Outlook
The economy is projected to grow by 4.7% over the medium-term, supported by tourism, a decrease from the pre-pandemic average of 7.4%. This growth is based on expected fiscal adjustments, including subsidy reforms and reduced public expenditure and investments. This slowdown also means slower poverty reduction in 2024.
The fiscal deficit is expected to remain high in 2024 due to ambitious spending plans .The proposed fiscal reform package is expected to help but a more sustainable fiscal path requires a larger adjustment, particularly through cuts in non-essential capital and untargeted recurrent spending.
Inflation is expected to rise due to the removal of blanket subsidies, potentially driving poverty by 2.5 percentage points. The current account deficit is expected to remain high due to commodity price pressures and capital imports for infrastructure projects. Rising external financing needs, including debt servicing, are expected to sustain pressure on foreign exchange reserves.
Major downside risks include a shock to the tourism sector, limited domestic and external financing, and a widening current account deficit. To maintain macroeconomic stability, a major fiscal adjustment and a multi-year reform plan are required, along with a targeted transfer mechanism to offset welfare losses among vulnerable groups.
Recent economic developments
In 2023, the number of tourist arrivals reached a record-breaking figure of 1.88 million. Nevertheless, this did not result in higher GDP growth due to lower per-tourist spending and shorter stays. The Maldivian economy is estimated to have grown by 4% in 2023. Domestic inflation, at 2.9% in 2023, remained higher than the historical average of 0.5%. Price increases were experienced in the food, education, restaurant, and lodging services sectors. Food inflation could increase poverty by 0.4 percentage points, with atolls experiencing even higher rates.
Travel export receipts fell 6.8%, while merchandise imports remained elevated at $3.5 billion. This resulted in a current account deficit of 23.4% of GDP. High import costs and external debt repayments also weighed heavily on gross reserves, which fell to $551.1 million in January 2024.
Failure to implement planned subsidy reforms, combined with rising recurrent and capital spending, resulted in a sharp increase in total expenditure and a fiscal deficit of 13.2% of GDP in 2023.
Challenges
Tourism, which accounts for a quarter of the Maldives' economy, has experienced slower growth in 2023 due to a decline in average duration of stay and lower tourist spending. This slowdown has exposed underlying economic vulnerabilities in the Maldives.
These vulnerabilities stem from persistent large current account and fiscal deficits. The country relies heavily on imports while having limited official reserves, creating an unsustainable imbalance. Government support for struggling state-owned enterprises (SOEs), along with blanket subsidies, high capital spending, and a public health program, further exacerbate these pressures.
While these subsidies and in-kind transfers are crucial for boosting household incomes, their unsustainable nature raises concerns. When fiscal pressures mount, the Maldivian people's well-being could be negatively impacted. Additionally, infrastructure projects, although promising long-term growth, were financed through non-concessional external borrowing and sovereign guarantees. The rising cost of borrowing abroad has forced the government to turn towards domestic sources, increasing the domestic financial sector’s vulnerability to government debt.
The government recently announced its commitment to a fiscal reform agenda to address these economic vulnerabilities. This agenda includes reforms to subsidies, SOEs, the public health insurance scheme (Aasandha), and reprioritizing capital spending. These reforms offer a path towards a more resilient Maldivian economy.
Last Updated: Apr 02, 2024
