## _cr0997

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### Economic performance and structure
- Real GDP growth was 7.6 percent in 2007, down from 18 percent in 2006.
- Tourism accounted for 31 percent of GDP (1998-2007 average).
- Bed capacity increased by 8.3 percent in 2007; tourist arrivals increased by 12 percent in 2007; tourist revenues rose by about 14 percent.
- Construction activity and tourism led growth, offsetting a fall in the fish catch.
- Fisheries account for 7 percent of GDP (1998-2007 average) and employ about 11 percent of the workforce.
- The fish catch fell by about 38 percent in 2007 relative to the previous year; net of the fishing sector, GDP grew by 9.6 percent.

### Inflation and external sector
- Inflation increased to 14.7 percent (year-on-year) in April, driven by rising food prices; fish prices rose by 47.5 percent.
- Food imports account for 30 percent of the CPI basket.
- Non-food inflation stood at 6 percent in April 2008.
- Oil price increases contributed to cost-push inflation.
- Current account deficit widened from 33 percent of GDP in 2006 to over 40 percent of GDP in 2007.
- Exports grew by 10 percent in 2007 despite declining fish exports; imports rose by 18 percent.
- External debt increased from 49.1 percent of GDP in 2006 to 69.6 percent of GDP in 2007.
  - Government external debt rose from 32.4 percent of GDP in 2006 to about 39 percent in 2007.
  - Most of the rise in external debt was attributable to private sector borrowing.

### Fiscal developments and 2007 outturn
- Overall fiscal deficit (domestically financed or “regular” budget plus foreign financed budget) was about 8 percent of GDP in 2007, much lower than the planned deficit of about 28 percent of GDP.
- Domestic revenue and expenditure outcomes (2007, in percent of GDP):
  - Domestic revenue: 45.1 (2007 actual) vs. 49.2 (2007 Budget) vs. 54.5 (Staff projection) vs. 45.0 (2007 Art IV).
  - Domestic expenditure: 48.4 (2007 actual) vs. 49.4 (2007 Budget) vs. 54.6 (Staff projection) vs. 54.6 (2007 Art IV).
  - Domestic financing: 2.3 (2007 actual) vs. -0.7 (2007 Budget) vs. 0.1 (Staff projection) vs. 9.0 (2007 Art IV).
- Government expenditure rose to 65.8 percent of GDP in 2007; about three-quarters of expenditure comprised current expenditure.
  - Civil service payments were about 16.5 percent of GDP.
  - Social welfare contributions were about 18 percent of GDP.
- Staff assessment: about 95 percent of the increase in domestically financed expenditure since 2004 is unrelated to the tsunami.

### 2008 budget: risks and specifics
- 2008 budget calls for zero domestic financing but envisages a large increase in current expenditure:
  - Overall domestic expenditure planned to increase by 27 percent.
  - Domestically financed part of the budget—excluding foreign grants and loans—planned to increase by over 38 percent compared to the 2007 outturn.
  - Two-thirds of the increase is on current expenditure, including:
    - An over 55 percent increase in the civil service wage bill (provided as of January 2008).
    - Quadrupled subsidies, mostly on account of administered electricity prices.
- Budget revenue plans rely on ad hoc measures with implementation risks:
  - Initially included a lease payment of about 14 percent of GDP (25 percent of domestic revenue) from a new transshipment port project; finalization delayed by one year.
  - Authorities intend to fill the shortfall by leasing out an additional 30 islands.
- Staff concerns:
  - If ad hoc revenues fail to materialize, monetizing the deficit would stoke imported inflation and increase external vulnerabilities.
  - Staff urged authorities to identify contingent expenditure cuts to avoid domestic financing of the deficit.
  - Staff urged immediate revision of electricity tariffs and resisting mid-year pressures to increase expenditure beyond the budgeted amount.

### Medium-term fiscal framework and revenue reform
- Staff recommendation: develop a medium-term fiscal framework (MTFF) to prioritize spending within a realistic resource envelope.
- Current expenditures need to be substantially scaled back to accommodate necessary infrastructure investments.
- Revenue reforms recommended:
  - Introduction of corporate taxation (Business Profit Tax leading to a general corporate income tax over time).
    - Historical note: a business profit tax was supposed to be introduced in 2008, bringing in revenues of about 2–3 percent of GDP.
  - Introduction of a broad-based sales tax / VAT/GST (timed after BPT implementation).
  - Replacing the current “per head” tourism tax ($8 per bed per night) with an ad valorem tax and increasing the tax to better capture high-end tourist spending.

### Competitiveness and external vulnerabilities
- Exchange rate peg to the U.S. dollar is judged appropriate and sustainable if supported by prudent fiscal policies.
- REER: since 2000, depreciated by 27 percent, including 1.9 percent depreciation since end-2006; staff views the exchange rate as broadly in equilibrium (REER within 5 percentage points of its NFA-stabilizing value).
- External debt ratios expected to climb sharply with planned resort expansion, peaking in 2010.
- Most of the rise in debt levels attributable to private sector borrowing through commercial banks.
- Elevated private sector debt warrants close monitoring; bank supervision should remain vigilant.

### Financial sector and credit developments
- Banking sector: one local and five international banks.
- Private sector credit increased by 40 percent in 2007; expansion dates from 2004 leasing program for new islands.
- Much expansion financed by foreign-owned banks borrowing from head offices and on-lending locally; risks mitigated by country risk exposure limits and collateralization of resort property.
- Nonperforming loans decreased to 1.7 percent in March 2008 from 6.6 percent in December 2005.
- On-site bank examinations are being conducted with MCM technical assistance.

### Staff appraisal and policy priorities
- Main macro message: maintain fiscal responsibility to avoid undermining favorable growth prospects with fiscal excesses and macroeconomic instability.
- Immediate priorities and recommendations:
  - Preserve the exchange rate peg by adhering to prudent fiscal policies.
  - Identify and implement contingency expenditure cuts if ad hoc revenue measures do not materialize.
  - Avoid domestic financing (monetization) of the deficit to prevent higher imported inflation and increased external vulnerabilities.
  - Implement the MTFF and revenue reforms (corporate tax, broad-based sales tax, ad valorem tourism tax).
  - Adjust electricity tariffs to reduce fiscal subsidies as oil prices rise.
  - Closely monitor elevated private sector external borrowing and maintain vigilant bank supervision.

### Fiscal outlook and medium-term framework (key projections and measures)
- Staff’s medium-term projections incorporate introduction of a business profit and an ad valorem tourist tax, but domestic revenues are forecast to drop by nearly 9 percentage points of GDP by 2013.
- Staff’s framework incorporates about a 13 percent of GDP adjustment in current expenditures by 2013, excluding an 8 percent of GDP decline related to the completion of tsunami reconstruction.
- Proposed measures to achieve expenditure adjustment:
  - Civil service reforms, including a nominal wage freeze and moderate downsizing based on natural attrition.
  - Rationalization of social expenditures through progress on population consolidation in the islands.
  - Cutting back on subsidies by adjusting domestic administered prices including electricity tariff.

### Key numerical medium-term fiscal indicators (In percent of GDP; selected entries preserved)
- Total revenue: 52.5 (Act.Est.) 58.0 (Budget 2006) 58.8 (2007) 51.8 (2008) 50.1 (2011) 46.6 (2013)
- Domestic revenue: 45.1 49.2 53.9 48.3 47.7 44.6
  - Tax revenue: 20.2 21.1 19.8 19.5 22.6 21.6
  - Land lease: 11.3 15.2 23.6 18.0 14.4 12.2
- Grants: 7.4 8.7 4.9 3.5 2.3 2.0
- Total expenditure and net lending: 59.3 65.8 68.3 55.2 47.1 44.3
  - Domestic Expenditure: 47.4 48.5 54.6 48.3 46.3 43.5
- Current expenditure: 47.8 52.3 52.8 44.3 35.0 32.0
  - Wages, allowances, benefit: 16.7 16.6 21.3 19.0 15.8 14.9
  - Social welfare contributions: 15.1 18.2 13.1 8.9 4.5 4.5
  - Subsidies: 1.3 1.1 3.6 2.7 0.9 0.4
- Capital expenditure: 12.4 14.4 16.6 12.0 13.0 13.0
- Overall balance: -6.8 -7.8 -9.4 -3.4 3.0 2.3
- Current balance: -3.2 -3.3 0.9 3.8 12.6 12.5
- Domestic financing: 2.3 -0.7 0.7 0.0 -1.5 -1.1
- Foreign financing: 4.5 8.6 8.7 3.4 -1.5 -1.3
- Note: 1/ Including all the tsunami-related expenditures.

