Seeking Stability In Turbulent Times Maldives Development Update MALDIVES DEVELOPMENT UPDATE SEEKING STABILITY IN TURBULENT TIMES October 2024 October 20 24 THE WORLD BANK Seeking Stability In Turbulent Times Maldives Development Update © [2024] International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@ worldbank.org. Photo Credits Cover, Parts A.1, A.2 and B: Erdem Atas October 20 24 THE WORLD BANK Seeking Stability In Turbulent Times Maldives Development Update Preface The Maldives Development Update (MDU) has two main goals. First, it takes the pulse of the Maldivian economy by outlining key developments over the past 12 months. Placing these in a global context, and based on these recent developments, the MDU then 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. The MDU was prepared by Ruijie Cheng, Erdem Atas, Richard Walker, Arvind Nair (Macroeconomics, Public Sector, Trade and Investment, South Asia Region), and Gregory Smith (Equitable Finance and Institutions). The special focus topic (Part B) on climate and development priorities was written by Martin Heger (Environment, South Asia Region) and Sebastian Forsch ((Infrastructure Resilience Policy and Finance, South Asia Region). The team is grateful to Cristian Lucas (Macroeconomics, Public Sector, Trade and Investment, South Asia Region), Nandini Krishnan, Marta Schoch, and Tiloka de Silva (Poverty), Tatsiana Kliatskova and Ghiles Elkadi (Finance, Competitiveness, and Innovation), Zoe Leiyu Xie, Juan Felipe Serrano Ariza, and Patrick Alexander Kirby (Macroeconomics, Trade and Investment, Prospects Group) for their inputs to the publication. The team thanks Mathew Verghis (Director, Equitable Growth, Finance and Institutions – EFI, South Asia Region), David Sislen (Country Director for Maldives, Nepal, and Sri Lanka), Gevorg Sargsyan (Country Manager, Maldives and Sri Lanka), and Shabih Ali Mohib (Practice Manager, Macroeconomics, Public Sector, Trade and Investment) for their guidance. Yasindu Amarasinghe and Tracey Ann Plunkett provided valuable administrative support and helped with the format and layout of the report, while Ali Naafiz led the dissemination efforts. The report was prepared based on published data available on or before September 12, 2024. Data sources include the World Bank, International Monetary Fund, Ministry of Finance, Maldives Monetary Authority, Maldives Bureau of Statistics, Ministry of Tourism, and press reports. Previous report editions: • May 2024: Maldives Development Update: Scaling Back and Rebuilding Buffers https://openknowledge.worldbank.org/entities/publication/acbc24eb-8fc1-4b94-8492-a41e4e41dd2f • October 2023: Maldives Development Update: Batten Down the Hatches https://openknowledge.worldbank.org/server/api/core/bitstreams/4fdca0d7-c521-4bf0-900b-88fad30ad00e/ content • April 2023: Maldives Development Update: Navigating A Tight Line https://openknowledge.worldbank.org/handle/10986/39627 To receive the MDU and related publications by email, please email infomaldives@worldbank.org. For questions and comments, please email rcheng@worldbank.org and eatas@worldbank.org.. For information about the World Bank and its activities in Maldives, please visit: https://www.worldbank.org/en/country/maldives @WorldBank, @WBMaldives, follow hashtag #MDUAM24 www.facebook.com/WorldBankSouthAsia instagram.com/worldbank/ www.linkedin.com/company/the-world-bank October 20 24 THE WORLD BANK Seeking Stability In Turbulent Times Maldives Development Update Abbreviations BML Bank of Maldives CAD Current Account Deficit CAM Communication Authority of Maldives CAR Capital Adequacy Ratio CCDR Country Climate and Development Report COVID-19 Coronavirus Disease 2019 CPI Consumer Price Index DAPPs Dynamic Adaptive Policy Pathways DHS Demographic and Health Survey EMDEs Emerging Markets and Developing Economies EWSs Early Warning Systems FCCL Fiscal Commitments and Contingent Liabilities FDI Foreign Direct Investment FRA Fiscal Responsibility Act G2G Government-to-government GDP Gross Domestic Product GGST General Goods and Services Tax GHG Greenhouse Gases GoM Government of Maldives HIES Household Income and Expenditure Survey MNACI Maldives National Association of Construction Industry MDU Maldives Development Update MIFCO Maldives Industries Fisheries Company Ltd MMA Maldives Monetary Authority MoF Ministry of Finance MoT Ministry of Tourism MPAs Marine Protected Areas MPI Multidimensional Poverty Index MRR Minimum Reserve Requirement MTRS Mid-Term Revenue Strategy MUDRP Maldives Urban Development Resilient Program MVR Maldivian Rufiyaa NAP National Adaptation Plan NBS National Bureau of Statistics NbS Nature-based Solutions NDA Net Domestic Assets NDC Nationally Determined Contribution NFA Net Foreign Assets NPL Non-performing Loan ODF Overnight Deposit Facility OLF Overnight Lombard Facility OMO Open Market Operations PIM Public Investment Management PPG Public and Publicly Guaranteed PPP Public Private Partnership October 20 24 THE WORLD BANK Seeking Stability In Turbulent Times Maldives Development Update Abbreviations PSIP Public Sector Investment Program PSPH Public Sector Pay Harmonization RBI Reserve Bank of India RE Renewable Energy SDF Sovereign Development Fund SDG Sustainable Development Goals SIDS Small Island Developing State SLR Sea Level Rise SOE State-Owned Enterprise STO State Trading Organization TGST Tourism Goods and Services Tax US$ United States Dollar y-o-y year on year October 20 24 THE WORLD BANK Seeking Stability In Turbulent Times Maldives Development Update Table of Contents Preface....................................................................................................................................................................... Abbreviations............................................................................................................................................................ Table of Contents..................................................................................................................................................... EXECUTIVE SUMMARY........................................................................................................ i A1. ECONOMIC UPDATE....................................................................................................... 1 1. Growth picked up in early 2024, while broad inflationary pressures have eased...............................................1 2. Fiscal deficit narrowed in cash terms but was accompanied by rising expenditure arrears.............................4 3. Public debt and external debt servicing increased in 2024................................................................................5 4. Household welfare may be affected due to potential austerity measures..........................................................8 5. Mounting external pressures have led to a sharp deterioration in FX reserves.................................................9 6. MMA and banking sector exposure to the sovereign remains high................................................................ 11 A2. OUTLOOK AND RISKS..................................................................................... 13 7. Growth is forecast to moderate, inflation to increase, and fiscal and external balances to narrow................ 13 8. Risks to the outlook are heavily on the downside............................................................................................ 15 9. Implementing reforms, with a sharp fiscal adjustment, remains an urgent priority....................................... 16 B. POLICY PRIORITIES TO ADDRESS CLIMATE AND DEVELOPMENT CHALLENGES..................................................................................................... 17 1. Maldives faces intertwined development and climate change challenges....................................................... 17 2. Climate change impacts in Maldives................................................................................................................ 18 3. Toward Climate-Resilient Islands, Infrastructure, and Ecosystems................................................................23 4. Toward Climate-Resilient Livelihoods.............................................................................................................24 5. Climate finance.................................................................................................................................................25 6. Recommendations............................................................................................................................................26 LIST OF REFERENCES............................................................................................ 29 LIST OF FIGURES Figure A.1: Real GDP gained momentum in 2024Q1…................................................................................................................. 2 Figure A.2: … as tourist arrivals increased, but the average duration of stay remains below 2022 levels............................... 2 Figure A.3: Headline inflation was subdued in 2024H1….............................................................................................................. 2 Figure A.4: … although price increases were acute in food and beverages.................................................................................. 2 Figure A.5: Global manufacturing contracted while services expanded....................................................................................... 3 Figure A.6: Growth in revenues driven by robust tourism activity................................................................................................ 5 Figure A.7: Expenditure declined on a cash basis, due largely to capital investment cuts and lower subsidies...................... 5 Figure A.8: Public infrastructure projects and subsidies have driven up spending over the last decade…............................. 6 Figure A.9: …which has led to a sharp increase in the debt stock................................................................................................. 6 Figure A.10: Richer households capture more of the spending on indirect subsidies, which are more important for the poor in relative terms...................................................................................................................................................................... 9 Figure A.11: Targeted cash transfers to poor and vulnerable households can offset the expected poverty increases folowing the subsidy removal............................................................................................................................................................... 9 Figure A.12: While import growth slowed….................................................................................................................................. 10 Figure A.13: …the trade deficit remains large................................................................................................................................. 10 Figure A.14: CAD somewhat financed by FDI….......................................................................................................................... 10 October 20 24 THE WORLD BANK Seeking Stability In Turbulent Times Maldives Development Update Figure A.15: …as reserves declined to critically low levels............................................................................................................ 10 Figure A.16: Growth in net domestic assets contributed to broad money growth…............................................................... 11 Figure A.17: ...while exposures of the financial sector to the sovereign and SOEs remain elevated..................................... 11 Figure A.18: Private credit growth accelerated…............................................................................................................................ 12 Figure A.19: …while deposit growth remained subdued.............................................................................................................. 12 Figure A.20: Real GDP growth will moderate over the medium term........................................................................................ 14 Figure A.21: Fiscal deficit is projected to narrow, with the pace depending on reform implementation.............................. 14 Figure A.22: Current account deficit is expected to narrow primarily due to anticipated PSIP reforms….......................... 15 Figure A.23: …but increasing external debt servicing needs will continue to exert pressures on reserves........................... 15 Figure B.1: Conceptual framework for climate change and development in Maldives............................................................. 18 Figure B.2: Capital stock damaged from coastal flooding in relative and absolute terms under different climate change scenarios................................................................................................................................................................................... 19 Figure B.3: GDP impact from SLR under the high-emission scenario....................................................................................... 21 Figure B.4: Debt/GDP impact from SLR under the high-emission scenario............................................................................ 22 Figure B.5: Development of the distribution of coral cover among reefs till 2100 under different climate scenarios....... 23 Figure B.6: Projected percentage change in fisheries – pelagic and reef-associated – revenue and net revenue................... 25 LIST OF TABLES Table A.1: Medium-term projections................................................................................................................................................ 13 Table B.1: High-level objectives and a snapshot of key recommendations................................................................................ 27 LIST OF BOXES Box 1: Global economic developments.............................................................................................................................................. 3 Box 2: Capturing and taxing the value created in the Maldives from offshore booking platforms.......................................... 6 LIST OF ANNEXES Annex 1: Balance of Payments (percent of GDP)......................................................................................................................... 30 Annex 2: Key Fiscal Indicators (percent of GDP)......................................................................................................................... 