Maldives Economic Update 2025: Growth Holds, Pressures Build

The World Bank’s Maldives Development Update (October 2025) provides a timely snapshot of where the Maldivian economy stands after the post-pandemic rebound and as new fiscal and external pressures emerge. The picture that emerges is a mixed one: growth continues, largely supported by tourism, but underlying vulnerabilities in public finances, debt, and foreign exchange liquidity remain significant and unresolved.

Growth continues, but at a slower pace

Economic growth moderated in early 2025. Real GDP growth slowed to 2.5 per cent year-on-year in the first quarter, compared with much stronger growth a year earlier. This deceleration reflects slower momentum in the tourism sector and a contraction in non-tourism activities such as construction, transport, and public administration.

Tourist arrivals continued to rise — increasing by 9.4 per cent year-on-year by August 2025 — but the average length of stay shortened, limiting overall growth in tourism revenues. While the sector remains the backbone of the economy, these trends suggest that future growth may be steadier rather than rapid.

Over the medium term, growth is projected to settle at around 4 per cent, supported by capacity expansions such as the new terminal at Velana International Airport, but constrained by financing challenges and slower activity outside tourism.

Inflation and household pressures

Inflation picked up in the first half of 2025, averaging 5 per cent, driven primarily by higher food prices and costs related to restaurants and accommodation. Inflation has been more pronounced in the atolls than in Malé, reflecting higher import dependence and foreign exchange constraints.

Although subsidies and administered prices have helped contain price pressures, elevated inflation is increasingly stretching household budgets — particularly for lower-income households and those outside the capital.

Fiscal position: improvement with caveats

On paper, the fiscal accounts showed improvement in early 2025. The government recorded a fiscal surplus of MVR 1.2 billion in the first half of the year, compared with a deficit in the same period in 2024. This was driven by strong tourism-related revenues and a sharp reduction in capital expenditure.

However, the report notes that these expenditure cuts were largely made on a cash basis rather than by reducing commitments, raising concerns about a growing stock of unpaid bills and arrears — particularly affecting state-owned enterprises and service providers. At the same time, key fiscal reforms announced in 2024, including subsidy rationalisation and SOE reform, have been delayed.

Rising debt and limited financing options

Public and publicly guaranteed debt continues to increase. By early 2025, total public debt reached around 127 per cent of GDP, with both domestic and external borrowing rising. External debt service obligations are particularly heavy in the near term, including a US$500 million Sukuk repayment due in 2026.

Access to external financing has become more constrained following credit rating downgrades in 2024. As a result, the government has relied increasingly on domestic banks, raising the financial sector’s exposure to the sovereign and heightening systemic risks.

Foreign exchange pressures persist

Foreign exchange availability remains one of the most pressing challenges. Although official reserves recovered to around US$775 million by mid-2025, usable reserves remain below one month of imports. A parallel foreign exchange market continues to operate, with a widening gap between the official and market exchange rates.

New foreign exchange regulations introduced in late 2024 and 2025 have helped channel foreign currency into the banking system, but they have also tightened liquidity for businesses, contributing to higher costs and operational difficulties for importers.

Outlook: risks tilted to the downside

The World Bank projects that fiscal and external deficits will remain elevated in the absence of decisive reforms. Public debt is expected to stay above 130 per cent of GDP over the medium term, while external financing needs remain substantial.

The main risks to the outlook stem from:

• Any slowdown or shock to the tourism sector

• Delays in fiscal adjustment and SOE reform

• Tight global financial conditions and limited access to affordable external financing

The report emphasises that a credible multi-year fiscal reform programme, combined with a realistic financing strategy and targeted protection for vulnerable households, is essential to restore macroeconomic stability.