## 1. Does Maldives Face a Possible Crisis? ## Source details **Canonical URL:** [1. Does Maldives Face a Possible Crisis?](https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1mdvea2019008.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1mdvea2019008.pdf.json) --- ### Context - Chronic fiscal and external imbalances driven by post-2004 tsunami spending and large civil service wage increases around the 2008 elections; fiscal deficit rose above 20 percent of GDP the following year. - IMF-supported program of around $90 million approved in December 2009 went off track by mid-2010. - A 20 percent devaluation in April 2011, with monetary tightening, averted immediate collapse but did not resolve structural fiscal weaknesses. - Hard-currency reserves under pressure: - Gross international reserves: about $300 million (around two months of imports). - Freely usable reserves: around $100 million after the December repayment of a $50 million bond. - Another $50 million bond matures in February, implying a further sharp decline in reserves. - Staff warning: acute downside risks from loose fiscal policy, especially if authorities rely increasingly on monetization to finance the fiscal deficit. ### Real sector — recent developments and outlook - Growth and tourism: - After averaging almost 7 percent for several years, growth expected to have declined to 3½ percent in 2012. - Baseline: growth should tick up and reach 4 percent by 2014, assuming world economy improvement and domestic political stability. - Principal downside risks: weakening market appetite for government paper, widening parallel-market premium, weakening tourist arrivals. - Inflation: - April 2011 devaluation pushed inflation to nearly 21 percent y/y by end-2011. - Headline inflation should have eased to 8 percent by end-2012. - Baseline expects inflation to drop to 4½ percent in the medium term (baseline assumes no change in the exchange rate). - Selected annual real GDP figures (percent): 2007: 10.6; 2008: 12.2; 2009: -3.6; 2010: 7.1; 2011: 7.0; 2012 (proj.): 3.5; 2013 (proj.): 3.8; 2014 (proj.): 4.0; 2015 (proj.): 4.1. - Inflation (end-of-period, CPI-Male): 2007: 8.9; 2008: 8.9; 2009: 5.4; 2010: 6.9; 2011: 16.7; 2012 (proj.): 8.0; 2013 (proj.): 4.7; 2014 (proj.): 4.5; 2015 (proj.): 4.4. ### Fiscal and external sectors — recent developments and outlook - Fiscal position: - Fiscal policy remained accommodative. - 2012 deficit likely exceeded the budget target of 9 percent of GDP and reached around 13½ percent of GDP in cash terms (or higher if unpaid bills are accounted for). - New arrears building up possibly on the order of Rf 1 billion, or 3 percent of GDP. - 2013 budget includes adjustment measures but not enough to prevent a continued increase in the debt ratio; contingent liabilities in the financial sector pose fiscal risks. - External position: - Current account deficit estimated at over 25 percent of GDP during 2012–15. - CGER methodologies suggest rufiyaa overvaluation of 16 to 28 percent. - Overall BOP deficit exceeded $260 million in 2012; parallel market met some dollar demand at a modest premium of around 10 percent. - Anticipated $25 million in budget support from India was never received. - State Bank of India did not roll over its $50 million government bond due in December and may not roll over another similar bond maturing in February. - Potential compensation claim related to December 2012 airport-privatization reversal: company claims $800 million; original airport deal valued at $511 million and included an upfront $78 million payment to government. - External accounts (selected, in millions of U.S. dollars): - Current account: 2007: -227; 2008: -612; 2009: -221; 2010: -197; 2011: -437; 2012 (proj.): -585; 2013 (proj.): -646; 2014 (proj.): -700; 2015 (proj.): -743. - Travel receipts (nonfactor services): 2007: 1,515; 2008: 1,559; 2009: 1,473; 2010: 1,713; 2011: 1,868; 2012 (proj.): 1,805; 2013 (proj.): 1,883; 2014 (proj.): 2,009; 2015 (proj.): 2,141. ### Monetary and financial sectors — recent developments and outlook - Monetary conditions and credit: - Real policy rate is negative. - Excess rufiyaa liquidity substantial at 5 percent of deposits (more than half resides with the Maldives Islamic Bank). - Private-sector credit shrank 10 percent y/y by November 2012. - Lending is heavily dollarized; banks are repaying foreign funding lines rather than expanding domestic credit. - Market functioning and central bank pressures: - Treasury bill auctions routinely undersubscribed, particularly for longer maturities. - Government pressured the Maldives Monetary Authority (MMA) not to conduct OMO auctions to channel funds toward T-bills and pushed for a lower minimum reserve requirement (MRR), which currently stands at 25 percent. - Direct monetization of the deficit has occurred on a large scale; MMA generally kept reserve money close to targets despite pressures. - Financial supervision and bank health: - Supervisory weaknesses, especially regarding the state bank. - Several commercial banks out of compliance with single-borrower and net-open-position (NOP) limits; NPL ratios have risen. - MMA provided across-the-board regulatory forbearance in 2012 on provisioning requirements for the next three years. - Bank of Maldives (BML) reports a capital adequacy ratio (CAR) above the minimum threshold of 12 percent under forbearance and reported accounting; with proper accounting and no forbearance, CAR falls to just 7 percent, consistent with 2011 onsite finding that the bank is critically undercapitalized. - BML petitioned to declare an interim dividend; MMA refused. ### Why a crisis has not (yet) materialized — staff assessment (Box 1) - Staff concern: loose fiscal policy could trigger a near-term currency crisis, but no crisis has materialized despite weak fiscal and external indicators (large deficits and debt ratios, limited domestic financing, rufiyaa overvaluation of 16–28 percent, low reserves). - Possible explanations: - Government accumulation of domestic arrears may have dampened private-sector imports, offsetting import stimulus from loose fiscal policy. Clearance financed by MMA monetization could precipitate rapid reserve loss, import surge, and parallel-market premium blowout. - Parallel market may be supplying dollars adequately; indications mixed: some firms report difficulty finding dollars, some report banks willing to extend rufiyaa but not dollar loans, yet parallel-market premium remained around 10 percent. - Box 1 conclusion: Situation unclear but risky; staff advise rapid and comprehensive policy adjustment on an urgent basis. ### Policy discussions and scenarios - Baseline scenario: - Under existing policies, debt would rise and large financing gaps would emerge (Tables 1–4). - Scenario implicitly assumes those gaps are filled (by new external financing or by dollars supplied in the parallel market). - If financing is not found, possible outcomes: collapse of reserves, sharp reduction in dollar availability in the parallel market, dramatic widening of the premium, forced devaluation, import compression, rising interest rates, slower growth, and a spike in inflation. - The baseline is itself a risk scenario. - Adjustment scenario: - Envisions fiscal and monetary tightening, a devaluation, and a Fund Staff Monitored Program (SMP) that catalyze additional donor financing. - Adjustment scenario would eliminate financing gaps and deliver an orderly resolution of imbalances with sustained policy implementation. ### Fiscal policy: deficit, 2013 budget, and mission-recommended adjustment measures - Mission objective: bring the deficit down steadily to stabilize the debt ratio by 2016; staff suggested monetary-policy/operations changes to facilitate domestic financing and policy adjustment/possible Fund engagement to trigger additional external financing. - Authorities passed a budget calling for a sharp deficit reduction, but staff expect the budget to imply a deficit substantially higher than the budget’s numbers. - 2013 budget vs. staff projections (figures in percent of GDP; table format preserved as slashes): - Total revenue and grants: 32.8 / 32.4 / 0.4 - Revenue: 31.3 / 30.2 / 1.1 - Grants: 1.5 / 2.2 / -0.7 - Expenditure and net lending: 36.8 / 48.7 / -11.9 - Current expenditure: 26.2 / 37.4 / -11.2 - Capital expenditure: 10.9 / 11.7 / -0.8 - Net lending: -0.3 / -0.3 / 0.0 - Overall balance: -4.0 / -16.3 / 12.3 - Overall balance, excluding grants: -5.5 / -18.5 / 13.0 - Note: 1/ Including 3 percent of GDP arrears clearance. - Mission-recommended fiscal measures to reduce the deficit while minimizing growth and distributional impact: - Increase tourism GST (TGST) to 15 percent by mid-2013 and not allow the bed tax to expire. - Selectively reverse duty reductions. - Further rationalize Aasandha costs. - Target electricity subsidies to the needy. - Freeze salaries and wages. - Support targeting subsidies on staple foods; establish a Pay Commission; have fewer paid councillors per island; embark on civil-service reform guided by government jobs analysis. - Tourism taxation context: - In 2012 tourists paid 6 percent TGST on accommodation and related services plus an $8 nightly tax. - TGST previously legislated to increase to 8 percent on January 1, 2013, while the bed tax was to expire at end-2013. - Comparator tourism-dependent economies tax in the 15-20 percent range. - World Bank analysis suggests tourism price elasticity of -0.41. - Budget outcome and staff expectations: - TGST increased to 12 percent as of mid-2013; bed-night tax eliminated at same time. - GGST base broadened slightly; airport departure charge increased from $18 to $25 per passenger; Pay Commission established. - While budget shows deficit falling from 13½ percent of GDP in 2012 to just 4 percent in 2013, staff expect it to stay flat or even rise to around 16¼ percent of GDP if one includes arrears clearance of 3 percent of GDP. - Staff suggested fiscal measures averaging around 2 percent of GDP each year would stabilize the debt by 2016, albeit at still high levels