## Introduction and Background

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### Geography and Development Strategy
- Maldives is an archipelago of close to 1,200 coral islands, some 200 of which are inhabited.
- Total area is 900,000 square kilometers, of which only 300 square kilometers are land.
- Key development constraints: widely dispersed population, high costs of providing social infrastructure and services, acute shortage of land (especially in Male).
- Government strategy: creating new growth centers in the north and the south and massive land reclamation in the vicinity of Male.
- Environmental constraints: fragile coral marine environment; tourism development strategy emphasizes environmental protection.
- Long-term threat: rising sea levels from global warming.

### Revision of National Income Accounts (Box 1)
- Base year changed from 1985 to 1995 using a prototype supply and use table.
- New procedures include FISIM and imputed rent of owner-occupied dwellings.
- Nominal GDP in 1995 is 34 percent higher according to the new estimates than in the old official accounts.
- New estimates for nominal GDP in 1999 are 42 percent higher than the figure reported in last year’s staff report.
- For 1998, new per capita GDP figure is US$1,987 whereas last year’s staff report had US$1,420.
- Main structural changes:
  - Tourism contribution rises from 18 percent to 34 percent.
  - Fisheries contribution declines from 11 percent to 8 percent.
- Cumulative real growth 1985–95: old estimate 126 percent; new estimate 138 percent (difference about 5 percent).
- Overall growth 1995–99: new 40 percent; old 39 percent.
- The 1995-base estimates present both production and expenditure sides, enabling savings–investment balance estimates.

### Recent Economic Performance and Outlook for 2001
- Growth:
  - 1990s: annual GDP growth averaged around 8 percent; per capita income rose by more than 70 percent to above US$2,000 in 2000.
  - 1999 GDP growth: 7.4 percent.
  - 2000 GDP growth: 4.8 percent.
  - 2001 projected GDP growth: 7 percent.
- Inflation and prices:
  - CPI fell by 1.1 percent in the twelve months to end-2000.
  - Staff estimates twelve-month inflation will rise above 4 percent at end-2001 and peak at 6-7 percent in early 2002, assuming wage pressures are contained and the exchange rate does not move further.
- Tourism and fisheries:
  - Strong increase in tourist arrivals in 2000 but average duration of stay shortened; expansion in bed capacity reduced capacity utilization and led to soft prices.
  - Tuna catch declined in 2000; domestic tuna prices increased while world market prices were low.
- Poverty and social indicators:
  - Incidence of poverty remains high in the atoll (outer islands): half the population lives on less than 15 rufiyaa (US$1.2) per day.
  - Life expectancy rose by 10 years since the 1980s; child immunization nearly universal; access to safe water close to 90 percent; illiteracy very low.

### Foreign Exchange Market, Devaluation, and Parallel Market
- POEC closure: On July 19, 2000, the MMA closed the Post Office Exchange Counter (POEC).
- Evidence of foreign exchange restriction during late 2000/2001:
  - Staff found a significant parallel market in foreign exchange with a premium of 6-12 percent over the official exchange rate.
  - Traders experienced undue delays in obtaining foreign exchange for bona fide current international transactions; some short-term arrears on suppliers’ credit were reported.
- Devaluation:
  - On July 25, 2001, the authorities devalued the rufiyaa by 9 percent.
  - Prior peg: central rate of 11.77 rufiyaa per dollar since October 1994.
  - New buying and selling rates announced July 24, 2001 (effective July 25): buying 12.75 rufiyaa; selling 12.85 rufiyaa.
- Impact on external balances:
  - Staff estimates full-year improvement in the current account balance from a 9 percent devaluation is marginally higher than 1 percent of GDP.
  - Devaluation lowers the value of GDP measured in U.S. dollars.
  - Staff projects the current account deficit at 8.4 percent of GDP in 2001 (after devaluation).

### External and Real Exchange Rate Developments
- Real effective exchange rate:
  - Appreciated by 4 percent in 2000; total appreciation from 1997 almost 10 percent.
  - Almost all appreciation since 1995 (order of 30 percent) reflects rising nominal effective exchange rate driven by U.S. dollar strength.
- Sectoral competitiveness:
  - Tourism competitiveness weakly linked to rufiyaa real effective rate because most costs and wages in resorts are invoiced/settled in U.S. dollars and supplies are imported.
  - Fisheries competitiveness affected by real exchange rate together with world tuna prices and terms of trade.
  - Staff estimates Maldives’ terms of trade deteriorated by close to 30 percent in 1999 and a further 3 percent in 2000.
  - Tuna prices recovered strongly in recent months (relative to the report period); if sustained and oil prices stable, terms of trade should improve significantly in 2001.
- Peg assessment:
  - Counterfactual suggests pegging to the euro rather than the U.S. dollar would have kept the real effective exchange rate around its 1995 level until mid-1999 and depreciated thereafter, lending credence to the view that the euro could be a better peg than the U.S. dollar.
- Sectoral effects:
  - Any downward adjustment in the rufiyaa–U.S. dollar peg would be of limited benefit to tourism but could enhance fisheries competitiveness if not fully passed into domestic costs, especially fish procurement prices.

### Fiscal Developments and Risks
- 2000 fiscal outturn:
  - Budget deficit outturn 4.6 percent of GDP vs budget target 1.2 percent of GDP.
  - Overruns in both capital and current expenditure.
  - Current spending grew by 18 percent compared with a target growth rate of 10 percent (mainly in general administration and social services).
  - Shortfall in tax revenue offset by increases in SOE profit payments and external grants.
  - More than half of the 2000 budget deficit (2.4 percent of GDP) was financed through additional drawings on the Ways and Means Account at the MMA.
- 2001 fiscal outlook and staff projection:
  - Less than half of the hoped-for foreign financing of capital projects (7.7 percent of GDP) is likely to materialize.
  - Financing from the MMA during the first half of 2001 suggests current spending again ran ahead of schedule.
  - Without direct fiscal measures, MMA financing for the whole year likely close to 2.5 percent of GDP (virtually none planned).
  - Staff projects a fiscal deficit of 5.2 percent of GDP in 2001 (an increase of 0.5 percentage points over 2000).
  - Staff scenario presented alongside recommended actions had a 2001 budget deficit of 4 percent of GDP for comparison.
- Fiscal impact of devaluation:
  - Staff estimates full-year impact of a 9 percent devaluation on the overall fiscal balance is almost 1 percent of GDP.

### Monetary and Reserve Developments
- Monetary aggregates and credit (2000):
  - Slow growth of broad money: 4.1 percent in 2000.
  - Strong growth in credit to the central government: 30.9 percent (mainly due to deficit financing from MMA).
  - Decline in the net foreign asset position of the monetary system: 6.6 percent.
  - Private sector credit growth subdued in 2000.
- Official reserves:
  - End-2000 official reserves: US$124 million, providing cover for 3.3 months of imports of goods and nonfactor services.
  - Staff projects official reserves will increase marginally in dollar terms in 2001, but import coverage will decline to 3.1 months by year-end.

### Current Account and Capital Flows
- Current account:
  - After a sharp widening in 1999, current account deficit narrowed to 9.5 percent of GDP in 2000.
  - In 1999, the current account deficit trebled to 14.6 percent of GDP.
  - In 2000, private capital inflows and concessional loans covered the lion’s share of the current account deficit; the remainder (1.4 percent of GDP) was financed from net foreign assets of the banking system.
  - With capacity utilization and prices in resorts recovering and tuna prices returning closer to historical norms, the current account deficit was expected to narrow further in 2001 (projected 8.4 percent of GDP, taking devaluation into account).

### Banking System and Vulnerability Indicators (Box 3 summary)
- Overall assessment: banking system remains generally sound.
- Supporting indicators cited:
  - Share of nonperforming loans is low.
  - Risk-weighted capital asset ratios are high.
  - Balance between foreign currency–denominated assets and liabilities is favorable.

### Medium-term outlook and illustrative scenario
- GDP growth is projected to stabilize at around 6 percent per year, including continuing strong contributions from tourism.
- Scenario assumptions:
  - Adoption and implementation of a stabilization and reform agenda to reduce vulnerability to external shocks, respond to declining availability of concessional foreign financing, and manage further integration into the international economy through the WTO and regional trading arrangements.
  - Fiscal expenditure growth maintained in line with that of nominal GDP.
  - Revenue-structure reform with a switch toward more reliance on tax revenues (through the introduction of the business profit tax) and less dependence on nontax revenue (mainly profit transfers from public enterprises and resort rents).
  - Overall fiscal deficit stabilizes at around 2 percent of GDP.
  - Current account deficit gradually declines.
  - Official reserves remain broadly stable in terms of their import cover of under three months.
  - Foreign debt and debt service remain well contained, partly because a significant share of foreign capital inflows is assumed to be in the form of direct investment.

### Key short-term pressures and risks
- Outlook depends critically on putting fiscal policy on a sustainable course; failure to contain spending growth and implement fiscal reform, including limiting central bank financing of budget deficits, would likely result in:
  - Repeated episodes of intense pressures in the foreign exchange market.
  - Periodic devaluations and higher inflation.
- External risks exist but Maldives generally scores adequately on traditional indicators of external vulnerability.

