## 1mdvea2024004 ## Source details **Canonical URL:** [1mdvea2024004](https://www.imf.org/-/media/files/publications/cr/2024/english/1mdvea2024004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1mdvea2024004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1mdvea2024004.pdf.json) --- ### Executive Board assessment and main messages - Directors welcomed the Maldives’ strong post-pandemic recovery but underlined that large fiscal and external vulnerabilities persist and risks are tilted to the downside. - Immediate policy adjustments are needed to: - Safeguard macroeconomic and financial stability. - Restore debt sustainability. - Support sustained strong and inclusive growth. - Without significant policy changes, the Maldives remains at high risk of external and overall debt distress. - Risks highlighted: delayed fiscal consolidation, weaker growth in key source markets for tourism, and high vulnerability to climate change (floods and sea level rise). ### Outlook and growth drivers - Real GDP growth (annual percentage change): - 2021: 37.3 - 2022: 13.9 - 2023 (Est.): 4.4 - 2024 (Projections): 5.2 - 2025: 6.5 - 2026: 5.0 - 2027: 4.8 - 2028: 4.5 - 2029: 4.5 - Growth drivers and tourism projections: - Velana International Airport (VIA) terminal expansion and associated increase in hotel accommodation capacities projected to boost growth potential; authorities forecast VIA terminal completion in 2025, with possible partial operation in late 2024. - Tourism bednights (000’): 2023: 13,103; 2024: 14,123; 2025: 15,689; 2026: 16,693; 2027: 17,650; 2028: 18,482; 2029: 19,392 - Tourist arrivals (000’): 2021: 1,322; 2022: 1,675; 2023: 1,879; 2024: 2,018; 2025: 2,210; 2026: 2,385; 2027: 2,521; 2028: 2,640; 2029: 2,770 - Tourism bednights (% change): 2021: 152.8; 2022: 21.7; 2023: 6.9; 2024: 7.8; 2025: 11.1; 2026: 6.4; 2027: 5.7; 2028: 4.7; 2029: 4.9 - Tourist arrivals (% change): 2021: 137.8; 2022: 26.7; 2023: 12.1; 2024: 7.4; 2025: 9.5; 2026: 7.9; 2027: 5.7; 2028: 4.7; 2029: 4.9 - The tourism sector contributed to about one third of real GDP growth in 2022. Tourist arrivals in 2023 reached 1.88 million (historic high). ### External sector and reserves - Current account (in percent of GDP): - 2021: -8.4 - 2022: -16.1 - 2023: -22.8 - 2024 (projection): -19.4 - 2025: -13.9 - 2026: -12.9 - 2027: -10.0 - 2028: -9.7 - 2029: -9.9 - Components (percent of GDP) and memorandum: - Exports: 2024: 6.1; 2025: 5.8; 2026: 5.6; 2027: 5.4; 2028: 5.2; 2029: 5.1 - Imports: 2024: -48.2; 2025: -46.4; 2026: -44.9; 2027: -44.2; 2028: -44.0; 2029: -43.9 - Tourism receipts (in nonfactor services, net): 2024–2029: 60.8 (each year) - Income (net): 2024: -10.3; 2025: -10.1; 2026: -9.7; 2027: -9.7; 2028: -9.6; 2029: -9.6 - Current transfers: 2024: -7.8; 2025: -8.3; 2026: -8.5; 2027: -6.4; 2028: -5.7; 2029: -6.0 - Gross official reserves (in millions of U.S. dollars, e.o.p.): - 2021: 806 - 2022: 832 - 2023: 589 - 2024 (proj.): 512 - 2025: 565 - 2026: 539 - 2027: 824 - 2028: 1,051 - 2029: 1,161 - Reserves in months of GNFS imports: - 2021: 2.0 - 2022: 2.1 - 2023: 1.4 - 2024: 1.1 - 2025: 1.2 - 2026: 1.1 - 2027: 1.6 - 2028: 1.9 - 2029: 2.0 - Exchange rate (rufiyaa/U.S. dollars, e.o.p.): 15.4 for 2021–2029 (each year listed as 15.4). - FX pressures and market functioning: - Persistent FX shortages with a significant spread of around 10-15 percent between official and parallel market rates. - Gross international reserves declined to US$589 million at end-December 2023, covering about 1.4 months of prospective imports. - The overall external position in 2023 is assessed to be substantially weaker than the level implied by fundamentals and desirable policies. ### Fiscal outlook, public debt, and vulnerabilities - Central government finances (in percent of GDP): - Revenue and grants: 2021: 25.7; 2022: 30.5; 2023: 32.3; 2024: 30.0; 2025: 29.3; 2026: 29.2; 2027: 29.2; 2028: 29.1; 2029: 29.1 - Expenditure and net lending: 2021: 39.5; 2022: 41.5; 2023: 45.7; 2024: 42.2; 2025: 38.6; 2026: 36.1; 2027: 34.6; 2028: 33.9; 2029: 33.3 - Overall balance: 2021: -13.8; 2022: -11.0; 2023: -13.4; 2024: -12.2; 2025: -9.4; 2026: -6.9; 2027: -5.4; 2028: -4.8; 2029: -4.2 - Overall balance excl. grants: 2021: -15.0; 2022: -12.1; 2023: -14.1; 2024: -13.3; 2025: -10.1; 2026: -7.6; 2027: -6.1; 2028: -5.4; 2029: -4.8 - Primary balance: 2021: -11.2; 2022: -7.4; 2023: -9.6; 2024: -7.6; 2025: -4.9; 2026: -2.9; 2027: -1.5; 2028: -1.0; 2029: -0.5 - Public and publicly guaranteed debt (selected): - 2022: 119.9; 2023: 110.4; 2024: 118.7; 2025: 121.1; 2026: 118.8; 2027: 117.0; 2028: 114.3; 2029: 111.6; 2030: 108.5 (table lists through 2029 with 108.5) - Fiscal drivers in 2023: - Overall fiscal deficit estimated at 13.4 percent of GDP in 2023, up from 7.8 percent envisaged in the initial budget. - Widened deficit due to significant increases in capital spending, rising interest costs, increased subsidies related to medical services, fuel and electricity, and election-related expenditure. - GST rate hikes estimated to yield tax revenue gains of about 3.2 percent of GDP in 2023; GST revenue collections expected to be 12.9 percent of GDP in 2023 (counterfactual without GST reforms: 9.7 percent of GDP). - Public debt developments: - Total PPG debt estimated at MVR 122 billion (about 118.7 percent of GDP) in 2023. - Gross financing needs are substantial; limited access to external financing led to domestic debt issuance and monetary financing; MMA advances securitized into long-term government bonds (face values of MVR 2.5 billion, 4.4 billion, and 1.9 billion). - Domestic PPG debt (2022): US$3,813 million (or around 61 percent of GDP); external PPG debt (2022): US$3,072 million (or around 49 percent of GDP). - Composition highlights: China is the largest creditor with about 19 (42) percent of total (external) PPG debt (composition table excerpts preserved). - DSA assessment: - Joint IMF-World Bank DSA: Maldives remains at high risk of external and overall debt distress without significant policy changes. - Public debt projected to stay above 110 percent of GDP over the medium term under current policies. - Gross external financing needs expected to rise and external refinancing pressures expected to peak in 2026. ### Monetary policy, financial sector, and liquidity - Monetary accounts (annual percentage change): - Broad money: 2021: 26.2; 2022: 6.0; 2023: 7.9; 2024: 7.7; 2025: 9.7; 2026: 7.1; 2027: 6.9; 2028: 6.6; 2029: 6.6 - Domestic credit: 2021: 8.8; 2022: 12.4; 2023: 13.1; 2024: 12.4; 2025: 12.6; 2026: 10.9; 2027: 10.5; 2028: 9.9; 2029: 9.6 - Key monetary and liquidity notes: - Directors welcomed discontinuation of exceptional use of MMA advances; recommended this be complemented by more active liquidity management. - Excess structural liquidity amounted to about 7 percent of GDP or 8.1 percent of banking system’s assets (source text). - Recommendation to raise Minimum Reserve Requirements (MRR) on Rufiyaa deposits to absorb up to MVR 1.5 billion of excess liquidity and to resume/scale OMOs with an initial liquidity-absorbing operation maturity of one-year. - Cash FX allocation limit: a maximum of US$500 per person/trip for Maldivians traveling abroad. - Directors encouraged acceleration of foreign exchange market reforms to enhance credibility of the peg; MMA developed a draft FX reform package. - Financial sector recommendations: - Adopt macroprudential policies to mitigate systemic risks from the sovereign-bank nexus. - Swiftly introduce a macroprudential institutional framework and instruments and develop systemic risk monitoring capacity. - Strengthen the financial safety net, oversight, and crisis management; address AML/CFT framework gaps. ### Banking sector stress tests and vulnerabilities - Stress test high-level findings: - Financial system vulnerable to severe shocks: sovereign, liquidity, market, and climate risks. - Non-performing loans ratio declined to a historic low of 5.2 percent of gross loans in September 2023. - Banking sector exposure to sovereign debt above 30 percent of total assets; sovereign exposure as share of total bank capital breaches 400 percent in some banks. - Selected stress-test statistics (preserved exactly as reported): - NPL projection foreign currency model — NPL ratio stress baseline scenario: 10.5 11.8 12 - Highest NPL ratio of any bank (foreign currency model, baseline): 34.4 41.6 46.1 46.8 - NPL ratio stress severe scenario (local currency): 3.4 5.4 6.3 6.2 - CAR baseline scenario (in percent of risk-weighted assets): 50.9 52.3 53.9 55 - CAR baseline scenario adjusted for 100 percent RW on domestic securities in foreign currency: 41.1 - Drop in CAR due to impact of domestic debt exchange (sovereign risk): 14.8 - Number of banks failing (credit concentration scenario): 5 - Percent of banking system <12 percent CAR (credit concentration): 27.1 - Capital shortfall in percent of GDP (credit concentration): 0.7 - Interest rate repricing risk — increase of interest rates by 2.0 percent: 51.1 - Liquidity risk — number of banks failing cashflow-based test in either currency: 2 - Banks failing the cashflow test in either currency in percent of system assets: 25.3 - Basel III Liquidity Coverage Ratio, MVR: 253.8 - Basel III Liquidity Coverage Ratio, USD: 235.1 - Deposit concentration risk — number of banks failing test in either currency: 7 - Assets of banks failing the test in percent of banking system assets: 49.9 - Foreign currency risk — number of banks breaching NOP limits after 20 percent devaluation 1/: 2 - Assets of banks failing the test in percent of banking system assets (FX risk): 23.3 - Recommended regulatory actions: - Gradually phase in a 100 percent risk weight on bank holdings of Maldives government securities in foreign currency and introduce liquidity requirements. - Strengthen MMA independence, off-site monitoring, loan loss provisioning framework (transition to IFRS9), early intervention and resolution triggers, recovery and resolution planning, and deposit insurance enhancements. - Establish an emergency liquidity assistance framework and strengthen interagency crisis preparedness. ### Public financial management, SOEs, and debt management - SOE fiscal risks and governance weaknesses: - Causes: lack of clear commercial objectives, absence of framework for non-commercial services, poor risk management, delayed and incomplete reporting, fragmented oversight between PCB and SSMD. - SOE liabilities and contingent risks: stock of externally guaranteed SOE debt ~ US$789 million (around 13 percent of GDP); large exposures to HDC and mainly from Chinese creditors. - Reform priorities for SOEs: - Adopt clear definition and ownership rationale for SOEs; triage portfolio (dissolve, reclassify, sell small/unprofitable SOEs). - Harmonize oversight (new SOE Law), set ownership policy, clarify roles and responsibilities, consider SOE holding company after portfolio rationalization. - Establish structured performance management with tailored financial and non-financial targets, budgets, and capital expenditure programs. - Debt management and financing assumptions: - Key medium-term financing assumptions include a bond issuance of around US$250 million in 2026 (maturing in 2031, interest ~10 percent) and use of around US$220 million from the Sovereign Development Fund (SDF) for debt repayments in 2026. - Domestic financing projected ~ ¾ of total financing in 2026; around 60 percent of domestic financing short term, interest rate of 4 percent. - Market access: US$500 million Sukuk issued in 2021 maturing in 2026 and US$100 million Eurobond rolled over in 2021 (maturing 2026). - Public financial management reforms underway: - Draft Debt Management Law reviewed; Fiscal Responsibility Act prepared for submission to Parliament. - SDF governance reforms and FX accumulation; SDF had accumulated around US$500 million at end-2023 (US$115 million in foreign currencies). - New State Shareholder Management Department created to monitor SOE fiscal risks and rationalize SOE capital spending. - IMF TA planned/on-going: Climate-PIMA and Green-PFM, debt management, SDF law, and PFM improvements. ### Climate change, adaptation costs, and structural reforms - Vulnerability and estimated costs: - Maldives highly vulnerable to climate change; estimated climate adaptation cost: US$8.8 billion (159 percent of 2022 GDP); climate mitigation cost: US$1 billion (18 percent of 2022 GDP). - Climate finance and project pipeline: - Maldives developed a pipeline of projects totaling US$500 million for the Green Climate Fund (GCF), part of PSIP. - Policy priorities: - Integrate climate sensitivity into public financial management and public investment management processes. - Introduce climate budget tagging and a Climate Budget Statement, and conduct periodic assessment of fiscal costs and risks of climate change. - Add climate dimensions to project appraisal, asset management, and selection processes to scale up climate adaptation and concessional climate finance. - Broader structural reforms: - Improve business climate, strengthen governance, tackle corruption, enhance skills development, protect property rights, support FDI facilitation, and align procurement processes for SOEs. - Authorities committed to renewable expansion: COP28 commitment to expand renewables to reach 33 percent of electrical supply within five years (current share: 4 percent). ### Prioritized policy recommendations (summarized) - Fiscal policy: - Swift, front-loaded fiscal consolidation combining expenditure rationalization and domestic revenue mobilization. - Phase out fuel, electricity, and other subsidies and replace with targeted cash transfers starting second half of 2024. - Rationalize capital spending; reprioritize PSIP; safeguard growth-enhancing capital expenditure. - Strengthen public financial, investment, and debt management; finalize Public Debt Management Law and Fiscal Responsibility Act reforms. - Consider Medium-term Revenue Strategy measures: lower PIT thresholds and personal allowance, raise top marginal PIT rate, increase statutory corporate income tax rate, rationalize import duty exemptions, introduce excises and carbon levy, and strengthen customs and tax administration. - Monetary and exchange rate: - Tighten monetary policy to ensure compatibility with the exchange rate peg; resume active liquidity management (OMOs) and increase MRR where appropriate. - Accelerate FX market reforms to enhance peg credibility and reduce parallel market spread. - Financial sector and macroprudential: - Adopt macroprudential policies to mitigate sovereign-bank nexus; gradually phase in non-zero risk weight on FX-denominated sovereign securities; introduce liquidity requirements; strengthen resolution frameworks and deposit insurance. - Debt and financing: - Develop a realistic multi-year debt management strategy, avoid non-concessional financing for non-priority spending, deepen domestic debt markets, and improve SDF governance and FX asset management. - Seek additional concessional financing and explore innovative instruments (e.g., debt-for-nature swaps). - Structural and climate-sensitive reforms: - Integrate climate considerations into budgeting and PIM; mobilize concessional climate finance; improve business climate, governance, and skills. ### Key contextual indicators and memorandum items - Population (2022): 523,787 - GDP per capita (in U.S. dollars, 2022): 11,818 - Poverty rate (in percent, $6.85 per day per person, 2019): 3.9 - Quota (in million SDRs, as of December 2023): 21.2 - GDP (in millions of rufiyaa): - 2021: 83,098 - 2022: 96,132 - 2023: 103,011 - 2024: 110,937 - 2025: 121,696 - 2026: 130,384 - 2027: 139,375 - 2028: 148,558 - 2029: 158,346 - GDP (in millions of U.S. dollars): - 2021: 5,392 - 2022: 6,238 - 2023: 6,685 - 2024: 7,199 - 2025: 7,897 - 2026: 8,461 - 2027: 9,044 - 2028: 9,640 - 2029: 10,276 *Source: MALDIVES STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION (IMF staff report, discussions took place in Malé during January 23 – February 6, 2024).