Understanding the dynamics of a fast-changing financing landscape for the Maldives is certainly becoming a key capability for policymakers. Concurrent trends across public, private, domestic, and international financing are deeply connected to both local and international contexts and a constant analysis of such variables will help anticipate fiscal space challenges as well as take full advantage of opportunities that the Maldives is facing in addressing its quest to sustainable development. Being able to build integrated financing strategies for national development in an upper-middle-income setting such as the Maldives is a trait to be mastered.

Prior to the COVID-19 pandemic in 2020, the total development financing inflows into the Maldives grew at an average rate of 21% per annum from 2011-2018, rising from $1.5 billion in 2011 to $7 billion in 2018. The share of domestic sources of financing (budget and private financing) has been decreasing consistently, while the share of foreign financing increased during the same period, as the development financing requirements exceeded domestic capacities to generate revenues. Most notably, the share of Maldives budgetary finance in the overall financing mix has reduced from 40% in 2011 to 32% in 2019, while the remaining financing flows came from domestic private sources and international sources.

The COVID-19 pandemic in 2020 caused a staggering 25% decline in overall financing inflows into the Maldives, reflecting a loss of nearly $2.6 billion compared to the peak level of financing in 2018. Total foreign direct investments into the country declined by 50% from $1 billion in 2019 to $0.51 billion in 2020, while the loss of tax revenue at the height of the pandemic also meant that budgetary financing declined by 36% from $1.9 billion in 2019 to $1.2 billion in 2020.

Taken together, this has left a large financing deficit that continues to be unfilled. At the height of the pandemic, the Government of Maldives increased its external borrowings, largely financed through the issuance of conventional bonds and loans leading to a 10% increase in international public financing inflows ($142 million dollars), but largely failed to fill the funding gap. The Maldive’s income status as an UpperMiddle Income (UMI) also meant that the country had challenges in mobilizing donors as recent budgetary records suggest that the country attracted only $78 million in donor grants in 2021 (3.2% of the budget), and is uncertain about expanding its donor grants at scale given its status as a UMI as well as overarching priorities derived from a new combo of international crisis. The government also continues to face challenges in undertaking an expansionary fiscal policy to boost its public sector investment programs as the budget remains mostly dominated by recurrent expenditures such as government emoluments and a range of social sector expenditure which are forecasted to take up 44% of the national budget in 2022.

To finance the post-COVID development agenda, the country would need to adopt a different financing approach that places sustainability at its heart. Several countries in the Asia Pacific such as Indonesia, Fiji, and Seychelles are aligning financing policies to the United Nation’s Sustainable Development Goals (SDGs) and pursuing innovative financing strategies to supplement scarce budgetary resources and to diversify the funding base to reach new investors. The Maldives stands to significantly benefit from aligning its financing ecosystem with global sustainability frameworks to attract a new breed of international investors eager to explore sustainable investment opportunities in emerging markets.

In particular, three financing approaches can lead to meaningful systemic change and additional resource mobilisation to achieve the 2030 Agenda in the Maldives.

The idea behind blended financing is to attract private capital through the strategic use of grant financing to derisk investment projects.

Publicly available data suggests that government ministries and entities operate a system of trust funds that show a significant ability to generate grant capital. One of the most well-known of these trust funds is the Maldives Green Fund, which is capitalized by the “Green Tax” levied on tourism.