## 1mdvea2019005

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### Executive Summary — Key Findings
- The weak external environment continues to depress growth; tourism and fisheries are slowly recovering but have not yet regained the ground lost in 2001.
- After over two decades of uninterrupted gains, per capita income likely remained flat in 2002.
- The pass-through from last year’s devaluation has been contained and inflation is not a policy concern.
- The international competitiveness of resorts and fisheries is not at issue; the devaluation and the weaker dollar have brought the effective real exchange rate closer to that of main competitors.
- Reserves have clawed back some of the losses in the aftermath of the devaluation; reserves recovered to about 3 months of imports.
- Widening fiscal deficits financed by money creation are undermining the viability of the fixed exchange rate regime.
- Central-bank financed budgetary imbalances continued in 2002, adding to the liquidity overhang in the banking sector; credit growth surged after credit ceilings were lifted, and NPLs are on the rise.
- Structural reforms are gathering momentum: important economic laws are in the works; restructuring of a key state-owned enterprise is to be implemented soon; the banking sector is adapting to greater competition.

### Policy Issues and Recommendations
- Monetary and exchange rate policy
  - Maintain the pegged exchange rate (U.S. dollar peg) as the cornerstone of the macroeconomic framework.
  - Monetary policy should support the fixed exchange rate regime; concern about continued monetization of fiscal deficits.
  - Close the government’s overdraft facility at the MMA (the Ways and Means account).
  - Introduce treasury bills and establish a legal basis for central bank independence (passage of the MMA Act).
  - Improve liquidity management and adapt central bank paper (e.g., offering shorter maturities or more attractive interest rates).
  - Consider gradual reduction of high reserve requirements once effective liquidity management is in place.
- Fiscal policy and consolidation
  - Fiscal consolidation is urgent; staff suggested measures to achieve an adjustment of some 1% percent of GDP in 2003.
  - Mission target: a deficit of about 3% percent of GDP (implying an adjustment of about 1% percent of GDP) would be achievable and mark a credible start of fiscal adjustment.
  - Suggested revenue measures:
    - Increase the bed tax (a specific tax of US$6) to US$8; combined with raising rental on public land use by state enterprises from one rufiyaa per square foot could yield revenues on the order of l-l % percent of GDP.
    - Medium-term: widen tax base via property and business taxes; shift from import duties to a general sales tax.
  - Expenditure-side measures:
    - Improve public accounting and expenditure controls.
    - Contain wage bill and slow wage growth; overhaul social security.
    - Prioritize capital spending within a multi-year plan and pursue civil service reform.
  - Limit reliance on commercial borrowing for public investment; exercise caution in debt management.
- Structural and institutional reforms
  - Continue privatization and divestment of activities suitable for the private sector; strengthen governance and accountability at state enterprises (notably MIFCO).
  - Strengthen bank supervision, review loan classification and provisioning rules, and enhance on-site supervision.
  - Enact the Public Finance Act and other key laws (Securities Act, Land Act); Law Commission to accelerate legislative process.
  - Use the WTO trade policy review to rationalize tariffs and exemptions.

### Recent Developments and Macroeconomic Overview
- Output and inflation
  - Output growth fell to around 2% percent in 2002, implying stagnant per capita income.
  - Output growth estimates and projections: Real GDP growth entries include 3.5 (2001), 2.3 (2002), and projections across 2001-2007 in Table series.
  - Inflation: post-devaluation spike followed by averaging 2 percent in 2002 (through September) and 3 percent in 2001.
- External sector
  - Balance of payments improved after large reserve losses in late 2001.
  - Current account deficit expected to remain wide at almost 9 percent of GDP.
  - Official inflows strong due to large capital expenditures (notably the Hulhumale land reclamation project); private inflows picked up with establishment of two new financial institutions.
- Exchange rate and reserves
  - 9 percent devaluation in July 2001 and a weaker dollar strengthened competitiveness; parallel market reportedly disappeared after the devaluation.
  - Authorities view import cover target of 5 months of imports as warranted; recent reserve build-up seen positively but staff judge current policies incompatible with reconstituting a foreign-exchange buffer over the medium term.
  - Specific reserve figures: Official reserves reported as US$127 million at end-November (3.4 months of imports); other table entries: 94.3; 111.3; 86.9 (US$ millions, year-end).
- Fiscal developments
  - Fiscal deficits widened on strong expenditure growth; deficit worsened in 2001 for the fourth year in a row and was expected to widen in 2002 to about 6 percent of GDP.
  - Preliminary 2002 fiscal outturn: budget deficit of 7 percent of GDP; 2003 budget approved by Parliament targets a widening overall deficit to 8% percent of GDP.
  - Central government finance table highlights (selected percent of GDP): total revenue and grants 35.6; 33.0; 38.8; 33.8; 35.5 (various years); expenditure and net lending 43.7; 37.7; 46.5; 40.8; 44.0.
- Monetary and financial sector
  - Central bank financed fiscal imbalances continued; overdrafts from the MMA fill budgetary shortfalls.
  - Lifting of credit ceilings released liquidity overhang: credit to the private sector surged by 23 percent in 2002; broad money grew at 13 percent through September.
  - At dismantlement of credit ceilings in mid-2001, outstanding credit from the MMA was nearly 20 percent of GDP or one-third of total public debt.

### Banking Sector Performance and Recommendations
- Market structure and developments
  - Market: three state-owned foreign banks (India, Pakistan, Sri Lanka), a local state-owned bank (Bank of Maldives), and HSBC as a new entrant; a leasing company partly owned by the IFC started operation in 2002.
  - Historically profitable banks despite high funding costs implied by a 35 percent reserve requirement on deposits.
  - Entry of new institutions produced downward flexibility in lending rates; removal of cap on interest rate spread and bank-by-bank credit ceilings.
- Risks and supervisory needs
  - NPLs have risen, especially at the largest bank; mission observed current level of NPLs at a key bank is on the order of 4 percent of GDP and its deposits amount to about 20 percent of GDP.
  - Recommendation: strengthen supervision; review regulatory framework for loan classification and provisioning; prioritize strengthening on-site supervision; develop a strategy to deal with potential systemic issues.
  - Operational weaknesses: lack of an interbank market and high reserve requirements — both should be addressed as part of a gradual strategy to enhance monetary operations.
  - Limit on credit to a single borrower currently set at 15 percent of a bank’s unimpaired capital and reserves.

