( ) Page: 1/96 TRADE POLICY REVIEW REPORT BY THE SECRETARIAT MALDIVES

Transcription

1 RESTRICTED WT/TPR/S/ February 2016 ( ) Page: 1/96 Trade Policy Review Body TRADE POLICY REVIEW REPORT BY THE SECRETARIAT MALDIVES This report, prepared for the third Trade Policy Review of Maldives, has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from Maldives on its trade policies and practices. Any technical questions arising from this report may be addressed to Sergios Stamnas (tel: ) and Nelnan Koumtingué (tel: ). Document WT/TPR/G/332 contains the policy statement submitted by Maldives. Note: This report is subject to restricted circulation and press embargo until the end of the first session of the meeting of the Trade Policy Review Body on Maldives. This report was drafted in English.

2 - 2 - CONTENTS SUMMARY ECONOMIC ENVIRONMENT Overview Recent Economic Developments Growth, income, and employment Prices Main Macroeconomic Policy Developments Monetary and exchange rate policy Fiscal policy Main Structural Policy Developments and Challenges Tax and fiscal reform Subsidies reform State-owned enterprises (SOEs) Labour market reform Pension reform Balance-of-Payments Developments Developments in Merchandise Trade Trends and Patterns in Foreign Direct Investment TRADE AND INVESTMENT REGIME Introduction General Constitutional and Legal Framework Trade Policy Formulation, Implementation, and Evaluation Trade Policy Objectives Main Trade Laws and Transparency Legislation Transparency Trade Agreements and Arrangements Multilateral agreements Regional agreements Bilateral agreements Generalized System of Preferences (GSP) and other unilateral preferences Foreign Investment Regime TRADE POLICIES AND PRACTICES BY MEASURE Introduction Measures Directly Affecting Imports Registration, documentation, and customs clearance Customs valuation Rules of origin Tariffs... 32

3 Applied MFN tariff MFN tariff dispersion and escalation Tariff bindings Tariff exemptions and concessions Tariff preferences Import prohibitions, restrictions, and licensing Anti-dumping, countervailing, and safeguard measures State trading Measures Directly Affecting Exports Registration and documentation Export taxes, charges, and levies Export prohibitions, controls, and licensing Export assistance Export-processing zones State trading Measures Affecting Production and Trade Standards and other technical requirements Standards, testing, and certification Sanitary and phytosanitary (SPS) requirements Marking, labelling, and packaging Taxation and tax incentives Indirect taxes Goods and services tax Bed/Green tax Other taxes Direct taxes Tax incentives Financial assistance Other forms of assistance Government procurement Local-content requirements State involvement in the economy Competition policy and price controls Intellectual property rights Industrial property Copyright and related rights Enforcement TRADE POLICIES BY SECTOR Introduction Fisheries and Agriculture... 51

4 Fisheries Features Policy, legislative and institutional framework Domestic measures Fishing Fish processing and MIFCO Border measures Agriculture Features Policy Domestic measures Border measures Manufacturing Features Domestic measures Border measures Energy Electricity Hydrocarbons Services Features Tourism Financial sector Banking Structure and performance Legislative and institutional framework Insurance Telecommunications Transport Maritime transport Air transport REFERENCES APPENDIX TABLES CHARTS Chart 1.1 Product composition of merchandise trade, 2009 and Chart 1.2 Direction of merchandise trade, 2009 and Chart 3.1 Distribution of MFN applied tariff rates, 2008 and Chart 3.2 Tariff escalation by 2-digit ISIC industry, Chart 3.3 Average applied MFN and bound tariff rates, by HS section, 2008 and

5 - 5 - Chart 4.1 Interest rate spread (%), January 2009 to May TABLES Table 1.1 Selected macroeconomic indicators, Table 1.2 Basic economic indicators, Table 1.3 Balance of payments, Table 1.4 Stock of (non-tourism) foreign direct investment, July Table 2.1 Main trade-related legislation, Table 3.1 Tariff structure, 2008, 2013 and Table 3.2 Duty exemptions, Table 3.3 Goods subject to import permits, July Table 3.4 Structure of tax revenue, Table 3.5 Tax exemption incentives to investors, investments and businesses in SEZs Table 3.6 Government procurement, Table 4.1 Fishing indicators, Table 4.2 Tourism indicators, APPENDIX TABLES Table A1. 1 Merchandise domestic exports by product groups, Table A1. 2 Merchandise imports by product groups, Table A1. 3 Merchandise domestic exports by destination, Table A1. 4 Merchandise imports by origin, Table A3. 1 Maldives' MFN applied tariff summary, Table A3. 2 Maldives MFN and SAFTA tariff summaries, Table A3. 3 List of tariff lines where applied MFN rates exceed bindings, Table A3. 4 Public enterprises of the Republic of Maldives Table A4.1 Maldives' air transport agreements, as of end-october

