Maldives: Staff Report for the 2014 Article IV Consultation—Informational Annex
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
11 Mar 2015
eISBN:
9781498381611
Language:
English
Keywords:
ISCR; CR; deficit; authority; debt ratio; finance consideration; appendix I. Maldives IMF-World Bank; financial asset; program loan; Maldivian rufiyaa; basket of currencies; Loans; Exchange rates; Balance of payments statistics
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This 2014 Article IV Consultation highlights that Maldives’ real economy has picked up. Growth is estimated to have reached 5 percent in 2014 with stronger tourism activity driven by a rapid expansion from Asian markets and a tepid recovery from Europe. The IMF staff expects growth to be about 5 percent in 2015. Weaker import prices have pushed down inflation to low levels. Growth is expected to remain relatively strong in the near term, though the fiscal adjustment envisaged in the 2015 Budget will have a mildly negative effect on growth.

Abstract

This 2014 Article IV Consultation highlights that Maldives’ real economy has picked up. Growth is estimated to have reached 5 percent in 2014 with stronger tourism activity driven by a rapid expansion from Asian markets and a tepid recovery from Europe. The IMF staff expects growth to be about 5 percent in 2015. Weaker import prices have pushed down inflation to low levels. Growth is expected to remain relatively strong in the near term, though the fiscal adjustment envisaged in the 2015 Budget will have a mildly negative effect on growth.

Fund Relations

(As of November 30, 2014)

Membership Status: Joined: January 13, 1978; Article XIV

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Latest Financial Arrangements:

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Projected Payments to Fund1

(SDR million; based on existing use of resources and present holdings of SDRs):

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Exchange Arrangements

From March 1, 1982 to June 30, 1985, the Maldivian rufiyaa was pegged to the U.S. dollar. Beginning in July 1985, the exchange rate of the rufiyaa was linked to a trade-weighted basket of currencies, but the exchange rate vis-à-vis the U.S. dollar remained relatively stable until February 1987. On March 1, 1987, the rufiyaa was devalued by 29 percent vis-à-vis the U.S. dollar. From 1987 to 1994, the exchange rate of the rufiyaa was adjusted periodically. Since October 1994, the exchange rate of the rufiyaa remained unchanged at Rf 11.77 per U.S. dollar, until July 25, 2001, when the rufiyaa was devalued to Rf 12.80 per U.S. dollar. Since April 2011, the rufiyaa has floated in a band of 20 percent on either side of Rf 12.85 per dollar. In practice, however, the rufiyaa has been virtually fixed at the band’s weaker end of Rf 15.42 per dollar. The de jure exchange rate arrangement is a pegged exchange rate within horizontal bands and the de facto exchange rate arrangement is classified as a stabilized exchange rate arrangement. Maldives continues to avail itself of the transitional provisions of Article XIV, and has not yet accepted the obligations of Article VIII, Sections 2, 3, and 4. It maintains an exchange restriction subject to IMF approval under Article VIII, Section 2(a) of the IMF’s Articles of Agreement arising from a shortage of foreign exchange at the official rate which leads to the MMA rationing its supply of foreign exchange to commercial banks. This results in a channeling of foreign exchange transactions for current international transactions to the parallel market where transactions take place at an exchange rate that deviates by more than 2 percent from the official exchange rate. The greater-than-2-percent exchange-rate spread gives rise to a multiple currency practice subject to IMF approval under Article VIII, Section 3 and also to exchange restrictions, given the additional cost involved for obtaining foreign exchange. The extent of rationing has been eased with an increase in amounts provided to commercial banks.

Last Article IV Consultation

The 2013 Article IV consultation was concluded by the Executive Board on February 4, 2013.

Technical Assistance

FAD: FAD main areas of engagement were in Public Expenditure and Financial Accountability (PEFA) assessment and providing TA for cash management. A joint IMF/WB Public Expenditure and Financial Accountability (PEFA) assessment was carried out in February 2014 to gauge progress made since the last PFM Action Plan for 2009–2011, identify remaining weaknesses and future direction. As a follow-up to the PEFA, the FAD team together with the World Bank also developed a Public Financial Management Reform Plan (PFMRP) for the GoM in June 2014. This was a broad PFM reform and consolidation plan aimed at improving the overall policy-making, coordination, implementation and monitoring framework in PFM. Altogether 3 missions on cash management TA were carried out in FY14. This mainly focused on developing a cash management manual for the GoM and related activities. On request from the authorities, the FAD in September 2014 also carried out a review of Chart of Accounts (CoA) at the ministry of finance and proposed structure for a revised CoA and an action plan to achieve same. In addition, there was a coordinated FAD/STA mission around the same time to review the mapping of the government COA to GFSM 2014.

