Abstract
This paper examines the Maldives’ 2009 Article IV Consultation on economic developments and policies. The Maldivian economy is facing large external and fiscal imbalances, resulting from the severe impact of the global financial crisis and exacerbated by an unsustainable fiscal expansion. The global crisis has led to sharp declines in tourism and related investment, other net capital flows, and exports. This has caused a significant fall in fiscal revenue, compounding a large increase in public spending, and pushed the economy into recession. A rising share of the resulting fiscal deficit has been financed by monetization.
The Executive Board of the International Monetary Fund (IMF) today approved blended financing arrangements for Maldives amounting to a combined SDR 57.4 million (about US$92.5 million). The financing is designed to help smooth the country’s adjustment to the fallout from the global crisis and support the authorities’ strong policy program.
The blended arrangements for Maldives include a 36-month, SDR 49.2 million (about US$79.3 million) Stand-By Arrangement (600 percent of Maldives’ quota), and a 24-month, SDR 8.2 million (about US$13.2 million) arrangement under the Exogenous Shocks Facility High Access Component (ESF-HAC, 100 percent of Maldives’ quota). The ESF-HAC is an IMF facility designed to provide policy support and financial assistance on concessional terms to eligible low-income countries facing temporary exogenous shocks.
A combined disbursement of SDR 5.13 million (about US$8.3 million) will become available under the arrangements following the Board’s decisions.
Following the Executive Board discussion, Mr Takatoshi Kato, Deputy Managing Director and Acting Chair, issued the following statement:
“The Maldivian economy was severely hit by the global crisis through significant declines in Maldives’ tourism receipts, capital inflows, and goods exports. Coming after unsustainable public spending over the last few years—partly reflecting post-tsunami reconstruction efforts—the crisis led to a very large fiscal deficit, a sharply weakened balance of payments position, and reserve losses.
“The government’s ambitious policy program, supported by the IMF, is aimed at addressing the impact of the global economic crisis and restoring macroeconomic stability and fiscal sustainability. At the core of the program is a very strong effort to bring down the fiscal deficit while protecting social spending. To that end, the authorities are taking immediate action to cut spending, including unwinding part of the recent large wage increases, and are introducing new revenue measures to broaden the tax base. They have also taken steps to reform the civil service, improve the targeting of subsidies to the poor, and transfer enterprises and services to the private sector.
“The program aims to rebuild international reserves to prudent levels while preserving the current exchange rate peg to the U.S. dollar. Monetary policy will support the fiscal adjustment efforts through a tightening of domestic currency liquidity. The authorities have taken key steps in this regard: the monetization of the fiscal deficit has been halted; the government debt stock with the Maldives Monetary Authority has been converted into tradable securities; and open market operations have been introduced to absorb excess liquidity.
“The authorities are committed to strengthening the financial sector. These measures include restructuring the Bank of Maldives’ portfolio; ensuring speedy action for the recovery of its collateral on defaulted debt; and, as necessary, securing a capital infusion. The authorities also plan to put in place a stronger legal framework for the operation, supervision, regulation, intervention, and liquidation of commercial banks, and have already introduced regulatory changes to enhance asset classification and loan loss provisioning.
“The authorities’ program, while subject to considerable risks, is strong, comprehensive, and well-focused, and deserves strong support of the international community. If fully implemented, it will put the Maldivian economy back on a path of macroeconomic stability and set the conditions for sustained economic growth and poverty reduction,” Mr Kato said.
ANNEX Recent Economic Developments
The Maldivian economy is facing severe fiscal and external imbalances. A rapid fiscal expansion began after the 2004 tsunami, including steep wage bill increases. From mid-2008, the global crisis significantly exacerbated existing imbalances and severely weakened the country’s balance of payments position. Tourism revenue has been badly affected by the global downturn, reducing fiscal and foreign exchange earnings and driving the economy into recession. Net capital inflows have also fallen sharply, as have goods exports. The loss in fiscal revenues, combined with the continued growth in public expenditures, led to a dramatic increase in the fiscal deficit in 2008-09, much of which has been monetized. Despite foreign exchange rationing by the Maldives Monetary Authority (MMA), international reserves had fallen to about 2¼ months of imports by end-September 2009.