6 - 6 - SUMMARY 1. Since its previous Trade Policy Review in 2009, Maldives' economic growth has been sustained, although at an irregular and relatively slower pace. Its ability to attract tourism from new and emerging markets (e.g. China) has helped the recovery from the global economic crisis. After a peak of 8.7% in 2011, real GDP growth decelerated to 2.5% in 2012 largely due to the impact of weak economic conditions in Europe on the tourism sector, but increased demand in tourism and related sectors made it rebound progressively to 6.5% in Inflation dropped progressively to 2.4% in 2014 (from a peak of 11.3% in 2011) and remained subdued in 2015; the unemployment rate also declined slightly from 12.2% in 2009 to 11.6% in 2014 owing mainly to the recovery in the tourism sector. 2. During the review period, the trade and trade-related structural reforms included the introduction of the goods and services tax (GST) and the business profit tax (BPT), new investment incentives for activities in special economic zones (SEZs), legislative measures for the formalization of informal enterprises, and a new pension system. Monetary policy accommodated fiscal indiscipline at times but with the enactment of the Fiscal Responsibility Act in 2013, strict limits on monetary accommodation were imposed, and the financing of the fiscal deficit was halted; furthermore, the 2015 Budget contained a mix of revenue raising and expenditure restraint measures as well as a large increase in capital expenditures financed by bilateral official loans. 3. Following a sharp decline in foreign exchange earnings, on 11 April 2011 Maldives, a highly-dollarized economy, switched from a de facto fixed exchange rate to a stabilized exchange rate regime with the rufiyaa allowed to fluctuate within a band of 20%. The nominal exchange rate moved quickly towards the upper limit of the band where it remains, while the real exchange rate appreciated by around 20% owing to rapid inflation pass-through. With low level of reserves, the Maldives Monetary Authority (MMA) is able to supply only a small fraction of foreign exchange demand with the rest satisfied in the parallel market; consequently, non-discriminatory exchange restrictions and a multiple currency practice (MCP) remain in place. Between 2009 and 2011 the current account deficit grew, due, inter alia, to a substantial increase in the value of imports reflecting, among other things, higher global oil prices, whereas between 2012 and 2014 it narrowed progressively owing mainly to the recovery in the tourism sector, and subdued global food and fuel inflation. In 2015 the deficit peaked due to a reduction in the trade surplus reflecting stronger domestic import demand and a fall in fish exports and re-exports. Maldives' gross official reserves rose in 2014 due to an increased supply of dollars in the market. Total public debt increased to 74.6% of GDP in 2014 while gross external debt decreased. 4. The high degree of openness of the Maldivian economy to international trade, and its integration into the world economy continued to be reflected by the ratio of its trade (exports plus imports) in goods and services-to-gdp, which rose to 198.6% in 2014 largely due to increased tourism receipts and goods imports. International trade and foreign direct investment (FDI) developments reflect the continuous importance of Asia as Maldives' main regional market and supplier, while the European Union remains its major individual merchandise market followed by Thailand. Marine food (mainly fish, crustaceans, and preparations thereof) remain Maldives' main exports. The foreign investment regime remains liberal; 100% foreign ownership is permitted in all sectors except for longline fisheries (since 2010) and retail trade. As of 2014 the positive list of foreign investment activities was replaced by a case-by-case review of each application. In addition to the 2015 constitutional changes opening land ownership to foreign investors, SEZs incentives applicable to both domestic and foreign investors, an equitable BPT (replacing the disadvantageous royalty regime), and dispute settlement guarantees were introduced recently. 5. During the review period, Maldives has been through a complex political transition period. Some changes were made in its legal and institutional framework for trade and investment, including new legislation or amendments, inter alia, on customs valuation, public health, taxation, copyright and related rights, tourism, land lease and financial services as well as the establishment of a Trade Facilitation Committee to advise on issues in facilitating trade and ease of doing business in the country. 6. The graduation of Maldives from least-developed-country (LDC) status in 2011 and/or its classification as an upper-middle-income country by the World Bank have had some implications for preferential market access to certain major markets (i.e. Canada, China and the EU), some WTO commitments/benefits (e.g. TRIPS), and possibly the level of official development assistance

