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IMF Country Report No. 23/366

MALDIVES

2022 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR MALDIVES

November 2023

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 2022 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 December 20, 2022 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 November 23, 2022, following discussions that ended on September 26, 2022, 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 November 4, 2022.

• An Informational Annex prepared by the IMF staff.

• A Debt Sustainability Analysis prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA).

• A Staff Statement updating information on recent developments.

• A Statement by the Executive Director for Maldives.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2023 International Monetary Fund

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PRESS RELEASE

PR/22/449

IMF Executive Board Concludes 2022 Article IV Consultation with Maldives

FOR IMMEDIATE RELEASE

Washington, DC - November 23, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Maldives.

Maldives’ economic activity rebounded strongly from the pandemic-induced contraction, supported by the authorities’ decisive policy measures. Real GDP growth recovered sharply to 37 percent in 2021 from the unprecedented contraction of 33.5 percent in 2020, as tourism activities bounced back. Inflation has risen but is contained due to price subsidies. Average headline inflation rose from 0.2 percent (y/y) in 2021 to 2.7 percent in July 2022, mostly reflecting higher costs of energy, food, transportation, and healthcare. Revenue recovery was robust in 2021, but fiscal vulnerabilities remained high. The fiscal deficit remained in double digits, reflecting elevated capital spending, an increased interest burden, and a higher wage bill. Continued support to SOEs added to fiscal vulnerabilities. The banking system remains sound, supported by strong buffers, but risks stem from the sovereign-bank nexus.

The recovery is expected to continue in the near term on the back of strong tourism growth and associated spillovers to related sectors such as transportation and trade. Staff projects GDP grow at 10.5 percent and 6.6 percent in 2022 and 2023 respectively. Inflation is projected to increase further, reaching 4.9 percent in 2023, reflecting the persistence of high costs of energy and food, spending pressures for the 2023 elections, and the one-off impact of the planned goods and services tax hikes in 2023. The fiscal deficit is expected to remain in double digits, despite continued strong revenue performance. The current account deficit is projected to widen to 16.5 percent of GDP in 2022 before gradually moderating over the medium term. The Maldives remains at a high risk of external debt distress and a high overall risk of debt distress. The total public and publicly guaranteed (PPG) debt-to-GDP ratio declined from the pandemic peak of 154 percent of GDP in 2020, aided by the economic recovery, but is expected to remain high over the medium-term. External financing needs are projected to rise and draw on the already thin reserve buffers, increasing debt rollover risks. Dollar shortages have persisted, as reflected in large spreads in the parallel foreign exchange market. Risks to the outlook are tilted to the downside, stemming mostly from a sharp global economic slowdown, high commodity prices, and tighter global financial conditions. A resumption of tourist arrivals from China is an upside risk to growth.

Executive Board Assessment²

The Executive Board welcomed the rapid economic recovery from the pandemic, underpinned by a swift vaccination rollout, policy support, and a strong rebound in tourism. However, fiscal and external vulnerabilities remain elevated, and risks to the outlook are tilted to the downside, including from a sharp slowdown in key source markets for tourism, high commodity prices, and tighter global financial conditions. Against this background, Directors urged steadfast implementation of comprehensive reforms to reduce vulnerabilities and strengthen economic resilience.

Noting that Maldives is at a high risk of debt distress, Directors stressed that sustained fiscal consolidation relying on both expenditure rationalization and domestic revenue mobilization, and supported by conservative debt management, is the top priority. They emphasized that rationalizing capital spending and subsidies, combined with targeted assistance to the most vulnerable, and SOE reforms will be critical. Directors welcomed significant steps taken by the authorities toward tax and subsidy reforms and called for their swift implementation. They commended the authorities for the recent approval of the General Goods and Services Tax (GST) and Tourism Goods and Services Tax (TGST) reforms. Directors also looked forward to the development of a Medium-Term Revenue Strategy and planned reforms of the Fiscal Responsibility Act. Should downside risks materialize, scarce fiscal resources should be reoriented toward targeted and temporary measures to support the most vulnerable.

