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Overview

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. Despite sharp fall in economic activity in 2020 during the Covid-19 pandemic, the economic growth recovered quickly in 2021. 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. However, the dependence on tourism makes the country highly vulnerable to macroeconomic and external shocks. In addition, existing high debt stock of the public sector, the government’s aim to undertake sizeable infrastructure investments through external non-concessional borrowing, and presence of high number of subsidies have led Maldives to be exposed to fiscal risks.

Key Conditions and Challenges

Tourism is the main driver of economic growth in Maldives and has seen a rapid recovery following the COVID-19 crisis. While the Russia-Ukraine war initially reduced tourists from Russia – one of Maldives’ key markets – Russian arrivals have been recovering since the resumption of Aeroflot flights in May. The recovery of arrivals from traditional European markets and new interest from Middle East countries have further bolstered growth. However, a heavy reliance on tourism and limited sectoral diversification remain a key structural challenge as the country is highly vulnerable to external and macroeconomic shocks.

As an economy that is also heavily import-dependent, Maldives is now facing significant current account and inflationary pressures due to the sharp rise in global commodity prices, which is also putting pressure on public finances. The government provides blanket provision of generous food and fuel subsidies through SOEs to help contain domestic price increases. To promote development and enhance growth, Maldives also scaled up infrastructure investments since 2016 that has boosted construction activity, tourism capacity, productivity, and medium-term growth prospects. Investments in physical and social infrastructure have also contributed towards poverty reduction and better living standards for Maldivians. However, financing of these large investments through external non-concessional sources and sovereign guarantees have contributed to growing fiscal and debt vulnerabilities. While Maldives has managed to rollover a significant portion of its foreign debt due in 2022, debt servicing risks are expected to remain elevated in the medium-term.

Although 3.9 percent of the population were below the international poverty line (US$6.85/person/day) in 2019, more than 90 percent of the poor were concentrated in the atolls. The poverty rate is estimated to have risen to 19.8 percent in 2020 due to the impact of the pandemic, but, with the economic rebound, is expected to drop to 3.8 percent by the end of 2022.

Recent Economic Developments

With the sustained recovery in tourism, the economy grew, in real terms, by 19.3 percent (y-o-y) in Q1 2022. The sector continues to grow faster than expected with arrivals reaching 813,211 in H1 2022, a 59 percent increase from the same period in 2021. Given this strong performance, arrivals are expected to reach pre-pandemic highs of 1.7 million by the end of the year, which exceeds the previous 2022 forecast of 1.57 million.

Despite the recovery in tourism driving stronger export earnings, the merchandise trade deficit expanded significantly in H1 2022. The trade deficit was driven by a 48 percent (y-o-y) increase in imports following the surge in commodity prices and growth in imports of capital goods and construction materials. At the same time, official reserves fell by 7 percent to US$750.4 million at the end of June, with reserve coverage falling to 2.9 months of imports from 3.8 months at the end of 2021. Prices of services, transportation, food and housing were also affected by the rise in commodity prices, with headline inflation increasing by 1.2 percent (annual average) in July 2022 compared to 0.5 percent in 2021.

Public finances are under pressure. While revenues remain broadly in line with budget expectations for H1 2022, the annual budget for subsidies, and development project investments were fully spent by the end of June. Given that inflationary pressures are likely to persist and with ongoing plans to complete key infrastructure projects, government may find it increasingly difficult to finance the subsidy program in its current form and other expenditures in H2 2022. This could have a negative impact on the poor, unless subsidies on food, fuel, and health are better targeted.

Outlook, Risks, and Challenges

Driven by robust tourism growth, the economy is projected to grow, in real terms, by 12.4 and 8.1 percent in 2022 and 2023, respectively. The growth is projected to be supported by: (i) greater capacity in the tourism sector due to the completion of Velana International Airport and opening of new resorts, (ii) the expected return of Chinese tourists, and (iii) continued spending on infrastructure, housing and renewable energy projects.

Although inflation is projected at 3.5 percent in 2022, it will likely moderate in 2023 as global energy prices normalize. The current account deficit is expected to remain elevated over the medium-term, as imports grow in response to increased domestic consumption and sustained public investments.

The fiscal deficit is projected to widen in 2022 due to higher capital expenditures and subsidy support. Although government has announced austerity measures, recurrent spending is likely to increase over the medium-term as the Public Sector Pay Harmonization Policy is implemented. The fiscal deficit is, however, expected to narrow in 2023/24 as revenues grow alongside robust tourism performance and following plans to increase general and tourism GST rates. Despite a narrowing of the fiscal deficit, public debt is expected to remain high at 120 percent of GDP in 2024.

Downside risks persist. Tourism could be adversely impacted by further global shocks. Further increases in commodity prices may cause an additional fiscal burden. With a significant widening of the current account deficit amidst the rising import bill, official reserves have declined to the lowest level since 2018, while government faces external debt servicing payments of about US$330 million on average over the next three years. Increasing inflation and certain austerity measures could negatively impact the poor. Stronger-than expected tourism, including from the traditional markets of China and Western Europe, and newer markets such as India and the Middle East, could offer upside potential for the growth outlook.

Reforms are needed to improve the fiscal outlook and ensure debt sustainability. More effective revenue mobilization measures, coupled with reforms to Aasandha 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: Sep 28, 2022

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

*Amounts include IBRD and IDA commitments
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Country Office Contacts

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Hotel Jen 4th Floor, #404 Ameer Ahmed Magu Male’ Rep. of Maldives
+960 3005289