## _cr05145

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---

### Executive Summary
- The tsunami of December 26, 2004 had a devastating effect on the Maldives; although loss of life was limited, extensive damage to housing and infrastructure occurred and about 5 percent of the population have lost their homes.
- Preliminary assessments place the costs of replacing damaged infrastructure at about $400 million (almost 50 percent of GDP).
- Before the tsunami, prospects for 2005 were bright: growth was expected to be around 6½ percent, the fiscal deficit was modest, reserves were increasing, and progress was being made in structural reforms.
- Projected macroeconomic impacts of the tsunami:
  - GDP growth in 2005 projected to fall to about 1 percent (a 5 percentage point reduction relative to pre-tsunami expectations).
  - Net losses to the balance of payments estimated at about $160 million.
  - Reconstruction costs to the budget estimated at about 13 percent of GDP in 2005, with additional revenue losses to the budget—mostly from lower tourism taxes—of about 5 percent of GDP.
- External assistance and financing:
  - Support from donors amounting to about $67 million is expected to be disbursed in 2005.
  - Another $91 million would be needed to fully cover the 2005 balance of payments costs of the tsunami.
- Government measures to protect fiscal and reserves positions include:
  - refraining from granting waivers of import duties for reconstruction of tourist resorts;
  - reallocation of previously planned capital expenditure to reconstruction needs;
  - reductions in nonwage current expenditure from budgeted levels.
- The authorities requested a purchase of an amount equivalent to SDR 4.1 million (50 percent of quota) under the Fund’s policy on emergency assistance related to natural disasters, and requested provision of subsidies to reduce the rate of charge on these resources to 0.5 percent per annum, in line with Fund policy for PRGF-eligible countries.
- Staff supports these requests given:
  - the exceptional severity of the tsunami’s economic impact and the magnitude of the external financing requirement;
  - the authorities’ record of sound macroeconomic management and good cooperation with the Fund;
  - the strong measures the authorities are taking.

### I. Background and Damage Estimates
- Human and physical impact:
  - Virtually complete destruction on 14 out of about 200 inhabited islands, leading to the abandonment of some islands.
  - Some 5 percent of the population have lost their homes.
  - One-quarter of tourist resorts are closed.
  - 8 percent of fishing boats were damaged.
- Sector importance:
  - Tourism and fisheries account for 40 percent of GDP, one-third of employment, and generate most of Maldives’ foreign exchange earnings.
- Estimated costs and fiscal burden:
  - World Bank/AsDB/UN joint team estimate cost of replacing damaged infrastructure at about $400 million (almost 50 percent of GDP).
  - Most of the cost of repairing damaged tourism facilities ($100 million) will be covered by insurance.
  - Estimated cost to the government budget about $110 million (13 percent of GDP) in 2005.
  - Revenue losses to the budget—mostly from lower tourism taxes—estimated at about 5 percent of GDP.
- Reconstruction needs by sector (Costs of Reconstruction, in millions of U.S. dollars; totals shown):
  - Education: Needs for Next Six Months 8.4; Medium-term Needs 12.7; Total Costs 21.1
  - Health: 4.9; 7.3; 12.2
  - Housing: 22.2; 51.8; 74.0
  - Water and sanitation: 18.4; 27.2; 45.6
  - Other costs for new host islands: 5.0; 10.0; 15.0
  - Fisheries: 5.8; 8.3; 14.1
  - Agriculture: 4.8; 6.3; 11.1
  - Transport: 2.0; 22.9; 24.9
  - Power: 1.9; 2.8; 4.6
  - Livelihoods: 17.4; 0.0; 17.4
  - Environment: 3.7; 6.1; 9.8
  - Disaster Risk Management: 0.7; 3.7; 4.4
  - Administration etc.: 15.0; 35.0; 50.0
  - Total (excluding reconstruction of tourist resorts and some transport costs covered by insurance): Needs for Next Six Months 110.1; Medium-term Needs 194.0; Total Costs 304.2
- Authorities’ request: Letter dated February 21, 2005 requests a purchase of SDR 4.1 million (50 percent of quota) under the Fund’s emergency assistance policy; request includes subsidies to reduce the rate of charge to 0.5 percent per annum, subject to availability of subsidy resources.

### II. Recent Economic Developments (pre-tsunami)
- Growth and inflation:
  - Real GDP growth averaged 8 percent annually over the past three years (through 2004).
  - Inflation picked up sharply in 2004, mostly due to higher prices of fish and other locally produced food products.
- Financial conditions:
  - Credit to the private sector grew by almost 60 percent in 2004.
  - Broad money increased by 33 percent in 2004.
  - The government avoided domestic financing of the deficit in 2004.
- Fiscal position and revenue measures:
  - Current spending increased significantly in 2004, largely reflecting a nearly 40 percent increase in civil servants’ salaries beginning in September 2004.
  - Authorities increased the “bed tax” (a per capita tax on tourists) in November 2004.
  - The overall deficit fell to 2.8 percent of GDP in 2004 and was entirely financed by external borrowing, mostly on concessional terms.
- External sector:
  - Current account recorded a deficit of 12 percent of GDP in 2004.
  - Reserves accumulated to the equivalent of 3½ months of imports.
  - External public sector debt at 42 percent of GDP; about 70 percent of debt is on concessional terms.
- Structural reforms and institutions:
  - March 2004: parliament amended the Land Act to remove uncertainties regarding use of land as collateral.
  - September 2004: regulations on the insurance industry were put into force.
  - October 2004: decision to amend the Maldives Monetary Authority (MMA) Act to separate Minister of Finance and Governor roles, and to set legal limits on government borrowing from the MMA in a second stage.
  - Establishment of a financial intelligence unit within the central bank; plans to develop AML/CFT framework with Fund assistance.
  - Other financial sector legislation (Banking Act, Securities Act) and public finance bills under preparation.
- Notable institutional change: Just days before the tsunami, the United Nations decided to graduate the Maldives from least developed countries (LDC) status.

