For much of the last three decades, Maldives has been a development success story. Marine resources play a vital role, with tourism and fishing the main drivers of growth. Now, however, a fiscal deficit threatens to derail the government’s development agenda. Read More »
For much of the last three decades, Maldives has been a development success story. The Maldives consists of 1,192 small tropical islands that cross strategic shipping routes, and it has a richly diverse marine environment. With more territorial sea than land, marine resources have played a vital role in shaping the contours of economic development, with nature-based tourism and fishing being the main drivers of economic growth. In the early 1980s, it was one of the world's 20 poorest countries, with a population of 156,000. Today, with a population of more than 300,000, it is a middle-income country with a per capita income of over $6,300.
Following 7.5% growth in 2011, real gross domestic product (GDP) growth was expected to slow to 3.6% in 2012, largely due to the slowdown in the tourism sector — which has a high dependence on the crisis-stricken European segment. The country's fiscal position has been under much stress following the tsunami of 2004 and continues to weaken in the face of unsustainable high public expenditures. Despite the introduction of new tax measures in 2011, revenue efforts have been compromised by far-ranging import duty rate reductions. Deficit financing has been increasingly challenging in the face of limited financing options.
Macroeconomic imbalances threaten to derail the government's development agenda.The policy response to the 2008-09 global financial crisis was partial and has left the country in a vulnerable position to withstand additional shocks. Macroeconomic imbalances, especially the fiscal deficit, and a general level of policy uncertainty are negatively affecting private-sector investment and, thereby, growth prospects. Moreover, preliminary evidence from the latest Household Income and Expenditure Survey (HIES) is showing that rising price levels are in part responsible for rising poverty rates in Male. The World Bank Group's engagement going forward will aim to support the government in reducing macroeconomic imbalances and will ensure that any project or program takes into account the risks associated with the current macroeconomic environment.
Sustaining the country's impressive human development progress will be a key challenge. Despite a dispersed population, the Maldives has achieved notable development progress in recent decades through a combination of private-sector-led tourism development and improving public service provision. Poverty rates have fallen steeply, from 40% in 1997 to 28% in 2004. Similar trends in poverty reduction emerge from the most recent HIES over the period 2003-2010. While ongoing work supported by the Bank will aim to provide more precision on the most recent trends, it is known that about 8% of Maldivians lived on less than $1.25 per day in 2009-10, compared to 9% in 2002-03.
Human development indicators such as infant mortality, maternal mortality, and educational attainment have registered improvements. The country is on track to meet most of the Millennium Development Goals (MDGs) and has already met the MDGs on eradicating extreme poverty and hunger, achieving universal primary education, reducing child mortality, improving maternal health, and combating HIV/AIDS, malaria and other diseases. Maldives remains the best-ranked country in the United Nations Development Programme's Human Development index in South East Asia (2011). It has good health indicators. Life expectancy is 74.8 years. Child mortality under 5 is 11 out of 100,000. The maternal mortality ratio is higher at 37 out of 100,000. Adult literacy stands at 98.4%. Public expenditures on combined health and education stand at 17.86% of GDP.
Maldives has made an eventful political transition recently. A strong and forceful popular demand for improved governance pressured political and institutional reforms beginning in late 2003 and led to the adoption of a "Roadmap for Reform Agenda" in early 2006. A new constitution, ratified in August 2008, paved the way for the country's first ever multi-party presidential elections in October 2008. In the election, Mohammed Nasheed of the Maldives Democratic Party (MDP) defeated former President Gayoom in the second round run-off to become the fourth president of the Maldives. However, following the resignation by Nasheed before completion of his elected term, his vice president was sworn into the presidency in February 2012.
Environmental sustainability is the fundamental development challenge in the country. Indeed, it is so critical to the future development and prosperity of the country that the new Constitution mandates the protection of the environment as a key human right. From an economic growth and development standpoint, the management of the country's natural resources and complex ecosystems will continue to determine the country's comparative advantage and growth prospects into the future. Biodiversity-based sectors contribute more than 70% of national employment, more than half of public revenues, almost the entirety of exports, and close to 80% of GDP. Both government and development partners realize the importance of environmental sustainability and are placing a high priority on work in this regard.
