (percent): Baseline 2018–2023: 7.5 6.5 6.0 5.5 5.5 5.5 ; Alternative 2018–2023: 7.5 6.5 6.5 5.2 5.3 5.4 - Government revenue (percent of GDP): Baseline 2018–2023: 26.0 25.4 25.4 25.3 25.3 25.4 ; Alternative 2018–2023: 26.0 25.4 27.1 27.0 27.0 27.0 - Fiscal balance (ex. grants, percent of GDP): Baseline 2018–2023: -4.8 -5.6 -6.1 -5.7 -5.5 -5.0 ; Alternative 2018–2023: -4.8 -5.6 -3.8 -2.7 -2.2 -1.5 - Primary balance (percent of GDP): Baseline 2018–2023: -2.6 -3.0 -3.2 -2.6 -2.2 -1.8 ; Alternative 2018–2023: -2.6 -3.0 -0.8 0.3 0.8 1.4 - Current account balance (percent of GDP): Baseline 2018–2023: -23.9 -19.5 -15.1 -13.4 -11.4 -9.8 ; Alternative 2018–2023: -23.9 -19.5 -13.6 -10.7 -8.6 -6.8 - Public debt (percent of GDP): Baseline 2018–2023: 71.4 76.8 80.7 83.1 81.5 81.4 ; Alternative 2018–2023: 71.4 76.8 78.6 78.2 73.6 70.5 *Source: Annex IV. Fiscal Adjustment Scenario — Table 1 (Staff calculation)* --- ### Annex V. External Sector Assessment — key findings and metrics - Overall assessment: - The external position in the Maldives is substantially weaker than fundamentals suggest. Key drivers: elevated current account deficit (CAD), an appreciating real effective exchange rate (REER), and low reserve buffers. - Staff supports a gradual move to a currency basket peg. - Recent developments and vulnerabilities: - The external position deteriorated since the 2017 Article IV as authorities ramped up infrastructure investment. - CAD estimated at 24 percent of GDP in 2018. - The deficit is increasingly financed by external debt; PPG external debt increased by 10 percent of GDP in 2018 and is projected to rise to 40 percent of GDP before moderating (DSA Appendix). - The average REER in 2018 was about 15 percent more appreciated than the average during 2011-12. - EBA-lite model results and implications: - CA approach: - Cyclically-adjusted CA estimated at -23.2 percent of GDP in 2018. - Multilaterally consistent cyclically-adjusted CA-norm of -8.3 percent of GDP. - CA-gap of -14.9 percent of GDP. - Elasticity of the trade balance with respect to changes in the REER estimated at -0.5, indicating the REER would need to depreciate by about 30 percent to close the CA-gap. - Policy gap is -2.7 percentage points of the CA-gap with the bulk contribution from the public health expenditure variable. - Policy gap components and values (as presented): - Policy gap -2.70% - Fiscal Policy -0.26% - Public Health Expenditure -3.51% - Change in Reserves -0.05% - Private Credit Level 0.21% - Private Credit Growth 0.26% - Capital Control 0.65% - CA-Actual -23.9% - Cyclical Contributions (from model) -0.7% - Cyclically adjusted CA -23.2% - CA-Norm -9.5% - Cyclically adjusted CA Norm -8.8% - Multilaterally Consistent Cyclically adjusted CA Norm -8.3% - CA-Gap -14.9% - of/which Policy gap -2.70% - Elasticity -0.50 - CA-Fitted -12.2% - Residual -0.12 - Natural Disasters and Conflicts 0.0% - Index REER approach: - REER gap estimated at 22.6 percent. - Ln(REER) Actual 4.66 - Ln(REER) Fitted 4.41 - Ln(REER) Norm 4.43 - Residual 0.25 - REER Gap 22.6% - Policy Gap -2% - Natural Disasters and Conflicts -0.1% - Reserves and reserve adequacy: - Gross international reserves estimated at 2.4 months of imports in 2018 and remain below suggested norms. - Applying the “Assessing Reserve Adequacy” (ARA) tool for credit-constrained economies with fixed exchange rate regimes indicates an adequate level of reserves ranging from 1-to-6 months of imports depending on the cost used. - The commonly used cost of holding reserves (6.2 percent) suggests reserves covering only one month of imports is adequate, reflecting high exports and FDI. - Recommendation: Given susceptibility to natural disasters and increasing reliance on private external flows to finance the CAD, a target for reserves of three months of import coverage is recommended. - Structural and competitiveness issues: - Concerns about competitiveness go beyond REER level. Weaknesses in regulatory framework, including appeal procedures and trade facilitation, hinder foreign and domestic investment. - Recommendation: Implement structural reforms to improve competitiveness, build reserve buffers, and modernize the exchange rate framework. The unwinding of large infrastructure projects will help readjust the CAD, but must be complemented by these reforms. *Source: Annex V. External Sector Assessment* ### Annex VI. Technical Assistance and Surveillance ### Annex VI. Technical Assistance and Surveillance ### TA provision and integration with surveillance - The Maldives has received a significant amount of Technical Assistance (TA), traditionally from headquarters, and recently from the South Asian Regional Technical Assistance and Training Center (SARTTAC), in Delhi. - The country team has been coordinating closely with the HQ and SARTTAC TA teams to ensure TA closely matches policy priorities identified by Fund surveillance. - Findings and recommendations of TA missions