Økonomiske studier
Maldives

Maldives

Population 0.3 million
GDP 8,433 $US
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2013 2014 2015(f) 2016(f)
GDP growth (%) 4.7 6.5 1.9 3.5
Inflation (yearly average) (%) 4.0 2.4 1.0 2.5
Budget balance (% GDP) -5.7 -7.6 -4.5 -3.2
Current account balance (% GDP) -4.4 -6.1 -4.6 -5.8
Public debt (% GDP) 66.6 72.8 76.9 78.9

(e) Estimate (f) Forecast

STRENGTHS

  • Growing bilateral relations with China
  • Tourism potential of the uninhabited atolls  
  • Airport Infrastructures
  • Supported by the World Bank and the Asian Development Bank (ADB)

WEAKNESSES

  • Dependence on international economic cycle due to poor economic diversification
  • Chronic budget deficit and growing momentum of public debt
  • Political instability
  • Vulnerable to adverse effects of climate change 

RISK ASSESSMENT

An economy heavily dependent on tourism 

The pace of growth in the Maldives, which are heavily dependent on the global economic cycle, is likely to remain dynamic in 2016. Firmly focussed on the tourist industry (75% of GDP), the economy will benefit from the gradual recovery of growth in the European countries and rapid expansion of the Asian market (the share of Chinese tourist visits went up from 6% to 31% between 2008 and 2014). Moreover, the opening of new hotels and the extension of capacities at Male airport are expected to help meet this rising tourist flow. Meanwhile, the lack of price elasticity in relative to demand in the Maldives should boost tourism growth despite the reduction in public spending due to the fiscal consolidation plan. This is expected to have a positive impact on related sectors: construction, communication and fishing. On the other hand, the Maldives will continue to benefit from the support of international donors, China in particular, for the archipelago's development based on infrastructure projects and tourism.

 

Persistent public and current account deficits 

The Archipelago's financial situation still bears deep scars from the 2004 tsunami and the after-effects of the economic crisis, making the economy vulnerable to any additional shocks. Although the Maldives enjoy the highest tax receipts in South Asia, the large deficit underlines the government's difficulties in containing public spending. This is because the rising public sector wage bill along with social spending are contributing to the persistent public deficit. However, the implementation of a fiscal consolidation programme as part of the 2015 budget includes measures aimed at budget sustainability in the Maldives in the medium term. Moreover, the public accounts imbalance exposes the banking system to sovereign risk since a considerable proportion of the public deficit is funded by the banks. The chronic deficits mean that public debt is growing at an increasingly rapid rate and reaching worrying levels.

The review of statistical data on the recommendation of the IMF has helped to significantly reduce the current account deficit. However, the country's geographic isolation means that it still has to import massively (energy, food) and remittances from foreign workers in the Maldives to their country of origin will keep the current account deficit at high levels. Accordingly, the Archipelago has significant external funding needs, which mean the country depends on international donors. The current account deficit, together with very low foreign exchange reserves, is a major source of foreign exchange risk.

 

Rising socio-political tensions and a difficult business environment 

Since the election of President Abdullah Yameen, half-brother of former President Gayoom (Head of State from 1978 to 2008), in 2013, democracy seems to be increasingly fragile. Several arrests have been made, including the arrest and sentencing to a 13-year prison sentence of former president, Mohamed Nasheed, a well-known opponent of the current president and accused of terrorism, or the arrest of the Prime Minister for alleged treason after the assassination attempt on the President in late September. These arbitrary arrests provoked numerous heavily suppressed popular demonstrations, and were denounced by international observers commenting on the government's attack on the civil and political rights of Maldivian citizens. Moreover, the country is being increasingly islamised, although tourist facilities have to date been spared the laws dictated by the State religion. Nonetheless, disaffection with the Archipelago on the part of tourists could be ruled out if the security situation were to deteriorate as a result of the intensification of extremist Islamist movements and an escalation of social tensions. These tensions could be heightened by the introduction of fiscal consolidation, as the inhabitants are very reliant on State aid (subsidies, welfare).

Moreover, the Archipelago suffers from a poor business climate. It is 128th out of 189 in the World Bank Doing Businessrankings 2016 (135th on the insolvency resolution indicator). Nonetheless, several reforms introduced to facilitate tax payments should help to improve the climate.

 

Last update: January 2016

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