* ### 5.2 percent in 2024. Looking ahead, the Velana international airport terminal expansion and ### 1mdvea2024004 - 5.2 percent in 2024. Looking ahead, the Velana international airport terminal expansion and ### Executive Board assessment and main messages - Directors welcomed the Maldives’ strong post-pandemic recovery but underlined that large fiscal and external vulnerabilities persist and risks are tilted to the downside. - Immediate policy adjustments are needed to: - Safeguard macroeconomic and financial stability. - Restore debt sustainability. - Support sustained strong and inclusive growth. - Without significant policy changes, the Maldives remains at high risk of external and overall debt distress. - Uncertainty surrounding the outlook is high; risks are tilted to the downside, including from delayed fiscal consolidation and weaker growth in key source markets for tourism. - The Maldives is highly vulnerable to climate change risks, with potentially severe economic costs due to floods and rising sea level. ### Outlook and growth drivers - Real GDP growth (annual percentage change): - 2021: 37.3 - 2022: 13.9 - 2023 (Est.): 4.4 - 2024 (Projections): 5.2 - 2025: 6.5 - 2026: 5.0 - 2027: 4.8 - 2028: 4.5 - 2029: 4.5 - Looking ahead, the Velana International Airport (VIA) terminal expansion and associated increase in hotel accommodation capacities is projected to further boost growth potential. - Tourism indicators (memorandum items): - Tourism bednights (000’): 2023: 13,103; 2024: 14,123; 2025: 15,689; 2026: 16,693; 2027: 17,650; 2028: 18,482; 2029: 19,392 - Tourist arrivals (000’): 2021: 1,322; 2022: 1,675; 2023: 1,879; 2024: 2,018; 2025: 2,210; 2026: 2,385; 2027: 2,521; 2028: 2,640; 2029: 2,770 - Tourism bednights (% change): 2021: 152.8; 2022: 21.7; 2023: 6.9; 2024: 7.8; 2025: 11.1; 2026: 6.4; 2027: 5.7; 2028: 4.7; 2029: 4.9 - Tourist arrivals (% change): 2021: 137.8; 2022: 26.7; 2023: 12.1; 2024: 7.4; 2025: 9.5; 2026: 7.9; 2027: 5.7; 2028: 4.7; 2029: 4.9 - The tourism sector contributed to about one third of real GDP growth in 2022. Tourist arrivals in 2023 reached 1.88 million (historic high). ### External sector and reserves - Current account (in percent of GDP): - 2021: -8.4 - 2022: -16.1 - 2023: -22.8 - 2024 (projection): -19.4 - 2025: -13.9 - 2026: -12.9 - 2027: -10.0 - 2028: -9.7 - 2029: -9.9 - Components (percent of GDP): - Exports: 2024: 6.1; 2025: 5.8; 2026: 5.6; 2027: 5.4; 2028: 5.2; 2029: 5.1 - Imports: 2024: -48.2; 2025: -46.4; 2026: -44.9; 2027: -44.2; 2028: -44.0; 2029: -43.9 - Tourism receipts (in nonfactor services, net): 2024–2029: 60.8 (each year) - Income (net): 2024: -10.3; 2025: -10.1; 2026: -9.7; 2027: -9.7; 2028: -9.6; 2029: -9.6 - Current transfers: 2024: -7.8; 2025: -8.3; 2026: -8.5; 2027: -6.4; 2028: -5.7; 2029: -6.0 - Gross official reserves (in millions of U.S. dollars, e.o.p.): - 2021: 806 - 2022: 832 - 2023: 589 - 2024 (proj.): 512 - 2025: 565 - 2026: 539 - 2027: 824 - 2028: 1,051 - 2029: 1,161 - Reserves in months of GNFS imports: - 2021: 2.0 - 2022: 2.1 - 2023: 1.4 - 2024: 1.1 - 2025: 1.2 - 2026: 1.1 - 2027: 1.6 - 2028: 1.9 - 2029: 2.0 - Exchange rate (rufiyaa/U.S. dollars, e.o.p.): 15.4 for 2021–2029 (each year listed as 15.4). ### Fiscal outlook and vulnerabilities - Central government finances (in percent of GDP): - Revenue and grants: 2021: 25.7; 2022: 30.5; 2023: 32.3; 2024: 30.0; 2025: 29.3; 2026: 29.2; 2027: 29.2; 2028: 29.1; 2029: 29.1 - Expenditure and net lending: 2021: 39.5; 2022: 41.5; 2023: 45.7; 2024: 42.2; 2025: 38.6; 2026: 36.1; 2027: 34.6; 2028: 33.9; 2029: 33.3 - Overall balance: 2021: -13.8; 2022: -11.0; 2023: -13.4; 2024: -12.2; 2025: -9.4; 2026: -6.9; 2027: -5.4; 2028: -4.8; 2029: -4.2 - Overall balance excl. grants: 2021: -15.0; 2022: -12.1; 2023: -14.1; 2024: -13.3; 2025: -10.1; 2026: -7.6; 2027: -6.1; 2028: -5.4; 2029: -4.8 - Primary balance: 2021: -11.2; 2022: -7.4; 2023: -9.6; 2024: -7.6; 2025: -4.9; 2026: -2.9; 2027: -1.5; 2028: -1.0; 2029: -0.5 - Public and publicly guaranteed debt: 2022: 119.9; 2023: 110.4; 2024: 118.7; 2025: 121.1; 2026: 118.8; 2027: 117.0; 2028: 114.3; 2029: 111.6; 2030: 108.5 (table lists through 2029 with 108.5) - Fiscal developments and drivers: - The overall fiscal deficit is estimated to reach 13.4 percent of GDP in 2023, up from 7.8 percent of GDP envisaged in the initial budget. - The widened fiscal deficit was due to significant increases in capital spending, rising interest costs amid increased debt stock and tight global financial conditions, increased subsidies related to medical services, fuel and electricity, and election-related expenditure. - Support to state-owned enterprises (SOEs) are added risks to fiscal sustainability, as they often require large and ad-hoc budget support to address solvency and liquidity issues. - GST and revenue: - GST rate hikes are estimated to yield tax revenue gains of about 3.2 percent of GDP in 2023. - GST revenue collections are expected to be 12.9 percent of GDP in 2023, compared with a counterfactual without GST reforms of 9.7 percent of GDP. ### Monetary, financial sector, and liquidity - Monetary accounts (annual percentage change): - Broad money: 2021: 26.2; 2022: 6.0; 2023: 7.9; 2024: 7.7; 2025: 9.7; 2026: 7.1; 2027: 6.9; 2028: 6.6; 2029: 6.6 - Domestic credit: 2021: 8.8; 2022: 12.4; 2023: 13.1; 2024: 12.4; 2025: 12.6; 2026: 10.9; 2027: 10.5; 2028: 9.9; 2029: 9.6 - Directors welcomed authorities’ decision to discontinue the exceptional use of the Maldives Monetary Authority advances and underscored that this should be complemented by more active liquidity management over time. - Directors encouraged an acceleration of foreign exchange market reforms to enhance the credibility of the peg. - Financial sector recommendations: - Adopt macroprudential policies to mitigate systemic risks stemming from the sovereign-bank nexus. - Swiftly introduce macroprudential institutional framework and instruments and further develop systemic risk monitoring capacity. - Strengthen the financial safety net, financial sector oversight, and crisis management. - Address gaps in the legal framework and implement the AML/CFT framework. ### Policy recommendations (prioritized) - Fiscal policy: - Swift implementation of a strong and credible form of fiscal consolidation comprising expenditure rationalization and domestic revenue mobilization. - Strengthen public financial, investment, and debt management to enhance credibility and effectiveness of fiscal policy. - Monetary and exchange rate policies: - Tighten monetary policy to ensure compatibility with the exchange rate peg. - Accelerate foreign exchange market reforms to enhance credibility of the peg. - Financial sector policy: - Adopt macroprudential policies and enhance financial sector oversight and crisis management. - Macro-structural policy: - Strengthen institutions to support climate adaptation and mitigation efforts and mobilize climate finance. - Improve the business climate, address governance and corruption vulnerabilities, and enhance skills development to support strong and inclusive growth. ### Key contextual indicators and memorandum items - Population (2022): 523,787 - GDP per capita (in U.S. dollars, 2022): 11,818 - Poverty rate (in percent, $6.85 per day per person, 2019): 3.9 - Quota (in million SDRs, as of December 2023): 21.2 - GDP (in millions of rufiyaa): - 2021: 83,098 - 2022: 96,132 - 2023: 103,011 - 2024: 110,937 - 2025: 121,696 - 2026: 130,384 - 2027: 139,375 - 2028: 148,558 - 2029: 158,346 - GDP (in millions of U.S. dollars): - 2021: 5,392 - 2022: 6,238 - 2023: 6,685 - 2024: 7,199 - 2025: 7,897 - 2026: 8,461 - 2027: 9,044 - 2028: 9,640 - 2029: 10,276 *Source: MALDIVES STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION (IMF staff report, discussions took place in Malé during January 23 – February 6, 2024).* ### 7. Public debt rose further. Total public and publicly guaranteed (PPG) debt is estimated to ### 1mdvea2024004 - 7. Public debt rose further. Total public and publicly guaranteed (PPG) debt is estimated to ### Public debt and fiscal financing - Total public and publicly guaranteed (PPG) debt is estimated to increase to MVR 122 billion, about 118.7 percent of GDP in 2023. - Gross financing needs are substantial due to large fiscal deficits and increased debt service repayments. - With limited access to external financing, rising fiscal financing needs are being met by: - Domestic debt issuance and monetary financing. - Bank financing through purchases of government securities continued to underpin most of domestic financing in 2023. - The authorities discontinued monetary financing at the end of 2023 and securitized outstanding Maldives Monetary Authority (MMA) advances into 30-to-40-year government bonds in early 2022, then February and December 2023, with face values of MVR 2.5 billion, 4.4 billion, and 1.9 billion, respectively. ### External position, reserves, and exchange rate pressures - The current account deficit is estimated to have deteriorated to 22.8 percent of GDP in 2023, driven by surging capital goods imports, high import costs of food and fuel, and strong import demands associated with tourism activity. - Persistent foreign exchange (FX) shortages with a significant spread of around 10-15 percent between the official and parallel market rates. - Real effective exchange rate marginally appreciated in the first eight months of 2023 and stayed well above its long-term historical average. - Gross international reserves declined to US$589 million at end-December 2023, covering about 1.4 months of prospective imports. - The overall external position in 2023 is assessed to be substantially weaker than the level implied by fundamentals and desirable policies, urgently requiring upfront fiscal consolidation to contain external financing needs and rebuild FX reserve buffers. ### Outlook and key macro projections - Growth: - Growth is projected at 5.2 percent in 2024. - Tourist arrivals are expected to rise further; authorities forecast 2 million tourist arrivals for 2024. - VIA terminal expansion completion is projected to boost growth potential, with expected completion in 2025 (authorities expediting completion in the last quarter of 2024 noted as a possible upside). - Inflation: - Inflation projected to rise to 3.8 percent in 2024 then gradually decline to 3 percent in 2025. - Planned phasing out of subsidies expected to add inflationary pressures. - Fiscal outcomes and debt: - Complete enactment of expected subsidy and medical expenditure reforms will help reduce total fiscal expenditure by 1.9 percent of GDP in 2024. - Overall fiscal deficit projected to narrow marginally to 12.2 percent of GDP in 2024. - Public debt would stay above 110 percent of GDP over the medium term under current policies. - External outlook: - Current account deficit projected at 19.4 percent of GDP in 2024. - Expected to remain around 10 percent of GDP over the medium term due to rising external debt service payments and profit remittance associated with FDI. - In absence of corrective policies, FX reserves projected to remain suppressed near-term, covering about 1 month of prospective imports before gradually rising over the medium term. ### Debt vulnerabilities and risks - The joint IMF-World Bank Debt Sustainability Analysis (DSA) assesses Maldives remains at high risk of external and overall debt distress without significant policy changes. - Protracted breaches in several debt indicators over the medium term make the assessment of debt unsustainable under current policies. - Gross external financing needs expected to rise in coming years, reflecting persistently large fiscal deficits and repayments and rollovers of non-concessional debt, mainly global sukuk. - External refinancing pressures expected to peak in 2026. - Debt dynamics remain vulnerable to adverse shocks in growth, interest rates, and fiscal position in the near term. - Downside risks highlighted include delayed fiscal consolidation, weaker growth in key tourist source markets (notably China), renewed uptick in global energy and food prices, tighter global financial conditions, and climate change vulnerabilities. ### Authorities’ views - Authorities broadly agreed with staff’s assessment on the outlook and risks and highlighted several upside risks linked to tourism: - Faster-than-expected return to normal growth supported by expanded source markets and connectivity. - Guesthouse sector segmentation could help diversify tourism products. - VIA terminal could be operational sooner-than-expected, augmenting airport capacity and tourism revenue. - Upside risks in key source markets (e.g., China) could boost tourism revenue. ### Key policy recommendations - Overall policy mix: - Swiftly implement front-loaded fiscal adjustments, accompanied by tighter monetary and macroprudential policies to reduce vulnerabilities, restore public finance sustainability, and lessen FX pressures. - Under staff’s baseline scenario, elevated near-term fiscal spending will continue to pressure the domestic economy and current account; declining official financing and FX reserves would weigh on stability and crowd out private investment. - Under staff’s proposed policy adjustment scenario, scaling back public spending, progressing domestic revenue mobilization, and tightening monetary policy would limit public debt creation, contain the current account deficit, rebuild FX reserves, and reduce macro-financial risks; macroprudential policies should rein in sovereign-bank nexus. - Fiscal policy and revenue: - Successful implementation of GST rate increases delivered sizable revenue windfalls in 2023, but additional strong and credible fiscal consolidation is required. - Authorities’ MTFS for 2024-2026 anchors include targets: (i) reducing public debt to less than 95 percent of GDP by 2026, (ii) reducing primary budget deficit to less than 5 percent of GDP by 2024, (iii) maintaining PPG debt-to-GDP ratio on a downward trend, and (iv) reducing recurrent expenditure to levels that do not exceed government revenue by 2024. Staff view: current policies unlikely to be sufficient to meet these targets. - Medium-term revenue strategy (MTRS) options include: lowering PIT thresholds and personal allowance, raising top marginal PIT rate, increasing statutory corporate income tax rate, rationalizing import duty exemptions, applying excises on tobacco, fuels, alcoholic products, and motor vehicles, and imposing carbon levy on fuels; strengthening customs and tax administration is recommended. - Expenditure rationalization priorities: - Implement subsidy reforms without delay; phase out fuel, electricity, and other subsidies and replace with targeted cash transfers starting second half of 2024; authorities developing a direct cash transfer mechanism with World Bank support. - Rationalize capital spending: heavily reprioritize, rationalize, and scale back capital spending (including through SOEs); ensure projects are realistically costed, appraised, and subject to transparent and rigorous selection; safeguard growth-enhancing capital expenditure while cutting less-essential costly projects. - Public wage and pension reforms: pay harmonization measures could add MVR 3 billion (2 percent of GDP) to government expenditure by 2026; comprehensively review public wage bill and pay harmonization targets; streamline and phase out overly generous, tax-financed pension benefits. - SOE reforms: triage SOE portfolio, restructure weak SOEs, reduce number of SOEs (especially non-commercial ones), develop new SOE legislation, strengthen fiscal risk and oversight framework, and improve performance management of SOEs. - Fiscal institutions and public financial management: - Strengthen fiscal institutions and public financial framework; expedite development of a strategic and focused Public Sector Investment Program (PSIP) and a costed medium-term national development strategy; enforce budget credibility, realistic project costings, and a binding PSIP budget ceiling. - Debt management: - Urgently develop a realistic and credible multi-year debt management strategy to reduce rollover and solvency risks. - Finalize the Public Debt Management Law and complete reform of the Fiscal Responsibility Act (FRA); set and disclose realistic numerical targets for fiscal deficit and public debt in a subsequent Charter of Fiscal Responsibility. - Avoid non-concessional financing of non-priority spending; deepen domestic debt markets to broaden investor base and reduce foreign currency risks. - Develop law for sovereign development fund (SDF) to earmark airport development fee and one-off windfall revenues; invest SDF in FX instruments that match loan portfolio; explore innovative financing such as debt-for-nature swaps given climate vulnerability. *Source: IMF staff report excerpt (Maldives) as provided in the content unit.* ### 21. The authorities emphasized their readiness to undertake the necessary fiscal ### 21. The authorities emphasized their readiness to undertake the necessary fiscal ### Fiscal policy, subsidy reform, and SOE reforms - Findings and actions: - Subsidy reforms will be executed from July 2024; preparatory work is underway with various stakeholders. - Line ministries were instructed to reprioritize investment projects under PSIP by appraising benefits over costs and ensuring future revenue generation. - Cabinet has endorsed an SOE reform plan; authorities are developing reform plans for individual SOEs to ensure operational efficiency and financial viability. - Recent resumption of the accumulation of inflows to the SDF in foreign currency would increase the debt servicing capacity in the future. - Risks and cautions: - Miscalibration of subsidy reforms and capital expenditure rationalization could induce unintended growth and welfare impacts. - Trade-offs of impending fiscal consolidation measures need careful management. - Policy recommendations (implicit in authorities’ actions): - Strengthen coordination with domestic stakeholders and multilateral donors to support implementation of fiscal policy adjustments. - Reprioritize public investment by focusing on projects with positive benefit–cost and revenue-generating potential. ### Monetary and exchange rate policies - Key findings: - Excess structural liquidity remains a risk to economic stability. - The peg to U.S. dollar continues to serve as a transparent nominal anchor. - Current stance of monetary policy is described as too accommodative, with increased MMA advances and subsequent securitization of monetary financing translating into central bank liquidity injection and large excess structural liquidity in the system (about 7 percent of GDP or 8.1 percent of banking system’s assets). - Securitization of MMA advances has compromised the MMA balance sheet and limited MMA’s ability to conduct independent and active liquidity management. - Measures taken and under consideration: - Discontinuing exceptional use of MMA advances based on a temporary suspension of limits on MMA advances under the FRA is a welcome first step. - Raising minimum reserve requirements (MRR) rate on Rufiyaa, while ensuring policy coordination between monetary and fiscal policies, would help absorb some excess liquidity and signal monetary tightening. - MMA should undertake more active liquidity management in domestic currency, relying on periodic open market operations (OMOs) to steer interest rates toward appropriate levels within the interest rate corridor. - IMF TA recommended: MMA gradually undertakes liquidity-absorbing operations to address excess structural liquidity resulted from the securitized monetary financing, initially with a maturity of one-year. - FX market reform and rationing: - Under the 2017 MMA’s FX-Intervention Policy, MMA provides weekly FX allocations to commercial banks based on foreign currency asset positions and net open positions; allocations include priority FX for imports, medical/education travel, and SOE obligations. - FX rationing and prioritized allocation give rise to an exchange restriction. - Proposed reforms: enhance use of Rufiyaa (e.g., for payrolls and transactions), promote Rufiyaa-denominated financial instruments for large investors (e.g., SOEs), streamline licensing regulation on money changing businesses, apply regulations on the use of the MVR widely (including for all salaries and taxes), and overhaul money changer licensing to channel FX supply through the domestic banking system. - Authorities’ views and implementation details: - Temporary suspension of clauses 32 a), d) and e) of the Fiscal Responsibility Act (FRA) 2013 expired at end-December 2023, effectively ending use of MMA advances to finance government deficits. - As a first step to address excess liquidity, MMA considered gradually increasing MRR rate on Rufiyaa deposits to absorb up to MVR 1.5 billion of excess liquidity. - MMA noted OMOs could complicate domestic financing through government securities in the near term; over time, MMA plans structural/long-term OMOs and more regular OMOs thereafter. - MMA is seeking IMF TA on liquidity forecasting and conducting OMOs. - MMA continues to view the peg as an appropriate policy anchor while recognizing challenges under limited foreign exchange reserves and has developed a draft package of FX market reforms shared with the government for technical consultation. - Specific numeric and procedural details: - Under existing FRA rules, MMA may provide advances for liquidity management only which shall not exceed 1 percent of average of the government revenues in the last three years. - Recommendation for initial liquidity-absorbing operation maturity: one-year. - Cash FX allocation limit: a maximum of US$500 per person/trip for Maldivians traveling abroad. ### Financial sector policies and macroprudential measures - Systemic vulnerabilities: - Increased systemic risks largely from a growing sovereign–bank nexus, high dollarization, and shortage of foreign exchange. - Banking sector remains sound with high capital and liquidity buffers and strong profitability. - Non-performing loans ratio declined to a historic low of 5.2 percent of gross loans in September 2023. - Banking sector exposure to sovereign debt continues to rise above 30 percent of total assets; sovereign exposure as share of total bank capital breaches 400 percent in some banks. - Application of a zero risk-weight on domestic sovereign exposures has contributed to sizable sovereign exposures. - Significant maturity mismatch and liquidity risk, including runs on callable foreign currency deposits. - Policy recommendations: - Gradually phase in a 100 percent risk weight on bank holdings of Maldives government securities in foreign currency and introduce liquidity requirements. - Swiftly introduce a macroprudential institutional framework and instruments; strengthen systemic risk monitoring capacity. - Strengthen financial sector oversight and crisis management by: - Strengthening MMA independence, redefining off-site monitoring, and enhancing enforcement. - Comprehensive review of regulations and supervisory processes for loan loss provisioning, focusing on loan classifications and the transition to IFRS9 (with IMF TA). - Making early intervention and resolution triggers forward-looking. - Introducing recovery and resolution planning. - Overhauling the use of public funds in resolution. - Enhancing the deposit insurance system. - Establish an effective emergency liquidity assistance framework to address high dollarization and FX shortages. - Strengthen interagency arrangements and crisis preparedness. - AML/CFT and related reforms: - Authorities are preparing for Maldives’ mutual evaluation by the Asia/Pacific Group on Money Laundering (APG) against FATF standards in 2024-2025. - Planned steps: mitigate risks from the national risk assessment (NRA), address legal framework gaps, issue regulations for remaining sectors (e.g., payment service providers and financing businesses), and enhance suspicious transaction reporting. - Supervision should be conducted on a risk-based approach to address risks including non-resident inflows. - Authorities’ views: - Authorities generally agreed with FSAP findings and recommendations, including the strong sovereign–bank nexus. - Authorities expressed concerns that a 100 percent risk weight on domestic sovereign securities in foreign currency could make sourcing FX from banks more difficult or costly; they support gradual phasing-in over the medium term. - Upcoming AML framework amendments are expected to address technical deficiencies toward the mutual assessment in 2025. ### Climate change, adaptation, and structural reforms - Vulnerability and risks: - Maldives is highly vulnerable to climate change and natural disasters; sea level rise and flooding pose existential threats to low-lying islands, with ocean warming and coral bleaching potentially affecting tourism over the longer term. - Atolls outside Malé are particularly vulnerable. - Climate finance and costs: - Climate adaptation and mitigation costs estimated at US$8.8 billion (159 percent of 2022 GDP) and US$1 billion (18 percent of 2022 GDP) respectively. - Maldives has developed a pipeline of projects totaling US$500 million for the Green Climate Fund (GFC), part of the Public Sector Investment Program. - Policy priorities and actions: - Integrate climate sensitivity into public financial management and public investment management processes. - Introduce climate budget tagging and a Climate Budget Statement into the budget process and conduct periodic assessment of fiscal costs and risks of climate change. - Provide guidance to the public sector on incorporating climate sensitivity into investment plans, with a stronger role for the Ministry of Finance and the Ministry of Climate Change, Environment and Energy. - Add climate dimensions to project appraisal and selection processes and to systems for asset management and maintenance to facilitate scaling up of climate adaptation and concessional climate finance. - Broader structural reforms to support growth: - Improve business climate, strengthen governance, tackle corruption, and enhance skills development to support strong and inclusive growth. - Draft Asset Declaration Bill and Anti-Corruption Commission strategic action plan 2020-2024 are part of governance improvements. - Policy priorities: enhance public disclosures of government and SOE financial transactions, harmonize procurement guidelines for SOEs, adopt more competitive procurement processes, align foreign investment legal framework, protect property rights, support FDI facilitation, and address skill gaps including improving quality and equal opportunity in education. - Authorities’ views and commitments: - Authorities are developing a National Development Strategy including a new National Adaptation Plan (NAP) and implementation strategies. - Commitments to scale up mitigation: develop renewable energy systems jointly with development partners toward COP28 commitment to expand renewables to reach 33 percent of the nation’s electrical supply within the next five years. - Budget tagging for the Sustainable Development Goals (SDGs) completed; climate budget tagging and a climate budget statement are underway. - Government is working to formulate an environmental, social, and governance (ESG) framework. - Authorities highlighted the importance of greater and more flexible access to concessional climate financing, noting access constraints due to strict procedural requirements, quota limits, or economy size relative to climate vulnerabilities. