Maldives: Staff Report for the 2016 Article IV Consultation
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International Monetary Fund. Asia and Pacific Dept
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Publication Date:
31 May 2016
eISBN:
9781484356661
Language:
English
Keywords:
ISCR; CR; GDP; deficit; exchange rate; current account; GDP deflator; cash flow; narrow money; quantifying cost; excess demand; Tourism; Climate change; Fiscal stance; Global; Asia and Pacific; sources Maldives
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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.

Abstract

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.

Setting

An islands idyll facing difficult challenges…

1. Maldives living standards have risen to middle income levels over the past two decades driven by tourism development. Tourism directly or indirectly accounts for three quarters of activity with income per capita reaching $6792 in 2014. The economy is highly dollarized, has a de facto fixed exchange rate but an open capital account and a deep parallel foreign exchange market. The country’s unique geography with 188 inhabited islands and spread over 90000 sq kms creates fiscal challenges—with high costs for the provision of public services across such far flung small islands. Despite this challenge, Maldives has successfully provided near universal access to basic services of electricity, clean water and sanitation (Table 7). But some gaps remain in health and education; and many youths have opted out of employment.

Table 1.

Maldives: Selected Economic Indicators, 2012–20 (Baseline Scenario)

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Sources: Maldivian authorities; and IMF staff estimates and projections.

CPI-Male definition.

MMA liabilities, include 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.

Data for 2015 Jan-Aug.

Table 2a.

Maldives: Central Government Finances, 2011–19 (Baseline Scenario)

(In millions of rufiyaa)

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Table 2b.

Maldives: Central Government Finances, 2011–19 (Baseline Scenario)

(In percent of GDP, unless otherwise specified)

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Sources: Maldivian authorities; and IMF staff estimates and projections.

The green tax will be effective late 2015, it replaces the bednights tax (eliminated November 2014).

Includes unidentified financing.

Arrears are not included.

Table 2c.

Maldives: Statement of General Government Operations, 2012–18 (Baseline Scenario)

(In millions of rufiyaa)

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Sources: Maldivian authorities; and IMF staff estimates and projections.

The bed tax will be eliminated at mid-2013.

It includes lease extension payments in 2011 and 2012.

Table 3.

Maldives: Monetary Accounts, 2007–20 (Baseline Scenario)

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Sources: Maldivian authorities; and IMF staff estimates and projections.
Table 4.

Maldives: Balance of Payments, 2011–20 (Baseline Scenario)

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Maldivian authorities; and IMF staff estimates and projections.

There are no capital transfers or portfolio investments.

MMA liabilities, include 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.

These flows are treated as non-debt creating, as they mainly reflect intra-company financing for tourism-related projects.

Public and private external debt includes IMF, but excludes domestic foreign-currency denominated debt.

Table 5.

Maldives: Selected Economic and Vulnerability Indicators, 2011–19

(Staff’s Recommended Adjustment Scenario) 1/

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Sources: Maldivian authorities; and IMF staff estimates and projections.

CPI-Male definition.

MMA liabilities, include 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.

Data for 2015 Jan-Aug.

Table 6.

Maldives: Selected Financial Soundness Indicators

(In percent, unless otherwise specified)

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Source: Maldives Monetary Authority.
Table 7.

Maldives: Millennium Development Goals

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Source: World Development Indicators Note: Figures in blue refer to periods other than those specified.

2. The islands are highly exposed to climate change. The economic costs from climate change could become very large by the end of the century, and Maldives would significantly benefit from a reduction in global emissions (Box 1). Domestic policies—encouraging voluntary resettlement onto fewer islands over the longer term, promoting renewable energy, improving waste management and environmentally-friendly tourism infrastructure—would also help adapt and build resilience to climate change.

3. An unprecedented scale up in public infrastructure is planned which could transform the economy but brings with it large financing risks. The public investment program is aimed at further developing tourism, easing constraints in the capital Malé, and includes elements of climate change adaptation. However, public debt levels are already very high following persistent fiscal problems; and while the investment program could boost growth in the long run, it will substantially add to fiscal and external risks in the near term.

4. Political tensions clouded developments last year. Maldives’ new constitution was established in 2008, with multi-party elections. Relations between political parties are fractious which has led to bouts of political unrest over the past ten years. In 2015 tensions rose following the arrest of the former president; and a sequence of events leading to the imposition of a brief state of emergency in November.

A01ufig1

Maldives Settlement Distribution

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Source: ADB Map Department, based on data from National Bureau of Statistics (2014).

Climate Change Challenges and Adaptation Policies /1

Maldives is highly exposed to climate change from a rising sea level, sea surges and flooding alternating with drought. The country comprises 25 low lying coral atolls with 1192 islands of which 188 are inhabited. 80 percent of the total land area is less than 1 meter above the mean sea level. Most of Maldives’ islands are small, half of all settlements, including tourist resorts, and two thirds of key infrastructure are within 100 meters of the coastline—and are exposed to severe weather events. Drought and flooding are already occurring with greater frequency than in the past. High urban density in the capital Malé—home to a third of the population—adds to difficulties.

Climate change adaptation costs are high for public and private sectors, including:

  • Developing renewable energy. Maldives is reliant on fossil fuels for electricity generation and faces the highest costs in South Asia. Solar energy is being developed, but geography and population dispersion pose challenges.

  • Promoting voluntary population resettlement. Consolidating onto fewer islands over the longer term is necessary to adapt to climate change and would help reduce the costs of service provision.

  • Improving infrastructure resilience. Coastal protection of inhabited islands, resorts, airports and ports.

  • Water security. Rainwater is the main source of drinking water on many islands. Changes in annual rainfall patterns are leading to periods of drought and localized water stress, requiring desalination and strengthened water resource management policies, including by the tourism industry.

  • Protection of biodiversity and better waste management. Critical to conserve coral reefs and reduce pollution.

  • Health. Higher risks from vector and water borne diseases have been identified as an emerging challenge.

  • Tourism and fisheries industries. Protection of the coral reefs, beaches and coastal infrastructure are essential for tourism. The fisheries industry will need to adapt to changes in sea temperature.

Maldives could face the highest economic burden in South Asia from climate change and has most to gain from global action. The Asian Development Bank/UKAID estimate that without global action to tackle climate change (business as usual scenario), the average economic costs in South Asia would accelerate. For Maldives the costs could be 2 percent of annual GDP in 2050 and 12 percent of annual GDP in 2100. By contrast, global action (the Copenhagen-Cancun scenario—keeping the mean temperature rise below 2 C) could limit the economic losses to Maldives to around 3.5 percent of annual GDP by 2100. Successful implementation of the Paris COP 21 agreement is therefore critical for Maldives. It will help mobilize grants and concessional financing in key adaptation areas. Research indicates that early investment in adaptation can help limit losses in later decades; and climate change policies are most effective when fully integrated in a sustainable development strategy.

