Economic growth is expected to remain strong this year but the Maldives faces challenges posed by high deficits and growing public debt, a visiting International Monetary Fund delegation warned Tuesday.

Bolstered by “large investments in infrastructure, tourism and real estate,” the IMF predicted growth of 6.5 percent for 2019 but stressed the need to increase the economy’s resilience and manage large fiscal and external imbalances.

“A potentially good outlook provides an opportunity to address deep-seated structural weaknesses and sustain long-term growth,” Phillip Karam, who led the IMF staff team, advised in a statement issued at the conclusion of a two-week visit for consultations with local authorities.

The team echoed advice offered after previous consultations to mitigate risks associated with loans that financed the previous administration’s infrastructure scale-up, which included the expansion of the international airport, a 25-storey hospital tower, and the construction of a Chinese-funded bridge to connect the capital with a new urban centre under development on a reclaimed island.

Repayment of the loans is expected to begin next year.

Briefing the press on Tuesday, Karam explained that the “real problem” was sovereign guarantees issued by the previous government for loans taken from Chinese state banks.

Unlike the loans that financed the infrastructure projects, the interest rates, maturity and grace periods of these commercials were “not favourable” to the Maldives, he told reporters.

Sovereign guarantees were provided for US$1.36 billion worth of loans taken by 23 state-owned enterprises and one private company, the new finance minister revealed in December.

– Vulnerability –

The growing public debt has increased the Maldives’ vulnerability to shocks, the IMF warned.

The downside risks “stem from trade tensions and policy uncertainty, and slower growth in advanced economies and China which would negatively affect tourism and undermine the weak external position.”

The Maldives “remains at a high risk of debt distress,” it added, advising that the “high and increasing level of public and publicly guaranteed debt needs to be managed carefully to reduce fiscal sustainability risks.”

With perennial budget deficits financed by treasury bills and bonds, debt is projected to increase in the medium-term.

The IMF advised building reserve buffers and growing the sovereign development fund – which was set up to save for debt repayment – coupled with tighter monetary and fiscal policies.

Along with plans to introduce a progressive income tax, the staff team welcomed “efforts to reform the tax system and restrain the growth of spending, including subsidies and health care spending.”

It also welcomed progress in “strengthening public investment management, increasing the credibility of annual budgets and integrating the annual budgets with the medium-term fiscal and debt management strategies,” as well as the Maldives Monetary Authority’s plans to review the pegged exchange rate regime “with the aim to strengthen exchange rate stability, accumulate foreign reserves and increase resilience to external shocks.”

The staff team backed a National Development Strategy formulated by the new administration that focuses on confronting governance challenges and tackling corruption.

“Actions to make the economy more competitive and generate a more conducive environment for investment will be critical to lift its medium-term growth prospects and create high value-added jobs,” it added.

“The team welcomes the government’s ongoing efforts to improve the business climate, including by revising investment-related laws and regulations, and enhancing access to finance, particularly for Small and Medium-sized Enterprises and the underserved population.”