Key Program Policies and Objectives
The authorities are undertaking a very significant adjustment program, aimed at addressing the severe impact of the global economic crisis and restoring macroeconomic stability and fiscal sustainability, thereby setting the conditions for renewed economic growth and poverty reduction. In particular, they plan to:
Reduce the very large budget deficit by curtailing spending and implementing revenue measures, in order to restore economic stability and fiscal sustainability;
Protect critical social spending and broaden the coverage of the pension system. The targeting of food, medicine and other subsidies to the poor will also be enhanced. For instance, across-the-board electricity subsidies have been eliminated and replaced by a cost-based electricity pricing formula combined with a subsidy mechanism for the poor;
Reduce excess liquidity of the Maldivian rufiyaa and rebuild reserves to prudent levels; and
Strengthen the financial system.
Maldives: Selected Economic and Vulnerability Indicators, 2004-12
MMA liabilities, include SDR allocation of SDR 7.4 million, equivalent to US$11.7 million, made available in Q3 2009, see http://www.imf.org/external/np/tre/sdr/proposal/2009/0709.htm. These are treated as long term liabilities of the MMA.
Includes IMF but excludes domestic foreign-currency denominated debt.
Maldives: Selected Economic and Vulnerability Indicators, 2004-12
| Population (in 1,000; 2008 est.) | 310 | |||||||||||
| GDP per capita (in U.S. dollars; 2008 est.): | 4,072 | |||||||||||
| Quota (in million SDRs): | 8.2 | |||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Est. | Prog. | |||||||||||
| OUTPUT AND PRICES | (Annual percentage change) | |||||||||||
| Real GDP | 9.5 | -4.6 | 18.0 | 7.2 | 5.8 | -4.0 | 3.4 | 3.7 | 4.1 | |||
| Inflation (end-of-period) | 10.1 | 2.9 | 3.9 | 10.4 | 8.6 | 6.7 | 4.7 | 6.3 | 3.5 | |||
| Inflation (period average) | 6.3 | 2.5 | 3.6 | 7.6 | 11.9 | 5.5 | 4.5 | 6.3 | 3.5 | |||
| GDP deflator | 2.4 | 1.2 | 3.5 | 7.4 | 13.0 | 11.0 | 4.0 | 6.3 | 3.5 | |||
| CENTRAL GOVERNMENT FINANCES | (In percent of GDP) | |||||||||||
| Revenue and grants | 34.2 | 47.7 | 52.1 | 55.8 | 49.0 | 36.3 | 37.0 | 43.4 | 44.2 | |||
| Expenditure and net lending | 36.0 | 59.0 | 59.3 | 60.8 | 62.8 | 65.0 | 54.8 | 47.5 | 47.9 | |||
| Overall balance | -1.8 | -11.3 | -7.2 | -4.9 | -13.8 | -28.8 | -17.8 | -4.2 | -3.6 | |||
| Overall balance excl. grants | -2.5 | -19.8 | -14.6 | -12.7 | -18.5 | -33.6 | -18.9 | -5.2 | -4.6 | |||
| Financing | 1.8 | 11.3 | 7.2 | 4.9 | 13.8 | 28.8 | 17.8 | 4.2 | 3.6 | |||
| Foreign | 4.1 | 2.4 | 4.5 | 4.6 | 3.8 | 12.7 | 4.2 | 2.0 | 2.6 | |||
| Domestic | -2.3 | 8.8 | 2.7 | 0.4 | 10.0 | 16.1 | 13.6 | 2.2 | 1.1 | |||
| Public and publicly guaranteed debt | 55.2 | 64.9 | 62.9 | 66.4 | 68.6 | 91.6 | 96.0 | 87.9 | 82.5 | |||
| Domestic | 15.1 | 23.6 | 23.4 | 26.5 | 31.2 | 46.8 | 54.5 | 50.4 | 47.0 | |||
| External (excl. IMF and currency swaps by MMA) | 40.1 | 41.3 | 39.6 | 39.8 | 37.4 | 44.8 | 41.5 | 37.5 | 35.5 | |||
| MONETARY ACCOUNTS | (Annual percentage change, unless otherwise indicated) | |||||||||||