### Public debt sustainability — baseline and scenarios (selected figures)
- Baseline: public sector debt projected to fall from 55.4 percent of GDP in 2008 to 30.5 percent of GDP by 2013.
- Scenario with no policy change (constant primary balance) in 2008-13: public debt-to-GDP would rise to 75.8 percent of GDP by 2013.
- If the primary balance remains fixed at the elevated level of 7.4 percent of GDP (as budgeted in 2008), the debt ratio would reach 75 percent of GDP by 2013.
- Primary deficit (selected series): 7.4 (2008), 1.5 (2009), -3.1 (2010), -4.6 (2011), -2.9 (2012), -3.6 (2013).
- Revenue and grants: 58.8 (2008), 51.8 (2009), 50.0 (2010), 50.1 (2011), 47.7 (2012), 46.6 (2013).
- Primary (noninterest) expenditure: 66.2 (2008), 53.3 (2009), 46.9 (2010), 45.4 (2011), 44.8 (2012), 43.0 (2013).
- Gross financing need (baseline): 27.2 (2008) declining to 8.1 (2013) as percent of GDP; in millions of U.S. dollars: 353.1 (2008) to 165.3 (2013).

### External debt sustainability and stress tests (selected figures)
- Baseline external debt-to-GDP ratio: 82.6 (2008), 91.7 (2009), 94.6 (2010), 93.3 (2011), 88.9 (2012), 82.7 (2013).
- Government external debt forecast to decline from 39 percent of GDP in 2008 to about 23 percent by 2013.
- Debt service as percentage of domestic exports: 12 percent in 2008, 14½ percent in 2010, about 13 percent by 2013.
- Stress-test outcomes:
  - Real depreciation shock: a one-time real depreciation of 30 percent would spike external debt ratio to over 120 percent in the shock year, then fall to about 90 percent by 2013.
  - Current account shock: a large current account shock could raise external debt ratio to about 144 percent by 2013.
- Gross external financing need (millions of U.S. dollars): 731.8 (2008), 596.7 (2009), 562.0 (2010), 466.5 (2011), 388.4 (2012), 305.9 (2013).
- Identified external debt-creating flows (percent of GDP): current account deficit, excluding interest payments: 44.4 (2008), 29.0 (2009), 22.1 (2010), 13.7 (2011), 8.1 (2012), 2.8 (2013).

### Key macroeconomic and fiscal assumptions (selected series)
- Real GDP growth (percent): 6.5 (2008), 6.5 (2009), 6.0 (2010), 6.0 (2011), 6.0 (2012), 6.0 (2013).
- Inflation rate (GDP deflator, percent): 15.0 (2008), 4.0 (2009), 3.0 (2010–2013).
- Average nominal interest rate on public debt (percent): 4.5 (2008), 3.8 (2009–2013).
- Growth of real primary spending (percent): 10.8 (2008), -14.2 (2009), -6.9 (2010), 2.8 (2011), 4.4 (2012), 1.8 (2013).

### Governance, institutional, and statistical actions
- Institutional reforms: separation of finance minister and central bank governor; inter-agency agreement empowering MMA; introduction of treasury bill sales in 2006; passage of the Civil Service Bill and the Audit Act; independent Civil Service Commission and Auditor General appointed.
- Statistical capacity: data provision broadly adequate for surveillance but with shortcomings in balance of payments, government finance, and national accounts; CPI base year 1995 still used; national accounts available only annually with considerable lag.
- Fiscal data and budget execution (as of end-June 2008 monthly data):
  - Government spent 41½ percent of budgeted current expenditures and 14 percent of budgeted capital expenditures.
  - Government planning to cut expenditures by 19 percentage points of GDP for the year if 2H spending equals 1H patterns; aim to cut 20 percent of expenditures from August onward.
  - Expected cuts from measures: at least Rf 596 million (3.6 percent of GDP, 5.3 percent of budgeted annual domestic expenditure).
  - Revised budget leaves a domestic financing gap of 1.9 percent of GDP.
- Recommended immediate measures: increase electricity tariffs; nominal wage bill freeze for the civil service; raise revenues through additional island leases (but less than previously discussed target of 30 islands).

### Selected macro indicators (selected years and levels preserved)
- Real GDP growth: 2003 8.5; 2004 9.5; 2005 -4.6; 2006 18.0; 2007 7.6; 2008 6.5.
- Inflation (period average): 2003 -2.8; 2004 6.3; 2005 3.3; 2006 3.5; 2007 7.4; 2008 15.0.
- Central government — Revenue and grants (percent of GDP): 2008 58.8.
- Central government — Expenditure and net lending (percent of GDP): 2008 68.3.
- Overall balance (percent of GDP): 2008 -9.4.
- External Debt (millions USD): 2008 1,070.6.
  - External Debt (percent of GDP): 2008 82.6.
- Gross official reserves (year-end, millions USD): 2008 341.7.
  - Gross official reserves (months of following year's imports of GNFS): 2008 2.7.
- Exchange rate (Rufiyaa per U.S. dollar, period average): 12.8.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### Executive Summary ......................................................................................................

### _cr0997 - Executive Summary

### Economic performance and structure
- Real GDP growth was 7.6 percent in 2007, down from 18 percent in 2006.
- Tourism rebounded strongly from the Asian tsunami; tourism accounted for 31 percent of GDP (1998-2007 average).
- Bed capacity increased by 8.3 percent in 2007; tourist arrivals increased by 12 percent in 2007, contributing to tourist revenues rising by about 14 percent.
- Construction activity and tourism led growth, offsetting a fall in the fish catch.
- Fisheries account for 7 percent of GDP (1998-2007 average) and employ about 11 percent of the workforce.
- The fish catch fell by about 38 percent in 2007 relative to the previous year; net of the fishing sector, GDP grew by 9.6 percent.

### Inflation and external sector
- Inflation increased to 14.7 percent (year-on-year) in April, driven by rising food prices; fish prices rose by 47.5 percent.
- Oil price increases also contributed to cost-push inflation.
- Current account deficit widened from 33 percent of GDP in 2006 to over 40 percent of GDP in 2007.
- Exports grew by 10 percent in 2007 despite declining fish exports; imports rose by 18 percent, driven by construction materials and higher oil and food prices.
- External debt increased from 49.1 percent of GDP in 2006 to 69.6 percent of GDP in 2007.
  - Government external debt rose from 32.4 percent of GDP in 2006 to about 39 percent in 2007.
  - Most of the rise in external debt was attributable to private sector borrowing.

### Fiscal developments and 2007 outturn
- The overall fiscal deficit (domestically financed or “regular” budget plus foreign financed budget) was about 8 percent of GDP in 2007, much lower than the planned deficit of about 28 percent of GDP.
- Domestic revenue and expenditure outcomes (2007, in percent of GDP):
  - Domestic revenue: 45.1 (2007 actual) vs. 49.2 (2007 Budget) vs. 54.5 (Staff projection) vs. 45.0 (2007 Art IV).
  - Domestic expenditure: 48.4 (2007 actual) vs. 49.4 (2007 Budget) vs. 54.6 (Staff projection) vs. 54.6 (2007 Art IV).
  - Domestic financing: 2.3 (2007 actual) vs. -0.7 (2007 Budget) vs. 0.1 (Staff projection) vs. 9.0 (2007 Art IV).
- Government expenditure rose to 65.8 percent of GDP in 2007; about three-quarters of expenditure comprised current expenditure.
  - Civil service payments were about 16.5 percent of GDP.
  - Social welfare contributions were about 18 percent of GDP.
- Staff assessment: about 95 percent of the increase in domestically financed expenditure since 2004 is unrelated to the tsunami.

