Statement by Mr. Shaalan on Maldives Executive Board Meeting February 20, 2013

2012 Article IV Consultation-Public Information Notice; Staff Report; and Statement by the Executive Director for Maldives


2012 Article IV Consultation-Public Information Notice; Staff Report; and Statement by the Executive Director for Maldives

After contracting in 2009, the Maldives economy rebounded strongly. GDP growth exceeded 7 percent in 2010 and in 2011, moderating in 2012 as a result of the slowdown in Europe. The fiscal deficit contracted sharply—by 11 percentage points of GDP—during 2009–2011. While strong revenue performance continued in 2012, the deficit is preliminarily estimated to have risen slightly. Inflation rose in 2011 in response to the devaluation, and has remained high as a result of the introduction of the GST in 2011 and the subsequent increase in the rate in early 2012.

Directors will recall that a three-year Standby Arrangement and a 24 month Arrangement under the Exogenous Shocks Facility were approved in December 2009. A key pillar of the program was a reduction in the fiscal deficit from 33½ percent of GDP in 2009 to 4½ percent of GDP in 2012, mainly through new taxes and civil service downsizing1. The program went off track following its First Review in March 2010 as the government had difficulties in garnering sufficient support to carry through planned reforms. Spending increased as a result of the introduction of two welfare programs, namely universal health coverage and a disability benefits program, that were considered a priority. A new decentralization law added to the civil service wage bill. It was also not possible to reach agreement on a modified program, partly because of the unsettled political environment which culminated in a change in government in February 2012.

Nevertheless, there was important progress in establishing a modern tax regime. Many of the tax measures envisaged under the program—including a new business profit tax, an ad valorem tourism tax, and a general sales tax—were implemented, yielding higher revenues than had been forecasted. Moreover, despite the suspension of civil service downsizing and wage cuts that had been agreed under the program, the nominal wage bill in 2012 was close to what was projected under the program.

Looking forward, the authorities are not convinced of the merits of a currency devaluation, and they consider a faster pace of fiscal consolidation than suggested by staff to be more appropriate. The authorities do not consider that an average annual deficit reduction of 1 percent of GDP in 2013–15 would satisfactorily advance fiscal sustainability. At the same time, the merits of a devaluation are questionable given the small scope for expenditure switching and large pass-through to domestic prices. As staff recognizes, the argument for devaluation is not as robust for the Maldives as for other countries where wage growth can be controlled. Moreover, staff considers it important to have a targeted social assistance scheme to shield the vulnerable from the effects of a devaluation, which is not in place. The authorities believe the devaluation in 2011 resulted in negative repercussions on inflation and the fiscal deficit without helping to reduce the current account deficit.

We also note in this context that an assessment of the appropriate exchange rate level is particularly difficult for the Maldives due to data problems. Foreign exchange is available in the economy and the absence of a large premium in the parallel market suggests that sizeable tourism sector flows are not channeled through the banking system and therefore not reflected in the balance of payments. Accordingly, the implied need for a 20 percent devaluation based on the exchange rate assessment is questionable.

The argument for an SMP rests on “the need to develop a good track record of policy implementation”. However, the authorities have demonstrated an ability to implement reforms. The recent tax measures raised revenues to a level higher than the program targets for 2012. In this context, it should be noted that the country has a solid track record in improving living conditions. The World Bank considers the Maldives a development success story and points to its improved social indicators. It is the best-ranked country in the United Nations Development Program’s Human Development Index in South East Asia (2011)2. The country, classified as one of the poorest 20 countries in the world in the early 1980s, rose to a middle income country with low and declining poverty rates. The authorities are cognizant of the need to place Maldives on solid ground with respect to debt sustainability as a basis to further improve the welfare of its population.

The authorities have indicated that they will not publish the report at this time. They are concerned about the market reaction to the recommendation of a 20 percent devaluation and references to the potential imminence of a crisis. Considerable editing would be required prior to publication which may not be feasible.

Maldives is a beneficiary of Fund technical assistance, which has been used quite effectively. The authorities thank management and staff for this valuable support. They trust that they can continue to count on the Fund to support their efforts at institutional capacity building. Finally, I wish to join the authorities in expressing appreciation for the staff team’s diligent work and the constructive policy discussions.


GDP was revised in 2012, following technical assistance from the Fund and Asian Development Bank. As a result, the fiscal deficit excluding grants in 2009 became 25 (not 33½) percent of GDP. The new figure reflects the deficit of 22.2 percent of GDP for 2009 as shown in Table 2b plus prior actions of 2.7 percent of GDP.

Maldives: 2012 Article IV Consultation-Public Information Notice; Staff Report; and Statement by the Executive Director for Maldives
Author: International Monetary Fund. Asia and Pacific Dept