## EXECUTIVE SUMMARY — Maldives (Content unit: 1mdvea2020001) ## Source details **Canonical URL:** [EXECUTIVE SUMMARY — Maldives (Content unit: 1mdvea2020001)](https://www.imf.org/-/media/files/publications/cr/2020/english/1mdvea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1mdvea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1mdvea2020001.pdf.json) --- ### Context and pandemic impact - The Maldives is suffering from the impact of the COVID-19 pandemic; the Maldivian economy is one of the most dependent countries on tourism. - GDP growth is projected to be about -8.1 percent in 2020, about 15 percentage points below the pre-pandemic growth rate, and with large downside risks. - Baseline external financing gap for 2020 is about US$214 million; fiscal financing gap for 2020 is around US$228 million. - The decline in tourists will lead to a loss of around US$1.46 billion in tourism receipts. ### Request for IMF support and proposed financing package - Authorities request a disbursement of SDR 21.2 million (equivalent to 100 percent of quota) under the exogenous shock window of the Rapid Credit Facility (RCF); full amount to be used for budget support. - Staff supports the request; capacity to repay the Fund is judged adequate, though Maldives continues to be at a high risk of debt distress. - At 21.2 million SDR, around US$ 28.9 million, the RCF amount would be equivalent to 13.5 percent of the balance of payments funding needs brought on by the pandemic. - Expected complementary financing and identified pledges in 2020: - World Bank: US$17.3 million - ADB: US$27.6 million - OFID: US$20.0 million - IFC: US$50.0 million - Other (unidentified): US$70.1 million - If disbursed, Fund exposure would amount to about 0.54 percent of GDP or about 5 percent of gross international reserves in 2020. ### Pre-pandemic macro-financial conditions - Pre-shock 2020 GDP growth projection: about 7.0 percent. - 2020 Budget: planned capital spending jump of 75 percent to a record-high 14 percent of GDP. - Total public debt (including guarantees) in 2019: estimated US$4.4 billion, around 77 percent of GDP. - External public and publicly guaranteed debt in 2019: estimated US$2.2 billion, around 38 percent of GDP. - Current account deficit in 2019: about 26 percent of GDP. - Exchange rate arrangement: stabilized vis-à-vis the US dollar (a de-facto peg) with tight FX controls and occasional FX rationing. - Financial sector: banks remain in good health with strong capitalization and profitability; NPLs relatively low and well-provisioned. ### Post-pandemic macroeconomic outlook (baseline and key projections) - Tourism shock and arrivals: - Pre-shock projected tourist arrivals growth for 2020: around 13 percent; actual January 2020 arrivals recorded 14 percent growth y/y. - Travel ban on flights from China enforced by February 4; arrivals growth contracted by 20 percent during 2020Q1 vs 2019Q1. - Assuming restrictions and on-arrival visas lifted in June, total tourist arrivals will contract by 31 percent in 2020 with respect to 2019 (39 percent fall with respect to pre-pandemic 2020 projections). - GDP and activity: - Real GDP growth: 2019: 5.7; 2020: -8.1; 2021: 13.2; 2022: 6.4; 2023: 5.9; 2024: 5.4; 2025: 5.4. - The contraction in tourist arrivals leads to a decline in GDP of around 11.7 percentage points; domestic disruptions account for around 3.4 percentage points of the GDP decline. - Social impact could be larger in the atolls where over 90 percent of poor Maldivians live. - External sector and reserves: - BOP gap for 2020: US$214 million. - Gross international reserves projected to decline by US$173 million to US$580 million (2 months of prospective imports). - At end-March 2020: gross reserves USD 741 million (about 2.6 months of prospective imports); usable reserves USD 369 million (0.9 months of prospective imports). - Fiscal impact: - Tax revenues projected to decline by about one third compared to 2019, mainly due to lower tourism GST collection. - COVID-19 related health expenses: about 0.25 percent of GDP. - Overall fiscal deficit widens to 11.7 percent of GDP in 2020. - Fiscal financing gap for 2020: around US$228 million (4.2 percent of GDP). ### Authorities’ immediate policy responses and announced measures - Public health actions: - Declared a Public Health Emergency on March 12, 2020; suspension of on-arrival visas; quarantine rules; bans on cruise ships; suspension of tourist check-ins at guest houses and city hotels since March 17; school closures. - Scaled up health care spending and preparedness with WHO collaboration. - Fiscal measures (Economic Recovery Plan and recent measures): - Increase health sector allocation by MVR 200 million (0.25 percent of GDP). - Reduce non-priority recurrent expenditure by MVR 1 billion (1.2 percent of GDP). - Reduce capital expenditure initially by MVR 3.1 billion (3.7 percent of GDP); cancel some new projects costing 3 percent of GDP in 2020–21. - Subsidize 40 percent of electricity bills and 30 percent of water bills for April and May. - Provide special 3-month allowance to those who lose jobs due to COVID-19. - Enable deferral (moratorium) of principal and interest loan repayments by 6 months for affected businesses and persons. - Ensure, through banks, availability of working capital to businesses. - Commit to monitor implementation of the new income tax and increase tourism-related fees after the crisis. - Monetary and financial sector measures (MMA): - Introduce regulatory measures enabling a moratorium of 6 months on loan repayments (customers must submit requests to banks). - Gradually reduce the Minimum Reserve Requirement (MRR) from 10 percent to up to 5 percent as needed. - Make available a short-term credit facility to financial institutions. - Seek activation of a US$150 million currency swap with the Reserve Bank of India. - MMA to increase FX intervention as needed, provide liquidity support, and avoid monetary financing of government credit operations. ### Policy guidance and recommended near-term fiscal stance - Fiscal policy: - Focus on carefully designed non-priority spending reductions and reallocation toward crisis-affected sectors. - Direct available resources to healthcare spending and well-targeted temporary support for vulnerable households and businesses. - Reduce as much as possible infrastructure projects in the 2020 Budget; complete ongoing projects but cancel several new projects. - Announced initial reductions: MVR 3.1 billion (3.7 percent of GDP) in capital expenditure and MVR 1 billion (1.2 percent of GDP) in non-priority recurrent expenditure. - Monetary, exchange rate, and financial sector: - Policy response should be consistent with the de-facto pegged exchange rate regime (no central bank monetization of fiscal deficits). - Focus on regulatory measures and liquidity provision: closely monitor credit conditions; provide fully collateralized targeted liquidity support with applicable haircuts; consider temporary easing of prudential/regulatory measures. - Continue close monitoring of FX reserves and liaise with the Reserve Bank of India regarding the swap facility. - Maintain financial sector oversight; ensure any assistance to borrowers or banks is transparent, targeted, and temporary. ### Medium-term recovery, risks, and debt sustainability - Recovery prospects: - Speed depends on duration of disruptions and preservation of economic capacity; a V-shaped rebound is possible if travel bans lift and confidence returns. - Experience from the Global Financial Crisis suggests quick recovery of tourist arrivals when infrastructure is intact; COVID-19 spares tourism infrastructure. - Downside risks: - Prolonged virus control, damage in source markets, or airline industry distress could produce a fat-bottomed U recovery with