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 37. The authorities highlighted their strategy to expand trade and investment through ### The authorities highlighted their strategy to expand trade and investment through ### Authorities' strategy and governance measures - Expand trade and investment through diversification and competitiveness enhancement. - Continue efforts to strengthen the tourism sector by enhancing overall capacity and diversified market segments within the sector. - Increase competitiveness of the tuna fishery by modernizing it with new and environmental-friendly vessels. - Note on tuna fishery: sustainable pole and line tuna fishing in the Maldives has helped conserve ocean resources, but this has weighed significant costs on the Maldivian tuna fishery as global tuna prices are not necessarily fair enough for such sustainable catches. - Authorities are considering ways to garner preferential market access from key tuna exports markets toward sustainable fishery. - Governance actions: continue to improve governance, including by passing a draft bill on asset declaration, and strengthen asset recovery process with a new bill on asset recovery. ### Staff appraisal — macroeconomic outlook and risks - Recent performance: - The Maldivian economy is estimated to have grown by 4.4 percent in 2023. - Achieving projected growth of 5.2 percent in 2024 will require significant policy adjustments to address existing vulnerabilities. - Inflation and outlook: - Inflation is expected to rise further, reflecting price pressures from the phasing-out of subsidies. - Risks to the outlook are tilted to the downside. - Fiscal and debt vulnerabilities: - Without significant policy changes, the overall fiscal deficit is projected to narrow marginally but remain elevated at 12.2 percent of GDP in 2024. - Continued support to SOEs is adding to fiscal vulnerabilities. - Gross external financing needs are expected to rise in the coming years, reflecting persistently large fiscal deficits and repayments and rollovers of non-concessional debt, mainly global sukuk. - The Maldives remains at high risk of external and overall debt distress, with debt assessed as unsustainable. - External position: - Large current account deficits would persist even over the medium term, reflecting high import costs of food and fuel, and strong import demands associated with tourism activity and capital investment, weighing on FX reserves. - The overall external position in 2023 is assessed to be substantially weaker than the level implied by fundamentals and desirable policies. ### Policy recommendations — fiscal, monetary, financial sector, and reform priorities - Fiscal consolidation: - A strong and credible form of fiscal consolidation is urgently needed to reduce debt and restore the sustainability of public finances. - Implement subsidy reforms without delay and consider further efforts to rationalize and streamline healthcare subsidies subsequently. - Rationalize and scale back capital spending, including through SOEs. - Mobilize domestic revenue and strengthen customs and tax administration to help ensure fiscal sustainability. - Strengthen fiscal and debt management to enhance the effectiveness of fiscal policy. - Monetary and FX policy: - Better fiscal-monetary policy coordination should facilitate necessary monetary policy actions to safeguard the exchange rate peg. - Discontinued using of MMA advances is a welcome first step and should over time be complemented by a more active liquidity management. - Should inflationary pressures increase or the parallel market exchange rate premium widen, the MMA should stand ready to further tighten monetary policy stance. - FX market reforms should be accelerated to enhance the credibility of the peg. - Fiscal adjustment will avoid renewed excessive burden on monetary policy. - Financial sector and macroprudential policy: - Adopt macroprudential policies to mitigate systemic risks stemming from the sovereign-bank nexus. - Amend capital regulation to gradually phase in a non-zero risk weight on bank holdings of Maldives government securities in foreign currency and introduce liquidity requirements. - Swiftly introduce a macroprudential institutional framework and instruments, and enhance systemic risk monitoring capacity. - Enhance financial sector oversight and crisis management, and strengthen the financial safety net. - Address gaps in the legal framework and implement the AML/CFT framework as a priority. - Inclusive and climate-sensitive reforms: - Accelerate reforms to support inclusive and sustainable development. - Integrate climate considerations into public financial and investment management processes and frameworks to support climate adaptation and mitigation efforts and facilitate scaling-up of climate finance from concessional sources. - Improve the business climate, strengthen governance and tackle corruption, and enhance skill development to support strong, inclusive, and sustainable growth. - Consultation cycle recommendation: - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Box 1 — Sectoral Analysis of Maldives’ Tourism Industry - Industry structure: - Resorts and guesthouses are the two largest segments in the Maldives’ tourism industry. - Resorts represent about 80 percent of total bednights. - Share of guesthouses has grown over time with notable increase in 2023 and reached almost 18 percent of total bednights. - Value-added differences: - The contribution of the guesthouses segment to the value added per one bednight is likely much smaller than contribution of the resorts. - Based on estimates using seasonally adjusted quarterly tourism real GDP data and number of bednights for different segments, the average value added generated by one bednight in a guesthouse is about 15 percent of the average value added generated by one bednight in a resort. - The estimate was done on data starting from 2016Q1 as guesthouses represented only a small share before 2016. The periods from 2020Q1 to 2021Q4 were excluded from estimation due to COVID-19 pandemic disruption to the tourism sector. - Implications for growth and inclusion: - Considering the difference in value added together with the increase in number of guesthouses bednights in 2023 could explain lower-than-expected growth of the tourism sector GDP despite solid growth in total bednights and tourist arrivals. - Provided that tourist arrivals are expanding and the management of tourism segments are well-balanced, growth of the guesthouses segment will continue to contribute positively to overall economic activity and growth. - Expansion of the guesthouses segment could be complemented by higher-value-added resorts, where the guesthouses segment may help broaden the tourist base by catering to a group of different—likely lower-cost—tourists, helping grow tourism GDP and contribute positively to economic inclusion in the Maldives. *Source: IMF staff report (Maldives).* ### Box 2. China Structural Slowdown and the Maldivian Economy ### Box 2. China Structural Slowdown and the Maldivian Economy ### China as a source market for Maldives tourism: historical patterns and pandemic shock - China became the leading source of tourists for the Maldives’ tourism industry since the early 2010s and overtook Germany, Italy, and the UK in tourist arrivals in 2010. - Chinese market share peaked in 2014 when the Maldives welcomed 363.6 thousands visitors from China, accounting for more than 30 percent of total arrivals. - COVID-19 and Chinese border restrictions caused a sharp decline in Chinese market share to 0.2 percent in 2021 and 0.9 percent in 2022. - After China reopened in early 2023, the Chinese market recovered: in Q3 2023 China accounted for 19 percent of total arrivals to the Maldives. ### Relationship between China’s service import demand and Maldives real GDP - Historical data (two decades before the pandemic) show a positive relationship between China’s real service import growth and Maldives real GDP growth. - Figure regression details (staff calculations): y = 0.1651x + 4.1903; R² = 0.1463. - The Maldives’ real GDP growth is described as "strongly correlated" with China’s demand for service imports, indicating the Chinese market is a key driver of Maldivian growth. ### Post‑pandemic recovery and resilience - The resilience of the Chinese market after reopening suggests that China’s travel imports will continue to support the Maldivian economy. - In the third quarter of 2023, China’s share of arrivals rebounded to 19 percent, supporting tourism recovery. ### Medium‑term outlook and downside risks from China’s structural slowdown - IMF World Economic Outlook (October 2023) projection: growth of China’s real service imports is expected to sharply slow from 13.5 percent in 2024 to around 4.6 percent annually until 2028. - Despite this slowdown, service imports from China are expected to remain relatively strong over the medium term. - Under the baseline scenario, spillover effects of China’s medium‑term slowdown on the Maldives are likely to be very limited; however, further growth slowdown in China could create a headwind to the Maldivian economy. *Prepared by Yizhi Xu (APD); sources: IMF World Economic Outlook, October 2023, and IMF staff calculations.* ### Annex I. Implementation of IMF Policy Recommendations ### Annex I. Implementation of IMF Policy Recommendations ### Fiscal consolidation: implementation and anchors - In January 2023, the authorities increased the Goods and Services Tax (GST) rates (from 6 to 8 percent) and the Tourism Goods and Services Tax (TGST) (from 12 to 16 percent), which have helped mobilize additional tax revenue of 3.1 percent of GDP in 2023. - The medium-term fiscal strategy for 2024-2026 established four medium-term fiscal anchors: - (i) reducing public debt to less than 95 percent of GDP by 2026, - (ii) reducing primary budget deficit to less than 5 percent of GDP by 2024, - (iii) maintaining public and publicly guaranteed debt relative to GDP on a downward trend, - (iv) reducing recurrent expenditure to levels that do not exceed government revenue by 2024. ### Rationalize capital spending and subsidies; targeted support - The 2024 budget presents a reform plan to phase out fuel, electricity, and other existing subsidies and replace them with targeted cash transfers toward low-income households, which will be implemented starting in the second half of 2024. - Note: election-related pressures have fueled a large increase in capital spending and frontloaded harmonization of public servant wage bills. ### Reform of state-owned enterprises (SOEs) - A new State Shareholder Management Department was created within the Ministry of Finance to: - actively monitor SOE fiscal risks, - rationalize SOE capital spending, - scrutinize support for SOEs. - Efforts to improve transparency include enhanced quarterly reporting and an SOE financial database. ### Public financial and debt management reforms - A draft Debt Management Law has been reviewed within the Ministry of Finance. - The Fiscal Responsibility Act has been prepared for submission to Parliament. ### Maldives Monetary Authority (MMA) advances and pandemic support - MMA advances were discontinued at the end of 2023 and all outstanding advances at that time were securitized. - Other pandemic-related policy support measures were fully unwound. - Going forward, MoF is committed not to rely on MMA advances in the future. ### Safeguarding financial stability - Banking sector prudential measures discussed in the context of a joint IMF-World Bank FSAP include: - higher risk weight on FX-denominated sovereign bonds, - borrower-based macroprudential instruments, - enhancements to the regulatory and supervisory framework, - crisis management arrangements (including intervention and resolution framework), - systemic risk monitoring data and analysis. - MMA is discussing the plan to implement FSAP recommendations with stakeholders. ### FX market reforms - A roadmap for FX reforms was developed to: - strengthen regulations of money changers, - encourage the use of Rufiyaa in domestic transactions, - limit transaction types on FX accounts. - Discussions between MMA and stakeholders from both public and private sectors on the roadmap are lagging. ### Building climate resilience and access to climate finance - The lack of concessional financing and grants for climate financing has constrained climate resilient investment. - IMF technical assistance on Climate-Public Investment Management Assessment (C-PIMA) and Green Public Financial Management (Green-PFM) is scheduled for January 2024, intended to help develop the authorities’ capacity to meet public financial and investment management requirements to facilitate access to climate funding, including through the Green Climate Fund (GCF). *Source: Annex I. Implementation of IMF Policy Recommendations.* ### 4. The underlying causes of the fiscal risks embedded in Maldives’ SOEs are many. They ### 4. The underlying causes of the fiscal risks embedded in Maldives’ SOEs are many. ### Causes and operational weaknesses - Lack of clear and commercial objectives for SOEs. - Absence of a proper framework for identifying, funding and costing non-commercial services. - Poor risk management practices: most SOEs do not have a formal risk management policy and leave the government to bear the consequences of external shocks, such as interest rate and oil price fluctuations. - SOE reporting weaknesses: PCB monitors and evaluates SOEs through quarterly and annual financial reports, which are often delayed and incomplete. - Performance management compromised by split responsibilities: separation of performance management (Privatization and Corporatization Board—PCB) from fiscal risk oversight (State Shareholding Management Division—SSMD) dilutes capacity to effectively manage fiscal risks. ### Institutional arrangements and oversight fragmentation - Privatization and Corporatization Board (PCB) - Main entity responsible for overseeing state-owned enterprises (SOEs) under its own legislation. - Monitors and evaluates SOEs through quarterly and annual financial reports (often delayed and incomplete). - Develops and applies corporate governance instruments: a corporate governance code, procurement regulations, and a strategic action plan. - Oversees performance of SOEs through five-year agreements that link management and board remuneration to financial metrics. - State Shareholding Management Division (SSMD) - Newly established at the Ministry of Finance. - Focuses on supporting the budget process for SOEs (in particular, in relation to subsidy payments and capital injections) and then managing immediate cash needs of SOEs. - Operates on a fortnightly basis, allowing very little time for SSMD to focus on more strategic management of fiscal risk. - Governance gap: The delineation of responsibilities between PCB and SSMD is not well defined; separating performance management (PCB) from fiscal risk oversight (SSMD) compromises a structured performance management framework. ### Administrative framework reforms underway - With IMF TA, authorities are drafting a new SOE law to: - Establish clear roles and responsibilities for the government and SOEs. - Set out a consistent and effective approach to risk management, capital allocation, and governance. - Enable a review of the ownership model for SOEs, which could have a significant impact on reducing fiscal risks. ### Key findings on fiscal risks and SOE reliance - SOE fiscal risks remain acute: most SOEs require large and unpredictable budget support, and many face heightened liquidity risk. - Government guarantees: the government guarantees some SOE debt, which is highly exposed to heavy debt service obligations of these SOEs. - Reform priorities recommended (listed below) to lessen SOE reliance on central government and safeguard public finances. ### Policy recommendations and reform priorities - Rationalizing SOE portfolios - Adopt a more precise definition of SOEs and the SOE ownership rationale to enable portfolio rationalization. - Consider options for small, unprofitable, or non-commercial SOEs: dissolution, reclassification, or sale. - Use the adoption of a new SOE Law to provide a clear and consistent framework for defining and regulating the SOE portfolio. - Harmonizing SOE institutional and oversight framework - Include an ownership policy in the new SOE law that defines objectives and scope of SOEs. - Clarify roles and responsibilities of oversight bodies within an institutional framework. - Establish a performance management and oversight framework that sets and enforces SOE-specific goals. - Consider creation of an SOE holding company to consolidate institutional framework—this would require portfolio rationalization. - Adopting a structured performance management framework - Move beyond five-year, remuneration-linked agreements to: - Set clear and enduring objectives for each SOE. - Agree on tailored financial and non-financial performance targets for each entity and industry. - Include in performance agreements: a financial budget, a capital expenditure program, and documentation of all non-commercial activities and their funding arrangements. - Ensure the oversight body monitors compliance with agreements and evaluates boards and management based on the established criteria, objectives and targets to enable more effective and accountable management of SOEs and their fiscal risks. *MALDIVES INTERNATIONAL MONETARY FUND (from provided content).