At a Glance
Maldives, a country of around 550,000 people dispersed across 185 islands, is an upper-middle-income country with a robust growth trajectory. The economy has maintained its strong growth momentum in 2023 due to rising tourist arrivals, and, with rising tourist arrivals, is expected to maintain a strong growth and poverty reduction trajectory. Overall, sustained growth performance in the last decade has significantly reduced poverty, and Maldives performs well on poverty outcomes compared to its regional, income, and small island peers. The economy is heavily dependent on tourism which has been the main driver of economic growth in Maldives and the dependence on tourism makes the country highly vulnerable to macroeconomic and external shocks. Commodity price volatility is exerting pressure on external and fiscal balances, through costlier imports and higher subsidies. In addition, existing high debt stock of the public sector, elevated levels of spending the government’s aim to undertake sizeable infrastructure investments through external non-concessional borrowing, and the presence of blanket subsidies for major consumption items have led Maldives to be exposed to elevated fiscal vulnerabilities. Public debt is expected to remain high, warranting continued efforts to reduce fiscal deficits, including comprehensive subsidy and public investment management reforms while mitigating impacts on the vulnerable.
Key Conditions and Challenges
Tourism, which accounts for almost one-third of the economy, has maintained its robust growth performance in the first half of 2023. Despite the Russian invasion of Ukraine, arrivals from Russia remain strong. An earlier-than-expected reopening of the Chinese market in January has compensated for fewer tourists from India and Gulf countries, while arrivals from Europe remained high. This supported employment opportunities, which are particularly important for the poorest. However, heavy reliance on tourism and limited sectoral diversification remain key structural challenges as Maldives is highly vulnerable to macroeconomic shocks.
As an economy that is heavily import-dependent, Maldives is facing significant external and inflationary pressures due to the sharp rise in global commodity prices. This is negatively affecting public finances given the government’s blanket provision of subsidies to help contain domestic price increases. This is further compounded by continued high capital expenditure and public debt, an increasing wage bill, and a costly health insurance scheme. Targeted austerity measures could mitigate risks to vulnerable households, particularly in the atolls, where 93 percent of the poor live, as past welfare gains have been driven by a strong redistributive model. The latter includes universal access to basic health and education services, pensions, health insurance, and income support programs – which contribute to a larger share of income for poorer households. Additional challenges to welfare include differential access to economic opportunities in Male relative to atolls – mirrored by a higher Gini index over the whole population (29.3) than within Male (25.2), higher vulnerability among the self-employed, and overcrowding affecting poorer urban households.
To promote development, Maldives has scaled up infrastructure investments since 2016. Although these investments have contributed towards growth and better living standards, financing of these large investments through non-concessional sources has led to growing debt vulnerabilities. Despite an increased cost of external borrowing, the government continued to use foreign financing for infrastructure investments in 2023, while also relying on domestic borrowing to support recurrent spending. This has led to a concerning rise in the financial sector exposure to the sovereign. The debt stock and debt servicing risks are expected to remain high in the medium term.
Recent Economic Developments
The economic growth, in real terms, was 13.9 percent (y-o-y) in 2022, followed by a 5.5 percent (y-o-y) in Q12023. The robust growth performance has led to a higher income than the pre-pandemic level, translating into projected poverty rates below 2019 levels Tourist arrivals reached 1.2 million by August 2023 and are projected at 1.9 million in 2023 – 13.8 percent higher than in 2022. However, along with the Goods and Services Tax (GST) increase in January 2023, higher global commodity prices led to rising domestic inflation, which reached an average of 3.5 percent (y-o-y) in H12023 – higher than the historical average of 0.5 percent. Price increases were particularly acute in the food -climbing to 8.0 percent in March before falling to 4.5 percent in June-, transport, health, and restaurant services sectors.
Despite growth in tourism earnings, the current account deficit doubled to 16.5 percent of GDP in 2022, due to far costlier oil imports and capital imports for large investment projects. High import costs and external debt repayments put significant pressure on gross reserves, which fell from US$790 million in January to US$594.1 million in July (from 2.8 to 2.0 months of imports).
Public finances remain under pressure. Given subsidy reforms were not implemented and capital spending cuts have not happened – both of which were proposed in the 2023 Budget – spending rose in 2023. However, this was somewhat offset by higher tax collections owing to the robust growth and increased tourism GST. Consequently, the 12-month rolling fiscal deficit declined in May to an estimated level of around 11 percent of GDP compared to 14.2 percent in 2022. MMA’s asset exposure to government further rose to 52 percent of its total financial assets at mid-2023, from 47.3 percent in 2022.
Outlook, Risks, and Challenges
The economy is projected to grow by 5.6 percent on average in the medium-term, supported by robust tourism performance. The return of Chinese tourists, together with increasing arrivals from new and existing markets are expected to lead to sustained growth. Tourism will further be supported by the expansion of Velana International Airport (planned to be completed by 2025), a diversified tourism sector, and investments in new resorts.
Despite the recent increase in GST collections, in the absence of fiscal reforms, any meaningful improvement in the fiscal balance will be offset by continued high levels of spending. Public debt will, therefore, remain high. A larger fiscal adjustment is required to build external buffers and reduce fiscal vulnerabilities, including reducing spending on untargeted subsidies and bulk procurement for pharmaceutical purchases, and more effective public investment management. Better targeted transfers – including redirecting inefficiently allocated resources– would help mitigate the negative impacts of subsidy reforms on the poor.
High levels of consumption, elevated global commodity prices, and the GST rate hike are projected to keep inflation above the historical average in the medium term. Without targeted support, higher prices passed onto households could worsen the poverty outlook. Therefore, future subsidy reforms need to be carefully designed to minimize welfare risks.
The current account deficit is expected to remain elevated. High commodity prices and necessary capital imports driven by the government’s ambition to complete ongoing and planned infrastructure projects and commence projects in outer Atolls are expected to lead to a high current account deficit over the medium-term. Volatile oil prices and rising external financing needs – including debt servicing – are expected to sustain pressure on official reserves.
Downside risks persist. Tourism could be adversely impacted by an extended global slowdown. Any further widening of current account deficit could put additional pressure on reserves. Government faces external debt servicing payments of US$570 million on average over the next two years amidst tighter global financing conditions. On the upside, the global tourism sector outlook is robust, and with strong economic growth, poverty rates are expected to decline.
Reforms are needed to improve the fiscal outlook and ensure debt sustainability. More effective revenue mobilization measures, coupled with reforms to Aasandha national health insurance scheme and existing subsidy programs, and better investment management are critical to bring down the high level of public debt, replenish fiscal buffers against future shocks, and lower the cost of growth-enhancing investments, especially with large debt service obligations coming due in 2026.
Last Updated: Oct 04, 2023