31 October 20 24 THE WORLD BANK Seeking Stability In Turbulent Times Maldives Development Update Executive Summary A. Economic Update, Outlook, and Risks Economic growth picked up in early 2024 driven by rising tourist arrivals. Real Gross Domestic Product (GDP) grew by 9.8 percent (y-o-y) in 2024Q1, driven by robust tourism performance (9.3 percent growth in 2024Q1) translating into stronger growth in transportation, communication, and domestic trade. Tourist arrivals picked up by 15.3 percent in 2024Q1 and continued to improve in subsequent quarters, leading to a 10.5 percent y-o-y increase as of end-August, while the average duration of stay remained steady, and spending per-tourist fell. Headline inflation declined in 2024H1, but food inflation remained elevated. Consumer price inflation declined to an average of 0.5 percent in 2024H1, from 2.9 percent in 2023, as the impact of past Goods and Services Tax (GST) rate increases eased, along with softer global commodity prices. However, food prices experienced a sharp increase, reaching an average of 6.7 percent (y-o-y) in 2024H1 from 5.9 percent at end-2023. The continued provision of blanket subsidies helped contain pressures on housing, utility, and transportation prices. The fiscal deficit narrowed in cash terms but was accompanied by an increase in arrears. The overall fiscal deficit in 2024Q1 narrowed to MVR 677 million (US$44 million or 0.6 percent of GDP) compared to MVR 2.9 billion (US$188.5 million or 2.9 percent of GDP) in the same period of 2023.1 Revenues increased from 9.3 percent of GDP in 2023Q1 to 9.5 percent of GDP in 2024Q1, driven by an 8.4 percent (y-o-y) increase in Tourism Goods and Services Tax (TGST) collections. Total expenditure declined by 11 percent (y-o-y) in 2024Q1, as a slight increase in recurrent spending by 6.5 percent (y-o-y) was offset by a sharp decline in capital expenditure by 44.6 percent (y-o-y) on a cash basis. However, expenditure cuts have been accompanied by a build-up in arrears. Concerns over delayed disbursements and unpaid obligations have been raised by government contractors, the fishing industry, and private hospitals. Previously planned and budgeted subsidy reforms for fuel, electricity, food, and sanitation – that aimed to reduce expenditure by 2 percent of GDP in 2024 – are yet to be implemented. The current account deficit (CAD) is expected to narrow slightly in 2024, but remain elevated, as widening trade deficits are offset by tourism. The trade deficit widened to US$1.5 billion (22.0 percent of GDP) in 2024H1 from US$1.4 billion (21.6 percent of GDP) in 2023H1. This was driven by imports growing 6.4 percent (y-o-y) in 2024H1, despite capital expenditure cuts that ensured merchandise imports remained flat in 2024H1 compared to 2023H1. Travel sector receipts, which account for 95 percent of services exports, experienced a robust growth of 24 percent from January to May 2024 (y-o-y). As a result, the CAD is expected to remain elevated but narrow to 16 percent of GDP in 2024 from 21.2 percent of GDP in 2023. Foreign exchange reserves have declined to critically low levels, with rising liquidity risks, driven by an elevated CAD and increasing external debt repayments while the Maldives Monetary Authority (MMA) has been introducing new measures to ease the pressures. Official reserves fell from US$590.5 million at end-2023 to US$ 443.9 million at end-August 2024, due to rising debt repayment obligations and high import needs. Official reserves are at their lowest level since 2017, sufficient to cover only 1 month of imports, down from 1.4 months of coverage at end-2023. Usable reserves declined from US$179 million to US$61.2 million in the same period. In response to this, the MMA introduced several new regulations with an aim to increase the FX liquidity in the financial system. Citing rising liquidity pressures and an increase in the default risk, Fitch Ratings downgraded the Maldives in June and August and Moody’s downgraded in September. Sukuk yields rose to 32 percent in early September from 17 percent at end-2023. 1Since June 20, the authorities have not released the fiscal statistics due to ongoing reconciliation works, leading to transparency con- cerns on the overall economic situation. October 20 24 THE WORLD BANK i Seeking Stability In Turbulent Times Maldives Development Update Commercial banks’ exposure to the sovereign have increased further. Exposure of the domestic financial sector to the sovereign and state-owned enterprises (SOE) debt increased by 9 percent (y-o-y) in June 2024, reaching approximately US$ 4.49 billion (63.9 percent of GDP). Banks’ exposure to the sovereign amounted to 36 percent of total assets, up from 30 percent as of end-2023. Meanwhile the MMA’s exposure amounted to 61 percent of total assets, up slightly from 59.6 percent as of end-2023. Credit to the private sector accelerated by 12 percent (y-o-y) in July 2024, with growth observed in personal loans and the construction sector. Deposit growth decelerated over the same period, with deposits in local currency only growing by 4 percent (y-o-y) in July 2024, compared to 8 percent at end-2023, and deposits in foreign currency declining for the past four months, which contributed to increasingly tight foreign exchange liquidity. Total public and publicly guaranteed (PPG) debt remained elevated and rose further in early 2024. Total PPG debt reached US$8.2 billion or an estimated 115.7 percent of GDP in 2024Q1,2 compared to US$7.2 billion or 109.7 percent of GDP in 2023Q1. Domestic debt increased to 68.4 percent of GDP in 2024Q1,3 from 62.9 percent of GDP in 2023Q1, as tighter global financial conditions compelled the government to depend more on domestic sources. External and externally guaranteed debt accounted for the remainder of the stock (47.4 percent of GDP) in 2024Q1. Growth is expected to pick up marginally over the medium term, supported by increased tourist arrivals due to the completion of the new terminal at the Velana International Airport. Real GDP growth is projected to rise marginally from 4.1 percent of GDP in 2023 to 4.6 percent in 2026. The baseline projections for the medium term are, however, slightly lower than the forecasts in April 2024, reflecting: (i) a delay in the completion of the new terminal at the airport, shifting some growth from 2025 to 2026; (ii) an expected fiscal adjustment, including the negative impact on real household incomes from the planned subsidy reforms and reduction in government consumption and investments; and (iii) a moderation in spending per tourist. Inflation is projected to rise significantly over the medium term, which could increase poverty unless targeted cash transfers are introduced. Inflation is projected to increase from 2.3 percent in 2024 to 7.8 percent in 2025 before moderating to 4.5 percent in 2026 driven by the proposed removal of blanket subsidies for fuel, food, electricity, sanitation, and transport. In the absence of targeted cash transfers to mitigate a withdrawal of subsidies, the poverty rate is projected to increase from 2.5 percent to 4.6 percent nationally and from 4.8 percent to 8.3 percent in the atolls. The fiscal deficit is likely to moderate, reducing the public debt stock marginally, although debt service costs are expected to increase significantly. The fiscal deficit is projected to narrow from 9.1 percent of GDP in 2024 to 6.1 percent in 2026 due to lower subsidies, health sector reforms, and a reduction in Public Sector Investment Program (PSIP) spending. As a result, public debt is forecast to decline from 119.3 percent of GDP in 2024 to 111.4 percent of GDP in 2026. At the same time, debt service costs are expected to increase significantly, from a projected US$408.3 million in 2024 to about US$615.6 million in 2025, and then spiking to US$1.07 billion in 2026. This includes the bullet repayment on the US$500 million Sukuk and a US$100 million private bond placement due in 2026. Downside risks are significant, given heightened external and fiscal vulnerabilities, and limited buffers. Elevated external and fiscal imbalances, together with high external debt service payments, continue to pose significant liquidity risks. Recent downgrades by rating agencies and elevated yields have reduced access and increased the cost of financing. Despite government efforts to transfer a portion of revenues to the Sovereign Development Fund (SDF), which was designed to pay off some of the maturing debt in 2026, the fund’s available balance of US$65 million at end-August 20244 falls short of external debt servicing needs. Additional fiscal risks – from guaranteed and on-lent loans, as well as trade payables, subsidies, and capital injections to SOEs – remain and were estimated at US$2.5 billion or 45 percent of GDP in 2019.5 2 Based on World Bank’s latest macroeconomic forecasts. 3 Based on World Bank’s latest macroeconomic forecasts. 4 https://en.sun.mv/88684. 5 World Bank 2022. October 20 24 THE WORLD BANK ii Seeking Stability In Turbulent Times Maldives Development Update A large fiscal consolidation is urgently required to regain fiscal and debt sustainability and ease liquidity pressures. Despite the government’s announcement of a homegrown fiscal reform agenda in February 2024, the policies are yet to be endorsed and implemented. Implementing these reforms is key to easing current liquidity pressures and bringing the budget closer to balance. They should also be accompanied by candid and timely communication with the public. Key reforms include expenditure reduction measures such as: (i) phasing out existing subsidies and replacing them with a targeted cash transfer scheme; (ii) improving efficiency in the health insurance scheme (Aasandha); (iii) reforms to SOEs including improvements in their corporate governance and financial viability; and (iv) a sharp cut in capital spending, accompanied by changes in the PSIP regulatory framework. On the revenue side, key reforms – as announced in the recent Medium-Term Revenue Strategy6 – include revisions to the Goods and Service Tax (GST) and Income Tax, revisions to import duties and airport taxes and charges, introduction of an excise tax regime, and raising the Green Tax. B. Policy priorities to address climate and development challenges7 The special topic summarizes the main findings from the World Bank Group’s September 2024 Country Climate and Development Report (CCDR). It discusses key dimensions of climate resilience and identifies recommendations to support the country in facilitating critical climate resilience and green transitions within the context of the current macroeconomic vulnerabilities. Sea-level rise (SLR) and related flooding is a major climate change concern with significant economic impacts. Projections suggest a potential rise of anywhere from 0.5 to 0.9 meters by 2100. Without adaptation, coastal flooding could damage up to 3.3 percent of total assets by 2050 during typical 10-year floods. At the macroeconomic level, it is estimated that SLR and flooding would cause an almost 11 percentage point reduction of GDP by 2050 in a high-emission scenario.8 This impact, however, can be reduced to less than 6 percentage points of GDP with sustained reconstruction and adaptation investments. In addition, fiscal consolidation could help create the necessary fiscal space for reconstruction and adaptation investments. This could contribute to a pick-up in growth and a reduction in the debt ratio in the long term under a high-emission scenario. This shows that strategic investments in climate change adaptation pay off. Maldivian islands have adapted to SLR naturally in the past, but climate change potentially makes their future natural adaptation highly uncertain. Despite an SLR of 3–4 mm per year in recent decades, only 3 percent of the islands experienced net land loss from 2004 to 2016, owing to natural accretion and strategic land reclamation. However, the degradation of coral reefs compromises the islands’ ability to sustain critical ecosystem services including sand production. The flood protection service of coral reefs alone is valued at US$442 million or 8 percent of GDP per year. Almost all coral cover among reefs could be lost if global temperatures exceed 2°C under a high- emission scenario. Under a lower warming scenario, however, reefs will retain substantial coral cover. Lowering global emissions and reducing impacts from local stressors, such as coastal development and pollution will be key to preserving the country’s vital coral reefs. Severe climate-induced impacts are expected to begin in the second part of this century. Up until mid- century the negative impacts are expected to be incremental only. However, by around 2050, negative impacts are expected to escalate quickly, especially under the moderate to high-emission scenarios. Ocean heating, for instance, could cause an almost entire collapse of coral reefs and fish stocks. It is critical to use the next decades to plan and build adaptative capacity and prevent the most severe scenarios to the extent possible. Tourism and fisheries, both reliant on the country’s natural capital, have been instrumental in Maldives’ economic transition. Tourism and fisheries account directly for about half of the value added to GDP and 6 Ministry of Finance, Medium Term Revenue Strategy 2024-2028. 