IMF Executive Board Concludes 2010 Article IV Consultation with Maldives

Public Information Notice (PIN) No. 11/26
February 28, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 14, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Maldives.1


Expansionary fiscal policies in Maldives after the 2004 tsunami led to severe fiscal and external imbalances, leaving the economy vulnerable. The situation deteriorated markedly in 2008–09, as the decline in tourism which followed the global economic crisis hit the Maldivian economy hard, aggravated the imbalances, and pushed the country into recession. In response, the authorities adopted an ambitious adjustment program supported by IMF financing. The program focused on a strong fiscal adjustment, monetary tightening and a strengthening of the financial sector.

After contracting by 2¼ percent in 2009, the economy rebounded strongly in 2010, on the back of a sharp recovery in tourism inflows. Real GDP growth is estimated at 4¾ percent in 2010. Inflation continues to reflect mainly international commodity price movements, increasing since mid-2009 on a year-on-year basis, and is expected to average 5 percent in 2010. The current account deficit is projected to have widened to about 32¼ percent of GDP in 2010, as the economic recovery and higher commodity prices have pushed up imports, offsetting the tourism rebound.

There has been considerable progress in the implementation of fiscal adjustment measures. In addition to the significant measures taken in 2009, the tourism goods and services tax (T-GST) was passed in August 2010 and came into effect from January 2011. Also, the business profit tax (BPT) was passed in December 2010 and will enter into effect in July 2011. Preliminary data put the 2010 fiscal deficit at around 17¾ percent of GDP, down from 29 percent in 2009, although financing information points to a deficit of around 20-21 percent of GDP. However, there have also been significant policy slippages that rendered the program’s ambitious targets unfeasible and undermine fiscal adjustment in 2011 and beyond. On the expenditure side, there have been no net fiscal savings from public employment restructuring, public sector wages will be restored to their September 2009 levels earlier than expected, and the new Decentralization and Disability Bills will lead to considerable spending increases. Also, the BPT will come on stream eighteen months later than planned.

Monetary policy has helped stabilize the economy. Active open market operations and the cessation of deficit monetization have effectively reduced excess rufiyaa liquidity. Private sector credit has stalled, but bank investments in treasury bills have pushed up aggregate credit and fueled broad money growth. International reserves remain on a downward path, only interrupted by temporary external financing injections, and the Maldives Monetary Authority (MMA) continues to ration the supply of foreign exchange to banks, while fully meeting the demand from the central government and some state-owned enterprises. Dollar shortages persist, and the parallel market premium has increased somewhat.

The real effective exchange rate (REER) has appreciated since mid-2008, broadly tracking movements in the US dollar. This, coupled with a difficult business environment and fiscal pressures, poses competitiveness challenges going forward.

The banking system as a whole is well capitalized, but vulnerabilities remain. Non-performing loans have continued to increase, reflecting banks’ exposure to large tourism-related borrowers hit by the global crisis, and this has affected bank profitability. Banks have also become significantly exposed to the sovereign. The MMA has reached agreement with banks on compliance with regulations on single borrower limits, asset classification and provisioning, and foreign currency exposure limits by end-2011.

Executive Board Assessment

Executive Directors noted that the Maldivian economy is recovering well, fueled by a strong rebound in tourism. Inflation has continued to be driven mainly by international commodity prices but a tight monetary policy stance has helped contain pressures. Over the medium term, economic activity is likely to stabilize and grow in line with global developments. Despite these encouraging signs, the economy faces unsustainable fiscal and external positions. While recognizing the difficult political situation facing the authorities, Directors stressed the need for decisive and comprehensive adjustment measures to achieve macroeconomic stability, sustainable growth and poverty reduction. Efforts to strengthen the financial sector and improve the business climate will also be critical.

Directors welcomed the progress made in the implementation of fiscal adjustment measures, which had led to a significant reduction in the budget deficit. They also welcomed the passage of the tourism goods and services tax and of the business profit tax, which will come into effect from 2011. However, they expressed concern about slippages, such as the lack of significant progress in public employment restructuring. Directors stressed the urgent need for continued and credible adjustment efforts, including through a combination of additional revenue-enhancing, expenditure-reducing, and expenditure-targeting measures. Strengthening public financial management will also be critical for fiscal consolidation. A number of Directors pointed out that the pace of adjustment should take into account political constraints.