relative to GDP. ### Fiscal adjustment scenarios and numbers (2013–16; percent of GDP) - Fiscal Adjustments, 2013–16 (difference between baseline and adjustment-scenario deficit paths): - Total adjustments: 1.5 / 2.4 / 3.3 / 6.0 - Revenue: 2.7 / 3.6 / 5.1 / 7.8 - Import duty: 0.9 / 0.8 / 0.8 / 3.5 - FM: Raise the average effective tariff rate from 6.3 to 10 percent in January 2016 (and GE effects) 2/ - Bed-night tax: 1.4 / 2.6 / 2.5 / 2.4 - FM: Maintain the bed night tax from 2013 onward (and GE effects) - Tourism GST (T-GST): 0.0 / 0.0 / 2.2 / 2.2 - FM: Raise the T-GST rate to 15 percent from 12 percent in Jan. 2015 (and GE effects) - Other: 0.4 / 0.2 / -0.4 / -0.2 - Expenditure: 1.2 / 1.2 / 1.8 / 1.8 - Wages bill: -0.7 / -0.2 / 0.3 / 0.5 - FM: Freeze on wage bill in 2013 (and GE effects) - Other: 1.9 / 1.4 / 1.5 / 1.3 - Memorandum items — Deficit paths: - Baseline scenario: 16.3 / 12.8 / 12.6 / 12.6 - Adjustment scenario: 14.8 / 10.4 / 9.3 / 6.6 - 2/ The rate was 14 percent prior to the reduction in tariff rates in 2012. ### External-sector policy: devaluation, reserves, and current account - Staff view: Maldives’ large current account deficit appears to reflect loose fiscal policy more than an independently overheated private sector; staff estimate a 1 percent of GDP increase in the fiscal deficit leads to a 0.4 percent of GDP increase in the current account deficit. - Mission recommended a 20 percent devaluation accompanied by wage and subsidy restraint; authorities unanimously disagreed. - Given CGER methodologies, a 20 percent adjustment accompanied by fiscal and monetary tightening appeared appropriate. - Devaluation would work mostly through import compression given dollarization in resorts and lack of domestic production, requiring targeted social assistance. - Reserves, 2013–15 (in millions of U.S. dollars): - Gross international reserves — Baseline: 317 / 333 / 350 - Financing gap: 77 / 136 / 161 - Baseline in the absence of financing gap: 240 / 120 / -24 - Adjustment scenario: 412 / 502 / 606 - Difference: 172 / 382 / 630 - Difference (in months of imports): 1.0 / 2.0 / 3.1 - Memorandum item — Nominal GDP (in U.S. dollars): 2,388 / 2,639 / 2,893 ### Monetary policy and operations — recommendations and operational changes - Agreement that monetary tightening is needed to mop up liquidity, keep inflation under control, and support the rufiyaa. - Mission suggested increasing the policy rate substantially from 7 percent; MMA favored a mere 50-basis-point hike. - Agreement that monetization should be resisted and government pressure to limit OMOs should be resisted. - MMA had sympathy for reducing the MRR to facilitate government financing but later agreed no changes should be made for now; staff suggested waiting until an easing cycle is needed. - Staff endorsed MMA efforts to agree with government on daily monetization limits to avoid month-end gaming. - Mission recommended MMA charge interest greater than the T-bill yield on advances to discourage monetization. - Staff urged expedited passage of a revised MMA Act to clarify and strengthen MMA independence. - Operational changes suggested: - Develop sharia-compliant instruments to tap idle liquidity at Maldives Islamic Bank. - Introduce a standing repo facility at a non-punitive rate to reduce banks’ disincentive to lock liquidity up in T-bills. - Continue work on a T-bill secondary market. - Lengthen the reserve maintenance period (MMA agreed to consider). - MRR asset eligibility should not be expanded to include cash-in-vault or T-bills. ### Financial sector policy and supervision - Staff recommendations: - Roll back across-the-board forbearance on provisioning requirements. - Adopt MCM TA recommendations to move toward forward-looking, risk-based supervision. - Implement differential minimum CARs for banks depending on risk profiles. - Conduct more frequent onsite examinations for weaker banks. - Use qualitative information in loan classification, not just days-past-due. - Deduct excess lending above related-borrower limit from regulatory capital. - Meet banks annually to discuss their plans. - Focus on BML: - BML operations supported by inadequate capital, exposing depositors and ultimately government as implicit guarantor to risk. - Mission applauded MMA decision not to permit BML to declare an interim dividend and urged maintaining this stance until compliance with prudential regulations. - Staff called for an independent assessment of the bank to facilitate finding a strategic investor to recapitalize BML; authorities agreed assessment was a priority. - Deposit insurance (DI): - Staff suggested MMA delay plans to introduce DI because preconditions under Basel Committee core principles are not met; concern MMA lacks sufficient reserves to offer credible insurance on dollar deposits. ### Medium-term issues and structural policies - Voluntary population consolidation: - Authorities plan 15 regional island centers and aim to halve the number of populated islands to around 100 over the long term. - Expected benefits: fiscal savings (annual wage bill for island councilors alone close to 1 percent of GDP), reduce unemployment by consolidating labor supply, support commerce, release islands suitable for redevelopment as resorts. - Economic diversification priorities: - Develop labor-intensive sectors: off-port shipping services, IT, financial services. - Continue moderate resort development and tailor offerings to the growing Asian market; debate over luxury vs. middle-market positioning. - Fishing sector: focus on producing and marketing value-added items. - Develop capital market and position Maldives as an Islamic finance center, though structural challenges (limited financial infrastructure, small pool of professionals, weak corporate governance and disclosure, low savings, limited financial literacy) pose obstacles. - Long-term environmental challenge: coping with adverse effects of climate change, including sea-level rise. ### Staff appraisal, risks, and recommended program engagement - Staff appraisal: - Economic conditions relatively stable so far, but fiscal and external indicators extremely worrying. - Market appetite for financing the government is declining; unclear how much longer the parallel market will supply dollar demand. - An external or domestic financing crisis could materialize, possibly in the near future. - Essential that a comprehensive policy response be undertaken now to bolster confidence and prevent a crisis. - Fund engagement: - Mission and authorities agreed Maldives could benefit from a Fund program; mission suggested beginning with an SMP to develop a track record. - SMP welcomed by authorities as opportunity to devise a homegrown solution; staff emphasized the solution must be strong and supported by a comprehensive policy package avoiding over-reliance on any one instrument. - Staff emphasized strong fiscal adjustment (including incomes and subsidy policy) should be at the core, supported by devaluation and monetary tightening; devaluation could possibly be replaced by further fiscal measures. - Exchange rate arrangement: since April 2011, rufiyaa officially floated in a band of 20 percent on either side of Rf 12.85 per dollar (i.e., between Rf 10.28 and Rf 15.42); in practice, rufiyaa virtually fixed at band’s weaker end; regime classified as stabilized. - Maldives remains an Article XIV member but maintains an exchange restriction and a multiple currency practice (MCP) under Article VIII, Sections 2(a) and (3), with MCP arising from MMA’s rationing of foreign exchange and greater-than-two-percent spread between official and parallel market rates. ### Risk Assessment Matrix — selected high-impact risks and policy responses - Market appetite for government paper weakens markedly - Likelihood: M; Impact: H - Policy Response: Accelerate fiscal adjustment; adjust exchange rate; tighten monetary policy; approach multilateral and bilateral donors for assistance. - General currency crisis, with importers unable to access dollars - Likelihood: M-L; Impact: H - Policy Response: As above. - Cancellation of airport concession dampens investor sentiment - Likelihood: M; Impact: M - Policy Response: As above. - Depositors lose faith in BML given weak capital - Likelihood: M-L; Impact: M - Policy Response: MMA Bank Supervision to intervene short term; announce medium-term plan including outside assessment and search for strategic investor. ### Debt Sustainability Analysis — main findings and projections (preserved wording/numbers) - Key findings: 1. Public debt reached 73 percent of GDP in 2011. 2. Heavy reliance on T-bills and external borrowings; authorities estimate arrears at about RF 1 billion, or 3 percent of GDP, at end-2012. 3. Total debt (public + private external) reached an estimated $2.3 billion, or 108 percent of GDP, in 2011. 4. Total debt estimated to have grown by over 20 percent to reach $2.8 billion, or 127 percent of GDP, in 2012; external financing explains a 15 percentage-point increase; domestic financing explains a 6 percentage-point increase. 5. Macroeconomic assumptions: growth expected to increase modestly to around 3¾ percent next year; projected average growth rate for 2014-18 of just above 4 percent. 6. Current policies lead to extremely large domestic and external financing requirements; a 20 percent devaluation would raise the rufiyaa value of external debt but under an adjustment scenario public debt ratios could stabilize at around 90 percent of GDP in 2016. 