Financial Crime World

Maldives Economy: Navigating Fiscal Vulnerabilities and Financial Sector Challenges

The Maldives economy has shown significant progress in recovering from the pandemic-induced contraction. However, the country still faces substantial fiscal vulnerabilities and challenges in its financial sector. This article examines these issues and outlines key recommendations for addressing them.

Fiscal Vulnerabilities: A Pressing Concern

High Public Debt and Debt Service

The Maldives’ public debt reached 115% of GDP at end-2022, with a debt service burden of 11%. This high level of debt has limited fiscal space, making it challenging for the government to respond to economic shocks.

  • Key challenges:
    • Fiscal vulnerabilities due to high public debt and debt service
    • Continued support to State-Owned Enterprises (SOEs)
    • Revenue gap and currency mismatch among SOEs

Addressing Fiscal Vulnerabilities

To address these challenges, the Maldives needs to:

  1. Introduce a national green taxonomy: Develop a framework for tracking green finance provided by public and private sources.
  2. Enhance credit infrastructure: Pass the Secured Transaction Act and Insolvency Law, review the Civil Procedure Code for fast-track or simplified procedures for smaller claims, and expand the collection of credit information.

Financial Sector Challenges: A Cause for Concern

Bank Exposure to Government Debt

Some banks hold government bonds well in excess of their capital, exposing them to significant risks.

  • Key challenges:
    • Diversify sources of financing for SOEs
    • Improve corporate governance and risk management practices among SOEs
    • Enhance transparency and accountability in government debt management

Addressing Financial Sector Challenges

To address these challenges, the Maldives needs to:

  1. Diversify sources of financing: Reduce reliance on external variable rate FX loans.
  2. Improve corporate governance: Develop a comprehensive plan to address the FX shortage and parallel market.
  3. Enhance transparency and accountability: Implement measures to improve financial sector stability.

Conclusion

The Maldives needs to take bold steps to address its fiscal vulnerabilities, improve corporate governance, and develop a more sustainable financial system. By implementing these recommendations, the country can mitigate risks, promote economic growth, and ensure a brighter future for its citizens.