## _cr1028 ## Source details **Canonical URL:** [_cr1028](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1028.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1028.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1028.pdf.json) --- ### Executive Summary — Context and Program - The Maldivian economy faces large external and fiscal imbalances due to the global financial crisis and prior unsustainable fiscal expansion. - Authorities requested a blended IMF arrangement: - Stand-By Arrangement: 600 percent of quota, or SDR 49.2 million, over 36 months. - Exogenous Shock Facility-High Access Component: 100 percent of quota, or SDR 8.2 million, over 24 months. - Program objectives: - Provide financing to smooth adjustment to the external shock. - Restore fiscal and external stability while protecting social spending. - Address weaknesses in the banking system. - Core policy framework: - Strong fiscal adjustment to contain aggregate demand and restore medium-term fiscal sustainability. - Complementary monetary tightening and operationalization of monetary instruments. - Measures to strengthen the banking sector and normalize foreign exchange markets. ### Recent Developments and Short-Term Outlook (2008–2009) - Growth and activity: - Real GDP grew 5¾ percent in 2008. - Real GDP expected to shrink by about 4 percent in 2009. - Tourism arrivals forecast to fall by 7 percent in 2009. - Construction projected to shrink by almost one-quarter in 2009. - Inflation: - Inflation fell to 3 percent y/y in August 2009. - Expected to rise to about 6¾ percent y/y in the second half of 2009. - Fiscal outcomes: - Public expenditure reached 63 percent of GDP in 2008. - Without adjustment, public expenditure on course to reach 69 percent of GDP by end-2009. - Fiscal deficit rose to 13¾ percent of GDP in 2008; absent corrective action could reach 33 percent of GDP in 2009. - Public debt could soar to 97 percent of GDP under no-adjustment scenario. - External sector and reserves: - Current account deficit widened to 51 percent of GDP in 2008. - Current account deficit expected to moderate to 30 percent of GDP in 2009 due to import compression. - Gross international reserves stood at 2¼ months of imports at end-September 2009. - Usable reserves were down to less than 3 weeks of imports. - Exchange rate and FX market: - Conventional fixed peg to the U.S. dollar at 12.8 rufiyaas per dollar since 2001. - MMA sells FX to banks at US$1 = 12.85 rufiyaa and to public sector at US$1 = 12.80 rufiyaa. - MMA rationed FX supply to commercial banks at US$ 2.3 million per week; parallel market premium around 10 percent over the official peg. ### Impact of the Global Crisis (quantified shocks and financing) - Estimated net negative balance of payments impact: US$309 million (24½ percent of 2009 GDP) in 2009–10 (staff estimates). - Selected balance of payments impacts (millions of U.S. dollars, as presented): - CURRENT ACCOUNT total impact: -647.9 (2008), -397.7 (2009), -337.6 (2010); Net Impact (2009 & 2010): -310.3; Cumulative (2009 & 2010) -560.5. - Travel receipts impact: 663.6 (2008), 521.2 (2009), 629.9 (2010); total 176.1 (2009 & 2010). - Exports (excluding re-exports): 125.9 (2008), 88.3 (2009), 100.2 (2010); total 63.2 (2009 & 2010). - Food and fuel imports (price effect): -448.3 (2008), -320.3 (2009), -358.9 (2010); total -217.4 (2009 & 2010). - Tourism & investment imports: -253.8 (2008), -162.5 (2009), -176.4 (2010); total -168.7 (2009 & 2010). - CAPITAL AND FINANCIAL ACCOUNT total impact: 495.9 (2008), 355.2 (2009), 252.3 (2010); total 384.3 (2009 & 2010). - FDI, Banks, and other investment (excluding privatization): 431.6 (2008), 166.2 (2009), 241.0 (2010); total 456.1 (2009 & 2010). - Gross Impact (A+C+D): 445.4 (2008), 250.0 (2009), 695.4 (2010). - Net Impact (A+C+D+B(i)+B(ii)): 226.1 (2008), 83.2 (2009), 309.3 (2010); Net Impact in percent of 2009 GDP: 17.9, 6.6, 24.5. - Multilateral financing: - Total projected financing from IMF, World Bank, and ADB: US$81 million for 2009–10. - ESF to cover the two years primarily affected; SBA to support medium-term fiscal adjustment. ### Fiscal Drivers, Adjustment Measures, and Expected Yields - Fiscal drivers: - Rapid fiscal expansion post-2004 tsunami, steep wage bill increases; central government wage bill and public employment high by international standards. - STELCO operating losses; implicit electricity subsidies budgeted at about 2½ percent of GDP in 2009. - Revenue contraction from slower imports, lower tourism, postponed lease payments. - Total planned fiscal measures (summary): - Total expenditure savings and revenue increases (by full-year impact): 29.3 percent of GDP (table-format presentation in source). - Selected measures and expected yields (Expected Yield 1/ in percent of GDP; timing as indicated): - Reduction of wages and allowances: Oct, 2009 — 2009 1.0; 2010 3.7; 2011 3.4; 2012 4.0; Full-year impact 13.9. - Staff redundancies: Oct 2009–Dec 2010 — 2009 0.1; 2010 2.7; 2011 4.2; 2012 4.2; Full-year impact 5.4. - Cost of staff cuts: one-off — 2009 -0.1; 2010 -0.6. - Increase in electricity tariffs: Nov, 2009 — 2009 0.5; 2010 2.5; 2011 2.5; 2012 2.5; Full-year impact 2.7. - Reductions in other current spending: Sept, 2009 — 2009 1.1; 2010 1.9; Full-year impact 2.0. - Reductions in capital spending: 2010 — 2010 1.1 one-off. - Revenue items: - Airport tax (transfer to government): Nov, 2009 — 2009 0.1; 2010 0.7; 2011 0.6; 2012 0.6; Full-year impact 0.8. - Increase in rates: Nov, 2009 — 2009 0.0; 2010 0.1; 2011 0.3; 2012 0.3; Full-year impact 0.3. - Business profit tax: Dec, 2009 — 2009 1.6; 2010 2.9; 2011 2.9; 2012 3.4; Full-year impact 3.4. - Ad valorem tax: Oct, 2010 — Full-year impact 10.8 (intermediate yields: 2010 1.9; 2011 7.9; 2012 8.5). - Foregone revenue from tourism tax (replacement effect): 2009–2012 — 2009 -0.8; 2010 -3.1; 2011 -3.1; 2012 -3.7. - General sales tax: Jan, 2011 — 2011 2.3; 2012 3.0; Full-year impact 3.8. - Together, revenue measures expected to yield as much as 15½ percent of 2009 GDP once full-year impact materializes. - Wage bill specifics: - Average civil service wage reduction of 14 percent effective October 1, 2009 (reductions between 10 and 20 percent depending on rank). - Measures extended to non-civil service government employees; staff reductions to be completed by end-2010. - Wage bill expected to fall from 28 percent of GDP in 2009 to 17½ percent by 2011, rising to 19¼ percent in 2012 as recent wage adjustments reversed. - About 38,000 central government employees; severance costs reduce net fiscal savings. ### Monetary Policy, OMOs, and Reserve Dynamics - Monetary stance and actions: - Deficit monetization halted from September 2009. - Government debt with MMA converted into bonds (maturities 1–15 years; fixed interest 6–9 percent, semi-annual). - Open market operations (RRPs) introduced August 2009 to absorb rufiyaa liquidity; RRPs weekly, one-week term. - Rationale for RRPs over outright sales: reversible transactions support money market formation. - Reserve and liquidity context: - Strong capital inflows kept money supply growing at double-digit rates through mid-2008; global shocks led to dollar shortages and reserve losses. - Usable reserves calculation and monitoring included as program performance criterion. ### Exchange Rate Policy, Competitiveness, and FX Rationing - Exchange rate regime: - Peg retained at Rf 12.8 per US dollar; staff and authorities concur peg and level appropriate conditional on program implementation. - Staff analysis: peg consistent with medium-term fundamentals under baseline; REER currently overvalued but path under baseline consistent with fundamentals. - Assessment of devaluation: - Devaluation not appropriate now: limited expenditure-switching, large pass-through to prices, limited net fiscal benefit in 2009, potential loss of confidence given low reserves. - FX rationing and multiple currency practice: - Rationing of FX to banks has induced parallel market trading at a premium ~10 percent; spread >2 percent constitutes a multiple currency practice. - Authorities plan to gradually eliminate FX rationing as reserves rebuild. ### Financial Sector Stress, Reforms, and Restructuring - Key vulnerabilities: - High exposure to tourism sector; concentration of loans in few large borrowers increased NPLs. - Banks reported capital positions strong but potential large losses from NPLs could compromise balance sheets. - Banks have substantial domestic liquidity buffers and long net open FX positions; large negative net foreign asset position and high loan-to-deposit ratio in FX increase dollar liquidity risk. - Bank of Maldives (BML): - Authorities intend to restructure BML’s portfolio, recover collateral on defaulted debt, and secure capital infusion as necessary; preferred to find a strategic partner. - Legal and supervisory reforms: - May 2009 regulations tightened prudential framework (capital adequacy; limits on related-party and single borrower exposures; asset classification and provisioning; audits; disclosure; governance). - Authorities agreed to seek passage of Banking Law and reforms to MMA Act by end-2010 (structural benchmark). - Staff recommended limiting open FX positions and strengthening supervision and enforcement. - Privatization: - Privatization program (telecom stake sold for US$40 million; majority stake in airport planned) to enhance productivity and provide finite deficit financing and FX inflows (not conditionality). ### Medium-Term Outlook and Projections (Adjustment scenario = program baseline) - Real GDP (percent change): 2008 5.8; 2009 -4.0; 2010 3.4; 2011 3.7; 2012 4.1; 2013 4.3; 2014 4.5. - Inflation (y/y percent change): 2008 11.9; 2009 5.5; 2010 4.5; 2011 6.3; 2012 3.5; 2013 3.0; 2014 3.0. - Overall fiscal balance (percent of GDP): 2008 -13.8; 2009 -28.8; 2010 -17.8; 2011 -4.2; 2012 -3.6; 2013 -2.3; 2014 -1.0. - Domestic financing (percent of GDP): 2008 10.0; 2009 16.1; 2010 13.6; 2011 2.2; 2012 1.1; 2013 1.1; 2014 0.0. - Public debt (percent of GDP): 2008 68.6; 2009 91.6; 2010 96.0; 2011 87.9; 2012 82.5; 2013 76.6; 2014 69.8. - Current account (percent of GDP): 2008 -51.4; 2009 -29.6; 2010 -23.4; 2011 -13.1; 2012 -11.1; 2013 -9.3; 2014 -7.9. - GIR (in months of GNFS imports): 2008 1.8; 2009 3.2; 2010 3.1; 2011 3.1; 2012 3.4; 2013 3.6; 2014 3.7. - Alternative no-adjustment scenario (selected): - Public debt (percent of GDP): 2008 68.6; 2009 96.6; 2010 113.7; 2011 123.1; 2012 130.6; 2013 138.8; 2014 147.5. - GIR (months of GNFS imports): 2008 1.8; 2009 1.4; 2010 1.0; 2011 1.0; 2012 1.0; 2013 1.0; 2014 1.0. - Note: no-adjustment assumes reserves maintained at 1 month of GNFS imports through borrowing at market rates. ### Debt Sustainability Assessment (DSA) — Risks and Scenarios - Joint IMF/World Bank DSA: Maldives rated at moderate risk of debt distress. - Total debt-to-GDP rose to almost 110 percent in 2008; projected to about 129 percent in 2009 under certain dynamics. - Baseline under program: external and public debt indicators decline over time; one minor temporary breach in PV external public debt-to-GDP in 2009. - Stress tests show vulnerability to export shocks (tourism) and combination shocks; extreme shocks can breach debt thresholds. - Public debt service: - Total public debt service cost averaged 7 percent of GDP in 2003–2008; expected to increase to 17.2 percent by 2010 before declining. - Projections of PV public debt-to-GDP: - 91 percent in 2009; 17 percent by 2029 (baseline assuming implementation). - Principal policy implication: urgent and sustained fiscal consolidation required; maintain borrowing constraints and diversify external inflows where possible. ### Social Protection, Growth Promotion, and Safeguards - Social protection: - Program objective: protect social spending and lay foundations for sustained poverty reduction. - Protected items: social welfare contributions, pensions, tsunami relief spending. - Electricity subsidy reform combined with targeted relief for the poor; targeting improvements for food, medicine, water subsidies. - Lower earners to be proportionally less affected by wage adjustments; shielding measures (e.g., scholarships) to address corporatization impacts. - Protected spending includes social housing and improving transport links to outer atolls. - Growth promotion: - Objective to restore investor confidence and reduce country risk premium by lowering public sector domestic and external debt. - Protect priority capital expenditure and human development spending where possible. - State reform via privatization and corporatization to make public sector leaner. - Safeguards: - Safeguards assessment of the MMA in progress; to be completed before first review. - Authorities to appoint an international firm to audit MMA accounts; modernize MMA Act; strengthen reporting and internal audit. ### Program Modalities, Conditionality, Prior Actions, and Monitoring - Facilities and access: - SBA: access 600 percent of quota (SDR 49.2 million) over 36 months. - ESF (High Access): access 100 percent of quota (SDR 8.2 million) over 24 months. - Financing assurances: - World Bank and ADB financing assurances amounting to US$59 million over program period. - Program allows nonconcessional external borrowing up to US$120 million through end-2010 for socially useful and economically viable projects. - Prior actions (implemented): - Announced wage and staffing reductions; raised electricity tariffs and introduced cost-based formula and targeted subsidy; converted government debt with MMA into tradable securities; transferred airport tax revenue to government; 2010 Budget submitted in line with program. - Conditionality and monitoring: - Quarterly reviews (first review March 2010, second review June 2010) with quantitative performance criteria, indicative targets, and structural benchmarks specified in the TMU. - Key quantitative criteria include floors/ceilings on usable reserves, reserve money, total financing of central government deficit, net MMA credit to government, and limits on contracting nonconcessional external debt and external arrears. - Data and reporting: - Monetary and financial statistics reported monthly; new preliminary monthly fiscal reporting begun but untested. - Staff to work with authorities to improve data quality and timeliness; technical assistance foreseen. - Repayment and capacity: - If disbursements follow schedule, peak Fund repayments in 2015; staff analysis indicates MMA could accumulate enough reserves to repay the Fund and maintain >4 months of imports. ### Risks to Program Implementation - Fiscal adjustment risks: - Political resistance from civil servants and public; government lacks parliamentary majority; delayed or insufficient implementation is a major risk. - Global economy: - Recovery of tourism, FDI, and private-sector inflows depends on global recovery and normalization of international financial markets. - Confidence and reserves: - Preservation of confidence critical; sudden loss of reserves or deposit withdrawals could occur. - Monetary policy: - OMOs are new; sizable domestic financing needs may crowd out MMA liquidity-absorbing operations. - Privatization and financial sector: - Privatization may be delayed or derailed; persistent high NPLs could keep credit growth subdued and increase fiscal risk via BML support. - Contingency: - Materialization of risks may require reassessment of program policies, including further tightening of monetary and fiscal measures. *Source: _cr1028 — Executive Summary and selected sections.