### External Vulnerability, Risks, and Scenarios
- Key vulnerabilities
  - Narrow production and export base; tourism and fisheries directly account for 40 percent of GDP and 22 percent of employment.
  - Inflation risks: international commodity price increases and rapid credit expansion could feed into inflation; demand pressures likely to affect international reserves.
  - Graduation from LDC status may reduce access to concessional funds; Maldives currently eligible for IDA funds on a “small island” exception.
- Scenario summaries
  - Current-policies scenario (2001-2007):
    - Fiscal deficits remain large until deteriorating reserves force action in 2005; import-intensive public projects bear adjustment, depressing activity.
    - Slow growth in fish exports and tourism receipts and debt service hamper reserve build-up; protracted fiscal profligacy leads to severe crowding-out of private sector.
  - Reform scenario (2001-2007):
    - Fiscal consolidation starts in 2003 with strong implementation of structural and legal reforms and speedier execution of concessional projects.
    - Upfront tax measures (including raising the bed tax and land rent for state-owned enterprises) and slower wage growth in 2003 enable gradual acceleration of growth via greater private sector participation and improved access to credit.
    - Reserves remain at a much more comfortable level and debt service is less burdensome; sustained growth prospects over the longer term are greatly enhanced.

### Debt, Financing, and Fund Relations
- External and public debt
  - External debt to GDP ratio about 42 percent (80 percent of which is public sector debt).
  - Debt service amounts to about 5l% percent of exports of goods and services.
  - Table projections show total public sector debt trajectories under different scenarios (examples: 51.0; 56.3; 61.3; 64.7; 65.2; 65.1; 65.0 in current-policies scenario).
- Fund relations (As of November 30, 2002)
  - Membership: Joined 1/13/78; Article XIV.
  - Quota: 8.20 (SDR Million); Fund holdings of currency: 6.65; Reserve position in Fund: 1.55.
  - Outstanding Purchases and Loans: None; Financial Arrangements: None.
  - Exchange arrangements: Pegged to U.S. dollar historically; devaluation to Rf. 12.8 per U.S. dollar on July 25, 2001; Maldives avails itself of transitional arrangements under Article XIV.

### Statistical Base, Data Issues, and Technical Assistance
- Statistical weaknesses
  - National accounts data available only annually and subject to large revisions.
  - Private capital flows in the balance of payments are roughly estimated; data on private external debt very limited.
  - Travel receipts estimated from a small-sample inquiry; estimates of profit remittances and reinvested earnings in tourism unsatisfactory.
  - Official reserves reported monthly with a variable two week lag.
- Capacity-building and TA
  - Authorities building statistical capacity with assistance from the AsDB and other donors; STA and AsDB provided missions on CPI, monetary, BOP, and national accounts.
  - Main official statistical publication: Statistical Yearbook of Maldives (latest version refers to 2002); Quarterly Economic Bulletin and Annual Report of the Maldives Monetary Authority available with lag.
- Recent data points (supplemental)
  - Tourist arrivals: January-November 2002 grew by 2.3 percent over same period in 2001.
  - Authorities estimate GDP growth in 2002 at 4.3 percent.
  - Inflation: 3.3 percent (12-month change) in November 2002.
  - Official reserves: US$127 million at end-November (3.4 months of imports), compared with US$131 million in April 2000.

### Key Quantitative Highlights (preserve source figures)
- Reserve and external indicators:
  - Official reserves (US$ millions, selected year-end figures): 94.3; 111.3; 86.9; US$127 million (end-November).
  - Gross official reserves reported elsewhere: 7,906 (table entry).
  - Central Bank short-term foreign liabilities (US$ millions): 2.2.
  - Short term foreign assets of the banking sector (US$ millions): 1.7.
  - Short term foreign liabilities of the banking sector (US$ millions): 111.3.
- Fiscal aggregates (selected levels in millions of Rufiyaa and percent of GDP):
  - Total revenue and grants (levels): 2001 Budget 2,710.4; 2001 Rev. Est. 2,522.6; 2002 Budget 2,740.3; 2002 Prel. Est. 2,725.3; 2003 Budget 2,986.g.
  - Expenditure and net lending (levels): 3,325.7; 2,885.9; 3,279.3; 3,293.7; 3,704.6.
  - Overall balance (levels): -615.3; -363.3; -539.0; -568.4; -717.8.
  - Percent of GDP: overall balance: -8.1; -4.7; -7.6; -7.0; -8.5 (selected years).
- Monetary and credit:
  - Reserve requirement on deposits: 35 percent.
  - Private sector credit increase in 2002: 23 percent.
  - Broad money growth through September 2002: 13 percent (in one section), table entries show multiple series (example broad money: 9.0; 10.5; other year entries).
- Social and demographic snapshots:
  - GDP per capita: $469 (1980-85); $2,265 (1995-2001).
  - Population total: 180,088 (1980-85); 275,975 (1995-2001).
  - Tourism and fisheries share: directly account for 40 percent of GDP and 22 percent of employment.
- Limits and regulatory ratios:
  - Limit on credit to a single borrower: 15 percent of a bank’s unimpaired capital and reserves.

*Prepared by the Staff Representatives for the 2002 Consultation with Maldives; extract from Staff Report for the 2002 Article IV Consultation (1mdvea2019005).*

### conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the

### conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the

### Executive Summary — Key Findings
- The weak external environment continues to depress growth; tourism and fisheries are slowly recovering but have not yet regained the ground lost in 2001.
- After over two decades of uninterrupted gains, per capita income likely remained flat in 2002.
- The pass-through from last year’s devaluation has been contained and inflation is not a policy concern.
- The international competitiveness of resorts and fisheries is not at issue; the devaluation and the weaker dollar have brought the effective real exchange rate closer to that of main competitors.
- Reserves have clawed back some of the losses in the aftermath of the devaluation; reserves recovered to about 3 months of imports.
- Widening fiscal deficits financed by money creation are undermining the viability of the fixed exchange rate regime.
- Central-bank financed budgetary imbalances continued in 2002, adding to the liquidity overhang in the banking sector; credit growth surged after credit ceilings were lifted, and NPLs are on the rise.
- Structural reforms are gathering momentum: important economic laws are in the works; restructuring of a key state-owned enterprise is to be implemented soon; the banking sector is adapting to greater competition.

### Policy Issues and Recommendations
- Fiscal and monetary policy need to be refocused to support the peg; disappearance of the parallel market after the devaluation suggests the exchange rate level is broadly appropriate.
- Institutional changes are urged to prevent future deficit monetization:
  - Early passage of the MMA Act.
  - Improvements in liquidity management to enhance the operational independence of the central bank.
- Fiscal consolidation is urgent; staff suggested measures on both the revenue and expenditure sides of the budget to achieve an adjustment of some 1% percent of GDP in 2003.
  - Authorities are reluctant to increase tourism-related taxes in the weaker economic environment and prefer better expenditure control.
- Structural reforms must continue to bolster medium-term prospects:
  - Legal reforms and further privatization to foster greater private sector participation and export diversification.
  - Financial liberalization needs to be supported by strengthened supervision.