7 - 7 - and technical assistance. Its involvement in regional trade agreements remains limited and unchanged; it is a party only to the South Asian Free Trade Agreement (SAFTA) and is about to launch negotiations for a free trade agreement with China. Despite a seemingly transparent legislative process and being a longstanding beneficiary of trade-related technical assistance (TRTA), Maldives' poor record of WTO notifications and observance of tariff binding commitments remains virtually unchanged. 7. The tariff remains one of Maldives' main trade policy instruments but its predominance as a source for government revenue has declined substantially with the introduction of new taxes. As a consequence of a 2011 unilateral MFN tariff liberalization initiative eliminating tariffs on about 31.5% of tariff lines, the average applied MFN tariff rate dropped from 21.4% in 2008 to 13.9% in Agricultural products continue to face lower tariff rates (averaging 11.3%) than non-agricultural items (WTO definition) (14.3%). The peak ad valorem rate was doubled to 400% (plastic bags and polythene film and sheets). The introduction of the HS2012 tariff nomenclature resulted in 7% less tariff lines. The tariff structure has become slightly more complex owing to the increase in the number of applied MFN rates, which in 2015 stood at 13 (zero, 5%, 10%, 15%, 20%, 25%, 35%, 50%, 100%, 150%, 200%, 400%, one specific duty) compared to 11 in For most activities, the tariff is characterized by some level of de-escalation between unprocessed and semi-processed products, and escalation to fully processed goods, which means that effective rates of tariff protection for final products can be considerably higher than nominal rates. The Maldives Customs maintains an online Customs Tariff containing only 6,422 "active" tariff lines for customs declaration purposes that could provide scope for administrative discretion. The fact that 94.9% of tariff lines are bound imparts a degree of predictability to the tariff. However, the simple average of bound MFN rates could considerably exceed the average applied MFN rate (possibly by about 24 percentage points), providing the authorities with extensive scope for increasing applied tariffs within bindings. Furthermore, similar to the time of its past TPR, applied MFN tariff rates appear to exceed bound rates on some 323 tariff lines of which 271 were on manufactured products. As Maldives' Tariff Schedule of Concessions is based on the HS2007 it is difficult to accurately compare its bindings' status with the currently applied HS2012 tariff schedule, thus, making the transposition of binding commitments to HS2012 another pressing task. 8. During the review period, trade facilitation improvements included the introduction of a fast clearance channel for imports as well as the launching of the internal process to ratify the WTO Agreement on Trade Facilitation. New customs legislation in 2011 allowed for the implementation of provisions of the WTO Agreement on Customs Valuation; the transaction value is now used in a large majority of cases as the valuation basis. 9. Import licensing continues to apply to all imports, and an ad valorem fee is collected for the issuance of licences. Import restrictions and prohibitions on various items for, inter alia, religious, health, safety, security, and environmental reasons have remained generally unchanged during the review period. There has been no major change in the area of standards and other technical requirements. Labelling requirements for pre-packaged food, food imports, tobacco products and breast-milk substitutes have been updated. 10. Export duties levied on fish products (royalties) were replaced by the BPT indirect tax as from 2012, whereas a 50% duty on the f.o.b. value of ambergris exports was retained for revenue purposes. No changes were made to export prohibitions, restrictions, or the licensing regime. As from 2014 incentives, inter alia, involving temporary BPT exemption, have been provided for the establishment of SEZs, including for export processing, but no such zone has been set yet. 11. Domestic support is provided mainly through tax and non-tax incentives (e.g. direct payments) some of which are available to sector-specific activities, e.g. fisheries, agriculture and energy sectors. State involvement in the economy, including in trading activities, remains prevalent in numerous sectors (e.g. fishing, public utilities, finance, telecoms, transport, and tourism). Despite the absence of privatization action during the review period, the authorities promoted joint ventures between government-owned companies and private sector stakeholders and in 2013 they passed legislation on the procedures for the privatization, corporatization, monitoring, evaluation and introduction of shares of state-owned properties to the stock exchange. No major changes were made in the government procurement framework of Maldives, a non-signatory to the WTO Plurilateral Agreement on Government Procurement; in addition to the possibility of restricting bids to domestic suppliers, local firms may be granted a margin of preference of up to 7.5% in the evaluation of bids.