* ### Executive Summary ### Executive Summary ### Context and crisis overview - The Maldivian economy faces large external and fiscal imbalances due to the severe impact of the global financial crisis and an unsustainable fiscal expansion. - Tourism, related investment, other net capital flows, and exports declined sharply, causing a significant fall in fiscal revenue and pushing the economy into recession. - A rising share of the fiscal deficit has been financed by monetization; despite foreign exchange rationing by the Maldives Monetary Authority (MMA), international reserves have fallen to about two months of imports. ### Program requested and policy framework - Authorities requested assistance under a blended arrangement: - Stand-By Arrangement: 600 percent of quota, or SDR 49.2 million, over 36 months. - Exogenous Shock Facility-High Access Component: 100 percent of quota, or SDR 8.2 million, over 24 months. - Program objectives: - Provide financing to smooth adjustment to the external shock. - Restore fiscal and external stability while protecting social spending. - Address weaknesses in the banking system. - Core policy framework: - Strong fiscal adjustment to contain aggregate demand and restore medium-term fiscal sustainability. - Complementary monetary tightening. - Measures to strengthen the banking sector. ### Key findings and projections (recent developments and outlook for 2009) - Growth and activity: - Real GDP grew 5¾ percent in 2008. - Real GDP is expected to shrink by about 4 percent in 2009. - Tourism arrivals are forecast to fall by 7 percent in 2009 compared to the previous year. - Construction sector projected to shrink by almost one-quarter in 2009 as tourism projects are delayed. - Inflation: - Inflation fell to 3 percent year-on-year (y/y) in August 2009. - Expected to rise to about 6¾ percent y/y in the second half of 2009 due to higher international fuel prices and domestic electricity tariffs. - Fiscal outcomes: - Public expenditure reached 63 percent of GDP in 2008. - Without adjustment, public expenditure was on course to reach 69 percent of GDP by end-2009. - Fiscal deficit rose to 13¾ percent of GDP in 2008; absent corrective action, it could reach 33 percent of GDP in 2009. - Public debt could soar to 97 percent of GDP under no-adjustment scenario. - External sector and reserves: - Current account deficit widened to 51 percent of GDP in 2008. - Current account deficit expected to moderate to 30 percent of GDP in 2009 due to import compression. - Gross international reserves stood at 2¼ months of imports at end-September 2009. - Usable reserves were down to less than 3 weeks of imports. - Exchange rate and regime: - Maldives has a conventional fixed peg against the U.S. dollar, pegged at 12.8 rufiyaas per dollar since 2001. - MMA sells foreign exchange to banks at US$1 = 12.85 rufiyaas and to the public sector at US$1 = 12.80 rufiyaas. - Authorities plan to gradually eliminate the current exchange restriction (foreign exchange rationing) over the course of the program. - Foreign exchange market conditions: - MMA rationed foreign exchange supply to commercial banks at US$ 2.3 million per week. - A parallel market emerged with a premium of around 10 percent over the official peg. ### Impact of the global crisis (quantified shocks and financing) - Estimated net negative impact on the balance of payments: US$309 million (24½ percent of 2009 GDP) in 2009–10 (staff estimates). - Breakdown highlights (selected items, in millions of U.S. dollars): - CURRENT ACCOUNT total impact: -647.9 (2008), -397.7 (2009), -337.6 (2010); Net Impact (2009 & 2010): -310.3; Cumulative (2009 & 2010) -560.5. - Travel receipts impact: 663.6 (2008), 521.2 (2009), 629.9 (2010); total 176.1 (2009 & 2010). - Exports (excluding re-exports): 125.9 (2008), 88.3 (2009), 100.2 (2010); total 63.2 (2009 & 2010). - Food and fuel imports (price effect): -448.3 (2008), -320.3 (2009), -358.9 (2010); total -217.4 (2009 & 2010). - Tourism & investment imports: -253.8 (2008), -162.5 (2009), -176.4 (2010); total -168.7 (2009 & 2010). - CAPITAL AND FINANCIAL ACCOUNT total impact: 495.9 (2008), 355.2 (2009), 252.3 (2010); total 384.3 (2009 & 2010). - FDI, Banks, and other investment (excluding privatization): 431.6 (2008), 166.2 (2009), 241.0 (2010); total 456.1 (2009 & 2010). - Gross Impact (A+C+D): 445.4 (2008), 250.0 (2009), 695.4 (2010). - Net Impact (A+C+D+B(i)+B(ii)): 226.1 (2008), 83.2 (2009), 309.3 (2010); Net Impact in percent of 2009 GDP: 17.9, 6.6, 24.5 (table entries preserved as presented). - Multilateral financing needs and program design: - Total projected financing from the IMF, World Bank, and ADB is US$81 million for 2009–10. - Under the proposed SBA/ESF blend, the ESF would cover the two years primarily affected by the fallout from the global crisis, while the 36-month SBA would support medium-term fiscal adjustment. ### Fiscal drivers and structural pressures - Rapid fiscal expansion after the 2004 tsunami, including steep wage bill increases, pushed public expenditure sharply higher. - Central government wage bill and public employment are high by international standards (charts and comparisons referenced). - The state-owned electricity company (STELCO) experienced large operating losses; implicit electricity subsidies were budgeted at about 2½ percent of GDP in 2009 and could exceed that without tariff adjustment. - Revenue contraction driven by: - Slower imports (customs duties are a key revenue source). - Lower tourism inflows. - Postponed lease payments from troubled tourist resort projects. ### Monetary policy, reserve dynamics, and competitiveness - Monetary policy constrained by fiscal dominance (government borrowing without limit from the MMA) and the fixed exchange rate regime. - Open market operations were introduced only in August 2009; prior to that, deficit monetization was ultimately reabsorbed via reserve losses. - Strong capital inflows had kept money supply growing at double-digit rates through mid-2008; global shocks led to dollar shortages and significant reserve losses. - Real effective exchange rate (REER) developments: - From 2001 to mid-2008, rufiyaa depreciated by 27 percent in real terms (25 percent nominal). - REER appreciated slightly thereafter but remains below its 1999–2008 average. - CGER-type quantitative analysis suggests that under baseline (adjustment) policies the current peg is consistent with medium-term fundamentals; the REER is significantly overvalued at present but its medium-term path under the baseline is consistent with fundamentals. - External sustainability: projections indicate the external accounts would return to equilibrium by 2013 under the envisaged program adjustment. ### Policy implications and priorities (from program discussions) - Immediate priorities: - Implement strong fiscal retrenchment to contain aggregate demand and reduce monetization of the deficit. - Protect social spending during fiscal consolidation. - Tighten monetary stance and operationalize monetary instruments (open market operations) to support the peg and curb inflationary pressures. - Address banking sector weaknesses and restore normal access to foreign exchange markets. - Structural and medium-term measures: - Gradually eliminate the exchange restriction (foreign exchange rationing) over the program period. - Adjust electricity tariffs to reduce implicit subsidies and limit fiscal transfers to STELCO. - Restore fiscal sustainability to bring public expenditures and wage bill to sustainable levels relative to GDP. _Executive Board documentation: staff visit dates and composition, consultations, and accompanying tables/figures are summarized in the source document._ *Source: _cr1028 - Executive Summary_* ### Box 2. Maldives: Exchange Rate, External Sustainability, and Competitiveness ### Box 2. Maldives: Exchange Rate, External Sustainability, and Competitiveness (concluded) ### Competitiveness and external position - Cross-country data suggest that the Maldivian economy remains competitive, but faces some structural weaknesses. - For the past five years, the path of the Maldives’ REER has remained below those of some relevant competitors for high-end tourism, except the Seychelles. - Growth of international visitor arrivals suggests that Maldives remains competitive in international tourism attraction. - Broader indicators point to challenges to the business climate: - Doing Business rank among 183 countries: 71 in 2008 and 87 in 2009. - Tourism Competitiveness / Average growth in arrivals (2001–2008): Maldives 7.1 (listed as "Maldives 7.1" in table). - Selected Real Effective Exchange Rates (January 2000 = 100) and country comparisons shown in figures (data points preserved in source figures). ### Financial sector stress and vulnerabilities - The global crisis and the domestic downturn have put significant stress on the banking system. - Key vulnerabilities: - High exposure to the tourism sector and concentration of loans in a few large borrowers led to a significant increase in non-performing loans (NPLs) for some banks. - Banks’ reported capital position remains strong, but potentially large losses from NPLs could compromise balance sheets. - Reduced financing options (e.g., lines of credit, parent financing). - Banks have substantial domestic liquidity buffers (including excess reserves at the MMA) and long net open positions in foreign exchange. - Large (though declining) negative net foreign asset position, large exposure to short-term external financing, and high loan-to-deposit ratio in foreign currency make banks vulnerable to dollar liquidity shocks. - Consequence: deteriorating asset quality, difficult economic outlook, and constrained financing have led private sector credit growth to grind to a halt in 2009 after several years of very high growth rates. ### Medium-term outlook (Adjustment scenario = program baseline) - Real GDP growth: - Projected increase to 3½ percent in 2010 and reach about 4½ percent in 2014. - Growth projected to average around 4 percent in 2010-14, compared with 6½ for the ten years to 2008. - Inflation: - Expected to decline gradually to about 3 percent in 2012–14, after a temporary increase in 2011 due to the introduction of a goods and services tax. - Fiscal balances: - Overall deficit projected to fall to 1 percent of GDP by 2014. - Primary balance turning to surplus from 2011. - External accounts and reserves: - Current account deficit projected to narrow sharply to about 8 percent in 2014, within its sustainability bound (Box 2). - Gross international reserves projected to increase gradually to about 3¾ months of imports by 2014. - Notes on methodology: - Estimates are based on a medium-run semi-elasticity of the ratio of the current account balance to GDP with respect to the real effective exchange rate of -0.464, a NFA to GDP norm of -90.2, and a medium-run equilibrium nominal GDP growth rate of 7.3 percent. - All figures are based on five year conditional forecasts, and are expressed in percent. Results reported are based on a GMM estimator applied to 182 countries.(Vitek 2009) ### Key macroeconomic indicators (selected, 2008–2014) - Baseline (Proj. under the program) — Est./Proj.: - Real GDP (percent change): 2008 5.8; 2009 -4.0; 2010 3.4; 2011 3.7; 2012 4.1; 2013 4.3; 2014 4.5 - Inflation (y/y percent change): 2008 11.9; 2009 5.5; 2010 4.5; 2011 6.3; 2012 3.5; 2013 3.0; 2014 3.0 - Overall fiscal balance (percent of GDP): 2008 -13.8; 2009 -28.8; 2010 -17.8; 2011 -4.2; 2012 -3.6; 2013 -2.3; 2014 -1.0 - Domestic financing (percent of GDP): 2008 10.0; 2009 16.1; 2010 13.6; 2011 2.2; 2012 1.1; 2013 1.1; 2014 0.0 - Public debt (percent of GDP): 2008 68.6; 2009 91.6; 2010 96.0; 2011 87.9; 2012 82.5; 2013 76.6; 2014 69.8 - Current account (percent of GDP): 2008 -51.4; 2009 -29.6; 2010 -23.4; 2011 -13.1; 2012 -11.1; 2013 -9.3; 2014 -7.9 - GIR (in months of GNFS imports): 2008 1.8; 2009 3.2; 2010 3.1; 2011 3.1; 2012 3.4; 2013 3.6; 2014 3.7 - No-adjustment scenario (Proj. no policy change) — Est./Proj.: - Real GDP (percent change): 2008 5.8; 2009 -3.8; 2010 2.8; 2011 2.5; 2012 2.8; 2013 3.2; 2014 3.6 - Inflation (y/y percent change): 2008 11.9; 2009 7.5; 2010 6.0; 2011 6.0; 2012 6.0; 2013 6.0; 2014 6.0 - Overall fiscal balance (percent of GDP): 2008 -13.8; 2009 -32.9; 2010 -28.3; 2011 -20.7; 2012 -20.3; 2013 -21.9; 2014 -23.4 - Domestic financing (percent of GDP): 2008 10.0; 2009 24.7; 2010 25.0; 2011 16.5; 2012 16.8; 2013 19.0; 2014 20.0 - Public debt (percent of GDP): 2008 68.6; 2009 96.6; 2010 113.7; 2011 123.1; 2012 130.6; 2013 138.8; 2014 147.5 - Current account (percent of GDP): 2008 -51.4; 2009 -29.6; 2010 -23.3; 2011 -16.3; 2012 -12.4; 2013 -11.0; 2014 -10.3 - GIR (in months of GNFS imports): 2008 1.8; 2009 1.4; 2010 1.0; 2011 1.0; 2012 1.0; 2013 1.0; 2014 1.0 - Note: 1/ Assumes that reserves will be maintained at 1 month of GNFS imports through borrowing at market rates. ### Risks and no-policy-change scenario - Without policy adjustment: - Fiscal deficit would remain high despite cyclical revenue increases. - Deficit monetization would continue, public debt would soar. - Current account deficit would decline more slowly; international reserves would fall to a minimum (assumed here at one month of imports), forcing increasing foreign exchange rationing. - Tourism might recover with the global economy, but private investment would be dragged down by loss of confidence and crowded out by high interest rates from rising government borrowing requirements. - Outcome: real GDP growth would at best recover slowly and inflation would remain above the baseline projection. ### Program discussions: fiscal policy objectives and measures - Authorities’ stance: - Authorities view the situation as very serious and support a Fund-supported program to smooth exogenous shocks, mobilize donor financing, and underpin a strong macroeconomic framework. - Core objective: very large fiscal adjustment to restore fiscal sustainability and absorb excess liquidity from deficit monetization while providing financing to rebuild reserves. - Fiscal policy objectives: - Authorities committed to drastically bring down the fiscal deficit, including unwinding recent large expenditure increases. - Immediate action to cut spending and introduce new revenue measures. - Projected fiscal path: fiscal deficit projected to fall from an estimated 33 percent of GDP in 2009 if no corrective action is taken, to under 18 percent of GDP in 2010 and about 4¼ percent of GDP in 2011. - Fiscal adjustment combines expenditure and revenue measures. ### Fiscal adjustment measures (expected yields and timing) - Summary totals (in percent of GDP; timing as indicated): - Total expenditure savings and revenue increases (by full-year impact 2/): 29.3 - Total expected yield by year (2009–2012 and Full-year impact 2/) shown in table format in source. - Selected lines from program table (Expected Yield 1/ in percent of GDP; Expected time of implementation): - Reduction of wages and allowances: Oct, 2009 — 2009 1.0; 2010 3.7; 2011 3.4; 2012 4.0; Full-year impact 13.9 - Staff redundancies: Oct 2009–Dec 2010 — 2009 0.1; 2010 2.7; 2011 4.2; 2012 4.2; Full-year impact 5.4 - Cost of staff cuts: one-off — 2009 -0.1; 2010 -0.6 - Increase in electricity tariffs: Nov, 2009 — 2009 0.5; 2010 2.5; 2011 2.5; 2012 2.5; Full-year impact 2.7 - Cost of targeted subsidy: 2009–2012 — 2009 0.0; 2010 -0.2; 2011 -0.2; 2012 -0.2; Full-year impact -0.2 - Reductions in other current spending: Sept, 2009 — 2009 1.1; 2010 1.9; 2011 0.0; 2012 0.0; Full-year impact 2.0 - Reductions in capital spending: 2010 — 2010 1.1 one-off - Revenue items: - Airport tax (transfer to government): Nov, 2009 — 2009 0.1; 2010 0.7; 2011 0.6; 2012 0.6; Full-year impact 0.8 - Increase in rates: Nov, 2009 — 2009 0.0; 2010 0.1; 2011 0.3; 2012 0.3; Full-year impact 0.3 - Business profit tax: Dec, 2009 — 2009 1.6; 2010 2.9; 2011 2.9; 2012 3.4; Full-year impact 3.4 - Ad valorem tax: Oct, 2010 — Full-year impact 10.8 (intermediate year yields shown as 1.9 in 2010; 7.9 in 2011; 8.5 in 2012) - Foregone revenue from tourism tax (replacement effect): 2009–2012 — 2009 -0.8; 2010 -3.1; 2011 -3.1; 2012 -3.7 - General sales tax: Jan, 2011 — 2011 2.3; 2012 3.0; Full-year impact 3.8 - Specific measures described: - Wage bill: - Average civil service wage reduction of 14 percent effective October 1, 2009 (reductions between 10 and 20 percent depending on rank). - Equivalent cuts extended to non-civil service government employees. - Staff reductions in the civil service to be completed by end-2010. - With measures, wage bill expected to fall from 28 percent of GDP in 2009 to 17½ percent by 2011, rising to 19¼ percent in 2012 as recent wage adjustments are reversed. - There are currently about 38,000 central government employees; redundancies entail severance payments which reduce net fiscal savings. - Some civil servants to be transferred to the private sector as part of corporatization of certain public services (airports, public works, schools, hospitals). - Electricity subsidies: - Electricity tariffs raised effective November 1, 2009, with increases ranging from 40 to 60 percent depending on consumption brackets. - Tariffs to be adjusted in future in line with a cost-based formula linked to fuel prices, with targeted subsidies to protect vulnerable segments. - Reform eliminates need for central government subsidies to STELCO and enables the electricity company to resume servicing of loans from the government. - Revenues: - Airport tax transferred to central government effective November 2009 and its rate raised by about 29 percent. - Business profit tax planned to be passed by end-2009 (structural benchmark). - New ad valorem hotel room tax planned by October 2010, expected to yield almost three times the revenues of the current specific tourism tax of US$8 per bed per night it replaces (structural benchmark). - Goods and services tax planned by early 2011, with Fund technical assistance (structural benchmark). - Together, revenue measures expected to yield as much as 15½ percent of 2009 GDP once full-year impact materializes. - Deficit financing: - From September, monetization of the fiscal deficit has been stopped. - Domestic deficit financing restricted to t-bill sales to commercial banks and state-owned enterprises. - An auction system for t-bill placements to be set up by end-2009 (structural benchmark). - Planned privatizations to provide short-term financing: stake in telecoms company sold for US$40 million; majority stake in the airport expected to be sold in coming months. - Purchase by local SBI branch of 2–3 year dollar-denominated bonds for US$100 million expected to assist funding. *Source: Fund staff estimates and projections, Maldives authorities (as presented in the provided content).