### Recent Developments and Outlook — Macroeconomic Overview
- Output and inflation:
  - Output growth fell to around 2% percent in 2002, implying stagnant per capita income.
  - Following a post-devaluation spike, inflation averaged 2 percent in 2002 (through September) and was well contained at 3 percent in 2001.
- External sector:
  - Balance of payments improved after large reserve losses in late 2001.
  - Current account deficit expected to remain wide at almost 9 percent of GDP, as gains from import compression were more than countered by a decline in tourism revenues.
  - Official inflows remain strong due to large capital expenditures (notably the Hulhumale land reclamation project); private inflows picked up with establishment of two new financial institutions.
- Exchange rate and competitiveness:
  - The 9 percent devaluation in July 2001 and a weaker dollar strengthened international competitiveness; real effective exchange rate movements have reversed earlier losses versus comparable tourist destinations.
  - The parallel market reportedly disappeared after the devaluation.
- Fiscal:
  - Fiscal deficits widened on strong expenditure growth; the deficit worsened in 2001 for the fourth year in a row and was expected to widen again in 2002 to about 6 percent of GDP.
  - Sustained growth in the wage bill and greater reliance on non-concessional borrowing pushed expenditures upward while revenues were held back by lower imports and tourist arrivals.
- Monetary and financial sector:
  - Monetary developments characterized by central bank financing of fiscal imbalances; budgetary shortfalls continue to be filled by overdrafts from the MMA.
  - Lifting of credit ceilings released a long-standing liquidity overhang: credit to the private sector surged by 23 percent this year, while broad money grew at 13 percent through September.
  - At the time of the dismantlement of credit ceilings in mid-2001, outstanding credit from the MMA was nearly 20 percent of GDP or one-third of total public debt.

### Structural and Institutional Issues
- Reforms and governance:
  - First steps to strengthen revenue base undertaken (2001 imposition of a payment for public land use on state enterprises); broader tax reform remains unfinished due to limited implementation capacity.
  - Control of public spending, including the public sector wage bill, remains a priority.
  - Actions closer to Fund advice on financial and structural reforms: liberalization of interest rates, removal of bank-by-bank credit ceilings, closure of the Post Office Exchange Counter, opening fisheries to private operators.
  - Legal framework improvements have been made but progress is slow.
- Data and statistics:
  - Gaps and inconsistencies in economic data continue to hamper surveillance and policy design; further capacity building and statistical strengthening are needed.

### Risks, Scenarios, and Outlook Considerations
- Inflation risks:
  - Despite limited pass-through to date, inflation may pick up as international commodity prices rise and the recent rapid credit expansion could feed into inflation, although demand pressures are more likely to be felt in international reserves.
- External vulnerability:
  - The narrow production and export base remains a fundamental source of vulnerability; tourism and fisheries directly account for 40 percent of GDP and 22 percent of employment.
- Medium-term policy priorities:
  - Policies need to support the fixed exchange rate and adapt to structural changes: financial sector liberalization, increased private-sector participation in formerly state-dominated activities, and tapering off of external assistance.

*Prepared by the Staff Representatives for the 2002 Consultation with Maldives; extract from Staff Report for the 2002 Article IV Consultation.*

### 10. The banking sector is challenged by greater competition and slowing growth.8

### 10. The banking sector is challenged by greater competition and slowing growth.8

### Banking sector performance and immediate challenges
- Historically profitable banks despite high funding costs implied by a 35 percent reserve requirement on deposits.
- Market structure: three state-owned foreign banks (from India, Pakistan, Sri Lanka), a local state-owned bank (Bank of Maldives), and a new entrant (HSBC); a leasing company partly owned by the IFC started operation in 2002.
- Entry of new financial institutions has produced first signs of downward flexibility in previously rigid lending rates.
- In a weaker economic environment, nonperforming loans (NPLs) have risen, especially at the largest bank.
- Mission observation: current level of NPLs at a key bank is on the order of 4 percent of GDP and its deposits amount to about 20 percent of GDP — implying potential significant fiscal costs from further asset impairment.
- Recommendation: strengthen supervision; review regulatory framework for loan classification and provisioning; prioritize strengthening on-site supervision; develop a strategy to deal with potential systemic issues.
- Operational weaknesses undermining intermediation include lack of an interbank market and high reserve requirements — both should be addressed as part of a gradual strategy to enhance monetary operations.

### Structural reform momentum
- Fish exports opened to private operators; authorities considering restructuring loss-making Maldives Industrial Fisheries Company (MIFCO).
- Shares of the State Trading Organization (STO) have been sold to the public, supporting fledgling capital market development.
- Key economic laws in progress: a Public Finance Act and revised Banking and MMA Acts.
- Initial overhaul steps at the MMA: lifting of bank-by-bank credit ceilings, abolition of the cap on the interest rate spread, and establishment of a facility for emergency liquidity assistance.
- Privatization progress: public offering of 10 percent of STO shares only partially subscribed due to inadequate information campaign and underdeveloped capital market; steps underway to strengthen trading infrastructure, including enactment of a Securities Law and consideration of a role for the Provident Fund.
- Mission urged stepped-up divestment of activities suitable for private sector and stronger governance/accountability at state enterprises.

### Near-term outlook and external vulnerability
- Ongoing recovery in tourism and greater dynamism in fisheries expected to help raise growth to some 3 percent in 2003.
- Prospects hostage to external vulnerabilities: hesitations in global recovery, geopolitical uncertainties, and the impact on Maldivian tourism of the October 2002 Bali bombings.
- Three-fourths of visitors to the Maldives come from Europe; their travel typically entails a stop-over in the Middle East.

### Macroeconomic policy — Monetary and exchange rate policy
- Consensus: maintain the pegged exchange rate (U.S. dollar peg) as the cornerstone of the macroeconomic framework given high openness, small size, currency composition of trade, limited capital market integration, and institutional shortcomings.
- 2001 devaluation judged effective in eliminating the parallel market and shoring up international competitiveness; pressures on reserves gone and outright rationing of foreign exchange ended.
- Mission cautioned against use of moral suasion to constrain demand for dollars.
- Shifting the peg to a Euro/dollar basket considered premature due to limited institutional capacity and need for a simple, transparent nominal anchor.
- Authorities pleased with recent build-up in reserves but view import cover target of 5 months of imports as warranted.
- Mission view: current policies incompatible with reconstituting a foreign-exchange buffer and budgetary resources over the medium term.
- Monetary policy should support the fixed exchange rate regime; concern about continued monetization of fiscal deficits.
- Institutional reforms recommended to reduce fiscal monetization: close the government’s overdraft facility at the MMA (the Ways and Means account); introduce treasury bills; establish a legal basis for central bank independence.

