Maldives has a population of around 540,000 people dispersed across 185 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 percent, and life expectancy of over 78 years. More than 30 percent of the population live in the capital city Male’.
Tourism is the main driver of economic growth, fiscal revenues, and foreign exchange earnings in Maldives. After the COVID-19 outbreak in March 2020, Maldives closed its borders for three months, which severely hit the sector. Only 555,494 tourists visited in 2020, a third of the 2019 level. Following a nationwide vaccination campaign that commenced in February 2021, over two thirds of the population have now been fully vaccinated. This supported a stronger recovery in tourism in the second half of 2021, with total arrivals reaching 1.3 million by the end of the year. However, a high dependence on tourism and limited sectoral diversification remains a key structural challenge as the country is highly vulnerable to external and macroeconomic shocks. Disruptions stemming from the pandemic and shocks due to global conflict highlight the risks associated with reliance on a single economic sector.
Additional long-standing structural weaknesses also remain. To promote faster growth, the government has rapidly scaled up infrastructure investments since 2016. This has helped boost construction activity, productivity growth, and medium-term growth prospects. Investments in physical and social infrastructure have also led to a reduction in poverty, with only 1.7 percent of the population estimated to be living below the poverty line (5.5 PPP USD/person/day) in 2019. However, financing of these large investments through external non-concessional sources and sovereign guarantees have contributed to growing fiscal and debt vulnerabilities. Significant public investments are expected to continue though, due to the government’s commitment to completing these projects before the 2023 presidential elections.
A recovery in tourism has led to a strong economic rebound since Q2 2021. Real GDP grew from a low base by over 70 percent (y-o-y) in Q2 and Q3 2021. Notably, Maldives received over 1.3 million tourists in 2021, which was about 80 percent of 2019 levels. Despite a new wave of COVID-19 infections, due to the Omicron variant, the growth momentum has continued into 2022. Tourist arrivals were 43 and 54 percent above 2021 levels in January and February 2022, respectively.
Along with the economic recovery and higher global commodity prices, headline inflation rose slightly to 0.5 percent in 2021, from deflation of 1.4 percent in 2020. This was driven mainly by increases in transport, food, housing, water, electricity, gas, and other fuel prices.
The current account deficit narrowed to an estimated US$1.1 billion (21.7 percent of GDP) in 2021 from US$1.3 billion (35.5 percent of GDP) in 2020, as exports surged by about 97 percent and exceeded the 59 percent growth in imports. The official gross reserves remained stable in 2021 and, following the repayment a US$250 million swap facility to the Reserve Bank of India, were US$791 million (2.4 months of 2021 imports) at the end of December.
Tourism-linked revenues rose alongside the recovery in tourism, with total revenues and grants amounting to US$631 million in Q2 and Q3 2021, which was only 15 percent below 2019 levels. Given that expenditures grew by 12 percent (y-o-y) in Q2 and Q3 2021, with capital expenditure only picking up in Q3 2021, the fiscal deficit is estimated to have narrowed to 17.7 percent of GDP in 2021. Combined with the fast recovery in GDP growth, this led to a fall in public debt from 146 percent of GDP in 2020 to 129 percent in 2021.
After a sharp increase to 11 percent of the population in 2020, the poverty rate is estimated to have fallen to 4 percent in 2021 due to the economic recovery, and is expected to return to pre-pandemic levels by 2023.
Due to a continued recovery in tourism and other sectors impacted by the pandemic, real GDP is expected to grow at 7.6 percent in 2022, and at 9.9 percent in 2023 supported by: (i) greater tourism capacity due to the completion of the Velana International Airport expansion and new resorts, (ii) a return of Chinese tourists following the reopening of their border, and (iii) continued capital expenditures and election-related spending.
Inflation is projected to rise to 3.5 percent in 2022, but moderate in the medium term as global energy prices normalize. Although service exports will increase as tourism recovers, the return to pre-pandemic levels of consumption and capital goods imports will lead to an expansion in the current account deficit to a projected 24 percent of GDP in 2023, before narrowing in 2024 due to a fall in capital goods imports as large investment projects are expected to be completed.
The fiscal deficit is projected to decline to 16 percent of GDP in 2022 and steadily narrow in the medium term as revenues improve due to tourism growth and new revenue mobilization measures (particularly the introduction of new departure taxes and an increased Airport Development Fee). Despite a narrowing of the fiscal deficit, public debt levels will remain high.
Downside risks remain. The baseline projection accounts for the estimated impacts of the Russia-Ukraine war on the tourism and oil prices under the current trend, but further increases in global energy prices may cause an additional fiscal burden. Tourism could be adversely impacted by a persistent reduction in Russian and Ukrainian tourists and new waves of the COVID-19 infections. However, there is some upside potential from increasing tourist arrivals from traditional source countries.
Despite improving fiscal prospects, prudent debt management remains critical to improving fiscal sustainability and lowering the cost of growth-enhancing investments, especially with large debt service obligations coming due in 2026.
There are risks to the upside and downside. Resilient tourism demand and a more rapid normalization of international travel could boost arrivals, but the gains may be limited by increased competition as other destinations begin to reopen. Future COVID-19 outbreaks, both locally and in major tourist markets, could slow the pace of the recovery. The low level of usable reserves and high indebtedness pose significant risks to macroeconomic stability.
The COVID-19 shock has shed renewed light on the importance of strengthening the Maldives’ resilience to external shocks. Although there are plans to develop agriculture and fishing to diversify the economy, the scarcity of arable land is a binding constraint. Focusing on higher value-added financial and business services could create good jobs, but the growth of these sectors is currently constrained by a shortage of local skills. Investing in human capital, including by retraining and upskilling workers, and focusing on bridging the digital divide that exists between Male’ and the outer atolls can help Maldives build back better.
Last Updated: Apr 08, 2022