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 incumbent government started several infrastructure projects to enable people to move from smaller islands to the Greater Male’ region, and construction has overtaken tourism as the main driver of growth. To allow for these investments, the government is reducing current expenditures. 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), the 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.
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. In addition, weak government institutions, continued rise in public debts, and the risk of external debt distress are considerable challenges faced by the country.
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.
Following his recent victory in the 2018 presidential elections, the president-elect has pledged 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. especially putting back the spotlight on Maldives in global discussions about climate change.
Recent Economic Developments
Real GDP grew by 7.1 percent in 2017, on the back of strong performance of the tourism sector, an acceleration of construction, transport and communication, and fisheries. These sectors contributed about 5 percentage points to headline growth (or over 70 percent).
Preliminary estimates for 2018 indicate that GDP growth accelerated to 12 percent y/y in the first quarter of 2018 compared to 6 percent in the first quarter of 2017, driven by strong performances from tourism (4.1pp), construction (2.1pp), trade (1.1pp), and transport and communication (1.1pp) sectors.
Headline inflation averaged 2.8 percent in 2017, driven by the increases in prices of food and housing and utilities, reflecting the partial removal of food subsidies and the pass-through of rising electricity prices. Over the first half of 2018, major components of the CPI basket receded, with the overall consumer price index falling by 0.4 percent. This decline in prices was more pronounced in the atolls, given the relatively higher weight of food items compared to Male’. Limited uptake of the cash transfer to compensate for the partial removal of food subsidies may have impacted on the poor households’ purchasing power.
The current account deficit is estimated to have narrowed to 18.8 percent of GDP in 2017 (from 24.4 percent in 2016). The financing of the current account was mainly through direct investment and, to a lesser extent, portfolio flows. Gross official reserves recovered from US$467million at end-2016 to US$586 million at end-2017 (US$206 million after netting out short-term foreign currency liabilities to domestic banks).
The government made progress in rebalancing fiscal expenditure to accommodate increased capital expenditure. The fiscal deficit narrowed from a 10.6 percent of GDP in 2016 to a 2.5 percent in 2017, driven mainly by a reduction in public investment from 10.9 percent of GDP in 2016 to 8.2 percent in 2017, and a reduction in spending on food subsidies and on the Aasandha unlimited health care system. Excluding the Public-Sector Investment Program, the underlying current fiscal balance went from a deficit of 2.0 percent of GDP in 2015 to an estimated surplus of 5.7 percent of GDP in 2017, reflecting revenue increases and current expenditure reforms. Public debt is estimated to have reached 61.2 percent of GDP in 2017, an increase from 59.7 percent of GDP in 2016, driven by external projected-related borrowing and the US$ 200 million Eurobond issuance. Maldives’ risk of external debt distress is assessed as high (IMF, 2017), due a widening current account deficit, low international reserves, pipeline of guarantees, and rapid debt buildup.
The construction and tourism sectors, the main drivers of recent growth, have not generated sufficient jobs for Maldivians, since they rely mostly on foreign labor and male employment. Youth and female unemployment are high. More than a quarter of women are either unemployed or not looking for a job. Almost a quarter of Maldivian youth are not employed, in education, or training (NEET). The driver for high NEET rate among females is inactivity, whereas for males is unemployment.
Maldives face important challenges that are common to small island states. These include: i) a small domestic market and limited opportunities for economic diversification; ii) a narrow and fragile resource base; iii) a shortage of skilled manpower and capacity constraints; iv) difficult inter-island transport and communication; v) high cost of social and economic infrastructure provision; vi) heavy dependence on external trade; and vii) vulnerability to external shocks, climate change and natural disasters.
On the fiscal front, it is critical to improve the medium-term fiscal sustainability by addressing key expenditure drivers in the budget. This includes increasing the efficiency of spending on Aasandha and improving budget credibility by making ministry and agency budget ceilings binding. In addition, a key challenge for the Maldives is to find the appropriate balancing act between, on the one hand, the ongoing large infrastructure projects to close some of the existing infrastructure gaps that potentially would allow to boost tourism, reduce the impact of climate change and ease constraints in the delivery of key public services, and on the other, the rapid accumulation of public debt, the widening current account deficits and the limited fiscal space available. Vulnerability of the overall debt portfolio, with indebtedness levels at over 60 percent of GDP, is heightened by the short maturity of domestic debt and low reserve coverage. Large volume of external loans and guarantees on non-concessional terms to finance infrastructure projects represent significant risks to the downside.
The government is still the top employer of Maldivians, about two thirds of whom are employed in jobs not related to tourism, suggesting a misalignment between the drivers of growth and aspirations of jobseekers. Measures that foster private sector job creation can help reduce pressure on the public sector to create jobs for an expanding working age population. The consolidation of population from vulnerable islands and atolls into Greater Male’, while also reducing pressure on Male’, may eventually allow for new forms of economic activity, create employment, improve quality of public service delivery, and increase resilience to climate change.
Last Updated: Oct 11, 2018