## 1mdvea2023001 ## Source details **Canonical URL:** [1mdvea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1mdvea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1mdvea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1mdvea2023001.pdf.json) --- ### Introduction and pre-pandemic vulnerabilities - Real GDP growth averaged around 7 percent during 2006–19, mostly driven by a buoyant tourism sector. - Income per capita exceeded USD 10,000 since 2014, yet large fiscal and external vulnerabilities impeded graduation from the PRGT. - Exposure to natural disasters and climate change increases the need for well-planned climate-change adaptation investments. - Fiscal vulnerabilities prior to the pandemic: - Budget deficit averaged 6 percent of GDP during 2015–19. - Capital spending averaged 10 percent of GDP during 2015–19. - Public and publicly guaranteed (PPG) debt increased by 23 percentage points of GDP between 2015 and 2019, reaching 78 percent of GDP in 2019. - More than half of the debt increase was due to increases in guaranteed debt, largely from SOE housing projects borrowing outside the central government budget. ### The Maldives and the COVID-19 shock: impact and policy response Findings on economic impact - GDP contracted by 32 percent in 2020. - Tourist arrivals halted between March 26 and July 15, 2020; tourism was a major contributor to the contraction. - Inflation: -1.6 percent in 2020 overall; food inflation at 3.3 percent. Fiscal support and emergency packages (actual spending) - Government allocated: - COVID-19 Health and Social Response: about 3 percent of GDP. - Economic Relief Package (ERP): about 3.1 percent of GDP. - Actual spending of the two packages amounted to 6.1 percent of GDP as of June 24, 2021. ERP components (Million MVR; Percent of 2020 GDP) - Economic Relief Package (total): 3,533; 6.1 percent of 2020 GDP - Covid-19 Recovery Loan Scheme: 1,154; 2.0 percent - Income Support Allowance: 421; 0.7 percent - Discount on Electricity Bills: 143; 0.2 percent - Discount on Water Bills: 26; 0.0 percent - Health and Social Response (HSR) total: 1,790; 3.1 percent - Ministry of Health: 560; 1.0 percent - National Disaster Management Authority: 784; 1.4 percent - Indira Gandhi Memorial Hospital: 146; 0.3 percent - Disaster Management Fund: 84; 0.1 percent - Ministry of National Planning, Housing and Infrastructure: 41; 0.1 percent - Other: 175; 0.3 percent Monetary, exchange rate, and financial measures - MVR MRR reduced to 7.5 percent on April 23, 2020 and reversed back to 10 percent on June 3, 2021; foreign currency MRR reduced to 5 percent on July 16, 2020. - FX swap facility: Total of US$400 million swap contracted on April 28 and December 29, 2020; US$250 million outstanding as of May 2021; maturity could be extended up to December 28, 2021. - USD 40 million placed as fixed deposit investments in one commercial bank. - Suspended money changer license issuance on October 22, 2020 to limit parallel market volatility. - Moratorium of 6 months on loan repayments enabled in April 2020, extended to end-2020 on Sep 29, 2020. - Provision requirement reduced to 3 percent for loans whose terms were changed due to COVID-19; regulatory leeway effective until 31st March 2021 with specified transition provisions. Fiscal and financing developments (2020–mid-2021) - Total revenue declined by 32 percent in 2020 relative to 2019, despite introduction of a Personal Income Tax (PIT). - Capital spending by end-2020 was higher by 11 percent relative to 2019 but under-executed by 38 percent compared to the 2020 approved budget. - Deficit reached MVR 13.1 billion (22.7 percent of GDP) in 2020. - Central government domestic financing was USD 803 million in 2020; largest source commercial banks with significant SBI headquarter support (USD 250 million linked to Government of India support). - MMA advances stood around MVR 3.6 billion at end-June 2021, up from 3.3 billion at end-December 2020. - External financing highlights: - USD 28.9 million from the IMF April 2020 RCF. - Five-year USD Sukuk of about USD 300 million issued in April 2021 with a 10.5 percent yield at issuance (about USD 200 million used to repay 77 percent of the maiden USD 250 million bond due in 2022). - USD 400 million swap with RBI boosted reserves at end-2020; USD 150 million repaid in February 2021 and USD 250 million set to expire in December 2021. - SDR allocation will add USD 29 million to gross and net international reserves. Banking sector and credit - Banking sector claims on the central government increased to 27.5 percent of total commercial bank assets in 2021Q1 (from 21.5 percent in 2020Q1). - Bank credit growth at 9 percent in 2021Q1. - As of end-March 2021, 18 percent of loans were in moratorium and another 9 percent of total value of loans was rescheduled. - Small increase in NPLs; banks increased provisions for loan losses. - Banks on average have strong capital buffers: 47 percent capital adequacy in March 2021. ### Outlook, projections, and key risks Growth and tourism recovery projections - Growth in 2021 projected at 18.9 percent, driven by tourism recovery. - Arrivals in 2021 up to end-June stood at around 510 thousand, 59 percent of pre-COVID-19 levels. - Arrivals projected to reach around 2 million (pre-COVID-19 projections for 2020) in 2023. - Tourism receipts and related projections (Table 1 highlights): - Tourist arrivals (000'): 555 (2020), 1,000 (2021), 1,434 (2022), 1,960 (2023) - Tourism bednights (000'): 4,500 (2020), 8,500 (2021), 10,179 (2022), 11,957 (2023) - Inflation projected at 1.4 percent in 2021, to increase to 2.3 in 2022, and decline to 2 percent over the medium-term. Fiscal projections and assumptions (central government, percent of GDP; "Without measures" and "With measures" series presented) - Authorities plan an ambitious expansion of capital spending: - Capital spending set to reach 15.6 percent of GDP in 2021, then decline to 13.9 and 12.4 percent of GDP in 2022 and 2023, respectively, and assumed to return to historical averages starting in 2027. - Current spending projected to exceed revenue by 4.5 and 1.7 percent of GDP in 2021 and 2022, respectively. - Key fiscal projection series (central government finances, 2021–24, percent of GDP; table entries preserved): - Total revenue and grants: 27.9, 27.9, 28.4, 28.4, 28.0, 29.5, 27.9, 29.3 - Tax revenue: 18.9, 18.9, 18.7, 18.6, 20.1, 19.0, 20.5 - Goods and services tax (GST): 9.6, 9.6, 9.8, 9.8, 10.0, 10.6, 10.2, 10.8 - Capital expenditure: 15.6, 12.0, 13.9, 8.5, 12.4, 8.5, 11.3, 8.0 - Overall balance: -18.1, -14.4, -12.8, -7.3, -9.1, -3.5, -7.3, -2.2 - Public and publicly guaranteed debt: 137.2, 133.6, 133.3, 124.7, 128.2, 114.8, 128.4, 110.7 External sector and reserves - The 2020 current account deficit contracted by 25 percent due to lower imports but remained elevated at 30 percent of GDP. - Gross official reserves covered around 3.7 months of prospective imports bolstered by USD 400 million RBI swap; reserves projected to decline in 2021 and 2022 before increasing with tourism recovery. - Table 1 highlights — gross international reserves (in millions of US$; e.o.p.): 587 (2017), 712 (2018), 754 (2019), 985 (2020), 508 (2021), 553 (2022), 976 (2023) Debt sustainability and DSA findings - Risk ratings: - High risk of external debt distress and a high overall risk of debt distress. - Total PPG debt-to-GDP ratio increased from 78 percent in 2019 to 146 percent in 2020, reflecting a nominal GDP contraction of about 34 percent and a PPG nominal debt expansion of 24 percent. - Total PPG debt-to-GDP (selected series from DSA): - 2019: 78.3; 2020: 146.0; 2021: 137.2; 2022: 133.3; 2023: 128.2; 2026: 122.9 - Public and publicly guaranteed debt (percent of GDP) baseline trajectory and stress-test outcomes indicate protracted breaches in several debt indicators without balanced and sustained fiscal consolidation. - Market financing actions: - Issued USD 300 million Sukuk in 2021 with five-year maturity and bullet repayment; coupon 9.875 percent and yield 10.5 percent. - USD 200 million of Sukuk used to repay 77 percent of the maiden USD 250 million Eurobond due in June 2022. - Debt-carrying capacity (CI Score): 2.53; classification: Weak. Downside and upside risks - Downside risks: - A slowdown in tourism recovery from additional COVID-19 variants/travel restrictions. - Tightening international financial conditions limiting access to low-cost external financing. - Domestic protracted high COVID-19 cases delaying recovery. - Fiscal risks from SOE liquidity risk, FX risks, limited coordination across line ministries and SOEs. - Pressures from the electoral cycle (e.g., minimum wage, public pay harmonization). - Further deterioration could endanger trust in the financial sector and the exchange rate peg. - Upside risks: - High vaccination rate and potentially larger-than-anticipated tourism recovery if major source markets permit more flexible travel in H2 2021. ### Policy recommendations — fiscal realism and rebalancing Short-term and medium-term recommendations (multipronged) - Implement balanced and sustained fiscal consolidation to restore debt sustainability given PPG debt trajectory. - Rationalize capital spending plans starting in 2021, including cuts and/or delays on some large investment projects (including capital spending of SOEs). - Secure deficit financing prior to higher spending. Staff estimate unsecured financing needs: - Unsecured financing of the deficits for 2021 and 2022 amounts to 3.7 and 2.8 percent of GDP, per staff estimations. - High amortizations in 2026 could require additional unsecured financing of 2.9 percent of GDP. - Recurrent spending pressures should be contained and capital spending rationalized; continue reducing non-priority current spending and containing wage bill pressures. - Prepare a costed medium-term national development strategy focusing on public investment requirements within a realistic overall resource envelope. - Continue reforms to public investment management (PIM) and procurement to enhance transparency and efficiency (e.g., harmonizing procurement guidelines for SOEs; publishing awarded project data). Revenue mobilization and tax reform - Staff medium-term revenue measures (starting in 2023): - Raising the top marginal income tax rate and lowering income thresholds. - Rationalizing Business Profit Tax (BPT) related tax expenditures. - Moving towards equalizing the domestic and tourist GST rates. - Other measures such as excises on tobacco, alcoholic products, fuels, and motor vehicles. - GST harmonization specifics: - Current GST rates: 6 percent (domestic sector) and 12 percent (tourist sector). - Raising the GST rate by 1 percentage point on domestic revenues would yield 447 MVR, or 0.5 percent of 2019 GDP. - A full harmonization of the tax rates would see revenue increase by 3.4 percent of GDP. - Airport service charge (ASC) proposal: - Current ASC: 25 USD per tourist arrival; doubling to 50 USD could raise 650 million MVR, or 0.7 percent of GDP based on 2019 tourist arrivals. - Legislative update noted: amendment to replace the ASC with a departure tax as of January 2022 with specified rates. ### Monetary policy, FX management, and external position guidance - MMA should stand ready to tighten monetary policy to ensure inflation remains stable and the parallel market exchange rate premium limited. - MMA increased the rufiyaa minimum reserve requirement back to 10 percent from 7.5 percent on June 3, 2021. - MMA could consider using open market operations, in rufiyaa, should inflation pick up and/or the parallel spread widens. - MMA advances should be used as a last resort and kept within the current approved ceiling. - FX management: - Reduce USD reserve requirement for banks from 10 to 5 percent and increase monthly allocation to banks to address FX shortages. - Careful management of FX to ensure compatibility with the exchange rate peg and better coordination to avoid SOEs accessing the parallel market. - External position assessment: - Staff assess the external position is substantially weaker than the level implied by fundamentals. - The EBA-lite current account methodology suggests the CA was below the norm in 2020 by around 11 percent of GDP after using the COVID-19 adjustor (implying an exchange rate more appreciated than fundamentals by around 20 percent). ### Safeguarding financial stability and SOE fiscal risks Banking sector and macroprudential measures - Support the MMA policy of allowing regulatory moratorium measures to expire as scheduled in March 2021. - Require banks to keep a forward-looking provisioning approach because NPL ratios might still have optimistic biases. - Address supervision data gaps and operationalize a bank resolution framework and lender of last resort policy. - Macroprudential toolkit: reserve requirements in rufiyaa and foreign currency, foreign currency open position limits, interbank limits, and leverage capital requirements. SOE risks, exposures, and oversight - SOE transfers (subsidies and capital contributions) amounted to about 2.5 percent of GDP by end of 2020. - Government guarantees provided to STO, HDC, and STELCO amounting to around 21 percent of GDP in 2020; largest guarantee HDC at 13 percent of GDP. - On-lending and direct Treasury lending estimated at 15 percent of GDP in 2020. - Around 36 percent of liabilities are monitored by government through sovereign guarantees and on-lending. - Policy actions to mitigate SOE risks: - Establish a new MOF unit for oversight of fiscal risks focusing on SOE-related fiscal risks; report to a new Fiscal Risk Committee in MOF. - Strengthen criteria, evaluation, and monitoring of guarantees: set ceilings, enforce eligibility and fee collection, require credit risk analysis, regular portfolio reviews. - Rationalize government support: prioritize utilities, liquidate highly budget-dependent SOEs, progressively make unlisted commercial SOEs ‘listable.’ - Promote transparency: central database of core financial information, publish SOE transactions with government, disclose quasi-fiscal activities. ### Structural, governance, statistical, and climate priorities PFM, governance, and transparency - Finish reform of the Fiscal Responsibility Act (FRA) to set and publicly disclose appropriate fiscal objectives and targets with strong accountability. - Continue PFM roadmap, procurement reforms, and publication of awarded project data. - Strengthen Treasury/Debt legal framework and develop domestic debt market to lengthen maturities. Statistics and data improvements - Priorities: produce supply-use tables, producer price index, a monthly index of economic activity, and government finance statistics following GFSM 2014. - Improve balance of payments compilation, ITRS, and external sector data, including IIP, CDIS, CPIS coverage. Climate policy, financing, and resilience - Maldives adopted the Climate Emergency Act on April 29, 2021 with plans to achieve net-zero carbon emissions by 2030 and submission of annual national carbon budget to Parliament. - Adaptive capacity gaps: over 80 percent of land less than one meter above mean sea level; significant financing needs for renewables and climate-resilient infrastructure. - Findings on resilient infrastructure (Melina and Santoro, 2021): - Building resilient infrastructure can halve GDP losses at the trough triggered by a natural disaster and yield higher returns due to durability. - Additional post-shock tax pressure for standard infrastructure reconstruction would be around 6-7 percentage points of GDP. - Financing implications: - Financing adaptation may require strengthening domestic revenue mobilization, expenditure rationalization, prioritization of adaptation investment, and grant financing. - Authorities note climate financing is often offered at market rates with additional conditionalities, limiting attractiveness; capacity constraints to access global climate funds persist. ### Tourism recovery (Appendix I) — evolution and composition - Maldives reopened to tourists on July 15, 2020. - Since reopening, tourist arrivals steadily increased: 59 percent of pre-COVID levels in 2021 up to end-June. - Peak season (Dec 2020–Feb 2021) arrivals around 60 percent of pre-COVID peak season levels. - Composition post-reopening: India and Russia around 40 percent of all arrivals after July 15, 2020; pre-COVID major sources like China have dwindled. - Entry conditions: entry without quarantine with a negative PCR test taken less than 96 hours prior to scheduled departure (prior to Oct 15, 2020 the window was 72 hours); infants less than one year exempt. - Staff noted the Maldives outperformed competitors in easing entry requirements and faster recovery of daily flight arrivals. ### Selected macro and financial projections (Table 1: Selected Economic Indicators, 2017–2026; series preserved) - Real GDP: 7.2 8.1 7.0 -32.0 18.9 13.2 12.1 6.1 5.4 5.4 - Inflation (period average): 2.3 1.4 1.3 -1.6 1.4 2.3 1.9 1.8 2.0 2.0 - Revenue and grants (percent of GDP): 27.7 27.2 26.4 19.4 27.2 27.9 28.4 28.0 27.9 27.3 27.2 - Expenditure and net lending (percent of GDP): 30.8 32.5 33.0 50.0 46.0 41.2 37.2 35.1 33.9 34.3 - Overall balance (percent of GDP): -3.1 -5.3 -6.6 -22.7 -18.1 -12.8 -9.1 -7.3 -6.6 -7.1 - Public and publicly guaranteed debt (percent of GDP): 64.6 72.0 78.3 146.0 137.2 133.3 128.2 128.4 126.8 122.9 - Gross international reserves (in millions of US$; e.o.p.): 587 712 754 985 508 553 976 1,251 1,496 1,220 - In months of GNFS imports: 1.7 2.1 3.7 3.7 1.7 1.8 2.8 3.3 3.6 2.8 - Tourist arrivals (000'): 1,386 1,484 1,703 555 1,000 1,434 1,960 2,196 2,396 2,602 ### Concluding staff appraisal and priority actions - The pandemic led to a large, unprecedented shock and an ongoing fragile recovery; 2021 projected recovery is strong but partial. - Under current policies, debt is on an unsustainable path and the external position remains substantially weaker than fundamentals imply. - Urgent priorities: - Rationalize and prioritize capital spending, secure deficit financing before commitments. - Implement balanced and sustained fiscal consolidation and revenue mobilization (including GST harmonization and PIT/BPT reforms). - Maintain monetary and FX prudence: use liquidity support judiciously, keep MMA advances within ceilings, and tighten policy if inflation or parallel FX spreads widen. - Strengthen SOE oversight, enforce guarantee ceilings and risk-based guarantee fees, and enhance PFM and procurement transparency. - Continue work to access concessional climate finance and scale capacity development for climate project preparation. *Source: Maldives—IMF country report content (excerpt).