* ### 14. Banking sector stress tests suggest that Maldives’ financial system remains vulnerable ### Banking sector stress tests suggest that Maldives’ financial system remains vulnerable ### Stress test findings — solvency, liquidity, market, and climate risks - Overall assessment: the financial system remains vulnerable to severe shocks related to sovereign, liquidity, market, and climate risks. - Solvency stress test: the sovereign-bank nexus has exposed banks to sovereign risks. - Liquidity stress test: significant risk at individual banks and a high dependence on large deposits. - Market risk test: manageable interest rate risk but some exposure to FX risk for some banks. - Climate risk test: no major impact from coastal floods until the end of the century, but with great uncertainty and possible indirect effects. ### Policy recommendations — liquidity management, FX, and market infrastructure - Establish a systemic liquidity management framework and FX regulations to mitigate risks posed by excess liquidity. - MMA should swiftly differentiate reserve requirements by currency (higher rate on FX deposits) and within FX reserves by maturity (lower MRR on longer-term deposits) to mitigate dollarization risks. - Near-term actions: - MMA should resume liquidity management operations. - Introduce a secondary local bonds market, including active primary dealers and an electronic platform for government debt securities auctions and trading. - Adopt regulations on money changing businesses in the foreign exchange markets. - Expected outcome: reforms in FX markets could mitigate FX shortage and prevent further pressures on the exchange rates due to excessive structural liquidity in the banking system. ### Regulatory and supervisory reforms - Amend capital regulation to apply a 100 percent risk weight on bank holdings of Maldives government securities in foreign currency on a gradual pace. - Introduce liquidity requirements. - MMA, as both financial regulator and supervisor, should: - Issue regulatory standards to clarify the enforcement regime. - Reevaluate off-site monitoring procedures. - Strengthen the independence of MMA’s Board of Directors. ### Macroprudential framework and borrower protections - Deploy macroprudential policy framework and instruments to tackle pockets of vulnerabilities. - MMA should augment reporting of data on recurrent household payment obligations from leasing contracts to the CIB. - Consult with stakeholders and establish a macroprudential framework, including a committee for macroprudential coordination. - Publish a financial stability report. - As credit flow is rebounding, introduce key borrower-based and capital-related macroprudential policy instruments. ### Strengthening stress testing, data, and climate risk analysis - Improve integrity and granularity of supervisory data, including data compiled by the Credit Information Bureau (CIB) to better track and safeguard household leverage. - MMA should develop methodologies for solvency, liquidity, and market risk stress tests and engage banks in dialogue about stress test procedures and results, including banks’ own stress tests. - Urgent need to improve granularity and coverage of climate and geographical exposures data for establishing climate risk analysis. ### Key stress-test statistics (selected figures preserved exactly as reported) - NPL projection foreign currency model — NPL ratio stress baseline scenario: 10.5 11.8 12 - Highest NPL ratio of any bank (foreign currency model, baseline): 34.4 41.6 46.1 46.8 - NPL ratio stress moderate scenario (foreign currency model): 9 11 12.6 13 - Highest NPL ratio of any bank (moderate): 34.4 43.2 48.5 49.5 - NPL ratio stress severe scenario (foreign currency model): 9 12.3 14.8 14.7 - Highest NPL ratio of any bank (severe): 34.4 47 54.4 54 - NPL projection local currency model — NPL ratio stress baseline scenario: 3.4 4.5 5.1 5.4 - Highest NPL ratio of any bank (local currency baseline): 27.5 36.1 40.4 42.1 - NPL ratio stress moderate scenario (local currency): 3.4 4.7 5.5 5.7 - Highest NPL ratio of any bank (local currency moderate): 27.5 37.4 42.4 43.6 - NPL ratio stress severe scenario (local currency): 3.4 5.4 6.3 6.2 - Highest NPL ratio of any bank (local currency severe): 27.5 41 46.2 46.2 - Capital adequacy ratio (CAR) baseline scenario (in percent of risk-weighted assets): 50.9 52.3 53.9 55 - CAR moderate scenario: 50.9 52.3 51 50.6 50.2 - CAR severe scenario: 50.9 39.3 44 45.1 - CAR baseline scenario adjusted for 100 percent RW on domestic securities in foreign currency: 41.1 - Drop in CAR due to impact of domestic debt exchange (sovereign risk): 14.8 - CAR two-notch downgrade of 5 largest borrowers: 50.9 46.7 48 49 - CAR downgrade to loss of 5 largest borrowers: 50.9 20.6 21.1 21.6 - Number of banks failing (credit concentration scenario): 5 - Percent of banking system <12 percent CAR (credit concentration): 27.1 - Capital shortfall in percent of GDP (credit concentration): 0.7 - Interest rate repricing risk — increase of interest rates by 2.0 percent: 51.1 - Liquidity risk — number of banks failing cashflow-based test in either currency: 2 - Banks failing the cashflow test in either currency in percent of system assets: 25.3 - Banks failing the cashflow test in either currency in percent of GDP: 23.3 - Basel III Liquidity Coverage Ratio, MVR: 253.8 - Basel III Liquidity Coverage Ratio, USD: 235.1 - Deposit concentration risk — number of banks failing test in either currency: 7 - Assets of banks failing the test in percent of banking system assets: 49.9 - Assets of banks failing the test in percent of GDP: 46 - Foreign currency risk — number of banks breaching NOP limits after 20 percent devaluation 1/: 2 - Assets of banks failing the test in percent of banking system assets (FX risk): 23.3 - Assets of banks failing the test in percent of GDP (FX risk): 20.1 *Source: Authorities' data and IMF Staff Estimates.* ### 5. Background. For monetary and exchange rate policies, CD will continue to focus on ### 5. Background. For monetary and exchange rate policies, CD will continue to focus on ### Monetary and exchange rate policies — background and objectives - Operationalizing an interest rate-based framework (i.e., interest rate corridor) is a primary focus. - The Maldives Monetary Authority (MMA) strategy to build reserves aims at: - normalizing FX operations, - redirecting FX receipts from the parallel market, and - reviewing FX allocation to SOEs. - Expected macroeconomic benefits: - enhance macroeconomic stability, and - bolster external buffer against external shocks. ### Ongoing and planned IMF CD activities for monetary and FX policy - IMF TA to date covered: - MMA strategic plan, - central bank governance, - functioning two-way FX market, and - active liquidity management. - Planned multi-year TA program aims to: - (i) strengthen the monetary policy and operational framework, including defining an interest rate corridor and directing interbank interest rates inside it, through re-activating open market operations (OMOs); - (ii) develop functioning FX markets; and - (iii) review the current exchange rate regime to support resilience and implement a strategy for partial and gradual de-dollarization and FX reserve accumulation. ### Financial sector — background and vulnerabilities - Since January 2018, SARTTAC has supported strengthening MMA supervisory capacity across: - banking and insurance supervision, and - non-bank financial institutions (NBFIs) regulation. - A joint IMF-World Bank Financial Sector Assessment Program (FSAP) concluded May 2023 identified key vulnerabilities: - bank-sovereign nexus, - high dollarization, and - FX scarcity. - FSAP recommendations focused on strengthening bank regulation and supervision to address macro-financial systemic vulnerabilities. ### Ongoing and planned IMF CD activities for the financial sector - CD activities undertaken: - developing and implementing risk-based banking supervision (including preparing implementation of risk management guidelines, reviews of on-site inspection and off-site supervision manuals, and drafting a regulation on liquidity risk management); - improving and disseminating Financial Soundness Indicators (FSI). - Going forward: - CD will continue assisting authorities on risk-based supervision, aligned with FSAP recommendations and priorities. ### Integrating Fund surveillance and CD — prioritized areas and TA highlights (selected) - Tax policy and administration: - 2022 FAD TA on medium-term revenue strategy that provides options to raise up to 9.4 percent of GDP in revenue by 2028. - FAD and SARTTAC support to improve tax administration, management of international tax risks, estimate of GST gap, and completion of Tax Administration Diagnostic Assessment Tool. - 2023 FAD TA reviewed draft amendments to Income Tax Act and continued support for MTRS and customs administration strengthening. - Expenditure policy: - 2022 FAD TA on reviewing fuel and electricity subsidies regimes. - 2023 FAD support on fiscal risk management in SOEs and pension oversight and fiscal risks management. - Public financial management: - 2023 FAD TA on developing a law for the Sovereign Development Fund (SDF) and an evaluation of fiscal transparency following the Fiscal Transparency Code of the IMF. - SARTTAC reviewed Fiscal Risk Management in State Owned Enterprises. - FAD assisted authorities revising the Fiscal Responsibility Act (FAD 2020). - A TA on Climate Public Investment Management (C-PIMA) and Green Public Financial Management (Green PFM) is scheduled for early 2024. - Debt management: - 2023 TAs on SDF and SOEs contributed to strengthening debt management capacity in 2023. - Fund TA assisted to develop a Debt Management Law (FAD/MCM/LEG—two missions in 2021). - Monetary and Exchange Rate Policies: - SARTTAC provided several TA missions to the MMA on MMA Strategic Plan, central bank governance, functioning two-way FX markets, de-dollarization, currency baskets and active domestic liquidity management. - In 2023, SARTTAC TA focused on introducing the interest rate corridor for an active liquidity management to support the peg. - Macro forecasting: - ICD is providing a 3-year TA project to build MMA’s capacity for consistent baseline forecasts and scenario analyses. - Statistics: - 2023 SARTTAC TA helped authorities collect data and map it to the GFSM2014 frameworks for key city councils and extrabudgetary units. - STA provided TA to assist the MMA in compiling Financial Soundness Indicators (FSIs) based on the IMF’s 2019 FSIs Compilation Guide (2019 FSIs Guide). ### Fund relations and selected financial figures (as of January 2024) - Membership Status: Joined: January 13, 1978; Article XIV. - General Resources Account: - Quota 21.20 SDR Million 100.00 percent. - Fund holdings of currency (exchange rate) 16.40 SDR Million 77.34 percent. - Reserve Tranche Position 4.80 SDR Million 22.66 percent. - SDR Department: - Net cumulative allocation 28.01 SDR Million 100.00 percent. - Holdings 0.95 SDR Million 3.38 percent. - Outstanding Purchases and Loans: - RCF Loans 21.2 SDR Million 100 percent. - Latest Financial Commitments — Outright Loans: - RCF: Commitment Date 04/22/2020; Expiration Date 04/24/2020; Amount Approved 21.20 (SDR million); Amount Drawn 21.20 (SDR million). - Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Forthcoming 2024 2025 2026 2027 2028 - Principal 2.12 4.24 4.24 4.24 - Charges/Interest 0.11 1.10 1.10 1.10 1.10 - Total 0.11 3.22 5.34 5.34 5.34 ### Exchange arrangements (note) - Since April 2011, the rufiyaa has floated in a band of 20 percent on either side of MVR 12.85 per dollar. - In practice, however, the rufiyaa has been virtually fixed at the band’s weaker end of MVR 12.85 per dollar. *Source: IMF Staff.