A01ufig2

Global Sea Level Rise in South Asia Without Global Action

(Model: business as usual scenario, units in meters)

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Source: Asian Development Bank/ U.K. Aid.
A01ufig3

Possible Mean Economic Costs for South Asia Under Different Scenarios

(In Percent of projected annual GDP)

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Source: Asian Development Bank. U.K.AID
1/ Sources Maldives Intended Nationally Determined Contribution to U.N. CCC; Assessing the Costs of Climate Change and Adaptation in South Asia, 2014 (Asian Development Bank and UK aid), and U.N. Development Assistance Framework (2016–2020).

Recent Developments

Growth has faltered and performance is mixed…

5. Maldives tourism has outperformed its peers in the past few years but this success faded in 2015. Growth slowed sharply from 6.5 percent in 2014 to around 2 percent (Figure 1). Tourist arrivals slowed following a collapse in arrivals from Russia, a slowing from China (after rapid market expansion) and a temporary downward blip as November’s state of emergency led to some cancellations.

Figure 1.
Figure 1.

Maldives: Comparison with Other Tourist Dependent Economies

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

6. The current account deficit widened to 8 percent of GDP, despite lower oil prices. Preliminary estimates suggest that the positive terms of trade shock was outweighed by the tourism slowdown, a large increase in non-oil imports and higher capital outflows.1 Gross official reserves fell back to $564mn at the end of 2015, although usable reserves showed an improvement, and the parallel market exchange rate premium increased to 6 percent in January 2016 from 3–4 percent in 2015. Inflation has remained contained (1.2 percent y on y in December) and further pass through from lower oil prices is expected (Figures 2 and 3).

Figure 2.
Figure 2.

Maldives: Summary of Recent Developments

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Figure 3.
Figure 3.

Maldives: External Sector Developments

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

A01ufig4

Tourism Outperformed Peers But Has Slowed

(Arrivals in year-on-year percent change)

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

1/ Countries include Mauritius, Seychelles, Bahamas and Barbados.Sources: Authorities data and IMF staff estimates.

7. Encouragingly, significantly better revenue performance contained the fiscal deficit. The 2014 fiscal deficit is estimated by staff to have reached 9.1 percent a significantly better outturn compared to 11.6 percent of GDP expected in the previous Article IV Consultation. In 2015 revenues were further buoyed by fiscal measures including the increase in the tourism goods and services tax (TGST) rate, higher business profits tax revenue (BPT) and import duties (Figure 4). Preliminary estimates suggest a small improvement in the overall deficit in 2015. Outstanding domestic arrears have also been reduced.

Figure 4.
Figure 4.

Maldives: Fiscal Developments

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

8. But public debt remains on a rising trajectory. Notwithstanding higher revenues, sustained deficits have placed public debt on a rising path to 73.1 percent of GDP in 2015, above the 60 percent limit in the Fiscal Responsibility Law—and higher infrastructure spending will drive up debt further (Figure 4). The international arbitration ruling over the authorities’ cancellation of the airport operating concession adds a significant contingent fiscal liability.2

9. Monetary conditions are easy with credit growth turning around. The Minimum Reserve Requirement and administered rates on treasury bills and bonds were halved in October 2015 as the authorities sought to stimulate credit, reduce interest costs and lengthen maturities. With a structural excess liquidity position, banks have continued to invest in treasury bills notwithstanding lower rates and have begun to take up longer maturity treasury bills. After some years of weakness, private sector credit has turned up rising 13 percent in the year to December (Figure 5).

Figure 5.
Figure 5.

Maldives: Money and Credit Developments

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

10. Financial soundness indicators are strengthening. Banks have met capital adequacy ratios and are compliant with prudential limits. Legacy non performing loans (NPLs) are being settled with the sale of tourism resorts and NPLs are down from the 2011 peak (Figure 6). However, a recent corruption case has highlighted the need to tighten banks’ operational risk management.

Figure 6.
Figure 6.

Maldives: Financial Soundness and Doing Business Indicators

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Outlook and Risks: High Stakes

A. Unprecedented Infrastructure Scale Up

11. A big push on infrastructure investment is underway to further develop the tourism sector and create a regional hub around the airport. Three main projects are in the pipeline (Box 2), costing around 35 percent of GDP and doubling capital spending in the next three years (Debt Sustainability Analysis).

Public Infrastructure Program

Three large projects are planned:

  • International airport development (cost totaling around US$828mn) will open up Maldives to increased tourist traffic. The airport is unable to accommodate large jets and is operating at close to full capacity. The new runway, plus terminal development, would increase passenger capacity fivefold (to 7.5 mn). While, geographical, logistical and size constraints are likely to cap feasible maximum tourism capacity, there is still substantial scope for expansion. Tourism and ancillary services are likely to increase once the airport development is completed. But risks include engineering complexity, implementation capacity, and the availability of financing.

  • Phase II Hulhumalé development and bridge (cost totaling around $400mn) will develop a new population center next to the international airport and Malé, to support population resettlement, ease overcrowding, and expand electricity generation at lower cost. Projects in the north and southern atolls aimed at developing hubs are in the early stages of development. Over the medium term, voluntary population resettlement, supported by employment opportunities, would help adapt to climate change and reduce the costs to government of service delivery.

  • Port relocation and development would improve resilience to climate change, ease bottlenecks and reduce transport costs—but this is at an early stage of planning with financing yet to be identified.

Staff’s Position

12. On the positive side, the economic gains from investment scale up could be substantial:

  • International experience suggests the impact on growth could be sizeable. More direct flights to small islands are also associated with a large increase in tourist arrivals (Appendix I). The airport development would remove a key growth inhibitor, potentially generating additional foreign investment.

  • There is ample room for Maldives’ tourist industry to grow. With accommodation at an average 70 percent occupancy rate, there is capacity to boost tourism in the short term and expand substantially in the long run with additional investment. Long term tourism forecasts point to robust growth in the Asia and Pacific region, with South Asia expected to be the most rapidly expanding region (see Chart).

  • Maldives is adept at attracting new markets for tourism. Tourist composition has changed markedly since 2008 with a much higher share of tourists from emerging Asia.

  • Climate change adaptation. The capital projects described in Box 2 may help diversify activity, ease congestion in Malé, and some may help build resilience to climate change.

A01ufig5

Tourism forecast to grow robustly in South Asia to 2030

(Annual growth in percent)

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Sources: UNWTO.
A01ufig6

Tourist arrivals… composition more Asia focused

2010 v.s. 2015 (In percent of total tourist arrivals)

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Sources: MMA and IMF staff estimates.

