Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 52876-MV

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A PROPOSED DEVELOPMENT POLICY CREDIT

IN THE AMOUNT OF SDR 8.5 MILLION, INCLUDING SDR 1 MILLION IN PILOT CRISIS RESPONSE WINDOW RESOURCES

(US$13.7 MILLION EQUIVALENT)

TO

THE REPUBLIC OF MALDIVES

FOR AN

ECONOMIC STABILIZATION AND RECOVERY PROGRAM

February 16,20 10

Poverty Reduction and Economic Management Department Maldives and Sri Lanka Country Department South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents mav not otherwise be disclosed without Wor ld Bank authorization.

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AAA ABS ADB

AGO

BML

CAS CCTF csc DPC DRP DSA EMP EPPS FY GDP GFS GoM HIES

IBRD

IDA IFC IF1 IHDP IMF JSAN LDP

LIC DSA

MBP MDGs MECC MMA

THE REPUBLIC OF MALDIVES - GOVERNMENT FISCAL YEAR January, 1 st - December, 3 1 st

CURRENCY EQUIVALENTS Exchange Rate Effective as o f 30 November 2009

Currency Unit = Maldivian Rufiyaa 1 .OO Rufiyaa = US$0.078 US$1.00 = 12.8 Rufiyaa

Metric System WEIGHTS AND MEASURES

ABBREVIATIONS AND ACRONYMS

Analytical and Advisory Activities Absolute Poverty Benefit Asian Development Bank

Auditor General’s Office

Bank o f Maldives

Country Assistance Strategy Climate Change Trust Fund Civil Service Commission Development Policy Credit Dhivehi Rayyithunge Party Debt Sustainability Analysis Environment Management Project Economic Policy Planning Section Fiscal Year Gross Domestic Product Government Finance Statistics Government of Maldives Household Income and Expenditure Survey International Bank for Reconstruction and Development International Development Association International Finance Corporation International Finance Institutions Integrated Human Development Project International Monetary Fund Joint Staff Advisory Note Letter of Development Policy Low-income country Debt Sustainability Analysis Mobile Phone Banking Project Millennium Development Goals Macro Economic Co-ordination Committee Maldives Monetary Authority

MOE MOFT MOHF MTDS MTEF MVR NAPA OM0 PAS PC PEFA PER PFM

PHRD

PPG PPP

PSAP

PSIA PSIP REER ROSC SAP SBA SDR SP STELCO TA TVM UNDP MDP VOM VPA

Ministry o f Education Ministry of Finance and Treasury Ministry of Health and Family Medium Term Debt Management Strategy Medium-Term Expenditure Framework Maldivian Rufiyaa National Adaptation Program of Action Open Market Operations Public Accounting System Privatization Committee Public Expenditure and Financial Accountability Public Expenditure Review Public Financial Management Japan Policy and Human Resources Development Trust Fund Public and Publicly Guaranteed Public Private Partnerships Pension and Social Protection Administrative Project (PSAP) Poverty and Social Impact Analysis Public Sector Investment Program Real Effective Exchange Rate Report on the Observance of Standards and Codes Strategic Action Plan Stand-By Agreement Special Drawing Rights Social Protection State - Owned Electric Company Technical Assistance TV Maldives United Nations Development Program Maldives Democratic Party Voice o f Maldives Vulnerability and Poverty Assessment

i

FOR OFFICIAL USE ONLY

Vice President: Isabel Guerrero

Sector Director: Emesto May Sector Manager: Miria Pigato

Country Director: Naoko Ishii

Task Team Leaders: Francis Rowe and Kirthisri Rajatha Wijeweera

The Maldives Development Policy Credit was prepared by an IDA team consisting of Francis Rowe and Kirthisri Rajatha Wijeweera (SASEPNo-Task Team Leaders, Shahnaz Sultana Ahmed, Rita Soni, and Zeenath Marikkar (SASEP), John Speakman (SASFP), Mir iam Witana (SAWS), Manoj Jain (SASFM), Ranjana Mukherjee (SASGP), Nobuo Yoshida, and Tomoyuki Sho (SASEP), Puja Datta (SASSP), and Richard Damania (SASDI). Sebastian Desuss (AFTP4) and Marco Scuriatti (SACOl) are the peer reviewers.

.. 11

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

THE REPUBLIC OF MALDIVES ECONOMIC STABILIZATION AND RECOVERY PROGRAM

TABLE OF CONTENTS

I . INTRODUCTION ........................................................................................................................................ 1 I1 . COUNTRY CONTEXT ............................................................................................................................. 2

A . RECENT POLITICAL AND ECONOMIC DEVELOPMENTS ............................................................. 2 B . MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ................................................... 6 C . POVERTY REDUCTION AND SOCIAL DEVELOPMENT ................................................................. 8 D . THE GOVERNMENT’S CRISIS RESPONSE AND MEDIUM-TERM DEVELOPMENT PLAN ...... 9

I11 . BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ........................................................... 12 A . LINK TO CAS ........................................................................................................................................ 12 B . COLLABORATION WITH IMF AND OTHER DONORS .................................................................. 14 C . RELATIONSHIP TO OTHER BANK OPERATIONS ......................................................................... 14 D . LESSONS LEARNED ........................................................................................................................... 15 E . ANALYTIC UNDERPINNINGS ........................................................................................................... 15

I V . THE PROPOSED DEVELOPMENT POLICY CREDIT ................................................................... 16 A . RATIONALE AND OBJECTIVES ....................................................................................................... 16 B . DESIGN AND FOCUS OF THE PROPOSED OPERATION ............................................................... 16

V . OPERATION IMPLEMENTATION ..................................................................................................... 25 A . POVERTY AND SOCIAL IMPACT ANALYSIS ................................................................................ 25 B . ENVIRONMENTAL ASPECTS ............................................................................................................ 28 C . IMPLEMENTATION AND MONITORING ........................................................................................ 29 D . FIDUCIARY ASPECTS, DISBURSMENTS AND AUDITING .......................................................... 29 E . RISK AND RISK MITIGATION ........................................................................................................... 30

ANNEXES 1 . LETTER OF DEVELOPMENT POLICY 2 . DEVELOPMENT POLICY CREDIT POLICY MATRIX 3 . MACRECONOMIC INDICATORS 4 . FUND RELATIONS NOTE

6 . COUNTRY AT A GLANCE 5 . JOINT BANK-FUND DEBT SUSTAINABILITY ANALYSIS

... 111

CREDIT AND PROGRAM SUMMARY

THE REPUBLIC OF MALDIVES

ECONOMIC STABILIZATION AND RECOVERY PROGRAM

Borrower

Implementing Agency

Financing Data

Operation Type

Main Policy Areas

Key Outcome Indicators

Program Development Objective(s) and Contribution to CAS

The Republic o f Maldives

Ministry o f Finance and Treasury

IDA Credit o n standard IDA terms Amount: SDR 8.5 mi l l ion including SDR 1 mi l l ion in Pilot Crisis Response Window Resources (US$ 13.7 million) The proposed operation i s processed under IDA Financial Crisis Response Fast-Track Facility

The operation i s the f i rs t o f a proposed two-operation programmatic series

Economic Growth, Public Financial Management, Public Enterprise Reform, Public Private Partnerships and Social Protection.

The key outcome indicators are: an economic growth rate o f 3 percent in 201 0 and 5 percent in 201 1, key elements o f the Strategic Act ion Plan have been costed, greater transparency in the presentation o f the Government’s annual Budget, and increased coverage o f the social safety net program. The proposed operation aims to support the Government’s efforts to bring about economic recovery, while protecting the vulnerable. It aims to support the Government achieve its development objectives set out in the Strategic Act ion Plan (SAP). The SAP aims to redefine the role o f the state in the economy to achieve upper-middle income status, ensure more equitable access to services and opportunities, improve service delivery, facilitate economic diversification, and support better environmental practices to sustain growth and adapt to global climate change. Much o f the plan i s to be implemented through the private sector where possible or public-private partnerships (PPPs) with the aim to minimizing fiscal impact given the weak fiscal position. The proposed operation is also consistent with the Maldives Country Assistance Strategy (CAS) FY2008- 12 which aims to support government efforts to better manage the economy and public finances. The CAS calls for a possible development pol icy operation in FY2010. The IMF and the Asian

iv

Risks and Risk Mitigation

Operation ID

Development Bank are providing support to the Government program to help regain macroeconomic stability.

The main risks to the proposed operation include political risk, the macroeconomic framework, vulnerability to external shocks, and limited technical capacity. Democracy in the Maldives is very much in a nascent stage and the Government o f President Nasheed lacks a parliamentary majority, which could significantly constrain the Government’s plans going forward. Political risks are l ikely to be a feature for the entire length o f the proposed program period. Given the size and form o f the Government’s fiscal adjustment program there are significant implementation r isks that may hamper the country’s growth. The strength o f the global economic recovery presents upside and downside risks to the proposed operation. A stronger-than- expected recovery in Europe - the largest tourist source - would help boost tourist arrivals, real GDP growth and government revenues in the Maldives, helping to ease the impact o f the fiscal adjustment in 2010. Alternatively, a slow and anemic global recovery would suppress a revival in tourism, GDP growth and FDI, while also making the fiscal adjustment more challenging. A s a small, open, and undiversified economy, the Maldives i s vulnerable to the adverse effects o f external shocks such as an o i l price shock. The focus on government revenues generation measures in the IMF and ADB programs will help mitigate the risk o f external shocks translating into large macroeconomic imbalances. Limited technical capacity i s one o f the leading development constraints in the Maldives. Capacity constraints significantly impact al l aspects o f government functions and the authorities in the recent past have sought increased technical assistance (TA) interventions from multi-lateral donors such as the World Bank, IMF and the ADB. Specific TA has not been built into the program, but capacity constraints were reflected in the program design.

P114463

V

I. INTRODUCTION

1. This proposed operation supports the new Government’s program to stabilize the economy and puts in place some of the key elements needed for a sound recovery. I t supports the Government’s reforms aimed at restoring fiscal sustainability and i ts efforts to implement i ts medium-term Strategic Action Plan. Both the financing and the policy actions supported by the operation come at a time when there are initial signs o f an economic recovery and evidence that the Government’s fiscal austerity measures are helping to put the fiscal deficit on a sustainable path. In this regard, the operation will underpin economic growth by helping to reduce the large macroeconomic imbalances that occurred in 2009.

2. The tourism sector-and the Maldivian economy at large-immediately felt the impact of the global recession, but some indications of recovery are now emerging. The tourism sector in Maldives i s the lifeblood o f the economy accounting for 30 percent o f GDP. The global crisis resulted in a 9 percent contraction in tourist arrivals through September 2009 compared to 2008. However, recent tourist arrivals data show a pick-up from the trough reached in July 2009. Following an 11 percent year-on-year increase in arrivals in October, arrivals increased a further by 7 percent in November. Revised projections now point to a full-year decline o f 3.5 percent in 2009 compared to a 7 percent decline anticipated at the beginning o f the year. GDP i s estimated to contract by 4 percent in 2009 and the current account deficit i s projected to reach nearly 30 percent o f GDP.

3. While the 2009 fiscal deficit i s very high, fiscal austerity measures and the improving economy are beginning to slowly turn the situation around. The fiscal deficit i s expected to have reached almost 28 percent o f GDP in 2009, down from earlier estimates o f 33 percent o f GDP. Fiscal data i s not available beyond September 2009, at which point revenues were down 23 percent compared to the f i rs t nine months o f 2008. However, in step with higher tourist arrivals and higher- than-expected import duties - as imports have rebounded more strongly than expected-revenues have picked up. This combined with the Government’s recent expenditure reductions-including a temporary cut o f public sector staffs’ salaries o f about 15 percent implemented from October 2009-suggests that the fiscal situation i s gradually improving

4. The Government i s committed to a reform program that has at its core a sharp fiscal adjustment. The Government has designed and i s implementing a program that would stabilize the macroeconomic situation through a significant fiscal adjustment and a scaling-up o f external financing. The IMF approved a 36-month combined Stand-By Arrangement and External Shocks Facility o f US$92.5 million (or 700 percent o f quota) on December 4, 2009. The ADB has approved a US$35 million budget support operation with half being disbursed in 2010 and the other half planned for mid-2011. This coordinated external financing i s meant to preserve confidence in the economy, reduce the country risk premium and thereby stimulate economic growth.

5. This proposed operation i s focused on helping the Government to implement its SAP, which aims to fundamentally change the role o f the state in the economy. The operation benefits from strong Government ownership and implementation commitment from the highest levels o f Government. The focus on public financial management - by addressing key institutional shortcomings in budget preparation and implementation - aims to enable the Ministry o f Finance and Treasury to recognize budget overruns early so that they can be addressed in a timely fashion.

1

The focus on public enterprise reform supports the Government’s ambitious public private partnership program, while underpinning fiscal sustainability. The social protection measures help cushion the impact o f what will be a significant structural change in the economy. The Bank’s proposed operation is the f i rst o f a two-operation programmatic series and i s being processed under the IDA Financial Crisis Response Fast-Track Facility. The operation also benefits from an additional SDR 1 mi l l ion allocation from IDA’S Crisis Response Window.

6. This first operation in the proposed two operation series will support the Bank’s already strong program of engagement with the authorities. The synergies between the social protection components o f this operation, next proposed operation in the series, and the recently approved Pension and Social Protection Administration project (PSAP) i s one important example. The result that is expected to be achieved in this area i s the implementation o f a new integrated social protection strategy that is well-targeted and fiscally sustainable. The proposed series i s also helping to bolster technical assistance (TA) and capacity building activities, l ike the Bank’s recent Governance Diagnostics work, the Government’s Public Accounting System project which i s expected to lead to the development o f a modern public accounting and financial management information system, the debt management technical assistance program and the public sector restructuring TA. These TA and capacity building efforts are expected to grow in strength as implementation o f the Government’s reform program progresses.

11. COUNTRY CONTEXT

A. POLITICAL AND ECONOMIC DEVELOPMENTS

7. For much o f the last three decades Maldives has been a development success story. In the early 1980s it was one o f the world’s twenty poorest countries with a population o f 156,000. Today, with a population o f just over 300,000, it is on i t s way towards achieving middle-income status with a per capita GDP approaching $2,800. Poverty rates, as measured by the headcount ratio, have fallen steeply, from 40 percent in 1997 to 28 percent in 2004. Other human development indicators - including infant mortality, maternal mortality, and educational attainment - have registered similar improvements. The sustained growth and rising prosperity o f the last three decades was founded on political stability and a private sector-led tourism industry based upon the country’s extraordinary natural assets. The Maldives consists o f 1,192 small tropical islands that cross strategic shipping routes and it has a marine environment that i s r ichly diverse. With more territorial sea than land, marine resources have played a vital role shaping the contours o f economic development, with nature-based tourism and fishing being the main drivers o f economic growth.

8. The political economy of the Maldives changed significantly post-2004, with the new Government inheriting unsustainable Government finances in 2008. Political and institutional reforms initiated in late 2003 resulted in the “Roadmap for Reform Agenda” in early 2006. The country’s f i rs t multi-party elections were held in 2008. In the run up to the elections, government spending increased considerably to reach 63 percent o f GDP in 2008 from 36 percent o f GDP in 2004. The public service wage bil l was a primary source o f the increase in recurrent expenditures, as both the number o f public sector employees and their wages have increased substantially. The total pay package increased by over 150 percent from 2004 to 2008 and the public service now

2

represents one-third o f the labor force.’ These and other recurrent spending went far beyond the needs o f the 2004 Tsunami reconstruction efforts.2

9. The first ever multi-party Presidential elections were held in October 2008, followed by the first ever multi-party parliamentary elections on May gth 2009. In the Presidential election, Mohammed Nasheed o f the Maldives Democratic Party (MDP) defeated former President Gayoom in the second round run-off to become the 4* President o f the Maldives. In the parliamentary elections, President Nasheed’s MDP secured 28 seats in the 77-member assembly coming second to the main opposition Dhivehi Rayyithunge Party (DRP) o f former President Gayoom and its coalition allies which secured 35 seats.