### III. Effects of the Tsunami on Growth, Prices, Fiscal and External Balances
- Growth and sectoral impacts:
  - Tourist sector: 20 out of 87 resorts temporarily closed; occupancy rates of 30–40 percent in January 2005 (compared to full capacity in January 2004).
  - Authorities project most affected resorts back in operation by mid-2005 and occupancy rates returning to normal by end-2005, leaving tourism revenues 26 percent lower than in 2004.
  - Fisheries expansion expected to be temporarily halted by damage to fishing vessels and fish processing facilities.
  - Sectors supplying goods and services to tourism will be adversely affected; construction and transportation sectors will benefit from reconstruction activity.
  - Staff projects growth of about 1 percent in 2005.
- Prices:
  - Staff projects CPI increase of 3 percent during 2005, with temporary increases likely in construction goods and transportation services.
- Fiscal impact (Impact of the Tsunami on the 2005 Budget, changes from 2005 Budget, in percent of 2005 post-tsunami GDP):
  - Total revenue and grants: 2.3
  - Total revenue: -4.7
  - Current revenue: -4.7
  - Tax revenue: -2.7
  - Nontax revenue: -2.0
  - Capital revenue: 0.0
  - Grants: 7.0
  - Expenditure and net lending: 13.8
  - Current expenditure: 2.6
  - Capital expenditure: 11.2
  - Overall balance: -11.5
  - Overall balance, excluding grants: -18.5
- Balance of payments effects (Effects of Tsunami on the Balance of Payments in 2005, in millions of U.S. dollars):
  - Negative effects total: 347
    - Reduction in nonfactor services (mostly tourism receipts): 170
    - Reduction in exports: 25
    - Additional post-tsunami imports for reconstruction of resorts: 80
    - Imports related to post-tsunami public sector reconstruction: 72
  - Offsetting positive effects total: 190
    - Insurance payments to resorts: 80
    - Decline in consumer goods imports due to decline in tourism: 55
    - Reduction in outward profit transfers by resorts: 10
    - Reduction in outward workers' remittances: 10
    - Reduction in imports due to lower GDP growth: 35
  - Overall balance: -157
  - Identified reconstruction-related financing: 67
    - Grants: 57
    - Loans: 10
  - Remaining balance of payments need: 91
- Staff estimates:
  - GDP growth in 2005 will be 5 percentage points lower than pre-tsunami expectations (projected growth about 1 percent in 2005).
  - Net losses to the balance of payments estimated at about $160 million (19 percent of GDP).

### IV. Authorities’ Response, Coordination, and Financing Needs
- Immediate government response:
  - Established a Disaster Management Center for information sharing and decision-making.
  - Deployed the National Security Service to provide essential supplies (especially water and food) to worst-affected islands.
  - Re-established communications and restored electricity to almost all islands within days.
  - Provided tents to thousands of displaced persons; by mid-January most had been placed in temporary shelters or with host families.
  - Cash payments made to those who had lost livelihoods or homes.
- Coordination and transparency:
  - Government worked closely with World Bank, AsDB and United Nations to assess recovery needs.
  - Established the Tsunami Relief and Reconstruction Fund with a board including private and government sector members and a UN representative to improve transparency and accountability in donor fund use.
- Longer-term planning:
  - Reinforced policy of voluntary population movements to less vulnerable islands.
  - Proposed a new plan for the creation of “safe islands” to increase economies of scale in public service provision and provide better protection against rising sea levels.
- External assistance needs:
  - Identified reconstruction-related financing of $67 million for 2005 (grants $57 million, loans $10 million).
  - Donor support amounting to about $67 million expected to be disbursed in 2005.
  - Additional $91 million needed to fully cover the 2005 balance of payments costs of the tsunami.
- Government fiscal measures to protect fiscal and reserves positions include:
  - refraining from granting waivers of import duties for reconstruction of tourist resorts;
  - reallocating previously planned capital expenditure to reconstruction needs;
  - reducing nonwage current expenditure from budgeted levels.

### Box 1 — Issues in Reconstruction Following the Tsunami: Key Constraints and Strategy
- Geographic and demographic constraints:
  - Maldives population: about 300,000.
  - Archipelago extent: 900 kilometers from north to south.
  - Atoll structure: 26 geographical atolls organized into 20 administrative atolls.
  - Total islands: 1,190.
  - Inhabited islands: 197.
  - Islands with land area > one square kilometer: 33.
  - One-third of the inhabited islands have a population of less than 500.
  - 70 percent of the inhabited islands has a population of less than 1,000.
  - Implication: dispersion increases costs of supplying basic services and raises unit costs of reconstruction.
- Reconstruction strategy and labor capacity:
  - Safe islands project: encourage voluntary relocation from smaller islands to larger islands to provide better infrastructure and protection.
  - Use of imported labor is common, especially in construction.
  - Workers in tourist resorts possess skills that could speed rehabilitation.
- Reconstruction financing and donor support:
  - Immediate donor commitments and expected disbursements:
    - Support from the World Bank, AsDB, UN agencies, Japan, and other donors amounting to about $67 million is expected to be disbursed in 2005.
    - Bilateral donors and multilateral institutions have pledged $88 million in tsunami relief to the Maldives, of which almost $75 million is expected to be in grants.
  - Identified additional financing needs:
    - Staff estimate an additional $91 million would be required to fully offset the balance of payments costs of the tsunami to the Maldives in 2005.
    - Significant additional support will also be required to cover reconstruction costs in 2006 and 2007.
  - Major donor commitments summarized:
    - United Nations agencies: mobilized some $25½ million in grants out of $66½ million sought; a significant part must be used during the first six months after the tsunami (subject to some donors waiving this requirement).
    - AsDB: $23 million total, of which $20 million is a grant and the balance a concessional loan; about one-third of the grant expected for budget support; expected delivery in 2005–06 with about $10 million to be disbursed in 2005.
    - World Bank: $14 million for the Post-Tsunami Recovery and Reconstruction project, of which $12 million would be reallocated from existing projects; expected financing split is 40 percent grant and the balance a loan on normal IDA terms.
    - Japan: $24 million in grants for emergency tsunami relief.
      - Note: $4 million is a grant extended by the government of Japan to the UNDP for the restoration of critical infrastructure.
  - Financing composition and implications:
    - So long as external financing for reconstruction is a mixture of grants and concessional loans, Maldives’ external debt will remain sustainable and debt service low.
- Policy measures and macroeconomic framework:
  - Authorities’ policy stance:
    - Intend to maintain the peg to the U.S. dollar; peg continues to serve Maldives well and the level of the real effective exchange rate appears appropriate given the temporary nature of the shock.
    - Will monitor private sector credit developments to ensure inflation control and competitiveness protection.
  - Fiscal measures already announced (intended to protect fiscal and reserves positions while maintaining the peg):
    - Refrain from granting waivers of import duties for reconstruction of tourist resorts.
    - Reallocate capital expenditure to reconstruction needs by deferring all capital projects in the domestic public sector investment program on which work has not already begun.
    - Limit manpower increases.
    - Refrain from any further wage increase.
    - Reduce budget allocations for nonwage current expenditure unrelated to disaster relief or reconstruction.
  - Fiscal impact of measures:
    - In aggregate, the measures could produce savings for the budget amounting to about 5 percent of GDP, and would reduce import demand, thus protecting the reserves position.
  - Trade-offs and funding preference:
    - Desirable for the financing gap to be closed fully through additional foreign financing to avoid domestic financing of the budget deficit and a loss of foreign exchange reserves.