7. With little relief from privatization receipts, Maldives faces a high risk of external public debt distress and risk of sudden and disorderly adjustments. - Selected quantitative indicators (preserved exactly): - Public debt: 73 percent of GDP in 2011. - Outstanding public domestic debt: 39 percent of GDP in 2011. - External public debt: about 34 percent of GDP at end-2011. - Arrears (authorities' estimate): about RF 1 billion, or 3 percent of GDP, at end-2012. - Total debt (2011): $2.3 billion, or 108 percent of GDP. - Total debt (2012 estimate): $2.8 billion, or 127 percent of GDP. - External financing contribution to 2012 increase: 15 percentage-point. - Domestic financing contribution to 2012 increase: 6 percentage-point. - Projected growth: around 3¾ percent next year; projected average growth rate for 2014-18 of just above 4 percent. - Projected current account deficit: around 26 percent of GDP on average in the medium term. - Devaluation example: 20 percent devaluation noted; public debt ratios could stabilize at around 90 percent of GDP in 2016 under an adjustment scenario. ### Comparative case and lessons — Seychelles (summary) - Seychelles experienced an acute BOP and public-debt crisis in 2008; key elements of successful reform included: - Exchange regime liberalization and float. - Significant and sustained fiscal tightening (public employment reduction, tax reform, targeted safety net). - New monetary policy framework focusing on liquidity management via indirect instruments. - Private-sector development measures, privatization, and fiscal governance improvements. - Outcomes: exchange-rate stabilization after adjustment, narrowed current account, reserves rebuilt, central government finances under control; remaining challenges included expanding fiscal discipline beyond central government and strengthening monetary framework. ### Statistical issues and data adequacy (As of January 2, 2013) - General assessment: "Data provision has some shortcomings, but is broadly adequate for surveillance." - Main shortcomings: - National accounts only annual and with lag; base year for constant prices is 2003; GDP estimates from production and expenditure approaches inconsistent. - Fiscal data: general government data published up to [2009]; monthly revenue and expenditure data system new and untested; inconsistent with monetary financing numbers. - External sector: BOP compiled annually with coverage and measurement problems; travel credits now estimated from tourism GST receipts revealing a larger tourism sector than previously indicated. - International reserve assets reported weekly with a (variable) one-week lag. - Maldives participates in the GDDS since October 14, 2011. *Italicized source attribution: IMF Staff report — Content unit: 1. Does Maldives Face a Possible Crisis? (Content unit: 1mdvea2019008).* ### 1. Does Maldives Face a Possible Crisis? __________________________________________________________ 5 ### 1. Does Maldives Face a Possible Crisis? ### Context - Maldives suffers from chronic fiscal and external imbalances driven by post-2004 tsunami spending and large civil service wage increases around the 2008 elections that pushed the fiscal deficit above 20 percent of GDP the following year. - An IMF-supported program of around $90 million was approved in December 2009 but went off track by mid-2010. - A 20 percent devaluation in April 2011, with monetary tightening, helped avert immediate collapse but did not resolve structural fiscal weaknesses. - Hard-currency reserves are under pressure: - Gross international reserves: about $300 million (around two months of imports). - Freely usable reserves: around $100 million after the December repayment of a $50 million bond. - Another $50 million bond matures in February, implying a further sharp decline in reserves. - Staff have warned of acute downside risks from loose fiscal policy, especially if the authorities rely increasingly on monetization to finance the fiscal deficit. ### Recent economic developments and outlook — Real sector - Growth and tourism: - After averaging almost 7 percent for several years, growth is expected to have declined to 3½ percent in 2012. - Modest recovery expected: growth should tick up and reach 4 percent by 2014, assuming world economy improvement and domestic political stability. - Principal downside risks include weakening market appetite for government paper, widening parallel-market premium, and weakening tourist arrivals. - Inflation: - The April 2011 devaluation pushed inflation to nearly 21 percent y/y by end-2011. - Headline inflation should have eased to 8 percent by end-2012. - Baseline expects inflation to drop to 4½ percent in the medium term (baseline assumes no change in the exchange rate). ### Recent economic developments and outlook — Fiscal and external sectors - Fiscal position: - Fiscal policy remained accommodative. - The 2012 deficit likely exceeded the budget target of 9 percent of GDP and reached around 13½ percent of GDP in cash terms (or higher if unpaid bills are accounted for). - New arrears building up possibly on the order of Rf 1 billion, or 3 percent of GDP. - 2013 budget includes adjustment measures but not enough to prevent a continued increase in the debt ratio; contingent liabilities in the financial sector pose possible fiscal risks. - External position: - Current account deficit estimated at over 25 percent of GDP during 2012–15. - CGER methodologies suggest rufiyaa overvaluation of 16 to 28 percent. - Overall BOP deficit exceeded $260 million in 2012, but reserves fell by much less as the parallel market met some dollar demand at a modest premium of around 10 percent. - An anticipated $25 million in budget support from India was never received. - The State Bank of India did not roll over its $50 million government bond that fell due in December and may not roll over another similar bond maturing in February. - Possible magnification of reserve pressure if compensation is paid related to the December 2012 reversal of the airport privatization (company claims $800 million; original airport deal valued at $511 million and included an upfront $78 million payment to government). ### Recent economic developments and outlook — Monetary and financial sectors - Monetary conditions and credit: - Real policy rate is negative. - Excess rufiyaa liquidity substantial at 5 percent of deposits (more than half resides with the Maldives Islamic Bank). - Private-sector credit shrank 10 percent y/y by November 2012. - Lending is heavily dollarized; banks are repaying foreign funding lines rather than expanding domestic credit. - Market functioning and central bank pressures: - Treasury bill auctions routinely undersubscribed, particularly for longer maturities. - Government pressured the Maldives Monetary Authority (MMA) not to conduct open-market operation (OMO) auctions to channel funds toward T-bills. - Government pushed for a lower minimum reserve requirement (MRR), which currently stands at a very high 25 percent. - Direct monetization of the deficit has occurred on a large scale; MMA generally kept reserve money close to targets despite pressures. - Financial supervision and bank health: - Supervisory weaknesses, especially regarding the state bank. - Several commercial banks out of compliance with single-borrower and net-open-position (NOP) limits; NPL ratios have risen. - MMA provided across-the-board regulatory forbearance in 2012 on provisioning requirements for the next three years. - Bank of Maldives (BML) reports a capital adequacy ratio (CAR) above the minimum threshold of 12 percent under forbearance and reported accounting; with proper accounting and no forbearance, CAR falls to just 7 percent, consistent with the 2011 onsite examination that the bank is critically undercapitalized. - BML petitioned to declare an interim dividend, which the MMA refused. ### Medium-term issues and structural policies - Voluntary population consolidation: - Authorities plan 15 regional island centers and aim to halve the number of populated islands to around 100 over the long term. - Expected benefits: - Fiscal savings from avoiding duplicated service provision (annual wage bill for island councilors alone close to 1 percent of GDP). - Reduce unemployment by consolidating labor supply. - Support commerce (a shop estimated to need a population of 30,000 to survive). - Release islands suitable for redevelopment as resorts. - Economic diversification priorities: - Develop labor-intensive sectors: off-port shipping services, IT, financial services. - Continue moderate resort development and tailor offerings to the growing Asian market; debate over luxury vs. middle-market positioning. - Fishing sector: focus on producing and marketing value-added items. - Develop the capital market and position Maldives as an Islamic finance center, though structural challenges—limited financial infrastructure, small pool of professionals, weak corporate governance and disclosure, low savings, and limited financial literacy—pose obstacles. - Long-term environmental challenge: coping with adverse effects of climate change, including sea-level rise. ### Box 1 — Staff assessment: Why a crisis has not (yet) materialized and remaining risks - Staff concern: loose fiscal policy could trigger a near-term currency crisis, but no crisis has materialized so far despite weak fiscal and external indicators (large deficits and debt ratios, limited domestic financing, rufiyaa overvaluation of 16–28 percent, low reserves). - Possible explanations for the absence of crisis: - Government accumulation of domestic arrears may have dampened private-sector imports, offsetting import stimulus from loose fiscal policy. But arrears cannot be sustained indefinitely; clearance financed by MMA monetization could precipitate rapid reserve loss, import surge, and parallel-market premium blowout. - Parallel market may be supplying dollars adequately; available indications are mixed: some reports (State Trading Organization) of difficulty finding dollars, some firms report banks willing to extend rufiyaa but not dollar loans, yet the parallel-market premium remained relatively modest (around 10 percent). - Conclusion/recommendation in Box 1: Situation unclear but risky; staff advise rapid and comprehensive policy adjustment on an urgent basis. ### Policy discussions and scenarios - Baseline scenario: - Under existing policies, debt would rise and large financing gaps would emerge (Tables 1–4). - Scenario implicitly assumes those gaps are filled (by new external financing or by dollars supplied in the parallel market). - If financing is not found, possible outcomes: collapse of reserves, sharp reduction in dollar availability in the parallel market, dramatic widening of the premium, forced devaluation, import compression, rising interest rates, slower growth, and a spike in inflation. - The baseline is itself a risk scenario. - Adjustment scenario: - Envisions fiscal and monetary tightening, a devaluation, and a Fund Staff Monitored Program (SMP) that catalyze additional donor financing. - Adjustment scenario would eliminate financing gaps and deliver an orderly resolution of imbalances with sustained policy implementation. *International Monetary Fund — Content unit: 1. Does Maldives Face a Possible Crisis?