7 The analysis in this section is based on and summarizes key insights from World Bank 2024a. 8 The analysis in this section considers three climate scenarios: a low greenhouse gas (GHG) emissions scenario (Shared Socioeconomic Pathway [SSP]1–2.6), a medium GHG emissions scenario (SSP2-4.5), and a high GHG emissions scenario (SSP5–8.5). October 20 24 THE WORLD BANK iii Seeking Stability In Turbulent Times Maldives Development Update jobs. Their success is intimately linked to the country’s green and blue natural capital, which is under threat from climate change impacts. The tourism sector urgently requires accelerated climate adaptation efforts across its resort islands and guesthouses. A survey across 55 resorts indicates that over 90 percent are grappling with moderate to severe beach erosion, while around 60 percent report considerable infrastructure damage due to climate- related events. To enhance the climate resilience of the tourism sector, the regulatory framework needs to be strengthened to ensure that new resorts and guesthouses are being developed using climate-resilient and green infrastructure, among other measures. Climate change is also anticipated to have a severe impact on the fisheries sector. Analysis projects a dramatic decrease in fish catch potential of almost 100 percent by the end of the twenty-first century under a high-emission scenario. If no adaptation action is taken, such impacts could translate to an almost 100 percent revenue reduction from fisheries. In response, alternative livelihood opportunities need to be assessed such as diversification of deep-sea fisheries and mariculture development. Further research also needs to be conducted on climate change impacts on pelagic and reef fish migration to inform fisheries planning. Gray infrastructure such as seawalls can have tangible coastal protection benefits in some cases, but also detriments in others. Depending on the island type, coastal protection with gray infrastructure may be the right-fit approach to protection. That said, there are also maladaptive examples, e.g., islands locked into hard protection pathways lead to the destruction of protective coral reefs. This has negative impacts on the tourism and fisheries sectors that rely on healthy coral ecosystems, calling for a nuanced approach that combines engineered and nature-based measures. Enhancing social protection and skills development is crucial for building the resilience of people and communities and fostering sustainable growth. Poor and vulnerable households in Maldives report higher incidences of floods and droughts. Existing social and social protection programs must be more adaptive, scalable, and targeted to reach the poorest households. Skill development and unemployment insurance could help mitigate risks from green transition policies. It is estimated that the financing requirements for Maldives’ climate change adaptation to SLR and flooding alone range between US$2 billion and US$4 billion. This estimate is based on selecting bespoke coastal protection solutions to cater to the physical characteristics of each island. It does not include climate change mitigation (estimated at US$1 billion) or other adaptation costs such as those related to ocean warming. The government faces several financing and institutional challenges in addressing climate change. The vulnerabilities in fiscal and external sectors have led to an erosion in macroeconomic buffers. As a result, Maldives is at a high risk of external and overall debt distress and faces significant constraints to financing climate and other strategic investments in the short to medium term. Although a comprehensive policy framework to address climate change has been established, implementation is hampered by inadequate inter- agency coordination, translation of policies into action, and tracking of commitments. Restoring fiscal space, building external buffers, and ensuring macroeconomic stability will be a prerequisite to mobilize the required financing for climate action. As discussed in Section A, major policy reforms are urgently needed, including significant expenditure adjustments via reforms in areas such as subsidies, healthcare, public investments, asset and debt management, and state-owned enterprises. Revenue- side measures such as the Green Tax, Airport Development Fees, and Departure Tax could be further increased to finance urgently needed climate action. In addition, structural reforms are needed to diversify the economy and mitigate the presence of state-owned enterprises in the economy over the longer term. A green transition in the energy sector can also help reduce fiscal spending and reap other development benefits. The country is heavily dependent on imported diesel fuel for electricity production which accounts for over 90 percent of its energy needs. The fuel import bill was US$507 million (8 percent of GDP) in 2022 October 20 24 THE WORLD BANK iv Seeking Stability In Turbulent Times Maldives Development Update for the public sector alone, with US$61 million paid in subsidies. The potential fiscal and foreign exchange savings from switching to cheaper solar energy could help facilitate investments in climate resilience and other development objectives over the medium to long term. The required financing for climate actions cannot be met by existing resources, and reforms are needed to improve access to finance. In addition to grants and established concessional financing instruments, new sources of concessional funds and other debt-neutral instruments should be explored. The country can also tap into carbon markets and develop climate-related risk management financial products. Further, Maldives needs an updated public investment management framework and could expand public-private partnerships to mobilize green finance. October 20 24 THE WORLD BANK v Seeking Stability In Turbulent Times Maldives Development Update A1. Economic Update 1. Growth picked up in early 2024, while broad inflationary pressures have eased Economic growth The economy grew by 9.8 percent (y-o-y) in the first quarter of 2024 (2024Q1), picked up in early primarily driven by strong activity in the tourism sector, which directly accounts 2024 supported by for a quarter of the economy. Tourism’s expansion of 9.3 percent in Q1, translated tourism into stronger growth in transportation, communication, and the domestic trade sub- sectors (Figure A.1). Fisheries, though a small sector of the economy, declined by 0.9 percent (y-o-y) in 2024Q1,9 which could lead to income and welfare losses for people whose livelihoods depend on the sector. Tourism growth was Tourist arrivals continued to increase in 2024 following a historical high of 1.88 driven by increased million in 2023. As of end-August, 1.36 million tourists had visited the Maldives, arrivals from China a 10.5 percent increase when compared to the same period in 2023. The average and sustained duration of stay remained unchanged at 7.7 days in 2024, compared to the same arrivals from Russia, period last year, albeit lower than the 8.1 days recorded in 2022. However, per tourist Europe, and new spending fell further by 7 percent (y-o-y) in 2024H1 compared to 2023H1 (Figure markets A.2). Chinese arrivals lead the market, contributing 14.6 percent of total visitors so far in 2024. Meanwhile, arrivals from India, which was the top market in 2023, have declined sharply from 11 percent of total visitors in 2023 to only 6 percent in 2024, ranking 6th on the list. Arrivals from Russia, Western Europe, and new markets such as the USA were sustained. 9Maldives fish exports have dropped to a record low, with a 48 percent (y-o-y) decrease in 2024H1. This was driven initially by the government’s hike of the price it pays for fish in the local market in 2023, which had a negative impact on private sector exporters who were unable to compete at that price. However, due to payment arrears, fishermen have been limiting sales to the publicly owned fish company Maldives Industries Fisheries Company Ltd (MIFCO). October 20 24 THE WORLD BANK 1 Seeking Stability In Turbulent Times Maldives Development Update Figure A.1: Real GDP gained momentum in 2024Q1… Figure A.2: … as tourist arrivals increased, but the Contribution to growth, percentage points average duration of stay remains below 2022 levels Number of tourist arrivals (rhs, lines), Days of stay (lhs, columns) 12 Others Transportation and communication 9.5 2022 av. Duration of stay 250,000 Tourism Wholesale and retail trade 2023 av. Duration of stay 10 Construction Electricity and water 2024 av. Duration of stay Manufacturing Agri. & Fish. GDP 2022 arrivals 2023 arrivals 8 9.0 200,000 2024 arrivals 6 8.5 150,000 4 2 8.0 100,000 0 -2 7.5 50,000 -4 2023Q1 2023Q2 2023Q3 2023Q4 2024Q1 7.0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: National Bureau of Statistics Maldives (NBS), WB Source: Ministry of Tourism (MoT), WB calculations. calculations. Note: Others include financial services, real estate, professional, scientific, and technical activities, public administration, education, human health and social work activities, entertainment and recreation. Headline inflation Consumer price inflation declined to an average of 0.5 percent in 2024H1, close to was contained, the historical average, from 2.9 percent in 2023, following impacts of past increases to but food inflation the Goods and Services Tax (GST) easing, along with softer global commodity prices. remained elevated Inflation started easing from 2023Q4, with the moderation in global commodity prices, and fell further in 2024Q1 as price increases slowed in almost all sectors. This decline was more pronounced in the atolls (0.4 percent) than in Malé (0.5 percent). However, food prices experienced a sharp increase, reaching an average of 6.7 percent (y-o-y) in 2024H1 (Figures A.3 and A.4). Other prices, such as for housing, utilities, and transportation, remained controlled due to the continued provision of blanket subsidies provided by SOEs. Figure A.3: Headline inflation was subdued in Figure A.4: … although price increases were acute in 2024H1… food and beverages Year-on-year change in consumer price index (CPI), percent Contributions to CPI growth, percentage points 5.0 Republic Malé Atolls Food & Bev. Housing and Utilities Info.& Comm. Transport 4.0 Others CPI Inflation 4 3.0 2.0 2 1.0 0 0.0 -2 -1.0 -2.0 -4 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 Jan-24 Feb-24 Mar-24 Apr-24 May-24 Jun-24 Aug-22 Oct-22 Dec-22 Feb-23 Apr-23 Jun-23 Aug-23 Oct-23 Dec-23 Feb-24 Apr-24 Jun-24 Source: NBS, WB calculations. Source: NBS, WB calculations. Note: Others include furnishing, health, education, restaurants, and accommodation. October 20 24 THE WORLD BANK 2 Seeking Stability In Turbulent Times Maldives Development Update Box 1: Global economic developments Global growth surprised on the upside over the past six months, but signs of weakness emerged in mid- 2024. Global manufacturing activity contracted unexpectedly in July 2024, but the faltering was mitigated by a continued solid expansion in global services (Figure A.5). Activity in EMDEs appears to be firming, except in China, where growth has slowed unexpectedly since June 2024. In the United States and the euro area, growth is set to exceed earlier expectations. Figure A.5: Global growth in 2023 was better than expected China’s growth is moderating, reflecting softening Percent domestic consumption, but solid external demand is supporting exports. The central bank lowered its policy Index, 50+ = expansion Manufacturing 2015-19 avg. interest rate in July 2024 and reportedly plans to boost 55 Services 2015-19 avg. consumption by lowering effective lending rates for 54 small loans and easing mortgage lending requirements. Consumption moderation in China poses downside 53 risks for tourist arrivals in Maldives. 52 In the United States, growth in 2024 is widely expected 51 to be stronger than anticipated six months ago but 50 is projected to slow from its 2023 rate. Moderating inflation and signs of a cooling labor market are 49 expected to allow the US Federal Reserve to cut the 48 monetary policy rate in the third quarter of 2024. Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 Jan-24 Feb-24 Mar-24 Apr-24 May-24 Jun-24 Jul-24 Aug-24 Economic activity in the euro area has recovered steadily, led by the services sector. Although the manufacturing sector continues to stagnate with subdued growth in Source: Haver Analytics. investment and exports, euro area growth for the year Note: Readings above (below) 50 indicate expansion (contraction). The last observation was in July 2024. is expected to exceed earlier expectations. Given the better projected performance in the US and euro area, this could provide a boost in tourist arrivals for Maldives. Global inflation continues to slow but remains above pre-pandemic averages amid broadly stable commodity prices. Slowing inflation has allowed central banks in some EMDEs to ease monetary policy and is anticipated to lead to monetary easing in major advanced economies by late 2024. The latter is expected to ease pressures and lower financing costs for many EMDEs. However, given the current erosion in investor confidence in Maldives, the impact of lower global financing costs is likely to be limited for Maldives. After a brief expansion in April and May 2024, global trade flows returned to their contractionary trends, driven by shrinking goods exports as countries struggled with conflicts and the rise of trade-restricting measures. Services exports continued to expand, albeit at a decelerating pace, which was positive for Maldives’s tourism sector. Global trade growth is expected to accelerate in 2025 but remains below the 2015–19 average.10 This growth is set to be driven increasingly by trade among countries that are aligned on foreign policy. Source: World Bank SARCE team. 10 World Bank 2024. October 20 24 THE WORLD BANK 3 Seeking Stability In Turbulent Times Maldives Development Update 2. Fiscal deficit narrowed in cash terms but was accompanied by rising expenditure arrears Fiscal deficit The overall reported fiscal deficit in 2024Q1 narrowed to MVR 677 million (US$44 narrowed in early million) or 0.6 percent of GDP, compared to MVR 2.9 billion (US$188.5 million) 2024 or 2.9 percent of GDP in the same period of 2023. Total expenditure declined in this period by 11 percent (y-o-y) to 10.1 percent of GDP, whilst revenue collection increased by 9.1 percent (y-o-y) to 9.5 percent of GDP in 2024Q1. Revenue collection The revenue increase in 2024Q1 came largely from Tourism Goods and Services Tax increased due to (TGST) and business and property tax collections, linked to more robust business robust tourism- activity in this period (Figure A.6). In addition, the government unveiled its Medium- related tax Term Revenue Strategy (MTRS), which includes revisions to the Goods and Service collections Tax11 and Income Tax, revisions to import duties and airport taxes and charges, and the introduction of an excise tax regime. The government also announced plans to raise the Airport Development Fee, Departure Tax, and Green Tax. The announced measures, including those in the MTRS, are yet to be implemented and have not yet impacted revenue collection. Expenditure was Recurrent expenditure grew by 6.5 percent (y-o-y), while capital expenditure declined cut on a cash basis, sharply by 44.6 percent (y-o-y) over the same period (Figure A.7). Interest payments driven by liquidity continued to be substantial in 2024Q1, totaling MVR1.4 billion (US$91.2 million), constraints… compared to MVR1.1 billion (US$71.5 million) during the same period in 2023. Expenditure cuts were necessitated by cash-flow constraints linked to limited domestic and external financing. …which has been Expenditure cuts have been made on a cash basis, and not on a commitment accompanied by a basis, creating a significant buildup of expenditure arrears. The Maldives National build-up of arrears Association of Construction Industry (MNACI) has been in discussions with the government due to delays in fund disbursements under the Public Sector Investment Program (PSIP). MNACI reported significant delays in payments to contractors for developmental projects across local atolls.12 Furthermore, due to payment arrears in the fisheries sector, fishermen have limited their sales to the publicly owned fish company Maldives Industries Fisheries Company Ltd (MIFCO).13 As part of the fiscal reform agenda, the government decided in June to purchase fish from local fishermen at global market prices, aiming to improve MIFCO’s financial situation and address the expenditure arrears in the fisheries sector. Private hospitals have also recently raised concerns regarding their financial strain due to unpaid government dues.14 Planned fiscal Previously planned and budgeted subsidy reforms (as part of the government’s home- reforms have been grown fiscal reform agenda) for fuel, electricity, food, and sanitation – that aimed to delayed reduce expenditures by 2 percent of GDP in 2024 – have not been implemented. 