### IMF Action, Staff Appraisal, and Recommendations
- Authorities’ request to the Fund:
  - Requested a purchase equivalent to SDR 4.1 million (50 percent of quota) to help cover the immediate financing need caused by the tsunami.
  - This request exceeds the standard limit of 25 percent of quota under the Fund’s policy on emergency assistance; staff supports the request given exceptional severity and magnitude of the external financing requirement.
- Executive Board decision and terms:
  - Access approved: SDR 4.1 million (50 percent of quota).
  - Press release: The Executive Board approved SDR 4.1 million (about US$ 6.3 million) in emergency assistance; repayment in eight equal quarterly installments over 3¼ to 5 years from disbursement; rate of charge subsidized to 0.5 percent per annum subject to resource availability.
- Rationale and expected effects of Fund support:
  - A drawing equivalent to 50 percent of quota would allow authorities to limit the anticipated temporary decline in reserves in the first half of 2005.
  - Maldives has no credit outstanding from the Fund and has a record of sound macroeconomic management and good cooperation with the Fund.
  - Because the policy framework is strong and the balance of payments need temporary, a PRGF arrangement would not be appropriate; emergency assistance is preferred due to urgency.
- Repayment capacity and debt service projections:
  - Most of Maldives’ external public sector debt is on concessional terms; Maldives has an impeccable record in servicing its public debt.
  - Prospects for the medium term are good provided donor support closes the financing gap.
  - Gross international reserves: expected to decline only marginally to 3.2 months of imports by end-2005, compared with 3.6 months of imports at end-2004.
  - The proposed purchase would amount to only 3 percent of the current stock of reserves.
  - Debt service is projected to be less than 5 percent of exports of goods and services.
  - Debt service payments to the Fund are projected to be at or below 1 percent of gross official reserves throughout the repayment period.
- Staff appraisal and recommendations:
  - Damage to Maldives’ economy was more extensive than in any other country affected by the tsunami; loss of life was limited but almost the entire population felt effects.
  - Thousands of families were rendered homeless and reconstruction of housing will fall largely on the government due to lack of insurance coverage.
  - The government’s timely actions—collaboration with the international community on needs assessment and transparent, accountable spending mechanisms—have mitigated immediate impacts.
  - Further donor support is needed to cover reconstruction needs and temporary decline in tourism; World Bank and AsDB mobilization efforts deserve support.
  - With strong donor support, preferably through grants or concessional loans, the Maldives government can preserve economic stability and move quickly to house the homeless and restore infrastructure.
- Operational recommendations:
  - Provide immediate external financing (SDR 4.1 million approved) to support essential imports and preserve reserves.
  - Subsidize rate of charge to concessional terms (0.5 percent per annum) for PRGF-eligible member, subject to subsidy resource availability.
  - Prioritize reallocation of domestic budget resources to reconstruction; defer nonurgent capital projects; limit wage and staffing expansion; curtail non-disaster-related current spending.
  - Seek grants and highly concessional loans before contracting less concessional external debt.
  - Adjust pace of reconstruction to avoid domestic bottlenecks and inflationary pressures; encourage imports of labor and community participation to mitigate capacity constraints.
  - Strengthen transparency and accountability in management of donor funds through a Board overseeing the Tsunami Relief and Reconstruction Fund.

### Selected Exact Macroeconomic and Balance-of-Payments Figures (as presented)
- Population (2003): 285,066
- Nominal GDP (2003): 690.8 (millions of U.S. dollars)
- GDP per capita (2003): 2,423 (U.S. dollars)
- Quota: 8.2 (millions of SDRs)
- Real GDP growth (2004 pre-tsunami): 8.8; (2005 post-tsunami estimate/projection): 6.5 then 1.0 (table series)
- Consumer prices (period average, 2004): 6.4; (2005 series) 6.8 then 2.8
- Central government revenue and grants (2004): 35.2 percent of GDP; (2005 projection series) 42.5
- Central government expenditure and net lending (2004): 38.0 percent of GDP; (2005 projection series) 57.6
- Overall balance (2004): -2.8 percent of GDP; (2005 projection): -15.1 percent of GDP
- Current account balance 2004: -89.2 (millions of U.S. dollars); 2005 post-tsunami projection: -207.4 (millions of U.S. dollars)
  - Current account balance (in percent of GDP): 2004: -11.8; 2005 post-tsunami: -25.1
- Gross official reserves (year-end, 2004): 205.1 (millions of U.S. dollars) — about 3.6 months of imports of GNFS (table series)
- External debt (2004): 395.5 (millions of U.S. dollars); (in percent of GDP) 47.8
- Trade balance 2004: -368.8 (millions of U.S. dollars); 2005 post-tsunami projection: -498.7 (millions of U.S. dollars)
- Tourism receipts (2004): 512.6 (millions of U.S. dollars); tourism receipts growth in 2004: 7.1 percent
- Donor pledges to date: almost $108 million; expected availability in 2005: about $67 million.
- Identified remaining balance-of-payments need: about $91 million.
- IMF projected disbursements (in millions of SDRs): 0.0 (2004), 4.1 (2005), 0.0 subsequent years (table series).
- Stock of outstanding Fund credit (table): 0.0 (2004), 4.1 (2005), 4.1 (2006), 4.1 (2007), declining thereafter.
- Charge/interest (subsidized rate) in Table 6: 0.0, 0.02, 0.02, 0.02, 0.02, 0.01, 0.00 (series as presented).