### Fiscal policy — stance, risks, and recommended adjustment
- Authorities aware fiscal stance is putting stress on the system; 2003 budget guidelines issued to line ministries to cut expenditure but preliminary requests running well above 2002 levels.
- Mission urged an upfront fiscal adjustment in the 2003 budget and speedier reforms to curb fiscal dominance.
- Mission target: a deficit of about 3% percent of GDP (implying an adjustment of about 1% percent of GDP) would be achievable and mark a credible start of fiscal adjustment.
- Historical context: a suggested decline in the deficit from 6.0 percent of GDP to 3.8 percent of GDP — around 1/2 percent of GDP accounted for by projected reduction in capital spending due to completion of a large public project.
- Revenue measures suggested:
  - Increase the bed tax (a specific tax of US$6) to US$8 to restore its real value — minimal impact on tourist arrivals; could yield revenues on the order of l-l % percent of GDP when combined with raising rental on public land use by state enterprises from its present rate of one rufiyaa per square foot.
  - Medium-term measures: widen tax base via property and business taxes; shift from import duties to a general sales tax to make revenues less susceptible to external developments.
- Expenditure-side measures:
  - Improve public accounting system and expenditure controls.
  - Contain wage bill and slow wage growth; overhaul social security.
  - Prioritize capital spending within a multi-year plan considering recurring expenditure implications.
  - Civil service reform to remain on the agenda.
  - Expenditure adjustments should complement, not substitute for, tax measures.
- Mission note: changes in the tariff structure are not planned immediately; tariffification of existing quotas and elimination of widespread exemptions should be considered to reduce distortions.

### Fiscal financing, concessional flows, and debt sustainability
- Continued decline of concessional lending and grants; private financing slowly replacing donor assistance.
- Graduation from United Nations’ LDC status may reduce access to concessional funds; Maldives currently eligible for IDA funds on a “small island” exception.
- Increased reliance on commercial borrowing raises longer-run debt sustainability concerns despite currently low debt service due to large share of concessional loans.
- External debt to GDP ratio about 42 percent (80 percent of which is public sector debt); debt service amounts to about 5l% percent of exports of goods and services.
- Mission recommendation: exercise caution in debt management while prioritizing unmet development needs.

### Medium-term outlook — scenarios and implications
- Current-policies scenario (Table 6): fiscal deficits remain large until deteriorating reserves force action in 2005; import-intensive public projects take the brunt of adjustment, depressing activity; slow growth in fish exports and tourism receipts, and debt service hamper reserve build-up; by end of projection significant fiscal consolidation and some reserve recovery occur but in a manner detrimental to growth; protracted fiscal profligacy leads to severe crowding-out of private sector.
- Reform scenario (Table 7): fiscal consolidation starts in 2003 with strong implementation of structural and legal reforms and speedier execution of concessional projects; tax measures taken upfront (including raising the bed tax and land rent for state-owned enterprises); slower wage growth in 2003 relative to current-policies scenario; reforms enable gradual acceleration of growth via greater private sector participation and improved access to credit; reserves remain at a much more comfortable level and debt service is less burdensome; sustained growth prospects over the longer term are greatly enhanced by prompt adjustment and reforms.

### Financial sector and supervision recommendations
- Financial liberalization expected to increase private sector participation and improve access to credit, particularly for small operators.
- Structural weaknesses to be addressed: absence of interbank market; high reserve requirements; lack of competition historically stifled credit access.
- Immediate supervisory priorities: strengthen bank supervision, review loan classification and provisioning rules, and enhance on-site supervision to monitor emerging NPLs and systemic risks.
- Limit on credit to a single borrower is currently set to 15 percent of a bank’s unimpaired capital and reserves.

### Legal, regulatory, and other structural issues
- Legal reform slow; newly instituted Law Commission could accelerate legislative process.
- Important laws pending: MMA Act (sanctioning central bank independence) and Public Finance Act (provisions for issuing government paper).
- Passage of Securities Act and Land Act are positive steps, but further reforms needed to create a business-friendly environment and encourage foreign investment.
- Trade regime: Maldives has a rating of 7 in the Fund’s index of trade restrictiveness (scale 1 to 10); tariff structure consists of 10 rates ranging from zero to 200 percent, with an average of about 23 percent and a standard deviation of 25 percent; simple average across tariff lines is 46 percent while effective tariff rate is around 14 percent, indicating a complex system of exemptions.
- Money-laundering and terrorism financing: authorities consider Maldives in line with international guidelines; Fund questionnaire on this topic was still being compiled at mission time and discussions deferred.

*Source: 1mdvea2019005 - 10. The banking sector is challenged by greater competition and slowing growth.8*

### 29. Notwithstanding some improvements, the statistical base remains weak.

### 29. Notwithstanding some improvements, the statistical base remains weak.

### Statistical base and surveillance implications
- National accounts data are available only at an annual frequency and are often subject to large revisions.
- Private capital flows in the balance of payments are roughly estimated.
- Data on private external debt are very limited.
- Collection and analysis of data to help the MMA better gauge developments in the foreign exchange market should receive special attention.
- Authorities are building statistical capacity with assistance from the AsDB and other bilateral donors, but gaps and inconsistencies continue to hamper surveillance and policy design.

### Exchange rate framework and monetary policy
- The pegged exchange rate (peg to the U.S. dollar) should continue to be the cornerstone of the macroeconomic framework.
- Justifications cited for maintaining the fixed exchange rate include openness, small size, limited integration in world capital markets, constrained institutional capacity, and a flexible labor market.
- Transparency and institutional considerations argue against a shift from a peg to the U.S. dollar to a basket of currencies any time soon.
- Monetary management must be geared to supporting the peg; monetization of budgetary deficits undermines the fixed exchange rate.
- Closure of the overdraft facility for government access to central bank funds (the Ways and Means Account) should be of the highest priority.
- Early enactment of the revised MMA Act is key to establishing operational autonomy for monetary policy.
- Over time, an overhaul of the MMA’s governance structure to secure full central bank independence would serve the Maldives best.
- Recent steps away from reliance on direct instruments of monetary control are in the right direction and should continue.
  - There is scope to better adapt central bank paper used to absorb liquidity (e.g., offering shorter maturities or more attractive interest rates).
  - Gradual reduction of high reserve requirements could be considered to curb banks’ funding costs, but only once effective liquidity management is in place.