* ### 2021. M. Mohieldin and M. Merhi (all OED) participated in the policy ### 1mdvea2023001 - 2021. M. Mohieldin and M. Merhi (all OED) participated in the policy ### Introduction - Real GDP growth averaged around 7 percent during 2006–19, mostly driven by a buoyant tourism sector. - Income per capita exceeded USD 10,000 since 2014, yet large fiscal and external vulnerabilities impeded graduation from the PRGT. - Exposure to natural disasters and climate change increases the need for well-planned climate-change adaptation investments. - Fiscal vulnerabilities prior to the pandemic: - Budget deficit averaged 6 percent of GDP during 2015–19. - Capital spending averaged 10 percent of GDP during 2015–19. - Public and publicly guaranteed (PPG) debt increased by 23 percentage points of GDP between 2015 and 2019, reaching 78 percent of GDP in 2019. - More than half of the debt increase was due to increases in guaranteed debt, largely from SOE housing projects borrowing outside the central government budget. ### The Maldives and the Pandemic - Economic impact of COVID-19: - GDP contracted by 32 percent in 2020, larger than contractions after the 2004 tsunami and the 2009 global financial crisis. - Tourism was a major contributor to the contraction; tourist arrivals were halted between March 26 and July 15, 2020. - Domestic containment measures reduced activity in construction, manufacturing, and trade. - Inflation: -1.6 percent in 2020 overall; food inflation at 3.3 percent. - Policy response and fiscal support: - Government allocated budgetary resources for COVID-19 Health and Social Response of about 3 percent of GDP and an Economic Relief Package (ERP) of about 3.1 percent of GDP. - Actual spending of the two packages amounted to 6.1 percent of GDP as of June 24, 2021. - ERP components (Million MVR; Percent of 2020 GDP): - Economic Relief Package (total): 3,533; 6.1 percent of 2020 GDP - Covid-19 Recovery Loan Scheme: 1,154; 2.0 percent - Income Support Allowance: 421; 0.7 percent - Discount on Electricity Bills: 143; 0.2 percent - Discount on Water Bills: 26; 0.0 percent - Health and Social Response (HSR) total: 1,790; 3.1 percent - Ministry of Health: 560; 1.0 percent - National Disaster Management Authority: 784; 1.4 percent - Indira Gandhi Memorial Hospital: 146; 0.3 percent - Disaster Management Fund: 84; 0.1 percent - Ministry of National Planning, Housing and Infrastructure: 41; 0.1 percent - Other: 175; 0.3 percent - Monetary, exchange rate, and financial measures: - Minimum required reserves (MRR) adjustments: MVR MRR reduced to 7.5 percent on April 23, 2020 and reversed back to 10 percent on June 3, 2021; foreign currency MRR reduced to 5 percent on July 16, 2020. - Short-term credit facility made available to financial institutions as required. - MMA increased US dollar sales to commercial banks; USD 40 million placed as fixed deposit investments in one commercial bank. - FX swap facility: under the currency swap with the Reserve Bank of India (RBI). Total of US$400 million swap contracted on April 28 and December 29, 2020; US$250 million outstanding as of May 2021; maturity could be extended up to December 28, 2021. - Suspended money changer license issuance on October 22, 2020 to limit parallel market volatility. - Moratorium of 6 months on loan repayments enabled in April 2020, extended to end-2020 on Sep 29, 2020. - Flexibility to banks on loan loss provisions: provision requirement reduced to 3 percent for loans whose terms were changed due to COVID-19; regulatory leeway extended and effective until 31st March 2021 with specified transition provisions. - Fiscal and financing developments: - Total revenue declined by 32 percent in 2020 relative to 2019, despite introduction of a Personal Income Tax (PIT). - Capital spending by end-2020 was higher by 11 percent relative to 2019 but under-executed by 38 percent compared to the 2020 approved budget. - Deficit reached MVR 13.1 billion (22.7 percent of GDP) in 2020. - Central government domestic financing was USD 803 million in 2020; largest source commercial banks with significant SBI headquarter support (USD 250 million linked to Government of India support). - MMA advances fluctuated and stood at around MVR 3.6 billion at end-June 2021, up from 3.3 billion at end-December 2020. - External financing included USD 28.9 million from the IMF April 2020 RCF and a five-year USD Sukuk of about USD 300 million issued in April 2021 with a 10.5 percent yield at issuance (about USD 200 million used to repay 77 percent of the maiden USD 250 million bond due in 2022). - USD 400 million swap with RBI boosted reserves at end-2020; USD 150 million repaid in February 2021 and USD 250 million set to expire in December 2021. - SDR allocation will add USD 29 million to gross and net international reserves. - Banking sector and credit: - Banking sector claims on the central government increased to 27.5 percent of total commercial bank assets in 2021Q1 (from 21.5 percent in 2020Q1). - Bank credit growth at 9 percent in 2021Q1. - As of end-March 2021, 18 percent of loans were in moratorium and another 9 percent of total value of loans was rescheduled. - Small increase in NPLs; banks increased provisions for loan losses. ### Outlook and Risks - Growth and tourism recovery: - Growth in 2021 projected at 18.9 percent, driven by tourism recovery. - Arrivals in 2021 up to end-June stood at around 510 thousand, 59 percent of pre-COVID-19 levels. - Arrivals projected to reach around 2 million (pre-COVID-19 projections for 2020) in 2023. - Inflation projected at 1.4 percent in 2021, to increase to 2.3 in 2022, and decline to 2 percent over the medium-term. - Fiscal projections and assumptions: - Authorities plan an ambitious expansion of capital spending over the medium term, contrasting with the 2020 RCF commitment to keep it within historical averages. - If executed as planned, capital spending set to reach 15.6 percent of GDP in 2021, then decline to 13.9 and 12.4 percent of GDP in 2022 and 2023, respectively, and assumed to return to historical averages starting in 2027. - Current spending projected to exceed revenue by 4.5 and 1.7 percent of GDP in 2021 and 2022, respectively. - Substantial allocations envisaged for infrastructure mega-projects including Greater-Malé Connectivity, Maldives International Port Development, National Social Housing Project, Gulhifalhu land reclamation, and Velana International Airport upgrades; several financed by India Exim Bank. - External sector and reserves: - The 2020 current account deficit contracted by 25 percent due to lower imports but remained elevated at 30 percent of GDP. - CAD has been elevated for several years in part because of high import content of major capital projects. - Gross official reserves covered around 3.7 months of prospective imports bolstered by USD 400 million RBI swap; reserves projected to decline in 2021 and 2022 before increasing with tourism recovery. - Debt sustainability and risks: - High risk of external debt distress and a high overall risk of debt distress. - Total PPG debt-to-GDP ratio increased from 78 percent in 2019 to 146 percent in 2020, reflecting a nominal GDP contraction of about 34 percent and a PPG nominal debt expansion of 24 percent. - Without significant fiscal adjustment, public debt is on an unsustainable path in the baseline scenario. - Recent Sukuk issuance mitigates rollover risks for 2022 but balanced and sustained fiscal consolidation and continued strong growth are required for debt sustainability. - Downside and upside risk factors: - Downside risks: - A slowdown in tourism recovery from additional COVID-19 variants/travel restrictions. - Tightening international financial conditions limiting access to low-cost external financing. - Domestic protracted high COVID-19 cases delaying recovery. - Fiscal risks: SOE liquidity risk, FX risks, limited coordination across line ministries and SOEs. - Pressures from the electoral cycle could trigger rapid implementation of an overcomplicated minimum wage structure and public wage harmonization amid high uncertainty and limited fiscal space. - Further deterioration could endanger trust in the financial sector and the exchange rate peg. - Upside risks: - High vaccination rate and potentially larger-than-anticipated tourism recovery if major source markets (China, Germany, Italy, Japan, the UK) permit more flexible travel in H2 2021. ### Policy Recommendations (summary of themes reflected in the report) - Fiscal realism and rebalancing: - Implement balanced and sustained fiscal consolidation to restore debt sustainability given PPG debt trajectory. - Reassess planned capital spending in light of constrained fiscal space and prioritize projects with high economic returns. - Strengthen revenue mobilization measures to reduce reliance on debt financing. - Monetary policy and exchange rate: - Maintain measures to support liquidity while safeguarding monetary stability. - Continue using FX facilities judiciously to preserve reserves and the exchange rate peg. - Financial stability: - Monitor bank asset quality given moratoria and reschedulings; ensure adequate provisioning and capital buffers. - Address SOE liquidity and contingent fiscal risks through enhanced oversight and coordination. - Structural and governance policies: - Improve coordination across line ministries and SOEs to limit fiscal risks. - Enhance transparency and fiscal governance around large infrastructure projects and guaranteed borrowing. - Climate and long-term resilience: - Prioritize well-planned climate-change adaptation investments given exposure to natural disasters and climate risks. *Source: Maldives—IMF country report content (excerpt).* ### 14. The authorities highlighted that the COVID-19 shock was unprecedented and the first ### 14. The authorities highlighted that the COVID-19 shock was unprecedented and the first time that the Maldives had to remain closed to tourists ### Authorities’ assessment of the shock, recovery, and debt dynamics - The COVID-19 shock was characterized as unprecedented and the first time the Maldives had to remain closed to tourists. - Authorities broadly concur with staff’s growth and inflation baseline, and the evolution of the fiscal balances over the medium-term. - The impact of the pandemic has been more protracted and severe than initially envisaged, but the recovery is ongoing and with significant upside. - Vaccination: around 70 percent of the adult population have already received at least one dose of the COVID-19 vaccine. - Ongoing capital spending expansion is largely attributed to infrastructure projects initiated in 2019 and their associated large disbursements materializing over the medium-term. - Additional financing during the pandemic resulted in the accumulation of further debt in 2020 despite efforts to contain non-priority spending relative to the approved 2020 budget. - Authorities emphasize: debt sustainability assessments should consider the highly concessional nature of the existing debt stock and the access the country has to the international financial market. - Debt management actions highlighted: - 2019: extended maturity of the privately placed USD 100 million Eurobond by three years. - 2021: rolled over 77 percent of the maiden Eurobond. - Issuance of Sukuk bonds (April 2021) was oversubscribed; Sukuk bonds were currently trading at a premium. ### Policy recommendations — overview - A comprehensive and coordinated approach across all policies is essential given high vulnerabilities. - Both urgent and medium-term policies are needed to manage risks, help the recovery, and reduce vulnerabilities. - A well-communicated and comprehensive package is preferable; coordinated approach by government and central bank would help control expectations. - Global uncertainty remains elevated; a more prudent spending policy approach is needed. ### A. Budget realism and fiscal rebalancing (imperative) Findings - High deficits and elevated debt positions over the medium-term call into question fiscal sustainability. - Fiscal deficit is projected to remain in double-digits as a percent of GDP until 2022. - Despite recovery in tourism receipts and improved public revenue, current spending is projected to exceed revenue over the next two years. - Capital spending is on the upper range of peer distribution; pre-pandemic capital spending was close to the top 10th percentile among peers. - SOE capital spending risks: any weakened SOE financial position will result in extra government support and further stress debt and FX shortages. - Revenue as a share of GDP has been declining since 2017. Short-term and medium-term staff recommendations (multipronged adjustment) - Short term: rationalize capital spending plans starting in 2021, including cuts and/or delays on some large investment projects (including capital spending of SOEs). - Deficit financing must be secured prior to higher spending. Staff estimate unsecured financing needs: - Unsecured financing of the deficits for 2021 and 2022 amounts to 3.7 and 2.8 percent of GDP, per staff estimations. - High amortizations in 2026 could require additional unsecured financing of 2.9 percent of GDP. - Recurrent spending pressures should be contained and capital spending rationalized; continue reducing non-priority current spending and containing wage bill pressures (including risks from minimum wage and public pay harmonization). - Prepare a costed medium-term national development strategy focusing on public investment requirements within a realistic overall resource envelope. - Continue reforms to public investment management (PIM) and procurement to enhance transparency and efficiency (e.g., harmonizing procurement guidelines for SOEs; publishing awarded project data). Fiscal framework and SOE risks - SOE transfers (subsidies and capital contributions) amounted to about 2.5 percent of GDP by end of 2020. - Fiscal risks from SOEs include government guarantees of external debt (HDC, STO) and need for capital injections or subsidies to support goods and utilities at fixed prices (STO, FENAKA, STELCO). - Decentralization: 8th amendment (2020) gives local councils more power; although current borrowing is insignificant, local councils can own property and incur liabilities—robust monitoring systems are critical. Fiscal Responsibility Act (FRA) - Numerical targets in the 2013 FRA have not been met since inception due to design weaknesses (unrealistic/multiple targets; unclear coverage; inadequate accountability). - Authorities are encouraged to finish the reform of the FRA and publicly disclose appropriate objectives and targets with strong accountability. Authorities’ views