*Source: IMF staff report (2005) on Maldives, _cr05145.*

### 2004. At that time, Directors welcomed the strong rebound in growth and improved

### _cr05145 - 2004. At that time, Directors welcomed the strong rebound in growth and improved

### Executive Summary
- The tsunami of December 26, 2004 had a devastating effect on the Maldives; although loss of life was limited, extensive damage to housing and infrastructure occurred and about 5 percent of the population have lost their homes.
- Preliminary assessments place the costs of replacing damaged infrastructure at about $400 million (almost 50 percent of GDP).
- Before the tsunami, prospects for 2005 were bright: growth was expected to be around 6½ percent, the fiscal deficit was modest, reserves were increasing, and progress was being made in structural reforms.
- Projected macroeconomic impacts of the tsunami:
  - GDP growth in 2005 projected to fall to about 1 percent (a 5 percentage point reduction relative to pre-tsunami expectations).
  - Net losses to the balance of payments estimated at about $160 million.
  - Reconstruction costs to the budget estimated at about 13 percent of GDP in 2005, with additional revenue losses to the budget—mostly from lower tourism taxes—of about 5 percent of GDP.
- External assistance and financing:
  - Support from donors amounting to about $67 million is expected to be disbursed in 2005.
  - Another $91 million would be needed to fully cover the 2005 balance of payments costs of the tsunami.
- Government measures to protect fiscal and reserves positions include:
  - refraining from granting waivers of import duties for reconstruction of tourist resorts;
  - reallocation of previously planned capital expenditure to reconstruction needs;
  - reductions in nonwage current expenditure from budgeted levels.
- The authorities requested a purchase of an amount equivalent to SDR 4.1 million (50 percent of quota) under the Fund’s policy on emergency assistance related to natural disasters, and requested provision of subsidies to reduce the rate of charge on these resources to 0.5 percent per annum, in line with Fund policy for PRGF-eligible countries.
- Staff supports these requests given:
  - the exceptional severity of the tsunami’s economic impact and the magnitude of the external financing requirement;
  - the authorities’ record of sound macroeconomic management and good cooperation with the Fund;
  - the strong measures the authorities are taking.

### I. Background
- Impact summary:
  - Virtually complete destruction on 14 out of about 200 inhabited islands, leading to the abandonment of some islands.
  - Some 5 percent of the population have lost their homes.
  - One-quarter of tourist resorts are closed.
  - 8 percent of fishing boats were damaged.
- Sector importance:
  - Tourism and fisheries account for 40 percent of GDP, one-third of employment, and generate most of Maldives’ foreign exchange earnings.
- Estimated costs and fiscal burden:
  - World Bank/AsDB/UN joint team estimate cost of replacing damaged infrastructure at about $400 million (almost 50 percent of GDP).
  - Most of the cost of repairing damaged tourism facilities ($100 million) will be covered by insurance.
  - Estimated cost to the government budget about $110 million (13 percent of GDP) in 2005.
  - Revenue losses to the budget—mostly from lower tourism taxes—estimated at about 5 percent of GDP.
- Reconstruction needs by sector (Costs of Reconstruction, in millions of U.S. dollars; totals shown):
  - Education: Needs for Next Six Months 8.4; Medium-term Needs 12.7; Total Costs 21.1
  - Health: 4.9; 7.3; 12.2
  - Housing: 22.2; 51.8; 74.0
  - Water and sanitation: 18.4; 27.2; 45.6
  - Other costs for new host islands: 5.0; 10.0; 15.0
  - Fisheries: 5.8; 8.3; 14.1
  - Agriculture: 4.8; 6.3; 11.1
  - Transport: 2.0; 22.9; 24.9
  - Power: 1.9; 2.8; 4.6
  - Livelihoods: 17.4; 0.0; 17.4
  - Environment: 3.7; 6.1; 9.8
  - Disaster Risk Management: 0.7; 3.7; 4.4
  - Administration etc.: 15.0; 35.0; 50.0
  - Total (excluding reconstruction of tourist resorts and some transport costs covered by insurance): Needs for Next Six Months 110.1; Medium-term Needs 194.0; Total Costs 304.2
- Authorities’ request: Letter dated February 21, 2005 requests a purchase of SDR 4.1 million (50 percent of quota) under the Fund’s emergency assistance policy; request includes subsidies to reduce the rate of charge to 0.5 percent per annum, subject to availability of subsidy resources.

