IMF: Fiscal and external vulnerabilities in Maldives continue to increase

Shops in market area of Male' City on March 22, 2021. (Sun Photo/Fayaz Moosa)

The International Monetary Fund (IMF) on Wednesday released an end-of-mission statement conveying preliminary findings after a team from the organization concluded a visit to Maldives.

The visit to discuss the recent economic developments, the outlook, and the policy priorities of Maldives, took place from June 21 to 29.

The mission was led by Tidiane Kinda, who issued a statement, which noted that the Maldivian economy was recovering from COVID-19 pandemic, underpinned by a strong resumption in tourism on the back of the authorities’ rapid vaccine rollout and policy support measures.

However, fiscal and external vulnerabilities continue to increase, mainly driven by high capital spending, rising subsidies, and an increased interest burden.

“The strong recovery in the tourism sector and associated spillovers to other sectors are expected to yield a solid growth of 8.7 percent in 2022. Inflation is projected to reach 3.1 percent in 2022, reflecting the partial pass-through from higher global food and energy prices due to increasing price subsidies, and spending pressures for the 2023 elections.”

The statement went on to say that the economic outlook is subjected to some significant risks such as an economic slowdown in key source markets for tourism and tighter global financial conditions.

“Fiscal vulnerabilities remain high. The fiscal deficit is expected to widen and remain in double digits in 2022, on the back of sustained high infrastructure spending and emerging spending pressures from rising subsidies, increased interest costs, and reforms of the wage bill.”

Moreover, one of the key factors noted to be contributing to fiscal vulnerabilities was the continued support of state-owned enterprises (SOEs). This is mostly through subsidies and capital contributions to repay debt contracted with sovereign guarantees.

Additioanlly, IMF said that though the debts have declined from peak pandemic period, Maldives was still at a high risk of debt distress.

“Dollar shortages have persisted with significant spreads in the parallel foreign exchange market. International reserves are declining, reflecting high food and fuel prices and fiscal spending pressures. Higher external financing costs are limiting options to tap international capital markets in the near term.”

IMF also noted that the current ongoing recovery window provides ample opportunity to swiftly implement the reformations needed to secure fiscal and debt sustainability.

The reformations include raising domestic revenue and rationalizing public expenditures.

Additionally, IMF noted and welcomed the authorities plans to increase tourism and domectis goods and services taxes, and reforming subsidies as important steps to recover.

IMF expressed their gratiture for the authorities and other counterparts for the hospitality and fruitgul disucssions during their stay.

They also expressed eagernedd to continitin to continuing the dialogue during the upcoming 2022 Article IV consultation in September.