further activity declines and larger financing gaps. - Debt sustainability and DSA findings: - Maldives remains at a high risk of debt distress; DSA shows debt sustainable only conditional on authorities’ commitment to reprioritize/cut capital expenditures, active debt management, and SDF accumulation. - Public and publicly guaranteed debt (percent of GDP): 2019: 76.9; 2020: 93.9; 2021: 87.3; 2022: 85.4; 2023: 83.0; 2024: 80.7; 2025: 78.1. - External debt (PPG and private, percent of GDP): 2019: 54.2; 2020: 69.0; 2021: 65.3; 2022: 61.5; 2023: 60.6; 2024: 58.3; 2025: 55.5. - PV of external PPG debt-to-GDP estimated 33 percent in 2019, projected to increase to around 43 percent in 2020, then decline thereafter. - Public debt (PV) estimated 72 percent in 2019 and projected to reach 87.5 percent in 2020; projected to decline toward 63 percent of GDP by 2030 under the authorities’ scaled-down capital program. - Sovereign Development Fund (SDF) had accumulated over US$200 million by end-2019; expected accumulation of about US$168 million during 2021–first-half 2022 bringing balance to about US$250 million at end-June 2022; SDF mitigates rollover risks (notably the US$250 million bond due in 2022 and the extended US$100 million bond due 2026). - Table of capacity-to-repay indicators (selected): - Total Fund obligations (millions USD): 2020: 28.89; 2021: 29.42; 2022: 29.52; 2023: 29.60; 2024: 29.68; 2025: 26.81; 2026: 20.85; 2027: 14.89; 2028: 8.94; 2029: 2.98; 2030: 0.00. - Total Fund obligations (percent of government revenue): 2020: 3.18; 2021: 2.11; 2022: 1.80; 2023: 1.59; 2024: 1.47; 2025: 1.22; 2026: 0.89; 2027: 0.59; 2028: 0.33; 2029: 0.10; 2030: 0.00. - Total Fund obligations (percent of exports of goods and services): 2020: 1.12; 2021: 0.78; 2022: 0.70; 2023: 0.64; 2024: 0.60; 2025: 0.50; 2026: 0.36; 2027: 0.24; 2028: 0.13; 2029: 0.04; 2030: 0.00. - Debt carrying capacity and vulnerabilities: - CI score: 2.47; classification: "weak debt carrying capacity". - Key vulnerabilities: high tourism dependence (tourism receipts ~ two-thirds of GDP; 80 percent of exports; 40 percent of fiscal revenues), large current account deficits, rising external and public debt from infrastructure investment, and exposure to natural disasters and climate change. ### Realism checks, stress tests, and most extreme shocks - Realism tools find macro projections reasonable and consistent; projected three-year change in the primary balance is around the 60th percentile of LIC adjustments under IMF programs. - Tailored stress tests identify shocks to exports and growth (and combination shocks) as the most extreme for PPG external and public debt indicators. - Debt-service vulnerabilities: debt service-to-exports breaches its threshold in 2022 when the US$250 million sovereign bond is due. ### Staff appraisal and recommended medium-term priorities - Near-term: deploy RCF resources for budget support; prioritize healthcare and targeted income support; maintain financial stability through targeted liquidity and prudential measures consistent with the peg. - Medium-term: - Sustained fiscal consolidation is imperative: reduce capital spending to historical averages; enforce recurrent expenditure discipline; boost revenues via tax administration reform and possible improvements to the recently introduced PIT. - Prioritize capital spending toward highly efficient projects per the 2015 PIMA assessment. - Actively manage debt and accumulate liquid assets in the SDF. - Seek grant financing and the most concessional terms for external borrowing. - Modernize monetary policy in line with the MMA Strategic Action Plan. *Source: IMF staff Executive Summary for Maldives, April 16, 2020.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - The Maldives is suffering from the impact of the COVID-19 pandemic. - The Maldivian economy is one of the most dependent countries on tourism. - GDP growth is projected to be about -8.1 percent in 2020, about 15 percentage points below the pre-pandemic growth rate, and with large downside risks. - The baseline impact would open a 2020 external financing gap of about US$214 million and a fiscal financing gap of around US$ 228 million. ### Request for Fund support - The authorities are seeking financial assistance under the exogenous shock window of the Rapid Credit Facility (RCF) to address the urgent balance of payments needs posed by the COVID-19 pandemic. - In the attached letter, the authorities request a disbursement of SDR 21.2 million, equivalent to 100 percent of quota, with the full amount to be used for budget support. - Staff supports the request. - The capacity to repay the Fund is adequate. Maldives continues to be at a high risk of debt distress. - The RCF disbursement will be magnified by the catalytic role of Fund assistance. It is expected that the Asian Development Bank (ADB) and World Bank (WB) will also provide additional financing in concessional terms. ### Pre-Pandemic Conditions - Pre-shock GDP growth projection for 2020 was about 7.0 percent, driven by continued strong tourism growth. - Ongoing airport improvements and plans for new resorts (more than 116 islands would be available for development during the next 10 years) supported the strong tourism outlook. - The 2020 Budget envisaged a jump in capital spending by 75 percent, to a record-high 14 percent of GDP, driven by relocation of the port and a bridge linking the port with Malé, and an ambitious Strategic Action Plan including about 20,000 housing units and 5 urban centers. - Revenue measures (including a Personal Income Tax and increases in airport development fees, airport service charges, import duty-related fees, and foreign workers’ registration fees) were expected to finance only a small part of the capital expenditure increase; the remainder was expected to be financed mostly by grants and external borrowing. - The Maldives maintains a stabilized exchange rate arrangement vis-à-vis the US dollar (a de-facto peg); the Maldives Monetary Authority (MMA) has maintained tight controls on the availability and use of foreign exchange, with FX rationing to banks sometimes triggering FX shortages and emergence of a parallel market. - Financial sector: banks remain in good health with strong capitalization and profitability; NPLs are relatively low and well-provisioned; financial sector oversight is broadly appropriate. - Policy space and buffers were limited before the pandemic: total public debt (including guarantees) stood at an estimated US$4.4 billion in 2019, around 77 percent of GDP; external public and publicly guaranteed debt stood at an estimated US$2.2 billion in 2019, around 38 percent of GDP; the current account deficit was about 26 percent of GDP in 2019. ### Post-Pandemic Outlook and Authorities Responses - Tourism shock and arrivals: - Global impact expected to severely cut tourism receipts during 2020 by around 40 percent relative to pre-pandemic projections. - Tourist arrivals were projected to grow by around 13 percent in 2020 pre-shock; actual arrivals in January 2020 recorded 14 percent growth y/y. - Travel ban on flights from China enforced by February 4 led Chinese arrivals to fall to zero; arrivals growth contracted by 20 percent during 2020Q1 with respect to 2019Q1. - Assuming restrictions and on-arrival visas lifted in June, total tourist arrivals will contract by 31 percent in 2020 with respect to 2019 (39 percent fall with respect to pre-pandemic 2020 projections). - Macroeconomic outlook: - GDP growth is projected to be about -8.1 percent in 2020, about 15 percentage points below the pre-pandemic growth rate, with large downside risks. - The contraction in tourist arrivals leads to a decline in GDP of around 11.7 percentage points. Disruptions to domestic activity (construction, manufacturing, wholesale