### II. Recent Economic Developments
- Growth and inflation:
  - Real GDP growth averaged 8 percent annually over the past three years (through 2004).
  - Inflation picked up sharply in 2004, mostly due to higher prices of fish and other locally produced food products.
- Financial conditions:
  - Credit to the private sector grew by almost 60 percent in 2004.
  - Broad money increased by 33 percent in 2004.
  - The government avoided domestic financing of the deficit in 2004.
- Fiscal position and revenue measures:
  - Current spending increased significantly in 2004, largely reflecting a nearly 40 percent increase in civil servants’ salaries beginning in September 2004.
  - Authorities increased the “bed tax” (a per capita tax on tourists) in November 2004.
  - The overall deficit fell to 2.8 percent of GDP in 2004 and was entirely financed by external borrowing, mostly on concessional terms.
- External sector:
  - Current account recorded a deficit of 12 percent of GDP in 2004.
  - Reserves accumulated to the equivalent of 3½ months of imports.
  - External public sector debt at 42 percent of GDP; about 70 percent of debt is on concessional terms.
- Structural reforms:
  - March 2004: parliament amended the Land Act to remove uncertainties regarding use of land as collateral.
  - September 2004: regulations on the insurance industry were put into force.
  - October 2004: decision to amend the Maldives Monetary Authority (MMA) Act to separate Minister of Finance and Governor roles, and to set legal limits on government borrowing from the MMA in a second stage.
  - Establishment of a financial intelligence unit within the central bank; plans to develop AML/CFT framework with Fund assistance.
  - Other financial sector legislation (Banking Act, Securities Act) and public finance bills under preparation.
- Notable institutional change: Just days before the tsunami, the United Nations decided to graduate the Maldives from least developed countries (LDC) status.

### III. Effects of the Tsunami
- Growth and sectoral impacts:
  - Tourist sector: 20 out of 87 resorts temporarily closed; occupancy rates of 30–40 percent in January 2005 (compared to full capacity in January 2004).
  - Authorities project most affected resorts back in operation by mid-2005 and occupancy rates returning to normal by end-2005, leaving tourism revenues 26 percent lower than in 2004.
  - Fisheries expansion expected to be temporarily halted by damage to fishing vessels and fish processing facilities.
  - Sectors supplying goods and services to tourism will be adversely affected; construction and transportation sectors will benefit from reconstruction activity.
  - Staff projects growth of about 1 percent in 2005.
- Prices:
  - Staff projects CPI increase of 3 percent during 2005, with temporary increases likely in construction goods and transportation services.
- Fiscal impact (Impact of the Tsunami on the 2005 Budget, changes from 2005 Budget, in percent of 2005 post-tsunami GDP):
  - Total revenue and grants: 2.3
  - Total revenue: -4.7
  - Current revenue: -4.7
  - Tax revenue: -2.7
  - Nontax revenue: -2.0
  - Capital revenue: 0.0
  - Grants: 7.0
  - Expenditure and net lending: 13.8
  - Current expenditure: 2.6
  - Capital expenditure: 11.2
  - Overall balance: -11.5
  - Overall balance, excluding grants: -18.5
- Balance of payments effects (Effects of Tsunami on the Balance of Payments in 2005, in millions of U.S. dollars):
  - Negative effects total: 347
    - Reduction in nonfactor services (mostly tourism receipts): 170
    - Reduction in exports: 25
    - Additional post-tsunami imports for reconstruction of resorts: 80
    - Imports related to post-tsunami public sector reconstruction: 72
  - Offsetting positive effects total: 190
    - Insurance payments to resorts: 80
    - Decline in consumer goods imports due to decline in tourism: 55
    - Reduction in outward profit transfers by resorts: 10
    - Reduction in outward workers' remittances: 10
    - Reduction in imports due to lower GDP growth: 35
  - Overall balance: -157
  - Identified reconstruction-related financing: 67
    - Grants: 57
    - Loans: 10
  - Remaining balance of payments need: 91
- Staff estimates:
  - GDP growth in 2005 will be 5 percentage points lower than pre-tsunami expectations (projected growth about 1 percent in 2005).
  - Net losses to the balance of payments estimated at about $160 million (19 percent of GDP).

### IV. The Authorities’ Response and the Need for Assistance
- Immediate government response:
  - Established a Disaster Management Center for information sharing and decision-making.
  - Deployed the National Security Service to provide essential supplies (especially water and food) to worst-affected islands.
  - Re-established communications and restored electricity to almost all islands within days.
  - Provided tents to thousands of displaced persons; by mid-January most had been placed in temporary shelters or with host families.
  - Cash payments made to those who had lost livelihoods or homes.
- Coordination and transparency:
  - Government worked closely with World Bank, AsDB and United Nations to assess recovery needs.
  - Established the Tsunami Relief and Reconstruction Fund with a board including private and government sector members and a UN representative to improve transparency and accountability in donor fund use.
- Longer-term planning:
  - Reinforced policy of voluntary population movements to less vulnerable islands.
  - Proposed a new plan for the creation of “safe islands” to increase economies of scale in public service provision and provide better protection against rising sea levels.
- External assistance needs:
  - Identified reconstruction-related financing of $67 million for 2005 (grants $57 million, loans $10 million).
  - Donor support amounting to about $67 million expected to be disbursed in 2005.
  - Additional $91 million needed to fully cover the 2005 balance of payments costs of the tsunami.
- Government fiscal measures to protect fiscal and reserves positions include:
  - refraining from granting waivers of import duties for reconstruction of tourist resorts;
  - reallocating previously planned capital expenditure to reconstruction needs;
  - reducing nonwage current expenditure from budgeted levels.

*Source: IMF staff report (2005) on Maldives, _cr05145.*

### Box 1. Issues in Reconstruction Following the Tsunami

### Box 1. Issues in Reconstruction Following the Tsunami

### Context and geographic constraints
- Maldives population: about 300,000.
- Archipelago extent: 900 kilometers from north to south.
- Atoll structure: 26 geographical atolls organized into 20 administrative atolls.
- Islands and habitation:
  - Total islands: 1,190.
  - Inhabited islands: 197.
  - Islands with land area > one square kilometer: 33.
  - One-third of the inhabited islands have a population of less than 500.
  - 70 percent of the inhabited islands has a population of less than 1,000.
- Implications:
  - Exceptional dispersion of population increases costs of supplying water, power, sanitation, health services, and schools.
  - Limited scope for economies of scale raises unit costs of reconstruction relative to other affected countries.
  - Reconstruction unit costs are higher because each inhabited island requires its own basic infrastructure regardless of population size.