* ### 14. There was agreement that substantial fiscal consolidation is needed. The mission ### 1mdvea2019008 - 14. There was agreement that substantial fiscal consolidation is needed. The mission ### Fiscal policy: deficit, budget, and adjustment measures - Mission suggested bringing the deficit down steadily to stabilize the debt ratio by 2016, acknowledging debt would remain high and require further medium-term action. - Authorities viewed the mission’s path as insufficiently ambitious given severe financing constraints. - Staff suggested monetary-policy/operations changes to facilitate domestic financing and policy adjustment/possible Fund engagement to trigger additional external financing. - Authorities passed a budget calling for a sharp deficit reduction, but staff expect the budget to imply a deficit substantially higher than the budget’s numbers. - 2013 budget vs. staff projections (text table; figures in percent of GDP unless otherwise stated): - Total revenue and grants: 32.8 / 32.4 / 0.4 - Revenue: 31.3 / 30.2 / 1.1 - Grants: 1.5 / 2.2 / -0.7 - Expenditure and net lending: 36.8 / 48.7 / -11.9 - Current expenditure: 26.2 / 37.4 / -11.2 - Capital expenditure: 10.9 / 11.7 / -0.8 - Net lending: -0.3 / -0.3 / 0.0 - Overall balance: -4.0 / -16.3 / 12.3 - Overall balance, excluding grants: -5.5 / -18.5 / 13.0 - Note: 1/ Including 3 percent of GDP arrears clearance. - Mission-recommended fiscal measures to reduce the deficit while minimizing growth and distributional impact: - Increase tourism GST (TGST) to 15 percent by mid-2013 and not allow the bed tax to expire. - Selectively reverse duty reductions. - Further rationalize Aasandha costs. - Target electricity subsidies to the needy. - Freeze salaries and wages. - Support targeting subsidies on staple foods; establish a Pay Commission; have fewer paid councillors per island; embark on civil-service reform guided by government jobs analysis. - Context on tourism taxation: - In 2012 tourists paid 6 percent TGST on accommodation and related services plus an $8 nightly tax (a few percent extra, in this luxury market). - TGST previously legislated to increase to 8 percent on January 1, 2013, while the bed tax was to expire at end-2013. - Comparator tourism-dependent economies tax in the 15-20 percent range. - World Bank analysis suggests tourism price elasticity of -0.41. - Budget outcome and staff expectations: - TGST increased to 12 percent as of mid-2013; bed-night tax eliminated at same time (six months early). - GGST base broadened slightly; airport departure charge increased from $18 to $25 per passenger; Pay Commission established. - Spending envelope required to shrink in nominal terms, but staff see these savings as not fully supported by policy measures. - While budget shows deficit falling from 13½ percent of GDP in 2012 to just 4 percent in 2013, staff expect it to stay flat or even rise to around 16¼ percent of GDP if one includes arrears clearance of 3 percent of GDP. - Staff suggested fiscal measures averaging around 2 percent of GDP each year would stabilize the debt by 2016, albeit at still high levels relative to GDP. ### Fiscal adjustment scenarios and numbers (2013–16) - Public-debt baseline vs. adjustment scenarios: chart referenced (2009–18, percent of GDP). - Fiscal Adjustments, 2013–16 (difference between baseline and adjustment-scenario deficit paths; percent of GDP): - Total adjustments: 1.5 / 2.4 / 3.3 / 6.0 - Revenue: 2.7 / 3.6 / 5.1 / 7.8 - Import duty: 0.9 / 0.8 / 0.8 / 3.5 - FM: Raise the average effective tariff rate from 6.3 to 10 percent in January 2016 (and GE effects) 2/ - Bed-night tax: 1.4 / 2.6 / 2.5 / 2.4 - FM: Maintain the bed night tax from 2013 onward (and GE effects) - Tourism GST (T-GST): 0.0 / 0.0 / 2.2 / 2.2 - FM: Raise the T-GST rate to 15 percent from 12 percent in Jan. 2015 (and GE effects) - Other: 0.4 / 0.2 / -0.4 / -0.2 - Expenditure: 1.2 / 1.2 / 1.8 / 1.8 - Wages bill: -0.7 / -0.2 / 0.3 / 0.5 - FM: Freeze on wage bill in 2013 (and GE effects) - Other: 1.9 / 1.4 / 1.5 / 1.3 - Memorandum items — Deficit paths: - Baseline scenario: 16.3 / 12.8 / 12.6 / 12.6 - Adjustment scenario: 14.8 / 10.4 / 9.3 / 6.6 - 2/ The rate was 14 percent prior to the reduction in tariff rates in 2012. ### External sector policy: current account, devaluation, and reserves - Staff view: Maldives’ large current account deficit appears to reflect loose fiscal policy more than an independently overheated private sector. - Staff analysis suggests a 1 percent of GDP increase in the fiscal deficit leads to a 0.4 percent of GDP increase in the current account deficit. - Mission recommended a 20 percent devaluation accompanied by wage and subsidy restraint; authorities unanimously disagreed. - Given CGER methodologies, a 20 percent adjustment accompanied by fiscal and monetary tightening appeared appropriate. - Devaluation would work mostly through import compression given dollarization in resorts and lack of domestic production; this requires firm incomes and subsidy policy and targeted social assistance to shield vulnerable groups. - Authorities opposed devaluation citing damage to credibility, lack of wage-increase room since 2009, and upcoming elections; they favored fiscal consolidation as core solution and preferred cutting public wages over raising import costs for the population. - Staff noted duty increases could be an alternative to compress imports but would hurt the resort sector and may not be more politically acceptable than devaluation. - Effect of adjustment on current account deficits and reserves (chart referenced; 2009–15): - Reserves, 2013–15 (in millions of U.S. dollars): - Gross international reserves — Baseline: 317 / 333 / 350 - Financing gap: 77 / 136 / 161 - Baseline in the absence of financing gap: 240 / 120 / -24 - Adjustment scenario: 412 / 502 / 606 - Difference: 172 / 382 / 630 - Difference (in months of imports): 1.0 / 2.0 / 3.1 - Memorandum item — Nominal GDP (in U.S. dollars): 2,388 / 2,639 / 2,893 ### Monetary policy and operations - Mission and MMA agreed on need for monetary tightening to mop up liquidity, keep inflation under control, and support the rufiyaa. - Mission suggested increasing the policy rate substantially from 7 percent; MMA favored a mere 50-basis-point hike. - Agreement that monetization should be resisted and government pressure to limit OMOs should be resisted. - MMA had sympathy for reducing the MRR to facilitate government financing but later agreed no changes should be made for now; staff suggested waiting until an easing cycle is needed. - Staff endorsed MMA efforts to agree with government on daily monetization limits to avoid month-end gaming. - Mission recommended MMA charge interest greater than the T-bill yield on advances to discourage monetization. - Staff urged expedited passage of a revised MMA Act to clarify and strengthen MMA independence. - Operational changes suggested to address government financing difficulties and reduce pressure to ease monetary policy: - A higher policy rate translating into higher T-bill yields could increase subscriptions (MMA doubted banks’ willingness). - Authorities requested TA in this area. - Specific operational changes discussed: - Develop sharia-compliant instruments to tap idle liquidity at Maldives Islamic Bank. - Introduce a standing repo facility at a non-punitive rate to reduce banks’ disincentive to lock liquidity up in T-bills. - Continue work on a T-bill secondary market. - Lengthen the reserve maintenance period (MMA agreed to consider). - MRR asset eligibility should not be expanded to include cash-in-vault or T-bills. ### Financial sector policy and supervision - Staff called for a firmer approach to financial supervision: - Recent forbearance on provisioning requirements should be rolled back. - Urged adoption of MCM TA recommendations to move toward forward-looking, risk-based supervision. - MMA receptive but made no firm commitment to roll back forbearance. - AML/CFT bill expected to be submitted to Parliament in the first quarter of 2013 will further strengthen supervision. - Specific supervisory measures recommended: - Implement differential minimum CARs for banks depending on risk profiles. - Conduct onsite examinations more frequently for weaker banks. - Use qualitative information in loan classification, not just days-past-due. - Deduct excess lending above related-borrower limit from regulatory capital. - Meet banks annually to discuss their plans. - Focus on Bank of Maldives (BML): - BML operations supported by inadequate capital, exposing depositors and ultimately government as implicit guarantor to risk. - Mission applauded MMA decision not to permit BML to declare an interim dividend and urged maintaining this stance until compliance with prudential regulations. - Staff called for an independent assessment of the bank to facilitate finding a strategic investor to recapitalize BML; authorities agreed assessment was a priority. - Deposit insurance (DI): - Staff suggested MMA delay plans to introduce DI because preconditions under Basel Committee core principles are not met. - Concern that MMA lacks sufficient reserves to offer credible insurance on dollar deposits. - DI would carry problems of adverse selection and moral hazard; MMA saw merit but is waiting for appropriate timing. ### Other policy areas - Mission supported authorities’ medium-term development