8 The passing of a Copyright and Related Rights Act in 2010 has been a major development in the protection of intellectual property rights (IPRs) while the preparation of draft legislation on patents, industrial designs, trademarks and geographical indications is under way. Maldives remains a non-signatory to any of the treaties administered by the World Intellectual Property Organization and protection enforcement is weak. Competition and bankruptcy and insolvency legislation remains at a drafting stage, although sector-specific legislation is in place for telecommunications. 13. Despite its declining share of GDP (1.4% in 2015) the fisheries sector continues to be of major importance to the Maldivian economy as it accounts for nearly all (97.4%, 2014) merchandise exports; following the loss of preferential treatment in the EU market some fish exports were partly diverted into other markets. During the review period, tariff protection for the activity was reduced significantly, although most tariff lines relating to fish and fish products remain unbound. Fisheries subsidies are in the form of direct payments are granted to support fuel costs ( ), a minimum income level during the low season (2014 onwards) and installation of equipment for on-board ice making facilities and for conversion of bigger fishing vessels to engage in longline fishing. The longline fishing policy and regime were changed to reflect illegal fishing and overfishing developments as well as domestic fishermen's interests/concerns; foreign participation in this type of fishery was ceased in 2010 and a catch allocation-based individual transferable quota (ITQ) scheme was established in The state-owned Maldives Industrial Fisheries Company (MIFCO) continues to enjoy considerable monopsony power as it holds exclusive rights in purchasing and processing skipjack tuna in two of four zones. 14. Notwithstanding its land limitations and climatic risks, agriculture remains a crucial sector in terms of employment and therefore poverty reduction. Domestic producers receive support in the form of direct payments mainly distributed to compensate for loss of income due to natural disasters; as from 2014 the direct payments were replaced with insurance schemes for farmers as well as concessional loans to support agricultural development. While average tariff protection to agriculture was reduced, tariffs on tobacco and alcohol products were increased for health, religious and revenue purposes. Staple foods (i.e. ordinary rice, flour and sugar) continue to be imported mainly through the majority government-owned enterprise State Trading Organization (STO) and sold at government-controlled prices involving a subsidy. 15. Development of manufacturing remains limited and state involvement seems to persist in a few key areas through, inter alia, STO's and MIFCO's activities. Although tariff protection of manufacturing was reduced except for some chemicals, cosmetics, soaps, tyres, textiles, motor vehicles, buses, and motor vehicle parts where it was increased it remained slightly higher than the overall average applied MFN tariff and much higher than rates levied on agricultural items. 16. Maldives remains fully import dependent on petroleum-based fuels with key activities like tourism and fishery being the main energy consumers. Action is being taken both at the border and investment level to promote renewable energy and address several constraints. State involvement in the energy sector was strengthened with the establishment of a second stateowned electricity company to achieve operational efficiency and ensure 24-hour electricity access to island communities. As electricity tariffs remain expensive by international standards, two types of subsidies equivalent to 0.7% of GDP (2014) are paid directly to households, some of which also benefit from cross-subsidization at the expense of businesses subject to much higher tariffs. 17. Services remain by far the largest sector of the economy (accounting for more than 80% of GDP and over 90% of total goods and services exports) with tourism being the largest activity and the largest generator of government revenue. The limited commitments of Maldives under the GATS remain unchanged. Tourism-related taxes and revenue were increased during the review period. Although tourism facilities are predominantly locally-owned, state involvement was apparently increased, and the lease period for islands or land was extended under certain conditions. New legislation in the financial sector covered Islamic banking, prudential requirements and prevention of money laundering and terrorism financing. Consequently, to capture a part of the market, a new Islamic bank was established and the offer of Shariah type financial products was expanded. The banks' capital adequacy ratio rose, but their minimum reserve requirement was reduced. Despite a recent drop, the relatively high level of non-performing loans (NPLs) remains a concern. State involvement in fixed-line communications was somewhat reduced in recent years with the state firm's (Dhiraagu) opening to public investment in late 2011; efforts were made to reduce its dominance in other telecoms segments. Other major developments

9 - 9 - include a new National Broadband Policy aimed, inter alia, at extending broadband Internet access to all the inhabited islands as well as the introduction of mobile number portability and the extension of the existing broad-based GST tax to telecommunications. Cabotage restrictions persist in both maritime and air transport activities. During the review period, the supply of international airline services was increased with the arrival of new operators and the expansion of airport capacity whereas a lower GST rate has benefited the domestic air transport of locals. On the other hand, state involvement in port and airport ownership and handling remained relatively unchanged. 18. Despite a favourable economic outlook Maldives' economic growth is expected to slow further in 2016 with the implementation of fiscal adjustments contained in the 2015 Budget. Downside risks to the economic outlook are posed by, inter alia, possible fiscal slippages, the timely implementation of proposals to diversify into new and tourism-support activities, and political volatility. With limited policy buffers, Maldives' economy also remains vulnerable to exogenous risks including a surge in oil prices, protracted slow growth in its major markets (mainly Europe, and increasingly China), as well as a strengthening of the U.S. dollar. International competitiveness is crucial to the sustainable development of Maldives' tourism-dependent economy given its high degree of openness and regional competition. A major economic challenge confronting Maldives, with potential trade policy implications, is to formulate appropriate macroeconomic policies and undertake productivity-enhancing structural reforms to address, inter alia, skill mismatch in the labour market, the high dependence on fishing, tourism and oil imports, and government expenditure-related distortions (e.g. subsidies) as well as improving the efficiency of public service provision across the country. These and related reforms would increase the flexibility of the Maldivian economy and its ability to respond to external shocks, thus enabling it to continue meeting its economic and welfare objectives.