and retail trade) account for around 3.4 percentage points of the GDP decline. - The social impact could be larger in the atolls away from the capital Malé since over 90 percent of poor Maldivians live in atolls. - External sector and reserves: - The BOP gap will be around US$214 million. - The decline in tourists will lead to a loss of around US$1.46 billion in tourism receipts. - Gross international reserves are projected to decline by US$173 million to US$580 million or 2 months of prospective imports. - At the end of March 2020, gross reserves stood at USD 741 million (about 2.6 months of prospective imports), and usable reserves at USD 369 million (0.9 months of prospective imports). The assessment uses a 2-month coverage ratio for BOP needs due to Maldives’ large capital and tourism-related imports. - Fiscal impact: - Tax revenues are projected to decline by about one third compared to 2019, with the main source being lower tourism GST collection; business profit tax also adversely affected. - COVID-19 related health expenses about 0.25 percent of GDP for medical consumables, equipment, quarantine facilities, and Emergency Operations Center management. - The overall fiscal deficit widens significantly from 2019, to 11.7 percent of GDP as a result of lower revenue and despite reductions in some non-priority current expenditure and large cuts in capital expenditure compared with the original budget. - The fiscal financing gap is estimated at around US$228 million for 2020 (4.2 percent of GDP). - Authorities’ actions: - Declared a Public Health Emergency on March 12, 2020; containment measures include suspension of on-arrival visas, quarantine rules, bans on cruise ships, suspension of tourist check-ins at guest houses and city hotels since March 17, and school closures. - Authorities have scaled up health care spending and put in place measures to contain the outbreak; also responded with a combination of fiscal, monetary, and prudential measures to minimize economic impact. ### Medium Term Recovery and Risks - Recovery prospects: - Speed of recovery depends mainly on the length of coronavirus-related disruptions and preservation of economic capacity. - Experience from the Global Financial Crisis suggests tourist arrivals and economic activity can recover quickly when infrastructure is not damaged; COVID-19 spares tourism infrastructure so arrivals can resume more quickly if travel bans lift and confidence returns. - Downside risks: - Baseline V-shaped recovery is subject to significant downside risks: prolonged control of the virus could delay travel demand recovery; serious economic damage in source markets and damage to airline industry could slow recovery. - Under adverse scenarios, the recovery could be a fat-bottomed U, triggering further declines in activity, worsening debt sustainability, and larger financing gaps. - Debt sustainability: - Maldives remains at a high risk of debt distress. The DSA’s sustainability depends on authorities’ commitment to reprioritize and cut capital expenditures, a V-shaped tourism recovery, strong medium-term growth prospects, and continued accumulation of liquid assets to the Sovereign Development Fund (SDF). - Rollover risks from two outstanding international sovereign bonds are mitigated by: (i) SDF accumulation of revenues from Airport Development Fees and other services; and (ii) the preemptive voluntary extension of the US$100 million privately placed bond in Abu Dhabi by three years to 2026. - Funds in the SDF are estimated to be enough to cover the US$250 million bond due in 2022, and funds accumulated up to 2026 will come close to the amount due then. - Lack of full fiscal commitment would leave Maldives vulnerable to adverse shocks and affect its ability to increase resilience to longer-term climate change challenges. ### Policy Issues and Discussions — Fiscal Policy - Constraints and risks: - High public debt and fiscal deficits limit fiscal space to increase spending and the deficit. - The 2020 Budget already targeted a significant increase in capital expenditures and the deficit, accompanied by record-high grants. - In the absence of policy adjustment, reduced tax revenues would push the deficit to an unsustainable level and could lead to pressures on the MMA to provide monetary financing. - Recommended fiscal response: - Focus on carefully designed non-priority spending reductions and reallocation of resources towards crisis-affected sectors. - Authorities are scaling down implementation of the ambitious 2020 public investment plans: completing ongoing projects but cancelling several new projects. - Announced initial reductions: MVR 3.1 billion (3.7 percent of GDP) reduction in capital expenditure and MVR 1 billion (1.2 percent of GDP) reduction in non-priority recurrent expenditure. - Available resources should be directed to healthcare spending and other well-targeted measures to combat COVID-19 and provide temporary support to vulnerable households and businesses most affected by the crisis. ### Policy Issues and Discussions — Monetary, Exchange Rate, and Financial Sector (summary of guidance) - The authorities should focus on crisis management and ensure that the policy response is consistent with the current de-facto pegged exchange rate regime (for example, no central bank monetization of fiscal deficits). - MMA’s tight FX controls and the de-facto peg have helped anchor inflation and hedge the tourism sector, but FX rationing can trigger shortages and parallel market emergence. - Financial sector remains broadly sound; continued oversight and targeted measures are needed to preserve stability and support recovery. *Source: IMF staff Executive Summary for Maldives, April 16, 2020.* ### 18. In the medium-term, sustained fiscal consolidation is imperative. A balanced fiscal ### 1mdvea2020001 - 18. In the medium-term, sustained fiscal consolidation is imperative. A balanced fiscal ### Medium-term fiscal strategy and debt sustainability - Balanced fiscal adjustment should be based on: - reduction of capital spending to historical averages, - recurrent expenditure discipline, - measures to boost revenues by tax administration reform and possibly improvements in the recently introduced PIT. - The DSA shows that debt is sustainable, but the Maldives continues to be at high risk of debt distress. - Debt sustainability hinges critically on: - the authorities’ commitment to reprioritize capital expenditure, - active debt management, including accumulation of liquid assets in the SDF. - Capital spending should be prioritized toward highly efficient projects as recommended by the 2015 PIMA assessment. - Authorities should actively seek grant financing to help make up for the expected loss in tourism revenue and avoid a further increase in debt. ### Monetary, exchange rate, and financial sector policy - Monetary policy role and recommended focus: - Monetary policy has played a very limited role in the Maldives as a tool of cyclical management. - Policy response should focus mainly on regulatory measures and liquidity provision. - Recommended central bank (MMA) actions to ensure continued operation of solvent firms and avoid credit/market freezes: - closely monitor credit conditions, - provide targeted liquidity support to financial institutions (fully collateralized, with applicable haircuts on assets for risk mitigation), - consider temporary easing of prudential/regulatory measures. - Specific measures taken or proposed: - MMA announced a gradual lowering, as and when needed, of reserve requirements to provide liquidity support to banks. - MMA introduced a moratorium of 6 months on banking loan repayments for those affected by COVID-19. - MMA should monitor foreign exchange reserves closely and maintain close contact with the