The growth outlook int he current fiscal year is projected to fall downward for the Maldives, according to the World Bank.
The bank on its South Asia Economic Focus said that the largest downward adjustment, by 1.6%, is projected for the Maldives along with Pakistan.
According to the World Bank, tourist arrivals reached 1.68 million in 2022, only slightly lower than the pre-pandemic high. On the other hand, tourist arrivals increased 23% year-on-year, which is aided by the return of Chinese tourists, which accounted for 15% of the increase in total tourist arrivals for the year (as of early March) compared with 2021.
The international financial organization further claimed that supported by the continued recovery in tourism, the Maldivian economy was expected to grow more than 10% in Q1-2022.
“Higher rates have raised borrowing costs for South Asian governments, increasing governments’ incentives to pursue fiscal consolidation to reduce fiscal burden,” said World Bank while it added that the Maldives have increased capital expenditure to finance large infrastructure projects and boost economic capacity for improved future growth prospects.
Meanwhile, the subsidies in the Maldives are estimated to have doubled as a share of the total expenditure. Subsidies rose from 4.2% in 2021 to nearly 9% in 2022. This drive-up was related to the cost of fuel and electricity subsidies spiking during 2022.
Maldives government has however, included fuel subsidy reform in the 2023 budget to reduce the fiscal burden.
World Bank further stated that as the interest rates rise around the world, governments in South Asia also face higher borrowing rates both domestically and in external markets, which is especially the case in the Maldives.
Interest payments in the Maldives rose from below 6% of the total expenditure before 2021 to 8.6% in 2022. Furthermore, about half of all public sector investment spending has gone into large-scale projects, such as construction and expansion of the international airport. The bank said such large-scale projects have long gestation periods and are “financed through short-maturity debts and hence carry rollover risks”.
The government expenditure is further stressed due to the subsidies; which is a prominent spending in the Maldives. The government provides diesel subsidy to electricity providers through SOEs along with electricity subsidy and price controls on domestic travel; all play against the revenues earned to the state.
In addition to this, the state provides blanket food subsidies mainly on rice, flour, and sugar.
Maldives is expected to grow by 6.6% in 2023 and 5.3% in 2024. The bank said that this growth is supported by a robust tourism performance. The return of tourists from China, added with continued growth in Russian and Indian arrivals will contribute to the increased tourist arrivals “in the near term.” The expansion of Velana International Airport (expected completion by 2025) and new resorts investments will boost tourism sector prospectively.
While the fiscal deficit is expected to narrow on the back of the recent GST rate bump, the public debt levels still remain high and debt-servicing costs continue to rise.
The bank further claimed that “tourism-shrinking global shocks” were still a potential downside risk and the high external debt and tightening global financing conditions pose threats to the fiscal and external accounts.