on fiscal stance - Authorities accept short-term budget deficits given revenue shortfalls; have reduced/delayed specific capital spending and plan to rely on foreign-financed projects backed by secured financing at favorable rates. - Concerns noted about regressivity of raising domestic GST to equal tourism GST; intend to mobilize revenue through: - restructuring the airport service charge and airport development fee (to come into effect on January 1, 2022); - developing real-estate tourism and resorts; - allocating a percentage of reclaimed land on different islands to be sold. - Authorities report progress on public investment execution transparency (standardized SOE procurement guidelines; publication of large procurements on Ministry of Finance website; publication of small procurements on government gazette; bid protesting mechanism; publication on isles.gov.mv portal). Key fiscal statistics and projections (Central Government finances, 2021–24, percent of GDP; with and without measures) - Total revenue and grants: 27.9, 27.9, 28.4, 28.4, 28.0, 29.5, 27.9, 29.3 - Tax revenue: 18.9, 18.9, 18.7, 18.6, 20.1, 19.0, 20.5 - Airport service charge: 0.5, 0.5, 0.7, 0.7, 0.9, 0.9, 0.9 - Business profit tax (BPT): 2.6, 2.6, 2.4, 2.4, 2.4, 2.4, 2.4, 2.5 - Personal income tax: 0.2, 0.2, 0.2, 0.2, 0.3, 1.0, 0.3, 1.0 - Goods and services tax (GST): 9.6, 9.6, 9.8, 9.8, 10.0, 10.6, 10.2, 10.8 - Tourism tax: 1.1, 1.1, 1.1, 1.1, 1.1, 1.2, 1.2 - Other taxes: 4.9, 4.9, 4.5, 4.5, 4.0, 4.0, 4.1, 4.1 - Nontax revenue: 6.9, 6.9, 7.0, 7.0, 7.1, 7.1, 7.4, 7.4 - Grants: 2.1, 2.1, 2.7, 2.7, 2.3, 2.3, 1.4, 1.4 - Total expenditure: 46.0, 42.3, 41.2, 35.7, 37.2, 33.0, 35.1, 31.5 - Current expenditure: 30.3, 30.3, 27.3, 27.2, 24.7, 24.5, 23.9, 23.5 - Capital expenditure: 15.6, 12.0, 13.9, 8.5, 12.4, 8.5, 11.3, 8.0 - Overall balance: -18.1, -14.4, -12.8, -7.3, -9.1, -3.5, -7.3, -2.2 - Public and publicly guaranteed debt: 137.2, 133.6, 133.3, 124.7, 128.2, 114.8, 128.4, 110.7 (Note: table entries correspond to projections “Without measures” and “With measures” for 2021–24 as presented.) ### Revenue mobilization and tax reform - Since 2019, tax policy reforms undertaken include: - establishing a Tax Policy Unit (TPU); - introducing a PIT in 2020; - abolishing a preferential tax regime; - abolishing all tax exemptions and incentives under the foreign investment act (FIA); - introducing transfer pricing rules and limiting interest deductions; - introducing a cross-border withholding tax on all sources of capital income and technical and management fees. - Staff medium-term revenue measures (starting in 2023): - raising the top marginal income tax rate and lowering income thresholds; - rationalizing Business Profit Tax (BPT) related tax expenditures; - moving towards equalizing the domestic and tourist GST rates; - other measures such as excises on tobacco, alcoholic products, fuels, and motor vehicles. - Staff’s proposed fiscal package includes rationalizing capital expenditure as of 2021 and would substantially improve projected budget deficits and debt levels during the next few years. ### Public financial management (PFM) reforms and transparency - Diagnostic inputs referenced: 2019 PIMA; PEFA (2021); Fiscal Transparency Evaluation (FTE, 2021). - Ongoing work to prepare a PFM roadmap prioritizing reforms. - Holistic approach needed across public sector to strengthen PFM, including improved oversight and coordination with SOEs. - Publication and procurement reforms described above aim to improve planning, transparency, and competitiveness. ### B. Adjusting monetary policy and enhancing exchange rate markets Monetary policy stance and instruments - MMA should stand ready to tighten monetary policy to ensure inflation remains stable and the parallel market exchange rate premium limited. - The MMA increased the rufiyaa minimum reserve requirement back to 10 percent from 7.5 percent on June 3, 2021. - MMA could consider using open market operations, in rufiyaa, should inflation pick up and/or the parallel spread widens. - MMA advances should be used as a last resort and kept within the current approved ceiling. FX market and reserve management - To address FX shortages, MMA reduced the USD reserve requirement for banks from 10 to 5 percent and increased the monthly allocation to banks; prioritized availability of FX to SOEs for loan repayment and import of essentials. - FX rationing to banks, despite recent easing, involves measures inconsistent with Article VIII of the IMF Articles of Agreement. - FX shortage historically impacted banks’ FX intermediation, leading to emergence of parallel market with significant deviations in recent months due to the pandemic’s impact on tourism. - Careful management of FX is necessary to ensure compatibility with the current exchange rate peg, including better coordination within the public sector to avoid SOEs accessing the parallel market. - Increased negative net currency exposure of the banking system, especially among large banks, suggests limited capacity to finance government and SOEs in foreign currency. External position assessment - Staff assess that the external position in the Maldives is substantially weaker than the level implied by fundamentals and desirable policies (Appendix 7). - The EBA-lite current account (CA) methodology suggests that the CA was below the norm in 2020 by around 11 percent of GDP after using the COVID-19 adjustor (implying an exchange rate more appreciated than fundamentals by around 20 percent). - The CA is projected to remain below the norm until 2023. - Gross reserve coverage in 2020 was bolstered by grants, multilateral/bilateral foreign financing inflows and the temporary measure of a USD 400 million SWAP with the RBI and will decrease at end-2021. - Swap details: USD 250 million swap rolled over for another 6 months on June 28 (before bilateral Swap Agreement expiration July 21, 2021); the swap will mature at the end of December 2021. Authorities’ views on monetary/FX stance - Authorities are proactively managing rufiyaa liquidity and working toward FX market reforms to address dollar shortages and structural inefficiencies. - MMA focus currently on minimum reserve requirements; open market operations could be considered in future. - MMA and MoF closely coordinate SOE access to FX for essential needs. - Authorities highlighted that the CA gap suggested by the EBA-lite CA methodology seems very large. ### C. Safeguarding financial stability - The report emphasizes financial stability risks arising from FX shortages, negative net currency exposure in the banking system, reliance on MMA and fiscal coordination, and SOE fiscal risks. - Recommended actions include careful FX management, coordination across public sector entities, restrictive and well-signaled use of monetary instruments if inflation or parallel FX spreads widen, and limiting MMA advances to within approved ceilings. *Source: IMF staff and Maldivian authorities (excerpt).* ### 32. The MMA should remain vigilant about the underlying build-up of financial ### 32. The MMA should remain vigilant about the underlying build-up of financial vulnerabilities, especially exposures to the government that have increased substantially during the crisis ### Banking sector health and financial vulnerabilities - A concessional USD 250 million loan from the SBI headquarters, intermediated through SBI Male, has supported sovereign domestic financing but leaves lending capacity in FX especially limited and raises risks of crowding out private sector lending in the medium term. - A large part of banks' portfolios corresponds to loans that benefitted from moratorium initiatives and working capital loans aimed at protecting banks’ loan portfolios and borrowers during the pandemic. - Banks on average have strong capital buffers: 47 percent capital adequacy in March 2021. - The full extent of banks’ asset quality problems will only be revealed once the full impact of the pandemic is realized and after supportive and forbearance policy measures are fully unwound. - The negative net FX exposure of the banking system has increased, especially among large banks, and should be carefully monitored by the MMA. - Staff recommendations: - Support the MMA policy of allowing regulatory moratorium measures to expire as scheduled in March 2021. - Require banks to keep a forward-looking provisioning approach because NPL ratios might still have optimistic biases due to remaining moratorium windows. - Address supervision data gaps and make progress on introducing a comprehensive crisis management framework by operationalizing a bank resolution framework and aligning the MMA’s lender of last resort policy. ### Authorities’ tools and actions on financial stability - The authorities state that the MMA is closely monitoring financing stability and that current loan classification and provisioning requirements are very prudent. - The MMA has macroprudential tools available: reserve requirements in both rufiyaa and foreign currency, foreign currency open position limits, interbank limits, and leverage capital requirements. - Plans exist to review and introduce other macroprudential requirements and liquidity regulations in the future. - The authorities have requested a full FSAP. ### Structural and governance policies - The Auditor General Office (AGO), mandated by Parliament, conducted performance audits on all COVID-19 related spending financed by the budget or donors’ funded projects, operations executed by SOEs, and welfare and unemployment schemes; some audits are ongoing while completed ones showed a high degree of compliance and public reporting. - Files with noted irregularities were transferred to the Anti-Corruption Commission (ACC) for further investigation. - The Ministry of Finance publishes a detailed database on awarded projects, but the data do not include a detailed list of beneficial ownership; such a list is recommended. - The authorities are procuring a consultant to conduct a national risk assessment (NRA) for AML/CFT expected to be completed by June 2022; the NRA will help prepare for the AML/CFT assessment by the Asia/Pacific Group on Money Laundering now postponed to 2024. - Staff recommendation: Mitigate the risks identified in the NRA and take other legislative and implementation (effectiveness) measures. - Progress noted on governance: - State Internal Audit function established in 2019. - Corporate Governance Code for state owned enterprises introduced in 2019. - Public Finance Circular issued in December 2020 requires state agencies to publish procurement contract information regularly. - Automation of many budget processes and strengthening of rules, regulations, and guidelines to enhance budget credibility. - Training and certifying financial executives in government agencies is underway to improve decentralized accountability. - The Strategic Action Plan (SAP) aims to institutionalize planning with standardized methods, shift toward full-fledged results-based budgeting, and embed the SDGs; expected to be put in place in the 2022 budget. - Staff supports the central bank’s initiative to further advance implementation of the instant payment system to facilitate access to affordable financial services and foster competition, efficiency, and inclusion. ### Climate policy, financing, and capacity development - The authorities adopted the Climate Emergency Act on April 29, 2021, which sets out ambitious conditional plans to achieve net-zero carbon emissions by 2030 and mandates submission of the subsequent year's national carbon budget to Parliament three months before year-end. - Authorities note large financing needs for renewables and climate-resilient infrastructure to support the net zero by 2030 goal and adaptation needs. - Lack of capacity to satisfy preconditions for climate finance, including provision of scientific evidence, is a main obstacle to timely access to global climate funds. - Authorities emphasize the need to secure grants and concessional financing for climate needs given limited fiscal resources; they reported that so far climate financing is offered at the same market rates as conventional instruments, with additional climate mitigating conditionalities, and therefore has not been a meaningful alternative among financing choices. - Staff and authorities look forward to continued collaboration on capacity development in: - Public finance management: updating the PFM roadmap, managing fiscal risks mainly from SOEs, updating the legal framework related to debt management. - Revenue administration and collection, and tax policy reforms. - Macroeconomic statistics: producing supply-use tables, the producer price index, a monthly index of economic activity, and government finance statistics following the Government Finance Statistics Manual 2014. - Technical assistance planned/evolving in improving the ITRS system, debt management, domestic debt market development, FX market reforms, and banking supervision and regulation. - Authorities expressed need for IMF assistance with accessing concessional climate finance and capacity development to facilitate access to climate change financing. ### Staff appraisal, outlook, and policy recommendations - The Maldivian economy was hard hit by the COVID-19 outbreak; the pandemic led to socio-economic hardship and an economic downturn, with particular susceptibility due to dependence on tourism. - The 2020 policy response was broad and coordinated across health, fiscal, monetary, and financial policies and helped save lives and livelihoods and preserve macro-financial stability. - The 2021 economic recovery is projected to be strong, but still fragile and partial; reopening to tourism in mid-July 2020 and a successful vaccination plan supported recovery prospects, and medium-term tourism prospects remain positive with airport expansion increasing capacity. - The economic outlook and vulnerabilities are challenging amid large fiscal and external deficits: - Financing the planned fiscal deficit would require external budget support in 2021 and 2022. - Under current policies, the external position is expected to remain substantially weaker than the level implied by fundamentals, and debt is on an unsustainable path. - Risks are tilted to the downside because of the recent COVID-19 outbreak in South Asia, uncertainty about economic recovery and vaccine coverage in tourist source countries, and political economy dynamics before the 2023 presidential election. - Further deterioration in the fiscal and real sectors could endanger trust in the financial sector. - A comprehensive and coordinated approach across all policies is essential given high vulnerabilities; both urgent and medium-term policies are needed to manage fiscal, external, and FX risks, help the recovery, and reduce vulnerabilities. - Budget realism and fiscal rebalancing are imperative: - Staff recommends rationalization of capital spending plans in the short term, including cuts and/or delays to some large public investment projects carried by either the central government or SOEs, in line with the April 2020 RCF report. - Financing for any higher current or capital spending should be secured prior to commitments or contractual agreements. - Over the medium term, further revenue mobilization is required to support capital spending expansion and mitigate risks related to high public debt. - There is room to diversify the tax base toward domestic resources. - Monetary and FX policy guidance: - Tightening monetary policy may be needed if inflation picks up and/or the parallel market exchange rate premium widens; the MMA could consider using open market operations in such circumstances. - MMA advances should be used as a last resort and kept within the current approved ceiling because they involve more risks during the recovery than in 2020, especially for a country with a de-facto peg and low reserves. - Structural reforms and governance: - Prudential regulation and supervision (including addressing data gaps) and introducing a comprehensive crisis management framework by operationalizing a bank resolution framework could be further advanced. - Structural changes to the FX market, amendments to the fiscal legal framework, and efforts to strengthen governance and transparency are core to a comprehensive strategy. - Staff does not recommend approval of existing exchange rate restrictions and multiple currency practices (MCPs) and advises the MMA to accept the obligations of Article VIII as a measurable goal of its FX market reforms under study. - Finishing reforms around the FRA is essential for setting and publicly disclosing appropriate fiscal objectives