13. However, on the negative side, external and fiscal vulnerabilities would increase. The bulk of infrastructure capital and labor will be imported, requiring foreign exchange cash flow (through external loans). If growth benefits are not substantial, debt may become unsustainable, leading to financing difficulties as the infrastructure loans amortize. Strengthened management of the capital budget is needed to help realize the growth benefits (see paragraphs 20, 27 and Box 3).

14. The transformation of tourism will pose additional challenges. Maldives business model would need to change from a niche luxury market to accommodate a wider range of luxury resorts, mid-market hotels and guesthouses. Domestic as well as international competition would intensify, demand would become more price elastic, and tourist spending per head would be lower than it is today. The challenges of generating demand to meet the expanded supply would likely be greater than at earlier stages of development.

Authorities’ Views

15. The infrastructure scale up is necessary to ensure that Maldives remains an attractive tourism destination and address social and economic challenges. The airport and port are operating at close to full capacity and substantial investment is needed to accommodate growing demand. The development of Hulhumalé and the bridge is a key plank of the authorities’ policies to relieve overcrowding in Malé, further develop the regional center and encourage voluntary population resettlement which will be necessary as the country adapts to climate change.

B. Outlook and Risks: A Challenging Global Environment

Staff’s Position

16. Growth rises moderately in 2016 against an uncertain global backdrop, and infrastructure scale up adds a little to potential in the medium term.

  • Growth picks up to 3.5 percent in 2016 supported by a modest recovery in tourism—a marketing initiative aimed at Asia plus new airline services should boost tourism arrivals; higher transport and electricity generation activity is also likely.

  • The current account deficit remains close to current levels in 2016 as the highly import intensive infrastructure projects come on stream and offset the improvement from lower oil prices, and widens beyond 2016 with higher infrastructure spending. In the near term, infrastructure spending goes hand in hand with external loan disbursements, but financing pressures could build as loans mature.

17. The medium term outlook is clouded by uncertain returns from infrastructure scaling up, and less robust growth in Asia. Staff factor in a ½ percent of GDP per year increase in medium-term potential growth from tourism development—consistent with public investment efficiency in line with the average of less developed economies. More positive growth outcomes could be achieved with higher public investment efficiency (Appendix I). Growth peaks at 5 percent, somewhat lower than the 6.5 percent reached during the initial phase of tourism development.

High Vulnerability, Risks to the Downside Dominate

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18. The risks are largely on the downside (Appendix IV):

  • A sharper than expected slowdown in China and persistent U.S. dollar appreciation. Chinese outbound tourism has broadly held up so far. But a slowdown would dent tourism arrivals. With tourist resorts pricing in U.S. dollars, a further U.S. dollar appreciation could also dampen growth.

  • Policy mistakes could compound vulnerabilities. External debt-financed capital expenditure will add to already elevated debt levels. Other tax incentive proposals could erode the tax base (paragraph 42). A re-emergence of political tensions would exacerbate risks.

19. There is little policy space to respond to risks. Reserves are low and there is no fiscal space to absorb shocks (including climate change related shocks). Fiscal slippage would likely be accompanied by capital outflows, pressure on the parallel foreign exchange market premium, and an erosion of official reserves. In those circumstances an accelerated fiscal adjustment would be needed with measures to shore up revenues as well as sustained and durable expenditure restraint.

…however, with careful fiscal management, there is upside potential…

20. Imposing greater fiscal discipline at an early stage would lead to better outcomes. Careful planning of capital projects (see paragraph 27 and Box 3), revenue raising efforts, and durable expenditure control would raise investment returns, catalyze additional financing and avert the need for more abrupt adjustment at a later stage.

Authorities’ Views

21. The authorities expect growth to bounce back to over 6 percent in 2016 and to remain stronger than projected by staff over the medium term. They expect sizeable domestic spillovers from public investment, in construction and tourism, which would also boost growth in the medium term. The infrastructure scale up is seen as necessary to address the bottlenecks in the economy and expand production capacity. On fiscal policy, non-tax revenues are expected to rise sharply and this would help cover capital spending; and spending plans would be adjusted if revenues are not forthcoming.

Policies for Fiscal Sustainability

Staff’s Position on the Budget

22. The 2016 Budget is expansionary. Public spending on wages, subsidies and social welfare has risen sharply in recent years. But in 2015 significant and encouraging progress was made addressing the deficit through revenue raising measures, a public employment freeze and streamlining of electricity subsidies. The deficit narrowed. Disappointingly, the 2016 Budget reverses this progress and Staff is not confident that the authorities’ deficit targets can be met:

  • Revenues. The authorities project a substantial boost to non-tax revenues including from the setup of special economic zones (SEZs) and new resort leases. Staff’s view is that such a large increase in non-tax revenues cannot be attained, as investors in the SEZs have yet to be identified and resort openings would need to accelerate sharply to bring in the revenues envisaged.

  • Expenditures. Differences on overall expenditures are less—though staff projects less capital and more current spending than the authorities. Staff and the authorities agree that firm control over the public sector wage bill is needed but there are also strains on healthcare, and social security spending. The reversal of the decision to fully eliminate electricity subsidies will add to costs.

Preliminary Fiscal Projections 2015-2017: Authorities and Staff

(in percent of GDP)/1

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In addition to current and capital expenditure, staff’s expenditure estimates include gradual clearance of outstanding domestic arrears.

23. Without fiscal adjustment, debt is on an unsustainable path. Staff projects that public debt could reach 121 percent of GDP in 2020; and would continue rising, substantially above in the Fiscal Responsibility Law (FRL). The risk of external debt distress has deteriorated to a high risk rating. Recent debt contracts have been on semi-concessional terms even though Maldives remains PRGT eligible.

Staff’s Fiscal Policy Recommendations

24. Durable fiscal adjustment is needed to prevent growing fiscal and external imbalances. The 2014 Article IV consultation emphasized that a sustained fiscal adjustment effort was needed with stronger expenditure restraint. The 2015 budget included measures which were a significant step forward, although they relied more on revenue raising efforts than on expenditure restraint. It was emphasized that careful planning of infrastructure investment would help ensure a bigger boost to growth. Staff supports priority public infrastructure spending where feasibility studies demonstrate viability (Box 3). But additional fiscal measures are needed to contain the increase in debt—now requiring both expenditure restraint and further revenue measures. Since the limits in the FRL are unlikely to be achieved in the near term, interim targets for the current primary balance could be used to anchor adjustment. Together with more strictly prioritized overall capital spending, this would help stabilize the debt ratio by 2020 and bring debt levels down thereafter. A medium term debt strategy—guided by the FRL—would help anchor the path. The growth impact should be contained as Maldives has low multipliers.

A01ufig7

Baseline and Staff’s Illustrative Scenario

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

25. Feasible measures could improve the current primary balance by 5.5 percentage points of GDP by 2020.

  • User fees should be charged for key infrastructure including a bridge toll and increase in airport departure tax.

