IMF Executive Board Concludes 2022 Article IV Consultation with Maldives
December 20, 2022
Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] 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 Assessment [2]
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.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm
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 (incl. 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 US$; e.o.p.) |
712 |
754 |
985 |
806 |
695 |
582 |
611 |
591 |
510 |
697 |
||||||||
|
In months of GNFS imports |
2.1 |
3.7 |
3.4 |
2.2 |
1.7 |
1.3 |
1.3 |
1.2 |
1.0 |
1.3 |
||||||||
|
Exchange Rate (rufyiaa/US$, e.o.p.) |
15.4 |
15.4 |
15.4 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||||||||
|
Memorandum items: |
||||||||||||||||||
|
GDP (in millions of rufiyaa) |
81,586 |
86,259 |
57,569 |
80,192 |
92,094 |
103,002 |
111,526 |
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 (percent change) |
10.2 |
12.8 |
-62.7 |
152.8 |
13.0 |
5.1 |
8.6 |
11.3 |
9.1 |
7.8 |
||||||||
|
Tourist arrivals (percent 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. |
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|
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. |
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Huong Lan Vu
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