Reserve Bank of India to activate the bilateral currency swap if needed. - Banking sector assessment: - The banking sector is in relatively good financial health and should be able to withstand a temporary and not-protracted shock to tourism and growth. - Given banks’ high liquidity and capital cushions, they can provide temporary easing in lending terms to otherwise creditworthy borrowers. - Any government policy allocating resources to assist distressed borrowers and/or banks should be transparent, targeted, and clearly temporary to avoid moral hazard and poor credit risk management (e.g., lowering lending and provisioning standards). - Exchange rate policy: - Policies should support the continuation of the currency peg. - Prior staff recommendation (last Article IV) was an eventual medium-term shift from a peg to the US dollar to a currency basket peg to increase resilience; MMA was undertaking technical medium-term preparations within the MMA strategy plan. - Under current emergency circumstances authorities should focus on crisis management and ensure the policy response is consistent with continuation of the current exchange rate arrangement (e.g., no central bank monetization of fiscal deficits). ### Governance, fiscal transparency, and resilience to natural disasters - Authorities’ recent steps: - renewed momentum to strengthen regulations and institutions to fight corruption, though significant work remains. - steps to improve fiscal transparency, including regular publication of fiscal data and improving accountability. - Climate change and disaster resilience: - Addressing climate change-related vulnerabilities and improving buffers and policy space remain key medium-term challenges. - Government launched in October 2019 a Strategic Action Plan to integrate climate change as a cross-cutting issue in sectoral development plans. ### Rationale for rapid RCF access, ability to repay, and safeguards - Instrument choice: - Given urgency, a RCF is the most appropriate instrument for Fund assistance to the Maldives. - Maldives could benefit from an Extended Credit Facility (ECF) for long-term work, but current urgency and uncertainty justify immediate RCF access. - Proposed access and complementary financing: - Staff consider access at the maximum 100 percent of quota under the exogenous shock window of the RCF to be appropriate. - At 21.2 million SDR, around US$ 28.9 million, the amount under the RCF would be equivalent to 13.5 percent of the balance of payments funding needs brought on by the pandemic. - Other major donors indicated similar or greater recovery assistance: WB (US$17.3 million) and the ADB (US$27.6 million), much of it in the form of grants to avoid increasing the debt burden. - Capacity to repay and Fund exposure: - If disbursed as above, the Fund’s exposure to the Maldives would amount to about 0.54 percent of GDP or about 5 percent of gross international reserves in 2020. - Staff judge debt sustainable over the medium term in a baseline that assumes rapid recovery in growth and authorities' commitment to reprioritize and cut capital expenditures and active debt management including accumulation of liquid assets in the SDF. - Significant risks to debt sustainability would arise from deviations from this favorable outlook. - Staff consider Maldives’ capacity to repay the Fund adequate but subject to risks, with total Fund obligations based on existing and prospective credit peaking at 1.12 percent of exports and 3.18 percent of government revenue in 2020. - Disbursement mechanics and government commitments: - Authorities requested channeling the expected RCF disbursement to the budget; allocation anticipated to take the form of a credit to the MMA, which would provide credit of an equivalent amount to the government. - Letter of intent (LOI) includes commitments to improve debt and macroeconomic sustainability, evaluate fiscal priorities across current and capital spending, redirect available funds to combat the coronavirus and provide temporary support to the most vulnerable households and businesses. - Commitments to direct monetary and financial policies to support liquidity and economic activity, while maintaining financial stability and avoiding undermining banking system soundness. - Commitments to incorporate donor budget support through the single Treasury account and to avoid monetary financing of government credit operations. - Safeguards: - The 2010 safeguards assessment of the MMA will be updated in connection with the RCF disbursement. - All but one safeguards’ recommendations have been implemented and the MMA continues to publish its audited financial statements. - Authorities committed to undergo a safeguard assessment, authorize Fund staff to discuss with the central bank’s external auditors, and provide access to the central bank’s most recent external audit reports. ### Staff appraisal and near-term macroeconomic outlook - Economic shock and projections: - Tourist arrivals are projected to decline by 31 percent in 2020 and tourism receipts by around US$1.46 billion, assuming a temporary disruption and resumption of travel in the second half of the year. - Following an estimated 5.7 percent growth in 2019, real GDP growth is projected to decline to -8.1 percent in 2020. - Gross international reserves are projected to decline to US$580 million or 2 months of imports, with a US$214 million BOP need. - Policy response implemented and recommended: - Combination of fiscal, monetary, and prudential measures has been implemented to minimize economic impact. - MMA measures focus on preventing a tightening of liquidity conditions and assisting financial institutions: minimum required reserves could be gradually cut as necessary, a short-term MMA credit facility made available to banks, and a temporary, transparent, and well-targeted moratorium on bank loan repayments introduced. - Recurrent spending cuts and reallocation to health and income support to the vulnerable are appropriate. - Authorities should reduce as much as possible the infrastructure projects envisaged in the 2020 Budget to free resources. - Medium-term priorities: - Maldives is a country with high external vulnerabilities and high risk of debt distress; medium-term policies need to reduce these vulnerabilities. - To ensure debt sustainability the fiscal deficit and public debt will need to be brought down significantly over the medium term by: - a combination of revenue measures and spending restraint, including reassessment of the ambitious public infrastructure investment plan. - Monetary policy needs to be modernized in line with the MMA Strategic Action Plan to improve its efficiency and capacity as a tool of cyclical management. *International Monetary Fund staff summary extracted from the provided chapter text.