### Addressing foreign exchange pressures (Policy discussion A)
- Staff conclusion: adjustment of the exchange rate was not warranted until other options had been more fully explored.
- Emphasis on root cause: expansionary fiscal policies and monetization of budget deficits.
- Alternatives recommended before devaluation:
  - Spending cuts, especially domestically-financed capital spending due to its high import content (over 80 percent), which would have an immediate effect on import demand.
  - Provision of additional hard currency to the market from official reserves.
- Specific staff recommendations:
  - Cut in domestically-financed capital spending of 1?4-2 percent of GDP (less than 20 percent of full-year spending under this item).
  - Increase MMA allocation of foreign currency to commercial banks for resale to the public by 50-100 percent for the next few months.
  - On a half-year basis, use 10-15 percent of the official reserves in support of the official exchange rate, bringing import coverage down to around 2.9 months at end-2001.
- Staff estimates on devaluation impact:
  - A 10 percent devaluation against the U.S. dollar would strengthen the current account balance mainly because of the income effect, and strengthen the fiscal balance — each by 1 percent of GDP on a full-year basis — but raise inflation by about 6 percentage points in the first year.
- Authorities’ actions and outcomes:
  - Authorities agreed broadly with staff recommendations and planned to provide more foreign currency to commercial banks and to hold domestically-financed capital expenditure below target (by almost 2 percent of GDP).
  - Subsequently, authorities announced a devaluation of the rufiyaa on July 25 after supplying additional hard currency amounting to less than 2 percent of the official reserves during June and July and judging the improvement to be inadequate.

### Needed macroeconomic policy reforms (Policy discussion B)
- Overall diagnosis:
  - Fixed exchange rate arrangement had been central but received insufficient support from fiscal and monetary policies.
  - Fiscal discipline had eroded, with automatic budget access to MMA financing undermining the monetary policy framework.
  - Urgent need for a medium-term macroeconomic framework to enforce consistency across ministries, public enterprises, and the MMA.
- Fiscal policy priorities:
  - Fiscal consolidation essential given Maldives’ coming graduation from the LDC group and likely loss of foreign grants and soft loans.
  - Measures suggested to achieve illustrative medium-term outcomes:
    - Strengthening the revenue base.
    - More effective controls on expenditure.
    - Elimination of long-term deficit financing by the MMA.
- Revenue reforms:
  - Authorities reviewing fees and charges; plans to introduce a property rental value tax and a business profit tax.
  - Short-run revenue-raising scope: adjust the flat per-head tourism tax (unchanged since 1988) and close customs duty exemptions.
  - Longer-term: pressures from WTO and regional arrangements argued for replacing customs duties with a general sales tax and excises.
- Expenditure control:
  - Impose hard budget constraints on spending ministries to reduce access to direct MMA financing through the Ways and Means Account.
  - Reform the public sector investment program (PSIP) into a multi-year, rolling framework to smooth capital expenditure and account for recurrent costs of completed projects.
  - Coordinate SOE capital spending with the PSIP.
  - Prioritize expenditures to protect social spending on education and health care; limit growth of current expenditure to that of nominal GDP.
  - Authorities noted elimination of the “unspent balances” approach and viewed the public accounting system project (AsDB-supported) as a prerequisite for restoring fiscal discipline.
- Government debt financing:
  - Ways and Means Account to be replaced by alternative sources: introduction of treasury bills for cash management and bonds for longer-term financing.
  - Encouraged development of these instruments to end central bank deficit financing and support capital market development.
  - Preliminary step: ensure government pays market interest rates on borrowing from the MMA.
- Monetary policy reform:
  - Re-direct monetary policy to support the fixed exchange rate by containing automatic deficit financing from the MMA.
  - Move toward indirect monetary policy management by a more independent MMA, keeping implementation subordinated to supporting the exchange rate.
  - Initial reform measures agreed:
    - Abolition of bank-by-bank credit ceilings.
    - Elimination of the 7 percentage point maximum allowable differential between rufiyaa lending and deposit rates, with the 20 percent ceiling on rufiyaa lending rates to follow soon after.
    - Gradual lowering of the 35 percent minimum reserve requirement and an increase in the effective rate of remuneration.
    - Improved liquidity management including flexible interest rates and auctions for MMA certificates of deposit (CDs), to pave the way for a treasury bill market and reduce reliance on the Ways and Means Account.
    - A standing facility for providing short-term, and fairly costly, liquidity support to banks.
  - Implementation status:
    - In late June, the MMA Board authorized these reforms.
    - On July 1, the MMA abolished bank-specific credit ceilings and expanded the CD program to include public enterprises on the buying side as well as commercial banks.
    - Elimination of the rufiyaa interest rate differential was expected to follow within a few weeks; lowering of the minimum reserve requirement and additional CD program improvements planned for 2002.
    - Technical assistance provided from MAE for sequencing and timing.

### Financial sector and banking-system vulnerability (Box 3 highlights)
- Structure and overall assessment:
  - Maldives’ banking system consists of four commercial banks, three of which are branches of foreign state-owned banks.
  - Banking-sector indicators show the system is basically sound.
- Key indicators and risks:
  - Average share of non-performing loans is low and declining, to less than 4 percent in 2000.
  - Average risk-weighted capital asset ratio is high, at over 30 percent in 2000.
  - Share of foreign exchange loans in total lending, though declining, is high at close to 60 percent.
  - Over 80 percent of foreign currency loans are to foreign-exchange earning tourist enterprises and are thus naturally hedged.
  - Over 50 percent of all loans are to the tourism sector, leaving banks vulnerable to adverse tourism shocks.
  - Overall balance between foreign currency denominated assets and liabilities is generally favorable; MMA planned to introduce net open position limits in foreign currency.
  - Interest rate risk limited at present because of the fixed margin between deposit and lending rates, though greater flexibility in future could change this.
- Supervisory improvements:
  - Banking supervision upgraded with AsDB assistance: capital adequacy requirements, standardized loan classification and provisioning rules, standardized definition of non-performing loans, and tax deductibility of loan loss provisioning.

### Deregulation, SOE reform, and the Skipjack Investment Liberalization Program
- SOEs continued to dominate much of commercial activity.
- Skipjack program specifics:
  - Abolishes MIFCO’s export monopoly on canned and frozen skipjack.
  - Allows private investors to participate in purchase, processing and exports of local skipjack fisheries, but investors are not allowed to engage in fishing operations themselves.
  - Divides Maldives’ exclusive economic zone into four geographic areas of operation: two areas open to private investment and two areas set aside for MIFCO.
  - Intended outcomes: greater efficiency within the sector, competition, and potential pressures for more complete liberalization including full privatization of MIFCO if private operators offer consistently higher prices to local fishermen.
- Staff view: welcomed greater openness toward SOE reform, including privatization; social objectives served by some SOEs could be achieved through less distortionary and more transparent policies, including direct subsidies from the budget.

### Financial supervision, capital markets, trade policy, and statistics
- Supervision needs to strengthen as credit ceilings and interest rate controls are abolished; authorities planned to place limits on banks’ open foreign currency positions and to upgrade regulation of nonbank financial institutions.
- Capital market development impeded by inadequate legislation; capital markets unit established within the MMA; staff encouraged prompt passage of enabling capital market legislation.
- Trade policy:
  - Tariff rates unchanged since new export-import law in 2000; Maldives planned to lower tariffs in line with WTO commitments.
  - Staff warned against import-substituting production behind tariffs; Maldives’ ranking on Fund’s ten point index of overall trade restrictiveness remains 7.
- Economic data, statistics, and transparency:
  - Gaps and inconsistencies remain despite improvements; revision of national accounts and MMA efforts to prepare more useful import data noted.
  - Authorities committed to establishing an autonomous Bureau of Statistics; proposed New Statistical Law and human resource development plan aim for statistical services on par with developed systems by 2010.
  - Staff urged move toward greater transparency and adherence to Codes of Good Practices on Fiscal Transparency and on Transparency in Monetary and Financial Policies.

### Macroeconomic assessment and key policy recommendations (Staff appraisal)
- Growth and outlook:
  - Strong growth performance over last decade; slowdown in 2000 likely temporary with rebound expected in 2001.
  - Medium-term prospects favorable if policy discipline restored and inflationary pressures from recent devaluation contained.
- Identified problems:
  - Gradual erosion of fiscal discipline contributed to rapid credit growth and pressures in the foreign exchange market.
  - Large overruns in expenditure, especially current spending, financed through the overdraft facility at the MMA.
  - Credit-financed fiscal expansion contributed to excess demand for hard currency; adverse external developments in tourism and fisheries reduced hard currency flows.
  - Foreign exchange restriction arising from limitations on MMA foreign currency availability (subject to approval under Article VIII).
- Devaluation:
  - Recent devaluation will bring lasting benefits only if supported by additional measures: tight financial policies, fiscal consolidation, new means of deficit financing, and monetary policy reform.
  - Authorities should be prepared to increase sales of foreign exchange to commercial banks to ensure market clears at the new official exchange rate.
  - Staff did not recommend approval of the foreign exchange restriction and encouraged expeditious move toward acceptance of obligations of Article VIII.
- Fiscal reform priorities:
  - Strengthen revenue base through planned business profits tax, property rental value tax, and eventually a general sales tax and excises.
  - Short-term cuts in capital spending, followed by hard budget constraints on spending ministries and phase-out of Ways and Means Account in favor of treasury bills and bonds.
- Monetary reform priorities:
  - Reorientation toward market-based monetary management: elimination of bank-specific credit ceilings, lifting rufiyaa interest rate controls, lowering minimum reserve requirements, improvements in MMA CD program.
- Structural and trade reforms:
  - Continue SOE reform and privatization where appropriate; impose limits on banks’ net open positions; early passage of capital market legislation; consider elimination of duty exemptions and lowering tariff rates.
- Statistics and transparency:
  - Strong endorsement for autonomous Bureau of Statistics and more open information policy including publication of consultation reports and PINS.