and targets and improving accountability. - Further advances on governance and transparency, AML/CFT risk mitigation measures (including addressing corruption risks), and other legislative and implementation measures are needed. - Progress toward the authorities’ ambitious agenda on adaptation and mitigation to climate change and budgetary implementation of climate and other SDG targets should continue. *Source: 1mdvea2023001 - 32. The MMA should remain vigilant about the underlying build-up of financial vulnerabilities* ### 49. It is recommended that the next Article IV consultation takes place on the standard ### 1mdvea2023001 - 49. It is recommended that the next Article IV consultation takes place on the standard ### Article IV consultation timing - It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. ### Recent economic developments (overview and real sector) - Tourism industry: "The tourism industry was hit hard by COVID-19... ...the domestic economy also contracted, particularly in Q2 2020 owing to lockdowns." - Composition of arrivals: "The composition of arrivals in the recovery has changed... ....given different restrictions on travel and different trends in the spread of COVID-19." - REER and drivers: "The REER started depreciating in the second half of 2020... .... due to low aggregate demand, low oil prices, and price subsidies on utilities." - Tourism and growth charts (descriptive): Tourism bednights, tourism arrivals, and GDP growth are shown as 12 Month Moving Average Growth Rates (series 2009–2021). ### Price developments - Inflation (year-on-year, in percent) series presented with Food, National CPI, and Oil (RHS) across 2011–2021. ### External sector developments - Current account: "The current account deficit contracted in nominal terms.... ....but remained elevated in percent of GDP." - External financing and reserves: "Exceptional external financing helped boost reserves.... ... including SWAPs with the RBI and bilateral and multilateral loans." - GIR: "GIR were 3.6 months of prospective imports... ....while external debt increased from higher borrowing and lower GDP." - Financial account and debt charts indicate changes in Debt -- Other Sectors, Debt -- Banks, Debt -- General Government, Debt -- Monetary Authorities, Portfolio Investment, Direct Investment, Financial Account (In percent of GDP) for 2008–2020. - External debt: PPG and private external debt presented in percent of GDP (2008–2020). - Gross Reserves / GNFS Imports shown (In Months) 2008–2020. - Current Account components charted (in percent of GDP) 2008–2020. ### Fiscal developments - Public debt: "Public debt gradually increased prior to spiking in 2020... ...reflecting high deficits and the COVID-19 fallout." - Spending: "Current and overall spending grew strongly in 2018 and 2019, before their growth turned negative in 2020." - Spending as share of GDP: upward trend due to current and capital expenditure pressures. - Revenue: "Tax revenue growth has been declining, turning negative in 2020 for the first time in a decade... ....and resulting in steadily falling revenue to GDP over the last four years." - Charts and series include Domestic Debt, External Debt, Public Debt (In percent of GDP), Primary fiscal balance and Overall Fiscal Balance (In percent of GDP), Government Total and Current Expenditure (Year-on-year change), Government Expenditure breakdown (In percent of GDP), Tax and Nontax Revenue (Year-on-year change), and Tax/Nontax revenue composition (In percent of GDP). ### Money and credit developments - Broad money growth: "Broad money growth has been supported... ...by the strong surge in net credit to government." - Monetary stance and liquidity: "Accommodative monetary stance fueled rufiyaa liquidity... .... MMA and banks increased funding to government." - FX liquidity: "Commercial banks have experienced strain in foreign exchange liquidity and funding... Large T-bill FX roll-over risks are mitigated by official holders’ rollover/grants intensions." - FX Payment/Rollover Obligations for Domestic Debt shown (In millions of USD) across 21 Mar 2021–Nov-23. - Monetary aggregates (year-on-year change, in percent) series for Broad money, Narrow money, Currency in circulation. - Monetary and Credit Growth (In percent, Year-on-Year growth) and Commercial Banks' Reserves (In percent of total deposits). - Contributions to Growth in Gross Stock of Domestic Claims and Contributions to Growth in Commercial Bank Liability charts provided. ### Financial sector developments - Credit growth and moratoria: "Monetization and moratorium on loan repayments helped credit growth... ...tourism and construction had the highest sectoral share of loans." - Private credit to GDP: "The large drop in real GDP drives private credit to GDP. Loans growth in tourism, and construction was high." - Bank resilience: "Capital position remains strong supported by income measures. Banks are taking on proactive provisioning." - Banking sector FSI and profitability metrics presented (Nonperforming loans to total gross loans, Net open position in foreign exchange to capital, Regulatory capital to risk-weighted assets, Liquid assets to short-term liabilities, Interest margin to gross income, Nonperforming loans net of provisions to capital, Return on assets, Return on equity). - Private credit developments: Bank Credit to Private Sector growth series (2008–2021). - Sectoral distribution of credit (In percent of total): Agriculture, Fishing, Manufacturing, Construction, Real estate, Tourism, Commerce, Transport, Utilities. - Change in Private Credit to GDP Ratio (year-on-year, percentage points) and Loan Growth by Sector (in percent, year-on-year) with values including -8.6, -20.9, -4.5, 8.8, 10.8, 19.1, -3.8, -20.9, 7.5 for 2019/2020/May-2021 sectors. ### Key macroeconomic projections and indicators (Table 1: Selected Economic Indicators, 2017–2026) - Real GDP: 7.2 8.1 7.0 -32.0 18.9 13.2 12.1 6.1 5.4 5.4 - Inflation (end-of-period) 1/: 2.2 0.5 1.7 -2.0 2.9 1.1 2.0 2.0 2.0 2.0 - Inflation (period average) 1/: 2.3 1.4 1.3 -1.6 1.4 2.3 1.9 1.8 2.0 2.0 - GDP deflator: 1.4 3.1 -0.5 -2.4 2.9 2.3 1.9 1.8 2.0 2.0 - Revenue and grants (percent of GDP): 27.7 27.2 26.4 19.4 27.2 27.9 28.4 28.0 27.9 27.3 27.2 - Expenditure and net lending (percent of GDP): 30.8 32.5 33.0 50.0 46.0 41.2 37.2 35.1 33.9 34.3 - Overall balance (percent of GDP): -3.1 -5.3 -6.6 -22.7 -18.1 -12.8 -9.1 -7.3 -6.6 -7.1 - Overall balance excl. grants: -3.5 -6.3 -7.9 -25.2 -20.2 -15.5 -11.4 -8.7 -7.5 -7.8 - Financing: 3.1 5.3 6.6 22.7 18.1 12.8 9.1 7.3 6.6 7.1 - Foreign financing: 4.2 7.0 1.1 3.5 7.1 4.8 6.1 3.5 4.1 -3.1 - Domestic financing 2/: -1.1 -1.7 5.5 19.2 7.2 5.2 3.0 3.8 2.6 7.3 - Public and publicly guaranteed debt (percent of GDP): 64.6 72.0 78.3 146.0 137.2 133.3 128.2 128.4 126.8 122.9 - Broad money (annual % change): 5.2 3.4 9.6 14.2 10.7 9.0 9.1 8.0 7.6 7.5 - Domestic credit (annual % change): 1.7 5.2 5.6 35.6 11.2 8.5 6.0 6.2 5.9 7.7 - Current account (percent of GDP): -21.6 -28.4 -26.5 -29.9 -15.9 -13.9 -8.9 -9.0 -8.6 -8.1 - Tourism receipts (in nonfactor services, net, percent of GDP): 57.8 57.2 56.1 37.4 59.4 61.4 63.1 65.5 66.4 67.8 - Gross international reserves (in millions of US$; e.o.p.): 587 712 754 985 508 553 976 1,251 1,496 1,220 - In months of GNFS imports: 1.7 2.1 3.7 3.7 1.7 1.8 2.8 3.3 3.6 2.8 - Exchange rate (rufiyaa/US$, e.o.p.): 15.41 15.41 15.41 15.41 .................. - Memorandum: GDP (in millions of rufiyaa): 73,155 81,568 86,788 57,603 70,478 81,608 93,219 100,676 108,280 116,392 - Memorandum: GDP (in millions of U.S. dollars): 4,747 5,293 5,632 3,738 4,573 5,296 6,049 6,533 7,027 7,553 - Tourism bednights (000'): 8,596 9,477 10,689 4,500 8,500 10,179 11,957 13,394 14,613 15,872 - Tourist arrivals (000'): 1,386 1,484 1,703 555 1,000 1,434 1,960 2,196 2,396 2,602 - Tourism bednights (% change): 10.6 10.2 12.8 -57.9 88.9 19.8 17.5 12.0 9.1 8.6 - Tourist arrivals (% change): 7.8 7.1 14.7 -67.4 80.0 43.4 36.7 12.0 9.1 8.6 - Dollarization ratio (FC deposits in percent of broad money): 48.7 48.8 52.9 45.8 .................. Notes and footnotes in Table 1: - 1/ CPI-Male definition. - 2/ Domestic financing includes MMA advances, SDF contribution and India’s USD 250 million bond from the State Bank of India branch in Male. - 3/ Unsecured financing includes planned new issuances of Sukuk, green and blue bonds. ### Central government finances (Tables 2a and 2b highlights) - Table 2a (In millions of Rufiyaa) provides detailed revenue and expenditure lines for 2017–2026, including: - Total revenue and grants series for 2017–2026 (e.g., 2025: 4,829; 2026: 5,433; note: full series presented in table). - Key tax lines: Tax revenue, Import duties, Airport service charge, Business profit tax (BPT), Personal income tax, Remittance Tax, GST (General GST and Tourism GST), Tourism tax ($6 green tax). - Nontax revenue and Grants series. - Expenditure and net lending, Current expenditure, Primary current expenditure, Salaries and allowances, Administrative Services, Social welfare contributions, Subsidies and transfers, Interest, Capital expenditure, Net lending, New Policy Initiatives. - Overall balance and Overall balance excluding grants series in absolute rufiyaa and financing components (external, domestic, unsecured financing). - Table 2b (In percent of GDP) provides the percent of GDP equivalents, including: - Total revenue and grants: 27.7 27.2 26.4 19.4 27.2 27.9 28.4 28.0 27.9 27.3 27.2 - Tax revenue: 20.2 19.4 18.8 12.5 19.0 18.9 18.7 18.6 19.0 19.1 19.3 - Expenditure and net lending: 30.8 32.5 33.0 31.2 50.0 46.0 41.2 37.2 35.1 33.9 34.3 - Primary balance: -1.6 -3.5 -4.8 -8.9 -20.0 -14.2 -9.0 -5.7 -3.9 -3.3 -4.0 - Public and publicly guaranteed debt: 64.6 72.0 78.3 93.9 146.0 137.2 133.3 128.2 128.4 126.8 122.9 - Footnote: "1/ Transfers to the Sovereign Development Fund are recorded as negative domestic financing, and withdrawals as positive financing." ### Monetary accounts (Table 3 highlights, 2017–2026) - Net foreign assets (in millions of rufiyaa): 10,292 10,511 12,967 6,134 3,952 7,360 15,805 20,508 24,540 20,426 - MMA net and commercial banks net series (detailed in table). - Net domestic assets and Domestic credit (levels and sectoral breakdown: public sector, central government (net), public enterprises, private sector). - Broad money (levels): 32,007 33,088 36,251 41,395 45,808 49,947 54,512 58,872 63,319 68,062 - Narrow money and Quasi-money levels provided. - Growth rates: Broad money 5.2 3.4 9.6 14.2 10.7 9.0 9.1 8.0 7.6 7.5; Domestic credit, net 1.7 5.2 5.6 35.6 11.2 8.5 6.0 6.2 5.9 7.7 - Gross foreign assets of MMA (stock; e.o.p.): 587 712 754 985 479 524 947 1,222 1,467 1,191 - Memorandum items: Velocity, Money multiplier, Reserve money (in millions of rufiyaa, e.o.p.). ### Balance of payments (Table 4 highlights, 2017–2026, US$ mn) - Current account (US$ mn): -1,027 -1,503 -1,490 -1,119 -726 -735 -540 -585 -605 -611 - Balance of goods and nonfactor services: -182 -518 -348 -649 -130 119 448 463 542 596 - Trade balance, exports, imports (f.o.b.) series presented (e.g., Imports (f.o.b.) -2,227 -2,764 -2,753 -1,708 -2,159 -2,315 -2,379 -2,582 -2,798 -3,036) - Travel receipts (tourism-related): Travel receipts 2,744 3,028 3,157 1,398 2,715 3,252 3,819 4,278 4,668 5,121 - Capital and financial account: 913 1,835 1,970 1,613 221 780 962 861 853 341 - Gross international reserves (stock; e.o.p.): 587 712 754 985 508 553 976 1,251 1,496 1,220 - In months of GNFS imports: 1.7 2.1 3.7 3.7 1.7 1.8 2.8 3.3 3.6 2.8 - External debt (in percent of GDP) 4/: 35.7 62.2 68.9 119.3 103.5 96.1 92.1 90.4 88.2 79.0 - Debt service (in percent of domestic GNFS exports): 5.4 7.2 12.4 36.2 21.9 20.0 15.6 13.9 13.0 19.6 - Notes: - 1/ There are no capital transfers. - 2/ MMA liabilities include swaps with the RBI. - 3/ These flows include external borrowing of the private sector. - 4/ Public and private external debt includes IMF, but excludes domestic foreign-currency denominated debt. ### Financial soundness indicators (Table 5 highlights, 2013–2021) - Regulatory capital to risk weighted assets series for 2013–2021 (examples: 41.1, 44.5, 37.2, 44.5, 44.6, 44.2, 46.8, 47.9, 46.6). - Non-performing loans to total gross loans: 17.6 17.5 14.4 11.0 10.6 10.5 8.9 9.4 9.3 7.9 - Return on assets and return on equity series (e.g., Return on assets 6.5 4.2 3.4 4.7 3.7 3.7 4.9 2.2 3.5). - Liquid assets to total assets and liquid assets to short-term liabilities series. - FX loans to total loans and FX liabilities to total liabilities series. - Sectoral distribution of loans: Domestic residents ~100.0 percent; Nonfinancial corporations and Households major borrowers. ### 2019 Article IV recommendations and related policy actions (Table 6) - Debt and Fiscal Policy - Recommendation: Fiscal consolidation to put public debt on a downward path, develop domestic debt market for longer tenors, be selective about externally-financed projects, balanced fiscal adjustment relying on revenue measures and tighter current spending control. - Related policy action: "The total PPG debt-to-GDP ratio increased to 146 percent in 2020, from 78 percent in 2019... Primary deficit in 2020 increased to 20 percent of GDP... Although the authorities have reduced or delayed capital spending on some infrastructure projects and plan to rationalize non-priority spending, medium-term projected capital expenditures are higher than historical averages." - PFM and Fiscal Policy - Recommendation: Complement fiscal adjustment with PFM reforms and management of contingent liabilities; limit sovereign guarantees; tackle budgetary pressures from SOE activities. - Related policy action: "Ongoing work is being implemented to enhance oversight of SOEs and strengthen the management of fiscal risks. Work is ongoing to reform the current Fiscal Responsibility Act." - Exchange Rate and Monetary Policy - Recommendation: Staff does not recommend approval of existing exchange rate restrictions and multiple currency practices (MCPs); advise MMA to accept obligations of Article VIII as measurable goal. Also recommended tighter monetary setting together with fiscal consolidation to narrow CAD and preserve foreign reserves. - Related policy action: "The FX rationing to banks, despite recent easing, involves measures inconsistent with Article VIII... The authorities are working towards FX market reforms to address dollar shortages and long-lived structural inefficiencies." and "MMA is proactively managing the system rufiyaa liquidity and tightened the rufiyaa related MRR rates. MMA could consider open market operations in the future, but the current focus is on using minimum reserve requirements, and it recently tightened the rufiyaa rate." - Governance - Recommendation: Strengthen fiscal governance by modernizing revenue administration, PFM and procurement reforms, improve transparency, regulatory environment, rule of law, property rights, AML/CFT compliance. - Related policy action: "Fiscal stability will require other improvements in the public financial framework. Authorities are also making progress in procuring a consultant to conduct a national risk assessment for AML/FT expected to be completed by June 2022... This assessment will help with the preparations for the AML/CFT assessment of Maldives by the Asia/Pacific Group on Money Laundering now postponed to 2024. Reforms are ongoing to address weaknesses in managing public investment... MoF publishes on its website a detailed list of awarded projects..." - Structural reforms - Recommendation: Accelerate reforms to enhance private sector role, diversify the economy, boost competitiveness, explore small business finance, enhance transportation links, address skills gaps, better target social protection. - Related policy action: "The government’s Strategic Action Plan (2019–23) focuses on decentralization, economic diversification, and integration of tourism with other industries, SMEs, labor, employment and migration, social protection and governance, among others." - Financial stability and structural reform - Recommendation: Financial sector oversight broadly appropriate; monitor credit growth and the closing credit gap. - Related policy action: "A large part of banks’ portfolios corresponds to loans that benefitted from moratorium initiatives and working capital loans... MMA is vigilant about credit risk and the policy of allowing regulatory moratorium measures expired as scheduled in March 2021." *Source: Maldives — IMF staff report content (figures, tables, and text as provided).