Maldives Urgently Needs Economic Reforms for Growth

MALE', October 10, 2024-Maldives faces heightened external and fiscal vulnerabilities that require urgent implementation of comprehensive economic reforms, says the World Bank in its twice-a-year country economic update.

Released today, the latest Maldives Development Update: Seeking Stability in Turbulent Times notes that the economy grew by 7.7 and 4.5 percent year-on-year in the first and second quarters of 2024, bolstered by an 8.5 percent increase in tourism in the first half of 2024.

Overall inflation remained low at 0.5 percent in the first half of 2024, but food prices have risen by 6.7 percent in the same period compared to last year. Increasing public debt and high fiscal spending, particularly for public sector investments and subsidies, remain worrying. Although the reported fiscal deficit dropped in the first quarter of 2024, payment delays are affecting major sectors such as healthcare and construction, which are not reflected in the reported fiscal statistics.

Foreign exchange reserves are low and are enough to cover only 1.5 month of imports. Reserves fell from $590.5 million at the end of 2023 to $443.9 million in August 2024. There is pressure due to high debt repayments, with total public debt rising to 116.5 percent of GDP in the first quarter of 2024, up from 110.4 percent last year during the same period. Despite transfers to the Sovereign Development Fund, the current balance of $65 million is not sufficient to cover rising financing needs. Fiscal risks from loans, trade payables, subsidies, and investments in state-owned enterprises (SOEs) remain elevated.

Comprehensive economic reforms are urgently needed to address fiscal and external imbalances, build investor confidence, and reduce debt over the medium-term. The government proposed a fiscal reform plan in February 2024, but limited progress has been made in implementation. While endorsement of the Medium-Term Revenue Strategy has been a positive step, urgent actions are needed to reduce spending. This includes reducing public investments, phasing out subsidies, improving health spending efficiency, and reforming SOEs to reduce the state's footprint in the economy.

"Maldives has made remarkable progress in realizing its development aspirations, but protecting these achievements and scaling them up will depend on addressing the current fiscal challenges," said David Sislen, World Bank Regional Country Director for Maldives, Nepal, and Sri Lanka. "Efficient public spending - with the timely implementation of expenditure reforms and targeted social support - will be essential to ensure resilience amid rising economic challenges."

The report also highlights the climate risks Maldives is facing and provides a path forward on how to jointly address climate and development challenges. Sea-level rise and coral reef degradation could severely impact the Maldives' economy, reducing GDP by 11 percentage points by 2050 under a worst-case scenario. Investments in climate adaptation could mitigate these effects and help boost long-term growth, while investments in renewable energy could eventually help reduce import and fiscal costs.

The Maldives Development Update is a companion piece to the South Asia Development Update, a twice-a-year World Bank report that examines economic developments and prospects in the South Asia region and analyzes policy challenges countries face. The October 2024 edition, titled Women, Jobs, and Growth, includes economic growth projections and examines the roles greater female labor force participation and trade openness can play in realizing the region's untapped economic growth potential.

Medium-term projections for Maldives:

Source: World Bank estimates and forecasts as of October 2024.