LEG: In October 2003 provided technical assistance on the revision of the Maldives Monetary Authority Act (MMA Act). A series of missions (March and September 2005, and April 2006) were provided to revamp the banking law. In August 2009, a mission provided assistance on the MMA Act (jointly with MCM). A follow-up mission in February 2011 focused on payments law. LEG conducted an AML/CFT assessment in October 2010 and conducted a desk-based review of the draft AML/CFT law in May 2012. In 2014 LEG provided advice on the Special Economic Zones Law, offshore banking legislation and deposit insurance.

MCM: Two missions visited in 2006 on monetary operations, financial market development, and banking issues. In 2007, a series of mission were provided on debt management, monetary policy and financial supervision. In 2008, three missions visited on monetary operations and liquidity management, monetary policy and financial supervision issues. In November 2008 and March/May/August 2009, a series of mission were provided on research capacity building, bank supervision, monetary policy and the MMA act. Two missions visited Malé to advise on monetary operations, liquidity management, and the development of a crisis management framework. In December 2010, MCM conducted a TA mission on crisis preparedness and management, bank restructuring, and monetary operations. In May and September 2011, MCM consecutively conducted missions on the development of debt markets, and on on-site banking supervision. In February 2012, MCM undertook a TA mission on assessing the foreign exchange operations framework. In 2014, MCM conducted a series of TA missions on banking supervision in early February and late May. Also, together with APD another joint mission on developing foreign exchange market was carried out. MCM also provided advice on deposit insurance schemes.

STA: In May 2007, STA conducted a mission on money and banking statistics. In February and April 2011, STA offered TA on multiple topics covering improvements in balance of payments statistics, government financial statistics (GFS), monetary and financial statistics (MFS) and national accounts. In June and September 2011, STA conducted TA missions on improving price statistics and on the General Data Dissemination System (GDDS). In February, May, and October 2012 STA continued providing TA on improving price statistics. Similarly, in April 2012, a TA mission on improving national accounts covered constructing GDP from the expenditure side and compiling quarterly national accounts. Further advice on improving GDP and developing quarterly GDP was provided in November 2012, January and July, 2014. Between March 2013 and November 2014, STA field five TA missions on balance of payments statistics, in the context of a project funded by the Government of Japan. Another TA mission on balance of payments statistics is scheduled for March 2015.

Safeguards Assessment

In line with the Fund’s safeguards assessments policy, an assessment of the Maldives Monetary Authority was concluded in March 2010. In addressing recommendations, the MMA appointed an external auditor and strengthened controls over foreign payments through the automation of the authorization process. A Chief Internal Auditor has also been appointed, while capacity in the internal audit function continues to be improved. In addition, to strengthen the legal framework, amendments to the MMA Act were drafted in 2011 in consultation with the Fund, and have yet to be enacted.

IMF–World Bank Joint Management Action Plan

(As of December 2014)

In view of the macroeconomic challenges facing Maldives and in the wake of a period of political volatility, the World Bank Group Interim Strategy Note (ISN) for FY14-FY16, presented to its Board in June 2014, proposes a selective program of engagement focused on deepening dialogue and support on macro-fiscal issues while strengthening the analytical foundations that would underpin a future program. To this end, a Systematic Country Diagnostic (SCD) is under preparation to shed light on the country’s challenges and opportunities for achieving more inclusive growth, reduced poverty and enhanced prosperity of the Maldivian people. The SCD will inform policy dialogue and provide the analytical basis for scoping out the next Country Partnership Framework (CPF). While the ISN is planned to span over a 24-month period, the preparation of the next CPF could be brought forward if opportunities emerge to support a full-fledged medium-term government program for macroeconomic stability and sustainable growth. Under the current ISN, support is being provided in the areas of: fiscal management, public financial management and debt management; sustainable growth; social inclusion and service delivery; and environment and natural resource management.

The teams have been holding, and will continue to hold, joint missions and regular briefing meetings on macroeconomic developments. Public financial management is a key area of collaboration for these operations as is universal subsidies and social protection reform, where the Bank is taking the lead on a number of initiatives aimed at improving targeting. The World Bank has carried out a technical assistance project on fiscal policy in FY 14, and has launched a Public Financial Management Systems strengthening project for FY 15–20, with the objective to enhance budget credibility, transparency, and financial reporting of central government finances. It will focus on strengthening the PFM environment (including enhancing the medium-term fiscal framework and strengthening debt and cash management) and strengthening budget execution. This work is carried out in close collaboration with the IMF providing considerable TA assistance in the areas of PFM and PEFA. The Bank, Fund and Government have jointly undertaken a Public Expenditure and Financial Accountability (PEFA) assessment in mid-2014, followed by a PFM action plan. The Bank is also providing technical assistance to forecasting tourism flows. The Appendix details the macro-critical activities that the Bank and IMF will work on over the coming year.

