MALDIVES DEVELOPMENT UPDATE BATTEN DOWN THE HATCHES October 2023 Batten Down the Hatches Maldives Development Update © [2023] 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. 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Photo Credits Cover, Parts A.1, A.2 and B: Erdem Atas October 2023 THE WORLD BANK i Batten Down the Hatches Maldives Development Update Preface The Maldives Development Update (MDU) has two main goals. First, it takes the pulse of the Maldivian economy by providing key developments over the past 12 months. Placing these in a global context, and based on these recent developments, it analyzes the outlook over the medium term. Second, every other edition of the MDU provides a more in-depth investigation of selected economic and policy issues. It has a wide audience including policymakers, policy analysts from think tanks or non-governmental organizations, and business and financial sector professionals interested in Maldives’ economic development. The MDU was prepared by Erdem Atas and Richard Walker (Macroeconomics, Public Sector, Trade and Investment, South Asia Region). The special focus topic (Part B) on infrastructure was written by Mark Alexander Giblett (Infrastructure Finance, PPPs and Guarantees, South Asia Region). The team is grateful to Nandini Krishnan and Marta Schoch (Poverty), Tatsiana Kliatskova (Finance, Competitiveness, and Innovation), Margaret Triyana (Macroeconomics, Trade and Investment, South Asia Region), Patrick Alexander Kirby (Macroeconomics, Trade and Investment, Prospects Group), Francesca Lamanna (Social Protection and Jobs, South Asia Region), Thisuri Jinadhi Wanniarachchi (Social Protection and Jobs, South Asia Region), Jyoti Maya Pandey (Social Protection and Jobs, South Asia Region), and Srinivas Varadan (Social Protection and Jobs, South Asia Region) for their inputs to the publication. The team thanks Mathew Verghis (Director, Equitable Growth, Finance and Institutions – EFI, South Asia Region), Faris Hadad-Zervos (Country Director for Maldives, Nepal and Sri Lanka), Chiyo Kanda (Country Manager, Maldives and Sri Lanka), Shabih Ali Mohib (Practice Manager, Macroeconomics, Public Sector, Trade and Investment), and Meriem Ait Ali Slimane (Acting Program Leader, EFI) for their guidance. Sashikala Jeyaraj provided valuable administrative support and helped format and layout the report, while Dilinika Peiris and Ali Naafiz led the dissemination efforts. The report was prepared based on published data available on or before September 15, 2023. 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: • April 2023: Maldives Development Update: Navigating A Tight Line https://openknowledge.worldbank.org/handle/10986/39627 • October 2022: Maldives Development Update: Towards Resilient and Affordable Housing https://thedocs.worldbank.org/en/doc/49141824db6f3a3b812bad33d5779541-0310062022/maldives- development-update-towards-resilient-and-affordable-housing • April 2022: Maldives Development Update: Navigating Choppy Seas https://openknowledge.worldbank.org/handle/10986/37662 To receive the MDU and related publications by email, please email infomaldives@worldbank.org. For questions and comments, please email eatas@worldbank.org and rwalker3@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 #MDUAM23 www.facebook.com/WorldBankSouthAsia instagram.com/worldbank/ www.linkedin.com/company/the-world-bank October 2023 THE WORLD BANK ii Batten Down the Hatches Maldives Development Update Abbreviations BML Bank of Maldives CAD Current Account Deficit CAM Communication Authority of Maldives CAR Capital Adequacy Ratio CPI Consumer Price Index COVID-19 Coronavirus Disease 2019 DHS Demographic and Health Survey EMDEs Emerging Markets and Developing Economies FDI Foreign Direct Investment FRA Fiscal Responsibility Act G2G Government-to-government GDP Gross Domestic Product GHG Greenhouse Gases GoM Government of Maldives GGST General Goods and Services Tax HIES Household Income and Expenditure Survey MDU Maldives Development Update MMA Maldives Monetary Authority MoF Ministry of Finance MPI Multidimensional Poverty Index MUDRP Maldives Urban Development Resilient Program MVR Maldivian Rufiyaa MPI Multi-Dimensional Poverty Index MRR Minimum Reserve Requirement NBS National Bureau of Statistics NDA Net Domestic Assets NPL Non-performing Loan NFA Net Foreign Assets 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 PSPH Public Sector Pay Harmonization PSIP Public Sector Investment Program RBI Reserve Bank of India SDF Sovereign Development Fund SDG Sustainable Development Goals SIDS Small Island Developing State 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 2023 THE WORLD BANK iii Batten Down the Hatches Maldives Development Update Table of Contents Preface ………………………………………………………………………………………………………………ii Abbreviations ......................................................................................................................................................... iii Table of Contents................................................................................................................................................... iv EXECUTIVE SUMMARY .................................................................................................. 1 A. Economic Update, Outlook, and Risks ......................................................................................................... 1 B. Supporting Sustainable and Resilient Infrastructure ..................................................................................... 4 A1. ECON OM IC UPDAT E .............................................................................................. 8 1. Context ........................................................................................................................................................... 8 2. Robust economic activity is sustained, but inflationary pressures remain high ...........................................10 3. Poverty has fallen, but inequality and specific welfare disparities remain ....................................................12 4. MMA’s exposure to the sovereign remains high, while lending to the private sector is picking up and deposit growth is low ...................................................................................................................................15 5. Higher commodity prices and financing needs are keeping pressure on external balances and reserves....17 6. Fiscal deficit and public debt remain high, even with stronger revenues .....................................................18 A2. OUT LOOK AN D R ISKS .......................................................................................... 22 7. Medium-term growth outlook remains positive, but clouded by rising macro-fiscal vulnerabilities........... 22 8. Downside risks persist, so restoring fiscal and debt sustainability remains a priority ................................. 24 B. SUPPOR T IN G SUST AIN ABLE AN D R ESILIEN T IN FR AST R UCT UR E ................ 26 1. Context ......................................................................................................................................................... 26 2. Despite a major focus on improving connectivity, Maldives faces ‘small island’ constraints in addressing remaining infrastructure gaps .................................................................................................................... 29 3. Maldives is also facing several ‘micro’ cross-cutting and sector specific constraints to the delivery of infrastructure services ................................................................................................................................. 30 4. Recommendations to improve the delivery of sustainable and resilient infrastructure in support of Jazeera Raajje .......................................................................................................................................................... 32 References............................................................................................................................................................. 38 LIST OF FIGURES Figure ES.1: Real GDP continues to grow on the back of high tourist arrivals .................................................................. 1 Figure ES.2: Despite the low overall poverty rate, welfare disparities across atolls remains a concern........................... 1 Figure ES.3: Public debt remains high… .................................................................................................................................... 2 Figure ES.4: …while MMA’s claims on central government continue to increase…......................................................... 2 Figure ES.5: …and deposit growth slowed…............................................................................................................................ 3 Figure ES.6: …reserves dropped with the rising import bill ................................................................................................... 3 Figure ES.7: External debt servicing projections show significant repayment needs in the medium term ..................... 4 Figure ES.8: Spending commitments and plans will likely impede the narrowing of the fiscal deficit ............................ 4 Figure ES.9: Public Expenditure mostly outpaced GDP growth… ...................................................................................... 5 Figure ES.10: …primarily driven by substantial increases in PSIP spending, subsidies, and the wage bill ..................... 5 Figure ES.11: Significant disparities in piped water and sewer connections between Malé and other atolls... ............... 6 Figure ES.12: … as well as disparities in fixed and mobile up/download speeds ............................................................... 6 Figure ES. 13: Infrastructure Delivery Constraints Impacting Maldives............................................................................... 6 Figure A.1: Global trade and industrial production (IP) slows down… ............................................................................... 9 Figure A.2: …while global inflation is decelerating................................................................................................................... 9 Figure A.3: Arrivals from India and Russia remained strong in 2022… ............................................................................. 10 Figure A.4: …while the return of Chinese tourists and arrivals from new markets boosted tourism in 2023 ............. 10 Figure A.5: Real GDP expands again in early 2023 ................................................................................................................ 11 Figure A.6: Price pressures remained high in the first half of 2023… ................................................................................. 11 October 2023 THE WORLD BANK iv Batten Down the Hatches Maldives Development Update Figure A.7: …especially for food & non-alcoholic beverages and transport...................................................................... 11 Figure A.8: Inequality disparities between the capital and other atolls… ..................... Error! Bookmark not defined. Figure A.9: …as poverty rates differ across the country ........................................................................................................ 12 Figure A.10: Share of workers in green and pollution-intensive jobs in the Maldives ...................................................... 14 Figure A.11: Industry composition of workers in green and pollution-intensive jobs in the Maldives ......................... 14 Figure A.12: MMA’s claims on central government remain high… .................................................................................... 15 Figure A.13: …while credit growth remains low and exposure of banks to the public sector rises ............................... 15 Figure A.14: Banks financial stability indicators remain stable… ......................................................................................... 16 Figure A.15: …but exchange rate risks contribute to existing vulnerabilities..................................................................... 16 Figure A.16: Despite reduced imports in 2023Q2… .............................................................................................................. 17 Figure A.17: …the trade deficit remains high .......................................................................................................................... 17 Figure A.18: CAD largely financed by FDI… ......................................................................................................................... 18 Figure A.19:…as reserves reached critically low levels ........................................................................................................... 18 Figure A.20: Growth in revenues driven by tourism expansion, tax hikes and business and property taxes… ........... 19 Figure A.21: …yet expenditure remains elevated due to capital investments, subsidies and other recurrent spending .......................................................................................................................................................................................................... 19 Figure A.22: Public debt remains high… .................................................................................................................................. 20 Figure A.23: …whilst external interest payments will be substantial in the next few years ............................................. 20 Figure A.24: Real GDP growth is expected to remain robust in the medium term… ..................................................... 23 Figure A.25: …while spending commitments and plans may impede a stronger narrowing of the fiscal deficit ........ 23 Figure A.26: Current account deficit expected to remain elevated due to higher imports… .......................................... 24 Figure A.27: …with significant external debt servicing pressures over the next few years.............................................. 24 Figure B.1: Before the pandemic, Maldives had grown faster than its peers… ................................................................. 26 Figure B.2: …but growth has been volatile due to its high dependence on tourism ........................................................ 26 Figure B.3: Maldives spends more than the average upper middle-income country, but on par with other SIDS...... 27 Figure B.4: Public expenditure growth mostly outpaced GDP growth… .......................................................................... 27 Figure B.5: …primarily driven by substantial increases in PSIP spending, subsidies, and the wage bill ....................... 28 Figure B.6: Maldives ND-GAIN Ranking (1995–2020)......................................................................................................... 29 Figure B.7: Piped water and sewer connections ...................................................................................................................... 29 Figure B.8: Fixed and mobile up/download speeds ............................................................................................................... 29 LIST OF TABLES Table ES.1: Benchmarking of key infrastructure indicators .................................................................................................... 5 Table ES.2: Summary of constraints and recommendations ................................................................................................... 7 Table A.1: Deprivations differ under different characteristics .............................................................................................. 13 Table A.2: Growth is expected to remain robust, but macro-fiscal vulnerabilities will persist........................................ 22 Table B.1: Benchmarking of key infrastructure indicators..................................................................................................... 27 Table B.2: Key cross-cutting constraints and recommendations .......................................................................................... 33 Table B.3: Key energy sector constraints and recommendations ......................................................................................... 34 Table B.4: Key transport sector constraints and recommendations .................................................................................... 34 Table B.5: Key digital sector constraints and recommendations .......................................................................................... 35 LIST OF BOXES Box 1: Global economic developments ...................................................................................................................................... 9 Box 2: The Green Transition and its labor market implications for Maldives ................................................................... 14 Box 3: Targeted social protection is a critical component of successful subsidy reforms................................................ 21 LIST OF ANNEXES Annex 1: Balance of payments (percent of GDP)................................................................................................................... 36 Annex 2: Key fiscal indicators (percent of GDP).................................................................................................................... 