1. Introduction. The new government has succeeded in stabilizing the economy and is in the process of restoring external balance and fiscal sustainability. In contrast to a few months earlier, pressure on the exchange rate and reserves has receded, and monetary policy has been relieved from the burden of fiscal financing, which had contributed to reserve losses. Government spending has been restrained, in spite of intense resistance in a politically strained environment. These challenging reforms were all the more arduous since the economy faced a sharp contraction—growth dropped from over 6 percent in 2008 to an estimated decline of 3 percent in 2009. Nevertheless, the authorities remain fully committed to their ambitious reform program, which they consider essential to reduce the economy’s vulnerability to external shocks and place it on a sound footing for sustained growth. Notwithstanding two performance criteria that were missed by a small margin, performance is broadly consistent with the program’s overall objectives.

2. Fiscal policy. The government remains committed to the 2010 fiscal target and continues to push forth the wage control and labor retrenchment efforts in the face of strong opposition. To offset the impact of the additional expenditure approved by Parliament for 2010, the authorities will implement revenue measures equivalent to 1.2 percent of GDP. They are also pushing for passage of the Business Profit Tax (a structural benchmark under the program) that Parliament did not approve by December. In case the public wage cuts are prematurely reversed, the authorities stand ready to introduce further compensatory measures.

3. Further efforts will be needed to attain the sizeable fiscal adjustment under the program. Additional measures will be identified, as needed, in the course of the next review to meet the program’s fiscal targets for 2011. Technical assistance is essential for timely implementation of reforms. The general goods and services tax (GST) is scheduled to come into effect in January 2011, provided there are no further delays to the April 2009 request for Fund TA. Progress with civil service reforms depends to some extent on the coordination with development banks in formulating and implementing a strategy.

4. Monetary policy. There has been a marked turnaround in the operations of the Maldives Monetary Authority (MMA), allowing it to successfully absorb much of the excess liquidity in the system. As planned, monetization of the fiscal deficit has ceased and the government’s debt stock with MMA has been converted into tradable securities to reverse the impact of past monetization on liquidity. Open market operations (OMOs) were introduced in August 2009 and T-bill auctions were launched in December. It should be recognized that a few technical and operational difficulties are often encountered at the start of such auctions. As the market gains more experience, they foresee smoother development of the OMOs and T-bill auctions. The small overrun in the ceiling on net credit to the government by the MMA resulted from accrued interest on government debt that was recently converted into tradable securities. Similarly, a minor and temporary breach of the reserve money target occurred due to a spike in settlement balances in the last few days of the year.

5. Exchange rate. Monetary and fiscal adjustments, together with foreign exchange inflows, have helped to strengthen confidence in the economy and alleviated pressure on the rufiyaa. Accordingly, the exchange rate premium has significantly diminished and the earlier foreign exchange liquidity shortages that led to rationing have eased.

6. Financial sector. Because a new regulatory framework was introduced in 2009 when the economy was in the midst of a contraction, several banks are unable to comply immediately with the framework in full. The MMA is attempting to reach agreement with each bank on a feasible compliance schedule. A new Banking Act is currently before Parliament, to strengthen the legal framework for the operation and resolution of commercial banks, and the MMA Act will soon be submitted along the lines of Fund TA advice.

7. Donor support. Concessional support would facilitate the economic recovery and reserve buildup, as well as ease the pressure on the private sector of increased domestic financing of the deficit. In addition, it would support public spending on capital projects and facilitate repayment of short-term borrowing.

8. On behalf of the Maldivian authorities, I would like to extend their appreciation to the Executive Board for supporting their efforts. I join the authorities in thanking staff for their dedicated engagement in formulating the reform program and providing valuable advice and technical assistance.