Maldives Development Update, May 2024: Scaling Back and Rebuilding Buffers

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.