10. The Government was elected on a program of smaller government and stronger service delivery. Two core principles o f the current Government’s Strategic Action Plan are to reduce the role o f the state in the economy and to ensure that government expenditures are based on sustainable revenues. An ambitious privatization and public private partnership (PPP) program i s underway as i s fiscal consolidation that rests heavily o n public service reform. Both efforts were originally conceived as ways to promote more efficient service delivery to the people o f Maldives and to ensure sustainable economic growth and poverty reduction, but are now also seen as key measures to help reduce macroeconomic imbalances.

11. The global financial crisis exposed the unsustainable level o f fiscal expenditures in recent years. The government’s revenue base i s narrow and volatile; it consists largely o f import duties, tourism receipts, dividends from state-owned enterprises and resort lease rentals. Both tax and non-tax revenues are driven mainly by the fortunes o f the tourism sector. The downturn in tourism with the onset o f the global economic crisis has led to a decline in tourist related revenues (direct tourism tax revenues have declined sharply) bringing the unsustainable level o f government expenditures into sharp ~ O C U S . ~

The average growth rate in the number o f public employees over this period was 6.5 percent implying that that bulk o f 1

the wage bi l l increase was due to wage increases. * In late 2004, the country was hit by the tsunami that devastated many parts o f South Asia. I t displaced 29,000 people from their homes and caused damage equivalent to 62 percent o f GDP.

Historically, grants have been between 2 and 5 percent o f GDP. The fiscal deficit including grants was 13.6 percent in 2008 and i s expected to be 26 percent o f GDP in 2009.

3

Figure 1. Maldives: Central Government Finances

Government Expenditures

Government Revenues

! ..................... ......

2w0 2004 2w0

-Tax Revenue Non-Tax Revenue

- - - R e r o r t t e s r e RentlRight 8x11) - ' ToYrimTax (Right axis)

Government Compensation and Employment

i' 25 40,000 1' 2 < nnn 1 ............................................................................................

20

15

10

5

0

2000 2002 2004 2006 2008

-Government Employment(Left axis) -Wages& Salaries (% of GDP)

0 -

5

-10 '

3 -15 -

-30

!

Fiscal Deficit (excluding grants)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Maldives Monetary Authority, IMF and Bank staff estimates.

......................................................................................

0

-50

-100

-150 y)

.200 0 5 -250

-300

-350

-400

-35 i .................................................................................................

12. Fiscal imbalances mirror external imbalances. Accelerating government expenditure since 2004 played a role in driving up imports to over 90 percent o f GDP in 2008. The multi-year boom in food and fuel prices, and strong demand for resort-related construction materials prior to the onset o f the global crisis, also contributed to the exceptional import growth o f recent years. The pace o f import growth far outstripped the robust growth in export o f services (especially tourism) prior to the crisis. Consequently, large and growing current account deficit resulted, reaching 53 percent o f GDP in 2008. With the sharp decline in commodity prices in the f i rs t half o f 2009 and extensive foreign exchange rationing, pressures on the import bill have eased and the deficit is expected to fall to 30 percent o f GDP in 2009.

13. Financing the current account deficit has become increasingly difficult. Deficits were mainly financed through private capital inflows, foreign borrowing by commercial banks and official financing (multilateral and bilateral) until mid-2008. But since then, private capital inflows have slowed and foreign banks have cut credit facilities to domestic branches during the current financial crisis. The Maldives Monetary Authority (MMA) has relied on drawing down foreign exchange reserves to cover the balance. Gross official reserves were bolstered in mid-March with

4

the disbursement o f US$50 million o f a US$lOO mill ion loan from the Indian Government. However, reserves quickly fe l l back from a peak o f US$267 million. Gross reserves have fluctuated below 3 months o f imports throughout 2009.

14. Low and declining foreign exchange reserves r isks undermining the exchange rate peg. The rufiyaa has been pegged to the US dollar at a rate o f MVR12.8 since 2001. The low reserve cover has meant that the MMA i s rationing foreign exchange in the economy. The real effective excliange rate has appreciated 12 percent since mid-2008, but remains below levels reached in 2005. Consumer price inflation has been declining in recent months, driven in large part by falling international commodity prices relative to 2008. The recent depreciation o f the U S dollar against major international currencies i s also helping to contain real exchange rate appreciation pressures.

15. Recent IMF analysis of the real effective exchange rate indicates that the gains of a devaluation o r a move to a floating regime would be small and uncertain while the costs would be substantial. In particular, the typical benefits associated with expenditure switching after a devaluation would be limited by the extremely small non-tradable sector in the economy. As such, there are almost no import-substituting sectors in the economy. Moreover, analysis based on purchasing power parity (PPP) exchange rates suggests that the currency i s only modestly overvalued. The core source o f external imbalances i s not the real effective exchange rate (REER), but the recent fiscal expansion.

16. Macroeconomic imbalances and the global crisis have also put stress on the banking system. Expansionary fiscal policy and high budget deficits led to dramatic public sector credit expansion in 2008 and the first half of 2009. In the absence o f an effective non-bank sector, much o f the domestic financing requirement falls on the banking sector. This public sector credit expansion i s crowding out private sector credit and putting the banks’ balance sheets at risk. Foreign exchange rationing i s also exposing banks to dollar liquidity shocks. These stresses are compounded by the bank’s high exposure to tourism, the concentration o f loans to a few borrowers, and limited financing options (e.g., lines o f credit, parent financing) since the onset o f the global financial crisis. Consequently, the risk o f growing non-performing loans i s rising. The state-owned Bank o f Maldives (BML), which accounts for,about 40 percent o f commercial bank assets, saw i t s non-performing-loans ratio increase significantly last year. More broadly, the net foreign asset position o f the banking sector has been negative since July 2008, leaving the banks susceptible to a possible depreciation o f the rufiyaa.

5

Figure 2. Maldives: External Sector Developments and Consumer Prices

Current Account Deficit Gross Foreign Exchange Reserves

75 70 65

60

2004 2005 2006 2007 2008 2009

!::#' i . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I

Real Effective Exchange Rate (2000=100)

95

250 3

200

2 150

100 1

0 50

Consumer Price Inflation ..................................................... ............................................................ lo .I--

16 1 /2 ............................................................................................................................. I

Source: Maldives Monetary Authority, IMF and World Bank staff.

B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

17. A return to robust economic growth in 2010 and beyond will depend heavily on a rebound in the tourism sector. A stronger-than-expected recovery in Europe - the largest tourist sending region - would help boost tourist arrivals, real GDP growth and government revenues. A rebound in global growth and an easing o f global credit constraints would also help foreign direct investment and stalled resort developments to pick up. GDP i s expected to contract by 4 percent in 2009 after growing 5.8 percent in 2008 and 7.2 percent in 2007. While foreign exchange rationing and a decline in fish catch also contributed to the result, the main driver o f the growth slowdown has been a fal l in tourist arrivals. Recent tourist arrivals data suggest that the expected rebound in the tourist sector in 2010 may materialize, but perhaps not by enough to help generate much more than 3 percent real GDP growth.

6

18. Signs of a rebound in tourism are evident in the latest arrival numbers. Tourist arrivals data show a pick-up from the bottom reached in July in the second ha l f o f 2009. Following an 11 percent year-on-year increase in arrivals in October, tourist arrivals increased by 7 percent in November. Revised projections now point to a seasonally adjusted decline o f 3.5 percent in 2009 compared to a 7 percent decline anticipated at the beginning o f the year. The recent depreciation o f the dollar against the Euro and major Asian currencies has helped boost the competitiveness o f the sector. The growing share o f Asian tourists seen in the last decade is another factor that may bode wel l for prospects for the rest o f this year, as many Asian countries are emerging from the global financial crisis quicker than other regions.

19. Traditionally, the fisheries sector has also been an engine of growth. While a distance second compared to the tourism sector, the sector does account for about 10 percent o f GDP and is the only other significant source o f foreign exchange for the e ~ o n o m y . ~ Fish catch levels have been o n a continual decline since 2006. The causes o f the drop in fish-catch are poorly understood, but may be related to changing ocean currents or fuel price increases. The total volume o f fish exports (excluding l ive fish) dropped by 38 percent in the first half o f 2009 relative to 2008 and earning from fish exports dropped by 43 percent during the period. The current rebound in international tuna prices will help the fisheries sector outlook.

20. Financing growing fiscal and external imbalances in recent years has increased the risk of debt distress. Defici t financing through unsterilized monetization has made up a growing share o f total financing, as external options have diminished during the global financial crisis. Deficit monetization in the form o f government borrowing from the MMA through virtually unlimited access to the ways and means account made up about 9 percent o f GDP in 2008 and has accounted for another 10 percent so far this year. Growth in private external debt used to finance resort construction also grew sharply prior to the onset o f the global financial crisis. Going forward, the expected large fiscal deficits are assumed to be financed primarily through a combination o f concessional external funds (including grants) and (to a lesser extent) domestic debt.

21. The Government’s adjustment program, with its focus on fiscal consolidation, aims to address the root causes of the current macroeconomic imbalances, preserving the exchange rate regime at its current level. In essence, Government efforts are aimed at reducing the fiscal deficit through a reduction o f the wage bill -while protecting social spending - and introducing new revenue measures to broaden, the tax base. These actions are being supported by a tightening o f domestic currency liquidity and a halting o f the monetization o f the fiscal deficit. While there are implementation risks, this well-focused Government program i s adequate to restore macroeconomic balances, the pre-requisite for putting the economy back on track and restoring growth.

22. The recent joint Bank-Fund debt sustainability analysis indicates that Maldives i s at a moderate risk o f public external debt distress (Annex 4). Vulnerabilities related to total public debt are higher, and addressing them will require timely implementation o f the authorities’ strong fiscal adjustment program. The borrowing space in the short and medium terms has shrunk after the recent accumulation o f large fiscal and external deficits. The build-up o f private external debt prior to the onset o f the global financial crisis and o f public domestic debt (mainly owed to the Maldives Monetary Authority, MMA) in the last two years has intensified the debt burden. Key r isks for debt

The sector employs about 1 1 percent o f the workforce and fish processing accounts for the bulk o f manufacturing activity and domestic merchandise exports.

7

sustainability are large future shocks to exports or fiscal pol icy slippages. This assessment rests heavily on the implementation o f the Government’s proposed fiscal adjustment. Recent growth in private external debt increases the risk o f external debt distress. Private external debt adds about 40 percentage points to the external public debt to GDP ratio, putting the total external debt ratio at 77 percent. Much o f this debt i s at maturities o f less than 10 years, at market interest rates and denominated in U.S. dollars. The stock has accelerated in recent years in line with the boom in resort construction prior to the global financial crisis. Given the rationing o f foreign exchange in the economy currently, servicing this debt is becoming increasingly difficult. Implementation o f the Government’s reform program will help to reduce foreign exchange rationing.

Table 1. Maldives: Selected Economic and Vulnerability Indicators

2oW 2M)5 2006 2007 2008 2009 2010 2011 2012 EBt. Projection

OUTPUT AND PRICES

Real GDP Inflation (period average) Inflation (endaf-period) GDP deflator

CENTRALGOMRNMENT FINANCES

Revenue and grants Fqenditure and net lending Overall balance Overall balance excl grants Financing

Foreign Domestic

Ofwhich: Privatiration receipts

Public debt External Domestic

MONETARY ACCOUNTS

Broad money Domestic credit

NFA o f c o m r c i a l banks (in millions of US$, e.o p ) Net Forexposition o f c o m r c i a l banks (in millions ofUS$, e 0.p

Ofwhich: To private sector

BALANCEOF PAYMENTS

Current account Of which:

%orts Domestic Re-eqorts

Imports Nonfactor services, net

Capital and fmancial account (mcl e&o) Ofwhich:

General government, net Banks and other sectors, net

Overall balance

Gross international reserves (in millions ofUS%; e o p ) In months ofGNFS imports In percent ofshort-term debt at remaining maturity

External debt Mediumand long-term Short-term I n percent ofdomestic GNFS exports

External debt service (in percent o f domestic GNFS eqorts)

Exchange rate (ru!jiaaRTS$, e o p )

MEMORANDUM ITEM

GDP (in millions of rufyiaa) GIIP (in nullions of US %)

9 5 6 3

I O 1 2 4

34 2 36 0 -1 8 -2 5 1 8 4 1

-2 3 0 2

55 2 401 15 1

32 8 32 6 57 6 600 27 0

-15 8

23 3 15 8 7 5

-72 7 45 1 21 4

3 2 I 4 6 5 7

204 4 3 4

585 0

42 7 41 6

1 0 52 7 5 0

12 8

9,939 776

-46 2 5 2 9 1 2

47 7 59 0

-11 3 -19 8 11 3 2 4 8 8 0 4

649 41 3 23 6

117 63 2 54 5

4 0 0 38 0

-36 4

21 6 13 8 7 8

-87 4 146 34 1

2 5 30 6 -2 3

I87 1 2 6

261 0

53 0 47 9

5 0 93 1

9 0

12 8

9,596 750

(Annual percentage change)

18.0 7 2 5.8 -4.0 3.4 3 6 7 6 119 5 5 4.5 3.9 10.4 8 6 6 7 4.7 3 5 7.4 13 0 11.0 4.0

(ln percent ofGDP)

52.1 558 490 36.3 37.0 59.3 60.8 62.8 650 54.8 -1 2 4.9 -13.8 -288 -178

-14.6 -127 -18 5 -33 6 -189 7 2 4 9 138 288 178 4.5 4 6 3.8 12.7 4.2 2.7 0.4 100 16 1 136 0.4 0 3 0.3 0 1 2.6

6 2 9 664 686 916 960 3 9 6 39.8 37.4 46.8 545

448 41.5 23.4 265 31 2

(Annual percentage change, unless othenvise indicated)

206 23 7 23.6 9 4 6 7 3 7 6 458 434 5 7 7 5 495 492 330 4 1 -21

-145 0 -338.0 -437.0 -416.0 -4660 72.0 640 141.0

(ln percent ofGDP, unless othenvise indicated)

-33 0

24 6 14 8 9 9

-89 I 35 0 37 9

4 2 26 0 4 9

232 2 2 7

168 0

62 8 52 8 I O 0 83 7 9 0

12 8

11,717 915

-41 5

21 6 I O 2 11 4

-91 5 36 0 48 8

3 4 37 1 7 3

3100 3 0

121 0

79 7 62 6 170

111 0 12 0

12 8

13,493 1,054

-51 4 -29 6

26 2 16 1 I O 0 6 6 I 6 2 9 5

-96 8 -58 2 29 4 220 460 30 5

5 3 8 4 33 3 14 6 -5 4 0 9

241 3 217 0 1 8 3 2

80 0 81 0

76 9 82 0 59 9 67 0 I 7 0 I 5 0

1140 I69 0 12 0 I 7 0

12 8 12 8

16,137 17,192 1,261 1,343

-23 4

17 7 6 9

I O 7 -58 8 28 4 20 6

-1 9 20 4 -2 8

291 0 3 1

88 0

80 0 68 0 13 0

I47 0 24 0

12 8

18,480 1,444

3 7 6 3 6 3 6 3

43 4 47 5 -42 -5 2 4 2 2 0 2 2 1 3

87 9 50 4 37 5

-13 1

I 7 7 6 8

I O 8 -55 9 33 0 I 1 1

-1 2 103 -2 0

305 0 3 1

1180

71 0 60 0 10 0

124 0 22 0

12 8

20,354 1,590

4 1 3 5 3 5 3 5

442 41 9 -3 6 -46 3 6 2 6 1 1 0 8

82 5 47 0 35 5

-11 I

11 8 6 8

11 0 -55 9 36 3 12 5

0 6 11 1 1 4

347 0 3 4

143 0

65 0 56 0

8 0 109 0 15 0

I 2 8

21,935 1,714

Sources. Maldivian authorities, and Fund staff estimates and projections.