37 October 2023 THE WORLD BANK v Batten Down the Hatches Maldives Development Update Executive Summary A. Economic Update, Outlook, and Risks The economy has maintained its strong growth momentum, with the expansion in tourism, and poverty is expected to fall further in 2023. The number of tourist arrivals grew by 14 percent (y-o-y) to 1.25 million by early September 2023, reaching a historic high compared to similar periods in other years (Figure ES.1). Despite the Russian invasion of Ukraine, arrivals from Russia remained strong. An earlier-than-expected reopening of the Chinese market, on January 18, has compensated for lower arrivals from India and Gulf countries, while arrivals from Europe continued to increase. As a result, the Maldivian economy grew by 5.5 percent (y-o-y) in the first quarter of 2023. Poverty levels also fell with the strong economic rebound, to an estimated level of 1.5 percent of the population. High inequality in the country, especially in the outer atolls, remains a real concern (Figure ES. 2). Figure ES.1: Real GDP continues to grow on the back Figure ES.2: Despite the low overall poverty rate, of high tourist arrivals welfare disparities across atolls remains a concern Total number of tourist arrivals Percent of total population 2019 2020 2021 2022 2023 18.9 200,000 20 Poverty Rate (National Poverty Line) 18 15.6 180,000 16 12.9 14.2 14.4 14 12.5 160,000 12 9.6 8.8 140,000 10 7.1 7.8 8 5.6 5.7 120,000 6 3.1 2.8 2.7 100,000 4 2.1 1.7 0.9 2 80,000 0 Noonu Aliff Aliff Thaa Raa Faafu Naviyani Shaviyani Addu Laamu Laviyani Kaafu Meemu Daalu Gaafu Aliff Haa Aliff Waavu Gaafu Daalu Haa Daalu Male' Baa Aliff Daalu 60,000 40,000 20,000 0 Upper Lower Upper Lower UpperLower -20,000 North Central South Apr Aug Sep Mar May Feb Oct Nov Dec Jan Jun Jul Region/Zone/Atoll Source: Ministry of Tourism, staff calculations. Source: Maldives Bureau of Statistics, WB staff calculations. Note: Upper middle-income poverty line – US$6.85/person/day. High global commodity prices continue to put pressure on domestic inflation, government’s fiscal position and the balance of payments. Average annual inflation was 3.3 percent in the first seven months of 2023, compared to 2.3 percent in 2022. The rise in prices was largely driven by food & non-alcoholic beverages and transport, while the government managed to curtail housing and utility prices through blanket subsidies. Due to not undertaking the planned subsidy reforms and maintaining a blanket subsidy policy for major consumption items, including fuel, electricity, and food, government is still facing significant spending pressures. The sharp growth in capital and construction material imports – to support completion of mega Public Sector Investment Program (PSIP) projects – is also adding further pressure to fiscal and current account balances. The annualized trade deficit increased by 7.4 percent (y-o-y) to US$3.07 million, as of July 2023, particularly due to the sizeable fuel and capital goods import bill. As the overall import bill climbed to US$3.5 billion, official reserves fell by 28.6 percent since end-2022, declining to US$594.1 million in July 2023. This was only sufficient to cover 2 months of imports, a significant drop from 3 months of coverage at end- 2022 (Figure ES. 6). Despite higher tax collection and revenues, overall fiscal performance is being constrained by the sharp rise in capital spending and subsidies. Total revenue growth was 18 percent between January and April 2023 compared to the same period in 2022. Much of this came from the Tourism Goods and Services Tax (TGST) and business and property tax collections. However, total expenditure grew by 33.5 percent over October 2023 THE WORLD BANK 1 Batten Down the Hatches Maldives Development Update the same period. This sharp increase was driven by higher subsidies, elevated Aasandha (health) spending, an increase in the health sector wage bill (related to implementation of the Public Sector Pay Harmonization (PSPH) policy), higher interest costs, and sustained high levels of capital spending (under the PSIP). Interest payments were substantial between January and August 2023, totaling MVR2.5 billion (US$162.3 million), compared to MVR2.18 billion (US$141.6 million) during the same period in 2022 – far exceeding the annual average between 2014–2019 of MVR 1.3 billion (US$85 million) or about 2 percent of GDP. This was driven by a large increase in interest payments for both domestic and external debt, due to increased outstanding Treasury securities and more reliance on external commercial debt. The previously planned and budgeted subsidy reforms (including fuel subsidies) – that aimed to reduce expenditures by 3 percent of GDP in 2023 – have not been implemented. Government’s spending on subsidies reached a historic high in August 2023 due to elevated global commodity prices, climbing to MVR2.63 billion (US$170.9 million) for the year, and already exceeding the MVR2.28 billion (US$148 million) that was budgeted for 2023. Figure ES.3: Public debt remains high… Figure ES.4: …while MMA’s claims on central government continue to increase… PPG in US$ million and percent of GDP (rhs) MVR million, percent (rhs) Total Domestic PPG Debt Claims on Central Government Total External PPG Debt Advances to CG 8,000 Total PPG Debt as a % of GDP (RHS) 160 Claims on Central Government (% of total assets) (rhs) 16,000 70% 7,000 140 14,000 60% 6,000 120 12,000 50% 5,000 100 10,000 40% 4,000 80 8,000 30% 3,000 60 6,000 4,000 20% 2,000 40 2,000 10% 1,000 20 0 0% 0 0 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22 May-19 May-20 May-21 May-22 May-23 2018 2019 2020 2021 2022 Source: Ministry of Finance, World Bank staff calculations. Source: MMA, World Bank staff calculations. The Maldives Monetary Authority (MMA) continues to finance the Budget deficit, with increasing exposure of the financial sector to sovereign bond holdings. The Ministry of Finance (MoF) has securitized most of the advances received from the MMA over the 2020–2023 period under the exemption of certain clauses of the Fiscal Responsibility Act (FRA). According to the latest figures, around MVR 6 billion out of MVR 8 billion has been securitized and the MMA’s advance limit was reduced from MVR 4.4 billion to MVR 2 billion. Repeated debt exchange operations through securitizations have, however, created space for new advances, and therefore expanded MMA’s total exposure to central government, with exposures increasing to MVR 13.8 billion, or 56.8 percent of MMA assets (Figure ES.4). The build-up of the sovereign exposure, that intensified during the pandemic, reflects a combination of supply and demand factors, including lack of domestic investment opportunities and weaknesses in credit infrastructure that constrain private sector lending. Bank exposure to the central government increased to 30.6 percent of their assets, as of July 2023, compared to 28.8 percent a year earlier. At the same time, growth in credit to the private sector picked up, while deposit growth slowed further to 1.6 percent y-o-y in July 2023 (Figure ES.5). Public debt remains high, due to sustained borrowing to finance the budget deficit and infrastructure projects. Total public and publicly guaranteed (PPG) debt rose to US$7.0 billion (113.5 percent of GDP) at the end of 2022, compared to US$5.9 billion (112.1 percent of GDP) the year before (Figure ES.3). Domestic debt accounted for 62.1 percent of GDP, while external and externally guaranteed debt accounted for the remainder (51.4 percent of GDP). These figures do not, however, include advances from MMA, which have been ongoing since the suspension of the FRA in early 2020. Moreover, additional fiscal risks – mostly October 2023 THE WORLD BANK 2 Batten Down the Hatches Maldives Development Update stemming from guaranteed and on-lent loans, as well as trade payables, subsidies, and capital injections to state-owned enterprises (SOEs) – were estimated at about US$2.5 billion or 45 percent of GDP in 2019. Therefore, Maldives’ fiscal space is limited to absorb future shocks to public finances. Figure ES.5: …and deposit growth slowed… Figure ES.6: …reserves dropped with the rising import bill Percent, percentage change (rhs) Official reserves US$ million and months of import cover (rhs) Sov and SOE exposures (% of total assets) (rhs) Months of imports (rhs) Credit Growth (YoY, %) 1,200 Months of imports (net ST liabilities) 8 40% 45% Official Reserves Deposit Growth (YoY, %) Reserves net ST liabilities 1,000 30% 35% 6 800 20% 25% 600 4 10% 15% 400 0% 5% 2 200 -10% -5% Jul-20 Jul-21 Jul-22 Jul-23 Jan-20 Jan-21 Jan-22 Jan-23 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Apr-23 0 0 2019 2020 2021 2022 Jul-23 Source: MMA, World Bank staff calculations. Source: MMA, World Bank staff calculations. External debt and fiscal vulnerabilities remain a significant concern for Maldives in the medium term. The country is projected to pay, on average, about US$570 million annually as external debt servicing over the 2024–25 period (Figure ES.7). Public and publicly guaranteed external debt servicing is then expected to reach US$1.07 billion in 2026, which includes bullet payments for the US$500 million Sukuk and US$100 million private placement – significantly testing the country’s ability to repay or roll over this debt. Such high levels of public debt, and associated refinancing risks, make the Maldivian economy extremely vulnerable to domestic and external shocks. Mobilization of additional debt at non-concessional terms would further exacerbate these vulnerabilities. Thus, despite robust growth prospects, prudent debt management remains a top priority for improving fiscal sustainability, lowering the cost of growth-enhancing investments – especially with large debt service obligations coming due – and ensuring a more resilient economy going forward. It’s time for Maldives to ‘batten down the hatches’: a strong fiscal adjustment is urgently required to replenish fiscal buffers against future shocks, given the high risk of debt distress. Although fiscal deficits are expected to gradually narrow over the medium term, total PPG debt to GDP is forecast to remain elevated at over 115 percent. The revised Medium-Term Fiscal Strategy (MTFS) could set a new benchmark for expenditure rationalization. Government’s decision to raise the GST rates is a positive start, but not sufficient for the adjustment that is required. A stronger commitment is urgently needed, as the planned subsidy reforms didn’t happen in 2023. A notable reduction in (and more effective) spending, and more effective revenue mobilization are crucial for Maldives’ debt and fiscal sustainability. Reforms to Aasandha, reducing and rationalizing subsidies to SOEs – especially for fuel and food subsidies – and a solid public investment management framework are amongst the key reform areas to bring down the high levels of public expenditure, replenish fiscal buffers against future shocks, and lower the cost of growth-enhancing investments. On the other hand, revenue mobilization can be improved by diversifying the tax base and mobilizing more domestic sources of revenue, reducing informality, and enhancing the tax morale and equity of the tax system. October 2023 THE WORLD BANK 3 Batten Down the Hatches Maldives Development Update Figure ES.7: External debt servicing projections show Figure ES.8: Spending commitments and plans will significant repayment needs in the medium term likely impede the narrowing of the fiscal deficit US$ million Percent of GDP 1200 Interest payments Principal and other payments Fiscal Balance Primary Balance 0 1000 -5 800 -6.7 -10 -8.9 -8.2 600 -10.4 -12.4 -11.8 400 -15 200 -20 0 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 -25 2020 2021 2022 2023f 2024f 2025f Source: Ministry of Finance and World Bank staff calculations. Source: Ministry of Finance and World Bank projections. Note: Data as of August 2023. Does not include debt service costs of pipeline loans, neither non-concessional nor commercial. Thus, debt servicing costs of the outer years may be underestimated. The outlook for tourism and, thus, the economy is positive over the medium term, although external and fiscal risks continue to rise. Real GDP growth is projected to be 6.5 percent in 2023, and 5.4 percent on average in the 2024–25 period. Inflation is projected to rise to 3.2 percent in 2023, largely due to the recent increase in GST rates. Heightened external and fiscal vulnerabilities, however, pose significant downside risks to the economic outlook – which include continued external borrowing at more expensive terms during a global tightening and weaker global economic outlook. As a result, reducing the dependency on tourism, limiting state involvement in economic activity, and diversifying the economy remains a major objective for the Maldives’ growth strategy. To enable this development and diversify the economy, Maldives could benefit from a more diversified tourism sector that also provides further benefits to those living in the outer atolls and inhabited islands, including offering new tourism products, such as environmentally friendly eco-tourism options, and developing the industry in the Northern and Southern Atolls through better infrastructure, connectivity, and favorable rents for resort developments. An upcoming new submarine cable is expected to enhance digital connectivity in Maldives, potentially leading to greater job opportunities. However, any infrastructure investments must be well sequenced and planned, and consider the country’s current debt vulnerabilities. Boosting the fisheries sector, by expanding fish processing and cold storage facilities, as well as opening new export markets, could help reduce the country’s high dependency on tourism. Additional avenues for diversification, trade and growth also need to be explored. B. Supporting Sustainable and Resilient Infrastructure Maldives has outperformed most of its peers in terms of infrastructure access. Available data indicates that Maldives outperforms most of its regional and Small Island Developing States (SIDS) peers in the provision of basic infrastructure services (Table ES.1). Maldives has benefitted from universal access to electricity since 2008, and there is widespread use of mobile phone services. Hospital beds per 1,000 people are 4.1, which is higher than the upper middle-income average, and the pupil-teacher ratio is very low at 5.0. October 2023 THE WORLD BANK 4 Batten Down the Hatches Maldives Development Update Table ES.1: Benchmarking of key infrastructure indicators Maldives Average Upper SIDS S. Asia MI Source: World Bank WDI and Maldives MoH 2021 These high levels of infrastructure access have been funded mainly through a substantial growth in public expenditures. This rapid growth in public expenditure has outpaced Maldives’ real GDP growth during most years (Figure ES.9), with much of the growth being driven by substantial increases in capital spending under the PSIP, subsidies and transfers to SOEs, and the wage bill (Figure ES.10). It is estimated that between 2014–2022, over 50 percent of the approved PSIP budget was spent on transport related infrastructure (including airports, ports, roads, and bridges), housing, and land reclamation. Figure ES.9: Public Expenditure mostly outpaced Figure ES.10: …primarily driven by substantial GDP growth… increases in PSIP spending, subsidies, and the wage bill In percent, y-o-y change Percent of GDP Other capital expenditures 50 Real GDP growth Expenditure growth PSIP Interest payments 40 60 Grants, Contributions and Subsidies Pensions, retirement beenfits, gratuities 30 Goods and Services 50 Salaries, wages, allowances 20 40 10 0 30 -10 20 -20 10 -30 0 -40 2014 2015 2016 2017 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Source: IMF Fiscal Affairs Database, October 2021, MMA and WB Source: WB PER (2022), MOF, WB staff calculations. staff calculations. Note: 2023 figures take into account the budgeted amount and the GOM’s GDP growth estimates. Maldives has relied heavily on borrowing to fund these high levels of public expenditure. Driven by the need to increase public expenditures to offset the adverse impacts of COVID-19, total public and publicly guaranteed (PPG) debt stood at around 150 percent of GDP in 2020. Despite this figure falling to 113.5 percent at the end of 2022, it is still significantly higher than the pre-COVID-19 levels, when the debt figure stood at 77.2 percent of GDP (Figure ES.3). Despite strong economic growth and high levels of infrastructure spending, significant disparities in terms of infrastructure access exist between Malé and the outer atolls. Although the expansion of infrastructure spending under the PSIP, together with a policy of decentralizing services to the atolls, has led to improvements in terms of infrastructure provision in the atolls, significant spatial disparities remain. For example, only 15 and 26 percent of households residing in the atolls have access to piped water and sewage October 2023 THE WORLD BANK 5 Batten Down the Hatches Maldives Development Update connections respectively, versus nearly universal access in Malé (Figure ES.11). Similar disparities exist in broadband internet service speeds (Figure ES.12). Figure ES.11: Significant disparities in piped water and Figure ES.12: … as well as disparities in fixed and sewer connections between Malé and other atolls... mobile up/download speeds In percent of total access Mbps 100% 97% 100% 80% 60% 40% 20% 15% 26% 0% Piped Water Sewer Malé Other Atolls Source: Statistics Maldives, 2020. Source: WB Staff analysis based on Speedtest Intelligence data between Jan 2020–Jan 2021. Maldives is trying to actively address these infrastructure gaps but faces significant constraints. As with other SIDs, Maldives faces general constraints that hinder its ability to deliver cost effective and efficient infrastructure services (Figure ES.13). In addition, Maldives faces several cross-cutting 1 and sector specific constraints that further hinder its ability to deliver infrastructure. Table ES.2 summarizes these and provides several actions and policy initiatives that Maldives can consider implementing to address these constraints and improve the efficiency and effectiveness of infrastructure delivery in the country. Figure ES. 13: Infrastructure Delivery Constraints Impacting Maldives A small, widely dispersed population that makes it difficult This has led to an infrastructure 'gap' between Greater Malé and the outer atolls. and costly to deliver infrastructure services efficiently and effectively. This means that government revenues, as well as the livelihoods of many Maldivians, are An economy that is heavily reliant on tourism with limited vulnerable to external factors (such as pandemics, travel restrictions, global politics) that opportunities for diversification. are beyond its control. A mode of service delivery that primarily relies on the This reliance on SOEs to deliver critical services has meant that many of these services delivery of infrastructure services through SOEs – many of are being delivered inefficiently. which are poorly managed and unprofitable. A significant use of subsidies (including fuel and tariff These recurring subsidies have put increasing pressure on the government’s fiscal subsidies) as a policy tool to improve the affordability of position, particularly during periods of high oil prices. critical services such as electricity and transport. A fiscal position that is severely constrained due to a This has meant that the government has had to continue to borrow to fund its ambitious combination of factors including high levels of capital infrastructure program which has, in turn, further constrained the government’s finances. expenditure, transfers to SOEs, subsidies, debt and interest payments and relatively low levels of revenue. Maldives has already experienced the impacts of climate change through increasing sea A high vulnerability to the impacts of climate change. water temperatures that are impacting fish stocks and coral, as well as through rising sea levels, storm surges, and heavy rains that have damaged infrastructure. 