Maldives' vulnerability to climate change calls for innovative solutions on adaptation and mitigation. Maldives is particularly vulnerable to projected adverse consequences of climate change,including sea-level rise, increases in sea surface temperature, ocean acidification,and frequency/intensity of droughts and storms. These impacts in turn pose serious challenges in areas such as water security, biodiversity conservation, and coastal erosion that call for adaptation solutions. On climate change mitigation, Maldives is not a major emitter of greenhouse gas emissions, but it is committed to achieve energy security through a low-carbon development path. The government has declared its intention to fight climate change over the next decade, including a vision to cut carbon emissions to become a carbon-neutral nation.
Cost-effective service delivery is always a challenge in small island nations. Enshrined in the new constitution is the requirement to decentralize public services to the inhabited islands. Without careful planning, ambitious decentralization plans risk lowering the quality of service delivery while raising the costs of provision. This is particularly relevant in the provision of health services, where it will not be possible to provide a consistent level of quality health care on all islands in a fiscally sustainable manner. The provision of education services, particularly secondary and higher education, is also a concern. As a result of rising demand from an expanding pool of young secondary school completers and increasingly sophisticated skills requirements from employers, the government is seeking to expand higher secondary education and higher education. Innovative, cost-effective approaches to equip graduates with the managerial and technical skills necessary to help the country sustain economic growth and be globally competitive will be needed to achieve the government's goals. The Bank is currently involved in providing technical assistance (TA) to support the National Health Insurance Scheme in the Maldives with the counterpart agency being the National Social Protection Agency. The TA aims to support the government to undertake reforms in the health insurance scheme to build in efficient management practices, cost containment mechanisms and institutional capacity, including monitoring and evaluation systems. Financial protection from health expenses and health insurance feature prominently in the government's health master plan and have been a strategic priority for the government.
The political transition of October 2008 has also meant a change in the institutional landscape of the country. The new constitution instituted separation of powers, set up independent institutions, and guaranteed a set of fundamental rights and freedoms to the people for the first time in the history of the Maldives. These new institutions, like an independent Supreme Court, an Auditor General's Office, the new composition and functions of the Parliament, and the decentralization agenda, among many others, are meant to provide the people of Maldives with voice, accountability, and good participatory government. It is proving to be more difficult and costly to effectively deliver these services to all Maldivians than anticipated. Moreover, the uncertainty created with the uneven application of these services is contributing to the macroeconomic imbalances in the country. Contract law and financial sector regulations are two areas where the private sector is particularly concerned, and investment is being held back as a result.
Capacity constraints are affecting the ability of the public sector to provide climate-resilient infrastructure and services. Institutional capacity remains much lower than that of an average upper-middle-income country. The new constitution added additional institutional complexity without a corresponding increase in the human capital needed to make the new institutions effective. Building capacity and providing ongoing training to public servants will be an important element of modernizing the country's public service.
The World Bank Group's strategy in the Maldives supports the government's Strategic Action Plan 2009-2013 (SAP), the national planning document that guides the development processes, works as an instrument of budget allocation, and serves as a mechanism of accountability to the citizens. It lays emphasis on the following pledges:
A nationwide transport system
Affordable living costs
Quality health care for all
Prevention of narcotics abuse and trafficking
Specifically, the Bank is supporting the government in the following areas:
Strengthening the delivery of social assistance and health programs: Financial protection from health expenses and health insurance feature prominently in the government's health master plan, and have been a strategic priority for the government. To support the government in implementing some of the strategies identified in the health master plan, the Bank is providing technical assistance to support the National Health Insurance Scheme in the Maldives. The aim is to help the government build in efficient management practices, cost containment mechanisms, and institutional capacity, including monitoring and evaluation systems.