11 The government proposes a comprehensive review of the Goods and Service Tax Act, along with the introduction of new legisla- tion aimed at increasing the tax base. See Box 2 for a detailed analysis of How to tax Maldivian value from offshore booking platform. 12 https://en.sun.mv/90381 13 https://corporatemaldives.com/decline-in-fishing-activity-leads-to-shortage-of-fish-products-in-retail-stores/ 14 https://edition.mv/celebrities/35151 October 20 24 THE WORLD BANK 4 Seeking Stability In Turbulent Times Maldives Development Update Figure A.6: Growth in revenues driven by robust Figure A.7: Expenditure declined on a cash basis, tourism activity due largely to capital investment cuts and lower y-o-y change, in percent subsidies y-o-y change, in percent 60 Other revenues Capital Expenditure Other recurrent spending Business and Property tax 40 Aasandha Subsidies Interest cost 50 Other Tourism Revenues Salaries and wages Total Expenditure Tourism GST General GST 30 40 Total Revenues and Grants 20 30 10 20 0 10 -10 0 -10 -20 -20 -30 2022-Q2 2022-Q3 2022-Q4 2023-Q1 2023-Q2 2023-Q3 2023-Q4 2024-Q1 2022-Q2 2022-Q3 2022-Q4 2023-Q1 2023-Q2 2023-Q3 2023-Q4 2024-Q1 Source: MoF, World Bank calculations. Source: MoF, World Bank calculations. Note: Other Tourism Revenues consist of import duties, green tax, airport service charges/departure tax, airport development fees, and resort rents. 3. Public debt and external debt servicing increased in 2024 Public debt increased Total public and publicly guaranteed (PPG) debt rose to US$8.2 billion or an further and remains estimated 115.7 percent of GDP in 2024Q1, compared to US$7.2 billion or 109.7 elevated percent of GDP in 2023Q1, due to elevated borrowing to finance the fiscal deficit and infrastructure projects (Figure A.8). Domestic debt increased to 68.4 percent of GDP in 2024Q1, from 62.9 percent of GDP in 2023Q1, as tighter global financial conditions compelled the government to depend more on domestic finances. As a result, outstanding external debt only grew by 8.6 percent (y-o-y) in 2024Q1 to US$3.4 billion or 47.4 percent of GDP (Figure A.9).15 In May 2024, the government signed agreements with the Saudi Fund for Development for a total of US$150 million in loans to expedite the construction of the new terminal at the Velana International Airport and to support the development of hospitals in three islands, which will lead to a further rise in the debt stock. External debt service Debt service costs increased by 13.3 percent (y-o-y) to US$408.3 million in 2024 needs increased, and from US$360.3 million in 2023 (See Figure A.23). Upon Maldives’ request, India has financing options agreed in 2024 to extend the maturities of one-year US dollar treasury bonds by one became more limited year, issued through the State Bank of India Male branch. In addition, negotiations in 2024 are underway to defer the repayment of other loans from China and the UAE. Credit rating downgrades by Fitch in June and August and by Moody’s in September have further constrained the ability to access markets for new financing, as yields on the US dollar Sukuk increased to 32 percent in early September as compared to 17 percent at end-2023. 15 Based on Quarterly Debt Bulletin published by the Ministry of Finance. October 20 24 THE WORLD BANK 5 Seeking Stability In Turbulent Times Maldives Development Update Figure A.8: Public infrastructure projects and subsidies Figure A.9: …which has led to a sharp increase in have driven up spending over the last decade… the debt stock Public expenditure as a share of GDP PPG in US$ millions and percent of GDP (rhs) 50 Other capital exp 9,000 External debt Domestic debt 125 PSIP Pensions 1 Total PPG debt (RHS) 8,000 Interest Payments 120 40 Administrative expenditure 7,000 Grants, Contributions and Subsidies 12 115 6,000 Salaries, wages and allowances 5,000 110 30 1 2 3 4 4,000 105 2 6 3,000 2 20 100 5 2,000 10 95 5 1,000 10 0 90 11 10 2022-Q1 2022-Q2 2022-Q3 2022-Q4 2023-Q1 2023-Q2 2023-Q3 2023-Q4 2024-Q1 0 2014 2023 Source: MoF, World Bank calculations. Source: MoF, World Bank calculations. Box 2: Capturing and taxing the value created in the Maldives from offshore booking platforms Currently, a significant share of the value of tourism-related goods and services delivered and rendered in the Maldives escapes taxation in the country. Non-resident online platforms sell vacation packages in the Maldives (accommodation, transportation, food and beverages, and leisure activities) to tourists abroad at market prices, while only a portion of these services and goods are taxed domestically. The offshore booking transaction between the tourist and the foreign platform is, at least at first sight, off-limits for the Maldives Inland Revenue Authority (MIRA), since it takes place outside the country between two non-resident parties, and it does not involve real estate located in the Maldives, but instead, goods and services delivered and rendered therein. Furthermore, MIRA has neither legal right nor means to access the offshore booking transaction information (price, terms and conditions, parties, payment). Hence, the value of such goods and services is not being taxed in the Maldives currently. The question is, what could be done to capture and tax in the Maldives the value created therein, but sold offshore? There are different options to address this tax avoidance scheme, but it is necessary to correctly delineate the transactions targeted. OECD´s Base Erosion and Profit Shifting (BEPS) Project aims to ensure that profits are taxed where economic activity and value creation take place. In 2017, the Maldives joined the Inclusive Framework for the global implementation of the BEPS Project, including the Two-Pillar Solution. Theoretically, from preliminary analysis, for direct taxation (income) purposes, the offshore online booking scheme could be tackled through different mechanisms: (i) addressing the tax challenges of the digital economy (BEPS Action 1 and Pillar One´s Amount A), (ii) preventing the artificial avoidance of permanent establishment status (BEPS Action 7), or (iii) aligning transfer pricing outcomes with value creation (BEPS Actions 8-10 and Pillar One´s Amount B). As refers to indirect taxation (consumption) purposes, it is notable that the Maldivian GST is based on the origin (rather than destination) principle. As a result of this, a supply of services by a person outside the Maldives (without a physical presence in the country) is not a supply of services in the Maldives and, therefore, is not subject to GST. The main challenge is to establish a nexus with the offshore booking platforms. The key questions are: (i) whether MIRA has the right to tax an offshore transaction whose value is mostly attributable to goods and services delivered and rendered in the Maldives, and (ii) how such value is to be determined as different from the value of the booking service itself (mainly, getting customers). Also, as we have seen, if the foreign booking platform has no physical presence in the Maldives, then such a transaction is not a supply of services in the Maldives for GST purposes. October 20 24 THE WORLD BANK 6 Seeking Stability In Turbulent Times Maldives Development Update Box 2: Capturing and taxing the value created in the Maldives from offshore booking platforms • Consequently, a first option would be finding a way to establish a nexus between the offshore platforms and the Maldives to claim direct (and indirect) taxing rights over the value of such booking transactions, though this may prove challenging. To begin with, such offshore booking transactions do not involve Maldivian resident customers, so, even if conducted online, Amount A under Pillar One would not capture these transactions, and neither would a turnover-based digital service tax (DST). Both taxes are aimed at taxing income (or revenue) from online transactions conducted without any physical presence in the market country by the non-resident providers (booking platforms) with domestic clients located in the market jurisdiction (the Maldives), which is not the case here since most customers/tourists are non-residents who are located abroad. • A second option would require establishing that the Maldives-related booking activity of offshore platforms constitutes a permanent establishment of those platforms in the Maldives, which may also be hard to defend as they do not meet the minimum threshold of business presence in the Maldivian territory, not even in terms of digital presence because their customer base is abroad. Therefore, it seems challenging to create a nexus that would justify taxing those foreign platforms, either from a direct or indirect perspective. In this regard, although taxing the digital economy in the Maldives would be highly recommended, especially the introduction of the GST on digital services, such tax policy measures would not help address the case at hand. Neither would extending the GST base to include imports help in implementing the destination principle, as this would increase prices for residents but not capture the value from offshore bookings because clients are located abroad. Therefore, the only viable alternative is to properly assess the price to be charged by the Maldivian providers. Since the taxing scope of MIRA does not cover such offshore transactions, then the focus must shift to the value of the Maldivian domestic transactions between the Maldivian companies (resorts, travel agencies, tourist service providers) and the offshore booking platforms, assuming those transactions exist. It is logical that Maldivian companies must be properly compensated for the goods and services offered to their clients (tourists and visitors in the Maldives). In normal circumstances, such compensation should be determined according to the market value agreed between independent parties (also known as arm´s length principle, ALP), which should not differ significantly across providers, irrespective of the booking platform, either local or foreign. Still, this is not the case, and most value is shifted abroad, probably due to better tax conditions (lower taxation) and the ability of multinationals to control and incur mispricing. If the parties (Maldivian company and offshore platform) are related, then the transfer pricing regime (TP) and the ALP should be applied, and income adjustments should be made to fully tax the value created in the Maldives. Also, corresponding adjustments should be made for GST purposes. This requires a strong TP team at MIRA to conduct TP-focused audits and advanced technical skills to negotiate advance pricing arrangements (APAs) to expedite revenue collections and minimize litigation. An interim ad hoc turnover-based presumptive levy targeting mispricing from offshore bookings could be introduced. In the meantime, until TP and APA capacity are fully developed in MIRA, an interim tax measure to capture the Maldivian value from offshore booking platforms could be introduced temporarily. It would consist of an ad hoc turnover-based presumptive levy on room occupancy referenced to the gap between local pricing and price quotes in offshore platforms for each specific Maldivian tourist resort, hotel, vessel, and guesthouse. It would bear some resemblance to the Green Tax, but it would be paid by the Maldivian companies, not by the tourists. It would be assessed by multiplying the difference between the price charged by the Maldivian company and the online room price charged by the offshore platform, times the occupancy rate, and times the tax rate (suggested at around 3 percent on differential turnover, as it would be assessed on turnover accrued by a non-resident third party but imposed on and paid by the Maldivian company, which has not realized such additional turnover). As an example, if a Maldivian resort charges 100 USD and the same room is commercialized at 300 USD through an offshore platform, the difference of 200 USD would be multiplied by the number of nights that the room was occupied during the year and then the tax rate would be applied. This presumptive tax would be a standalone levy on gross differential turnover that would be creditable against any future TP adjustment for the same period, and repealed once the TP unit has sufficient capacity and benchmarking to implement a reliable risk-based TP audit selection system and October 20 24 THE WORLD BANK 7 Seeking Stability In Turbulent Times Maldives Development Update an APA negotiation team. This interim measure would compensate for the tax loss from transfer mispricing and would encourage Maldivian companies to commercialize their vacation packages directly B2C instead of doing it B2B through (related or not) offshore companies operating booking platforms. If 100 percent B2C were not an option, at least B2B pricing should be adjusted upwards to capture the real value. In addition, given the recent Minister’s announcement,16 this levy could be collected in USD. 4. Household welfare may be affected due to potential austerity measures Fiscal reforms to The Maldivian economy is heavily reliant on international tourism with the revenues address the looming being redistributed to the population via a strong redistributive system, including macroeconomic significantly subsidized access to healthcare and education, public sector employment, challenges may price controls and subsidies, and income support programs. Given the planned reforms negatively affect to the healthcare system and subsidy reforms, households may face significant welfare household welfare losses given these austerity measures and the higher prices that are likely to follow. Overnight subsidy removal is estimated to increase poverty from 2.5 to 4.6 percent nationally and from 4.8 to 8.3 percent in the atolls, if not compensated with targeted cash transfers. The poverty rate could nearly double among households with more than three children and single-parent households. Targeted assistance Despite indirect subsidies being more important for poor and vulnerable households to poorer households as a share of household income, high-income households capture a larger share of will be crucial for spending on subsidies. For instance, the richest and poorest income deciles benefit mitigating the from 13 and 8 percent, respectively, of the total spending on subsidies, but these impacts of these subsidies account for 2 and 11 percent, respectively, of household income in these reforms two deciles (Figure A.10). Moreover, 43 percent of subsidy spending (equivalent to 4.1 percent of the 2023 budget) is going to the richest 40 percent of the population. Subsidy removal, therefore, creates an opportunity to move towards a more targeted, fiscally sustainable, and pro-poor means of allocating public spending. The poverty impacts of blanket subsidy removal could be offset if the removal of subsidies is accompanied by an income-targeted cash transfer. Assuming an overall budget of MVR1.2 billion, estimates suggest that such a targeted transfer could be effective to offset the poverty increase from subsidy removal if a flat transfer of the same amount is provided to everyone in the targeted bottom 60 percent of the population. The impact will be greater if payments are higher for the bottom 20 percent of the population as compared to the population in the 20th to 60th percentile of the population (Figure A.11). Implementing a targeted transfer will require shifting to a new targeting framework, underpinned by a proxy means test (PMT) to identify eligible beneficiaries. 