### 2008 budget: risks and specifics
- The 2008 budget calls for zero domestic financing but envisages a large increase in current expenditure:
  - Overall domestic expenditure planned to increase by 27 percent.
  - Domestically financed part of the budget—excluding foreign grants and loans—planned to increase by over 38 percent compared to the 2007 outturn.
  - Two-thirds of the increase is on current expenditure, including:
    - An over 55 percent increase in the civil service wage bill (provided as of January 2008).
    - Quadrupled subsidies, mostly on account of administered electricity prices.
- The budget’s revenue plans rely on ad hoc measures with implementation risks:
  - Initially included a lease payment of about 14 percent of GDP (25 percent of domestic revenue) from a new transshipment port project; finalization delayed by one year.
  - Authorities intend to fill the shortfall by leasing out an additional 30 islands.
- Staff concerns and warnings:
  - If ad hoc revenues fail to materialize, monetizing the deficit would stoke imported inflation and increase external vulnerabilities.
  - Staff urged the government to identify contingent expenditure cuts to avoid domestic financing of the deficit.
  - Staff emphasized resisting mid-year pressures to increase expenditure beyond the budgeted amount and urged immediate revision of electricity tariffs.

### Medium-term fiscal framework and revenue reform
- Staff recommendation: develop a medium-term fiscal framework (MTFF) to prioritize spending within a realistic resource envelope.
- Current expenditures need to be substantially scaled back to accommodate necessary infrastructure investments.
- Revenue reforms recommended include:
  - Introduction of corporate taxation.
  - Introduction of a broad-based sales tax.
  - Replacing the current “per head” tourism tax with an ad valorem tax.

### Competitiveness and external vulnerabilities
- The exchange rate peg to the U.S. dollar is judged appropriate and sustainable if supported by prudent fiscal policies.
- Despite recent inflation, competitiveness is maintained in part due to depreciation of the dollar against the euro and the predominance of European tourists.
- External debt ratios are expected to climb sharply with planned further resort expansion, peaking in 2010.
- Most of the rise in debt levels is attributable to private sector borrowing through commercial banks.
- Elevated private sector debt warrants close monitoring; bank supervision should remain vigilant.

### Financial sector and credit developments
- Banking sector: one local and five international banks.
- Private sector credit increased by 40 percent in 2007; expansion dates from 2004 leasing program for new islands.
- Much expansion financed by foreign-owned banks borrowing from head offices and on-lending locally; risks mitigated by country risk exposure limits and collateralization of resort property.
- Nonperforming loans (NPLs) decreased to 1.7 percent in March 2008 from 6.6 percent in December 2005.
- On-site bank examinations are being conducted with MCM technical assistance.

### Staff appraisal and policy priorities
- Main macro message: maintain fiscal responsibility to avoid undermining favorable growth prospects with fiscal excesses and macroeconomic instability.
- Immediate priorities and recommendations:
  - Preserve the exchange rate peg by adhering to prudent fiscal policies.
  - Identify and implement contingency expenditure cuts if ad hoc revenue measures do not materialize.
  - Avoid domestic financing (monetization) of the deficit to prevent higher imported inflation and increased external vulnerabilities.
  - Implement the MTFF and revenue reforms (corporate tax, broad-based sales tax, ad valorem tourism tax).
  - Adjust electricity tariffs to reduce fiscal subsidies as oil prices rise.
  - Closely monitor elevated private sector external borrowing and maintain vigilant bank supervision.

*Source: Executive Summary (IMF country report content).*

### 11.      Staff argued that expenditure reforms are critical for achieving medium-term

### 11.      Staff argued that expenditure reforms are critical for achieving medium-term

### Fiscal outlook and medium-term framework
- Staff argued that expenditure reforms are critical for achieving medium-term fiscal stability and creating room for needed capital expenditures.
- Staff’s medium-term projections incorporate the successful introduction of a business profit and an ad valorem tourist tax, but domestic revenues are forecast to drop by nearly 9 percentage points of GDP by 2013.
- Revenue weakness reflects: the contribution of lease payments falling over time; windfall payments from the transshipment project—if they materialize—fall only in 2009 and 2010; and import duty collection weakening in line with declining import needs for resort and infrastructure construction materials.
- Leasing out additional islands at a pace far exceeding the ambitious but sustainable pace envisaged in Maldives’ tourism development master plan is likely to face heightened implementation risks by overburdening infrastructure and the financial sector.
- Staff’s framework incorporates about a 13 percent of GDP adjustment in current expenditures by 2013, excluding an 8 percent of GDP decline related to the completion of tsunami reconstruction.
- Proposed measures to achieve expenditure adjustment:
  - Civil service reforms, including a nominal wage freeze and moderate downsizing based on natural attrition.
  - Rationalization of social expenditures through progress on population consolidation in the islands.
  - Cutting back on subsidies by adjusting domestic administered prices including electricity tariff.
- These measures are intended to create space for infrastructure investment to support the expanding tourism sector and enable small domestic surpluses that underpin declining public debt ratios.

### Key numerical medium-term fiscal indicators (In percent of GDP)
- Act.Est.        Budget 200620072008200920112013
- Total revenue 52.5 58.0 58.8 51.8 50.1 46.6
- Domestic revenue 45.1 49.2 53.9 48.3 47.7 44.6
  - Of which:
    - Tax revenue 20.2 21.1 19.8 19.5 22.6 21.6
    - Land lease 11.3 15.2 23.6 18.0 14.4 12.2
- Grants 7.4 8.7 4.9 3.5 2.3 2.0
- Total expenditure and net lending 59.3 65.8 68.3 55.2 47.1 44.3
  - Of which: Domestic Expenditure 47.4 48.5 54.6 48.3 46.3 43.5
- Current expenditure 47.8 52.3 52.8 44.3 35.0 32.0
  - Of which:
    - Wages, allowances, benefit 16.7 16.6 21.3 19.0 15.8 14.9
    - Social welfare contributions 15.1 18.2 13.1 8.9 4.5 4.5
    - Subsidies 1.3 1.1 3.6 2.7 0.9 0.4
- Capital expenditure 12.4 14.4 16.6 12.0 13.0 13.0
- Overall balance -6.8 -7.8 -9.4 -3.4 3.0 2.3
- Current balance -3.2 -3.3 0.9 3.8 12.6 12.5
- Domestic financing 2.3 -0.7 0.7 0.0 -1.5 -1.1
- Foreign financing 4.5 8.6 8.7 3.4 -1.5 -1.3
- Note: 1/ Including all the tsunami-related expenditures.

### Revenue reform priorities and recommendations
- Staff observed that revenue reforms should be expedited because the Maldives’ tax structure is outdated and inflexible to exogenous shocks; main revenue sources are import duties, resort and land lease payments, dividend transfers from SOEs, and a tourist tax.
- Mission recommendations (in line with FAD TA recommendations):
  - Business profit tax (BPT): The mission urged the authorities to introduce the BPT as soon as possible. Over the medium term, to broaden the tax base and increase the revenue potential and fairness of direct taxation, a separate personal income tax should be introduced and the BPT should evolve into a more general corporate income tax.
    - Historical note in source: After a number of years of preparatory work in consultation with FAD experts, a business profit tax was supposed to be introduced in 2008, bringing in revenues of about 2–3 percent of GDP.
  - Ad valorem tourism tax: Replace the specific tourism tax (currently $8 per bed per night) with an ad valorem tax and increase the tax to better capture high-end tourist spending.
  - VAT/GST: The mission encouraged the authorities to announce a clear timetable to substitute a VAT for a large portion of import duties; introduction of VAT could quickly follow successful implementation of the BPT.
- Authorities’ stance:
  - Reaffirmed intention to broaden the tax base and were optimistic about adopting the BPT in 2009 after parliamentary elections.
  - Had reservations about increasing the tax burden on the tourism sector via an ad valorem tourism tax and considered a broad-based consumption tax (GST) more equitable; no timetable for GST currently.

