IMF stresses need for ‘urgent and stronger’ fiscal controls to save Maldives

The International Monetary Fund (IMF) has repeated its warning that the Maldives’ sunny five percent economic growth forecast for 2025 masks potential headwinds, resulting in the need for “more urgent and stronger” fiscal consolidation measures.

The Maldivian government has said it plans to roll out fiscal reforms designed to save MVR 7.7 billion in costs this year. But there has been growing concern over the delay in the rollout of these urgently needed reforms.

A team from IMF – led by Piyaporn Sodsriwiboon - visited Male’ from February 3-16, to discuss recent economic developments, the outlook, and the country’s policy priorities.

The IMF mission issued a statement on Tuesday highlighting its findings.

The IMF mission noted that while the Maldives’ economy is expected to grow by five percent this year – driven by robust tourism activity – there is large uncertainty around the forecasts, and risks are tilted to the downside.

“External vulnerabilities remain, amid a persistently large current account deficit and pressures on foreign exchange reserves. The overall fiscal deficits and public debt are projected to stay elevated, calling for urgent policy adjustment,” reads the statement.

Inflation is expected to rise to 2.3 percent this year, partially due to higher import duties.

The IMF mission noted that the Maldivian government has assumed its homegrown fiscal reform agenda, discontinued the exceptional use of Maldives Monetary Authority (MMA) advances and passed the Fiscal Responsibility Act and Public Debt Management Act.

“Swift implementation of expenditure reform measures as outlined in the 2025 budget would be key to reduce imbalances in an orderly manner and restore economic stability,” stressed the mission.

But the IMF mission stressed a need for urgent action in addition to the revenue mobilization measures in place.

“In addition to the revenue mobilization measures enacted by the government, there is the need for more urgent and stronger fiscal consolidation. Holistic expenditure rationalization is necessary to restrain excessive spending, while improving spending efficiency and protecting priority social spending,” said the mission.

The IMF mission urged the government to introduce subsidy reforms to phase out untargeted subsidies and roll out well-targeted direct income transfers to vulnerable households as envisaged in the 2025 budget.

It also stressed a “critical” need to reprioritize and rationalize public sector investment program (PSIP) to address immediate fiscal challenges, and to continue the rollout of reforms of state-owned enterprises (SOEs) and Aasandha-healthcare reforms.

“Strengthening the public financial framework is critical to enhance fiscal policy credibility and effectiveness. A comprehensive debt strategy would also help restore debt sustainability and improve debt management,” said the mission.

The IMF mission said that a coordinated tightening of the policy mix would effectively help address macroeconomic vulnerabilities.

It welcomed the Maldives Monetary Authority (MMA)’s commitment to resume active monetary operations, and recommended that the MMA stand ready to further tighten monetary policy, should inflationary or external pressures intensify.

“Heightened systemic risks from bank-sovereign nexus call for tighter macroprudential policies and vigilant financial sector oversight. Prudent foreign exchange reserve management, alongside the necessary macroeconomic adjustments that include substantial and immediate fiscal adjustments as well as stricter monetary and macroprudential policies to address economic imbalances effectively, would help safeguard the exchange rate peg,” reads the statement.

The IMF mission added that structural reforms aimed at improving the business environment and governance, expanding trade and investment, and enhancing skill development remain crucial for sustaining robust and inclusive growth.

International financial institutions have repeatedly called on the Maldivian government to cut spending and implement fiscal reforms.

Part of the Maldivian government’s fiscal reforms included cutting the salaries of top state officials, political appointed and parliamentarians.

But on Tuesday, the Parliament’s Public Accounts Committee decided to counsel the government that the pay cuts cannot be implemented without changing the laws.

 Amid concern regarding the economic situation, Maldives saw a sharp decline in revenue this year. When questioned about dip, Economic Minister Mohamed Saeed said he does not know the reason for the decline and would need to look into it.

The government has repeatedly provided assurance that that the reforms will help turn the situation around.