### Fiscal policy, public finances, and consolidation
- The present stance of fiscal policy jeopardizes external viability; fiscal discipline needs to be restored quickly.
- The 2003 budget should mark the start of credible consolidation.
- Revenue measures recommended include increasing the tourism bed tax and land rent for state-owned enterprises to more realistic levels.
- Expenditure-side recommendations:
  - Contain expenditures on general administration and the wage bill.
  - Prioritize capital spending.
  - Smooth capital spending in a multi-year public investment program, considering recurring expenditure implications of public projects.
- Institutional and administrative reforms needed:
  - Strengthen mechanisms of expenditure control.
  - Introduce government securities to tap domestic savings for deficit financing.
  - Overhaul the public accounting system and early passage of the Public Finance Act.
  - Review the system of allowances for public sector employees in the context of social security and civil service reform.
- Financing cautions:
  - Limit reliance on commercial funds to finance public investments to avoid long-term public debt sustainability problems.
- Tax policy recommendations to reduce revenue vulnerability to external shocks:
  - Introduce a property tax.
  - Introduce a business profit tax.
  - In time, shift from import duties to a general sales tax.

### Structural reforms, privatization, and financial sector supervision
- Strengthen resilience to shocks through structural reforms to enhance private sector role and foster non-traditional exports.
- Continue privatization of state enterprises that could be operated by the private sector.
- Reforms to strengthen accountability and operational efficiency of state enterprises, particularly MIFCO, should not be delayed.
- The authorities have promoted greater liberalization and competition in the banking sector; this should be matched by strengthened supervision.
  - Urgent reassessment of the adequacy of current regulation on loans classification and provisioning is important.
  - Review MMA preparedness to deal with potential systemic concerns.
- The unfinished legal reform agenda needs to be pursued aggressively by the newly established Law Commission to establish an enabling legal environment for business formation and foreign investment.
- Although the Maldives has a commendably liberal exchange regime, trade policies remain moderately restrictive:
  - The current tariff structure suggests distortions and an opaque system of exemptions.
  - The upcoming WTO trade policy review is an opportunity to rationalize arrangements and advance trade liberalization.

### Policy and institutional recommendations (summary)
- Close the Ways and Means Account (overdraft facility) as a priority.
- Enact the revised MMA Act promptly to establish operational autonomy for monetary policy.
- Overhaul MMA governance over time to secure full central bank independence.
- Continue adapting monetary instruments (shorter maturities, attractive interest rates) and consider gradual reduction of high reserve requirements once liquidity management is effective.
- Restore fiscal discipline starting with the 2003 budget.
- Increase tourism bed tax and land rent for state-owned enterprises.
- Contain general administration and wage bill spending; prioritize and smooth capital spending.
- Strengthen expenditure controls; introduce government securities; pass the Public Finance Act.
- Review public sector allowances within social security and civil service reform.
- Limit use of commercial borrowing for public investment.
- Broaden revenue base: property tax, business profit tax, and eventual shift from import duties to a general sales tax.
- Continue privatization where appropriate and strengthen state enterprise governance, notably for MIFCO.
- Strengthen banking supervision, loans classification and provisioning rules, and MMA contingency preparedness.
- Pursue legal reforms to support business formation and foreign investment.
- Use the WTO trade policy review to rationalize tariffs and exemptions.

### Consultations and follow-up
- It is recommended that the next Article IV consultation with the Maldives take place on the standard 12-month cycle.
- Authorities are not yet ready to accept the obligations under Article VIII, Sections 2,3, and 4, of the Fund’s Articles of Agreement; they noted the issue would be considered in the near future.

*Source: IMF staff appraisal and related sections from the provided chapter.*

### 26. I

### 1mdvea2019005 - 26. I

### Indicators of External Vulnerability (1991-2002)
- Broad money (annual percent change): 7.0; 10.5; 15.9; 10.4; -51.6; -51.1; 8.2; 15.1; 10.5; -6.0; -0.5; 5.3; 21.9 20.9 18.4; 11.9; 12.8 11.9; 28.6; 25.5 22.0; -37.4; -26.9; 30.9; 38.0; 33.0; 21.1; 12.7 12.8 15.2; -7.1 -1.6 18.0; 21.2 15.7 10.2; 13.7; 14.5 9.8; -32.0 23.0 8.9
- Key external stock and flow indicators (selected values reported in the table):
  - Gross official reserves (in US$ millions): 7,906
  - Central Bank short-term foreign liabilities (in US$ millions): 2.2
  - Short term foreign assets of the banking sector (in US$ millions): 1.7
  - Short term foreign liabilities of the banking sector (in US$ millions): 111.3
  - Total external debt (multiple year entries): 142.4 417.5 420.3 308.4 252.1 208.3
  - Total external debt to domestic exports GNFS: 40.8; 35.0 37.2 36.1 33.9; 33.6
  - Total reserves to short term external debt (residual maturity): 24.8 25.0 25.6 24.3 22.9 24.9
  - Official reserves in months of following year’s imports GNFS: 59.3 46.2 49.5 52.4 49.9 48.8
  - Exchange rate (per US$, end period): reported series include 4.3 7.6 4.0 4.7 5.2 5.1; and other series showing 3.0 14.0 2.3 2.6 3.4 -0.6
- Sources: Maldivian authorities; Fund staff estimates and projections.
- Notes provided in table footnotes:
  - The first entry is the average for 1995-96.
  - Adjusted for the exchange rate change in 2001.
  - GNFS = Goods and Non Factor Services.
  - Domestic exports are defined as merchandise exports net of re-exports.