have played an integral role in Fund surveillance documents, shaping final policy recommendations. - TA-surveillance integration helps focus general policy recommendations (for example, "increase tax revenues") into specific suggestions (for example, what taxes to introduce and how to design the tax parameters). ### Policy priorities identified in surveillance - Fiscal consolidation to reduce fiscal deficits and public debt. - Modernizing the monetary policy framework to improve monetary policy transmission. - Reforming the FX market and exchange rate regime to reduce dollarization and improve external competitiveness. - Strengthening public investment management to ensure that the ongoing large infrastructure investment improve the Maldives’ economic performance. ### TA on fiscal consolidation - The Fund is providing TA on tax policy, including identifying new sources of revenues and the introduction of the PIT. - The Fund is providing TA on tax administration to further improve the MIRA‘s capacity, including in international tax transactions, and to strengthen compliance risk management. ### TA on modernization of the monetary policy framework - The Fund is supporting the MMA’s 2018–22 Strategic Reform Plan. - The Fund has started providing TA in three areas: - Modernization of MMA governance, including strengthened operational independence. - Monetary and FX policy in support of more active and effective monetary policy, de-dollarization, and development of a functional FX market. - Financial sector supervision and regulation. *Annex VI. Technical Assistance and Surveillance* ### 5. Finally, the Fund has been actively involved in assisting the authorities in improving the ### 5. Finally, the Fund has been actively involved in assisting the authorities in improving the planning, budgeting, and implementation of public investment projects to address the shortcomings identified in the 2016 PIMA Report. ### Fund assistance on public investment management and PFM - Objective: Improve planning, budgeting, and implementation of public investment projects to address shortcomings identified in the 2016 PIMA Report. - Expected outcomes: - Rigorous project appraisal and scrutiny to improve project selection. - Reduction of waste. - Support for longer-term economic growth and fiscal and external sustainability. - Related technical assistance and follow-up missions: - Public Investment Management Assessment (PIMA) conducted in December 2016. - Follow-up mission on Strengthening Public Investment Management in June 2018. - January 2018 mission focused on budget formulation and public investment. - FAD involvement in Chart of Accounts (CoA) review (September 2014) and mapping to GFSM 2014. ### Fund relations and membership details - Membership Status: Joined: January 13, 1978; Article XIV. - Quota and holdings (General Resources Account): - Quota: 21.20 SDR Million 100.00 percent quota. - Fund holdings of currency (exchange rate): 16.40 SDR Million 77.34 percent quota. - Reserve Tranche Position: 4.80 SDR Million 22.66 percent quota. - SDR Department: - Net cumulative allocation: 7.69 SDR Million 100.00 percent allocation. - Holdings: 2.42 SDR Million 31.48 percent allocation. - Outstanding Purchases and Loans: - ESF Arrangements: 0.51 SDR Million 2.42 percent quota. - Latest Financial Arrangements (historical): - Stand-By: 12/04/2009 to 12/3/2012; Amount Approved (SDR million) 49.20; Amount Drawn (SDR Million) 8.20. - ESF: 12/04/2009 to 12/3/2011; Amount Approved (SDR million) 8.20; Amount Drawn (SDR Million) 2.05. - Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Forthcoming 2019: Principal 0.41; Charges/Interest 0.05; Total 0.46. - 2020: Principal 0.10; Charges/Interest 0.06; Total 0.16. - 2021: Principal [blank]; Charges/Interest 0.06; Total 0.06. - 2022: Principal [blank]; Charges/Interest 0.06; Total 0.06. - 2023: Principal [blank]; Charges/Interest 0.06; Total 0.06. ### Exchange arrangements and FX management - De jure exchange rate arrangement: pegged exchange rate within horizontal bands. - De facto exchange rate arrangement: stabilized exchange rate arrangement. - Since April 2011, the rufiyaa has floated in a band of 20 percent on either side of Rf 12.85 per dollar. - In practice, the rufiyaa has been virtually fixed at the band’s weaker end of Rf 15.42 per dollar. - Transitional provisions: Maldives continues to avail itself of the transitional provisions of Article XIV but no longer maintains measures under this provision and has not yet accepted obligations of Article VIII, Sections 2, 3, and 4. - Exchange restriction: Maintains an exchange restriction subject to IMF approval under Article VIII, Section 2(a) arising from a shortage of foreign exchange at the official rate which leads to the Maldives Monetary Authority (MMA) rationing its supply of FX to commercial banks. - Multiple currency practice: Channeling of FX transactions to the parallel market where