10 ECONOMIC ENVIRONMENT 1.1 Overview 1.1. Since its previous Trade Policy Review in 2009, Maldives' economic growth has been sustained, although at an irregular and slower pace. Its ability to attract tourism from new and emerging markets (e.g. China, Section (4.5.2)) has helped its recovery from the global economic recession. 1 International competitiveness is crucial to the economy given its high degree of openness (Section 1.6). Inflation peaked at 10.9% in 2012, reflecting both domestic and external factors; the unemployment rate declined to 11.2% in Maldives has improved its human development performance and reduced its income inequality level 2, supported by high levels of government expenditure on human development. 3 International trade and foreign direct investment (FDI) developments reflect the continued importance of Asia as Maldives' main regional market and supplier, while the European Union remains its major merchandise market followed by Thailand Maldives shares many of the challenges of other small island developing states, including: high cost of public service provision and limited ability to exploit economies stemming from its small size; dependence on a few sectors; limited access to international markets due to its remoteness; and vulnerability to climate change and high cost of natural disasters. 4 Despite a favourable economic outlook and some success in diversifying its production/export base from traditional fishing into tourism, risks to the economy remain. 5 Domestic risks stem from possible fiscal slippages and the timely implementation of proposals to diversify into new labour-intensive sectors such as off-port shipping, information technology, financial services and tourism-support activities (Sections and 2.7). With limited policy buffers, the risks of fiscal slippages are high and Maldives' highly dollarized economy is vulnerable to external shocks. 6 The main external risks include protracted slow growth in its major markets (mainly Europe, and increasingly China), as well as a strengthening of the U.S. dollar. As at end-october 2015, the authorities considered risks to growth as coming mostly from the tourism sector as growth in arrivals was less than anticipated and the average duration of stay was on a downward trend Recent Economic Developments Growth, income, and employment 1.3. Since the global financial crisis, Maldives' growth has resumed although remaining below its pre-crisis performance. After a decline of 5.3% in 2009 as a result of the global economic recession, real GDP growth peaked to 8.7% in 2011 (Table 1.1). It decelerated to 2.5% in 2012 largely due to the impact of domestic political unrest (Section 2.2) and weak economic conditions in Europe in the tourism sector. As a result of increased tourism demand and related sectors real GDP rebounded to 4.7% in 2013 and rose slightly to 6.5% in According to the IMF, GDP growth is forecast to remain fairly strong at 5% in 2015 and to slow down to 3.9% in 2016 with the implementation of fiscal adjustments contained in the 2015 Budget (Section 1.3.2). 1 Tourism contributes directly and indirectly to 78.1% of GDP (Section 4.5.2), and the impact of the global economic recession has been more severe than in other tourism-dependent economies. Maldives Monetary Authority (2014). 2 In 2013, Maldives, which is in the UNDP's medium human development category, ranked 103 rd out of 187 countries (104 th out of 187 in 2008). Its income inequality index (Gini coefficient) dropped from 0.41 in 2004 to 0.37 in ; a value of 0 represents absolute equality, a value of 1 absolute inequality. UNDP (2014b); and UNDP (2014a). 3 Over the past decade, public expenditure on education averaged 8.1% of GDP, and around 10% of the budget was allocated annually to the health sector. A wide range of social protection programmes has recently been introduced, including: the universal health insurance scheme, old age basic pension, electricity benefit, and retirement pension. Ministry of Economic Development (2013). 4 Asian Development Bank (2015c). 5 IMF (2015). 6 Plans to improve infrastructure and develop special economic zones (SEZs) (Section 1.3.2) are expected to support growth and help build buffers. With tourist transactions mainly in U.S. dollars, the economy is highly dollarized. 7 MALDIVES MONETARY AUTHORITY(2015b). 8 Tourism demand picked up in 2013 as Maldives is increasingly diversifying into the Chinese market. Arrivals grew by 17% and drove up other sectors such as the construction, communications, and fisheries.

11 Table 1.1 Selected macroeconomic indicators, Real GDP (% change) Real GDP at market price (Rf million, 2003 prices) 19, , , , , ,043.7 Real GDP at market price (US$ million, 2003 prices) 1, , , , , ,693.3 Current GDP at market price (Rf million) 27, , , , , ,122.0 Current GDP at market price (US$ million) 2, , , , , ,063.8 GDP per capita US$ 5, , , , , ,738.9 Unemployment rate (%) Prices and interest rates Inflation - Male (CPI, % change) Lending rate (foreign currency) Lending rate (national currency) Saving rate (foreign currency) Saving rate (national currency) Exchange rate Rf/US$ (year average - IMF) Overall fiscal balance (% of GDP) Revenue and grants Current revenue Tax revenue Expenditures and net lending Net operating balance (excl. net lending) Government debt Domestic debt External sector (% of GDP, unless otherwise indicated) Current account Net merchandise trade Exports Imports Services balance Receipts Travel Payments Capital account Financial account Direct investment Balance of payments Trade to GDP ratio (%) Merchandise goods exports (% change) a Merchandise goods imports (% change) a Service exports (% change) a Travel Service imports (% change) a Gross international reserves (US$ million) in months of imports External debt (US$ million) Debt service ratio b Not available. a b Source: Growth rates on merchandise goods and services trade are based on US$, as taken from the BOP. Rates of debt service to exports of goods and services. Maldives Monetary Authorities online information; National Bureau of Statistics, Ministry of Finance and Treasury online information; IMF online information; and World Development Indicators, viewed at: Since 2009, changes in the overall sectoral pattern of Maldives' GDP has consisted of a rise in the contribution of construction which accounted for 13.2% of economic activity in 2014, and a decline in fisheries (due largely to the decline in fish catch), financial services and real estate (Table 1.2) During the review period, the unemployment rate declined from 12.2% in 2009 to 11.1% in 2012 due mainly to the recovery in the tourism sector, but rose to 11.6% in 2013 (Table 1.1). Youth unemployment is, however, on a rising trend owing to a mismatch in the skills required in the job market and the unavailability of these skills among locals. 9 The informal economy plays an 9 UNDP (2014b).