* ### 14. Social protection. The current economic recession will undoubtedly have a negative ### _cr1028 - 14. Social protection. The current economic recession will undoubtedly have a negative ### Social protection - Program objective: protect social spending and lay foundations for sustained poverty reduction. - Protected items: social welfare contributions, pensions, spending on relief for the tsunami victims. - Electricity subsidy reform: replaced by a cost-based pricing scheme combined with targeted relief for the poor; subsidy previously disproportionately benefited higher income strata in Malé. - Targeting improvements: authorities committed to enhancing targeting of food, medicine, water and other subsidies. - Public sector wages and allowances: adjustments to be implemented so lower earners are proportionally less affected. - Shielding measures: measures to shield the poor from public service corporatization impacts (e.g., scholarships for education). - Protected social expenditures: expenditure on social housing and improving transport links to the outer atolls. ### Growth promotion - Objective: stimulate faster real GDP growth by providing a stronger macroeconomic policy framework to restore investor confidence and reduce country risk premium through lower public sector domestic and external debt. - Protection of spending: program seeks to protect priority capital expenditure and spending on human development as much as possible. - State reform: policies aim to make the public sector leaner and more efficient, including privatizing enterprises and services that can be more efficiently provided by the private sector (paragraph 19). - Tax note: authorities’ planned ad valorem tax rate of 6 percent on tourism is characterized as low by international standards and relative to competing tourist destinations and should not materially affect competitiveness. ### Monetary policy - Role: support fiscal adjustment by tightening domestic currency liquidity to stem reserve losses. - Key step: halt the monetization of the deficit (adopted in September). - Government debt: converted into tradable securities with the MMA using these securities as collateral for OMOs through reverse repos, reversing impact of deficit monetization on liquidity. ### Open Market Operations (Box 3) - Purpose: absorb high levels of rufiyaa liquidity from deficit monetization; OMOs via reverse repos (RRP) using government securities as collateral introduced August 2009. - Rationale for RRPs vs outright sales: (i) banks’ appetite for long-term placements in government bonds unknown; (ii) reversible transactions increase need for subsequent operations and contribute to creating a money market. - Features: - Between August and September 2009, total government debt with the MMA converted into bonds, with maturities ranging between 1–15 years and fixed interest rates between 6–9 percent, payable semi-annually. - RRPs held weekly on Thursdays, settlement on Sunday (Friday and Saturday not working days), overlapping reporting period for minimum reserve requirements. - Term of RRPs is one week. - MMA does not announce targeted amounts or interest rates. - Each bank may submit 3 different bids specifying amount (number of securities) and interest rate; bids are binding. - MMA collects bids and a Market Operations Committee submits a proposal to the governor; final decision by governor; result (total bids, accepted amount, average interest rate) made public same day. - Early outcome: accepted bids increased every week during first four weeks while interest rates remained low; banks reluctant to bid amounts leaving low free reserves; interest rates likely to rise once MMA increases awarded amounts. ### Exchange rate policy - Regime: pegged regime retained; authorities and staff concur peg and level remain appropriate conditional on program implementation. - Rationale: - Fixed exchange rate has served Maldives as an effective nominal anchor. - Staff analysis: under envisaged policy adjustment, peg remains appropriate; real exchange rate consistent with medium-term fundamentals under baseline scenario (Box 2). - Root cause of large current external imbalances attributed to domestic fiscal and monetary policies, not exchange rate per se. - Devaluation assessment: - Devaluation not appropriate currently: limited scope for expenditure switching given high import dependence; would mainly reduce expenditure by increasing domestic currency cost of imports with rapid and large pass-through to consumer prices. - Net fiscal impact in 2009 would be limited if public sector wages frozen, could be negative if wages increased. - Devaluation could lead to loss of confidence and invite speculation given low reserves. - Program aim: retain current peg by containing demand pressures via significant fiscal and monetary tightening and build-up of international reserves secured by new external financing. - Contingency: if policy adjustment not implemented, peg might become unsustainable; appropriateness of exchange rate level and regime to be continuously assessed. - FX rationing: as conditions stabilize, authorities intend to gradually phase out rationing of foreign exchange supplied to commercial banks by increasing amounts provided. ### Financial sector policies - Need: financial system needs strengthening. - Bank of Maldives (BML): authorities intend to restructure BML’s portfolio, ensure speedy recovery of collateral on defaulted debt, and secure capital infusion as necessary; preferred option is finding a strategic partner for state shares. - Legal framework: authorities agreed to seek passage of the Banking Law and reforms to the MMA Act by end-2010 (structural benchmark) to strengthen operation, supervision, regulation, intervention and liquidation of commercial banks. - Public financial management improvements: - PEFA report: significant shortfalls in predictability and control of budget execution and management of cash, debt, and guarantees; recommends comprehensive fiscal risk assessment and management framework. - Steps taken: introduction of a treasury single account; adoption of a new Public Accounting System (PAS); commitment to introduce debt management units at the MMA and Ministry of Finance with transparent borrowing, on-lending and guarantee guidelines. - Staff support for administrative decentralization provided it does not increase public expenditures. - Regulatory and supervisory weaknesses: - Loan classification and provisioning inadequate. - Loan portfolio concentration exposes banks to severe risks from impaired loans of few borrowers. - Banks accumulated large imbalances between foreign currency-denominated assets and liabilities (long open positions). - May 2009 regulations issued to strengthen prudential framework (capital adequacy; limits on loans to related persons and single borrowers; asset classification and provisioning; external audits; publication and disclosure; corporate governance). - Need to strengthen supervision and enforcement, including standing firm on asset classification and provisioning rules. - Staff recommendations: adopt regulation to limit open foreign currency positions, implement and enforce licensing regulatory framework, pass Banking Law and reforms to MMA Act (structural benchmark). ### Privatization and other policy discussions - Privatization plans: staff supports authorities’ privatization of state-owned enterprises and services; Privatization Committee established. - Central plank: privatization of the airport; stakes in telecommunications company already sold; other enterprises/services (electricity, water, sewage) could be divested. - Objectives: enhance productivity and long-term growth; privatization proceeds offer finite deficit financing and potential relief to dollar shortages through foreign investor participation. - Note: privatization efforts not part of program conditionality. ### Program modalities: facilities, access, phasing, financing, conditionality, prior actions, reviews, data, repayment, debt analysis, safeguards - Facilities and access level: - Authorities requested a blended arrangement: Stand-By Arrangement (SBA) with access of 600 percent of quota (SDR 49.2 million) over 36 months, and an arrangement under the Exogenous Shock Facility (High Access Component) with access of 100 percent of quota (SDR 8.2 million) over 24 months. - ESF purpose: smooth adjustment to global shocks over next two years; SBA extends over third year to reach sustainable fiscal position. - Phasing: staff proposes an even pattern of disbursements for Fund financing under both SBA and ESF. - Financing: - Financing assurances from World Bank and ADB amounting to US$59 million over the program period secured. - Together with proposed Fund financing, assurances would cover 100 percent of projected residual external financing gap over program period. - World Bank organizing donor meeting for further pledges from regional and bilateral sources. - Additional financing would smooth adjustment, build up reserves, reduce pressure on private sector from increased domestic financing, and support public capital projects. - Recent allocations of special drawing rights (SDRs) are reflected in gross and net international reserves; authorities intend to save them to bolster reserves. - Program allows nonconcessional external borrowing up to US$120 million through end-2010 for socially useful and economically viable projects. - Conditionality: - Focus: achieve required fiscal adjustment and monetary tightening while protecting spending on the poor. - Quantitative and structural conditionality, including prior actions, described in Tables 1–2 of MEFP. - Fiscal targets monitored through a deficit financing performance criterion (a below-the-line measure of the fiscal deficit) given data limitations. - International reserves monitored through a target on usable reserves (excludes encumbrances). - Prior actions (all implemented): - Announced and mandated reductions in salaries and allowances and staffing adjustments to reduce government wage bill. - Raised electricity tariffs and introduced automatic, cost-based electricity pricing formula and a subsidy mechanism for the poor. - Converted totality of government’s outstanding debt to the MMA into tradable securities. - Transferred airport tax from airport operator to government. - 2010 Budget in line with agreed measures and targets submitted to Majlis in mid-November. - Reviews: - Quarterly program reviews based on quantitative performance criteria, indicative targets, and structural benchmarks. - First review expected completed in March 2010 based on end-December 2009 performance; second review expected in June 2010 based on end-March 2010 performance. - Authorities to consult Fund staff on policy responses if significant fall in usable reserves. - Data issues: - Monetary and financial statistics reported monthly. - Preliminary monthly public expenditure and revenue data recently begun; new reporting system untested. - Staff will work with authorities to improve quality and timeliness of data provision, possibly via technical assistance. - Capacity to repay: - Government committed to implementing MEFP policy program; program represents significant adjustment expected to restore domestic and external stability reasonably quickly. - Balance of payments need from exogenous shock expected to ease over next two years. - Tourism sector expected to recover and expand from 2010 onwards with global recovery; external financing should gradually normalize. - Fund’s exposure relatively small compared to Maldives’ external payment flows (Table 8). - If disbursements made as scheduled, there will be a peak in repayments to the Fund in 2015. - Staff analysis shows MMA would accumulate enough reserves to repay the Fund and maintain a level of international reserves of more than 4 months of imports. - Debt sustainability analysis (DSA): - Risk of distress for external public and publicly guaranteed (PPG) debt remains moderate; risks to total public debt are considerable. - Large current account and fiscal imbalances have led to rapid increases in external and public debt stocks. - With strong fiscal adjustment envisaged, external and public debt would steadily decline and no external PPG debt burden indicators would breach indicative thresholds. - Historical scenario upward trajectory of debt-to-GDP ratio indicates past fiscal policy was not sustainable. - Key risks: large export (tourism) shocks and fiscal policy slippages. - Safeguards: - Safeguards assessment of the MMA in progress and to be completed before first review. - Ongoing assessment notes vulnerabilities in external audit by the Auditor General. - Authorities agreed to appoint an international firm to perform MMA's audit in accordance with international standards on auditing, modernize the MMA Act, strengthen financial reporting practices, and develop internal audit function. *Source: _cr1028 - 14. Social protection. The current economic recession will undoubtedly have a negative* ### 32. Exchange restrictions and multiple currency practices. The rationing of foreign ### _cr1028 - 32. Exchange restrictions and multiple currency practices. The rationing of foreign ### Exchange restrictions and multiple currency practices - The rationing of foreign exchange provided to the commercial banks by the MMA is forcing some current international transactions to be conducted in the parallel market at a premium of around 10 percent over the official peg. - This action by a government agency has given rise to a multiple currency practice due to the spread of more than 2 percent between the exchange rates in the official and parallel markets. - An exchange restriction has arisen from the additional premium that has to be paid in the parallel market. ### Risks to the program - General: There are substantial risks to the program related to political, external, and domestic economic factors. - Fiscal adjustment: - Resistance from civil servants or the broader public, and political opposition, could undermine the very large budget