Maldives Faces Persistent Economic Challenges Due to Decade-Long Debt and Deficits

The Maldives continues to grapple with significant economic vulnerabilities due to a decade of debt accumulation and persistently high fiscal and current account deficits. Erdem Ataş, the country economist and resident coordinator of the World Bank in the Maldives, recently reiterated these concerns in a tweet, emphasizing that economic growth or additional financing alone cannot resolve these issues.

Ataş highlighted that the Maldives' economic woes are the result of a combination of factors that have developed over the past ten years. He pointed out that addressing these vulnerabilities will require expenditure cuts to reduce fiscal and current account deficits. Such measures are essential for supporting the reserves of the Maldives Monetary Authority (MMA) and improving the debt situation in the medium term. Ataş also acknowledged the government's ongoing efforts to implement fiscal reforms.

The World Bank's "Maldives Development Update" provides a detailed analysis of the current economic situation. According to the report, the Maldivian economy grew by 4.0 percent in 2023, a notable decline from the 13.9 percent growth in 2022. This slowdown occurred despite a record number of tourist arrivals, which reached 1.88 million in 2023. However, increased arrivals did not translate into higher economic growth due to reduced spending per tourist and shorter stays.

The report also underscores the persistent fiscal deficits and rising public debt, which have led to liquidity and solvency risks. The fiscal deficit expanded to an estimated 13.2 percent of GDP in 2023, driven by high capital spending on infrastructure projects and significant recurrent spending, including subsidies and health expenditures. Consequently, public debt surged to 122.9 percent of GDP in 2023, with domestic debt increasing substantially due to tighter global financial conditions.

Additionally, the current account deficit (CAD) widened to an estimated 23.4 percent of GDP in 2023, exacerbated by a decline in travel sector receipts and sustained high merchandise imports. The widening CAD and rising debt obligations resulted in a significant drop in official reserves, which fell to just 1.8 months of import cover by February 2024.

The Maldivian government has been proactive in initiating various fiscal reforms to address these economic challenges. These efforts include planned subsidy reforms and measures to enhance revenue mobilization and expenditure management. However, the implementation of these reforms has faced delays, necessitating a supplementary budget in 2023 to address the financing gap.

Ataş's emphasis on the need for expenditure cuts aligns with the World Bank's recommendations for a multi-year fiscal consolidation plan. Such a plan is crucial to ensuring fiscal and debt sustainability, rebuilding buffers against future shocks, and reducing the cost of growth-enhancing investments.