### Debt, external vulnerabilities, and exchange rate regime
- Staff projects public debt ratio will decline substantially over the medium term if the government maintains zero domestic financing and achieves balanced domestic budgets or small domestic surpluses.
- If the primary balance remains at its 10-year average level, the debt ratio would continue to rise; the 10-year average includes a particularly expansionary phase following the tsunami. Based on the pre-tsunami average, the debt ratio remains constant.
- External debt dynamics:
  - External debt is projected to rise sharply in the next few years before starting to decline.
  - Staff projects external debt-to-GDP ratio will climb to almost 95 percent in 2010, before declining gradually to about 83 percent by 2013.
  - This accumulation largely reflects private inflows into resorts and infrastructure projects concentrated in the 2008–10 period, not increased government borrowing.
  - The projected debt path is sensitive to current account and/or exchange rate shocks.
- External sector and competitiveness:
  - Forecast year-on-year inflation rate of 15 percent in 2008 driven mainly by food and oil price increases.
  - Since the beginning of 2000, the REER has depreciated by 27 percent, including 1.9 percent depreciation since end-2006.
  - Staff views the exchange rate as broadly in equilibrium; rough calculations indicate the REER is within 5 percentage points of its NFA-stabilizing value.
  - The mission reaffirmed that the dollar peg is an appropriate exchange rate regime, but noted it must be supported by prudent fiscal policies.
- Financial sector and supervision:
  - Bank inflows could be sensitive to global conditions; bank supervision should remain vigilant and monitoring of private sector external debt should be improved.
  - Risks mitigated to some extent by country risk exposure limits of the banks and collateralization of resort properties.

### Governance, institutional, and other policy actions
- Institutional reforms welcomed by staff:
  - Separation of finance minister and central bank governor; appointment of a new central bank governor.
  - Inter-agency agreement empowered the MMA to set interest rates and put a ceiling on government borrowing through the Ways and Means Account.
  - Introduction of treasury bill sales in 2006.
  - Passage of the Civil Service Bill and the Audit Act; independent Civil Service Commission and Auditor General appointed.
  - Other legislation (Banking Act, AML/CFT legislation) being expedited; Maldives joined the Asia/Pacific Group on Money Laundering.
- Staff urged the authorities to consider accepting the obligations of Article VIII, Sections 2, 3, and 4; MMA staff prepared a note to be presented to its board expeditiously.
- Civil service actions already implemented: downsizing of the civil service by 1,800 staff (about 5½ percent of total civil servants) via mandatory retirement.

### Staff appraisal: key conclusions
- The economy is rebounding from the tsunami, with strong tourism-led growth and a construction boom, though fish catch declines weighed on 2007 growth.
- Inflation rose steeply to 14.7 percent (year-on-year) in April, with food prices up 26 percent over the year to April.
- Fiscal stance poses risks: expenditures as a share of GDP are unsustainably high; the 2008 budget shows excessive expenditures and rapid increases in recurrent domestically financed spending.
- Over the medium term, both revenue and expenditure measures are required to maintain fiscal stability, reduce public debt, and create space for necessary infrastructure spending.
- Achieving the government's zero domestic balance target is crucial to reducing debt over the medium term.
- External vulnerabilities have increased; external debt-to-GDP ratio projected to reach almost 95 percent in 2010 before falling with project completions. Bank supervision and improved monitoring of private debt are essential.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 31.      The dollar peg remains an appropriate exchange rate regime, and the Maldives

### _cr0997 - 31.      The dollar peg remains an appropriate exchange rate regime, and the Maldives

### Exchange rate regime and competitiveness
- The dollar peg "remains an appropriate exchange rate regime" for the Maldives, serving to reduce transactions costs and foreign exchange risks and to provide an effective nominal anchor.
- The Maldives has "retained its international competitiveness."
- Since the bulk of tourists are from Europe, "the depreciation of the dollar against the euro in recent years has provided the economy with a cushion against an erosion in competitiveness due to the rise in inflation."

### Policy recommendation
- "It is recommended that the next consultation with Maldives take place within the standard 12-month cycle."

### Recent macroeconomic developments and salient indicators (selected)
- Real GDP growth (selected years): 18.0; 7.6; 6.5 (table and figure references).
- Inflation (period average, selected): 3.5; 7.4; 15.0 (table and figure references).
- Current account balance (2008, in millions of U.S. dollars): -613.0.
  - Current account balance (in percent of GDP, 2008): -47.3.
- Trade balance (2008, in millions of U.S. dollars): -869.3.
- Nonfactor services (net, 2008, in millions of U.S. dollars): 385.4.
  - Tourism receipts (2008, in millions of U.S. dollars): 636.2.
- Gross official reserves (year-end, 2008, in millions of U.S. dollars): 325.5.
  - Official reserves (in months of following year's imports of GNFS, 2008): 2.6.
- External debt (2008, in millions of U.S. dollars): 1,070.6.
  - External debt (in percent of GDP, 2008): 82.6.
- Exchange rate (rufiyaa per U.S. dollar, period average): 12.8 (repeated across the period).

### Fiscal and monetary developments (selected)
- Central government: Total revenue and grants (2008, in percent of GDP): 58.8; Expenditure and net lending (2008, in percent of GDP): 68.3.
- Overall balance (2008, in percent of GDP): -9.4.
  - Overall balance, excluding grants (2008, in percent of GDP): -14.3.
- Government debt (end of period, 2008, in millions of rufiyaa): 9,189.8.
  - Government debt (end of period, 2008, in percent of GDP): 56.0.
  - Foreign component of government debt (end of period, 2008, in percent of GDP): 39.0.
- Broad money (annual percent change, 2008): 23.7.
- Net foreign assets (2008, in millions of rufiyaa): -2,886.1.

### Debt sustainability analysis — key findings and baseline assumptions
- Baseline premised on "GDP growth of about 6 percent per annum over the medium term," driven by cautiously optimistic tourism and fisheries expansion.
- Fiscal assumptions include "a substantial scaling down of current expenditure over the medium term, in conjunction with revenue reforms described in the main text of the staff report."
- Public sector debt dynamics:
  - Public sector debt rose rapidly following the tsunami.
  - The primary deficit increased from an average of "2¼ percent of GDP during 2000–04" to an average of "6⅔ percent of GDP during the 2005–07 period."
  - Between 2004 and 2007 the overall debt ratio rose "by over 13 percentage points of GDP."
- Under the baseline DSA:
  - The public debt ratio "declines steadily over the medium term" reflecting fiscal prudence and revenue reforms.
  - Projections assume "zero or small positive domestic balances" (zero or negative usage of domestic financing) and the start of net repayment of government external debt "as per the amortization schedule," implying a sharp turnaround of the primary balance "into positive territory starting in 2010."
  - As a result, "both domestic and foreign public debt ratios decline appreciably, achieving a level well below the pre-tsunami average over the medium term."
- Principal risk to the baseline: fiscal stance. A historical scenario (reverting to historically high primary deficits) "would imply an increasing trajectory for public debt, rather than the forecast decline." Historical driver noted as the historically high primary deficits with a 10-year average referenced in the full analysis.