### Current Policies with Eventual Forced Adjustment Scenario (2001-2007) — Macroeconomic projections
- Output and prices:
  - Real GDP growth (2001-2007 series includes): 3.5 (2001), 2.3 (2002), 0.7, 1.0, 3.2, 3.5, 1.2 2.2 (various year entries shown).
  - Consumer prices (period average) multiple year entries shown in table.
- Central government (percent of GDP, selected years):
  - Revenue and grants: 32.8 (2001); 33.7 (2002); 34.3 33.9 34.1 (subsequent entries)
  - Tax revenue: 13.6 13.4 13.2 12.4 12.3
  - Non-tax revenue: 16.7 18.9 19.7 20.1 20.6
  - Grants: 2.4 1.3 1.4 1.3 1.2
  - Expenditure and net lending: 37.7 39.6 38.5 36.8 36.9
  - Current expenditure: 26.4 26.2 29.0 29.3 29.3
  - Capital expenditure: 11.7 13.9 10.0 8.0 8.0
  - Overall balance: -4.9 -6.0 -7.3 -7.2 -4.3 -2.9 -2.8 (various entries)
  - Overall balance, excl. grants: -7.2 -7.1 -8.7 -8.6 -5.6 -4.2 -4.0 (series entries)
- Financing:
  - Domestic financing and foreign financing series listed: 2.0 1.6 4.7 4.9 2.6; 1.3 1.3; 2.8; 4.4 2.5 2.2 1.7 1.6 1.5
- Debt and public sector:
  - Total public sector debt: 51.0 56.3 61.3 64.7 65.2 65.1 65.0
  - Total government debt: 44.4 49.0 54.0 58.2 59.6 59.2 58.7
  - Of which: Foreign debt: 24.9 28.4 29.7 30.3 30.4 30.3 30.2
  - Public enterprise debt: 6.6 7.3 7.2 6.5 5.6 5.9 6.3
- Monetary survey (annual percent change, selected):
  - Broad money: 9.0 10.5; Domestic credit: 19.4 18.4; Credit to the private sector: 8.4 11.9; other series: 29.9 21.1
- Balance of payments (US$ millions, selected):
  - Trade balance and Current account balance series include: -237.8; -209.7 -223.7 -230.3 -211.5 -216.4 -218.0
  - Gross official reserves (year-end): 94.3 111.3 86.9
  - External debt (year-end): 209.8 262.2 281.2 296.2 308.2 320.2
  - External debt (In percent of GDP): 33.6; 42.4 43.6 43.4 42.9 42.1
  - Debt service (In percent of exports of GNFS): 5.1 5.5 4.9 4.8 4.8 5.5
- Memorandum items:
  - Gross official reserves (year-end) and months of imports presented: 94.3 111.3 86.9; 56.2 46.9 49.0 (various month entries)
- Footnotes:
  - The decline in exports in 2006 reflects the expiration of garment export privileges. Garments account for almost half of merchandise exports.
  - Domestic exports are defined as merchandise exports net of reexports.
  - GNFS = Goods and Nonfactor Services.

### Reform Policies Scenario (2001-2007) — Alternative projections
- Output and prices:
  - Real GDP growth examples: 3.5 (2001), 2.3 (2002), 0.7, 1.0, 2.8, 5.0, 1.5, 1.9 (series entries).
- Central government (percent of GDP, selected):
  - Revenue and grants: 32.8 (2001); 33.7 (2002); 35.1 34.6 34.2 (subsequent entries)
  - Tax revenue: 13.6 13.4 14.1 13.5 12.9
  - Non-tax revenue: 16.7 18.9 19.6 19.9 20.1
  - Grants: 2.4 1.3 1.3 1.2 1.1
  - Expenditure and net lending: 37.7 39.6 31.6 37.0 36.1
  - Current expenditure: 26.4 26.2 26.1 25.4 24.6
  - Capital expenditure: 11.7 13.9 12.0 12.0 12.0
  - Overall balance and overall balance excl. grants improvements: examples shown -3.8 -2.8; -5.4 -4.2; -2.5 -2.3 -2.0; -3.8 -3.5 -3.1
- Financing and debt outcomes:
  - Financing entries include domestic/foreign items: 2.0 1.6 0.9 -0.1 -0.2 -0.1 -0.2; and 2.8 4.4 2.9 2.9 2.7 2.4 2.2
  - Total public sector debt trajectory: 51.0 56.3 57.9 56.5 54.0 52.0 49.5
  - Total government debt: 44.4 49.0 50.7 50.2 48.9 46.9 44.4
  - Of which: Foreign debt: 24.9 28.4 30.1 31.1 31.4 31.1 30.3
  - Estimated public enterprise debt: 6.6 7.3 7.2 6.3 5.2 5.1 5.1
- Monetary survey (percent change, annual, selected):
  - Broad money: 5.9 8.9 8.0; Domestic credit: 11.8 12.5 6.8; Credit to government (net) and private sector series shown with varying entries.
- Balance of payments (US$ millions, selected):
  - Domestic exports (in percent change) and tourism receipts show improved trajectories (examples include 5.0 6.0 7.0 -46.3 l/ 8.0 in the table).
  - Trade balance and current account series include: -237.8 -209.7 -218.5 -220.8 -222.6 -244.3 -249.4
  - Gross official reserves (year-end): 94.3 111.3 94.5 81.7 83.7 92.5
  - External debt (year-end): 209.8 262.2 283.7 303.7 323.7 343.7
  - External debt (In percent of GDP) series: 33.6; 42.4 44.0 44.1 43.4 42.0
  - Debt service (In percent of domestic exports of GNFS): 2.9 3.2 2.6 2.1 2.2 2.3; other related ratios shown.
- Memorandum items include reserve-month metrics and projection items (e.g., 117.5; 2.9; 363.7; 40.2; 23.4; 4.6).

### Maldives: Fund Relations (As of November 30, 2002)
- 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
  - Percent of quota breakdown: 100.00; 81.05; 18.95
- SDR Department (SDR Million):
  - Net cumulative allocation: 0.28
  - Holdings: 0.28
  - Percent allocation breakdown: 100.00; 98.80
- Outstanding Purchases and Loans: None.
- Financial Arrangements: None.
- Projected Obligations to Fund: None.
- Exchange arrangements (historical highlights):
  - Pegged to U.S. dollar: March 1, 1982 to June 30, 1985.
  - Linked to trade-weighted basket beginning July 1985; devaluation of rufiyaa by 29 percent on March 1, 1987.
  - Since October 1994 unchanged at Rf 11.77 per U.S. dollar until July 25, 2001 devaluation to Rf. 12.8 per U.S. dollar.
  - Maldives avails itself of transitional arrangements under Article XIV; exchange rate restrictions subject to approval under Article VIII.
- Last Article IV Consultation: 2001 Article IV consultation (SM/01/253, August 14, 2001) concluded by the Executive Board on August 31, 2001 (EBM/01/86).

