## 1mdvea2019006

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### Executive Summary — Tsunami impact and macroeconomic shock
- December 2004 tsunami caused devastating damage; physical damage relative to the size of the economy was the highest among affected countries.
- Cost of reconstructing housing and infrastructure estimated at $375 million (about 50 percent of GDP).
- Private tourist resorts sustained damages amounting to $100 million (largely covered by insurance).
- Human displacement: displacement of 5 percent of population.
- Tourism declined by a third (tourist arrivals fell by 33 percent).
- Real GDP contracted by 3¾ percent in 2005.
- Overall balance of payments deficit of $140 million projected for 2005.
- Foreign reserves declined from 3½ months of imports a year ago to 2½ months.
- Financing from the Maldives Monetary Authority (MMA) amounted to 9 percent of GDP in 2005.

### Reconstruction progress and financing
- Donors have so far pledged 70 percent of assessed reconstruction needs.
- Aid amounting to $260 million has been pledged so far, but disbursements and reconstruction were initially slow.
- As of October 2005, 18 percent of donor pledges (or about 6 percent of GDP) had been disbursed.
- Recorded budgetary reconstruction spending as of October 2005 was Rf 300–400 million (3 percent of GDP), including a government contribution of 1 percent of GDP.
- Government estimates total recovery efforts in 2005 should amount to over 10 percent of GDP.
- In the 2006 budget, donor funding of recovery efforts is expected to be about Rf 2.4 billion or 20 percent of GDP.
- Government contribution included in the 2006 budget is 1–2 percent of GDP.
- Additional donor commitments of around $100 million are still needed to fully reconstruct infrastructure, especially for transport and water and sanitation.

### Macroeconomic developments, vulnerabilities, and key statistics
- Economy highly dependent on tourism and fisheries; tourism contributed nearly half of growth prior to the tsunami.
- Income per capita grew by 60 percent over the decade through 2004 to above $2,500.
- Dollar peg has served as a credible nominal anchor.
- Vulnerabilities: undiversified production, small size, geography; global warming and rising sea levels pose long-term threat.
- Fiscal structure inflexible: revenues (e.g., “bed” tax fixed per overnight stay; resort lease payments and SOE transfers pre-determined) and expenditures downward rigid.
- Historical policy outcome: high recourse to MMA borrowing and a currency devaluation in 2001.
- Selected 2004–06 highlights:
  - Population (2004): 299,520
  - Nominal GDP (2004): 799.6 (in millions of U.S. dollars)
  - GDP per capita (2004): 2,670 (in U.S. dollars)
  - Real GDP (annual % change): 2004: 8.8; 2005: -3.6; 2006: 8.0 (est./proj.)
  - Central government revenue and grants (percent of GDP): 2005: 48.8; 2006: 51.1
  - Expenditure and net lending (percent of GDP): 2005: 61.1; 2006: 72.3
  - Overall balance (percent of GDP): 2005: -12.3; 2006: -21.3
  - Domestic financing (percent of GDP): 2005: 9.0; 2006: 9.8
  - Government debt (end period, percent of GDP): 2005: 53.7; 2006: 68.2
  - Gross official reserves (year-end, millions): 2005: 187.2; 2006: 164.0
  - Current account balance (percent of GDP): 2005: -36.5; 2006: -38.5
  - External debt (percent of GDP): 2005: 58.9; 2006: 70.4

### 2005 fiscal and financial developments
- Supplementary budget (August 2005) envisaged budget deficit (including foreign grants) of Rf 1.6 billion (15 percent of GDP)—up from 4 percent of GDP in the original budget—and a domestic financing requirement of 12 percent of GDP.
- Tourism-related revenues declined by 4 percent of GDP.
- New revenue measures in the original budget (2 percent of GDP) were not implemented.
- Domestic contributions to higher relief and recovery outlays and new initiatives each added 2 percent of GDP to the fiscal deficit.
- Authorities saved about 3 percent of GDP mainly by reducing administrative expenditures during the last quarter of 2005, leaving an estimated deficit of 12 percent of GDP with MMA borrowing of 9 percent of GDP.
- Despite high domestic financing, inflation remained well below 5 percent (year-on-year) as private domestic currency lending was modest.
- Commercial banks’ foreign borrowing: about $100 million from headquarters abroad; private sector foreign-currency lending increased by $94 million (first nine months of 2005), representing 80 percent of private credit growth.

### Monetary policy, MMA operations, and recommendations
- Monetary policy has been passive with the MMA automatically financing the fiscal deficit.
- Key measures and current practice:
  - Tap sales of MMA CDs introduced in 1995; tap sales continue with a fixed interest rate of 4 percent regardless of market liquidity.
  - Interest rates liberalized in 2001 except for a 20 percent ceiling on lending rates.
  - Minimum reserve requirement (MRR) lowered from 35 percent to 30 percent in 2003 and has remained at 30 percent.
  - Commercial bank interest rates broadly unchanged since mid-2002.
- Institutional reform status:
  - An amended MMA Act (drafted in 2003) to make the central bank independent and set limits to government borrowing was withdrawn from parliament for further revision.
- Monetary management recommendations:
  - Expedite adoption of the amended MMA Act to make the monetary authority independent and set legal limits to government domestic borrowing.
  - Reduce the reserve requirement further to improve intermediation.
  - Continue development of a liquidity forecasting framework, auction MMA CDs, and eventually replace MMA CDs with treasury bills.
  - MMA could consider adjusting CD rates to absorb liquidity created by high government domestic borrowing.
  - Automatic financing of the budget deficit by the MMA should cease.

### Structural reform progress and priorities
- Legislative and reform items at various stages:
  - Business Profit Tax (BPT) Act not yet enacted.
  - Preparations for a sales tax and an MTEF did not progress last year.
  - Public Finance Act enacted in December but without the provision limiting government access to MMA borrowing.
  - Public Enterprise Act preparation delayed.
  - Banking and Securities Acts drafted in early 2005; planned for submission to parliament in 2006.
  - Insurance legislation under preparation.
- Public enterprises:
  - No firm privatized since 2001.
  - Government plans to sell shares of Allied Insurance, Housing Development and Finance Corporation, and Water and Sewerage Company in 2006.
- Financial sector supervision:
  - On-site examinations of three major banks completed with MFD assistance.
  - NPLs average less than 4 percent of loan portfolio for three of the four commercial banks; one bank has an 18 percent NPL ratio with measures taken.