* ### Appendix I. Tourism Recovery Underway ### Appendix I. Tourism Recovery Underway ### Pre-COVID outlook and initial impact of COVID-19 - Arrivals were projected to grow by around 10 percent in 2020, from their record high level of 1,702,887 in 2019 (around 15 percent growth from 2018). - To contain the spread of the virus the Maldives closed arrivals from China starting February 23, 2020 and eventually closed all tourist arrivals on March 27, effective until July 14, 2020. ### Reopening and evolution of arrivals - The Maldives reopened to tourists on July 15, 2020. - Since reopening, tourist arrivals have been steadily increasing, recording 59 percent of their pre-COVID levels in 2021 up to end-June. - When reopened on July 15, 2020, average daily arrivals were below 10 percent of their pre-COVID 2019 levels until September 2020. - During the peak season (December 2020 to February 2021) arrivals were around 60 percent of arrivals in the peak season pre-COVID 2019. - In the first two weeks of May, arrivals were 70 percent of their pre-COVID 2019 levels. - Entry conditions for tourists are minimal: entry is granted without quarantine with the presentation of a negative PCR test taken at the first port of embarkation to the Maldives and less than 96 hours prior to the scheduled departure time. - Prior to October 15, 2020, the negative PCR test had to be taken less than 72 hours prior to the scheduled departure time. - Infants less than one year old are exempt. - Staff in resorts have been prioritized for COVID-19 vaccinations, increasing safety in resorts. - The recent surge in COVID-19 in South Asia caused some countries, particularly in Europe (Germany, UK, Italy), to implement restrictions on travelers to the Maldives. ### Competitive position and policy environment - The Maldives outperformed competitors in part because it was able to lower earlier restrictions on tourists upon arrival; according to the Oxford Policy Tracker the entry requirements in the Maldives have been lower than most competitors since its reopening to tourists in July 2020. - Daily flight arrivals to the Maldives have recovered faster than most competitors. ### Change in composition of tourist arrivals and recent restrictions - The composition of tourist arrivals post-COVID has changed: arrivals from India and Russia were around 40 percent of all arrivals after reopening on July 15, 2020. - Other European and non-Asian countries make up the bulk of the remaining arrivals. - Before COVID-19, China and other Asia Pacific countries were major sources of tourists; arrivals from these countries have dwindled given their restrictions on travel since the start of COVID-19. - On April 27 a temporary suspension was placed on visitors from India to hotels and guesthouses in locally populated islands. - As of May 13, 2021, all tourist visas for travelers originating from South Asia were temporarily halted, causing arrivals to decline to 52 percent of their pre-COVID levels between May 13 to June 30, 2021. - The halt was lifted for resorts on July 15, 2021 and planned for guesthouses and islands on July 31, 2021. - Tourists from other regions continued to travel to the Maldives with arrivals from Russia and countries not in Asia or Europe increasing their share post-COVID. - Arrivals excluding those originating in India were 61.5 percent of pre-COVID levels between May 13 to June 30, 2021. *Source: IMF staff compilation from Appendix I. Tourism Recovery Underway.* ### 5. The analysis was based on available data prior and during the COVID-19 pandemic. ### 1mdvea2023001 - 5. The analysis was based on available data prior and during the COVID-19 pandemic. ### Analysis period and data scope - Analysis period: 2015–2020. - Focus: indicators of high-risk activity mainly related to liquidity performance and the impact of the COVID-19 pandemic in 2020. - Note: data for some SOEs (e.g., HDC and STELCO) were preliminary and incomplete at time of drafting. ### Overall risk - Trend: increase in risk over the past six years, exacerbated by the pandemic in 2020. - 2015: majority of SOEs had a low to moderate profile of risk. - End-2019: trend evolved to more moderate to high risk. - 2020: deterioration to high to very high risk for most SOEs. - Example: MACL and MPL had revenues heavily impacted by border closures in 2020 (3 months). - Liquidity indicators identified as the main driver of deteriorating risk ratings. - Worsening liquidity led to extended budgetary support for debt service (examples: AIA, HDC, STELCO). ### Profitability performance indicators - Ratios used: - Cost recovery: ability to generate revenue to cover operating expenses (ratio < 1 implies unsustainable without supplementary funding). - Return on equity: ability to turn equity into profit; for loss-making SOEs shows pace of government equity erosion. - Findings: - Most SOEs face high to very high cost in recovery; trend worsened in 2020. - Return on equity risk increased in 2020 compared to previous years; for all SOEs except AIA the risk remained moderate. - AIA: very high risk due to negative equity stock from accumulated deficits necessitating recapitalization. - HDC: 2020 profit and loss data preliminary (reported until November 2020); very low risk in 2017–2018 related to a revaluation gain included in profit (impacting EBITDA). - STO: return on equity evolution marked by one-time write off of the hotel project in Hulhumale in 2019 which improved risk profile in 2019. ### Liquidity performance indicators - Ratios used: - Quick ratio: ability to meet short-term liabilities using most liquid short-term assets. - Creditor turnover days: speed of paying suppliers; increasing days indicates slower payments and potential worsening position. - Findings: - Elevated short-term liquidity risk across most of the sample. - Quick ratio: all sample face higher degrees of risk meeting short-term obligations with available liquid assets; pandemic added pressure. - Creditor turnover days: all sample except STELCO and MWSC showed very high risk. - Debtor turnover days: most SOEs face challenges collecting bills from customers, highlighting accumulation of cross arrears in the public sector and complicating liquidity management. - Result: accumulation of arrears affecting SOEs’ ability to pay suppliers. ### Solvency performance indicators - Ratios used: - Debt-to-assets and debt-to-EBITDA: assess debt burden and ability to pay off debt. - Findings: - Solvency risk increased since 2018; long-term ability to pay debt is at risk for many SOEs. - 36 percent of liabilities are monitored by government through sovereign guarantees and on-lending. - Around 10 percent of GDP of estimated liabilities remain outside active government monitoring. - Potential shock to debt payments would place enormous pressure on an already weakened budget. ### Government exposure to SOEs - SOE reliance on government support: - Subsidies and capital contributions were 2 percent and 4 percent of GDP respectively in 2020. - Many SOEs provide goods/services at controlled prices, suffer weak corporate governance, rely on government transfers, and undertake non-commercial activities with cross-subsidization. - Forms of government support for nine analyzed SOEs: - Guarantees: - Government guarantees provided to STO, HDC, and STELCO amounting to around 21 percent of GDP in 2020. - Largest guarantee: HDC at 13 percent of GDP to secure foreign funding of housing projects. - New housing corporation Fahi Dhiriumlhum Corporation: government pledged around USD 300 million in sovereign guarantees (subject to guidelines and due diligence). - Legal and management weaknesses: FRA (article 33) limits guarantees to amounts allocated in the national budget (not currently implemented); budget lacks ceiling on total stock or annual issuance; guidelines lack required credit risk analysis and fee collection enforcement; MOF lacks expertise to assess credit risks and is working to strengthen processes with development partner support. - Although no guarantees have technically been called, MOF has supported SOE debt service repayment via capital contributions and direct lending. - On-lending and direct Treasury lending: - 2020 estimate: total of on-lending and direct borrowing from the Treasury is 15 percent of GDP. - Increase reflects a high risk of non-performing loans. - Example: HDC borrowed around MVR 670 million in 2019 from the Treasury to refinance principal and interest for contracted foreign loans that had sovereign guarantees. - FAD technical assistance (February 2020) reported this category of loans (~1.8 percent of GDP by end-2019) are considered non-performing. - Subsidies and capital contributions: subsidies mainly for food and fuel (to control electricity cost); capital contributions for capital injections to weak SOEs. - Cross holdings (payables/receivables): issues with unpaid government bills to SOEs; example: STO had around MVR 790 million of government entities’ unpaid bills by end-2020, delaying SOEs’ collections and affecting their ability to pay suppliers. ### Conclusion: implications for fiscal position - High-risk activity mainly related to financial liquidity support can exacerbate the government’s fiscal position when fiscal space is limited and the public balance sheet is weak. - Need to strengthen SOE oversight and rationalize government support. ### Policy recommendations (short-term, institutional, fiscal oversight, transparency) - Short-term prioritization: - With increasing probability of liquidity risk and limited fiscal space, government should prioritize SOE support in competing demands and target the most critical areas (e.g., prioritize utilities if lack of support could endanger basic services). - Strengthen institutional framework for SOE fiscal risk oversight: - Establish a new MOF unit for oversight of fiscal risks focusing first on SOE-related fiscal risks; unit to work closely with MOF departments and Privatization and Corporation Board (PCB), and report to a new Fiscal Risk Committee in MOF. - Liquidate highly or fully budget dependent SOEs or restrict their autonomy. - Progressively make unlisted commercial SOEs ‘listable.’ - Rationalize government support to SOEs: - Strengthen scrutiny of SOE capital expenditure proposals and improve SOE budget planning. - Strengthen criteria, evaluation, and monitoring of guarantees: - Enforce compliance with procedures, set ceilings on total outstanding guarantees and guarantees issued/allocated during the year, enforce eligibility criteria and fee collection. - Review guarantee issuance policy to include: (i) a credit risk analysis, (ii) regular reviews of portfolio risks, and (iii) suitable risk mitigation measures including a more risk-based approach to charging guarantee fees. - Include spending and performance data in PCB reports. - Promote transparency in monitoring and reporting on SOEs: - In SOE publications, include overview of financial performance of the public corporation sector and disclose all transactions with the government. - Set up a central database of core financial information, risk indicators, and state support for public corporations; require reporting of quasi-fiscal activities. - Publish an ownership policy clarifying government’s policy and financial objectives as shareholder. - Identify and disclose quasi-fiscal activities, preferably with their respective size, undertaken by public corporations. - Strengthen risk analysis of individual SOEs with systematic analysis of financial performance and position. ### Appendix V — Medium-term measures to increase revenues (selected measures and estimates) - Objective: diversify tax base and strengthen tax policy to sustainably finance priority spending; mobilize domestic revenue after tourism recovers and with adequate social spending targeting the most vulnerable. - Suggested measures: - Lower thresholds at each level of income and raise the top marginal income tax rate. - Personal Income Tax (PIT) implemented in January has four rates; top marginal tax rate is 15 percent. - Exemption threshold: incomes below 720,000 MVR (three times GDP per capita) are exempt. - Top marginal rate applies to incomes above 2.4 million MVR (11 times GDP per capita). - Individual income tax raised 71.5 million MVR up to mid-April 2021. - 2019 TA report estimated reforms in these areas could raise 650 million MVR, or around 0.7 percent of 2019 GDP, annually. - Rationalize Business Profit Tax (BPT) related tax expenditures: - Recommendation: uniform turnover tax of around 3 or 4 percent for businesses below the GST registration threshold. - Businesses below GST threshold account for 60 percent of businesses but only 1 percent of revenue. - Move legal persons and individuals providing professional services into the reformed BPT; remove MVR 500,000 tax-free threshold under BPT. - BPT rate currently 15 percent; average (including zero rates of peer countries) is 22 percent, suggesting scope to raise the rate. *IMF staff calculation and data from authorities* ### 4. Moving towards equalizing the GST rates between its domestic and tourist sectors: The ### 4. Moving towards equalizing the GST rates between its domestic and tourist sectors: The ### GST structure and rationale for harmonization - Current GST rates: 6 percent (domestic sector) and 12 percent (tourist sector). - By international standards these rates are at the lower end, yet GST accounts for around 10 percent of GDP. - The dual-rate system is unusual internationally, though several other tourist dependent island economies have similar practices. - Policy objective: The introduction of a modern broad-based VAT at a uniform tax rate should remain an overarching policy objective, mainly for the medium- to long-term. - Short-to-medium term recommendation: Gradually harmonize rates by increasing the 6 percent rate. ### Revenue impact estimates - Raising the GST rate by 1 percentage point on domestic revenues would yield 447 MVR, or 0.5 percent of 2019 GDP. - A full harmonization of the tax rates would see revenue increase by 3.4 percent of GDP. - Fiscal incidence note: Consumption taxes are generally less progressive than taxes on income or wealth; regressivity effects can be addressed by using part of the generated revenue for pro-poor expenditures. ### Other revenue-raising measures - Excises as supplements to GST: could generate additional revenues from goods with inelastic demand and negative externalities, including tobacco, alcoholic products, fuels, and motor vehicles. - Airport service charge (ASC) current levels: - 25 USD per tourist arrival. - 12 USD for resident passengers. - Short-term option: Doubling the levy to 50 USD for tourists could raise 650 million MVR, or 0.7 percent of GDP based on 2019 tourist arrivals. - Legislative update (footnote): On July 5, 2021 the People’s Majlis passed an amendment to replace the ASC with a departure tax as of January 2022. The approved departure tax rates are: - USD 12 for Maldivians travelling in Economy Class, - USD 30 for foreigners travelling in Economy Class, - USD 60 for all passengers travelling in Business Class, - USD 90 for all passengers travelling in First Class, - USD 120 for all passengers travelling on private jets. - The bill also approved similar changes to the Airport Development Fee (ADF). - Other short-term options: introduce user-fees such as tolls. ### Strengthening revenue administration (MIRA) — priorities - Rationale: Changes to tax legislation may impact voluntary compliance if taxpayers perceive taxes as too high; MIRA’s capacity to monitor and address non-compliance is key to realizing PIT reform gains. - Reform priorities for MIRA: 1. Embedding compliance risk management, both domestic and international, into MIRA’s processes, and improving its IT functionality and data collection sources. 2. Strengthening MIRA’s capacity to identify and address international tax risks. 3. Identifying and addressing PIT-specific risks. - Transparency measure: Estimating tax expenditures and publishing the results would strengthen fiscal reporting and facilitate informed decision making. *Source: IMF staff chapter on moving towards equalizing GST rates and related fiscal measures.