transactions take place at an exchange rate that deviates by more than 2 percent from the prevailing market exchange rate gives rise to multiple currency practice subject to IMF approval under Article VIII, Section 3. - Official exchange rate used by MMA for government transactions: calculated based on the mid-point of the weighted average of the buying and selling rates of FX transactions conducted by commercial banks one day earlier. - Policy note: Lack of a mechanism to prevent the official exchange rate from deviating by more than 2 percent from the prevailing market exchange rate gives rise to multiple currency practice subject to IMF approval under Article VIII, Section 3. - Operational change: Extent of FX rationing has been eased over the past two years by increasing amounts provided to commercial banks and adjusting amounts in line with seasonal patterns. ### Technical assistance (TA) summary by IMF department - FAD (Fiscal Affairs Department): - PEFA assessment: joint IMF/WB-led PEFA in February 2014. - Public Financial Management Reform Plan (PFMRP) developed June 2014. - Cash management: three missions since FY14; updated action plan in August 2015; cash management manual development. - CoA review: September 2014; mapping to GFSM 2014 coordinated with STA. - PIMA: December 2016. - MIRA strategic and risk management TA: October 2017, July 2018, February 2019 (Tax Policy TA), and February 2019 concurrent tax administration missions (2020-24 Strategic Plan, risk framework, staff skills). - January 2018 mission: budget formulation and public investment management. - June 2018 follow-up mission on Strengthening Public Investment Management. - LEG (Legal Department): - MMA Act revision TA: October 2003; additional missions in 2005, 2006, 2009, 2011. - AML/CFT assessment: October 2010; desk-based review May 2012. - Advice on Special Economic Zones Law, offshore banking legislation and deposit insurance: 2014–2015. - MCM (Monetary and Capital Markets Department): - Multiple TA missions 2006–2016 on monetary operations, financial market development, banking supervision, liquidity management, crisis management, debt markets, FX operations, deposit insurance. - 2017–18 multi-year TA program to enhance Insurance Division supervisory capacity. - December 2018 multitopic TA to formulate a TA roadmap (central bank governance, monetary and FX operations, financial sector supervision and regulation). - January 2019 TA: application of IFRS 9 – Financial Instruments; internal audit and enterprise risk management progress review. - February 2019 external expert advised MMA governor on governance and internal organization. - STA (Statistics Department): - Missions on money and banking statistics (May 2007), balance of payments, GFS, MFS, national accounts (2011 onwards). - CPI rebased to June 2012=100; weights based on 2012 household income and expenditure survey. - PPI and CPI rebase assistance targeted by 2019. - Multiple missions on GDP, quarterly accounts, BOP, and GFS between 2012–2017. - SARTTAC missions: April 2018 (external sector statistics), August 2018 (GFS and PSDS training), January 2019 (GFS and PSDS strengthening), February 2019 (CPI update and experimental annual GDP by expenditure 2017). ### Safeguards assessment and central bank governance - Safeguards assessment of MMA: concluded March 2010. - Actions taken: - Appointment of an external auditor. - Strengthened controls over foreign payments through automation of the authorization process. - Appointment of a Chief Internal Auditor and continued capacity improvement in internal audit. - Amendments to the MMA Act drafted in 2011 in consultation with the Fund; MMA Act amended in 2015. - Outstanding safeguards recommendations not yet incorporated: - Establishment of an Audit Committee. - Limits on credit to government. - Safeguards for personal autonomy of Board members. ### Statistical issues and data adequacy (As of March 2019) - Overall assessment: Macroeconomic statistics improved; data 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 was rebased to 2014; revised annual and quarterly GDP estimates from 2003 to 2016 released at end-2017. - Estimates of GDP by expenditure at current prices were prepared as part of the 2014 supply and use tables and balanced with no statistical discrepancy; authorities preparing independent estimates of GDP by expenditure and comparing with GDP by economic activity—significant discrepancies remain. - STA assistance provided for annual production and expenditure GDP measures and developing quarterly GDP series. - CPI rebased to June 2012=100; PPI and CPI rebase assistance to be completed by 2019. - Fiscal sector: - General government data reported in GFS Yearbook; latest published data for 2014. - Monthly revenue and expenditure data are available but the reporting system is new and reliability needs improvement. - Consistency with below-the-line financing numbers from