Maldives has a population of around 515,696 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 78 years. More than 30 percent of the population live in the capital city Male’, while the rest are distributed among just under 200 other inhabited islands. Basic human development indicators are high. Maldives ranks 101 out of 189 countries in the Human Development Index (HDI) for 2017, the second-highest HDI rank in South Asia. The country’s GDP per capita reached $11,890 in 2018, compared to $200 in 1978.
The country is physically vulnerable to rising sea levels. Eighty percent of the total land area of the country, which is less than 300 square kilometers, is lower than 1 meter above the mean sea level. The country’s exposure to natural hazards and climate variability poses a threat to lives and the economy. 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 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 current government’s agenda is climate change.
After three years of rapid expansion, real GDP growth decelerated to an estimated 5.2 percent in 2019 due to a slowdown in retail trade and construction. Tourism flourished in 2019 as visitor arrivals grew by 14.7 percent (y-o-y). Total arrivals reached a record 1.7 million.
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 narrowed to an estimated 21.8 percent of GDP in 2019 as imports of machinery and materials declined. Despite record tourist arrivals, tourism-related services exports only grew by 4.1 percent y-o-y in 2019 compared to 10.4 percent y-o-y previously. Gross official reserves increased to USD753 million at end-2019, but usable reserves (after netting out short-term foreign currency liabilities to domestic banks) only amount to USD316 million, equivalent to 1.4 months of goods imports.
The COVID-19 outbreak has had a debilitated effect on tourism, which directly and indirectly accounts for two-thirds of GDP, but also due to suppressed construction activity. Revenues fell by an estimated 23.4 percent in the first quarter of 2020 (y-o-y) as tourist-related revenues shrank, whereas spending grew by 10.2 percent. Central government debt rose to an estimated 61.8 percent of GDP in 2019 from 58.5 percent in 2018.
Real GDP is expected to contract by 8.5 percent in 2020, 13.9 pp lower than the baseline (pre-COVID-19). This is mostly due to the slump in tourism, which directly and indirectly accounts for two-thirds of GDP, but also due to suppressed construction activity.
The shock to tourism adversely affects employment and household earnings, as one-third of adult males and a quarter of females are engaged in tourism-related jobs. Lower-income households that depend on fisheries are also affected as exports of raw fish have ceased due to weak demand. The national poverty rate is expected to increase as households close to the poverty line would likely fall into poverty due to the loss of income sources. A larger impact is expected in the atolls, as there is greater dependence on fisheries and the poverty rate was already higher.
As of end-February 2020, usable reserves have further declined to USD278 million, as lower tourist flows reduce foreign exchange earnings. To prevent price hikes as COVID-19 disrupts imports, the authorities have implemented a range of price controls on staple foods. In addition, to ensure financial system stability, the Maldives Monetary Authority (MMA) announced measures aimed at providing liquidity to financial institutions. The MMA also obtained a foreign currency swap facility amounting to USD 150 million with the Reserve Bank of India. The Maldives maintains a de facto stabilized exchange rate arrangement.
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: Apr 10, 2020