16 MIRA 2024. October 20 24 THE WORLD BANK 8 Seeking Stability In Turbulent Times Maldives Development Update Figure A.10: Richer households capture more of Figure A.11: Targeted cash transfers to poor and the spending on indirect subsidies, which are more vulnerable households can offset the expected important for the poor in relative terms poverty increases following the subsidy removal Percentage Poverty headcount rates based on the national poverty line 14 Share of spending on subsidies captured 7 Subsidies as a share of household income 12 6 10 5 4 8 3 6 2 4 1 2 0 0 Baseline After Universal Transfer Transfer to Subsidy transfer to B60 B60 with 2 3 4 5 6 7 8 9 Poorest decile Rechest decile Removal to full targeted top-up for population by B20 using PMT PMT Source: HIES 2019, WB calculations. Source: HIES 2019, WB calculations. Note: B20 (B60) refers to the share of the population living in the bottom two (six) deciles. 5. Mounting external pressures have led to a sharp deterioration in FX reserves The trade deficit The current account deficit remained elevated at US$1.4 billion (or 21.2 percent of widened further in GDP) in 2023, largely financed by foreign direct investment (FDI). Net FDI grew by early 2024 and the an estimated 4 percent (y-o-y) to US$761.5 million (or 11.5 percent of GDP) covering CAD is expected to 54.4 percent of the current account deficit in 2023 (Figure A.14). The trade deficit remain at elevated widened to US$1.5 billion in 2024H1 from US$1.4 billion in H12023 driven by a sharp levels decline in fish exports of 45.5 percent (y-o-y) and growth in goods imports of 6.6 percent (y-o-y) despite a reduction of capital expenditure (Figure A.13). Merchandise imports remained elevated at US$1.8 billion in 2024H1, up marginally from US$ 1.7 billion in 2023H1, but merchandise import growth showed signs of slowing down due to the reduction of construction-related imports since 2024Q2 (Figure A.12). Travel sector receipts, which account for 95 percent of services exports, experienced a robust growth of 24 percent from January to May 2024 (y-o-y) compared to the same period in 2023. Driven by these services exports, the current account deficit is expected to narrow marginally, but remain elevated at 16 percent of GDP, in 2024. October 20 24 THE WORLD BANK 9 Seeking Stability In Turbulent Times Maldives Development Update Figure A.12: While import growth slowed… Figure A.13: …the trade deficit remains large Contribution to import growth, in percent US$ million 80 Others 1,200 Trade Balance Imports Exports Construction & Capital 1,000 Transport equip 800 60 Petroleum 600 Electronic Furniture 400 40 Food items 200 Total Imports 0 20 -200 -400 0 -600 -800 -20 -1,000 2022-Q1 2022-Q2 2022-Q3 2022-Q4 2023-Q1 2023-Q2 2023-Q3 2023-Q4 2024-Q1 2024-Q2 2022-Q2 2022-Q3 2022-Q4 2023-Q1 2023-Q2 2023-Q3 2023-Q4 2024-Q1 2024-Q2 Source: MMA, World Bank calculations. Source: MMA, World Bank calculations. Official reserves have Elevated current account deficits, and rising external debt repayment obligations, led declined to critically to a decline in official reserves from US$590.5 million at end-2023 to US$ 443.9 low levels, increasing million as of end-August 2024. This is sufficient to cover only 1 month of imports. vulnerabilities Although short-term liabilities (i.e., coming due within the next 12 months) declined to US$382.7 million in August 2024 from US$543.5 million a year earlier, usable reserves dropped to a low level of US$61.2 million or 0.1 months of import cover. (Figure A.15). Figure A.14: CAD somewhat financed by FDI… Figure A.15: …as reserves declined to critically low Percent of GDP levels Official reserves US$ million (lhs) and months of import cover (rhs) Net Other investments Net Portfolio investments 1200 Months of imports (rhs) 8 Net FDI Secondary income Primary income Months of imports Balance on Goods & Services Current Account Balance (net ST liabilities) 1000 Official Reserves (lhs) 40 Reserves net ST liabilities 6 30 800 20 10 600 4 0 400 -10 2 -20 200 -30 -40 0 0 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Aug-24 Source: MMA, World Bank calculations. Source: MMA, World Bank calculations. Note: 2023 figures are based on World Bank GDP estimations October 20 24 THE WORLD BANK 10 Seeking Stability In Turbulent Times Maldives Development Update 6. MMA and banking sector exposure to the sovereign remains high Monetary policy has The MMA kept policy rates and minimum reserve requirements unchanged.17 Broad been unchanged money (M2) remained stable, with a growth of one percent (y-o-y) in July 2024 (Figure since October 2022 A.16). Broad money growth was mostly driven by the increase in net domestic assets, while net foreign assets declined. The dollarization of the economy remained relatively stable but high at 45 percent in July 2024 compared to 46 percent in July 2023. Foreign exchange The official exchange rate is currently pegged at MVR 15.42 per USD, however on pressures have led to account of FX shortages a parallel FX market persists. The decision and reversal declining reserves by the country’s largest commercial bank to limit foreign transactions on August 25 were accompanied by significant volatility in the parallel exchange rate market where rates have been 15-20 percent higher than the official market.18 This underscored the severity of foreign exchange liquidity challenges in the financial sector. The MMA has On Oct 1, 2024, MMA introduced regulations requiring hotels and guesthouses to introduced new register with the MMA and deposit a certain amount of USD per tourist ($500 for measures to improve hotels per tourist and $25 for guesthouses per tourist) in the domestic banking system, FX liquidity with an aim to improve FX liquidity in the banking system. The MMA anticipates to challenges in the generate US$750 m additional yearly FX inflows into the banking system. financial system Given constrained Exposure of the domestic financial sector to the sovereign and SOE debt continued access to external to increase, amounting to MVR 63,795 million in sovereign securities and MVR financing, rising 5,981 million in SOE debt in June 2024. While the growth rate of sovereign and public sector SOE debt accumulation on the financial sectors’ balance sheets slightly moderated, it borrowing was remained high at 9 percent (y-o-y) in June 2024 (Figure A.17). Banks, other financial Figure A.16: Growth in net domestic assets Figure A.17: ...while exposures of the financial sector contributed to broad money growth… to the sovereign and SOEs remain elevated annual percentage change, percentage point contribution MVR million, percent Other items (net) Claims on private sectors Claims on Central Government, Banks Claims on other sectors Claims on Central Government, MMA Net claims on central government Claims on CG+SOEs, OFC Net foreign assets Broad money growth (rhs) Growth in Claims on CG+SOEs, Total (y-o-y, rhs) Dollarization ratio (rhs) 40% 60% 70,000 40% 30% 50% 60,000 50,000 30% 20% 40% 10% 30% 40,000 20% 0% 20% 30,000 -10% 10% 20,000 10% -20% 0% 10,000 -30% -10% 0 0% Apr-23 Aug-23 Dec-23 Apr-24 Aug-23 Dec-23 Apr-24 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22 Dec-22 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22 Dec-22 Apr-23 Source: MMA, World Bank calculations. Source: MMA, World Bank calculations. Note: Other financial corporations include finance companies, insurance companies, and pension funds. 17 Minimum reserve requirement (MRR) has been at 10 percent of average local currency deposits since June 2021, while the MRR for foreign currency deposits has been at 10 percent since October 2022. The interest rate corridor has also been maintained in the same band, with the overnight deposit facility and overnight Lombard facility unchanged at 1.5 and 10 percent, respectively. 18 https://www.bankofmaldives.com.mv/articles/703/bank-of-maldives-announces-card-limits-for-foreign-transactions October 20 24 THE WORLD BANK 11 Seeking Stability In Turbulent Times Maldives Development Update largely absorbed corporations and MMA are heavily exposed to the sovereign and SOE debt that by the domestic accounts for 36 percent, 68 percent, and 61 percent of their total assets, respectively, financial sector which warrants continued monitoring due to the high risk of public debt distress in Maldives. Private credit growth Credit to private sector growth has been on an upward trend since end-2022, accelerated, while accelerating to 12 percent (y-o-y) in July 2024 (Figure A.18). The highest credit growth deposit growth was observed in personal loans (27 percent, y-o-y), and the construction sector (25 remained subdued percent, y-o-y). At the same time, deposit growth continued decelerating (Figure A.19). Deposits in local currency grew by 4 percent (y-o-y) in July 2024, as compared to 8 percent growth at end-2023. Deposits in foreign currency have been declining for the past four months, with the deceleration rate reaching 1.4 percent in July 2024 (y-o-y), which contributed to increasingly tight foreign exchange liquidity conditions. There is, however, an excess of MVR liquidity in the market, whose redistribution across banks is limited due to the lack of appropriate market mechanisms, such as active open market operations (OMOs) or standing facilities to manage systemic liquidity. The banking sector Banks remain well capitalized, with a capital adequacy ratio of 50.6 percent in remains stable, 2024Q2,19 well above the regulatory minimum of 12 percent. However, the practice of but vulnerabilities zero credit risk weighting of both local and foreign currency government exposures continue to persist implies that sovereign risks are not captured. While non-performing loans (NPLs) due to FX shortages dropped by 0.8 percentage points since end-2023, they remain elevated, amounting to and heavy exposure 7.5 percent of total loans in 2024Q2. Provisioning for NPLs is relatively low, at 51.8 to the sovereign percent of NPLs. Banks’ profitability slightly declined, with returns on assets of 4.9 percent in 2024Q2 (as compared to 5.1 percent at end-2023) and returns on equity of 15.3 percent (as compared to 15.4 percent) over the same period. The net open position in foreign exchange remained negative from 2022 and reached minus 11.8 percent of capital in 2024Q2, indicating increasing vulnerabilities of banks to foreign exchange risks. Figure A.18: Private credit growth accelerated… Figure A.19: …while deposit growth remained sub- MVR million, percent dued MVR million, percent Tourism Commerce Deposits in FC Construction Real Estate Deposits in LC Other Personal loans Deposits in LC Growth (YoY, %) (rhs) Credit Growth (YoY, %) (rhs) Deposits in FC Growth (YoY, %) (rhs) 40,000 15% 70,000 50% 60,000 40% 30,000 10% 50,000 30% 40,000 20% 20,000 5% 30,000 10% 10,000 0% 20,000 0% 10,000 -10% 0 -5% 0 -20% Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22 Dec-22 Apr-23 Aug-23 Dec-23 Apr-24 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22 Dec-22 Apr-23 Aug-23 Dec-23 Apr-24 Source: MMA, World Bank calculations. Source: MMA, World Bank calculations. 19The ratio is likely overstated due to the zero-credit risk weight applicable to all government exposures and absence of any provisions on government exposures. October 20 24 THE WORLD BANK 12 Seeking Stability In Turbulent Times Maldives Development Update A2. Outlook and Risks 7. Growth is forecast to moderate, inflation to increase, and fiscal and external balances to narrow The expansion of Real GDP growth is projected to be 4.7 percent in 2024, followed by similar levels the airport will help in 2025 and 2026 (Table A.1). This will be supported by the completion of the new maintain the forecast terminal at Velana International Airport by mid-2025, which is expected to lead to rate of GDP pick- further increases in tourist arrivals. The baseline projections for medium-term growth up as the airport are, however, slightly lower than the forecasts in April 2024 (Figure A.20), reflecting expansion boosts the following factors: (i) a delay in completing the airport project, shifting some tourism growth from 2025 to 2026; (ii) an expected fiscal adjustment, including the impact on real household incomes from the planned subsidy reforms as per Budget 2024 and a fall in government consumption and investments; and (iii) more moderate spending per tourist. Table A.1: Medium-term projections 2022 2023e 2024f 2025f 2026f Real GDP Growth, at constant market prices 13.9 4.1 4.7 4.7 4.6 Agriculture 3.1 0.8 -7.5 3.4 2.9 Industry 25.2 7.6 2.3 1.6 0.9 Services 14.7 3.1 5.8 5.2 5.1 Inflation (Consumer Price Index) 2.3 2.9 2.3 7.8 4.5 Current Account Balance (% of GDP) -16.3 -21.2 -15.9 -13.7 -12.1 Fiscal Balance (% of GDP) -11.6 -12.7 -9.4 -7.8 -6.1 Primary Balance (% of GDP) -8.0 -8.6 -4.1 -3.1 -1.5 Debt (% of GDP) 112.3 122.8 119.3 114.9 111.4 Source: World Bank estimates and forecasts as of March 2024. October 20 24 THE WORLD BANK 13 Seeking Stability In Turbulent Times Maldives Development Update Inflation is projected Inflation is forecast to rise above the historical average over the next couple of years, to rise due to the planned removal of blanket subsidies – expected to be implemented in December 2024 – and its spillover effects on other sectors. The fiscal deficit is The narrowing of the fiscal deficit in 2024 (Figure A.21) is due to the scarcity of expected to narrow domestic and external financing, which has led to a notable reduction in capital and public debt to spending. While subsidy reforms are delayed, the fiscal deficit projections also decline marginally consider planned Aasandha reforms supported by the bulk procurement of medicines due to planned ex- that are likely to decrease health spending. Assuming a timely implementation of the penditure cuts government’s fiscal reform package, including a meaningful spending reduction, the fiscal deficit is expected to narrow from 12.7 percent of GDP in 2023 to 6.1 percent of GDP in 2026. As a result, public debt is projected to decline marginally from 