* ### 32. The outbreak represents a significant shock to the Maldives and staff supports the ### 1mdvea2020001 - 32. The outbreak represents a significant shock to the Maldives and staff supports the ### Pandemic shock and policy response - Staff supports the authorities’ request for a RCF disbursement in the amount of 100 percent of the quota. - The outbreak represents a significant shock to the Maldives’ tourism-dependent economy: tourism arrivals stopped growing or fell sharply in March (China). ### Real economy and inflation - Real GDP (annual): 2016: 6.3; 2017: 6.8; 2018: 6.9; 2019: 5.7; 2020: -8.1; 2021: 13.2; 2022: 6.4; 2023: 5.9; 2024: 5.4; 2025: 5.4. - Inflation (end-of-period, CPI-Male definition): 2016: 1.8; 2017: 2.2; 2018: 0.5; 2019: 1.3; 2020: 1.4; 2021: 2.1; 2022: 2.0; 2023: 2.0; 2024: 2.0; 2025: 2.0. - Inflation (period average): 2016: 0.8; 2017: 2.3; 2018: 1.4; 2019: 1.3; 2020: 1.5; 2021: 1.5; 2022: 2.0; 2023: 2.0; 2024: 2.0; 2025: 2.0. ### External sector and reserves - Current account (in percent of GDP): 2016: -23.6; 2017: -21.7; 2018: -28.2; 2019: -26.1; 2020: -23.1; 2021: -11.8; 2022: -9.2; 2023: -9.1; 2024: -9.3; 2025: -9.0. - Tourism receipts (in nonfactor services, net, percent of GDP): 2016: 57.4; 2017: 58.0; 2018: 54.9; 2019: 58.8; 2020: 41.7; 2021: 53.0; 2022: 54.7; 2023: 55.7; 2024: 55.9; 2025: 56.2. - Gross international reserves (in millions of US$; e.o.p.): 2016: 468; 2017: 588; 2018: 712; 2019: 753; 2020: 580; 2021: 724; 2022: 759; 2023: 1,007; 2024: 1,110; 2025: 1,178. - Gross reserves / GNFS imports (in months): 2016: 1.6; 2017: 1.7; 2018: 2.1; 2019: 2.9; 2020: 2.0; 2021: 2.3; 2022: 2.2; 2023: 2.7; 2024: 2.8; 2025: 2.8. - External debt (PPG and private, in percent of GDP): 2016: 27.5; 2017: 35.6; 2018: 50.4; 2019: 54.2; 2020: 69.0; 2021: 65.3; 2022: 61.5; 2023: 60.6; 2024: 58.3; 2025: 55.5. - Maldives’ current account deficit is among the highest among tourist dependent countries; external debt has been increasing as infrastructure investment picked up. - Reserve coverage improvement in 2019 reflects mainly the decline in projected imports in 2020. ### Fiscal position and public debt - Central government finances (percent of GDP): - Revenue and grants: 2016: 27.5; 2017: 27.8; 2018: 27.1; 2019: 27.3; 2020: 19.4; 2021: 23.7; 2022: 25.1; 2023: 26.0; 2024: 26.3; 2025: 26.4. - Expenditure and net lending: 2016: 36.9; 2017: 34.1; 2018: 32.2; 2019: 32.1; 2020: 31.2; 2021: 29.8; 2022: 30.1; 2023: 29.8; 2024: 29.6; 2025: 29.3. - Overall balance: 2016: -9.3; 2017: -6.3; 2018: -5.1; 2019: -4.8; 2020: -11.7; 2021: -6.2; 2022: -4.9; 2023: -3.8; 2024: -3.3; 2025: -2.9. - Overall balance excluding grants: 2016: -9.6; 2017: -6.6; 2018: -6.1; 2019: -6.2; 2020: -14.3; 2021: -7.6; 2022: -5.9; 2023: -4.4; 2024: -3.9; 2025: -3.5. - Primary balance: 2016: -7.4; 2017: -4.8; 2018: -3.3; 2019: -3.1; 2020: -10.1; 2021: -4.4; 2022: -3.1; 2023: -1.9; 2024: -1.4; 2025: -1.1. - Public and publicly guaranteed debt (percent of GDP): 2016: 57.7; 2017: 61.3; 2018: 71.3; 2019: 76.9; 2020: 93.9; 2021: 87.3; 2022: 85.4; 2023: 83.0; 2024: 80.7; 2025: 78.1. - Fiscal deficits have been volatile but generally elevated; public debt has been gradually increasing, reflecting high fiscal deficits. - Growth in spending picked up in 2018 and 2019, reflecting mainly stronger growth in current spending; tax revenue growth has been declining, resulting in falling revenue-to-GDP ratio. ### Money, credit, and banking sector - Broad money (annual percent change): 2016: -0.2; 2017: 5.2; 2018: 3.4; 2019: 7.8; 2020: -5.9; 2021: 16.0; 2022: 8.5; 2023: 8.0; 2024: 7.5; 2025: 7.5. - Domestic credit (annual percent change): 2016: 19.7; 2017: 1.7; 2018: 5.2; 2019: 3.8; 2020: -3.1; 2021: 10.3; 2022: 6.0; 2023: 5.9; 2024: 5.6; 2025: 5.8. - Private sector credit-to-GDP ratio remains relatively low; private credit growth moderated while public sector credit picked up. - Commercial banks’ reserves are high. - Sectoral composition of private credit (2019, percent of total credit): Tourism; Construction; Commerce; Other loans; Real estate; Transport & communication; Fishing; Manufacturing; Electricity, gas, water; Agriculture (figures shown in source charts). ### External financing and IMF support - External financing requirements and sources (in millions of US$): - Financing requirements 2020: 1,462.3; 2021: 945.9; 2022: 1,089.0; 2023: 975.3; 2024: 982.0; 2025: 1,086.8. - Financing sources 2020: 1,248.4; 2021: 945.9; 2022: 1,089.0; 2023: 975.3; 2024: 982.0; 2025: 1,086.8. - Financing Gap: 2020: 213.9; 2021–2025: 0.0 each year. - Financing from IMF (RCF disbursement) in 2020: 28.9. - Identified other external financing in 2020 includes: World Bank 17.3; ADB 27.6; OFID 20.0; IFC 50.0; Other (unidentified) 70.1. - Table 7 indicators of capacity to repay the Fund: - Total Fund obligations based on existing and prospective credit (in millions of USD): 2020: 28.89; 2021: 29.42; 2022: 29.52; 2023: 29.60; 2024: 29.68; 2025: 26.81; 2026: 20.85; 2027: 14.89; 2028: 8.94; 2029: 2.98; 2030: 0.00. - Total Fund obligations (in percent of government revenue): 2020: 3.18; 2021: 2.11; 2022: 1.80; 2023: 1.59; 2024: 1.47; 2025: 1.22; 2026: 0.89; 2027: 0.59; 2028: 0.33; 2029: 0.10; 2030: 0.00. - Total Fund obligations (in percent of exports of goods and services): 2020: 1.12; 2021: 0.78; 2022: 0.70; 2023: 0.64; 2024: 0.60; 2025: 0.50; 2026: 0.36; 2027: 0.24; 2028: 0.13; 2029: 0.04; 2030: 0.00. - Total Fund obligations (in percent of GDP): 2020: 0.54; 2021: 0.47; 2022: 0.43; 2023: 0.40; 2024: 0.38; 2025: 0.32; 2026: 0.23; 2027: 0.15; 2028: 0.08; 2029: 0.03; 2030: 0.00. - Table 4 (Balance of Payments) highlights: - Current account (in millions of US$): 2016: -1,032; 2017: -1,026; 2018: -1,502; 2019: -1,498; 2020: -1,249; 2021: -742; 2022: -627; 2023: -666; 2024: -734; 2025: -767. - Tourism-related import components and travel receipts time series show the sharp shock in 2020 (travel receipts percent change: 2019: 15.5; 2020: -33.4; 2021: 47.7). ### Key vulnerabilities and structural features - The Maldives is highly dependent on tourism: tourism receipts are a relatively high share of GDP (Tourism Receipts, 2018: shown as percent of GDP in source charts). - Current account deficits are large relative to peers among tourist-dependent countries. - The REER appreciated after the devaluation in 2011 but has been depreciating since 2017; REER has depreciated moderately recently consistent with other tourist-dependent countries. - External debt and public debt rose sharply reflecting large infrastructure investment and fiscal deficits. *Source: Maldivian authorities and IMF staff (selected figures, tables, and text as provided in the source content).* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Impact of COVID-19 and emergency financing request - Tourism receipts account for about two thirds of GDP. - COVID-19 is expected to severely cut tourism receipts for the 2020 season. - Balance of payments (BOP) financing gap for 2020 is estimated at US$214 million, or about 4 percent of GDP. - The Government requests emergency financing from the IMF in the equivalent of SDR 21.2 million (about US$28.9 million), equivalent to a disbursement of 100 percent of quota under the Rapid Credit Facility (RCF). - Expected catalytic effect: IMF assistance is expected to catalyze additional grants and concessional loans from the World Bank, the Asian Development Bank and bilateral partners. - Projected contraction in GDP for 2020: negative GDP growth of between -7.8 percent to -11.5 percent, compared with 7.5 percent growth before the COVID-19 pandemic. - Estimated loss in tourism receipts in 2020: around US$1.46 billion. ### Fiscal measures announced (Economic Recovery Plan and recent measures) - Increase funds allocated to the health sector for the COVID-19 response by MVR 200 million (0.25 percent of GDP). - Reduce government non-priority recurrent expenditure by MVR 1 billion (1.2 percent of GDP). - Reduce capital expenditure initially by MVR 3.1 billion (3.7 percent of GDP); continue rebalancing between capital and current expenditure as necessary. - Ensure, through banks, availability of working capital to businesses. - Subsidize 40 percent of electricity bills and 30 percent of water bills for the months of April and May. - Provide special 3-month allowance to those who lose their jobs due to COVID-19. - Enable principal and interest loan repayments to banks to be deferred by 6 months to businesses and persons negatively impacted directly by COVID-19. - Government commitment on revenues and fiscal consolidation: - Monitor implementation of new income tax and increase, as planned after the crisis, tourism-related fees and service charges. - Cancellation of some new projects costing 3 percent of GDP in 2020–21. - Public investment projected to