12 important role in creating jobs and livelihood opportunities, especially in the outer islands. 10 Measures taken to encourage the formalization of informal enterprises include: a dedicated programme providing business support services (including concessionary financing for business start-up and development); the Business Profit Tax Act and the Goods and Services Tax Act of 2011 (Sections and 3.4.2), which require enterprises to register for tax purposes; the Small and Medium Enterprises Act of 2012, which provides incentives tied to registration; and the Business Registration Act of 2014 (Section 2.7). According to the authorities, registration of businesses operating in the informal economy has improved as a result of these measures. 11 Table 1.2 Basic economic indicators, GDP by economic activity at constant 2003 prices (% change) Agriculture and mining Fisheries Manufacturing Electricity and water supply Construction Services Wholesale and retail trade Tourism (resorts, etc.) Transport Communication Financial services Real estate Business services Government administration Education Health Social services Share of main sectors in current GDP (%, basic price) Agriculture and mining Fisheries Manufacturing Electricity and water supply Construction Services Wholesale and retail trade Tourism (resorts, etc.) Transport Communication Financial services Real estate Business services Government administration Education Health Social services Financial services indirectly measured Source: National Bureau of Statistics, Ministry of Finance and Treasury, Statistical Yearbook of Maldives 2015 online information. 10 There is no data on the informal sector or informal employment. However, the Household Income and Expenditure Survey it to capture the informal sector and informal employment. 11 Online information. Viewed at:

13 Prices 1.6. Inflation peaked at 11.3% in 2011 and remained high in 2012, reflecting both domestic and external factors. On the domestic side, the pass-through effect of the April 2011 depreciation of the rufiyaa (Section 1.3.1), the introduction of the goods and services tax (GST), and surging domestic fish prices were the main drivers. 12 External factors were mainly higher global food, energy and commodity prices. Inflation dropped to 4% in 2013 and remained subdued in 2014, inter alia, on account of the waning effect of these factors. According to the IMF, inflation is projected to ease further to 0.3% in 2015 but to pick up (2.1% in 2016) with the full year effect of the increase in import duties (Section 1.3.2), and to settle at around 4% in the medium-term (2018 and 2019). 13 The authorities indicated that inflation will remain contained in 2015 as oil and commodity prices remain low and the projected increase in import duties did not materialize. 1.3 Main Macroeconomic Policy Developments Monetary and exchange rate policy 1.7. Monetary policy remains the responsibility of the Maldives Monetary Authority (MMA). Key decisions relating to monetary policy are recommended by the Monetary Policy Committee for approval by the MMA Board of Directors, its highest decision-making body. However, the MMA needs approval from the President for any changes in the exchange rate. The MMA remains committed to its objectives of maintaining price stability and an adequate level of international reserves, while promoting non-inflationary economic growth. 14 The exchange rate is the main anchor for price stability and the liquidity position of the banking system is used as the operational target for monetary operations. The main instruments used by the MMA are: the Minimum Reserve Requirement (MRR); open market operations (since 2009); and standing facilities (since 2010). MMA's interventions over the past years have consisted mainly in injecting or absorbing excess liquidity in the banking sector. Between 2014 and 2015, the MMA cut the MRR from its level (25% since 2006) to 10%, in a move to reduce financing costs (Section ). 15 During the review period, monetary policy occasionally accommodated fiscal indiscipline through the MMA's provision of credit to fund budget deficits. 16 Under the Fiscal Responsibility Act of 2013, strict limits were imposed on monetary accommodation (Section 1.3.2), and financing of the fiscal deficit was halted During the review period, Maldives passed from a de facto fixed exchange rate to a stabilized exchange rate regime which, according to the IMF, is suitable for Maldives in view of the very high openness of its goods and services market, the dollarized nature of the economy, and the large seasonal variation in tourism revenues. The rufiyaa has been pegged to the U.S. dollar at the rate of Rf per U.S. dollar (since July 2001); however, maintaining the peg became unsustainable as persistent foreign exchange shortages were exacerbated by a sharp decline in foreign exchange earnings during the global economic crisis. With effect from 11 April 2011, Maldives switched to a stabilized exchange rate regime with the rufiyaa allowed to fluctuate within a horizontal band of 20% on either side of a central parity of per U.S. dollar (i.e. between Rf and per U.S. dollar). 18 The nominal exchange rate moved quickly towards the upper limit of the band where it remains, as foreign exchange pressures persist (Table 1.1); at the same time the rufiyaa appreciated against the currencies of most of its major trading partners (mirroring the strengthening of the U.S. dollar). Following the April 2011 devaluation, the real exchange rate quickly appreciated by around 20% owing to rapid inflation pass-through. 19 According to the IMF, the exchange rate was modestly overvalued in Maldives Monetary Authority (2014). 13 IMF (2015). 14 IMF (2015). 15 Maldives Monetary Authority online information. Viewed at: 16 In 2013, net credit to the Government increased by 27.7% to Rf 6 billion (Maldives Monetary Authority, 2014). 17 The provisions of the Fiscal Responsibility Act related to monetization were delayed until The Act was fully implemented in May Maldives Monetary Authority Press release No. PR/GB/2011/7 (unofficial translation). Viewed at: 19 Exchange rate devaluations have been unsuccessful (the latest being the 2011 experience) as the rapid inflation pass-through offset the impact of the nominal exchange rate devaluation. IMF (2015).

