IMF Highlights the Need for Urgent Fiscal Reforms in the Maldives

The International Monetary Fund (IMF) recently concluded its 2024 Article IV consultation with the Maldives, offering a comprehensive assessment of the country’s economic outlook and the pressing need for immediate policy adjustments. Despite demonstrating resilience in recovering from the COVID-19 pandemic, the Maldives faces significant fiscal and external vulnerabilities that require urgent attention to ensure sustainable growth and economic stability.

Economic Recovery and Challenges

The Maldivian economy exhibited strong growth in 2022, expanding by 13.9% with significant contributions from the tourism sector, which accounted for about one-third of this growth. Inflation was contained at 1.9% year-on-year in December 2023, aided by declining food and energy prices as well as government subsidies. The successful implementation of goods and services tax (GST) rate hikes also brought substantial revenue gains in 2023.

However, the overall fiscal deficit is estimated to have reached 13.4% of GDP in 2023, with public debt projected to rise to 118.7% of GDP. The current account deficit widened sharply to 22.8% of GDP, driven by surging imports of capital goods, food, and fuel, coupled with robust import demands associated with tourism activities. Consequently, gross international reserves declined to $589 million at the end of 2023, covering only about 1.4 months of prospective imports.

Economic Outlook

Real GDP growth is expected to moderate to 4.4% in 2023 before gradually increasing to 5.2% in 2024. The expansion of the Velana International Airport terminal and the increase in hotel accommodation capacities are projected to boost growth potential. However, the Maldives remains at high risk of external and overall debt distress without significant policy changes. The economy is highly vulnerable to external shocks, such as fluctuations in key tourism source markets and climate change impacts, which could lead to severe economic costs from floods and rising sea levels.

IMF Recommendations

The IMF's Executive Board emphasized the need for immediate policy adjustments to safeguard macroeconomic and financial stability, restore debt sustainability, and support sustained inclusive growth. Key recommendations include:

Fiscal Policy:

• Fiscal Consolidation: Immediate and credible fiscal consolidation is crucial. This involves expenditure rationalization and enhanced domestic revenue mobilization to restore debt sustainability and rebuild international reserves.

• Public Financial Management: Strengthening public financial, investment, and debt management is essential to improve the effectiveness and credibility of fiscal policy.

Monetary and Exchange Rate Policies:

• Monetary Policy Tightening: Aligning monetary policy with the exchange rate peg is necessary to maintain economic stability. This includes discontinuing the exceptional use of Maldives Monetary Authority advances and improving liquidity management.

• Foreign Exchange Market Reforms: Accelerating foreign exchange market reforms will enhance the credibility of the exchange rate peg.

Financial Sector Policy:

• Macroprudential Policies: Adopting macroprudential policies will help mitigate systemic risks stemming from the sovereign-bank nexus. Enhancing financial sector oversight and crisis management is also critical.
  

• Financial Safety Net: Strengthening the financial safety net and addressing gaps in the legal framework, particularly in the areas of anti-money laundering and combating the financing of terrorism (AML/CFT), are priorities.
  

Macro-Structural Policy:

• Climate Adaptation and Mitigation: Given the Maldives' high vulnerability to climate change, integrating climate considerations into public financial and investment management processes is vital. Mobilizing additional climate finance will support climate adaptation and mitigation efforts.

• Business Climate and Governance: Improving the business climate, strengthening governance, addressing corruption, and enhancing skill development are essential to boost growth potential and competitiveness.

Conclusion

The IMF's Executive Directors commended the Maldivian authorities for their commitment to advancing homegrown fiscal reforms. They stressed that strong and credible fiscal consolidation, combined with better fiscal and monetary policy coordination, is urgently needed to restore economic stability and ensure sustainable growth. By addressing these vulnerabilities and implementing recommended policy changes, the Maldives can navigate its current economic challenges and pave the way for a more resilient and inclusive future.