* ### 15.42 per dollar. The de jure exchange rate arrangement is a pegged exchange rate within horizontal ### 1mdvea2024004 - 15.42 per dollar. The de jure exchange rate arrangement is a pegged exchange rate within horizontal ### Exchange rate regime and foreign exchange (FX) restrictions - Official exchange rate: 15.42 per dollar. - De jure arrangement: a pegged exchange rate within horizontal bands. - De facto arrangement: classified as a stabilized exchange rate arrangement. - Article XIV provisions: Maldives continues to avail itself of the transitional provisions of Article XIV but no longer maintains any measures under this provision, and has not yet accepted the obligations of Article VIII, Sections 2, 3, and 4. - Exchange restriction: Maldives Monetary Authority (MMA) rations its supply of foreign exchange (FX) to commercial banks and state-owned enterprises to certain priority items, channeling FX for current international transactions to the illegal parallel market. - Recommendation: The authorities should continue undertaking reasonable efforts to eliminate the spread with the parallel market. ### Last Article IV Consultation - The 2022 Article IV consultation was concluded by the Executive Board on November 23, 2022. ### IMF technical assistance (TA) engagement — Fiscal Affairs Department (FAD) - Main engagement areas: tax policy and tax administration, subsidy reforms, public investment and financial management, and debt management. - Specific missions and outputs (selected): - December 2016: Public Investment Management Assessment (PIMA). - October 2017: Tax Administration TA mission reviewing MIRA 2015–19 Strategic Plan progress. - January 2018: Budget Formulation TA mission (budget preparation and public investment management). - June 2018: Follow-up on Strengthening Public Investment Management. - July 2018: TA on developing a risk management framework for MIRA. - February 2019: Tax Policy TA assessing overall design of taxation and reform options. - February 2019: Concurrent tax administration missions (2020-24 Strategic Plan, risk framework, staff skills). - February 2020: Mission to strengthen management of fiscal risks of SOEs and tax policy reform review. - November 2020: Missions on reviewing the Fiscal Responsibility Act and a Fiscal Transparency Evaluation. - 2021: Joint desk review of debt management law and a Tax Administration Assessment Tool (TADA) mission. - 2022: Missions on Medium-term Revenue Strategy (MTRS), GST Gap Analysis, and Fuel and Electricity Subsidy Reforms. - 2023: FAD assisted with i) legal/policy/operational framework for Sovereign Development Fund (SDF) in February, ii) reviewing draft MTRS in May, iii) reviewing SOE risk management with SARTTAC in July, iv) reviewing draft amendments to Income Tax Act (ITA) in November, v) improving customs administration (valuation control) in September and November, vi) developing baseline understanding of pension system's sustainability for Maldives Pension Administration Office (MPAO) in November. - 2024: FAD assisted in mainstreaming climate change considerations into public financial and investment management (Green PFM and Climate PIMA). ### IMF Legal Department (LEG) TA - October 2003: TA on revision of MMA Act. - March and September 2005, April 2006: Missions to revamp banking law. - August 2009: Mission on MMA Act (jointly with MCM). - February 2011: Payments law follow-up mission. - October 2010 and May 2012: AML/CFT assessment and desk-based review of draft AML/CFT law. - 2014–2015: Advice on Special Economic Zones Law, offshore banking legislation, and deposit insurance. ### IMF Monetary and Capital Markets Department (MCM) TA - 2006–2009: Missions on monetary operations, liquidity management, monetary policy, financial supervision, crisis management framework, and bank restructuring. - December 2010: TA on crisis preparedness/management, bank restructuring, and monetary operations. - 2011–2016: TA on debt markets, on-site banking supervision, FX operations framework, banking supervision, FX and monetary policy operations, operational risk, and FX reserve management. - 2017–2019: Missions on accounting and auditing framework for MMA, monetary operations work plan with SARTTAC, multi-year TA to enhance supervisory capacity of Insurance Division, TA roadmap for central bank governance, monetary and FX operations, and financial sector supervision; follow-up mission in 2019 and desk-review of policy notes in 2021 on Use of MVR in all monetary transactions; Repatriation and surrender of export earnings; Licensing money changers. - 2020–2023: SARTTAC and HQ support to strengthen supervisory capacity, IFRS 9 application assistance, governance and internal organization advice, operationalizing an interest rate corridor (Dec 2021–Jan 2022), follow-up banking supervision missions in June 2022 and November 2023 assessing corporate governance and risk management guideline implementation. ### IMF Statistics Department (STA) TA - April 2018: External sector statistics SARTTAC mission to assess data reliability and BOP components. - August 2018, January 2019, August 2019: GFS and PSDS training and strengthening compilation/dissemination aligned with internationally accepted statistical standards and GFSM 2014. - February 2019: Missions assisted CPI update and experimental annual GDP estimates by expenditure at current prices for 2017. - January 2020 and January 2021: Missions focused on enhancing GFS and PSDS compilation and dissemination, producing quarterly GFS for BCG, and broadening institutional coverage. - 2020–first half 2021: Missions on national accounts, improving expenditure approach for annual GDP and quarterly national accounts. - June 2022: Mission to assist MBS with developing PPI and updating CPI. - December 2022: Assistance to develop supply use tables (SUTs) to rebase GDP to 2019. - January and November 2023: Missions to help collect data and map to GFSM2014 frameworks for key city councils and EBUs. - March 2023: Mission to assist MMA in compiling Financial Soundness Indicators (FSIs) per IMF’s 2019 FSIs Guide. ### IMF Institute of Capacity Development (ICD) TA - May and August 2023: Two in-person TA missions to assist MMA customize and implement an Excel-based microframework in line with the “Comprehensive Adaptive Expectations Model” (CAEM) to produce consistent baseline forecasts and risk analysis. ### Safeguards assessment - An assessment of the MMA was concluded in March 2010. - Reforms implemented in response: appointment of an external auditor, automation of authorization process strengthening controls over foreign payments, appointment of a Chief Internal Auditor, improved internal audit capacity, and amendments to the MMA Act approved in 2020. - The authorities have committed to undergo an update safeguards assessment in connection with the rapid credit facility (RCF) arrangement, which is currently in progress. ### Relations with other international financial institutions - World Bank and Asian Development Bank activities in Maldives referenced (contacts not reproduced here per content rules). ### Statistical issues — Assessment of data adequacy for surveillance (As of January 2024) - General: Macroeconomic statistics have improved with STA and ADB support; data broadly adequate for surveillance but gaps remain affecting balance of payments, government finance, and national accounts statistics. - Real sector: - Quarterly and annual national accounts compiled (base year 2019) using SUTs 2019. - EXCEL-based GDP compilation system modernized; improved consistency between GDP-Production and Quarterly GDP estimates. - GDP by expenditure and quarterly GDP series improved and disseminated on Maldives official website. - December 2022: MBS released updated CPI based on weights from 2019 Household Income and Expenditure Survey. - Plans to expand CPI coverage to include owner occupied housing are on hold pending rent index improvements. - MBS compiles and disseminates PPI for electricity, water supply, resorts (accommodation and food services), construction, information and communication, and education; monthly PPI data disseminated quarterly. PPI coverage to be expanded to include fishing and transportation in early 2024. - Fiscal sector: - GFS data disseminated based on GFSM 2014 for budgetary central government (BCG); experimental quarterly GFS for BCG started. - Ongoing reforms to update chart of accounts and accounting basis toward international standards to produce balance sheet data. - Local government data limited; decentralization plans include a portal for local government finances. - SOEs: quarterly report produced with data on individual SOEs; consolidated public corporations subsector GFS not currently produced. - Financial sector: - MMA reports monthly standardized report forms (SRFs) for central bank, other depository corporations, and other financial corporations. - An integrated monetary database operational. - Inconsistencies exist between monetary and fiscal data on fiscal deficit financing due to timing and coverage. - Maldives reports some Financial Access Survey series, including mobile money and gender-disaggregated series, and indicators for commercial bank branches per 100,000 adults and ATMs per 100,000 adults. - Following 2023 STA TA, MMA reports 14 core FSIs and ten additional FSIs for deposit takers monthly, two FSIs on real estate markets monthly, two additional FSIs on OFCs quarterly, three additional FSIs on insurance corporations quarterly, and one FSI on households quarterly for IMF FSI website publication. - External sector: - MMA compiles balance of payments data annually only. - MMA finalizing new international transaction reporting system (ITRS) to assist quarterly BOP and IIP compilation. - MMA does not compile CDIS or CPIS data; difficulties in assembling consistent financial transactions data for these surveys. - Quarterly external debt and debt service data available for government and MMA, and to some extent for banking sector and state enterprises; no reporting to World Bank QEDS database. - Main source for external debt statistics: Commonwealth Secretariat Debt Recording Management System (DRMS). - 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 Article IV missions; other movements of foreign currency assets not identified. ### Data standards and quality - Participation: Maldives has participated in the IMF’s General Data Dissemination System (GDDS) since October 14, 2011, with metadata posted on the Data Standards Bulletin Board. - June 18, 2019: Maldives implemented the recommendations of the Enhanced General Data Dissemination System (e-GDDS) by publishing essential macroeconomic statistics through a National Summary Data page (NSDP). - No ROSC (report on the observance of standards and codes) data available. ### Maldives: Table of Common Indicators Required for Surveillance (As of January 31, 2024) — selected entries (dates preserved exactly) - Exchange Rates: Date of Latest Observation December 2023; Date Received January 2024; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: Date of Latest Observation December 2023; Date Received January 2024; Frequency M M M. - Reserve/Base Money: Date of Latest Observation December 2023; Date Received January 2024; Frequency M M M. - Broad Money: Date of Latest Observation November 2023; Date Received December 2023; Frequency M M M. - Central Bank Balance Sheet: Date of Latest Observation December 2023; Date Received January 2024; Frequency M M M. - Consolidated Balance Sheet of the Banking System: Date of Latest Observation November 2023; Date Received December 2023; Frequency M M M. - Interest Rates2: Date of Latest Observation December 2023; Date Received January 2024; Frequency M M M. - Consumer Price Index: Date of Latest Observation December 2023; Date Received January 2024; Frequency M M M. - Revenue, Expenditure, Balance and Composition of Financing3 – Central Government: Date of Latest Observation 2022; Date Received September 2023; Frequency A M M. - Stocks of Central Government and Central Government-Guaranteed Debt5: Date of Latest Observation 2022; Date Received September 2023; Frequency A A A. - External Current Account Balance: Date of Latest Observation 2022; Date Received September 2023; Frequency A A A. - Exports and Imports of Goods and Services: Date of Latest Observation 2022; Date Received September 2023; Frequency A A A. - GDP/GNP: Date of Latest Observation 2022A, 2023Q3; Date Received August 2023, January 2024; Frequency A, Q A, Q A, Q. - Gross External Debt: Date of Latest Observation 2022A; Date Received September 2023; Frequency A A A. - International Investment Position: Not available. - Footnotes preserved with numbering as in source (1–6) clarifying coverage, frequency codes, and data notes. ### Staff report — 2024 Article IV Consultation — Debt Sustainability Analysis (DSA) - DSA type: Joint Bank-Fund Debt Sustainability Analysis. - Risk ratings: - Risk of external debt distress: High - Overall risk of debt distress: High - Granularity in the risk rating: Unsustainable - Application of judgement: No - Key findings: - The Maldives remains at a high risk of external and overall debt distress, same as the previous DSA. - External gross financing needs have increased relative to the previous DSA due to (i) high commodity prices, (ii) a more expansionary fiscal stance amid increases in capital project related spending, subsidies, and recurrent expenditures, and (iii) repayments and rollovers of non-concessional debt, mainly global sukuk. - External refinancing pressures are expected to peak in 2026. - Increasingly higher amortizations and large interest payments would trigger protracted breaches in several debt indicators, leading to the assessment of debt not sustainable under the authorities’ current policies. - Debt dynamics remain vulnerable to adverse shocks in growth, interest rates, and fiscal position in the near term. - Key external debt indicator: the present value (PV) of external debt-to-GDP will converge to the 30 percent threshold by the medium-term. - Policy prescription: Restoring debt sustainability requires sustained fiscal consolidation, continued strong growth, and prudent debt management. - Administrative notes: - This DSA prepared jointly by IMF and World Bank, following the 2018 Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries. - The Maldives Composite Indicator of 2.40 indicates a weak debt-carrying capacity, based on the October 2023 IMF World Economic Outlook (WEO) and the 2022 World Bank Country Policy and Institutional Assessment (CPIA). - Report approvals and preparation: - Approved by Anne-Marie Gulde-Wolf and Boileau Yeyinou Loko (IMF) and Manuela Francisco and Mathew A. Verghis (IDA). - Prepared by the staffs of the International Monetary Fund and the International Development Association. - Date on report: March 5, 2024. *Source: IMF staff report and supporting material contained in the provided PDF content.