Overview

  • Maldives, whose population of about 400,000 people is dispersed over 188 islands vulnerable to climate change, has an economy narrowly based on tourism and fisheries. It has a complex political situation, weak government institutions, a high fiscal deficit and public debt, and inclusion issues.

    The Government has started several infrastructure projects to enable people to move from smaller islands to Greater Malé, and construction has overtaken tourism as the main driver of growth. To allow for these investments, the Government is reducing current expenditure. In the medium term, with the emphasis on construction, large current account deficits will be financed by investment and infrastructure loans.

    Based on the Country Partnership Framework (FY2016- 2019), World Bank Group support focuses on enhancing employment and economic opportunities of Maldivians, strengthening natural resource management and climate resilience, and improving the efficacy of public financial management and policy making.

    Since the adoption of a new Constitution in 2008, the political context has been dynamic. There is growing political instability ahead of Presidential and Parliamentary elections due in 2018 and 2019 respectively. Government institutions remain relatively weak.

    Thanks to returns from tourism, Maldives made strong gains in human development and is now an upper middle-income country. Between 1990 and 2015, GNI per capita increased by over 200 percent, and life expectancy at birth increased by 15.6 years. Headcount poverty declined from 23 percent in 2003 to 16 percent in 2010 based on the national poverty line. Inclusion issues persist, with high youth unemployment and low women’s workforce participation.

    Environmental sustainability, climate change and disaster resilience are also significant risks. Almost half of all settlements and over two thirds of critical infrastructure are located within 100 meters of the shoreline and are under immediate threat from rising sea levels.

    Recent economic developments

    Construction has been the main driver of growth, growing at an average of 19 percent in 2015-17.After peaking at 10.1 percent growth in 2013, the tourism sector slowed down between 2014 and 2016, due to a slowdown in tourist arrivals especially from China and Russia. Tourism bed night growth started to recover in 2016 and reached 10.8 percent in 2017. Bank staff estimates that real GDP growth in 2017 remained around 6.2 percent as in 2016, below the government’s projection of 6.9 percent.

    CPI inflation increased from below 0.5-1 percent in 2015 and 2016 to 2.8 percent in 2017, reflecting the partial removal of food subsidies and the pass-through of rising electricity prices. It is expected that fast price rises of food and beverages (5.6 percent in 2017) and of rents (4.6 percent) has hit Maldivian households particularly hard. Inflation was higher in the atolls, with food prices rising even more significantly, which may have affected poor households even further, since the uptake of the cash transfer to compensate for the partial removal of the food subsidies was limited so far.

    The cur­rent account deficit widened sharply from 3.2 percent in 2014 to an estimated 21.4 percent of GDP in 2017, driven by the large increase in investment-related imports, with FDI inflows reflecting investment into opening 13 resorts in 2017, and project loan disbursements into large infrastructure projects. Thanks to a USD 250 million sovereign bond issuance, gross official reserves recovered from US$467 million at end-2016 to US$586 million at end-2017, although usable reserves (after netting out short-term foreign currency liabilities to domestic banks) are only USD 206 million, equivalent to 1.1 months of goods imports.

    The government has made progress in rebalancing fiscal expenditure to accommodate increase capital expenditure. The fiscal balance shifted from a 10.6 percent of GDP deficit in 2016 to a 2.5 percent of GDP deficit in 2017, driven mainly by a reduction in public investment from 10.9 percent of GDP in 2016 to 8.2 percent of GDP 2017, and a reduction in spending on food subsidies and on the Aasandha health care system. Excluding the Public Sector Investment Program, the underlying  current fiscal balance went from a deficit of 2.0 percent of GDP in 2015 to an estimated surplus of 5.7 percent of GDP in 2017, reflecting revenue increases and current expenditure reforms.

    Public debt excluding guarantees is estimated to have reached 61.9 percent of GDP, an increase from 59.7 percent of GDP in 2016, driven by external projected-related borrowing and the sovereign bond, while domestic T bills were redeemed.

