Abstract
MALDIVES
Title Page
MALDIVES
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS
November 4, 2022
Approved By
Anne-Marie Gulde-Wolf and Andrea Schaechter (IMF) and Marcello Estevao and Mathew A. Verghis (IDA)
Prepared by the staffs of the International Monetary Fund and the International Development Association.
Maldives: Joint Bank Fund Debt Sustainability Analysis
Maldives: Joint Bank Fund Debt Sustainability Analysis
| Risk of external debt distress | High |
| Overall risk of debt distress | High |
| Granularity in the risk rating | Not sustainable under baseline |
| Application of judgement | No |
Maldives: Joint Bank Fund Debt Sustainability Analysis
| Risk of external debt distress | High |
| Overall risk of debt distress | High |
| Granularity in the risk rating | Not sustainable under baseline |
| Application of judgement | No |
The Maldives remains at a high risk of external and overall debt distress. Since the September 2021 Debt Sustainability Analysis (DSA), some debt indicators, such as debt-to-GDP ratio, have improved in the near term, reflecting the robust recovery in tourism and growth in 2021. Nevertheless, external gross financing needs have increased significantly relative to the 2021 DSA due to (i) persistently higher commodity prices, (ii) a more expansionary fiscal stance reflecting higher subsidies, as well as other current and capital project related spending, and (iii) repayments and rollovers of nonconcessional debt, mainly global sukuks. External refinancing pressures are expected to peak in 2026. The authorities have been current on debt service obligations to both domestic and external creditors. Increasingly higher amortizations and large interest payments would trigger protracted breaches in several debt indicators by 2026 making the assessment of debt not sustainable under the baseline projections, similar to the 2021 DSA. The key external debt stock indicator, the present value (PV) of external debt-to-GDP, will converge to the 30 percent threshold by the medium-term. Addressing debt vulnerabilities requires sustained fiscal consolidation, conservative debt management, and continued strong growth. Staff noted the authorities’ adoption of fiscal anchors in their 2023-2025 medium-term fiscal strategy to support fiscal sustainability. In addition to the planned increase of Goods and Services Tax (GST), which is included in the baseline projections, a decisive and sustained additional fiscal adjustment of around 3 percent of GDP would help lower the PV of public debt below 70 (50) percent of GDP by 2032 (2042) and put debt on a sustained downward path. The debt dynamics will remain vulnerable to adverse shocks in growth, interest rates (due to Secured Overnight Financing Rate (SOFR)-linked debt), and the fiscal position in the near term. A possible upside is the resumption of tourist arrivals from China.
Background and Developments on Debt
1. Total public and publicly guaranteed (PPG) debt-to-GDP ratio declined to about 124 percent of GDP in 2021 from 154 percent in 2020 and 137 percent of GDP projected for 2021 in Article IV 2021, reflecting the unexpected rebound in tourism and growth supported by a strong vaccination program and pandemic related policies. However, the ratio remained elevated compared to 78.8 percent in 2019, reflecting the double-digit fiscal deficit in response to spending pressures and end-year global commodity price hikes. Nominal PPG debt stock increased to US$6469 million in 2021 from US$5768 million in 2020 driven by a large annual increase in central government budgetary debt, to about US$5527 (an increase of about 14 percent) even as guaranteed debt increased at a slower pace to about US$941 million. Overall, both external and domestic debt increased during 2021 with the domestic debt slightly above half the mix (53 percent of total).1
Maldives: PPG Debt, 2021
(In percent of total)
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Source: Maldives Ministry of Finance.2. Domestic PPG debt stood at US$3452.1 million (MVR 53164 million) or 66.3 of GDP at end 2021 up from US$2973.6 million in 2020 in nominal terms. Unlike guarantees on external debt, which have been declining steadily since end-2020 due to payments by state-owned enterprises like HDC and STELCO, guarantees on domestic debt has remained stable over time. To bridge the financing of the government during the COVID-19 crisis, in end-April 2020 the parliament of the Maldives approved the temporary suspension of elements of Fiscal Responsibility Act (FRA) to allow for a one-year expansion of the cap of MMA advances to the government to MVR 4.4 billion (US$286 million). Domestic PPG debt also includes US$239.5 million (MVR 3.689 billion) in advances, from the Maldives Monetary Authority (MMA) to the central government (4.6 percent of GDP).2 In end-December 2021 the authorities engaged in securitization of the outstanding MMA advances, in the amount of MVR 2.5 billion (US$162 million, around 4.5 percent of domestic PPG debt) converting the advances into a 40-year bond at a 2.4 percent annual interest. Commercial banks had the largest claim on central government, around US$1439.7 million (42 percent of domestic PPG debt), followed by other financial corporations, US$1068 million (30.9 percent of domestic PPG debt). A US$250 million bond, purchased in 2020 by the State Bank of India (SBI) Male branch as budget support to buffer the impact of COVID, remains outstanding. This bond is expected to be paid back in 10 years as a bullet payment with bi-annual interest payment in dollars at an interest rate of 3.5 percent.3
Maldives: Domestic PPG Debt, 2021
(In percent of total domestic PPG)
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Sources: Maldives Ministry of Finance; and Maldives Monetary Authority.Maldives: External PPG Debt, 2021
(In percent of total)
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Source: Maldives Ministry of Finance3. External PPG debt stood at US$3046 million in 2021, around 58.5 percent of GDP up from US$2796 million in 2020 in nominal terms. External PPG debt is predominantly owed to commercial (44 percent) and bilateral (40 percent) creditors. End-2021 data suggests that direct budgetary debt, constituted 71 percent of PPG external debt, with the remaining 29 percent extended to State-Owned Enterprises (SOEs) with sovereign guarantees. Around 67 percent of guaranteed external loans are for housing development projects carried out by the SOEs, the Housing Development Corporation (HDC) and the Fahi Dhiriulhun Corporation (FDC). Guaranteed external debt is owed mainly to commercial creditors (around 9 percent of total) with the rest (3 percent) to bilateral creditors and a small amount (1 percent) to a multilateral creditor. China is the largest external creditor (20 percent of total public debt or 42 percent of total external PPG debt), with the Chinese Exim Bank holding 11 percent of the total.
