International Monetary Fund (IMF) on Monday warned the Maldives of possible economic risks at the back drop of the large infrastructure surge in the archipelago.
In a statement released after an IMF team visited the capital Male in July, Philippe Karam, delegation head noted an expected a modest growth recovery with low inflation, and continued fragile fiscal and external positions in the short term.
"GDP growth is projected to recover gradually to over 4.5 percent in 2017 and 2018 and stabilize at close to 5 percent over the medium term, on account of strong construction and tourism activity," the statement read.
However, IMF said the fiscal deficit decline from 2016 is expected to continue in 2017 over the medium term while the current account deficit is expected to increase significantly due to the infrastructure ramp up and higher material imports, reserves to remain low, and the real exchange rate to appreciate.
IMF also praised recent government measures on the country's fiscal policy mainly aimed at reducing spending, including subsidy reforms and wage and employment rationalization while public financial management measures have also been strengthened for better commitment control and cash management.
"Looking ahead, the economy faces a number of downside risks. External risks stem from slower growth in the advanced economies that could affect tourism and undermine the weak external position. The Maldives also remains highly vulnerable to adverse climate change.”
The risks of the large infrastructure scale up especially in the Greater Male region which include expanding tourism, social services and employment outweigh the benefits as the infrastructure surge increases Maldives’ vulnerability arising from high public and external debt, according to the statement.
The IMF team in the statement made a number of recommendations to mitigate the possible economic risks urging the government to implement policies focused on reducing the large fiscal and external deficits, building foreign reserves, developing the financial sector, and enhancing longer-term growth potential through structural reforms.
The statement also stressed on the need to immediately finding revenue raising measures needed to cover the large scale up costs, while fiscal consolidation needs to continue to restore sustainability and be supported by further revenue and expenditure reforms.
"“Monetary policy should be tightened to support the exchange rate peg from any pressures arising from government financing and balance of payments."