  • Other revenue raising measures. Maldives has a well administered tax system that performs better than in neighboring and other comparator economies (see Appendix II). This can be leveraged to bolster revenues. Broadening the base of business profits tax (BPT) and increasing rates on other taxes should be feasible as the BPT rate is low compared to the Asia Pacific region and the tourism goods and services tax is not out of line with other competitor economies.

  • Expenditure saving. The authorities focus on the public sector wage bill is welcome. The public service review should be restarted but it will take time to plan and implement, while ensuring key functions are preserved. A baseline costs review of the healthcare system would identify emerging pressures and scope for savings. Plans to better target social welfare and food subsidies through means testing and to eliminate the electricity subsidy (the latter postponed) are welcome. SOE transparency and oversight should be strengthened to reduce rent seeking. Savings could also be made through greater use of renewable energy.

Fiscal Adjustments to the Primary Balance 2016–20201/

(In percent of GDP relative to the baseline scenario)

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Source: IMF staff estimates

This table shows the difference between baseline and adjustment scenario deficit paths reflecting the direct and indirect impact of fiscal measures, including the impact on growth from fiscal consolidation.

26. The Paris COP21 agreement opens new opportunities for financing for climate change adaptation. A more strategic approach, together with a medium term debt plan, would help Maldives obtain better terms. Presenting the climate-change adaptation features and quantifying costs in each Budget would help demonstrate Maldives’ development strategy and could mobilize resources available to small states following Paris COP 21.

27. Better public financial management is a prerequisite to support fiscal sustainability. The 2014 Public Expenditure and Financial Accountability assessment (PEFA) and recent technical assistance have confirmed that deep rooted expenditure control problems remain. Difficulties include unrealistic budgets with insufficient spending allocations, unenforced expenditure ceilings and reshuffling of spending between activities/ministries. Completion of the Public Accounting System would address some but not all of these problems. Staff’s technical assistance has recommended wide-ranging reforms (Table 8), including to public investment management (Box 3). Strengthening budgetary institutions would improve investment outcomes. An economic management team, building on the Economic and Youth Council and including the MMA, could be established to steer investment priorities and instill discipline. Commitment by the Majlis to the aggregate spending envelope and composition of spending would also help.

Table 8.

Public Financial Management Reform Plan (2015–2018)

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Commitment at the political level by the Majlis (Maldives’ parliament) to the spending envelope and the composition of spending in addition to the budget aggregate would be important. The Reform Plan was developed by the IMF and World Bank following the 2014 PEFA.

Public Investment Management Efficiency

Improvements in public investment management (PIM) can significantly enhance the productivity of investment. In many countries infrastructure scale-up initiatives have not generated a sustained growth impetus as inefficient processes undermined public investments, crowded out private investments and saddled countries with high debt (“Making Public Investment Efficient”, IMF 2015).

Maldives’ budgeting and planning process is weak. Capital expenditure proposals are not prioritized, instead a list of projects is aggregated from all levels of government, with parliament adding projects. Capital budgets are not aligned with implementation capacity and are undertaken with only partial funding identified. The practice of deferring capital projects within the year when fiscal revenue outturns disappoint is inefficient and inhibits planning; new projects are often launched and ongoing projects left uncompleted.

Maldives could strengthen all aspects of the PIM process. A rigorous vetting and selection process (with feasibility studies) would ensure project viability. Ceilings for capital expenditure should focus on finishing committed projects before proposing new spending. IMF technical assistance has been offered to follow up in these areas. A revised annual budgeting and implementation process similar to the one adopted by Chile has been proposed by staff—the process eliminates projects with no financial viability in the pre-investment phase; starts political debate over projects after the pre-investment phase; and has mandatory steps for each project decision: idea, pre-feasibility study, feasibility study, and design.

Authorities’ Views

28. The authorities expect substantial growth gains from infrastructure scale-up—with the payoffs enabling debt reduction in the medium term. They do not see a need for higher tax rates, although they are open to considering base broadening and user fees for some infrastructure projects. They are optimistic that the increase in external debt is manageable and that non-tax revenues, expenditure restraint and a boost to growth will be sufficient to repay infrastructure project loans. If revenues disappoint they would defer some lower priority capital spending. On expenditures restraint, the public sector hiring restrictions will continue to be enforced and they will consider undertaking a public service review. The authorities are looking at better targeting subsidies and social welfare schemes, as well as streamlining healthcare expenditures. Technical assistance is supporting the strengthening of public financial management, including the capital budget, and the roll out of the public accounts system. Staff’s proposal to quantify and present the climate adaptation policies in each Budget is welcome.

External Sector Assessment

Background

29. The real exchange rate has appreciated by 30 percent since the 2011 devaluation with a 10 percent increase over the past year. Since the April 2011 devaluation, Maldives has operated within a wide exchange rate band at 20 percent either side of Rf 12.85 per dollar but in practice the rate has stayed at the weakest end of the band, operating like a de facto peg to the U.S. dollar.3 The real exchange rate has risen as the U.S. dollar has appreciated against the euro, with increase higher than for some of Maldives’ competitors.

A01ufig8

REER Appreciation since 2014

(Dec 2015 cf Dec 2014, percentage change)

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Sources: IMF INS database and staff calculations.

The Operation of Maldives Parallel Foreign Exchange Market

Maldives has a stabilized exchange rate; the capital account is very open but there is an active parallel foreign exchange market with a stable premium. With low reserves, the MMA is able to supply only a small fraction of foreign exchange demand to commercial banks. Excess demand leads to the existence of a parallel market. The tourist industry appears to be a key supplier and driver of the parallel market. The scale of the premium has been stable fluctuating from 2–15 percent since the GFC (2–6 percent in the past year) possibly reflecting the oligopolistic nature of the market. Flows are difficult to monitor as many transactions are conducted abroad and do not go through the domestic banking system.

The parallel market premium and shortage of foreign exchange at the official rate gives rise to exchange restrictions and multiple currency practices (MCP) subject to IMF approval under Article VIII Sections 2(a) and 3./1 Maldives is an Article XIV member but no longer maintains any measures under Article XIV. The official exchange rate used by MMA for government transactions may deviate by more than 2 percent from the prevailing market exchange rate and there is no mechanism to prevent such a spread which gives rise to a multiple currency practice. Although these measures are non-discriminatory, Fund approval is not recommended as they are unlikely to be temporary and would be eliminated only once official reserves levels are higher and the fiscal position has improved. Over the past two years the MMA has eased rationing by increasing the foreign exchange provided to commercial banks and adjusting amounts in line with seasonal patterns.

1/ See Informational Annex.