### 2006 budget assessment, risks, and mission recommendations
- Mission objective: restore fiscal discipline in 2006, limiting domestic financing to less than 3 percent of GDP.
- Government intentions discussed (prior to budget adoption):
  - Implement 2005 budget measures and largely eliminate import duty exemptions.
  - Expect higher resort lease payments and advance lease payments from tenders of five new resort islands.
  - On expenditures: limit domestic spending to the original 2005 budget level except for an increase in the wage bill amounting to 3 percent of GDP and elimination of power, water, and food subsidies saving 2 percent of GDP.
  - If implemented, domestic financing requirement could be slightly less than 3 percent of GDP.
- Actual 2006 budget adopted includes significantly higher spending (about 7 percent of GDP increase) with:
  - Even higher wage bill and additional health and education spending not tsunami related.
  - Increased allocations for domestic investment projects not donor-funded.
- Budget financing risks:
  - Proposed financing assumed advance lease payments amounting to 4½ percent of GDP and additional budget support from bilateral donors (3 percent of GDP).
  - Collecting advance lease payments from 35 island tenders within one year is considered difficult; donor support assumptions appear optimistic.
  - Shortfalls could lead to government borrowing from the MMA exceeding 9 percent of GDP, risking inflationary pressure and/or losses in foreign reserves.
- Mission recommendations for fiscal management:
  - Enhance revenues and prioritize spending through introduction of the MTEF and civil service reforms.
  - Accelerate implementation of BPT (planned for 2008) and preparation of a sales tax; aim to collect about 3 percent of GDP by 2008 per authorities’ plan.
  - Adjust the tourist “bed” tax more frequently with a view to turning it into an ad valorem tax.
  - Early introduction of the MTEF for capital spending to prioritize projects.
  - Limit general administration expenses and streamline the public service; civil servants are 10 percent of the population and their wage bill is 20 percent of GDP.
  - Expeditious enactment of the Public Finance Act and the Audit Act to improve public sector management.

### Exchange rate regime and assessment
- Dollar peg assessed as an appropriate exchange rate arrangement:
  - Peg reduced transaction costs and exchange rate risks, provided a transparent nominal anchor, and suited constrained institutional capacity.
  - Level of the exchange rate appears generally appropriate despite near double-digit inflation earlier in the year.
  - No parallel foreign exchange market; forex shortages eased with strong recovery of tourist arrivals in late 2005.
- Risk: Sustained expansionary fiscal stance implied in the 2006 budget could mount inflationary pressures and ultimately jeopardize the peg.

### Banking sector and supervision
- MMA continued regular on- and off-site inspections focused on improving risk management.
- Inspections facilitated a decline and restructuring in nonperforming loans.
- Commercial banks have high concentration risk and increasing net open foreign exchange positions; MMA should closely monitor developments.
- Authorities requested continued MFD technical assistance.

### Medium-term outlook, scenarios, and debt dynamics
- Base Case medium-term projections highlights (real GDP growth, consumer prices, current account, reserves, external debt):
  - Real GDP growth (%): 2006: 8.0; 2007: 4.0; 2008–2010: 3.0 (each year)
  - Consumer prices (period average): 2006: 7.0; 2007–2010: 6.0 (each year)
  - Current account balance (percent of GDP): 2006: -35.3; 2007: -17.6; 2010: -3.6
  - Gross official reserves (year-end, millions): 2006: 187.9; 2010: 191.9
  - External debt (year-end, millions): 2006: 674.6; 2010: 646.3
- Reform Case medium-term projections highlights:
  - Real GDP growth (%): 2006: 10.2; 2007: 7.0; 2008: 6.5; 2009: 6.0; 2010: 5.0
  - Consumer prices (period average): 2006: 5.7; 2007: 3.8; 2008–2010: 2.5 (each year)
- Scenario risks:
  - A medium-term strategy aligned with the 2006 budget (limited reform) carries serious risks: weaker-than-envisaged revenues likely to cause steady reserve declines and require corrective actions.
  - A scenario based on the newly announced 2006 budget could raise fiscal debt-to-GDP ratio and erode foreign reserves, potentially requiring abrupt corrective actions.
- Fiscal adjustment required under an alternative prudent path:
  - To limit domestic borrowing to a sustainable level, revenues need to be raised by 4–5 percentage points of GDP in five years and domestic recurrent spending lowered also by 4–5 percent.
  - Even with large fiscal adjustment, official reserves projected to increase minimally due to declining foreign aid and amortization of commercial banks’ foreign borrowing.
- Structural reform priorities to realize private capital inflows:
  - Renewed efforts to privatize or corporatize public enterprises; consider full privatization of entities directly competing with private sector and corporatization of remaining SOEs.
  - Advance economic and financial legislation (public enterprises, banking, securities, customs administration, and MMA Act amendment).

### External vulnerability, debt, and stress tests
- External debt increased to about 60 percent of GDP from 42 percent in 2004 due to tsunami recovery loans and commercial banks’ borrowing from overseas headquarters.
- Sensitivity analyses indicate debt burden may increase further with exogenous or policy-induced shocks.
- Debt-service and external financing indicators show large spikes in 2005 and high gross external financing needs projected for 2006 under baseline scenarios.
- Stress tests include country-specific growth shocks and a one-time 30 percent nominal depreciation that raise debt ratios substantially.

### Trade policy, AML/CFT, statistics, and Article VIII
- SAFTA provisions: LDC members have 10 years to reduce tariff rates to 0–5 percent; Maldives has not made concrete plans and would phase in reductions taking account of tax reforms.
- Staff stressed reducing tariffs on a most favored nation basis to limit trade diversion.
- MMA has set up a financial intelligence unit; LEG/MFD TA provided to develop AML/CFT frameworks; legislation expected to be presented to parliament during 2006.
- Data weaknesses: government finances and balance of payments (especially capital flows) not timely and subject to frequent revisions; national accounts require improvements.
- Exchange system remains free of restrictions on current international transactions; authorities prefer to wait one or two more years post-tsunami before considering acceptance of Article VIII obligations.

### Donor conditionality and budget support
- World Bank and Asian Development Bank (AsDB) considering extending budget support totaling nearly $40 million (of which about half could be disbursed in 2006) provided a sound fiscal framework is reestablished.
- Both institutions urge authorities to recommit to prudent policy given the more expansionary 2006 budget.

### Update since staff report — MMTC, fiscal risks, monitoring, and contingency planning
- Authorities formed a Multi-Agency Macroeconomic Technical Committee (MMTC) including Ministry of Finance and Treasury, Ministry of Planning and National Development, Department of Inland Revenue, and MMA to identify risks, monitor developments, and recommend measures.
- MMTC-identified fiscal risks for 2006:
  - Budgeted advance lease payments from tendering islands: Rf 537 million (4½ percent of GDP) budgeted; actual 2006 collection may be about one half of Rf 537 million per Department of Inland Revenue projection.
  - Possible shortfall from elimination of duty waivers: up to Rf 200 million (1⅔ percent of GDP).
  - STELCO subsidy risk: subsidy of Rf 225 million (2 percent of GDP) would be required if tariffs not raised (STELCO estimates tariffs would need to be raised by 45 percent to avoid losses).
  - Envisaged foreign financing may fail to materialize.
- MMTC monitoring thresholds and contingency triggers:
  - Foreign reserves thresholds:
    - “Emerging risk” threshold: US$170 million (2⅓ months of imports of goods and services). Reserves at end-2005 amounted to US$187 million.
    - “High risk” threshold: US$140 million.
  - MMA borrowing thresholds (Ways and Means overdraft):
    - “Emerging” risk if government borrows Rf 120 million in 2006 (1 percent of GDP).
    - “High” risk with additional borrowing of Rf 300 million.
- Contingency measures the Minister of Finance intends to use if risks materialize:
  - Delay capital projects not started and not critical.
  - Delay ongoing projects as appropriate.
  - Restrict local and foreign travel of government officials.
  - Minimize discretionary allowances.
  - Reduce budget allocations for repair and maintenance.
  - Delay all new recruitment except cabinet-approved essential cases.
  - Not introduce any new subsidies and phase out existing subsidies except those targeted to the poor or disaster-affected.
- Staff appraisal: Authorities’ willingness to act is encouraging, but early implementation is critical; quantitative impact of contingency measures on the budget balance remains uncertain.