Directors advised that the Maldives Monetary Authority (MMA) advances to the government should be gradually phased out to lower pressures on international reserves and prices. MMA should stand ready to further tighten monetary policy should inflationary pressures increase and/or the elevated parallel market premium widen further. Directors also urged implementation of FX reforms.

Directors agreed that financial sector policies should remain vigilant to safeguard financial stability, considering the large exposure of the banking sector to the sovereign and the expiration of pandemic-related lending support schemes. They encouraged continued enhancements in the AML/CFT framework and looked forward to the planned FSAP to help prioritize reforms in the financial sector.

Noting that the Maldives is extremely vulnerable to climate change, Directors stressed the importance of investments in climate-resilient infrastructure to boost prospects for a more inclusive and resilient growth in the medium term. They noted that significant financial support from the international community will be needed for climate adaptation. Directors supported continued Fund technical assistance to enhance public financial management and improve access to climate-related funds. They also stressed the need to further strengthen governance.

Table 1.

Maldives: Selected Economic and Financial Indicators 2018-27

Sources: Maldivian authorities and IMF staff projections. 1/ CPI-Male definition. 2/ Domestic financing includes MMA advances, SDF contribution and India’s USD 250 million bond from the State Bank of India branch in Male. 3/ Unsecured financing includes possible new sources of domestic financing or negotiated official bilateral financing as higher external financing costs are limiting options to tap international capital markets.

Table 1.

Maldives: Selected Economic and Financial Indicators 2018-27

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
				Prel.	Proj.
Output and prices		(Annual percentage change)
Real GDP	8.1	6.9	-33.5	37.0	10.5	6.6	5.7	6.5	5.9	5.5
Inflation (end-of-period) 1/	0.5	1.7	-2.0	0.2	7.0	3.2	2.0	2.0	2.0	2.0
Inflation (period average) 1/	1.4	1.3	-1.6	0.2	3.9	4.9	2.4	2.0	2.0	2.0
GDP deflator	3.1	-1.1	0.4	1.7	3.9	4.9	2.4	2.0	2.0	2.0
Central government finances			(In percent of GDP)
Revenue and grants	27.2	26.4	26.4	26.6	28.9	29.6	29.2	28.8	28.7	28.7