### Reconstruction strategy and labor capacity
- Safe islands project:
  - Authorities plan to encourage voluntary relocation from smaller islands to larger islands to:
    - Provide better infrastructure.
    - Improve access to schools and health care.
    - Offer better protection against the sea.
- Labor advantages:
  - Use of imported labor is common, especially in construction.
  - Absence of specialization in smaller islands produces a flexible labor force deployable across activities (e.g., fishing and basic construction).
  - Workers in tourist resorts possess skills that could speed rehabilitation of damaged resorts and limit interruption of employment.

### Reconstruction financing and donor support
- Immediate donor commitments and expected disbursements:
  - Support from the World Bank, AsDB, UN agencies, Japan, and other donors amounting to about $67 million is expected to be disbursed in 2005.
  - Bilateral donors and multilateral institutions have pledged $88 million in tsunami relief to the Maldives, of which almost $75 million is expected to be in grants.
- Identified additional financing needs:
  - Staff estimate an additional $91 million would be required to fully offset the balance of payments costs of the tsunami to the Maldives in 2005.
  - Significant additional support will also be required to cover reconstruction costs in 2006 and 2007.
- Major donor commitments summarized:
  - United Nations agencies: mobilized some $25½ million in grants out of $66½ million sought; a significant part must be used during the first six months after the tsunami (subject to some donors waiving this requirement).
  - AsDB: $23 million total, of which $20 million is a grant and the balance a concessional loan; about one-third of the grant expected for budget support; expected delivery in 2005–06 with about $10 million to be disbursed in 2005.
  - World Bank: $14 million for the Post-Tsunami Recovery and Reconstruction project, of which $12 million would be reallocated from existing projects; expected financing split is 40 percent grant and the balance a loan on normal IDA terms.
  - Japan: $24 million in grants for emergency tsunami relief.
    - Note: $4 million is a grant extended by the government of Japan to the UNDP for the restoration of critical infrastructure.
- Financing composition and implications:
  - So long as external financing for reconstruction is a mixture of grants and concessional loans, Maldives’ external debt will remain sustainable and debt service low.

### Policy measures and macroeconomic framework
- Authorities’ policy stance:
  - Intend to maintain the peg to the U.S. dollar; peg continues to serve Maldives well and the level of the real effective exchange rate appears appropriate given the temporary nature of the shock.
  - Will monitor private sector credit developments to ensure inflation control and competitiveness protection.
- Fiscal measures already announced (intended to protect fiscal and reserves positions while maintaining the peg):
  - Refrain from granting waivers of import duties for reconstruction of tourist resorts.
  - Reallocate capital expenditure to reconstruction needs by deferring all capital projects in the domestic public sector investment program on which work has not already begun.
  - Limit manpower increases.
  - Refrain from any further wage increase.
  - Reduce budget allocations for nonwage current expenditure unrelated to disaster relief or reconstruction.
- Fiscal impact of measures:
  - In aggregate, the measures could produce savings for the budget amounting to about 5 percent of GDP, and would reduce import demand, thus protecting the reserves position.
- Trade-offs and funding preference:
  - Given the scale of the problem and the undesirability of imposing a further burden on the people of the Maldives, it would be desirable for the financing gap to be closed fully through additional foreign financing.
  - With donor support, Maldives could avoid domestic financing of the budget deficit and a loss of foreign exchange reserves; otherwise, significant fiscal measures would likely result in lower reserves, increased vulnerability, and delays in housing the homeless and restoring essential infrastructure.

### External assistance and Fund involvement
- Authorities’ request to the Fund:
  - Requested a purchase equivalent to SDR 4.1 million (50 percent of quota) to help cover the immediate financing need caused by the tsunami.
  - This request exceeds the standard limit of 25 percent of quota under the Fund’s policy on emergency assistance; staff supports the request given exceptional severity and magnitude of the external financing requirement.
- Rationale and expected effects of Fund support:
  - A drawing equivalent to 50 percent of quota would allow authorities to limit the anticipated temporary decline in reserves in the first half of 2005.
  - Maldives has no credit outstanding from the Fund and has a record of sound macroeconomic management and good cooperation with the Fund.
  - Because the policy framework is strong and the balance of payments need temporary, a PRGF arrangement would not be appropriate; emergency assistance is preferred due to urgency.
- Repayment capacity and debt service projections:
  - Most of Maldives’ external public sector debt is on concessional terms; Maldives has an impeccable record in servicing its public debt.
  - Prospects for the medium term are good provided donor support closes the financing gap.
  - Gross international reserves: expected to decline only marginally to 3.2 months of imports by end-2005, compared with 3.6 months of imports at end-2004.
  - The proposed purchase would amount to only 3 percent of the current stock of reserves.
  - Debt service is projected to be less than 5 percent of exports of goods and services.
  - Debt service payments to the Fund are projected to be at or below 1 percent of gross official reserves throughout the repayment period.

### Medium-term prospects and staff appraisal
- Short- to medium-term outlook:
  - By the end of 2005, all damaged tourist resorts are expected to be back in operation, and tourist arrivals expected to be back to normal, allowing a return of exports of goods and services to pre-tsunami levels by 2006.
  - Reconstruction of housing and infrastructure will take longer and will require continued external financing at least through 2007.
- Staff appraisal and recommendations:
  - Damage to Maldives’ economy was more extensive than in any other country affected by the tsunami; loss of life was limited but almost the entire population felt effects.
  - Thousands of families were rendered homeless and reconstruction of housing will fall largely on the government due to lack of insurance coverage.
  - The government’s timely actions—collaboration with the international community on needs assessment and transparent, accountable spending mechanisms—have mitigated immediate impacts.
  - Further donor support is needed to cover reconstruction needs and temporary decline in tourism; World Bank and AsDB mobilization efforts deserve support.
  - With strong donor support, preferably through grants or concessional loans, the Maldives government can preserve economic stability and move quickly to house the homeless and restore infrastructure.

