The World Bank's Maldives Development Update report sheds light on the mounting fiscal vulnerabilities and public debt faced by the Maldives, despite robust economic growth. The report underlines the Maldives Monetary Authority's (MMA) increasing role in financing the nation's budget deficit, which has expanded due to the suspension of the Fiscal Responsibility Act (FRA). Consequently, the MMA's asset exposure and the claims of public and private banks on the central government have risen considerably.
Total public and publicly guaranteed debt remains high at 106 percent of GDP by 2022Q3, down from 114 percent of GDP at the end of 2021. The Maldives' fiscal space is limited, and the high risk of debt distress is a growing concern. External debt servicing alone is projected to average $393 million annually over the 2023-25 period. This figure is expected to reach $1 billion in 2026, including bullet payments for the $500 million Sukuk and $100 million private placement, significantly testing the country's ability to repay or rollover this debt.
The World Bank advises the Maldives to implement strong fiscal adjustments, including spending reductions and increased revenue mobilization. Key reform areas recommended by the report include adjustments to the Aasandha health insurance system, reductions and rationalization of subsidies to state-owned enterprises (SOEs), and improved public investment planning and management. By adopting these measures, the Maldives can work towards creating a more resilient and sustainable economy, better equipped to handle future challenges.
Addressing the high levels of public debt is essential, but the Maldives must also focus on diversifying its economy to reduce dependency on tourism. The report suggests developing a more diversified tourism sector that benefits the outer atolls and inhabited islands, focusing on environmentally friendly eco-tourism options, and enhancing digital connectivity to create more job opportunities. Additionally, the Maldives should consider boosting the fisheries sector by expanding fish processing, cold storage facilities, and exploring new export markets.