plans, noting importance of broad national consensus. - Population consolidation could reduce administration and service costs but may have significant social consequences; mission emphasized program must remain fully voluntary. - Mission endorsed plans to diversify the economy, urging realistic goals for capital-market development. ### Fund engagement and exchange rate arrangement - Mission and authorities agreed Maldives could benefit from a Fund program; mission suggested beginning with an SMP to develop a track record. - SMP welcomed by authorities as opportunity to devise a homegrown solution; staff emphasized the solution must be strong and supported by a comprehensive policy package avoiding over-reliance on any one instrument. - Staff made clear strong fiscal adjustment (including incomes and subsidy policy) should be at the core, supported by devaluation and monetary tightening; devaluation could possibly be replaced by further fiscal measures. - Detailed program issues to be discussed later in a separate negotiating mission. - Authorities requested their interest in an SMP be mentioned in the mission’s concluding press release. - Exchange rate arrangement: - Since April 2011, rufiyaa officially floated in a band of 20 percent on either side of Rf 12.85 per dollar (i.e., between Rf 10.28 and Rf 15.42). - In practice, rufiyaa virtually fixed at band’s weaker end; regime classified as stabilized. - Maldives remains an Article XIV member but maintains an exchange restriction and a multiple currency practice (MCP) under Article VIII, Sections 2(a) and (3), with MCP arising from MMA’s rationing of foreign exchange and greater-than-two-percent spread between official and parallel market rates. - Staff reviewing recently introduced foreign exchange measures; authorities noted no change on Article VIII issues until underlying imbalances are addressed. ### Staff appraisal and risks - Assessment: - Economic conditions relatively stable so far, but fiscal and external indicators are extremely worrying. - Market appetite for financing the government is declining; it is unclear how much longer the parallel market will supply dollar demand. - An external or domestic financing crisis could materialize, possibly in the near future. - Essential that a comprehensive policy response be undertaken now to bolster confidence and prevent a crisis. *Source: IMF Staff report (Content unit: 1mdvea2019008, chapter text supplied).* ### 29. Fiscal consolidation is key to stabilizing the economy. Without firm action now, Maldives’ ### 1mdvea2019008 - 29. Fiscal consolidation is key to stabilizing the economy. Without firm action now, Maldives’ ### Fiscal consolidation: urgency and risks - Without firm action now, Maldives’ large debt burden will grow unsustainably, and its already weak balance of payments will weaken further, threatening the peg. - The financing environment for government has become increasingly challenging and will not sustain continued large deficits. - Arrears financing has pernicious effects throughout the economy and must be cleared and then avoided, as must direct monetization by the MMA. - Given Maldives’ already high level of indebtedness, nonconcessional borrowing would be inadvisable. ### Assessment of recent fiscal measures and remaining gaps - Authorities introduced important fiscal measures: raising tourism taxation, broadening the base of the GGST, increasing the airport departure charge, and raising duties. - Intentions to curb spending on Aasandha and electricity subsidies, and the establishment of a Pay Commission, will yield important savings over time. - Despite these steps, deficits appear to be on only a modestly declining trajectory, which is not enough to prevent the debt ratio from rising or to restore external balance. - Further measures needed: - further increases in tourism taxation; - subsidy reform; - rationalization of the public service wage bill; - ensuring vulnerable groups are shielded. - Recognition that the near-term adjustment still involves a high debt-to-GDP ratio, which would have to be addressed over the medium term, but near-term goals should be realistic and achievable. ### Exchange rate policy and devaluation - Fiscal adjustment should be accompanied by a substantial devaluation. - Political economy constraints argue against too ambitious a path of deficit reduction; sharing the burden across multiple instruments makes sense. - A devaluation combined with an incomes/subsidy policy could help curb imports given the extent of rufiyaa overvaluation and the very weak levels of reserves. - Import compression via duty hikes is an alternative but would harm the dollar-earning resort sector and is therefore a second best. ### Monetary policy and operations - Monetary policy should be tightened and the operations framework reformed to: - mop up liquidity; - keep inflation under control; - prevent the need for further devaluation; - facilitate government financing. - The policy rate should be increased substantially. - Resist pressures to loosen policy by reducing the MRR, refraining from conducting OMOs, and monetizing the deficit directly. - Supportive measures to increase demand for Treasury bills: - a reduction in the Lombard rate; - a longer reserve maintenance period; - efforts to develop sharia-compliant instruments; - create a secondary market in government securities. - The MMA’s preliminary plans coincide with this advice in many respects. ### Financial supervision and BML - Financial supervision, particularly with regard to BML, needs strengthening. - MMA’s past approach of offering forbearance, often on an across-the-board basis, should change; insistence on compliance with prudential requirements and working with individual banks is required. - Move toward a more forward-looking, risk-based supervisory regime, and quickly adopt the AML/CFT bill. - Deposit insurance should not be introduced for the time being. - For BML, obtain an independent assessment as a high priority, possibly setting the stage for bringing in a strategic investor who could recapitalize the bank. ### Development plans, population consolidation, and diversification - Authorities’ development plans focusing on population consolidation and economic diversification appear sound but need popular consensus to be successful. - Population consolidation can dramatically reduce costs of administration and service provision, but must remain voluntary to avoid social disruption. - The initiative may over time provide scope for public service downsizing. - Emphasis on developing job opportunities in new, labor-intensive sectors to reduce vulnerability to a downturn in tourism demand. - Capital-market-development goals should be realistic and achievable given Maldives’ structural challenges. ### IMF engagement and program conditionality - Authorities have expressed interest in an IMF program, but will need a firm and comprehensive set of policies in place to proceed. - Pursuing fiscal and external adjustment, which the market will require given limited budget financing and declining international reserves, in the context of an IMF program could be helpful. - Maldives would first need to develop a good track record of policy implementation; an SMP could be a first step and could help catalyze other financing flows. - Such a program would need to feature a comprehensive set of policy responses to address Maldives’ imbalances. *Source: IMF country assessment text provided in the content unit.* ### 36. It is recommended that the next Article IV consultation take place on the standard ### 1mdvea2019008 - 36. It is recommended that the next Article IV consultation take place on the standard ### Real and external sector developments - Growth and tourism - "Growth is expected to drop in 2012 as domestic political turmoil and the European slowdown are hitting tourism." - GDP growth (selected annual real GDP figures, percent): 2007: 10.6; 2008: 12.2; 2009: -3.6; 2010: 7.1; 2011: 7.0; 2012 (proj.): 3.5; 2013 (proj.): 3.8; 2014 (proj.): 4.0; 2015 (proj.): 4.1. - Tourism bednights and tourism year-on-year growth series are shown as closely tracking GDP growth (Figure 1). - Inflation and external price pressures - "Inflation spiked with the April 2011 devaluation and remains high on account of tax increases and commodity price pressures." - Inflation (end-of-period, CPI-Male): 2007: 8.9; 2008: 8.9; 2009: 5.4; 2010: 6.9; 2011: 16.7; 2012 (proj.): 8.0; 2013 (proj.): 4.7; 2014 (proj.): 4.5; 2015 (proj.): 4.4. - Fuel (World) and Food (World) price series are depicted alongside CPI inflation in Figure 1. - Trade, current account, and financing gaps - "With not only tourism weakening, but the goods trade balance also worsening, driven by oil prices and loose fiscal policy... the current account deficit has widened." - Current account balance (in percent of GDP): 2007: -14.7; 2008: -32.4; 2009: -11.1; 2010: -9.2; 2011: -20.5; 2012 (proj.): -26.5; 2013 (proj.): -27.0; 2014 (proj.): -26.5; 2015 (proj.): -25.7. - Imports (RHS, percent of GDP) and the External Current Account are charted in Figure 1. - "In the absence of sustainably higher capital inflows... Maldives would face large financing gaps starting next year, on account of loose fiscal policies in the baseline." - Financing gap (assumed financing to keep GIR from falling below end-2012's months of import coverage) shown in international reserves chart: Financing gap (proj.) 2012: 3.2; 2013: 5.2; 2014: 5.6 (Table 1 footnote and Figure 1 annotations). ### Fiscal developments - Overall fiscal trajectory - "On current policies, the fiscal deficit will rise in 2012 and remain bloated into the medium term... leaving debt on an increasing path." - Central government overall balance (percent of GDP): 2007: -3.6; 2008: -11.2; 2009: -20.5; 2010: -15.6; 2011: -11.3; 2012: -13.4; 2013 (proj.): -16.3; 2014 (proj.): -12.8; 2015 (proj.): -12.4 (Table 2b). - Public and publicly guaranteed debt (percent of GDP): 2007: 45.3; 2008: 45.7; 2009: 58.6; 2010: 65.7; 2011: 72.4; 2012 (proj.): 80.4; 2013 (proj.): 86.2; 2014 (proj.): 