1 Cross cutting constraints are those not specific to one sector but impact or “cut across” a range of sectors. October 2023 THE WORLD BANK 6 Batten Down the Hatches Maldives Development Update The implementation of the recommendations in Table ES.2 will require improved inter-agency coordination. In developing sector policies and planning investments, it will be critical for Maldives to ensure that relevant ministries and agencies improve their coordination to better leverage potential cross sector synergies. For example, it will be important for the energy and transport sectors to coordinate their respective sector planning in the context of a transition to e-mobility. It will also require that sustainability and resilience are embedded in infrastructure planning. Given its vulnerability to climate change, Maldives must continue to encourage a change in mindset across all ministries and agencies, such that all potential projects are looked at through a climate “lens” to ensure the prioritization of those projects that support sustainability and resilience. While Maldives has made remarkable economic progress over the last two decades, it now needs to be more selective and effective in its infrastructure investments in support of Jazeera Raajje. To continue to support economic development in the face of severe fiscal constraints and climate change, Maldives needs to improve and strengthen the overall PIM framework. This will help ensure that key infrastructure services are planned, prioritized, and delivered in a way that enhances connectivity, while at the same time ensuring that such services are affordable, sustainable, and resilient. Table ES.2: Summary of constraints and recommendations Theme Constraints Key Recommendations/Actions Cross Cutting  Lack of capital costing in national strategies and  Strengthen the Public Investment Management Framework. plans, as well as a lack of transparent criteria to select  Identify opportunities for private sector investment and and prioritize projects. implement policies to support private sector financing.  Dominant role of the public sector in providing  Strengthen the legal framework for SOEs and improve infrastructure services, risks crowding out the private governance and management. sector.  Strengthen the institutional, legal, and regulatory enabling  Weak SOE governance, poor performance, and environment for PPPs. limited financial reporting.  Absence of a clear and consistent PPP policy and legal and regulatory framework. Energy  Heavy dependence on diesel imports for generation,  Continue to scale up the solar renewable energy program to leading to increased GHG emissions and an increase RE generation and explore other sources of RE. unsustainable system of fuel and end user subsidies.  Develop a Green Hydrogen roadmap.  High end user tariffs.  Increase investment in transmission and distribution.  Outdated and inefficient T&D systems.  Improve demand side efficiencies.  Poor performance and weak balance sheets of  Proactively tap climate funds and continue efforts to leverage STELCO and FENAKA. private sector financing into RE. Transport  Lack of integrated transport planning combined with  Develop a comprehensive transport sector master plan to limited availability of data for informed decision improve transport sector planning. making.  Strengthen data collection to inform effective planning and  Heavy reliance on fossil fuels leading to increased investment. GHG emissions and subsidies.  Continue to expand the inter-island ferry network to improve  Traffic congestion and high emissions in Malé. connectivity.  Limited private sector participation.  Promote e-mobility to reduce GHG emission and transport sector related subsidies.  Leverage private sector financing, particularly using PPPs. Digital  Limited competition and gaps in the enabling  Develop a national broadband strategy and action plan to regulatory environment. improve broadband access and affordability.  High prices in the wholesale international capacity  Support a more conducive and competitive environment in segment. the mobile market to reduce prices.  Lack of information on the performance of the  Assess the feasibility of extending fiber connections to telecom sector. unconnected atolls.  No active infrastructure sharing for spectrum.  Increase telecom sector transparency and prescribe  Limited coverage of national submarine fiber standards for service quality and consumer protection. backbone.  Introduce a comprehensive legal framework on cybercrime  No cybercrime law or any cybersecurity policy, and cybersecurity. strategy, or legislation.  Leverage digital technologies to address climate change. October 2023 THE WORLD BANK 7 Batten Down the Hatches Maldives Development Update A1. Economic Update 1. Context The economy has The economy grew by 5.5 percent (y-o-y) in the first quarter of 2023, as tourism maintained its strong continued its strong performance in 2023. Despite the Russian invasion of Ukraine, growth momentum arrivals from Russia remained solid. An earlier-than-expected reopening of the with rising tourist Chinese market, on January 18, compensated for fewer tourists from India and Gulf arrivals… countries, while arrivals from Europe continued to increase. As a result, total arrivals for 2023 reached 1.25 million by early September – 14.0 percent higher compared to the same period in 2022. …while high global Average annual inflation was 3.3 percent in the first seven months of 2023, compared commodity prices to 2.3 percent in 2022. Due to not undertaking the planned subsidy reforms and have continued to maintaining a blanket subsidy policy for major consumption items, including fuel, put pressure on electricity and food, government is still facing significant spending pressures. The inflation, and fiscal sharp growth in capital and construction material imports – to support completion and external of mega Public Sector Investment Program (PSIP) projects – is also adding further balances… pressure to fiscal and current account balances. …and external debt Elevated public spending, particularly on ambitious PSIP projects that are financed distress and fiscal by external loans (including commercial and non-concessional loans during a global vulnerabilities tightening period), and elevated spending on subsidies are keeping public debt high. remain a real Total public and publicly guaranteed (PPG) debt was 113.5 percent of GDP in 2022, concern, as high with the share of external debt increasing to 51.4 percent of GDP. 2 This has been levels of spending driven by government contracting new loans to finance general expenditure, fund and external PSIP projects, and cover budget deficits. Despite higher revenue collection, following borrowing are the increase in Goods and Services Tax (GST) rates in early 2023, significant fiscal sustained. pressures remain due to elevated levels of spending. Therefore, urgent expenditure rationalization and debt reforms are required to support an effective and comprehensive fiscal adjustment. 2 Official debt figures for 2023 were not available as of September 13, 2023. October 2023 THE WORLD BANK 8 Batten Down the Hatches Maldives Development Update Box 1: Global economic developments Continued high inflation and the effects of monetary policy tightening are weighing on global activity. Growth has slowed substantially this year, with global trade and industrial activity essentially stagnant (Figure A.1). Services activity has been more robust but is also slowing. The slowdown in activity is particularly apparent in China, Figure A.1: Global trade and industrial production where the rebound following its economic reopening appears (IP) slows down… to have faded. Continued fragilities in the property market are Percent, year-on-year 30 having widespread spillovers for the rest of the economy. Goods trade IP Investment and export growth have also been particularly 25 weak. China is the third largest source of visitors to Maldives, and its recent economic difficulties pose risks to the number 20 of Chinese tourists going forward. Incoming data for the Euro Area have generally been downbeat, with elevated levels 15 of inflation and confidence remaining depressed. In the 10 United States, the labor market has experienced an extended period of robust expansion, but this is now slowing as excess 5 savings accumulated during the pandemic have largely been spent and demand is decelerating. 0 -5 Although global inflation (Figure A.2) and the pace of policy Jul-21 Jul-22 Jan-21 Jan-22 Jan-23 Sep-21 Nov-21 Sep-22 Nov-22 Mar-21 Mar-22 Mar-23 May-21 May-22 May-23 rate increases by central banks is decelerating – with the hiking cycle in many major economies appearing to be close to peaking – financial conditions remain difficult, as reflected Source: Netherlands CPB, World Bank. Note: Monthly data. The last observation is May 2023. by elevated borrowing costs and tight credit standards. Most EMDEs are weathering this period of financial tightness without severe strain, but several countries in South Asia are Figure A.2: …while global inflation is decelerating exceptions and have struggled with balance of payments Percent difficulties. High interest rates will continue to put pressure Global AEs EMDEs 12 on Maldives’ fiscal position, as debt taken at low rates is rolled over. 10 Despite slowing global growth, commodity prices have 8 started rising again. Extended production cuts by OPEC+ and high demand from the transportation sector are pushing 6 energy prices up. This will add to fiscal pressures in Maldives, as the country’s electricity production is dependent on 4 subsidized diesel imports. 2 On the upside, stock market volatility and risk spreads remain low in most markets, and major stock indexes have risen 0 markedly since the beginning of the year. Net capital inflows Jan Jul Jan Jul Jan Jul Jan Jun 2020 2020 2021 2021 2022 2022 2023 2023 have been low but positive, and bond issuance has rebounded after a severe contraction last year. Most EMDE currencies Source: Haver Analytics, World Bank. have also been stable in 2023. Note: AEs = advanced economies; EMDEs = emerging market and developing economies. Median CPI is used. Sample includes 35 AEs and 101 EMDEs. Last observation is June 2023. Risks to the outlook are predominantly to the downside, with the most pressing concerns related to financial and fiscal stress. Many countries in South Asia have drawn on international assistance to weather the global shock of higher commodity prices and borrowing costs, and to stem substantial capital outflows and currency depreciation. The region’s persistent trade deficits – which have averaged 4 percent of GDP since 2015 – require financing by capital inflows that make the region vulnerable to adverse shifts in market sentiment. This vulnerability is particularly high in countries, such as Maldives, with low foreign currency reserves. Source: World Bank SARCE team. October 2023 THE WORLD BANK 9 Batten Down the Hatches Maldives Development Update 2. Robust economic activity is sustained, but inflationary pressures remain high Economic growth Real Gross Domestic Product (GDP) grew by 13.9 percent (y-o-y) in 2022, followed has been strong on by 5.5 percent (y-o-y) growth in 2023Q1 – primarily driven by strong activity in the robust tourist tourism sector, which accounts for almost one-third of the economy and constituted arrivals… half of the economic growth in these periods. According to official statistics, the tourism sector expanded by 22.4 percent in 2022, and 9.8 percent in 2023Q1, translating into stronger growth in transportation, communication, and domestic trade (Figure A.5). …as the tourism Following the 26.7 percent annual growth in arrivals in 2022 – to an almost pre- sector continues to pandemic high of 1.7 million – tourist arrivals have again grown strongly in 2023. As perform well… of early September, 1.25 million tourists had visited the Maldives, which is a 14.0 percent increase compared to the same period of 2022. Although the average stay declined to 7.6 nights from 8.1 in the first half of 2022, hotel and resort occupancy was higher at 61.3 percent, compared to 61.1 percent in this period of 2022. … with increased Arrivals are expected to reach 1.9 million by the end of 2023. Despite Russia’s interest from new invasion of Ukraine, Russia has been ranked as the leading tourism market in 2023, markets and return while it was the second biggest market after India in 2022. The return of Chinese of Chinese tourists… tourists in early 2023, continued arrivals from India and Western Europe, and increasing interest from new markets, such as USA and Northern Europe, have also boosted tourism sector growth in 2023 (Figure A.3 and Figure A.4). Figure A.3: Arrivals from India and Russia remained Figure A.4: …while the return of Chinese tourists and strong in 2022… arrivals from new markets boosted tourism in 2023 Share of tourist arrivals in 2022 Share of tourist arrivals from Jan–Aug 21, 2023 India Russia 14% 12% Others Others India 35% 35% 11% Russia 12% China Spain 10% 2% Switzerland UK 2% 11% Switzerland 2% UK 8% South France Germany Korea Spain France 3% USA Italy Germany 2% 2% 3% USA Italy 8% 4% 6% 7% 5% 6% Source: Ministry of Tourism, WB staff calculations. Source: Ministry of Tourism, WB staff calculations. …bolstering the With increasing visitors, growth has also picked up in the transport and performance in other communication sector, and there’s been an expansion in construction activity. In the sectors. first quarter of 2023, growth in the transport and communication and construction sectors were 7.5 percent and 15.9 percent (y-o-y). Despite increased tourism activity, domestic trade and real estate sectors activity declined by -3.9 percent and -1.2 percent (y-o-y), respectively. Overall, tourism, construction, and transportation sectors drove almost all economic growth in the first quarter of 2023. Although a small sector of the economy, fisheries grew by 7.3 percent over the same period, which was important for those people whose livelihoods depend on the sector. October 2023 THE WORLD BANK 10 Batten Down the Hatches Maldives Development Update Figure A.5: Real GDP expands again in early 2023 Contribution to growth, percentage points 40 Agri.&Fish. Manufacturing Construction Trade Tourism Transportation and Communication 30 Others GDP 20 10 0 2022-Q1 2022-Q2 2022-Q3 2022-Q4 2023-Q1 Source: National Bureau of Statistics Maldives (NBS), staff calculations. Inflation remained Inflation in Maldives continued to rise in early 2023, following the impact of the GST higher than the rate increases – that became effective in January 2023 – and the constant high global historical average, commodity prices. As a result, consumer prices increased by an average of 3.3 percent driven by GST rate (y-o-y) in the first seven months of 2023, well above the historical average of 0.5 changes and high percent. This increase was slightly more pronounced in the atolls (3.8 percent) than commodity prices... in Malé (3.0 percent), although inflation in Malé had risen faster in 2022 due to growing housing and furnishing costs (Figure A.6). …with a large The overall rise in prices was largely driven by food & non-alcoholic beverages and contribution from transport, while the government managed to ease pressures on housing and utility food & non- prices through blanket subsidies. As overall 2023 inflation peaked at 4.0 percent (y- alcoholic beverages o-y) in March, it reached 8.0 percent in the food & non-alcoholic beverages and and transport. transport sectors. Price pressures subsided in these sectors, with inflation falling to 4.5 and 3.4 percent in July, respectively, as government increased subsidy support to these sectors (Figure A.7). Figure A.6: Price pressures remained high in the first Figure A.7: …especially for food & non-alcoholic half of 2023… beverages and transport Year-on-year change in consumer price index (CPI), percent Contributions to CPI growth, percentage points Others 6.0 Restaurants & Accommodation 5.0 Education Information & Communication 4.0 Transport 7 Health 3.0 Furnishing & Household equip. 