Press Release No. PR19/64

IMF Staff Completes 2019 Article IV Mission to Maldives

March 5, 2019

• Following strong growth in 2018, IMF staff projects growth to moderate to 6.5 percent in 2019 and 6.0 percent in 2020.

• The medium-to-long-term outlook can be challenging, managing large fiscal and external imbalances, with risks tilted to the downside. External conditions are becoming less favorable, underscoring the need to increase the economy’s resilience.

• The IMF team assesses that a measured tightening of policies is warranted to safeguard macroeconomic and external stability, against fragile fiscal and external positions.

• Sustaining strong growth and lifting medium-term growth prospects will depend on actions to make the Maldives’ economy more competitive and generate a more conducive environment for investment to boost private sector development.

An International Monetary Fund (IMF) staff team, led by Mr. Philippe Karam, visited Malé during February 20-March 5, 2019 for the 2019 Article IV consultation. At the conclusion of the visit, Mr. Karam issued the following statement:

“Supported by large investments in infrastructure, tourism and real estate, growth is expected to remain strong in 2019. A potentially good outlook provides an opportunity to address deep-seated structural weaknesses and sustain long-term growth. At the same time, the current economic expansion also comes with challenges that need to be carefully managed. Higher fiscal and current account deficits and growing external and public debt have increased vulnerability to adverse shocks.

“In the near term, the economy faces several downside risks. External risks stem from trade tensions and policy uncertainty, and slower growth in advanced economies and China which would negatively affect tourism and undermine the weak external position. Tighter global financial conditions could push up borrowing costs. In the long-term, the Maldives remains highly vulnerable to climate change.

“Maldives remains at a high risk of debt distress. The high and increasing level of public and publicly guaranteed debt needs to be managed carefully to reduce fiscal sustainability risks. Over the medium term, public debt is projected to increase before returning to current levels. The team welcomes the authorities’ efforts to improve the monitoring and publication of public debt, including government guarantees.

“Financing pressures from domestic debt remain as the bulk of issuance is in short-term securities. For external debt, amortizations from large infrastructure projects pick up starting next year. Safeguarding and building the Sovereign Development Fund and reserve buffers is crucial in alleviating financing pressures.

“To manage fiscal and external sector pressures and promote a more durable economic expansion, a measured tightening of policies is warranted—tighter monetary conditions and smaller fiscal deficits in the near-term than projected under current policies would be more suited to current economic circumstances. These adjustments would reduce external pressures and foster a pace of expansion more consistent with the economy’s current domestic productive and revenue-generating capacity.

“Against this backdrop, the IMF staff team and the authorities discussed policies to restore fiscal buffers, strengthen public financial and debt management, improve governance, and invest in new sources of growth.

“Good progress is being made with strengthening public investment management, increasing the credibility of annual budgets and integrating the annual budgets with the medium-term fiscal and debt management strategies. These reforms have the potential to improve the quality and delivery of government services, raise investment efficiency and improve debt management. The 2019 Budget provides an opportunity to realign spending more closely to the goals of the government’s National Development Strategy.

“As the new government implements its new initiatives, it needs to be mindful of the limited fiscal space for implementing countercyclical fiscal policies and addressing the longer-term challenge of climate change. The team welcomes the authorities’ efforts to reform the tax system and restrain the growth of spending, including subsidies and health care spending.

“The team welcomes the Maldives Monetary Authority’s Strategic Plan to modernize the monetary policy framework and the transmission of its policies to the broader economy. Monetary conditions could be tightened to control liquidity growth and support the currency peg.

“The peg has served the Maldives well and remains appropriate. However, updating the exchange rate management to better meet the needs and challenges of the Maldivian economy is desirable. In this context, staff welcomes the MMA plans to review the current exchange rate regime with the aim to strengthen exchange rate stability, accumulate foreign reserves and increase resilience to external shocks.

“The Maldives confronts large governance challenges and the new administration has properly focused on addressing these challenges as part of its National Development Strategy. Staff welcomes measures that will serve to strengthen governance and institutions and reduce corruption.”

“Actions to make the economy more competitive and generate a more conducive environment for investment will be critical to lift its medium-term growth prospects and create high value-added jobs. The team welcomes the government’s ongoing efforts to improve the business climate, including by revising investment-related laws and regulations, and enhancing access to finance, particularly for Small and Medium-sized Enterprises and the underserved population.

“The IMF stands ready to support the government’s reform efforts through policy advice and the development of better capacity for economic analysis and policy formulation, including on monetary and fiscal policies, tax reform and revenue administration, financial sector supervision, and macroeconomic statistics.

The team met with the Minister of Finance, Mr. Ibrahim Ameer, Governor of Maldives Monetary Authority, Mr. Ahmed Naseer, Cabinet ministers and senior officials, the Attorney General, the Majlis Economic Affairs and Public Finance Committees, banks, private sector representatives, development partners, and civil society members. Staff from the World Bank and the Asian Development Bank also joined some of the discussions. The team wishes to thank the authorities for their cooperation and hospitality during its visit.

The team will prepare a report that, subject to management approval, is tentatively scheduled to be considered by the IMF’s Executive Board in April 2019.