Improving access to higher education, quality and relevance of education for skills development: The Education Sector Development Project (ESDP) will support the government of Maldives' education development program. The ESDP will support innovative development initiatives at the front-line school level, in terms of quality assurance and teacher professional development. The ESDP will support novel development initiatives at the central level to complement and support the front-line school level activities, via strengthening the leadership and management skills of principals and expansion and diversification of higher secondary and tertiary education. The ESDP would also have a fund under which project and program monitoring and evaluation, as well as policy research for future education development, would be supported.
Demonstrating the economic benefits of improved management of marine resources: The economic fortunes of the Maldives are shaped by its marine assets — tourism and fishing. Stewardship and management of these assets are a critical part of prudent economic management that is required to accelerate and sustain economic growth. A primary objective of this Non-Lending Technical Assistance (NLTA) is to alleviate some of the growth bottlenecks in the marine environment, with a proposed delivery in FY14. The NLTA is expected to achieve enhanced knowledge and capacity of Maldives to maximize and sustain growth from marine resources.
Piloting green and climate-resilient territorial planning on one island. The objective of this exercise is to demonstrate that environmentally sound planning is cost-effective and economically beneficial. The focus would be on an island other than Male where planning has been ad hoc and past decisions cannot be reversed.
Fiscal outcomes, fiscal consolidation and public expenditure management: After the initial success of Public Accounting System (PAS), substantial efforts are now required to implement the remaining agenda for the Integrated Financial Management Information System (IFMIS). The major items that remain requires completing payroll/material management to all Male-based agencies; and then rollout to all atoll/island treasury sub-offices. The payroll (human resource) rollout is critical to the implementation of the Bank-supported pension program. Efforts at buttressing commitment control through a consolidating attention to public investment remain a priority to avoid arrears, especially in the current unpredictable macroeconomic circumstances.
The Bank has approved additional support to the Auditor General's Office through an Institutional Development Fund (IDF) to enhance the scope and quality of audit services. The grant will support implementation of the strategies developed under the previous IDF grant, and to complement the support from other donors in the areas of public financial management and accountability. Bank engagement is expected to be in the areas of audit planning and human resource management, financial statement audits, performance audits and analyzing audit impact.
The CECM project would facilitate the provision of up to 30% of peak demand for energy from renewable energy through grid-connected solar photovoltaic systems which would displace costly and polluting fossil fuels. This would be coupled with an energy conservation program in order to improve the quality and efficiency of end user energy services to about 7,000 people.
The WCCM will benefit its 22,000 inhabitants, enabling local governments to implement a clear strategy for wetland management, drainage management, ecotourism, and community rainwater harvesting. The project will also enter into a partnership with five tourist resorts in the North and South Male Atolls on a pilot basis for coral reef monitoring and demonstrate how information from monitoring can be used to support decision-making to prioritize areas for conservation.
The AASWM will help effectively manage solid waste generated in selected inhabited islands of the Ari Atoll, thereby reducing the environmental risks to marine habitats and greenhouse gas emissions. The project intends to set up five Island Waste Management Centers (IWMCs) operational on a pilot basis and facilitate the process of scaling up an integrated solid waste management system in the inhabited islands and resorts of Ari Atoll.
Fiscal outcomes, fiscal consolidation and public expenditure management: The Bank has assisted with the implementation of Public Accounting System (PAS), an integrated financial management information system (IFMIS) that aims to improve budget management and implementation by strengthening government accounting, timely monitoring of expenditure and revenue, and enhancing cash management.Implementation of Treasury Single Account (TSA) along with PAS has led to closure of more than 1,500 bank accounts of spending units and operation of a single public bank account across public sector agencies, which has substantially improved cash management.