decline from 8.9 percent of GDP in 2019 to 7.2 percent of GDP on average in 2020–25. - Implemented revenue measures expected to raise 1 percent of GDP for the exchequer in 2021. - Aim to reduce the primary fiscal deficit after grants to 1 percent of GDP by 2025. - Overall fiscal outcome: overall fiscal deficit widens to 11.7 percent of GDP in 2020 as a result of a sharp decline in revenue despite expenditure reductions. ### Monetary and financial sector measures by Maldives Monetary Authority (MMA) - Introduce regulatory measures to enable a moratorium of 6 months on loan repayments for those impacted (customers must submit requests to banks). - Gradually reduce the Minimum Reserve Requirement (MRR) from 10 percent to up to 5 percent to provide liquidity support to banks, as needed. - Make available a short-term credit facility to financial institutions as required. - Increase as needed the MMA’s foreign exchange intervention and use other available facilities to maintain the exchange rate peg. - Seek to obtain a foreign currency swap facility amounting to US$150 million under the currency swap agreement signed between the MMA and the Reserve Bank of India. - MMA stands ready to provide liquidity support to banks and will avoid monetary financing of government credit operations. - The RCF resources will be lent to the Treasury; the MMA will be the counterparty for Fund lending. ### Debt levels, structure, and risk assessments - Total public and publicly guaranteed (PPG) debt in 2019: around US$4.4 billion, approximately 77 percent of GDP. - Domestic debt share: about 50 percent of public debt is domestic and denominated in local currency. - Domestic debt holders (June 2019): Other financial corporations 42 percent; Commercial banks 36 percent; Central bank 21 percent; Public Non-Financial Corporations 0.3 percent; Private Sector 1 percent (as illustrated in text). - External PPG debt in 2019: around US$2.2 billion, approximately 38 percent of GDP. - Composition of external PPG debt (2019): China 53 percent; Multilateral 17 percent; Paris Club 2 percent; Non-Paris Club (excl. China) 8 percent; Commercial 20 percent. - Two international sovereign bonds outstanding total US$350 million. - Joint Bank-Fund Debt Sustainability Analysis (DSA) ratings: - Risk of external debt distress: High - Overall risk of debt distress: High - Granularity in the risk rating: Sustainable - Application of judgement: No - Staff judgment: public debt is assessed as sustainable conditional on implementation of the authorities’ stated policies (policies are substantial and require high commitment). - Drivers of recent debt increases: public housing projects (HDC), airport expansion, electricity and sanitation infrastructure. ### Macroeconomic assumptions, projections, and financing implications - Pre-pandemic 2020 GDP growth projection: 7 percent. - COVID-19 shock to 2020 growth: -15.1 percentage points total; tourism sector accounts for -11.7 percentage points; domestic spillovers account for -3.4 percentage points. - Medium-term growth projections broadly align with the last DSA, assuming rebound in tourist arrivals to 2019 levels in 2021. - Inflation outlook: medium-term inflation slightly more favorable due to decline in oil and food prices. - Capital expenditure path: from average about 12.2 percent of GDP during 2016-19 to 7.2 percent in 2020-25. - Non-interest current account deficit: large in 2020 due to tourism revenue loss; partly offset by lower tourism-related imports, lower oil prices, and lower remittance outflows. - Domestic financing structure: - As of June 2019, more than 55 percent of domestic financing was short term (maturity < one year). - Interest rates on short-term debt have ranged between 3.7 and 4.5 percent since December 2016. - Over the medium term, assume similar share of short-term debt with an interest rate of 4.5 percent for short-term debt; share of longer-term debt gradually increases. - Domestic banks and the pension fund projected to remain main holders of government debt. - Rollover risk mitigation: Sovereign Development Fund (SDF) and preemptive voluntary extension of a privately placed US$100 million bond originally due in 2023 (now due in 2026). *Source: Letter of Intent and Joint Bank-Fund Debt Sustainability Analysis, Maldives, April 16, 2020.* ### 5. Realism tools suggest that the macroeconomic projections are reasonable and consistent ### 5. Realism tools suggest that the macroeconomic projections are reasonable and consistent ### Realism tools and macroeconomic projections - Realism tools indicate the macroeconomic projections are reasonable and consistent with historical patterns and those observed in other low-income countries (LICs). - The projected three-year change in the primary balance is around the 60th percentile of adjustments undertaken by LICs under an IMF program. - Baseline growth is far below what is suggested by a multiplier approach owing to the nature of the COVID-19 shock which has severely impacted the tourism sector in 2020. - Public investment is lower than projected in the last DSA because of the authorities’ revised capital expenditure plans in response to the shock to tourism. - The contribution of capital investment to growth is in line with the decline in capital spending and is proportional to historical contributions. ### External and public debt dynamics: summary findings - External debt dynamics have been driven predominantly by the current account deficit. - Major infrastructure projects over the last 5 years (housing, a hospital, a bridge, expansion of the new airport) were financed predominantly with external debt, with a large fraction of materials and services imported, expanding the current account deficit. - Public debt dynamics have been driven by the primary deficit. A large residual reflects SOE activity outside the budget. - Debt dynamics remain generally favorable owing to strong growth prospects and loan terms that are usually semi-concessional. ### Key projections and indicators (selected series — Current vs Previous) - Real GDP growth (in percent change) - Current: 2019 5.7, 2020 -8.1, 2021 13.2, 2022 6.4, 2023 5.9, 2024 5.4, 2025 5.4, 2026-38 4.7 - Previous: 2019 6.5, 2020 6.0, 2021 5.5, 2022 5.5, 2023 5.5, 2024 5.5, 2025 5.5, 2026-38 5.5 - Inflation - Current: 2019 1.3, 2020 1.5, 2021 1.5, 2022 2.0, 2023 2.0, 2024 2.0, 2025 2.0, 2026-38 2.0 - Previous: 2019 2.0, 2020 2.4, 2021 2.5, 2022 2.5, 2023 2.3, 2024 2.0, 2025 2.0, 2026-38 2.0 - Primary fiscal deficit (in percent of GDP) - Current: 2019 3.9, 2020 10.1, 2021 4.4, 2022 3.1, 2023 1.9, 2024 1.4, 2025 1.1, 2026-38 0.4 - Previous: 2019 3.0, 2020 3.2, 2021 2.6, 2022 2.2, 2023 1.8, 2024 1.4, 2025 1.4, 2026-38 -0.2 - Non-interest current account deficit (in percent of GDP) - Current: 2019 24.6, 2020 22.2, 2021 10.5, 2022 7.9, 2023 7.8, 2024 8.1, 2025 7.8, 2026-38 5.0 - Previous: 2019 18.0, 2020 13.0, 2021 11.2, 2022 9.3, 2023 8.0, 2024 5.1, 2025 7.5, 2026-38 3.5 - Grants (in percent of GDP) - Current: 2019 1.6, 2020 2.6, 2021 1.4, 2022 1.0, 2023 0.7, 2024 0.6, 2025 0.6, 2026-38 0.4 - Previous: 2019 0.6, 2020 0.6, 2021 0.5, 2022 0.5, 2023 0.5, 2024 0.4, 2025 0.4, 2026-38 0.3 - Capital Expenditures (in percent of GDP) - Current: 2019 9.5, 2020 8.0, 2021 7.0, 2022 7.0, 2023 7.0, 2024 7.0, 2025 7.0, 2026-38 7.0 - Previous: 2019 9.5, 2020 9.6, 2021 9.0, 2022 8.6, 2023 8.3, 2024 8.1, 2025 8.1, 2026-38 7.8 - Public Debt (in percent of GDP) - Current: 2019 76.9, 2020 93.7, 2021 87.0, 2022 85.2, 2023 82.8, 2024 80.5, 2025 78.0, 2026-38 63.9 - Previous: 2019 76.8, 2020 80.7, 2021 83.1, 2022 81.5, 2023 81.4, 2024 83.8, 2025 83.2, 2026-38 68.8 ### Debt carrying capacity and Composite Indicator (CI) - The Maldives’ CI score is calculated at 2.47, and the country is classified as having "weak