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IMF Country Report No. 16/135
MALDIVES
2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR MALDIVES
May 2016
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2016 Article IV consultation with Maldives, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its May 13, 2016 consideration of the staff report that concluded the Article IV consultation with Maldives.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on May 13, 2016, following discussions that ended on January 17, 2016, with the officials of Maldives on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on April 7, 2016.
An Informational Annex prepared by the IMF staff.
A Debt Sustainability Analysis prepared by the staffs of the IMF and International Development Association (IDA).
A Staff Supplement updating information on recent developments.
A Statement by the Executive Director for Maldives.
Copies of this report are available to the public from
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© 2016 International Monetary Fund
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MALDIVES
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION
April 6, 2016
Key Issues
Context Maldives living standards have risen to middle income levels over the past two decades driven by tourism development. The country’s geography—with a widely dispersed population across small far flung islands—creates fiscal challenges and the economy has faced persistent fiscal deficits over the past decade. The economy is highly exposed to climate change which further adds to fiscal costs.
Recent economic developments. The real economy outperformed its peers in the past few years but tourism slowed last year. The current account deficit widened despite a positive terms of trade shock but inflation is contained. Public debt is high and on a rising trajectory. The authorities are embarking on a substantial infrastructure scale up which could transform the economy but brings with it external financing risks.
Policy recommendations:
Fiscal policy. Durable fiscal adjustment is needed to prevent growing fiscal and external imbalances. Staff supports priority public infrastructure spending where benefits clearly outweigh costs. But additional fiscal measures are needed to contain the overall increase in debt. This should include revenue raising measures and firmer control of current spending, alongside more prioritized capital expenditure. Strengthened public financial management is critical to support fiscal goals.
Monetary, financial and external policies. The external position looks moderately weaker than implied by fundamentals and desirable policies and the exchange rate moderately overvalued. Alongside fiscal adjustment, support from monetary and financial policies would help stabilize the external position.
Building longer term resilience. Building climate change resilience, improving public service delivery and economic diversification are key challenges. Encouraging voluntary resettlement to regional hubs and better connectivity would reduce the cost of service provision but will take many years. A detailed national development strategy would ensure that investment plans are well coordinated and bring about bigger growth dividends. Diversification into new sectors would be helpful, but care is needed to preserve the tax base.
Approved By
Kalpana Kochhar and Catherine Pattillo
Discussions took place in Malé during January 5–17, 2016. Staff representatives comprised Ms. A Stuart (head), J. De, J. A. Garcia (APD), K. Wijeweera (APD, and Resident Representatives Office), J. Ge (RES) and Ms. E. Kvintradze (Resident Representative, Sri Lanka and Maldives). Ms. W. Abdelati (OED) joined the discussions. Mr. Atolia (RES) provided research and support from HQ. Research assistance: Ms. Q. Zhang. Administrative assistance: Mr. S. George
Contents
SETTING
RECENT DEVELOPMENTS
OUTLOOK AND RISKS: HIGH STAKES
A. Unprecedented Infrastructure Scale Up
B. Outlook and Risks: A Challenging Global Environment
POLICIES FOR FISCAL SUSTAINABILITY
EXTERNAL SECTOR ASSESSMENT
SUPPORTING MONETARY AND FINANCIAL POLICIES
BUILDING LONGER TERM RESILIENCE
STAFF APPRAISAL
BOXES
1. Climate Change Challenges and Adaptation Policies
2. Public Infrastructure Program
3. Public Investment Management Efficiency
4. The Operation of Maldives Parallel Foreign Exchange Market
5. Maldives: External Sector Assessment: Quantified Approaches
FIGURES
1. Comparison with Other Tourist Dependent Economies
2. Summary of Recent Developments
3. External Sector Developments
4. Fiscal Developments
5. Money and Credit Developments
6. Financial Soundness and Doing Business Indicators
TABLES
1. Selected Economic Indicators, 2012–20
2a. Central Government Finances, 2011–19
2b. Central Government Finances, 2011–19
2c. Statement of General Government Operations, 2012–18
3. Monetary Accounts, 2007–20
4. Balance of Payments, 2011–20
5. Selected Economic and Vulnerability Indicators, 2011–19
6. Selected Financial Soundness Indicators
7. Millennium Development Goals
8. Public Financial Management Reform Plan (2015–2018)
APPENDICES
I. The Benefits and costs of Scaling Up Using a Debt Investment
II. Maldives: Tax System – Keep it Simple, Keep it Fair
III. Financial Inclusion in the Maldives
IV. Risk Assessment Matrix
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MALDIVES
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
April 6, 2016
Prepared By
Asia and Pacific Department
(In consultation with other departments)
Contents
FUND RELATIONS
IMF–WORLD BANK JOINT MANAGEMENT ACTION PLAN
RELATIONS WITH THE ASIAN DEVELOPMENT BANK
STATISTICAL ISSUES
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MALDIVES
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITYANALYSIS
April 8, 2016
Approved By
Kalpana Kochhar, Catherine Pattillo (IMF), and Satu Kahkonen (IDA)
Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA)
This Debt Sustainability Analysis (DSA) updates the March 2015 DSA. Maldives’ external risk rating has been elevated to a high risk of debt distress, based on an assessment of public external debt in the context of large prospective increases in capital spending. The assessment of the overall risk of debt distress is also high and is reinforced by significant vulnerabilities related to domestic debt. The 2016 Budget, included in the baseline, projects a substantial increase in capital spending financed wholly by external debt (with no offsetting fiscal measures) which will add to both debt and foreign currency risk and would markedly change the composition of Maldives debt. The execution rate of the capital projects is highly uncertain—and under-execution is likely—but after factoring this in debt still rises sharply (and there could be cost overruns). The authorities’ 2016 Budget entails a large increase in external debt which would breach the PV of external debt to GDP threshold.1
Fiscal policy mistakes and shocks to tourism exports or foreign direct investment are key risks that could trigger debt distress. To stabilize and then reduce public debt ratios, staff proposes greater prioritization of capital expenditures, additional fiscal revenue and expenditure measures and public financial management reforms. Adjustment measures – as illustrated by the staff’s illustrative scenario (Figures 4 and 5)—are needed to reduce the probability of debt distress while accommodating an increase in capital expenditure.
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MALDIVES
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—SUPPLEMENTARY INFORMATION
May 10, 2016
Prepared by
Asia and Pacific Department
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Press Release No. 16/246
FOR IMMEDIATE RELEASE
May 26, 2016
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