### Recommendation on Article IV consultation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Selected economic and fiscal indicators (highlights from tables and charts)
- Population (2000): 270,101
- Nominal GDP (2000): $556 million
- GDP per capita (2000): $2,059
- Quota: SDR 8.2 million
- Gross official reserves (year-end, in millions of U.S. dollars): series includes 99.7, 119.9, 128.5, 124.1, 123.2, 117.1, 126.7
- External debt (year-end, in millions of U.S. dollars): series includes 171.0, 206.1, 417.9, 420.3, 307.3, 249.6, 247.8, 235.5, 254.8
- External debt (in percent of GDP): series includes 43.0, 38.5, 35.6, 38.9, 38.1, 38.0, 41.1, 39.7, 42.3
- Debt service (in percent of exports of goods and nonfactor services): series includes 3.8, 3.4, 7.2, 3.7, 4.1, 4.5, 4.4, 4.6, 4.6
- Exchange rate (rufiyaa per US$): 11.77 repeated for several years; 12.80 in 2001 in some tables
- Terms of trade (percent change) examples: -7.5, -5.0, -10.9, -32.9, -3.2
- Selected fiscal aggregates (percent of GDP):
  - Total revenue and grants: series includes 31.0, 31.8, 33.8, 36.7, 37.8, 35.6, 36.7, 37.1
  - Expenditure and net lending: series includes 32.3, 33.8, 38.1, 37.9, 42.4, 43.7, 40.7, 42.3
  - Overall balance: series includes -1.4, -2.0, -4.3, -1.2, -4.6, -8.1, -4.0, -5.2
  - Overall balance excluding grants: series includes -4.2, -4.7, -6.7, -3.7, -7.7, -10.5, -6.5, -7.9
  - Current balance: series includes 8.0, 7.7, 7.8, 8.2, 6.8, 6.5, 4.2, 4.8
- Balance of payments highlights (1997–2001):
  - Current account balance (in percent of GDP): series includes -6.8, -4.5, -14.6, -9.5, -11.0, -7.5, -8.4
  - Trade balance (US$ millions): series includes -214.0, -215.9, -262.4, -233.3, -280.4, -242.4, -245.2
  - Tourism receipts and nonfactor services receipts: series includes 190.5, 204.3, 203.6, 208.8, 241.9, 218.0, 232.4
- Illustrative medium-term scenario (Table 5, 2001–2006) selected projections:
  - Real GDP growth: 7.0 (2001 Revised), then 6.0 each year 2002–2006.
  - Consumer prices (period average): 3.7 (2001 Revised), then 5.7, 4.3, 3.3, 3.0, 3.0.
  - Central government revenue and grants: 37.1 (2001 Revised), then 36.8, 38.3, 38.1, 38.1, 38.0 (percent of GDP).
  - Tax revenue: 15.5 (2001 Revised), then 16.3, 19.0, 21.0, 26.2, 30.3 (percent of GDP).
  - Nontax revenue: 18.7 (2001 Revised), then 18.0, 17.0, 15.0, 10.0, 6.0 (percent of GDP).
  - Expenditure and net lending: 42.3 (2001 Revised), then projected 40.0 each year 2002–2006 (percent of GDP).
  - Overall balance: -5.2 (2001 Revised), then -3.2, -1.7, -1.9 (2002–2004 shown).
  - Current account percent of GDP (illustrative): -8.4 (2001), then -7.8, -6.4, -5.3, -4.2, -3.3.
  - Gross official reserves (year-end): 126.7 (2001), then 126.5, 132.5, 134.4, 140.5, 144.9 (US$ millions).
  - External debt (year-end, US$ millions): 240.1 (2001), then 280.1, 317.6, 352.6, 382.6, 392.6.
  - External debt (percent of GDP): 42.3 (2001), then 45.2, 47.0, 47.8, 47.5, 44.6.
  - Debt service (percent of exports of goods and nonfactor services): 4.6 (2001), then 4.6, 4.8, 5.0, 5.0, 4.7.

### Fund relations, technical assistance, and capacity-building (ANNEX I highlights)
- Membership and IMF resources:
  - Joined 1/13/78; Article XIV.
  - Quota SDR 8.20; Fund holdings of currency 6.65; Reserve position in Fund 1.55.
- Exchange arrangements and history:
  - From March 1, 1982 to June 30, 1985: rufiyaa pegged to the U.S. dollar.
  - Since October 1994: unchanged at Rf 11.77 per U.S. dollar until July 25, 2001, when devalued to Rf. 12.8 per U.S. dollar.
- IMF technical assistance (selected):
  - FAD, MAE, and STA missions on budget management, revenue reform, treasury bills, monetary management, foreign exchange operations, bank supervision, and statistical work across 1993–2001.
- Relations with World Bank (IDA) and AsDB:
  - IDA current portfolio: Education and Training III Commitment 17.5; Undisbursed 13.2 (US$ millions).
  - AsDB provided 9 Special Fund loans totaling $53.81 million since 1981; cumulative disbursements $36.96 million as of May 31, 2001.
- Social and demographic indicators (selected comparisons):
  - GDP per capita: 1980-85: $469; 1995-2000: $2,059.
  - Population: 1980-85 total 180,088; 1995-2000 total 270,101.
  - Life expectancy at birth (years): 58.7 (1980-85); 67.9 (1995-2000).
  - Access to safe water: 28 (1980-85); 97 (1995-2000).
- Statistical issues and data quality:
  - Substantial improvements but problems remain in national accounts, fiscal, and balance of payments statistics.
  - CPI compiled since June 1995 with improved procedures; government working toward autonomous Bureau of Statistics.
  - MMA started monthly reporting to STA in 2001; inconsistencies remain between monetary and fiscal data.

_Source: "Introduction and Background" and associated annexes (content unit 1mdvea2019004)._

### Introduction and Background

### Introduction and Background

### Geography and Development Strategy
- Maldives is an archipelago of close to 1,200 coral islands, some 200 of which are inhabited.
- Total area is 900,000 square kilometers, of which only 300 square kilometers are land.
- Key development constraints: widely dispersed population, high costs of providing social infrastructure and services, acute shortage of land (especially in Male).
- Government strategy: creating new growth centers in the north and the south and massive land reclamation in the vicinity of Male.
- Environmental constraints: fragile coral marine environment; tourism development strategy emphasizes environmental protection.
- Long-term threat: rising sea levels from global warming.

### Revision of National Income Accounts (Box 1)
- Base year changed from 1985 to 1995 using a prototype supply and use table.
- New procedures include FISIM and imputed rent of owner-occupied dwellings.
- Nominal GDP in 1995 is 34 percent higher according to the new estimates than in the old official accounts.
- New estimates for nominal GDP in 1999 are 42 percent higher than the figure reported in last year’s staff report.
- For 1998, new per capita GDP figure is US$1,987 whereas last year’s staff report had US$1,420.
- Main structural changes:
  - Tourism contribution rises from 18 percent to 34 percent.
  - Fisheries contribution declines from 11 percent to 8 percent.
- Cumulative real growth 1985–95: old estimate 126 percent; new estimate 138 percent (difference about 5 percent).
- Overall growth 1995–99: new 40 percent; old 39 percent.
- The 1995-base estimates present both production and expenditure sides, enabling savings–investment balance estimates.

### Recent Economic Performance and Outlook for 2001
- Growth:
  - 1990s: annual GDP growth averaged around 8 percent; per capita income rose by more than 70 percent to above US$2,000 in 2000.
  - 1999 GDP growth: 7.4 percent.
  - 2000 GDP growth: 4.8 percent.
  - 2001 projected GDP growth: 7 percent.
- Inflation and prices:
  - CPI fell by 1.1 percent in the twelve months to end-2000.
  - Staff estimates twelve-month inflation will rise above 4 percent at end-2001 and peak at 6-7 percent in early 2002, assuming wage pressures are contained and the exchange rate does not move further.
- Tourism and fisheries:
  - Strong increase in tourist arrivals in 2000 but average duration of stay shortened; expansion in bed capacity reduced capacity utilization and led to soft prices.
  - Tuna catch declined in 2000; domestic tuna prices increased while world market prices were low.
- Poverty and social indicators:
  - Incidence of poverty remains high in the atoll (outer islands): half the population lives on less than 15 rufiyaa (US$1.2) per day.
  - Life expectancy rose by 10 years since the 1980s; child immunization nearly universal; access to safe water close to 90 percent; illiteracy very low.