2.0 6 Housing&Utilities 5 Food & Non-alcoholic Beverages 1.0 Inflation y-o-y 0.0 4 3 -1.0 2 -2.0 1 -3.0 0 Jul-21 Jul-22 Jul-23 Nov-21 Jan-22 Nov-22 Jan-23 Sep-21 Sep-22 Mar-21 Mar-22 Mar-23 May-21 May-22 May-23 -1 -2 Jul-21 Jul-22 Jul-23 Nov-21 Jan-22 Nov-22 Jan-23 Sep-21 Sep-22 Mar-21 Mar-22 Mar-23 May-21 May-22 May-23 Republic Male' Atolls Source: Maldives Bureau of Statistics, WB staff calculations. Source: Maldives Bureau of Statistics, WB staff calculations. October 2023 THE WORLD BANK 11 Batten Down the Hatches Maldives Development Update 3. Poverty has fallen, but inequality and specific welfare disparities remain Poverty is projected The poverty rate in 2019 was 3.9 percent and, following the strong post-COVID-19 to decline further recovery since 2021, it is projected to decrease to 1.5 percent in 2023. 3 The economy with the strong and jobs have been driven by high-end tourism, while a strong redistributive system economic recovery – which includes universal access to health and education services, public sector since 2021… employment and pensions, health insurance, price controls and subsidies, and income support programs – allowed economic gains to improve living standards in Malé and the atolls. At the national level, this translates into very low deprivations in non-monetary dimensions of welfare. This redistributive welfare model also limited welfare losses during the pandemic, although this came at a considerable fiscal cost, as discussed in section A.6. …but inequality Although the Gini index 4 has consistently fallen and stood at 29.3 in 2019 – which remains a concern… is relatively low compared to other countries in the region – this does not capture spatial disparities between Malé and the atolls, where 92 percent of the poor live. This is better captured by looking at the Gini index within Malé and within atolls separately. The former stood at 25.2 percent while the latter at 24.2 – both lower than when populations from Malé and atolls are pooled together (29.3), implying substantial disparities between the capital region and atolls (Figure A.8). …with substantial The “atolls versus Malé” story must be unpacked further since several atolls perform disparity in welfare well on poverty measures. In fact, distance from Malé is not associated with higher between the atolls poverty. Shaviyani in Upper North and Addu in Lower South have poverty rates and Malé. that are comparable to the national rate (5.6 and and 5.7 percent), while some atolls closer to Malé exhibit higher poverty rates, including Raa in Lower North and Aliff in Upper Central (18.9 and 14.2 percent). Each region and almost every zone has a combination of atolls with low and high poverty rates, except for Gaafu Aliff and Gaafu Daalu in Upper South (Figure A.9). Figure A.8: Inequality disparities between the capital Figure A.9: …as poverty rates differ across the and other atolls… country Gini index, 2019 In percent below upper middle-income country poverty line 18.9 20 35 Inequality measure (Gini index) Poverty Rate (National Poverty Line) 18 29.3 15.6 16 12.9 14.2 14.4 30 14 12.5 25.2 24.2 12 9.6 8.8 25 10 7.1 7.8 8 5.6 5.7 6 3.1 2.8 20 4 2.1 1.7 2.7 0.9 2 15 0 Noonu Aliff Aliff Thaa Raa Faafu Naviyani Shaviyani Addu Laamu Laviyani Kaafu Meemu Daalu Gaafu Aliff Haa Aliff Waavu Gaafu Daalu Haa Daalu Male' Baa Aliff Daalu 10 5 Upper Lower Upper Lower UpperLower 0 North Central South MALE' ATOLLS NATIONAL Region/Zone/Atoll Source: HIES 2019, WB Staff calculations. Source: HIES 2019, WB Staff calculations. 3 According to the US$6.85 poverty line for upper middle-income countries. 4 The Gini index is a measure of the distribution of income across a population on a scale between 0-100. A higher Gini index indicates greater inequality, with high-income individuals receiving much larger percentages of the population’s total income. October 2023 THE WORLD BANK 12 Batten Down the Hatches Maldives Development Update Welfare disparities Additional disparities in welfare levels can be observed for larger households and also depend on the households with more than one child per adult. For example, looking at the profile size of the of the poor, additional disparities can be observed between households with 10 or household… more household members and households with 9 or less. The former are three times more likely to be living in poverty than the latter (Table A.1): 12 percent of households with 10 or more members live in poverty against 4 percent for smaller households. This welfare penalty for large households is greater in Malé (15.9 and 5.7 percent for larger and smaller households respectively). 5 Overcrowding, where a large family is packed into a small space, is also a strong indicator of deprivation. 6 …while female and Female-headed households are associated with a slightly higher incidence of poverty self-employed in Maldives, but it seems that this is primarily driven by Malé. Earning household households are more heads can be categorized as employees, self-employed, and employers, the latter likely to be being individuals who provide jobs to non-family members. As shown in Table A.1, impoverished. the incidence of poverty among households with self-employed household heads is more than double that of households with heads in wage-earning jobs (Box 2 provides additional labor market analysis and the potential for green jobs). Table A.1: Deprivations differ under different characteristics Populatio Poverty Populatio Deprivation Population Deprivatio Characteristic n Share, % Rate, % n Share, % Rate, % Share, % n rate, % (National) (National) (Malé) (Malé) (Atolls) (Atolls) 10 members or 7.7 12 5.8 15.9 9.6 10.5 more Household size 9 members or 92.3 4 94.2 5.7 90.4 5.1 less Children / More than 0.5 7.1 12 5.3 12.5 8.9 13.9 Household Size 0.5 or less 92.9 4.9 94.7 6.7 91.1 5.5 Members / More than 3 10.4 8.4 13.9 22.4 7.2 13.2 Room 3 or less 89.6 4.9 86.1 2.9 92.8 5.5 Female 42.7 6 38.7 7.5 46.3 6.6 Gender of Head Male 57.3 5 61.3 6.7 53.7 5.8 Employee 66.7 2.4 77.7 5.8 54.2 4 Employment Status of Head (Earning Heads Only) Self-Employed 27.6 5.5 16.3 10.4 40.4 5.3 Employer 5.7 3.5 6 0 5.4 2.5 Source: HIES 2019, World Bank Staff estimates. 5 Households with more than one child per adult are also at least twice as likely to be poor or deprived relative to other households (12 percent poverty rate among the former against 4.9 percent for the latter). 6 8.4 percent of the population living in households with more than three members per room lives in poverty versus 4.9 percent for households with three or less members per room. The incidence of poverty among overcrowded households in Malé is greater, and such households are about eight times more likely to be deprived than households that are not. October 2023 THE WORLD BANK 13 Batten Down the Hatches Maldives Development Update Box 2: The Green Transition and its labor market implications for Maldives Job creation is a priority for Maldives to achieve green, resilient, and inclusive growth (WB 2021). The green transition presents an opportunity to create green jobs such as recycling and environmental engineers (Granata and Posadas 2022). The green transition is also expected to reduce pollution-intensive jobs that are most common in industries with high pollution intensity, such as machinery mechanics and construction laborers (Vona et al 2018). Workers in such jobs that may be lost may require assistance, and policies such as increasing access to education can Figure A.10: Share of workers in green and help ease the transition. pollution-intensive jobs in the Maldives In Maldives, the share of workers in green jobs is 3 percent, lower Percent than the 8 percent share of workers in pollution-intensive jobs 14.0% (HIES 2019), similar to the rest of South Asia. Most jobs are 12.0% neither green nor pollution-intensive, like the rest of the region 10.0% and globally (Figure A.10). Gender inequality in the country’s labor market is reflected in the disparity in employment in green jobs: 88 8.0% percent of workers in green jobs are men while 36 percent of 6.0% workers in pollution-intensive jobs are men. Among men, 4 4.0% percent of workers are in green jobs, and 6 percent in pollution intensive jobs. Among women, less than 1 percent of workers are 2.0% in green jobs and 13 percent are in pollution intensive jobs. 0.0% Additionally, women in the informal sector, with limited social Green jobs Pollution intensive jobs protection, are more likely to be employed in green jobs while this Men Women Total is not the case for men. Collaborating with groups like South Asia Gender and Energy (SAGE) and Women Practitioners' Network Source: National Bureau of Statistics, WB staff calculations. in the Energy Sector (WePOWER) can promote green, formal employment for women and promote gender equality for inclusive growth. Growing the formal sector can also increase private investment and revenue mobilization. Globally, workers in green jobs are relatively high paying and Figure A.11: Industry composition of workers in workers in green jobs tend to be better educated (IMF 2022), but green and pollution-intensive jobs in the Maldives in Maldives, workers with lower education are more likely to have Percent green jobs and as a result, there is no wage premium in green jobs Agriculture Manufacturing Electricity (SADU 2023). This is due to the 20 percent of low-skilled workers Construction Retail Transportation in green jobs such as garbage collection and recycling. While waste 100 Other management is important for the country’s environmental sustainability, Maldives has the potential to increase higher-skilled 80 green occupations, such as civil engineers and technicians as the renewable energy sector grows. 60 The country’s green jobs are less concentrated than its pollution- 40 intensive jobs, with about 70 percent in manufacturing (Figure 20 A.11). Almost all the women employed in pollution-intensive jobs are in manufacturing, while women employed in green jobs are 0 more heterogeneous. The country’s growing blue economy holds Green, Men Poll. int., Men Green, Women Poll. int., Women the potential to create green jobs. About 5 percent of green jobs are in aquaculture. There is, however, a need to shift towards Source: National Bureau of Statistics, WB staff calculations. higher-skilled, higher-wage occupations. The importance of tourism and related activities is also reflected in the country’s green jobs. About 2 percent of green jobs are in tourism and 13 percent of green jobs are in retail. Among men, about 15 percent of green and pollution-intensive jobs are in retail. Among women, a higher share of women employed in tourism and retail are in green jobs. These sectors can grow more sustainably so workers can transition to greener jobs. The continued growth in tourism may also help address the gender gap in the labor market to improve the country’s social sustainability. Maldives has made progress in growing its renewable energy, aquaculture, and tourism sectors, which are sources of greener jobs for sustainable growth. The green jobs available in the country are currently lower skilled, but there are opportunities to create higher-skilled green jobs. Policies that address the skill gap to prepare workers, especially the young, can ease the transition and allow the country to grow sustainably. Source: WB Staff analysis. October 2023 THE WORLD BANK 14 Batten Down the Hatches Maldives Development Update 4. MMA’s exposure to the sovereign remains high, while lending to the private sector is picking up and deposit growth is low Policy rates have The Maldives Monetary Authority (MMA) has kept the minimum reserve been unchanged requirement (MRR) unchanged at 10 percent of average local currency deposits, since June 2021, since the last increase from 7.5 percent in June 2021, while the MRR for foreign despite inflationary currency deposits has been maintained at 10 percent since October 2022. In pressures. addition, the interest rate corridor has also been maintained in the same band, with the overnight deposit facility (ODF) 7 and overnight Lombard facility (OLF) 8 unchanged at 1.5 percent and 10 percent, respectively. MMA continues to The Ministry of Finance (MOF) has securitized most of the advances received from finance the budget the MMA over the 2020–2023 period under the exemption of certain clauses of the deficit. Fiscal Responsibility Act (FRA). 9 According to the latest figures, around MVR 6 billion out of MVR 8 billion has been securitized and the MMA’s advance limit was reduced from MVR 4.4 billion to MVR 2 billion. Repeated debt exchange operations through securitizations have, however, created space for new advances, and therefore expanded MMA’s total exposure to central government, with exposures increasing to MVR 13.8 billion, or 56.8 percent of MMA assets (Figure A.12). Figure A.12: MMA’s claims on central government Figure A.13: …while credit growth remains low and remain high… exposure of banks to the public sector rises MVR million, percent Percent, percentage change (rhs) Claims on Central Government Sov and SOE exposures (% of total assets) (rhs) Advances to CG Credit Growth (YoY, %) Claims on Central Government (% of total assets) (rhs) 40% 45% Deposit Growth (YoY, %) 16,000 70% 14,000 30% 35% 60% 12,000 50% 20% 25% 10,000 40% 8,000 30% 10% 15% 6,000 4,000 20% 0% 5% 2,000 10% 0 0% -10% -5% Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22 May-19 May-20 May-21 May-22 May-23 Jul-20 Jul-21 Jul-22 Jul-23 Jan-20 Jan-21 Jan-22 Jan-23 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Apr-23 Source: MMA, World Bank staff calculations. Source: MMA, World Bank staff calculations. Lending to the Growth of bank credit to the private sector remained broadly unchanged, at 7.2 private sector picked percent (y-o-y) in July 2023. Credit to major sectors (tourism, construction, personal up, while deposit loans, and commerce) except for the construction sector, continued to expand. The 7 MMA commenced the ODF for commercial banks on 23 March 2010, whereby banks can place their excess funds at MMA overnight. This facility carries the lowest rate in the system, below the deposit rate offered to commercial banks' customers. The ODF rate is 1.5 percent per annum, effective 1 September 2014. 8 The MMA introduced OLF to commercial banks on 9 May 2010, allowing for banks to borrow from the MMA on an overnight basis, mainly to avoid disruptions in the payments system and to meet the MRR level. This facility carries the highest rate in the system, above the overnight lending rates among commercial banks. The OLF rate is 10 percent per annum, effective 1 September 2014. 9 The Fiscal Responsibility Act (FRA) aims to achieve fiscal stability and sustainability, improve fiscal transparency, and increase the accountability of government. The Act sets out several quantitative fiscal targets and procedural rules to be followed to enforce responsibility in fiscal management. The suspension of certain clauses of the FRA was approved by parliament in April 2020 at the request of the Minister of Finance, citing weak government cashflows due to the COVID-19 pandemic. October 2023 THE WORLD BANK 15 Batten Down the Hatches Maldives Development Update growth slowed down highest growth was observed in personal loans 10 and tourism – 25 and 12 percent, substantially… respectively. At the same time, deposit growth continued to slow down, to 1.6 percent (y-o-y) in July 2023. The slowdown was mostly driven by a decline in foreign exchange deposits that dropped by 4.3 percent (y-o-y) in the same period. …while lending to The build-up of the sovereign exposure, that intensified during the pandemic, the public sector reflects a combination of supply and demand factors, including lack of domestic intensified, investment opportunities and weaknesses in credit infrastructure that constrain constraining private private sector lending. Bank exposure to the central government increased to 30.6 sector lending. percent of their assets, as of July 2023, compared to 28.8 percent a year earlier. Direct exposures to SOEs (some of which have known financial difficulties, such as the Housing Development Corporation) represented 4.6 percent of banking sector assets, growing by 25.3 percent (y-o-y) in July 2023 (combined central government and SOE exposure is shown in Figure A.13). The banking sector As of Q2 2023, the banking system’s capital adequacy ratio (CAR) is well above the currently remains regulatory minimum of 12 percent, 11 and profitability is high. Non-performing loans well capitalized, but remain constant, at around 6 percent, and provisioning is high (Figure A.14). vulnerabilities exist. Vulnerabilities mostly stem from intensification of the sovereign-bank nexus that could erode bank capital in the event of sovereign distress. In addition, high dollarization, combined with FX shortages, poses risks to financial stability. FX loans account for around 40 percent of total loans, and FX deposits account for 50 percent of total deposits. Since 2022, the net open position in foreign exchange has been negative, exposing banks’ balance sheets to FX exchange risk arising from a potential Maldivian rufiyaa devaluation (Figure A.15). Figure A.14: Banks financial stability indicators remain Figure A.15: …but exchange rate risks contribute to stable… existing vulnerabilities Percent Percent Return on assets FX loans to deposits ratio (%) 80% Return on equity Liquid assets to short-term liabilities Net open position in foreign exchange to capital (%) 70% 70% (rhs) 15% 60% 10% 60% 50% 5% 50% 40% 0% 40% 30% -5% 20% 30% 10% -10% 20% 0% -15% Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 10% 0% 2018 2019 2020 2021 2022 Q2-2023 Source: MMA, World Bank staff calculations. Source: MMA, World Bank staff calculations. Although Maldives Under the current monetary policy framework, the exchange rate peg to the US continues to maintain dollar is used as the nominal anchor to help maintain price stability through the and manage a de exchange rate. The MMA aims to maintain the exchange rate peg within a set facto stabilized horizontal band, where the exchange rate is allowed to fluctuate within the bounds 10 Household indebtedness continues growing, including through ‘rent-to-own’ and ‘lease and hire’ schemes that are not properly recorded in the credit information bureau, leaving recurring household payment obligations underreported. 