8

C. POVERTY REDUCTION AND SOCIAL DEVELOPMENT

23. Returning to positive rates o f economic growth i s a pre-requisite for sustaining the country’s impressive progress in improving human development outcomes. Despite the challenges o f a dispersed population, the Maldives has achieved notable development progress in recent decades through a combination o f private sector-led tourism development and improving public service provision. Annual real GDP growth has averaged over seven percent in the last 25 years, contributing to a sharp reduction in poverty. Poverty rates, as measured by the headcount ratio, have fallen steeply, from 4Opercent in 1997 to 28 percent in 2004.5

24. Other human development indicators - infant mortality, maternal mortality, or educational attainment - have registered similar improvements. The country i s on track to meet most o f the Mil lennium Development Goals (MDGs), and has already met the MDGs on eradicating extreme poverty and hunger, achieving universal primary education, reducing chi ld mortality, improving maternal health, and combating HIV/AIDS , malaria and other diseases6 Efforts to promote gender equality and empower women, as wel l as ensuring environmental sustainability and effective climate adaptation will need to be sustained to reach these MDGs. Moreover, while poverty has declined sharply overall in recent years, vulnerability and inequality are a concern, as a significant number o f people fe l l ba’ck into poverty during the recent crisis, and the disparities between remote islands with small populations and the capital Male region remain substantial.

25. The Government i s seeking to consolidate human development gains while also responding to the current challenges. The SAP seeks to increase the quality o f service provision to a standard commensurate with the country’s income levels. It also aims to address key emerging issues such as vulnerability, malnutrition, fertility, and youth unemployment which represent significant implications for other aspects o f social and human development, including education and economic productivity. The current macroeconomic crisis i s an additional challenge to the successful implementation o f i t s development plans, but the approach adopted by Government i s one that seeks to address the short-term challenge o f crisis management while st i l l ensuring that the core principles o f i t s development plan remain intact.

D. THE GOVERNMENT’S CRISIS RESPONSE AND MEDIUM-TERM DEVELOPMENT PLAN

26. The Government’s measures are designed to regain macroeconomic stability and lay the foundations for future economic growth. The SAP aims to redefine the role o f the state in the economy to achieve upper-middle income status, ensure more equitable access to services and opportunities, improve service delivery, facilitate economic diversification, and support better environmental practices to sustain growth and adapt to global climate change. M u c h o f the plan is to be implemented through the private sector where possible or public-private partnerships (PPPs). Ultimately the SAP seeks to establish an integrated transport network, ensure affordable living

The GoM reports these poverty rates in the PRSP based on a poverty line of Rf. 15 per day, which i s equivalent to US$ 1.17 using the nominal exchange rate, or US$3.45 in purchasing power parity (PPP) terms. Recent poverty rates are not available. However, the impact of the current global economic crisis could be expected to have increased the poverty rates.

Millennium Development Goals - Maldives Country Report 2007, Government of Maldives.

9

costs, provide affordable housing, ensure affordable and quality healthcare and stem the entry o f narcotics into the country.

27. A fundamental component of the Government’s SAP i s to engage the private sector in the provision o f goods and services that are currently being provided by the state. A policy that includes privatization o f state owned enterprises, setting up joint ventures with the domestic and international investors, corporatization o f state entities and a program o f public private partnerships would guide implementation o f the S A P . The Privatization Committee, composed o f cabinet members, and other Government officials and chaired by the Minister o f C iv i l Aviation, has been set up to implement the Government’s vision. All three IFIs - the World Bank Group, the Fund and the ADB - are supporting complementary components o f the Government’s plan.

28. The Government’s long term development plan i s an ambitious new vision f o r Maldives. It reflects a commitment to fundamentally changing the economic system o f the country to one that i s based on private sector led investment and underpinned by good governance and strong accountability. At the same time, the Government recognizes that the new democratic political system needs careful nurturing to entrench it and promote i t s growth. The Government’s ability to deliver on these promises has been compromised by the impacts o f the global financial crisis, the unsustainable fiscal expenditures inherited from the previous administration and the challenge o f weak capacity across al l levels o f Government.

29. Fully recognizing the severity of the immediate situation, the Government has been active in the last few months implementing a coherent stabilization program supported by IMF financing. The main element o f the Government’s program i s expenditure reduction. It has implemented wage cuts for the public service in October 2009 and has cut domestically financed capital expenditures. Regarding public service reforms, implementation o f the redundancies planned for 2009 and 20 10 is underway with 1,200 o f the expected 9,000 redundancies taking place from July to November 2009. Plans for the reduction o f the additional staff are being developed and discussed with the C iv i l Service Commission. The Government has also increased the electricity tari f f charged by state-owned electricity company (STELCO) by an average o f 35 percent (for Male residents, with increases for the rest o f the country planned for early 2010). These actions have taken place in an extremely challenging environment, particularly considering the lack o f a parliamentary majority for the Government.

30. Revenue measures also figure prominently in the Government’s program. Plans are underway to introduce a goods and services tax on the tourism sector, which will be additional to the existing flat-rate bed tax, and to accelerate implementation o f the business profits tax. The goods and services tax will be applied to the other sectors o f the economy by 201 1. The Government has also stopped monetizing the deficit. The overriding objective o f these measures i s to put government revenues on a more stable and reliable basis.

31. These measures are expected to place the fiscal deficit on a sustainable path. The fiscal consolidation measures taken by the Government are expected to reduce the fiscal deficit (excluding grants) from an expected 28 percent o f GDP in 2009 to less than 5 percent o f GDP in 2012. The weight o f the measures will come into effect in 2010 and in 201 1 where the deficit i s expected to decline to 18.9 percent and 5.2 percent, respectively. Complementary measures are being taken through a tightening o f monetary policy and measures to strengthen the capital and

10

liquidity position o f the banking sector. The Government expects that these measures will promote faster economic growth by providing a stronger macroeconomic pol icy framework and reducing external financing constraints. With successful implementation o f this program, the team’s assessment i s that the macroeconomic policy stance o f the Maldives i s adequate (see Annex 2).

32. The austerity measures are to be complemented with social support measures. In addition to severance packages that are mandated under the Civil Service Act the government plans to introduce a retraining program for those that lose their jobs in the public service. They have also announced plans for student loans and loans for those who wish to start small and medium sized enterprises. For the poor and vulnerable who will be most affected by the increase in electricity tariffs the Government will introduce targeted consumer subsidies. Section IV provides additional detail on these measures.

11

Box 1. Key Features o f the IMF Program

The IMF program i s a blended financing arrangement comprising: (a) SDR 49.2 mil l ion (or 600 percent o f quota) Stand-By Arrangement (SBA) over 36-months, and (b) SDR 8.2 mil l ion (100 percent o f quota) Exogenous Shock Facility-High Access Component over 24-months. In US$ terms the (combined) assistance amounts to $92.5 mi l l ion over 3-years. The core o f the policy framework that underlies the program i s a strong fiscal adjustment to contain aggregate demand and put public finances back on a sustainable medium-term path. Fiscal measures are complemented by monetary tightening and measures to strengthen the banking sector.

Fiscal measures Reduction in civi l service wages o f between 10 and 20 percent depending on rank. This adjustment w i l l be reversed when domestic Government revenues reach 7 bil l ion rufiyaas, which i s projected for 201 1. Civ i l service staff reductions to total 9,000 by end-2010. Of these, some 3,200 civi l servants w i l l be transferred to the private sector through the Government’s corporatization process. Operational spending and non-priority domestically financed capital spending are also to be reduced by 2 percent o f GDP and 1 percent respectively (prior action). Electricity tariffs raised by 40 to 60 percent depending on consumption bracket (prior action) and a mechanism for automatic price revision in step with global o i l prices w i l l be implemented. Revenue measures include an increase in the airport tax rate o f 29 percent, the expansion o f the business profits tax (structural benchmark), introduced o f a 6 percent ad valorem hotel room tax (structural benchmark), and the introduction o f a goods and services tax by early 201 1 (structural benchmark).

Monetary measures Monetary policy w i l l support fiscal adjustment efforts by tightening domestic liquidity in order to stem reserve losses. Halting the monetization o f the fiscal deficit has been key in this regard. Domestic fmancing o f the deficit w i l l be restricted to t-bill placements. An auction system for t-bill placements w i l l be set up by end-2009 (structural benchmark). The Government debt stock with the MMA has been converted into tradable securities (prior action). In August, the MMA started using these securities as collateral to conduct open market operations (OMOs) through reverse repos, another attempt at tightening monetary policy. Under the program no adjustment to the exchange rate regime i s anticipated as the combination o f strong fiscal adjustment and monetary tightening i s expected to relieve pressure on the exchange rate. In the event that the proposed measures prove insufficient to curb pressure on the rufiyaa, the authorities would seek alternative policy action including a possible adjustment to the exchange rate regime.

Financial Sector Measures Strengthen the financial position o f the Bank o f Maldives. The Government has signaled their intention to restructure BML’s portfolio, ensure rapid action for recovery o f collateral on defalted debt, and if necessary, secure a capital infusion. The Government’s preferred option i s to find a strategic partner to take over the State’s shares. The authorities w i l l seek passage o f the Banking Law and the reforms to the M M A Act by end-2010 (structural benchmark).

111. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. LINKTOCAS

34. The Maldives Country Assistance Strategy (CAS) was jointly prepared by the Bank and the IFC and approved by the Board on January 8,2008. The proposed World Bank Group assistance program seeks to further three strategic development outcomes: (a) a well-managed economy attracting increased investment; (b) increased quality o f education in support o f a better

12

skilled workforce; and (c) improved capacity to manage the country’s pristine, but fragile, natural environment.

35. The CAS rests on three pillars:

0 Pillar I: Economic and fiscal governance, aiming to support the Government’s efforts to manage i t s economy and finances better, while strengthening the investment climate. Pillar 11: Human development and social protection, seeking to strengthen the quality o f public services for human development and social protection. Pillar 111: Environmental management, bolstering efforts to strengthen environmental management capacity and skills, build a sound knowledge base to better address the environmental r isks facing the country, mitigate threats to nature based tourism by improving environmental infrastructure, and implement a strategy to build climate resilience and adapt to the impending risks o f climate change.

0

36. These pillars and strategic outcomes were to be supported through IDA credits, strategic IFC investments and Advisory Services and a flexible program of AAA. IDA investment loans programmed in the CAS for FY08 and FY09 included the three new IDA operations proposed in the CAS - mobile phone banking, environmental management and pension administration - that have now been approved by the Board. For the last three years o f the CAS period, the strategy proposed a programmatic, policy-based investment model and assumed that the Bank Group program would be more specifically defined as part o f the CAS Progress Report process.

37. Staff have initiated work on the CAS Progress Report which will examine CAS implementation and results to date, and discuss the future direction of the Bank’s program. In September 2009, an all-day workshop was held with Government officials, including President Nasheed and key ministers. The meeting included most o f the Bank’s regional management team and senior Bank and IFC staff working o n the Maldives. Key results f rom the retreat and subsequent staff consultations with Government indicate that the three original pillars o f the CAS have remained broadly valid, while the Government would l ike specific support in the fol lowing areas: i) macroeconomic (especially fiscal) reform with particular emphasis on c iv i l service reforms and technical assistance to retrain retrenched public servants , ii) creating the framework for PPP and support for transactions, iii) improving the social safety net, iv) good governance, specifically to initiate diagnostic work needed to help develop the Government’s Governance and Anti- Corruption Strategy, v) economic diversification, vi) employment, and vii) climate change. Given the need for policy reform in the country and the limited resources available for project preparation and AAA, the preferred approach for IDA i s to use the development policy lending instrument, while also providing TA in a few key areas.

38. This proposed operation i s aligned with the CAS - especially Pillar 1 but also the second pillar with includes social protection. The CAS calls for a possible development pol icy operation in FY 10. The pol icy actions supported by this proposed operation would be focused on helping the Government to put in place key elements to support economic growth.

13

B. COLLABORATION WITH IMF AND OTHER DONORS

39. The Bank has been working in close coordination with the IMF and the ADB to put together complementary programs of support for the Government’s reform package. Bank and Fund staff have carried out regular consultations to align programs o f support. Three joint missions were undertaken between June and September 2009, with one being a tripartite mission that included an ADB representative to work on the debt sustainability analysis. An important component o f the collaboration has been agreeing to a division o f labor that builds on each institutions’ comparative advantages and the past areas o f engagement with the Government. The teams have also been careful to realize implementation capacity constraints o f the Government. The ADB and the IMF have taken the lead on various areas o f tax reform, while the Bank i s taking the lead on aspects o f medium-term expenditure reform, budget implementation and social safety nets. The ADB i s working closely with the Government on i t s privatization agenda, while the World Bank and IFC are focused on public-private partnership (PPP) aspects o f the agenda.7

40. IF1 financing will support the Government’s economic growth promotion efforts. The IMF Board in early December approved a 36-month combined Stand-By Arrangement and External Shocks Facility o f US$92.5 mill ion (or 700 percent o f quota). The ADB approved a US$35 million budget support operation half disbursed in 2010 and a roughly equal amount planned for disbursement in mid-2011. The Bank i s proposing a single tranche DPC o f US$13.7 million this year, which could be followed by another operation o f similar value next year. The operations are presented in a programmatic series and include a medium-term framework o f support, given the protracted nature o f the challenges that the Government i s facing. The coordinated programs o f support from IFIs will be a critical input for mobilizing additional support for the Government at a Donors’ Forum scheduled for March o f this year.

C. RELATIONSHIP TO OTHER BANK OPERATIONS

41. This proposed operation complements each o f the ongoing operations under the current CAS. The proposed operation has as i t s core objective to aid the Government in regaining sustained growth and poverty reduction. I t does so in a way that helps build institutional capacity that can facilitate better service delivery, support a stronger investment climate and promote better social protection. The ongoing operations include an Integrated Human Development Project (IHDP) o f $15.6 million approved in May 2004, a Mobile Phone Banking Project (MBP) o f US$7.7 million approved in April 2008, an Environmental Management Project (EMP) for US$l3.2 million approved in May 2008, a post-Tsunami Emergency project o f US$14 million co-financed by the European Commission’ and a Pension and Social Protection Administration Project (PSAP) for US$3.6 million approved on May 12, 2009. The Bank i s also preparing a US$9.7 million Climate Change Trust Fund (CCTF) Program to be financed by the European Commission for delivery in September 2010.

42. The ongoing IDA program and this proposed operation are complementary to IFC’s work program in the country. Working towards the agreed strategic development outcomes o f the World Bank Group CAS for FY 08-12, IFC’s main focus in the CAS period to date has been in

’ Specifically, the Bank is helping the government to establish a PPP framework, while the IFC is helping them structure PPP transactions. Project closes in January 2010. 8

14

four key areas - tourism, financial markets, renewable energyhlimate change and infrastructure. IFC's advisory services program has assisted the Maldives Monetary Authority (MMA) in establishing and strengthening prudential guidelines (e.g. in Islamic Banking) and also provided technical assistance to help set up a Credit Bureau. During the previous CAS period the IFC committed a total of U S $47.8 mi l l ion in both debt and equity, consisting o f four projects in the financial, tourism, logistics and telecommunications sectors. IFC has more than doubled its commitments to about US$103 mi l l ion (or roughly twice that o f IDA) in the f i rs t part o f the current CAS period (2008 to June 2009).

D. LESSONS LEARNED

43. This proposed operation i s the first budget support operation that the Bank will provide to the Government of Maldives. As such, there i s no direct experience with providing budget support that the team can draw on for this operation. The Bank's active engagement with the Maldives over the years has, however, provided many lessons that the team has drawn o n for the preparation o f this operation. Key among them is that capacity constraints significantly impact al l parts o f government functions. The operation aims to carefully prioritize the many critical actions that must be taken to improve public finances so as not to overburden the authorities, while at the same time unlocking some key binding constraints. A key lesson o f recent engagement with the new Government is that they are open to working with the Bank and other IFIs to build staff capacity at al l levels. An important complement to this operation will be to leverage trust funds to provide the Government the TA support they desire.