* ### Appendix VIII. A Framework for Sustainable and Climate Resilient ### Appendix VIII. A Framework for Sustainable and Climate Resilient Development in the Maldives ### Vulnerability to climate change - The Maldives’ territory comprises small low-lying coral islands, with over 80 per cent of the land area less than one meter above mean sea level. - Sea level rise is a principal long-term risk; increased precipitation will worsen damages from coastal flooding during storms and enhance salinization (IPCC 2018). - The Maldives’ overarching dependence on natural ecosystems, particularly for tourism, makes climate non-action not an option. ### Adaptive capacity and past action - Scientific and technical assessments since 1987 have reiterated the need for long-term adaptation (NAPA 2006). - Sea wall construction around the capital Male' commenced in September 1988; the government has implemented several adaptation projects since. - Frontier analysis indicates a large distance to the adaptation frontier for the Maldives (Dabla-Norris et al, 2021), implying considerable scope to improve adaptive capacity. - The green and adaptive infrastructure gap threatens both climate mitigation (renewables and nature preservation) and adaptation (coastal protection, water and waste management, and resilient infrastructure). ### International engagement, NAPA, and mitigation commitments - The Maldives was prominent in early UNFCCC negotiations and was the first to sign the Kyoto Protocol. - The First National Communication (FNC) to the UNFCCC was submitted in 2001, containing mitigation and adaptation measures and project profiles. - The National Adaptation Programme of Action (NAPA) was adopted in 2006 to communicate urgent and immediate adaptation needs and to support the SDGs; NAPA was prepared with support from GEF and UNDP. - The Update of Nationally Determined Contribution (NDC) of Maldives (2020) sets plans to reduce 26 percent of emissions by 2030 and to strive to achieve net zero by 2030, if there is adequate international support and assistance. The NDC sets forth ambitious plans to increase the share of renewable energy in the energy mix. - The NDC (2020) targets development of the National Adaptation Plan (NAP) with short, medium, and long-term adaptation programs with international support. ### Implementation gaps and institutional steps - Since NAPA adoption, the Maldives has implemented various non-structural interventions and institutional reforms (national climate change action plan, disaster management plan, sectoral action plans). - Implementation is lacking: no enacted regulations directly addressing climate change and no developed concrete financing plans. - The Maldives adopted the Climate Emergency Act (April 29, 2021) with an ambitious plan to achieve net-zero carbon emissions by 2030 and mandates submission of the subsequent year's national carbon budget to Parliament three months before year-end. - The Strategic Action Plan (SAP) 2019–2023 introduces a results matrix to align budgets to results, coordinate sustainable development action plans across Ministries, and embeds SDGs into a shift toward results-based budgeting (expected to be put in place in the 2022 budget). - Following recommendations of the 2019 PIMA TA, a stronger Public Investment Management (PIM) rating could facilitate access to climate finance. ### Benefits of building resilient infrastructure (findings from Melina and Santoro, 2021) - There is a significant dividend associated with building resilient infrastructure calibrated for the Maldives. - Under worsened climate conditions, the cumulative output gain from investing in more resilient technologies increases by up to a factor of two. - Impact of a shock on GDP: - Building resilient infrastructure can halve the losses in terms of GDP at the trough triggered by a natural disaster. - Investing in resilient infrastructure yields a dividend even before a disaster, due to greater gross rate of return and durability (captured by a smaller depreciation rate relative to standard infrastructure). - The supplementary increase in tax revenues required for reconstruction in the case of standard infrastructure would be politically infeasible; the additional tax pressure should be of the tune of 6-7 percentage points of GDP in the aftermath of a shock. - Financing: - Financing public investment with higher taxation would lead to sacrifices in GDP and private consumption and investment during the ramp-up of investment. - Grant-financing can reduce this cost or eliminate it if it covers the investment plan in full. - It is financially convenient for donors to help build resilience prior to natural disasters rather than finance ex-post reconstruction. ### Fiscal implications and prioritization - Investing in adaptation infrastructure can yield high returns but is fiscally costly. - Financing large adaptation investments will challenge fiscal space, which has deteriorated due to COVID-19. - The Maldives featured among countries with high adaptation costs and limited fiscal space even before COVID-19. - Financing adaptation may require: - Strengthening domestic revenue mobilization, - Expenditure rationalization, - Prioritization of adaptation investment, - Grant financing. ### Access to concessional climate finance and capacity constraints - Access to concessional climate finance remains a challenge; climate financing is reportedly offered at the same market rates as conventional instruments but with additional climate-mitigation conditionalities, making them not a meaningful alternative among financing choices. - Main obstacles to timely access to global climate funds include lack of capacity to satisfy preconditions (provision of scientific evidence, paperwork). - Given limited fiscal space post COVID-19, the authorities reiterated requests for international cooperation via financial assistance, capacity development, and facilitation of access to global climate finance at concessional rates. *Source: Appendix VIII. A Framework for Sustainable and Climate Resilient Development in the Maldives (staff-prepared text).* ### 2012. In 2014 and 2015 LEG provided advice on the Special Economic Zones Law, offshore banking ### 1mdvea2023001 - 2012. In 2014 and 2015 LEG provided advice on the Special Economic Zones Law, offshore banking ### Technical Assistance — Monetary and Capital Markets (MCM) - 2006: two missions provided TA on monetary operations, financial market development, and banking issues. - 2007: TA on debt management, monetary policy and financial supervision. - 2008: three missions on monetary operations and liquidity management, monetary policy and financial supervision. - Nov 2008 and Mar/May/Aug 2009: TA on research capacity building, banking supervision, and monetary policy; reviewing of the MMA Act with recommendations. - Two missions (2008–09): advice on monetary operations, liquidity management, and development of a crisis management framework. - Dec 2010: TA mission on crisis preparedness and management, bank restructuring, and monetary operations. - May and Sep 2011: TA on development of debt markets and on-site banking supervision. - Feb 2012: TA on assessing the FX operations framework. - First half of 2014: continued TA on banking supervision; joint MCM-APD mission on developing FX market. - 2014: advice on deposit insurance schemes. - 2015: MCM TA follow-up missions on banking supervision (March) and FX reserve management (September). - Mar 2016: TA on FX and monetary policy operations. - May 2016: follow-up mission on banking supervision focusing on operational risk. - 2017: two HQ missions on accounting and auditing framework for MMA; two SARTTAC missions establishing work plan for monetary operations and banking supervision. - 2017–18: four TA missions as part of multi-year TA program to enhance supervisory capacity of the Insurance Division of the MMA. - Dec 2018: multitopic TA to formulate a TA roadmap supporting MMA reforms (central bank governance, monetary and FX operations, financial sector supervision and regulation); follow-up mission in 2019. - 2020: SARTTAC mission to assist MMA in strengthening supervisory capacity in banking and insurance. - Jan 2019: TA mission on application of International Financial Reporting Standard 9 – Financial Instruments and reviewing progress in strengthening Internal Audit and Enterprise Risk Management. - Feb 2019: external expert advised MMA governor on strengthening MMA governance and internal organization. - 2021: desk-review of policy notes on Use of MVR in all monetary transactions; Repatriation and surrender of export earnings; Licensing money changers. ### Technical Assistance — Statistics (STA and SARTTAC) - May 2007: STA mission on money and banking statistics. - Feb and Apr 2011: TA on balance of payments statistics, government financial statistics (GFS), monetary and financial statistics (MFS), and national accounts. - Jun and Sep 2011: TA on improving price statistics and on the General Data Dissemination System (GDDS). - Feb/May/Oct 2012: continued TA on improving price statistics. - Apr 2012: TA on improving national accounts (constructing GDP from the expenditure side and compiling quarterly national accounts). - Nov 2012, Jan and Jul 2014, Apr 2015: further advice on improving GDP and developing quarterly GDP (Apr 2015 jointly with APD). - Mar 2013–Jan 2016: STA fielded eight TA missions on balance of payments statistics and two on government finance statistics (project funded by the Government of Japan). - Last STA TA mission in this sequence: Feb 2017. - Apr 2018 SARTTAC mission: assessed data reliability, improved specific BOP components, advised on source data and statistical techniques. - Aug 2018 SARTTAC mission: GFS and public sector debt statistics (PSDS) training — onset of broader SARTTAC effort to strengthen fiscal reporting. - Jan 2019 SARTTAC mission: GFS and PSDS — strengthening compilation and dissemination per international statistical standards. - Aug 2019 SARTTAC PSDS training mission: training on concepts, methods, and practices related to PSDS compilation and dissemination. - Feb 2019 SARTTAC missions: assisted with updating CPI and developing experimental annual GDP estimates by expenditure at current prices for 2017. - Jan 2020 and Jan 2021 SARTTAC GFS and PSDS missions: enhancing compilation and dissemination practices; aligning to GFSM 2014; moving toward quarterly GFS reports; broadening institutional coverage of fiscal statistics. - 2020–first half 2021: SARTTAC missions focused on national accounts statistics, improving expenditure approach for annual GDP and quarterly national accounts. ### Safeguards Assessment - March 2010: safeguards assessment of the MMA concluded. - In response: - MMA appointed an external auditor. - Strengthened controls over foreign payments through automation of the authorization process. - Appointed a Chief Internal Auditor and improved internal audit function capacity. - Amendments to the MMA Act were drafted in 2011 in consultation with the Fund. - 2015: MMA Act amended; however, some safeguards recommendations were not incorporated: - establishment of an Audit Committee, - limits on credit to government, - safeguards for personal autonomy of Board members. ### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of June 2021) - General: Macroeconomic statistics have improved with STA and AsDB TA. Data broadly adequate for surveillance but gaps remain affecting balance of payments, government finance, and national accounts. - Real sector: - GDP rebased to 2014; revised annual and quarterly GDP estimates from 2003 to 2016 released end-2017. - Estimates of GDP by expenditure at current prices prepared as part of 2014 supply and use tables; balanced with no statistical discrepancy, but authorities preparing independent estimates of GDP by expenditure and significant discrepancies remain. - STA and SARTTAC assisted in improving annual production and expenditure GDP measures and developing quarterly GDP series. - CPI updated in 2019 with weights from the 2016 Household Income and Expenditure Survey; included new outlets, basket items, expanded rental units survey. - PPI not produced in 2017–2019; SARTTAC supported re-introduction of quarterly PPI covering education sector in 2020; additional PPIs for communications, utilities, and accommodation and food services planned for 2021. - Fiscal sector: - With SARTTAC support, authorities disseminate GFS based on Government Finance Statistics Manual 2014 for budgetary central government. - Ongoing reforms to update chart of accounts and accounting basis to international standards to allow production of balance sheet data. - Data on local government limited; plans underway to provide a portal with detailed local government finances. - Quarterly report on individual SOEs produced, but GFS data for consolidated public corporations subsector not currently produced; plans with SARTTAC to produce such data. - Financial sector: - APD receives electronic monetary statistics every two weeks covering MMA and commercial banks balance sheets. - Summary data published in MMA’s Monthly Statistics, Quarterly Economic Bulletin, and Annual Report. - Inconsistencies between monetary and fiscal data regarding financing of fiscal deficit due to timing and coverage. - MMA uses standardized report forms (SRFs) for central bank, other depository corporations, and other financial corporations. - Integrated monetary database operational. - Maldives reports some Financial Access Survey indicators (commercial bank branches per 100,000 adults; ATMs per 100,000 adults). - MMA reports all twelve core Financial Soundness Indicators (FSIs) and six additional FSIs for deposit takers plus two additional FSIs on real estate markets quarterly to IMF’s FSI website; coverage could be improved to include other financial corporations, nonfinancial corporations, and households. - External sector: - MMA compiles balance of payments data on an annual basis only. - Actions to improve coverage: project to enhance international transaction reporting system (ITRS), better coordination among data producers, improving data collection processes. - Estimation of travel credits should be further improved; new survey needed to capture construction of mega projects. - MMA does not compile IIP, CDIS, CPIS data; difficulties in consolidating existing information for consistent financial transactions compilation. - Quarterly data on external debt and debt service available for government and MMA, and to some extent for banking sector and state enterprises, but no data reported to World Bank QEDS database. - Main source for EDS is Commonwealth Secretariat Debt Recording Management System (DRMS) which has EDS templates for reporting to the World Bank and assisting MMA in improving BOP data and future IIP preparation. - Official reserve assets reported every two weeks with a (variable) one-week lag. - Predetermined foreign currency outflows (mainly debt service payments) reported to APD at the time of annual Article IV consultation missions; other movements of foreign currency assets not identified. ### Data Standards and Quality - Maldives has participated in the General Data Dissemination System (GDDS) since October 14, 2011. - STA e-GDDS mission took place in 2019 assisting authorities publish essential macroeconomic data through a National Summary Data Page (NSDP). - No data ROSC available. *Source: IMF staff report excerpts (Maldives) as presented in the provided content.