Maldives has a population of around 515,696 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%, and life expectancy of over 78 years. More than 30 percent of the population live in the capital city Male’.
Maldives has managed to attain upper middle-income status and reduce poverty mainly through the successful development of high-end tourism. According to official estimates, only 3.6 percent of the population lived below the poverty line for upper middle-income countries (US$ 5.50/person/day in PPP) in 2016. However, heavy reliance on tourism, which directly accounts for a quarter of GDP, makes the economy vulnerable to external shocks. Although growth aver-aged 5.7 percent from 2000 to 2019, natural disasters and global shocks have repeatedly caused large and sudden swings in output.
The COVID-19 pandemic is the largest shock to have ever hit the Maldives’ economy. The government closed borders between end-March to mid-July 2020, resulting in a sudden stop of tourist inflow. To mitigate the adverse welfare impacts of the crisis, the government spent USD 187 million or about 4.7 percent of estimated 2020 GDP on special financing facilities for firms and freelance workers, monthly income support allowances, and discounted utility bills.
Restoring fiscal and debt sustainability along with investments in renewable energy and digital technologies, as well as economic diversification are key to building back better. Even before the pandemic, Maldives was already at high risk of overall and external debt distress. Reliance on external non-concessional loans to finance the ambitious public infrastructure agenda has led to a large increase in debt. The large contraction in GDP and additional borrowing due to COVID-19 have further elevated debt vulnerabilities. Delaying large public investment projects until the economy strengthens would help to alleviate these pressures.
Maldives’ economy is estimated to have contracted by 28 percent in 2020 as tourism and construction activity slumped. Only 555,494 tourists visited the country, a third of the number in 2019. Since December, however, tourism has picked up strongly thanks to the absence of quarantine requirements and the unique ‘one island, one resort’ concept. Approximately 189,000 tourists, mostly from Russia and India visited Maldives in January and February 2021; however, this is still 42 percent below the comparable period in 2019.
Against this backdrop of anaemic economic activity, prices fell by an average of 1.4 percent y-o-y in 2020. The deflation was more pronounced in Malé than in the atolls, but in both cases driven by housing and utilities (reflecting lower rent and oil prices), as well as information and communications services. Food prices, however, rose by 3 percent on average, driven by an increase in tobacco duties.
The goods trade deficit narrowed from US$ 2.5 billion in 2019 to US$ 1.5 billion in 2020, as a compression in imports out-weighed the decline in exports. Imports fell by an estimated 36 percent y-o-y, driven by lower imports of raw materials as construction activity contracted. Lower imports of food and fuel due to lower tourist arrivals and lower oil prices, respectively, also contributed. Meanwhile, exports fell by 20 percent y-o-y, mostly due to a large decline in re-exports of jet fuel from fewer international aircraft movements. However, exports of fish increased by 3 percent, boosted by a large increase in exports of processed fish in the second half of the year.
Maldives maintains a de facto stabilized exchange rate arrangement. Official reserves recovered from a low of US$ 569.8 million at end-August 2020 to US$ 855.7 million at end-February 2021, as tourists returned and the Maldives Monetary Authority activated the remainder of its US$ 400 million foreign currency swap arrangement with the Reserve Bank of India. The central bank also implemented measures to manage shortages of US dollars. Usable reserves – netting out short-term liabilities – amounted to US$ 156.5 million at end-February 2021, equivalent to a month of 2020 goods imports.
The fiscal deficit reached 20 percent of estimated GDP in 2020. While the sudden stop in tourism led total revenues and grants to fall by 35 percent y-o-y, total expenditures fell only by 4.5 percent. Although the government cut recurrent spending by 9 percent, capital expenditures are estimated to have grown by 7 percent. As a result of the higher deficit and negative growth, total public and publicly guaranteed debt is estimated to have increased to 139.3 percent of GDP in 2020 from 78.4 in 2019.
With most Maldivians dependent on tourism and fisheries for their livelihoods, World Bank estimates based on household survey data indicate that the poverty rate has increased from an estimated 2.1 per-cent in 2019 to 7.2 percent in 2020.
Assuming its borders remain open to visitors, Maldives is expected to receive 1 million tourists in 2021, about 60 percent of the 2019 number. Real GDP is therefore projected to grow by 17 percent in 2021. The rebound in growth largely reflects base effects and assumes a continuation of strong tourism inflows especially from Russia and India. Although medium-term prospects for tourism are strong, real GDP is not expected to return to pre-pandemic levels until 2023, in line with global aviation and travel forecasts. The poverty rate is expected to decline slowly over the medium term to 2.7 percent in 2023.
External and fiscal imbalances will remain elevated. Despite the recovery in tourism receipts, the current account deficit is expected to widen over the medium term as imports linked to tourism and construction normalise. The fiscal deficit is expected to decline as revenues recover but is forecast to remain in double-digits due to expansionary fiscal policies. The 2021 Budget, for example, targets a 45 percent increase in capital expenditures from 2020, while revenues are not expected to cover current expenditures. With the recovery in growth, the debt ratio is expected to moderate to 131.4 percent of GDP in 2023.
Risks are heavily tilted to the downside and some are outside Maldives’ control, such as the pace and effectiveness of COVID-19 vaccinations globally. The outlook may deteriorate if more stringent restrictions on international travel are reintroduced. The low level of usable reserves and high indebtedness pose significant risks to macroeconomic stability.
Against this backdrop of slower growth and high debt, addressing core spending needs will be a challenge. Additional financing may be difficult to raise in the near-term given rising debt levels and the global nature of the shock. Greater fiscal prudence would help address fiscal and debt sustainability risks. In particular, large public infrastructure investments that are not urgently needed in a context of weak aggregate demand could be postponed.
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, can help Maldives build back better.
Last Updated: Mar 29, 2021