*Source: _cr05145 - Box 1. Issues in Reconstruction Following the Tsunami*

### 23. The staff supports the Maldives’ request for a purchase under the Fund’s policy

### _cr05145 - 23. The staff supports the Maldives’ request for a purchase under the Fund’s policy on emergency assistance for natural disasters

### IMF staff recommendation and IMF action
- Staff supports the Maldives’ request for a purchase under the Fund’s policy on emergency assistance for natural disasters to facilitate essential imports and limit reserve depletion during the immediate crisis.
- Access approved: SDR 4.1 million (50 percent of quota). Staff notes this is larger than the standard limit of 25 percent of quota but is justified by the exceptionally large tsunami impact and strong authorities’ mitigation efforts.
- Staff supports the authorities’ request that the rate of charge on these resources be reduced to concessional terms via subsidies, subject to availability of subsidy resources.
- Press release: The Executive Board approved SDR 4.1 million (about US$ 6.3 million) in emergency assistance; repayment in eight equal quarterly installments over 3¼ to 5 years from disbursement; rate of charge subsidized to 0.5 percent per annum subject to resource availability.

### Economic and disaster impact (key figures and projections)
- Human and physical impact:
  - Death toll: 82; Missing: 26; Injured: over 1,300.
  - About 20 of the Maldives’ 200 inhabited islands have housing and infrastructure completely destroyed.
  - About 13,000 people—5 percent of the population—rendered homeless.
- Damage and financing estimates:
  - Joint World Bank-Asian Development Bank-UN assessment: recovery costs about $400 million, equivalent to almost one-half of GDP.
  - Net losses to the balance of payments from lower tourist receipts and fisheries exports: around $160 million (with losses greatest in the first quarter of the year).
  - Recovery costs in first six months of 2005: $110 million—about 13 percent of GDP.
  - Donor pledges so far: almost $108 million (majority grants, remainder concessional loans); about $67 million expected to be available during 2005.
  - Remaining financing gap urgently sought: about $91 million.
- Macroeconomic effect on growth and budget:
  - The tsunami will reduce GDP growth by around 5–6 percent in 2005.
  - Estimated revenue losses (mostly from lower tourism taxes): equivalent to about 5 percent of GDP.

### Policy response and fiscal measures announced by authorities
- Immediate relief and administrative response:
  - Government began damage assessment and essential supplies within 24 hours.
  - By January 5: communications re-established with 188 islands; electricity available in 194 islands.
  - By January 20: over half of homeless placed in temporary housing; modest cash payments disbursed to worst affected.
  - January 9: President established Board to manage Tsunami Relief and Reconstruction Fund; Board includes private and government members and the UN Acting Resident Coordinator to ensure transparency and accountability.
- Planned budgetary and expenditure measures (intended savings: 500 million rufiyaa, equivalent to about 5 percent of GDP, in 2005):
  - Reallocate capital expenditure to reconstruction by deferring all capital projects in the domestic public sector investment program where work has not begun; reduce planned expenditures on machinery and equipment and vehicles.
  - Reduce planned increases in civil service manpower; no further wage increases in 2005.
  - Reduce budget allocations for nonwage current expenditure unrelated to disaster relief or reconstruction (discontinue/delay some transportation and utilities spending, cut foreign travel, reduce IT and office supplies).
  - Refrain from granting waivers of import duties for reconstruction of tourist resorts.
  - Improve monitoring of state enterprises to increase efficiency and reduce operational expenses.
- Medium-term fiscal stance and policy intentions:
  - Return from 2006 to limited borrowing or modest repayments to the Maldives Monetary Authority (MMA); finance remaining reconstruction from foreign grants and loans, or savings elsewhere in the budget.
  - Broaden tax base by introducing a Business Profits tax.
  - Increase MMA autonomy in conduct of monetary policy.
  - Exercise restraint in contracting new external debt; aim to secure grants and highly concessional loans where possible.
- Trade and exchange regime stance:
  - Government does not intend to impose new or intensify existing restrictions on payments and transfers for current international transactions, nor introduce multiple currency practices, nor impose new or intensify import restrictions for balance of payments purposes.

### Macroeconomic indicators and balance-of-payments highlights (selected exact figures from tables)
- Population (2003): 285,066
- Nominal GDP (2003): 690.8 (millions of U.S. dollars)
- GDP per capita (2003): 2,423 (U.S. dollars)
- Quota: 8.2 (millions of SDRs)
- Selected aggregates (2004 pre-tsunami; 2005 post-tsunami estimates/projections where provided):
  - Real GDP growth (2004 pre-tsunami): 8.8; (2005 post-tsunami estimate/projection): 6.5 then 1.0 (table series)
  - Consumer prices (period average, 2004): 6.4; (2005 series) 6.8 then 2.8
  - Central government revenue and grants (2004): 35.2 percent of GDP; (2005 projection series) 42.5
  - Central government expenditure and net lending (2004): 38.0 percent of GDP; (2005 projection series) 57.6
  - Overall balance (2004): -2.8 percent of GDP; (2005 projection): -15.1 percent of GDP
  - Current account balance 2004: -89.2 (millions of U.S. dollars); 2005 post-tsunami projection: -207.4 (millions of U.S. dollars)
    - Current account balance (in percent of GDP): 2004: -11.8; 2005 post-tsunami: -25.1
  - Gross official reserves (year-end, 2004): 205.1 (millions of U.S. dollars) — about 3.6 months of imports of GNFS (table series)
  - External debt (2004): 395.5 (millions of U.S. dollars); (in percent of GDP) 47.8
  - Trade balance 2004: -368.8 (millions of U.S. dollars); 2005 post-tsunami projection: -498.7 (millions of U.S. dollars)
  - Tourism receipts (2004): 512.6 (millions of U.S. dollars); tourism receipts growth in 2004: 7.1 percent; projected drop in 2005 domestic export growth indicates severe impact (see tables).
- IMF-related projected payments and Fund involvement:
  - Projected disbursements in table: 0.0 (2004), 4.1 (2005), 0.0 subsequent years (in millions of SDRs).
  - Stock of outstanding Fund credit (table): 0.0 (2004), 4.1 (2005), 4.1 (2006), 4.1 (2007), declining thereafter.
  - Charge/interest (subsidized rate) in Table 6: 0.0, 0.02, 0.02, 0.02, 0.02, 0.01, 0.00 (series as presented).