### Authorities’ request and financing needs
- Authorities requested a purchase under the Fund’s policy for emergency and natural disaster assistance equivalent to SDR 4.1 million (50 percent of quota) to help cover a US$91 million balance of payments shortfall.
- Authorities requested subsidies to reduce the rate of charge down to 0.5 percent per annum on this Fund purchase.
- Authorities awaiting outcome of an Asian Development Bank meeting on March 18 before considering a consultative group meeting to seek donor pledges to close the US$91 million balance of payments gap.
- Authorities confirmed they will not seek Paris Club rescheduling as most debt is to multilaterals and non-Paris Club countries.

*Source: Executive Summary and excerpts from Content unit 1mdvea2019006 (IMF staff report excerpt).*

### Executive Summary ......................................................................................................

### Executive Summary

### Tsunami impact and macroeconomic shock
- The December 2004 tsunami caused devastating damage; physical damage relative to the size of the economy was the highest among affected countries.
- Cost of reconstructing housing and infrastructure estimated at $375 million (about 50 percent of GDP).
- Private tourist resorts sustained damages amounting to $100 million (largely covered by insurance).
- Human displacement: displacement of 5 percent of population.
- Tourism declined by a third (tourist arrivals fell by 33 percent).
- Real GDP contracted by 3¾ percent in 2005.
- Overall balance of payments deficit of $140 million projected for 2005.
- Foreign reserves declined from 3½ months of imports a year ago to 2½ months.
- Financing from the Maldives Monetary Authority (MMA) amounted to 9 percent of GDP in 2005.

### Reconstruction progress and financing
- Donors have so far pledged 70 percent of assessed reconstruction needs.
- Aid amounting to $260 million has been pledged so far, but disbursements and reconstruction were initially slow.
- As of October 2005, 18 percent of donor pledges (or about 6 percent of GDP) had been disbursed.
- Recorded budgetary reconstruction spending as of October 2005 was Rf 300–400 million (3 percent of GDP), including a government contribution of 1 percent of GDP.
- The government estimates that total recovery efforts in 2005 should amount to over 10 percent of GDP.
- In the 2006 budget, donor funding of recovery efforts is expected to be about Rf 2.4 billion or 20 percent of GDP.
- In addition, the government contribution included in the 2006 budget is 1–2 percent of GDP.
- Additional donor commitments of around $100 million are still needed to fully reconstruct infrastructure, especially for transport and water and sanitation.

### Macroeconomic developments and vulnerabilities
- The economy remained highly dependent on tourism and fisheries; tourism contributed nearly half of growth prior to the tsunami.
- Income per capita grew by 60 percent over the decade through 2004 to above $2,500.
- The dollar peg has served as a credible nominal anchor.
- The economy is vulnerable to external shocks due to undiversified production, small size, and geography; global warming and rising sea levels pose a long-term threat.
- Fiscal structure is inflexible: raising fiscal revenue in a timely manner is hard and spending is downward rigid.
- Revenues are inflexible in the short run (the “bed” tax is nominally fixed per overnight stay; resort lease payments and SOE transfers are pre-determined).
- Expenditures tend to be rigid downward; during 1999–2001 these features led to high recourse to MMA borrowing and a currency devaluation in 2001.

### 2005 fiscal and financial developments
- The supplementary budget prepared in August 2005 envisaged a budget deficit (including foreign grants) of Rf 1.6 billion (15 percent of GDP)—up from 4 percent of GDP in the original budget—and a domestic financing requirement of 12 percent of GDP.
- Tourism-related revenues declined by 4 percent of GDP.
- New revenue measures included in the original budget (2 percent of GDP) were not implemented.
- Domestic contributions to higher relief and recovery outlays and newly announced initiatives each added 2 percent of GDP to the fiscal deficit.
- Authorities saved about 3 percent of GDP mainly by reducing administrative expenditures during the last quarter of 2005, leaving an estimated deficit of 12 percent of GDP with MMA borrowing of 9 percent of GDP.
- Despite high domestic financing, inflation remained well below 5 percent (year-on-year) as private domestic currency lending was modest.
- Foreign-owned commercial banks borrowed about $100 million from their headquarters abroad and on-lent largely to tourist resorts for importing reconstruction materials.
- During the first nine months of 2005, commercial banks’ private sector lending in foreign currency increased by $94 million, 80 percent of private credit growth.

### Policy assessment and recommendations
- The 2006 budget is highly expansionary and threatens sustainability; the government added to the fiscal deficit through new recruits, expansion of untargeted social programs, and a large domestically funded public investment program while using optimistic revenue projections.
- The government needs to renew commitments to tighter policy.
- Fiscal reforms of high priority:
  - Introduce corporate taxation and a broad based sales tax.
  - Improve expenditure management through adopting a Medium-Term Expenditure Framework (MTEF) to contain spending in line with realistic revenue projections and protect high priority activities.
  - Prioritize civil service reforms.
- Monetary policy recommendations:
  - Gear monetary policy to sustaining the peg arrangement based on indirect management.
  - Objective of monetary policy should be to support the peg arrangement, which has served well as a credible nominal anchor.
  - Automatic financing of the budget deficit by the Maldives Monetary Authority (MMA) should cease.
  - Adopt indirect monetary operations based on auctioning of MMA certificate of deposits (CDs) or treasury bills.
- Structural reforms and medium-term viability:
  - Pursuit of prudent macroeconomic policy and implementation of structural reforms are indispensable for sustaining robust growth and reducing vulnerability.
  - Priority actions include privatization of state-owned enterprises (SOE)—the public sector still dominates activities that in other countries are carried out by the private sector—and adoption of key economic and financial legislations.
  - Creating a business environment conducive to broad-based private investment is essential.

### Donor conditionality and budget support
- The World Bank and the Asian Development Bank (AsDB) are considering extending budget support totaling nearly $40 million (of which about half could be disbursed in 2006) provided a sound fiscal framework is reestablished.
- Both the World Bank and AsDB are urging the authorities to recommit to a prudent policy given the more expansionary 2006 budget adopted after the Article IV mission.