### Foreign Exchange Market, Devaluation, and Parallel Market
- POEC closure: On July 19, 2000, the MMA closed the Post Office Exchange Counter (POEC).
- Evidence of foreign exchange restriction during late 2000/2001:
  - Staff found a significant parallel market in foreign exchange with a premium of 6-12 percent over the official exchange rate.
  - Traders experienced undue delays in obtaining foreign exchange for bona fide current international transactions; some short-term arrears on suppliers’ credit were reported.
- Devaluation:
  - On July 25, 2001, the authorities devalued the rufiyaa by 9 percent.
  - Prior peg: central rate of 11.77 rufiyaa per dollar since October 1994.
  - New buying and selling rates announced July 24, 2001 (effective July 25): buying 12.75 rufiyaa; selling 12.85 rufiyaa.
- Impact on external balances:
  - Staff estimates full-year improvement in the current account balance from a 9 percent devaluation is marginally higher than 1 percent of GDP.
  - Devaluation lowers the value of GDP measured in U.S. dollars.
  - Staff projects the current account deficit at 8.4 percent of GDP in 2001 (after devaluation).

### External and Real Exchange Rate Developments
- Real effective exchange rate:
  - Appreciated by 4 percent in 2000; total appreciation from 1997 almost 10 percent.
  - Almost all appreciation since 1995 (order of 30 percent) reflects rising nominal effective exchange rate driven by U.S. dollar strength.
- Sectoral competitiveness:
  - Tourism competitiveness weakly linked to rufiyaa real effective rate because most costs and wages in resorts are invoiced/settled in U.S. dollars and supplies are imported.
  - Fisheries competitiveness affected by real exchange rate together with world tuna prices and terms of trade.
  - Staff estimates Maldives’ terms of trade deteriorated by close to 30 percent in 1999 and a further 3 percent in 2000.
  - Tuna prices recovered strongly in recent months (relative to the report period); if sustained and oil prices stable, terms of trade should improve significantly in 2001.
- Peg assessment:
  - Counterfactual suggests pegging to the euro rather than the U.S. dollar would have kept the real effective exchange rate around its 1995 level until mid-1999 and depreciated thereafter, lending credence to the view that the euro could be a better peg than the U.S. dollar.
- Sectoral effects:
  - Any downward adjustment in the rufiyaa–U.S. dollar peg would be of limited benefit to tourism but could enhance fisheries competitiveness if not fully passed into domestic costs, especially fish procurement prices.

### Fiscal Developments and Risks
- 2000 fiscal outturn:
  - Budget deficit outturn 4.6 percent of GDP vs budget target 1.2 percent of GDP.
  - Overruns in both capital and current expenditure.
  - Current spending grew by 18 percent compared with a target growth rate of 10 percent (mainly in general administration and social services).
  - Shortfall in tax revenue offset by increases in SOE profit payments and external grants.
  - More than half of the 2000 budget deficit (2.4 percent of GDP) was financed through additional drawings on the Ways and Means Account at the MMA.
- 2001 fiscal outlook and staff projection:
  - Less than half of the hoped-for foreign financing of capital projects (7.7 percent of GDP) is likely to materialize.
  - Financing from the MMA during the first half of 2001 suggests current spending again ran ahead of schedule.
  - Without direct fiscal measures, MMA financing for the whole year likely close to 2.5 percent of GDP (virtually none planned).
  - Staff projects a fiscal deficit of 5.2 percent of GDP in 2001 (an increase of 0.5 percentage points over 2000).
  - Staff scenario presented alongside recommended actions had a 2001 budget deficit of 4 percent of GDP for comparison.
- Fiscal impact of devaluation:
  - Staff estimates full-year impact of a 9 percent devaluation on the overall fiscal balance is almost 1 percent of GDP.

### Monetary and Reserve Developments
- Monetary aggregates and credit (2000):
  - Slow growth of broad money: 4.1 percent in 2000.
  - Strong growth in credit to the central government: 30.9 percent (mainly due to deficit financing from MMA).
  - Decline in the net foreign asset position of the monetary system: 6.6 percent.
  - Private sector credit growth subdued in 2000.
- Official reserves:
  - End-2000 official reserves: US$124 million, providing cover for 3.3 months of imports of goods and nonfactor services.
  - Staff projects official reserves will increase marginally in dollar terms in 2001, but import coverage will decline to 3.1 months by year-end.

### Current Account and Capital Flows
- Current account:
  - After a sharp widening in 1999, current account deficit narrowed to 9.5 percent of GDP in 2000.
  - In 1999, the current account deficit trebled to 14.6 percent of GDP due to high investment in tourism and public infrastructure, growing remittances, and terms of trade shocks (record low tuna prices).
  - In 2000, private capital inflows and concessional loans covered the lion’s share of the current account deficit; the remainder (1.4 percent of GDP) was financed from net foreign assets of the banking system.
  - With capacity utilization and prices in resorts recovering and tuna prices returning closer to historical norms, the current account deficit was expected to narrow further in 2001 (projected 8.4 percent of GDP, taking devaluation into account).

### Banking System and Vulnerability Indicators (Box 3 summary)
- Overall assessment: banking system remains generally sound.
- Supporting indicators cited:
  - Share of nonperforming loans is low.
  - Risk-weighted capital asset ratios are high.
  - Balance between foreign currency–denominated assets and liabilities is favorable.

*Source: "Introduction and Background" (content unit 1mdvea2019004).*

### 16. The outlook for the Maldivian economy over the medium term remains broadly

### 16. The outlook for the Maldivian economy over the medium term remains broadly

### Medium-term outlook and illustrative scenario
- GDP growth is projected to stabilize at around 6 percent per year, including continuing strong contributions from tourism.
- Scenario assumptions:
  - Adoption and implementation of a stabilization and reform agenda to reduce vulnerability to external shocks, respond to declining availability of concessional foreign financing, and manage further integration into the international economy through the WTO and regional trading arrangements.
  - Fiscal expenditure growth maintained in line with that of nominal GDP.
  - Revenue-structure reform with a switch toward more reliance on tax revenues (through the introduction of the business profit tax) and less dependence on nontax revenue (mainly profit transfers from public enterprises and resort rents).
  - Overall fiscal deficit stabilizes at around 2 percent of GDP.
  - Current account deficit gradually declines.
  - Official reserves remain broadly stable in terms of their import cover of under three months.
  - Foreign debt and debt service remain well contained, partly because a significant share of foreign capital inflows is assumed to be in the form of direct investment.

### Key short-term pressures and risks
- The outlook depends critically on putting fiscal policy on a sustainable course; failure to contain spending growth and implement fiscal reform, including limiting central bank financing of budget deficits, would likely result in:
  - Repeated episodes of intense pressures in the foreign exchange market.
  - Periodic devaluations and higher inflation.
- External risks exist but Maldives generally scores adequately on traditional indicators of external vulnerability (reference to Table 6 in source).

### Addressing foreign exchange pressures (Policy discussion A)
- Staff conclusion: adjustment of the exchange rate was not warranted until other options had been more fully explored.
- Emphasis on root cause: expansionary fiscal policies and monetization of budget deficits.
- Alternatives recommended before devaluation:
  - Spending cuts, especially domestically-financed capital spending due to its high import content (over 80 percent), which would have an immediate effect on import demand.
  - Provision of additional hard currency to the market from official reserves.
- Specific staff recommendations:
  - Cut in domestically-financed capital spending of 1?4-2 percent of GDP (less than 20 percent of full-year spending under this item).
  - Increase MMA allocation of foreign currency to commercial banks for resale to the public by 50-100 percent for the next few months (or until supply improved with the next tourist season in the latter part of 2001).
  - On a half-year basis, use 10-15 percent of the official reserves in support of the official exchange rate, bringing import coverage down to around 2.9 months at end-2001.
- Staff estimates on devaluation impact:
  - A 10 percent devaluation against the U.S. dollar would strengthen the current account balance mainly because of the income effect, and strengthen the fiscal balance — each by 1 percent of GDP on a full-year basis — but raise inflation by about 6 percentage points in the first year.
- Authorities’ actions and outcomes:
  - Authorities agreed broadly with staff recommendations and planned to provide more foreign currency to commercial banks and to hold domestically-financed capital expenditure below target (by almost 2 percent of GDP).
  - Subsequently, authorities announced a devaluation of the rufiyaa on July 25 after supplying additional hard currency amounting to less than 2 percent of the official reserves during June and July and judging the improvement to be inadequate.

