IMF Staff Completes 2017 Article IV Mission to Maldives

July 17, 2017

• IMF staff expects a modest growth recovery with low inflation, and continued weak fiscal and external positions. GDP growth is projected to recover gradually to above 4.5 percent in 2017 and 2018.
• Large investments in sectors including housing, health, airport facilities and others aim to diversify the economy and support future growth. However, looking ahead, the Maldives economy faces a number of risks, including fragile fiscal and external positions, slower growth in the advanced economies, and adverse climate change. The large infrastructure surge increases Maldives’ vulnerability arising from high debt and needs to be managed prudently.
• Policies should focus on reducing fiscal and external deficits, building foreign reserves, developing the financial sector, and enhancing longer-term growth potential through structural reforms.

An International Monetary Fund (IMF) staff team, led by Mr. Philippe Karam, visited Malé during July 5-18 for the 2017 Article IV consultation. At the conclusion of the visit, Mr. Karam issued the following statement:

“Maldives is scaling up its infrastructure, which could raise the economy to a higher growth path. This investment surge has the potential for transforming the economy but also carries risks given the country’s large fiscal and external imbalances. Policies should focus on mitigating these risks while building resilience and pursuing inclusive and sustainable growth.”

“In the near term, we expect a modest growth recovery with low inflation, and continued fragile fiscal and external positions. GDP growth is projected to recover gradually to over 4.5 percent in 2017 and 2018 and stabilize at close to 5 percent over the medium term, on account of strong construction and tourism activity. The fiscal deficit widened in 2016 and is projected to decline gradually in 2017 and over the medium term. Externally, the current account deficit is expected to increase significantly due to the infrastructure ramp up and higher material imports, reserves to remain low, and the real exchange rate to appreciate.”

“Looking ahead, the economy faces a number of downside risks. External risks stem from slower growth in the advanced economies that could affect tourism and undermine the weak external position. The Maldives also remains highly vulnerable to adverse climate change.”

“Domestically, the large infrastructure scale up in the Greater Malé region has the potential to consolidate population in a widely dispersed island economy, close gaps in electricity, transportation, and social services, as well as promote climate change adaptation. The investment will also help expand tourism, which will benefit employment. However, this surge increases Maldives’ vulnerability arising from high public and external debt and needs to be managed prudently.”

“To this end, policies should focus on reducing the large fiscal and external deficits, building foreign reserves, developing the financial sector, and enhancing longer-term growth potential through structural reforms.”

“On fiscal policy, the government has implemented a number of strong initiatives and measures, mainly aimed at reducing spending, including subsidy reforms and wage and employment rationalization, in line with past IMF advice. Public financial management measures have also been strengthened for better commitment control and cash management. In addition, revenue raising measures are also needed to cover the large scale up costs. Fiscal consolidation needs to continue to restore sustainability and be supported by further revenue and expenditure reforms.”

“Monetary policy should be tightened to support the exchange rate peg from any pressures arising from government financing and balance of payments. The peg regime is appropriate for the Maldives given the small scale, high openness and dollarized nature of the economy. With greater tourism from Asia and potential increased financing from the region, consideration could be given to an import-weighted currency composite in the future. Stress testing and oversight capacity of the banking sector should continue to be strengthened”

“In enhancing sustainable growth, staff supports measures in areas of investment, electricity generation, renewable energy, and waste management, and strengthening active labor market policies to promote investment in job skill training. Fostering competition and promoting economic diversification is key.”

“Finally, the Maldives stands to gain from advance identification and easier access to disaster-related financing in combatting climate change. A proactive policy approach should integrate risk reduction and disaster response programs into the core budget, along with public investment planning and a sound debt management framework. Climate change adaptation should be part of an overall national development strategy that aims to capitalize on infrastructure investment while managing the fiscal risks.”

The team met with Minister of Finance and Treasury, Mr. Ahmed Munawar, Governor of Maldives Monetary Authority, Dr. Azeema Adam, the Economic Affairs and Public Finance Committees’ of the Majlis, and Cabinet ministers and senior officials, banks, tourism operators and other representatives of the private sector and multilateral organizations. 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 September 2017.