### Technical Assistance (selected missions and areas)
- FAD (fiscal affairs):
  - April 1994: Mr. Potter and Ms. Bedague — budget management advice.
  - November 1994–December 1995: periodic assistance from Mr. Webber (consultant).
  - July 1994 and August/September 1995: Mr. Faria and Mr. Kambil (consultant) — revenue reform strategy and drafting tax legislation.
  - October 1996; June 1997: tax administration missions to develop Inland Revenue Department strategy.
- MAE (monetary and exchange matters):
  - March 1993: consultant on introduction of treasury bills.
  - November 1994: mission headed by Mr. Taniguchi — monetary management, foreign exchange operations, bank supervision.
  - 1995–1997: consultants on treasury bills, MMA certificate market, reform of monetary operations, foreign exchange advisory.
  - Early 2001 and July 2001: consultants on foreign exchange and monetary management; follow-up on lifting credit ceilings.
  - October 2002: multi-purpose mission on banking, foreign exchange operations, and reserves management.
- STA (statistics):
  - June 1993 and February 1994: assistance on monetary and balance of payments statistics.
  - May 1995 and August 1996: assistance on compilation of new consumer price index.

### Relations with the World Bank Group (As of October 31, 2002)
- IBRD/IDA lending operations (total commitments in IDA net of cancellation): Total 62.24 (In millions of U.S. dollars net of cancellation).
  - Current Portfolio (IDA): Education and Training III — 17.6 commitment; 12.9 undisbursed.
  - Closed projects listed include Fisheries I, II, III; Male Airport Upgrading; Education and Training I and II.
- Project implementation focus:
  - IDA involvement emphasized fisheries, tourism-supporting Male Airport Upgrading, and human resource development.
  - IDA provided a $243,000 Institutional Development Fund (IDF) grant to strengthen Public Enterprise Monitoring in the Ministry of Finance and Treasury.
  - Current IDA portfolio includes Third Education and Training project and $245,000-IDF technical assistance for land and housing market legal/regulatory framework.
  - Country Assistance Strategy dated November 17, 2000: shift toward increased non-lending activities and programmatic lending to reduce poverty and regional disparities; new project under consideration to foster regional growth centers in outer atolls.

### Relations with the Asian Development Bank (As of August 31, 2002)
- AsDB assistance since 1981:
  - 11 Special Fund loans totaling $71.3 million.
  - Cumulative disbursements as of August 2002: $43.3 million (61 percent of amount available for withdrawal).
  - 28 advisory TA grants for $11.39 million; 14 TA grants amounting to $3.19 million for project preparation.
- List of loans (selected entries, net loan amount and disbursed):
  - Inter-island Transport Project (1981): 0.85 (disbursed 0.85)
  - Multi-project (1984): 2.88 (disbursed 2.88)
  - Power System Development Projects and Male Port Development Projects across late 1980s–1990s with amounts and disbursement figures listed.
  - 1997–2001 loans include amounts and disbursement status (e.g., 1997: 6.46 net, disbursed 4.72; 2001: 9.40 net, disbursed 0.00; 2001: 7.90 net, disbursed 0.00).
- AsDB focus shift:
  - Early projects focused on Male infrastructure; more recent focus on social infrastructure in the atolls and education.

### Social and Demographic Indicators (selected)
- GDP per capita: $469 (1980-85); $2,265 (1995-2001).
- Land area: 298 km (1980-85); 298 km (1995-2001).
- Population:
  - Total population: 180,088 (1980-85); 275,975 (1995-2001).
  - Rate of growth (percent per annum): 2.8 (1980-85); 2.0 (1995-2001).
  - Density in Male (persons per sq. km.): 86.8 (1980-85); 70,000 (listed under latest single year; table shows mixed entries).
- Population characteristics (1998 and other years):
  - Infant mortality at birth (per 1,000): 27.8
  - Crude birth rate (per 1,000): 49.5
  - Crude death rate (per 1,000): 19
  - Life expectancy at birth (years): 58.7; 68.3 (other series)
- Labor force (in percent of working-age population):
  - Labor force participation rate: 46.7 (one entry) and 54.8 (another entry)
  - Male: 69.6; 71.7 (two entries)
  - Female: 21.4; 37.4 (two entries)
  - Unemployment rate (1995): 17
- Health care (1997 and related):
  - Access to safe water: 89 (percent)
  - Immunization (DPT, percent of children under age one): 92
  - Population per physician: 7,889
  - Population per nurse: 1,328
  - Population per hospital bed: 1,068; 1,500; 687; 275 (multiple entries reflecting different years/metrics)
- Education:
  - School enrollment, primary (gross, 1997): 145.6; 128.3 (two entries)
  - School enrollment, secondary (gross, 1996): 59.5; 4.1 (table shows multiple entries)
  - Adult illiteracy rate (percent, ages 15 and above): 6.8; 3.3

### Statistical Issues and Technical Assistance (Annex V)
- Progress and remaining challenges:
  - Substantial improvements in macroeconomic statistics in recent years with STA and AsDB assistance.
  - Main official statistical publication: Statistical Yearbook of Maldives (latest version refers to 2002).
  - Other publications received by APD: Quarterly Economic Bulletin and Annual Report of the Maldives Monetary Authority (with lag).
- Real sector and national accounts:
  - AsDB assistance to set up a framework for more comprehensive national accounts.
  - Results include rebased production-side figures and preliminary expenditure-side figures.
- Price statistics:
  - CPI based on the 1993 income and expenditure survey and incorporating improved data collection procedures was developed with STA assistance and compiled since June (table truncated at that point).

*Sources: Maldivian authorities; Fund staff estimates and projections; World Bank staff; Asian Development Bank; Statistical Yearbook of Maldives, various years; World Development Indicators 2000.*

### 1995. A STA consumer price statistics mission of August 1996 recommended that the authorities

### 1mdvea2019005 - 1995. A STA consumer price statistics mission of August 1996 recommended that the authorities

### Consumer price statistics
- A STA consumer price statistics mission of August 1996 recommended that the authorities develop additional price indices for a more comprehensive analysis of inflation.

### Fiscal sector (data reporting)
- In 1996, the authorities resumed regular reporting of data for publication in the GFS Yearbook and the latest published data refer to 2000.

### Monetary sector (data reporting and reconciliation)
- In 2001 the Maldives Monetary Authority (MMA) began reporting monetary data on a monthly basis.
- There are inconsistencies between monetary and fiscal data regarding the financing of the fiscal deficit; reconciliation involves issues of timing and coverage.