### Needed macroeconomic policy reforms (Policy discussion B)
- Overall diagnosis:
  - Fixed exchange rate arrangement had been central but received insufficient support from fiscal and monetary policies.
  - Fiscal discipline had eroded, with automatic budget access to MMA financing undermining the monetary policy framework.
  - Urgent need for a medium-term macroeconomic framework to enforce consistency across ministries, public enterprises, and the MMA.
- Fiscal policy priorities:
  - Fiscal consolidation essential given Maldives’ coming graduation from the LDC group and likely loss of foreign grants and soft loans.
  - Measures suggested to achieve illustrative medium-term outcomes:
    - Strengthening the revenue base.
    - More effective controls on expenditure.
    - Elimination of long-term deficit financing by the MMA.
- Revenue reforms:
  - Authorities reviewing fees and charges; plans to introduce a property rental value tax and a business profit tax.
  - Short-run revenue-raising scope: adjust the flat per-head tourism tax (unchanged since 1988) and close customs duty exemptions.
  - Longer-term: pressures from WTO and regional arrangements argued for replacing customs duties with a general sales tax and excises.
- Expenditure control:
  - Impose hard budget constraints on spending ministries to reduce access to direct MMA financing through the Ways and Means Account.
  - Reform the public sector investment program (PSIP) into a multi-year, rolling framework to smooth capital expenditure and account for recurrent costs of completed projects.
  - Coordinate SOE capital spending with the PSIP.
  - Prioritize expenditures to protect social spending on education and health care; limit growth of current expenditure to that of nominal GDP.
  - Authorities noted elimination of the “unspent balances” approach and viewed the public accounting system project (AsDB-supported) as a prerequisite for restoring fiscal discipline.
- Government debt financing:
  - Ways and Means Account to be replaced by alternative sources: introduction of treasury bills for cash management and bonds for longer-term financing.
  - Encouraged development of these instruments to end central bank deficit financing and support capital market development.
  - Preliminary step: ensure government pays market interest rates on borrowing from the MMA.
- Monetary policy reform:
  - Re-direct monetary policy to support the fixed exchange rate by containing automatic deficit financing from the MMA.
  - Move toward indirect monetary policy management by a more independent MMA, keeping implementation subordinated to supporting the exchange rate.
  - Initial reform measures agreed:
    - Abolition of bank-by-bank credit ceilings.
    - Elimination of the 7 percentage point maximum allowable differential between rufiyaa lending and deposit rates, with the 20 percent ceiling on rufiyaa lending rates to follow soon after.
    - Gradual lowering of the 35 percent minimum reserve requirement and an increase in the effective rate of remuneration.
    - Improved liquidity management including flexible interest rates and auctions for MMA certificates of deposit (CDs), to pave the way for a treasury bill market and reduce reliance on the Ways and Means Account.
    - A standing facility for providing short-term, and fairly costly, liquidity support to banks.
  - Implementation status:
    - In late June, the MMA Board authorized these reforms.
    - On July 1, the MMA abolished bank-specific credit ceilings and expanded the CD program to include public enterprises on the buying side as well as commercial banks.
    - Elimination of the rufiyaa interest rate differential was expected to follow within a few weeks; lowering of the minimum reserve requirement and additional CD program improvements planned for 2002.
    - Technical assistance provided from MAE for sequencing and timing.

### Financial sector and banking-system vulnerability (Box 3 highlights)
- Structure and overall assessment:
  - Maldives’ banking system consists of four commercial banks, three of which are branches of foreign state-owned banks.
  - Banking-sector indicators show the system is basically sound.
- Key indicators and risks (as reported):
  - Average share of non-performing loans is low and declining, to less than 4 percent in 2000.
  - Average risk-weighted capital asset ratio is high, at over 30 percent in 2000, reflecting excess liquidity associated with high minimum reserve requirements and credit ceilings.
  - Share of foreign exchange loans in total lending, though declining, is high at close to 60 percent.
  - Over 80 percent of foreign currency loans are to foreign-exchange earning tourist enterprises and are thus naturally hedged.
  - Over 50 percent of all loans are to the tourism sector, leaving banks vulnerable to adverse tourism shocks.
  - The overall balance between foreign currency denominated assets and liabilities is generally favorable; MMA planned to introduce net open position limits in foreign currency.
  - Interest rate risk limited at present because of the fixed margin between deposit and lending rates, though greater flexibility in future could change this.
- Supervisory improvements:
  - Banking supervision upgraded to align with international best practices with AsDB assistance: capital adequacy requirements, standardized loan classification and provisioning rules, standardized definition of non-performing loans, and tax deductibility of loan loss provisioning.

*Source: IMF mission report excerpt provided in the content unit.*

### 34. Deregulation aimed at fostering a larger and more dynamic private sector would

### 34. Deregulation aimed at fostering a larger and more dynamic private sector would

### Deregulation, SOE reform, and the Skipjack Investment Liberalization Program
- State-owned enterprises (SOEs) continued to dominate much of commercial activity in Maldives.
- Authorities indicated initial discussions, in the context of the preparation of the Sixth National Development Plan, on a possible review of the role and scope of public enterprises in the economy.
- Concrete reform: introduction of greater private participation and competition in the fisheries sector through the Skipjack Investment Liberalization Program (Box 4).
- Skipjack program specifics and expected effects:
  - Abolishes MIFCO’s export monopoly on canned and frozen skipjack.
  - Allows private investors to participate in purchase, processing and exports of local skipjack fisheries, but investors are not allowed to engage in fishing operations themselves.
  - Divides Maldives’ exclusive economic zone into four geographic areas of operation: two areas open to private investment and two areas set aside for MIFCO.
  - Intended outcomes: greater efficiency within the sector, competition, and potential pressures for more complete liberalization including full privatization of MIFCO if private operators offer consistently higher prices to local fishermen.
  - Authorities saw privatization being preceded by the introduction of corporate taxation to make up for the loss of SOE profit payments to the budget.
- Staff view: welcomed greater openness toward SOE reform, including privatization; underscored that social objectives served by some SOEs could be achieved through less distortionary and more transparent policies, including direct subsidies from the budget.
- Example social roles cited: MIFCO’s role in providing income support for fishing communities, and the perceived role of the State Trading Organization (STO) in ensuring adequate supplies and preventing excessive price volatility of basic commodities.

### Financial supervision and capital markets
- Supervision needs to strengthen to keep pace with financial sector developments as credit ceilings and interest rate controls are abolished.
- Authorities planned to:
  - Place limits on open positions banks could take in foreign currency.
  - Upgrade capacity to regulate and supervise nonbank financial institutions (insurance companies, leasing companies, etc.).
  - Request Fund technical assistance in this area.
- In conjunction with monetary reform measures approved in late June, the Maldives Monetary Authority (MMA) was authorized to impose limits on open positions in foreign currency.
- Capital market development:
  - Inadequacy of capital market legislation was an obstacle to diversification and future growth.
  - Some institutional steps taken, including establishment of a capital markets unit within the MMA.
  - Staff encouraged prompt passage of enabling capital market legislation to lay groundwork for development of markets in longer term borrowing instruments and equity shares.

### Trade policy and tariffs
- Tariff rates had been left unchanged since the passage of a new export-import law in 2000.
- Maldives planned to lower tariffs in line with WTO commitments.
- Progress on the South Asian Free Trade Area (SAFTA) could necessitate lowering of intra-regional tariffs.
- Staff warned against development of import-substituting production behind tariffs, which had so far been imposed exclusively for revenue generation.
- Box referenced: Maldives’ ranking on the Fund’s ten point index of overall trade restrictiveness remains 7.

### Economic data, statistics, and transparency
- Gaps and inconsistencies in economic data impeded surveillance and policy design despite improvements.
- Noted actions and needs:
  - Revision of the national income accounts.
  - MMA efforts to prepare more useful import data.
  - Additional work needed to strengthen data gathering on financial flows and the labor market, and to better reconcile fiscal and monetary accounts in timing and coverage.
- Authorities committed to improvements and drew up a long-term plan to establish an autonomous Bureau of Statistics (Box 5) with comprehensive data gathering responsibilities.
- Box 5 highlights:
  - New Statistical Law to provide for a Department or Bureau of Statistics to collect and disseminate a wide array of timely and reliable statistical information.
  - Bureau to be autonomous in gathering, collating and storing confidential information, under general auspices of the Ministry of Planning and National Development, and act as central coordinating agency for major statistics.
  - Human resource development plan and staffing needs identified, with overseas and domestic diploma fellowships.
  - Goal: statistical services on par with developed systems by 2010.
- Transparency:
  - Lack of information about policy intentions and important economic variables may have contributed to tensions in the foreign exchange market.
  - Staff drew authorities’ attention to the Codes of Good Practices on Fiscal Transparency and on Transparency in Monetary and Financial Policies.
  - Authorities planned to move toward a more open information policy; Ministry of Planning and National Development had launched a website containing some economic statistics.

