Publication: Maldives Development Update, May 2024: Scaling Back and Rebuilding Buffers
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2024-05-08
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2024-05-08
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The Maldives experienced a slowdown in economic growth in 2023, despite an increase in tourist arrivals. The GDP growth rate was 4.0 percent, well below the pre-pandemic trend. The increase in tourist arrivals did not lead to higher GDP growth due to a decline in spending per tourist. Inflation rose in early 2023 due to increased tax rates and high commodity prices, particularly in food and non-alcoholic beverages. The government managed to ease pressure on utility prices and transportation through subsidies. The country faced large external imbalances and a decline in foreign exchange reserves, leading to liquidity pressures. The fiscal deficit increased to 13.2 percent of GDP, driven by high levels of capital spending and subsidies. Key reforms for stabilization were not implemented, resulting in the need for a supplementary budget. The Maldives Monetary Authority financed the budget deficit, and banks' exposure to the sovereign remained high. The country has a high risk of debt distress and is vulnerable to domestic and external shocks. A large fiscal consolidation is urgently needed to ensure fiscal and debt sustainability. Tourism is expected to drive medium-term prosperity, but downside risks remain due to external and fiscal vulnerabilities. The baseline projections for GDP growth in the medium term are lower than previous forecasts due to expected fiscal adjustments and lower tourist spending. Inflation is projected to rise in 2024 due to planned subsidy reforms. Difficulties in liquidity management and failure to implement fiscal reforms pose risks to the economic outlook. Developing alternative growth drivers and reducing SOE involvement in economic activity are crucial for long-term growth.
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“World Bank. 2024. Maldives Development Update, May 2024: Scaling Back and Rebuilding Buffers. © World Bank. http://hdl.handle.net/10986/41525 License: CC BY-NC 3.0 IGO.”
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Expenditure compression in the social sectors and reduction in capital spending allowed for reaching the fiscal targets.Publication Maldives Development Update, April 2014(World Bank, Washington, DC, 2014-04)Real GDP growth in Maldives stood at 3.7 percent in 2013 and its outlook is positive at 4.5 percent for 2014. The tourism demand is slowly picking up and has a positive impact on growth in the non- tourism sectors. Chinese tourists continue to compensate for the weaker demand from Europe, but overall the length of stay has declined, as well as spending per tourist. Growth while dynamic was less inclusive, as the tourism industry is operating on an enclave model of development. The share of GDP from the primary sector, agriculture, mining and fisheries that employ the largest share of Maldivians in the outer atolls, was less than 0.3 percent of GDP in 2013. Loose fiscal policy in a context of moderating economic growth has led to rising macroeconomic imbalances. While revenue collection has been strong, over the past five years the gap between revenues and expenditures has widened, financed through unsustainable levels of public debt at increasing interest rates. The 2014 Budget comes with a record high envelope of MVR 17.95 billion (around 50 percent of GDP), about MVR 3 billion in new revenue measures, and an estimated 3.2 percent financing gap. Financing such high level of spending and meeting this ambitious financing gap would be difficult. Cash management will be tight through 2014. Inflation moderated to 6 percent in 2013 in 2013 although food inflation remained high.
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