*Source: IMF staff report content provided in the supplied PDF chapter.*

### 3.4 percent of GDP. If the primary balance remains fixed at the elevated level of 7.4 percent

### _cr0997 - 3.4 percent of GDP. If the primary balance remains fixed at the elevated level of 7.4 percent

### Public debt sustainability: baseline and scenarios
- Baseline: public sector debt projected to fall from 55.4 percent of GDP in 2008 to 30.5 percent of GDP by 2013 (Table I-1: "Baseline: Public sector debt 1/ 55.4 ... 30.5").
- Scenario with no policy change (constant primary balance) in 2008-13: public debt-to-GDP path would rise to 75.8 percent of GDP by 2013 ("Scenario with no policy change (constant primary balance) in 2008-13 55.4 59.3 63.7 68.0 72.0 75.8").
- If the primary balance remains fixed at the elevated level of 7.4 percent of GDP (as budgeted in 2008), the debt ratio would continue to expand and reach 75 percent of GDP by 2013 (first paragraph).
- Sensitivity to growth shocks:
  - A one-fourth standard deviation shock to growth leads to a public debt ratio of 55 percent in 2013 instead of the baseline forecast of 30 (text: "one-fourth standard deviation shock to growth leading to a public debt ratio of 55 percent in 2013 (instead of the baseline forecast of 30)").
  - Excluding the year of the tsunami and the following year, the growth rate shock scenario generates a falling path for public debt reaching about 40 percent of GDP by 2013 (text).
- Primary balance and debt-creating flows (selected exact figures from Table I-1):
  - Primary deficit: 7.4 (2008), then 1.5 (2009), -3.1 (2010), -4.6 (2011), -2.9 (2012), -3.6 (2013).
  - Revenue and grants: 58.8 (2008), 51.8 (2009), 50.0 (2010), 50.1 (2011), 47.7 (2012), 46.6 (2013).
  - Primary (noninterest) expenditure: 66.2 (2008), 53.3 (2009), 46.9 (2010), 45.4 (2011), 44.8 (2012), 43.0 (2013).
  - Automatic debt dynamics contribution: -8.2 (2008), -3.5 (2009), -2.6 (2010), -2.4 (2011), -2.0 (2012), -1.8 (2013).
- Debt-stabilizing primary (debt-stabilizing primary, Table I-1): -1.5 (debt-stabilizing primary, final column in table).
- Gross financing need (baseline): declines from 27.2 (2008) to 8.1 (2013) as percent of GDP; in millions of U.S. dollars: 353.1 (2008) to 165.3 (2013).

### External debt sustainability: baseline and stress tests
- Baseline external debt-to-GDP ratio:
  - Projected climb to about 95 percent in 2010, then decline to 82.7 percent by 2013 (text: "The external debt-to-GDP ratio is forecast to climb to about 95 percent in 2010, after which it will diminish"; Table I-2: "Baseline: External debt ... 94.6 93.3 88.9 82.7").
  - Table I-2 baseline series: 82.6 (2008), 91.7 (2009), 94.6 (2010), 93.3 (2011), 88.9 (2012), 82.7 (2013).
- Government vs private external debt:
  - Government external debt forecast to decline from 39 percent of GDP in 2008 to about 23 percent by 2013 (text: "Government external debt, in contrast is forecast to decline ... falling gradually from 39 percent of GDP in 2008 to about 23 percent by 2013").
  - The overall projected external-debt path is driven by private sector borrowing (text).
- Debt service and exports:
  - Debt service as percentage of domestic exports: 12 percent in 2008, 14½ percent in 2010, about 13 percent by 2013 (text: "rising as a percentage of domestic exports from 12 percent in 2008 to 14½  percent in 2010, before declining to about 13 percent by 2013").
- Stress-test outcomes (exact scenarios and impacts):
  - Real depreciation shock: a one-time real depreciation of 30 percent would cause external debt ratio to rise sharply to over 120 percent in the year of depreciation, then fall to about 90 percent in 2013 (text: "A real depreciation of 30 percent would cause the ratio to rise sharply to over 120 percent ... before falling to about 90 percent in 2013").
  - Current account shock: a large current account shock produces an external debt ratio rising steadily to about 144 percent by 2013 (text: "the trajectory of the external debt ratio ... rising steadily to about 144 percent by 2013").
  - Combined and other scenario details are shown in Figure I-2 (descriptive references in source).
- Gross external financing need (selected exact figures, Table I-2):
  - In millions of U.S. dollars: 731.8 (2008), 596.7 (2009), 562.0 (2010), 466.5 (2011), 388.4 (2012), 305.9 (2013).
  - As percent of GDP: 56.5 (2008), 41.6 (2009), 35.9 (2010), 27.3 (2011), 20.8 (2012), 15.0 (2013).
- Identified external debt-creating flows (Table I-2):
  - Current account deficit, excluding interest payments: 44.4 (2008), 29.0 (2009), 22.1 (2010), 13.7 (2011), 8.1 (2012), 2.8 (2013).
  - Net nondebt creating capital inflows (negative): -22.8 (2008), -20.6 (2009), -18.8 (2010), -14.2 (2011), -11.1 (2012), -7.2 (2013).
  - Automatic debt dynamics: -0.8 (2008), -1.3 (2009), -1.1 (2010), -1.2 (2011), -1.2 (2012), -1.2 (2013).

### Key macroeconomic and fiscal assumptions underlying the baseline
- Real GDP growth (in percent): 8.5 (2003), 9.5 (2004), -4.6 (2005), 18.0 (2006), 7.6 (2007), 6.5 (2008), 6.5 (2009), 6.0 (2010), 6.0 (2011), 6.0 (2012), 6.0 (2013).
- Inflation rate (GDP deflator, in percent): -0.4 (2003), 2.4 (2004), 1.2 (2005), 3.5 (2006), 7.4 (2007), 15.0 (2008), 4.0 (2009), 3.0 (2010), 3.0 (2011), 3.0 (2012), 3.0 (2013).
- Average nominal interest rate on public debt (in percent): 3.5 (2003), 3.4 (2004), 3.6 (2005), 3.9 (2006), 4.9 (2007), 4.5 (2008), 3.8 (2009–2013).
- Average real interest rate (in percent): 3.9 (2003), 1.0 (2004), 2.4 (2005), 0.4 (2006), -2.5 (2007), -10.5 (2008), -0.2 (2009), 0.8 (2010–2013).
- Growth of real primary spending (deflated by GDP deflator, in percent): 9.6 (2003), 3.4 (2004), 57.8 (2005), 18.5 (2006), 18.9 (2007), 10.8 (2008), -14.2 (2009), -6.9 (2010), 2.8 (2011), 4.4 (2012), 1.8 (2013).
- Nominal external interest rate (in percent): 2.1 (2003), 2.7 (2004), 4.3 (2005), 2.9 (2006), 5.1 (2007), 5.1 (2008), 4.8 (2009), 4.7 (2010), 4.6 (2011–2013).

### Stress-test interpretation and vulnerabilities highlighted by staff
- Public debt path is sensitive to real GDP growth shocks; standardized sensitivity tests may overstate impact because tsunami year and recovery increase measured volatility (text).
- External debt path is particularly vulnerable to:
  - A large current account shock (driven by exposure to tourism patterns and world commodity prices), which could raise external debt to about 144 percent by 2013 (text).
  - A large real depreciation (which could follow fiscal slippages, deficit monetization, high inflation, or a surge in import demand), which would spike external debt to over 120 percent in the shock year (text).
- The projected external-debt increase over 2008–10 is mainly driven by private-sector borrowing to finance resort construction and infrastructure, with commercial banks borrowing from head offices and on-lending domestically (text).

### Explicit scenario figures and diagnostic markers (selected table entries)
- Public sector debt-to-revenue ratio: 94.2 (2008), 103.2 (2009), 95.6 (2010), 81.4 (2011), 75.1 (2012), 65.5 (2013).
- External debt-to-exports ratio (in percent): 104.4 (2008), 116.2 (2009), 120.7 (2010), 119.7 (2011), 113.9 (2012), 105.5 (2013).
- Debt-stabilizing noninterest current account (Table I-2): -10.7 (final column).