### Macroeconomic assessment and key policy recommendations (Staff appraisal)
- Growth and outlook:
  - Maldives’ growth performance over the last decade had been strong; slowdown in growth in 2000 likely temporary with a rebound expected in 2001.
  - Medium-term prospects favorable if policy discipline is restored and inflationary pressures from recent devaluation are contained.
- Identified problems:
  - Gradual erosion of fiscal discipline contributed to rapid credit growth and pressures in the foreign exchange market.
  - Large overruns in expenditure, especially current spending, financed through the overdraft facility at the MMA.
  - Credit-financed fiscal expansion contributed to excess demand for hard currency; adverse external developments in tourism and fisheries reduced hard currency flows.
  - Foreign exchange restriction arising from limitations on MMA foreign currency availability (subject to approval under Article VIII).
- Devaluation:
  - Recent devaluation of the rufiyaa will bring lasting benefits only if supported by additional measures: tight financial policies, fiscal consolidation, new means of deficit financing, and monetary policy reform.
  - Uncertain whether devaluation alone will eliminate the foreign exchange restriction; authorities should be prepared to increase sales of foreign exchange to commercial banks to ensure market clears at the new official exchange rate.
  - Staff did not recommend approval of the foreign exchange restriction and encouraged expeditious move toward acceptance of obligations of Article VIII.
- Fiscal reform priorities:
  - Fiscal consolidation essential to macroeconomic stability and viability of fixed exchange rate regime.
  - Strengthen revenue base through introduction of new taxes: planned business profits tax, property rental value tax, as well as a general sales tax and excises.
  - Cuts in capital spending in the short term to be followed by imposition of hard budget constraints on spending ministries over the medium term.
  - Elimination of the unspent balance approach is important.
  - Ways and Means Account should be phased out and replaced with government debt financing through market-based instruments (treasury bills and bonds).
- Monetary policy and reforms:
  - Increased fiscal discipline would allow re-orientation of monetary policy to support the pegged exchange rate.
  - Authorities’ intentions regarding monetary reform welcomed: elimination of bank-specific credit ceilings, lifting of rufiyaa interest rate controls, lowering of minimum reserve requirements, and improvements in the MMA’s CD program.
  - A stronger monetary policy framework better equipped to support a pegged exchange rate.
- Structural reforms:
  - Gradual progress but extensive agenda remains.
  - Receptiveness to SOE reform and privatization is encouraging; Skipjack plan is a welcome development.
  - Supervisory capacity of the MMA needs to keep pace; limits on banks’ net open positions in foreign currency should be imposed quickly.
  - Early passage of capital market legislation needed to ensure development of debt and equity instruments to finance the budget and sustain investment and growth.
- Trade reforms:
  - Authorities encouraged to undertake more ambitious trade reforms than those planned under WTO commitments.
  - Elimination of duty exemptions and an overall lowering of tariff rates are desirable.
- Statistics and transparency:
  - Staff strongly endorses the establishment of an autonomous Bureau of Statistics.
  - Encouraged adoption of a more open policy regarding economic data and public debate about economic policies, including publication of consultation reports and PINS.

*Source: IMF staff report excerpt (Chapter 34) from the Maldives 2000 Article IV consultation materials.*

### 50. It is recommended that the next Article IV consultation take place on the standard 12-

### 1mdvea2019004 - 50. It is recommended that the next Article IV consultation take place on the standard 12-

### Recommendation on Article IV consultation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Economic and external developments (figures and trends)
- Real GDP growth (annual percentage change): chart shows series for 1990–2001 (visual only).
- Inflation and terms of trade (annual percentage change): charted for 1992–2001 (visual only).
- Tourist arrivals and fish catch: charted for 1992–2001 (visual only).
- External trade (millions of US dollars): charted for 1992–2001 (visual only).
- Current account balance: charted for 1995–2001 showing negative balances in late 1990s (visual only).
- External debt and debt service:
  - External debt (year-end, in millions of U.S. dollars) and percent of GDP series presented (1995–2001) (visual only).

### Exchange rate developments
- Bilateral and effective exchange rates (1991–2001) are plotted with 1995=100 base (visual only).
- Noted exchange rate: 11.77 rufiyaa per US$ for multiple years; 12.80 rufiyaa per US$ for 2001 in some tables.

### Fiscal and monetary developments (highlights from charts)
- Central government operations and balance (1995–2001) are charted (visual only).
- Central government financing (domestic and foreign) and money & credit (annual percentage change) are charted (visual only).
- Gross official reserves (millions of US dollars) charted for 1992–2001.
- Monetary authorities' claims on central government (in percent of GDP) charted for 1995–2001.

### Selected economic indicators (Table 1 highlights, 1995–2001)
- Population (2000): 270,101
- Nominal GDP (2000): $556 million
- GDP per capita (2000): $2,059
- Quota: SDR 8.2 million
- Gross official reserves (year-end, in millions of U.S. dollars): series includes 99.7, 119.9, 128.5, 124.1, 123.2, 117.1, 126.7
- External debt (year-end, in millions of U.S. dollars): series includes 171.0, 206.1, 417.9, 420.3, 307.3, 249.6, 247.8, 235.5, 254.8 (presented across different table sections)
- External debt (in percent of GDP): series includes 43.0, 38.5, 35.6, 38.9, 38.1, 38.0, 41.1, 39.7, 42.3
- Debt service (in percent of exports of goods and nonfactor services): series includes 3.8, 3.4, 7.2, 3.7, 4.1, 4.5, 4.4, 4.6, 4.6
- Exchange rate (rufiyaa per US$): 11.77 repeated for several years; 12.80 in 2001 in some tables
- Terms of trade (percent change) examples: -7.5, -5.0, -10.9, -32.9, -3.2 (presented in table)
- Selected fiscal aggregates (percent of GDP, Table 1 & Table 3):
  - Total revenue and grants: series includes 31.0, 31.8, 33.8, 36.7, 37.8, 35.6, 36.7, 37.1
  - Expenditure and net lending: series includes 32.3, 33.8, 38.1, 37.9, 42.4, 43.7, 40.7, 42.3
  - Overall balance: series includes -1.4, -2.0, -4.3, -1.2, -4.6, -8.1, -4.0, -5.2
  - Overall balance excluding grants: series includes -4.2, -4.7, -6.7, -3.7, -7.7, -10.5, -6.5, -7.9
  - Current balance: series includes 8.0, 7.7, 7.8, 8.2, 6.8, 6.5, 4.2, 4.8

### Balance of payments (Table 2 highlights, 1997–2001)
- Current account balance (in percent of GDP): series includes -6.8, -4.5, -14.6, -9.5, -11.0, -7.5, -8.4
- Trade balance (US$ millions): series includes -214.0, -215.9, -262.4, -233.3, -280.4, -242.4, -245.2
- Exports, f.o.b: series includes 93.0, 95.6, 91.5, 108.7, 123.1, 123.1, 123.1
- Imports, f.o.b: series includes -307.0, -311.5, -353.9, -342.0, -403.5, -365.5, -368.3
- Nonfactor services receipts and tourism receipts: receipts series include 190.5, 204.3, 203.6, 208.8, 241.9, 218.0, 232.4; tourism receipts highlighted within receipts
- Unrequited transfers (net): series includes -10.8, -11.7, -22.8, -28.5, -32.8, -32.8, -32.8
- Official medium- and long-term loans (net): series includes 21.9, 14.7, 5.2, -2.1, 37.6, 14.5, 14.5
- Disbursements and amortization examples: disbursements include 30.7, 25.8, 17.6, 12.4, 64.0, 30.0, 30.0; amortization include -8.8, -11.1, -12.5, -14.5, -15.5, -15.5, -15.5
- Net errors and omissions: series includes -3.2, -5.3, 26.3, 21.6, 0.0, 0.0, 0.0
- Overall balance (US$ millions): series includes 21.4, 29.1, -7.2, -7.9, -1.0, -2.5, -5.3
- Monetary movements: series includes -27.4, -29.1, 7.2, 1.9, 1.0, 2.5, 5.3
- Gross official reserves (in millions of U.S. dollars) repeated: 99.7, 119.9, 128.5, 124.1, 123.2, 117.1, 126.7
- External debt (in millions of U.S. dollars): 178.1, 200.8, 212.9, 211.6, 265.6, 240.1, 240.1
- Exchange rate (mtiyaa/R1.S. dollar): series shows 11.77 repeated and 12.80 in 2001
- GDP (in millions of U.S. dollars): series includes 500.8, 515.7, 559.3, 556.2, 646.4, 604.1, 567.3

### Central government finance (Table 3 highlights, 1997–2001)
- Total revenue and grants (in millions of rufiyaa): 1,824.1; 1,930.2; 2,225.3; 2,403.9; 2,474.9; 2,710.4; 2,612.4; 2,694.1
- Current revenue (in millions of rufiyaa): 1,652.0; 1,763.6; 2,058.6; 2,234.2; 2,269.6; 2,514.1; 2,416.1; 2,481.9
- Tax revenue (in millions of rufiyaa): 864.1; 902.7; 977.3; 1,084.3; 1,040.1; 1,131.6; 1,079.6; 1,125.6
- Nontax revenue (in millions of rufiyaa): 787.9; 860.9; 1,081.3; 1,149.9; 1,228.9; 1,382.5; 1,336.5; 1,356.3
- Grants (in millions of rufiyaa): 168.2; 164.5; 162.7; 168.5; 201.8; 182.1; 182.1; 198.0
- Expenditure and net lending (in millions of rufiyaa): 1,906.0; 2,053.3; 2,506.4; 2,480.4; 2,776.0; 3,325.1; 2,895.2; 3,071.9
- Current expenditure (in millions of rufiyaa): 1,182.0; 1,297.9; 1,545.8; 1,700.0; 1,825.6; 2,017.9; 2,120.9; 2,136.9
- Capital expenditure (in millions of rufiyaa): 754.9; 816.0; 949.4; 860.6; 994.3; 1,353.3; 819.8; 980.6
- Overall balance (in millions of rufiyaa): -81.3; -123.1; -281.1; -76.6; -301.1; -615.3; -282.8; -377.8
- Total debt (end of period, in millions of rufiyaa): 2,373.0; 2,605.5; 2,782.9; 2,802.0; 3,141.6; 3,744.1; 3,424.4; 3,519.4
- Of which: Foreign (end of period, in millions of rufiyaa): 1,495.9; 1,625.2; 1,681.9; 1,703.9; 1,824.2; 2,413.9; 1,893.0; 2,020.2