The first independent Auditor General's Office (AGO) in 2008: With the assistance of an Institutional Development Fund (IDF) grant, in 2008, the Audit Office in Maldives was transformed. An Audit Act was legislated and an independent auditor general (professional accountant) was appointed for the first time. The AGO started out with risk-based strategic audits across central government audit entities, some of which had never been audited before. Several high-profile audits were conducted and disseminated (through press conferences) which set a platform for initiating debate on governance issues across the government. The audit reports are now posted on the AGO's website as soon as they are tabled in the People's Majlis. In addition, a major achievement has been the production of the first annual statement of the execution of the budget for 2009, produced in 2010. Previously, financial statements of the government were neither prepared nor published.
Procurement reform: The Bank supported new procurement regulations and a set of standard bidding documents which is a major improvement over the prevailing systems.
Access to finance: World Bank Group support in the financial area centered on putting in place a credit registry located at the Maldives Monetary Authority (MMA), the modernization of the banking payment system, and the establishment of mobile banking to ease the constraints that a difficult geography places on access to credit.
Investment policy and tourism: According to the Doing Business Database, the quality of the business environment in Maldives was 95th in the world (out of 185 economies) in FY2013, worsened from 79 in FY2012. The difficult macroeconomic environment could well be an emergent hindrance, although the main line of business, tourism, has rebounded.
Estimating Maldives tourism response to price changes: In Maldives, where tourism is the lifeblood of the economy, a proper understanding of the pricing structure of the industry and how it features vis-a-vis its competition is an important determination. A proper assessment of the pricing structures and responsiveness of demand to price changes would not only be useful for the resort operators but also for the government in the formulation of tax policy. The bank's Tourism Sector TA — Phase II (carried out over FY12) provided an insight into these issues.
Devising a forecasting methodology for tourist earnings: Having a robust platform for forecasting earnings from tourism is of vital importance to a multitude of stakeholders in the country, particularly for tourism policy and planning, fiscal policy, and the conduct of monetary and exchange rate policy. Through detailed deliberations carried out with the authorities and other stakeholders, the Bank team during FY11-12 developed models for tourism sector arrivals and earnings forecasts.
A comprehensive and modern pension system: A Pension Law, effective in mid-2009, set the basis for the new pension system and led to the creation of the Maldives Pension Administration Office (MPAO).The new pension system combines two pillars. The first pillar provides to all Maldivians over age 65 a basic pension (2,000 rufiyaa) that is subject to a partial offset if the individual has significant pension income based on employment. All eligible Maldivians are already receiving the mandatory payments. The second pillar is a defined-contribution plan that covers public and private sectors. Around 70,000 eligible individuals have registered and are contributing. The defined-contribution plan absorbed the existing civil service pension scheme previously in existence. Civil servants received compensation for their rights in the old system in the form of a corresponding transfer to their accounts in the new system. International Development Association (IDA) support to achieve these results was provided through the Pension and Social Protection Administration Project, which has received additional financing (FY11) to continue supporting the initiative, including advice on pension regulation and investments.
Developing a targeted social assistance system: During the crisis, the budget protected social welfare contributions, pensions, and spending on relief for tsunami victims. In addition, the government replaced the subsidy for electricity that benefited the higher-income strata of the Male population with a cost-based pricing scheme combined with targeted relief for the poor. The need to resort to the use of various instruments evidenced the lack of a well-targeted system of social assistance, and the government requested Bank support to develop a single social assistance scheme that brings all subsidies under a single and well-targeted system. The government has issued a unified safety net strategy paper to cabinet, whose implementation the Bank is supporting through the extension to the Pension and Social Protection Administration Project.
Improving access to and 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 focused on removing the main constraints, which included a lack of well-trained teachers, and costly access given the dispersion of the population across the islands. The bulk of the Bank support came through the Integrated Human Development Project (IHDP) and Post Tsunami Reconstruction projects, both of which have been completed. In addition, analytical work contributed to dialogue about the options to strengthening up tertiary education in the country.
Improving teacher development, school leadership, teaching and learning materials, and facilities: The number of trained teachers increased from 3,400 in 2009 to around 6,000 in 2011, with 1,000 of 7,000 teachers countrywide remaining untrained. However, 70 percent of trained teachers have only advanced certificate training (O levels plus a one-year certificate) and the country has yet to find an effective system of training. Even though the quality of primary and secondary education improved, learning levels need to be strengthened.