* ### 4. This debt sustainability analysis includes PPG external and domestic debt. Public debt ### 1mdvea2023001 - 4. This debt sustainability analysis includes PPG external and domestic debt. Public debt ### Public debt coverage and definitions - Debt coverage: Includes PPG external and domestic debt; public debt includes the debt of the central government, including guarantees to SOEs. Other components do not apply to the Maldives. - External debt definition: Defined by the residency criteria. - Domestic USD issuance: Government domestically issues some USD denominated debt (outstanding as of December 2020 was USD 205 million) and has recently borrowed USD 250 million from the State Bank of India branch in Malé; these amounts are classified as domestic debt since the holders are residents. - Transparency: Information about guarantees to SOEs and other details of the public debt are publicly disclosed on the webpage of the Ministry of Finance. ### Context: country status and special programs - IDA status and constraint: As an IDA-eligible country at high risk of external debt distress, Maldives is subject to a zero ceiling on external non-concessional borrowing under IDA’s Sustainable Development Finance Policy (SDFP). - DSSI: The DSSI suspended interest and principal repayments due between May 1 and Dec. 31, 2020 from official bilateral creditors on direct debt; private creditors were encouraged to participate. Two extensions suspended interest and principal payments falling in 2021. Payment of suspended amounts will be NPV neutral. Suspended amounts from the original DSSI are to be repaid in three years with one-year grace; amounts from the extension are to be repaid over 5 years with one-year grace. - Relief amounts: Relief in 2020 is USD 19 million, and for 2021 estimated at USD 69 million. ### Macro forecast background and key projections - Tourism and growth: - Tourism share: makes up around one quarter of value-added GDP. - 2020 contraction: growth contracting by 32 percent in 2020; tourism in December 2020 recovering to around 56 percent of pre-COVID levels. - Tourist arrivals: In 2020 tourist arrivals were around 555 thousand compared to 1.7 million in 2019. Arrivals are projected to be 1 million in 2021 and gradually increase to 1.96 million by 2023. - Tourist origin shares (post-COVID to June 30, 2021): India 17 percent, Russia 23 percent, other European countries 19 percent. - Short-term arrivals: Between May 13 and end-June, 2021, arrivals around 52 percent of pre-COVID levels; as of June 30, 2021 arrivals around 59 percent of pre-COVID levels. - Halt lift: The halt was lifted for travelers originating in South Asia on July 15, 2021. - Inflation: Prices contracted in 2020 by about 1.6 percent; outlook remains moderate. - Capital expenditure and fiscal balances: - Authorities' capital expenditure plans: 16 percent of GDP in 2021, 14 percent of GDP in 2022, 12 percent of GDP in 2023; compared to 9 percent of GDP in 2019 and an average of 8 percent of GDP during 2010-18. - Primary fiscal deficit projections: around 14 percent of GDP in 2021 and decline to around 6 percent of GDP in 2023. - Domestic financing: - As of June 2020, around 62 percent of domestic financing was short term (maturity of less than one year). - Short-term interest rates: ranged between 3.7 and 4.5 percent since December 2016. - Medium-term assumption: around 60 percent of domestic financing is short term with an interest rate of 4 percent; share of long-term debt gradually increases; unsecured financing met from domestic creditors; domestic banks and pension funds projected to remain main holders of government debt. ### Change in macro assumptions and infrastructure financing - Current account and imports: - Non-interest current account deficit: contracted by around 25 percent in 2020 (or USD 371 million); ratio to GDP remained elevated at 30 percent. - Capital imports: projected to be elevated in the next few years given capital expenditure plans. - EXIM Bank India lines of credit: - Government of Maldives signed lines of credit for more than USD 1.2 billion with EXIM Bank India: USD 800 million and USD 400 million signed in March 2019 and October 2020 respectively to finance infrastructure projects including Gulhifalhu Port, relocation of Male Commercial Harbour, Greater Male’ Connectivity Project, social housing units, and water and sanitation projects. - Disbursements from the LOC with Exim India that occur in 2021 will start to amortize in 2026. - Growth contribution: Growth impact may be limited due to high import content of projects and primarily social focus of several projects; contribution of government capital expenditure to growth expected to remain close to those in the previous DSA. ### Numerical macro projections (selected table entries preserved exactly) - Real GDP growth (in percent change) - Current-32.018.913.212.16.15.45.44.6 - Previous-8.113.26.45.95.45.45.44.6 - Inflation - Current-1.61.42.31.91.82.02.02.0 - Previous1.51.52.02.02.02.02.02.0 - Primary fiscal deficit (in percent of GDP) - Current20.014.29.05.73.93.34.00.5 - Previous10.14.43.11.91.41.10.90.3 - Non-interest current account deficit (in percent of GDP) - Current27.013.711.97.17.26.96.64.6 - Previous22.210.57.97.88.07.86.74.7 - Grants (in percent of GDP) - Current2.52.12.72.31.40.90.80.3 - Previous2.61.41.00.70.60.60.50.3 - Capital Expenditures (in percent of GDP) - Current14.615.613.912.411.310.210.87.0 - Previous8.07.07.07.07.07.07.07.0 - Public Debt (in percent of GDP) - Current146.0137.2133.3128.2128.4126.8122.9100.3 - Previous93.987.385.483.080.778.175.561.4 ### Debt-carrying capacity, classification, and stress tests - CI score: Calculated at 2.53 using the April 2021 WEO and the 2019 World Bank CPIA. - CI components (selected preserved entries): - CPIA: 0.3853.2491.2549% - Real growth rate (in percent): 2.7197.5430.218% - Import coverage of reserves (in percent): 4.05220.1750.8232% - Import coverage of reserves^2 (in percent): -3.9904.070-0.16-6% - World economic growth (in percent): 13.5203.0780.4216% - CI Score2.53100% - CI ratingWeak - Final classification: Weak (current and previous vintages Weak; scores 2.53, 2.41, 2.47 reported). - Tailored stress tests: Relevant for natural disasters, contingent liabilities, and market financing; tailored tests kept at default calibrations. The most extreme shocks: combination shock and shock to exports for PPG external debt indicators; shock to growth for public debt indicators. - Contingent liabilities: Risks from non-guaranteed SOE debt covered by the contingent liability shock. Most SOE debt is guaranteed; default calibrated shock at 2 percent of GDP used to cover non-guaranteed SOE risk where applicable. ### External debt sustainability findings - Risk rating: Maldives remains at a high risk of external debt distress. - Recent deterioration: All external debt indicators have deteriorated since the last DSA due to stronger contraction in growth in 2020 and higher debt-financed capital expenditures over the medium-term. - PPG external debt-to-GDP: - Baseline projection: projected to decrease by around 7 percentage points to 60 percent of GDP in 2021. - PV of PPG external debt-to-GDP: will remain above threshold of 30 percent until 2031. - Debt-to-exports ratio: PV of the debt-to-exports ratio is below its threshold in the baseline scenario. - Liquidity indicators: Debt service-to-exports ratio and debt service-to-revenue ratio breach their thresholds under the baseline scenario due to elevated debt service obligations on existing external PPG debt. - Recent market issuance and rollover management: - Issued USD 300 million Sukuk in 2021 with five-year maturity and bullet repayment; coupon 9.875 percent and yield 10.5 percent. - USD 200 million of Sukuk used to repay 77 percent of the maiden USD 250 million Eurobond due in June 2022. - Privately placed USD 100 million bond: maturity renegotiated in 2019 and extended by three years to 2026. - Since privately placed Eurobonds and the Sukuk will be due in 2026, 2026 exhibits a spike in debt service payments. - Reprofiling under the DSSI increased debt repayment in the medium term though amounts are relatively small. - Sovereign development fund (SDF): Created to mitigate rollover risk from Eurobonds; COVID-19 crisis necessitated use of most FX accumulated balances for MMA reserves and/or to satisfy FX demand. - Amortization of EXIM LOC disbursements: start in 2026. - Assessment: In the medium-term, rollover risks associated with commercial bonds, higher debt servicing costs, and continued borrowing to finance large fiscal deficits lead to protracted breaches in several external debt indicators, making debt unsustainable. ### Overall public debt sustainability findings - Total PPG debt-to-GDP: - Projected decline by around 9 percentage points in 2021 to 137 percent on the back of higher GDP. - Gradual decline to 123 percent in 2026. - Threshold and breach: Given weak debt carrying capacity, threshold on overall PV of debt-to-GDP is 35 percent. Maldives breaches this threshold for the entire projection period and remains at a high risk of overall debt distress. - Domestic debt importance: Domestic debt made up 59 percent of total PPG debt on average between 2010 and 2019. - Country classification nuance: Although Maldives qualifies for PRGT resources and uses the LIC DSF, the structure of the economy is closer to an EM given GDP-per-capita above USD 10 thousand in 2019. Debt-to-GDP ratio above 70 percent is noted as the ratio that best predicts occurrence of a debt distress event in EM countries. - Technical assistance: IMF and WB are providing debt management technical assistance. - Recommendations on domestic market: Development of the domestic debt market to lengthen maturity, especially for foreign exchange denominated instruments issued in domestic markets, was recommended. - Transparency practices: Ministry of Finance formulates and publishes its medium-term debt strategy annually on its website; a public debt bulletin is published biannually; figures on debt outstanding are published quarterly. ### Risk rating, vulnerabilities, and required measures - Overall risk: High risk of external debt distress and high overall risk of debt distress. - Drivers of weakening positions: Deeper and longer than expected COVID-19 shock and authorities’ expanded medium-term public investment program; financing larger fiscal deficit more difficult and expensive. - Current servicing: Authorities are current on debt service obligations to both domestic and external creditors. - Debt sustainability assessment: Debt is assessed to be unsustainable under the baseline projections due to protracted breaches in several debt indicators. - Required actions to secure sustainability: - Balanced and sustained fiscal consolidation. - Conservative debt management. - Continued strong growth. - Rationalizing capital spending, especially in large public investment projects carried out by the central government or SOEs. - Over the medium term, mobilizing further revenues by diversifying the tax base toward domestic resources. - Vulnerabilities: Debt dynamics remain vulnerable to adverse shocks to growth, interest rates, and the fiscal position. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mdvea2023001.pdf* ### 14. The authorities emphasized that understanding the context of the COVID-19 shock is ### 1mdvea2023001 - 14. The authorities emphasized that understanding the context of the COVID-19 shock is ### Context and debt-sustainability assessment - The shock to GDP was severe and caused an upward revision to all ratios to GDP. - Authorities emphasized that understanding the context of the COVID-19 shock is important in making an assessment on debt sustainability. - Repayment capacity deterioration was less severe than stock ratios of GDP and is expected to recover faster than stock ratios. ### Sovereign bond issuance and market signals - Sukuk issuance was oversubscribed, signaling healthy demand for the sovereign debt of Maldives in international markets. - Sukuk bonds were trading at a premium. - Authorities plan to remain active in international markets and plan additional Sukuk issuances for the current year and through 2023. - Authorities highlighted proactive management of rollover risks: - In 2019 by extending the maturity of the privately placed USD 100 million Eurobond by three years. - In 2021 by rolling over 77 percent of the maiden Eurobond. ### Interest rates on external debt - External loans (excluding sovereign bonds) of the central government were highly concessional and have a weighted average interest rate of 2.2 percent. - The weighted average interest rate for the stock of public external debt, including sovereign bonds, was around 3.5 percent. ### Capital spending and project timelines - Ongoing capital spending expansion is largely attributed to infrastructure projects initiated in 2019 and associated large disbursements materializing over the medium-term. - In 2019 many projects undertaken by the former administration had been completed or were on halt, so capital spending was relatively low in 2019 compared to recent years. - Projects initiated by the government in 2019 were in planning and preparatory stages, with major disbursements happening in 2020. ### Sovereign Development Fund (SDF) - The Sovereign Development Fund (SDF), established in 2017 to set aside funds for future debt repayment obligations of the Maldives, reached a fund size of USD 223 million as of July 2020. - With the recent increase in Airport Development Fee rates and the forecasted recovery in tourist arrivals, the SDF size will continue to grow in the coming years. - The government is working on drafting an act to strengthen the legal status and governance of the SDF. ### Debt sustainability analysis and stress tests (figures referenced) - Figures present indicators of Public and Publicly Guaranteed External Debt under alternative scenarios, 2021–2031, including: - Debt service-to-revenue ratio, PV of debt-to-exports ratio, PV of debt-to-GDP ratio, and debt service-to-exports ratio under most extreme shocks. - Public debt indicators under alternative scenarios, 2021–2031, and realism tools showing contributions to real GDP growth and investment rates. - Notes on stress-test methodology and assumptions: - "The most extreme stress test is the test that yields the highest ratio in or before 2031." - The one-off breach is presented when applicable but deemed away for mechanical signals in some cases. - All additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. - Default terms of marginal debt are based on baseline 10-year projections. - The public DSA allows for domestic financing to cover additional financing needs generated by the shocks under the stress tests in the public DSA. *Source: Maldives – IMF staff report content unit 14.* ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### 1mdvea2023001 - 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### Fiscal Adjustment and Possible Growth Paths - 3-year PB adjustment distribution: - 3-year PB adjustment greater than 2.5 percentage points of GDP in approx. top quartile. - Projected 3-year adjustments shown with multipliers: - Multiplier = 0.2; Multiplier = 0.4; Multiplier = 0.6; Multiplier = 0.8. - Timeline snapshots (selected years shown in figures): - Historical: 2015–2022. - Projected: 2017–2026 (Prev. DSA and Curr. DSA series indicated). ### Drivers of Debt Dynamics — Baseline Scenario (Maldives) - Debt composition and drivers (figures and charts): - Gross Nominal PPG External Debt and Gross Nominal Public Debt shown in percent of GDP across DSA vintages. - Debt-creating flows and unexpected changes in debt measured in percent of GDP (past 5 years). - Notable distributional notes: - 1/ Difference between anticipated and actual contributions on debt ratios. - 2/ Distribution across LICs for which LIC DSAs were produced. - 3/ Given relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. ### Market Financing Risk Indicators (Key points) - Benchmarks and signals: - Maximum gross financing needs (GFN) over 3-year baseline projection horizon considered. - EMBI spreads correspond to the latest available data. - Indicators and values (figures show trajectories 2021–2031): - Debt service-to-revenue ratio, PV of debt-to-exports ratio, PV of debt-to-GDP ratio, Debt service-to-exports ratio plotted 2021–2031. - Table notes: - 1/ Maximum gross financing needs (GFN) over 3-year baseline projection horizon. - 2/ EMBI spreads correspond to the latest available data. ### External Debt Sustainability Framework — Selected Table Highlights (Baseline Scenario, 2018–2041) - External debt (nominal), historical and selected projections (in percent of GDP): - 2018: 62.2 - 2019: 68.9 - 2020: 119.3 - 2021: 103.5 - 2022: 96.1 - 2023: 92.2 - 2024: 90.4 - 2025: 88.2 - 2026: 79.0 - 2031: 46.4 - 2041: 80.2 - Of which: public and publicly guaranteed (PPG) external debt (percent of GDP): - 2018: 36.0 - 2019: 40.1 - 2020: 66.5 - 2021: 59.8 - 2022: 57.2 - 2023: 57.1 - 2024: 57.4 - 2025: 57.0 - 2026: 49.5 - 2031: 36.7 - 2041: 29.5 - Change in external debt (percent of GDP): - 2018: 26.6 - 2019: 6.7 - 2020: 50.4 - 2021: -15.8 - 2022: -7.4 - 2023: -4.1 - 2024: -1.6 - 2025: -2.3 - 2026: -9.2 - 2031: -3.2 - 2041: -0.9 - Identified net debt-creating flows (percent of GDP): 13.8, 5.6, 55.5, -10.4, -5.9, -9.2, -4.2, -4.0, -3.8, -1.8, -0.6, 6.8, -5.3 (table sequence). - Non-interest current account deficit (percent of GDP): 27.6, 25.5, 27.0, 13.7, 11.9, 7.1, 7.2, 6.9, 6.6, 5.0, 5.7, 16.0, 6.8 (table sequence). - Endogenous debt dynamics contributions (percent of GDP): -2.9, -2.8, 37.8, -16.2, -9.8, -8.3, -3.4, -2.9, -2.9, -1.8, -1.3. - Residual (includes exceptional financing and valuation adjustments) examples: 12.8, 1.0, -5.1, -5.3, -1.5, 5.2, 2.6, 1.7, -5.4, -1.4, -0.3, 1.0, -0.2. - Sustainability indicators (selected): - PV of PPG external debt-to-GDP ratio examples: 61.4, 53.5, 49.4, 48.0, 47.8, 47.1, 40.0, 29.8, 22.5 (table sequence). - PV of PPG external debt-to-exports ratio examples: 128.9, 80.0, 72.2, 68.9, 66.7, 64.9, 54.7, 38.9, 29.2 (table sequence). - PPG debt service-to-exports ratio examples: 2.4, 5.1, 17.7, 10.0, 9.7, 6.7, 5.8, 5.5, 12.4, 4.6, 3.3. - PPG debt service-to-revenue ratio examples: 6.1, 13.4, 34.1, 25.9, 26.0, 18.1, 15.7, 15.0, 34.1, 13.4, 9.6. - Gross external financing need (Million of U.S. dollars) examples: 1,242.8; 