monetary authorities is weak. - External debt data being reconciled with creditors. - Data on state enterprises operations are limited. - Financial sector: - APD receives electronic monetary statistics every two weeks covering MMA and commercial banks. - Summary data published in MMA’s Monthly Statistics, QEB, and AR. - Integrated monetary database operational. - MMA provides quarterly FSIs to STA: all core FSIs and two encouraged FSIs for deposit takers (capital to assets, large exposures to capital) are reported; MMA could improve FSI reporting to include remaining encouraged FSIs. - Some financial access survey (FAS) indicators reported, including two indicators of the U.N. Sustainable Development Goals. - External sector: - MMA compiles BOP data annually; coverage improved but limited in some areas. - Recommendations pending implementation: improve estimation of travel credits; launch new survey to capture ongoing construction boom. - Results of DI surveys yet to be exploited for IIP compilation and participation in the IMF`s CDIS. - Other private financial flows estimated using CPIS and BIS data. - MMA not reporting any IIP data to STA; difficulties in compiling consistent IIP. - Quarterly data on external debt and debt service available for government and monetary authority; not reported to World Bank QEDS. - High staff turnover hindering progress on IIP and External Debt compilation and dissemination. - Official reserve assets reported every two weeks with a (variable) one-week lag. - Predetermined foreign currency outflows (mainly debt service payments) are known and reported to APD at annual Article IV consultation missions; other movements of foreign currency assets are not identified. - GDDS participation: Maldives has participated since October 14, 2011. An STA e-GDDS mission scheduled in mid-June to assist publication of essential macroeconomic data through a National Summary Data Page (NSDP). - No data ROSC available. ### Table of Common Indicators Required for Surveillance (As of April 16, 2019) — selected entries - Exchange Rates: Date of Latest Observation March 2019; Date Received March 2019; 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 February 2019; Date Received March 2019; Frequency D D D. - Reserve/Base Money: Date of Latest Observation February 2019; Date Received March 2019; Frequency W W M. - Broad Money: Date of Latest Observation February 2019; Date Received March 2019; Frequency W W M. - Central Bank Balance Sheet: Date of Latest Observation February 2019; Date Received March 2019; Frequency W W M. - Consolidated Balance Sheet of the Banking System: Date of Latest Observation February 2019; Date Received March 2019; Frequency W W M; Date Published Sep 2017. - Interest Rates: Date of Latest Observation February 2019; Date Received March 2019; Frequency W W M. - Consumer Price Index: Date of Latest Observation January 2019; Date Received March 2019; Frequency M W M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of Latest Observation 2018; Date Received March 2019; Frequency A M M. - GDP/GNP: Date of Latest Observation 2018 Q3; Date Received March 2019; Frequency A,, Q M M. - Gross External Debt: Date of Latest Observation 2018; Date Received March 2019; Frequency A M M. ### Debt sustainability and risk assessment (Joint Bank-Fund DSA) - Risk of external debt distress: High. - Overall risk of debt distress: High. - Granularity in the risk rating: Sustainable. - Application of judgement: No. - Key facts and findings: - External public and publicly-guaranteed debt increased by 10 percent of GDP in 2018 leading all indicators, except the debt-to-exports ratio, to breach their thresholds under the baseline. - Authorities are predominantly financing infrastructure investment scale-up with external debt, some of which is guaranteed. - Debt profile susceptible to rollover risks from outstanding international sovereign bonds and financing pressures from amortizations of guaranteed loans for major infrastructure projects. - A Sovereign Development Fund has been set up with resources allocated to mitigate anticipated liquidity pressures. - Winding down of large-scale infrastructure supports an assessment that debt is sustainable. - Public domestic debt remains elevated and around half of it is composed of short-term Treasury bills. - Key risks: fiscal policy slippages and shocks to tourism exports and capital expenditures. - Policy implication: Stabilizing and reducing public debt ratios will require strengthening the medium-term fiscal framework to improve the external position. _Prepared by the staffs of the International Monetary Fund and the International Development Association. April 30, 2019._ ### 1. Total public and publicly-guaranteed (PPG) debt in Maldives increased by 10 percent of ### 1mdvea2019002 - 1. Total public and publicly-guaranteed (PPG) debt in Maldives increased by 10 percent of ### Summary of debt stock and composition - Total PPG debt in 2018: around US$3.8 billion, approximately 72 percent of GDP. - Increase in public sector debt in 2018 driven by external PPG debt linked to major infrastructure projects (overlap of ending and starting projects). - About 50 percent of public sector debt is domestic and most of it is denominated in local currency. - Domestic debt creditors (December 2018): - Other financial corporations: 42 percent - Commercial banks: 35 percent - Central bank (MMA): 22 percent - Public non-financial corporations: 1 percent - Private sector: 0.4 percent - Short-term domestic debt accounts for around half of total domestic debt. - Domestic debt market is not fully developed; authorities have received TA to formulate a Medium-Term Debt Management Strategy (MTDS) and plan to issue securities with longer maturities (work has not begun). ### External PPG debt details - External PPG debt in 2018: around US$1.9 billion. - Around 60 percent of external PPG debt is owed to bilateral official creditors. - Of bilateral debt, 83 percent is owed to China — equivalent to US$928 million or about 50 percent of PPG external debt; US$403 million of this is guaranteed. - Guaranteed external debt increased markedly in 2018, bulk owed to China in association with housing projects carried out by the Housing Development Corporation (an SOE). - Terms on most guaranteed debt are non-concessional. - Sovereign bonds issued in 2017 and 2018: totaling US$350 million (6.6 percent of 2018 GDP) on commercial lending terms. - External PPG debt currency composition: - U.S. dollar: 53 percent - Renminbi: 19 percent - SDR: 17 percent ### Coverage and methodology - Fund’s debt sustainability analysis (DSA) includes PPG external and domestic debt; public debt includes central government debt (including guarantees to SOEs) and central bank debt. Non-guaranteed SOE debt is excluded. - External debt in this DSA is defined by currency criterion. ### Macroeconomic background and projections (selected figures) - Non-interest current account deficit (CAD): projected at 23 percent of GDP in 2018 (around 8 percent of GDP higher than previously projected). - Drivers: higher imports linked to increased implementation of large infrastructure projects financed by increased PPG external debt. - Tourism arrivals projected to grow at 8 percent over the medium term compared to 5.5 percent previously. - Fiscal: Preliminary 2018 outturns show a lower primary deficit due mainly to lower current spending; absence of new revenue measures and a more moderate decline in capital spending imply a slower medium-term decline in the primary deficit. - Domestic financing projected to cover around 60 percent of gross financing needs over the medium term. - Grants from bilateral and multilateral partners to continue but are smaller than concessional borrowing and decline over the medium term. - Growth and inflation (current vs previous projections) - Real GDP growth (in percent change) - Current: 2018: 7.5; 2019: 6.5; 2020: 6.0; 2021: 5.5; 2022: 5.5; 2023: 5.5 - Previous: 2018: 4.7; 2019: 4.8; 2020: 5.0; 2021: 5.0; 2022: 5.0; 2023: 4.6 - Inflation - Current: 2018: 2.0; 2019: 2.0; 2020: 2.4; 2021: 2.5; 2022: 2.5; 2023: 2.3 - Previous: 2018: 2.0; 2019: 2.0; 2020: 2.4; 2021: 2.5; 2022: 2.5; 2023: 2.3 - Primary fiscal deficit (in percent of GDP) - Current: 2018: 2.6; 2019: 3.0; 2020: 3.2; 2021: 2.6; 2022: 2.2; 2023: 1.8 - Previous: 2018: 4.6; 2019: 3.3; 2020: 2.5; 2021: 1.9; 2022: 0.8; 2023: 0.9 - Non-interest current account deficit (in percent of GDP) - Current: 2018: 23.0; 2019: 18.0; 2020: 13.0; 2021: 11.2; 2022: 9.3; 2023: 8.0 - Previous: 2018: 15.4; 2019: 14.7; 2020: 12.5; 2021: 11.0; 2022: 8.4; 2023: 9.0 ### Debt carrying capacity and sustainability analysis - Composite Indicator (CI) score: 2.48 — classified as “weak debt carrying capacity.” - PPG external debt-to-GDP: - 2018: around 35 percent - projected to increase to 41 percent of GDP by 2021 - projected to decline to 33 percent in 2028 - FDI: historically strong, averaging 9 percent of GDP between 2007 and 2018; projected to remain strong and mostly associated with tourism. - Debt service and rollover risks: - Debt service indicators projected to increase and peak in 2022 because of the US$250 million repayment of a bullet sovereign bond issued in 2017. - Sovereign Development Fund (SDF) established to mitigate rollover risks; accumulated funds as of end 2018: US$125 million. - Staff projects the SDF to sufficiently cover international sovereign bond obligations coming due, supported by a policy of weekly revenue earmarking to the Fund. - Market financing: sovereign bond issuance to date US$350 million, around 18 percent of outstanding PPG external debt. - Exports of goods and services: 60 percent of GDP — export shock is among the most severe stress tests. - Gross financing needs surpass threshold due to the large share of short-term domestic debt issuance. ### Public