*Source: Executive Summary, 1mdvea2019006*

### 12.      More generally, monetary policy has been passive with the MMA automatically

### 1mdvea2019006 - 12.      More generally, monetary policy has been passive with the MMA automatically

### Monetary policy and MMA operations
- Monetary policy has been passive with the MMA automatically financing the fiscal deficit.
- Key past measures:
  - Tap sales of MMA CDs introduced in 1995.
  - Interest rates liberalized in 2001 except for a 20 percent ceiling on lending rates.
  - Minimum reserve requirement (MRR) lowered from 35 percent to 30 percent in 2003.
- Current practice:
  - MRR has remained at 30 percent.
  - Tap sales of MMA CDs continue with a fixed interest rate of 4 percent regardless of the level of market liquidity.
  - Commercial bank interest rates have remained broadly unchanged since mid-2002.
- Institutional reform:
  - An amended MMA Act (drafted in 2003) to make the central bank independent and set limits to government borrowing was withdrawn from parliament for further revision.
- Policy recommendation (monetary management):
  - Expedite adoption of the amended MMA Act to make the monetary authority independent and set legal limits to government domestic borrowing.
  - Reduce the reserve requirement further to improve intermediation.
  - Continue development of a liquidity forecasting framework, auction MMA CDs, and eventually replace MMA CDs with treasury bills.
  - MMA could consider an adjustment of CD rates to absorb liquidity created by the government’s high domestic borrowing.

### Balance of payments and reserves
- Current account deficit for 2005 is estimated to have been a record high $300 million (37 percent of GDP).
- Tourism receipts declined by $160 million in 2005.
- Commercial banks’ borrowing from foreign headquarters covered a large portion of total import needs and limited reserve loss to about $20 million.
- Official reserves at end-2005 amounted to $187 million (2½ months of imports).

### Structural reform progress and status
- Pace of structural reforms has lagged due in part to limited implementation capacity and the tsunami disaster.
- Key legislative and reform items at various stages:
  - Business Profit Tax (BPT) Act not yet enacted despite lengthy parliamentary debate.
  - Preparations for introduction of a sales tax and a medium–term expenditure framework (MTEF) did not progress last year.
  - Public Finance Act enacted in December but without the provision limiting government access to MMA borrowing.
  - Public Enterprise Act preparation delayed due to disagreements over SOE control.
  - Banking and Securities Acts drafted in early 2005 and planned for submission to parliament in 2006.
  - Insurance legislation under preparation.
- Public enterprises:
  - No firm privatized since 2001.
  - Government plans to sell shares of Allied Insurance, Housing Development and Finance Corporation, and Water and Sewerage Company in 2006.
- Financial sector supervision:
  - On-site examinations of three major banks completed with MFD assistance.
  - NPLs average less than 4 percent of loan portfolio for three of the four commercial banks; one bank has an 18 percent NPL ratio with measures taken to address them.

### Fiscal developments and 2006 fiscal policy
- Mission objective: restore fiscal discipline in 2006, limiting domestic financing to less than 3 percent of GDP.
- Government intentions discussed:
  - Implement 2005 budget measures and largely eliminate import duty exemptions.
  - Expect higher resort lease payments from increases in lease rates and advance lease payments from tenders of five new resort islands.
  - On expenditures: limit domestic spending to the original 2005 budget level except for:
    - Increase in the wage bill amounting to 3 percent of GDP (internal promotions and new recruits mostly in education, health, police, and national security).
    - Elimination of power, water, and food subsidies saving 2 percent of GDP.
  - If implemented, domestic financing requirement could be slightly less than 3 percent of GDP.
- Actual 2006 budget adopted includes significantly higher spending (about 7 percent of GDP increase) with:
  - Even higher wage bill and additional health and education spending not tsunami related.
  - Increased allocations for domestic investment projects not donor-funded.
- Budget financing risks:
  - Proposed financing assumed advance lease payments amounting to 4½ percent of GDP from winners of tenders of 35 new resort islands and additional budget support from bilateral donors (3 percent of GDP).
  - Given experience, collecting advance lease payments from 35 island tenders within one year is considered difficult; assumed donor support appears optimistic.
  - Shortfalls could lead to government borrowing from the MMA exceeding 9 percent of GDP, risking significant inflationary pressure and/or losses in foreign reserves.
- Mission recommendations for fiscal management:
  - Enhance revenues and prioritize spending through introduction of the MTEF and civil service reforms.
  - Accelerate implementation of BPT (planned for 2008) and preparation of a sales tax; aim to collect about 3 percent of GDP by 2008 per authorities’ plan.
  - Adjust the tourist “bed” tax more frequently with a view to turning it into an ad valorem tax.
  - Early introduction of the MTEF for capital spending to prioritize projects according to cost-benefit criteria.
  - Limit general administration expenses and streamline the public service; civil servants are 10 percent of the population and their wage bill is 20 percent of GDP.
  - Expeditious enactment of the Public Finance Act and the Audit Act to improve public sector management (Public Finance Act approved at end-December but without MMA borrowing limit).

### Exchange rate regime
- The dollar peg is assessed as an appropriate exchange rate arrangement.
  - Peg reduced transaction costs and exchange rate risks, provided a transparent nominal anchor, and suited constrained institutional capacity to manage a foreign exchange market.
  - Level of the exchange rate appears generally appropriate despite near double-digit inflation earlier in the year.
  - No parallel foreign exchange market; business community concerns about forex shortages eased with strong recovery of tourist arrivals in the last quarter of 2005.
- Risk: If the expansionary fiscal stance implied in the 2006 budget is sustained, inflationary pressures could mount and the peg rate could ultimately be jeopardized.

### Banking sector and supervision
- MMA has continued regular on- and off-site inspections focused on improving risk management practices.
- Inspections have facilitated a decline and restructuring in nonperforming loans.
- Commercial banks tend to have high concentration risk and increasing net open foreign exchange positions; MMA should closely monitor developments.
- Authorities requested continued MFD technical assistance.