Maldives: External PPG Debt by Creditor Type, 2021
(In percent of total)
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Source: Maldives Ministry of Finance.| USD million | % of total public debt | % of PPG external debt | |
| Direct External debt | 2,170 | 33 | 71 |
| Multilateral | 454 | 7 | 15 |
| Bilateral | 959 | 15 | 31 |
| o/w China | 543 | 8 | 18 |
| Commercial | 758 | 12 | 25 |
| Guaranteed External debt | 875 | 13 | 29 |
| Multilateral | 36 | 1 | 1 |
| Bilateral | 253 | 4 | 8 |
| o/w China | 188 | 3 | 6 |
| Commercial | 587 | 9 | 19 |
| o/w China | 542 | 8 | 18 |
| USD million | % of total public debt | % of PPG external debt | |
| Direct External debt | 2,170 | 33 | 71 |
| Multilateral | 454 | 7 | 15 |
| Bilateral | 959 | 15 | 31 |
| o/w China | 543 | 8 | 18 |
| Commercial | 758 | 12 | 25 |
| Guaranteed External debt | 875 | 13 | 29 |
| Multilateral | 36 | 1 | 1 |
| Bilateral | 253 | 4 | 8 |
| o/w China | 188 | 3 | 6 |
| Commercial | 587 | 9 | 19 |
| o/w China | 542 | 8 | 18 |
4. The debt sustainability analysis includes PPG external and domestic debt. Public debt comprises the debt of the central government, including guarantees to SOEs. The stock of externally guaranteed SOE debt stood at around US$875 million (around 17 percent of GDP) with large exposures to the housing development corporation and mainly from Chinese creditors (see ¶ 3). External debt is defined by residency criteria. The calibration of the contingent liability shock is based on the default values for the SOE debt (2 percent of GDP) and financial market component (5 percent of GDP) since they are sufficient to represent fiscal risks.4
Debt Coverage
Debt Coverage
 |
Debt Coverage
|
5. During 2020, the Maldivian government received exceptional concessional external financing amounting to around US$ 269.8 million in loans and grants from international financial institutions (IFIs) and US$ 11.35 million from bilateral creditors, including US$28.9 million from the IMF’s Rapid Credit Facility (RCF) approved on April 22, 2020, and US$59.7 million in grants. Around 81 percent of grants were provided by the Asian Development Bank (US$ 25.0 million), the World Bank (US$15.6 million), and Japan (US$7.5 million), (see complete list of creditors providing pandemic related assistance, here). No further concessional loans have been contracted since the pandemic 2020, except for some grant financing provided from IDA and, potentially, others. The Maldives continues to borrow under non-concessional terms from the capital markets. Although Maldives is categorized as an IDA-only country at high risk of external debt distress, effective FY23, it faces a hardening of financing terms as a remedial measure for not complying with the agreed zero non-concessional borrowing ceiling under IDA’s Sustainable Development Finance Policy (SDFP) for the second year in a row. As a result, effective July 1, 2022, Maldives’ financing terms will be 50 percent grants and 50 percent 40-year credits on Small Economy terms with a 10-year grace period, instead of the 100 percent grants applied in FY22.5
The Maldives issued two sovereign Eurobonds with a total face value of US$350 million.
i. The first, issued to Abu Dhabi in 2018, was expected to fall due in 2023 (US$100 million) and now extended to 2026.
ii. Another US$250 million maiden Eurobond (also known as Sunny side bond) issued to the international market, which was partly repurchased in March 2021, with the remainder repaid on maturity in June 2022.
In March 2021, the government was able to issue a global Sukuk bond, due to mature in 2026, in the amount of US$200 million at 10.5 percent, that helped repurchase 77 percent of the US$250 million maiden Eurobond that was expected to mature in 2023, and was trading at 26 percent yield. At the time, and in the absence of access to concessional financing, this helped to save the yield differential.
Subsequently, the Maldives issued another US$100 million sukuk in April 2021 under the same conditions as the March 2021 subscription and,
Another US$200 million in September 2021 to cover budgetary expenses, trading at about 20 percent yield.
In May 2022 the government also secured a US$100 million loan through private placement expected to mature in 2025 and at a 7 percent annual interest rate.
