Maldives Development Update:

Driven by a rebound in tourism, Maldives’ economy continued to recover strongly in 2022, and poverty is expected to return to pre-pandemic levels by end-2022. The number of tourist arrivals grew by 42.9 percent (y-o-y) in the first eight months of 2022 and is on course to reach the annual pre-pandemic high of 1.7 million (Figure ES.1). A decline in arrivals from Eastern Europe and Russia was offset by other markets, particularly Western Europe, India, and Middle East countries. Formal sector employment and wages also picked up with the strong economic rebound, but a weaker recovery of informal sector jobs is concerning, given the impact this might have on further increasing inequality in the country.

Maldives was hit by the surge in global commodity prices, putting pressure on domestic inflation, the government’s fiscal position, and the balance of payments. Maldives’ inflation climbed to 5.2 percent (yo-y) in June 2022 before declining to 2.5 percent (y-o-y) in July 2022, compared to 0.5 percent in 2021. Due to blanket subsidies provided on fuel and food items, the government is facing significant pressure to continue financing the subsidy program in its current form. The merchandise trade deficit has widened considerably this year – with fuel imports climbing to over 14 percent of GDP in H12022 compared to on average 8 percent of GDP in the 2020-21 period. This is exerting considerable pressure on official reserves that have fallen by 9.6 percent since end-2021; declining to US$728 million in July, and only sufficient to cover 2.7 months of imports compared to 3.8 months at end-2021.

Despite the increase in, particularly, tourism-related revenues, overall fiscal performance is being constrained by the sharp rise in subsidies and interest payments. Due to the increase in global commodity prices, the government’s spending on food and fuel subsidies, of US$112 million in H12022, already substantially exceeds the US$92 million that was budgeted for the whole of 2022. Interest payments have also jumped up and are already at US$115 million or 3.8 percent of GDP for H12022, compared to the annual average of US$85 million or about 2 percent of GDP in the 2014-19 period. This is being driven by the large increase in domestic interest payments and the additional burden of external commercial debt, which is likely to be even more demanding in the medium term.

Exposure to sovereign bond holdings remains high, as the Maldives Monetary Authority (MMA) increasingly finances the budget deficit. The temporary suspension of the Fiscal Responsibility Act (FRA), which has\ been extended until end-2023, has led to a significant increase in MMA’s claims on central government. The suspension allowed the Ministry of Finance (MoF) to overdraw MVR 4.4 billion (US$286 million) from the MMA/public banks, which would normally be limited to MVR 170 million. As a result, MMA’s asset exposure (including Treasury bills and bonds, and advances) increased to 52.5 percent of its total financial assets at end-August 2022, from 42 percent at end-2021. This has been mirrored by an increase in net claims on the central government by commercial banks, with their sovereign exposure climbing from about 70 percent in 2019 to 83 percent in July 2022, further tightening the sovereign-banking system nexus. At the same time, growth in credit to the private sector has been decelerating.

Public debt is at unprecedented levels, exceeding the size of Maldives’ entire economy. Total public and publicly guaranteed (PPG) debt stood at US$6.1 billion or an estimated 118 percent of GDP at end-2021. Domestic debt accounted for the bulk of total debt (62 percent of GDP), while external and externally guaranteed debt accounted for the remainder (56 percent of GDP). These figures do not include the significant advances from MMA/public banks. Moreover, fiscal risks – mostly stemming from guaranteed and on-lent loans, as well as trade payables, subsidies, and capital injections to SOEs – were estimated at about US$2.5 billion or 45 percent of GDP in 2019. While such risks have not materialized, Maldives lacks the fiscal space to address any potential fallout to public finances, should they occur.