Infrastructure projects could ‘transform’ economy, but poses risks

President Abdulla Yameen’s ambitious infrastructure projects could transform the Maldives’ economy in the long-run, but poses financing risks due to persisting fiscal deficits and high levels of public debt, the International Monetary Fund has said.

After concluding annual consultations with the government, a visiting IMF mission said in a statement today that the “unprecedented scale up in public infrastructure” – including the expansion of the international airport and construction of the Malé-Hulhulé bridge – could boost tourism capacity and prove transformational “if implemented successfully, together with supportive education and employment policies”.

But financing the projects could significantly add to fiscal risks, the IMF cautioned.

“The 2016 budget is expansionary, it includes substantial external borrowing for the mega infrastructure projects, adding to already elevated public debt,” reads the statement.

With government expenditure outstripping income in recent years, public debt reached 75 percent of GDP or more than US$2 billion at the end of 2014.

Despite forecasting a budget deficit of MVR1.3 billion (US$84 million) for 2015, Finance Minister Abdulla Jihad told the parliament in November that the figure was likely to reach MVR3.6 billion (US$233 million) – 6.9 percent of GDP – after failing to realise anticipated income from new revenue raising measures, including US$100 million as acquisition fees from investments in Special Economic Zones.

The revenue shortfalls were plugged through the sale of treasury bills and bonds. At the end of November, the outstanding government securities reached MVR19.5 billion (US$1.2 billion).

The IMF advised bringing the fiscal position under control, “together with careful capital expenditure management, to prevent a growing imbalance,” and help loan repayment.

“This will require striking the right balance between fiscal consolidation on the one hand and enabling prioritised capital expenditures on the other, in an uncertain external environment,” the IMF said.

The IMF recommended a number of measures to increase revenue and curtail spending, including broadening the base for business profit tax and increasing rates for other taxes and tariffs.

Aside from tax hikes, the IMF also recommended introducing user fees for commercial and leisure use in key projects such as the bridge.

The mission welcomed the government’s plans to target subsidies and reform the public sector, “which are important to help stabilise debt and will take time to be carefully planned and implemented.”

Savings could also be made through curbing rising healthcare costs, improving oversight of state-owned transport and utility companies, and “continuing to promote greater use of renewable energy.”

The Maldives meanwhile stands to gain concessional financing to promote climate resilient development after the landmark climate change deal reached in Paris COP 21, the IMF said.

Speaking to the press today, Alison Stuart, who led the IMF mission, said the climate agreement presents “a window of opportunity for the Maldives” to secure financing from developed economies.

The IMF also referred to policies pursued by successive governments to incentivise voluntary resettlement, which “will take time as it requires a change in the social fabric but will reap multiple benefits.”

The current administration plans to relocate 70 percent of the Maldives’ population – currently scattered across 188 islands – to a new ‘Youth City’ being developed in the capital’s suburb Hulhumalé.

“The development of regional hubs and greater transport connectivity would help adapt to climate change, promote economic diversification and reduce the cost of public service provision including in critical areas of health, education, and water management,” the statement continued.

“Building on the climate change adaptation plan, establishing a detailed national development strategy would help ensure that plans are coherent, well coordinated and sequenced, and that they create employment opportunities and access to housing.”

Stuart meanwhile said that the IMF was “surprised” by the slowdown of the Maldivian economy in 2015 on the back of a weaker than expected performance by the critical tourism industry.

The government had revised its forecast for economic growth in 2015 from 8.5 percent to 4.8 percent.

While the tourism industry is expected to rebound in 2016, Stuart warned of the impact of “strong economic headwinds to growth from the global economy,” including the slowdown of the Chinese economy.

Chinese tourists accounted for nearly one-third of visitors to the Maldives in 2015.

The appreciation of the US dollar against the Euro could also adversely affect arrivals from key European markets, she noted.

But the increased capacity at the airport could help transform the Maldives from “a niche, luxury market to a broader tourism market, including the mid-size and small guesthouse sectors.”

Along with opportunities for growth, the tourism sector could also face challenges from “more intense competition both domestically and abroad.”