6. The Maldives applied for the G20 Debt Service Suspension Initiative (DSSI) and received relief from most bilateral official creditors totaling around US$19 million in 2020. They also applied for both extensions to the DSSI from creditors that provided suspension on the original request. Most bilateral creditors granted a third extension of the debt outstanding under the DSSI, which freed up about US$66.7 million in 2021 through postponement of debt servicing.6
Macroeconomic and Financing Assumptions
7. The macroeconomic assumptions underlying this debt sustainability analysis (DSA) are as follows:
Growth. Real GDP partly recovered in 2021, due to favorable base effects as tourist arrivals resumed, with 1.32 million arrivals (lower than 2019 arrivals of 1.7 million but exceeding the Article IV 2021 projections of 1 million arrival), on the back of a highly vaccinated population and opening of borders. Tourist arrivals have steadily risen and are approaching pre-pandemic levels. The continued strong expected recovery in the tourism sector (with about 1.63 million arrivals expected compared to 1.43 million projected during 2021 Article IV and slightly higher average bed nights) and associated spillovers to other sectors are expected to yield a robust real GDP growth of 10.5 percent in 2022. With the opening of the runway, the arrivals and bednights are expected to strengthen in 2023, and remain strong thereafter. Medium-term growth projections are also supported by the expansion of airport passenger (terminal) capacity to meet higher demand from airlines, particularly for the Velana International Airport in Male. The expansion of the Hannimandoo International Airport in the North could provide further boost to tourist reception capacity. The positive impact of increased airport and accommodation capacities on tourist flows and growth is expected to more than offset the negative impulse from the fiscal consolidation in the baseline, considering low fiscal multipliers in small states7. Complementary structural reforms, including plans for financial market deepening and to enhance skills in the tourism and hospitality sector are expected to improve labor productivity. Growth is expected to remain strong in 2023, but moderate, in line with the global economic slowdown.
Headline inflation is projected to be higher than the Article IV 2021 projections, reaching 3.9 percent in 2022, reflecting the persistence of higher costs of energy, food, transportation, and healthcare observed through July 2022, spending pressures for the 2023 elections, and the end of discounts for telecommunication services. Inflation is projected to increase to about 4.9 percent in 2023, mostly reflecting the impact of the GST and TGST increases and is expected to stabilize in the medium term.
Risks to the outlook are tilted to the downside, arising mainly from an economic slowdown in key source countries for tourists, threats of new more contagious COVID-19 variants, and tightening global financial conditions. A protracted war in Ukraine could add to inflationary pressures through higher food and energy prices and disruptions to supply chains. Slow implementation of macro critical structural reforms to boost productivity, revenue and exports, or a large currency depreciation with rising debt servicing costs without matching increases in domestic revenues could be a drag on growth. Diverting resources from growth friendly investment spending are other plausible risks. A resumption of tourist arrivals from China is an upside risk to growth.
Fiscal policy. The primary fiscal deficit is projected to improve over the medium term. Still, high deficits are expected to persist in the medium-term, contributing to elevated public debt. Fiscal vulnerabilities remain high, despite a robust recovery in revenue. The fiscal (primary) deficit is expected to remain in double digits and peak in 2022, despite revenue performing strongly by end-September and projected to exceed the 2019 pre-pandemic level (higher than projected in the 2021 Article IV). The authorities anticipate expenditures to be higher than budgeted in 2022, as emerging spending pressures arise from increased subsidies, increased interest costs, sustained high infrastructure spending and reforms of the wage bill. To reduce budget financing risks in 2023, the authorities intend to mobilize revenue of around 2.7 percent of GDP by increasing the domestic and tourist GST rates from 6 to 8 percent and from 12 to 16 percent, respectively.8 The increase in GST rates, which is included in the baseline, is one of the SDFP PPAs for FY23 and could provide an added incentive to implement this key tax policy reform measure. To support fiscal sustainability, the authorities also developed their medium-term fiscal strategy along four anchors: (i) reducing public debt excluding guarantees to less than 100 percent of GDP by 2025, (ii) reducing the primary budget deficit to less than 5 percent of GDP by 2023, (iii) maintaining public debt as a share of GDP on a downward trend, and (iv) reducing recurrent expenditure to levels that do not exceed government revenue by 2023.
There are a number of upside risks to the fiscal outlook including the implementation of a subsidy reform for which the authorities have received Fund’s technical assistance, and a reform of the pricing of medical consumables under the Aasandha health insurance scheme. These reforms would help generate fiscal efficiencies and savings. On the downside, the key risks include delays in implementation of revenue measures, materialization of additional spending pressures to shield against higher commodity prices and public investment cost overruns. Also, fiscal risks could arise from materialization of contingent liabilities and capital contributions to SOEs, mainly to repay their debt contracted with sovereign guarantees, and poor targeting of social assistance, including in social housing programs. For instance, social housing is not well-targeted based on income eligibility criteria and lease tariff is set at below market price. The delinquency rate for social housing is also elevated at about 37 percent. Government’s ambitious public infrastructure investment agenda, executed mainly by SOEs, has been a key driver of debt vulnerabilities.
Non-interest current account (CA) dynamics. The external sector recovery has been set back by the impact of the war in Ukraine and reserves have come under pressure. The external financing pressures emanated originally from the authorities’ expansionary, post-pandemic fiscal stance with an acceleration of capital spending. The non-interest current account deficit (CAD) improved temporarily (-6.8 percent of GDP), driven by higher tourism receipts in 2021. The noninterest current account deficit is projected to stay elevated at 8-12 percent of GDP over the medium term (above the 2021 Article IV projections), reflecting high import costs of fuel, food, and construction materials.