90.9; 2015 (proj.): 95.5 (Table 1 and Table 2b). - Expenditure drivers - "Expenditures have remained high... reflecting the new universal health insurance scheme as well as other subsidies." - Central Government Expenditure (percent of GDP, selected): Current expenditure 2012 (e): 30.4; Capital expenditure 2012 (e): 12.2 (Table 2b). - Social welfare, subsidies and transfers (percent of GDP): Aasandha program and electricity subsidy and other social welfare contributions show marked increases in 2011–2012 (Figure 2 series). - Salaries and allowances (percent of GDP): 2012 (e): 13.2 (Table 2b). - Revenue developments - "Revenues are expected to drop slightly from 2011 to 2012... as new tax streams have been offset by other losses and giveaways." - Total revenue and grants (percent of GDP): 2011: 31.0; 2012 (proj.): 28.9; 2013 (proj.): 32.4; 2014 (proj.): 31.1; 2015 (proj.): 30.3 (Table 2b). - Major tax and non-tax receipts (percent of GDP) include: Import duty, Resort lease and its extension, Business profit tax (BPT), T-GST (tourism sector), G-GST (Figure 2). - The bed tax ($8 bed tax) is noted to be eliminated at mid-2013 (Table 2a footnote). ### Monetary and financial sector developments - Monetary aggregates and credit - "Monetary aggregates have broadly remained muted... with the public sector crowding out the private sector amid tepid credit growth..." - Broad money (percent change): 2007: 24.1; 2008: 21.8; 2009: 14.4; 2010: 14.6; 2011: 20.0; 2012 (proj.): 9.2; 2013 (proj.): 8.4 (Table 3). - Domestic credit (percent change): 2007: 44.7; 2008: 35.2; 2009: 14.0; 2010: 4.7; 2011: 11.2; 2012 (proj.): -1.8; 2013 (proj.): 4.6 (Table 3). - Credit composition (percent of GDP): Private sector credit 2012 (e): 14.8; Central government (net) 2012 (e): 7.8; Public enterprises 2012 (e): 1.6 (Table 3). - Liquidity and banking sector health - "...despite substantial excess liquidity being held by commercial banks." - Commercial banks' reserves (percent of total deposits) and MRR series depicted in Figure 3; commercial banks' reserves are elevated relative to the MRR in 2011–2012. - NPLs have worsened; NPL to total loans (percent): 2012 Q3 shown rising in Figure 3 (specific series charted). - Capital adequacy ratio (percent) and profitability (return on equity and return on assets) are charted: profitability is low (Figure 3). - Government securities market - "The government is facing increasing difficulty in tapping the securities market." - T-bill auction activity and average yields: 28-day, 91-day, OMO yield series and bid/offered ratio are charted, with monthly average weighted yields noted (Table 3 footnote). ### Selected quantitative indicators and scenarios - Baseline scenario key indicators (Table 1 highlights) - Population (in 1,000; 2009 est.): 315. - GDP per capita (in U.S. dollars; 2009 est.): 6,305. - Quota (in million SDRs): 10.0. - Gross international reserves (in millions of US$; e.o.p.) (selected): 2007: 308; 2008: 241; 2009: 261; 2010: 350; 2011: 335; 2012 (proj.): 304; 2013 (proj.): 317; 2014 (proj.): 333; 2015 (proj.): 350. - Usable reserves (in millions of US$; e.o.p.) (selected): 2007: 172; 2008: 106; 2009: 112; 2010: 144; 2011: 137; 2012 (proj.): 99; 2013 (proj.): 106; 2014 (proj.): 115; 2015 (proj.): 124. - Adjustment scenario (Table 5 highlights) - Under the Adjustment Scenario, Real GDP growth (selected): 2012 (proj.): 1.4; 2013 (proj.): 1.6; 2014 (proj.): 2.6. - Central government overall balance (percent of GDP) under Adjustment Scenario: 2012: -13.4; 2013 (proj.): -14.5; 2014 (proj.): -10.2; 2015 (proj.): -8.9. - Gross international reserves (in millions of U.S. dollars; e.o.p.) under Adjustment Scenario (selected): 2012: 304; 2013: 412; 2014: 502; 2015: 606 (Table 5). - Current account (percent of GDP) under Adjustment Scenario: 2012: -28.1; 2013 (proj.): -23.7; 2014 (proj.): -21.6; 2015 (proj.): -19.4. - Balance of payments (selected levels, Table 4) - Current account (in millions of U.S. dollars): 2007: -227; 2008: -612; 2009: -221; 2010: -197; 2011: -437; 2012 (proj.): -585; 2013 (proj.): -646; 2014 (proj.): -700; 2015 (proj.): -743. - Travel receipts (tourism-related receipts, in nonfactor services): 2007: 1,515; 2008: 1,559; 2009: 1,473; 2010: 1,713; 2011: 1,868; 2012 (proj.): 1,805; 2013 (proj.): 1,883; 2014 (proj.): 2,009; 2015 (proj.): 2,141. ### Policy implications and recommendations (implied by text and figures) - Monitor and assess the fiscal stance - The fiscal deficit is forecast to rise in 2012 and debt is on an increasing path; tightening or re-prioritizing expenditure (notably subsidies and new health scheme costs) and safeguarding revenue streams (including careful management of tax changes and bed-tax elimination) would be central to stabilizing debt dynamics. - Address external financing and reserve adequacy - Without sustainably higher capital inflows, Maldives faces financing gaps and weakening reserves; policies to restore investor confidence and mobilize concessional or non-debt-creating financing are implied priorities. - Strengthen financial sector resilience - Rising NPLs and low profitability suggest the need for strengthened bank supervision, asset quality monitoring, and measures to rebalance credit toward the private sector while managing public sector crowding-out. - Improve government access to securities markets - Difficulty tapping the securities market suggests reviewing debt management strategy and sequencing domestic and external financing to reduce crowding-out and market dislocations. *Sources: Maldivian authorities; and IMF staff estimates and projections.* ### APPENDIX I. MALDIVES: RISK ASSESSMENT MATRIX ### APPENDIX I. MALDIVES: RISK ASSESSMENT MATRIX ### Risk Assessment Matrix — Key Risks, Likelihood, Impact, and Policy Response - Market appetite for government paper weakens markedly (i.e., T-bill undersubscription worsens). - Directional marker:  - Likelihood: M - Impact: H - Policy Response: Accelerate fiscal adjustment; adjust exchange rate; tighten monetary policy; approach multilateral and bilateral donors for assistance. - General currency crisis, with importers unable to access dollars to finance imports of necessities. - Directional marker:  - Likelihood: M-L - Impact: H - Policy Response: As above. - Cancellation of airport concession dampens investor sentiment. - Directional marker:  - Likelihood: M - Impact: M - Policy Response: As above. - Tourist arrivals fall, whether on account of slower global growth or domestic political instability. - Directional marker:  - Likelihood: M-L - Impact: M - Policy Response: Allow currency to depreciate (fiscal and monetary policy space both limited). - Depositors lose faith in BML, given weak capital. - Directional marker:  - Likelihood: M-L - Impact: M - Policy Response: MMA's Bank Supervision Department to intervene in short term; also announce medium-term plan, including outside assessment and search for strategic investor. ### Short summary metrics from the Risk Matrix page - Page reference: MALDIVES 28 INTERNATIONAL MONETARY FUND --- ### Debt Sustainability Analysis (Appendix II) — Main Findings and Projections - Purpose: Updated debt sustainability analysis (DSA) using the Low-Income Country Framework, updating the January 2011 DSA (IMF Country Report No. 11/293). - Overall conclusion: Under the baseline scenario, reflecting current policies, public debt is expected to rise steadily; the debt path is unsustainable and Maldives continues to face a high risk of public external debt distress. Key findings (preserve numbering and wording) - 1. Maldives’ public debt reached 73 percent of GDP in 2011, an increase of about 6 percentage points since the last DSA. Debt dynamics remain unsustainable and are driven by excessive borrowings from the domestic market as well as external sources. - 2. The country has relied heavily on the issuance of Treasury bills and external borrowings to finance large and sustained fiscal deficits. Unmet financing needs, however, exist and have led to monetization of the deficit as well as the accumulation of domestic payments arrears, which the authorities estimate at about RF 1 billion, or 3 percent of GDP, at end-2012 but could be larger. The DSA does not explicitly include arrears in the analysis, given the uncertainty about the stock, but the arrears constitute a significant risk factor, as clearance of these obligations could lead to additional, formal debt that would worsen the profiles beyond what is shown in this appendix. Outstanding public domestic debt reached 39 percent of GDP in 2011. In addition, the country has received external financial assistance primarily from India and China in the form of commercial loans. External public debt stood at about 34 percent of GDP at end-2011. Looking forward, the authorities should formulate a comprehensive debt strategy and should seek additional donor support and increase the share of concessional borrowing for the external public debt, including for SOEs. - 3. Maldives’ total debt (total public debt and private external debt) reached an estimated $2.3 billion, or 108 percent of GDP, in 2011. In dollar terms, this is essentially unchanged from the 2010 DSA baseline, but with the GDP revision in 2011, the debt-GDP ratio has dropped from 143 percent in the full DSA. Private external debt is estimated to be about 35 percent of GDP in 2011. - 4. Total debt is estimated to have grown by over 20 percent to reach $2.8 billion, or 127 percent of GDP, in 2012. External financing (both public and private) explains a 15 percentage-point increase. The remaining 6 percentage-point increase comes from domestic financing, mainly through the issuance of Treasury bills. With no privatization receipts expected this year, the fiscal deficit translates directly into growing debt, the former being 1 percent higher than in the 2010 DSA baseline. - 5. The macroeconomic assumptions in the near to medium term are broadly in line with the previous DSA. Growth is expected to increase modestly to around 3¾ percent next year, with a projected average growth rate for 