*International Monetary Fund. Maldives: Staff Report for the 2008 Article IV Consultation—Informational Annex; July 30, 2008.*

### ANNEX I.  M

### ANNEX I.  M

### I. Membership Status
- Joined 1/13/78; Article XIV

### II. General Resources Account
- SDR Million % Quota
  - Quota: 8.201 100.00
  - Fund holdings of currency: 10.23 124.80
  - Reserve position in Fund: 1.55 18.95

### III. SDR Department
- SDR Million % Quota
  - Net cumulative allocation: 0.28 100.00
  - Holdings: 0.39 137.76

### IV. Outstanding Purchases and Loans
- SDR Million % Quota
  - Emergency assistance: 3.59 43.75

### V. Financial Arrangements
- None

### VI. Projected Obligations to Fund
(SDR million; based on existing use of resources and present holdings of SDR)
- Forthcoming
  - 2008
    - Principal: 1.03
    - Charges/interest: 0.07
    - Total: 1.10
  - 2009
    - Principal: 2.05
    - Charges/interest: 0.08
    - Total: 2.13
  - 2010
    - Principal: 0.51
    - Charges/interest: 0.01
    - Total: 0.52
  - 2011
    - Principal: (no entry)
    - Charges/interest: 0.00
    - Total: 0.00

### VII. Exchange Arrangements
- From March 1, 1982 to June 30, 1985, the Maldivian rufiyaa was pegged to the U.S. dollar.
- Beginning in July 1985, the exchange rate of the rufiyaa was linked to a trade-weighted basket of currencies, but the exchange rate vis-à-vis the U.S. dollar remained relatively stable until February 1987.
- On March 1, 1987, the rufiyaa was devalued by 29 percent vis-à-vis the U.S. dollar.
- From 1987 to 1994, the exchange rate of the rufiyaa was adjusted periodically.
- Since October 1994, the exchange rate of the rufiyaa remained unchanged at Rf 11.77 per U.S. dollar until July 25, 2001, when the rufiyaa was devalued to Rf 12.80 per U.S. dollar.
- Maldives continues to avail itself of the transitional arrangements under the provisions of Article XIV, but no longer maintains restrictions under Article XIV.
- Under these circumstances, any exchange rate restriction that arises is subject to approval under Article VIII.

### VIII. Last Article IV Consultation
- The 2007 Article IV consultation was concluded by the Executive Board on July 30, 2007.

### IX. Technical Assistance
- FAD
  - April 1994: Mr. Potter and Ms. Bédague visited Male to advise on budget management.
  - November 1994 to December 1995: periodic assistance from Mr. Webber (consultant).
  - July 1994: Mr. Faria and Mr. Kambil (consultants) assisted in formulating a strategy for revenue reform.
  - August/September 1995: visit by Mr. Kambil to draft tax legislation.
  - October 1996: tax administration mission developed a strategy to establish an Inland Revenue Department.
  - June 1997: follow-up mission by a consultant.
  - May 2007: mission conducted a diagnostic review of tax and tariff policy and administration.
- LEG
  - October 2003: Mr. Head provided assistance on the revision of the Maldives Monetary Authority Act (MMA Act).
  - March and September 2005, and April 2006: series of missions to revamp the banking law.
- MCM
  - March 1993: consultant provided assistance on the introduction of treasury bills.
  - November 1994: mission headed by Mr. Taniguchi provided assistance on monetary management, foreign exchange operations, and bank supervision.
  - February/June 1995: consultant provided assistance for the development of a treasury bill and MMA certificate market.
  - February/March 1996: mission headed by Mr. Swinburne provided advice on the reform of monetary operations and exchange system.
  - May 1997: visit of a foreign exchange advisor.
  - Early 2001: two consultants provided assistance on foreign exchange and monetary management, of two missions each.
  - July 2001: consultant provided assistance on monetary management following the lifting of credit ceilings and further impending changes in the monetary framework.
  - October 2002: multi-purpose mission took stock of developments and provided recommendations in banking, foreign exchange operations, and foreign exchange reserves management.
  - October 2003: in cooperation with the legal consultant, Mr. Dornseif (Deutsche Bundesbank) provided assistance on the drafting of the amended MMA Act.
  - 2006: two missions visited on monetary operations, financial market development, and banking issues.
- STA
  - June 1993 and February 1994: assistance on monetary and balance of payments statistics, respectively.
  - May 1995: STA consultant provided assistance on the compilation of a new consumer price index.
  - August 1996: further assistance on consumer price index.
  - November 2005: TA on monetary and banking issues.
  - June 2006: STA provided advice on government finance statistics.
  - January 2007: STA provided advice on balance of payments statistics.

*Source: ANNEX I.  M — MALDIVES: FUND RELATIONS (As of June 30, 2008).*

### ANNEX IV.  Maldives: Social and Demographic Indicators

### ANNEX IV.  Maldives: Social and Demographic Indicators

### Data provision and statistical capacity
- Data provision has some shortcomings, but is broadly adequate for surveillance.
- Technical assistance received from STA and the Asian Development Bank (AsDB) has improved macroeconomic statistics.
- Remaining shortcomings affect balance of payments, government finance, and national accounts statistics.
- Authorities have requested Fund assistance in balance of payments and government finance; ongoing assistance on monetary statistics continues.
- Main official statistical publication: Statistical Yearbook of Maldives (contains data series up to 2004).
- APD receives, with lag, the Quarterly Economic Bulletin and the Annual Report of the Maldives Monetary Authority.

### Real sector: national accounts and prices
- National accounts statistics:
  - Available only on an annual basis and with a considerable lag.
  - Inconsistencies between GDP data from the production and expenditure sides.
  - AsDB assisting to set up a framework for more comprehensive national accounts.
- Consumer Price Index (CPI):
  - Compiled since June 1995 based on the 1993 income and expenditure survey.
  - 1995 base year still used; may not reflect current consumer spending patterns.
  - A 1996 STA consumer price statistics mission recommended developing additional price indices.
- Statistical recommendation summary:
  - Update CPI base and weighting to reflect current consumption patterns.
  - Compile national accounts more frequently and reconcile production/expenditure sides.

### Fiscal sector
- General government data:
  - Reported for publication in the GFS Yearbook; latest published data are for 2007.
- Data on state enterprises' operations are limited.
- Budget execution (as of end-June 2008 monthly data):
  - Government spent 41½ percent of budgeted current expenditures.
  - Government spent 14 percent of budgeted capital expenditures.
- Ministry of Finance revised down the budget and remains committed to zero domestic financing.
  - Government planning to cut expenditures by 19 percentage points of GDP for the year if 2H spending equals 1H patterns.
  - Aim to cut 20 percent of expenditures from August onward.
  - Expected cuts from measures: at least Rf 596 million (3.6 percent of GDP, 5.3 percent of budgeted annual domestic expenditure).
  - Revised budget leaves a domestic financing gap of 1.9 percent of GDP.
- Recommended immediate measures:
  - Increase electricity tariffs (to reduce government subsidies to state-owned electricity company).
  - Nominal wage bill freeze for the civil service.
  - Raise revenues through additional island leases, but less than previously discussed target of 30 islands.
- Staff recommendation: pursue deeper and less ad hoc expenditure reductions and revenue-enhancing reforms.

### Monetary sector
- Comprehensive monetary data published in the Quarterly Economic Bulletin and the Annual Report, with significant lag.
- Data for MMA accounts, commercial banks, and interest rates reported to the Fund for IFS on a regular and timely basis.
- Inconsistencies between monetary and fiscal data regarding fiscal deficit financing due to timing and coverage issues.
- April 2007 STA mission:
  - Completed standardized reporting forms (SRFs) for the central bank and other depository corporations.
  - Developed integrated monetary database meeting the data needs of MMA, STA, and APD.
  - Regular reporting of SRFs to begin once MMA approves data for dissemination.
  - Follow-up mission expected to complete reporting forms for other financial corporations.