11 Financial soundness indicators might be overstated since government exposures receive a zero-risk weight and therefore there are no credit risk charges for these exposures. October 2023 THE WORLD BANK 16 Batten Down the Hatches Maldives Development Update exchange rate, some of MVR 10.28 to MVR 15.42. Furthermore, the MMA continues to manage excess transactions are liquidity in the banking system through Open Market Operations and the Foreign being pushed into the Exchange Swap Facility to maintain the domestic money supply and support parallel market. exchange rate stability consistent with economic activity. However, due to limits on FX deposit withdrawals and FX-denominated credit card spending, firms and households make a large part of their FX transactions through the parallel FX market, which is trading at a 10–15 percent premium. 5. Higher commodity prices and financing needs are keeping pressure on external balances and reserves The current account The CAD, which was 8.7 percent of GDP (US$455 million) in 2021, widened to 16.8 deficit (CAD) percent of GDP (just over US$1 billion) in 2022, following a 48.4 percent (y-o-y) widened significantly growth in capital goods imports and higher import costs that were primarily driven in 2022... by global commodity price increases (see Annex 1). Services exports grew by 26.9 percent (y-o-y) in 2022 – of which 90 percent of earnings came from tourism and related sectors – yet they failed to curtail the overall CAD. …as elevated import The merchandise trade deficit expanded by 38.4 percent (y-o-y) to US$2.9 billion in costs, along with 2022, due to the sizeable petroleum import bill (up to over 13.5 percent of GDP), as sizeable capital well as higher construction and capital goods imports, driven by accelerated PSIP goods imports, drove projects. Petroleum imports grew sharply by 83 percent (y-o-y) and contributed to a considerable half of the overall import growth, while imports of transport equipment and expansion in the construction materials also soared by 48 percent (y-o-y) in 2022. The annualized trade trade deficit. deficit increased by 7.4 percent (y-o-y) to US$3.07 billion, as of July 2023. Starting from the second quarter of 2023, petroleum imports declined by 9 percent (y-o-y), but the overall import bill remined high (Figure A.16), and imports of transport equipment and construction materials remained high in the first half of 2023. Despite the robust growth in tourism, the high trade deficit continues to exert pressure on the balance of payments (Figure A.17). Figure A.16: Despite reduced imports in 2023Q2… Figure A.17: …the trade deficit remains high Contribution to import growth, in percent US$ million Other items Construction and Capital goods Trade Balance Import Exports Transport equipment & parts Petroleum products Electronic & electrical appliances Furniture, fixtures & fittings 1200 Food items 1000 70% 800 60% 600 50% 400 40% 200 30% 0 20% -200 10% -400 0% -600 -10% -800 -20% -1000 Source: MMA, World Bank staff calculations. Source: MMA, World Bank staff calculations. The CAD was largely While net FDI in 2022 grew by 12.3 percent (y-o-y) to US$721.9 million, it remained financed by FDI in below the pre-pandemic level of US$961 million in 2019. The government did not 2022… issue any international securities in 2022 and depended on MMA reserves and October 2023 THE WORLD BANK 17 Batten Down the Hatches Maldives Development Update domestic market borrowing of US$100 million, through the State Bank of India’s Maldives branch, to boost reserves (Figure A.18). Given the large trade deficits in 2023, the CAD is expected to remain high. In August 2023, the authorities borrowed a $55 million loan for budgetary support purposes. … and pressures on The widening trade deficit kept the pressure on official reserves in 2022, which have official reserves fallen further in 2023 (Figure A.19). As the import bill remained high, at US$3.5 persist, making billion in the first seven months of 2023 compared to $3.2 billion in the same period Maldives yet more of 2022, official reserves continued to decline – falling by 28.6 percent since end- vulnerable to 2022 to US$594.1 million in July 2023. This is only sufficient to cover 2.0 months of external shocks. imports, a significant drop from 3.0 months at end-2022. More concerning though, is the sharp fall in useable reserves. Although short-term liabilities (i.e., coming due within the next 12 months) declined from US$564.5 to US$469.1 million from end- 2022 to July 2023, this improvement was not sufficient to improve the reserve coverage – usable reserves declined from US$268 million (0.9 months of import) to US$125 million (0.4 months of import) over the same period. Figure A.18: CAD largely financed by FDI… Figure A.19:…as reserves reached critically low Percent of GDP levels Official reserves US$ million and months of import cover (rhs) Net Other investments Months of imports (rhs) Net Portfolio investments 1,200 Months of imports (net ST liabilities) 8 Net FDI Official Reserves 50.0 Reserves net ST liabilities Secondary income 40.0 Primary income 1,000 Goods & Services 6 30.0 Current Account Balance 800 20.0 10.0 600 4 - -10.0 400 -20.0 2 -30.0 200 -40.0 2019 2020 2021 2022 0 0 2019 2020 2021 2022 Jul-23 Source: MMA, World Bank staff calculations. Source: MMA, World Bank staff calculations. 6. Fiscal deficit and public debt remain high, even with stronger revenues Fiscal deficit At 14.4 percent of GDP in 2022, the fiscal deficit further rose compared to 2021 (see remained high in Annex 2). Increasing revenues (by almost 2.0 percentage points) to 27.8 percent of 2022. GDP were, however, offset by increasing expenditures of a similar scale. Total expenditures reached 41.8 percent of GDP in 2022, significantly higher than the 32.9 percent of GDP in 2019, but lower than the peak of 50.4 percent of GDP in 2020. Growth in tourism The expansion in tourism and related taxes continued to drive revenue growth in 2023, and recent tax which was 18 percent between January and April 2023, compared to the same period reforms contributed in 2022. Much of this came from the Tourism Goods and Services Tax (TGST) and to robust revenue business and property tax collections, linked to the robust business activity in this growth in 2023... period (Figure A.20). …but the overall Total expenditure grew by 33.5 percent between January and April 2023 compared to fiscal performance the same period in 2022. In this period, other recurrent and capital spending climbed was constrained by by 45.1 and 43 percent (y-o-y), respectively (Figure A.21). This sharp increase has been October 2023 THE WORLD BANK 18 Batten Down the Hatches Maldives Development Update increased spending driven by higher subsidies, elevated Aasandha (health) spending, an increase in the across the board. health sector wage bill (related to implementation of the Public Sector Pay Harmonization (PSPH) policy), higher interest costs, and sustained high levels of capital spending (under the PSIP). Interest payments were substantial between January and August 2023, totaling MVR2.5 billion (US$162.3 million), compared to MVR2.18 billion (US$141.6 million) during the same period in 2022 – far exceeding the annual average between 2014–2019 of MVR 1.3 billion (US$85 million) or about 2 percent of GDP. This was driven by a large increase in interest payments for both domestic and external debt, due to increased outstanding Treasury securities and more reliance on external commercial debt. Capital expenditure Despite a projected reduction in the 2023 Budget, capital expenditure increased by 43 continued to percent (y-o-y) between January and April 2023. Accelerated capital spending was increase in 2023, and driven mainly by the Greater Malé Connectivity Project, water and sewerage projects, subsidy reforms were land reclamation projects and large-scale public housing developments in Hulhumalé, not implemented. which constitute the main projects of the PSIP and are largely financed through external non-concessional borrowing. The previously planned and budgeted subsidy reforms (including fuel subsidies) – that aimed to reduce expenditures by 3 percent of GDP in 2023 – have not been implemented. Government’s spending on subsidies reached a historic high in August 2023 due to elevated global commodity prices, climbing to MVR2.63 billion (US$170.9 million) for the year, and already exceeding the MVR2.28 billion (US$148 million) that was budgeted for 2023. Figure A.20: Growth in revenues driven by tourism Figure A.21: …yet expenditure remains elevated due expansion, tax hikes and business and property taxes… to capital investments, subsidies and other recurrent y-o-y change, in percent spending y-o-y change, in percent 100 Other Revenues Losses and Write-offs Business and Property Tax Capital Expenditure Other Tourism Revenues 100 Other Recurrent spending 40 80 General GST Subsidies Tourism GST 80 Financing and Interest Costs 60 Total Revenues Salaries and Wages 60 Total Expenditure (RHS) 20 40 40 20 20 0 0 0 -20 -20 -20 Q32021 Q42021 Q12022 Q22022 Q32022 Q42022 Jan-Apr 2023 Q32021 Q42021 Q12022 Q22022 Q32022 Q42022 Jan-Apr 2023 Source: Ministry of Finance, World Bank staff calculations. Source: Ministry of Finance, World Bank staff Note: Other Tourism Revenues consists of import duties, green tax, calculations/estimate. airport service charges/departure tax, airport development fees and resort rents. Public debt remains Total public and publicly guaranteed (PPG) debt rose to US$7.0 billion (113.5 percent high, exceeding the of GDP) at the end of 2022, compared to US$5.9 billion (112.1 percent of GDP) the size of the year before, due to sustained borrowing to finance the budget deficit and infrastructure economy… projects (Figure A.22). Domestic debt accounts for 62.1 percent of GDP, while external and externally guaranteed debt accounts for the remainder (51.4 percent of GDP). These figures do not, however, include advances from MMA, which have been ongoing since the suspension of the FRA in early 2020 (see Section 3). October 2023 THE WORLD BANK 19 Batten Down the Hatches Maldives Development Update …with growing A US$500 million Sukuk issuance in 2021 allowed the government to address the external debt service immediate refinancing risks, by paying off 77 percent of a US$250 million Eurobond needs, especially in maturing in 2022. Additionally, a privately placed bond of US$100 million, initially due 2026. in 2023, has been extended to 2026. The Sukuk issuance, however, came at a higher cost with a coupon rate of 9.875 percent and a yield of 10.5 percent. In addition, both the Sukuk and privately placed bond will now be due in 2026, which will contribute to significant external debt servicing of almost US$1.07 billion in 2026, including the guaranteed debt of SOEs (Figure A.27). The Sovereign Development Fund (SDF) 12 could partially finance some of this, while possible refinancing options could imply even higher borrowing costs (Figure A.23). The high levels of debt and rising debt servicing, including larger principal payments, are likely to further constrain fiscal space and the balance of payments in the medium term. This will constrain Maldives’ capacity to absorb further shocks. To address the Increases in the GGST rate from 6 to 8 percent, and the TGST rate from 12 to 16 elevated fiscal percent, were rolled out in January 2023. This reform is expected to increase vulnerabilities, government revenues by 3 percent of GDP annually. A strong increase in tax revenues government raised (26 percent, y-o-y) in the first four months of 2023 reflects the effects of these hikes. taxes in early 2023, A few additional expenditure measures were also taken. The government finalized bulk which alone are procurement agreements for pharmaceutical products with bilateral partners in June unlikely to be 2023, which will help reduce costs. The government is also phasing the sufficient for a implementation of the ongoing PSPH policy to smoothen the fiscal burden from meaningful fiscal public wage increases. Despite these recent measures, expenditure is expected to adjustment. remain elevated given the delay in implementing the planned energy subsidy reforms, continued increase in recurrent spending, acceleration of public investment projects, and high (and rising) interest payments. The elimination of blanket subsidies is urgently required for a meaningful start to the fiscal adjustment, which can instead be replaced by an enhanced and targeted social protection mechanism (see Box 3). Figure A.22: Public debt remains high… Figure A.23: …whilst external interest payments will be substantial in the next few years PPG in US$ millions and percent of GDP (rhs) External interest payments, US$ mn Total Domestic PPG Debt Private Total External PPG Debt Multilateral 8,000 Total PPG Debt as a % of GDP (RHS) 160 200 Buyers Credit 7,000 140 Bilateral Loans and other securities 6,000 120 160 Securities 5,000 100 120 4,000 80 3,000 60 80 2,000 40 40 1,000 20 0 0 0 2018 2019 2020 2021 2022 2022 2023 2024 2025 Source: Ministry of Finance, World Bank staff calculations. Source: Ministry of Finance, World Bank staff calculations. Note: Data as of August 2023. Does not include debt service costs of pipeline loans, including non-concessional and commercial. Thus, interest costs of outer years may be underestimated. Proceeds from the Airport Development Fee and dividends from the state-owned airport operator, MACL, are transferred into the 12 SDF and earmarked for debt repayment. As of August 2023, the SDF amounted to US$450.9 million. October 2023 THE WORLD BANK 20 Batten Down the Hatches Maldives Development Update Box 3: Targeted social protection is a critical component of successful subsidy reforms Over the past several decades, there has been growing recognition of the potential for targeted social protection to help governments achieve desired policy reforms around cutting general subsidies (food, fuel, etc.), including to lower fiscal cost while mitigating the impact of such reforms on the poor and most vulnerable. Evidence shows that generalized price subsidies are captured mainly by those who consume more and often tend to belong to higher income groups, thereby making such subsidies regressive. In fact, in most cases, a large share of the benefit from subsidies increases the political influence and vested interest of well-off people rather than those most in need of financial support (Arze del Granado et al 2023, IMF 2017). Many countries around the world have moved away progressively from universal price subsidies, and opted for more fiscally sustainable targeted cash transfers that help mitigate the negative welfare effects of subsidy reforms on households. The Dominican Republic is a successful case in which the government took advantage of the existing social protection systems to design and deliver an energy subsidy reform program in 2012. More specifically, the beneficiaries of Solidaridad, the conditional cash transfer program, received additional transfers for gas and electricity (Bonogas and Bonoluz respectively). These direct compensation mechanisms could be put in place rapidly because the country had effective delivery platforms, including mechanisms to identify those most in need, whilst also improving fiscal efficiency (Mukherjee et al 2023). Assurance that compensation mechanisms are in place allowed the government to generate the political support needed for the overall reform. Another example is Indonesia where subsidy reforms were carried out in two waves. A new social protection program was set up in the first wave, while existing programs were expanded later. In a time of fiscal constraints, such targeted cash transfers systems have become even more critical. Maldives spends a substantial portion of its budget on subsidies that are poorly targeted. Subsidies (including electricity, water, food, fuel, and lending to SOEs) account for 4.6% percent of GDP (MoF 2023). The subsidy bill as a percent of GDP almost doubled between 2019 and 2022, mainly due to a sharp rise in fuel subsidies (MoF 2023), adding further pressure to an already high public debt ceiling. Due to their regressive nature, the cost of subsidies exceeds their benefit, and these programs could be replaced by better-targeted cash transfers. Poverty-targeted cash transfer programs in Maldives cover less than 5 percent of the population, but with generous transfers. Cash transfer programs in the Maldives have the most generous benefits in the South Asia region, but are narrowly targeted, covering only 4.1 percent of the total population. Monthly transfers range between MVR1,000 (US$65) per child per month for the foster/single parent allowance and MVR2,000 (US$130) for the disability allowances (NSPA 2023). 