30. Despite lower oil prices, the current account deficit is estimated to have widened in 2015. The deficit will widen as infrastructure projects are implemented but this will be matched by external financing inflows and does not pose an immediate financing problem, although rollover risks will rise in the medium term.

Staff’s Position

31. The external sector position looks moderately weak. The assessment is difficult given the large turnover in the parallel foreign exchange market, possible underestimation of tourism spending, and likely data revisions. But, available evidence points in one direction:

  • Standard indicators (Box 5) point to a moderately weak external position and moderately overvalued real exchange rate. The loose fiscal stance explains most of the policy gap.

  • Reserves are low relative to adequacy metrics. The parallel foreign exchange market premium also points to some overvaluation (Box 4).

  • Infrastructure spending could add 7–10 pps of GDP a year to the current account deficit.

  • Further U.S. dollar appreciation could hurt competitiveness.

32. With a moderately weak external position and pressures likely to build, corrective action is needed. Fiscal adjustment would help improve the external position and support the exchange rate going forward. A peg/stabilized regime is appropriate for Maldives given the small scale, high openness, dollarized nature of the economy, and large seasonal variation in revenues. The U.S dollar link was historically appropriate given a natural hedge of the tourism sector and U.S. dollar denominated imports and financing. With greater tourism from Asia, prospective financing from the region and the future possibility of greater exchange rate flexibility in China, consideration could be given in the medium term to reviewing the operation of the stabilized exchange rate.

Authorities’ Views

33. The authorities are committed to the stabilized exchange rate regime in the current band and agree that improving the fiscal position is the best way to sustain it. They are of the view that large capital spending will generate growth which will help contain the fiscal deficit going forward. The stabilized exchange rate regime and the U.S dollar link remains appropriate and no exchange rate adjustment is needed at present. The increase in the parallel market premium in January 2016 is likely to be seasonal and therefore temporary; it has not been passed on to consumer goods prices suggesting it is not too high. The premium is likely to fall back to 3 to 4 percent, but as it is structural in nature, it is not expected to be eliminated. The authorities agree that there is likely to be no change on Article VIII issues until official reserves levels have increased and the fiscal deficit narrowed.

Maldives: External Sector Assessment: Quantified Approaches

Current account approach points to a moderately weak external position. The current account (CA) equation from the extended External Balance Assessment (EBA-lite) methodology points to a CA norm of -4.0 percent of GDP, and suggests that the 2015 CA is moderately weaker than the CA norm. 1/ Loose fiscal policy accounts for 1.7 percentage points of the policy gap. The CA gap for Maldives reflects a saving-investment imbalance with a weak savings culture and persistent fiscal deficits. However, there is uncertainty surrounding the CA estimate for 2015 which is preliminary and revisions are likely. Also, estimates of tourism spending in Maldives may be underestimated (see Maldives 2014 Article IV Consultation). These factors may explain the large residual of 2 percent of GDP. Looking ahead the current account is likely to remain weak relative to fundamentals and desirable policies as infrastructure spending will keep the deficit wide.

Real exchange rate methods point to a moderately overvalued exchange rate. Based on the EBA-lite CA methodology, staff assesses the REER gap to be around 11 percent. Simple trends—such as using a HP filter—also point to an overvaluation of similar magnitude.

Maldives: EBA-lite CA analysis

article image
A01ufig9

Maldives: Real Effective Exchange Rate

(Index 2010 = 100)

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Sources: IMF Information Notice System (INS) data and staff calculations.

Reserves remain low relative to adequacy metrics: Staff’s reserve adequacy framework for low income countries suggests that the optimum level of usable reserves for Maldives is in the range 3–7.5 months of imports for a fixed exchange rate regime. The estimates depend on the assumptions made about the net cost of holding reserves, external funding costs and economic size. Actual reserves—both usable and gross—are below the adequate level of import cover suggested by the range of metrics.

A01ufig10

Reserve Adequacy Assessment

(In months of current imports)

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

1/ EBA-lite applies a modified EBA methodology to a larger country sample (149 countries, compared with 49 in the case of EBA).

Supporting Monetary and Financial Policies

Background

34. Monetary policy was eased in 2015 to boost credit, reduce interest costs and lengthen maturities on sovereign bonds. The MRR was halved to 10 percent and administered yields on treasury bills and bonds were cut to 3–4.6 percent. With excess liquidity, banks and the pension fund have continued to purchase treasury bills; and have taken up longer term bonds. Credit growth has begun to accelerate.

35. Access to finance remains difficult and the authorities are seeking ways to cut costs. Maldives ranks 116th on Doing Business indicators (World Bank) for access to finance by small and medium sized enterprises(SMEs), and financial inclusion is challenging with the high cost of providing services to remote islands (Appendix III). The authorities’ initiatives include concessional and Islamic financing to SMEs; and mobile banking services. They have also announced a plan for sovereign guarantees for private sector loans in the tourism sector as a way to rejuvenate investment in tourism resorts mothballed since the global financial crisis.

Staff’s Position

36. The overall monetary stance appears relatively loose, especially given the expansionary fiscal policy setting and a wider current account deficit. The 2014 Article IV consultation noted that the policy stance was eased during 2014 with measures that staff viewed as being aimed at facilitating government financing. Following further easing, the policy stance appears relatively loose. While previously administered rates were very high, they are now below the rates in neighboring countries. Though financing pressures are not currently evident, a tightening of yields in small steps may be needed if financing shortfalls emerge. The authorities should also stand ready to increase the MRR if the external imbalance looks to be widening, capital outflows increase and there is pressure on reserves. Open market operations could help mop up liquidity. Over the longer term, once the fiscal position improves, the MMA should move back to auctions and market based financing of government debt.

37. Facilitating credit:

  • Sovereign guarantees to the private sector. The scheme is a costly way to promote credit and adds to contingent fiscal costs. Staff recommends dropping or strictly limiting it. If implemented, the following features would be important—ensure risk sharing with banks; provide guarantees only on new loans (to residents); and impose fees to build a provisions fund against a call on guarantees.

  • Other ways to improve access to finance. Credit growth has been subdued until recently given public financing needs, high NPLs, and limited information on counterparty risk. Constraints could be eased: by fully establishing the credit information bureau to aid risk assessment; and by clarifying secured creditors’ legal rights regarding collateral plus more timely enforcement of the bankruptcy law to help banks more easily recover losses and provide a better environment for the extension of loans.

  • Encouraging savings. Developing mobile money through the non-bank (mobile phones) should help facilitate financial intermediation across the country. The World Bank FSAP development module may also identify ways to strengthen the savings culture.