### External sector
- Balance of payments data:
  - Compiled on an annual basis.
  - Problems of coverage and measurement in a range of areas.
  - Travel receipts estimated using a small and outdated survey of resorts/hotels to determine daily average expenditure by tourists.
  - Estimates of distributed and reinvested earnings in tourism unsatisfactory.
  - Information on private financial flows incomplete.
  - January 2007 technical assistance mission proposed steps to include data on direct investment, travel receipts, and other specific items.
- Official reserves:
  - Reported monthly with a (variable) two-week lag.
- External debt and debt service:
  - Quarterly data available for government and monetary authority, and to some extent for banking sector and state enterprises at annual consultation missions.
  - No data reported for the nonfinancial private sector.
- Predetermined outflows on foreign currency assets (mainly debt service payments) are known and reported at annual consultation missions; other movements not identified.

### Table of Common Indicators required for surveillance (selected entries, as of July 17, 2008)
- Exchange Rates: Date of latest observation 6/08; Date received 7/09/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 3/31/08; Date received 4/21/08; Frequency M/M/M.
- Reserve/Base Money: Date of latest observation 5/08; Date received 6/10/08; Frequency M/M/M.
- Broad Money: Date of latest observation 5/08; Date received 6/25/08; Frequency M/M/M.
- Central Bank Balance Sheet: 5/08; 6/13/08; M/M/M.
- Consolidated Balance Sheet of the Banking System: 5/08; 6/25/08; M/M/M.
- Interest Rates: 5/08; 6/25/08; M/M/M.
- Consumer Price Index: 3/31/08; 4/21/08; M/M/M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: 2007; 3/21/08; A/M/M.
- GDP/GNP: 2007; 2/21/08; A/M/M.
- Gross External Debt: 2007; 2/21/08; A/M/M.
- International investment Position: 2006; 10/17/07.

### IMF staff and Executive Board assessments (selected findings and recommendations)
- Macroeconomic context (2007–2008):
  - Economy rebounded strongly after December 2004 tsunami, underpinned by tourism and reconstruction.
  - 2007: rapid tourism growth and construction kept headline growth in line with pre-tsunami average despite low fish catch.
  - Inflation rose sharply to nearly 15 percent year on year due to soaring food and oil prices.
- Fiscal concerns:
  - Expenditures increased sharply following the tsunami; majority of increase in domestically financed expenditure unrelated to tsunami.
  - 2008 budget increased current expenditures in an election year financed by extraordinary revenue measures with implementation risks.
  - Over 50 percent increase in the wage bill and quadrupled subsidies (mainly due to administered electricity prices) pushed expenditure to nearly 70 percent of GDP.
  - Planned zero domestic financing in 2008 relied on a large receipt (about 15 percent of GDP) from a transshipment port project delayed; authorities planned to lease 30 islands to fill shortfall but revised down budget, cutting expenditure by 20 percent from August onward.
- External sector and debt:
  - Current account deficit widened to 45 percent of GDP in 2007, driven by construction-related imports and rising commodity prices despite strong tourism earnings.
  - Deficit financed mainly by large private capital inflows, including foreign borrowing by commercial banks on-lent to resort developers.
  - External debt increased to near 70 percent of GDP in 2007.
- Exchange rate regime:
  - U.S. dollar peg has served Maldives well and remains appropriate.
  - Maldives appears to have adequate room to maintain competitiveness under the peg provided imported inflation is not exacerbated by fiscal slippages.
  - Real effective exchange rate has declined more than comparator tourism-based small economies.
- Legal and institutional reforms:
  - Amendment to the Maldives Monetary Authority (MMA) act: separation of finance minister and governor; MMA empowered to set interest rates and cap government Ways and Means borrowing.
  - Civil Service Bill and Audit Act passed; independent civil service commissioner and auditor general appointed.
  - Directors encouraged early passage of pending Banking Act and AML/CFT legislation.
- Executive Directors' policy recommendations:
  - Ensure fiscal sustainability by containing excessive fiscal spending and avoiding ad hoc revenue reliance.
  - Identify further contingent expenditure cuts and implement measures to reduce subsidies and contain civil service wage bill.
  - Implement revenue-enhancing reforms, including introduction of corporate taxation, a broad-based sales tax, and an ad valorem tourism tax.
  - Develop a realistic medium-term expenditure framework to prioritize spending within available resources.
  - Monitor external vulnerabilities and banking sector risks closely given rise in external debt and debt service.

### Selected economic indicators (2003–08) — annual and levels (as presented)
- Real GDP (annual percentage change): 2003 8.5; 2004 9.5; 2005 -4.6; 2006 18.0; 2007 7.6; 2008 6.5.
- Inflation (period average): 2003 -2.8; 2004 6.3; 2005 3.3; 2006 3.5; 2007 7.4; 2008 15.0.
- Central government — Revenue and grants (percent of GDP): 2003 34.8; 2004 34.5; 2005 48.1; 2006 52.5; 2007 58.0; 2008 58.8.
  - Of which: Grants: 2003 1.4; 2004 0.7; 2005 8.6; 2006 7.4; 2007 8.7; 2008 4.9.
- Central government — Expenditure and net lending (percent of GDP): 2003 38.2; 2004 36.0; 2005 59.0; 2006 59.3; 2007 65.8; 2008 68.3.
  - Of which: Domestic spending (percent of GDP): 2003 34.0; 2004 33.2; 2005 49.1; 2006 48.4; 2007 49.4; 2008 55.8.
- Overall balance (percent of GDP): 2003 -3.4; 2004 -1.6; 2005 -10.9; 2006 -6.8; 2007 -7.8; 2008 -9.4.
- Overall balance, excluding grants (percent of GDP): 2003 -4.8; 2004 -2.3; 2005 -19.5; 2006 -14.2; 2007 -16.6; 2008 -14.3.
- Financing (percent of GDP):
  - Domestic: 2003 -1.3; 2004 -2.5; 2005 8.4; 2006 2.3; 2007 -0.7; 2008 0.7.
  - Foreign: 2003 4.7; 2004 4.1; 2005 2.4; 2006 4.5; 2007 8.6; 2008 8.7.
- Balance of payments (in millions of U.S. dollars):
  - Exports, including re-exports: 2003 152.0; 2004 181.0; 2005 161.6; 2006 225.2; 2007 228.0; 2008 344.2.
  - Imports: 2003 -414.3; 2004 -564.8; 2005 -655.5; 2006 -815.3; 2007 -964.7; 2008 -1,213.5.
  - Nonfactor services (net): 2003 311.1; 2004 352.4; 2005 118.8; 2006 320.7; 2007 357.6; 2008 401.6.
  - Current account balance (millions of U.S. dollars): 2003 -31.8; 2004 -125.8; 2005 -268.8; 2006 -302.0; 2007 -424.5; 2008 -596.7.
  - Current account balance (percent of GDP): 2003 -4.6; 2004 -16.2; 2005 -35.9; 2006 -33.0; 2007 -40.1; 2008 -46.0.
  - Official capital (net): 2003 29.9; 2004 25.0; 2005 18.6; 2006 42.1; 2007 39.2; 2008 128.3.
  - Private capital (net): 2003 70.3; 2004 140.1; 2005 145.8; 2006 147.8; 2007 212.7; 2008 295.0.
  - Errors and omissions (net): 2003 5.3; 2004 13.3; 2005 -10.9; 2006 52.9; 2007 56.2; 2008 0.0.
  - Overall balance: 2003 26.5; 2004 44.2; 2005 -17.3; 2006 45.1; 2007 76.9; 2008 32.6.
  - Gross official reserves (year-end, millions USD): 2003 160.3; 2004 204.4; 2005 187.1; 2006 232.2; 2007 309.1; 2008 341.7.
  - Gross official reserves (months of following year's imports of GNFS): 2003 2.7; 2004 2.9; 2005 2.1; 2006 2.3; 2007 2.5; 2008 2.7.
- External Debt (millions USD): 2003 289.5; 2004 331.8; 2005 429.5; 2006 449.2; 2007 736.3; 2008 1,070.6.
  - External Debt (percent of GDP): 2003 41.8; 2004 42.7; 2005 57.3; 2006 49.1; 2007 69.6; 2008 82.6.
- Public External Debt (millions USD): 2003 272.9; 2004 311.6; 2005 309.9; 2006 361.8; 2007 523.7; 2008 652.0.
  - Public External Debt (percent of GDP): 2003 39.4; 2004 40.1; 2005 44.1; 2006 40.7; 2007 38.9; 2008 41.7.
- Debt service (millions USD): 2003 22.0; 2004 32.3; 2005 43.1; 2006 43.3; 2007 66.9; 2008 96.9.
- Exchange rate (Rufiyaa per U.S. dollar, period average): 12.8 (listed as 12.812.812.8 and 12.8 in the table).
- Memorandum item — Nominal GDP (in millions of rufiyaa): 2004 8,863.2; 2005 9,938.7; 2006 9,596.6; 2007 11,722.0; 2007 (another entry) 13,543.0; 2008 16,586.8.