    Outlook

    Under the baseline, growth is expected to be driven by construction and by tourism arrivals, facilitated by the opening of new resorts in 2017. The current account is projected to narrow gradually to 19.3 percent of GDP by 2020 as new capital investment projects are gradually tapering off. Reserve coverage is projected to remain weak. Despite the one-off impact of promised civil service wage increases, the fiscal deficit is projected to narrow gradually as public investment projects are tapering off, and public debt is projected to rise to 2020 and peak soon after. The recent World Bank-IMF Debt Sustainability Analysis assessed Maldives’ risk of external debt distress as high, due a widening current account deficit, low international reserves, pipeline of guarantees, and rapid debt buildup.

    However, the immediate outlook is highly uncertain given the probable impact of the February-March state of emergency on the tourism and non-tourism sector, which may not be visible in the data immediately. Widespread travel advisories may lead to cancellations affecting the tourism sector. If a significant negative shock to tourism bed nights materializes, it may lead to a reduction in fiscal revenue, tourism exports and activity in the tourism and ancillary sectors. This may require a fiscal adjustment to rebalance the fiscal accounts and the balance of payments.

    A reduction in tourism may also likely have a negative impact on employment, as Maldivians face strong competition from a relatively cheaper foreign workforce for low-skilled jobs and a relatively better educated foreign workforce for high-skilled jobs. The Maldives face other risks that may impact macroeconomic stability. Other risks stem from exogenous factors such as a downturn in global economy, concerns about global terrorism, health pandemic, or natural disasters that may also impact tourism. Another is a risk of increase in global commodity prices (for example, fuel prices) that can impact the economy given its heavy reliance on imports. There is also a concern about fiscal slippages, especially due to delays in controlling current expenditure and the realization of contingent liabilities through guarantees.

    Challenges  

    The immediate challenge is dealing with macro-fiscal impact of the state of emergency and travel advisories. Structural challenges include improving medium-term fiscal sustainability by addressing key expenditure drivers in the budget. This includes increasing the efficiency of spending on Aasandha, and replacing the electricity subsidies by a targeted cash transfer to help poor families pay electricity bills. It is also important to improve budget credibility by making ministry and agency budget ceilings binding.

    The recent public-sector employment freeze was positive from a fiscal perspective. However, it is may to put pressure on the absorption capacity of the Maldivian labor market, since public sector employment is the main sector of employment of 25 to 64-year-old Maldivians, and the working age population is increasing. Therefore, it is critical to foster private sector job creation, since the main drivers of growth, construction and resort tourism, are highly reliant on foreign labor.

    In this context, the consolidation of population from vulnerable islands and atolls to larger islands in Greater Malé, while also reducing pressure on Malé is a country priority. If successful, it may eventually allow for new forms of economic activity in line with the aspirations of Maldivian youth and provide employment, improve the quality of public services such as health and education, and make the country more resilient to climate change.

  • The World Bank Group’s Country Partnership Framework (FY2016-2019), endorsed by the institution’s Board of Directors in May 2016, aims to support Maldives to achieve more inclusive and sustainable growth, making better use of the country’s assets – human capital, natural assets, and financial resources. It focuses on enhancing employment and economic opportunities for Maldivians, strengthening natural resource management and climate resilience, and improving the efficacy of public financial management and policy making, Youth, gender, and governance are considered critical crosscutting development challenges to be addressed by the World Bank Group. These areas take into account the development priorities identified in the Systematic Country Diagnosis of September 2015.

    Under IDA17 (FY15-17), Maldives received $33.2 million. During IDA18 (FY18-20), Maldives may access approximately $73 million in concessional financing. 