904.6; 1,239.5; 848.3; 840.2; 518.8; 516.6; 504.3; 921.3; 701.4; 1,024.7. - Key macroeconomic assumptions (selected): - Real GDP growth (in percent): 8.1, 7.0, -32.0, 18.9, 13.2, 12.1, 6.1, 5.4, 5.4, 4.4, 4.7, 2.5, 7.8. - GDP deflator in US dollar terms (change in percent): 3.1, -0.5, -2.4, 2.9, 2.3, 1.9, 1.8, 2.0, 2.0, 2.0, 0.7, 2.1, 2.1. - Effective interest rate (percent): 2.4, 1.6, 2.8, 2.2, 2.3, 2.2, 2.1, 2.0, 1.8, 1.4, 1.6, 1.7, 1.8. - Growth of exports of G&S (US dollar terms, in percent): 8.0, 4.4, -52.4, 71.8, 18.6, 16.4, 10.9, 8.9, 8.3, 6.5, 6.6, 1.4, 15.9. - Growth of imports of G&S (US dollar terms, in percent): 17.1, -0.3, -40.6, 31.3, 10.0, 7.5, 11.8, 8.0, 8.1, 6.2, 8.3, 5.8, 10.5. - Memorandum items: - Nominal GDP (Million of US dollars) series includes: 5,293; 5,632; 3,738; 4,573; 5,296; 6,049; 6,533; 7,027; 7,553; 10,609; 19,865. - Nominal dollar GDP growth examples: 11.5; 6.4; -33.6; 22.4; 15.8; 14.2; 8.0; 7.6; 7.5; 6.5; 5.5; 4.8; 10.1. ### Public Sector Debt Sustainability Framework — Selected Table Highlights (Baseline Scenario, 2018–2041) - Public sector debt (percent of GDP), historical and projections: - 2018: 72.0 - 2019: 78.3 - 2020: 146.0 - 2021: 137.2 - 2022: 133.3 - 2023: 128.2 - 2024: 128.4 - 2025: 126.8 - 2026: 122.9 - 2031: 104.0 - 2041: 89.8 - Of which: external debt (percent of GDP) mirrors external DSA PPG series (see External Debt table). - Change in public sector debt (percent of GDP): - 2018: 7.5 - 2019: 6.3 - 2020: 67.7 - 2021: -8.8 - 2022: -3.9 - 2023: -5.2 - 2024: 0.2 - 2025: -1.6 - 2026: -3.8 - 2031: -2.9 - 2041: 0.0 - Identified debt-creating flows and primary deficit (selected): - Primary deficit (percent of GDP) examples: 3.5, 4.9, 20.0, 14.2, 9.0, 5.7, 3.9, 3.3, 4.0, 0.4, 0.6, 5.3, 3.8. - Revenue and grants (percent of GDP) examples: 27.2, 26.8, 27.2, 27.9, 28.4, 28.0, 27.9, 27.3, 27.2, 26.6, 26.4, 26.1, 27.4. - Automatic debt dynamics (percent of GDP) examples: -4.9, -2.7, 43.5, -20.6, -13.4, -11.8, -5.0, -4.5, -4.5, -2.9, -0.9. - Contribution from average real interest rate examples: 0.3, 1.1, 3.9, 2.6, 2.7, 2.6, 2.4, 2.1, 2.0, 1.7, 3.2. - Contribution from real GDP growth examples: -4.9, -4.7, 36.8, -23.2, -16.0, -14.3, -7.4, -6.6, -6.5, -4.5, -4.1. - Residual examples: 8.2, 3.8, 7.6, -2.4, 0.4, 0.9, 1.2, -0.4, -0.4, -0.4, 0.4, 3.2, -0.3. - Sustainability indicators (selected): - PV of public debt-to-GDP ratio examples: 140.9, 130.9, 125.5, 119.2, 118.7, 116.9, 113.4, 97.0, 84.8. - Debt service-to-revenue and grants ratio examples: 74.1, 26.4, 47.3, 157.7, 135.2, 141.0, 156.7, 167.9, 185.7, 177.3, 80.1. - Gross financing need examples: 24.4, 12.3, 29.5, 58.2, 47.5, 45.3, 47.6, 49.2, 51.6, 47.5, 21.8. - Key macro and fiscal assumptions (selected): - Real GDP growth: same series as external DSA (e.g., 8.1, 7.0, -32.0, 18.9, 13.2, 12.1, 6.1, 5.4, 5.4, 4.4, 4.7, 2.5, 7.8). - Average nominal interest rate on external debt (percent) examples: 3.5, 2.7, 4.8, 4.0, 3.9, 3.6, 3.4, 3.2, 2.8, 2.3, 2.5, 2.6, 3.0. - Primary deficit that stabilizes the debt-to-GDP ratio (percent): -4.0, -1.4, -47.8, 23.0, 12.9, 10.9, 3.8, 4.9, 7.8, 3.3, 0.5, -17.7, 7.6. ### Sensitivity Analysis — Key Indicators (Public and PPG External Debt, 2021–2031) - Baseline PV of debt-to-GDP ratio (percent) for selected years: - 2021: 53; 2022: 49; 2023: 48; 2024: 48; 2025: 47; 2026: 40; 2027: 38; 2028: 36; 2029: 33; 2030: 31; 2031: 30. - Alternative scenarios and bound tests (table panels A, B, C) show outcomes under: - A1. Key variables at their historical averages in 2021-2031. - B1–B6. Bound tests: Real GDP growth, Primary balance, Exports, Other flows, Depreciation, Combination of B1-B5. - C1–C4. Tailored tests: Combined contingent liabilities, Natural disaster, Commodity price (n.a. where not applicable), Market Financing. - Thresholds indicated in tables: - PV of debt-to-GDP threshold: 30 (table). - Debt service-to-exports and debt service-to-revenue thresholds: 10 and 140 (table context). ### Public Debt Sensitivity (2021–2031) — Selected Table Highlights - Baseline public debt (percent of GDP) examples: - 2021: 131; 2022: 126; 2023: 119; 2024: 119; 2025: 117; 2026: 113; 2027: 110; 2028: 106; 2029: 102; 2030: 100; 2031: 97. - Total public debt benchmark: 35 (benchmark row). - PV of Debt-to-Revenue Ratio and Debt Service-to-Revenue Ratio panels show baseline and scenario trajectories (values presented in tables). - Projections (numerical series) provided for alternative scenarios and bound tests with notable large increases under adverse combinations (e.g., B1 real GDP growth adverse path shows large numerical jumps in projection series). ### COVID-19 and Recent Economic Developments (Supplementary Information, Staff Report) - COVID epidemiological and vaccination status (selected datapoints): - New cases fell after peaking in May 2021. - As of last week of August 2021, new cases fell on average to about 128 per day (peak single-day 2,194 on May 20, 2021). - Positivity rate declined to about 2 percent as of August 26, 2021 (31 percent on May 20, 2021). - Vaccination: 56 percent of the population with full vaccination as of one reporting point; as of September 5, 2021, more than 70% had received the first dose and almost 56% received the second dose. - Pfizer vaccine administration to students aged 12 to 17 began since August 15. - Tourism recovery and risks: - Arrivals in July were 77 percent of pre-COVID 2019 levels. - Arrivals during August 1–25 were about 100 percent vis-à-vis same days in 2019. - Total arrivals for 2021 up to August 25: 733 thousand (66 percent of pre-COVID levels). - Staff view continuation of overperformance as an upside risk; global uncertainty remains (Delta variant, quarantine measures from some jurisdictions). - Possible revised total 2021 projected arrival figures: around 1.1 million (if recent positive developments sustained). - Fiscal and external position: - Fiscal deficit projected around 18 percent of GDP in 2021. - MMA advances to government about 3.42 MVR billion as of August 25 (3.48 MVR billion at end of July). - Gross reserves reached USD 861.2 million as of August 25, 2021 (SDR allocation contributed). - Market reactions: - Parallel market rate averaged 18.1 MVR per US Dollar during August 1–25 (18.8 in July). - Moody’s downgraded sovereign notes to Caa1 from B3 on August 17; outlook changed to stable from negative. - Maiden Eurobond yield jumped to about 9.2 percent after downgrade; Sukuk yield to about 9.8–10 percent. - Social and economic impact: - Estimated GDP contraction in 2020: 32%. - Pandemic increased estimated poverty rate by 5.1 percentage points in 2020 (World Bank). - By end of August 2021, total arrivals exceeded 750,000 with an increase of 87% compared with 2020; average duration of stay increased to 9 days in 2021. ### Fiscal Policy Response and Medium-Term Strategy - COVID-19 fiscal packages and relief: - “COVID-19 Health and Social Response” about 3.1 percent of GDP. - “Economic Relief Package” about 3.0 percent of GDP. - Combined fiscal support totaling 6.1 percent of GDP as of June 24, 2021. - Income support reached around 23 thousand individuals; recovery loans to more than 2,100 SMEs and 410 large businesses. - Fiscal measures and management: - Government reduced non-essential expenditures, implemented salary deductions, reduced operating expenditures, halted projects with insufficient progress, and delayed specific capital spending. - Liability management: any-and-all tender offer where 76.76% of the Eurobond maturing in mid-2022 was tendered and settled from a 5-year Sukuk issued under a Sukuk Issuance Program. - Participated in G20 Debt Service Suspension Initiative. - Medium-Term Fiscal Strategy 2022–2024 objectives: - Reduce primary budget deficit to GDP ratio to 5% by 2023. - Reduce Budgetary Central Government Debt to GDP ratio to 105% by 2023. - Fiscal consolidation to be resumed in a growth-friendly manner once recovery is firmly established. - Consolidation to target inefficiencies in government subsidy schemes, expenditure on SOEs, and operational expenditures. - Authorities committed to implementing New Revenue Measures proposed in 2019 and revising Public Debt Law and improving SOE oversight. - Capital spending policy: - Restricted ongoing capital spending to projects initiated in 2019 and backed by secure financing at favorable rates (examples listed in source: Velana International Airport Development project; Maldives International Port Project; Male-Villimale-Gulhifalhu-Thilafushi bridge project; projects to develop the agricultural sector). ### Key Policy Recommendations and Considerations (implicit from staff and authorities’ positions) - Resume fiscal consolidation in a growth-friendly manner once recovery is established. - Prioritize reducing primary deficit to 5% of GDP and central government debt to 105% of GDP by 2023 as per Medium-Term Fiscal Strategy 2022–2024. - Improve fiscal framework: enhance SOE oversight, advance Fiscal Responsibility Act, and revise Public Debt Law. - Rely further on foreign financed projects with secured financing at favorable rates to improve deficit financing over the medium-term. - Limit capital spending to projects with secure financing to support growth while containing fiscal risks. *MALDIVES — INTERNATIONAL MONETARY FUND (staff report supplementary information and DSA tables as provided in source content).* ### 2020. The Government has also announced a medium-term privatization program to improve the ### 1mdvea2023001 - 2020. The Government has also announced a medium-term privatization program to improve the ### Privatization, PFM, and fiscal policy focus - The Government announced a medium-term privatization program to improve the corporate governance and performance of SOEs and to reduce their reliance on government support. - Authorities will continue focusing on: - updating the PFM roadmap; - managing fiscal risks (mainly from SOEs); - updating the legal framework related to debt management. - Authorities note IMF support in: - enhancing revenue administration and collection; - providing advice on reforms in tax policy. ### Debt Sustainability Assessment - The debt-to-GDP ratio increased in 2020 due to: - the widening of the fiscal deficit; and - the sharp contraction in nominal GDP as a result of the Covid-19 pandemic. - Despite the 2020 increase in debt-to-GDP, the government remains in a position to comfortably honor all debt obligations. - Authorities' points on LICDSF applicability to the Maldives: - the sharp rise in the debt-to-GDP ratio in 2020 was mostly due to the fall in GDP rather than an increase in public spending; - overall public spending was lower than projected for the year; - most of the Maldives’ debt stock is at highly concessional rates; - authorities have been proactively managing rollover risks in their outstanding Eurobonds; - unlike most LICDSF countries, the Maldives has access to international financial markets. - Evidence of market access: - recent sukuk issuance was oversubscribed threefold, signaling healthy demand for Maldives sovereign debt. - Financing strategy and outlook: - securing concessional financing from bilateral and multilateral partners remains central to the Government’s strategy; - as the economy recovers, the debt-to-GDP will improve with fiscal consolidation measures in place and strong GDP growth expected in the medium term. - Sovereign Development Fund (SDF) role: - authorities emphasize the role of the SDF in mitigating financing risks over the medium term and intend to continue building up funds for repaying debt; - the recovery in arrivals and the increase in Airport Development Fee rates will result in higher amounts being accrued in SDF in the medium term; - Government plans to introduce a law which would improve the governance and management of the SDF. ### Monetary policy and financial stability - The Maldives Monetary Authority (MMA) actions during the pandemic included: - reduction of the minimum required reserves (RR) up to 5 percent as and when required; - making available a short-term credit facility to financial institutions as and when required; - introducing regulatory measures to enable a moratorium on loan repayments. - The MMA intervened at the beginning of the crisis, actively providing liquidity support to the banking sector to mitigate adverse economic impacts. - FX and liquidity: - with strong tourism sector recovery in recent months, the foreign exchange (FX) liquidity position of the banking sector has improved; - to ensure an adequate FX buffer, the MMA continues to maintain bilateral liquidity arrangements with other central banks. - Prudential and macroprudential framework: - MMA has a strong and effective prudential and supervisory framework supporting system financial soundness and resilience; - macroprudential tools include reserve requirements in both rufiyaa and foreign currency, foreign currency open position limits, interbank limits, and leverage capital requirements; - there are plans to review and introduce other macroprudential requirements and liquidity regulations in the future. - Planned and ongoing assessments: - authorities requested a full FSAP to be conducted in the second half of 2022; - authorities are preparing a national risk assessment for AML/FT expected to be completed by June 2022, to aid preparations for the AML/CFT assessment by the Asia/Pacific Group postponed to 2024. - Authorities will continue to monitor incoming macroeconomic and financial sector data and stand ready to adjust policy instruments and intervention strategy as needed. - Authorities take note of staff assessment of the external sector and view that the CA gap suggested by the EBA-lite CA methodology seems to be very large. ### Other reforms, SDGs, and building resilience to climate change - Strategic priorities and recovery planning: - Government’s Strategic Action Plan (2019–23) outlines economic and social priorities focusing on decentralization, economic diversification (fisheries and agricultural sectors), SMEs, labor, employment and migration, social protection, and governance; - many reforms aim to enhance the role of the private sector and boost competitiveness while supporting inclusive growth. - National Resilience and Recovery Plan 2020-2022: - authorities are reprioritizing sustainable development goals and targets, including on climate issues, to reflect urgent pandemic related developmental needs; - authorities are preparing for a results-based budgeting framework. - Poverty and livelihoods: - World Bank estimates that the poverty rate increased to 7.2 percent in 2020. - Most Maldivians depend on tourism and fisheries for their livelihoods. - Climate vulnerability and policy: - over 80 percent of the land is less than one meter above sea level and is therefore under threat from rising sea levels; - dispersed geography increases difficulties in service delivery and limits opportunities for job creation and economic diversification; - addressing exposure to natural disasters and climate change requires well-planned climate-change adaptation investments. - Climate Emergency Act and net-zero target: - authorities adopted a Climate Emergency Act on April 29, 2021, which introduces legal structure and guidelines for addressing climate change, ensuring sustainability of natural resources, and sets out plans to achieve net-zero carbon emissions by 2030. - Climate finance challenges and needs: - as a climate vulnerable nation aiming for net zero emissions by 2030, authorities emphasize the need to secure grants and concessional financing given limited fiscal resources; - currently, climate financing for the Maldives is offered at the same market rates as conventional instruments, with additional climate mitigating conditionalities, limiting its attractiveness; - authorities expressed the need for Fund assistance with accessing concessional climate finance and capacity development to facilitate access to climate change financing. - Debt issuance process change: - authorities have recently completed the centralization of domestic securities issuance to the Debt Department at the Ministry of Finance. ### Conclusion - The past eighteen months have presented unprecedented challenges for the Maldives. - Health and welfare of Maldivians remain a priority. - Authorities are committed to: - maintaining macroeconomic stability while addressing pandemic-related challenges; - their fiscal strategy and economic reforms; - redoubling efforts when the crisis subsides. *Source: 1mdvea2023001 - 2020. The Government has also announced a medium-term privatization program to improve the* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mdvea2023001.pdf_