Financing assumptions. Spending pressures arising mainly from subsidy payments and capital outlays, and an expected payment (US$250 million) in 2022 of a Eurobond, forced the authorities to access the global sukuk market, in the absence of access to sufficient concessional financing. The authorities raised US$500 million at a high cost (10.5 yield) maturing in 2026. The SDR allocation equivalent to US$29 million were added to reserves in 2021 and later in 2022 used for budget support.9 External and total gross financing needs have been large and significantly above 2021 Article IV projections in the medium term, as authorities continue to take recourse to non-concessional and shorter-term financing. Going forward, the authorities do not plan for significant issuances from the international market prior to 2025. Most financing needs are ambitiously expected to be funded domestically in the medium term. As MMA’s advances to the government are reaching their limits and additional domestic bank financing are expected to be constrained, a budget financing gap (unidentified financing) of around 1.7 percent of GDP could open in 2023. The debt sustainability framework assumes the unidentified financing as residual domestic financing.10 The authorities recently contracted a US$100 million loan, with a three-year maturity in 2025 and a 7 percent interest rate. This together with the maturing US$500 million sukuk bonds and another US$100 million bond (Abu Dhabi) in 2026, will require refinancing starting in 2025. The Sukuk issuance program has been established for three-years with total value of US$1 billion. Moving ahead, the authorities plan to issue additional tranches as and when required together with the advice of the Islamic Corporation for the Development of the Private Sector (ICD) and when market conditions become favorable.11 The framework assumes refinancing in two parts:
i. A sukuk issuance of US$125 million in 2025 and maturing in 2030, followed by
ii. Another sukuk issuance of US$250 million in 2026 and maturing in 2031.
Authorities would like to access concessional financing to mitigate roll-over of risk, particularly from the global sukuks. A large share of domestic financing in the Maldives was short term (maturity of less than one year). Interest rates on short-term debt have ranged between 3.7 and 4.5 percent since December 2016. Over the medium term, we assume that around 65 percent of domestic financing is short term with an interest rate of 4 percent and that the share of longterm debt gradually increases over time.
Macroeconomic Assumptions
Macroeconomic Assumptions
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 27-40 | |
| proj. | ||||||||
| Real GDP growth (in percent change) | ||||||||
| Current | 37.0 | 10.5 | 6.6 | 5.7 | 6.5 | 5.9 | 5.5 | 4.9 |
| Previous | 18.9 | 13.2 | 12.1 | 6.1 | 5.4 | 5.4 | 5.4 | 4.6 |
| Inflation | ||||||||
| Current | 0.2 | 3.9 | 4.9 | 2.4 | 2.0 | 2.0 | 2.0 | 2.0 |
| Previous | 1.4 | 2.3 | 1.9 | 1.8 | 2.0 | 2.0 | 1.8 | 2.0 |
| Primary fiscal deficit (in percent of GDP) | ||||||||
| Current | 11.7 | 11.0 | 6.2 | 6.1 | 2.3 | 1.3 | 1.0 | 0.5 |
| Previous | 14.2 | 9.0 | 5.7 | 3.9 | 3.3 | 4.0 | 0.4 | 0.5 |
| Non-interest current account deficit (in percent of GDP) | ||||||||
| Current | 6.8 | 15.4 | 13.3 | 12.0 | 12.1 | 8.5 | 8.2 | 6.6 |
| Previous | 13.7 | 11.9 | 7.1 | 7.2 | 6.9 | 6.6 | 5.0 | 4.6 |
| Grants (in percent of GDP) | ||||||||
| Current | 1.3 | 1.1 | 1.5 | 0.8 | 0.7 | 0.6 | 0.6 | 0.3 |
| Previous | 2.1 | 2.7 | 2.3 | 1.4 | 0.9 | 0.8 | 0.7 | 0.3 |
| Capital Expenditures (in percent of GDP) | ||||||||
| Current | 11.0 | 13.2 | 8.9 | 9.2 | 6.5 | 5.6 | 5.3 | 4.4 |
| Previous | 15.6 | 13.9 | 12.4 | 11.3 | 10.2 | 10.8 | 7.0 | 7.0 |
| Public Debt (in percent of GDP) | ||||||||
| Current | 124.3 | 122.6 | 117.5 | 117.7 | 112.9 | 107.7 | 103.2 | 81.0 |
| Previous | 137.2 | 133.3 | 128.2 | 128.4 | 126.8 | 122.9 | 118.6 | 100.3 |
Macroeconomic Assumptions
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 27-40 | |
| proj. | ||||||||
| Real GDP growth (in percent change) | ||||||||
| Current | 37.0 | 10.5 | 6.6 | 5.7 | 6.5 | 5.9 | 5.5 | 4.9 |
| Previous | 18.9 | 13.2 | 12.1 | 6.1 | 5.4 | 5.4 | 5.4 | 4.6 |
| Inflation | ||||||||
| Current | 0.2 | 3.9 | 4.9 | 2.4 | 2.0 | 2.0 | 2.0 | 2.0 |
| Previous | 1.4 | 2.3 | 1.9 | 1.8 | 2.0 | 2.0 | 1.8 | 2.0 |
| Primary fiscal deficit (in percent of GDP) | ||||||||
| Current | 11.7 | 11.0 | 6.2 | 6.1 | 2.3 | 1.3 | 1.0 | 0.5 |
| Previous | 14.2 | 9.0 | 5.7 | 3.9 | 3.3 | 4.0 | 0.4 | 0.5 |
| Non-interest current account deficit (in percent of GDP) | ||||||||
| Current | 6.8 | 15.4 | 13.3 | 12.0 | 12.1 | 8.5 | 8.2 | 6.6 |
| Previous | 13.7 | 11.9 | 7.1 | 7.2 | 6.9 | 6.6 | 5.0 | 4.6 |
| Grants (in percent of GDP) | ||||||||
| Current | 1.3 | 1.1 | 1.5 | 0.8 | 0.7 | 0.6 | 0.6 | 0.3 |
| Previous | 2.1 | 2.7 | 2.3 | 1.4 | 0.9 | 0.8 | 0.7 | 0.3 |
| Capital Expenditures (in percent of GDP) | ||||||||
| Current | 11.0 | 13.2 | 8.9 | 9.2 | 6.5 | 5.6 | 5.3 | 4.4 |
| Previous | 15.6 | 13.9 | 12.4 | 11.3 | 10.2 | 10.8 | 7.0 | 7.0 |
| Public Debt (in percent of GDP) | ||||||||
| Current | 124.3 | 122.6 | 117.5 | 117.7 | 112.9 | 107.7 | 103.2 | 81.0 |
| Previous | 137.2 | 133.3 | 128.2 | 128.4 | 126.8 | 122.9 | 118.6 | 100.3 |