correction as well as the tax reforms that are key to the program’s success. - The risk is heightened by the government’s lack of parliamentary majority. - Delayed or insufficient implementation of the envisaged expenditure or revenue measures is a major risk. - The global economy: - The turnaround of the economy and of fiscal revenues, the restoration of access to international market financing, the expansion of foreign direct investment, and the recovery in external inflows to the private sector depend on a reasonably solid recovery of global economic activity, a normalization of international financial markets, and a pick up in tourism inflows. - External inflows to the private sector are projected to sum about 60 percent of GDP between 2009–2012 and comprise flows to privatization and tourism projects. - The global economic environment entails risks both to the upside and the downside. - Confidence: - Preservation of confidence in the economy is critical; the path of international reserves and the perceived sustainability of the peg are particularly important. - Approval of the program should help boost confidence by boosting reserves and easing foreign exchange shortages, but a sudden shift in sentiment resulting in losses of reserves or deposit withdrawals cannot be ruled out. - Monetary policy: - Open market operations are new in Maldives; a more stable economic environment would have been desirable for their introduction. - Substantial domestic financing requirements remain and will compete with, and to a certain extent crowd out, the MMA’s operations to absorb excess domestic liquidity. - Privatization: - Fiscal projections reflect substantial privatization revenues in 2010 and beyond, especially from the airport (also reflected as capital inflows to other sectors in the balance of payments). - There is a risk that unforeseen events, including political resistance, could postpone or derail the planned privatizations. - Financial system: - If banks’ NPLs were to remain high or deteriorate further, credit growth could remain subdued. - In the case of BML, the risk to the budget could increase. - Contingency: - If any of these risks materializes to a significant extent, the policy measures in the program would have to be reassessed, potentially involving a reevaluation of monetary, exchange rate, and fiscal policies, possibly including further tightening of monetary policy and additional fiscal policies, particularly on the revenue side. ### Staff appraisal — overview and program assessment - Overview: - The global crisis has hit Maldives hard. Growth, external financing, and budget revenues have all been adversely affected by the global economic downturn and the international financial crisis. - This, combined with an unsustainable fiscal expansion, led to severe balance of payments pressures and put the economy on the brink of a currency crisis. - Program objectives: - Bring about the large budget deficit reduction required to restore stability and medium-term fiscal sustainability. - Reduce excess rufiyaa liquidity and rebuild reserves to prudent levels. - Strengthen the financial system. - Fiscal policy appraisal: - The core of the program is a very large fiscal adjustment to reduce aggregate demand pressures and restore fiscal sustainability. - The adjustment comprises a partial reversal of recent large increases in the wage bill, cuts in other operational expenses and non-priority capital, complemented by revenue measures. - The program places the burden of adjustment on current expenditure, while protecting the poor and keeping cuts in capital expenditure relatively modest. - Sustained efforts are needed to strengthen public financial management. - Monetary policy appraisal: - A shift towards a more active monetary policy is important to complement fiscal adjustment and reduce pressures on reserves. - The recent introduction of effective monetary policy instruments and the cessation of fiscal deficit monetization represent a major step forward. - Authorities are determined to push forward this transition and have been supported by extensive Fund technical assistance. - Exchange rate policy appraisal: - The authorities’ program aims to preserve the current exchange rate regime and the peg’s current level. - A balanced analysis suggests that the gains from a devaluation, or a move to a floating regime, would be small and uncertain, while the costs would be substantial. - The envisaged fiscal adjustment and monetary policy tightening are designed to achieve the correction in demand required to maintain the viability of the current peg. - External financing, including from the Fund, should boost confidence by increasing reserves. - Staff supports the authorities’ request for temporary Fund approval of the exchange restriction and multiple currency practice discussed above, which have been imposed for balance of payments reasons, are temporary, and do not discriminate against Fund members. - Financial sector appraisal: - The program’s financial sector reform agenda addresses system weaknesses. - Authorities’ willingness to explore a range of options to strengthen BML is commendable. - The MMA needs to act decisively to ensure early compliance by all banks with new MMA regulations on loan classification and provisioning, as well as on foreign currency position, at the earliest possible date. - Overall judgment and recommendation: - While risks to the program are substantial, they must be weighed against the benefits of Fund financial support. - Without Fund support and the additional external financing it catalyzes, the authorities’ very large adjustment effort could be insufficient to avoid a balance of payments crisis, which would imply a disorderly adjustment in the currency and potentially widespread social instability. - The authorities’ program is strong, comprehensive, and well-focused, and merits the Fund’s support. - Staff recommend the approval of the requested blend arrangement, comprising a Stand-By Arrangement and an arrangement under the Exogenous Shock Facility. *Source: _cr1028 - 32. Exchange restrictions and multiple currency practices. The rationing of foreign* ### 43. It is expected that the next Article IV consultation be held in accordance with ### It is expected that the next Article IV consultation be held in accordance with Decision No. 12794-(02/76), as amended. ### Overview and key macroeconomic indicators (2004–12; selected years) - Population (in 1,000; 2008 est.)310 - GDP per capita (in U.S. dollars; 2008 est.):4,072 - Quota (in million SDRs): 8.2 - Real GDP (annual percent change): 2004:9.5; 2005:-4.6; 2006:18.0; 2007:7.2; 2008:5.8; 2009:-4.0; 2011:3.4; 2012:3.7; projection 2013:4.1 - Inflation (end-of-period): 2004:10.1; 2005:2.9; 2006:3.9; 2007:10.4; 2008:8.6; 2009:6.7; 2011:4.7; 2012:6.3; 2013:3.5 - GDP deflator (annual percent change): 2004:2.4; 2005:1.2; 2006:3.5; 2007:7.4; 2008:13.0; 2009:11.0; 2011:4.0; 2012:6.3; 2013:3.5 - GDP (in millions of rufiyaa): 2004:9,939; 2005:9,596; 2006:11,717; 2007:13,493; 2008:16,137; 2009:17,192; 2010:18,480; 2011:20,354; 2012:21,935 - GDP (in millions of US$): 2004:776; 2005:750; 2006:915; 2007:1,054; 2008:1,261; 2009:1,343; 2010:1,444; 2011:1,590; 2012:1,714 ### Central government finances (2004–12; levels and percent of GDP) - Total revenue and grants (in millions of rufiyaa): 2004:3,404; 2005:4,578; 2006:6,105; 2007:7,535; 2008:7,913; 2009:6,235; 2010:6,829; 2011:8,824; 2012:9,706 - Revenue (excl. privatization receipts) (in millions of rufiyaa): 2004:3,331; 2005:3,753; 2006:5,237; 2007:6,491; 2008:7,159; 2009:5,410; 2010:6,628; 2011:8,610; 2012:9,489 - Tax revenue (in millions of rufiyaa): 2004:1,647; 2005:1,723; 2006:2,370; 2007:2,905; 2008:3,393; 2009:2,674; 2010:3,301; 2011:5,017; 2012:5,725 - Expenditure and net lending (in percent of GDP): 2004:36.0; 2005:59.0; 2006:59.3; 2007:60.8; 2008:62.8; 2009:65.0; 2011:54.8; 2012:47.5; 2013:47.9 - Current expenditure (in percent of GDP): 2004:28.1; 2005:48.4; 2006:47.9; 2007:48.6; 2008:51.4; 2009:51.4; 2011:45.2; 2012:41.0; 2013:41.5 - Salaries and allowances (in percent of GDP): 2004:12.9; 2005:17.6; 2006:16.4; 2007:16.3; 2008:20.6; 2009:28.1; 2011:21.2; 2012:17.6; 2013:19.3 - Overall balance (in percent of GDP): 2004:-1.8; 2005:-11.3; 2006:-7.2; 2007:-4.9; 2008:-13.8; 2009:-28.8; 2011:-4.2; 2012:-3.6 - Overall balance, excl. grants (in percent of GDP): 2004:-2.5; 2005:-19.8; 2006:-14.6; 2007:-12.7; 2008:-18.5; 2009:-33.6; 2011:-5.2; 2012:-4.6 - Financing (in percent of GDP): 2004:1.8; 2005:11.3; 2006:7.2; 2007:4.9; 2008:13.8; 2009:28.8; 2011:17.8; 2012:4.2; 2013:3.6 - Public and publicly guaranteed debt (in percent of GDP): 2004:55.2; 2005:64.9; 2006:62.9; 2007:66.4; 2008:68.6; 2009:91.6; 2011:87.9; 2012:82.5 ### Monetary accounts (selected indicators; 2004–10) - Broad money (percent change): 2004:32.8; 2005:11.7; 2006:20.6; 2007:23.7; 2008:23.6; 2009:9.4; 2010:6.7 - Domestic credit (percent change): 2004:32.6; 2005:63.2; 2006:37.6; 2007:45.8; 2008:43.4; 2009:5.7; 2010:7.5 - Domestic credit to private sector (percent change): 2004:57.6; 2005:54.5; 2006:49.5; 2007:49.2; 2008:33.2; 2009:-4.1; 2010:-2.1 - NFA of commercial banks (in millions of US$, e.o.p.): 2004:60; 2005:-40; 2006:-145; 2007:-338; 2008:-437; 2009:-416; 2010:-466 - Net forex position of commercial banks (in millions of US$, e.o.p.)273; 872; 641; 41; 41 (selected periods reported) ### Balance of payments (2004–12; selected) - Current account (in percent of GDP): 2004:-15.8; 2005:-36.4; 2006:-33.0; 2007:-41.5; 2008:-51.4; 2009:-29.6; 2011:-13.1; 2012:-11.1 - Exports (in percent of GDP): 2004:23.3; 2005:21.6; 2006:24.6; 2007:21.6; 2008:26.2; 2009:16.1; 2011:17.7; 2012:17.7; 2013:17.8 - Domestic exports (in percent of GDP): 2004:15.8; 2005:13.8; 2006:14.8; 2007:10.2; 2008:10.0; 2009:6.6; 2011:6.9; 2012:6.8 - Re-exports (in percent of GDP): 2004:7.5; 2005:7.8; 2006:9.9; 2007:11.4; 2008:16.2; 2009:9.5; 2011:10.7; 2012:10.8 - Imports (in percent of GDP): 2004:-72.7; 2005:-87.4; 2006:-89.1; 2007:-91.5; 2008:-96.8; 2009:-58.2; 2011:-58.8; 2012:-55.9 - Nonfactor services, net (in percent of GDP): 2004:45.1; 2005:14.6; 2006:35.0; 2007:36.0; 2008:29.4; 2009:22.0; 2011:28.4; 2012:33.0; 2013:36.3 - Capital and financial account (incl. errors & omissions) (in percent of GDP): 2004:21.4; 2005:34.1; 2006:37.9; 2007:48.8; 2008:46.0; 2009:30.5; 2011:20.6; 2012:11.1; 2013:12.5 - Overall balance (in percent of GDP): 2004:5.7; 2005:-2.3; 2006:4.9; 2007:7.3; 2008:-5.4; 2009:0.9; 2011:-2.8; 2012:-2.0; 2013:1.4 - Gross international reserves (in millions of US$; e.o.p.): 2004:204; 2005:187; 2006:232; 2007:310; 2008:241; 2009:277; 2010:291; 2011:305; 2012:347 - Gross international reserves (in months of GNFS imports): 2004:3.4; 2005:2.6; 2006:2.7; 2007:3.0; 2008:1.8; 2009:3.2; 2010:3.1; 2011:3.1; 2012:3.4 - Exchange rate (rufiyaa/US$, e.o.p.): 2004:12.8; 2005:12.8; 2006:12.8; 2007:12.8; 2008:12.8 ### Detailed fiscal and monetary tables (selected levels, 2004–10) - Total revenue and grants (percent of GDP): 2004:34.2; 2005:47.7; 2006:52.1; 2007:55.8; 2008:49.0; 2009:36.3; 2010:37.0; 2011:43.4; 2012:44.2 - Nontax revenue (percent of GDP): 2004:16.9; 2005:21.2; 2006:24.5; 2007:26.6; 2008:23.3; 2009:15.9; 2010:18.0; 2011:17.7; 2012:17.2 - Privatization receipts (percent of GDP): 2004:0.2; 2005:0.4; 2006:0.4; 2007:0.3; 2008:0.3; 2009:3.0; 2010:7.0; 2011:3.4; 2012:2.7 - Current balance (percent of GDP): 2004:5.5; 2005:-9.3; 2006:-3.2; 2007:-0.5; 2008:-7.0; 2009:-19.9; 2011:-9.4; 2012:1.3; 2013:1.7 - Primary balance (percent of GDP): 2004:-0.4; 2005:-9.6; 2006:-5.5; 2007:-3.2; 2008:-11.8; 2009:-26.8; 2011:-14.3; 2012:0.1; 2013:0.3 - Broad money (in percent of GDP): 2004:32.8; 2005:11.7; 2006:20.6; 2007:23.7; 2008:23.6; 2009:9.4; 2010:6.7 ### Medium-term projections (2006–14; selected) - Real GDP (annual percent change): 2006:18.0; 2007:7.2; 2008:5.8; 2009:-4.0; 2010:3.4; 2011:3.7; 2012:4.1; 2013:4.3; 2014:4.5 - Inflation (end-of-period): 2006:3.9; 2007:10.4; 2008:8.6; 2009:6.7; 2010:4.7; 2011:6.3; 2012:3.5; 2013:3.0; 2014:3.0 - Revenue and grants (percent of GDP): 2006:52.1; 2007:55.8; 2008:49.0; 2009:36.3; 2010:37.0; 2011:43.4; 2012:44.2; 2013:44.1; 2014:43.9 - Expenditure and net lending (percent of GDP): 2006:59.3; 2007:60.8; 2008:62.8; 2009:65.0; 2010:54.8; 2011:54.8; 2012:47.5; 2013:46.4; 2014:44.9 - Overall balance (percent of GDP): 2006:-7.2; 2007:-4.9; 2008:-13.8; 2009:-28.8; 2010:-17.8; 2011:-4.2; 2012:-3.6; 2013:-2.3; 2014:-1.0 - Public and publicly guaranteed debt (percent of GDP): 2006:62.9; 2007:66.4; 2008:68.6; 2009:91.6; 2010:96.0; 2011:87.9; 2012:82.5; 2013:76.6; 2014:69.8 - Current account (percent of GDP): 2006:-33.0; 2007:-41.5; 2008:-51.4; 2009:-29.6; 2010:-23.4; 2011:-13.1; 2012:-11.1; 2013:-9.3; 2014:-7.9 ### Financing requirements and sources (2004–12; in millions of US$) - External financing requirements (in millions of US$): 2004:197; 2005:308; 2006:419; 2007:653; 2008:905; 2009:737; 2010:695; 2011:553; 2012:491 - Current account deficit (in millions of US$): 2004:122; 2005:273; 2006:302; 2007:438; 2008:648; 2009:398; 2010:338; 2011:209; 2012:190 - Amortization of MLT debt (in millions of US$): 2004:23; 2005:26; 2006:34; 2007:47; 2008:74; 2009:87; 2010:144; 2011:149; 2012:99 - FDI (net) (in millions of US$): 2004:159; 2005:141; 2006:51; 2007:21; 2008:10; 2009:10; 2010:11; 2011:12 - Financing gap (in millions of US$): 2004:0; 2005:0; 2006:0; 2007:0; 2008:0; 2009:2; 2010:6; 2011:55; 2012:47; 2013:19 ### Reviews and disbursements under proposed IMF arrangements (dates and amounts) - Approval of SBA and ESF arrangements: December 4, 2009 — Amount of Purchase: 50.0 (In millions of SDRs); In percent of quota: 12.5; Additional columns show 4.1 and 1.0 and 25 (table entries) - Subsequent scheduled completion dates and amounts for reviews and observance of performance criteria: March 25, 2010; June 25, 2010; September 25, 2010; December 25, 2010; March 25, 2011; June 25, 2011; September 25, 2011; December 25, 2011; March 25, 2012; June 25, 2012; September 25, 2012 — each row shows Amount of Purchase 50.0 or 50.0/50.0 and percent of quota 12.5 or 4.1 in later entries; Total:600 (In millions of SDRs); 100 (In percent of quota); 49.2; 08.2; 0 (table entries) - Table heading: Table 7. Maldives: Reviews and Disbursements under the Proposed Arrangements ### Indicators of capacity to repay the Fund (2006–21; selected) - Fund obligations based on existing credit (principal, in millions of SDRs): 2006:0.0; 2007:0.0; 2008:1.5; 2009:2.1; 2010:0.5 - Fund obligations based on existing and prospective credit (principal, in millions of SDRs): selected later years include 5.1; 13.3; 16.8; 12.5; 4.7; 1.6; 1.6; 1.2; 0.4 (years shown in table) - Outstanding Fund credit (in millions of SDRs): 2006:4.1; 2007:4.1; 2008:2.6; 2009:5.6; 2010:25.6; 2011:45.1; 2012:57.4; 2013:52.3; 2014:39.0; subsequent years decline to 0.0 by 2021 (table entries) - Outstanding Fund credit (in percent of quota): 2006:50.0; 2007:50.0; 2008:31.3; 2009:68.8; 2010:312.6; 2011:550.0; 2012:700.0; 2013:637.6; 2014:475.0; later years decline ### Advice from the 2008 Article IV discussions and implementation status (selected) - Advice: Adhere to zero domestic financing of the 2008 budget as intended; identify contingent expenditure cuts in the event that revenues do not materialize. - Implementation note: The authorities did not contain spending in 2008, and revenues, in particular from land leases, fell significantly short of budget projections. As a result, domestic financing of the budget, excluding proceeds from the sale of assets, rose to 9½ percent of GDP, much of which was monetized. - Advice: Contain the wage bill through civil service reform. - Implementation note: A rationalization of the civil service pay scale was undertaken in March 2009, but this has led to substantial increases in wages. Recently, the government has announced cuts in wages and allowances, and in civil service staffing levels. - Advice: Reduce subsidies to the state-owned electricity company (STELCO), by increasing electricity tariffs. - Implementation note: The authorities have raised electricity tariffs and are introducing a cost-based formula for further price adjustments. A transfer scheme to protect vulnerable segments of the population is being implemented. - Advice: Enhance revenues in the medium term through the (text truncated in source) *Sources: Maldivian authorities, and Fund staff estimates and projections.