14 Since the global financial crisis, the appearance of a parallel market premium and a shortage of foreign exchange at the official rate has continued to give rise to non-discriminatory exchange restrictions and a multiple currency practice (MCP). With a low level of reserves, the MMA was able to supply only a small fraction of foreign exchange demand, with the excess satisfied in the parallel market, and the premium has remained stable and low for an extended period; the scale of the premium has ranged from around 5% to 15%, and during 2014 it reverted to just 3% to 4% due to an increased supply of U.S. dollars (Section 1.5). 20 The tourism industry appears to be a key supplier and driver of the parallel market. The existing restriction arising from rationing has eased, with the MMA increasing the foreign exchange provided to commercial banks from US$3 million to US$4 million a week from September Fiscal policy During the period under review, the fiscal deficit was reduced from 19% of GDP (based on net operating balance figures) in 2009 to 3.4% in 2014 (Table 1.1), partly due to the recovery in the tourism sector and the introduction of new tax measures (Sections and 3.4.2). The Fiscal Responsibility Act of 2013 set a number of rules relating to public debt and fiscal deficit. 21 The 2015 Budget measures aim to rein in the deficit through a mix of revenue raising and expenditure restraint measures as well as a large increase in capital expenditures (for a Male airport road bridge and for airport development) financed by official bilateral loans. Planned revenue raising measures included a tourism "green tax"; increased import or excise duties on some consumer items; fees from the acquisition of land for special economic zones (SEZs) (Sections 2.7, , 4.3.2, and 4.5.3); and licence fees for new resorts. A freeze in public sector employment and targeting electricity and food subsidies are expected to contain expenditures. However, the risks of slippages are high, and some have already materialized. 22 They include: the possible reversal of the planned increase in import duties for motorcycles and textiles; downward revision of tourist arrivals and its impact on revenues from the tourism goods and services tax (GST); and delays in targeting electricity subsidies. The Fiscal Responsibility Act of 2013 stipulates that the primary balance of the budget is to be in surplus by the end of 2017, and the overall balance is to be maintained at a level not exceeding 3.5% of GDP. In the proposed 2016 Budget, expenditures are projected to increase by 12.7% to Rf 27.5 billion (US$1.7 billion) to accommodate government spending, mostly on public investment projects. 23 As a result, the deficit is expected to widen to Rf 3.4 billion. 1.4 Main Structural Policy Developments and Challenges Tax and fiscal reform During the period under review, tax reform plans included the introduction of the GST and the business profit tax (BPT) aimed at reducing the vulnerability of government revenues to external shocks as well as tax and non-tax incentives (Sections and 3.4.2). The Maldives Inland Revenue Authority was also established as an independent body for tax administration. Revenue raising and expenditure restraint measures were planned at the 2015 Budget (Section 1.3.2) Subsidies reform Subsidies remain in place in the fisheries, agriculture and energy sectors (Sections , 4.3.2, and 4.4.2). Basic foodstuffs (flour, rice, sugar) are imported by a state-trading entity and sold at officially-set prices (Sections and ). Plans to reduce energy subsidies are under consideration (Section 4.4). 20 IMF (2015). 21 Under the Act rules relating to public debt require: the interest rate on loans from the MMA to be at the prevailing market rate, the repayment period not to exceed 91 days, and the loan amount not to exceed 1% of the average government revenue of the past three years; the Government to bring the level of the national debt below the threshold of 60% of the total GDP of the preceding year by the end of 2017; and loans to be taken only if they are for national development projects or to facilitate the improvement of productivity. 22 Maldives Monetary Authority (2014). 23 Online information, viewed at:

