Press Release No. 23/451

IMF Executive Board Concludes 2023 Financial System Stability Assessment with Maldives

December 14, 2023

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Financial Sector Assessment Program (FSAP) [1] with Maldives on November 27, 2023 without convening formal discussion. [2] The Financial Sector Stability Assessment (FSSA) report was completed on November 6, 2023. The report is based on the work of joint IMF/World Bank FSAP missions to Maldives during February-March and May 2023.

Maldives is a tourism dependent economy with a small financial sector dominated by state-owned banks. Systemic risks stem largely from a growing sovereign-bank nexus, high dollarization, and a shortage of foreign exchange. The FSAP risk analysis found that banks are generally resilient to adverse economic shocks but highly exposed to sovereign debt and large borrowers, which makes them vulnerable to adverse developments on these fronts. While banks generally maintain adequate liquidity, they are relatively exposed to foreign currency risks. A climate risk analysis suggests no material mid-century coastal flood impact on the banking system.

The FSAP concluded that further strengthening of financial sector policies is needed to improve the resilience of the financial system. The authorities should adopt regulation to address frictions in the foreign exchange market, resume liquidity management operations and develop systemic risk indicators. Priority should also be given to establishing a macroprudential framework along with instruments, publishing a financial stability report, and ensuring full reporting of non-bank payment obligations. To improve financial sector oversight, the Maldives Monetary Authority should issue regulatory standards to clarify the enforcement regime and review its off-site monitoring procedures and staffing.

Similarly, the financial safety net and crisis management arrangements should be enhanced by improving early intervention mechanisms, introducing recovery and resolution planning, and enhancing the deposit insurance system. In addition, an effective liquidity assistance framework should be established. To address challenges from climate change, the granularity and coverage of climate data should be improved and climate risk analysis initiated.

[1] The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance. FSAPs are mandatory for the 47 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member countries. The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA).

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.