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Maldives 2019 Article IV Consultation Summary

Core Content

The 2019 Article IV Consultation with the Maldives by the IMF focused on economic developments, policy recommendations, and risks associated with the country's fiscal and external imbalances. The consultation took place between February 20 and March 5, 2019, with the Executive Board concluding its review on May 29, 2019.

Main Economic Developments

• Growth: The Maldives experienced strong growth, with real GDP growth at 6.9% in 2017 and an average of 9.1% in the first three quarters of 2018, driven by tourism, commerce, and construction.
• Inflation: Inflation decelerated to 0.2% in early 2019, due to lower administered prices for staples and reinstatement of food subsidies.
• Fiscal Deficit: The 2018 fiscal deficit (including grants) was 4.3% of GDP, up from 3% in 2017, mainly due to increased current spending in social welfare, subsidies, health, and student loans.
• Public Debt: Public and publicly guaranteed (PPG) debt reached 70% of GDP in 2018, driven by government guarantees for state-owned enterprises (SOEs).
• Current Account Deficit (CAD): The CAD reached 24% of GDP in 2018, due to higher imports from public infrastructure and new resort developments.
• Reserves: Gross international reserves (GIR) increased to US$756 million (2.4 months of imports), partly due to a US$100 million swap with the RBI.

Key Policy Recommendations

A. Macroeconomic Policies

• Fiscal Sustainability: Rebuild fiscal buffers by prioritizing productive infrastructure and development spending, and increase revenues through tax reforms, strengthening tax administration, and improving efficiency and equity.
• Monetary Policy: Tighten monetary policy to align with the exchange rate peg, and consider a basket exchange rate peg once operational and communication challenges are addressed.
• External Imbalances: Address external imbalances by reforming the exchange rate regime, building international reserves, and enhancing financial inclusion.

B. Safeguarding Financial Stability and Enhancing Financial Inclusion

• Financial Stability: Monitor credit growth in relation to nominal GDP growth, and address supervisory data gaps.
• Financial Inclusion: Encourage financial inclusion through reforms and policy measures that expand access to financial services.

C. Policies to Promote Sustainable and Inclusive Growth

• Structural Reforms: Implement reforms to increase competitiveness, encourage private sector participation, and improve the regulatory environment.
• Private Sector Role: Strengthen the private sector's role in new growth areas by creating a favorable business climate and improving governance.
• Rule of Law and Anti-Corruption: Enhance rule of law, property rights, and anti-corruption efforts to support sustainable and inclusive growth.

D. Strengthening Governance

• Transparency and Accountability: Improve governance, transparency, and AML/CFT compliance.
• Debt Management: Strengthen debt management, especially regarding SOEs and public guarantees, to reduce contingent liabilities.

Key Risks and Outlook

• Outlook: Real GDP growth is projected to remain strong at 6.5% in 2019, with inflation rising moderately.
• CAD: The current account deficit is expected to narrow to 19.5% of GDP in 2019, and gradually adjust to just below 10% of GDP by 2023.
• Debt Risks: High and rising public debt remains a major risk, with PPG debt expected to reach 82% of GDP by 2023.
• Debt Distress: The debt-to-GDP ratio could increase further in the event of adverse shocks, raising refinancing costs and weakening investor confidence.
• Fiscal Deficit: Under current policies, the fiscal deficit is expected to rise to 5% in 2019, and further widen in 2020, with only slight improvement over the medium term.

Executive Board Assessment

• Economic Growth: The Executive Board welcomed the strong growth and positive medium-term outlook, but emphasized the need for policies to reduce fiscal and external imbalances.
• Fiscal Consolidation: They called for fiscal consolidation to restore sustainability, build resilience, and manage risks from public guarantees.
• Exchange Rate: A tighter monetary policy stance is needed to maintain exchange rate stability and reduce external imbalances.
• Structural Reforms: The Board encouraged structural reforms to improve the business climate, boost competitiveness, and enhance financial stability.
• Debt Management: Strengthening debt management and institutional oversight of SOEs is essential to reduce risks.

Key Figures and Data

Conclusion

The IMF highlighted the need for urgent action to address fiscal and external imbalances, improve governance, and enhance financial stability. The Maldives remains highly vulnerable due to large public debt, high CAD, and limited policy space, requiring sustained and inclusive growth policies to ensure long-term stability and reduce risks from external shocks and debt distress.