Maldives Independent
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Morning Brief

IMF advises “urgent action” on delayed reforms to avert debt crisis

A digest of the top news story that dominated headlines yesterday.

13 Feb, 9:00 AM

Maldives Independent

Good morning. Today we’re covering a stark warning from the IMF about the country running out of time to avoid a disastrous debt default. In the news-in-brief section for yesterday, we have an electric taxi service, police authorised to confiscate vapes, and the untimely death of a music legend.
  
The Maldives is bailing water from its leaking economy, a visiting International Monetary Fund delegation suggested. By wavering on planned fiscal reforms, the government is running out of time to keep plugging a sizeable budget deficit amid mounting debt that exceeds 120 percent of GDP, they warned.
On Wednesday morning, after 10 days in Malé for an annual “health checkup on the Maldives economy,” the IMF staff mission met with parliamentary oversight committees for public accounts and economic affairs. 
Delays in reducing government spending on wages and subsidies could "jeopardise the Maldives economy,” IMF mission chief Piyaporn Sodsriwiboon told MPs. 
“Looking ahead, without significant policy adjustment, we will see overall deficit and public debt continue to stay elevated for many years. But you may not have enough time. Because external pressures are also growing with a very large current account deficit and a very significant financing pressure,” she observed. 
“The Maldives is going through a pivotal moment where you need urgent action to restore the sustainability of public finance and debt.” 
The remarks echoed persistent warnings from both the IMF and World Bank of a “high risk of debt distress” over the past decade. Public debt reached US$ 8 billion in 2023 as the Covid-19 crisis followed an infrastructure boom with Chinese and Indian loans.
Last year, credit ratings agencies Fitch and Moody’s downgraded the Maldives over the uncertain ability to repay up to US$ 700 million this year followed by US$ 1 billion in 2026. Depleted usable foreign currency reserves stood at US$ 63 million at the end of 2024, barely enough for a month of imports.  
Meanwhile, on the previous day, the public accounts committee took up 10 percent pay cuts proposed by the government. But committee chair Qasim Ibrahim and some ruling party lawmakers opposed the salary reductions. They favoured other cost-cutting options, such as dissolving unnecessary state-owned corporations and merging regulatory and oversight bodies.
As cuts across the board would require legal changes, immediate reductions could be imposed on four institutions, which would only save MVR 14 million (US$ 908,000), Deputy Speaker Ahmed Nazim said.  
Key observations from the IMF team:

Strong projected growth of five percent driven by tourism 

Opening of new passenger terminal expected to ease bottlenecks and boost tourist arrivals

But large uncertainty to forecast with risks tilted to the downside 

Ambitious and homegrown fiscal reform agenda was encouraging, as was the 2023 tax hikes, stopping printing money, and passage of new fiscal responsibility and public debt management laws 

Growth impact of infrastructure spending now marginal due to higher cost of borrowing

Recommendations:

Swift implementation of expenditure rationalisation measures approved in budget 

Streamline health insurance scheme

Phase out blanket subsidies – which has lots of leakages – with targeted direct assistance to vulnerable groups

Reform inefficient and loss-making state-owned enterprises 

Reprioritise public sector investment projects and scale back excessive capital investments

Strong bank-sovereign nexus poses increased systemic risk. Tighter macro-prudential policy and vigilant oversight needed in the financial sector

Over the long-term, broader structural reform needed to improve climate resilience

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