The Maldives Development Update (MDU) has two main goals. First, it takes the pulse of the Maldivian economy by providing key developments over the past 12 months. Placing these in a global context, and based on these recent developments, it analyzes the outlook over the medium term. Second, every other edition of the MDU provides a more in-depth investigation of selected economic and policy issues. It has a wide audience including policymakers, policy analysts from think tanks or non-governmental organizations, and business and financial sector professionals interested in Maldives’ economic development.
RECENT ECONOMIC DEVELOPMENTS
In 2022, tourist arrivals in the Maldives reached 1.68 million -only 1.6 percent lower than the pre-pandemic high- which supported growth in the real estate, transport, and trade sectors, leading to an estimated 12.3% year-on-year real economic growth. However, rising global commodity prices caused domestic inflation to increase to an average of 2.3% in 2022, higher than the historical average of 0.5%. This affected food, transport, health, and restaurant services sectors.
Despite growth in tourism earnings, the current account deficit widened to an estimated 24.6% of GDP in 2022, due to expensive imports of oil and capital goods. This put pressure on gross reserves, which dropped to less than US$500 million in October 2022 but later recovered to over US$800 million by the end of the year, following a US$200 million currency swap deal with India.
The fiscal deficit increased to 14.5% of GDP in 2022 due to blanket subsidies for energy and food commodities, as well as sustained high capital spending. Although austerity measures were implemented to reduce administrative costs and the public sector wage bill, over 80% of the deficit was covered by domestic sources. As a result, the Maldives Monetary Authority's (MMA) asset exposure to the government rose to 48% of its total financial assets at the end of 2022.
Tourism, constituting nearly one-third of Maldives' economy, has rebounded quickly after the pandemic, with increasing arrivals from India, Gulf countries, and Russia. However, Maldives faces challenges from its heavy dependence on tourism, limited sectoral diversification, and vulnerability to macroeconomic shocks.
High global commodity prices have led to external and inflationary pressures, straining public finances due to subsidies, capital expenditure, and an inefficient health insurance scheme. Welfare is at risk due to untargeted austerity measures, with additional challenges from unequal economic opportunities and overcrowding in urban areas.
Since 2016, Maldives has increased infrastructure investments, enhancing construction activity, tourism capacity, and medium-term growth prospects. While these investments have improved living standards and reduced poverty, financing through non-concessional sources and sovereign guarantees have introduced fiscal vulnerabilities.
The government has turned to domestic financing sources due to the rising cost of external borrowing, which is crowding out private credits and increasing the financial sector's exposure to sovereign risk. Public and publicly guaranteed debt stock and debt servicing risks are expected to remain high in the medium term.
The Maldivian economy is projected to grow by 6% on average in the medium term, driven by a robust activity in the tourism sector. Total arrivals are expected to increase by 7.1% year-on-year in 2023, reaching 1.8 million. The expansion of Velana International Airport and new resort investments will further boost tourism. The recent rise in GST rates will help narrow the fiscal deficit, but public debt levels remain high, necessitating additional fiscal adjustments through expenditure rationalizations particularly on public investments, subsidies, and pharmaceutical spending.
In 2023, inflation is expected to rise due to recovering demand, elevated global commodity prices, and the GST rate hike, which calls for a tighter macroeconomic policy mix. Subsidy reforms targeting the poor and vulnerable is essential to alleviate fiscal pressure. The current account deficit will likely remain high due to high commodity prices and necessary capital imports as the government pursues infrastructure projects.
Downside risks include potential adverse impacts on tourism from global shocks and further widening of the current account deficit, which could strain official reserves. The government faces external debt servicing payments of about US$393 million on average over the next three years amidst tightening global financing conditions. However, stronger-than-expected tourism, particularly with the return of Chinese tourists, presents an upside potential. Without pandemic relief measures, the poverty rate would have risen to 19.9% in 2020, but with economic recovery, poverty rates are anticipated to decrease to 2.1% in 2023.
Last Updated: Apr 04, 2023
The Maldives' economic growth prospects have been encouraging, particularly in the tourism sector, which could still drive further expansion. However, a significant fiscal adjustment is needed. The government’s decision to raise taxes is a positive start, and should pave the way for additional necessary adjustment. A notable reduction in spending and expenditure reforms, coupled with effective revenue mobilization are crucial for Maldives’ debt and fiscal sustainability.
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