### Financing needs, donor support, and gaps
- Donor pledges to date: almost $108 million; expected availability in 2005: about $67 million.
- Net balance-of-payments losses in 2005 exceed pledged support; remaining financing gap cited: about $91 million.
- Additional external financing requirements identified in tables:
  - Table 1/2 indicates an Additional external financing requirement of 91.3 (millions of U.S. dollars) in a post-tsunami scenario and other entries showing 11.0 (millions of rufiyaa equivalent) in related fiscal tables; exact presentation varies by table.

### Policy recommendations and operational considerations highlighted
- Provide immediate external financing (SDR 4.1 million approved) to support essential imports and preserve reserves.
- Subsidize rate of charge to concessional terms (0.5 percent per annum) for PRGF-eligible member, subject to subsidy resource availability.
- Prioritize reallocation of domestic budget resources to reconstruction; defer nonurgent capital projects; limit wage and staffing expansion; curtail non-disaster-related current spending.
- Seek grants and highly concessional loans before contracting less concessional external debt.
- Adjust pace of reconstruction to avoid domestic bottlenecks and inflationary pressures; encourage imports of labor and community participation to mitigate capacity constraints.
- Strengthen transparency and accountability in management of donor funds through a Board overseeing the Tsunami Relief and Reconstruction Fund.

*Source: IMF staff report and attachments in _cr05145 - 23. The staff supports the Maldives’ request for a purchase under the Fund’s policy on emergency assistance for natural disasters.*

### 6.5 percent, the fiscal deficit was modest, and international reserves were increasing.

### _cr05145 - 6.5 percent, the fiscal deficit was modest, and international reserves were increasing.

### Overview and immediate outlook
- Pre-tsunami growth projection for 2005: 6.5 percent.
- Post-tsunami revised growth projection for 2005: 1.0 percent.
- Disaster impact: substantial financing gaps in the budget and the balance of payments.
- Reconstruction costs estimated by the international community: about US$400 million (about 50 percent of GDP).
- Immediate budgetary needs within reconstruction estimate: US$110 million.
- Balance of payments shortfall due to losses in export receipts and tourism earnings: about US$160 million.
- Identified uncovered balance of payments gap to be closed by donors and IMF leverage: US$91 million.

### Pre-Tsunami economic performance and vulnerabilities
- Recent growth: averaging 8 percent over the last three years.
- Per capita income: doubled over a decade.
- Inflation: generally kept under control.
- External vulnerability: high dependence on tourism and tuna exports.
- Recent external position: current account deficit widened to 12 percent of GDP.
- International reserves: increased to just over US$200 million (equivalent to 3½ months of 2004 imports).
- Fiscal 2004 performance:
  - Current revenue base increased by 1 percent of GDP despite falling grants.
  - Deficit of recent years halved.
  - Revenue increase associated with rising current expenditures of equal magnitude, predominantly due to the first increase since 1999 in civil servant salaries.
- Private sector credit: significant, including new lending for investment by tourist resorts, contributing to a sharp acceleration in imports.

### Tsunami damage to productive capacity
- Affected sectors:
  - About a quarter of tourist resorts were affected and closed, causing a sharp fall from previously full occupancy rates.
  - About one-tenth of the fishing fleet and some processing facilities were damaged or lost.
- Expected recovery timeline: key productive sectors not expected to recover to pre-tsunami levels until the mid-year or toward year-end.

### Policy measures, reforms, and donor coordination
- Government fiscal measures in response to the disaster:
  - Refrain from granting import duty waivers for tourism.
  - Reorient capital and non-wage spending toward reconstruction needs.
  - Refrain from awarding any new wage increases.
  - Bed tax was increased late last year as planned to contribute to revenue once tourism picks up.
- Ongoing and proposed structural reforms:
  - Proposed amendment of the Maldives Monetary Authority (MMA) Act to increase central bank independence by separating functions of the Minister of Finance and Governor of the MMA.
  - Financial intelligence unit established at the MMA.
  - Proposed legal limits on lending to government now in parliament, necessitating new sources of financing without burdening debt sustainability.
  - Other financial sector reforms are underway.
- Donor coordination:
  - Authorities awaiting outcome of an Asian Development Bank meeting in Manila on March 18 before considering a consultative group meeting to seek donor pledges to close the US$91 million balance of payments gap.
  - Authorities expressed gratitude for support received so far from the Asian Development Bank, the World Bank, the United Nations, and Japan, but indicated more is needed.
- Debt stance: Maldives will not be seeking any debt rescheduling from the Paris Club, as most debt is to multilaterals and non-Paris Club countries.

### IMF and Executive Director positions
- IMF view: strongly supports efforts by the World Bank and Asian Development Bank to mobilize financial assistance in the form of grants or highly concessional loans from donors to help the Maldives through the crisis; reconstruction needs are immense and the authorities need balance of payments and budget support to deal with costs arising from the temporary decline in tourism.
- Executive Director A. Shakour Shaalan:
  - Conveyed Maldives authorities’ gratitude for the Board’s decision to extend post-conflict emergency assistance to PRGF-eligible countries hit by natural disasters.
  - Noted broad agreement with staff analysis and policy recommendations.
  - Encouraged approval of the SDR 4.1 million request and conveyance of the country’s request for additional concessional support to facilitate a rebound and contribute to debt sustainability.

*Statement by A. Shakour Shaalan, Executive Director for Maldives, March 4, 2005*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05145.pdf_