Expenditure and net lending	32.5	33.0	49.9	40.9	43.1	39.5	39.0	34.7	33.5	33.0
Overall balance	-5.3	-6.6	-23.5	-14.3	-14.3	-9.9	-9.8	-5.9	-4.8	-4.3
Overall balance excl. grants	-6.3	-7.9	-25.2	-15.6	-15.4	-11.4	-10.6	-6.6	-5.4	-5.0
Financing	5.3	6.6	23.5	14.3	14.3	9.9	9.8	5.9	4.8	4.3
Foreign	7.0	1.1	4.4	6.5	2.8	2.2	1.9	0.5	1.5	-0.2
Domestic 2/	-1.7	5.5	19.2	7.8	11.4	7.7	7.9	5.4	3.3	4.5
of which: Unsecured financing 3/	...	...	...	...	...	1.7	...	...	...	...
Primary balance	-3.5	-4.8	-20.7	-11.7	-11.0	-6.2	-6.1	-2.3	-1.3	-1.0
Public and publicly guaranteed debt	72.0	78.8	154.4	124.3	122.6	117.5	117.7	112.9	107.7	103.2
Monetary accounts		(Annual percentage change)
Broad money	3.4	9.5	14.2	26.2	14.7	9.8	8.3	8.6	8.1	7.7
Domestic credit	7.6	3.4	34.4	8.8	20.8	9.9	12.2	11.9	11.1	10.8
Balance of payments	(In percent of GDP, unless otherwise indicated)
Current account	-28.4	-26.6	-35.5	-8.8	-16.5	-15.2	-13.8	-13.6	-9.7	-9.3
Of which:
Exports	6.4	6.4	6.9	5.5	5.6	5.3	5.2	5.1	5.0	5.0
Imports	-52.2	-49.2	-45.7	-46.0	-51.2	-50.0	-49.2	-48.3	-45.7	-45.3
Tourism receipts (in nonfactor services, net)	57.2	56.4	37.4	66.7	65.0	62.2	62.2	62.2	62.2	62.2
Income (net)	-9.3	-10.0	-8.2	-9.3	-8.2	-8.6	-8.3	-8.0	-7.6	-7.4
Current transfers	-9.3	-10.4	-9.6	-8.1	-8.9	-7.8	-7.3	-7.2	-7.1	-6.9
Capital and financial account (including e&o)	30.7	27.4	41.7	5.3	15.1	13.5	14.2	13.4	8.8	11.4
Of which:
General government, net	3.0	1.9	4.0	4.0	4.1	0.5	1.9	-0.5	0.6	-0.9
Banks and other sectors, net	17.7	3.5	8.2	-5.0	-1.2	1.0	0.3	0.3	0.3	0.3
Overall balance	2.4	0.7	6.2	-3.4	-1.4	-1.7	0.4	-0.2	-0.9	2.1
Gross international reserves (in millions of USS; e.o.p.)	712	754	985	806	695	582	611	591	510	697
In months of GNFS imports	2.1	3.7	3.4	2.2	1.7	1.3	1.3	1.2	1.0	1.3
Exchange Rate (rufyiaa/USS, e.o.p.)	15.4	15.4	15.4
Memorandum items:
GDP (in millions of rufiyaa)	81,586	86,259	57,569	80,192	92,094	103,002	11,526	121,113	130,866	140,884
GDP (in millions of U.S. dollars)	5,294	5,598	3,736	5,204	5,976	6,684	7,237	7,859	8,492	9,142
Tourism bednights (000’)	9,477	10,689	3,985	10,073	11,380	11,964	12,994	14,456	15,772	16,997
Tourist arrivals (000’)	1,484	1,703	556	1,322	1,626	1,709	1,856	2,126	2,319	2,499
Tourism bednights (% change)	10.2	12.8	-62.7	152.8	13.0	5.1	8.6	11.3	9.1	7.8
Tourist arrivals (% change)	7.1	14.7	-67.4	137.8	23.0	5.1	8.6	14.5	9.1	7.8
Dollarization ratio (FC deposits in percent of broad money)	48.8	52.9	45.8	...	...	...	...	...	...	...