Figure 3. Maldives: A Capacity Constrained Policy 6 0 Making Environment

u - a m 0 0 I

; & o s

MdJhci

Per Capita GrossDornestic Product,US%

E. ANALYTIC UNDERPINNINGS

44. The design of the proposed operation has benefitted from a number o f recent analytic pieces. The public financial management part o f the program has been informed by the jo int Bank- Fund PEFA assessment as well as the recent Debt Management Performance Assessment (DeMPA). The public enterprise reform elements o f the program have been based on a recent diagnostic analysis o f public private partnership arrangements in the country. The social protection aspects build on a Bank publication - Social Protection in the Maldives: Options for Reforming Pensions and Safety Nets (World Bank April 2006). Recent TA provided to the authorities in the area o f public service reform informs that component o f the operation. The macroeconomic analysis in the report draws on recent analytical work used for input into the recent World Bank Group/Government Country Assistance Strategy retreat (September 2009), 'the Bank's ongoing macroeconomic monitoring reports and IMF analysis during the course o f recent jo int missions and the preparation o f their proposed Stand-By Arrangement.

15

IV. THE PROPOSED DEVELOPMENT POLICY CREDIT

A. RATIONALE AND OBJECTIVES

45. The proposed development policy credit aims to underpin the Government’s efforts to restore economic growth and protect the vulnerable. There are three main areas o f the Government’s plan that this proposed operation will support:

a. Public Financial Management: There are several institutional changes that the Government is working on to ensure that budget preparation, implementation and monitoring processes are improved so as to support the delivery o f credible budgets within a sustainable medium-term framework. The proposed operation will focus on changes to the medium-term expenditure framework, within year monitoring o f budget outturns and improving overall budget accountability.

b. Public Enterprise Reform: A key principle o f the Government’s development plan i s to reduce the role o f the state in the economy. It i s also seen as a way to underpin the fiscal austerity measures to help ensure their sustainability. The proposed operation aims to guide the drive for PPPs in a way that minimizes future fiscal risks to the Government and ensures that the privatization process i s conducted transparently and communicated effectively to relevant stakeholders.

c. Social Protection: The Government’s fiscal measures, especially the increase in STELCO’s tariff structure, necessitate wel l targeted safety net programs to cushion the impact o f rising prices. Existing safety net programs are ad hoc and overlapping, and the Government intends to unify and improve them over time. In the meantime, the Government is introducing electricity, water and food subsidies to protect poor households from the rise in utility prices. This and the next proposed operation will support the development o f a new eligibility criteria for the recently introduced subsidies, while helping to build the foundations for a more harmonized national social protection system.

46. The Government’s reform program warrants rapid financial and analytic response from the Bank. Even under normal circumstances the Government’s development plan would warrant Bank and other donor support given l imited domestic resources. The effect o f the current global financial crisis has exposed a legacy o f poor fiscal policy that is in urgent need o f rebalancing in conjunction with significant external financing. The Government has presented a credible reform plan that aims to address the current fiscal imbalances and restore growth. The Bank’s financial support i s a key complement to the IMF and ADB financing that is expected this year and next. Additionally, the proposed areas o f support identified for this operation may help in harnessing other donor financing during the Maldives Donor’s Forum planned for end-March 201 0.

B. DESIGN AND FOCUS OF THE PROPOSED OPERATION

47. Policy actions supported by this proposed operation are focused on helping the Government to restore the economic fundamentals for a growth recovery. The focus on public financial management by addressing key institutional shortcomings in budget preparation and

16

implementation aims to enable the Ministry o f Finance and Treasury to recognize budget overruns early so that they can be addressed early. The focus on public enterprise reform supports the Government’s ambitious public private partnership program, while underpinning fiscal sustainability. The social protection measures help cushion the impact o f what is to be a significant structural change in the economy.

48. The policy actions supported by this proposed operation have been chosen strategically from the Government’s broad reform agenda. The choice o f the pol icy actions reflect the enormous challenge o f marshalling the l imited Government capacity to undertake measures that will help regain fiscal sustainability. L i ke several other small-island economies, capacity o f Government i s not commensurate with typical indicators o f the level o f development. In this context, the policy actions are focused on the critically important elements o f the reform program that are realistically achievable and set the basis for future economic growth. The proposed programmatic structure o f the operation also supports the Government’s effort to build reform momentum during i t s early tenure in Government and allows the Bank to gauge implementation progress.

17

Box 2. Application of Good Practice Principles on Development Policy Lending Operations

Principle 1: Reinforce ownership

The proposed operation i s closely aligned with the Government’s priorities documented in the SAP, with its ambition to implement their development plan through PPPs where possible. The program chooses those policy measures that the Government deems essential to the successful implementation of their program while complementing other donor assistance.

Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework

The policy matrix that underpins this proposed operation was developed jointly with the Maldivian authorities and was discussed with the ADB and the IMF during i t s development phase to align with their programs of support.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances

Given the urgent need to reduce macroeconomic imbalances in the economy, the proposed operation has been designed under IDA’S Fast Track Facility. The timing, design, and scope o f the operation are thus customized based on this urgency, but also on the limited capacity of the Government. Nevertheless, it i s fblly consistent with the Government’s medium-term plans for poverty reduction and improved service delivery.

Principle 4: Streamline critical actions for achieving results

The proposed operation i s the first in a proposed programmatic series. The prior actions for the first operation are limited to 4, while the triggers for the proposed second operation have been limited to 8. The Government’s policy actions number well over 30 when considering the actions under the programs of support from the IMF and the ADB. The prior actions and triggers considered here are focused on achieving key results under the Government’s program and are supported by milestones that aim to provide analytic support for sound implementation.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance based financial support

Progress made with implementation of reforms and achievement of outcome goals will be monitored through regular macroeconomic updates and discussed frequently with the authorities. These activities will provide clear guidance to the Government for when and if the resources associated with the second proposed operation would flow to Government.

Public Financial Management

49. The current fiscal crisis has brought into focus the long-standing weaknesses in budgetary processes. The current fiscal imbalances are due in part to expenditure policies that were not based on a realistic forecast o f Government revenues. The Bank has been working with the authorities in recent years to help implement a Medium-Term Expenditure Framework. A key result o f this work has been the presentation o f the 2009 budget in a 3-year framework. A key challenge moving forward would be to instill greater realism into budgets by adopting conventional GFS standards. Realism has been inhibited by the requirements o f the Public Finance Act to show

18

balanced budgets each year. One way authorities achieve this result is to include al l expected privatization receipts and the sale o f state assets as a revenue item.g Implementing expenditure policies on the basis o f highly uncertain revenue outturns has been one reason for the rise o f expenditures to unsustainable levels. A joint Bank-Fund Public Expenditure and Financial Accountability (PEFA) assessment was recently completed in October 2009 and a comprehensive action plan for improvement has been agreed, which will be monitored during the implementation o f the proposed program.

50. The first prior action in this component of the program i s to present the 2010 budget in a 3-year rolling framework that conforms to Government Finance Statistics 1986. The GFS presentation will be made in parallel to the existing formulation until a change to the Public Finance Act can be made. The objective o f this action i s to reduce the over-optimism on fiscal deficit projections once the fiscal consolidation efforts are undertaken. Re-establishing the Macroeconomic Coordinating Committee (MECC) ahead o f the presentation o f the 2010 budget and setting a timetable for regular meetings and outputs will help move the MTEF beyond simply a tool used for presentational purposes to a more credible pol icy instrument.

51. Weak expenditure control and monitoring i s also inhibiting the use of the MTEF as a policy tool. The budget preparation process st i l l has a one-year focus. The initial annual budget allocations are typically in line with medium-term government priorities, but these allocations change considerably during the year. The final allocations are made based on ad-hoc decisions due to inadequate (and not up to date) knowledge o f budget outturns and arbitrary developments in the processing o f project loans and grants, rather than being driven by systematic, medium-term objectives. The lack o f a transparent budget release and the absence o f reliable and timely reporting mechanisms, leads to an ad-hoc, non-transparent approach to in-year budget adjustments.

52. The Bank has been working with Government to produce reliable and timely reporting mechanisms through implementation of a Public Accounting System (PAS). The PAS project is expected to lead to the development o f a modern public accounting and financial management information system that will automate many aspects o f the accounting and budget management o f government. PAS will facilitate substantial improvements in budget execution, internal control, cash management, accounting and fiscal reporting. With full implementation it can create a basis for improvements in budget planning and in management o f fiscal risks. PAS implementation reached an important milestone in M a y 2009 when it became operational with respect to general ledger and payment processing for Male-based agencies. The system has now been fully implemented in Phase I agencies (Ministry o f Finance & Treasury, Customs and Department o f Inland Revenue).

53. The second prior action in this component of the program i s to implement Phase I1 o f the PAS project in three government agencies. Five key government agencies have been targeted for Phase two implementation - President’s Office, Department o f National Planning, C iv i l Service Commission, Ministry o f Education, and Addu Ato l l o f which the rollout to the former three was completed in December 2009 and the other two in early 2010. Implementation o f this prior action will support the requirement under the L a w on Public Finance 2006 (effective in 2009) to produce financial statements o f the Government, which have not yet been prepared and

The Auditor General’s Report o f 2008 on government finances i s highly critical o f the budget presentation that i s 9

required under the Public Finance Act.

19

published. To date, the annual budget provides a 'budget to actual' utilization report, which contains spending estimates but does not consist o f financial statements prepared using acceptable standards. Triggers for the proposed second operation are to (a) publish the f i rst audited financial statements of Government for 2009 and (6) issue revised Public Finance regulations (including procurement regulations) to establish adherence to internationally accepted public sector accounting standards, enhancing internal control pamework and improving spending eflciency. The objective o f these measures is to underpin fiscal expenditure discipline in the face o f revenue shocks to maintain fiscal discipline at both the sectoral and macro level.

54. Cash and debt management practices add to budget uncertainty. Cash flows are estimated by the Treasury on an annual basis but not updated periodically. The Treasury makes cash in- and outflow forecasts for the 12 months o f the budget year based on past seasonal patterns. I t does not use expenditure planning information from l ine ministries. The MMA has generally accommodated cash f low shortages by providing T-bills to the banking system (on behalf o f the Government) and/or providing access to the Ways and Means account and extending direct short term loans. The Treasury does not provide any in-year cash f l ow updates to the MMA. Debt management operations suffer f rom lack o f capacity to perform basic functions o f debt recording and reporting, and a lack o f coordination among key agencies, especially the MMA, making debt service projections that go into the budget highly uncertain.

55. The third prior action in this component of the operation i s for the Government to prepare a forecasting methodology for monthly revenues that can be updated monthly and presented to the Fiscal Affairs and Economic Policy Division of the MoFT. The objective o f th i s prior action i s to provide policy makers with an updated position o f government revenues and the outlook to reduce the fiscal impact o f revenue shocks. It also aims to support the Government in making timely in-year budget adjustments.

56. Capital expenditure policy i s also a key source o f budget uncertainty. Capital expenditures are heavily influenced by the Government's Public Sector Investment Program (PSIP). The annual PSIP is prepared by the MoFT and its composition i s determined on the basis o f an indicative domestic resource figure as wel l funds available through external aid. A key shortcoming o f the PSIP process i s the insufficient regard for future recurrent cost implications o f new capital projects, which i s in part due to the focus o f the budget process on one-year planning." The PSIP process also suffers from inadequate analysis o f the economic viability, a rationalization o f using public resources for the proposed activity, or an investigation o f the opportunity costs o f choosing a particular project. A trigger for the proposed second operation is to unzjj the PSIP with the rest of capital and recurrent expenditures on a 3-year basis.

57. The fourth action in this component o f the program i s to construct a single unified public sector pay and employment database. One of the key challenges preventing the MoFT from making within year budget adjustments is the lack o f timely information on expenditure outturns. A key component o f expenditures i s the. wage bill for public servants. While there i s data on the number o f public servants employed and their pay packages, there is no one unified and reconciled database that i s updated regularly. T o address this issue, the fourth prior action is to

lo Although in recent years actual capital expenditures tended to be lower than budgeted due to implementation capacity constraints.

20

establish a comprehensive database o f a l l public sector employees and their total pay packages that can be updated semi-annually until the human resources module o f the public accounts system is fully functional. Each month the M o F T will monitor the treasury’s disbursement figures for the salary bill, by base pay and allowances, and compare against the baseline figures o f the database so that accurate budget out-turns can be measured during the year.

58. The appointment o f the first independent Auditor General in 2008 was an important step toward improving governance in Maldives. Until April 2007, the Auditor General’s Office (AGO) reported to the President and the audit reports were not sent to or scrutinized by the Parliament. An IDF Grant provided by the World Bank in 2006 helped enact the Audit Act o f 2007 which established AGO as the Supreme Audit Institution. Under the new AG, risk based strategic audits for 2008 were conducted across central government audit entities, some o f which had not been audited for decades. The nature o f audit was expanded from the detailed transactions-level compliance audits to include performance audits and the audit reports were posted on AGO website as soon as they were tabled in the People’s Majlis. This received extensive public interest and the Auditor General held press conferences in providing ex-post oversight over government systems o f PFM. In spite o f having had considerable impact, much needs to be done to fol low up on these audit findings and enhance the scope and coverage o f the other accountability institutions in Maldives such as the office o f the Attorney General, Tender Evaluation Board, the Anti-Corruption Commission and the Prosecutor General’s Office.

Public Enterprise Re form

59. In his first Presidential address to Parliament, President Nasheed made it clear that his Government would change the role o f the state in the economy. A fundamental component o f the Government’s Strategic Action Plan would be to engage the private sector in the provision o f goods and services that had previously been provided by the state. A pol icy that includes privatization o f state owned enterprises, setting up joint ventures with the domestic and international investors, corporatization o f state entities and a program o f public private partnerships would guide implementation o f the SAP. The Privatization Committee, composed o f cabinet members and other Government officials and chaired by the Minister o f C iv i l Aviation and Communication, has been set up to implement the Government’s vision.

60. There are a number of reasons why public enterprise reform, a privatization agenda and public private partnerships (PPPs) are important for Maldives. These include: (i) better public financial discipline, (ii) fiscal benefits in terms o f lump sum receipts, ongoing revenues and reduced expenditures, (iii) greater economic efficiency - better labor and capital productivity, (iv) improved service delivery, and (v) the introduction o f private sector innovation to the operation and financing o f service delivery. These benefits are not unique to Maldives, but are particularly relevant in the current context where the recent history o f increasing government expenditures together with the expansion o f the c iv i l service and lack o f focus on service delivery precipitated the current fiscal imbalances.

61. The Government has been quite active in the area o f public enterprise reform. Their initiatives have been structured on three pillars: (a) cost recovery, (b) privatization, and (c) corporatization. In the current context, pillar (a) is viewed as a precursor for either (b) or (c). Under the cost recovery pillar, an important milestone was reached when STELCO implemented a new

21

electricity tar i f f schedule beginning November 2009 and launched a fue l surcharge that activates when the price o f diesel goes above a threshold level. Under the privatization pillar, the Government is in advanced stages o f privatizing the national airport, it recently sold a 7 percent stake in Dhiraagu Telecom and will be selling i t s remaining stake to the public v ia the Maldives Stock Exchange.' Under the corporatization pillar, the Government signed a management contract in November 2009 with a provider for management o f the secondary school in Male. TV Maldives (TVM) and the radio channel Voice of Maldives (VOM)) have become publicly held companies.

62. The Bank and the IFC have been working with the Government to effectively implement its ambitious agenda in this area. While both institutions agree with the principles o f the Government's plans, they have cautioned the Privatization Committee (PC) members and other members o f Government against rushing implementation. Political opposition i s building up against the proposed privatizations, while several stakeholders claim that transparency can be improved. Government can also do more to enhance i t s communications strategy and to foster stakeholder debate on the privatization drive. The l i s t o f intended privatizations needs to be prioritized based on an opportunity cost assessment and considering investor appetite in the current global context. Setting clear expectations on the timing o f privatizations i s also an important component o f the communications strategy. Bank and IFC teams have also highlighted the importance to al low investors sufficient time to carry out due diligence and to allow advisors time to carry out the necessary dialogue on the trade-offs to optimize proceeds from the transaction.'*

63. The Government has an ambitious PPP agenda. There are a number o f areas o f attention that are required to make PPPs attainable and sustainable. In particular, the lack o f formal PPP policy and legislative framework i s a considerable gap. A PPP policy document would lay out the objectives o f the program and the process to be followed. Beyond this, there i s also the need for a full-time, dedicated and capacitated PPP Unit for implementing the PPP program. Currently there is no such unit in place - and Invest Maldives - the secretariat to the PC, has no dedicated staff for PPPs, and structuring PPP projects i s not part o f their core mandate. Going further the country would also need to look at developing guidelines and procedures for analyzing, initiating and procuring PPP projects.

