Press Release No. 16/12

Press Release: IMF Staff Completes 2015 Article IV Mission to Maldives

January 17, 2016

An International Monetary Fund (IMF) mission, led by Ms. Alison Stuart, visited Malé during January 4-17 for the 2015 Article IV Consultation¹ —a periodic surveillance that the IMF undertakes with its member countries to exchange views on key economic challenges and discuss possible policy alternatives.

At the conclusion of the visit, Ms. Stuart issued the following statement:

“Maldives is embarking on an unprecedented scale up in public infrastructure which if handled well could prove transformational for the economy but it also brings with it large financing risks. The focus of the Article IV mission was on recent developments, managing the infrastructure scale up, and looking to the medium term.”

“Maldives tourism performance outperformed its peers in past few years but tourism and overall growth slowed in 2015. Some recovery is expected this year, aided by the efforts to tap new markets and the Visit Maldives 2016 campaign. However, there are strong headwinds from the economic slowdown in China, and US dollar appreciation against the euro could impinge on competitiveness in the key European markets.”

“Despite a large cut in the oil import bill, the current account deficit looks to have widened last year driven by rising non-oil imports, perhaps reflecting the start of the infrastructure scaling up process. Gross official reserves have fallen back somewhat, although usable reserves have risen; the overall reserves position should continue to be closely monitored. The parallel market premium has crept up, pointing to a moderately weak external position.”

“The fiscal deficit narrowed a little in 2015, as revenues exceeded expectations. Monetary conditions are easy, though inflation is contained as a result of lower commodity prices. After years of subdued credit, investment demand is starting to turn around and credit growth is beginning to strengthen, as financial soundness indicators have improved.”

“Looking forward, the government’s infrastructure investment scale up will substantially boost tourism capacity and if implemented successfully, together with supportive education and employment policies, it could be transformational. It would change Maldives from niche luxury into a larger more diverse market. This would bring opportunities but would also pose challenges as the sector would become exposed to more intense competition.”

“Financing the infrastructure scale up is significantly adding to fiscal risks. The 2016 Budget is expansionary, it includes substantial external borrowing for the mega infrastructure projects, adding to already elevated public debt.”

“The fiscal position needs to be brought under control, together with careful capital expenditure management, to prevent a growing imbalance. This will require striking the right balance between fiscal consolidation on the one hand and enabling prioritized capital expenditures on the other, in an uncertain external environment. Both revenue raising and expenditure saving measures are needed.”

“The IMF staff believes that:

• Durable increases in revenues can be achieved using Maldives well administered tax system (which performs better than in neighboring economies), and by leveraging the small number of broad based taxes. User fees (for commercial and leisure use) should be introduced for key projects. A range of additional tax measures are also needed given the scale of the financing requirements. This could include considering broadening the base for business profits tax and increasing rates for a range of taxes and excises.

• On expenditures, the authorities’ plans—to better target subsidies and reform public service to improve efficiency and contain the wage bill—are important to help stabilize debt and will take time to be carefully planned and implemented. Stemming rising healthcare costs will be important, as will better targeting of social welfare, while safeguarding social safety nets. Other savings could be made on transport, communications and utilities by improving SOE oversight and continuing to promote greater use of renewable energy.”

“Strengthening public financial management and the investment framework are also essential to improve budget credibility.”

“Maldives has much to gain from effective global action to combat climate change as agreed in Paris COP 21, including securing additional concessional financing to promote climate resilient development. Maldives is already investing in a number of areas to adapt to climate change and to protect the environment. Successive governments’ policies to use incentives to encourage voluntary resettlement will take time as it requires a change in the social fabric but it will reap multiple benefits. The development of regional hubs and greater transport connectivity would help adapt to climate change, promote economic diversification and reduce the cost of public service provision including in critical areas of health, education, and water management. Building on the climate change adaptation plan, establishing a detailed national development strategy would help ensure that plans are coherent, well coordinated and sequenced, and that they create employment opportunities and access to housing.”

“The mission met with Minister of Finance, Mr. Abdulla Jihad, Governor of Maldives Monetary Authority, Dr. Azeema Adam, the Economic Affairs and Public Accounts Committees’ of the Peoples Majlis, the Economic and Youth Council, and Cabinet ministers and senior officials, banks, tourism operators and other representatives of the private sector, other multilateral organizations and NGOs. The mission wishes to thank the authorities for their cooperation and warm hospitality during its visit.

“The mission will prepare a report that, subject to management approval, is tentatively scheduled to be considered by the IMF’s Executive Board in April 2016.”

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.