122.8 percent of GDP in 2023 to 111.4 percent of GDP in 2026 (Table A.1). Figure A.20: Real GDP growth will moderate over the Figure A.21: Fiscal deficit is projected to narrow, medium term. with the pace depending on reform implementation Year-on-year growth, percent Percent of GDP 16.0 Mar-2024 forecasts Sep-2024 forecasts Fiscal Balance Primary Balance 0.0 14.0 13.9 13.9 12.0 -2.0 -1.5 10.0 -4.0 -3.1 -4.1 8.0 -6.0 6.0 4.7 5.2 4.1 -6.1 4.0 -8.0 4.0 -8.0 -7.8 4.7 4.7 -10.0 -8.6 4.1 4.6 -9.4 2.0 -12.0 0.0 -11.6 -14.0 -12.7 2022 2023e 2024f 2025f 2026f 2022 2023e 2024f 2025f 20206f Source: Ministry of Finance and World Bank projections. Source: Ministry of Finance and World Bank projections The CAD is ex- The narrowing of the CAD from 21.2 percent of GDP in 2023 to 12.1 percent of pected to narrow over GDP in 2026 (Table A.1) is expected to be supported by robust growth in service the medium term exports and slower growth in imports – as capital goods imports slow primarily due to the anticipated PSIP reforms (Figure A.22). High external financing needs – including significant debt servicing requirements – are expected to sustain pressure on the balance of payments and official reserves. External debt re- Annual average debt servicing needs are projected at US$615.6 million in 2025, followed payment needs are by a spike to US$1.07 billion in 2026 (Figure A.23). This includes bullet payments for expected to increase the US$500 million Sukuk and US$100 million private bond placement. Despite the significantly government’s aim to refinance US$ 500 million in 2026, this may not be possible given current market conditions. The country’s ability to repay or roll over its external debt will primarily depend on building investor confidence through the implementation of a multi-year fiscal reform program, better global financing conditions, and the availability of credit enhancement measures for liquidity management or debt for nature deals. October 20 24 THE WORLD BANK 14 Seeking Stability In Turbulent Times Maldives Development Update Figure A.22: Current account deficit is expected to Figure A.23: …but increasing external debt servicing narrow primarily due to anticipated PSIP reforms… needs will continue to exert pressures on reserves Percent of GDP External debt service projections for PPG debt, US$ million 0.0 1,200 Total Interest and Other Payments Total Principal Repayments Official reserves 1,000 -5.0 800 -10.0 600 -12.1 -15.0 -13.7 400 -16.3 -15.9 200 -20.0 -21.2 0 -25.0 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2022 2023e 2024f 2025f 20206f Source: MMA and World Bank estimates. Source: MoF, MMA and World Bank calculations. Note: Data as of April 2024, do not include debt service costs of pipeline loans – neither non-concessional nor commercial. Thus, debt servicing costs of the outer years may be underestimated. 8. Risks to the outlook are heavily on the downside Implementing External and fiscal vulnerabilities, along with increased debt service needs, pose major reforms is key to downside risks to the economic outlook. Failure to implement planned fiscal reforms, avoiding a major while obtaining new external debt at expensive terms, could lead to a fiscal or debt economic shock sustainability shock, as the country is already at a high level of debt distress. Maldives has very Despite government efforts to transfer a portion of revenues to the Sovereign limited external Development Fund (SDF), which was designed to pay off some of the maturing buffers to meet debt in 2026, the fund’s available balance of US$65 million (as of end-August 2024)20 financing needs remains small in comparison to medium-term external debt servicing needs. Given the limited level of reserves and external debt service needs, the SDF is likely to remain under significant pressure to meet short-term debt repayment obligations. Downside risks to The global economic outlook is dimmed by slower growth, a risk of high com- the global economic modity prices, and ongoing geopolitical conflicts. Major economies such as China are outlook post further projected to experience an extended economic slowdown, with risks tilted towards challenges the downside. These global uncertainties, as well as any additional global shocks, pose risks to Maldives’ economic outlook, especially where there is a slowdown in countries that are key markets for tourists, such as China and Europe. Stronger tourism performance would provide some upside. A multi-year fiscal The PPG debt to GDP is forecast to remain at over 118 percent (Table A.1). Such high reform program levels of public debt, and associated refinancing risks, make the Maldivian economy with a strong fiscal vulnerable to domestic and external shocks. Low external and fiscal buffers, mean adjustment path is that fiscal adjustment is required to mitigate debt sustainability risks. Thus, despite urgently required. somewhat robust growth prospects, prudent debt management remains a top priority to improve fiscal sustainability, lower the cost of growth-enhancing investments – especially with large debt service obligations coming due (Figure A.23) – and ensure a more resilient economy going forward. 20 https://en.sun.mv/88684. October 20 24 THE WORLD BANK 15 Seeking Stability In Turbulent Times Maldives Development Update 9. Implementing reforms, with a sharp fiscal adjustment, remains an urgent priority A multi-year fiscal Reducing fiscal and external imbalances is critical to restoring fiscal and debt reform program sustainability and managing liquidity risks. This entails the immediate implementation with a strong fiscal of the homegrown fiscal reform agenda, announced in February 2024, including: (i) adjustment path is phasing out existing blanket subsidies and replacing them with a targeted cash transfer critical, and urgently scheme;21 (ii) improving health spending efficiency by changing the coverage policy required of health services and implementing measures to reduce drug costs (such as bulk procurement of medicines);22 and (iii) prioritizing the PSIP envelope and rationalizing capital expenditure. Importantly, the reform plan needs to be accompanied by an effective mechanism to offset welfare losses among vulnerable groups, and timely and candid communication to the public. Any further delay in fiscal reforms could lead to further erosion in investor confidence and an unprecedented economic shock. Diversification of the Maldives’ heavy dependence on tourism leaves the country vulnerable to external economy remains a shocks, emphasizing the need for economic diversification. The government has long-term objective launched recent initiatives to support diversification including establishing the Development Bank of Maldives. New tourism products, such as environmentally friendly eco-tourism options, better infrastructure, enhanced connectivity, and favorable rents for resort developments, could further enhance tourism in the Northern and Southern Atolls and support diversification within the tourism sec- tor. Diversification beyond tourism could be supported by improved digital con- nectivity including an upcoming new submarine cable, and gradually reducing the government’s heavy presence in the non-tourism economy through SOEs. At a sectoral level, the fisheries sector be supported by the expansion of fish pro- cessing and cold storage facilities, focusing on new export markets, and reducing the state’s footprint in the sector to remove market distortions. However, any additional infrastructure investments to support diversification must be well- sequenced and consider affordability given the country’s current debt vulnerabilities. 21 According to the approved budget, this is expected to result in expenditure savings of around MVR1.5 billion or around 1.3 percent of projected GDP in 2024. To mitigate the negative welfare impacts of subsidy reforms on vulnerable groups, the government plans to provide direct cash transfers that correspond to around half of subsidy-related savings. 22 The bulk procurement measures will lead to an estimated 0.3 percent of GDP spending reduction in 2024. October 20 24 THE WORLD BANK 16 Seeking Stability In Turbulent Times Maldives Development Update B. Policy priorities to address climate and development challenges23 1. Maldives faces intertwined development and climate change challenges Resilient and green Maldives needs to address its climate change and development challenges and development requires opportunities in an integrated manner (see Figure B.1). The presence of a heavy public a synchronized debt burden, coupled with large fiscal and external vulnerabilities, leaves little room to policy response. finance much-needed investments in climate resilience in the short to medium-term (see Section A1). Therefore, a synchronized and well-coordinated policy response is required to tackle climate change, development, and current macroeconomic challenges. A climate-resilient Maldives has begun to focus on resilience and seize the opportunities of a blue and development green economy. However, much more needs to be done to preserve the natural capital path is the most on which its economy is based and to unlock additional areas for green, resilient, sustainable trajec- and inclusive growth. Green transitions in the energy, mobility, waste, and housing tory for the nation’s sectors can build resilience, reduce harmful climate and environmental impacts, and economic and social save fiscal space in the longer term. Clean ocean water and waste management are development. key for tourism, fisheries, and people. Maintaining environmental sustainability and establishing appropriate links to value chains will be critical in developing high-value products supplied to the local tourism industry or niche international markets. The government has The lack of a detailed National Adaptation Plan (NAP) and weaknesses in pro- established a compre- ject planning, preparation, and selection exacerbate effective public investments in hensive policy frame- climate adaptation. The 2020 Nationally Determined Contribution (NDC) targets a work to address 26 percent reduction in emissions by 2030, with aspirations for net zero emissions, climate change, but contingent on international support. However, policy implementation is hampered implementation is not by coordination challenges among institutions with partly overlapping mandates and sufficiently effective. disjointed activities. Local island councils also struggle to manage climate impacts and disaster response, and central agencies face challenges in monitoring and forecasting. 23 The analysis in this section is based on and summarizes key insights from World Bank. 2024a. October 20 24 THE WORLD BANK 17 Seeking Stability In Turbulent Times Maldives Development Update Figure B.1: Conceptual framework for climate change and development in Maldives 2. Climate change impacts in Maldives Tourism and fisher- Combined, these two sectors contribute to about half of the value-added to GDP ies, both reliant on and jobs. The tourism sector alone accounts, directly, for almost 30 percent of GDP, the country’s natural more than 60 percent of foreign exchange receipts, and almost 50 percent of public capital, have been revenues.24 Fisheries contributes around 4.5 percent of nominal GDP and 50 percent instrumental in of merchandise exports; it provides direct or indirect income to more than 20 percent Maldives’ economic of the population.25 The tourism sector, drawing visitors for its pristine beaches and transition. vibrant marine life, reports that 80 percent of tourists are attracted by the beaches and over 60 percent by underwater activities.26 This demonstrates the importance of coral reef health, upon which 3 in 10 fish species depend. The fisheries sector’s profitability, particularly in tuna fisheries, also hinges on the health of coral reefs and marine ecosystems. However, economic and tourism growth has not always been sustainable, and the foundational natural capital basis is under threat from climate change impacts. Sea-level rise (SLR) At least 80 percent of the landmass lies less than 1 m above mean sea level, and over and related flooding 40 percent of the population resides within 100 m of the coastline.27 Between 1992 is the main climate and 2015, annual SLR averaged just under 4 mm. However, projections carried out hazard facing Mal- by the World Bank Group’s Country Climate and Development Report (CCDR)28 dives. suggest the rate could increase to between 6 and 12 mm per year, under severe warming scenarios, potentially leading to a rise of anywhere from 0.5 to 0.9 m by 24 World Bank 2023. 25 World Bank 2020. 26 World Bank 2024b. 27 ibid. 28 World Bank 2024a. October 20 24 THE WORLD BANK 18 Seeking Stability In Turbulent Times Maldives Development Update 2100. Without adaptation, coastal flooding could damage up to 3.3 percent of total assets by 2050 during typical 10-year floods. For rare, more intense events, damage to natural assets could reach up to 3.8 percent (for century-level floods) and 4.4 percent (for millennium-level floods). Without any Depending on the climate scenarios,29 in 2050, coastal flooding can result in damages adaptation to SLR, of up to 2.8–3.3 percent of the total asset stock in a 1-in-10-year event, 3.4–3.8 percent more valuable land in a 1-in-100-year event (see Figure B.2), and 3.9–4.4 percent in a 1-in-1000-year event and productive (not shown). These damages are equivalent to US$0.7–1.1 billion or between 11.3 and capital will be 17.7 percent of GDP. Toward 2080, the damage rises as high as US$1.6 billion even exposed to coastal under a 1-in-100-year event. flooding. Figure B.2: Capital stock damaged from coastal flooding in relative and absolute terms under different climate change scenarios Share of total capital stock and US$ terms Source: World Bank 2024d. Future natural Maldivian islands have adapted to SLR naturally in the past, but the impacts of adaptation potential climate change make their future natural adaptation potential highly uncertain. The of islands to SLR physical foundation of atoll islands largely comes from the sand produced by marine remains uncertain. ecosystems. This has historically enabled them to adapt to SLR. Despite SLR of 3–4 mm per year in recent decades, only 3 percent of the islands experienced net land loss from 2004 to 2016, while 59 percent saw increases in land area and 38 percent remained stable, owing to natural accretion and strategic land reclamation. However, the degradation of coral reefs compromises the islands’ ability to sustain this vital sand production. More than economic loss, this represents a substantial reduction in the ecosystem services that coral reefs provide. The flood protection service of coral reefs alone is valued at US$442 million or 8 percent of GDP per year. 29 The analysis in this section considers three climate scenarios: a low greenhouse gas (GHG) emissions scenario (Shared Socioeconomic Pathway [SSP]1–2.6), a medium GHG emissions scenario (SSP2-4.5), and a high GHG emissions scenario (SSP5–8.5). 