    World Bank Program

    World Bank financing to Maldives has traditionally been limited. As of September 2017, the portfolio comprised four IDA operations with a total net commitment value of $52 million. The operations support solid waste management, education, fisheries and public financial management. The trust fund portfolio has been used to support clean environment and renewable energy. The World Bank is preparing a package of operations to strengthen Maldives’ fiscal, institutional, and physical resilience. In view of the government’s interest in strengthening macroeconomic stability, the World Bank is considering a development policy financing to support reforms. In addition, given Maldives’ exposure to the tourism sector, which is vulnerable to natural disasters and  health epidemics, it is discussing the potential of a Catastrophe Deferred Drawdown Option (Cat DDO), a form of contingent financing offered by IBRD to help countries take a proactive stand towards reducing exposure to catastrophic risk. Furthermore, the World Bank is considering support for sustained urbanization and expanding employment opportunities. Given Maldives’ financing needs and debt situation, the World Bank is exploring ways to leverage IDA resources to mobilize private sector capital and financing from other international development institutions. 

    A significant body of analytical work and non-lending technical assistance has underpinned the World Bank program over the past few years, including human capital development, gender, youth, water security, tourism, health insurance, and poverty.

    World Bank Active Portfolio

    IDA finances four investment operations in the Maldives, with a total net commitment of USD52 million: Enhancing Education Development Project (USD10 million), the PFM Systems Strengthening Project (USD6.5 million), the Maldives Clean Environment Project (USD18 million), and the Maldives Regional Fisheries Project (USD17.5 million).  In addition, there are several trust fund projects.  The two largest are the Accelerating Sustainable Private Investments in Renewable Energy - ASPIRE (USD16 million IDA guarantee and USD11.6 million SCF-SREP grant) and the Climate Change Adaptation Project (USD4.2 million financed by the Maldives Climate Change Trust Fund). 

    Advisory services and analytic work (ASAs) support include resource mapping, macro monitoring and analysis, Financial Sector Assessment Program, non-bank mobile money, youth and gender, health financing sustainability, social protection support and poverty reduction. These ASAs seek to inform policy reform and sector dialogue, and support institutional capacity building.  Limited institutional capacity and over-stretched government counterpart resources have contributed to ASA delays. 


    WORLD BANK – IFC COLLABORATION 

    Maldives became a member of the International Finance Corporation (IFC) in 1983. Since then, IFC has invested $157 million, including $8.5 million mobilized from other institutions. IFC’s committed and outstanding investment portfolio stood at $2 million at the end of June 2017, supporting housing finance. IFC’s operations in the Maldives are overseen by its Colombo office in Sri Lanka.

    IFC’s strategy in the Maldives focuses on addressing the development gaps in the areas of inclusion, infrastructure productivity, and sustainability. To promote inclusion, IFC is targeting financial intermediaries that can provide access to finance to MSMEs and women. To support development of infrastructure and increase productivity, IFC is focusing on electricity services, tourism infrastructure, maritime transport, and urban development and related infrastructure. To enhance sustainability, IFC will promote renewable, resource efficiency solutions and climate change adaptation and mitigation measures.

    In addition to housing finance, IFC has invested in several businesses, including a telecom operator, a leading hotel operator in Maldives, a finance leasing company and a Maldivian sponsor’s South-South investment in Seychelles. IFC’s advisory projects have included support for the Maldives Monetary Authority on establishing a credit bureau, and drafting the Non-Banking Financial Institutions Act. IFC also has completed projects promoting green growth, such as advising on resort island energy efficiency and on solid waste management for Malé.

    MIGA

    The Multilateral Investment Guarantee Agency (MIGA) supports the World Bank Group strategy for the Maldives and stands ready to facilitate foreign investment into the country. While the Agency does not have current exposure in the Maldives, MIGA remains engaged and will consider projects across sectors as appropriate opportunities emerge.

  • Strengthening Public Financial Management: The PFM project has assisted and enabled the government to follow a medium- term approach to debt management as a result of strengthening activities of the debt management and reporting systems, process and capacity. A comprehensive legal review further helped to amend the key PFM laws to provide a sound legal framework for PFM. Capacity of the internal auditors have been strengthened to closely monitor and support the implementation of the new processes, in addition to improvement in quality of financial reporting and transparency. Furthermore, the public accounting system (PAS) material management module is now live across the key Government agencies and being used to control commitments.

