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Publication Title | MALDIVES IMF Country Report No 16 135

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Text | MALDIVES IMF Country Report No 16 135 | 082

The authorities are committed to the stabilized exchange rate regime within the currency band and agree with staff that continued improvement in the fiscal position is the best way to support it. The exchange rate has stabilized since the 2011 devaluation; the capital account is very open; and the economy highly dollarized. Like other countries pegged to the dollar, the real exchange rate has appreciated by 30 percent since 2011. There is an active parallel market, which is structural in nature due to the size of dollar-denominated tourist transactions, with a relatively stable premium. The operation of the exchange system will remain under review, taking into account market developments. Regarding the Article VIII issues, the authorities believe the deviations from the official rate would remain until the fiscal deficit narrows and official reserves strengthen.
The MMA eased monetary policy by significantly reducing the marginal reserve requirement in 2015 which helped reduce borrowing cost, boost private credit, and lengthen maturities on sovereign bonds. Despite this easing, the overall expansion in monetary aggregates remained contained in 2015, reflecting lower net foreign assets and sluggish growth of private sector credit in the first half of the year. Credit picked up in the second half of the year after a long spell of stagnation. Enhancing financial inclusion is a national priority and the authorities would welcome Fund support, including providing information on successful experiences elsewhere. They are moving toward mobile banking services through the use of Dhoni Banking Units to reach the outer islands. An announced sovereign guarantee scheme for private sector loans in tourism aims to rejuvenate investment in some projects that were stalled during the global financial crisis. In designing the scheme, the authorities plan to limit its size and its contingent cost. More generally, the MMA continues to reinforce its supervisory capacity and activities, within a risk-based approach.
The authorities’ national development plan for climate adaptation was shared with staff. It highlights the challenges and policies considered important to mitigate the impact of climate change. The authorities agree that there is scope for a more strategic approach that would set in context current infrastructure plans and include more systematic climate adaptation planning, including reporting on the budgetary impact. The authorities agree with staff’s suggestion to quantify and present the climate adaptation policies in each budget. It is hoped that adding such detail would help access possible financing. They would welcome specific examples of how this has been done by others. They also see merit in a more coordinated planning of the different investment projects and monitoring of their implementation.
The development of special economic zones could help diversify economic activity in labor intensive sectors. The authorities take note of staff’s concerns regarding excessive tax incentives and the potential for tax erosion or tax evasion, which could be mitigated by adequate reporting procedures. Safeguards will be considered when viable projects are under consideration.
The Maldives authorities welcome the opportunity to have an open and candid exchange of views with staff on their current challenges and policies. They appreciate the Fund’s valuable TA and look forward to a continued fruitful engagement with the Fund. They also welcome the Fund’s increased focus on issues of relevance to small states under the leadership of DMD Zhu.

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