Sources: Maldivian authorities and IMF staff projections. 1/ CPI-Male definition. 2/ Domestic financing includes MMA advances, SDF contribution and India’s USD 250 million bond from the State Bank of India branch in Male. 3/ Unsecured financing includes possible new sources of domestic financing or negotiated official bilateral financing as higher external financing costs are limiting options to tap international capital markets.

View Table

Table 1.

Maldives: Selected Economic and Financial Indicators 2018-27

	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
				Prel.	Proj.
Output and prices		(Annual percentage change)
Real GDP	8.1	6.9	-33.5	37.0	10.5	6.6	5.7	6.5	5.9	5.5
Inflation (end-of-period) 1/	0.5	1.7	-2.0	0.2	7.0	3.2	2.0	2.0	2.0	2.0
Inflation (period average) 1/	1.4	1.3	-1.6	0.2	3.9	4.9	2.4	2.0	2.0	2.0
GDP deflator	3.1	-1.1	0.4	1.7	3.9	4.9	2.4	2.0	2.0	2.0
Central government finances			(In percent of GDP)
Revenue and grants	27.2	26.4	26.4	26.6	28.9	29.6	29.2	28.8	28.7	28.7
Expenditure and net lending	32.5	33.0	49.9	40.9	43.1	39.5	39.0	34.7	33.5	33.0
Overall balance	-5.3	-6.6	-23.5	-14.3	-14.3	-9.9	-9.8	-5.9	-4.8	-4.3
Overall balance excl. grants	-6.3	-7.9	-25.2	-15.6	-15.4	-11.4	-10.6	-6.6	-5.4	-5.0
Financing	5.3	6.6	23.5	14.3	14.3	9.9	9.8	5.9	4.8	4.3
Foreign	7.0	1.1	4.4	6.5	2.8	2.2	1.9	0.5	1.5	-0.2
Domestic 2/	-1.7	5.5	19.2	7.8	11.4	7.7	7.9	5.4	3.3	4.5
of which: Unsecured financing 3/	...	...	...	...	...	1.7	...	...	...	...
Primary balance	-3.5	-4.8	-20.7	-11.7	-11.0	-6.2	-6.1	-2.3	-1.3	-1.0
Public and publicly guaranteed debt	72.0	78.8	154.4	124.3	122.6	117.5	117.7	112.9	107.7	103.2
Monetary accounts		(Annual percentage change)
Broad money	3.4	9.5	14.2	26.2	14.7	9.8	8.3	8.6	8.1	7.7
Domestic credit	7.6	3.4	34.4	8.8	20.8	9.9	12.2	11.9	11.1	10.8
Balance of payments	(In percent of GDP, unless otherwise indicated)
Current account	-28.4	-26.6	-35.5	-8.8	-16.5	-15.2	-13.8	-13.6	-9.7	-9.3
Of which:
Exports	6.4	6.4	6.9	5.5	5.6	5.3	5.2	5.1	5.0	5.0
Imports	-52.2	-49.2	-45.7	-46.0	-51.2	-50.0	-49.2	-48.3	-45.7	-45.3
Tourism receipts (in nonfactor services, net)	57.2	56.4	37.4	66.7	65.0	62.2	62.2	62.2	62.2	62.2
Income (net)	-9.3	-10.0	-8.2	-9.3	-8.2	-8.6	-8.3	-8.0	-7.6	-7.4
Current transfers	-9.3	-10.4	-9.6	-8.1	-8.9	-7.8	-7.3	-7.2	-7.1	-6.9
Capital and financial account (including e&o)	30.7	27.4	41.7	5.3	15.1	13.5	14.2	13.4	8.8	11.4
Of which:
General government, net	3.0	1.9	4.0	4.0	4.1	0.5	1.9	-0.5	0.6	-0.9
Banks and other sectors, net	17.7	3.5	8.2	-5.0	-1.2	1.0	0.3	0.3	0.3	0.3
Overall balance	2.4	0.7	6.2	-3.4	-1.4	-1.7	0.4	-0.2	-0.9	2.1
Gross international reserves (in millions of USS; e.o.p.)	712	754	985	806	695	582	611	591	510	697
In months of GNFS imports	2.1	3.7	3.4	2.2	1.7	1.3	1.3	1.2	1.0	1.3
Exchange Rate (rufyiaa/USS, e.o.p.)	15.4	15.4	15.4
Memorandum items:
GDP (in millions of rufiyaa)	81,586	86,259	57,569	80,192	92,094	103,002	11,526	121,113	130,866	140,884
GDP (in millions of U.S. dollars)	5,294	5,598	3,736	5,204	5,976	6,684	7,237	7,859	8,492	9,142
Tourism bednights (000’)	9,477	10,689	3,985	10,073	11,380	11,964	12,994	14,456	15,772	16,997
Tourist arrivals (000’)	1,484	1,703	556	1,322	1,626	1,709	1,856	2,126	2,319	2,499
Tourism bednights (% change)	10.2	12.8	-62.7	152.8	13.0	5.1	8.6	11.3	9.1	7.8
Tourist arrivals (% change)	7.1	14.7	-67.4	137.8	23.0	5.1	8.6	14.5	9.1	7.8
Dollarization ratio (FC deposits in percent of broad money)	48.8	52.9	45.8	...	...	...	...	...	...	...

Sources: Maldivian authorities and IMF staff projections. 1/ CPI-Male definition. 2/ Domestic financing includes MMA advances, SDF contribution and India’s USD 250 million bond from the State Bank of India branch in Male. 3/ Unsecured financing includes possible new sources of domestic financing or negotiated official bilateral financing as higher external financing costs are limiting options to tap international capital markets.