Directors endorsed the tight policy stance of the MMA, and recommended continued monetary tightening to safeguard price stability, stem reserve losses and contain currency pressures. They observed that the fixed exchange rate regime has served as an effective nominal anchor for the Maldivian economy. Nevertheless, the economy continues to experience a steady downward pressure on reserves and persistent dollar shortages. Directors called for continued discussions between the authorities and the staff on this issue while being mindful of the risks involved and the impact on the poor.

Directors noted that the banking system as a whole exhibits reasonable levels of capitalization and domestic currency liquidity. However, credit quality remains poor and banks’ exposure to the sovereign has reached high levels. They emphasized that the MMA should continue to enforce prudential regulations, particularly on provisioning, single borrower limits, and foreign currency exposure limits. The Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) framework should also be strengthened. Directors welcomed the progress in advancing structural financial sector reforms.

Directors called for a close policy dialogue between the authorities and the staff with a view to reaching agreement on a strong, medium-term adjustment strategy, including credible and realistic prior actions, as a basis for completing the second review under the program.

Maldives: Selected Economic and Vulnerability Indicators, 2006–12

Population (in 1,000; 2009 est.)


GDP per capita (in U.S. dollars; 2009 est.):


Quota (in million SDRs):

  2006 2007 2008 2009 2010 2011 2012
          Est. Proj.


(Annual percentage change)

Real GDP

18.0 7.2 6.2 -2.3 4.8 4.0 4.1

Inflation (end-of-period)

3.1 10.3 9.1 4.0 5.0 6.0 3.5

Inflation (period average)

3.5 7.4 12.3 4.0 5.0 5.5 4.8

GDP deflator

3.5 7.4 12.6 7.1 6.5 5.5 4.8


(In percent of GDP)

Revenue and grants

52.1 55.8 46.0 35.9 35.5 39.4 42.3

Expenditure and net lending

59.4 61.4 63.1 64.9 53.4 60.7 61.1

Overall balance

-7.3 -5.5 -17.1 -29.0 -17.9 -21.3 -18.8

Overall balance excl. grants

-14.7 -13.3 -20.3 -33.5 -20.7 -22.0 -19.4


7.3 5.5 17.1 29.0 17.9 21.3 18.8


4.5 4.6 4.6 8.4 10.3 9.6 4.6


2.8 1.0 12.5 20.6 7.6 11.7 14.2

Public and publicly guaranteed debt

62.9 66.3 68.6 85.0 87.6 91.7 101.8


23.4 26.4 31.2 43.9 46.9 50.6 60.4

External (excl. IMF and currency swaps by MMA)

39.6 39.8 37.4 41.2 40.7 41.1 41.4


(Annual percentage change, unless otherwise indicated)

Broad money

18.9 24.1 21.8 12.5 16.8 -6.0

Domestic credit

38.6 44.7 35.2 14.0 4.9 -0.9

Of which: To private sector

48.6 49.4 29.7 -4.1 -2.5 -6.2


(In percent of GDP, unless otherwise indicated)

Current account

-33.0 -41.5 -51.4 -30.9 -32.3 -37.1 -35.6

Of which:



24.6 21.6 26.2 12.8 12.2 11.7 11.6


-89.1 -91.5 -96.9 -64.6 -67.4 -75.0 -73.4

Nonfactor services, net

35.0 36.0 29.4 28.3 31.3 35.4 38.0

Capital and financial account (incl. e&o)

37.9 48.8 46.0 32.1 37.9 26.5 23.3

Of which:


General government, net

4.2 3.4 5.3 5.5 1.9 2.3 3.7

Banks and other sectors, net

14.9 21.1 14.4 8.5 16.2 13.7 7.9

Overall balance

4.9 7.3 -5.4 1.2 5.6 -10.5 -12.3

Gross international reserves (in millions of US$; e.o.p.) 1/

232 310 241 262 351 254 65

In months of GNFS imports

2.7 3.0 1.8 2.8 3.2 2.0 0.5

In percent of short-term debt at remaining maturity

149 117 80 97 105 67 15

External debt 2/

66 81 77 79 85 92 97

Medium- and long-term

55 63 60 65 70 76 79


11 18 17 14 15 17 18

External debt service (in percent of domestic GNFS exports)

9 13 13 15 15 18 17



GDP (in millions of rufyiaa)

11,717 13,496 16,131 16,879 18,835 20,656 22,518

Sources: Maldivian authorities and IMF staff estimates and projections.

1/ MMA liabilities, include SDR allocation of SDR 7.4 million, equivalent to US$11.7 million, made available in Q3 2009, see These are treated as long term liabilities of the MMA.

2/ Includes IMF but excludes domestic foreign-currency denominated debt.

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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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