*Source: IMF staff report excerpts and Public Information Notice, Article IV consultation with the Maldives (2008).*

### 1.      The Maldives economy has resumed its impressive growth trend as sound policies

### The Maldives economy has resumed its impressive growth trend as sound policies and generous international support have aided its recovery from the effects of the December 2004 Tsunami

### Overview and recovery
- The Maldives economy has resumed an impressive growth trend aided by sound policies and generous international support following the December 2004 Tsunami.
- The economy remains highly dependent on tourism and tuna exports.
- Ongoing reconstruction and an ambitious tourism development plan have boosted construction and services activity, contributing to a deterioration of the fiscal balance.
- Steady growth in per capita GDP has propelled the country to middle-income levels, while authorities seek to reduce external vulnerabilities and ensure long-term fiscal sustainability.

### Growth and outlook
- GDP growth resumed its normal pace of around 7½ percent in 2007 despite an unexpected drop in fish catch.
- Post-tsunami dynamics:
  - Sharp contraction in 2005.
  - Exceptional growth of 18 percent in 2006 as the economy rebounded.
- Tourism levels returned to pre-tsunami levels and fish catch recovered in early 2008.
- Near-term outlook: favorable for GDP growth and the balance of payments, assuming a lasting correction in commodity prices and ongoing expansion in hotel capacity.
- Medium-term drivers: further tourism expansion, enhanced human and institutional capacity, and stronger financial institutions to foster economic diversification.

### Inflation
- Headline inflation rose from 4 percent to nearly 15 percent in April (driven by rising food and fuel prices).
- Food imports account for 30 percent of the CPI basket.
- Non-food inflation stood at 6 percent in April 2008, compared to 2 percent a year earlier.
- Fuel has a small direct CPI share but affects domestic prices via transport, construction, tourism, and delivery of services across remote islands.
- A severe housing shortage has raised housing costs, partly due to a large increase in foreign labor.
- The weakening dollar, to which the rufiyaa is pegged, contributed to rising import costs and inflation.
- A correction in commodity prices would allow inflation to revert back to previous levels of around 4 percent.

### External developments and competitiveness
- Predominance of European tourists means competitiveness has not been hurt by the weakening dollar peg.
- The Maldives is in a good competitive position relative to main comparators and can withstand some further real appreciation without adverse impact on tourism.
- Staff confirms absence of any exchange rate misalignment and reaffirms that the dollar peg provides an effective nominal anchor and remains the most appropriate regime.
- Intensive reconstruction has supported a tourism rebound, with tourist receipts rising steadily in the last three years to surpass pre-tsunami levels.
- Current account deficit widened despite strong tourism growth due to higher imports:
  - About one-half of the increase in the value of imports came from capital goods.
  - One quarter of the increase came from higher payments for petroleum products.
- Imports were financed primarily by private capital flows and commercial bank borrowing, allowing a modest addition to reserves to maintain adequate import coverage.

### Budgetary operations and fiscal outcome
- 2007 fiscal outcome:
  - Considerably better than projected during the last Article IV consultation and better than targeted under the 2007 budget.
  - Domestic revenue increased by 5 percent of GDP primarily from resort lease payments.
  - Grant receipts exceeded the budgeted amount by 1½ percent of GDP.
  - Overall revenue fell short of the budget by about 2½ percent of GDP due to an anticipated increase in import duties not materializing.
  - Current spending was contained to within ½ percent of GDP of the budgeted amount.
  - Capital spending was kept well below the budget target.
  - Overall fiscal deficit including grants came in at 7.8 percent of GDP, well below the staff’s projection of 24 percent of GDP.
  - Projected domestic financing (of 9 percent of GDP) did not materialize.
- Financing strategy: reliance, where possible, on grant financing, concessional borrowing, and private sector leasing to contain domestic financing; reflects authorities’ resolve to rein in spending pressures and avoid domestic financing.
- 2008 budget stance and measures:
  - Authorities aim to maintain a balanced budget in terms of domestic financing and adjust spending in line with domestic revenue and foreign financing.
  - Expected revenue from the transshipment port project delayed; cabinet decision in August 2008 to reduce remaining budget allocations of each line ministry/office by 20 percent.
  - Discussions underway with World Bank and Asian Development Bank on possible budget support; bilateral donors approached for possible grant support.
  - Spending pressures driven by scheduled Presidential elections before the 10th of October 2008 and Parliamentary elections in March 2009, expanding tourism infrastructure needs, rising demand for public services, and a large inflow of foreign labor.
  - Number of expatriates nearly doubled since 2004, increasing the island’s population by about 10 percent and raising administrative burden.
  - Higher subsidy payments were necessary to ensure affordable food staples, assist fisheries with rising fuel prices, and mitigate higher fuel costs on electricity prices.
  - Full pass-through of petroleum price increases; authorities plan to adjust electricity prices to gradually remove electricity subsidies.
  - Public sector wage correction in January 2008 to reduce erosion of real incomes, with larger increases for lower-end pay scales.
  - Some underspending likely in certain budget categories.

### Debt and fiscal sustainability
- Authorities committed to zero domestic financing policy supported by key expenditure and revenue reforms to ensure medium-term fiscal sustainability.
- Public debt ratio edged up with reconstruction activity but is expected to recede rapidly over the medium-term.
- To offset anticipated decline in official disbursements and lease payments, authorities plan to introduce a business profit tax in 2009.
  - Ministry of Legal Reform estimates the bill will be submitted to Parliament before December 2008.
- Consideration is being given to broadening the tax base through a consumption tax, requiring further study for an equitable and orderly approach.
- Planned infrastructure and public sector governance reforms expected to help rationalize public spending on social services.
- Expected savings from planned consolidation of population to reduce high-cost services in remote areas.
- Newly formed civil service commission should facilitate downsizing of the civil service over the medium-term and avoid future ad-hoc compensation increases.
- Rising incomes should allow greater provision of private health and education services, reducing reliance on public services.
- Ministry of Finance and Treasury is working to ensure a medium-term fiscal framework will be in place starting from 2009.

### Financial sector developments
- Private sector credit expanding robustly in line with the tourism development plan since 2004.
- Most lending originates through parent banks of international commercial banks, contributing to higher external debt ratio.
- External vulnerabilities mitigated by parent bank exposure limits and well-collateralized loans.
- Strengthened off-site and on-site supervision has reduced nonperforming loans since 2005; impaired loans currently account for less than 2 percent of total loans.

### Monetary and institutional reforms
- Recent reforms have strengthened the Maldives Monetary Authority (MMA) and its capacity to manage liquidity.
- Amendment of the MMA Act separated leadership of the central bank and ministry of finance and reorganized the governing body.
- An inter-agency agreement gives the MMA jurisdiction on setting interest rates and places a ceiling on government borrowings through the Ways and Means Account.
- Authorities have initiated another amendment to clarify that the central bank need not be a captive purchaser of government bills.
- These reforms will strengthen the MMA’s instruments and capacity to control domestic liquidity.

### Concluding remarks
- Authorities express appreciation for staff advice and thank the Fund and its membership for continued support.

*Source: _cr0997 - 1. The Maldives economy has resumed its impressive growth trend as sound policies and generous international support have aided its recovery from the effects of the December 2004 Tsunami*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0997.pdf_