64. The Bank has already initiated support to the GoM to develop PPP policy and an implementation framework, and the current program would aim to further build on this initiative. Earlier this year the Bank undertook a needs assessment o f the PPP reform program. This assessment highlighted two main areas o f weakness: (i) the institutional framework was not adequate to ensure a sustainable and successful program, and (ii) there was inadequate use o f professional transaction advisers. The current program would attempt to address the f i rs t o f these weaknesses - in establishing an effective institutional (policy, regulatory and program management) capability, in close collaboration with the IFC. To facilitate this, an important milestone for this component o f the program is for the Government to produce a PPP strategic framework paper and submit the report to the Cabinet for guidance. The IFC has already taken the lead in addressing the second area o f weakness; in collaboration with the Bank, it has secured important advisory mandates for the airport and the solid waste management company.

The Government sale to UK Cable and Wireless implies that Cable and Wireless n o w owns the majori ty stake in the

The Asian Development Bank has an active program o f support for the Government in the area o f privatizations. The

11

telecom.

Bank's role has been focused more on the PPP agenda, which i s the focus o f this operation. 12

22

Social Protection

65. Maldives has several social safety net programs, but they are small and fragmented. Current programs include: (a) the Absolute Poverty Benefit (ABS) scheme introduced in 2003 under which Rf. 1000 a month (initially Rf. 500) was provided for highly vulnerable individuals; (b) a universal (pension-tested) o ld age allowance o f Rf. 2000 for those aged 65 years and above introduced in early 2009; (c) a blind allowance o f Rf. 1500 for the legally blind; (d) health insurance (Madhana) coverage for local medical care for public employees, persons receiving the ABS and people who are 65 years and older; and (e) several small programs o f assistance for poor students, persons with disabilities, and health care. However, the coverage o f these programs is quite limited. The safety net system has very l o w coverage and funding relative to the level o f income o f the Maldives. In 2004, only 0.3 percent o f the population and 1.6 percent o f the poor were covered by recurrent transfers; and total safety net spending (outside o f the tsunami benefit) was 0.2% o f GDP (World Bank 2006). This share has increased dramatically in 2009 with the introduction o f the old age allowance, which currently covers about 13,500 persons aged 65 and above.

66. As a result, the key objective of protecting the poor i s not being met. Analysis o f the VPA 2004 household survey data reveals that there are high inclusion and exclusion errors. Without reforms in targeting efficiency, the current safety net programs are inadequate to alleviate poverty. In addition, these multiple programs rely on different eligibility criteria even when ostensibly targeted to the same population. Several o f the criteria used are subjective and information required to determine eligibility i s unverifiable.

67. The pension system in the Maldives covers only public sector employees through a significant subsidy at a high cost to the Government. I t s public sector pension system pays out after 20 years o f uninterrupted government service and there i s no requirement to retire. Employees can continue to work for another 20 years and earn another pension. Yet the c iv i l service pension scheme is not designed to produce a reasonable level o f retirement income. C iv i l servants receive a pension equivalent to 50 percent o f basic salary after every 20 years o f service and regardless o f age. In May 2009, the World Bank approved a US$3.8 mi l l ion credit to assist the Government to revitalize its pension system under a new implementing authority with the aim o f making the existing system more financially sustainable and to expand coverage to the rest o f the workforce over time.

68. The Government has been clear that improvements in existing social protection programs and the development of new programs must accompany the fiscal austerity measures. Both the privatization policy and the removal o f corporate subsidies would tend to increase the cost o f essential services. The State Electricity Company Limited (STELCO) and the associated entities which manage power houses in the islands, have provided subsidized electricity to residential, business, and government customers for many years. The subsidy was paid directly to STELCO'by the MoFT, and hence was poorly targeted. STELCO's new electricity tar i f f schedule beginning November 2009 has the effect o f increasing electricity prices by 35 percent o n average. The pricing revision also incorporated a fuel surcharge that activates when the price o f diesel goes above a threshold level. The new tariff schedule differentiates tariffs more substantially across the types and levels o f electricity usage. In order to provide assistance to the poor who are likely to be most affected by this reform the Government has initiated an interim subsidy (see below). This

23

electricity subsidy was introduced in Male in early December 2009 and will be rolled out to the rest o f the country once the new tariffs are applied nationally.

69. The milestone for this component of the program aims to support the Government’s effort to improve the poverty impact o f these proposed subsidies. I t s primary aim i s to support the development o f a well-designed interim mechanism for targeting poor households that is fiscally sustainable and consistent with a permanent targeting system. The Government o f Maldives is currently engaged in identifying households eligible for the proposed subsidies to cushion the impact o f rising tar i f fs. A Steering Committee and Working Group has been formed with representatives f rom various Ministries to oversee the design and implementation o f this interim targeting strategy. At present, the proposed interim targeting tool for these subsidies relies on self- reported economic status, mainly per capita daily income. However, self-reported income i s typically prone to measurement error and misreporting and is dif f icult to verify. The Working Group is currently exploring alternative methods that could disburse assistance quickly to the poor. In this regard it is essential to prepare a PSIA study that assesses the targeting performance o f the interim support program. It i s also necessary to determine if the fiscal costs o f the new program are lower than the old subsidy.

70. The milestones and the suggested triggers for the next proposed operation aim to support the Government’s eventual transition to an integrated social protection system. While the subsidies currently proposed are a rapid response to the current crisis, the Government i s also concerned about developing a long-term social protection strategy for the Maldives. The Government has a long term vision o f moving towards an integrated social protection system based on the rationalization o f the existing programs and the currently proposed subsidies. This integrated system would rest on common systems for beneficiary identification (building on the National Registry) and a common platform for program delivery. The Government has already started to take steps in this direction (e.g., there are plans to discontinue the ABS with the introduction o f the utility subsidies). However, much needs to be done to establish the building blocks o f this system and the targeting mechanism for the proposed subsidies would need to be consistent both with the broader fiscal strategy o f the Government and this long term vision. This permanent targeting mechanism could build o n the interim targeting system currently being developed or it can take an entirely different form, such as geographic targeting (e.g., based on poverty mapping), community- based targeting, or proxy-means testing.

71. Any effort to unify the current spate of social safety net programs, to ensure that they better target the poor and vulnerable, and make sure that fiscal costs are limited, must be underpinned with sound analysis. However, the information currently available for such analysis i s somewhat outdated (2004 VPA, 2002/03 HIES and 2006 Census). By early 2010, the self- reported data will be available for some preliminary analysis and the newest round o f the Household Income and Expenditure Survey will also become available by the end o f 201 0 for more rigorous analysis. In this context, there are two proposed triggers for the next operation. The f i rs t i s to complete an assessment o f the targeting performance and fiscal implications o f the interim electricity and water subsidies. The second i s to develop a common database for monitoring beneficiaries o f the social protection programs. In parallel, the Government aims to develop the strategic proposal for a unified social protection system.

24

Table 2. Maldives: ProDosed Prior Actions for DPCl and Triggers for DPC2 -- Issue DPCl DPCZ

Publir Financial Management ~~ ~~~

Weaknesses m budget preparation and Present the 2010 budget to Parliament on mplementatlon processes, as well as a November 22,2009 premised on a three (3) year (PSIP) with the rest ofcapital and recurrent we& m e d h - t e m fscal framework rolling hmework in conformity with the standard expenditures on a 3-year basis

Government Finance Statistics (GFS 1986)

Unify the Public Sector InvestmentProgram

Withmyear monitoring of budget Complete implementation ofthe second phase of outturns is weak and cash management the Public Accounting System project in each of- is non-existent the President's OBce, Department ofNational

Planning and Civil Service Commission

Prepare a forecasting methodology for monthly revenues that i s updated monthly and presented to the Fiscal Affairs and Economic Policy Division of the Ministry of Finance

Establish a comprehensive database featuring consolidated data on all public sector employees, together with each employee's pay package that can be updated semi-annually until the human resources module ofthe Public Accounts System is fully operational

Publish the first audited financial statements for government ofMaldives for FY 2009

Issue revised Public Finance regulations (including procurement regulations) to establish adherence to internationally accepted public sector accounting standards.

The Government's debt portfolio is characterkd by high risk and high cost debt

Draft a medium-term debt management strategy document, present MTDS to Cabinet and publish on M o T F website

Public Enterprise Reform The government has embarked on an ambnlous prrvatrzatlon program and seeks to mclude the prrvate sector m actrvnes currently undertaken by the pubk sector

Establish an autonomous regulatory authority for key utilities

Prepare operational guidelines for approval and issuance ofguarantees

Social Protection Current safety net programs are ad hoc, overlappmg and not well targeted

Complete an assessment ofthe targeting performance and fiscal implications of the electricity implemented 1 November 2009 and water subsidy

Develop a common database for monitoring beneficiaries ofSP programs

V. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACT ANALYSIS

72. Gaining a better understanding of the potential impacts o f electricity and water tariff increases will form part o f the PSIA. The Government has been aware o f the urgency o f letting electricity tariffs reflect international fuel price changes, while simultaneously considering the effects o f tariff and subsidy changes on poverty and fiscal performance. Prior to the current change in the tariff schedule electricity subsidies were based on consumer usage only. Preliminary benefit- incidence analysis indicates that the old subsidies were not pro-poor, since although the level o f household electricity usage i s positively correlated to the level o f i t s consumption expenditures, the

25

corre~ation i s rather low (0.38 ibr total ~ i o u ~ e l i o ~ ~ e ~ p ~ ~ i ~ i t u r ~ s ~ " Even in the l i ~ ~ l i n e tari f f block. or lowest usage levels (0-1 00 k ~ l i ) ~ al~i iost 75 percent o f users belong to the richest four ~ u ~ n t ~ l e s .

Source: Maldivian autftarities and Bank Staf f estimates.

73. Preliminary analysis indicates that the e€ectricily subsidy under the new electricity tariff schedule i s an improvement on the old subsidy, but there i s room to improve its targeting of the poor. STELGO's new tari f f schedule to residents in Male' coincided with the ~ i s c o t ~ t i i i u a t ~ o ~ i o f subsidy from the GoM. To mitigate the impact o f price increases on the poor. STELCC) largely kept the existing tarif l design that gives different prices according to the levels o f consumption but r-tlodified i t by setting only the first two block prices (tip to 300 kWh per month) at below cost. A benefit incidence analysis (BIA) that describes the d i s t r i b u t i ~ ~ i o f subsidies across different income (cons~tnpt~on) groups shows that the share o f total subsidy received by the poorest 20 percent o f the population in Male' continues to be one o f the smallest under the new schedule, despite some improvements (see right-hand figure).

.......

Source: Maldivian aitthorities and Rank Staf f estimates.

71. A large proportion o f the beneficiaries of electricity subsidy are non-poor, w h i l e a substantial number o f poor households does not receive any subsidy. 'I-he share o f the non-poor tvfiv are receiving a subsidy aniong total beneficiaries (i,e., leakage rate) i s estimated to be about 90 percent, while the share o f the poor who are not receiving subsidy xithin the total poor p ~ p L ~ ~ a ~ i ~ ~ ~ (Le.. wider-coverage rate) i s estimated to be about 39 percent. This pc3or targeting perforrt~anec of the new tari f f structure i s explained by the foIlowing four factors.

26

a. A change o f tariffs cannot influence the distribution o f subsidy to poor households that do not have direct access to electricity.

b. Despite large increases, tar i f fs are still lower than the marginal cost at almost all consumption levels around which most observations are empirically distributed (which allows most large consumers to continue to enjoy subsidies).

c. The new tariff schedule has given the smallest marginal increase for the middle consumption range o f 201-300 kWh, not the lowest consumption (or lifeline tariff) band.

d. Since the correlation between total household electricity consumption and per capita household income is empirically not strong, the existing tariff design that hinges on has inherent limitations for targeting.

75. The poor targeting performance o f the new tariff structure supports the GoM’s effort to tackle the problem o f rising prices more directly through either a targeted consumer subsidy program o r a unified social protection measure. The GoM started the targeted subsidy program for electricity and water to the poor in order to address the problem o f rising prices more directly. Although the details o f the program are s t i l l being developed, a full picture o f the program, as well as self-report data, will become available by early 2010 for the assessment o f the targeting performance o f the program and i t s fiscal implications. It i s essential to think through how best data and methods should be combined to complete the PSIAs in order to understand the more comprehensive impact o f the electricity tariff reform on the poor, which takes into account the performance o f targeted subsidy program.

76. To better complement the limitations of the existing tariff design, the GoM should instead consider a protection measure that works independent o f the utility tariff schedules. Preliminary analyses suggest that linking the design and implementation o f a new protection measure to the existing tariff structures (such as the targeted subsidy program) automatically builds the constraints o f the tari f f designs (e.g., coverage) into the new protection measure. The proposed long-term transition to a unified social rotection measure (such as national cash transfer) is desirable from this point o f view, as wellP) Bank staff will work with the authorities prior to the second operation to help make the transition to a unified social protection measure effective.

l3 In the medium or long run, the poverty monitoring capacity o f the government needs strengthening. The Maldives currently does not have an official poverty line derived from rigorous methods. This becomes an issue when the government intends to provide targeted subsidies to poor households whose consumption levels are below a threshold. Further, the Government poverty measurement has been relying on nominal data, which do not take into account price differentials across regions (and over time). However, price levels may vary significantly across regions. To the extent that those differentials exist, making poverty comparisons across different locations could bring complications. Therefore, it i s desirable to derive an official poverty l ine using updated and large-scale household expenditure data. In the medium and long run, the targeted subsidy or transfer programs should be redesigned based on the new poverty l ine and targeting mechanism so the same standard i s applied across different locations and time periods.

27

B. ENVIRONMENTAL ASPECTSI4

77. The focus of this operation i s on promoting fiscal sustainability and setting the stage for stronger economic growth. As such, it has no direct environmental impact. There is a risk that the Government’s proposed reduction in the public service may further constrain the ability o f G o M to address the mounting environmental challenges. Mit igating this risk, however, is the IDA funded Maldives Environmental Management Project that seeks to build capacity, knowledge and human capital for better environmental management. This would somewhat buffer the sector f rom any loss o f staff.

78. The environment i s the main economic asset o f the country. Sustained economic growth and poverty reduction rests primarily on sound environmental stewardship and governance. The economic and development progress in the Maldives has been exclusively fueled and sustained by the country’s immense marine resource^.*^ Nature-based tourism i s the primary industry accounting for the bulk o f growth, followed by fishing and f ish processing. Apart from their tourist appeal, the country’s marine resources are also an important livelihood asset, particularly in the remote islands and atolls where they sustain a vibrant fishing industry. Fishing employs about 30 percent o f the work force, is the second largest foreign exchange earner after tourism and i s the primary source o f animal protein in the Maldivian diet. It i s no surprise that with such a narrow economic base, environmental risks translate directly into measurable economic r isks to the two key growth sectors o f the economy.

79. Environmental concerns are growing. Despite the significance o f i t s marine assets in fueling prosperity, there i s growing evidence o f unsustainable pressures on the natural resource base. An unspoiled marine environment is the major draw card for tourists, hence resorts are generally well managed, while other inhabited islands suffer from problems o f solid waste and the f low o f raw sewage into relatively stagnant lagoons. O f particular concern is the growing volume o f waste in areas visited by tourists, with the appearance o f debris on dive sites, sand-banks and beaches. Waste disposal is l ikely to become even more challenging in the future as population densities rise and prosperity grows. Other threats to ree f ecology include intrusive and poorly planned construction activities that damage or weaken valuable corals, damage caused by divers and dive boat anchors and the illegal collection o f marine flora.