13 In terms of the coverage of the poor, cash transfer programs covered 5.8 percent of those in the poorest quintile, and 6.5 percent in the second-poorest quintile (World Bank 2023). 14 Cash transfers reach people in all income quintiles, and there is a case for improved targeting to focus on the inclusion of the poorest and exclusion of those in the higher income categories. The low coverage of poor and vulnerable households through social protection, coupled with the high expenditures on subsidies and ongoing fiscal vulnerabilities, present a strong case for subsidy reforms. Targeted cash transfers can help Maldives manage potential distributional and welfare impacts of the reforms. The National Social Protection Agency (NSPA) houses the Social Protection Information System (SPIS), a digitalized beneficiary registry that can be used to identify social protection beneficiaries. Given the low coverage of poverty-targeted programs, the number of people registered in the system to date is limited. However, the system has great potential. It was used to deliver the Emergency Income Support program for workers who had suffered a loss of income or jobs because of the COVID-19 pandemic in 2020. The emergency program was put in place in only a few weeks as it could piggyback on existing delivery systems, benefiting from the broad penetration of online services, a unique ID, systems interoperability, and electronic payment. Going forward it would be critical for the country to invest in broadening the scope of the national social protection information system to cover a larger share of the population. Social protection information systems that are regularly updated and have good coverage can help better target limited resources to those most in need and ensure effective implementation of forthcoming subsidy reforms. Going forward, Maldives will have to invest in strengthening the national social registry and continue to invest in enhancing delivery mechanisms and efficient payment channels for cash transfer programs. Source: WB staff analysis. 13 National Social protection Agency website. Accessed on 9.1.2023. https://www.nspa.gov.mv/v2/index.php/v2-4/ 14 ADePT SP Output, World Bank, 2023. October 2023 THE WORLD BANK 21 Batten Down the Hatches Maldives Development Update A2. Outlook and Risks 7. Medium-term growth outlook remains positive, but clouded by rising macro-fiscal vulnerabilities Growth outlook is The economy is expected to experience continued growth due to an increase in positive over the tourist arrivals, capital spending and private consumption. Real GDP growth is medium term, but projected to be 6.5 percent in 2023, and 5.4 percent on average in the 2024–25 period. with significantly The baseline projections for 2024–2025 are lower than the forecasts in April 2023 elevated external and (Figure A.24), reflecting the following factors: (i) actual 2022 GDP growth was higher fiscal risks. than expected (i.e., 13.9 percent compared to 12.3 percent); and (ii) the completion of the Velana International Airport project, along with other major infrastructure projects, are delayed. Better than expected tourist arrivals marginally offset these factors. Heightened external and fiscal vulnerabilities, however, pose significant downside risks to the economic outlook – which include continued external borrowing at more expensive terms during a global tightening cycle and a weaker global economic outlook. Stronger tourism performance could present some upside, including more tourists from Europe, China, Russia, and India, and growing interest from new markets. Higher PSIP spending on infrastructure, housing, and renewable energy projects could also help boost growth, especially over the longer term, but will come at the cost of increased macro-fiscal vulnerabilities unless they are better planned, sequenced, and managed – and with their impacts on fiscal and external vulnerabilities properly considered (Table A.2). Table A.2: Growth is expected to remain robust, but macro-fiscal vulnerabilities will persist 2021 2022 2023f 2024f 2025f Real GDP Growth, at constant market prices 37.7 13.9 6.5 5.2 5.5 Inflation (Consumer Price Index) 0.5 2.3 3.2 2.7 2.5 Current Account Balance (% of GDP) -8.7 -16.8 -17.6 -20.9 -19.4 Fiscal Balance (% of GDP) -14.2 -14.4 -12.4 -11.8 -10.4 Debt (% of GDP) 112.1 113.5 113.7 115.1 116.3 Source: World Bank estimates and forecasts as of September 2023. 22 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update Inflation is expected Inflation is projected to rise to 3.2 percent in 2023, largely due to the recent increase to remain modest in GST rates. This is lower than the April 2023 forecast of 5.7 percent for 2023 given due to the the additional subsidies provided by government to help contain price pressures. government’s Despite these additional fuel and food subsidies, elevated global commodity prices subsidy program, are still expected to be partially passed through to households, due to the limited fiscal notwithstanding the space to fully absorb the price increases. Although inflation is expected to decline to recent tax increases. 2.5 percent over the medium term, recent global oil production cuts pose risks to the stability of oil prices. Fiscal deficits are Despite an increase in revenues, blanket subsidies, sustained support to poorly likely to remain high, managed SOEs, high recurrent spending, continued capital spending despite given ambitious worsening borrowing conditions, and implementation of the PSPH policy are spending expected to keep government spending and fiscal deficits elevated (Figure A.25). commitments and Capital spending is expected to remain raised over the medium term, as government plans. aims to accelerate the completion of water and sanitation projects and the Velana Airport terminal by 2025. In addition, The Greater Malé Connectivity Project, regional airports, social housing, harbors, hospitals, and land reclamation projects are ongoing or in the pipeline. Although initial revenue reforms have been initiated and further reforms are being considered, these are unlikely to be sufficient to achieve government’s ambitious fiscal adjustment plans. A better targeted subsidy program is critical to reducing the overall fiscal burden. Figure A.24: Real GDP growth is expected to remain Figure A.25: …while spending commitments and robust in the medium term… plans may impede a stronger narrowing of the fiscal Year-on-year growth, percent deficit Percent of GDP 50 Sep-2023 forecast Apr-2023 forecast Fiscal Balance Primary Balance 0 40 30 13.9 -5 20 6.6 5.3 5.9 -6.7 10 -10 -8.2 -8.9 0 6.5 5.2 5.5 -10.4 -12.4 -11.8 -10 -15 -20 -30 -20 -40 2019 2020 2021 2022 2023f 2024f 2025f -25 2020 2021 2022 2023f 2024f 2025f Source: Ministry of Finance and World Bank projections. Source: Ministry of Finance and World Bank projections. Despite tourism Imports of capital goods and growth in consumption spending are expected to keep growth, the current the current account deficit (CAD) elevated over the medium term (Table A.2). The account deficit is CAD is projected to moderate slightly in 2025, as larger investment projects are expected to remain wound up and capital spending declines (Figure A.26). Persistently large CADs and substantially significant external debt servicing will continue to exert pressures on the balance of elevated. payments and external buffers. A strong fiscal As discussed, public debt significantly exceeds the size of Maldives’ entire economy. adjustment is Although fiscal deficits are expected to gradually narrow over the medium term, total urgently required to PPG debt to GDP is forecast to remain elevated at over 115 percent (Table A.1). rebuild buffers Such high levels of public debt, and associated refinancing risks, make the Maldivian economy extremely vulnerable to domestic and external shocks. Thus, despite robust 23 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update against domestic and growth prospects, prudent debt management remains a top priority for improving external shocks. fiscal sustainability, lowering the cost of growth-enhancing investments – especially with large debt service obligations coming due (Figure A.27) – and ensuring a more resilient economy going forward. Figure A.26: Current account deficit expected to Figure A.27: …with significant external debt servicing remain elevated due to higher imports… pressures over the next few years Percent of GDP US$ million 0 1200 Interest payments Principal and other payments -5 1000 -10 800 -15 -20 -16.7 -17.6 600 -19.4 -20.9 -25 400 -30 200 -35 0 -40 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2020 2021 2022 2023f 2024f 2025f Source: Maldives Monetary Authority and World Bank estimates. Source: Ministry of Finance and World Bank staff calculations. Note: Data as of August 2023. Does not include debt service costs of pipeline loans, neither non-concessional nor commercial. Thus, debt servicing costs of the outer years may be underestimated. The revised Through the new MTFS, the authorities plan to reduce expenditure by: (i) Medium-Term eliminating fuel, electricity, food and sanitation subsidies, and replacing them with Fiscal Strategy a targeted cash transfer mechanism – with an ambitious plan to have this in place (MTFS) could set a by July 2024; (ii) changing the coverage policy of health services for high income new benchmark for earners, and implementing measures to reduce drug costs (such as bulk expenditure procurement of medicines from India and other countries, which also requires an rationalization. upgrade in the storage capacity of STO); and (iii) reducing the PSIP envelope. Implementation of these reforms will, however, require strong commitment and effective communication with all Maldivians. 8. Downside risks persist, so restoring fiscal and debt sustainability remains a priority Significant downside The global economic outlook is dimmed by high levels of uncertainty, stemming risks cloud the from supply-side shocks caused by the pandemic and Russia’s invasion of Ukraine, medium-term as well as monetary tightening measures to address rising global inflation. As growth prospects. discussed in Box 1, major economies including China are projected to experience an extended slowdown due to financial and fiscal distress, with risks tilted towards the downside. The existence of these global uncertainties, as well as any additional global shocks, poses significant risks to Maldives’ economic outlook, especially if there is a slowdown in key source countries for tourists, as was the case during the height of the pandemic. 24 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update External financing External debt and fiscal vulnerabilities remain a significant concern for Maldives in risks are growing the medium term. The country is projected to pay, on average, about US$570 million and are highly annually as external debt servicing over the 2024–25 period (Figure A.29). PPG debt sensitive to global servicing is then expected to reach US$1.07 billion in 2026, which includes bullet conditions. payments for the US$500 million Sukuk and US$100 million private placement – significantly testing the country’s ability to repay or roll over this debt. The latter is also very much dependent on an improved global financing environment by 2026. Continued Despite government’s efforts to transfer a portion of revenues to the SDF, which is borrowing and designed to pay off some of the maturing debt, the available balance in the fund limited external remains much lower than the external debt servicing that is coming due over the buffers are next few years. In addition, the continuation of high global commodity prices could concerning. lead to a sustained deterioration in the country’s fiscal and current account balances, and further erode the official reserves. The inadequate level of official reserves (currently at US$594.1 million or 2.0 months of imports as of July 2023) is concerning as: (i) the current account deficit may widen further due to a combination of weaker-than-expected tourism arrivals, continued high PSIP spending, and/or higher-than expected commodity prices; and (ii) further tightening of global financial markets could make it difficult or too expensive to roll over debt. Restoring fiscal and It’s time for Maldives to ‘batten down the hatches.’ A significant fiscal adjustment debt sustainability is is needed. Government’s decision to raise the GST rates is a positive start, but not critical for sufficient for the adjustment that is required. A stronger commitment is urgently sustainable long- needed, as the planned subsidy reforms didn’t happen in 2023. A notable reduction term growth. in (and more effective) spending, and more effective revenue mobilization are crucial for Maldives’ debt and fiscal sustainability. Reforms to Aasandha, reducing and rationalizing subsidies to SOEs – especially for fuel and food subsidies – and a solid public investment management framework are amongst the key reform areas to bring down the high levels of public expenditure, replenish fiscal buffers against future shocks, and lower the cost of growth-enhancing investments. On the other hand, revenue mobilization can be improved by diversifying the tax base and mobilizing more domestic sources of revenue, reducing informality, and enhancing the tax morale and equity of the tax system. Reducing the Maldives’ heavy dependance on tourism makes the country vulnerable to external dependency on shocks, emphasizing the need for structural diversification of the economy over the tourism, limiting longer term. In addition, government’s heavy presence in economic activity, with state involvement in SOEs forming a significant part of the non-tourism economy, hinders private sector economic activity, development. To enable this development and diversify the economy, Maldives and diversifying the could benefit from a more diversified tourism sector that also provides further economy remains a benefits to those living in the outer atolls and inhabited islands, including offering major challenge. new tourism products, such as environmentally friendly eco-tourism options, and developing the industry in the Northern and Southern Atolls through better infrastructure, further enhanced connectivity, and favorable rents for resort developments. An upcoming new submarine cable is expected to enhance digital connectivity in Maldives, potentially leading to greater job opportunities. However, any infrastructure investments must be well sequenced and planned, and consider the country’s current debt vulnerabilities. Boosting the fisheries sector, by expanding fish processing and cold storage facilities, as well as opening new export markets, could help reduce the country’s high dependency on tourism. Additional avenues for diversification, trade, and growth also need to be explored. 25 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update B. Supporting Sustainable and Resilient Infrastructure 1. Context Maldives has In the decade prior to the COVID-19 pandemic (2010–2019), Maldives grew at an enjoyed strong average rate of 6.4 percent, with real GDP growth outpacing the upper middle economic growth, income and South Asian averages (Figure B.1). While the country was severely driven largely by impacted by the pandemic, with GDP shrinking by 33.5 percent in 2020, it tourism… rebounded strongly in 2021 with GDP growing by 41.7 percent. This strong recovery was supported by a rapid COVID-19 vaccination rollout, quick relaxation of border measures with simple entry requirements, and the unique “one island, one resort” model (Figure B.2). Figure B.1: Before the pandemic, Maldives had Figure B.2: …but growth has been volatile due to its grown faster than its peers… high dependence on tourism In percent, y-o-y change In percent, y-o-y change and in US$ 40 GDP per capita (right axis) 30000 7 Real GDP growth (left axis) 6 30 20000 5 20 4 10000 3 10 2 0 0 1 -10 Political 0 turmoil: 2.5 -10000 Average small Maldives High-income South Asia -20 income average Global Upper middle- average island state average 2004 tsunami: recession: -7.2 COVID-19: -20000 -30 -33.5 -13.1 -40 -30000 Source: IMF WEO and WDI, staff calculations. Source: Statistics Maldives, WB Staff calculations. 