IMF warns Maldives at high risk of external debt

By Easwaran Rutnam

@easwaranrutnam

MALE, Dec 21 (Daily Mirror World) -- The International Monetary Fund (IMF) has warned that the Maldives remains at a high risk of external debt.

The warning was issued after the IMF Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Maldives.

The IMF said that Maldives’ economic activity rebounded strongly from the pandemic-induced contraction, supported by the authorities’ decisive policy measures. 

The recovery is expected to continue in the near term on the back of strong tourism growth and associated spillovers to related sectors such as transportation and trade. 

The IMF warned that the Maldives remains at a high risk of external debt distress and a high overall risk of debt distress. 

“The total public and publicly guaranteed (PPG) debt-to-GDP ratio declined from the pandemic peak of 154 percent of GDP in 2020, aided by the economic recovery, but is expected to remain high over the medium-term. External financing needs are projected to rise and draw on the already thin reserve buffers, increasing debt rollover risks. Dollar shortages have persisted, as reflected in large spreads in the parallel foreign exchange market. Risks to the outlook are tilted to the downside, stemming mostly from a sharp global economic slowdown, high commodity prices, and tighter global financial conditions. A resumption of tourist arrivals from China is an upside risk to growth,” the IMF said.

The Executive Board welcomed the rapid economic recovery from the pandemic, underpinned by a swift vaccination rollout, policy support, and a strong rebound in tourism. However, fiscal and external vulnerabilities remain elevated, and risks to the outlook are tilted to the downside, including from a sharp slowdown in key source markets for tourism, high commodity prices, and tighter global financial conditions. Against this background, Directors urged steadfast implementation of comprehensive reforms to reduce vulnerabilities and strengthen economic resilience.

Noting that Maldives is at a high risk of debt distress, Directors stressed that sustained fiscal consolidation relying on both expenditure rationalization and domestic revenue mobilization, and supported by conservative debt management, is the top priority. 

They emphasized that rationalizing capital spending and subsidies, combined with targeted assistance to the most vulnerable, and SOE reforms will be critical. Directors welcomed significant steps taken by the authorities toward tax and subsidy reforms and called for their swift implementation. 

They commended the authorities for the recent approval of the General Goods and Services Tax (GST) and Tourism Goods and Services Tax (TGST) reforms.

Directors also looked forward to the development of a Medium-Term Revenue Strategy and planned reforms of the Fiscal Responsibility Act. Should downside risks materialize, scarce fiscal resources should be reoriented toward targeted and temporary measures to support the most vulnerable.

Directors advised that the Maldives Monetary Authority (MMA) advances to the government should be gradually phased out to lower pressures on international reserves and prices. MMA should stand ready to further tighten monetary policy should inflationary pressures increase and/or the elevated parallel market premium widen further. Directors also urged implementation of FX reforms.

Directors agreed that financial sector policies should remain vigilant to safeguard financial stability, considering the large exposure of the banking sector to the sovereign and the expiration of pandemic-related lending support schemes. They encouraged continued enhancements in the AML/CFT framework and looked forward to the planned FSAP to help prioritize reforms in the financial sector.
Noting that the Maldives is extremely vulnerable to climate change,

Directors stressed the importance of investments in climate-resilient infrastructure to boost prospects for a more inclusive and resilient growth in the medium term. They noted that significant financial support from the international community will be needed for climate adaptation. Directors supported continued Fund technical assistance to enhance public financial management and improve access to climate-related funds. They also stressed the need to further strengthen governance.