debt outlook and fiscal policy recommendations - Public sector debt: estimated 72 percent of GDP in 2018. - Despite favorable automatic debt dynamics, primary deficit projected to increase public debt over the medium term, reaching 83 percent of GDP in 2021 under current projections. - Staff recommendation: an ambitious fiscal adjustment to achieve a primary surplus of 1.4 percent of GDP, which would gradually lower public debt to 70 percent of GDP by 2023. - Additional staff recommendations: - Develop the domestic debt market by lengthening debt maturities and minimizing rollover risks from short-term debt. - Be selective about externally-financed projects and contract new external debt on concessional terms, to the extent possible. ### Stress tests, risks, and overall assessment - Tailored stress tests for natural disasters, contingent liabilities, and market financing applied; kept at default calibrations. - Most extreme shocks: - For PPG external debt indicators: the combination shock and the shock to exports. - For public debt indicators: the shock to growth. - Overall risk ratings: - High risk of external debt distress. - High overall risk of debt distress. - Key risk drivers: elevated public debt, rollover risks from sovereign bonds, and external financing of SOE projects. - Mitigants: SDF and projected decline in externally-financed SOE projects. - Final staff guidance: fiscal consolidation to put public debt on a downward path, develop domestic debt market to allow longer tenors, and ensure selectivity and concessionality in new external borrowing where possible. *Source: IMF staff report (content unit 1mdvea2019002).* ### 11. The authorities recognize the risk that high public debt poses. The new administration is ### 1mdvea2019002 - 11. The authorities recognize the risk that high public debt poses. The new administration is ### Authorities' assessment and immediate actions - The authorities recognize the risk that high public debt poses. - The new administration is focusing on close oversight of the issuance of government guarantees and has been publishing data on government guarantees on the Ministry of Finance’s website for increased transparency. - The authorities maintain that institutional weaknesses are not the primary cause for the increase in government-guaranteed debt owed to China but reflect decisions by the previous administration to finance large infrastructure projects. - The authorities emphasized the role of the SDF in mitigating financing risks over the medium term and intend to continue building up funds for repaying debt. ### External Debt DSA — Baseline projections and key statistics (Table 1) - External debt (nominal) series (2015–2038 as presented): 26.730.339.549.356.658.759.756.955.949.029.635.354.8 - of which: public and publicly guaranteed (PPG): 16.820.525.434.838.240.040.737.836.733.019.322.337.0 - Change in external debt: -2.23.79.29.87.32.11.0-2.8-1.0-2.2-0.6 - Identified net debt-creating flows: -2.711.08.912.77.42.80.9-1.0-2.2-3.5-4.2-0.20.4 - Non-interest current account deficit: 7.323.121.723.018.013.011.29.38.05.40.612.310.5 - Deficit in balance of goods and services: -9.21.24.66.70.5-3.5-4.7-6.0-7.2-10.2-15.8-6.8-5.4 - Net FDI (negative = inflow): -7.3-10.4-10.1-8.5-9.2-9.2-9.6-9.3-9.1-7.3-3.7-9.5-8.7 - Residual: 0.4-7.30.3-3.0-0.1-0.70.1-1.81.21.23.6-1.10.5 - Sustainability indicators (selected): - PV of PPG external debt-to-GDP ratio: ......25.433.035.536.336.533.131.928.414.5 - PV of PPG external debt-to-exports ratio: ......37.550.454.055.455.550.448.643.021.6 - PPG debt service-to-exports ratio: 5.94.50.32.86.17.27.512.07.83.42.1 - PPG debt service-to-revenue ratio: 17.312.00.77.115.818.519.631.220.18.65.1 - Gross external financing need (Million of U.S. dollars): 350.8752.1763.91157.4880.8700.9622.8770.3520.1293.7-50.5 - Nominal GDP (Million of US dollars): 4,098 4,402 4,858 5,328 5,786 6,283 6,795 7,348 7,937 11,451 23,896 - Memorandum items: - PV of external debt: ......39.547.453.955.155.552.251.044.424.9 - PV of PPG external debt (in Million of US dollars): 1233.91755.62052.42283.62477.62432.22529.03253.23467.8 ### Public Sector Debt DSA — Baseline projections and key statistics (Table 2) - Public sector debt series (2015–2038 as presented): 53.459.461.671.476.880.783.181.581.479.653.853.780.5 - of which: external debt: 16.820.525.434.838.240.040.737.836.733.019.322.337.0 - Change in public sector debt: -1.86.02.29.85.43.92.4-1.6-0.1-1.7-2.0 - Identified debt-creating flows: 0.65.6-2.6-0.90.71.30.90.3-0.1-1.5-2.92.4-0.3 - Primary deficit: 3.97.41.52.63.03.22.62.21.80.6-1.46.11.9 - Revenue and grants (percent of GDP): 27.127.327.126.526.026.025.825.825.826.428.124.326.1 - Primary (noninterest) expenditure (percent of GDP): 31.134.728.629.129.029.228.428.027.627.126.730.528.0 - Automatic debt dynamics: -3.4-1.8-4.1-3.5-2.2-1.9-1.7-2.0-1.8-2.1-1.5 - Residual: -2.40.44.810.73.02.51.5-1.9-0.1-0.10.90.21.8 - Sustainability indicators (selected): - PV of public debt-to-GDP ratio: ......61.669.574.077.178.976.876.575.049.1 - PV of public debt-to-revenue and grants ratio: ......227.7262.4284.1296.8305.3297.9296.3283.7174.7 - Debt service-to-revenue and grants ratio: 72.669.370.576.770.864.961.182.886.469.847.1 - Gross financing need: 21.624.520.721.117.415.313.415.719.016.910.5 ### Key macroeconomic and fiscal assumptions (from tables) - Real GDP growth (in percent): 2.97.36.97.56.56.05.55.55.55.55.55.25.8 - GDP deflator in US dollar terms (change in percent): 7.90.13.22.02.02.42.52.52.32.02.04.82.2 - Effective interest rate (percent): 0.80.50.72.73.44.04.03.63.42.21.51.02.9 - Growth of exports of G&S (US dollar terms, in percent): -4.70.14.55.89.38.48.48.07.87.87.86.77.9 - Growth of imports of G&S (US dollar terms, in percent): 0.515.59.99.2-0.21.96.25.85.56.56.79.45.6 - Grant element of new public sector borrowing (in percent): .........14.913.416.916.816.916.729.129.0...20.5 - Government revenues (excluding grants, in percent of GDP): 26.127.026.826.025.425.425.325.325.426.127.9 23.525.6 - Aid flows (in Million of US dollars): 41.312.214.1103.684.3150.1149.2154.7141.0202.4411.8 ### Stress tests and sensitivity analysis (Figures, Tables 3–4) - Stress tests use multiple shocks and report the most extreme shock in or before 2028; one-off breaches are presented but deemed away for mechanical signals where appropriate. - Table 3 and Table 4 present sensitivity and bound tests for indicators including: - PV of debt-to-GDP ratio - PV of debt-to-exports ratio - Debt service-to-exports ratio - Debt service-to-revenue ratio - Debt service-to-revenue and PV of debt-to-revenue outcomes under alternative scenarios (historical averages, growth shocks, primary balance, exports, one-time 30 percent nominal depreciation, combinations, natural disaster, combined contingent liabilities, market financing). - Selected baseline and alternative outcomes (examples as presented): - PV of debt-to-GDP ratio (2018–2028 baseline row in Table 3): 33 35 36 36 33 32 33 32 31 30 28 - Debt service-to-exports ratio (baseline row in Table 3): 50 54 55 55 50 49 51 49 47 45 43 - Debt service-to-revenue ratio (baseline row in Table 4): 70 74 77 79 77 77 77 79 78 77 75 - PV of debt-to-revenue ratio (baseline row in Table 4): 262 284 297 305 298 296 304 302 297 291 284 - Thresholds and breaches: bold values in tables indicate breaches of thresholds (tables show multiple instances where stress-test scenarios approach or exceed thresholds for various indicators). ### Policy implications highlighted in the source - Increase transparency and oversight on issuance of government guarantees (already being implemented by publishing guarantee data). - Continue building SDF funds to mitigate medium-term financing risks and to support debt repayment. - The authorities attribute increased government-guaranteed debt owed to China to decisions by the previous administration to finance large infrastructure projects, not primarily to institutional weaknesses. *Sources: Country authorities; and staff estimates and projections.* ### 2.5 percentage points of GDP in ### 2.5 percentage points of GDP in ### Background - Population of around 436 thousand people dispersed across about 190 islands. - Economy transformed by high-end tourism; Real GDP growth: - averaged 6.1 percent per annum over 2011-17, - was about 7.5 percent in 2018, - growth projected to remain strong in 2019. - Government development strategy focused on the Greater Malé region aiming to: - improve service delivery, - protect households from climate change and natural disasters, - create economic opportunities. - Implementation of the strategy has translated into construction and infrastructure spending as major drivers of economic growth. - Climate vulnerability: over 80 percent of land is less than one meter above sea level. ### External sector — key findings and projections - Current account deficits (CADs) viewed by authorities as reflecting temporary increases in imports associated with large infrastructure projects. - CAD remained high in 2018 due to public infrastructure projects and resort investments: - 10 new resorts opened in 2018, - another 20 resorts expected to open in 2019. - CAD projections: - CAD is projected to decline to 19.5 percent of GDP in 2019, - expected to decline to below 10 percent of GDP over the medium term (staff estimate). - EBA-lite model results: - CA norm estimated at around 9 percent of GDP, - CA-gap of 15 percent. - Authorities’ adjustment point: - argue CA-gap would be reduced substantially if adjusted for a temporary spike in infrastructure spending estimated at 8 percent of GDP. - Reserves and reserve adequacy: - foreign exchange reserves increased to 2.4 months of imports at end-January 2019, - staff assesses reserves as below IMF reserve adequacy metrics. - Reserve-building measures under MMA reform plan include: - incentives to