2014-18 of just above 4 percent, as against the 4½ percent rate assumed previously. The current account deficit is lower than in the previous DSA mainly because of higher-than-initially-projected tourism receipts, but is projected to remain around 26 percent of GDP on average in the medium term. The fiscal deficit is expected to be lower relative to GDP than in the previous DSA. While the government implemented some revenue enhancing measures, it also cut import duty rates substantially, offsetting the gains from new measures. Overly optimistic revenue projections in the approved 2012 budget failed to provide sufficient incentives for containing government spending, resulting in little consolidation of fiscal deficits. Nonetheless, with the upward revision to GDP, fiscal deficits have declined relative to GDP. As such, while this DSA continues to show that debt grows out of control in the baseline, just as in the last DSA, the debt ratio stays at lower levels throughout. - 6. As in the full DSA (IMF Country Report No. 11/293), this DSA update stresses that current policies would lead to extremely large domestic and external financing requirements. The financing needs cannot realistically be met, and therefore the DSA calls for additional fiscal consolidation measures in the near term. Notwithstanding its impact on narrowing the current account deficits, a devaluation of 20 percent would raise the rufiyaa value of the external debt in Maldives. But if this devaluation were to happen in the context of an adjustment scenario (see text chart and table and paragraph 16), the decline in fiscal deficits in 2014 and beyond would help to bring the debt to a sustainable path, the public debt ratios being stabilized at around 90 percent of GDP in 2016. - 7. With little relief expected from privatization proceeds, Maldives still confronts a high risk of external public debt distress. The risk of sudden and disorderly adjustments exists. Further deterioration of public finances and shocks to exports and tourism earnings are important risks. ### Policy Recommendations and Strategic Actions (from the DSA text) - Formulate a comprehensive debt strategy. - Seek additional donor support. - Increase the share of concessional borrowing for the external public debt, including for SOEs. - Implement additional fiscal consolidation measures in the near term to address large domestic and external financing requirements. - Consider exchange rate adjustment options (noting that a 20 percent devaluation would raise rufiyaa value of external debt but could be part of an adjustment scenario that stabilizes debt ratios around 90 percent of GDP in 2016). ### Selected quantitative indicators and projections (preserved exactly as in source) - Public debt: 73 percent of GDP in 2011. - Outstanding public domestic debt: 39 percent of GDP in 2011. - External public debt: about 34 percent of GDP at end-2011. - Arrears (authorities' estimate): about RF 1 billion, or 3 percent of GDP, at end-2012. - Total debt (public + private external): $2.3 billion, or 108 percent of GDP, in 2011. - Total debt (2012 estimate): $2.8 billion, or 127 percent of GDP, in 2012. - External financing contribution to 2012 increase: 15 percentage-point. - Domestic financing contribution to 2012 increase: 6 percentage-point. - Projected growth: around 3¾ percent next year; projected average growth rate for 2014-18 of just above 4 percent (versus 4½ percent previously assumed). - Projected current account deficit: around 26 percent of GDP on average in the medium term. - Devaluation example: 20 percent devaluation noted; public debt ratios could stabilize at around 90 percent of GDP in 2016 under an adjustment scenario. *Source: APPENDIX I. MALDIVES: RISK ASSESSMENT MATRIX; APPENDIX II. UPDATED DEBT SUSTAINABILITY ANALYSIS USING THE LOW-INCOME COUNTRY FRAMEWORK (IMF staff estimates and projections).* ### APPENDIX III. MALDIVES: EXTERNAL STABILITY ASSESSMENT ### APPENDIX III. MALDIVES: EXTERNAL STABILITY ASSESSMENT ### External position and REER assessment - Staff find Maldives’ external position and real effective exchange rate (REER) to be out of alignment with medium-term fundamentals. - The Maldivian rufiyaa has appreciated in real terms by almost 20 percent since the April 2011 devaluation. - The nominal devaluation led to a spike in inflation; given the high degree of exchange rate pass-through, inflation quickly eroded the competitiveness gains. - The recent period of relatively high inflation has unwound the entire real depreciation observed since 2002. - CGER methodologies suggest: - The current account deficit is far larger than the norm. - The REER is overvalued by between 16 and 28 percent. - Under baseline policies: - The current account will continue to diverge from the medium-term norm. - In the near term, Maldives will face extremely large financing gaps if reserves are to be maintained. ### Policy prescription and recommended adjustment - Staff see the appropriate policy prescription as: - Significant fiscal consolidation accompanied by a devaluation and growth-enhancing structural reforms. - Rationale: - Fiscal adjustment helps restore external balance by reducing the current account deficit and addressing financing constraints. - Devaluation is needed to correct the REER overvaluation and restore competitiveness. - Structural reforms are required to boost growth and expand the scope for diversification. ### Structural constraints and competitiveness risks - Despite the recovery of the tourism sector from the global financial crisis, Maldives faces structural challenges: - Limited scope for diversification. - A business climate that has become less friendly. - Potential spillovers from a fiscal/external crisis that would likely constrain private-sector-led growth. - To improve competitiveness and address imbalances, fiscal consolidation accompanied by a devaluation and structural reforms is essential. ### APPENDIX IV: Assessing the link between the twin deficits - Question considered: the strength and sign of the relationship between the fiscal deficit and the external current account deficit (CAD) for Maldives. - Data limitations: - Running a VAR on fiscal balance, CAD, and growth is not very informative given limited data (annual observations starting in 1990) and structural breaks (e.g., the 2004 tsunami) that make the CAD nonstationary. - Cross-country evidence and staff choices: - Endegnanew et al. (2012) used a panel of 42 selected microstates, including Maldives, and found the current account appears to be positively associated with the fiscal balance, with a coefficient on the cyclically-adjusted primary balance (in percent of GDP) of around 0.40. - The coefficient estimates reported: - 0.40 when using the panel of 42 microstates. - 0.31 if oil exporters are dropped from the sample. - 0.34 if the sample is broadened to include the global sample of 155 countries. - The authorities’ own rule of thumb: a 1 percent of GDP widening of the fiscal deficit leads to a 0.56 percent of GDP increase in the CAD. - To be conservative, staff use a coefficient of 0.40 in constructing baseline and alternative forecasts. - Imports and government spending: - Staff’s estimates using Endegnanew et al.’s panel of 42 countries find no significant relationship between the fiscal deficit and imports. - There is a significant relationship between government expenditures and imports: - Coefficient of 1.09 for government expenditures and imports. - Coefficient of 0.81 when only current expenditures are considered. - Restricting the sample to 24 highly tourism-dependent states causes the coefficient to drop to 0.72. *Source: APPENDIX III. MALDIVES: EXTERNAL STABILITY ASSESSMENT (and APPENDIX IV) — IMF staff analyses as presented in the source PDF.* ### APPENDIX V. THE CASE OF SEYCHELLES ### APPENDIX V. THE CASE OF SEYCHELLES ### Background and crisis - Seychelles faced an acute balance-of-payments and public-debt crisis in 2008. - Modest reform efforts begun in 2003 had achieved some fiscal adjustment, trade reform, and economic liberalization, but substantial imbalances remained. - The rupee was devalued in 2006 and 2007, which boosted inflation, while expansionary fiscal and monetary policies continued to undermine competitiveness. - By 2007: - the fiscal deficit reached nearly 10 percent of GDP; - public debt was close to 150 percent of GDP (of which nearly two-thirds was external); - gross official reserves were down to just a few days of import cover. - The 2008 food and fuel price shocks and the global slowdown exacerbated problems: - inflation rose further; - GDP growth, which had been strong since 2005 on account of tourism-related earnings and FDI, declined sharply; - the current account deficit widened. - Authorities introduced complex exchange controls, leading to foreign-exchange shortages, increased dollarization, and a parallel foreign-exchange market. - Balance of payments financing increasingly relied on external arrears accumulation. - The authorities missed a payment on a privately-placed external debt issue in July 2008 and on a Eurobond payment in October 2008, and Standard & Poor’s downgraded Seychelles to "selective default." ### Reform strategy requested from the Fund The authorities requested Fund assistance in support of a comprehensive reform strategy, which featured: - liberalization of the exchange regime, involving the elimination of all exchange restrictions and a float of the currency, as well as public wage restraint; - a significant and sustained tightening of fiscal policy, backed by a reduction in public employment, tax reform and improvements in revenue administration, and the replacement of indirect subsidies with a better targeted safety net; - a new monetary policy framework focusing on liquidity management via indirect instruments; and - a boost to private-sector development through further privatization, enhanced fiscal governance, and a review of the tax regime. ### Debt restructuring and creditor response - The reform measures opened the door for comprehensive