38. There is scope for further supervisory strengthening. Compliance with prudential limits has improved and NPLs are almost fully covered. Nonetheless there are areas for strengthening and the MMA’s is increasing its focus on operational, liquidity and market risks alongside credit risk; as well as building analytical capacity. Plans to relax single borrower limits for some infrastructure projects backed by collateral will need to be strictly controlled. Risks stemming from high exposures to the tourism sector, lending concentration and the rapid growth of construction credit deserve particular attention. Given the high footprint of foreign banks in Maldives, it is important that the authorities access the views of all home regulators. Reconsidering the types of licenses available to foreign exchange money changers could assist with prioritizing supervision over large players. Regular data collection, analysis and closer supervision of large fx operators would assist policy decisions. A safeguards assessment of the MMA was conducted in 2010; progress has been made on many recommendations (see Informational Annex), although the recommendation to enhance MMA’s autonomy and accountability through legal reform remains outstanding.

Authorities’ Views

39. The authorities view the monetary policy stance as appropriate. The significant reduction in the MRR in 2015 had helped to turn around a lackluster domestic credit market and credit expansion in the second half of the year is viewed as positive. The MMA is also mindful that credit growth should not accelerate too rapidly. The relaxation of the single borrower limit will only be in clearly circumscribed circumstances, and it will be closely monitored on a case by case basis to contain financial stability risks. More generally the MMA is bolstering its supervisory capacity and is focusing more attention on operational and other risks. The impact of the lower yields on treasury bills and the bond market is yet to be fully observed, but the banks have plentiful reserves and tap auctions have typically been adequately subscribed. The authorities noted that the sovereign guarantee scheme will be limited in aggregate size and they plan to take staff’s views into account when designing the scheme.

Building Longer Term Resilience

Background

40. Maldives’ geography—critical for tourism—poses a climate change challenge and imposes high costs. The costs of service provision across small and far flung islands is unavoidably high, and is compounded by the costs of building resilience to climate change and disaster relief management (see Box 1). Maldives is already investing in a number of areas to adapt to climate change—food and water security, infrastructure resilience, public health, coastal protection, fishing industry, waste management and renewable energy—but focus on these priorities is often diverted by poor planning and the need to deal with a weak fiscal position.

41. The government is promoting long voluntary resettlement to regional hubs and improving transport connectivity. This would enable higher quality service provision at lower cost in key areas such as health, education and water management and would help contain the cost of climate change adaptation. However, resettlement will take place only over many years as it requires changes in the social fabric and adequate provision of housing.

42. The SEZs are part of the government’s strategy to diversify into labor intensive sectors such as off port shipping services, IT and financial services. The SEZs (with a 40 percent limit on tourism activity) will encourage mixed activity into labor intensive sectors such as off-port shipping services, IT and financial services and help diversification.

Staff’s Position

43. Careful planning and prioritizing infrastructure investment scale up would ensure that it adds more to growth. It would generate better growth outcomes, raise foreign investment and unlock cheaper financing. Greater predictability in investment and spending would also reduce waste. The development of regional hubs and voluntary resettlement will also cut the cost of public service provision. But resettlement also brings with it the challenge of providing the relocated population with access to traditional ways of making a living or viable alternatives, and adequate housing.

44. Establishing a detailed national development strategic plan would foster coordination of climate change resilience and other plans and create employment opportunities. Such a plan would set current infrastructure plans in context and could identify scope for prioritization. It could include more systematic climate adaptation planning and be supplemented by reporting of the climate adaptation impact of the Budget, including a quantification of climate change costs. The strategy could include ways to better prepare and equip Maldivian youth for employment in the tourism and supporting service sectors.

45. Ring-fencing SEZs. Staff agrees that development of the SEZs could help diversify economic activity in labor-intensive sectors. But the SEZs will need to be strictly ring fenced so as not to substantially add to incentives and undermine the tax base. Keeping the tax system broad based, simple, transparent, stable and automated is important as it reduces scope for corruption and bargaining. Safeguards are also needed to ensure that financial institutions setting up an SEZ face equivalent prudential, supervisory and reporting requirements as those onshore (including anti money laundering provisions).

46. Data gaps could inhibit policy making. Priority should be given to passage of the statistics law (planned for 2017) which provides data collection powers to the MMA, Maldives Internal Revenue Authority and the statistics office; and would improve private sector data. The same requirements should apply to entities operating in SEZs. Continued support through technical assistance in the areas of external statistics, national accounts and fiscal areas is a high priority.

Authorities’ Views

47. Climate change adaptation measures features high on the government’s medium term agenda. The government’s voluntary resettlement policy should generate significant cost savings in terms of service delivery which will help improve fiscal position and create space for development activities. Other climate adaptation measures over the medium term include progressive reduction in thermal generated electricity—to raise renewable capacity—to provide 30 percent of daily peak load by 2018 and schemes for harvesting rain water for domestic purposes.

48. The authorities are also hopeful that the SEZ law will bring about much needed diversification of the economy. The scheme includes a generous tax incentive scheme which comprises of a blanket 10-year tax holiday (on land tax, GST and income tax) for all approved ventures. The authorities are hopeful of managing the tax expenditures and believe that the additional economic activity created will have long term favorable impact on the economy.

Staff Appraisal

49. Maldives developed rapidly reaching middle income levels driven by tourism development. 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 has remained contained and further pass through from lower oil prices is expected this year.

50. Substantial infrastructure scale up could transform the economy but brings with it external financing risks. Airport development has been shown to have significant growth effects in other small tourism economies and other projects will support the authorities’ efforts to build resilience to climate change. However, after good progress in reducing the deficit, the 2016 Budget is expansionary driven by capital spending. Public debt will rise from already elevated levels, and prospective external borrowing indicates a high risk of debt distress.

51. Durable fiscal adjustment is needed to prevent growing fiscal and external imbalances. Capital expenditures should be prioritized and accommodated only where feasibility studies show the benefits clearly outweigh the costs. Additional restraint is needed to contain the increase in debt. Staff would recommend a fiscal adjustment of around 5.5 percentage points of GDP by 2020. User fees should be charged for key infrastructure. Maldives well administered tax system can be leveraged to generate higher revenues, through base broadening and higher tax rates. Firmer control of current spending is needed—including the wage bill and healthcare costs. Plans to better target subsidies should move forward. Stronger public financial management, including over capital budgets would raise the probability of successful fiscal adjustment.

52. The external position looks moderately weak. The current account deficit has widened, the real exchange rate appreciated last year following U.S. dollar appreciation and reserves remain low relative to adequate levels. Notwithstanding uncertainties, overall the external position looks moderately weaker than fundamentals and desirable policies; and the real exchange rate moderately overvalued. A tighter fiscal policy stance would improve the external position and support the exchange rate. A stabilized exchange rate regime continues to be appropriate for Maldives. The parallel market premium of greater than 2 percent, the rationing of foreign exchange and an official exchange rate used by MMA for government transactions that may deviate by more than 2 percent from the prevailing market rate, leads to multiple currency practices and exchange restrictions. Without a timetable for removal of these measures, Fund staff does not recommend their approval.