* ### introduction of corporate taxation, broad-based ### introduction of corporate taxation, broad-based ### Background and outlook - Recent political transition: President Mohamed Nasheed sworn in November 2008 after October 2008 multi-party presidential elections. - External shock: Global financial and economic crisis reduced tourist arrivals starting September 2008, lowered access to international credit markets, and drove the balance of payments need. - Pre-existing fiscal pressures: Wage bill rose from 13 percent of GDP in 2004 to 21 percent of GDP in 2008. - Near-term projections: - Tourism receipts in 2009 projected to decline by around 7 percent. - Anticipated real GDP fall in 2009 of up to 4 percent. - Growth for 2010 expected to recover to about 3½ percent, assuming global recession abates late 2009. - Reserves and liquidity: - Usable foreign reserves fell to below 1 month of imports. - The MMA limited the amount of foreign exchange sold weekly to commercial banks as a short-term measure. ### IMF-supported program and financing request - Request for IMF support: - Stand-By Arrangement (SBA) for SDR 49.2 million (equivalent to about US$ 78.2 million, or 600 percent of quota) for a period of 36 months. - Arrangement under the Exogenous Shock Facility (High Access Component) for SDR 8.2 million (about US$ 13 million, or 100 percent of quota) over 24 months. - Additional financing commitments: - World Bank direct budget support of about US$24 million. - Asian Development Bank direct budget support of about US$35 million. - Further funds from India and ongoing donor outreach (World Bank-organized donors meeting). ### Fiscal policy objectives and measures - Medium-term fiscal targets: - Fiscal deficit would have reached about 33 percent of GDP in 2009 without corrective action. - Targeted reduction to 29 percent of GDP in 2009 and to 18 percent of GDP in 2010. - Expenditure-side measures: - Civil service temporary wage reduction effective October 1, 2009 of between 10 and 20 percent, depending on rank; reversal when central government domestic revenue reaches Rf 7 billion. - Freeze on number of positions in CSC, Maldives Police Services and Maldives National Defence Force (April 2009 instruction). - Transfer of services (airports, public works, schools, hospitals) to private sector; privatization program including sale of a stake in the telecommunications company for US$40 million and planned sale of majority shares of Maldives Airports Company with proceeds over three years. - Cuts in operational expenses and postponement of domestically-financed, non-priority capital projects. - Expected full-year impact of expenditure measures: Rf 2½ billion (14 percent of GDP). - Overall central government spending targeted to just over Rf 10 billion (about 55 percent of GDP) by end-2010. - Revenue-side measures and tax reforms: - Transfer of airport tax to central government effective November 2009; Parliament raised its rate by about 29 percent. - Structural benchmark: introduce by end-2009 a business profit tax on all enterprises earning above a certain threshold. - Structural benchmark: introduce by end-September 2010 a new ad valorem-based tourism tax to substitute the existing $8/per night/per person tax. - Structural benchmark: put in place a goods and services tax (GST) in 2011. - Revenue impact estimates: - Conservative yield of these revenue measures: 3½ percent of GDP in 2010. - Much larger impact in later years: over 15 percent of 2009 GDP when full-year impact of the ad-valorem tax is felt and other measures come on stream. - Financing adjustments: - Halted monetization of the deficit starting September 2009 and switched to t-bill and bond sales. - Intention to initiate auctions of t-bills in the primary market by the end of 2009 (structural benchmark). - Privatization receipts to provide short-term financing. ### Social protection and targeting - Protection of spending on tsunami relief and social welfare contributions. - Broadening coverage of the pension system. - Targeting of food, medicine and other subsidies to the poor; cuts in non-targeted transfers. - Electricity subsidy reform starting November 2009: restructured from universal to targeted approach; electricity tariff raised and based on a cost-linked formula with relief for the most vulnerable; expected to eliminate need for central government transfers to STELCO and enable loan repayments. ### Public financial management and institutional reforms - Adoption of IMF/World Bank PEFA recommendations. - Introduction of a single treasury account at the MMA. - Transition to a new Public Accounting System (PAS) to enhance budget execution, internal control, cash management, accounting and fiscal reporting. - Establishing debt management units and transparent procedures for borrowing, on-lending, and government guarantees. - Commitment to develop a medium-term expenditure framework (MTEF); an MTEF was presented at a donors’ meeting in May 2009 but will need revision given recent revenue and expenditure measures. ### Exchange rate regime and monetary policy - Exchange rate peg: Rf 12.8 per US dollar since 2001. - Commitment to support the peg via fiscal adjustment and monetary tightening. - Request to IMF for approval to maintain existing exchange restriction and multiple currency practice during the Fund arrangement; undertaking not to intensify the restriction nor modify the multiple currency practice during the arrangement. - Gradual easing of foreign exchange rationing as conditions improve; phase-out by increasing maximum amounts supplied to banks. - Monetary tightening measures: - Halting of deficit monetization starting September 2009. - Conversion of government debt stock with the MMA into negotiable securities with varying maturities. - Beginning open market operations to reabsorb excess liquidity and yield market interest rates. - Auctions of government securities to facilitate emergence of secondary markets and a money market. - Structural benchmark: passage by end-2010 of reforms to the MMA Act to strengthen autonomy, limit financing of the fiscal deficit, improve governance and accountability, and provide instruments for independent monetary policy. ### Financial sector policy and banking sector measures - Banking system status: - System described as well capitalized with long net open positions in foreign exchange, but experiencing higher non-performing loans due to tourism downturn. - Some banks faced stress in foreign-currency liquidity and reduced access to external financing. - Bank of Maldives (BML) specifics: - BML has been particularly affected; management replaced. - Policy to restructure its portfolio and, as required, secure capital infusion, possibly by attracting a strategic partner. - Legal and supervisory reforms: - Draft Banking Act prepared with IMF technical assistance and submitted to Parliament. - Draft AML/CFT law prepared with IMF assistance, passed various review stages, and to be submitted to Parliament this year. - Maldives has established a financial intelligence unit within the Maldives Monetary Authority (MMA). *Source: _cr1028 - introduction of corporate taxation, broad-based* ### 21. We will expedite passage of the Banking Law (structural benchmark). In ### _cr1028 - 21. We will expedite passage of the Banking Law (structural benchmark). In ### Banking law and structural benchmark - We will expedite passage of the Banking Law (structural benchmark). In conjunction with reforms to the MMA Act, this legislation will provide an enhanced legal framework for the operation, supervision, regulation, intervention, and resolution of commercial banks. ### Safeguards assessment - The authorities welcome the safeguards assessment currently in progress. - Following recommendations of an IMF mission in October 2009, the MMA has taken steps to appoint an international audit firm to conduct the audit of the MMA’s financial statements in accordance with international standards. - The MMA is committed to implementing the other priority recommendations of the safeguards assessment. ### Program monitoring and review timetable - The program will be monitored on the basis of quarterly reviews, with quantitative performance criteria, indicative targets, and structural benchmarks. - Completion of the first and second reviews, scheduled for March 2010 and June 2010, will require observance of the quantitative performance criteria for end-December 2009 and end-March 2010, respectively. - Program conditionality is further specified in the accompanying Technical Memorandum of Understanding (TMU). - The Government authorizes the IMF to publish this Letter of Intent and its attachments, Tables 1 and 2. ### Quantitative performance criteria and indicative targets (selected series as presented) - Performance criteria (I) — evaluated at the programmed exchange rate: - Usable reserves of MMA (floor on stock, in million $): 1288764100120120120127 - Reserve money (ceiling on stock, in million MRF): 5,6695,9745,9486,0505,9505,9005,7505,750 - Total financing of the central government's budget deficit (ceiling on cumulative flow from beginning of FY, in million MRF): 1,3352,8884,0614,9701,1702,2002,8653,320 - Net credit of MMA to central government (ceiling on cumulative flow from beginning of FY, in million MRF): 3405681,143750100100100100 - Contracting or guaranteeing of new nonconcessional external debt (ceiling on stock, in million $): .........70120120120120120 - Accumulation of external payments arrears (ceiling on stock, in million $): 0000 0000 - Indicative target (II): - Domestically financed expenditure by government (ceiling on cumulative flow from beginning of FY, in million MRF): 2,2484,9587,2658,8002,5005,0007,50010,000 - Adjusters (III): - External financial support to the government and MMA (grants and loans), excl. IMF (cumulative flow from beginning of FY, in million $): 12113819628737112147168 - Central government revenue (cumulative flow from beginning of FY, in million $): 1,1572,5614,0225,4101,3742,8174,6646,628 - Memorandum items (IV): - Program exchange rates MRF/$: 12.8012.8012.8012.8012.8012.8012.8012.80 - Program exchange rates $/SDR: 1.501.501.501.501.501.501.501.50 ### Prior actions and structural benchmarks (summary of Table 2) - Implemented prior actions (PA): - Conversion of the government's outstanding debt with the MMA into negotiable securities. PAImplemented - Directives mandating adjustments in wages, allowances and staffing levels to reduce central government's wage bill in line with the program. PAImplemented - Transfer of revenue from airport tax to the central government. PAImplemented - Introduction of a cost-based formula to govern electricity tariff adjustments; approval by the Maldives Energy Authority of an electricity tariff increase in line with that formula; and introduction of an electricity subsidy scheme targeted to the poor. PAImplemented - Submission to Parliament of 2010 Budget in line with the program PAImplemented - Launch of t-bill auctions SBDecember, 2009 - Passage by Parliament and entry into effect of business profit tax SBDecember, 2009 - Passage by Parliament and entry into effect of ad valorem tax on tourism industry SBSeptember, 2010 - Passage by Parliament of revised Banking Bill and MMA act SBDecember, 2010 - Passage by Parliament and entry into effect of goods and services tax (GST) SBJanuary, 2011 ### Technical Memorandum of Understanding — scope and definitions - Purpose: - Sets framework for monitoring Maldives under the program supported by an SBA and ESF. - Specifies definitions for quantitative performance criteria and indicative targets and monitoring/reporting procedures. - First review in or after March 2010; second review in or after June 2010. - Targets and ceilings specified for: - Floor on usable reserves of the MMA. - Ceiling on reserve money of the MMA. - Ceiling on total financing of the central government's deficit. - Ceiling on net credit of MMA to central government. - Ceiling on contracting and guaranteeing of new nonconcessional external debt. - Ceiling on accumulation of new external payment arrears (continuous performance criterion). - Indicative ceiling on overall domestically financed government expenditure, excluding debt amortization payments. ### Institutional definitions - Central government: all units of budgetary central government. - Domestic banking system: the MMA, the existing and any newly licensed commercial banks incorporated in Maldives, and their branches. - Domestic non-bank sector: private individuals and any business or institution, private or public, not classified as part of the domestic banking system. ### Monetary aggregates — valuation and component definitions - Program valuation rules: - Rf 12.80 per U.S. dollar for foreign currency-denominated accounts. - SDR-denominated accounts at program exchange rate of U.S. dollar 1.50 per SDR. - Monetary gold valued at US$950 per ounce. - Usable reserves of the MMA: - Calculated as gross international reserves less international reserve liabilities less foreign currency deposits at the MMA. - Gross international reserves defined as sum of: monetary gold holdings of the MMA; holdings of SDRs; Maldives’s reserve position in the IMF; cash in foreign currencies; foreign currency assets held abroad under direct and effective control of the MMA and readily available for intervention and of investment grade or held with an investment-grade institution. - International reserve liabilities defined as: all outstanding liabilities of Maldives to the IMF; and any foreign convertible currency liabilities of the MMA to nonresidents with original maturity up to and including one year. - Foreign currency deposits at the MMA include deposits of commercial banks, state-owned enterprises and the government. - Reserve money of the MMA: - Reserve money consists of currency issued by the MMA (excluding MMA holdings of currency), commercial banks’ deposits held with the MMA and public enterprises’ deposits held with the MMA. - Net credit of the MMA to the central government: - Defined as net borrowing of the central government from the MMA (ways and means advances, loans, overdrafts, holdings of restructuring bonds, holdings of treasury bills or other government bonds, and all other accounts on account of the government, minus central government deposits at the MMA). ### Fiscal aggregates — definitions and adjustments - Total financing of the central government’s deficit: - A ceiling applies, measured cumulatively from the beginning of the year. - The ceiling on total financing will be adjusted downward by eighty percent of the amount of total central government’s revenue in excess of programmed levels. - Defined as sum of: (i) net domestic financing; (ii) net external financing; and (iii) privatization receipts. - Net domestic financing = net domestic bank financing + net nonbank domestic financing. - Net domestic bank financing = net MMA credit to central government + change in commercial banks’ claims on central government (domestic and foreign currency, including holdings of government securities) minus central government balances held in commercial banks. - Net nonbank domestic financing = change in holdings of government securities by domestic non-bank sector + net change in the float. - Net external financing = disbursements of external loans to central government + exceptional financing + proceeds from bonds issued abroad less amortization due, net reduction in external arrears, and changes in cash/deposits/securities held for liquidity outside domestic banking system. - Privatization proceeds = cash receipts from asset sales by government domestically or abroad. - Central government revenue: - Defined as sum of tax revenue and non-tax revenue, excluding subsidiary loan repayments; government loan account