| Broad money | 32.8 | 11.7 | 20.6 | 23.7 | 23.6 | 9.4 | 6.7 | … | … | |||
| Domestic credit | 32.6 | 63.2 | 37.6 | 45.8 | 43.4 | 5.7 | 7.5 | … | … | |||
| Of which: To private sector | 57.6 | 54.5 | 49.5 | 49.2 | 33.0 | -4.1 | -2.1 | … | … | |||
| BALANCE OF PAYMENTS | (In percent of GDP, unless otherwise indicated) | |||||||||||
| Current account | -15.8 | -36.4 | -33.0 | -41.5 | -51.4 | -29.6 | -23.4 | -13.1 | -11.1 | |||
| Of which: | ||||||||||||
| Exports | 23.3 | 21.6 | 24.6 | 21.6 | 26.2 | 16.1 | 17.7 | 17.7 | 17.8 | |||
| Imports | -72.7 | -87.4 | -89.1 | -91.5 | -96.8 | -58.2 | -58.8 | -55.9 | -55.9 | |||
| Nonfactor services, net | 45.1 | 14.6 | 35.0 | 36.0 | 29.4 | 22.0 | 28.4 | 33.0 | 36.3 | |||
| Capital and financial account (incl. e&o) | 21.4 | 34.1 | 37.9 | 48.8 | 46.0 | 30.5 | 20.6 | 11.1 | 12.5 | |||
| Of which: | ||||||||||||
| General government, net | 3.2 | 2.5 | 4.2 | 3.4 | 5.3 | 8.4 | -1.9 | -1.2 | 0.6 | |||
| Banks and other sectors, net | 14.6 | 30.6 | 26.0 | 37.1 | 33.3 | 14.6 | 20.4 | 10.3 | 11.1 | |||
| Overall balance | 5.7 | -2.3 | 4.9 | 7.3 | -5.4 | 0.9 | -2.8 | -2.0 | 1.4 | |||
| Gross international reserves (in millions of US$; e.o.p.) 1/ | 204 | 187 | 232 | 310 | 241 | 277 | 291 | 305 | 347 | |||
| In months of GNFS imports | 3.4 | 2.6 | 2.7 | 3.0 | 1.8 | 3.2 | 3.1 | 3.1 | 3.4 | |||
| In percent of short-term debt at remaining maturity | 585 | 261 | 168 | 121 | 80 | 81 | 88 | 118 | 143 | |||
| External debt 2/ | 43 | 53 | 63 | 80 | 77 | 82 | 80 | 71 | 65 | |||
| Medium- and long-term | 42 | 48 | 53 | 63 | 60 | 67 | 68 | 60 | 56 | |||
| Short-term | 1 | 5 | 10 | 17 | 17 | 15 | 13 | 10 | 8 | |||
| External debt service (in percent of domestic GNFS | ||||||||||||
| exports) | 5 | 9 | 9 | 12 | 12 | 17 | 24 | 22 | 15 | |||
| MEMORANDUM ITEMS | ||||||||||||
| GDP (in millions of rufyiaa) | 9,939 | 9,596 | 11,717 | 13,493 | 16,137 | 17,192 | 18,480 | 20,354 | 21,935 | |||
MMA liabilities, include SDR allocation of SDR 7.4 million, equivalent to US$11.7 million, made available in Q3 2009, see http://www.imf.org/external/np/tre/sdr/proposal/2009/0709.htm. These are treated as long term liabilities of the MMA.
Includes IMF but excludes domestic foreign-currency denominated debt.
Maldives: Selected Economic and Vulnerability Indicators, 2004-12
| Population (in 1,000; 2008 est.) | 310 | |||||||||||
| GDP per capita (in U.S. dollars; 2008 est.): | 4,072 | |||||||||||
| Quota (in million SDRs): | 8.2 | |||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Est. | Prog. | |||||||||||
| OUTPUT AND PRICES | (Annual percentage change) | |||||||||||
| Real GDP | 9.5 | -4.6 | 18.0 | 7.2 | 5.8 | -4.0 | 3.4 | 3.7 | 4.1 | |||
| Inflation (end-of-period) | 10.1 | 2.9 | 3.9 | 10.4 | 8.6 | 6.7 | 4.7 | 6.3 | 3.5 | |||
| Inflation (period average) | 6.3 | 2.5 | 3.6 | 7.6 | 11.9 | 5.5 | 4.5 | 6.3 | 3.5 | |||
| GDP deflator | 2.4 | 1.2 | 3.5 | 7.4 | 13.0 | 11.0 | 4.0 | 6.3 | 3.5 | |||
| CENTRAL GOVERNMENT FINANCES | (In percent of GDP) | |||||||||||
| Revenue and grants | 34.2 | 47.7 | 52.1 | 55.8 | 49.0 | 36.3 | 37.0 | 43.4 | 44.2 | |||