30This is without accounting for the expected socioeconomic growth over the decades to come, which might further increase the amount of capital and assets located in areas at risk of coastal flooding. For instance, according to NBS, the population growth is projected to reach almost 1 million by 2054, further increasing the capital stock required to serve these residents. October 20 24 THE WORLD BANK 19 Seeking Stability In Turbulent Times Maldives Development Update SLR would have a The macroeconomic modeling exercise31 assesses the impact of SLR on economic significant impact on growth, and the debt trajectory for various scenarios with different assumptions about the output… fiscal consolidation, reconstruction investments, and adaptation investments32 with different protection levels. Two response scenarios were modeled to assess the impact of SLR on economic growth: (1) no fiscal consolidation, slow reconstruction,33 and no adaptation, and (2) fiscal consolidation, fast reconstruction, and adaptation (assumed to be 50 percent financed through public debt financing between 2027 and 2039 and 50 percent financed by the private sector through higher-cost private capital). Under the second scenario, three different degrees of adaptation effectiveness (assuming 25, 50, and 75 percent damage reduction) were modeled. It estimates SLR impacts on GDP under three different emission scenarios and finds that the median impact is an 11.3 percent reduction by 2050 under the high emission scenario, 10.7 percent under the medium emission scenario, and 10.2 percent under the low emission scenario. …however, the im- GDP impacts can be significantly reduced with context-informed and fast pact can be reduced reconstruction and adaptation action. For instance, under the worst-case emission with sustained recon- scenario, GDP impacts can be reduced from about 11 percentage points to about 5 struction and adapta- percentage points by 2050. Under the first response scenario (no fiscal consolidation, tion investments. slow reconstruction, and no adaptation), there is a significant adverse impact on GDP with an approximate 11 percentage point reduction from the baseline by 2050 under the high emission case. However, under the second scenario with fiscal consolidation, fast and context-aware reconstruction taking effect just one year after SLR-induced flooding, and adaptation investments, the GDP decline is reduced to about 9 percentage points, assuming a protection level of 25 percent. Under the scenarios of adaptation investments with higher adaptation effectiveness (50 percent or 75 percent), investments are estimated to further cushion the negative impact to less than 7 percentage points or 5 percentage points of GDP reduction from the baseline by 2050, effectively reversing compounding negative impacts over time.34 However, failure to implement planned fiscal reforms could lead to a potential macro-financial crisis and therefore adversely affect the country’s growth and debt profile, causing delays in required asset reconstruction and climate adaptation investments (see Figure B.3). Fiscal consolidation The same two response scenarios were modeled to assess the impact of SLR on helps lower the debt the debt-to-GDP ratio (see Figure B.4). Under the first scenario, GDP losses accrue ratio and creates under climate change, and consequently, debt as a share of GDP rises sharply. The necessary fiscal debt-to-GDP ratio becomes almost 10 percentage points higher than the baseline space for reconstruc- by 2050. In contrast, the debt-to-GDP ratio declines substantially in the initial stage tion and adaptation in the second scenario by more than 16 percentage points from the baseline due to a fast fiscal consolidation in three years, which provides resources to protect against future climate events. Though the debt ratio bounces back due to the partially publicly 31 See World Bank. 2024a. 32 The assumptions are (a) an adaptation cost of US$2.61 billion (constant 2022 dollars) based on the midpoint estimate of the most comprehensive investment scenario; (b) the adaptation cost uniformly distributed across 13 years from 2027 to 2039; and (c) adaptation benefits start to materialize three years after the cost starts incurring and are fully realized by 2042. 33 Reconstruction refers to repairing damaged capital stock. The assumption is that shocks destroy capital with average productivity. Therefore, reconstruction brings higher returns (average) than other productive investments (marginal). Thus, it is assumed that reconstruction is prioritized and financed. The cost of reconstruction crowds out productive public investment. Relocation aspects are not considered due to a lack of granular data. 34 GDP reaction is sensitive to adaptation investment intervention. Despite a general downward trend over the time horizon until 2050, GDP bounces back slightly when the adaptation investment kicks in around 2027, while accelerating to decline when the investment phases out around 2039. However, the response is temporary and returns to the trend quickly. October 20 24 THE WORLD BANK 20 Seeking Stability In Turbulent Times Maldives Development Update investments in the financed adaptation investments until 2040, it declines by more than 8 percent long term. (protection level at 75 percent) and about 6 percent (protection level at 25 percent) from the baseline over a longer term until 2050. Overall, the debt ratio under a fiscal consolidation scenario stays on a downward path and is much lower compared to the scenario without a fiscal consolidation.35 Figure B.3: GDP impact from SLR under the high-emission scenario 1. No fiscal consolida�on; slow reconstruc�on; 2a. Fiscal consolida�on; fast reconstruc�on; adapta�on no adapta�on with protec�on level of 25 percent 2b. Fiscal consolida�on; fast reconstruc�on; 2c. Fiscal consolida�on; fast reconstruc�on; adapta�on adapta�on with protec�on level of 50 percent with protec�on level of 75 percent 35 An important limitation of the modeling results is that only impacts from SLR are assessed while other hazards such as ocean temperature rise are not accounted for – the macroeconomic impact of all climate change threats combined would thus be significantly larger. October 20 24 THE WORLD BANK 21 Seeking Stability In Turbulent Times Maldives Development Update Figure B.4: Debt/GDP impact from SLR under the high-emission scenario 1. No fiscal consolida�on; slow reconstruc�on; 2a. Fiscal consolida�on; fast reconstruc�on; adapta�on no adapta�on with protec�on level of 25 percent 2b. Fiscal consolida�on; fast reconstruc�on; 2c. Fiscal consolida�on; fast reconstruc�on; adapta�on adapta�on with protec�on level of 50 percent with protec�on level of 75 percent Almost all coral cover Ocean warming – resulting in coral bleaching events – is a major climate concern. among reefs could be Past ocean heating events in Maldives led to significant coral mortality. The severe lost if global tem- 1998 coral bleaching event, for instance, resulted in a reduction of coral coverage per-atures exceed from more than 70 percent to less than 10 percent. Fortunately, corals recovered 2°C. to nearly pre-shock levels, until the next bleaching event occurred in 2016. Coral bleaching is cyclical, and corals can recover if they have the necessary time. However, climate change shortens the duration between ocean heatwaves and intensifies them. It is estimated that almost all coral cover among reefs could be lost if global temperatures exceed 2°C (see Figure B.5).36 Even under a low-emission scenario, heatwave intensity will increase two to five times. Despite significant impacts, under the low-emission scenario, reefs would retain substantial coral cover. Severe climate-in- Projections of the climate change impacts on coral reefs, fish stocks, land, and duced impacts are infrastructure, all indicate that up until mid-century the negative impacts are expected to begin by expected to be incremental only.37 However, by around 2050, negative impacts 2050. are expected to escalate quickly, especially under the medium to high-emission scenarios. Ocean heating, for instance, could cause an almost entire collapse of coral reefs and fish stocks. It is critical to use the decades leading up to these projected impacts to plan and build adaptative capacity for high-impact scenarios and, with the support of the international community, prevent them to the extent possible. 36 See World Bank 2024a. 37 ibid. October 20 24 THE WORLD BANK 22 Seeking Stability In Turbulent Times Maldives Development Update Figure B.5: Development of the distribution of coral cover among reefs till 2100 under different climate scenarios Source: World Bank 2024a. Note: Distribution of predicted values of total coral cover captured every two years with all geophysical coral reef mappings combined for the ‘North’ (left), ‘Central’ (middle) and ‘South’ regions of Maldives (right) for a model with no crown-of-thorns starfish outbreaks. For every selected year, Number (reefs) = 120 values for SSP1-1.9 and Number (reefs) = 200 values for all the other scenarios of carbon emission. The boxes show the interquartile range which visualizes the spread of reef states between the 25th and 75th percentile. From each box, whiskers are drawn up and down to 1 time the interquartile range, which covers around 85–90 percent of reef states. The central mark indicates the median. 3. Toward Climate-Resilient Islands, Infrastructure, and Ecosystems Tourism and fisher- Given the heterogeneity of Maldivian islands, climate adaptation options must be ies, both reliant on carefully planned and tailored to the needs of each island. Specific island typology and the country’s natural four archetypical Dynamic Adaptive Policy Pathways (DAPPs) have been developed to capital, have been guide island-level SLR adaptation strategies.38 These generic pathways offer a starting instrumental in point for developing more detailed adaptation strategies for individual islands and Maldives’ economic recommend solutions for various situations and points in time. There are five broad transition. categories of adaptation options for making atoll islands more climate resilient, 38 ibid. October 20 24 THE WORLD BANK 23 Seeking Stability In Turbulent Times Maldives Development Update including: (a) protection infrastructure (using hard/gray measures to reduce SLR and flooding); (b) accommodation measures (building resiliently, such as on stilts or floating); (c) nature-based solutions (NbS), using natural practices such as restoring coral reefs or planting mangroves for flood protection; (d) island raising and land reclamation; and (e) relocation and migration. Underpinning these adaptation options are climate, disaster, environmental monitoring and modeling, and early warning systems (EWSs) – all serving as crucial tools to facilitate effective implementation. Current gray Currently, the most prevalent coastal adaptation measures in Maldives are land solutions can provide reclamation and hard/gray coastal protection infrastructure. While gray-engineered tangible coastal measures currently dominate adaptation efforts on both inhabited islands and resort protection, but side islands, several resort islands have experimented with NbS. Gray infrastructure can effects need to be have tangible coastal protection benefits in some cases but also detriments in other assessed and cases. This highlights the complexity of coastal protection in the face of economic mitigated. imperatives such as tourism and the urgent need for a nuanced approach combining engineered and nature-based measures. Island raising and Hulhumalé, for instance, was designed and developed with future SLR in mind and reclamation can features extensive island augmentation. The land was raised to approximately 1.8 m address risks above mean sea level to reduce flood risks. However, land reclamation often affects from SLR but can lagoons and coral reefs, which are instrumental in natural island formation and growth, also exacerbate by disrupting natural sediment transport processes. The removal and redistribution vulnerabilities. of sand and sediment can also damage coral structures that protect against coastal erosion and flooding. Safeguarding coral Coral reefs provide important ecosystem services. They are an important attraction reefs is a priority. for tourists and a habitat for a range of flora and fauna underpinning the fishery industry. In addition, they prevent damage from storm surges and ensure the country’s existence in the face of SLR. Coral sands represent 90 percent of the sediments of the islands whose continued supply supports the natural adapta-tion of the islands to SLR. Coral reefs prevent annual flood damage amounting to about 8 percent of GDP. Simulations of coral cover under different climate scenarios show that coral reefs are expected to be severely affected by ocean heating.39 4. Toward Climate-Resilient Livelihoods The tourism sector The tourism sector urgently requires accelerated climate adaptation efforts across its urgently requires a resort islands and guesthouses. A survey conducted across 55 resorts indicates that d-aptation actions. over 90 percent are grappling with moderate to severe beach erosion, while around 60 percent report considerable infrastructure damage due to climate-related events.40 To enhance the climate resilience of the tourism sector, the regulatory framework needs to be strengthened to ensure that new resorts and guesthouses are being developed using climate-resilient and green infrastructure, among other measures. Severe climate Climate change is also anticipated to have a severe impact on the fisheries sector. The change impacts are analysis projects a dramatic decrease of almost 100 percent in fish catch potential by anticipated in the the end of the twenty-first century under a high-emission scenario.41 If no adaptation fisheries sector. action is taken, such impacts could translate to almost 100 percent revenue reduction from fisheries (Figure B.6). In response, alternative livelihood opportunities for fishers 39 ibid. 40 ibid. 41 ibid. October 20 24 THE WORLD BANK 24 Seeking Stability In Turbulent Times Maldives Development Update need to be assessed – such as diversification of deep-sea fisheries and mariculture development – and further research needs to be conducted on climate change impacts on pelagic and reef fish migration to inform fisheries planning. Figure B.6: Projected percentage change in fisheries – pelagic and reef-associated – revenue and net revenue Relative to the base period (1990–2010) under different climate scenarios Source: World Bank. 2024c. Note: Solid lines indicate revenue, and dashed lines are net revenue (revenue − fishing cost). Social protection and Enhancing social protection and skills development is crucial for building the re- skills development silience of people and communities. Poor and vulnerable households in Maldives are critical for report higher incidences of floods and droughts. Remote atolls face increased risks of resilient and coastal flooding and extreme sea levels and have more difficulty accessing post-disaster sustainable growth. support. There is a foundation for a responsive social protection delivery system, but it requires improved digital infrastructure, data, and institutional strengthening. Existing social protection programs need to be more adaptive, scalable, and targeted to reach the poorest households. Skill development and unemployment insurance could help mitigate risks from green transition policies, which must be designed carefully, as they could also further add strain to public finance. A robust social protection system, digitization, and smart policy design can shield the poor from the impacts of decarbonization reforms, such as energy subsidy removal. 