Maldives has a population of around 436,330 people dispersed across 188 islands. The country has been a development success; enjoying robust growth coupled with considerable development of the country’s infrastructure and connectivity. It has also provided high quality and affordable public services for its people, resulting in impressive health and education indicators with a literacy rate approaching 100%, and life expectancy of over 77 years. The country’s GDP per capita reached $11,890 in 2018, compared to $200 in 1978.
Maldives’ current development challenges stem from risks from climate change, disaster resilience and environmental sustainability with rising levels of solid waste. 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.
The additional challenge of the country’s geography leads to a dispersed population across many small islands, which makes service delivery difficult and can limit opportunities for job creation and economic diversification. Compounded with inclusion issues, this has caused relatively elevated levels of youth unemployment at 15.3 percent and low rates of women participating in the workforce.
To respond to these challenges, the new government has reversed centralization policies of the previous government, promising to empower local councils by allocating a portion of the annual state budget and to develop at least 5 regional economic hubs across the archipelago. The government has also embarked on a series of reforms to restore democratic institutions and the freedom of the press, re-establish the justice system, and protect fundamental human rights. Also high on the new government’s agenda is climate change.
Real GDP grew by 6.7 percent in 2018, on the back of strong performance in tourism, construction, and trade. Preliminary estimates indicate that growth slowed down to 3.1 percent y-o-y in Q1 2019, compared to 13.1 percent in Q1 2018. Tourism contributed approximately 2.4 percentage points, followed by transportation and communication (0.7 percentage points) and financial services (0.4 percentage points). Construction declined by 23.1 percent. The opening of new resorts and infrastructure (expansion of the international airport and development of a connecting bridge) and housing projects have fueled the construction sector over the last 5 years, and the decline in construction reflects the completion of some large infrastructure projects. Tourist arrivals and bed nights increased by 18.7 percent and 14.7 percent y-o-y in H1 2019 respectively, supported by these investments and the expansion in the guest houses’ sector.
The overall Consumer Price Index (CPI) remained unchanged in H1 2019. This was mainly driven by policy changes that led to a decrease in prices of staple food items and electricity. Price declines were more pronounced in the atolls, with the CPI falling on average by 1 percent in H1 2019, whereas the CPI for Male’ increased by 1.2 percent. Two major contributors to the decline in the atolls were food and non-alcoholic beverages and housing and utilities.
The current account deficit is estimated to have widened to 25.3 percent of GDP in 2018, from 21.7 percent in 2017. The trade deficit increased with the rapid expansion of goods imports (24.0 percent y-o-y) linked to imports of building materials. Services exports performed strongly (11.4 percent y-o-y growth) thanks to strong tourism receipts. The current account deficit was financed mainly through debt flows and direct investment. Gross official reserves decreased to USD 677.4 million in June 2019 (2.9 months of imports), from USD 726.4 million a year before. Usable reserves stood at USD 276 million.
Preliminary estimates suggest that the fiscal deficit widened to 4.7 percent of GDP in 2018, from 3 percent in 2017. Public debt is estimated to have reached 59 percent of GDP in 2018. According to the World Bank-IMF debt sustainability analysis, Maldives remains at high risk of debt distress. The overall deficit narrowed y-o-y in H1 2019. Revenue and grants increased by 5.3 percent y-o-y in H1 2019, with tax revenues growing by 6.3 percent y-o-y, non-tax revenues falling by 8.3 percent y-o-y (driven partly by a decline in SOE dividends) and grants more than doubling. Total spending contracted by 8 percent y-o-y in H1 2019, largely due to under-execution of the public sector investment program (-61.2 percent y-o-y). Recurrent expenditures increased by 8.8 percent y-o-y.
The poverty headcount rate is low, at 8.2 percent using the national poverty line and 6.6 percent using the international poverty line for upper middle-income countries of USD 5.50 a day. Large disparities in welfare and other socio-economic outcomes persist, with over 90 percent of poor Maldivians living in atolls.
Labor market challenges prevail for youth and women. Over a quarter of women are either unemployed or not looking for a job. Youth unemployment is high at 15.3 percent. The government is the top employer among Maldivians. Tourism and construction, the main drivers of growth, rely mostly on foreign labor and male employment. About two thirds of Maldivians are employed in jobs not related to tourism, suggesting a misalignment between the drivers of growth and aspirations of jobseekers.
Real GDP growth is expected to slow down to 5.2 percent in 2019, with the completion of large infrastructure projects and the slow transition to new ones. Tourism is expected to continue to be the main driver of growth, with recent infrastructure investment helping relieve supply bottlenecks in the sector. Growth is expected to rebound to 5.5 percent in 2020 as these new projects pick up pace. The current account deficit is projected to narrow over the medium-term, as investment-related imports gradually subside. The overall fiscal deficit is projected to increase initially before declining over the forecast period. Public debt is projected to rise over the forecast period and peak soon after.
One key challenge for the Maldives is to strike an appropriate balance between making large investments needed to close existing infrastructure gaps – potentially allowing to boost tourism, increase resilience to climate change and ease constraints in service delivery – and managing the rapid accumulation of public debt. The overall level of indebtedness is high and reserves coverage is low. The large volume of external loans and guarantees on non-concessional terms to finance infrastructure projects represents significant risks.
Large disparities in welfare and other socio-economic outcomes across regions are a cause for concern. Poverty rates vary widely across geographic areas, and Maldivians in the southern atolls are particularly affected by poverty, with almost 1 in 5 being poor. Public sector jobs account for about 40 percent of total employment. Public-private wage differentials and other benefits associated with public employment dis-incentivize young jobseekers from taking up private sector opportunities. The projected expansion in the young labor force means that private sector alternatives will be required.
Key priority areas for reform include: i) containing recurrent spending and improving the efficiency of social spending; ii) renewing efforts in economic and social inclusion of all regions across the country; ii) fostering private sector job creation; iii) reducing vulnerability by enhancing disaster risk preparedness; and iv) Public Financial Management reforms and other measures to improve budget credibility.
Last Updated: Oct 16, 2019