8. Debt dynamics in the Maldives will be mostly driven by growth in the medium-term, but also by primary fiscal deficits, and nominal interest rates (Figure 5). In the past, the current account deficit and the primary fiscal deficit have been the main contributors to the accumulation of external and domestic debt, respectively. Large residuals, which mostly reflect stock-flow adjustment, has also contributed to public debt accumulation. Over the next five years, growth will be the dominating driver, countering the expansion of nominal external interest cost. Domestic debt dynamics over the next five years are balanced by growth and by the primary fiscal deficit, leading to a moderate decline in projected debt-to-GDP ratios. As with the last DSA, gross financing needs continue to breach their indicative benchmark, reflecting higher borrowing needs arising from both exogenous shocks and domestic spending push.
9. The realism tool for the baseline projections picks up the substantial size of the authorities’ capital investment plans over the next few years (Figure 6). The improvement in the primary balance-to-GDP ratio between 2021 and 2024 is driven by a return to more moderate levels of capital spending and a recovery in GDP but at a more gradual and realistic pace of adjustment than in the previous DSA, reflecting election related spending pressures until 2023.12 Given the extraordinary nature behind the swings in growth rates, largely driven by changes in tourism, the multiplier approach is not a suitable way to calculate alternative growth paths. The baseline fiscal adjustment is at the 94th percentile of LIC programs. The Government of Maldives signed lines of credit for more than US$1.2 billion with EXIM Bank India. The largest, for US$800 million and US$400 million, were signed in March 2019 and October 2020, respectively, to finance several infrastructure projects including the development of the Gulhifalhu Port and relocation of Male Commercial Harbour, the Greater Male’ Connectivity Project, construction of social housing units, and water and sanitation projects. While the disbursement from these commitments is expected to be slow, the government is inclined to continue with these projects to avoid sudden stops and disruptions while limiting new projects. Critical projects for growth such as the expansion of the airport in Male are expected to continue.
Country Classification and Determination of Scenario Stress Test
10. The debt carrying capacity of the Maldives remains weak. The composite indicator (CI) score is 2.40 (less than the 2.69 threshold) using the April 2022 WEO and the 2022 World Bank Country Policy and Institutional Assessment (CPIA). The CI is based on a weighted average of several factors such as the country’s real GDP growth, remittances, international reserves, world growth, and the CPIA score. The calculation of the CI is based on 10-year averages of the variables, across five years of historical data and five years of projections, and the corresponding CPIA.
11. Tailored stress tests for natural disasters, contingent liabilities, and market financing are relevant for the Maldives. The Maldives is susceptible to rising sea levels and rising global interest rates are expected to impact around 4 percent of budgetary external debt and a large share of outstanding external guaranteed debt (around US$750 million) that are linked to the SOFR.13 The tailored stress tests were kept to their default calibrations as these are appropriate for the Maldives. The tailored stress tests are not the most extreme shocks for any of the debt indicators. The most extreme shocks are the shock to exports for the PPG external debt indicators, and the shock to growth for the public debt indicators and external debt service to revenue indicator.
Country Classification
Country Classification
| Final | Classification based on current vintage | Classification based on the previous vintage | Classification based on the two previous vintages |
| Weak | Weak | Weak | Weak |
| 2.40 | 2.58 | 2.53 |
Country Classification
| Final | Classification based on current vintage | Classification based on the previous vintage | Classification based on the two previous vintages |
| Weak | Weak | Weak | Weak |
| 2.40 | 2.58 | 2.53 |
External and Public Debt Sustainability
12. Three of the four external debt indicators are above their respective thresholds under the baseline scenario (Figure 3). Maldives remains at a high risk of external debt distress even though growth in 2021 surprised on the upside. As a result, the external debt indicators have improved since the last DSA.14 The PPG external public debt-to-GDP ratio in the baseline scenario is projected to decrease by around 20 percentage points, from 55 percent of GDP in 2022 to around 35 percent. However, the PV of the PPG external debt-to-GDP ratio will remain above the threshold of 30 percent until 2026 (2030 in the previous DSA), after which it will converge and then fall below the threshold by 2027. Meanwhile, the PV of the debt-to-exports ratio is below its threshold in the baseline scenario as in the last DSA. Both liquidity indicators, the debt service-to-exports ratio and the debt service-to-revenue ratio, breach their thresholds under the baseline scenario due to elevated debt service obligations on existing external PPG debt as in the last DSA.