15 State-owned enterprises (SOEs) State-owned enterprises are operating in various sectors of the economy and may benefit from direct or indirect support such as government guarantees on debt and exemption from certain regulations (Section 3.4.7) Labour market reform Maldives' legal and institutional framework for workplace relations remains virtually unchanged. There is no minimum wage set for the private sector. The authorities indicated that there is no plan to do so, as it would adversely affect productivity. 24 However, a de facto benchmark floor of Rf 5,000 (US$320) per month is in place for public sector employees Pension reform A new pension system was introduced in Unlike the former system which covered only public sector employees, the new scheme was extended gradually to the private sector, self-employed and foreign workers. 26 Participation for self-employed and foreign workers is non-mandatory. By the end of 2013, there were more than 120,000 workers enrolled into the new scheme, and the accumulated pension savings is projected to reach US$300 million by the end of The lack of allowable investment opportunities is one of the major impediments to the success of the new system. Over 85% of pension savings are being invested in short-term government securities. Transitional benefits, which were put in place before the new pension scheme becomes fully functional, were never phased out. In addition, institution-specific pensions and benefits emerged resulting in the duplication of retirement benefits and pressures on the budget. As a consequence, pensions doubled from 2012 to 2013 and accounted for 2.2% of GDP. Pension pay-outs to public sector employees receiving double pension benefits are projected to reach US$11 million in 2016 (from US$3.5 million in 2010). 1.5 Balance-of-Payments Developments During the review period, the current account remained in deficit. In 2011, it rose to US$383.4 million, reflecting higher global oil prices and a surge in imports of construction materials stemming from the revival of some public sector projects and the launch of new ones. 27 The deficit narrowed in 2012 and 2013 owing mainly to the recovery in the tourism sector, and subdued global food and fuel inflation in Although the merchandise trade balance deteriorated further in 2014, it was largely offset by a significant increase in receipts from travel services. The deficit was expected to peak at US$399.9 million in 2015 due to a reduction in the trade surplus reflecting stronger domestic import demand and a fall in fish exports and re-exports. According to the authorities, the deficit would be around the same level in Persistent primary fiscal deficits have led to a high and increasing level of public debt. Total public debt increased from 52% of GDP in 2009 to 74.6% in 2014 (Table 1.1), well above the 60% limit imposed by the Fiscal Responsibility Act. Maldives' public debt problem is largely a domestic one, as domestic debt increased from 28% to 44% of the GDP over the same period. Gross external debt decreased by 20.1% to US$738.5 million (Table 1.1); the debt service ratio declined to 2.3% in 2014 (from 2.9% in 2012). 29 The ADB noted in its 2015 Economic Outlook 30 that debt sustainability is a risk because of the Government's plans to massively scale up public capital investment over the next three years (with at least 30% financed through loans), and the demonstrated difficulty of cutting back current spending. 24 Online information, viewed at: 25 Maldives Pension Act of World Bank (2014b). 27 Maldives Monetary Authority (2012). 28 Maldives Monetary Authority (2014); and IMF (2015). 29 Due to ongoing data revisions, the debt service ratio is only available from 2011 onwards. 30 Asian Development Bank (2015a).

16 Table 1.3 Balance of payments, (US$ million) a Current account Goods and services balance Goods balance -1, , , , ,896.9 Exports Imports 1, , , , ,138.8 Services balance 1, , , , ,183.2 Receipts 2, , , , ,048.7 Travel 1, , , , ,644.6 Payments Income balance Current transfers Capital account Financial account Direct investment Direct investment in Maldives Portfolio investment Other investment Net errors and omissions Balance of payments a Source: Estimates. Maldives Monetary Authority online information. Viewed at: Maldives' gross official reserves increased from US$261 million in 2009 to US$614.7 million (3.7 months of merchandise imports) in 2014 (Table 1.1). In 2014 alone, the increase amounted to US$246 million as a result of a large improvement in net capital inflows. 31 Nevertheless, according to the IMF they were low compared to standard reserve adequacy indicators (around 2.8 months imports) as usable reserves were just US$132 million (0.6 months imports). 32 As of September 2015, gross international reserves stood at US$627 million. 1.6 Developments in Merchandise Trade The high openness of Maldives' economy to international trade, and its integration into the world economy, continued to be reflected by the high ratio of its trade (exports plus imports) in goods and services to GDP. The ratio increased from 193.9% in 2011 to 198.6% in 2014, largely due to an increase in travel receipts (Table 1.1) The composition of merchandise trade remains concentrated in a few items, especially for exports. Marine food (mainly fish, crustaceans, and preparations thereof) remains Maldives' main exports (Chart 1.1). In 2012, domestic exports almost doubled to US$161.6 million (Table A1.1) thanks to higher exports resulting from an improvement in fish landings, and higher international fish prices; the level of re-exports remain particularly high. The composition of merchandise imports remained broadly unchanged (mainly involving manufactured products, intermediate inputs for the apparel industry, food, and fuels). The share of agricultural products in total imports dropped slightly to 22.9% while the share of fuels increased from 20.7% to 28.7%, reflecting increased energy demand due to the economic activity (operation of new resorts, new regional airports, etc.) Merchandise trade is oriented towards Asia, although the EU remains the major market for Maldives' merchandise exports (almost exclusively fish). There was a minor shift away from the markets of the EU (possibly reflecting a reduction in GSP privileges (Section 2.6.4)) and Sri Lanka, towards Thailand and the United States which were, together with the EU, the main individual export destinations in 2014 (Chart 1.2). During the same period, the share of the United Arab Emirates (Maldives' major merchandise suppliers as of 2014 owing to the increased demand in energy) in total imports rose while those of Singapore and India dropped (Chart 1.2). 31 World Bank (2015b). 32 Low reserves levels also indicate external sector weakness. IMF (2015).