### External sector (coverage and quality issues)
- Following the 1994 STA mission, measures were taken to improve balance of payments data coverage and quality, but problems persist:
  - Travel receipts are still estimated on the basis of a small-sample inquiry of resorts/hotels to determine daily average expenditure by tourists.
  - Estimates of profit remittances and reinvested earnings in the tourism sector are still unsatisfactory.
  - Information on private capital flows is incomplete.
  - Official reserves are reported monthly with a (variable) two week lag.
  - Predetermined drains on foreign currency assets (mainly debt service payments) are known and reported at the time of the annual missions, while contingent drains on foreign currency assets have not been identified.
  - Quarterly data on external debt and debt service is available for the government and the monetary authority, and to a limited extent for the banking sector, while no data is reported for the corporate sector. Data is made available at the time of the annual missions.

### Recent economic developments (supplemental information)
- Tourist arrivals: In January-November 2002, tourist arrivals grew by 2.3 percent over the same period in 2001.
- GDP growth: Authorities estimate growth in 2002 at 4.3 percent, higher than the earlier estimate by two percentage points.
- Inflation: 3.3 percent (12-month change) in November 2002.
- Official reserves: Reached US$l27 million at end-November (3.4 months of imports), compared with US$131 million in April 2000.

### Fiscal developments in 2002 and the 2003 budget
- Preliminary 2002 fiscal outturn:
  - Budget deficit of 7 percent of GDP (2002), an outturn close to that targeted at the time of budget formulation but larger than expected by staff.
  - Expenditures reportedly rose by 3 percentage points of GDP from 2001, mainly due to higher capital spending (mostly foreign-financed), partially offset by stronger than expected inflows of grants.
  - The estimated 2002 deficit, up from 4.7 percent of GDP in 2001, would represent a continuation of a pattern of widening fiscal imbalances, albeit with reduced recourse to central bank financing.
- 2003 budget (approved by Parliament at end-December):
  - Targets a widening in the overall deficit to 8% percent of GDP, mainly driven by further spending increases.
  - Current expenditure budgeted to rise by 1% percentage points of GDP.
  - Capital expenditure budgeted to rise by 2% percentage points of GDP.
  - Authorities expect the deficit to be mostly foreign-financed, with central bank financing projected to fall to 0.3 percent of GDP.
  - Details on the prospective sources of foreign financing are not yet available.
  - Staff concern: fiscal target is inconsistent with the pressing need for fiscal restraint; if planned foreign financing does not materialize, central bank funds might be used to finance the deficit, jeopardizing external viability. Excessive reliance on foreign financing at commercial terms may also pose risks.

### Table highlights — Central Government Finance, 2001-2003 (selected levels and percent of GDP)
- Levels (in millions of Rufiyaa):
  - Total revenue and grants: 2001 Budget 2,710.4; 2001 Rev. Est. 2,522.6; 2002 Budget 2,740.3; 2002 Prel. Est. 2,725.3; 2003 Budget 2,986.g
  - Total revenue: 2001 Budget 2,528.3; 2001 Rev. Est. 2,310.9; 2002 Budget 2,640.8; 2002 Prel. Est. 2,578.l; 2003 Budget 2J73.4
  - Grants: 182.1; 211.7; 99.5; 147.2; 113.4
  - Expenditure and net lending: 3,325.7; 2,885.9; 3,279.3; 3,293.7; 3,704.6
  - Current expenditure: 2,017.9; 1,971.4; 2,113.0; 2,136.l; 2,367.5
  - Capital expenditure: 1,353.3; 940.7; 1,207.8; 1,198.0; 1,459.0
  - Overall balance: -615.3; -363.3; -539.0; -568.4; -717.8
  - Foreign financing: 589.6; 145.8; 511.0; 506.8; 689.8
  - Domestic financing: 25.7; 217.5; 28.0; 61.6; 28.0
- Percent of GDP:
  - Total revenue and grants: 35.6; 33.0; 38.8; 33.8; 35.5
  - Current revenue: 33.0; 30.0; 37.2; 31.9; 33.6
  - Tax revenue: 14.9; 13.7; 15.6; 13.3; 13.4
  - Non-tax revenue: 18.2; 16.3; 21.7; 18.6; 20.1
  - Expenditure and net lending: 43.7; 37.7; 46.5; 40.8; 44.0
  - Current expenditure: 26.5; 25.8; 29.9; 26.5; 28.1
  - Capital expenditure: 17.8; 12.3; 15.3; 14.9; 17.3
  - Overall balance: -8.1; -4.7; -7.6; -7.0; -8.5
  - Overall balance excluding grants: -10.5; -7.5; -9.0; -8.9; -9.9
  - Current balance: 6.5; 4.2; 7.3; 5.4; 5.4
  - Foreign financing: 7.7; 1.9; 7.2; 6.3; 8.2
  - Domestic financing: 0.3; 2.8; 0.4; 0.8; 0.3
- [In millions of Rufiyaa] (in percent of GDP)
- Source: Data provided by the Maldivian authorities.

### Monetary policy and banking sector
- Measures implemented: abolition of the cap on interest rate spread, removal of bank specific credit ceiling, use of central bank certificate of deposits.
- Outcomes:
  - Management of liquidity improved and long standing liquidity overhang was released.
  - Private sector credit increased by 23 percent in 2002, while money growth was contained.
  - Aim of monetary policy: support the pegged exchange rate system.
  - Plans: further develop use of indirect monetary policy instruments to control liquidity; move to limit government’s automatic resort to the MMA overdraft facility; lay institutional groundwork for introduction of treasury bills to replace the present overdraft system.
- Reserves objective: Authorities agree with staff that continuing accumulation of reserves to the equivalent of 5 months of imports needs to be underpinned by a stronger fiscal position.

### Structural reforms and other issues
- Structural reforms revived to promote private sector:
  - Opened fish exports to private operators.
  - Restructuring of the loss making Maldives Industrial Fisheries Company in progress.
  - Shares of the State Trading Organization (STO) were sold to the public; further share sales planned with measures to improve trading infrastructure, including enacting a securities law and possibly giving a role to the Provident Fund.
  - Law Commission established to speed up legislative process and pass legal reforms to improve business environment.
- Banking sector reforms:
  - Entry of an international bank and establishment of a leasing company.
  - Authorities aim to reduce reserve requirements and establish an interbank market.
  - Need to improve regulatory and supervisory framework given growing competition.
  - Non-performing loans (NPLs): recent emergence merits closer look at loan classification and provisioning; big jump in NPLs in June 2002 mainly attributable to a rise at one of the largest banks which reached 25 percent of total loans (authorities consider this a localized problem).
- Statistical capacity:
  - Authorities aware of statistical limitations in their economic database and are working with the AsDB and other donors to address weaknesses and capacity constraints.

*Source: Data provided by the Maldivian authorities; IMF Staff Report supplement, January 6,2003.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019005.pdf_