The Maldivian government now faces the critical challenge of balancing fiscal discipline with economic growth. While reforms may be difficult, they are essential to ensure macroeconomic stability and sustainable development in the years ahead.
The International Monetary Fund (IMF) has urged the Maldives to implement stronger fiscal consolidation measures, including expenditure cuts and monetary tightening, to restore macroeconomic stability and ensure long-term debt sustainability.
These steps, the IMF avers, will prevent a fall of the Maldivian Rufiyaa.
Following a visit to the Maldives from February 3 to 16, 2025, an IMF mission, led by Piyaporn Sodsriwiboon, released a statement emphasizing the need for urgent policy adjustments to address the nation’s growing fiscal and monetary challenges. The IMF’s assessment comes at a crucial time, as the Maldives navigates increasing economic pressures stemming from both domestic and external factors.
According to the IMF, the Maldivian government faces the critical challenge of balancing fiscal discipline with economic growth. The IMF feels that while reforms may be difficult, they are essential to ensure macroeconomic stability and sustainable development in the years ahead.
Call for Fiscal Responsibility
The Maldives, a popular tourist destination, has faced persistent fiscal deficits and mounting public debt. The IMF has advised the government to take decisive steps to curb excessive spending, improve spending efficiency, and protect priority social programs.
“In addition to the revenue mobilization measures enacted by the government, there is the need for more urgent and stronger fiscal consolidation,” the IMF statement read. “Holistic expenditure rationalization is necessary to restrain excessive spending while improving spending efficiency and protecting priority social spending.”
The Maldives government has already taken steps toward fiscal reform, including a 10 percent wage cut across the public sector and state-owned enterprises. Additionally, tax and import duty hikes have been implemented to boost revenue. However, concerns have been raised that a steep hike in tobacco taxes may have led to reduced revenues due to increased smuggling.
The IMF mission also highlighted the necessity of subsidy reforms. The organization recommended phasing out untargeted subsidies and replacing them with well-targeted direct income transfers for vulnerable households, as outlined in the 2025 budget. Ensuring that these transfers reach the most economically disadvantaged groups will be crucial for mitigating social impacts while maintaining fiscal discipline.
Furthermore, the IMF emphasized the need to rationalize the Public Sector Investment Program (PSIP) to better address immediate fiscal challenges. Ongoing reforms of state-owned enterprises (SOEs) and the Aasandha healthcare program should also continue to enhance fiscal stability. These measures are expected to improve efficiency and reduce financial pressures on the government, which has been grappling with the growing burden of public expenditure.
Protecting the Maldivian Rufiyaa
One of the IMF’s key recommendations was for the Maldives Monetary Authority (MMA) to tighten monetary policy to prevent a depreciation of the Maldivian rufiyaa (MVR). Analysts warn that a failure to manage interest rates properly could result in forex shortages and a collapse of the currency peg, which has long been a cornerstone of economic stability in the Maldives.
The Maldives had previously relied on the exceptional use of advances from the MMA, effectively printing money to finance government spending. The IMF welcomed the discontinuation of this practice, which had contributed to inflationary pressures and forex reserve depletion. However, the impact of these policy shifts will depend on how effectively the government manages alternative sources of financing.
“Prudent foreign exchange reserve management, alongside the necessary macroeconomic adjustments that include substantial and immediate fiscal adjustments as well as stricter monetary and macroprudential policies, would help safeguard the exchange rate peg,” the IMF stated.
The mission also endorsed the MMA’s commitment to resuming active monetary operations. However, the IMF did not specify whether these operations would involve deflationary measures such as repo transactions or the outright sale of MMA-held securities. If implemented effectively, these measures could help stabilize the rufiyaa and rebuild foreign reserves, ensuring that the country is better positioned to handle external shocks.
Structural Reforms and Climate Resilience
Despite fiscal challenges, the Maldivian economy is expected to grow by 5 percent in 2025, driven largely by robust tourism activity and the expansion of airport terminals, which will alleviate supply-side bottlenecks. However, inflation is projected to rise to 2.3 percent, partly due to increased import duties.
The IMF warned that external vulnerabilities remain high due to a persistently large current account deficit and pressures on foreign exchange reserves. Without urgent fiscal reforms, the overall deficit and public debt will remain elevated, putting further strain on the economy. The government will need to focus on maintaining investor confidence, particularly in key sectors such as tourism and infrastructure.
The IMF also emphasized the importance of structural reforms to improve the business environment, governance, trade, and investment. In particular, enhancing skill development will be crucial for sustaining long-term economic growth. Addressing gaps in workforce training and education could help the Maldives diversify its economic base and reduce reliance on tourism revenues.
Additionally, the Maldives faces severe climate change risks, including rising sea levels, floods, and natural capital degradation. The IMF urged the government to integrate climate sensitivity into public financial and investment management processes and mobilize additional climate financing. Investing in climate resilience projects, including coastal protection and sustainable tourism initiatives, will be essential for ensuring long-term economic stability.
The IMF mission expressed appreciation for the constructive discussions held with Maldivian authorities, including Finance Minister M. Zameer, Governor A. Munawar, and other senior officials.
In the coming months, further discussions between the government and international financial institutions will determine the next steps in this complex economic restructuring process.
The decisions made now will have lasting implications for the Maldives’ financial well-being, requiring careful planning and execution to achieve long-term prosperity.