Title Page

MALDIVES

STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION

November 4, 2022

KEY ISSUES

Context. The Maldives’ economy is recovering rapidly from the pandemic, underpinned by a strong resumption in tourism on the back of the authorities’ rapid vaccine rollout and policy support measures. Fiscal and external vulnerabilities remain elevated due to rising subsidies, high capital spending, and an increased interest burden. The Maldives has a high risk of external debt distress and a high overall risk of debt distress. Inflation has risen but is relatively contained due to price subsidies. Risks to the outlook are tilted to the downside, including a possible sharp slowdown in key source markets for tourism, high commodity prices, and tighter global financial conditions. A resumption of tourist arrivals from China is an upside risk to growth.

Economic Policy Recommendations. The ongoing economic recovery provides an opportunity to swiftly implement a comprehensive set of reforms to reduce fiscal, debt, and external vulnerabilities, and strengthen economic resilience:

• A sustained fiscal consolidation that relies both on expenditure rationalization and domestic revenue mobilization is the top priority. Rationalizing capital spending and subsidies, combined with targeted assistance to the most vulnerable, and a reform of SOEs are critical. The authorities’ homegrown reform agenda under the 2023 budget is already taking significant steps in this direction, including through plans for tax and subsidy reform measures, and should be implemented swiftly.

• Maldives Monetary Authority (MMA) advances should be gradually reduced until fully phased out and used as a last resort. MMA should stand ready to further tighten monetary policy should inflationary pressures increase and/or the parallel market exchange rate premium widen.

• Financial sector policies should remain vigilant to safeguard financial stability considering the large exposure of the banking sector to the sovereign and the expiration of pandemic-related lending support schemes.

• Should downside risks materialize, the limited fiscal space would necessitate a reorientation of scarce resources toward targeted and temporary measures to support the most vulnerable.

• Complementary policies, including planned FX reforms, further strengthening of governance, and investment in climate-resilient infrastructure are also needed to boost prospects for a more inclusive and resilient growth in the medium term.

Approved By

Anne-Marie Gulde-Wolf (APD) and Andrea Schaechter (SPR)

Contents

• CONTEXT

• RECENT DEVELOPMENTS: A STRONG RECOVERY BUT VULNERABILITIES REMAIN

• OUTLOOK: A CHALLENGING GLOBAL CONTEXT

• POLICIES TO REDUCE VULNERABILITIES

• A. Near-Term Policy Mix

• B. Fiscal Policy

• C. Monetary and Exchange Rate Policies

• D. Financial Sector Policies

• BUILDING A MORE RESILIENT ECONOMY

• A. Climate Change

• B. Governance and Other Structural Reforms

• STAFF APPRAISAL

• BOXES

• 1. Capital Expenditures in the Maldives

• 2. Analyzing Fiscal Risks of SOEs

• FIGURES

• 1. Summary of Recent Developments

• 2. External Sector

• 3. Fiscal Sector

• 4. Money and Credit Developments

• 5. Financial Sector

• TABLES

• 1. Selected Economic and Financial Indicators, 2018-27

• 2. Balance of Payments, 2018-27

• 3. Monetary Accounts, 2018-27

• 4. Summary of Government Operations and Stock Positions, FY2018-27 In millions of Rufiyaa

• 5. Summary of Government Operations and Stock Positions, FY2018-27 (In percent of GDP)

• 6. Financial Soundness Indicators—Local Banking Sector, 2019 Q1-2022Q2

• 7. Integrating Fund Surveillance and Capacity Development

• APPENDICES

• I. External Sector Assessment

• II. Past Article IV Recommendations

• III. Risk Assessment Matrix

• IV. Downside Scenario

• V. Digitalization and Public Finances

• VI. Energy Subsidy Reform

• VII. Bank - Sovereign Nexus

• VIII. Accessing Climate Financing to Address Climate Change in Maldives