### Medium-term outlook, debt sustainability, and reform priorities
- Scenario risks:
  - A medium-term strategy aligned with the 2006 budget (limited reform) would carry serious risks: with weaker-than-envisaged revenues, official reserves would likely decline steadily, implying a need for strong corrective actions.
  - A scenario based on the newly announced 2006 budget could raise the fiscal debt-to-GDP ratio and erode foreign reserves to levels likely requiring abrupt corrective actions in coming years.
- Alternative medium-term scenario:
  - Real GDP growth stabilizes at around 5 percent after a rebound in 2006.
  - To achieve sustainable growth with declining foreign aid would require prudent fiscal management and vigorous structural reforms.
  - To limit domestic borrowing to a sustainable level, revenues need to be raised by 4–5 percentage points of GDP in five years and domestic recurrent spending lowered also by 4–5 percent.
  - Even with a large fiscal adjustment, official reserves are projected to increase minimally due largely to declining foreign aid and amortization of ongoing foreign borrowing by commercial banks.
- Structural reform priorities to realize private capital inflows assumed in projections:
  - Renewed efforts to privatize or corporatize public enterprises; consider full privatization of entities directly competing with the private sector and corporatization of remaining SOEs.
  - Advance economic and financial legislation (public enterprises, banking, securities, customs administration, and MMA Act amendment).
- Debt outlook:
  - External debt increased to about 60 percent of GDP from 42 percent in 2004 due to tsunami recovery loans and foreign-owned commercial banks’ borrowing from overseas headquarters.
  - Sensitivity analyses indicate the debt burden may increase further with exogenous or policy-induced shocks.
  - A debt sustainability analysis based on a prudent policy approach indicates the debt-to-GDP ratio could stabilize over the medium term.

*Source: Content unit 1mdvea2019006 (IMF staff report excerpt).*

### 28.      The mission discussed prospective changes in import tariffs. Under the SAFTA,

### 1mdvea2019006 - 28.      The mission discussed prospective changes in import tariffs. Under the SAFTA,

### Tariff policy and SAFTA provisions
- SAFTA, signed in early 2004, includes agreements on rules of origin, sensitive product lists, and compensation for revenue losses of LDC members.
- LDC members, including the Maldives, have 10 years to reduce tariff rates to 0–5 percent.
- Authorities have not made concrete plans for tariff reductions and agreed they would need to be phased in taking into account the pace of tax reforms, in particular introduction of a broad-based sales tax, to minimize revenue losses.
- Staff stressed the importance of reducing tariffs on a most favored nation basis to limit trade diversion.
- Garment exports were decimated due to the expiry of the multi-fiber agreement; the impact on the economy and the current account was limited since these exports were based on imported inputs (including labor) and the value added was marginal.

### Anti‑money laundering and combating the financing of terrorism (AML/CFT)
- The Maldives Monetary Authority (MMA) has set up a financial intelligence unit.
- The MMA received LEG/MFD TA to develop comprehensive AML/CFT legislative, institutional, and supervisory frameworks.
- Legislation is currently being reviewed by the Law Commission and expected to be presented to the parliament during 2006.
- Authorities reiterated their commitment to implementing the recommendations of LEG and MFD.

### Statistics, data needs, and technical assistance
- Further improvement in the collection and dissemination of statistics is needed.
- Authorities requested assistance from the Fund in the areas of balance of payments and government finance data, in addition to ongoing assistance in monetary statistics.
- Authorities will seek assistance from other agencies to improve their national accounts.
- Data provision weaknesses noted: government finances and balance of payments (especially capital flows) are not available in a timely manner and are subject to frequent revisions; national accounts data require improvements.

### Exchange system and Article VIII acceptance
- The exchange system remains free of restrictions on the making of payments and transfers for current international transactions.
- Authorities would like to wait one or two more years until the disruption due to the tsunami was fully behind them before considering acceptance of the obligations of Article VIII, Sections 2, 3, and 4.

### Staff appraisal — vulnerability to external shocks and recovery
- The December 2004 tsunami revealed the Maldives’ vulnerability to external shocks, particularly given dependence on tourism.
- To reduce vulnerability, fiscal and monetary reforms are needed to enhance capacity for timely demand management and structural reforms to expand private sector activities and enhance supply-side resilience, although rapid diversification scope appears limited.
- Reconstruction work progressed slowly in 2005 due to problems in local consultation, limited capacity, and insufficient coordination; government and donors have been addressing these problems and the pace of implementation is accelerating.
- Additional donor commitments are required to finance necessary recovery work.

### Fiscal stance and risks
- The fiscal stance adopted in the 2006 budget jeopardizes stability and corrective measures are needed.
- Government raised spending in the budget to a level much above what had been previously envisaged based on optimistic revenue and foreign financing assumptions.
- As a result, a high domestic borrowing requirement to the tune of 9 percent of GDP could arise, which could place significant pressures on inflation, official reserves, and (ultimately) the peg.
- Government needs to renew its commitment to fiscal viability by resisting demands for higher wages, recruitment, and other spending initiatives.

### Fiscal reform priorities
- Further fiscal reforms are imperative to enhance medium-term resilience.
- Recommendations include:
  - Increase revenue and its buoyancy through introduction of corporate taxation and broad based sales tax.
  - Improve expenditure management to contain total spending in line with realistic revenue projections and prioritize spending to protect high priority activities.
  - Contain general administration costs, the wage bill, and domestic capital spending.
  - Pursue civil service reforms.

### Exchange rate peg and monetary policy
- The peg arrangement has served the Maldives well as a credible nominal anchor and should be continued.
- Justification: economy’s openness, small size, constrained institutional capacity; safeguard peg with appropriate macroeconomic and structural policy mix.
- Current level of the exchange seems broadly appropriate given strong tourism recovery and absence of a parallel foreign exchange market, assuming prudent macroeconomic policy.
- Monetary policy should be geared to sustaining the peg arrangement.
- Large fiscal deficits and automatic financing by the MMA undermine the exchange rate peg and should cease.
- Early enactment of the MMA amendment is crucial to make the institution more independent and set legal limits to the government’s MMA borrowing.

### Monetary management and banking supervision
- Authorities’ efforts to introduce indirect monetary management and improve banking supervision are commendable.
- Progress made in preparing for introduction of a more market-oriented monetary policy once the MMA ends its automatic financing of the deficit.
- Next steps include reducing reserve requirements and introducing auctions of MMA certificate of deposits or treasury bills to tap domestic savings and absorb liquidity.
- MMA’s supervision of commercial banks has been strengthened, leading to a reduction in NPLs.

### Structural reforms for medium‑term growth and resilience
- Over the medium term, structural reforms are indispensable for sustaining robust growth and reducing vulnerability.
- Economy remains dominated by the public sector and dependent on tourism; medium-term viability remains a challenge.
- Reforms needed to create a business environment conducive to broad-based private investment.
- Priority actions include privatization of SOEs and implementation of key economic and financial legislation such as the BPT Act, the amended MMA Act, the Banking Act, the Audit Act, and the Public Enterprises Act.

*Source: 1mdvea2019006 - excerpt of IMF staff report.*

### 41.      It is recommended that the next Article IV consultation with the Maldives take place

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

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

### Real and external sector developments (1995–2005)
- Real GDP Growth (annual percentage change): time series presented in Figure 1 (1995–2005); notable episodes:
  - Output contracted in the aftermath of the tsunami.
  - Tourism arrivals plummeted; Tourist Nights Index (three-month moving average, percent change year-year) shows sharp declines (Jan-00 to Oct-05 series).
- Inflation and terms of trade (annual percentage change):
  - GDP deflator and Consumer prices shown; “inflation has so far remained in check.”
- Current account balance:
  - Current account balance (in millions of U.S. dollars and in percent of GDP) deteriorated markedly; “the current account deficit remains large.”
- External trade (in millions of U.S. dollars):
  - Exports, f.o.b.; Nonfactor services, net; Imports, f.o.b. illustrated (1995–2005).
  - “...the trade balance has worsened...”
- External debt and debt service:
  - External debt (in percent of GDP, left scale) and debt service in percent of exports of goods and nonfactor services (right scale) rose.