debt carrying capacity". - CI methodology: weighted average of factors including real GDP growth, remittances, import coverage of reserves, world growth, and the CPIA score; calculation based on 10-year averages of the variables across 5 years of historical data and 5 years of projection, and the corresponding CPIA. - CI components (10-year average values, coefficients, contributions): - CPIA: Coefficient 0.385, 10-year average 3.17, CI component 1.2249, Contribution 49% - Real growth rate (in percent): Coefficient 2.71, 10-year average 0.96, CI component 0.177, Contribution 7% - Import coverage of reserves (in percent): Coefficient 4.05, 10-year average 2.17, CI component 0.987, Contribution 29% - Import coverage of reserves^2 (in percent): Coefficient -3.99, 10-year average 3.23, CI component -0.13, Contribution -5% - Remittances (in percent): Coefficient 2.02, 10-year average 0.67, CI component 0.011, Contribution 1% - World economic growth (in percent): Coefficient 13.52, 10-year average 0.349, CI component 0.471, Contribution 19% - CI Score: 2.47 (100%), CI rating: Weak - Classification based on current vintage: Weak; previous vintage: Weak; two previous vintages: Weak - Vintage CI values: 2.47, 2.52, 2.48 ### External debt sustainability details - PV of external PPG debt-to-GDP: - Estimated 33 percent in 2019. - Projected to increase to around 43 percent of GDP in 2020 owing to the sharp contraction in GDP growth and disbursements related to existing projects. - Projected to gradually decline to 34 percent in 2025 and to 24 percent in 2030. - PV of debt-to-exports ratio: below its threshold under the baseline and projected to continue to decline. - Debt service-to-exports: breaches its threshold in 2022 when the maiden US$250 million sovereign bond is due. - Repayment schedule: second international bond (US$100 million privately placed with Abu Dhabi) was extended to 2026 from 2023. - Sovereign Development Fund (SDF): - Set up to accumulate funds for payment and mitigate rollover risks. - Financed mainly by an airport development fees and other services at Velanaa international airport. - As of end-2019, SDF had accumulated over US$200 million. - Authorities converted US$120 million into domestic currency with the Maldives Monetary Authority (MMA); converted funds are included in domestic financing of the budget in 2020. - Further accumulation not expected in 2020 because of COVID-19 shock. - Expected accumulation during 2021 and first-half of 2022: about US$168 million, bringing the balance to about US$250 at the end of June 2022. - Projected accumulation from June 2022 to 2026 would approach the amount due in 2026. - Staff view: SDF mitigates rollover risks associated with the sovereign bonds. Staff judge external debt in the Maldives to be sustainable. - Most extreme shocks: - For PPG external debt indicators: shock to exports is the most extreme. - For debt service-to-revenue: the most extreme shock is a one-time depreciation. ### Overall public debt sustainability - PV of public debt-to-GDP: - Estimated 72 percent in 2019 and above the indicative threshold, as in the 2019 DSA. - Projected to reach 87.5 percent of GDP in 2020 owing to the growth shock. - Projected to gradually decline to around 63 percent of GDP by 2030, reflecting the authorities’ scaled down capital expenditure program. - Domestic public debt: an important and projected continued source of financing; around half of domestic debt is currently short term with interest rates of around 4.5 percent. - Staff recommendations: - Develop the domestic debt market by lengthening debt maturity and minimizing rollover risks from short-term debt. - Maintain transparency: the Ministry of Finance formulates and publishes its medium-term debt strategy annually and publishes a public debt bulletin annually. - Most extreme shock to public debt indicators: shock to growth. ### Tailored stress tests and assessment - Tailored stress tests for natural disasters, contingent liabilities, and market financing are relevant for the Maldives (susceptible to rising sea levels and with two sovereign bonds amounting to US$350 million). - Risks from non-guaranteed SOE debt are covered by the contingent liability shock. - Tailored stress tests were kept at pre-set, default calibrations as appropriate for the Maldives. - Tailored stress tests are not the most extreme shocks for any of the indicators. - Most extreme shocks identified: - Combination shock and shock to exports for the PPG external debt indicators. - Shock to growth and exports for the public debt indicators. ### Assessment and policy implications - The Maldives has a high risk of external debt distress and a high overall risk of debt distress. - Three out of four external debt indicators breach their respective thresholds under the baseline scenario. - Public debt is above its indicative threshold. - Rollover risks from repayment of two outstanding international sovereign bonds are mitigated by the SDF and the extension of the maturity of one bond. - Risk of debt distress will remain high pending sustained implementation of: - A more prudent expenditure policy. - New revenue measures introduced in the 2020 budget including the personal income tax. - Further mitigation measures advised: - Obtain the most concessional terms available for contracting external debt. - Seek grant financing to the extent possible. - Sustainability of debt is predicated on implementation of the authorities’ stated policies, which are substantial and require a high level of sustained commitment. *Source: 1mdvea2020001 - 5. Realism tools suggest that the macroeconomic projections are reasonable and consistent* ### 12. The authorities recognize that the Maldives has a high level of debt and is at a high risk of ### 1mdvea2020001 - 12. The authorities recognize that the Maldives has a high level of debt and is at a high risk of ### Authorities' assessment and near-term mitigation - The authorities recognize that the Maldives has a high level of debt and is at a high risk of debt distress. - The authorities reiterated that the SDF significantly mitigates the rollover risk from their sovereign bonds coming due. - Extension of the maturity of the US$100 million bond allows more space between repayments and further mitigation of rollover risk. - The significant reduction in the capital spending plans will put debt on a declining path and reduce risks posed by high debt levels. ### Key DSA headline indicators (selected values from tables; in percent of GDP unless otherwise indicated) - External debt (nominal): 69.0 (2020); projections: 65.3 (2021), 61.5 (2022), 60.6 (2023), 58.3 (2024), 55.5 (2025), 40.5 (2030), 28.9 (2040). - Public and publicly guaranteed (PPG) external debt: 49.6 (2020); projections: 46.4 (2021), 42.6 (2022), 41.8 (2023), 40.5 (2024), 38.5 (2025), 27.4 (2030), 20.6 (2040). - Change in external debt: 14.8 (2020); -3.8 (2021); -3.8 (2022); -0.9 (2023); -2.3 (2024); -2.8 (2025); -2.2 (2030). - Public sector debt (nominal): 93.9 (2020); projections: 87.3 (2021), 85.4 (2022), 83.0 (2023), 80.7 (2024), 78.1 (2025), 66.7 (2030), 51.4 (2040). - Change in public sector debt: 17.0 (2020); -6.7 (2021); -1.9 (2022); -2.4 (2023); -2.3 (2024); -2.5 (2025); -1.9 (2030). ### Debt service and sustainability metrics (selected) - PPG debt service-to-exports ratio: 4.8 (2020); 6.1 (2021); 12.5 (2022); 6.7 (2023); 7.1 (2024); 8.1 (2025). - PPG debt service-to-revenue ratio: 13.7 (2020); 16.4 (2021); 31.9 (2022); 16.6 (2023); 17.3 (2024); 19.8 (2025); 13.4 (2030); 9.5 (2040). - PV of PPG external debt-to-GDP ratio (selected projected values): 43.1 (2021); 40.6 (2022); 37.1 (2023); 36.6 (2024); 35.5 (2025); 33.8 (2030); 23.7 (2040). - PV of PPG external debt-to-exports ratio (selected projected values): 90.0 (2021); 67.7 (2022); 60.0 (2023); 58.5 (2024); 56.6 (2025); 53.7 (2030); 36.8 (2040). ### Macroeconomic assumptions underpinning projections (selected) - Real GDP growth: 6.8 (2017); 6.9 (2018); 5.7 (2019); -8.1 (2020); 13.2 (2021); 6.4 (2022); 5.9 (2023); 5.4 (2024); 5.4 (2025); 4.8 (2030); 4.2 (2040). - Nominal dollar GDP growth: 8.3 (2017); 12.5 (2018); 7.8 (2019); -5.9 (2020); 16.0 (2021); 8.5 (2022); 8.0 (2023); 7.5 (2024); 7.5 (2025); 6.9 (2030); 6.3 (2040). - Government revenues (excluding grants, percent of GDP): 27.5 (2017); 26.1 (2018); 25.7 (2019); 16.9 (2020); 22.2 (2021); 24.2 (2022); 25.3 (2023); 25.6 (2024); 25.8 (2025); 26.2 (2030); 26.8 (2040). - Net FDI (negative = inflow): -15.5 (2019); -6.0 (2020); -8.5 (2021); -8.7 (2022); -8.7 (2023); -8.7 (2024); -6.2 (2030); -3.0 (2040). ### Drivers of debt dynamics (baseline and historical contributors) - Endogenous debt dynamics (contribution): 5.6 (2020); projections negative thereafter, e.g., -6.5 (2021); -2.5 (2022); -2.1 (2023). - Contribution from nominal interest rate: 0.9 (2020); 1.4 (2021); 1.3 (2022); 1.2 (2023). - Contribution from real GDP growth: 4.7 (2020); -7.9 (2021); -3.8 (2022); -3.4 (2023). - Residual (difference between anticipated and actual contributions on debt ratios): -7.0 (2020); 0.7 (2021); -0.5 (2022); 2.1 (2023). ### Market financing risk indicators and stress testing summaries - Market financing indicators and tailored stress tests identify the most extreme shocks (e.g., Combination, Exports, Growth) as those producing highest ratios by or before 2030. - Table-based sensitivity analysis shows multiple scenarios and bound tests (e.g., Real GDP growth, Primary balance, Exports, Depreciation, Combination) with breaches highlighted in bold where benchmarks are exceeded. - Gross external financing need (Million of U.S. dollars): 805.2 (2017); 1112.5 (2018); 882.4 (2019); 1143.2 (2020); selected projected values: 537.9, 678.7, 490.9, 546.4, 614.0, 539.1, 983.3. ### Notable policy-relevant findings and implications in the text - The SDF and the maturity extension of a US$100 million bond are explicitly cited by authorities as important mitigants of rollover risk. - Significant reduction in capital spending is projected to put debt on a declining path, reducing risks from high debt levels. - Stress test results and sensitivity analyses illustrate vulnerability to shocks (growth, exports, market financing), with several scenarios producing breaches of debt and debt-service benchmarks. *Source: IMF staff and Maldives authorities as presented in the DSA and related figures and tables in the provided chapter.* ### 2. Maldives has been a development success, largely due to the expansion of a dynamic ### 2. Maldives has been a development success, largely due to the expansion of a dynamic ### Development outcomes and exposure to tourism - Robust growth, considerable development in infrastructure and connectivity, and high quality public services produced impressive health and education indicators. - Tourism contribution: - Two-thirds of GDP - 80 percent of exports - 40 percent of fiscal revenues - High exposure to the COVID-19 pandemic due to tourism dependence. ### Economic impact and projections - The economy is projected to contract by 8.1 percent in 2020, about 15 percentage points below pre-pandemic projections. - The COVID-19 pandemic has created an urgent balance of payments need and a sizeable fiscal financing gap. ### Public health and containment actions - Flights from affected countries were suspended on February 4. - The Government declared its first ever state of public health emergency on March 12. - Authorities worked with WHO to prepare isolation centers, intensify screening, conduct contact tracing, test suspected cases, and treat the affected. - Increased funding to the health sector and scaled up health care spending. ### Fiscal policy response and social measures - Fiscal measures to mitigate the pandemic’s impact include: - Reduced non-priority expenditures. - A three-month allowance to those who lost their jobs due to the pandemic. - The Government remains committed to fiscal consolidation to restore fiscal and debt sustainability. - Revenue-side measures and plans: - Monitor implementation of the newly introduced personal income tax. - Planned increases in airport development fees and airport service charges, and in other fees (import duty-related fees and foreign workers’ registration fees) once the crisis is overcome. - Consider additional measures, as needed, to shore up revenues. - Public investment and project decisions: - Completion of ongoing public sector investment projects. - Cancellation of new projects costing 3 percent of GDP in 2020-21. - Authorities expect public investment to further decline to 7.2 percent of GDP on average over the medium term, contributing to an improvement in the primary fiscal balance consistent with public debt sustainability. - Transparency and governance: - Authorities emphasize the importance of high transparency of government accounts, including contingent liabilities linked to government guarantees and other forms of government support. - Commitments to strengthen regulations and institutions, fight corruption, and improve fiscal transparency. - Continued work with the Fund to enhance the fiscal responsibility framework and strengthen operation and risk supervision of state-owned enterprises. ### Monetary and financial sector measures - The Maldives Monetary Authority (MMA) assesses the banking sector as in good health and able to withstand a temporary shock to tourism and growth. - MMA measures to prevent liquidity tightening and minimize disruptions: - Regulation enabling a 6-months moratorium on loan repayments. - Gradual reduction of the Minimum Reserve Requirement from 10 to 5 percent. - Made available a short-term credit facility to financial institutions. - Increased foreign exchange intervention and use of available facilities, as needed, to maintain the exchange rate peg. ### Expectations for recovery and external support - Authorities expect emergency financial assistance from the Fund and other multilateral and bilateral agencies to help cover the temporary external financing gap. - Ongoing expansion of tourism capacity (more than 116 islands will be available for development during the next 10 years) and infrastructure upgrades (notably a new airport runway and terminal) are expected to lay the groundwork for a quick resumption of tourism activity. - Preemptive debt actions: - Voluntary extension of the US$100 million privately placed bond in Abu Dhabi by three years to 2026. - Coordination with international debt initiatives: - Government welcomes the coordinated approach agreed upon by the G20 and the Paris Club, supported by the Fund and World Bank, toward a time-bound suspension by bilateral official creditors of debt service payments for the poorest countries who request forbearance, and the call on private creditors to participate on comparable terms. ### Financing request under the RCF - The Government of the Maldives requests emergency financing from the Fund in the equivalent of SDR 21.2 million, equivalent to 100 percent of quota under the RCF. - Purpose and expected effects: - Fund assistance will help meet the urgent balance of payments need stemming from disruptions to tourism as a result of the COVID-19 pandemic. - Authorities are confident that Fund assistance will attenuate the adverse impact of the ongoing shock on the economy. - The Fund’s assistance is expected to catalyze additional financial support in the form of grants and concessional loans from the World Bank, the Asian Development Bank, as well as bilateral partners. *Source: Excerpt from provided IMF content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mdvea2020001.pdf_