IMF Cautions Maldives Against High Risk Of External And Overall Debt Distress
Following the pandemic-induced contraction, the Maldivian economy expanded by 13.9% in 2022 and is estimated to grow by 4.4% in 2023, according to the IMF.
The Maldives’ post-pandemic growth has been strong, but fiscal and external vulnerabilities have increased, calling for urgent policy adjustment, according to the International Monetary Fund.
“Without significant policy changes, the overall fiscal deficits and public debt are projected to stay elevated, and the Maldives remains at high risk of external and overall debt distress," the IMF said in its Article IV mission on the island country.
Amid elevated fuel prices coupled with continued strong import demand, the current account deficit in 2024 is projected to remain large, albeit gradually narrowing over the medium term, it said.
Following the pandemic-induced contraction, the Maldivian economy expanded by 13.9% in 2022 and is estimated to grow by 4.4% in 2023, according to the IMF.
As tourist arrivals are expected to rise further, growth is projected at 5.2% in 2024. The Velana airport terminal expansion and associated increase in hotel accommodation capacities are projected to boost growth potential.
"Nevertheless, uncertainty surrounding the outlook remains high and risks are tilted to the downside, calling for urgent policy adjustment," the IMF stated.
“With limited policy space and growing balance of payments pressures, swift implementation of a strong and credible form of fiscal consolidation, comprising holistic expenditure rationalisation and domestic revenue mobilisation, is needed, it said.
Reforming state-owned enterprises is also warranted to reduce additional fiscal burdens, according to it. Strengthening fiscal institutions and public financial and debt management frameworks is critical to enhancing the credibility and effectiveness of fiscal policy.
In this regard, the authorities are taking a welcome step to develop an ambitious and homegrown fiscal reform agenda, including subsidy reforms that phase out existing subsidies and replace them with targeted direct income transfers, Aasandha—healthcare reform, reprioritisation and rationalisation of public sector investment programme, SOE reforms, and are committed to urgently implementing this, the IMF said.
The Maldives is highly vulnerable to climate change risks, with potentially severe economic costs due to floods and rising sea levels. Given the Maldives’ vulnerabilities to climate change and natural disasters, strengthening institutions to support climate adaptation and mitigation efforts will help enable access to additional climate financing and deliver on the climate pledges, it said.
Improving the business climate, strengthening governance, and enhancing skill development will also support strong, inclusive and sustainable growth, it said.
