Press Release No. 24/152

IMF Executive Board Concludes 2024 Article IV Consultation with Maldives

May 13, 2024

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Maldives.

Despite headwinds from the war in Ukraine, the Maldives’ economic recovery from COVID‑19 pandemic has shown resilience. The economy grew by 13.9 percent in 2022, with the tourism sector contributing to about one third of growth. Inflation has been contained at 1.9 percent y‑o-y in December 2023, helped by falling food and energy prices and price subsidies.

The successful implementation of goods and services tax (GST) rate hikes has borne fruit, bringing sizable revenue windfalls in 2023. Nevertheless, the overall fiscal deficit is estimated to reach13.4 percent of GDP in 2023, with public debt to rise further to 118.7 percent of GDP in 2023. Reflecting surging capital goods imports, high import costs of food and fuel, and strong import demands associated with tourism activity, the current account deficit sharply widened to 22.8 percent of GDP in 2023. Gross international reserves declined to US$ 589 million at end-2023, covering about 1.4 months of prospective imports.

Real GDP growth is estimated to moderate to 4.4 percent in 2023, before gradually rising to 5.2 percent in 2024. Looking ahead, the Velana international airport terminal expansion and associated increase in hotel accommodation capacities is projected to further boost growth potential. Amid elevated commodity prices coupled with continued strong import demands, the current account deficit is projected to remain large albeit gradually narrow over the medium term. Without significant policy changes, the Maldives remains at high risk of external and overall debt distress. Uncertainty surrounding the outlook is high and risks are tilted to the downside, including from delayed fiscal consolidation and weaker growth in key sources markets for tourism. The Maldives is highly vulnerable to climate change risks, with potentially severe economic costs due to floods and rising sea level.

Executive Board Assessment[2]

Executive Directors welcomed the Maldives’ strong post-pandemic recovery, but underlined that large fiscal and external vulnerabilities persist and risks are titled to the downside. Against this background, Directors stressed the need for immediate policy adjustments to safeguard macroeconomic and financial stability, restore debt sustainability, and support sustained strong and inclusive growth.

Directors welcomed the authorities’ commitment to advance their homegrown fiscal reforms. They underscored that strong and credible fiscal consolidation is urgently needed to restore debt sustainability and help rebuild international reserves. This should entail a combination of holistic expenditure rationalization and further domestic revenue mobilization. Strengthening public financial and debt management is also critical to enhance the effectiveness of fiscal policy.

Directors concurred that better fiscal and monetary policy coordination should facilitate necessary monetary policy actions to safeguard the exchange rate peg. To this end, they commended the authorities’ decisive action to discontinue the exceptional use of the Maldives Monetary Authority advances, and underscored that this should be complemented by more active liquidity management over time. Directors also encouraged an acceleration of foreign exchange market reforms to enhance the credibility of the peg.

Directors urged the authorities to adopt macroprudential policies to help mitigate systemic risks stemming from the sovereign-bank nexus. They encouraged the authorities to swiftly introduce macroprudential institutional framework and instruments and further develop the systemic risk monitoring capacity. Directors considered that the financial safety net needs to be strengthened, along with enhancing financial sector oversight and crisis management. They emphasized that addressing gaps in the legal framework and implementing the AML/CFT framework remain a priority.

Directors encouraged the authorities to accelerate reform efforts to support inclusive and sustainable development. They emphasized that improving the business climate, strengthening governance and tackling corruption, and enhancing skill developments are crucial to boost growth potential and competitiveness. Given the Maldives’s high vulnerability to climate change, Directors underscored that reforms to integrate climate considerations into the public financial and investment management processes and frameworks will help support climate adaptation and mitigation efforts and mobilize additional climate finance.

[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.