* ### 1. Supported by strong tourism rebound, total public and publicly guaranteed (PPG) debt-to- ### 1mdvea2024004 - 1. Supported by strong tourism rebound, total public and publicly guaranteed (PPG) debt-to- ### Debt developments and headline figures - Total PPG debt fell to about 110 percent of GDP in 2022, from 120 percent in 2021. - Nominal PPG debt stock increased to US$6,885 million in 2022 from US$6,469 million in 2021. - Public debt-to-GDP ratio remains elevated and is estimated to rise further in 2023, compared to its pre-pandemic level of 78.8 percent in 2019. - Both external and domestic debt increased during 2022 with domestic debt slightly above half of the mix (55 percent of total). ### Domestic PPG debt (2022) — composition and notable operations - Domestic PPG debt rose to US$3,813 million (or around 61 percent of GDP) in 2022, up from US$3,452 million in 2021. - Parliament approved temporary suspension of elements of the Fiscal Responsibility Act (FRA) to allow expansion of the cap on government advances with the Maldives Monetary Authority (MMA) to MVR 4.4 billion (US$286 million) until end-2023. - Domestic PPG debt in 2022 included US$256 million (MVR 3,946 million) in advances (around 7 percent of total domestic PPG debt) from the MMA to the central government. - In 2022, authorities securitized outstanding MMA advances of MVR 2.5 billion (US$160 million) by converting advances into a 40-year bond at a 2.4 percent annual interest. - Commercial banks had the largest claim on central government, around US$1,695 million (44 percent of domestic PPG debt). - The State Bank of India (SBI) Male Branch purchased a US$100 million bond in 2022, in addition to a US$250 million bond purchased in 2020 as budget support. The 2020 bond is expected to be paid back in 10 years with bi-annual dollar interest payments at 7.75 percent; the 2022 bond is expected to be paid in 7 years as a bullet payment with bi-annual interest payments at 3.75 percent. ### External PPG debt (2022) — composition and creditors - External PPG debt stood at US$3,072 million (or around 49 percent of GDP) in 2022, up from US$3,046 million in 2021 in nominal terms. - External PPG debt is predominantly owed to bilateral and commercial creditors. - Direct budgetary debt constituted 71 percent of external PPG debt; remaining 29 percent contracted by State-Owned Enterprises (SOEs) with sovereign guarantees. - Guaranteed external loans for housing development projects carried out by SOEs (including HDC and FDC) accounted for about 60 percent of total guaranteed external loans. - Guaranteed external SOE debt is owed mainly to commercial creditors (around 8 percent of total), with the rest (4 percent) to bilateral creditors and a small amount (1 percent) to a multilateral creditor. - China is the largest creditor with about 19 (42) percent of total (external) PPG debt. - The Maldives used a swap arrangement with Reserve Bank of India (RBI) in the amount of US$100 million in 2022, which was paid back in full in 2023; this swap was excluded from external PPG. - Composition table excerpts (US$ million; percent): - Direct External debt: 2,175 | 31.6 | 70.8 (total PPG debt; percent of PPG external debt) - Multilateral: 447 | 6.5 | 14.6 - Bilateral: 1,028 | 14.9 | 33.5 - o/w China: 588 | 8.8 | 19.1 - Commercial: 700 | 10.2 | 22.8 - Guaranteed External debt: 897 | 13.0 | 29.2 - Multilateral: 38 | 0.5 | 1.2 - Bilateral: 277 | 4.0 | 9.0 - o/w China: 169 | 2.5 | 5.5 - Commercial: 582 | 8.5 | 18.9 - o/w China: 53 | 4.7 | 17.8 - Total External: 3,072 | 44.6 | 100.0 ### Debt Sustainability Analysis (DSA) coverage and contingent liabilities - The DSA includes PPG external and domestic debt; public debt includes the debt of central government as well as guarantees to SOEs. - Stock of externally guaranteed SOE debt stood at around US$789 million (around 13 percent of GDP), with large exposures to HDC and mainly from Chinese creditors. - Calibration of contingent liability shock based on default values: SOE debt default value of 2 percent of GDP and financial market component of 5 percent of GDP are used to represent fiscal risks. - Public debt coverage used in analysis (percent of GDP): - Other elements of general government not captured: 0.0 - SoE's debt (guaranteed and not guaranteed): 2.0 - PPP: 3.3 - Financial market (default minimum): 5.0 - Total (2+3+4+5): 10.3 ### Macroeconomic assumptions and projections (selected series) - Real GDP growth (current projections, percent change): - 2022: 13.9 - 2023: 4.4 - 2024: 5.2 - 2025: 6.5 - 2026: 5.0 - 2027: 4.8 - 2028: 4.4 - Avg. 2029-40: 4.5 - Inflation (current projections, percent change): - 2022: 2.6 - 2023: 2.6 - 2024: 3.8 - 2025 onward: 3.0 then 2.0 (stabilizing at around 2 percent medium term) - Primary fiscal deficit (in percent of GDP, current projections): - 2022: 7.4 - 2023: 9.6 - 2024: 7.6 - 2025: 4.9 - 2026: 2.9 - 2027: 1.5 - 2028: 1.0 - Avg. 2029-40: 0.2 - Non-interest current account deficit (in percent of GDP, current projections): - 2022: 15.1 - 2023: 20.1 - 2024: 17.1 - 2025: 11.8 - 2026: 11.2 - 2027: 8.4 - 2028: 8.1 - Avg. 2029-40: 7.1 - Capital expenditures (in percent of GDP, current projections): - 2022: 11.6 - 2023: 13.6 - 2024: 10.4 - 2025: 8.8 - 2026: 6.9 - 2027: 5.9 - 2028: 5.3 - Avg. 2029-40: 4.2 - Public Debt (in percent of GDP, current projections): - 2022: 110.4 - 2023: 118.7 - 2024: 121.2 - 2025: 118.8 - 2026: 117.1 - 2027: 114.4 - 2028: 111.7 - Avg. 2029-40: 94.6 ### Risks to the outlook - Downside risks: - Delayed fiscal consolidation and failure to reduce debt could add pressures on exchange rate and FX reserves, amplifying liquidity and solvency risks. - Failure to reduce capital spending would enlarge external financing gaps and current account deficits, draining FX reserves. - Slow implementation of macro-critical structural reforms could undermine productivity, revenue, and exports. - External downside risks include economic slowdowns in key tourist source countries, volatile commodity prices, and tightening global financial conditions. - A large depreciation with rising debt servicing costs without matching domestic revenue increases could divert resources from growth-friendly investment. - Upside risks: - Early completion of airport terminal expansion could advance a boost to growth. - Swift and decisive fiscal consolidation could restore macro stability and support sustained medium-term growth. ### Fiscal policy, revenue measures, and medium-term anchors - Fiscal stance and projections: - Primary fiscal deficit expected to peak in 2023 and remain high in 2024 due to sustained high infrastructure spending, subsidies and wage bills. - Public debt projected to rise to 121.2 percent of GDP in 2024 and decline marginally over the medium term. - Revenue measures enacted: - GST and TGST rates increased from 6 to 8 percent and from 12 to 16 percent, respectively, in 2023. - Medium-term fiscal anchors for 2024-2026: - (i) reducing public debt to less than 95 percent of GDP by 2026, - (ii) reducing primary budget deficit to less than 5 percent of GDP by 2024, - (iii) maintaining PPG debt relative to GDP on a downward trend, - (iv) reducing recurrent expenditure to levels that do not exceed government revenue by 2024. - Fiscal risks from SOEs and contingent liabilities noted, including capital contributions to SOEs to repay guaranteed debt and inadequate targeting of social assistance. ### Financing assumptions, planned issuances, and risks - Key medium-term financing assumptions: - A bond issuance of around US$250 million in 2026, maturing in 2031 with interest rate at around 10 percent. - Use of around US$220 million from Sovereign Development Fund (SDF), through FX accumulation of projected airport development fees during 2024-2026, for debt repayments in 2026. - Around 12 percent of external financing is assumed from unidentified financing in 2026. - Domestic financing projected at about ¾ of total financing in 2026, then gradually increasing over the medium term. - Around 60 percent of domestic financing is short term, with an interest rate of 4 percent. - Share of long-term debt gradually increases over time. - Market access and past issuances: - Authorities in 2021 raised US$500 million Sukuk maturing in 2026 and rolled over US$100 million Eurobond maturing in 2026. - A budget financing gap (unidentified financing) of around 2.9 percent of GDP could open in 2024; the DSA assumes domestic financing mechanically fills this gap. - Authorities do not plan significant issuances from international financial markets prior to 2025. - Sukuk issuance program established for three-years with total value of US$1 billion; baseline assumes US$250 million used for rollover. - Risks to financing strategy: - Risks to domestic financing are high given discontinuation of exceptional MMA advances and the banking sector’s sizeable sovereign exposures. - Utilization of SDF involves risks: adequacy of FX accumulation and availability of convertible foreign currencies to exchange Rufiyaa funds from SDF for external debt repayments. - Importance of urgently strengthening governance of SDF and ensuring SDF’s FX accumulation in liquid and redeemable FX assets. - Large share of domestic financing in Maldives was short term (maturity < one year); interest rates on short-term debt have ranged between 3.5 and 4.6 percent since December 2016. *Source: IMF staff projections and Maldives authorities as presented in the content unit.* ### 6. Drivers of debt dynamics is expected to remain broadly unchanged from the previous DSA ### 6. Drivers of debt dynamics is expected to remain broadly unchanged from the previous DSA ### Drivers of debt dynamics - Debt dynamics in the Maldives will be driven mainly by real GDP growth, primary fiscal deficits, and nominal interest rates. - Historically: - Current account deficits were the main contributor to accumulation of external debt. - Primary fiscal deficits were the main contributor to accumulation of domestic debt. - Over the next five years: - Real GDP growth will be the dominating driver, countering the expansion of nominal external interest costs. - Domestic debt dynamics are balanced by growth and primary fiscal deficits, leading to a moderate decline in projected debt-to-GDP ratios. - Gross financing needs continue to breach their indicative benchmark, reflecting higher borrowing needs arising from both exogeneous shocks and domestic spending push. ### Realism tools and projection assumptions - Macroeconomic projections are broadly consistent with historical patterns according to realism tools. - The gradual improvement in the primary balance-to-GDP ratio is driven by: - A return to more moderate levels of capital spending. - A recovery in GDP at a more gradual pace of adjustment than in the previous DSA. - Given large volatility in growth rates driven by changes in tourism, the multiplier approach is not suitable for calculating alternative growth paths. - The baseline fiscal adjustment is at the 73rd percentile of LIC programs. - The contribution of government capital expenditure to growth is expected to remain close to that in the previous DSA. - The government plans to continue with several large infrastructure projects, but disbursement is expected to be slow to avoid sudden stops and disruptions. - Footnotes in the source: - Residuals to changes in total external debt would be largely attributed to movements in private sector, primarily tourism resorts, on their debt-creating inflows and outflows. - The Government of Maldives signed lines of credit for more than US$1.2 billion with EXIM Bank India. The largest, for US$800 million and US$400 million, were signed in March 2019 and October 2020 respectively to finance several infrastructure projects (e.g., the development of the Gulhifalhu Port and relocation of Male Commercial Harbour, the Greater Male’ Connectivity Project, construction of social housing units, and water and sanitation projects). ### Debt carrying capacity and tailored stress tests - The debt carrying capacity of the Maldives remains weak. - Composite indicator (CI) score: 2.40 (less than the 2.69 threshold) using the Oct 2023 WEO and the 2023 World Bank CPIA. - CI is based on a weighted average of factors including real GDP growth, remittances, international reserves, world growth, and the CPIA score; calculated using 10-year averages across five years of historical data and five years of projections, and the corresponding CPIA. - Tailored stress tests applied: - Natural disaster stress test (Maldives susceptible to rising sea levels, flood, and natural disasters). - Contingent liabilities shock for risks from non-guaranteed SOE debt. - Market financing stress test for rising global interest rates affecting budgetary external debt. - Relevant calibrations and exposures: - Almost all outstanding external guaranteed SOE debt (around US$720 million) are loans with adjustable interest rates linked to the Secured Overnight Financing Rate (SOFR). - “About 83 percent of the existing debt is based on fixed interest rate instruments,” Debt Bulletin, Issue 10, December 2022, Debt Management Department, Ministry of Finance. - Tailored stress tests kept to default calibrations; they are not the most extreme shocks for any debt indicators. - The most extreme shocks are: - Shock to exports for PPG external debt indicators. - Shock to growth for public debt indicators and external debt service to revenue indicator. ### External debt sustainability (key findings) - Three external debt indicators breach their respective thresholds under the baseline scenario. - Maldives remains at a high risk of external debt distress despite recent improvements. - PV of PPG external debt-to-GDP ratio: - Will remain above the threshold of 30 percent until 2030, then converge and fall below the threshold from 2031 onward. - PV of debt-to-exports ratio: - Expected to stay below its threshold in the baseline scenario, as in the last DSA. - Liquidity indicators: - Debt service-to-exports ratio breaches its threshold under the baseline scenario. - Debt service-to-revenue ratio breaches its threshold under the baseline scenario. - Breaches reflect elevated debt service obligations on existing external PPG debt. - Stress test vulnerabilities: - Exports shock is the most severe shock for external debt indicators. - Under the exports shock, the PV of external debt-to-GDP ratio increases from around 45 percent of GDP in 2023 to around 146 percent of GDP in 2025, then gradually falls over the medium term but continues to breach the threshold. - Exports shocks lead to protracted breaches for PV of debt-to-exports ratio and debt service-to-exports ratio. - Other shocks considered include shocks to real growth, the fiscal balance, exchange rate depreciation, and external flows, with smaller impacts than the exports shock. ### Overall public debt sustainability (key findings) - Overall public debt indicators suggest a high overall risk of debt distress. - Total PPG debt-to-GDP ratio: - Declined to around 110 percent in 2022 on the back of higher tourism-led GDP. - Projected to increase to around 121 percent of GDP in 2024 due to a continued expansionary fiscal policy stance. - Projected to gradually decline to around 112 percent of GDP by 2028. - The Maldives breaches the applicable threshold for the entire projection period and remains at high risk of overall debt distress. - Stress tests: - PPG debt is vulnerable to shocks to growth. - Under the growth shock scenario, PV of Debt-to-GDP ratio, PV of Debt-to-Revenue ratio, and Debt Service-to-Revenue Ratio will continue to rise over the medium term, with PV of debt-to-GDP ratio in protracted breach of the indicative threshold of 35 percent. ### Policy recommendations to restore debt sustainability - Sustained fiscal consolidation, continued strong growth, and seeking additional concessional financing that would substitute for other expensive financing are required. - Fiscal consolidation should include: - Rationalizing capital spending, especially in large public investment projects carried out by the central government or SOEs. - Improving targeting of social assistance, including in social housing programs. - Streamlining current expenditures—rationalizing subsidies and holding back wage increases. - Further domestic revenue mobilization. - Specific consolidation benchmark: - In addition to the increase of GST rates in 2023, a sustained fiscal consolidation of around 2-3 percent of GDP annually during 2024-29 would help to lower the public debt to GDP ratio around 90 percent of GDP by 2030 and increase the probability of bringing the debt back on a sustainable path. - Other measures to alleviate FX shortages and debt servicing requirements: - Seeking additional concessional financing. - MMA’s potential FX swap arrangements. - Accelerate authorities’ FX reform initiatives (e.g., strengthen regulations of money changers, encourage the use of Rufiyaa in domestic transactions). ### Vulnerability assessment and outlook - The Maldives remains at a high risk of external and overall debt distress. - Since the previous DSA: - Some indicators, such as debt-to-GDP ratio, slightly improved in 2022 reflecting robust economic recovery. - From 2023 onward: - External and fiscal positions are expected to weaken relative to the previous DSA due to higher fiscal spending pressures from expanded medium-term public investment programs. - Gross external financing needs are projected to increase further compared to the previous DSA because of a more expansionary fiscal policy stance reflecting increased capital project related spending, subsidies, recurrent expenditures, and repayments and rollovers of non-concessional debt, mainly global sukuk. - External refinancing pressures are expected to peak in 2026 with higher amortizations and large interest payments, triggering protracted breaches in several debt indicators. - Assessment conclusion: - Debt dynamics remain vulnerable to adverse shocks in growth, interest rates, and fiscal position in the near term. - PV of external debt-to-GDP will converge to the 30 percent threshold and then fall below the threshold in the medium term. - As with the previous DSA, debt is assessed as unsustainable under the authorities’ current policies, given sustained threshold breaches of several debt indicators and significant rollover risk from external refinancing requirements in the coming years. *Source: 1mdvea2024004 - 6. Drivers of debt dynamics is expected to remain broadly unchanged from the previous DSA (IMF).