53. Support from monetary and financial policies would help stabilize the external position. The current monetary stance appears relatively loose, especially given expansionary fiscal policy. Small step increases in administered rates may be called for and the MRR may need to be raised if capital outflow pressures emerge. The MMA’s focus on further strengthening supervision beyond credit risk should continue.

54. Building climate change resilience, improving public service delivery and economic diversification are key medium term challenges. Maldives could face substantial long run economic costs from climate change. Encouraging voluntary resettlement to regional hubs and better connectivity is an important part of the authorities’ adaptation strategy. It would also reduce the cost of service provision but will take many years. Establishing a detailed national development strategic plan would help ensure that investment programs are well coordinated and bring about growth dividends. Diversification of economic activity in new sectors through SEZs is welcome but strict ring-fencing of SEZ tax exemptions is needed to preserve the tax base.

55. Work strengthening statistics is yielding good returns and should be continued. A statistics law would help greatly improve private sector data provision.

56. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

Appendix I. The Benefits and Costs of Scaling Up Using a Debt Investment Growth Model

International evidence shows that the benefits of airport development could be substantial. The airport expansion in particular could have a substantial growth impact, expanding capacity, leading to lower airfares and boosting tourism demand:

  • Airport development. Punta Cana has become a key Caribbean tourist destination as its airport became the most important in the Dominican Republic: raising numbers from 850 thousand tourists (35 percent of all arrivals in the country) in 2000 to nearly 3 million (65 percent of arrivals) in 2014 (an increase of almost 240 percent).

  • Culiuc (2014) suggests that the presence of direct flights to small islands is associated with a large increase in tourist arrivals. While estimates are sensitive to estimation methodology and control variables, increases range between 20-80 percent. Acevedo et al (2015) finds that increasing the number of flights to tourist destinations is the most effective way to boost tourist arrivals.

But there are fiscal as well as growth implications from infrastructure scaling up. Research in the October 2014 WEO, Is it Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment, showed there are historically wide variations in the macroeconomic outcomes of public investment for emerging markets and less developed economies—with inefficient investment often leading to larger fiscal deficits without substantially improving the quality of public assets.

A debt investment growth (DIG) model traces the possible growth and fiscal impacts for Maldives (see Selected Issue).12 The DIG model takes into account the highly open nature of Maldives’ economy, high import intensity, and the size and pace of investment plans. Since the benefits are mainly to the tourism sector, and supporting FDI will be needed in resorts and transportation to fully exploit the enhanced infrastructure, there is greater than usual uncertainty about the economic impact. This is captured by using alternative rates of return for public capital.

  • The baseline demonstrates potential for higher growth. With the return on public capital in line with the average drawing on evidence from less developed economies, the model suggests a temporary by sustained increase in real growth rates of ½–¾ percentage points can be attained (Figure A (right panel), blue lines). But higher growth rates can be achieved with greater efficiency of public investment.

  • The impact on public finances is also large. An increase in tax rates of more than 6 percentage points to 19 percent would be necessary to finance the scaling up and limit the impact on the deficit in the absence of further adjustments, even allowing for a substantial amount of concessional debt. A more balanced fiscal response with a smaller increase in taxation could be achieved with other, complementary adjustments in the budget, such as in public transfers—to limit the increase in taxes to 15 percent would require a temporary cut in transfers of 2.5 percent of GDP. The authorities’ current plans are more heavily weighted to external debt than would be suggested in this model.

  • Sound project implementation is crucial to boost private sector confidence and to reap all the potential benefits. Increasing the return on public investment from 25 to 50 percent, could increase output growth by an additional 0.6 percentage points for 3–4 years after completion, and by around 0.3 percentage points for 6–7 years. Private investment and capital, as well as private consumption, would all increase substantially over the medium-to-long term. Poor project management that results in lower public investment efficiency would not add much to growth but would drive the debt level higher.

Chart 1.
Chart 1.

Macroeconomic Impact

(i) baseline 25 percent return (blue lines); (ii) 50 percent return (green lines) (iii) 15 percent return (red lines)

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Chart 2.
Chart 2.

Public finance impact

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Appendix II. Maldives: Tax System – Keep it Simple, Keep it Fair

Maldives tax system and revenue performance compare favorably to South Asian economies and Caribbean islands. Maldives tax system is relatively new with a small number of broad based taxes that enables efficient tax administration and strong revenue collections. The tax system being newly established operates efficiently and productively and has not been distorted with tax incentives which other comparators find to be the main cause for their tax base erosions and weakening revenue performances. As the tax system matures, it is important to maintain its strengths as a simple, fair and effective framework and avoid introducing tax incentives. Experience shows that tax incentives carry a significant risk to the long-term revenue generation capacity.

Maldives Special Economic Zones Act 2014 (SEZ) sets unlimited discretionary space for tax incentivizing of investment, which carries significant risks to the current simple, effective and efficient tax system. SEZs are specifically designated geographical areas with special regulations and financial incentives aiming at attracting investment and job-creation. Maldives plans to set up free trade, offshore financial services, industrial, export processing, and ports SEZs. Incentives include wide-ranging exemptions from import duty, BPT, GST, and withholding taxes, and concessions in bringing in expatriate workers and land taxes. There are many shortcomings to SEZ framework, particularly:

  • Unlimited room for discretion. Respective roles and margins of discretion are not clearly defined. Some incentives are automatically available (“guaranteed”), while more generous ones are subject to negotiation. The act does not define roles, accountability, reporting, and oversight frameworks for issuing, negotiating, and evaluating incentives.

  • Unlimited room for tax incentivizing. The act does not define nature of tax incentives and its limits. Potentially extremely broad tax exemptions, holidays, rate reductions, and various forms of deductions could be obtained affecting BPT and GST legal frameworks.

Discretionary tax incentivizing under SEZ may undermine health, stability and efficiency of the overall tax system. SEZ sets open windows for interaction between various Special Interest Groups (SIGs) and government opening unlimited space for using tax incentivizing. Similar to Caribbean countries and Sri Lanka, this will invite competition among potential investors, business community, individuals to seek tax regime customizations which will be made available only for these groups, protecting them from any unwanted competition. More importantly, this will make tax system prone to annual injections of new tax incentives, eroding the tax base and reducing the revenue potential. As a result of these efforts, current efficient and effective tax system will become increasingly complex, unpredictable, and unstable. More tax incentives are granted under SEZ, more government would need to scramble to find alternative revenue sources, increase tax rates, and bring on new taxes to compensate for the tax base erosion and revenue reduction from incentivizing.