debt restructuring, as creditors recognized that frontloaded fiscal adjustment, featuring large primary surpluses, was insufficient to place public debt on a sustainable path. - As of end-2012, agreements had been signed with all but one creditor. ### Outcomes and remaining challenges - The policies were largely successful: - the exchange rate overshot but then appreciated strongly and has been relatively stable since; - the current account deficit narrowed and reserves were built up; - central government finances were brought under control; - inflation and interest rates stabilized after an initial spike; - growth dipped but soon recovered. - Outstanding challenges include: - expanding fiscal discipline beyond the central government; and - strengthening the monetary framework further. *Source: APPENDIX V. THE CASE OF SEYCHELLES* ### 7.1 percent for 7 projects, agriculture and natural resources sector at 4.6 percent for 3 projects, ### 1mdvea2019008 - 7.1 percent for 7 projects, agriculture and natural resources sector at 4.6 percent for 3 projects, ### Public Sector Loans and Grants Portfolio — key amounts and projects - Regional Development Project, Phase II: Net Amount 6.06 (in millions of U.S. dollars) - Private Sector Development Project (TA Loan): Net Amount 7.07 (in millions of U.S. dollars) - Economic Recovery Program: Net Amount 33.06 (in millions of U.S. dollars) - Capacity Development for Economic Recovery Project: Net Amount 1.44 (in millions of U.S. dollars) - Inclusive Micro-, Small- & Medium-Sized Enterprise Development (Grant): Net Amount 4.45 (in millions of U.S. dollars) — Net amount as of November 30, 2012. - Inclusive Micro-, Small- & Medium-Sized Enterprise Development: Net Amount 5.55 (in millions of U.S. dollars) — Not yet effective. ### Technical Assistance (TA) Portfolio — active TA projects and amounts - Six TA projects in the active portfolio with a total amount of $ 5.45 million. - Five capacity development TA and one project preparatory TA. - Detailed TA Net Amounts (in millions of U.S. dollars): - 7424 Institutional Strengthening for Economic Management: 3.225 - 7672 Small & Medium Enterprise Development: 0.650 - 7946 Developing the Revenue Administration Management Information System: 0.500 - 8000 Capacity Development for the Maldives Energy Authority: 0.400 - 8070 Strengthening Capacity for Operations Management: 0.225 - 6337–21 Maritime Transport Master Plan: 0.450 - Source for portfolios: Asian Development Bank. Net amounts reported as of November 30, 2012. ### Statistical issues — assessment and main shortcomings (As of January 2, 2013) - General assessment: - "Data provision has some shortcomings, but is broadly adequate for surveillance." - Macroeconomic statistics improved with technical assistance from STA and the Asian Development Bank (AsDB). - Remaining shortcomings affect the balance of payments, government finance, and national accounts statistics. - Real sector: - National accounts statistics available only on an annual basis and with a considerable lag. - GDP estimates made using both the production and expenditure approaches, but estimates are inconsistent. - Base year for constant price estimates is 2003. - CPI rebased to June 2012=100; weights based on the 2012 household income and expenditure survey. - Fiscal sector: - General government data reported for publication in the GFS Yearbook; latest published data are for [2009]. - Monthly revenue and expenditure data available but reporting system is new and reliability untested. - Consistency with below-the-line financing numbers provided by monetary authorities is weak. - Data on external debt subject to reconciliation with creditors. - Data on operations of state enterprises are limited. - Monetary sector: - APD receives weekly electronic report covering balance sheets of the MMA and commercial banks. - Current summary data published in MMA’s Monthly Statistics, QEB, and AR, but with significant lag. - Inconsistencies between monetary and fiscal data regarding financing of the fiscal deficit. - An April 2007 STA mission completed standardized report forms and developed an integrated monetary database; it became operational in 2010. - External sector: - MMA compiles balance of payments data on an annual basis; problems of coverage and measurement across a range of areas. - Travel credits now estimated on the basis of tourism GST receipts, revealing the sector is much larger than previously indicated. - Coverage of foreign direct investment firms is limited, leading to under-reporting. - Estimates of distributed and reinvested earnings of direct investment enterprises in the tourism sector remain unsatisfactory. - Information on private financial flows is incomplete; international investment position incomplete as private sector data are not available. - Quarterly data on external debt and debt service available for government and monetary authority, and to some extent for banking sector and state enterprises; no data for the nonfinancial private sector. - Official reserve assets reported weekly with a (variable) one-week lag. ### Data standards, reporting, and availability - Maldives has participated in the General Data Dissemination System (GDDS) since October 14, 2011. - No data ROSC available. - Authorities report macroeconomic data to the IMF regularly and generally timely for publication in the IFS, BOPSY, and GFSY. ### Table of Common Indicators Required for Surveillance — selected entries (As of January 2, 2013) - Exchange Rates: Date of Latest Observation 12/30/2012; Date Received 12/31/2012; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 12/27/2012; Date Received 12/31/2012; Frequency D D D - Reserve/Base Money: Date of Latest Observation 12/20/2010; Date Received 12/31/2012; Frequency W W M - Broad Money: Date of Latest Observation 12/20/2012; Date Received 12/27/2012; Frequency W W M - Central Bank Balance Sheet: Date of Latest Observation 12/20/2012; Date Received 12/27/2012; Frequency W W M - Consolidated Balance Sheet of the Banking System: Date of Latest Observation 12/20/2012; Date Received 12/27/2012; Frequency W W M - Interest Rates: Date of Latest Observation 12/24/2012; Date Received 12/31/2012; Frequency W W M - Consumer Price Index: Date of Latest Observation 11/30/2012; Date Received 12/4/2012; Frequency W W M - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of Latest Observation 2011; Date Received 10/26/2012; Frequency A M M - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of Latest Observation 2011; Date Received 10/26/2012; Frequency A M M - Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation 2011; Date Received 10/26/2012; Frequency A M M - External Current Account Balance: Date of Latest Observation 2011; Date Received 10/26/2012; Frequency A M M - Exports and Imports of Goods and Services: Date of Latest Observation 10/30/2012; Date Received 12/6/2012; Frequency M M M - GDP/GNP: Date of Latest Observation 2011; Date Received 12/6/2012; Frequency A M M - Gross External Debt: Date of Latest Observation 2010; Date Received 1/4/2012; Frequency A M M - International Investment Position: Date of Latest Observation 2011; Date Received 10/26/2012; Frequency A A A ### Statement by Mr. Shaalan on Maldives — Executive Board Meeting, February 20, 2013 — key observations - Growth and macro performance: - After contracting in 2009, GDP growth exceeded 7 percent in 2010 and in 2011, moderating in 2012 as a result of the slowdown in Europe. - The fiscal deficit contracted sharply—by 11 percentage points of GDP—during 2009-2011. - The fiscal deficit is preliminarily estimated to have risen slightly in 2012 despite continued strong revenue performance in 2012. - Inflation rose in 2011 in response to the devaluation, and remained high as a result of the introduction of the GST in 2011 and the subsequent increase in the rate in early 2012. - Program history and fiscal consolidation: - A three-year Standby Arrangement and a 24 month Arrangement under the Exogenous Shocks Facility were approved in December 2009. - Program target: reduction in the fiscal deficit from 33½ percent of GDP in 2009 to 4½ percent of GDP in 2012, mainly through new taxes and civil service downsizing. - Program went off track following its First Review in March 2010 due to political and implementation difficulties; spending increased due to introduction of universal health coverage and a disability benefits program and a new decentralization law. - Despite program slippage, many tax measures were implemented—new business profit tax, ad valorem tourism tax, and a general sales tax—yielding higher revenues than forecasted. - Note: GDP was revised in 2012; fiscal deficit excluding grants in 2009 became 25 (not 33½) percent of GDP. The new figure reflects the deficit of 22.2 percent of GDP for 2009 plus prior actions of 2.7 percent of GDP. - Exchange rate and devaluation considerations: - Authorities not convinced of merits of a currency devaluation; consider a faster pace of fiscal consolidation more appropriate than staff suggestion of average annual deficit reduction of 1 percent of GDP in 2013-15. - Staff’s implied need for a 20 percent devaluation is questioned given data problems and evidence that sizeable tourism sector flows are not reflected in the balance of payments. - Staff emphasizes importance of a targeted social assistance scheme to shield the vulnerable from effects of a devaluation, which is not in place. - Governance and capacity: - Maldives has used Fund technical assistance effectively; authorities express appreciation and wish to continue capacity building support. - Publication note: - Authorities indicated they will not publish the report at this time due to concern about market reaction to recommendation of a 20 percent devaluation and references to potential imminence of a crisis; considerable editing would be required prior to publication. *Source: IMF staff report and Executive Board materials (As presented in the provided PDF content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1mdvea2019008.pdf_