### Fiscal developments and central government finances (2001–06, percent of GDP and millions)
- Population (2004): 299,520
- Nominal GDP (2004): 799.6 (in millions of U.S. dollars)
- GDP per capita (2004): 2,670 (in U.S. dollars)
- Quota (in millions of SDRs): 8.2
- Selected indicators (2001–06) — Annual percentage change / Percent of GDP / Levels:
  - Real GDP: 2001: 3.5; 2002: 6.5; 2003: 8.5; 2004: 8.8; 2005: -3.6; 2006: 8.0 (est./proj. formatting as in Table 1)
  - Consumer prices (period average): 2001: 0.7; 2002: 0.9; 2003: -2.9; 2004: 6.4; 2005: 5.7; 2006: 7.0
  - Central government revenue and grants (percent of GDP): 2001: 33.0; 2002: 33.1; 2003: 34.9; 2004: 33.2; 2005: 48.8; 2006: 51.1
    - Grants (percent of GDP): 2001: 2.8; 2002: 1.6; 2003: 1.4; 2004: 0.7; 2005: 15.7; 2006: 14.2
  - Expenditure and net lending (percent of GDP): 2001: 37.7; 2002: 38.0; 2003: 38.3; 2004: 34.8; 2005: 61.1; 2006: 72.3
    - Capital spending (percent of GDP): 2001: 12.3; 2002: 12.5; 2003: 13.6; 2004: 10.7; 2005: 22.3; 2006: 31.1
  - Overall balance (percent of GDP): 2001: -4.7; 2002: -4.9; 2003: -3.4; 2004: -1.7; 2005: -12.3; 2006: -21.3
  - Overall balance, excluding grants (percent of GDP): 2001: -7.5; 2002: -6.5; 2003: -4.8; 2004: -2.4; 2005: -27.9; 2006: -31.7
  - Financing (percent of GDP): Domestic: 2001: 2.8; 2002: 0.4; 2003: -1.3; 2004: -2.3; 2005: 9.0; 2006: 9.8. Foreign: 2001: 1.9; 2002: 4.5; 2003: 4.7; 2004: 4.0; 2005: 3.2; 2006: 9.4
  - Government debt (end of period, percent of GDP): 2001: 43.5; 2002: 47.0; 2003: 47.0; 2004: 42.3; 2005: 53.7; 2006: 68.2
    - Of which: Foreign (percent of GDP): 2001: 23.9; 2002: 26.9; 2003: 29.7; 2004: 29.6; 2005: 32.2; 2006: 39.7

- Fiscal dynamics and commentary:
  - “With expenditures growing faster than revenues... overall balance plunged deep into negative territory... domestic financing of the deficit swelled.”
  - “Additional external financing requirement” appears in 2006 projections (Tables 1–3).

### Monetary and reserves developments
- Money and credit (annual percentage change, selected years):
  - Domestic credit: 2001: 18.2; 2002: 11.9; 2003: -6.0; 2004: 33.1; 2005: 55.5; 2006: 26.9
  - Broad money: 2001: 8.0; 2002: 19.5; 2003: 14.5; 2004: 32.8; 2005: 9.1; 2006: 20.2
- Dollarization ratio (foreign currency deposits as a percentage of broad money): series shown (1995–2005); “Dollarization increased...”
- Gross official reserves (levels and months of imports of GNFS):
  - Gross official reserves (year-end, in millions of U.S. dollars): 2001: 93.8; 2002: 134.0; 2003: 160.3; 2004: 204.4; 2005: 187.2; 2006: 164.0 (Table 2)
  - In months of imports of GNFS (year-end): 2001: 2.5; 2002: 3.5; 2003: 3.6; 2004: 3.4; 2005: 2.5; 2006: 1.9
  - “...and a loss of foreign reserves.”

### Balance of payments (2001–06, millions of U.S. dollars and percent of GDP)
- Exports, including reexports (millions): 2001: 110.1; 2002: 132.3; 2003: 151.9; 2004: 181.0; 2005: 169.6; 2006: 182.8
- Imports (millions): 2001: -346.3; 2002: -344.7; 2003: -414.3; 2004: -567.3; 2005: -686.8; 2006: -811.9
- Nonfactor services (net, millions): 2001: 244.2; 2002: 251.7; 2003: 311.1; 2004: 352.4; 2005: 118.1; 2006: 198.1
  - Balance on nonfactor services — Receipts: 2001: 354.1; 2002: 362.9; 2003: 432.1; 2004: 505.2; 2005: 326.1; 2006: 437.2
    - Of which: Tourism receipts (millions): 2001: 327.1; 2002: 337.1; 2003: 401.6; 2004: 470.9; 2005: 269.1; 2006: 360.8
  - Payments on nonfactor services: 2001: -109.8; 2002: -111.1; 2003: -121.0; 2004: -152.9; 2005: -207.9; 2006: -239.1
- Current account balance (millions): 2001: -58.8; 2002: -35.7; 2003: -31.9; 2004: -128.9; 2005: -297.9; 2006: -359.0
  - Current account balance (percent of GDP): 2001: -9.4; 2002: -5.6; 2003: -4.6; 2004: -16.1; 2005: -36.5; 2006: -38.5
- Capital flows and overall balance:
  - Official capital (net, millions): 2001: 7.8; 2002: 26.8; 2003: 34.4; 2004: 26.0; 2005: 26.5; 2006: 114.9
  - Private capital (net, millions): 2001: 24.3; 2002: 33.9; 2003: 56.8; 2004: 125.3; 2005: 135.0; 2006: 156.0
  - Overall balance (millions): 2001: -21.4; 2002: 39.8; 2003: 74.3; 2004: 57.7; 2005: -136.4; 2006: -88.2
- Monetary movements and reserve changes:
  - Change in MMA reserves: 2001: 29.7; 2002: -40.2; 2003: -26.5; 2004: -44.0; 2005: 17.2; 2006: 23.2
  - Change in commercial banks' NFA: 2001: -8.3; 2002: 0.4; 2003: -47.8; 2004: -14.8; 2005: 113.0; 2006: 45.0
  - “Additional external financing requirement” cited in table entries (e.g., 2006: 20.0 in certain schedules).

