IMF Executive Board Concludes 2019 Article IV Consultation with Maldives
Washington, D.C ,
On May 29, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation  with Maldives. The Maldives’ growth has been strong in recent years, driven by tourism, commerce, and construction. Real GDP growth reached 6.9 percent in 2017 and an average of 9.1 percent in the first three quarters of 2018 (y/y), led by strong investment in tourism, commerce, and construction. Inflation has decelerated to 0.2 percent in early 2019 driven by a decrease in administered prices for staples in April 2018 and reinstatement of staple food subsidies.
However, the Maldives continues to face large and growing public debt and a high current account deficit. The 2018 fiscal deficit (including grants) is estimated at 4.3 percent of GDP, compared to 3 percent of GDP in 2017, and public and publicly guaranteed debt continued to increase, to over 70 percent of GDP in 2018, partly reflecting government guarantees to external borrowing by state-owned enterprises. The widening of the deficit reflects mainly an accelerated growth in social welfare contributions, subsidies, health, and student loan scheme spending. Monetary policy has been accommodative and growth of credit to private sector has picked up. Despite strong growth in tourism revenues, the current account deficit reached 24 percent of GDP in 2018, reflecting higher imports associated with increased public infrastructure investment and new resort developments.
The outlook is for continued strong growth and moderate inflation, and only a gradual improvement in fiscal and current account deficits. Real GDP growth is projected to reach 7.5 percent in 2018 and to remain strong at 6.5 percent in 2019, driven by government infrastructure investment, tourism, and construction. Inflation is forecast to increase moderately in 2019. As major infrastructure projects will gradually start to unwind, the current account deficit will begin to narrow. Under the current policies, the fiscal deficit is projected to remain elevated. However, successful implementation of tax reforms and improved tax administration, together with measures to contain budgetary spending, would result in a narrowing of both fiscal and current account deficits and mitigate the risks posed by high and rising public and external debt.
Executive Board Assessment 
Executive Directors welcomed the strong growth of the Maldives’ economy, supported by tourism, commerce, and construction and indicated that the medium-term growth outlook remains positive. Noting Maldives’ high and growing public and external debt, moderate foreign reserves, and vulnerabilities to shocks, Directors called for policies to reduce fiscal and external imbalances, build resilience to shocks, including from natural disasters and climate change, and that foster sustained and inclusive growth.
Directors welcomed the authorities’ commitment to fiscal consolidation to restore fiscal and debt sustainability and reduce external imbalances. They noted that a combination of revenue and expenditure measures is needed to achieve a growth-friendly fiscal consolidation. In this context, Directors welcomed the authorities’ intention to introduce a personal income tax and emphasized the need for strengthened tax administration. Directors also called for keeping current spending under control, investment spending prioritization and continuous improvements in public financial management and budget control. Directors also noted the potential fiscal risks associated with external borrowing by state-owned enterprises (SOEs) and associated public guarantees and stressed the need for a strengthening of debt management, including the oversight and institutional framework of the SOE activities.
Directors indicated that a tighter monetary policy stance would ensure compatibility with the exchange rate peg, and together with fiscal consolidation would contribute to lower external imbalances and a build-up in reserves. They noted that the authorities’ decision to establish the Sovereign Development Fund was a welcome development. Directors encouraged increasing technical assistance to support the Maldives Monetary Authority’s ongoing efforts to modernize monetary policy and the foreign exchange operations framework.
Directors commended the authorities’ efforts in making growth more inclusive and diversifying the economy, while ensuring financial resilience. They welcomed the formation of the National Development Strategy focusing on building resilience and creating economic opportunities and encouraged the authorities to implement structural reforms, such as strengthening the rule of law, property rights, and the legal and regulatory environment, to improve the business climate and boost competitiveness. On the financial sector, while noting strong capital positions and profitability of banks, they encouraged the authorities to address supervisory data gaps and enhance financial inclusion.
Directors also welcomed the authorities’ commitment to strengthening governance and transparency. They noted that further improvement is needed to strengthen AML/CFT compliance and to improve the anti-corruption framework.