repayments; the MMA revaluation account; and receipts from privatization. - Domestically financed expenditure by government: - Indicative ceiling measured cumulatively from the beginning of the year. - Defined as actual domestically financed central government expenditure on a cash basis, excluding amortization payments, calculated on expenditure reports submitted by Accountable Government Agencies. ### Public debt and concessionality - External debt ceiling: - Ceiling applies to contracting and guaranteeing by central government, the MMA, or other agencies on behalf of central government of new non-concessional debt of any maturity with nonresidents after program approval; the ceiling applies to total amounts of debt and commitments contracted or guaranteed after program approval regardless of disbursement timing. - Exclusions from the ceiling: - Use of Fund resources; lending from the World Bank, the Asian Development Bank, and the International Fund for Agricultural Development; debts incurred to restructure/refinance/prepay on more favorable terms; concessional debts; any rufiyaa-denominated treasury bills and government bonds and MMA bills held by nonresidents; debts classified as international reserve liabilities of the MMA; debts to restructure/refinance/prepay existing debts; normal import financing (self-liquidating). - Concessionality definition: - Debt is concessional if it includes a grant element of at least 35 percent. Grant element = difference between NPV of debt and its nominal value expressed as percentage of nominal value. NPV discount rates: currency specific CIRRs published by OECD; for maturity >=15 years use ten-year-average CIRR; for maturity <15 years use six-month average CIRR. Margins added: 0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more. Loans from private entities are not concessional unless accompanied by grant element provided by a foreign official entity such that combined grant element >=35 percent. ### External payment arrears - Continuous performance criterion: - Nonaccumulation of external payments arrears on external debt contracted or guaranteed by central government or the MMA. - External payments arrears consist of external debt-service obligations (principal and interest) not paid at time due as specified in contractual agreements. - Overdue debt and debt service obligations that are in dispute will not be considered external payments arrears for program monitoring. ### Data provision and reporting obligations - Authorities committed to using best available data and promptly reporting revisions to the Fund’s Asia and Pacific Department. - Reporting frequency and responsibilities (selected items): - Monetary data (MMA): monetary survey, MMA balance sheet, consolidated balance sheets of commercial banks — monthly; balance sheet of MMA and consolidated bank sheets — weekly within ten working days of end of week and monthly within fifteen working days of end of month. - Interest rates and volumes on standing facilities and market operations — weekly within ten working days of end of week and monthly within fifteen working days of end of month. - Detailed breakdown of net credit to the central government from MMA, commercial banks and nonbank sector — weekly within ten working days and monthly within fifteen working days. - Results of reverse repurchase operations — within five working days of each operation. - Fiscal data (MOFT): domestically financed central government expenditure on cash basis excluding amortization — monthly within four weeks of end of month; net domestic bank financing — monthly within four weeks; net nonbank domestic financing — monthly within four weeks; net external financing — monthly within four weeks; privatization receipts — monthly within 4 weeks; results of outright sales and auctions of treasury bills — within five working days of each operation. - External sector data (MMA and MOFT): outstanding stock, disbursements, amortization, interest payments of short-term external debt by creditor in original currency and U.S. dollars — quarterly within four weeks; medium- and long-term external debt data — quarterly within four weeks; external debt newly contracted or guaranteed including terms — quarterly within 4 weeks; arrears on external debt — quarterly within four weeks; exports and imports in value terms — monthly within four weeks. - Other data (Department of National Planning): consumer price index data including detailed breakdown by major categories — monthly within four weeks of end of month. *Source: IMF document _cr1028 (selected sections).* ### ANNEX I. GUIDELINES ON PERFORMANCE CRITERIA WITH RESPECT TO FOREIGN DEBT ### ANNEX I. GUIDELINES ON PERFORMANCE CRITERIA WITH RESPECT TO FOREIGN DEBT ### Definition of "debt" and scope - Debt is defined as a current (not contingent) liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time to discharge principal and/or interest liabilities. - Primary forms of debt specified: - Loans: advances of money (including deposits, bonds, debentures, commercial loans and buyers’ credits), and temporary exchanges of assets equivalent to fully collateralized loans (e.g., repurchase agreements and official swap arrangements). - Suppliers’ credits: contracts permitting the obligor to defer payments until after delivery of goods or services. - Leases: the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the agreement, excluding payments covering operation, repair or maintenance. - Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. ### Joint IMF/World Bank DSA: overall assessment and vulnerabilities - Prepared by the staffs of the International Monetary Fund and the International Development Association; approved November 25, 2009. - Debt distress rating: Maldives is rated to be at a moderate risk of debt distress. - Main vulnerabilities and drivers: - Vulnerabilities for total public debt are higher and require timely implementation of a strong fiscal adjustment program. - Borrowing space in the short and medium terms has shrunk after recent accumulation of large fiscal and external deficits. - Build-up of private external debt prior to the global financial crisis and public domestic debt (mainly owed to the Maldives Monetary Authority, MMA) in the last two years has intensified the debt burden. - Key risks: large future shocks to exports or fiscal policy slippages. - Conditional outlook: Satisfactory implementation of the proposed fiscal adjustment would lead to a sustained downward path in the public and external debt stocks. ### I. The debt portfolio — key findings - Total debt to GDP ratio: - Increased fast since 2004 and reached almost 110 percent of GDP in 2008. - Projected increase in the total debt-to-GDP ratio to about 129 percent in 2009 (driven largely by a further build-up of domestic debt amid external financing limits and a fiscal deficit running close to 30 percent of GDP). - Composition and growth: - Each major category of debt showed strong growth following the 2004 tsunami; private external debt growth (financing tourism expansion) was particularly fast. - Public external debt rose rapidly after the 2004 tsunami, reaching US$472 million (37½ percent of GDP) in 2008. - About 70 percent of public external debt (or one third of total debt stock) is from multilateral and bilateral creditors. - Rationale for LIC framework: - Given the composition and expected concessional borrowing, the LIC framework was used for the DSA. ### II. Macroeconomic assumptions (2009–2029) — main assumptions quoted - Real GDP growth: - 2009-14 projected to average 2½ percent a year (compared with an average of 7¼ percent over the previous five years). - Negative growth in 2009 projected at -4 percent. - Growth expected to recover thereafter to around 4½ percent. - Inflation (GDP deflator): - Projected to average 4¼ percent a year in 2009-14 (compared with an average of 6½ percent over the previous five years). - Expected to stay at 3 percent thereafter. - Interest rates on public debt: - Assumed to increase to 4½ percent by 2011 (compared with an average of 3¼ percent over the previous five years), then decline thereafter. - External current account deficit (including grants): - 2009-14 projected to average 15½ percent of GDP a year and decline to 5 percent by 2019 (compared to 51½ percent in 2008). - Overall fiscal deficit (including grants): - Projected at 28¾ percent of GDP in 2009. - Expected to decline to an average of 5¾ percent of GDP in 2010-14, with the budget expected to remain in balance thereafter. - Result: volume of domestic borrowing will decline, although its cost may rise somewhat as outstanding obligations to the MMA are securitized at a slightly higher average market rate than the penal rate previously charged. - Public external debt financing assumption: - Public external debt is assumed to be contracted mainly on concessional terms until the end of the projection period. - Government expenditures and revenue measures: - Government expenditures expected to decline from 63 percent of GDP in 2008 to 45 percent by 2014. - New revenue measures (airport tax, ad valorem bed tax, business profits tax, general sales tax) expected to yield about 15 percent of 2009 GDP once their full impact is felt. ### III. External debt sustainability — baseline and scenarios - Baseline scenario key points: - As of end-2008, PPG debt represented 49 percent of total external debt. - Near-term worsening expected as Maldives seeks external assistance: includes Indian government assistance totaling US$200 million and borrowing from IFIs projected at US$146 million. - Authorities also expect additional nonconcessional external borrowing through end-2010. - External-debt-to-GDP ratio projected to decline from 2010 onwards under the baseline. - With one minor and temporary exception (PV of external public debt-to-GDP ratio slightly above the 40 percent threshold in 2009), all external debt indicators remain below debt burden thresholds under the baseline. - Debt service ratios remain well within thresholds despite a hump in 2010–11 from repayment of a large loan from the Indian government. - Program places a ceiling on non-concessional public external borrowing going forward. - Stress tests and alternative scenarios: - Stress tests indicate vulnerability to exogenous export shocks: - PV of debt-to-GDP ratio, debt-to-exports ratio and debt service-to-exports ratios breach thresholds under the most extreme standard stress test. - Most extreme shocks: combination shock (one standard deviation shock to growth, exports, GDP deflator and non-debt flows) for PV debt-to-GDP; export shock (export value growth at historical average minus one standard deviation in 2010–11 relative to the 2008 baseline) for debt-to-exports and debt service-to-exports. - Historical scenario: - When key macroeconomic variables are set to their historical averages, all stock debt burden indicators breach respective thresholds and debt service burden indicators show an increasing trend after 2014. - The main driver is the non-interest current account deficit, which averaged 20 percent of GDP over the 10-year period to 2008 (including the 2004 tsunami, 2007–08 food and fuel price run-up, and recent fiscal deficits). - Historical scenario may overestimate risks if those events are unique, but illustrates that without significant fiscal consolidation the debt path would become unsustainable. - Private external debt risks: - Private external debt accounts for over one half of the external debt-to-GDP ratio. - Much of private external debt has maturities of less than 10 years, is at market interest rates, and denominated in U.S. dollars. - Private external debt increases liquidity and re-financing risks and could entail contingent liabilities for the sovereign, raising risks beyond an analysis of PPG data alone. - Non-FDI external inflows to the non-financial private sector (mainly financing for privatization and tourism projects) sum to about 60 percent of GDP over 2009–2012 and are treated as non-debt creating in observed data and projections; part could be debt creating. - Staff judgment: - Risk of public external debt distress for Maldives is moderate. - Marginal and temporary breach in external debt-to-GDP ratio is attributed to severe fiscal and current account imbalances over the past two years; steady decline in external debt burden indicators under the program reduces the risk of debt distress significantly. - Stress tests show particular vulnerability to export shocks and declines in non-debt creating inflows. ### IV. Public debt sustainability — baseline indicators and projections - Public debt stock dynamics: - Nominal public debt increased from 55 percent of GDP in 2004 to around 69 percent in 2008. - Expected to reach 94 percent of GDP in 2009 (including IMF loans and some transactions of financial entities). - Present value of total public debt in 2008 was 67 percent of GDP. - Drivers and composition: - Increase driven by expansionary fiscal policy and a dramatic shortfall in fiscal revenue. - Much of the fiscal deficit has been financed domestically through MMA credit to the government (in 2008 MMA credit represented 75 percent of the central government’s domestic debt and 55 percent of the total public domestic debt stock) and sales of t-bills held mainly by commercial banks. - Central government accounted for 79 percent of total public debt in 2008. - Public debt service: - Total public debt service cost averaged 7 percent of GDP a year in 2003–2008. - Expected to increase to 17.2 percent by 2010 before shifting to a downward trajectory later in the projection period. - Selected creditor shares and PPG debt service (In percent of GDP) — projected path excerpts: - Total PPG debt: 55.2 (2004), 64.9 (2005), 62.9 (2006), 66.4 (2007), 68.6 (2008), 94.0 (2009), 98.7 (Proj.). - PPG external: 40.1 (2004), 41.3 (2005), 39.6 (2006), 39.8 (2007), 37.4 (2008), 47.3 (2009), 44.2 (Proj.). - Multilateral: 23.5 (2004), 24.2 (2005), 24.8 (2006), 25.8 (2007), 22.5 (2008), 26.9 (2009), 25.2 (Proj.). - Bilateral: 3.9 (2004), 5.2 (2005), 4.8 (2006), 4.3 (2007), 4.6 (2008), 8.8 (2009), 8.2 (Proj.). - Private creditor: 12.8 (2004), 11.9 (2005), 11.0 (2006), 9.7 (2007), 10.2 (2008), 11.6 (2009), 10.8 (Proj.). - PPG domestic: 15.1 (2004), 23.6 (2005), 23.4 (2006), 26.5 (2007), 31.2 (2008), 46.8 (2009), 54.5 (Proj.). - MMA (component of domestic): 8.7 (2004), 15.0 (2005), 9.4 (2006), 8.1 (2007), 17.0 (2008), 20.1 (2009), 19.3 (Proj.). - Commercial banks (component): 2.6 (2004), 5.1 (2005), 7.7 (2006), 11.5 (2007), 13.5 (2008), 24.9 (2009), 29.0 (Proj.). - Total PPG debt service: 6.8 (2004), 7.9 (2005), 7.1 (2006), 7.3 (2007), 7.8 (2008), 9.0 (2009), 17.2 (2010). - Notes on public debt definitions: - Public debt refers to the non-financial public sector (central government and state-owned enterprises), publicly guaranteed debt, and includes IMF debt contracted by central banks and a currency swap under negotiation (MMA and central bank of Sri Lanka for $25 million). ### Policy implications emphasized in the analysis - Urgent fiscal consolidation is required to: - Address severe fiscal and external imbalances. - Reduce the reliance on domestic financing (including MMA credit) and lower projected public domestic debt buildup. - Achieve projected declines in overall fiscal deficit from 28¾ percent of GDP in 2009 to an average of 5¾ percent of GDP in 2010-14 and a balanced budget thereafter. - Maintain borrowing constraints: - Program places a ceiling on non-concessional public external borrowing going forward. - Reduce vulnerability to export shocks: - Given sensitivity to tourism and export receipts, policies that enhance export resilience and diversify foreign exchange sources are critical. - Improve data on private external inflows: - Authorities need better information to disaggregate non-FDI external inflows to the non-financial private sector to assess possible debt-creating elements. *Source: Excerpt from Executive Board Decision No. 12274 (as revised on August 24, 2000) and Joint IMF/World Bank Debt Sustainability Analysis for Maldives (Prepared by IMF and IDA staffs; approved November 25, 2009).