13. The authorities have been proactive in managing near term external rollover risks and need to address the bunching of payments in the medium term, but external gross financing needs have increased as a share of gross international reserves since Article IV 2021. In 2021 the authorities issued US$500 million in a Sukuk with a five-year maturity and a bullet repayment in 2026. However, the Sukuk was costly with a coupon of around 9.9 percent and a yield of 10.5 percent. Of the US$500 million, US$200 million of the Sukuk issuance was used to repay 77 percent of the maiden US$250 million Eurobond due in June 2022, mitigating rollover risks. The maturity of the privately placed (Abu Dhabi) US$100 million bond was renegotiated in 2019 and extended by three years to 2026. Since the privately placed Abu Dhabi bond and the Sukuk will be due in 2026, this year exhibits a spike in debt service payments. The authorities also need to address the exposure to SOFR. The reprofiling of the debt under the DSSI has also increased debt repayment in the medium term, though amounts are relatively small.15 The authorities created a sovereign development fund (SDF) in 2017 to mitigate the rollover risk from Eurobonds with accumulated funds in Rufiyaa equivalent to above US$270 million as of 1st September 2022.16 The authorities are considering ways to restructure the SDF to act as a buffer and Fund TA has been requested. In the medium-term, rollover risks associated with commercial bonds, higher debt servicing costs, and continued borrowing to finance large fiscal deficits in the baseline lead to protracted breaches in several external debt indicators, making debt not sustainable under the baseline (Figure 3).
Maldives: External Vulnerabilities and Debt Service
(In US dollars and share of Gross International Reserves (GIR))
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Source: IMF Staff Estimates.Note: Framework assumes roll over i.) A bond issuance of US$100 million in 2025 and maturing in 2030, ii) followed by another bond issuance of US$225 million in 2026 and maturing in 2031.14. Overall public debt indicators suggest a high overall risk of debt distress (Figure 4). The total PPG debt-to-GDP ratio declined by around 30 percentage points in 2021 to around 124 percent on the back of higher tourism led-GDP and is expected to decline to around 103 percent of GDP by 2027.17 Given Maldives’ weak debt carrying capacity, the threshold on overall PV of debt-to-GDP is 35 percent. The Maldives breaches this threshold for the entire projection period. The domestic debt market is an important source of financing for the government with domestic debt making up 53 percent of total PPG debt in 2021 (about 62 percent is short-term). It is worth noting in this context that although the Maldives qualifies for PRGT resources and thus uses the LIC DSF, the structure of the economy is closer to an EM given the level of the country’s development and GDP-per capita (close to US$8400 and continue to be in the Upper Middle-Income category). The Maldives has been able to access capital markets in recent years and foresees up to a $500 million of further issuance under its global sukuk program (see footnote 11). Nonetheless, the debt-to-GDP ratio of the Maldives is well-above the prepandemic ratio of around 80 percent under the baseline. A sustained adjustment of around 3 percent of GDP however, beyond GST, would help to lower the PV of public debt below 70 (50) percent of GDP by 2032 (2042). The IMF and the WB are both providing debt management technical assistance to the authorities. With gross financing needs remaining elevated, the authorities should develop a medium-term debt management plan.18 The Ministry of Finance is committed to transparency and formulates and publishes its medium-term debt strategy on its website annually. In addition, a public debt bulletin is published biannually and figures on debt outstanding are published quarterly.
Maldives: Gross External Financing Need as a Share of Gross International Reserves
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Sources: Maldives Ministry of Finance; and IMF staff estimates.Vulnerability Assessment
15. Maldives has a high risk of external and overall debt distress. Some debt indicators, such as the public debt-to-GDP ratio, have improved in the near term, compared to the previous September 2021 Debt Sustainability Analysis (DSA). This improvement reflects the robust recovery in tourism and growth in 2021. The PV of the PPG external debt-to-GDP ratio will converge to the 30 percent threshold and then fall below the threshold by 2027. Nevertheless, external gross financing needs have increased significantly relative to the 2021 DSA. The external position from 2022 onwards is expected to weaken relative to the 2021 DSA due to higher commodity prices exacerbated by the war in Ukraine and deeper fiscal spending pressures arising from subsidies and authorities expanded medium-term public investment program. Financing the larger fiscal deficit has turned more difficult and expensive, triggering the need to extend the suspension of elements of the FRA to allow the increased cap on MMA advances for two years, beyond what was envisaged in April 2020, until 2023 (a one-year extension was expected during 2021 Article IV). The authorities are, and have been, current on debt service obligations to both domestic and external creditors. While the recent Sukuk issuance partially mitigates rollover risks, high debt servicing costs through the medium-term and continued borrowing, with shorter tenure, to finance large fiscal deficits lead to protracted breaches in several debt indicators over the medium term. As such, debt is assessed to be not sustainable under the baseline projections.