Appendix I. Maldives IMF–World Bank Joint Management Action Plan

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Relations with the Asian Development Bank

(As of November 30, 2014)

Asian Development Bank

ADB’s interim country partnership strategy (CPS) for 2014–2015 was endorsed by its Board of Directors in October 2014. The interim CPS continues the partnership strategy and focus on ADB’s prioritized areas and sectors of operations that were inherent in the interim CPS for 2012–2013; these include: energy, transport, and finance (in particular, micro, small, and medium-sized enterprises). In support of investments in these areas, ADB is providing capacity building support to strengthen institutional capacity in various sectors such as tax administration, operations management, and MSME development; and in agencies such as Maldives Energy Authority and the Ministry of Finance and Treasury.

Work on the full CPS will commence in early 2015.

Loans and Grants

Since ADB started lending to the Maldives in 1981 and up to 2014-end, it has provided 24 loan and grant projects to the country with a total approved amount of $209.91 million. As of November-end, 2 loans and grants (in the MSME and energy sectors) were active with a net amount of $45.350 million (Table 1). In October 2014, the ADB Board of Directors approved the Outer Island Sustainable Energy Development Project; of its total cost, $38.08 million came from Asian Development Fund (ADF).

Table 1.

Ongoing Loan and Grant Portfolio

(As of November-end 2014, in $ million)

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Technical Assistance

As of November-end 2014, ADB had approved 68 TA projects to the Maldives, with a total amount of $26.90 million. Of the ongoing 4 TA projects (Table 2), 2 are in the energy sector ($1.9 million altogether), and 2 in public sector management ($1.175 million altogether) for a total of $3.075 million.

Table 2.

Ongoing TA Portfolio

(As of November-end 2014, in $ million)

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PSM= public sector management

Contract Awards/Commitments

As a result of the closure of the Economic Recovery Program (ERP) loan as well as two other projects, the level of contract awards for all of 2013 was reduced significantly as compared to 2012 (Table 3).

Table 3.

Contract Awards/Commitment Performance

(Without program loans as of September 30, 2014)a

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No contract awarded for 2014

Refers to full year projection.

Disbursements

Total disbursements in 2012 were high due to the ERP; since its closure, and that of two other projects, the level of disbursements has declined. The disbursement ratio in 2013 was 7.8 percent both with and without program loans (Table 4).

Table 4.

Disbursement Performance

(As of September 30, 2014)

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Partnerships and Cofinancing

In addition to the ADF funds for the Outer Island Sustainable Energy Development Project, approved in October 2014, it had cofinancing resources of $72 million, comprising $50 million from the European Investment Bank, $12 million from the Scaling Up Renewable Energy Program in Low Income Countries (SREP), and $10 million from the Islamic Development Bank.

By the end of 2013, cumulative direct value-added official cofinancing for Maldives amounted to $14.2 million for four investment projects and $2.3 million for four technical assistance projects.

Private Sector Operations

In 2008, ADB approved a direct loan of $7.5 million and an equity investment of $4.5 million in the Housing Development Finance Corporation, which provided funding for critically needed housing in the country. As of year-end 2013, cumulative approvals in 2 projects amounted to $16.5 million (including $4.5 million equity investment in loan 7274/2418). Total outstanding balances and undisbursed commitments to nonsovereign projects in the Maldives amount to $5.7 million, representing 0.1% of ADB’s total nonsovereign portfolio as of 31 December 2013.

Regional Cooperation

ADB is supporting the Maldives through the study on Regional Economics of Climate Change (RECCSA), which identifies adaptation measures to climate change impact and recommends cleaner technologies and options for the country and for the region. ADB-supported studies also focus on strengthening and promoting regional cooperation on climate change by analyzing regional climate change risks and addressing the issues associated with climate change at the cross-sectoral and cross-country levels, which are of importance to the Maldives.

ADB also provided assistance in the preparation of the study on Indian Ocean Cargo and Passenger Ferry to analyze the feasibility of launching subregional passenger and cargo services, connecting the Maldives to India (Tuticorin and Cochin) and Sri Lanka (Colombo). This will help the Maldives to increase accessibility and mobility; facilitate trade and regular cargo movement; and improve logistics, which can consequently open new opportunities for tourism development.

The Maldives also receives capacity building support for customs modernization under the South Asia Subregional Economic Cooperation (SASEC) program. In May 2014, the Maldives (together with Sri Lanka), became full members of SASEC (original members were Bangladesh, Bhutan, India, and Nepal). SASEC focuses on planning, preparing, and implementing regional projects in energy, trade facilitation, and transport.

Statistical Issues

(As of January 22, 2015)

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Maldives: Table of Common Indicators Required for Surveillance

(As of January 7, 2015)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds. Interest rates on bank deposits are not provided.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

1

Prepared jointly by IMF and World Bank staff

1

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

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Cover IMF Staff Country Reports
Maldives: 2014 Article IV Consultation—Staff Report; Press Release; and Statement by the Executive Director for the Maldives
Author: International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2015: Issue 068
Publisher:
International Monetary Fund
ISBN:
9781498381611
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9781498381611.002