Economic Growth Slows in the Maldives Amid Rising Tourist Arrivals and Fiscal Challenges

The Maldives, an archipelago renowned for its stunning beaches and vibrant tourism industry, faces significant economic challenges despite rising tourist arrivals. According to the World Bank's latest report, the Maldives' economy is grappling with large external imbalances, high public debt, and substantial liquidity pressures, necessitating urgent fiscal reforms to maintain stability and growth.

Key Economic Indicators

As of 2023, the Maldives' population stands at approximately 0.5 million, with a GDP of $6.6 billion and a per capita income of $12,624.9. The country has an upper middle-income poverty rate of 3.9% and a Gini index of 29.3, indicating moderate income inequality. Primary school enrollment is high at 97.8%, and life expectancy at birth is a robust 79.9 years. However, the country's total greenhouse gas emissions remain a concern at 2.7 million metric tons of CO2 equivalent.

Slowing Economic Growth

Despite a 12% increase in tourist arrivals in 2023, reaching a record 1.88 million visitors, economic growth has slowed. This paradox is attributed to decreased spending per tourist and shorter stays, with a growing preference for budget-friendly guest houses over luxury resorts. Consequently, the Maldives' real GDP grew by only 4.0% in 2023, significantly below its historical average of 7.4%.

The tourism sector, which directly contributes to a quarter of the economy, saw contractions in both the tourism and trade sectors by 0.4% and 0.9% respectively in 2023. These contractions reflect broader economic vulnerabilities, including high fiscal deficits and declining foreign exchange reserves, exacerbated by substantial liquidity pressures.

Fiscal Challenges and Public Debt

The Maldives' fiscal landscape is strained, with public debt reaching 122.9% of GDP in 2023. Persistent large current account and fiscal deficits have depleted external buffers, putting immense pressure on public finances. The government's support for underperforming state-owned enterprises (SOEs), blanket subsidies, and high levels of capital spending further exacerbate fiscal vulnerabilities. Additionally, the public health insurance scheme (Aasandha) and other in-kind transfers play a vital role in boosting household incomes, particularly among the economically disadvantaged and those living in the atolls.

The rising cost of external borrowing has compelled the government to seek domestic financing sources, increasing the financial sector's exposure to sovereign debt. The World Bank highlights that without a comprehensive fiscal adjustment plan, public and publicly guaranteed (PPG) debt will remain high, posing significant risks to macroeconomic stability.

Recent Developments

In response to these challenges, the Maldivian government has announced its commitment to a fiscal reform agenda aimed at addressing economic vulnerabilities. Although details of this agenda are yet to be fully released, it is expected to include reforms to subsidies, SOEs, the public health insurance scheme, and capital spending. Savings from these reforms could be used to mitigate poverty and inequality increases.

Tourist receipts contracted by 6.8% in 2023, while merchandise imports remained elevated at $3.5 billion due to high commodity and capital goods imports. This resulted in a current account deficit widening to an estimated 23.4% of GDP. High import costs and external debt repayments have also put significant pressure on gross reserves, which fell to $551.1 million in January 2024, equivalent to 1.9 months of imports.

Outlook and Recommendations

Looking ahead, the Maldives' economy is projected to grow by an average of 4.7% over the medium term, supported by tourism. However, this growth is contingent on significant fiscal adjustments, including subsidy reforms and reduced government consumption and investments. The fiscal deficit is expected to remain elevated in 2024, with a financing gap of over $700 million. Consequently, PPG debt is projected to hover around 120% of GDP over the medium term.

Inflation is expected to rise due to the planned removal of blanket subsidies, potentially driving poverty up by 2.5 percentage points and exacerbating inequalities in employment opportunities. The current account deficit is projected to remain elevated due to continued capital imports for ongoing and planned infrastructure projects, sustaining pressure on official reserves.

The World Bank underscores the necessity of a major fiscal adjustment and the implementation of a multi-year reform plan to sustain macroeconomic stability. This plan should be accompanied by targeted transfer mechanisms to offset welfare losses among vulnerable groups.

In conclusion, while the Maldives faces significant economic challenges, the implementation of strategic fiscal reforms can pave the way for a more resilient and diversified economy. Addressing these vulnerabilities head-on will be crucial to securing a stable and prosperous future for the Maldives and its people.