International Monetary Fund (IMF) has backed the decision of the Government of the Maldives to increase the Tourism and Domestic Goods and Services Tax (TGST) from 12% to 16% and Domestic Goods and Services Tax (GST) from 6% to 8% in 2023 to boost domestic revenue. IMF made the statement after its mission conducted a staff visit to the Maldives from June 21-29.
IMF stated that the economic growth of the Maldives is gathering pace, supported by a strong recovery in tourism. It noted that while tourist arrivals from Russia have declined since the start of the war in Ukraine, strong arrivals from other countries in Europe have so far more than offset this decline. As of end-June, total tourist arrivals in 2022 were only about 6% below the corresponding pre-pandemic level. The strong recovery in the tourism sector and associated spillovers to other sectors are expected to yield a solid growth of 8.7% in 2022. Inflation is projected to reach 3.1% in 2022 due to higher global food and energy prices, and spending pressures for the presidential election next year.
Furthermore, IMF stated that fiscal vulnerabilities remain high and the fiscal deficit is expected to widen and remain high in 2022, because of sustained high infrastructure spending and emerging spending pressures from rising subsidies, increased interest costs, and reforms of the wage bill. It stated that continued support to state-owned enterprises (SOEs), mostly through subsidies and capital contributions to repay debt contracted with sovereign guarantees, remains a key factor adding to fiscal vulnerabilities.
IMF cautioned that the external vulnerabilities continue to increase and while public and publicly guaranteed debt has declined from the pandemic peak, aided by economic recovery, the Maldives remains at a high risk of debt distress, which requires further adjustment to policies. It added that dollar shortages have persisted with significant spreads in the parallel foreign exchange market. It further stated that international reserves are declining, reflecting high food and fuel prices and fiscal spending pressures, while higher external financing costs are limiting options to tap international capital markets in the near term.
IMF noted that critical reforms include raising domestic revenue, rationalising public spending, in particular capital spending, reducing the interest burden by limiting non-concessional borrowing, and reforming subsidies while providing targeted assistance to the most vulnerable. IMF advised that a swift implementation of these reforms will help lower fiscal financing needs and contain pressures on the fragile reserve buffers. As such, IMF stated a swift implementation of the government’s intention to reform subsidies and reduce the dependence of SOEs on the central government’s budget would help reduce fiscal vulnerabilities.