80. Climate change poses an additional long term environmental risk to the country. Geography has rendered the Maldives especially vulnerable to climate change. Being land scarce and l o w lying (over 80 percent o f the country is less than 1 meter above sea level), the Maldives is exposed to the risk o f intensifying weather events including damage caused by inundation, high winds, flooding, erosion and damage to infrastructure from storm surges. Sea level rise poses an existential threat in the worst case scenarios. The proposed Climate Change Trust Fund (CCTF) Program will help design and implement pi lot activities in the areas o f sewage and solid waste management, coastal protection and biodiversity conservation, and promote low-carbon development.

Information for this assessment i s drawn from project documents o f the World Bank and the Maldives NAPA. 14

Complementing these i s a substantial gray literature focused on marine aspects of the environment.

Being a country with more territorial sea than land, marine resources have played a vital role shaping the contours of 15

economic development.

28

C. IMPLEMENTATION AND MONITORING

81. The Ministry of Finance and Treasury (MoFT) will carry out the implementation, monitoring, and evaluation of the proposed program. The Economic Policy Planning Section (EPPS) o f the M o F T will be the point o f contact and coordinating agency for this operation. The outcome indicators will be monitored quarterly in close collaboration with the IMF and the EPPS.

82. The proposed program sets out a number of qualitative and quantitative benchmarks and targets for 2010 and 2011. The Bank team will monitor and fol low up on progress, carry out regular consultations with the relevant ministries and assess implementation o f pol icy measures. The follow-up and monitoring will consist o f quarterly macroeconomic assessments. The Bank team will also report on implementation progress through specific policy notes and track official documents (memoranda, gazette) to support the verification o f effective policy decisions that are considered under the proposed program.

83. Implementation effectiveness of the Government’s reform program will also depend on consultations and participation of key stakeholders. In this regard, the Government has been active to date making sure that key decisions are explained to the public as wel l as key stakeholders through various press statements and public circulars. Bank staff have also engaged in consultations with stakeholders, for example, having an open discussion with members o f parliament regarding the seriousness o f the macroeconomic situation and the consequences o f no reform. Consultations and coordination with key stakeholders will continue to be part o f the reform program implementation.

D. FIDUCIARY ASPECTS, DISBURSEMENTS AND AUDITING

84. An IMF Safeguards Assessment o f the Maldives Monetary Authority (MMA) i s currently in progress. Review o f the audit reports and other available documents reveal that there are issues with the current external audit o f the MMA as conducted by the Auditor General’s Office, which would need to be bolstered. There may be a need (i) to appoint an international firm to perform MMA’s audit in accordance with international standards on auditing, (ii) to strengthen MMA financial reporting practices, and (iii) develop the internal audit function. These actions will be agreed after the completion o f the IMF safeguard assessment.

85. The Bank will disburse the credit proceeds in a dedicated US Dollars deposit account of GoM account with the Central Bank of Maldives (Maldives Monetary Authority- MMA) based on which MMA will credit the rufiyaa equivalent in GOM’s Rufiyaa account, to be used for expenditures against approved budget. The Ministry o f Finance and Treasury controls and operates this account, which i s part o f the Government o f Maldives’s general foreign exchange reserves. The Government will be required to provide a confirmation to the Bank that the proceeds o f the credit have been received in the designated deposit account with MMA and that an equivalent amount in local currency has also been credited to an account o f the Government available to finance budgeted expenditures. The Bank will require an audit o f the special deposit

29

account16, in accordance with international auditing standards from an auditor, who i s independent and acceptable to the Bank.

86. Disbursement o f the credit proceeds would not be linked to specific purchases. However, G o M would not use the credit proceeds to pay for expenditures included in the Bank’s standard negative l is t . If any portion o f the Credit is used to finance ineligible expenditures as so defined in the Agreement, the Bank shall require the G o M to refund the amount.

87. credit will be reflected through a legal agreement between G o M and IDA.

Legal and Disbursement Arrangements. The financing terms and conditions for the IDA

88. The credit proceeds will be provided in a single tranche disbursement The Bank support under the proposed credit will be based o n prior actions already met. These prior actions are l isted in the legal agreement and evidence of their status was agreed at negotiations.

E. RISK AND RISK MITIGATION

89. The main risks include political risk, risks to the macroeconomic framework, vulnerability to external shocks, and limited technical capacity.

Political risk. Democracy in the Maldives is very much in a nascent stage. The Government o f President Nasheed lacks a parliamentary majority which could significantly constrain the Government’s plans going forward. Legislation pertaining to various new tax measures such as the Business Profits Tax and the ad-valorem tourism tax could run into delays in approval. Political risks are l ikely to be a feature for the entire length o f the proposed program period and could undermine the Government’s fiscal consolidation efforts.

0 Macroeconomic framework. The scale o f the fiscal adjustment under the IMF’s stabilization program would be dif f icult in most circumstances, and pose significant implementation risks. In the case o f the Maldives, the new constitution (2008) enshrines the independence o f the C iv i l Service Commission (CSC) to change the wage levels o f the c iv i l service, which necessitates close cooperation between the Ministry o f Finance and the CSC to implement the cuts to the total wage bill.I7 Without close cooperation there i s a risk that the wage cuts announced in October are not sustained. Evidence o f this risk was realized in late December when the CSC unilaterally ordered the reversal o f the October wage cuts to begin on January 1, 2010. The reversal o f wage cuts would undermine fiscal sustainability and put at risk the continuation o f the IMF program. The MoFT and the President’s office have issued a Press Statement indicating that the pay package cuts will be maintained until domestic revenues reach 7 bi l l ion rufiyaa (IMF projections show this level being reached in 2011)’ as per the CSC’s circular o f October 2009. While the risk o f reversal remains, the

The scope o f the audit would cover (a) the accuracy of the summary of the transactions of the dedicated account, including the accuracy of the exchange rate conversions; (b) verification that the dedicated account was used only for the purposes o f the operation; and (c) verification that a l l payments out of the dedicated account was used for specified purposes. The audit will be submitted within six months after the funds in the dedicated account have been f i l ly used. l7 The Civil Service Act o f 2008 empowers the independent Civil Services Commission (CSC) with the task of determining civil service positions and pay. As such, the MoFT and the President’s office cannot unilaterally implement public service pay and employment cuts.

16

30

Government is committed to maintain the wage cuts. Evidence o f this commitment came when they issued c iv i l service pay checks at the reduced rates in January. The Bank will liaise closely with the IMF team on the quarterly reviews o f their program to gauge progress in this area. The Bank will not proceed to the second proposed operation should macroeconomic imbalances not improve through lack o f Government reform effort.

Vulnerability to external shocks. As a small, open, and undiversified economy, the Maldives i s vulnerable to the adverse effects o f external shocks (e.g. an o i l price shock). These could have a major impact on debt sustainability, for example. Strengthening the policy framework will be essential to mitigating the risk o f external shocks. The strength o f the global economic recovery presents upside and downside risks to the proposed operation. A stronger-than-expected recovery in Europe - the largest tourist source - would help boost tourist arrivals, real GDP growth and government revenues, helping to ease the fiscal adjustment in 2010. Strong global growth and an easing o f global credit constraints would also help foreign direct investment and stalled resort developments pick up. Alternatively, a slow and anemic global recovery would suppress a revival in tourism, GDP growth and FDI, making the fiscal adjustment more difficult. A lower than anticipated rebound in tourism and economic growth could lead to increased pressure o n the exchange rate and exacerbate the already acute external financing gap, which may have to be remedied by a devaluation o f the currency. O n the domestic side, the size o f the fiscal adjustment that the government is undertaking presents significant implementation risks, particularly that wage cuts and redundancies are reversed during the course o f the program before fiscal sustainability i s restored.

'

0 Limited technical capacity. Limited technical capacity i s one o f the leading development constraints in the Maldives. Capacity constraints significantly impact al l parts o f government functions and GoM in the recent past has sought increased interventions from multi-lateral donors such as the World Bank, IMF and the ADB. Specific TA policies have not been built into the program, but capacity constraints have been reflected in the program design.

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ANNEX 1. LETTER OF DEVELOPMENT POLICY

@ q L d

32

33

34

m m

Annex 3. Macroeconomic Indicators

Table 1. Maldives: Selected Economic and Vulnerability Indicators

2W4 2005 21x6 2037 2008 2009 2010 2011 2012 Est. Projection

OUTPUT AND PRICES

Real GDP Inflation (period average) Inflation (end-of-period) GDPdeflator

m R A L GOVERNMINI FINANCES

Revenue and grants Expenditure and net lending Overall balance Overall balance excl. grants Financing

Foreign Domestic

Ofwhich: Rivatization receipts

Public debt mernal Domestic

MONETARY ACCOUNTS

Broad money Domestic credit

NFA of commercial banks (In millions of US%, e.o p.) Net Forexposition ofcommercial banks (in millions ofUSS, e.0.p.

Ofwhich: To private sector

BALANCEOF PAYMENTS

Current account Ofwhich: worts

Domestic Re-exports

Imports Nonfactor services, net

Capital and fmancial account ( ic l . e&o) Ofwhich:

Generalgovernment, net Banks and other secton, net

Overall balance

BOSS international reserves (in milions ofus$; e 0.p ) In months o f GNFS imports In percent o f shon-term debt at remaining maturity

Faternal debt Medium- and long-term Shon-term In percent o f domestic GNFS exports

Fatemal debt sewice (in percent of domestic GNFS exports)

Exhangerate (rufyiaa~'US5, e.0.p.)

MEMORANDUM ITEM

GDP (in millions ofrufyiaa) GDP (in millions ofUS 6)

9 5 6 3

10 1 2 4

34 2 36 0 -1 8 -2 5 1 8 4 1

-2 3 0 2

55 2 40 1 15 1

32 8 32 6 57 6 600 27 0

-15 8

23 3 15 8 7 5

-72 7 45 1 21 4

3 2 14 6 5 7

204 4 3 4

585 0

42 7 41 6

10 52 7 5 0

12 8

9,939 776

-46 2 5 2 9 1 2

47 7 59 0

-11 3 -19 8 11 3 2 4 8 8 0 4

649 41 3 23 6

11 7 63 2 54 5

-40 0 38 0

-364

21 6 13 8 7 8

-87 4 I 4 6 34 I

2 5 30 6 -2 3

187 1 2 6

261 0

53 0 47 9

5 0 93 1 9 0

12 8

9,596 750

(Annual percentage change)

18.0 1.2 5.8 -4.0 3.4 3 6 7 6 11.9 5 5 4.5 3 9 104 8 6 6.7 4 7 3 5 7 4 13.0 11.0 4.0

(In percent o f GDP)

52.1 55.8 49.0 36.3 37.0 65.0 54.8 59.3 608 62.8

-7.2 -49 -13 8 -28.8 -17.8 -146 -12.7 -18 5 -336 -18.9

7 2 4.9 13 8 28.8 17.8 4.5 4 6 3.8 12.7 4.2

16.1 13.6 2.7 0.4 10.0 0.4 0 3 0 3 0.1 2.6

62.9 66.4 68.6 91.6 96.0 39.6 398 37.4 468 545 23.4 265 31.2 448 41.5

(Annual percentage change, unless othemise indicated)

206 23.7 23.6 9.4 6.7 37.6 45 8 434 5 7 7.5 49.5 492 33.0 -4 1 -2.1

-145.0 -338.0 437.0 -416.0 -466.0 n . 0 64.0 1410

(In percent ofGDP, unless otherwise indicated)

-33 0

24 6 14 8 9 9

-89 1 35 0 37 9

4 2 260 4 9

232 2 2 7

168 0

62 8 52 8 I O 0 83 7 9 0

12 8

11,717 915

-41 5

21 6 102 11 4

-91 5 36 0 48 8

3 4 37 I 7 3

3100 3 0

121 0

79 7 62 6 170

1110 12 0

I 2 8

13,493 1,054

-296 -234 -51 4

26 2 161 177 I O 0 6 6 6 9 16 2 9 5 107

-% 8 -582 -58 8 29 4 220 284 460 305 206

5 3 8 4 -19 33 3 146 204 -5 4 0 9 -28

241 3 2770 291 0 1 8 3 2 3 1

80 0 810 880

820 800 76 9 59 9 670 680 170 150 130

1140 1690 1470 12 0 170 240

12 8 128 128

16,137 17,192 18,480 1,261 1,343 1,444

3 7 6 3 6 3 6 3

43 4 47 5 -42 -5 2 4 2 2 0 2 2 1 3

87 9 50 4 37 5

-13 1

17 7 6 8

108 -55 9 33 0 I 1 1

-1 2 103 -2 0

305 0 3 1

I180

71 0 600 100

I24 0 22 0

12 8

20,354 1,590

4 1 3 5 3 5 3 5

4-2 47 9 -3 6 4 6 3 6 2 6 I 1 0 8

82 5 47 0 35 5

-11 1

I 7 8 6 8

11 0 -55 9 36 3 12 5

0 6 11 I 1 4

347 0 3 4

143 0

65 0 56 0 8 0

109 0 15 0

12 8

21,935 1,714

Sources Maldivian authorities, and Fund staff estunates and projections

38

Table 2. Maldives: Central Government Finance

2004 2005 2006 2007 2008 2009 2010 2011 2012 Est. Projection

TOTAL REVENUE AND GRANTS Revenue

Taxrevenue Import duties Tourism tax Other

Ofwhrch: New measures Nontaxrevenue

SOE profit transfers Leasepayments Other

Grants

EXPENDITURE AND NET LENDING

Of which: Salaries and allowances Inbresf

Capital qenditure Net lending

Current expenditure

OVERALL BALANCE OVERALL BALANCE, EXCL. GRANTS

FINANCING External Domestic

Ofwhrch: Privatization receipts

MEMORANDUM ITEMS

Current balance Primary balance Public debt

Domestic External (excl. IMF)

GDP ( in millions o f mfiyiaa)

34.2 33.5 16.6 11.4 4.1 1.0 0.0

16.9 5.6 6.5 4.9 0.7

36.0 28.1 12.9 1.4

10.0 -2.0

-1.8 -2.5

1.8 4.1

-2.3 0.2

5.5 -0.4 55.2 15.1 40.1

9,939

47.7 39.1 18.0 13.0 3.6 1.4 0.0

21.2 6.3 7.0 7.8 8.6

59.0 48.4 17.6

1.6 11.8 -1.2

-11.3 -19.8

11.3 2.4 8.8 0.4

-9.3 -9.6 64.9 23.6 41.3

9,596

52.1 44.7 20.2 14.4 4.2 1.6 0.0

24.5 6.2

12.2 6.1 7.4

59.3 47.9 16.4 1.7

12.4 -1.0

-7.2 -14.6

7.2 4.5 2.7 0.4

-3.2 -5.5 62.9 23.4 39.6

11,717

(In percent of GDP)

55.8 48.1 21.5 15.5 4.1 2.0 0.0

26.6 5.8

13.7 7.0 7.7

60.8 48.6 16.3

1.7 13.1 -0.9

-4.9 -12.7

4.9 4.6 0.4 0.3

-0.5 -3.2 66.4 26.5 39.8

13,493

49.0 44.4 21.0 15.2 3.6 2.1 0.0

23.3 7.0

10.7 5.6 4.7

62.8 51.4 20.6 2.0

12.6 -1.1

-13.8 -18.5

13.8 3.8

10.0 0.3

-7.0 -11.8 68.6 31.2 37.4

16,137

36.3 31.5 15.6 10.2 3.2 2.1 0.2

15.9 5.3 6.1 4.5 4.8

65.0 51.4 28.1

2.0 13.7 0.0

-28.8 -33.6

28.8 12.7 16.1 0.1

-20.1 -26.8 91.6 46.8 44.8

17,192

37.0 35.9 17.9 9.7 2.4 5.8 4.3

18.0 2.9

10.1 5.0 1.1

54.8 45.2 21.2 3.5

10.9 -1.3

-17.8 -18.9

17.8 4.2

13.6 2.6

-10.7 -14.3 96.0 54.5 41.5

18,480

43.4 42.3 24.6

' 8.9 0.0

15.7 13.9 17.7 2.8 9.4 5.5 1.0

47.5 41.0 17.6 4.3 7.8

-1.4

-4.2 -5.2

4.2 2.0 2.2 1.3

-2.8 0.1

87.9 50.4 37.5

20,354

44.2 43.3 26.1

8.9 0.0

17.2 15.3 17.2 2.8 9.1 5.2 1.0

47.9 41.5 19.3 3.9 7.5

-1.1

-3.6 -4.6

3.6 2.5 1.1 0.8

-2.1 0.3

82.5 47.0 35.5

21,935

Sources: Maldivian authorities, and Fund staff estimates a i d projections. I/ The tourismtaxis expected to be replaced by an ad valoremtaxin mid 2010. (receipts under which are shown under new measures)

