IMF restates advice for mitigating risks over high debt

The International Monetary Fund has restated advice for mitigating risks associated with high levels of debt driven by the current administration’s ambitious infrastructure scale-up.

The expansion of the Velana International Airport and the construction of a bridge to connect the capital with a new urban centre under development on a reclaimed artificial island “could raise the economy to a higher growth path,” a visiting IMF delegation told the press Monday.

“This investment surge has the potential for transforming the economy but also carries risks given the country’s large fiscal and external imbalances. Policies should focus on mitigating these risks while building resilience and pursuing inclusive and sustainable growth,” said Phillipe Karam, who led the IMF staff team for the 2017 article IV consultation.

The team visited the Maldives from July 5 to 18 and met with the finance minister, central bank governor and lawmakers as well as bankers, tourism operators and other representatives of the private sector and multilateral organisations.

The IMF warned last year that the Maldives is facing “a high risk of external debt distress” due to financing the large-scale projects entirely with external loans. But the government says the flagship projects are “necessary investments” with longer-term payoffs.

The IMF concurred that “the large infrastructure scale up in the Greater Malé region has the potential to consolidate population in a widely dispersed island economy, close gaps in electricity, transportation, and social services, as well as promote climate change adaptation.”

But the team cautioned that the increased vulnerability from high levels of public and external debt “needs to be managed prudently,” recommending policies focused on “reducing the large fiscal and external deficits, building foreign reserves, developing the financial sector, and enhancing longer-term growth potential through structural reforms.”

Despite “continued fragile fiscal and external positions,” the IMF team predicted that GDP growth will recover gradually and exceed 4.5 percent in 2017 and 2018 “on account of strong construction and tourism activity.”

After widening in 2016, the fiscal deficit is projected to gradually decline over the medium term, but the current account deficit is “expected to increase significantly due to the infrastructure ramp up and higher material imports”.

The foreign currency reserves will remain low and the real exchange rate will appreciate, the team predicted, whilst downside risks for the economy include slower growth in tourist arrivals and the adverse impacts of climate change.

The team also acknowledged measures for reducing government spending such as targeting food and electricity subsidies as previously advised by the IMF.

“In addition, revenue raising measures are also needed to cover the large scale up costs. Fiscal consolidation needs to continue to restore sustainability and be supported by further revenue and expenditure reforms,” it added.

“Monetary policy should be tightened to support the exchange rate peg from any pressures arising from government financing and balance of payments. The peg regime is appropriate for the Maldives given the small scale, high openness and dollarized nature of the economy. With greater tourism from Asia and potential increased financing from the region, consideration could be given to an import-weighted currency composite in the future. Stress testing and oversight capacity of the banking sector should continue to be strengthened.”

The team also backed measures to both attract investment and improve electricity generation, waste management and the labour market.

“Fostering competition and promoting economic diversification is key,” the team said.

“Finally, the Maldives stands to gain from advance identification and easier access to disaster-related financing in combatting climate change,” it continued.

“A proactive policy approach should integrate risk reduction and disaster response programs into the core budget, along with public investment planning and a sound debt management framework. Climate change adaptation should be part of an overall national development strategy that aims to capitalise on infrastructure investment while managing the fiscal risks.”

The government meanwhile raised US$200 million last month from the country’s debut sovereign bond issue in the international finance market.

The parliament’s public accounts committee was subsequently informed of an MVR800 million (US$51.8 million) taken by the government from the Bank of Maldives to settle unpaid bills.

The loan was unforeseen in the 2017 budget and obtained despite record levels of tax revenue, prompting opposition lawmakers to allege that the government was forced to borrow from the national bank to pay salaries for civil servants.

The main opposition Maldivian Democratic Party contended that the government sold the sovereign bonds to shore up depleted foreign currency reserves.

Ibrahim Ameer from the MDP’s economic committee told reporters that the usable reserve position of US$220 million is misleading because US$100 million is owed to India’s central bank and US$75 million to the State Bank of India.

The US$100 million was secured in a currency swap deal after the central bank bought a US$140 million bond from the state-owned airport company to help compensate GMR. The Indian infrastructure giant was paid US$271 million in damages for the cancellation of its contract to develop the main international airport.

“When you deduct this, our own reserve is US$50 million. What’s in our reserve is money taken on loan. The RBI agreement will be over at the end of June and SBI will not roll over or renew any further,” the opposition economist said.