DTIS, Volume I - Enhanced Integrated Framework (EIF)

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crisis. Accordingly, the Rufiyaa was devalued by 8.5 per cent in 2001 to avert a foreign currency shortage. Although the authorities acknowledge the adverse impact of an over-valued exchange rate on economic diversification and competitiveness, they are also concerned about the inflationary effects that a devalued currency may have on an economy heavily reliant on imports. Together with the structural changes in the economy, the exchange rate regime may point to a situation that resembles the so-called ‘Dutch disease.’ Although the disease is generally associated with the spending of revenue generated from a natural resource discovery, it can occur from any development that results in large inflows of foreign currency. With tourism accounting for 80 per cent of FDI receipts in the Maldives, the tourism sector has had a similar effect. The impact has been most prominent on the Maldivian fisheries sector, which has experienced slow growth and reduced welfare impacts. IV. Inflation and Financial Sector Trends The exchange rate peg and conservative management by the Maldives Monetary Authority (MMA) over financial flows has resulted in low single digit and even below zero inflation rates during the last five years. However, one of the effects of reconstruction and rehabilitation following the tsunami was a sharp increase in inflation to 8 per cent during the first half of 2005, which had decreased to 6.6 per cent by the end of July 2005. The MMA forecast is that inflation will continue to decrease during 2006 and 2007 to previous levels. Overall there was a sharp growth in liquidity and credit during the first half of 2005 as lending for reconstruction and rehabilitation picked up after the tsunami. (see Table 2.3 below). This expansion in credit was largely facilitated by an increase in borrowings from overseas by the commercial banks, also leading to an abrupt down turn in net foreign assets (NFA) of the banking system. Table 2 3: Inflation, Interest Rates, Liquidity Trends and Debt 2000 2001 2002 2003 2004 07/2005 Exchange rate pegged (Rf per US$) 11.77 12.24 12.8 12.8 12.8 12.8 Inflation (per cent change in CPI) -1.2 0.7 0.9 -2.9 6.4 6.6 Interest level (per cent p.a.) 17 - 24 8 -13 8 -13 Net foreign assets (million Rf) 1662.9 2,613.4 3,366.6 2,813.7 Public sector credit (million of Rf) 1,344.9 1,002.2 741.5 1,168.9 Private sector credit (million of Rf) 2,100.8 2,244.4 3,541.3 4,306.7 Other items (million of Rf) -1,142.1 -1,316.3 -1,622.6 -1,555.8 Broad money (M2) 3,966.4 4,543.7 6,026.9 6.703.4 External reserves in months of import 4.1 4.1 3.8 3.2 External debt/GDP (per cent) 33.9 33.6 40.4 39.3 38.4 Debt service ratio ª) 4,2 4.1 4.3 3.7 3.8 5.6 ª) Ratio of debt service to exports of goods and non-factor services Source: Economic Statistics, MMA, December 2004 and update, July 2005 9
On an annual basis, total NFA of the banking system declined by 15 per cent compared to a 44 per cent growth at the end of the first half of 2004. As a result, reserves stood at 3.8 months of merchandise imports by July 2005 against 4.2 months a year earlier. Interest rates were reduced in 2004 to an 8-13 per cent band for lending in both Rufiyaa (Rf) and US$ denominated loans from the previous 17-24 per cent band. But even the reduced rate is considered by private sector operators to be high relative to the rate of inflation. In addition, the requirement for collateral of up to 150 – 200 per cent of the value of a loan is a serious deterrent on investment. In March 2004, parliament amended the Land Act of 2003, removing uncertainties regarding the use of land as collateral. Notwithstanding this reform, titles to land are still not generally applicable as collateral except in a few locations such as in the major land reclamation project at Hulhumale’, close to Male’ the capital, where freehold has been introduced on trial basis. Not surprisingly, there is very little investment banking activity. During the <strong>DTIS</strong> exercise, the IMF was assisting the government in reviewing bank policy and in drafting a new bank law. Most of the credit that is provided by the four commercial banks operating in the country is for operating capital. On an annual basis, total credit extended by commercial banks grew by 56 per cent at the end of June 2005 or double the amount of 2004.The tourism sector accounted for the largest share of the total credit portfolio (59 per cent) to reach Rf 2,348 million (US$ 183.4 million) at the end of June 2005. The second largest share is held by the wholesale and retail commerce sector (20 per cent), which grew by 60 per cent on an annualized basis to reach Rf 838 million (US$ 65.5 million) at the end of June 2005. With regard to other major sectors, construction and fisheries each accounted for 6 per cent of the loan portfolio. Credit to the construction sector increased by 29 per cent on an annual basis. Growth in credit to the fisheries sector showed a slow down in growth from 51 per cent at the end of June 2004 to 26 per cent at the end of June 2005. Non-bank financing is carried out through two agents in the Maldives: the Maldives Finance Leasing Company Pvt. Ltd. (MFLC) and the Housing Development Finance Corporation Ltd (HDFC). The former provides financing for removable equipment to all sectors. It had total outstanding leases of Rf131.2 at the end of June 2005. The sectoral distribution of these leases was 59 per cent for tourism sector, 19 per cent fisheries, 16 per cent transport, 2 per cent manufacturing and 4 per cent to non-specified activities. HDFC was established to introduce mortgage financing in the Maldives and had an outstanding loan portfolio of Rf 1.5 billion (US$118.1 million) by the end of the first half of 2005. This represented a 35 percent increase from the previous year. 10