### External debt and debt-service indicators
- External debt (in millions of U.S. dollars): 2001: 209.8; 2002: 259.0; 2003: 289.5; 2004: 331.8; 2005: 481.6; 2006: 657.6
- External debt (percent of GDP): 2001: 33.6; 2002: 40.4; 2003: 41.9; 2004: 41.5; 2005: 58.9; 2006: 70.4
  - “The sharp increase in external debt in 2005 is due in part to the rise of commercial bank borrowing from abroad.”
- Debt service (millions): 2001: 22.0; 2002: 22.9; 2003: 22.0; 2004: 28.4; 2005: 32.2; 2006: 34.8
  - Debt service (percent of domestic exports of GNFS): 2001: 5.1; 2002: 5.0; 2003: 4.0; 2004: 4.5; 2005: 7.3; 2006: 6.3

### Medium-term scenarios and projections (Base Case and Reform Case, 2004–10)
- Base Case Medium-Term Scenario (Table 5, Proj. 2004–10 highlights):
  - Real GDP growth (annual percent): 2004: 8.8; 2005: -3.6; 2006: 8.0; 2007: 4.0; 2008: 3.0; 2009: 3.0; 2010: 3.0
  - Consumer prices (period average): 2004: 6.4; 2005: 5.7; 2006: 7.0; 2007: 6.0; 2008: 6.0; 2009: 6.0; 2010: 6.0
  - Current account balance (percent of GDP): 2004: -16.1; 2005: -36.5; 2006: -35.3; 2007: -17.6; 2008: -13.2; 2009: -9.0; 2010: -3.6
  - Gross official reserves (year-end, millions): 2004: 205.2; 2005: 187.9; 2006: 187.9; 2007: 187.9; 2008: 177.9; 2009: 178.5; 2010: 191.9
  - External debt (year-end, millions): 2004: 331.8; 2005: 481.6; 2006: 674.6; 2007: 711.0; 2008: 710.7; 2009: 703.9; 2010: 646.3
- Reform Case Medium-Term Scenario (Table 6, Proj. 2004–10 highlights):
  - Real GDP growth (annual percent): 2004: 8.8; 2005: -3.6; 2006: 10.2; 2007: 7.0; 2008: 6.5; 2009: 6.0; 2010: 5.0
  - Consumer prices (period average): 2004: 6.4; 2005: 5.7; 2006: 5.7; 2007: 3.8; 2008: 2.5; 2009: 2.5; 2010: 2.5
  - Current account balance (percent of GDP): 2004: -16.1; 2005: -36.5; 2006: -35.3; 2007: -17.6; 2008: -13.2; 2009: -9.0; 2010: -3.6 (reform case tables provide alternative debt and fiscal paths)

### External vulnerability and stress tests (2000–10 framework)
- Indicators of external vulnerability and stress tests (Table 7 and successive tables):
  - External debt (percent of GDP): 2004: 41.5; 2005: 58.9; 2006 (baseline projections): 70.4 (Table 8 and Table 10 variations across scenarios)
  - External debt-to-exports ratio (percent): 2005: 97.2 (Table 7), with large increases in 2005 driven by higher external borrowing.
  - Gross external financing need (in billions of U.S. dollars and percent of GDP) shows spikes in 2005 and projected high financing needs in 2006 under baseline scenarios (e.g., 2005: 342.1 billion reported in one table labeling; other tables list large numeric gross financing needs and percent of GDP—these are presented in the source tables and scenario panels).
  - Stress tests (alternative scenarios and bound tests) show vulnerability to shocks:
    - A2: Country-specific shock in 2006 (reduction in GDP growth of one standard deviation) reduces debt-stabilizing noninterest current account ratios (examples given: A2 results show lower stabilization requirements).
    - B6: One-time 30 percent nominal depreciation in 2006 raises debt ratios substantially (examples in tables).

### Social, demographic, and structural indicators
- Social and demographic indicators (comparisons 1980–85 vs. 1995–2004):
  - GDP per capita (U.S. dollars): 1980–85: 469; 1995–2004: 2,670
  - Land area (sq. km.): 298
  - Total population: 1980–85: 180,088; 1995–2004: 299,520
  - Rate of population growth (percent per annum): 1980–85: 2.8; 1995–2004: 2.2
  - Density in Male (persons per sq. km.): 1980–85: 42,000; 1995–2004: 70,000
  - Life expectancy at birth (years): 1980–85: 57.1; 1995–2004: 69.5
  - Infant mortality at birth (per 1,000): 1980–85: 115.0; 1995–2004: 55.0
  - Access to safe water: 1980–85: 17; 1995–2004: 100
  - Immunization (DPT, percent of children under age one): 1980–85: 28; 1995–2004: 98

### Statistical issues and data shortcomings
- Overall assessment:
  - “While data provision for surveillance purposes is adequate overall, staff’s analysis was affected by shortcomings in certain areas.”
- Real sector:
  - National accounts: available only on an annual basis and with a considerable lag; inconsistencies between production and expenditure GDP data.
  - CPI: compiled since June 1995 based on the 1993 income and expenditure survey; base year 1995 may not reflect current consumption patterns.
- Fiscal sector:
  - General government data reported in GFS Yearbook; latest published data for 2005. Limited data on state enterprises.
- Monetary sector:
  - Monetary data published with significant lag; inconsistencies between monetary and fiscal financing of fiscal deficit (timing and coverage).
  - New standardized reporting forms for the central bank completed November 2005; follow-up for other depository corporations expected.
- External sector:
  - Balance of payments coverage problems persist: travel receipts estimated from small-sample resort/hotel surveys; profit remittances and reinvested earnings in tourism unsatisfactorily estimated; private capital flow information incomplete.
  - Official reserves reported monthly with variable two-week lag; quarterly external debt and debt service available at annual consultations for some sectors but not for nonfinancial private sector.

### Fund relations, technical assistance, and membership
- Membership status: Joined 1/13/78; Article XIV.
- Quota and holdings (as of December 31, 2005):
  - Quota: 8.20 (SDR Million)
  - Fund holdings of currency: 10.75 (SDR Million)
  - Reserve position in Fund: 1.55 (SDR Million)
  - SDR cumulative allocation: 0.28 (SDR Million); Holdings: 0.32 (SDR Million)
- Outstanding purchases and loans:
  - Emergency assistance: 4.15 (SDR Million)
- Financial arrangements: None
- Projected obligations to Fund (SDR million; forthcoming):
  - Charges/interest: 0.17 (multiple forthcoming entries for 2006–2009 as in Annex)
  - Principal entries shown for 2007 and 2008 in the projected obligations table as presented in source.
- Exchange arrangements:
  - Historical peg and devaluations summarized: Rufiyaa per U.S. dollar remained unchanged at Rf 11.77 until July 25, 2001 devaluation to Rf 12.80 per U.S. dollar.
  - Maldives continues to avail itself of transitional arrangements under Article XIV but no longer maintains restrictions under Article XIV; exchange restrictions subject to Article VIII approval.
- Last Article IV Consultation:
  - 2004 Article IV consultation concluded by the Executive Board on May 24, 2004 (SM/04/157, April 30, 2004; EBM/04/50-2).
- Technical assistance (selected examples and agencies):
  - FAD: assistance on budget management and revenue reform (1994–1997 missions and consultants).
  - LEG: assistance on revision of the Maldives Monetary Authority Act (October 2003).
  - MFD: assistance on treasury bills, monetary management, bank supervision, and MMA Act drafting (missions spanning 1993–2003 and ongoing TA in 2005).
  - STA: assistance on monetary and balance of payments statistics (1993–1996 missions and 2005 TA).
  - Authorities have requested additional Fund assistance in balance of payments and government finance statistics; ongoing assistance on monetary statistics continues.