Consideration should be given to tightening SEZ legislation with a view to limiting discretionary space and protecting integrity of the existing tax system. In particular: i) define roles, responsibilities, accountability and reporting framework for various agencies involved in tax incentivizing decisions; ii) use alternative incentive mechanisms than the tax legislation; iii) establish gatekeeper role for ministry of finance and treasury for any tax incentivizing decisions with a view of protecting integrity of the tax system; iv) quantify and report all tax incentives as part of budget submission; and v) establish and enforce quantitative ceilings for tax incentives, if such being considered.

Lessons: Pros and Cons for Tax Incentives

article image
Source: IMF FAD TA (2015)
Chart 1.
Chart 1.

Maldives: Tax Productivity

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Appendix III. Financial Inclusion in the Maldives

Financial Inclusions (FI)—access to formal financial services by households and firms—is especially challenging for Maldives, given the high transaction and sunk costs of providing these services to the sparsely populated and remote islands.1 Despite these challenges, Maldives compares relatively favorably on two measures of FI: the number of bank branches and the number of ATMs, if measured in terms of area (Chart 1). Additionally, it also scores relatively well on FI amongst some developing economies in Asia according to a study done by the Asian Development Bank. 2 However, because of the high population density in the capital and larger islands, these indicators are pulled down when measured on a per 100,000 adults basis highlighting the problem that FI on the small remote islands is still very low.

Chart 1.
Chart 1.

Geographical Coverage in the Maldives

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Improving financial access by marginalized groups would help them raise income (reducing its volatility), and build assets, promoting growth and improving resilience to economic shocks. As part of their efforts to increase FI, the Maldives authorities are scaling up their support to SMEs including through concessional and Islamic financing, reviving small scale industries, encouraging female labor force participation and prioritizing government contracts to SMEs. The Bank of Maldives has also increased its FI efforts by providing a range of services via dhoni banking units to the remote islands. They have also announced that plans are under way to provide banking services to all islands by 2017. In addition, the FIRST Initiative has also launched a project—Enabling a Non-Bank Mobile Money Solution—that addresses financial inclusion targeting the population in the outer islands where financial infrastructure is largely absent.3

Challenges persist and credit remains expensive and exclusive due to: (i) limited information about counterparty risk (the coverage of the credit registry is limited); (ii) a lack of accurate information on collateral (given the absence of an electronic collateral registry) and complexities in the legal framework. Credit diversification is therefore limited and businesses not in the perceived profitable sectors have difficulties in obtaining credit. Furthermore, harnessing up to date technology such as mobile and internet banking would help the population in remote atolls to have access to basic financial services and reduce transaction costs. Internet banking is available from the major banks but mobile banking is still in its nascent stage and the widespread scope of telecom connectivity is still underutilized.

Measures to improve inclusion include: revamping the credit registry and pushing for technology like mobile banking to combat geographical constraints in parallel to schemes to promote the ease of credit to women and youth via SME development. Strengthening financial literacy programs, conducting surveys to understand the needs of minority groups and their constraints, making use of existing networks like the postal system for financial awareness would also help.

Chart 2.
Chart 2.

Demographic Coverage in the Maldives

Citation: IMF Staff Country Reports 2016, 135; 10.5089/9781484356661.002.A001

Appendix IV. Maldives: Risk Assessment Matrix

article image
The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.
1

Revisions to BOP data are likely as the methodology improves with IMF technical assistance.

2

In 2012 the authorities cancelled the airport concession contract with GMR and Malaysia Airports Berhad to upgrade and operate Malé airport. In June 2014 international arbitration ruled in favor of GMR. Maldives Airport Company Limited (MACL) paid $4mn in immediate costs. A final settlement has yet to be reached.

3

The de jure exchange rate regime is a pegged exchange rate within horizontal bands.

1

Buffie, E., Berg, A., Pattilo, C., Portillo, R. and L.-F. Zanna, 2012, “Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces,” IMF Working Paper, WP/12/144.

2

For model details see Selected Issues Paper “Scaling up public expenditure on infrastructure” (forthcoming)

1

FI is measured in three dimensions – access, usage, and quality of financial services and products. A total of 24 key categories endorsed by G20 leaders measure the three dimensions of financial inclusion. See http://www.gpfi.org/featured/g20-basic-set-financial-inclusion-indicators. Given that the authorities only submit data to the Financial Access Survey and not to FINDEX, only data on access is currently available (the authorities plan to report to FINDEX in 2016).

2

Financial Inclusion, Poverty, and Income Inequality in Developing Asia, ADB Working Paper No. 426. http://www.adb.org/sites/default/files/publication/153143/ewp-426.pdf

3

FIRST was created in 2002, with the primary mandate of promoting the implementation of the Financial Sector Assessment Program and is currently supported by five donors: the Department for International Development of the United Kingdom, Germany’s Federal Ministry of Economic Cooperation and Development, the Ministry of Finance of Luxembourg, the Ministry of Foreign Affairs of the Netherlands, and the State Secretariat for Economic Affairs of Switzerland, as well as the World Bank Group and the IMF.

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Cover IMF Staff Country Reports
Maldives: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Maldives
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2016: Issue 135
Publisher:
International Monetary Fund
ISBN:
9781484356661
ISSN:
1934-7685
Pages:
82
DOI:
https://doi.org/10.5089/9781484356661.002

Maldives Settlement Distribution

Global Sea Level Rise in South Asia Without Global Action

(Model: business as usual scenario, units in meters)

Possible Mean Economic Costs for South Asia Under Different Scenarios

(In Percent of projected annual GDP)
Figure 1.

Maldives: Comparison with Other Tourist Dependent Economies
Figure 2.

Maldives: Summary of Recent Developments
Figure 3.

Maldives: External Sector Developments

Tourism Outperformed Peers But Has Slowed

(Arrivals in year-on-year percent change)
Figure 4.

Maldives: Fiscal Developments
Figure 5.

Maldives: Money and Credit Developments
Figure 6.

Maldives: Financial Soundness and Doing Business Indicators

Tourism forecast to grow robustly in South Asia to 2030

(Annual growth in percent)

Tourist arrivals… composition more Asia focused

2010 v.s. 2015 (In percent of total tourist arrivals)

Baseline and Staff’s Illustrative Scenario

REER Appreciation since 2014

(Dec 2015 cf Dec 2014, percentage change)

Maldives: Real Effective Exchange Rate

(Index 2010 = 100)

Reserve Adequacy Assessment

(In months of current imports)
Chart 1.

Macroeconomic Impact

(i) baseline 25 percent return (blue lines); (ii) 50 percent return (green lines) (iii) 15 percent return (red lines)
Chart 2.

Public finance impact
Chart 1.

Maldives: Tax Productivity
Chart 1.

Geographical Coverage in the Maldives
Chart 2.

Demographic Coverage in the Maldives