    Establishment of mariculture in targeted atolls and improvement of fisheries management at national and regional levels: The Bank’s assistance to augment, sustain and conserve the marine fishery will benefit an overall 9,500 fisher households currently employed in the fishing sector (vessel owners, fishing crew, and workers in the value chain of tuna fishing) by reversing the trend of declining and threatened fishery resources. The main beneficiaries of new mariculture and improved conservation regime of reef fishery will be communities living in the remote atolls of Maldives, including about 1,800 persons who will receive direct benefits. Ministry of Fisheries and Agriculture and its affiliated agencies such as the Marine Research Centre will be directly benefitting from the improvement of capacities for fisheries sector management. Private sector stakeholders in the South-West Indian Ocean Region, including enterprises engaged in large-scale fishing, or aquaculture, or providing services to the sector, fishing fleets, investors in fisheries and mariculture and the tuna processing enterprises, and foreign investors in the tourist resorts within Maldives are important regional players and will benefit indirectly from the project.

    Increased access to energy through renewable energy sources: The ASPIRE Project aims to add 20 MW of photovoltaic (PV) based renewable energy generation to the islands’ energy mix, using US$11.684 million of SREP funds together with US$16 million IDA Guarantees to attract private investments of around US$40 million. The main objective of ASPIRE is to increase renewable energy generation in the Maldives, whose residents already have full access to electricity. While ASPIRE will not increase the number of households connected to the Maldivian electricity networks, it will contribute to improving access by enhancing the reliability and power quality of these systems. Solar PV generation will help in meeting the daytime loads and allow consumers to access reliable and quality electricity. In outer islands and new settlements such as Hulhumale’, where demand is rapidly increasing without much increase in supply, ASPIRE’s effect on improving access to reliable electricity will be even more pronounced.

    Building capacity and improving quality of education: Bank assistance focused on easing constraints to providing equitable access to all levels of education from preschool to higher secondary education (10 years of basic education). The program has supported long-term training in school-based management through a Bachelor of Degree in Education Leadership and Management and 33 participants have completed the course. The program also contributed to increased number of trained principals across the country in addition to building capacity of parents, local community members, teachers and Teacher Resource Centre coordinators across 212 schools in 20 atolls. Moreover, a total of 34,052 beneficiaries, including teachers, students, senior management team members and principals have received training under the School-Based Professional Development (SBPD) component of the project. This has exceeded the initial target of schools in 80% of atolls implementing SPBD.

    Climate change adaptation and mitigation: The key project beneficiaries are the local communities in the Addu and Gnaviyani atolls, selected private resorts, and island/atoll councils. Through interventions in wetland management and solid waste management in the Addu and Gnaviyani atolls, the project will benefit more than 4,000 households through enhanced tourism, livelihood opportunities, and ecosystem conservation. The coral reef monitoring intervention will directly benefit at least 10 private tourism operators. Through interventions in capacity building for mainstreaming of climate adaptation in island level planning, the project will benefit all the 20 atoll councils and 66 island councils in the country and the communities serviced by these councils.

    Supporting solid waste management in the inhabited islands of Zones 4 & 5: In line with central and local government priorities, the project facilitates the achievement of key Maldives development priorities, which explicitly require the improvement of SWM and development of a circular economy featuring waste reduction, reuse, and recycling. An investment of $17.5 million will aim to provide each inhabited island with an integrated waste management system that meets the requirements of the population and quantity and type of waste generated in the selected zones. The project will also contribute to halt damage to the local environment and more importantly to the coral reefs and open sea; from indiscriminate waste disposal, especially of plastic waste. Furthermore, the project will support to combat important challenges: preserving the Maldives as an unspoiled destination (which attracts the high-end tourism that has powered the country’s impressive growth), increasing resilience to rising sea levels, and protecting the health of people and the ocean.

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LENDING

Maldives : Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments


PHOTO GALLERY

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Additional Resources

Country Office Contacts

Male
5th Floor, H. Aage. Bank of Ceylon Building, Boduthakurfaanu Magu, Male 20182, Republic of Maldives,+960 334 3208
infomaldives@worldbank.org