| Expenditure and net lending | 36.0 | 59.0 | 59.3 | 60.8 | 62.8 | 65.0 | 54.8 | 47.5 | 47.9 | |||
| Overall balance | -1.8 | -11.3 | -7.2 | -4.9 | -13.8 | -28.8 | -17.8 | -4.2 | -3.6 | |||
| Overall balance excl. grants | -2.5 | -19.8 | -14.6 | -12.7 | -18.5 | -33.6 | -18.9 | -5.2 | -4.6 | |||
| Financing | 1.8 | 11.3 | 7.2 | 4.9 | 13.8 | 28.8 | 17.8 | 4.2 | 3.6 | |||
| Foreign | 4.1 | 2.4 | 4.5 | 4.6 | 3.8 | 12.7 | 4.2 | 2.0 | 2.6 | |||
| Domestic | -2.3 | 8.8 | 2.7 | 0.4 | 10.0 | 16.1 | 13.6 | 2.2 | 1.1 | |||
| Public and publicly guaranteed debt | 55.2 | 64.9 | 62.9 | 66.4 | 68.6 | 91.6 | 96.0 | 87.9 | 82.5 | |||
| Domestic | 15.1 | 23.6 | 23.4 | 26.5 | 31.2 | 46.8 | 54.5 | 50.4 | 47.0 | |||
| External (excl. IMF and currency swaps by MMA) | 40.1 | 41.3 | 39.6 | 39.8 | 37.4 | 44.8 | 41.5 | 37.5 | 35.5 | |||
| MONETARY ACCOUNTS | (Annual percentage change, unless otherwise indicated) | |||||||||||
| Broad money | 32.8 | 11.7 | 20.6 | 23.7 | 23.6 | 9.4 | 6.7 | … | … | |||
| Domestic credit | 32.6 | 63.2 | 37.6 | 45.8 | 43.4 | 5.7 | 7.5 | … | … | |||
| Of which: To private sector | 57.6 | 54.5 | 49.5 | 49.2 | 33.0 | -4.1 | -2.1 | … | … | |||
| BALANCE OF PAYMENTS | (In percent of GDP, unless otherwise indicated) | |||||||||||
| Current account | -15.8 | -36.4 | -33.0 | -41.5 | -51.4 | -29.6 | -23.4 | -13.1 | -11.1 | |||
| Of which: | ||||||||||||
| Exports | 23.3 | 21.6 | 24.6 | 21.6 | 26.2 | 16.1 | 17.7 | 17.7 | 17.8 | |||
| Imports | -72.7 | -87.4 | -89.1 | -91.5 | -96.8 | -58.2 | -58.8 | -55.9 | -55.9 | |||
| Nonfactor services, net | 45.1 | 14.6 | 35.0 | 36.0 | 29.4 | 22.0 | 28.4 | 33.0 | 36.3 | |||
| Capital and financial account (incl. e&o) | 21.4 | 34.1 | 37.9 | 48.8 | 46.0 | 30.5 | 20.6 | 11.1 | 12.5 | |||
| Of which: | ||||||||||||
| General government, net | 3.2 | 2.5 | 4.2 | 3.4 | 5.3 | 8.4 | -1.9 | -1.2 | 0.6 | |||
| Banks and other sectors, net | 14.6 | 30.6 | 26.0 | 37.1 | 33.3 | 14.6 | 20.4 | 10.3 | 11.1 | |||
| Overall balance | 5.7 | -2.3 | 4.9 | 7.3 | -5.4 | 0.9 | -2.8 | -2.0 | 1.4 | |||
| Gross international reserves (in millions of US$; e.o.p.) 1/ | 204 | 187 | 232 | 310 | 241 | 277 | 291 | 305 | 347 | |||
| In months of GNFS imports | 3.4 | 2.6 | 2.7 | 3.0 | 1.8 | 3.2 | 3.1 | 3.1 | 3.4 | |||
| In percent of short-term debt at remaining maturity | 585 | 261 | 168 | 121 | 80 | 81 | 88 | 118 | 143 | |||
| External debt 2/ | 43 | 53 | 63 | 80 | 77 | 82 | 80 | 71 | 65 | |||
| Medium- and long-term | 42 | 48 | 53 | 63 | 60 | 67 | 68 | 60 | 56 | |||
| Short-term | 1 | 5 | 10 | 17 | 17 | 15 | 13 | 10 | 8 | |||
| External debt service (in percent of domestic GNFS | ||||||||||||
| exports) | 5 | 9 | 9 | 12 | 12 | 17 | 24 | 22 | 15 | |||
| MEMORANDUM ITEMS | ||||||||||||
| GDP (in millions of rufyiaa) | 9,939 | 9,596 | 11,717 | 13,493 | 16,137 | 17,192 | 18,480 | 20,354 | 21,935 | |||
MMA liabilities, include SDR allocation of SDR 7.4 million, equivalent to US$11.7 million, made available in Q3 2009, see http://www.imf.org/external/np/tre/sdr/proposal/2009/0709.htm. These are treated as long term liabilities of the MMA.
Includes IMF but excludes domestic foreign-currency denominated debt.