World Bank Urges Immediate Fiscal Reforms and Sustainable Infrastructure Investment Planning in Maldives

MALE’, November 22, 2023 — Maldives faces significant economic risks from rising spending, high debt and external shocks, despite a projected 6.5% growth in real GDP in 2023 and an average of 5.4% from 2024 to 2025, says the World Bank in its latest Maldives Development Update. Launched last month, Batten Down the Hatches, was the subject of an event today organized by the World Bank and the Maldives National University (MNU).

The report offers a cautiously optimistic forecast for the Maldives’ economic trajectory, anchored by the robust performance of the tourism industry. However, the country faces significant fiscal challenges, exacerbated by global commodity price surges, escalated government expenditure on capital projects and subsidies, and the central bank’s ongoing budget deficit financing. These issues require immediate and decisive fiscal reforms including better management practices for public investment, moving toward targeted subsidies, increasing revenues, prudent debt management for a meaningful fiscal adjustment.

While Maldives had plans to reduce fiscal deficits, the country has failed to achieve its targets so far and  national debt is projected to hover above 115% of GDP over the medium term. Earlier this year, the government increased Goods and Services Tax (GST) rates, yet more decisive and prompt actions are required, particularly on the expenditure side as the expected subsidy reforms for 2023 have been delayed.

For fiscal prudence, Maldives must urgently refine its expenditure strategy and enhance revenue generation. Essential reforms include overhauling the Aasandha national health insurance program, rationalizing budgetary contributions for state-owned enterprises particularly in the energy and food sectors and moving towards targeted subsidies, and establishing a robust public investment framework to ensure orderly and strategic infrastructure development. On revenue enhancement, immediate efforts should concentrate on expanding the tax base, leveraging domestic revenue streams and promoting equitable taxation.

“Maldives has shown remarkable resilience and recovery from the COVID-19 pandemic, but will need to remain vigilant in the face of new and emerging shocks such as conflicts around the world, price volatilities in  global markets, and high inflation affecting the disposable income of people in major tourist markets,” said Faris H. Hadad-Zervos, the World Bank Country Director for Maldives, Nepal and Sri Lanka. “There is an urgent need to address the country’s fiscal and external vulnerabilities, especially through prudent debt management and expenditure reform measures, and develop a sustainable and resilient infrastructure investment framework, to ensure long-term growth and prosperity for its people.”

As discussed during sessions at the event, Maldives has achieved remarkable results in basic infrastructure services, outperforming many of its neighbors and other Small Island Developing States. Since 2008, everyone in Maldives has access to electricity, and mobile phone services are widely available. The country also has more hospital beds per 1,000 people than the average for upper middle-income countries, and a very low pupil-teacher ratio. These achievements are largely due to a rapid increase in public spending, which has grown faster than the country’s real GDP. A lot of this spending has been invested in infrastructure for transport, housing, and land reclamation.

However, as a result of rising infrastructure spending, public debt sharply increased to finance these projects, especially during the COVID-19 crisis and Maldives is subject to major fiscal vulnerabilites. Moreover, there are still big gaps in infrastructure access between Malé, the capital city, and the outer atolls, where many people lack services like piped water, sewage, and broadband internet.

Maldives is trying to close these gaps, but the country faces many challenges common to Small Island Developing States like the worsening impacts of climate change and limited fiscal space. These challenges make it difficult for the country to provide efficient and affordable infrastructure services. To improve, Maldives needs to take into account the high public debt reality, carefully and orderly plan for investments, and coordinate better among different ministries and agencies, especially for projects that involve multiple sectors. The country also needs to prioritize sustainability and resilience, given its exposure to climate change.

Sources: World Bank estimates and forecasts as of September 2023.

Note: (e)=estimate, (f)=forecast.