Page 1 and 2: FINAL R E P O R T Volume 1 MALDIVES
Page 3 and 4: GSP HACCP HDFC HDI HIES HH HRD HS I
Page 5 and 6: TRIPS TRTA TSA TTMP UAE UK UNCTAD U
Page 7 and 8: CHAPTER 6: CUSTOMS SERVICES AND TRA
Page 9 and 10: major stakeholders as the basis of
Page 11 and 12: C. ECONOMIC TRENDS Buoyant GDP grow
Page 13 and 14: WTO members (through the Committee
Page 15 and 16: The recommendations cover these iss
Page 17 and 18: Requirements Action no. Action reco
Page 25 and 26: government, and lawmakers are elect
Page 27 and 28: . 4
Page 29 and 30: to Sri Lanka. However, by 2004 the
Page 31: This relatively high proportion of
Page 35 and 36: elow provides data on the public in
Page 37 and 38: According to the estimates prepared
Page 39 and 40: Table 2.8: Damage to agricultural f
Page 41 and 42: II. Imports - Merchandise There has
Page 43 and 44: the relatively high rate of unemplo
Page 45 and 46: A. DESTINATION OF MERCHANDISE EXPOR
Page 47 and 48: Penetration of international market
Page 49 and 50: Overall, the importance of foreign
Page 51 and 52: on goods deemed luxury goods (e.g.
Page 53 and 54: the Japan and USA markets. 11 Fish
Page 55 and 56: The Modalities provide that the res
Page 57 and 58: emoved. However, in order to provid
Page 59 and 60: EBA. Appropriate transition arrange
Page 61 and 62: Several provisions such as Article
Page 63 and 64: CHAPTER 4 POVERTY REDUCTION AND HUM
Page 65 and 66: Table 4.2: Poverty Gap Ratios per R
Page 67 and 68: produced locally and are readily av
Page 69 and 70: commerce, information and communica
Page 71 and 72: Table 4.3: Fishery Sector employmen
Page 73 and 74: This also requires policies that ta
Page 75 and 76: with routine functions of administe
Page 77 and 78: Applying for a license to invest in
Page 79 and 80: E. MINISTRY OF FISHERIES, AGRICULTU
Page 81 and 82: K. PRIVATE SECTOR STAKEHOLDERS Priv
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Overall, it is estimated that the c
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The cash is held and disbursed by t
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difficult to reach given the except
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system of micro-credit intermediari
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F. LAND, RAW MATERIALS AND SUPPLIES
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B. LABOUR MARKET REFORM About 44 pe
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Appendix The mixed record of the Ma
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legislation incorporates the initia
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CHAPTER 6 CUSTOMS SERVICES AND TRAN
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Maldives Port Authority • Respons
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the correct amount of customs duty
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suspense procedures, thus eliminati
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A new domestic terminal at MIA will
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There is need to clarify MAC’s na
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Changes in the role and structure o
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Significant improvements have been
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CHAPTER 7 THE TOURISM SECTOR Chapte
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British market in 2001. In 2004, be
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Similarly, considerable demand was
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for imports of support infrastructu
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government revenues from the supply
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number of trainees that have been t
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established as a quality tourism de
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Maldives' unspoiled marine environm
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The Faculty works very closely with
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TOURISM ACT A key objective of the
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HRD studies and conduct of necessar
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D. ESTABLISH AN ENABLING BUSINESS E
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Main Recommendation No. 5: review a
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Main Recommendation No. 6: Scale-up
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CHAPTER 8 FISHERY SECTOR Chapter Pl
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processing under-performing more th
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per cent - see Table 8.4. The secto
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In the light of these market trends
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documentation, and administration.
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monitoring and evaluation dates fro
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and catering industry chefs demand
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It is expected that the trial fishe
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• Can seaming and retorting; •
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DTIS, Volume I - Enhanced Integrated Framework (EIF)

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