39

Table 3. Maldives: Balance o f Payments

2004 2005 2006 2007 2008 2009 2010 2011 2012 Est. PrOJEtlOn

(In d o n s 0fU.S. dollars. unless otherwise indicated)

CURRENT ACCOUNT

Trade balance worts (fob) Imports (fob)

Tourismrelated Other

Nonfactor services, net Gfwhrch: Travel receipts

I n c o m , net

Current transfers, net Receipts Payments

C A P I T A L AND FINANCIAL ACCOUNT

Gfwhich: I / Foreign direct investmmt, net Other investment, net

ERRORS AND OMISSIONS

OVERALL BALANCE

M E M O R A N D U M f I z M S

O o s s international reserves (stock; e.0.p.) In m n t h s ofGNFS imports

Usable reserves (stock; e.0.p.) In percent o fshon- temdebt

Current account (in percent ofGDP) GNFS balance (in percent ofGDP)

Exhange rate (rufiyaa per S; average) GflP

-122

-384 181

-565

428 350 471

-35

-54 8

-61

153

-137

15 138

13

44

2 M 3.4 1 I 7 335

-15.8 -4.3

12.8 776

-273

-494 162

-655 -142 -514 110 287

-3 1

142 211 -70

264

9 254

-8

-17

187 2.6 95

133 -36.4 -51.2

12.8 750

-302

-590 225

-815 -171 -645 321 512

41

8 91

-83

291

14 277

56

45

232 2.7 129 93

-33.0 -29.4

12.8 915

-438

-731 228

-%5 -232 -733 380 602

-67

-14 91

-105

442

15 427

73

77

310 3.0 182 71

-41.5 -33.9

12.8 1,054

-618

-891 330

-1,221 -254 -967 370 664

64

-63 65

-128

4%

12 484

84

-68

24 1 1.8

110 38

-51.4 41.3

12 8 1,261

-398

-566 216

-782 -162 -619 295 52 1

-63

64 65

-128

355

10 345

55

13

277 3.2 105 31

-29.6 -20.2

12.8 1,343

-338

-593 255

-849 -176 -672 410 630

-65

-90 21

-111

252

10 242

45

-40

291 3.1 130 39

-23.4 -12.7

... 1,444

-209

-609 28 1

-889 -185 -704 525 701

-67

-58 17

-75

156

11 145

20

-32

305 3.1 108 42

-13.1 -5.3

... 1,590

-1%

-653 306

-959 -199 -759 62 I 769

-73

-85 17

-102

214

12 202

0

23

347 3.4 132 54

-11.1 -1.9

... 1,714

Sources: Maldivian authorities, and Fund staff estimates and projections.

40

Annex 4. FUND RELATIONS NOTE

Matdives-Assessment Letter for the World Bank

November 23.2009 -

The global crisis hers hi/ the Maldivian economy hcirci: conibinetl with uti imn,sic.~triinctblc,fiscc.rl expansion, it has I d to a Iurge,fiscul d&xY unci severe bulunce c?fpuynient.s prcwurc.v. The aulhoriries ure committed to c i strong policy uiljirslnient program. crnd huve reqiusred IMFjinuneirrl supportjbr their progrcim.

Recent Economic Developments and Near-Term Outlook

Maldives i s faring large external and fiscal imbalances. Following a period o f dramatic fiscal expansion. the economy was severely hit by the global financial crisis, which has pushed the economy into recession, caused a significant fall in fiscal revenue, and led to a sharp deterioration in the external position.

* After growth of 5% percent i n 2008, real GDP i s expected to shiirik by about 4 percent in 2009, driven b> the decline in tourism and a rerrcnchnient ofthe construction sector. Inflation has been falling on the back of lower import prices, hut aa commodity prices recowr, it i s expected to bounce back in the second half o f this year to reach about 6% percent year-on-year by end-2009.

Government cxpcnditute almost doubled as a share of GUP between 2004 and 2008. and. without adjustment, would reach 69 percent of(jD1’ by end-%09. A ke) driver has k e n tlic uage hill. The global crisis has intensified the l iscal imbalances: re\ enue has bccn shrinking on account of slnuer imports and lower tourism intlows and tourisin-related investment. A s a result. the fiscal deficit rose to 13% percent of CiDP in 2008 and. without corrective xtion. could reach 33 percent o f CiDP in 2009. while puhlic debt i s piojected to rise lo 02 perccnt ofGDP thib year.

Aftcr widening to 51 percent of GDP in 2008. the current account dcficit i s cxpccted to inoderate to 30 percent ofGDP in 1009 reflecting the economic sloudoun. foreign exchange constraints. a i d lower import prices Jlowwrr. the reduced availability of e.;iciniil fiiiancing has led to reserve losses imports at end-Scptcinbcr ?009--and f<xced the Maldncs Monetary Authorit> (MMA) to ration foreign cxchanyu

*

witit the reserve c m e r down to about t w i months o f

The global crisis and the doniestic downturn have put significant stress on the banking sector. Access to exteriial credit became inore difficult and non-pcrfomiing loans (Nf’ls) hwe incrcased due to banks’ large rxposurc to tourism projects. The state-ou ned t3ank o f Maldirrs (HM1.). which accounts for about 45 percent of cotninercial bank assets. has been particiilarlj affected

41

- 2 -

Economic Policies

Going fonvard, the authorities are committed to a very significant adjustment program, aimed at reducing the fiscal deficit to stem aggregate demand pressures, restore stability and medium-term fiscal sustainability: absorbing excess rufiyaa liquidity and shoring up reserves to prudent levels: and strengthening the banking sector.

Fiscal policy. The core ofthe program i s a large fiscal adjustment to bring public debt back to sustainable levels. The adjustment coniprises: (i) a significant reduction in the wage bill (to unwind part o f the large recent increases) through cuts in remuneration and staffing levels: (ii) reductions in other operational expenses and non-priority capiial expenditure: ilnd (iii) revenue measures. including the introduction o f an ad valorem tax on tourism, a business profits tax and a goods and services tax. As a result. the fiscal deficit i s expected to decline to about 17% percent o f GDP in 2010 and 4% percent o f GDP in 201 I. ' b e authorities havc already initiated steps towards fiscal adjustment.

Monetary policy. Monetary tightening will con~plen~ent fiscal ad,justment and help reduce pressures on resen es. Key steps in this regard haw h e n the cessation o f deficit monetization. the conversion o f the government's debt stock with the M M A into nugotiable securitics, and the recent introduction of open market operations.

Exchange rate policy. The !hod oxchange rate regime has served Maldives \sell by providing an effective nominal anchor. The current level o f the peg is consistent with medium-term fundamciitals i f the policy adjustment i s implemcntcd as envisaged. Thu program aims to preserve the viability ofthe current exchange rate peg through a conibination o f fiscal adjustnicnt, monetary tightoning, and external financing.

Finaricial sector policies. The authorities are committcd to strengthening the firiaiicial regulation and supervision framework, including through passage oft l ie Ihnking 1,aw and the reforms to the MMA Act. They have also passcd new regulations on adequate loan classification and provisioning, as well as on foreign currency position.

'The policy program is ambitious, and subject to considerable risks. The key risk i s delayed or insufficient implementation o f the entisagcd fiscal adjustment, uhich could entail significant revisions to the piogram. Also, the global economic environment entails upside and downside rishs

IMF Relations

'The authorities and I M F staff have reached agreement, cidrcfirentiimi, on thc adjustment pt,licies outlined 3bove. The authorities have requcstcd IMF financial support 111 the arnount o f 700 pcrceni o f quota (approx. US91 million) over three years through a blend o f a Stand-B) Arrangement and arrangenient under the Exogenous Shock Facility. Consideration o f the request b) thc IMF's Executive Board i s tentatitely scheduled for Deccniber 4. 200Y. The last Article I V Consultation was concluded on Seprember 3.2008

42

ANNEX 5. JOINT BANK-FUND DEBT SUSTAINABILITY ANALYSIS

Based on the low-income country debt sustainability analysis (LIC DSA), Maldives’ is rated to be at a moderate risk of debt distress. Vulnerabilities for total public debt are higher, and addressing them wi l l require timely implementation of the authorities’ strong fiscal adjustment program. The borrowing space in the short and medium terms has shrunk after the recent accumulation of large fiscal and external deficits. The build-up ofprivate external debt prior to the onset of the global financial crisis and ofpublic domestic debt (mainly owed to the Maldives Monetary Authority, M M ) in the last two years has intensiJied the debt burden. Key risks for debt sustainability are large future shocks to exports or fiscal policy slippages. Satisfactory implementation of the fiscal adjustment proposed under the program would lead to a sustained downward path in the public and external debt stocks.I8

VI. THE DEBT PORTFOLIO

1. The total debt to GDP ratio has increased fast since 2004, and reached almost 110 percent o f GDP in 200819. Each major category o f debt has shown strong growth rates following the 2004 tsunami. Growth in private external debt, used to finance a rapidly expanding tourism sector, has been particularly fast. An increasing fiscal deficit in the last two years has also led to a build up o f public debt, much o f it domestic. With external financing sources l imited for much o f 2009 and a fiscal deficit running close to 30 percent o f GDP, a further build-up o f domestic debt has been observed so far this year, which largely explains the projected increase in the total debt-to-GDP ratio to about 129 percent in 2009.

Maldives: Composition of Total Debt In millions of U S dollars (left scale), in percent of GDP (right scale)

1400 140

1200 Pnvate Extemal (S T ) 120

1000 Public Domestic 100

” Pnvate Extemal (MLT)

Public Extemal

Total Debt (nght axs 800 80

600 60

400 40

200 - - 20

0 0 2003 2004 2005 2006 2007 2008

2. Public external debt rose rapidly after the 2004 tsunami, as donor funds flowed into the country for reconstruction needs. It reached US$472 mi l l ion (37% percent o f GDP) in 2008.

Maldives’ policies and institutions, as measured by the World Bank’s Country Policy and Institutional 18

Assessment (CPIA), averaged 3.53 over the past three years (2006-2008), placing it as a “medium performer.” The relevant indicative thresholds for this category are: 40 percent for the N P V o f debt-to-GDP ratio, 150 percent for the N P V o f debt-to-exports ratio, 250 percent for the N P V o f debt-to-revenue ratio, 20 percent for the debt service-to- exports ratio, and 30 percent for the debt service-to-revenue ratio. These thresholds are applicable to public and publicly guaranteed (PPG) external debt.

In this section, total debt refers to total PPG debt (external and domestic) and private external debt. 19

43

About 70 percent (or one third o f the total debt stock) i s from multilateral and bilateral creditors. This fact, and the assumption that new borrowing is expected to be contracted from multilateral and bilateral creditors throughout the projection period, motivates the use o f the low-income country (LIC) framework for the DSA.20

VII. MACROECONOMIC ASSUMPTIONS

3. Maldives i s facing severe fiscal and external imbalances. For the first three years after the 2004 tsunami disaster, the authorities pursued a growth strategy based o n infrastructure spending and expansion o f tourism, financed by both official grants and loans and private sector foreign borrowing. However, the global economic downturn has had a significant negative impact on export and tourism receipts, as well as government revenue. Moreover, private sector financing has contracted sharply. Combined with excessive government spending, this has led to a growing fiscal deficit, much o f which has been monetized by the central bank. To address these challenges, the Government o f Maldives has adopted a package o f economic policy measures as described in their Memorandum o f Economic and Financial Policies (MEFP). The D S A that follows builds on the program baseline scenario (Box 1).

*' T h i s i s the fvst DSA for Maldives that uses the LIC fiamework. Previous DSAs were conducted using the template designed for Middle-Income Countries (MICs). Thus, no debt distress rating was previously assigned. Although a comparison of ratings i s therefore not possible, a qualitative comparison with the last DSA (IMF Country Report No. 09/97) suggests that the risk o f debt distress has increased.

44

Box 1: Main Assumptions for the Debt Sustainability Analysis (2009- 2029)

Real GDP growth in 2009-14 i s projected to average 2% percent a year compared with an average o f 7% percent over the previous f ive years. Negative growth in 2009, projected at -4 percent, i s mainly due to reduced activity in the tourism sector, which has been adversely affected by global economic downturn. Growth i s expected to recover thereafter to around 4% percent, as global and domestic conditions improve, but t o remain below the recent historical average. This assumes that resort development takes place at a more sustainable pace than that observed since the tsunami, and that supply constraints wil l hold back the fisheries sector.

Inflation (which drives the GDP deflator) i s projected to average 4% percent a year in 2009-14, compared with an average o f 6% percent over the previous f ive years, thanks to a moderation o f global prices and the fiscal adjustment effort. Inflation i s expected to stay at 3 percent thereafter, in l ine with trading partners’ rates, reflecting continued fiscal consolidation and a tighter monetary policy.

Interest rates on public debt are assumed to increase to 4% percent by 201 1 (compared with an average o f 3% percent over the previous five years), reflecting a tighter domestic liquidity. They are assumed to decline thereafter.

The external current account deficit (including grants) in 2009-14 i s projected to average 15% percent o f GDP a year and decline to 5 percent by 2019 reflecting a significant fiscal retrenchment, compared to 5 1 !4 percent in 2008. Thereafter, it would remain at below i t s pre-tsunami level (2003).

The overall fiscal deficit (including grants) is projected at 28% percent o f GDP in 2009, as the full impact o f the adjustment effort will only be felt in 2010. The deficit i s expected to decline to an average o f 5% percent o f GDP in 2010-14, owing to a strong fiscal . consolidation. The budget is expected to remain in balance thereafter. As a result, the volume o f domestic borrowing wil l decline, although i t s cost may rise somewhat as the stock o f outstanding obligations f rom the Government to the MMA are securitized at a slightly higher average market rate than the penal rate charged by the MMA on the Government’s overdraft account. Public external debt i s assumed to be contracted mainly on concessional terms until the end o f the projection period.

Government expenditures are expected to decline from 63 percent o f GDP in 2008 to 45 percent by 2014, mainly reflecting c iv i l service reforms. The Government’s revenue measures-airport tax, ad valorem bed tax, business profits tax, and the general sales tax-are expected to y ie ld about 15 percent o f 2009 GDP once their full impact is felt. These new taxes will partly offset steep falls in import duties, lease payments, and profits transfers f rom SOEs, stemming, respectively, f rom the fa l l in public expenditure, a moderation in future lease payments f rom resorts, and privatization.

45

VIII. EXTERNAL DEBT SUSTAINABILITY’~

Baseline Scenario

4. Maldives’ external debt has increased rapidly since the Tsunami, reflecting an increase in both public external financing and private foreign-financed investment. As o f end- 2008, PPG debt represented 49 percent o f total external debt. The external debt path is expected to worsen in the near term, as the Maldivian authorities seek external assistance to tide over the difficult economic situation. In particular, this includes financial assistance from the Indian government totaling US$200 and borrowing from IFIs (IMF, World Bank, and Asian Development Bank) projected at US$146 million. The authorities are also expecting additional non-concessional external borrowing through end-20 1 0.23 This borrowing explains the hump in the path o f external debt service in 2010-1 1. The external-debt-to-GDP ratio, however, i s projected to decline from 2010 onwards.

5. the debt burden thresholds under the baseline scenario. The P V o f external public debt-to- GDP ratio is projected to be slightly above the 40 percent threshold this year, but trend down thereafter as expected program implementation helps reduce the current account deficit to sustainable levels. This marginal and temporary breach o f the threshold i s due in large part to the extraordinary fiscal and current account imbalances o f the past two years, which the Fund- supported program aims to address. The program also places a ceiling on non-concessional public external borrowing going forward. All other public external debt burden indicators remain wel l below thresholds throughout the projection period. Whi le there is a hump in debt service payments over the next two years as a result o f a repayment o f a large loan from the Indian government, both debt service ratios remain wel l within the thresholds.