* ### 11. The PV of the public debt-to-GDP ratio is projected to fall sharply under the ### 11. The PV of the public debt-to-GDP ratio is projected to fall sharply under the ### Baseline projections and fiscal outcomes - PV of the public debt-to-GDP ratio: - 91 percent in 2009 - 17 percent by 2029 - PV of the public debt-to-revenue (including grants) ratio: - 252 percent in 2009 - 39 percent by 2029 - Public debt service-to-revenue (including grants) ratio: - Increases to 28 percent by 2010 - Shifts to a downward trajectory later in the projection period - Drivers and context: - Declines reflect strong fiscal adjustment efforts on both the revenue and expenditure sides - New public borrowing from all sources in the context of the program, including Fund financing, has been considered - Risks to debt sustainability appear manageable in the context of the programmed fiscal adjustment ### Stress tests and vulnerabilities - General vulnerability: - Maldives’ high level of public debt makes its sustainability vulnerable to exogenous shocks or fiscal policy slippages - Primary balance shock scenario: - If the primary deficit remains fixed at the elevated level of 26 ½ percent of GDP (as in 2009), the debt ratio would continue to expand and would reach 416 percent of GDP by 2029 - This scenario illustrates that the current fiscal stance is not sustainable and highlights risks from insufficient or delayed implementation of fiscal adjustment measures envisaged in the program - Growth shock scenario: - A one standard deviation permanent shock to long-term real GDP growth would lead to a PV public debt ratio of 124 percent of GDP in 2029 - Comparison: baseline projection for 2029 is 17 percent *Source: _cr1028 - 11. The PV of the public debt-to-GDP ratio is projected to fall sharply under the* ### 13. Maldives faces a moderate risk of external PPG debt distress. With the exception of a ### _cr1028 - 13. Maldives faces a moderate risk of external PPG debt distress. With the exception of a ### Risk assessment and headline finding - Maldives faces a moderate risk of external PPG debt distress. - With the exception of a one-time breach in the PV of debt-to-GDP threshold in 2009, no thresholds are breached under the baseline scenario. - The analysis indicates vulnerability to shocks to the tourism sector (which are also shocks to growth), non-debt creating inflows and the primary balance. - The country also faces considerable risks to debt sustainability based on its overall public debt level. - Policy implication: the need for strong fiscal adjustment; if fiscal consolidation efforts fall short, the risk of public and external debt ratios moving to an unsustainable trajectory would significantly increase. - Recommendation: diversify, to the extent possible within the country’s geographical constraints, the structure of the economy. ### Stress tests and scenario results (qualitative mapping) - The most extreme stress test is defined as the test that yields the highest ratio in 2019. - In figure b. (PV of debt-to-GDP ratio) the most extreme stress corresponds to a Combination shock. - In figure c. (PV of debt-to-exports ratio) the most extreme stress corresponds to an Exports shock. - In figure d. the most extreme corresponds to a Combination shock. - In figure e. the most extreme corresponds to an Exports shock. - In figure f. the most extreme corresponds to a Combination shock. - Bound tests and alternative scenarios include: - A1. Key variables at their historical averages in 2009-2029. - A2. New public sector loans on less favorable terms in 2009-2029 (interest rate on new borrowing higher by 2 percentage points). - B1–B4. Single-variable lower-tail shocks (real GDP growth, export value growth, US dollar GDP deflator, net non-debt creating flows). - B5. Combination of B1–B4 using one-half standard deviation shocks. - B6. One-time 30 percent nominal depreciation relative to the baseline in 2010. ### Key projected indicators and vulnerabilities (selected figures from staff projections) - External debt (nominal) 2009: 62.8; 2019: 21.1. - o/w public and publicly guaranteed (PPG) external debt 2009: 39.6; 2019: 14.4. - Change in external debt (a) 2009: 9.8; 2019: -1.6. - Identified net debt-creating flows (b) 2009: 7.5; 2019: -2.7. - Net FDI (negative = inflow) 2009: -16.1; 2019: -10.1. - PV of external debt (selected series): 2011: 75.3; 2012: 77.5; 2013: 73.9; 2014: 63.2; 2015: 56.6; 2016: 51.4; 2017: 47.0; 2018: 34.6; 2019: 18.1. - PV of PPG external debt (selected series): 2011: 35.8; 2012: 42.7; 2013: 38.1; 2014: 34.5; 2015: 32.5; 2016: 29.8; 2017: 26.9; 2018: 20.6; 2019: 11.5. - PV of PPG external debt, in percent of exports (selected): 2011: 42.9; 2012: 73.3; 2013: 58.5; 2014: 50.8; 2015: 46.1; 2016: 41.4; 2017: 36.6; 2018: 27.5; 2019: 15.1. - PV of PPG external debt, in percent of government revenues (selected): 2011: 80.7; 2012: 135.6; 2013: 106.1; 2014: 81.6; 2015: 75.2; 2016: 69.1; 2017: 62.5; 2018: 47.4; 2019: 26.3. - Debt service-to-exports ratio (in percent): 2009: 7.6; 2010: 10.4; 2011: 10.0; 2012: 15.3; 2013: 19.8; 2014: 18.3; 2015: 12.4; 2016: 11.2; 2017: 8.2; 2018: 3.3; 2019: 2.0. - PPG debt service-to-exports ratio (in percent): 2009: 4.1; 2010: 4.5; 2011: 4.7; 2012: 7.8; 2013: 12.4; 2014: 11.4; 2015: 6.6; 2016: 6.0; 2017: 5.8; 2018: 2.2; 2019: 1.5. - PPG debt service-to-revenue ratio (in percent): 2009: 7.8; 2010: 7.8; 2011: 8.9; 2012: 14.4; 2013: 22.5; 2014: 18.4; 2015: 10.7; 2016: 10.0; 2017: 9.9; 2018: 3.8; 2019: 2.6. - Total gross financing need (Millions of U.S. dollars) 2009: 225.8; 2010: 363.8; 2011: 571.1; 2012: 470.3; 2013: 425.4; 2014: 303.8; 2015: 210.6; 2016: 198.4; 2017: 175.7; 2018: 118.0; 2019: 65.9. - Non-interest current account deficit that stabilizes debt ratio (selected): 2009: 20.4; 2019: 3.7. - Key macro assumptions (selected): - Real GDP growth (in percent): 2006: 18.0; 2007: 7.2; 2008: 5.8; 2009: 6.6; 2010: 5.6; 2011: -4.0; 2012: 3.4; 2013: 3.7; 2014: 4.1; 2015: 4.3; 2016: 4.5; 2019: 2.6; projections through 2029 often assume 4.5. - GDP deflator in US dollar terms (change in percent): 2006: 3.5; 2007: 7.4; 2008: 13.0; 2009: 2.3; 2010: 4.9; 2011: 11.0; subsequent years include 4.0, 6.3, 3.5, 3.0, 3.0, 5.1, and projected 3.0s. - Effective interest rate (percent): 2006: 6.9; 2007: 9.1; 2008: 4.7; 2009: 4.3; 2010: 2.1; 2011: 4.3; 2012: 4.6; 2013: 4.8; 2014: 4.5; 2015: 4.3; 2016: 4.2; 2019 onward projected in the 3.3–3.5 range. - Growth of exports of G&S (US dollar terms, in percent): 2006: 60.4; 2007: 12.9; 2008: 19.9; 2009: 11.5; 2010: 22.3; 2011: -25.6; 2012: 20.1; 2013: 15.0; 2014: 12.0; 2015: 9.5; 2016: 9.7. - Government revenues (excluding grants, in percent of GDP): 2006: 44.7; 2007: 48.1; 2008: 44.4; 2009: 31.5; 2010: 35.9; 2011: 42.3; 2012: 43.3; subsequent years ~43.0–43.6. - Memorandum items: - Nominal GDP (Millions of US dollars): 2006: 915.4; 2007: 1054.2; 2008: 1260.7; 2014: 1590.2; 2018: 2861.6; 2019: 5972.2 (series includes other years). - PV of PPG external debt (in Millions of US dollars) (selected): 2006: 451.2; 2007: 573.0; 2008: 549.5; 2009: 548.7; 2010: 557.2; 2011: 548.8; 2012: 532.1; 2013: 590.9; 2014: 684.3. ### Public sector debt and sustainability indicators (selected) - Public sector debt (percent of GDP) (selected): 2006: 62.9; 2007: 66.4; 2008: 68.6; 2012: 94.0; 2013: 98.7; 2014: 92.1; 2019: 49.8; 2029: 20.1. - o/w foreign-currency denominated (percent of GDP) (selected): 2009: 35.8; 2010: 46.4; 2011: 44.3; 2012: 38.3; 2019: 20.6; 2029: 11.5. - PV of public sector debt (percent of GDP) (selected): 2009: 67.0; 2010: 91.3; 2011: 92.6; 2012: 84.9; 2013: 79.5; 2014: 72.3; 2019: 43.8; 2029: 17.1. - PV of public sector debt-to-revenue and grants ratio (in percent) (selected): 2009: 136.6; 2010: 251.7; 2011: 250.6; 2012: 195.8; 2013: 179.7; 2014: 164.1; 2019: 98.8; 2029: 38.6. - Gross financing need (percent of GDP) (selected): 2009: 29.2; 2010: 28.0; 2011: 38.7; 2012: 61.2; 2013: 70.0; 2014: 60.4; 2019: 25.2; 2029: 6.6. - Debt service-to-revenue and grants ratio (in percent) (selected): 2009: 8.3; 2010: 8.0; 2011: 9.7; 2012: 15.1; 2013: 28.4; 2014: 24.6; 2019: 5.9; 2029: 3.1. - Primary deficit that stabilizes the debt-to-GDP ratio (selected): 2009: 7.5; 2010: -0.2; 2011: 9.6; 2012: 1.0; 2013: 9.5; 2014: 6.8; 2019: 2.6; 2029: 1.1. ### Policy implications and priorities - Maintain and implement strong fiscal consolidation to prevent a shift toward unsustainable public and external debt trajectories. - Diversify the economy beyond tourism to reduce vulnerability to tourism-sector shocks and associated growth shocks, recognizing geographic constraints. - Strengthen resilience to shocks through prudent debt management and careful sequencing of nonconcessional borrowing (note: program permission to contract up to 120 million USD in additional nonconcessional external debt from program start to end-2010, per PCs). - Monitor and manage exposure to swings in non-debt creating inflows (e.g., FDI) and maintain revenue performance (government revenues excluding grants around the mid-40s percent of GDP in projections). *Source: Staff projections and simulations.* ### 10.9 million) was allocated to the Maldives for all of IDA 15. However, it was recently agreed ### _cr1028 - 10.9 million) was allocated to the Maldives for all of IDA 15. However, it was recently agreed ### IDA allocation and funding availability - A regional re-allocation will increase the country’s IDA allocation by about USD 10.5 million (from SDR 10.9 million to SDR 17.9 million). - There are somewhat more resources available than was anticipated in the CAS. - IDA is planning to employ about half of the remaining IDA15 allocation in a DPC for FY10 to support Government efforts to improve its fiscal situation and meet the targets set in the IMF program. - The remaining half (about USD 12 million) will be available to fund some combination of: - a second phase of the DPC, - a new DPC, or - new investment lending. ### Preferred instruments, analytical work, and conditionality - Given the need for policy reform and limited resources for project preparation and AAA, the preferred approach for IDA is to use the DPC instrument unless there is an investment loan that can leverage additional resources. - A responsive program of analytical work has proved constructive in the Maldives and is consistent with the World Bank Group’s strategy for middle income countries. - The proposed sector lending program assumes that authorities manage the current risks and avert a crisis. - Development policy lending is preferable but will be contingent on demonstrated reforms. - A DPL operation is under consideration for FY10 and is reflected in the program table. - Regarding AAA, TA would be offered in a few areas, including some where the Bank is already active. ### IFC focus and planned activities - IFC’s focus for the remaining period of the CAS: - further step up work in climate change through clean energy audits with clients, - collaborate with the World Bank on other areas of the climate change agenda, - continue focus on infrastructure for both IFC investment and advisory work, especially supporting the government’s privatization agenda through advisory work on setting up PPPs, - respond to the Government’s request to help explore opportunities to expand financing to SMEs, - support student loans in the coming years. ### IMF and IFI coordination - The teams of the IMF and other IFIs have been working closely with the World Bank’s macro and fiscal team. ### IBRD/IDA Lending Operations — Net Commitments, Disbursements, Undisbursed (as reported) - Maldives Environment Management Project: Net Commitments 13.15, Disbursements 1.27, Undisbursed 11.52 - Mobile Phone Banking Project: Net Commitments 7.7, Disbursements 2.68, Undisbursed 5.15 - Post Tsunami Emergency Project: Net Commitments 14.0, Disbursements 8.94, Undisbursed 0.015 - Integrated Human Development: Net Commitments 21.3, Disbursements 9.28, Undisbursed 2.96 - Pension and Social Protection Administration: Net Commitments 3.8, Disbursements 0, Undisbursed 4.16 - Sub-total (active projects): Net Commitments 59.95, Disbursements 22.17, Undisbursed 23.80 - Closed projects (IDA) sub-total: Net Commitments 66.6, Disbursements 61.0, Undisbursed ... - Total: Net Commitments 126.55, Disbursements 83.17, Undisbursed 23.80 Notes attached in source: - Disbursement figures subject to SDR/USD exchange rate fluctuations. Source: WB Operations Portal and Client Connection. - US$10 million were cancelled to make IDA resources available under the Maldives Post-Tsunami Emergency Recovery Credit and Grant. Original commitment was US$21.3 million. US$5.7 million were then regranted as additional financing in 2006. - Of this total, $8.4 million provided as credit and $5.6 million (40 percent of total financing) as grant. - US$2 million cancelled to make IDA resources available under the Maldives Post-Tsunami Emergency Recovery Credit and Grant. US$1.4 million in additional financing was contributed to the project in 2006. - At current SDR/USD rates. ### Relations with the Asian Development Bank (As of 30 September 2009) - Since 1981, AsDB has provided 17 loans with total approved amount of $104.31 million. - As of 30 September 2009, seven loans were active with a net loan amount of $47.93 million, comprising: - transport and communication: $17.09 million (36 percent) — two projects - energy: $9.62 million (20 percent) — one project - industry and trade: $7.21 million (15 percent) — one project - education: $6.12 million (13 percent) — one project - water supply, sanitation, and waste management: $6.11 million (13 percent) — one project - multisector: $1.77 million (4 percent) — one project - As of 30 September 2009, contract awards totaled $2.45 million, bringing the cumulative figure to $28.03 million. - Of the total contract awards: $2.292 million (93 percent) went for the single education project, $0.134 million (6 percent) for the energy project, and $0.026 million for the two transport and communications projects. - Disbursements as of 30 September 2009 totaled $3.991 million, bringing cumulative disbursements to $20.34 million. The disbursement ratio was 12.82 percent. Technical assistance (As of 30 September 2009) - AsDB had approved 56 technical assistance (TA) projects for a total amount of $19.5 million: - 16 project preparatory TAs - 40 advisory TAs addressing institutional strengthening and capacity development - In terms of TA amount by sector: - law, economic management, and public policy: 47 percent for 22 projects - transport and communications: 15 percent for 11 projects - education: 10 percent for 6 projects - energy: 7 percent for 6 projects - industry and trade: 7 percent for 2 projects - agriculture: 6 percent for 3 projects - finance: 5 percent for 4 projects - urban development and multisector: 3 percent for 2 projects - As of 30 September 2009, there are 4 TAs in the active portfolio with a total amount of $1.60 million: - 1 project preparatory TA - 3 advisory TAs *Prepared by Asian Development Bank staff; source PDF content used as provided.