16. Addressing debt vulnerabilities requires balanced and sustained fiscal consolidation and continued strong growth. In addition to the planned increase of GST rates, which is included in the baseline, a sustained adjustment of around 3 percent of GDP, would help lower the PV of public debt below 70 (50) percent of GDP by 2032 (2042) and put debt on a sustained downward path, although liquidity ratios would remain elevated over the medium term (text charts right below). Fiscal consolidation should include rationalizing capital spending, especially in large public investment projects carried out by the central government or SOEs and improving the targeting of social assistance, including in social housing programs. It should also comprise streamlining current expenditures - both subsidies and containing wage increases and further domestic revenue mobilization. Staff noted the authorities’ adoption of fiscal anchors in their 2023-2025 medium-term fiscal strategy to support fiscal sustainability. However, more effort is needed, and on-going reforms are being implemented to improve governance and public financial management (PFM). The debt dynamics over the medium-term will remain vulnerable to adverse shocks to growth, interest rates (due to SOFR-linked debt, including a large share of guaranteed external debt and about 4 percent of direct budgetary debt), and the fiscal position. Authorities don’t plan to access significant amounts of expensive external financing until 2025 and would like access to concessional financing to mitigate roll-over of risk, particularly from the global sukuks. In this regard there is a need for greater coordination amongst donors supporting the Maldives’ development strategy, including through a creditor outreach event. The authorities will consider a new FX swap agreement under the existing South Asian Association for Regional Cooperation (SAARC) framework 2019-2022, which has been extended till 30 June 2023, should the need arise. These factors and a resumption of tourist arrivals from China-which is an upside risk to growth - could be useful in addressing and mitigating in part the debt service cliff in 2026.
Maldives: Indicators of Public and Publicly Guaranteed External Debt under Fiscal Consolidation Scenario, 2022-2032 1/
(In percent, unless otherwise mentioned)
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.Maldives: Indicators of Public Debt under Fiscal Consolidation Scenario, 2022-2032
(In percent)
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.AUTHORITIES’ VIEWS
17. The authorities agree that the risk of external debt distress and overall risk of debt distress remains high.
The authorities emphasized that understanding the context of the COVID-19 shock and the subsequent and persistent commodity price shocks is important in assessing debt sustainability. Following the severe shock to GDP that led to a spike of the debt-to-GDP ratio, persistent oil and food price shocks offset the improvement that the post-pandemic tourism rebound could have brought. Given the severity of these exogeneous and global shocks, the authorities suggested that a more nuanced view beyond the LIC DSF model is needed. The authorities highlighted that any assessment on debt sustainability should give credit to the close to concessional nature of the existing debt stock. 86 percent of the direct external debt portfolio has an interest rate below 3 percent, and for external PPG debt this is around 55 percent. While the Maldives remains at a high risk of external debt distress and a high overall risk of debt distress, the US$100 million private placement in 2022 and the 2021 Sukuk issuance—US$500 million— helped the country mitigate rollover risks in the near term by shifting the amortization and interest payments to 2025 and 2026, respectively. The authorities also highlighted that the market yield of the Sukuk bonds responded positively to the announcement of tax hikes in 2023. As the cost of issuing debt on the capital market is expected to be high in this environment of increasing policy rates by central banks of advanced economies, the revised financing strategy does not include significant issuances to the international market prior to 2025, (2023-2025 fiscal strategy). The next significant issuance, amounting to US$200 million, is expected to go forward in 2025 by issuing either a conventional bond or a sukuk, (2023-2025 fiscal strategy). Between now and then, the strategy to obtain foreign financing is to rely primarily on concessional financing from bilateral or multilateral sources. As such, it is planned to raise US$100 million per annum in concessional foreign financing over the next three years, (2023-2025 fiscal strategy).
18. Moving forward, the authorities are committed to a fiscal consolidation path that will bring debt down to a sustainable path as laid out in the 2023-2025 fiscal strategy statement. The authorities will consider a new FX swap agreement under the existing SAARC framework 2019-2022, which has been extended till 30 June 2023, should the need arise. The authorities noted that the Sovereign Development Fund (SDF) established in 2017 to set aside funds for future debt repayment obligations of the Maldives, has reached the equivalent of above US$270 million as of 1st September 2022. However, most of the SDF funds is invested in T-bills denominated in Rufiyaa. With the recent increase in Airport Development Fee rates and the forecasted recovery in the tourist arrivals, the SDF size will continue to grow in the coming years. Currently the government, with technical assistance from the Fund, is working to strengthen the legal status and governance of the SDF. The IMF is also helping with the drafting of the Public Debt law, which is a part of the Government’s legislative agenda.