Supporting health institutional reform: TheIHDP supported targeted health initiatives with mixed results due in part to the restructuring of the Ministry of Health and an adverse human resource situation. The project component on health put in place innovative initiatives towards rationalizing care for non-communicable diseases (NCDs) by establishing standard treatment protocols and operating procedures and improving access to health services, including through use of telemedicine and better monitoring of health outcomes. The NCD standard treatment protocols have been incorporated in the new health information system developed by the Ministry of Health and rolled out countrywide. Online and real-time data entry by doctors during consultation is a highlight of the new system. Although the telemedicine facilities and equipment have been in place in four centers for a few months, their use has been sporadic, as logistical hurdles need to be ironed out. But government commitment through a massive training program to man 39 telemedicine facilities currently in place (35 financed by other donors) and WHO participation augur well for the sustainability of the initiative.
Addressing threats to the environment: Awareness has grown of the growing pressures on the natural resource base of Maldives. Resorts are generally well-managed, but solid waste and raw sewage in other inhabited islands end up in relatively stagnant lagoons. Waste disposal is likely to become even more challenging in the future as population densities rise and prosperity grows. Potable water is growing increasingly scarce in the islands. Other threats to reef ecology include intrusive and poorly planned construction activities that damage or weaken valuable corals, damage caused by divers and dive boat anchors, and the illegal collection of marine flora. The World Bank Group is supporting improvements in institutional capacity for environment management, development of solid waste management systems, and preparing for the impact of climate change.
Improving human and institutional capacity for environmental management: The Maldives Environmental Management Project (MEMP) has increased the technical and managerial capacity of the government, working with the Ministry of Environment and associatedagencies like theEnvironmental Protection Agency and the Marine Research Center. The project has trained high-level technical staff abroad, and a university-level environmental management program has been initiated that assures basic training. The project has improved capacities of the Marine Research Centre in developing a knowledge base and monitoring systems as well as involving communities in monitoring and awareness creation.
Improving waste management on Male: The public-private partnership mobilized $50 million in private investment toward improving waste collection, transportation and disposal; reducing marine and air pollution; generating power; processing 70% of the country's solid waste; and reducing greenhouse gas emissions. The International Finance Corporation (IFC) helped the government develop an integrated waste management and implementation strategy for the country, working closely with the Bank and a broad range of development partners. The total cost of the project was $1 million, including donor contributions.
Supporting waste management services for the inhabited islands in the North Province: MEMP is financing a regional solid waste management program in targeted northern islands. More than 80% of the target professional staff (within the government) are enrolled or have completed foreign training or an in-country degree/diploma program under the capacity building component of the project. The Marine Research Centre (MRC) has developed monitoring protocols and a knowledge base for terrestrial and coastal monitoring.
Developing a regulatory framework for the Maldives energy sector: The activity provided support to the government of Maldives and Maldives Energy Authority (MEA) in the design of a robust regulatory regime, corporate governance, and capacity building of the regulator. The activity supported the drafting of critical regulations to guide MEA in ensuring adequate, reliable, and affordable power is delivered to customers as well as provide assurance to companies and other private investors on future energy sector developments in the country. In addition, a skills-gap analysis and other capacity building activities were undertaken to support MEA's institutional development and strengthen its ability to effectively exercise its regulatory mandate. The activity was supported by the Energy Sector Management Assistance Program, a global technical assistance partnership administered by the World Bank and sponsored by bilateral donors, as well as the Asia Sustainable and Alternative Energy program.
Financing renewable energy investments: The Bank and other multilateral development banks are working to enable Maldives (as one of selected six islands) to receive up to $180 million in funding for renewable energy.The priority is to support renewable energy technologies that have gone beyond pilot phase, that are economically viable, and that have developmental impact. While the funds are intended to support renewable energy technologies, energy efficiency investments and inter-island connectivity, which will contribute to developing renewable energy, may also be eligible.