* ### 14. The authorities agreed that, without significant policy changes, the risk of external debt ### 14. The authorities agreed that, without significant policy changes, the risk of external debt ### Debt outlook and risks - Authorities assessed that, without significant policy changes, the risk of external debt distress and overall risk of debt distress remains high. - The authorities are committed to a fiscal consolidation path that will bring debt-to-GDP ratio to a downward trend. - Market-financing risk indicators signal potential heightened liquidity needs; EMBI spreads (latest available) referenced as 570 in Figure 5 context. ### Policy measures and fiscal reforms under implementation - Authorities are developing an ambitious and homegrown fiscal reform agenda to be implemented urgently, including: - Subsidy reforms that phase out existing subsidies and replace them with targeted direct income transfers. - Aasandha—healthcare reform. - Reprioritization and rationalization of the public sector investment program (PSIP). - SOE reforms. - Authorities are drafting a Public Debt Management Law to strengthen debt management processes, including ensuring transparency (e.g., debt reporting), and to further articulate the medium-term debt strategy. ### Sovereign Development Fund (SDF) - The Sovereign Development Fund (SDF), established in 2017 to set aside funds for future debt repayment obligations, had accumulated at around US$500 million at end-2023, of which US$115 million in foreign currencies. - With expected increase in tourist arrivals and the expansion of the Male International Airport, the SDF size is expected to continue to grow in foreign currencies. - A new SDF law to be enacted this year is expected to further clarify legal status and improve governance, thereby strengthening the SDF. ### External liquidity and FX arrangements - Authorities will explore a new FX swap agreement under the South Asian Association for Regional Cooperation (SAARC) framework, should the need arise. - Authorities are also working to establish FX swap arrangements with bilateral partners. ### Debt sustainability projections and indicators (selected figures preserved exactly as presented) - PV of PPG external debt-to-GDP ratio: 46.5, 45.2, 43.4, 40.9, 37.1, 36.1, 35.2, 25.8, 21.3 (series from Table 1 context). - PV of PPG external debt-to-exports ratio: 56.9, 64.2, 63.0, 56.1, 51.4, 50.1, 49.1, 36.6, 30.8 (as presented). - PPG debt service-to-exports ratio: 17.4, 7.9, 5.7, 9.5, 9.0, 7.0, 15.4, 5.3, 5.0, 4.5, 3.3 (series in Table 1). - PPG debt service-to-revenue ratio: 34.1, 24.0, 15.9, 21.5, 17.8, 39.0, 13.5, 12.6, 11.1, 7.7 (series in Table 1). - Gross external financing need (Million of U.S. dollars): 1111.7, 138.7, 626.5, 1152.2, 849.8, 465.4, 1010.7, 306.0, 372.3, 680.2, 1207.3 (as listed). - Real GDP growth (in percent): -32.9, 37.7, 13.9, 4.4, 5.2, 6.5, 5.0, 4.8, 4.5, 4.5, 6.7, 4.8 (key macro assumptions series). - Nominal GDP (Million of US dollars) (selected years): 3,739; 5,392; 6,238; 6,685; 7,199; 7,897; 8,461; 9,044; 9,640; 13,263; 24,344 (Table 1 memorandum). - PV of external debt (in percent of GDP, memorandum): 53.0, 52.0, 50.5, 48.0, 44.4, 43.6, 42.8, 34.2, 31.7 (series shown). - Total external debt service-to-exports ratio (memorandum): 19.9, 10.8, 8.2, 12.3, 11.9, 9.7, 18.3, 8.3, 8.1, 7.9, 7.4 (as presented). ### Public sector debt metrics (selected figures preserved exactly as presented) - Public sector debt (percent of GDP, selected years): 154.2, 119.9, 110.4, 118.7, 121.2, 118.8, 117.1, 114.4, 111.7, 96.0, 78.2, 82.9, 110.3 (Table 2 series). - Of which: external debt (percent of GDP, selected years): 74.8, 56.5, 49.2, 49.8, 49.0, 47.3, 44.0, 43.0, 42.1, 32.1, 26.8, 35.8, 41.2 (Table 2 series). - PV of public debt-to-GDP ratio (selected): 107.6, 114.0, 115.5, 112.4, 110.2, 107.5, 104.8, 89.8, 72.7 (Table 2). - PV of public debt-to-revenue and grants ratio (selected): 353.0, 352.5, 385.7, 384.1, 377.4, 368.6, 360.3, 310.9, 246.1 (as shown). - Debt service-to-revenue and grants ratio (selected): 48.7, 146.1, 26.0, 34.8, 59.8, 75.7, 107.5, 93.9, 96.3, 106.4, 46.4, 6.4 (series in Table 2). - Gross financing need (selected): 30.2, 48.8, 15.4, 20.9, 25.5, 27.1, 34.3, 28.9, 29.0, 30.8, 14.0 (Table 2). ### Drivers and sensitivity analysis - Figures and tables illustrate drivers of debt dynamics, realism tools for baseline scenario, market-financing risk indicators, and detailed sensitivity analysis for key indicators of external and public debt through 2033. - Sensitivity analyses (Tables 3 and 4) show multiple scenario outcomes and bound/tailored tests for PV of debt-to-GDP ratio, PV of debt-to-exports ratio, debt service-to-exports ratio, and debt service-to-revenue ratio across shocks such as real GDP growth, primary balance, exports, other flows, depreciation, combined shocks, combined contingent liabilities, natural disaster, and market financing. Thresholds and breaches are reported in those tables (bold values indicate breaches). *Statement by Mahmoud Mohieldin, Executive Director for Maldives; Ali Alhosani, Alternate Executive Director for Maldives; and Ali Abdul Raheem, Advisor to Executive Director, March 20, 2024* ### Introduction ### Introduction ### Recent Economic Developments and Outlook - Maldives economy has recovered strongly from the COVID-19 pandemic and has shown resilience to subsequent shocks. - Tourist arrivals in 2023: 1.88 million visitors (surpassed the pre-pandemic record). - Tourist arrivals in first two months of 2024: 409,777 visitors, a 16.9 percent growth compared to the same period for 2023. - Authorities' 2024 target for tourist arrivals: 2 million. - Real GDP growth: - Estimated 2023: 4.4 percent. - Expected 2024: 5.2 percent (with anticipated growth in tourist arrivals). - Projected 2025: 6.5 percent (with terminal opening). - Velana International Airport upgrade project prioritized to expand production capacity and alleviate airport capacity constraints. - Government aim: open new airport terminal in phases, operationalize first phase in the fourth quarter of 2024 for the 2024 tourism peak season. - Authorities forecast tourist arrivals will increase to 3-5 million per year with completion of the project. - Bed occupancy: 58 percent in 2023; authorities note more beds in the pipeline and capacity to absorb additional arrivals. - Inflation developments: - 2022 average inflation: 2.3 percent (accelerated by global commodity price shocks). - 2023 headline inflation: 2.9 percent on average (partly due to increase in Goods and Services Tax rates). - Inflation peaked in Q1 2023 and subsequently declined. - January 2024 inflation: 0.9 percent (y-o-y). - Authorities expect inflation to accelerate to 3.8 percent in 2024 with proposed subsidy reforms. - Authorities' assessment: strong real GDP growth and declining inflation provide substantial policy space for fiscal and monetary tightening. ### Fiscal Policy and Reforms - New administration committed to an ambitious home-grown fiscal consolidation program. - Inaugural address to Parliament on 5th February 2024 outlined focus on expenditure reforms. - Subsidy reforms: - Reform indirect subsidies on electricity, fuel and staple foods. - Introduce targeted subsidies starting from July 2024. - Health scheme reforms: - Plan to control cost of the Aasandha health scheme via scheme design reforms and bulk procurement arrangements (pilot with UNDP assistance). - SOE reforms: - Cabinet endorsed an SOE reform plan; regulator developing SOE-specific reforms. - Public investment pipeline under review to prioritize and rationalize capital expenditures. - Authorities commit to raise ambition of fiscal consolidation plans relative to the 2024 Budget (formulated during a political transition) and emphasize careful calibration and communications to secure public buy-in. - Public Financial Management strengthening: - Strengthening the Sovereign Development Fund (SDF): SDF Act drafted and submitted to Parliament to strengthen management and governance and enhance transparency. - Decision to resume deposits to the SDF in foreign currency. - Legislative agenda includes: a new Fiscal Responsibility Act, a Public Debt Management Act, a new SOE Act, and amendments to the Public Finance Act and Regulation. - Debt Sustainability Analysis (DSA): - Authorities note staff assessment and are confident fiscal consolidation can shift debt trajectory toward sustainability. - Authorities express long-standing concerns regarding the Low-Income Country Debt Sustainability Framework (LIC-DSF) and welcome the upcoming LIC-DSF review. ### Monetary Policy and Financial Stability - Maldives Monetary Authority (MMA) supports gradual monetary tightening to absorb excess structural liquidity, aligned with fiscal tightening. - Fiscal Responsibility Act (FRA) suspension: - Suspension allowed central bank advances to finance government deficits since March 2020. - New government requested Parliament to halt the suspension upon taking office in November 2023; halt made effective on 31st December 2023. - MMA considers well-sequenced and gradual increases in the Minimum Reserve Requirement (MRR) to absorb excess liquidity and signal tightening. - Need for coordinated fiscal and monetary tightening to reduce foreign exchange demand and rebuild FX buffers: - Since 2022, global commodity price shocks, higher import demand from recovering tourism, and expansionary fiscal policy widened the current account deficit and weighed on foreign exchange reserves. - FX market reforms and de-dollarization: - MMA developed a package of measures to reform the FX market to support de-dollarization. - Favara Instant Payment System rolled out in 2023 to complement FX reforms and expand usage of the Maldivian rufiyaa. - Authorities exploring options for FX swap arrangements with bilateral partners. - Financial sector soundness: - Banking sector characterized by high capital buffers, strong profitability, and historically low levels of non-performing loans. - Authorities welcome and broadly concur with the findings and recommendations of the 2023 FSAP (joint IMF-World Bank). - Vulnerabilities acknowledged: sovereign-bank nexus. - Planned measures include gradually phasing in higher risk weights on bank holdings of foreign currency sovereign securities. - Long-term unwinding depends on containing government financing needs via fiscal consolidation, diversifying sovereign debt portfolio, and developing domestic secondary market for public debt. - AML/CFT: - National risk assessment completed; authorities working on mitigating identified risks and addressing legal framework gaps. ### Climate Change and Other Structural Reforms - Maldives highly vulnerable to climate change and natural disasters; low-lying islands at risk from sea level rise and changing weather patterns. - Climate commitments and energy targets: - Nationally Determined Contributions: pledged to reduce carbon emissions by 26 percent by 2030 and strive towards net-zero emissions by 2030, with adequate international support. - COP 28 commitment: ramp up renewable energy production from 4 percent currently to 33 percent in 5 years. - Estimated costs: - Cost of climate adaptation: USD 8.8 billion (159 percent of 2022 GDP). - Cost of climate mitigation: USD 1 billion (18 percent of 2022 GDP). - Challenges: high cost of adaptation/mitigation and limited access to climate financing due to strict procedural requirements and constrained access levels. - Recent capacity-building and institutional work: - Green Public Financial Management (Green-PFM) and climate sensitive Public Investment Management Assessment (Climate-PIMA) exercises completed by the Fund. - Ministry of Finance working on climate budget tagging and fine-tuning environmental, social and governance (ESG) framework. - MMA developing a green taxonomy for the banking sector with support from the Alliance for Financial Inclusion. - National development planning: - Authorities developing a National Development Strategy as strategic vision for economic growth and poverty reduction for the next 20 years and plan to enshrine it in law. - Economic diversification and export strategies: - Tourism remains main economic activity; priority on facilitating private sector investment and developing critical public infrastructure (e.g., airports). - Potential to diversify tourism products and source markets. - Fisheries sector focus: enhance domestic processing capacity to increase value added of fish exports. - Maldives practices sustainable pole-and-line fisheries but does not receive premium value for products; major export markets do not provide preferential access for sustainably produced fisheries products. - Government recently set up a fisheries promotion agency to develop Maldives sustainable fisheries brand and market products. - Authorities value IMF capacity development: - Maldives among the most intensive Fund capacity development recipients in the Asia Pacific region and highly value the technical assistance provided by the Fund. ### Conclusion - Authorities welcome the timing of the Article IV mission at the start of the new administration. - New government strongly committed to decisive action on fiscal and debt sustainability and to implementing a home-grown program of fiscal consolidation and macroeconomic stabilization. *Source: Introduction (Content unit: 1mdvea2024004)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mdvea2024004.pdf_