* ### ANNEX IV. MALDIVES—STATISTICAL ISSUES ### ANNEX IV. MALDIVES—STATISTICAL ISSUES ### I. Assessment of Data Adequacy for Surveillance - General assessment: - "Data provision has some shortcomings, but is broadly adequate for surveillance." - Macroeconomic statistics have improved in recent years with technical assistance from STA and the Asian Development Bank (AsDB). - Remaining shortcomings affect balance of payments, government finance, and national accounts statistics. - Main official statistical publication: Statistical Yearbook of Maldives, contains data series up to 2004. - APD receives a monthly electronic statistical report covering a broad range of economic and financial statistics. - APD receives, with a lag, the Quarterly Economic Bulletin (QEB) and the Annual Report (AR) of the Maldives Monetary Authority (MMA). - Real sector: - National accounts statistics available only on an annual basis and with a considerable lag. - GDP estimates are made using both production and expenditure approaches, but "these estimates are inconsistent." - Base year for constant price estimates is 1995; "recent changes in the structure of the economy are not reflected by the base period weights." - AsDB assisting authorities to set up a framework for compiling more comprehensive national accounts. - Consumer Price Index (CPI) rebased to June 2004=100 with AsDB assistance. - CPI weights based on household income and expenditure survey conducted between September 2002 and June 2003 and adjusted for price changes up to June 2004. - Fiscal sector: - General government data reported for publication in the GFS Yearbook; latest published data are for 2008. - Monthly data on revenue and expenditure are available, but the reporting system is new and "its reliability is as yet untested." - Consistency between monthly fiscal data and below-the-line financing numbers from monetary authorities is "weak." - Data on external debt are subject to reconciliation with creditors. - Data on operations of state enterprises are limited. - Monetary sector: - APD receives a weekly electronic report on monetary statistics covering MMA and commercial bank balance sheets. - Current summary data published in MMA’s Monthly Statistics, QEB, and AR, but with a significant lag. - Inconsistencies between monetary and fiscal data regarding financing of the fiscal deficit due to timing and coverage issues. - April 2007 STA mission completed standardized report forms for central bank and other depository corporations and developed an integrated monetary database expected to become operational shortly. - A new call report form for other financial corporations is expected to be introduced with follow-up assistance. - External sector: - MMA compiles balance of payments data on an annual basis; problems in coverage and measurement. - Travel credits (receipts) estimated using a small, outdated survey of resorts/hotels. - Coverage of foreign direct investment firms is limited, leading to underreporting. - Estimates of distributed and reinvested earnings of direct investment enterprises in the tourism sector are "unsatisfactory." - Information on private financial flows is incomplete; international investment position incomplete because private sector data are not available. - Quarterly data on external debt and debt service 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. - STA technical assistance mission in January 2007 proposed steps to improve data on direct investment, travel receipts, and other items. - Official reserve assets reported weekly with a (variable) one-week lag. - Predetermined foreign currency outflows (mainly debt service payments) are known and reported to APD at annual Article IV consultation missions; other movements of foreign currency assets are not identified. ### II. Data Standards and Quality - Maldives does not participate in the General Data Dissemination System (GDDS). - "No data ROSC available." ### III. Reporting to STA (Optional) - "The authorities report macroeconomic data to the Fund on a regular and generally timely basis for publication in the IFS, BOPSY, and GFSY." ### Maldives: Table of Common Indicators Required for Surveillance (As of November 17, 2009) - Frequency and timeliness highlights (date of latest observation / date received / frequency of data / frequency of reporting / frequency of publication): - Exchange Rates: 10/29/2009 / 11/08/2009 / W / W / M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 10/29/2009 / 11/08/2009 / W / W / M - Reserve/Base Money: 10/29/2009 / 11/08/2009 / W / W / M - Broad Money: 8/31/2009 / 9/24/2009 / M / M / M - Central Bank Balance Sheet: 10/29/2009 / 11/08/2009 / W / W / M - Consolidated Balance Sheet of the Banking System: 10/29/2009 / 11/08/2009 / W / W / M - Interest Rates: 8/31/2009 / 9/24/2009 / M / M / M - Consumer Price Index: 7/2009 / 10/16/2009 / M / M / M - Revenue, Expenditure, Balance and Composition of Financing – General Government: 2008 / 8/31/2009 / A / M / M - Revenue, Expenditure, Balance and Composition of Financing – Central Government: 2008 / 8/31/2009 / A / M / M - Stocks of Central Government and Central Government-Guaranteed Debt: 2008 / 8/31/2009 / A / M / M - External Current Account Balance: 2008 / 8/31/2009 / A / M / M - Exports and Imports of Goods and Services: 8/31/2009 / 9/24/2009 / M / M / M - GDP/GNP: 2008 / 9/19/2009 / A / M / M - Gross External Debt: 2008 / 9/19/2009 / A / M / M - International investment Position: 2008 / 8/27/09 / A / A / A ### Key statistical shortcomings identified (summary) - National accounts: annual frequency, considerable lag, inconsistent production and expenditure estimates, outdated constant-price base year (1995). - Price statistics: CPI rebased to June 2004=100; underlying weights from 2002–2003 survey adjusted to June 2004. - Fiscal reporting: new monthly system with untested reliability and weak consistency with monetary financing records; limited state enterprise data. - Monetary statistics: improved standardized reporting forms and integrated monetary database under development; timing/coverage inconsistencies with fiscal data. - External sector: annual BOP compilation with coverage/measurement gaps (travel receipts, FDI coverage, distributed/reinvested earnings, private flows, IIP); quarterly external debt data limited; weekly reserves reported with variable one-week lag. *Source: ANNEX IV. MALDIVES—STATISTICAL ISSUES (As of October 27, 2009).* ### 1. Overview. The administration of President Mohamad Nasheed that took office in ### 1. Overview. The administration of President Mohamad Nasheed that took office in ### Background and crisis impact - Took office in November 2008 amid a severe external shock from the global financial crisis. - Crisis effects: - Severely curtailed foreign exchange earnings and net capital flows. - Rapid drawdown in foreign exchange reserves. - Sharp drop in government revenue by nearly one third relative to 2007. - Pre-crisis fiscal pressures: - Post-Tsunami relief and reconstruction projects supported strong growth but enlarged the public sector between 2004 to 2007. - Public expenditure inflated to unsustainable levels in the run-up to the October 2008 elections, reflecting a rising wage bill partly due to civil service reform. ### Policy intent and initial government stance - Ruling party manifesto (2008-2013) called to “plan state expenditure in proportion to government income and reduce wasteful and excessive spending”. - No time to adjust the 2009 budget before submission in mid-November 2008; government engaged the IMF in the first weeks in office to assess policies to restore fiscal and external sustainability. - Sought interim foreign exchange support from bilateral creditors and private investors until multilateral financing could be secured. ### Request for Fund resources and program design - Authorities, in close collaboration with the Fund, prepared an ambitious comprehensive program to restore macroeconomic stability and growth. - Access levels sought: - 600 percent of quota under the three-year Stand By Arrangement. - 100 percent under the 2-year ESF. - Totaling SDR 57.4 million over 36 months. - Authorities had initially requested higher exceptional access to soften shock impact, bolster reserves, lower program risks, and support successful implementation. ### International support - Secured financing from the World Bank and AsDB for about $59 million. - Approached the Government of India for a 2-3 year dollar-denominated bond of $100 million; had contracted a $100 million trade credit earlier in 2009. - Discussing a swap agreement with the Government of Sri Lanka. - A $40 million stake in the state telecommunications company provided interim foreign exchange. - Intended to request additional concessional support at a World Bank-organized conference to facilitate recovery, reserve buildup, ease private sector pressure, support public capital spending, and facilitate repayment of short-term borrowing. - May seek augmentation of IMF access depending on donor meeting outcomes and the pace of global recovery and capital flow resumption. ### Tsunami legacy - World Bank estimated Tsunami damage at 65 percent of GDP. - Reconstruction aid disbursed over several years; about 85 percent of affected housing and physical infrastructure had been restored by end 2008. - Government expenditure rose from 36 percent of GDP in 2004 to 61 percent of GDP in 2007. - Number of permanent government employees increased by 24 percent, primarily due to public take-over of all private schools and expansion of health facilities. - Trade deficit nearly doubled following the Tsunami; current account deficit rose from 16 percent in 2004 to 33 percent in 2006. - Rising oil and food prices in 2007 and increased imports of construction materials pushed the current account deficit to over 40 percent of GDP in 2007 and over 50 percent of GDP in 2008. - Total debt to GDP increased from 55 percent of GDP in 2004 to 91 percent of GDP in 2008. ### Civil service reforms and wage dynamics - Civil Service Commission (CSC) established in 2007; Civil Service Act adopted in March 2008. - CSC recommended job classifications, a 12 percent pay dispersion between grades, and equalized pay for similar work. - New civil service salary structure introduced in late 2008; election-period pay increases (~20 percent in specific sectors) were extended to all sectors effective February 1, 2009. - Public sector wage increase in January 2008 due to erosion of real incomes from higher commodity prices and weakening of the rufiyaa. - Without corrective measures, wage bill would increase from 16.3 percent of GDP in 2007 to 29.1 percent of GDP in 2009—an unsustainable level. - Presidential actions: - August 2009 announced partial reversal of February salary increase and elimination of most allowances. - Salary reductions implemented starting in September 2009, yielding 4 percent of GDP on an annual basis. - CSC ruled against elimination of allowances, delaying some measures. - Retrenchment program accelerated: elimination of 9,000 government positions and rapid transfer of services to the private sector by mid-2010. - Target to reduce public wage bill from 29 percent of GDP in 2009 (before salary reductions) to 17½ percent of GDP by 2011. ### Program objectives and macroframework - Aim: restore external balance and fiscal sustainability primarily through a sharp fiscal adjustment over two years while maintaining the current exchange rate peg. - Growth expectations: - Growth expected to resume in 2010 to around 4 percent as tourism receipts and tourism-related investments rebound. - Revenue and balance targets: - Government revenue expected to partially recover to its 2007 level. - Primary balance targeted to turn positive by 2011. - Overall deficit targeted to fall to 1 percent of GDP by 2014. - Current account and reserves: - Current account deficit expected to narrow drastically as imports remain subdued. - Gross international reserves to be maintained at 3-4 months of imports. ### Fiscal adjustment specifics - Programmed fiscal measures expected to yield full year savings of 29 percent of GDP when fully implemented by 2012 (as outlined in the table on page 17). - Adjustment split: falls equally on expenditure and revenue mobilization, with more immediate effect on expenditure. - Without corrective measures, total government expenditure would have reached 67.6 percent of GDP in 2009; to be slashed by 12½ percentage points to under 55 percent of GDP in 2010. - Expenditure savings composition (full-year impact amounts to 14 percent of 2009 GDP when fully implemented): - Wage cuts: 4 percent. - Staff redundancies: 3 percent. - Electricity tariff increases: 2½ percent. - Reduction in transport and office expenses: 2 percent. - Lower capital spending: 1 percent. - Revenue measures (yielding 3½ percent of GDP in 2010): - Transfer of the airport tax to the government together with an increase in its rate. - Switching the $8 per night fixed rate to an ad valorem hotel room tax. - Introduction of a business profit tax to be passed by Parliament by end 2009. - Further consolidation in 2011-2012 to rely on introduction of a general sales tax from 2011. - Full year impact of all revenue measures amounts to 15 percent of 2009 GDP when fully implemented. - Total fiscal measures over the program amount to 29¼ percent of GDP. ### Monetary policy - Several steps to reduce fiscal financing burden on monetary policy and stem reserve losses: - Government decided to cease monetization of the fiscal deficit. - Convert government debt stock held by the Maldives Monetary Authority (MMA) into tradable securities to reverse past monetization impact on liquidity. - Open market operations introduced in August 2009. - Treasury bill auctions scheduled to begin by December 2009 to replace direct monetization. ### Exchange rate policy and competitiveness - Fiscal and monetary tightening aimed to support the current peg, considered appropriate by staff and authorities. - Devaluation judged inappropriate due to: - Small scope for expenditure-switching. - Large pass-through effect on domestic prices. - High confidence risks and potential speculation given low reserves. - Staff analysis (Box 2) indicates the economy remains competitive at this exchange rate compared to other tourism-dependent economies. - Competitiveness could be improved by addressing structural business climate weaknesses. - Authorities have been rationing foreign exchange to commercial banks due to low reserves, giving rise to multiple-currency practices; committed to gradually eliminating this practice as reserves build up. ### Financial sector policies - Significant progress in financial regulation and supervision; ongoing efforts to address remaining weaknesses. - MCM and LEG advice benefited reforms: - Banking law and reforms to the MMA Act presented to parliament. - Regulations introduced in May 2009 to strengthen prudential framework: tighter capital adequacy requirements, limits on loans to related persons and single borrowers, asset classification and provisioning, audit and disclosure requirements, and corporate governance. - Authorities pressing recovery of collateral on defaulted loans for the Bank of Maldives and intend to secure capital infusion, preferably with a strategic partner to take over the state share. ### Structural reforms - Policy aim: leaner and more efficient public sector; transfer services to private sector and sell public enterprises. - Retrenchment plan to reduce public workforce by privatizing services. - Privatization Committee working on sale of a stake in the telecommunication company, airport privatization, and other enterprises. - Public financial management strengthening underway with FAD support to improve budget planning, control, monitoring, and implementation. - Major legislative agenda: over 80 bills before Parliament to prioritize. - Reforms intended to improve business climate, foster a more diversified private sector, and strengthen resilience to shocks. ### Debt sustainability - Total debt (public and private) reached almost 110 percent of GDP in 2008, resulting in a rating of moderate risk of debt distress. - Under the baseline scenario, with fiscal adjustment embedded in the program, all external debt indicators (with one minor and temporary exception) remain below relevant LIC debt burden thresholds. - Fiscal consolidation is expected to bring down the debt to GDP ratio; a more gradual consolidation path would still be consistent with a sustained downward path in public and external debt stocks. ### Authorities’ view and technical assistance - Authorities expressed appreciation for staff analysis, policy advice, and Fund technical assistance instrumental to reform formulation and implementation. - Consider continued technical assistance of paramount importance for implementing the ambitious reform program. - While seeking a smoother adjustment path and higher Fund financing, authorities look forward to continued close collaboration during program implementation. *IMF Staff Report — 1. Overview.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1028.pdf_