### Monetary accounts and MMA balance sheet (Table 4 highlights, 1997–2001)
- Broad money (levels in rufiyaa): series includes 2,303.4; 2,828.1; 2,929.9; 3,049.8; 3,312.3; 3,382.1
- Net foreign assets (monetary authorities and commercial banks) and domestic assets charted with values across years (table provides level and changes).
- Reserve money and components (MM A balance sheet) presented with levels and net foreign/net domestic assets.
- Money and credit annual percentage changes: examples include broad money growth 23.1, 22.8, 3.6, 4.1, 8.6, 10.9 (across periods shown).
- Memo items:
  - GDP (in millions of rufiyaa) series includes 6,069.6; 6,582.5; 6,546.1; 7,110.0; 7,261.3
  - RufiyawU.S. dollar: 11.8 repeated; 12.8 in 2001
  - Official reserves (millions of US dollars): 99.1; 119.9; 128.5; 124.1; 117.1; 126.7

### Illustrative medium-term scenario (Table 5, 2001–2006)
- Output and prices (annual percentage change):
  - Real GDP growth: 7.0 (2001 Revised), then projections: 6.0, 6.0, 6.0, 6.0, 6.0 (2002–2006)
  - Consumer prices (period average): 3.7 (2001 Revised), then projections: 5.7, 4.3, 3.3, 3.0, 3.0
- Central government (percent of GDP, projections):
  - Revenue and grants: 37.1 (2001 Revised), then 36.8, 38.3, 38.1, 38.1, 38.0
  - Tax revenue: 15.5 (2001 Revised), then 16.3, 19.0, 21.0, 26.2, 30.3
  - Nontax revenue: 18.7 (2001 Revised), then 18.0, 17.0, 15.0, 10.0, 6.0
  - Grants: 2.7 (2001 Revised), then 2.4, 2.2, 2.0, 1.9, 1.7
  - Expenditure and net lending: 42.3 (2001 Revised), then projected steady 40.0 for 2002–2006
  - Current expenditure: 29.4 (2001 Revised), then 27.0 each year 2002–2006
  - Capital expenditure: 13.5 (2001 Revised), then 13.0 each year 2002–2006
  - Overall balance: -5.2 (2001 Revised), then -3.2, -1.7, -1.9 (2002–2004 shown)
  - Overall balance, excl. grants: -7.9 (2001 Revised), then -5.6, -3.9, -3.9, -2.0, -3.7
- Financing and public debt:
  - Domestic financing and foreign financing projections presented (examples: Domestic 1.2, -0.3, 0.4; Foreign 2.5, 2.7 shown)
  - Total government debt (percent of GDP): 48.5 (2001 Revised), projected 47.6, 45.3, 43.4 (2002–2004)
  - Of which: Foreign debt (percent of GDP) examples: 27.8 (2001 Revised), 27.5, 27.2, 26.4

- Balance of payments (medium-term projections):
  - Exports (percent change) examples: 15.9 (2001), 7.0, 6.0, 6.0, 6.0, 6.0
  - Imports (percent change) examples: 7.7, 7.4, 6.5, 5.9, 5.9, 6.1
  - Tourism receipts (percent change) examples: 10.2, 9.2, 9.2, 8.1, 8.2, 8.2
  - Trade balance (US$ millions, illustrative): -245.2 (2001), then -263.3, -280.0, -295.2, -311.3, -328.9
  - Nonfactor services, net and current account balance (US$ millions and percent of GDP) presented across projections (examples: current account percent of GDP -8.4, -7.8, -6.4, -5.3, -4.2, -3.3)
  - Gross official reserves (year-end) examples: 126.7 (2001), then 126.5, 132.5, 134.4, 140.5, 144.9
  - External debt (year-end, US$ millions) series: 240.1, 280.1, 317.6, 352.6, 382.6, 392.6
  - External debt (in percent of GDP) examples: 42.3, 45.2, 47.0, 47.8, 47.5, 44.6
  - Debt service (percent of exports of goods and nonfactor services) series: 4.6, 4.6, 4.8, 5.0, 5.0, 4.7

### Indicators of external vulnerability (Table 6 highlights, 1991–2001)
- Public sector debt (percent of GDP) examples: 44.6, 40.3, 42.9, 42.3, 48.0
- Broad money (percent change, 12-month basis) and private sector credit (12-month basis) shown with various averages (examples: private sector credit 20.3, 38.9, 25.7, 4.0, 8.0, 12.9 across periods)
- Current account balance (percent of GDP) examples: -6.8, -4.5, -14.6, -9.5
- Gross official reserves (in US$ millions): 99.7, 119.9, 128.5, 124.1, 125.4
- Official reserves in months of imports of goods & non-factor services: 3.0, 3.5, 3.3, 3.3, 3.1
- Broad money to reserves and total reserves to short-term external debt (residual maturity) are presented (examples: total reserves to short-term external debt 417.9, 420.3, 307.3, 249.6)
- Total external debt (percent of GDP) examples: 35.6, 38.9, 38.1, 38.0, 41.1
- Debt service to domestic exports GS examples: 7.2, 3.7, 4.1, 4.5
- Exchange rate (period average): 11.8 repeated and 12.8 noted for 2001
- REER appreciation (+) (12 month basis) examples: 14.0, 2.3, 2.6, 3.6

_ Sources: Data provided by the Maldivian authorities; and IMF staff estimates and projections._

### ANNEX I

### MALDIVES: FUND RELATIONS (ANNEX I)

### Membership and IMF Resources
- Membership Status: Joined 1/13/78; Article XIV
- General Resources Account (SDR Million):
  - Quota 8.20
  - Fund holdings of currency 6.65
  - Reserve position in Fund 1.55
  - % Quota: 100.0; 81.1; 19.0 (corresponding to Quota, Fund holdings of currency, Reserve position)
- SDR Department (SDR Million):
  - Net cumulative allocation 0.28
  - Holdings 0.23
  - % Allocation: 100.0; 80.7 (corresponding to Net cumulative allocation, Holdings)
- Outstanding Purchases and Loans: None
- Financial Arrangements: None
- Projected Obligations to Fund: None

### Exchange Arrangements and History
- Key chronology:
  - From March 1, 1982 to June 30, 1985: rufiyaa pegged to the U.S. dollar.
  - Beginning July 1985: exchange rate linked to a trade-weighted basket of currencies; rufiyaa vs. U.S. dollar remained relatively stable until February 1987.
  - March 1, 1987: rufiyaa devalued by 29 percent vis-à-vis the U.S. dollar.
  - 1987–1994: exchange rate adjusted periodically.
  - Since October 1994: unchanged at Rf 11.77 per U.S. dollar until July 25,2001, when devalued to Rf. 12.8 per U.S. dollar.
- Legal/operational status:
  - Maldives continues to avail itself of the transitional arrangements under the provisions of Article XIV, but no longer maintains restrictions under Article XIV.
  - Any exchange rate restrictions that arise are subject to approval under Article VIII.
  - The Post Office Exchange Counter (existed until July 2000) did not by itself give rise to an exchange rate restriction.
  - Restrictions have arisen from time to time in the context of a general foreign exchange shortage and undue delays in making current international payments (as found in 1994-95).

### Article IV Consultation
- Last Article IV consultation: The 2000 Article IV consultation (SM/OO/191, August 14,200O) concluded by the Executive Board on November 3,200O (EBMOOD08).

### IMF Technical Assistance (selected missions and topics)
- FAD:
  - April 1994: Mr. Potter and Ms. BCdague visited Male to advise on budget management.
  - November 1994–December 1995: periodic assistance from Mr. Webber (consultant).
  - July 1994: Mr. Faria and Mr. Kambil (consultant) assisted in formulating a strategy for revenue reform.
  - August–September 1995: Mr. Kambil visited to draft tax legislation.
  - October 1996: tax administration mission to develop strategy to establish an Inland Revenue Department.
  - June 1997: follow-up mission by a consultant.
- MAE:
  - March 1993: consultant assistance on introduction of treasury bills.
  - November 1994: mission headed by Mr. Taniguchi on monetary management, foreign exchange operations, and bank supervision.
  - February–June 1995: consultant assistance for development of treasury bill and MMA certificate market.
  - February–March 1996: mission headed by Mr. Swinburne on reform of monetary operations and exchange system.
  - May 1997: foreign exchange advisor visit.
  - Early 2001: two consultants provided assistance on foreign exchange and monetary management (two missions each).
  - July 2001: consultant assistance on monetary management following lifting of credit ceilings and other changes.
- STA:
  - June 1993 and February 1994: assistance on monetary and balance of payments statistics.
  - May 1995: STA consultant on compilation of new consumer price index; follow-up in August 1996.