hold domestic currency, - support de-dollarization, - strengthen foreign exchange market operations, - enhance effectiveness of foreign exchange intervention, - consideration of larger and longer-term swap arrangements with the Reserve Bank of India for emergency liquidity assistance. - Sovereign Development Fund (SDF): - established in 2017 to serve as a fiscal reserve for amortization of sovereign bonds due in 2022 and 2023, - SDF balances reached US$124 million at end-February 2019, covering 35 percent of the sovereign bonds. ### Fiscal policies and reforms — findings and authorities’ stance - Authorities concur that fiscal consolidation is needed to strengthen sustainability and increase buffers. - Recent fiscal actions: - several expenditure-reduction measures in 2016 and 2017, - increased social spending in 2018 for inclusive growth. - New government fiscal strategy: - reduce the deficit by boosting revenues and cutting inefficient spending, - seek new sources of financing at favorable terms. - Tax policy intentions: - intend to introduce a personal income tax in 2020, - strengthen tax administration, - do not favor increasing the General Sales Tax due to regressivity and adverse impact on SMEs, - concerned that increasing the airport service charge would negatively affect the guesthouse sector. - Fiscal adjustment priorities highlighted by authorities: - address spending inefficiencies and leakages in the health care system, - reform subsidies, - enhance procurement policies and efficiency of State-Owned Enterprises (SOEs). - Public financial management and public investment reforms: - establishment of a Tax Policy Unit at the Ministry of Finance, - improvements in budget preparation, commitment control, cash management, and reduced expenditure reallocations, - progress implementing IMF 2016 Public Investment Management Assessment recommendations, - Civil Services Commission completed human resources audits to institutionalize compensation system and contain expenditure growth. - Debt and guarantees: - authorities recognize risk from high public debt, - increased scrutiny and regular auditing and publication of government guarantees, - expanded coverage of public debt to include guaranteed debt, - emphasize SDF role in mitigating financing risks and intend to continue building funds for debt repayment. ### Monetary and financial sector policies — findings and measures - MMA reform and technical assistance: - MMA appreciates IMF technical assistance for its comprehensive reform plan and seeks continued support to modernize monetary policy and FX operations frameworks. - Monetary policy stance: - MMA assesses the stance as appropriate and does not see the need for tightening in absence of inflation and FX market pressures, - parallel market premium declined following MMA foreign exchange sales decisions in 2016 and 2017, - MMA stands ready to activate alternative monetary instruments based on open market operations if needed. - Credit growth and financial stability: - current credit growth assessed as well-paced, - private credit grew above nominal GDP last year, reflecting financial deepening and lending mainly for productive investment, - no sign of sector-specific credit booms, - banks show high capitalization, reserves exceeding minimum requirements, high profitability, declining nonperforming loans, and nearly total provisioning for specific loan losses, - currency risk limited as foreign currency loans extended mainly to borrowers with foreign currency income. - Financial stability and inclusion measures underway: - improving reporting standards, - drafting new liquidity regulations, - improving on-site and off-site supervision, - increasing operational capacity, - reviewing the credit guarantee scheme, - satisfactory collection and dissemination of credit information, - payment system development project to facilitate financial inclusion, - strengthening corporate governance requirements and risk management practices, - strengthening AML/CFT capacity, including legal framework improvements and increased resources for the independent Financial Intelligence Unit. ### Authorities’ views and institutional engagement - Authorities disagree with staff’s assessment that important external financing challenges exist (¶14). - Authorities welcome candid exchange with IMF staff but regret high frequency of IMF mission chief turnover. - Authorities appreciate IMF technical assistance and support of the Resident Representative Office based in Sri Lanka. - Authorities reiterate request for a Maldivian national to be employed in the Resident Representative Office, possibly based in Malé. - Authorities welcome the IMF’s continued focus on issues relevant to small states. *Statement by Sami Geadah, Alternate Executive Director for Maldives; and Maya Choueiri, Senior Advisor to Executive Director, May 29, 2019* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019002.pdf_