With one minor and temporary exception, all external debt indicators remain below

21 External debt sustainability analysis i s focused on PPG external debt, to which thresholds are applicable. Private external debt i s not considered for the purpose of IDA grant allocations.

22 A credit o f US$lOO million was made available to the government o f Maldives by the government o f India in early 2009, and repayments of US$50 million in two tranches are expected to be made in 2010 and 201 1, respectively. Also, the Male branch o f the State Bank o f India (SBI) i s expecting to contract a US$lOO million two- year non-concessional loan (subject to fifty percent rollover) fiom i t s parent by end 2009 and early 2010, and on- lend it to the government o f Maldives in exchange for foreign currency-denominated domestic bonds. 23 Such borrowing includes a foreign exchange swap with the Central Bank o f Sr i Lanka for at least US$25 million to boost international reserves, as well as the following infiastructure and development projects: (i) the construction o f ten harbors, which has been favorably assessed by the Board of the Islamic Development Bank (IDB) and i s being financed as follows-Saudi Fund ($15 million), the IDB ($15 million), and OFID ($10 million); (ii) an infiastructure development project (housing, sewerage, electricity, and desalination) in tsunami affected areas funded by Abu Dhabi ($15 million); and (iii) reclamation projects and supply of equipment to be financed by loans under negotiation. The terms of such financing vary, but are generally very favorable in relation to terms that Maldives may have received had it sought to borrow on international or domestic financial markets.

46

Stress Tests and Alternative Scenarios

6. Stress tests indicate vulnerability to exogenous export shocks. The PV o f debt-to-GDP ratio, debt-to-exports ratio and debt service-to-exports ratios breach the thresholds under the most extreme standard stress test. For the former, the most extreme stress test i s the combination shock-a one standard deviation shock to growth, exports, GDP deflator and non-debt flows- while in the latter two cases the most extreme shock i s the export shock-an export value growth at historical average minus one standard deviation in 2010-1 1 relative to the 2008 baseline. This highlights the vulnerability o f the economy to the variability o f tourism receipts.

7. The historical scenario indicates unsustainable debt dynamics. When key macroeconomic variables are set to their historical averages al l stock debt burden indicators breach respective thresholds, while the debt service burden indicators show an increasing trend after 2014. The key factor driving this scenario is the non-interest current account deficit, which averaged 20 percent o f GDP over the 10-year period to 2008. This 10-year average contains three rather extreme events that drove the current account deficit to unprecedented highs: the 2004 tsunami, the extraordinary run-up in food and fuel prices in 2007 and 2008, and the rising fiscal deficit o f the past few years. To the extent that the magnitudes o f these events can be considered unique, the historical scenario may overestimate potential risks o f debt distress. Nevertheless, the simulations illustrate that without significant fiscal consolidation the debt path would become unsustainable.

8. debt accounts for over one hal f o f the external debt-to-GDP ratio. Much o f this debt i s at maturities o f less than 10 years, at market interest rates, and denominated in U.S. dollars. T o the extent that private external debt may increase liquidity and re-financing risks for the country as a whole, or entail contingent liabilities for the sovereign, the risks to debt sustainability could be higher than an analysis o f external PPG data alone may suggest. Moreover, private external debt may be underestimated in Maldives: non-FDI external inflows to the non-financial private sector-which comprise mainly financing for privatization and tourism projects, and which sum to about 60 percent o f GDP over 2009-201 2-are treated as non-debt creating in both observed data and projections. Part o f these flows, however, could be debt creating.

Private external debt may increase the risks to debt sustainability. Private external

24

9. In the staff's view, the risk of public external debt distress for Maldives i s moderate. With one exception, no external debt burden indicator breaches the thresholds in the baseline scenario. Staff judges the marginal and temporary breach in the external debt-to-GDP ratio to be a function o f the severe fiscal and current account imbalances over the past two years that the program aims to address.25 The steady decline in external debt burden indicators under the

24The authorities do not have adequate information to disaggregate these flows into FDI and arm's length borrowing. Accordingly, the FDI account in the balance o f payments may also be underestimated. 25 Recent experience has demonstrated flexibility in rating o f external debt distress (SM/09/216), including in Mongolia (2009), Madagascar (2008), Ma l i (2008) and in Bhutan (2007). In the case o f Bhutan, the incorporation o f two new largely debt financed hydropower projects in the baseline scenario caused some external debt indicators to

47

program indicates that the r isk o f debt distress declines significantly with the proposed fiscal adjustment. However, stress tests illustrate that the debt path i s particularly vulnerable to export shocks and decline in non-debt creating inflows, while the historical scenario shows unsustainable debt dynamics.

IX. PUBLIC DEBT SUSTAINABILITY

Baseline Scenario

10. tsunami, from 55 percent o f GDP in 2004 to around 69 percent in 2008, and is expected to reach 94 percent o f GDP (including IMF loans and some transactions o f financial entities) in 2009.26 This sharp increase has been driven by an expansionary fiscal pol icy combined with a dramatic shortfall in fiscal revenue. M u c h o f the fiscal deficit over the next two years has been financed domestically, through MMA credit to the Government (which in 2008 represented 75 percent o f the central government’s domestic debt and 55 percent o f the total public domestic debt stock) and sales o f t-bills, held mainly by commercial banks. Total public debt service cost has remained at an average o f 7 percent o f GDP a year in 2003-2008, and i s expected to increase to 17.2 percent by 2010 before shifting to a downward trajectory later in the projection period.

The stock of Maldives’ nominal public debt has increased rapidly since the 2004

Maldives: Total Public and Publicly Guaranteed (PPG) Debt by Creditor (In percent of GDP)

2009 2010 2o08 Proj. Proj.

Total PPG debt 55.2 64.9 62.9 66.4 68.6 94.0 98.7

2004 2005 2006 2007

PPG external 11 Multilateral Bilateral Private creditor

PPG domestic MMA Commercial banks Others

40.1 41.3 39.6 39.8 37.4 23.5 24.2 24.8 25.8 22.5 3.9 5.2 4.8 4.3 4.6

12.8 11.9 10.0 9.7 10.2 15.1 23.6 23.4 26.5 31.2 8.7 15.0 9.4 8.1 17.0 2.6 5.1 7.7 11.5 13.5 3.8 3.5 6.3 6.9 0.7

47.3 44.2 26.9 25.2 8.8 8.2

11.6 10.8 46.8 54.5 20.1 19.3 24.9 29.0

1.8 6.2

Total PPG debt service 6.8 7.9 7.1 7.3 7.8 9.0 17.2 11 Includes IMF and currency swaps by MMA, but excludes domestic foreign-currency denominated debt.

1 1. The PV of the public debt-to-GDP ratio i s projected to fall sharply under the baseline scenario, from 91 percent in 2009 to 17 percent by 2029, owing to strong fiscal

breach their thresholds in both the baseline and the alternative scenarios/stress tests. However, on account o f several country-specific mitigating factors a moderate risk o f debt distress rat ing was retained. Other recent cases o f flexible treatment on ratings include Mongol ia (2009). 26 Public debt refers here to the debt o f the non-financial public sector, comprising the central government and state- owned enterprises, as we l l as publ icly guaranteed debt. In line w i th inclusion o f IMF debt contracted by the central banks, it also includes a currency swap between the MMA and the central bank o f S r i Lanka for $25 mi l l i on currently being negotiated. The central government accounted in 2008 for 79 percent o f the total public debt. The present value o f total public debt in 2008 was 67 percent o f GDP.

48

adjustment efforts on both the revenue and expenditure sides (Table 2a). The PV o f the public debt-to-revenue (including grants) ratio would decline from a projected 252 percent in 2009 to 39 percent by 2029. The public debt service-to-revenue (including grants) ratio would increase to 28 percent by 2010 before shifting to a downward trajectory later in the projection period (Figure 2 and Table 2a). N e w public borrowing from al l sources in the context o f the program, including Fund financing, has been considered, and risks to debt sustainability appear manageable in the context o f the programmed fiscal adjustment.

Stress Tests and Alternative Scenarios

12. Maldives’ high level o f public debt makes its sustainability vulnerable to exogenous shocks or fiscal policy slippages. The stress tests indicate that the debt path i s particularly vulnerable to shocks to the primary balance and long te rm growth. If the primary deficit remains fixed at the elevated level o f 26% percent o f GDP (as in 2009), the debt ratio would continue to expand and would reach 416 percent o f GDP by 2029. This, o f course, illustrates that the current fiscal stance i s not sustainable. I t also points to the risks arising f rom insufficient or delayed implementation o f the fiscal adjustment measures envisaged in the program. Sensitivity tests also show that the public debt path is susceptible to shocks to long-term real GDP growth, with a one standard deviation permanent shock to growth leading to a PV public debt ratio o f 124 percent o f GDP in 2029, compared with a baseline projection o f 17 percent.

X. CONCLUSION

13. one-time breach in the P V o f debt-to-GDP threshold in 2009, no thresholds are breached under the baseline scenario, but the analysis indicates the country’s vulnerability to shocks to the tourism sector (which are also shocks to growth), non-debt creating inflows and the primary balance. This suggests the need to diversify, to the extent possible within the country’s geographical constraints, the structure o f the economy. Maldives also faces considerable risks to debt sustainability based on its overall public debt level. This underscores the need for strong fiscal adjustment: should the authorities fall short on their fiscal consolidation efforts, the risk o f the public and external debt ratio moving on to an unsustainable trajectory would significantly increase.

Maldives faces a moderate risk of external PPG debt distress. With the exception o f a

49

5

Figure 1. Maldives: Indicators of Public and Publicly Guaranteed External Debt under Baseline and Alternative Scenarios. 2009-2029 I/

lo:\-

30 a. Debt Accumulation

12

0 -4 ' =Rate ofDebt Accumulation

-Grant element of new borrowing (% nght scale) 1 1 Grant-equivalent financing (% of GDP)

c.PV o f debt-to-exports ratio 200

180

0 4 I 2009 2014 2019 2024 2029

e.Debt service-to-exports ratio

25 I 1 5 1 I \ I

0 4 I 2009 2014 2019 2024 2029

-Baseline - Historical scenario

Source: Staff projections and simulations.

b.PV o f debt-to GDP ratio 140 ,

e-- /

100 120 1 /

0 4 . 2009 2014 2019 2024 2029

d.PV o f debt-to-revenue ratio 350 1

0 4 2009 2014 2019 2024 2029

35 , f.Debt service-to-revenue ratio

20 -

15 -

10 -

5 -

0 4 2009 2014 2019 2024 2029

Most extreme shock l / I Threshold

1/ The most extreme stress test i s the test that yields the highest ratio in 2019. In figure b. i t corresponds to a Combination shock; in c. to a Exports shock; in d. to a Combination shock; in e. to a Exports shock and in figure f. to a Combination shock

Figure 2. Maldives: Indicators o f h b l i c Debt Under Baseline and Alternative Scenarios, 2009-2029 1/

Fix Primary Balance - -- Baseline Most extreme shock Growth LT - Historical scenario

- A 4 n

60

50

40

30

20

10

0

-<"

400 . 350

300

250

200

150

100

50

0 , Debt Service-to-Revenue Rat io 2/ 4

.0 /

/ -

,- ,- /

/ / - 4 ..,

4 / .. .., - / .

c-- -4 _---.___ __-- -

-

1000

900

800

700

600

500

400

300

200

100

0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Sources: Maldivian authorities; and Fund staff estimates and projections. 1/ The most extreme stress test i s the test that yields the highest ratio in 2019 2/ Revenues are defined inclusive o f grants.

51

? " 1 u c - e m N - ;

: : : t m x m t o i c ' n o . . . - W N

: : : y e E m b c e e ' I I o N N

I . .

3 E 2 1 B

0

5 5

? Y

n o ~ ~ n w o w q o a e t c i t o c t m m c ~ - -

N t N - - P

n o n n t w - N N q m * ~ n ~ m a t c i o ~ c i - o

~ t n - - P

b - Q

52

OI N 0 x 0 w

CI

:: x z

w 7 8

6 9 9

8 P rn

1

G: 52%

w z s

e e c

8 P -2 1

53

- N

N

N

N

N

N

N

n

N

n

N

0

0

'

Q

a

c

- -

n -

m

.

54

0 *

b? n

w u m e w n

m i 0 NOI w n

u .. P

55

m V I o w - w * * V I V I

w w - m N w w w w t -

m - t - m m m m r - u ' m

0,

h

W n

Ifi

2

2

*

0

W

- VI N

2

;3

m m m w m t - - h N

X W N V ' O P - a -

m * - m o t - - * -

- * m w w m - m -

t - - m W N h - m -

m m m P m o - N N

2 2 s N N N

N N N V I V I W N N N

2

f m IJ - I .; -

a

m w w m t -

ANNEX 6. COUNTRY AT A GLANCE

Maldives at a dance

1988 2007 2o08 (%of GDP) Agriculture .. 9.5 6.5 6.2

Manufacturing .. 7.7 6.6 6.6 Services .. 75.6 76.3 76.1

Household final consumption expenditure .. 35.0 General gov't final consumption expenditure .. 18.3 Imports of goods and services 68.7 75.8 x33.9 1D.1

Industry .. 14.9 V.2 n.7

x3/27/09

I

Growthofcapitrl and GDP(%)

:: 20

'," i

03 04 05 06 07 08 ,

30

I O

W - G C F d G D P

Developmontdimond*

Life expectancy

T

GNI Gross per primary capita nrollment

IL

Access to improved water source

- Maldives - Lower-middle-income grmp

Indebtedness 1988-98 1998-08 2007 2008 2008-12 I

(average annualgmkih) GDP 6 5 6 6 5 2 . I -Maldives

I _. .. - Lower-mddle-income g m p GDP percapita 4 6 4 9 3 5

Exports of goods and services 7 5

(average annualgmvdh) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services

Manufacturing

1988-98 1998-08 2007

2.4 3.1 - 7 . 5 9.5 8.3 9.9 5.6 4.3 3.7 8.9 6.5 8.6

.. 2.8

.. 9.4

.. 7.6 6.1

~~~

Note. 2008 data are preliminaryestimates

2o08 I Growth of expafts and irnpofts (%) I. 0.2

6.2 15 5.0 10

30

8.0 ;; 5

.. 0

*The diamonds showfourkey indicators in the countly(in bold) compared!Mh its income-groupaverage.If data are missing,the diamond will be incomplete.

~ ~ } ? ~ e s f f c prtces (76 change) Consumer prices trnplicit GDP deflator

Government finance (96 of GDP mcludes current grants) Current revenue Current budget batance Overall surplus/defiot

TRADE

(US$ mMons) Total exports (fob)

Marine exports ' Garments Manufactures

Total imports (a0

Fuel and energy Capital goods

Food

Export price indexj2000= 700) Import price indexj2000= 100) Terms of trade j2000=700)

B A L A ~ C E of P A Y ~ ~ N ~ S

(US$ rnfNIonsj Exports of goods and servfces Imports of goods and services Resource batance

Netmr~rne Net current iransfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ mihonsj Conversion rate (DEC, /ocaVUS$)

~ X T ~ ~ N A L DEBT and RESOURCE FLOWS

(US$ milson SI Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

Woild Bank progtam Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1 9 ~ 8

1988

I

2988

128 116 12

-10 7

9

5 -14

22 8 8

1988

71 0 7

10

1

1998

-1 4 -3 2

30 3 9 g -1 3

1998

96 57 18

354

102 101 101

1998

436 447 -12

-2% -10

"22

42 -20

119 11 8

1998

1 g4 0

44

16

0

8

2007

6 8 6 6

56 0 7 5

-4 4

2007

228 0

1,096 I75

203 408

2007

737 1270 -473

-48

-472

436 -24

30% 12 8

2007

576 0

77

60

2

27

241 12 8

2008

987 5

79

65

2

37

C ~ ~ p o $ i t i o n of 2007 debt {US$ mill.)

B 77

A - lBRD E - Bilateral 6 . iDA D ~ Other multilateral F I Pr vate C - IMF G - Siontert i i