### Relations with the World Bank (IDA) — Portfolio and Operations (as of July 31,2001)
- Current Portfolio (IDA):
  - Education and Training III: Commitment 17.5 (In millions of U.S. dollars net of cancellation); Undisbursed 13.2
  - sub-total: 17.5; 13.2
- Closed projects (IDA) — Commitments and Undisbursed:
  - Fisheries I: 2.48; 0.0
  - Fisheries II: 4.93; 0.0
  - Fisheries III: 10.00; 0.0
  - Male Airport Upgrading: 7.59; 0.0
  - Education and Training: 7.92; 0.0
  - Education and Training II: 13.40; 0.0
  - sub-total: 46.32; 0.0
- Total: 63.82; Undisbursed 13.2
- Project implementation and strategic focus:
  - IDA supported fisheries projects, Male Airport Upgrading, and education projects; total support about $62 million since first credit effective August 10, 1979.
  - Received a $243,000 Institutional Development Fund (IDF) grant to strengthen the Public Enterprise Monitoring unit in the Ministry of Finance and Treasury.
  - Current IDA portfolio has Third Education and Training project and technical assistance ($245,000-IDF) for land and housing market legal/regulatory framework.
  - Current Country Assistance Strategy (CAS) dated November 17,2000: shift to increase non-lending activities and move from sector-specific project lending to a programmatic approach; objective to reduce poverty and regional disparities in access to social and infrastructure services.

### Relations with the Asian Development Bank (AsDB) (as of May 31,2001)
- AsDB has provided 9 Special Fund loans totaling $53.81 million since 1981.
- Cumulative disbursements as of May 31,2001: $36.96 million (68.7 percent of amount available for withdrawal).
- AsDB provided 28 advisory technical assistance grants for $11.24 million and 11 TA grants amounting to $2.24 million for loan project preparation.
- List of loans (year, net loan amount, disbursed):
  - 1981 Inter-island Transport Project (closed): 0.85; 0.85
  - 1984 Multi-project (closed): 2.88; 2.88
  - 1987 Power System Development Project (closed): 6.54; 6.54
  - 1988 Male Port Development Project (closed): 6.75; 6.75
  - 1991 Second Power System Development Project (closed): 9.21; 9.21
  - 1993 Second Male Port Development Project (closed): 7.85; 7.85
  - 1997 Third Power System Development Project: 6.41; 1.22
  - 1998 Post Secondary Education Development Project: 5.91; 0.25
  - 1999 Regional Development Project: 7.41; 1.41
  - Total: 53.81; 36.96

### Social and Demographic Indicators (selected comparisons)
- Latest single year columns given: 1980-85 and 1995-2000
- GDP per capita:
  - 1980-85: $469
  - 1995-2000: $2,059
- Land area: 298 km; 298 km
- Population:
  - Total population: 180,088 (1980-85); 270,101 (1995-2000)
  - Rate of growth (percent per annum): 2.8 (1980-85); 2.0 (1995-2000)
  - Density in Male (persons per sq. km.): 86.8 (1980-85); 70,000 (1995-2000) — note large change in reported figure
- Population characteristics (1998):
  - Infant mortality at birth (per 1,000): 29.2
  - Crude birth rate (per 1,000): 49.5
  - Crude death rate (per 1,000): 19
  - Life expectancy at birth (years): 58.7 (1980-85); 67.9 (1995-2000)
- Labor force (in percent of working-age population):
  - Labor force participation rate: 46.7 (1980-85); 44.4 (1995-2000)
  - Male: 69.6 (1980-85); 63.9 (1995-2000)
  - Female: 21.4 (1980-85); 24.4 (1995-2000)
  - Unemployment rate (1995): 17 (1980-85); 89 (1995-2000) — reported figures as provided
- Health care (1997):
  - Access to safe water: 28 (1980-85); 97 (1995-2000)
  - Immunization (DPT, percent of children under age one): 7,889 (1980-85); 1,328 (1995-2000) — values as presented
  - Population per physician: 10,080 (1980-85); 1,068 (1995-2000)
  - Population per nurse: 1500 (1980-85); 687 (1995-2000)
  - Population per hospital bed: 270 (1980-85)
- Education:
  - School enrollment, primary (gross): 150.7 (1980-85); 128.3 (1995-2000)
  - School enrollment, secondary (gross): 10.4 (1980-85); 69.1 (1995-2000)
  - Adult illiteracy rate (percent, ages 15 and above): 7.5 (1980-85); 3.8 (1995-2000)
- Sources cited in table: Statistical Yearbook of Maldives, various years; Maldivian authorities; World Development Indicators 2000; and IMF staff estimates.

### Statistical Issues and Data Quality
- General:
  - Substantial improvements in financial and economic statistics with STA technical assistance, but problems remain in national accounts, fiscal, and balance of payments statistics.
  - Enactment of statistical legislation expected to aid improvements.
  - Main official publication: Statistical Yearbook of Maldives (latest version 2000). APD receives Quarterly Economic Bulletin, Annual Report of Maldives Monetary Authority, and Quarterly Fiscal Report from Ministry of Finance and Treasury (with lag).
- National accounts:
  - Substantial progress; AsDB assisting in framework for more comprehensive national accounts.
  - Rebasing on production side and preliminary expenditure-side figures emerging.
- CPI:
  - CPI publication discontinued in 1994 due to outdated weights and compilation issues.
  - STA expert visit May 1995 helped construct new CPI based on 1993 income and expenditure survey.
  - New CPI compiled since June 1995 with improved procedures; STA mission August 1996 recommended additional price indices.
- Government finance:
  - Regular reporting to GFS Yearbook resumed in 1996; latest published data for 1999.
  - Maldives Monetary Authority provided summary data for IFS for 2000.
- Balance of payments:
  - Measures taken after STA mission February 1994 to improve coverage and quality.
  - Remaining problems: coverage and timing of imports; travel receipts estimated from small-sample resort/hotel inquiry (February 1994); unsatisfactory estimates of profit remittances and reinvested earnings in tourism sector; incomplete information on private capital flows.
- Money and banking:
  - Data reporting to STA was irregular, but in 2001 MMA started reporting monthly.
  - Inconsistencies exist between monetary and fiscal data on fiscal deficit financing; reconciliation involves timing and coverage issues.
  - Some inconsistencies between data on monetary authorities and on other depository corporations.

### Statement by Mr. Shaalan (Executive Board Meeting 01/86, August 30, 2001) — Selected points
- Appreciation for IMF staff policy advice and technical assistance, including recent assistance in monetary policy; value of close cooperation and continuity over past two years.
- Background and achievements:
  - Major advances in policy areas; focus on developing productive base, human and physical infrastructure, and maintaining stable macroeconomic environment.
  - Growth averaged close to 9 percent since the mid 1990ís, with per capita income rising to around $2000 and marked improvements in health and education indicators.
  - Prudent macro policies and fixed exchange rate contributed to macro stability and low inflation.
  - Concern that access to concessional resources is diminishing and likely to continue declining; continued access viewed as indispensable for developmental needs.
- Recent developments (2000–2001):
  - 2000 influenced by terms of trade shock, real effective exchange rate appreciation, declining tuna catch, and weaker-than-expected tourism season.
  - Reversal in second half of 2000; outlook for 2001 favorable.
  - Expected growth increase from 4 percent in 2000 to 7 percent in 2001 due to pickup in construction, recovery in tourist sector prices, and tuna market.
  - Recent rufiyaa devaluation expected to restore competitiveness.
  - External current account deficit narrowed in 2000 to 9.5 percent of GDP, mainly financed by large private capital inflows and some concessional loans.
- Fiscal and monetary pressures:
  - Government spending overruns linked to weaknesses in budgetary process and limited administrative capacity to estimate recurrent spending for new projects.
  - Fiscal deficit overshot budgeted level in 2000 and reached 4.6 percent of GDP; actual revenues exceeded projected level.
  - Authorities resorted to central bank financing, adding to exchange rate pressures.
- Exchange rate policy:
  - Authorities concluded exchange rate level was a drag and that shortages justified a devaluation.
  - Continue to believe a fixed exchange rate system remains most suitable; committed to provide sufficient foreign exchange at new rate and implement supporting macroeconomic policies.
  - Real appreciation: amounted to 10 percent since 1997 and more than 20 percent since 1995 (authorities' assessment).
  - Devaluation of 9 percent considered appropriate to restore competitiveness and ease market pressures.
- Fiscal policy reform priorities:
  - Strengthen revenue base: review of revenue system, updated charges and fees, introduced property and business profit taxes.
  - Avoid increasing tourism taxes until sector is firmly recovered.
  - Strengthen expenditure control and control access to central bank financing.
  - Working on new public accounting system with AsDB assistance.
  - Preparing public finance law to enable treasury bills and bonds to reduce reliance on central bank financing.
- Monetary policy reforms:
  - Major progress toward market-based monetary management:
    - Abolished bank-specific credit ceilings (imposed in 1995).
    - Expanded MMA certificate of deposit program to allow public enterprises to participate.
    - Eliminated maximum allowable interest differential between lending and deposit rate.
    - Introduced a discount facility.
    - Planned measures for 2002: reduction of reserve requirement and increase in rate of remuneration on reserves.
  - Technical assistance from MAE critical to implementation and sequencing.
  - Priority to upgrade supervision of financial institutions and establish prudential limits on foreign exchange open positions of banks.
- Structural and statistical reforms:
  - Emphasis on promoting private sector role; opened local skipjack catch industry to private participation to enhance competition.
  - Planning a new statistical law to establish an independent statistical agency to collect and disseminate timely and accurate statistics.

*Annex content as provided in ANNEX I of the Maldives country materials (content unit: 1mdvea2019004 - ANNEX I).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019004.pdf_