26 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update … and outperforms Available data indicate that Maldives outperforms most of its regional and Small most of its peers in Island Developing States (SIDS) peers in the provision of basic infrastructure terms of services (Table B.1). Maldives has benefitted from universal access to electricity infrastructure access. since 2008, and there is widespread use of mobile phone services. Hospital beds per 1,000 people at 4.1 is higher than the upper middle-income average and the pupil-teacher ratio is very low at 5.0. Table B.1: Benchmarking of key infrastructure indicators Maldives Average Upper SIDS S. Asia MI Source: World Bank WDI and Maldives MoH 2021. This positive Prior to COVID-19, annual public spending in Maldives was around one third of infrastructure access nominal GDP, which is slightly ahead of other upper middle-income countries, but has come at the cost in line with other SIDS (Figure B.3). This increased to around 50 percent in 2020, of a significant rise due to the significant increase in public spending to mitigate the economic impacts in public spending… of COVID-19 but has since dropped to 42 percent in 2022. This rapid growth in spending has outpaced real GDP growth in most years (Figure B.4), with much of the growth being driven by substantial increases in capital spending under the PSIP, subsidies and transfers to SOEs, and the wage bill (Figure B.5). It is estimated that between 2014–2022, over 50 percent of the approved PSIP budget was spent on transport related infrastructure (including airports, ports, roads, and bridges), housing, and land reclamation. Figure B.3: Maldives spends more than the average Figure B.4: Public expenditure growth mostly upper middle-income country, but on par with other outpaced GDP growth… SIDS In percent, y-o-y change and in US$ In percent of GDP 37.9 Real GDP growth Expenditure growth 40 50 33.4 33.6 35 30.8 30 27.1 40 25 30 20 15 20 10 10 5 0 0 -10 -20 -30 -40 2018 2019 2020 2021 2022 Source: IMF Fiscal Affairs Database, October 2021. Source: IMF Fiscal Affairs Database, October 2021, MMA and WB staff calculations. Note: 2023 figures take into account the budgeted amount and the GOM’s GDP growth estimates. 27 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update …leading to Driven by the need to increase public expenditures to offset the adverse impacts excessive borrowing, of COVID-19, total public and publicly guaranteed (PPG) debt stood at around and rising debt and 150 percent of GDP in 2020. Despite this figure falling to 113.5 percent at the end fiscal vulnerabilities. of 2022, it is still significantly higher than the pre-COVID-19 levels, when the debt figure stood at 77.2 percent of GDP. As discussed in Section A, the level of PPG debt is forecast to remain above 115 percent of GDP in the medium term (see Section A). Such high levels of debt will likely limit the ability of the government to address future economic shocks and invest in infrastructure. Figure B.5: …primarily driven by substantial increases in PSIP spending, subsidies, and the wage bill Percent of GDP Salaries, wages, allowances Goods and Services Pensions, retirement beenfits, gratuities 60 Grants, Contributions and Subsidies Interest payments 50 PSIP Other capital expenditures 40 30 20 10 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: WB PER (2022), MOF, WB staff calculations. SOEs also have a The dominant role of the public sector, including SOEs, is not unusual in a small dominant role in the island state such as Maldives. Services need to be delivered to a small population, economy and in spread out over many islands, and opportunities for private sector investment are service provision… limited. However, the public sector plays a much larger role in the economy of Maldives compared with other SIDS. Aside from the associated fiscal risks, this outsized role for the public sector can potentially “crowd out” the private sector and stifle innovation and enterprise. … and climate Maldives is the world’s lowest lying country, with 80 percent of its land area lying change and disaster less than one meter above the sea level, making it extremely vulnerable to climate vulnerability pose change. In addition, most of Maldives’ critical infrastructure assets lie less than 100 significant meters from the shoreline. Storms, heavy rainfall, cyclones, floods, and sea surges challenges. have damaged infrastructure and interrupted service delivery in the past, and such events are expected to increase in intensity and frequency. Maldives ranks 106 out of 181 countries in the 2020 Notre Dame Global Adaptation Initiative (ND- GAIN) Index 15 (Figure B.6). The adverse impacts of climate change under a business-as-usual scenario are expected to reduce Maldives’ GDP by 2.3 percent by 2050, 16 which is the highest of any country in South Asia. 15 The ND-GAIN Index ranks countries using a score that calculates a country’s vulnerability to climate change and other global challenges, as well as its readiness to address resilience. 16 https://climateknowledgeportal.worldbank.org/country/maldives 28 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update Figure B.6: Maldives ND-GAIN Ranking (1995–2020) Ranking 160 140 120 100 80 60 40 20 0 1995 2000 2005 2010 2015 2020 Source: ND Gain Index. Large disparities The expansion of spending under the PSIP, together with a policy of decentralizing exist between Malé services to the atolls, has led to a significant improvement in terms of infrastructure and the outer atolls provision in the atolls. However, spatial disparities remain. Only 15 and 26 percent in terms of of households residing in the atolls have access to piped water and sewage infrastructure connections respectively, versus nearly universal access in Malé (Figure B.7). quality. Similar disparities exist in broadband internet service speeds (Figure B.8). Figure B.7: Piped water and sewer connections Figure B.8: Fixed and mobile up/download speeds In percent of total access Mbps 100% 97% 100% 80% 60% 40% 20% 15% 26% 0% Piped Water Sewer Malé Other Atolls Source: Statistics Maldives, 2020. Source: WB Staff analysis based on Speedtest Intelligence data between Jan 2020–Jan 2021. 2. Despite a major focus on improving connectivity, Maldives faces ‘small island’ constraints in addressing remaining infrastructure gaps The costs of service With just over half a million inhabitants (521,547 as at 2021) and less than 300 square delivery are high and kilometers of total land area, Maldives is the smallest and most densely populated there is limited country in South Asia, with a population density of around 1,700 people per square ability to benefit kilometer. The country is an archipelago of 1,190 coral islands grouped into 26 atolls, from economies of of which around 200 are inhabited islands. The capital city of Malé has an even scale… higher population density of 53,700 people per square kilometer. This puts it well ahead of other large and densely populated cities in the region, such as Mumbai and Dhaka. Except for tourism and fisheries, all economic activity is concentrated in Malé and, while national poverty levels are low (1.7 percent in 2022), significant 29 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update disparities persist between Malé and the outer atolls. Due to the country’s small size, remote location in the Indian Ocean, and a very dispersed population, the costs of doing business and delivering services are high and there is limited ability to benefit from economies of scale. …whilst the Tourism and associated services account for almost 30 percent of GDP, more than economy remains 60 percent of foreign exchange receipts, almost half of public revenues, 17 and the heavily dependent on bulk of private sector jobs. While the COVID-19 pandemic prompted the tourism. government to accelerate economic diversification, opportunities outside tourism will remain limited in the near-term. The scarcity of land and other natural resources constrains domestic production and leads to a heavy reliance on imports, especially for fuel and construction materials. 3. Maldives is also facing several ‘micro’ cross-cutting and sector specific constraints to the delivery of infrastructure services 18 Cross-cutting These cross-cutting constraints are not specific to one sector, but typically have an constraints include impact across several sectors. Therefore, addressing such constraints can have a public investment positive multiplier effect across sectors. There are four cross-cutting areas that are management, typically relevant in the context of infrastructure delivery in many countries, namely: financing, SOEs, and PPPs. - Public Investment Management (PIM) - Funding and Financing - State Owned Enterprises (SOEs) - Public Private Partnerships (PPPs) Efficiency of public International benchmarking indicates that Maldives needs to improve the efficiency investment spending of its public spending on infrastructure, particularly in terms of prioritization, needs to be procurement, and execution, with the following weaknesses having been identified: improved…  Lack of capital costing in national strategies and plans, leading to the risk that infrastructure investment plans are approved without a proper understanding of the actual costs.  Lack of operations and maintenance costing over the lifetime of the project.  Lack of robust and transparent criteria to select and prioritize projects.  Weak framework for project appraisals.  Projects being procured on a negotiated or unsolicited basis which undermines the value for money proposition.  Weaknesses in implementing projects on time and on budget, leading to higher implementation costs. …and financing Most of Maldives’ infrastructure investments to date have been financed through constraints need to public funding or external borrowings, including G2G loans and commercial sources be considered while which can be more expensive. More importantly, the scale of these investments and making investment borrowings have contributed to the fiscal vulnerabilities currently being experienced decisions. by the country (see Section A). Given these vulnerabilities, it will be important for Maldives to mobilize private sector capital and long-term sources of financing (including climate financing) to support future infrastructure investments. In this context, there are several constraints that need to be addressed, including: 17 World Bank Group. 2023. Maldives Country Partnership Framework. 18 For a more detailed assessment, see World Bank Group. 2023. Maldives InfraSAP Report 30 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update  Dominant role of the public sector in providing infrastructure services (particularly SOEs), which is crowding out the private sector.  Limited availability of domestic long-term debt in the country.  Limited size of capital markets.  Lack of institutional investors. The dominant role of While SOEs typically play a significant role in service provision in many SIDS, the SOEs in the SOE sector in Maldives plays a much more significant role in the economy, economy is leading accounting for around 10 percent of GDP. Many of these SOEs are underperforming to further (particularly those in the energy and transport sectors) and, because of their public inefficiencies… service obligations, are being run at a loss, with less than one fifth of the SOEs paying dividends to the government on a regular basis. The remainder are a drain on the budget, resulting in the government needing to provide a combination of loans, guarantees, subsidies and cash injections to keep the majority of SOEs running. The following are some of the key issues related to the provision of infrastructure services by SOEs in Maldives:  Lack of an SOE legal framework.  Weak financial reporting.  Lack of transparency and limited competition in procurement.  Poor SOE governance and limited capacity. …but, PPPs can be Considering the government’s fiscal vulnerabilities, it will be important to support utilized to reduce the mobilization of private sector capital for infrastructure investments, particularly inefficiencies. using public-private partnerships (PPPs). However, while the Strategic Action Plan (SAP) 2019–2023 identifies and supports infrastructure investments through PPPs, PPPs and private investment in infrastructure have been relatively limited. To support the successful implementation of PPPs, several constraints need to be addressed, including:  Lack of a clear and consistent PPP policy and legal and regulatory framework.  A PIM framework that doesn’t support the identification of potential PPP projects.  Weak PPP institutional framework, limited capacity, and poor coordination.  Lack of a competitive and transparent PPP procurement framework.  Limited framework to manage PPP related fiscal risks. Moving to sector While universal energy access was achieved in 2008, this access still mainly relies on specific constraints, the use of small diesel fueled power units to supply an isolated island-based grid the energy sector’s system. In recent years, Maldives has been actively supporting several programs to high fossil fuel develop renewable energy projects (particularly solar) to reduce the reliance on fossil dependency, with fuels and meet its 2030 net zero target. However, the percentage share of renewable associated rising energy projects in the generation mix remains relatively low, and the sector suffers subsidies, is from several issues and constraints that will need to be addressed, including: problematic…  Heavy dependence on diesel imports for generation, which is leading to increased GHG emissions.  Unsustainable system of fuel and end user subsidies, which is contributing to fiscal constraints.  High end-user tariffs despite the subsidies.  Limited opportunities to benefit from economies of scale. 31 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update  Outdated and inefficient transmission and distribution (T&D) systems leading to grid instability and energy losses.  Poor performance and weak balance sheets of the two main generators and suppliers of electricity (STELCO and FENAKA), 19 which require significant financial support from the government. …while transport As an archipelago of around 200 highly dispersed islands, sea and air transport connectivity requires connectivity play a critical role in Maldives. To improve connectivity, Maldives is an upgrade. supporting an expansion in the number of airports and rapidly expanding the Integrated National Public Ferry Network (INPFN). However, there are several issues and constraints in the sector that need to be addressed to improve the efficiency and effectiveness of transport services:  Lack of integrated transport planning.  Irregular and unreliable inter-island ferry services.  Heavy traffic congestion and high emissions in Malé.  Heavy reliance on fossil fuels, which leads to increased GHG emissions and subsidies.  Lack of adequate data for informed decision making.  Poor SOE performance.  Limited private sector participation. Although Maldives is ahead of its regional peers in terms of digital access and connectivity, performance is better having one of the highest per-capita international bandwidths in the region. However, than regional peers, despite 100 percent coverage, there is a digital divide between Malé and the atolls, as there are significant well as significant usage gaps. There are also challenges relating to affordability and disparities in the quality of fixed broadband services. In this context, the following constraints have accessing digital been identified: services.  Limited competition and gaps in the enabling regulatory environment.  High prices in the wholesale international capacity segment.  Lack of information on the performance of the telecom sector.  No active infrastructure sharing for spectrum.  Current microwave spectrum assignments do not promote efficient use of this resource and have led to further bottlenecks in the middle mile segment.  Limited coverage of national submarine fiber backbone.  No cybercrime law or any cybersecurity policy, strategy, or legislation. 4. Recommendations to improve the delivery of sustainable and resilient infrastructure in support of Jazeera Raajje Maldives needs to To continue to support economic development in the face of severe fiscal constraints improve the and climate change, it will be critical for Maldives to address the constraints and issues efficiency and identified above, by improving and strengthening the overall PIM framework. This effectiveness of its will help to ensure that key infrastructure services are planned, prioritized, and overall approach to delivered in a way that enhances connectivity, while at the same time ensuring that infrastructure such services are affordable, sustainable, and resilient. planning and delivery… 19 State Electricity Company Limited (STELCO) and Fenaka Corporation Limited (FENAKA). 