5. Climate finance Adaptation to SLR The financing requirements for Maldives’ climate change adaptation to SLR and and flooding requires flooding alone range between US$2 billion and US$4 billion. This estimate is based on a significant amount selecting bespoke coastal protection solutions to cater to the physical characteristics of of financing. each island (which contrasts with previous estimates based on the costliest measures). It does not include other adaptation costs such as those related to ocean warming, which will significantly threaten tourism and fisheries. Similarly, it also does not include the financing gap for mitigation (i.e., renewable energy investments), which has been estimated at US$1 billion through 2030.42 42 Potomac Group 2023. October 20 24 THE WORLD BANK 25 Seeking Stability In Turbulent Times Maldives Development Update Addressing Restoring fiscal space, building external buffers, and ensuring macroeconomic stability macroeconomic will be a prerequisite to mobilizing the required financing for climate action. As vulnerabilities will discussed, major policy reforms are urgently needed, including significant expenditure be essential for adjustments via reforms in subsidies, the health sector, public investment, asset and financing climate debt management, and state-owned enterprises (SOEs) and private sector support (see action. Section A1). Revenue-side measures such as the Green Tax, Airport Development Fees and Departure Tax could be further increased to finance urgently needed climate action.43 In addition, structural reforms are needed for a more diversified and resilient economy over the longer term. A green transition The country is heavily dependent on imported diesel fuel for electricity production in the energy sector which accounts for over 90 percent of its energy needs. The fuel import bill was US$507 can help restore million (8 percent of GDP) for the public sector alone in 2022, with US$61 million fiscal space and reap paid in subsidies. The potential fiscal and foreign exchange savings from switching to other development cheaper solar energy could help facilitate investments in climate resilience and other benefits. development objectives over the medium to long term.44 In addition, creating its own energy would reduce vulnerability to global energy shocks and create quality jobs for the local population. The financing A variety of external financing sources should be explored. Grants and concessional requirements cannot financing totaling around US$500 million have contributed to financing climate be met by domestic projects in the past. For adaptation investments that are not commercially viable, grants public finance alone. will continue to be crucial but will not be sufficient to fill the significant financing requirement. New sources of concessional funds may be tapped, which could be facilitated by establishing dedicated conservation and climate adaptation trust funds. Related to this, the government could consider other debt-neutral instruments such as debt-for-nature swaps or donor outcome-based bond structures. The country can also tap into carbon markets, including for blue carbon projects, and develop climate-related risk management financial products such as insurance and instruments for disaster risk financing. The private sector Maldives needs an updated public investment management (PIM) framework and will have to play an could expand public-private partnerships (PPPs) to mobilize green finance. Once the important role. existing fiscal and external vulnerabilities are addressed and the appropriate regulatory frameworks are in place, more projects can be bid out to the private sector. The small project size and lack of capacity might require the use of de-risking instruments to attract more private capital and foreign direct investment (FDI) to meet climate adaptation and mitigation financing needs. A fiscal com-mitments and contingent liabilities framework for PPP projects can help manage the associated fiscal risks and enhance coordination between institutions. 6. Recommendations Six High-Level Table B.1 provides a snapshot of the Key Recommendations with those considered Objectives and urgent marked with a symbol.45 The High-Level Objectives include improving related Key macroeconomic stability and fiscal space to finance climate action, mobilizing climate Recommendations finance, enhancing the climate resilience of islands, infrastructure, ecosystems, livelihoods, and unlocking the development benefits from green transitions in the 43 From the Medium-Term Revenue Strategy 2004-2008 by Ministry of Finance. The authorities have decided to raise the mentioned rates by January 2025. 44 This considers the costs of importing, constructing, and maintaining the materials and machinery for renewable energy. 45 The Key Recommendations are further elaborated (including the time frame for implementation, synergies and trade-offs with other development objectives, implementation barriers, and progress indicators) in Chapter 8 of World Bank 2024a. October 20 24 THE WORLD BANK 26 Seeking Stability In Turbulent Times Maldives Development Update are vital to building energy, mobility, and waste sectors with an aim to develop a path to address climate climate resilience. and development challenges in an orderly manner. Table B.1: High-level objectives and a snapshot of key recommendations High-Level Objective 1: Improve macroeconomic stability and fiscal space to finance climate action (1.1) Reduce expenditure related to subsidies, infrastructure, expensive health care options, and SOEs to return public spending to sustainable levels; address fiscal vulnerabilities; create space for climate-related spending over the medium term; and increase private sector participation. (1.2) Implement revenue mobilization measures including tax reforms such as raising the Green Tax and dedicating proceeds to environmental- and climate-resilient interventions. (1.3) Limit the lending from the banking sector to public sector to allocate more resources to the private sector for climate adaptation investments and enhance banking regulation and supervision to ensure financial stability. High-Level Objective 2: Mobilize climate finance (2.1) Operationalize the Climate Finance Hub and develop a climate investment plan with bankable projects. (2.2) Set up a conservation and climate adaptation trust fund with appropriate governance structures to help attract additional concessional finance for climate adaptation and environmental protection. (2.3) Develop a national carbon market strategy and infrastructure and promote the development of robust carbon crediting systems to tap into finance from voluntary and compliance markets. (2.4) Introduce climate budget tagging to improve climate-related spending and decision- making and facilitate the engagement with green investors. High-Level Objective 3: Enhance the climate resilience of islands and infrastructure (3.1) Develop an NAP and related island/regional development plans that explicitly integrate SLR, flooding, and ocean heating scenarios to guide future spatial and development planning. (3.2) Develop guidelines for island raising and land reclamation to optimize their use and, when used, increase the resilience and sustainability of newly developed land and limit negative environmental impacts. (3.3) Systematically study the feasibility and unintended side effects of hard/gray protection infrastructure and preserve natural island processes to avoid maladaptation and lock-in effects. (3.4) Update building codes and practices to increase the resilience and sustainability of infrastructure. (3.5) Further assess the feasibility and effectiveness of NbS to support their scale-up. High-Level Objective 4: Enhance the climate resilience of islands and infrastructure (4.1) Develop a coral management and funding plan with a time horizon until 2050 to scale up coral reef restoration, including exploring emerging restoration technologies. (4.2) Improve waste management and coastal infrastructure development to reduce local stressors on coral reefs. October 20 24 THE WORLD BANK 27 Seeking Stability In Turbulent Times Maldives Development Update (4.3) Systematically develop and implement marine protected areas (MPAs) to conserve high- biodiversity marine and coastal ecosystems. (4.4) Establish a coral reef management decision support system to guide the targeting of conservation and restoration interventions. High-Level Objective 5: Enhance the climate resilience of livelihoods (fisheries and tourism) (5.1) Research pelagic and reef fish migration and impacts under different climate scenarios to inform fisheries planning. (5.2) Assess alternative livelihood opportunities for fishers such as diversification of deep-sea fisheries and mariculture development to improve the resilience of fishing communities. (5.3) Strengthen the regulatory framework to ensure that new resorts and guesthouses are being developed using climate-resilient and green infrastructure, existing resorts and guesthouses receive advice on and support for upgrades/retrofits, and minor repair and climate resilience upgrade works can proceed without lengthy approval processes. High-Level Objective 6: Enhance the climate resilience of livelihoods (fisheries and tourism) (6.1) Phase out fossil fuel subsidies and reduce public expenditure while mitigating the impacts on poor and vulnerable households. (6.2) Promote risk-sharing frameworks and increased private sector participation and PPPs to increase renewable energy adoption and improve waste management. (6.3) Introduce a renewable energy mandate for resorts to increase the share of renewable energy. (6.4) Develop a strategy and action plan to promote green mobility, including non-motorized transport, e-scooters, e-buses, e-ferries, and charging infrastructure. October 20 24 THE WORLD BANK 28 Seeking Stability In Turbulent Times Maldives Development Update List of References MIRA (Maldives Inland Revenue Authority) 2024. 5th Amendment to the Income Tax Regulation. 2024/R- 84. September. Available at: https://www.mira.gov.mv/ContentItems/View/5th-amendment-to-itr-news Potomac Group. 2023. Assessment and Options Analysis of Climate and Nature Financing Instruments and Opportunities in the Maldives. Background report prepared for the World Bank’s Maldives Country Environment Analysis report (2024). World Bank. 2020. Maldives Systematic Country Diagnostic. Washington, DC: World Bank World Bank. 2022. Maldives Public Expenditure Review. Washington, DC: World Bank World Bank. 2023. Maldives Country Partnership Framework. Washington, DC: World Bank World Bank. 2024. Global Economic Prospects. June. Washington, DC: World Bank World Bank. 2024a. Maldives Country Climate and Development Report. Washington, DC: World Bank World Bank. 2024b. “Maldives: Country Environmental Analysis. Towards a More Sustainable and Resilient Blue Economy.” Washington, DC: World Bank Group. World Bank. 2024c. “The Climate Resilience of the Maldivian Fisheries Sector.” Background paper of the Maldives Country Climate and Development Report. Washington, DC: World Bank. World Bank. 2024d. Quantitative Risk Assessment of Sea Level Rise-induced Coastal Flooding. Background paper of the Maldives Country Climate and Development Report. Washington, DC: World Bank. October 20 24 THE WORLD BANK 29 Seeking Stability In Turbulent Times Maldives Development Update Annex 1: Balance of Payments (percent of GDP) 2020 2021 2022 2023e Current Account Balance -35.8 -8.6 -16.3 -21.2 Balance on Goods and Services -17.9 9.6 3.2 -1.3 Merchandise Trade Balance -39.1 -40.1 -47.3 -43.3 Merchandise Exports 7.0 5.4 6.5 6.6 o/w fish exports 4.2 2.7 2.4 2.3 o/w re-exports 3.3 2.6 3.9 3.9 Merchandise Imports 46.1 45.5 53.8 49.9 o/w fuel 7.1 8.6 13.5 11.4 o/w capital and construction goods 15.1 14.2 17.9 17.4 Services Trade Balance 21.3 49.7 50.5 42.1 Service Exports 41.3 70.5 76.2 67.5 o/w travel services (tourism) 37.7 66.8 73.0 64.0 Service Exports 20.0 20.8 25.7 25.4 Primary Income, net -8.3 -10.2 -11.5 -11.7 Secondary Income, net -9.7 -8.0 -7.9 -8.3 o/w worker remittance outflows 10.7 9.4 9.2 8.9 Capital Account Balance 0.0 0.0 0.0 0.0 Net borrowing (balance from current and capital a/c) -35.8 -8.6 -16.3 -21.2 Financial Account Balance (excluding reserves and related items) 34.7 11.4 13.7 16.1 Direct Investment, net 11.9 12.2 11.9 11.5 Portfolio Investment, net -1.3 5.4 -1.3 -0.3 o/w general government debt issuance 0.0 -5.9 0.9 0.0 Other Investment, net 24.1 -6.2 3.2 4.8 Net Errors and Omissions 6.6 -6.2 3.0 1.6 OVERALL BALANCE 5.5 -3.4 0.4 -3.6 FINANCING Official Reserves (- increase) -5.5 3.4 -0.4 3.6 October 20 24 THE WORLD BANK 30 Seeking Stability In Turbulent Times Maldives Development Update Annex 2: Key Fiscal Indicators (percent of GDP) 2020 2021 2022 2023e Total Revenue and Grants 26.7 26.4 30.6 33.5 Total Revenue 25.0 25.2 29.5 32.5 Tax Revenue 19.2 18.2 20.6 23.7 o/w Import Duties 4.0 3.5 3.7 3.4 o/w Business and Property Tax 6.4 3.4 4.5 5.1 o/w Tourism Goods and Services Tax 3.9 6.5 6.9 8.6 o/w General Goods and Services Tax 3.7 3.1 3.4 4.4 o/w Airport Service Charges 0.5 0.6 0.9 1.0 o/w Green Tax 0.6 1.0 1.0 1.0 Non-Tax Revenues 5.8 6.9 8.7 8.9 o/w Airport Development Fees 0.5 0.6 0.8 1.0 o/w Property Income 1.4 2.8 2.3 1.9 Grants 1.7 1.3 1.1 1.0 Total Expenditure 50.4 40.7 42.2 46.3 Recurrent Expenditure 35.6 29.8 29.6 31.8 o/w Personal Emoluments 14.4 10.7 9.9 10.0 o/w Pensions, Retirement Benefits, and Gratuities 2.7 2.0 1.9 1.9 o/w Goods and Services 7.7 6.9 2.5 8.5 o/w Grants, Contributions, and Subsidies 8.0 7.5 7.2 7.6 o/w Interest Payments 2.8 2.6 3.6 4.1 Capital Expenditure 14.8 10.9 12.6 14.5 o/w Public Sector Investment Program 9.1 6.6 9.2 11.6 Primary Fiscal Balance -20.9 -11.6 -8.0 -8.6 Overall Fiscal Balance -23.7 -14.2 -11.6 -12.7 October 20 24 THE WORLD BANK 31 Seeking Stability In Turbulent Times Maldives Development Update October 20 24 THE WORLD BANK