Article

Country Briefs: Prudent Fiscal Policy Holds Key to Maldives’ Future Economic Stability

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
May 2006
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In the decade prior to the December 2004 tsunami, Maldives benefited from expanding tourism receipts and sound macroeconomic management to raise per capita income by 60 percent to above $2,500 and significantly improve social indicators. But the economic consequences of the tsunami were severe. Real GDP dropped by an estimated 3¾ percent in 2005, tourist arrivals fell by one-third, foreign exchange earnings plummeted, the current account deficit (exacerbated by higher oil prices) increased by 11½ percentage points of GDP, official reserves declined markedly, and the fiscal deficit surged.

According to the IMF’s latest economic review, however, tourist arrivals began to make a strong recovery toward the end of 2005, and real GDP is expected to rebound in 2006. And, despite high financing of the budget by the Maldives Monetary Authority (MMA), inflation has been subdued, because domestic currency lending has been modest.

Maldives
Est.Proj.
20022003200420052006
Real GDP (percent change)6.58.58.8-3.68.0
Consumer prices (period average)0.9-2.96.45.77.0
(percent of GDP, unless otherwise indicated)
Overall government balance-4.9-3.4-1.7-12.3-21.3
Current account balance-5.6-4.6-16.1-36.5-38.5
Gross official reserves (year-end,
million U.S. dollars)134.6161.0205.2187.2164.0
Data: Maldivian authorities and IMF staff estimates and projections.
Data: Maldivian authorities and IMF staff estimates and projections.

The IMF Executive Board expressed deep sympathy for the losses inflicted on Maldives by the tsunami and commended the authorities for recently accelerating reconstruction work with donor support. Looking ahead, Directors called for a return to a firm commitment to prudent fiscal policy, which, with monetary discipline, provides indispensable support for the country’s exchange rate peg arrangement. They underlined the importance of accelerating the introduction of corporate profit taxation and a broad-based sales tax to boost revenues, and of managing expenditures based on realistic revenue projections while protecting priority spending. The authorities were also urged to end automatic financing by the MMA.

Directors praised efforts to introduce indirect monetary management and improve banking supervision but urged the speeding up of structural reforms. A business environment conducive to broad-based private investment, supported by the privatization of public enterprises and the implementation of key economic and financial legislation, would be critical to achieving medium-term viability, they said.

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