32 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update …particularly While some of the issues and constraints highlighted above are sector specific, it will through enhancing be important for the government to ensure that relevant ministries and agencies inter-agency coordinate more effectively when developing sector policies and planning coordination… investments to better leverage cross-sector synergies. For example, it will be critical for the energy and transport sectors to coordinate their respective sector planning in the context of a transition to e-mobility. … with a climate Given that most of the islands are less than 1 meter above sea level, climate change change agenda poses an existential threat to Maldives. Storms, cyclones, and sea surges have integrated into damaged infrastructure in the past and have interrupted service delivery. infrastructure Unfortunately, given the remoteness of some of these islands, repairing and decision making… reinstating services not only takes time, but is very expensive. Therefore, it will be critical that climate change considerations are fully integrated into infrastructure investment decisions, by ensuring that all projects are looked at through a climate ‘lens’. … and through There are several specific actions and policy initiatives that Maldives can consider actions and policy implementing to try and address the cross-cutting and sector-specific issues that have initiatives that been identified as constraining the efficient and effective delivery of infrastructure. improve the delivery Some of these actions and policy initiatives are summarized in the tables below: of infrastructure. Table B.2: Key cross-cutting constraints and recommendations Constraint Key Recommendations/Actions While Maldives continues to Strengthen the Public Investment Management Framework: invest significant amounts in • Develop a standard template for appraising projects and develop transparent and consistently applied criteria to infrastructure, international identify and prioritize projects. benchmarking indicates that • Ensure that identified projects are properly costed (construction and operation), approved and budgeted. Maldives needs to improve • Strengthen procurement rules (as well as the oversight of such rules) to ensure that contracts are competitively the efficiency of its capital and transparently procured. spending. • Strengthen the capacity of ministries and agencies to properly monitor and evaluate the implementation of projects approved under the PSIP. Given fiscal pressures, the Identify opportunities for private sector investment and implement policies to support private sector government is likely to be financing: constrained in its future • Require all ministries, agencies, and SOEs to assess their project pipelines to determine which projects have the ability to invest in potential to mobilize private sector capital (including climate financing). infrastructure. • Assess the regulatory framework for the pension sector and the life insurance market to determine the feasibility of allowing pension funds and insurance companies to invest in infrastructure assets. • Further develop the regulatory framework to support Sharia-compliant financing. • Review the regulations governing the use and application of the government’s existing sustainability funds (including the Green Fund) to determine whether there are any restrictions in using these funds to support blended financing. SOEs play a dominant role in Strengthen the legal framework for SOEs and improve governance and management: providing infrastructure • Introduce an SOE law that, inter alia, sets out the rationale and policy for creating new SOEs and specifies the services, but many of these process for securing the necessary parliamentary approvals for providing financial support. SOEs are poorly managed, • Performance parameters and key performance indicators (KPIs) should be established for each of the SOEs to inefficient and loss making, incentivize and monitor performance. requiring the government to • Regulations should be implemented that require all SOEs to provide their semi-annual/annual financial provide subsidies and cash statements in a timely manner, using the same consistent format that reflects generally accepted accounting injections which are adding principles. to fiscal pressures. SOEs • The current SOE portfolio should be reviewed to determine which of the SOEs are viable without the need for can also ‘crowd’ out the any government support and assess their potential for private sector investment. private sector. There has been limited Strengthen the institutional, legal, and regulatory enabling environment for PPPs: success in implementing • Implement the proposed PPP Law, together with the appropriate supporting regulations and guidelines. PPP projects to date. • Established a formal PPP unit to act as a center of excellence and ensure that it has the necessary resources, capacity, and authority to carry out its designated functions in a coordinated manner. 33 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update • Strengthen the institutional framework for PPPs to clarify roles and responsibilities and remove overlapping responsibilities. • Develop a comprehensive national PPP project pipeline (including RE and transport projects) to help attract investors. • Develop a robust institutional framework and process to manage PPP related fiscal risks. Table B.3: Key energy sector constraints and recommendations Constraint Key Recommendations/Actions Heavy reliance on diesel Continue to scale up the solar renewable energy program to increase RE generation and explore other generation and related fuel sources of RE: and tariff subsidies is adding • Shorten the government’s review and approval process for bids and adopt digital bid submissions. to the government’s fiscal • Explore other sources of RE including wind, tidal, and wave. problems and increasing • Strengthen engagement with domestic and international investors, e.g., by conducting market sounding activities GHG emissions. Despite to showcase opportunities and identify potential investors in renewable projects in Maldives. these subsidies, end user tariffs are still relatively high. To achieve its ambitious goal Develop a Green Hydrogen Roadmap: of net zero emissions by • Determine the optimal timing for green hydrogen adoption, considering the country’s ambitious net-zero target 2030, the government by 2030 and explore the potential of combining solar + battery systems with green hydrogen solutions to create should consider diversifying a techno-commercially optimized energy solution for Maldives. its sources of renewable • Establish a pilot project to test the feasibility and effectiveness of green hydrogen production and integration into energy to include green the grid. hydrogen. The current T&D system is Increase investment in transmission and distribution: outdated and inefficient • Mobilize private sector financing for grid upgrades by providing incentives for private sector participation in leading to energy losses and transmission and distribution infrastructure projects. grid instability. • Engage with the URA to ensure the development and enforcement of regulations and standards that support private sector investment in grid upgrades, as well as the integration of renewable energy into the grid system. Increasing the supply of Improve demand side efficiencies to help reduce energy consumption: renewables into the • Develop and enforce building energy efficiency codes for the residential and tourism sectors. generation mix is expensive • Organize awareness campaigns and educational programs to inform consumers, businesses, and the tourism and will take time. sector about the benefits of energy efficiency measures and the Hakathari program. • Explore partnerships with international organizations and experts to gain insights into best practices and innovative solutions for energy efficiency, adapting them to the unique context of Maldives. Given the government’s Proactively tap climate funds and continue efforts to leverage private sector financing into RE: fiscal constraints, it will need • Identify and tag potential climate projects and strengthen the government’s capacity to prepare and implement to rely on mobilizing climate smart energy projects. financing from a wide range • Consider launching a Maldives-focused green bond program, supported by guarantees, to attract private sector of sources to meet its investment for renewable energy projects. mitigation and adaptation • Collaborate with development partners to design and implement a country-specific risk guarantee program that goals. provides private investors with increased confidence in the RE market. • Establish a dedicated blended financing facility for RE in Maldives which combines concessional loans and/or grants with private sector financing to accelerate the deployment of renewable energy projects. Table B.4: Key transport sector constraints and recommendations Constraint Key Recommendations/Actions Maldives, particularly Malé, does not Develop a comprehensive transport sector master plan to improve transport sector planning: have a well-planned and integrated • Develop a comprehensive transport sector master plan that is integrated with the master plans of other transport system – mainly due to a lack sectors (including the energy and digital sectors), provides costings for construction and operation, of integrated transport planning and and prioritizes e-mobility and road safety. poor project implementation. • In addition to supporting the tourism sector, any new transport master plan should focus on the development of efficient and sustainable maritime logistic services to support the fishing and agricultural sectors. There is currently limited availability of Strengthen data collection to inform effective planning and investment: data to make informed planning and • Develop a centralized transport database that systematically gathers key transport related data. investment decisions in the transport • Utilize the database to generate appropriate analytics to support transport sector planning and project sector. monitoring, as this will help improve the impact and efficiency of investments in the sector. The current ferry network still has Continue to expand the inter-island ferry network to improve connectivity: connectivity gaps which are potentially • It will be important to build out inter-island ferry connectivity, taking into account the need to build and constraining economic development upgrade ports and jetties. and the delivery of services particularly in the outer atolls. 34 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update Constraint Key Recommendations/Actions • Given the need to provide services on loss making routes, it will be critical to look at options to lower costs and improve efficiency, e.g., optimizing routes and combining passengers and freight on the same route. • Explore options for attracting private sector investment into the ferry network, given that around USD75 million will be needed to build out the network. The transport sector is generating GHG Promote e-mobility to reduce GHG emission and transport sector related subsidies: emissions, as well as increasing fiscal • Leverage off the Least Cost Power Generation Expansion plan currently being prepared and develop constraints, due to fuel and ticket an Electric Vehicles (EV) roadmap for Maldives. subsidies • Consider supporting EV pilot schemes that will serve to collect data to support EV charging infrastructure and increased EV share in fleets through the pilot scheme of e-minibuses for the Malé bus network, followed by a potential pilot of an e-ferry network. • Integrate electric mobility transition with zero-emissions charging operations enabled by PV generation systems (on the bus and ferry terminal roofs) to ensure both economic and environmental sustainability. Given the government’s current fiscal Leverage private sector financing, particularly through PPPs: constraints, it will be important to look • As part of the transport masterplan, it will be important to screen and identify projects that have the at opportunities for mobilizing private potential to attract private sector investment and develop a pipeline of bankable transport projects. sector capital. • Identify and address the regulatory and policy barriers to private investment in the transport sector and improve overall capacity to implement PPPs. • Identify an appropriate risk mitigation package to support private sector investment in the transport sector, e.g., provision of minimum revenue guarantees. Table B.5: Key digital sector constraints and recommendations Constraints Key Recommendations/Actions While Maldives has 100 percent mobile Develop a national broadband strategy and action plan to improve broadband access and coverage, there is a digital divide in terms affordability: of broadband access between Malé and • Define policy reforms and regulatory measures to foster competitive pressure with the aim of the outer atolls. improving the affordability, coverage, and quality of broadband services. • Build the capacity of the regulatory authority to define and enforce regulations on competition and resource management. Maldives currently has a duopoly of Support a more conducive and competitive environment in the mobile market to reduce prices: service providers and a nascent policy • Conduct a study on the viability of active infrastructure sharing in Maldives in consultation with and regulatory framework that doesn’t stakeholders and develop legal/regulatory frameworks to cover active infrastructure sharing. incentivize competition. • Review competition in the communications market in Maldives and impose regulations on dominant providers. • Assess the current use of the microwave spectrum to maximize efficiency and reuse of these resources. Many atolls are only connected by Assess the feasibility of extending fiber connections to unconnected atolls: microwave links, which have limited • Undertake a feasibility assessment on the merits and deployment costs of extending fiber to capacity. unconnected atolls. • Develop public-private funding mechanisms to meet the capital and operating expenditures needed to extend fiber networks and establish a Universal Service Fund as a separate entity that is overseen by an independent administrator to support universal access as outlined in the Telecommunications Act. The lack of information on the Increase telecom sector transparency and prescribe standards for service quality and consumer performance of the telecom sector makes protection: its very difficult to assess sector • Require the Communication Authority of Maldives (CAM) to provide monthly statistics on the performance. telecoms sector, such as the number of active SIMs, data usage per SIM, and interconnection prices. • Consider imposing a requirement for licensees to make information about the number and type of complaints received from consumers publicly available, and to what extent licensees have complied with the quality-of-service standards issued by CAM. Maldives has suffered several instances Introduce a comprehensive legal framework on cybercrime and cybersecurity: of data privacy violations, unauthorized • The government should align the substantive cybercrime law provisions in its Telecommunications access to data, and identify theft, which is Act and Penal Code with international best practices and criminalize internationally recognized potentially reducing the confidence of cybercrimes, to enhance digital security in Maldives. businesses and citizens in using digital • Maldives should introduce comprehensive cybersecurity legislation to, inter alia, identify and technologies. categorize critical infrastructure and prescribe measures to enhance security measures for such infrastructure. While Maldives does have access to large Leverage digital technologies to address climate change: amounts of climate related data, digital • Expand and automate data collection to enable seamless data sharing across stakeholders and technologies could be better leveraged to provide practical insights for government planning and actions around climate change. collect and run analytics on data more • Identify innovative yet sustainable solutions to bolster the country’s information data and decision- quickly. making system to help Maldives address the impacts of climate change, e.g., using emerging technologies such as unmanned aerial or underwater vehicles, robotics, and satellite imagery. 35 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update Annex 1: Balance of payments (percent of GDP) 2019 2020 2021 2022 Current Account Balance -26.1 -35.8 -8.7 -16.8 Balance on Goods and Services -6.1 -17.9 9.6 3.1 Merchandise Trade Balance -41.9 -39.2 -40.2 -47.4 Merchandise Exports 6.3 7.0 5.4 6.5 o/w fish exports 2.6 4.2 2.7 2.4 o/w jet fuel re-exports 3.6 2.5 2.5 3.9 Merchandise Imports 48.2 46.1 45.7 53.8 o/w fuel 8.1 7.1 8.7 13.5 o/w capital and construction goods 17.6 15.1 14.2 18.0 Services Trade Balance 35.8 21.3 49.8 50.5 Service Exports 59.2 41.3 70.6 76.3 o/w travel services (tourism) 55.3 37.7 67.0 73.1 Service Imports 23.4 20.0 20.8 25.8 Primary Income, net -9.8 -8.3 -10.2 -11.4 Secondary Income, net -10.2 -9.7 -8.0 -8.5 o/w worker remittance outflows 10.4 10.7 9.5 9.0 Capital Account Balance 0.0 0.0 0.0 0.0 Net borrowing (balance from current and capital a/c) -26.1 -35.8 -8.7 -16.8 Financial Account Balance (excluding reserves and related 34.6 37.9 8.8 18.0 items) Direct Investment, net 16.8 11.9 12.3 11.7 Portfolio Investment, net 13.5 1.9 2.8 -1.1 o/w general government debt issuance 0.0 0.0 5.9 -0.9 Other Investment, net 4.2 24.1 -6.2 7.4 Net Errors and Omissions -7.8 3.4 -3.6 -0.9 OVERALL BALANCE 0.7 5.5 -3.4 0.4 FINANCING Official Reserves (- increase) -0.7 -5.5 3.4 -0.4 36 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update Annex 2: Key fiscal indicators (percent of GDP) 2019 2020 2021 2022 Total Revenue and Grants 26.4 26.7 26.4 27.8 Total Revenue 25.1 25.0 25.2 27.1 Tax Revenue 18.8 19.2 18.2 20.0 o/w Import Duties 3.9 4.0 3.5 3.6 o/w Business and Property Tax 3.6 4.8 2.4 3.3 o/w Tourism Goods and Services Tax 5.6 3.9 6.5 6.8 o/w General Goods and Services Tax 3.2 3.7 3.1 3.2 o/w Airport Service Charges 0.8 0.5 0.6 0.8 o/w Green Tax 1.0 0.6 1.0 1.0 Non-Tax Revenues 6.2 5.8 6.9 7.0 o/w Airport Development Fees 0.8 0.5 0.6 0.8 o/w Property Income 2.0 1.3 2.7 2.2 Grants 1.3 1.7 1.3 0.6 Total Expenditure 32.9 50.4 40.7 41.8 Recurrent Expenditure 24.3 35.6 29.8 29.4 o/w Personal Emoluments 9.4 14.4 10.7 9.9 o/w Pensions, Retirement Benefits & Gratuities 1.7 2.7 2.0 1.8 o/w Goods and Services 5.4 7.4 6.9 5.5 o/w Grants, Contributions and Subsidies 5.9 8.2 7.5 8.7 o/w Interest Payments 1.7 2.8 2.6 3.4 Capital Expenditure 8.7 14.8 10.9 12.7 o/w Public Sector Investment Program 4.8 9.7 6.6 9.4 o/w Development Project Investment & Loan Outlays 3.8 5.0 4.4 3.3 Primary Fiscal Balance -4.5 -20.9 -11.6 -11.0 Overall Fiscal Balance -6.5 -23.7 -14.2 -14.4 37 October 2023 THE WORLD BANK Batten Down the Hatches Maldives Development Update References Arze del Granado, Javier; Coady, David; and Gillingham, Robert. 2012. “The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries.” World Development 2012, vol. 40, issue 11, 2234-2248. 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