*Source: IMF staff report and tables, “Staff Report for the 2005 Article IV Consultation — Maldives,” Asia and Pacific Department, February 16, 2006 (supplementary information and annexes as provided).*

### 1.      Based on information that has become available since the issuance of the staff report

### Based on information that has become available since the issuance of the staff report

### The 2006 budget implementation and institutional response
- Authorities formed a Multi-Agency Macroeconomic Technical Committee (MMTC) comprising representatives of the Ministry of Finance and Treasury, Ministry of Planning and National Development, Department of Inland Revenue, and the Maldives Monetary Authority to: identify risks; monitor macroeconomic developments closely; and recommend to the Minister of Finance measures to prevent significant deterioration.
- The MMTC’s actions do not change the overall analysis and staff appraisal contained in the staff report.

### MMTC-identified fiscal risks for 2006
- Revenue optimism risk:
  - Budgeted advance lease payments from tendering islands: Rf 537 million (4½ percent of GDP) budgeted.
  - Department of Inland Revenue projects actual collection from this source within 2006 may likely be only about a half of Rf 537 million.
  - Possible shortfall from elimination of duty waivers: up to Rf 200 million (1⅔ percent of GDP).
- Subsidy risk:
  - Removal of the subsidy to the State Electricity Company (STELCO) envisaged in the budget.
  - STELCO estimates tariffs would need to be raised by 45 percent for it to avoid losses.
  - With tariffs at current levels, a subsidy of Rf 225 million (2 percent of GDP) would be required.
- Foreign financing risk:
  - Envisaged foreign financing may fail to materialize (risk noted without elaboration).

### Monitoring thresholds and contingency triggers
- MMTC will monitor monthly indicators: revenues, expenditures, foreign exchange reserves, and borrowing from the MMA, and proposes thresholds that trigger remedial actions.
- Foreign reserves thresholds:
  - “Emerging risk” threshold: US$170 million (2⅓ months of imports of goods and services). Reserves at end-2005 amounted to US$187 million.
  - “High risk” threshold: US$140 million — more urgent remedial measures required if reserves fell to this level.
- MMA borrowing thresholds (Ways and Means overdraft):
  - “Emerging” risk if government borrows Rf 120 million in 2006 (1 percent of GDP).
  - “High” risk with additional borrowing of Rf 300 million.

### Contingency measures the Minister of Finance intends to use if risks materialize
- MMTC asked to prepare contingency plans to forestall a fiscal crisis and guide containment of expenditures and revenue enhancement.
- Measures likely to be involved:
  - Delaying capital projects that have not been started and are not absolutely critical for immediate development purposes.
  - Delaying ongoing projects as appropriate.
  - Restricting local and foreign travel of government officials.
  - Minimizing discretionary allowances.
  - Reducing budget allocations for repair and maintenance.
  - Delaying all new recruitment except the ones that the cabinet considers essential.
  - Not introducing any new subsidies and phasing out existing subsidies except those specifically targeted to the poor or those directly affected by natural disasters.
- The letter does not explicitly state which measures should be employed to which intensity when macroeconomic risks emerge or become high; decisions appear left to policymakers’ judgment at the time.
- Staff appraisal:
  - Authorities’ willingness to act is encouraging, but early implementation is critical.
  - Potential quantitative impact of contingency measures on the budget balance remains uncertain.
  - Staff stresses need to implement corrective measures early to reduce the deficit and contain crisis risk.

### Statement by Mr. Shaalan — macroeconomic context and tsunami impact
- Acknowledgements:
  - Authorities grateful for Board’s decision to extend post-conflict emergency assistance to PRGF-eligible countries hit by natural disasters and for staff’s mission assessing economic developments after the tsunami.
  - Authorities broadly agree with analysis and policy recommendations in the staff report.
- Pre-Tsunami economic performance:
  - Growth rates averaged 8 percent over the last three years, contributing to doubling in per capita income over a decade.
  - Inflation generally kept under control.
  - Economic projections indicated favorable developments expected to continue into 2005.
  - Vulnerabilities: high dependence on tourism and tuna exports.
  - Acceleration in imports widened the current account deficit to 12 percent of GDP despite strong export growth.
  - International reserves increased to just over US$200 million (equivalent to 3½ months of 2004 imports).
  - Fiscal performance in 2004: current revenue base increased by 1 percent of GDP; deficit was halved despite growing current expenditures.
  - Structural reforms: proposed amendment of the Maldives Monetary Authority (MMA) Act to increase central bank independence; financial intelligence unit set up at the MMA; proposed legal limits on lending to government now in parliament.
- Recent developments since the tsunami (December 26):
  - About a quarter of tourist resorts were affected and closed.
  - About one-tenth of the fishing fleet and some processing facilities were damaged or lost.
  - GDP growth projection adjusted from pre-tsunami projection of 6½ percent to only 1 percent for the year.
  - Reconstruction costs estimated at about US$400 million (about 50 percent of GDP), of which US$110 million are needed immediately for budgetary needs.
  - Balance of payments shortfall due to losses in export receipts and tourism earnings estimated at about US$160 million and cannot be fully covered by identified inflows.
- Authorities’ fiscal measures and revenue actions:
  - Refrain from granting import duty waivers for tourism.
  - Reorient capital and non-wage spending toward reconstruction needs.
  - Refrain from awarding any new wage increases.
  - “Bed tax” was increased late last year as planned to contribute to revenue once tourism picks up.

### Request for IMF emergency assistance and financing needs
- Authorities requested a purchase under the Fund’s policy for emergency and natural disaster assistance:
  - Request for purchase equivalent to SDR 4.1 million (50 percent of quota).
  - This purchase intended to leverage the remainder of US$91 million shortfall in the balance of payments and avert a precipitous fall in reserves.
- Authorities requested subsidies to reduce the rate of charge down to 0.5 percent per annum on this Fund purchase.
- Authorities awaiting outcome of an Asian Development Bank meeting on March 18 before considering a consultative group meeting to seek donor pledges to close the US$91 million balance of payments gap.
- Authorities confirmed they will not be seeking any debt rescheduling from the Paris Club, as most debt is to multilaterals and non-Paris Club countries.

*Source: Supplement to staff report (SM/06/47, 2/8/06) and Statement by Mr. Shaalan, Executive Board Meeting March 4, 2005.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019006.pdf_