Maldives: Indicators of Public and Publicly Guaranteed External Debt Under Baseline Scenario, 2022-2032 1/
(In percent, unless otherwise mentioned)
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.Maldives: Indicators of Public Debt Under Baseline Scenario, 2022-2032 1/
(In percent)
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.Maldives: Drivers of Debt Dynamics - Baseline Scenario
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.Maldives: Realism Tools- Baseline Scenario
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Maldives: Market-Financing Risk Indicators-Baseline Scenario
Citation: IMF Staff Country Reports 2023, 366; 10.5089/9798400258633.002.A003
Sources: Country authorities; and staff estimates and projections.Maldives: External Debt Sustainability Framework, Baseline Scenario, 2019-2042 1/
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Maldives: External Debt Sustainability Framework, Baseline Scenario, 2019-2042 1/
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Maldives: External Debt Sustainability Framework, Baseline Scenario, 2019-2042 1/
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Maldives: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019-2042
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Maldives: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019-2042
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Maldives: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019-2042
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Maldives: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt-Baseline Scenario, 2022-2032
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Maldives: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt-Baseline Scenario, 2022-2032
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Maldives: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt-Baseline Scenario, 2022-2032
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Maldives: Sensitivity Analysis for Key Indicators for Public Debt-Baseline Scenario, 2022-2032
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Maldives: Sensitivity Analysis for Key Indicators for Public Debt-Baseline Scenario, 2022-2032
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Maldives: Sensitivity Analysis for Key Indicators for Public Debt-Baseline Scenario, 2022-2032
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The Maldives used the swap arrangements with the Reserve Bank of India (RBI) in the amount of US$400 million in 2020. This was paid back in full in two tranches, an early payment of US$150 in January 2021 and remaining US$250 at end end-December 2021. The swap arrangement with the RBI was for the purpose of reserve management and there is no indication of it is being used for fiscal purposes. Thus, the swap with RBI was excluded from public debt.
The advances were initiated in March 2020 and had an outstanding balance of US$214 million in end-2020. The Ministry of Finance was granted a one-year extension to the increase in the cap on government advances to help bridge financing needs in 2021. A further extension of the increase in cap in the amount of MVR 4.4 billion was granted until April 2022 and now extended until December 2023 at 1.5 percent per annum, over and above the securitized amount of MVR 2.5 billion.
The SBI loan is included in commercial bank claims on the central government.
As most of SOEs’ debt are guaranteed, the default calibrated shock of 2 percent of GDP is reasonable to cover the risk from non-guaranteed SOE debt.
Maldives did not satisfactorily implement two of the FY22 PPAs including a zero non-concessional borrowing (NCB) ceiling PPA for the second time for which Maldives faced a discount of IDA resource (or lost set-aside applied to FY22 allocation). As an IDA-eligible country at high risk of external debt distress, Maldives is subject to a zero ceiling on external non-concessional borrowing under IDA’s Sustainable Development Finance Policy (SDFP). If Maldives does not satisfactorily implement its missed FY22 PPA(s) in FY23, it will lose the set-aside currently applied to the FY23 allocation, and if it fails to implement the new FY23 PPA(s), then another set-aside will also be applied to the FY24 allocation. Repeated non-performance (especially of non-concessional borrowing ceilings) could also trigger an extension of the hardening of IDA financing terms.
The DSSI is a G20 initiative to help IDA-eligible countries cover the health costs of COVID-19. The original DSSI consisted of a suspension of interest and principal repayments due between May 1 and Dec. 31, 2020 from official bilateral creditors on direct debt. Private creditors were encouraged to participate. Two extensions of the DSSI were applied to suspend interest and principal payments falling due in 2021. The payment of suspended amounts will be NPV neutral. The suspended amounts from the original DSSI are to be repaid in three years with one-year grace. The amounts from the extension are to be repaid over 5 years with one-year grace.
See Alichi et al. ,2019, https://www.imf.org/en/Publications/WP/Issues/2019/03/26/Fiscal-Policy-Multipliers-in-Small-States-46679. Complementary structural reforms would also support growth.
The GST remains regressive as the effective tax rate is much lower for the better-off segments of the population, and there is considerable scope to identify further reforms that would, simultaneously or in combination, increase revenue mobilization while more effectively protecting the poor and vulnerable. A comprehensive welfare assessment of the tax and transfer system is being initiated this FY, which should provide the evidentiary basis for such reforms.
The new SDR allocation was transferred in 2022 to the Ministry of Finance together with the associated liability and therefore recorded as external debt.
The debt sustainability analysis does not include any financing gap at it assumes that unidentified financing is covered through domestic sources. Should domestic financing in this amount not materialize, the authorities will have to rationalize spending or increase revenue, to avoid the risk of accumulating domestic arrears or further monetization of the deficit. Both pending bills accumulation and central bank financing would likely raise Maldives’ sovereign debt premium in an environment of tighter global financial conditions.
The first tranche of USD 200 million was issued on 08th April 2021, with a tap on the same series on 30th April, of USD 100 million, and another US$200 million later in September 2021, leaving another US$500 million to access, of which a total of US$375 million is assumed to be used in the baseline for rollover.
Of note is the large contribution of residuals to changes in total external debt and attributed to movements in private sector, primarily tourism resorts, debt-creating inflows and outflows.
”Nearly 98 percent of the existing debt is based on fixed interest rate instruments,” page 10, Debt Bulletin, Issue 8, December 2021, Debt Management Department, Ministry of Finance. Variable rate facilities are a small component of the entire debt portfolio - about 4 percent of the direct debt and 15 percent of PPG debt.
Annual IDA disbursements from 2022 until the end of the projection period are assumed on small economy terms.
The authorities applied for the DSSI and both extensions. Relief in 2020 is US$19 million, and for 2021 estimated at US$69 million.
The authorities set up the Sovereign Development Fund (SDF) in 2017 collecting Airport Development Fee and dividends from the state-owned airport operator to repay the external loans related to the expansion of the international airport.
The decline in total PPG debt-to-GDP ratio was projected at 9 percentage points between 2020 to 2021 in the 2021 Article IV.
Performance and policy actions (PPA) under IDA’s SDFP are being carried out to strengthen debt transparency and debt management. Maldives is an IDA only country and is borrowing on small economy terms.
