Maldives The Government started a number of large infrastructure projects 2016 to allow the population to move from small, vulnerable islands to Population, million 0.4 Greater Malé, one of the reasons why construction has overtaken GDP, current US$ billion 3.6 tourism as the main driver of growth. To make space for these in- GDP per capita, current US$ 8,620 vestments, the government is implementing a reduction in current Sources: World Bank WDI expenditure. In the medium term, construction is expected to re- main the main driver of growth with large current account deficits financed by investment and infrastructure loans. Percent Contributions to real GDP growth 8 6 4 2 0 -2 -4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 Construction Tourism GDP growth at basic prices Sources: Ministry of Finance and Treasury, and World Bank staff calculations Recent developments The fiscal deficit in 2016 has widened slightly to an es- Overall GDP growth rebounded to an estimated 4.1 timated 8.6 percent of GDP. Revenue and grants are percent in 2016, compared to 2.8 percent in 2015.3 estimated to have declined slightly to 32.2 percent of Construction for housing and large investment proj- GDP. The expenditure side reflects a significant policy ects has taken over as the main driver of growth since shift of around 4 percent of GDP away from recurrent late 2014, while tourism has been slowing down due to expenditure, by abolishing electricity subsidies effec- an economic slowdown in key countries. tively, to capital expenditure into primarily population centers around Greater Malé and into the expansion Inflation fell further to 0.5 percent in 2016 thanks to of the main airport. Public debt grew from 63.4 to an continued low global food and fuel prices and a stable estimated 69.5 percent of GDP. Thanks to concessional exchange rate, as most products are imported. external debt and domestic debt issued at low, fixed 54 3 World Bank staff estimates. Official final estimates GDP have not yet been released. SOUTH ASIA ECONOMIC FOCUS SPRING 2017 rates, and relatively high revenue collection, the cost of of GDP instead, which would still be the lowest defi- debt service is low at 17 percent of revenue. In a sign cit since 2007. Efficiency gains in the universal health of increased transparency, the Ministry of Finance and system could make the budget more flexible and sub- Treasury started to publish monthly fiscal outcomes on sidies reduction make it less exposed to global com- its website. modity price shocks. However, the level of public debt is expected to remain elevated as long as the invest- A long-running court case between the airport SOE ment boom continues. and an Indian engineering company was settled for USD 271 million in November 2016, partly through The current account deficit is likely to remain around selling a bond to the central bank, which used a USD 20 percent of GDP, financed by FDI, external loans, 100 million 6-month currency swap with the Reserve an expected Eurobond issuance and one-off income Bank of India to replenish reserves. The current ac- sources. Usable reserves are expected to remain low, as count deficit has widened sharply from 9.5 percent in the currency swap and other foreign loans will be due 2015 to 25.7 percent of GDP in 2016, on the back of re- for repayment. duced tourist services income, further declines in fish exports and increased imports of construction mate- rials, and the one-off impact of the settlement on the Risks and challenges current account, while commodity imports fell thanks It is important that Maldives preserves its tax base and to low global prices. FDI inflows were not sufficient efficient tax system, as it prepares to develop Special to cover the current account deficit unlike previous Economic Zones offering tax concessions. On the ex- years. Gross official reserves fell to USD 467 million at penditure side, the World Bank encourages the Gov- end-2016, although usable reserves4 were only USD ernment to continue to seek efficiency improvements 200 million (1.2 months of imports). The exchange in the health system, while updating and strengthen- rate to the USD remains at 15.4, the low end of the ing its targeted social protection system to avoid a re- currency band. turn of food and electricity subsidies once commodity prices rise again. Improved project selection, planning and budgeting for construction, maintenance and op- Outlook erations could increase the value-for-money for pub- Maldives is expected to continue to expand the num- lic investment. A Sovereign Development Fund set up ber of resorts, attracting substantial FDI inflows of to receive the newly introduced Airport Development around 9-10 percent of GDP a year. Construction is Charge and dividends from the airport SOE will ring- also likely to remain a key growth driver, while the fence funds to repay the loans to finance the airport tourism sector growth is likely to remain below pre- expansion. vious growth rates, reflecting lower growth expecta- tions in key countries, despite an expected recovery The level of reserves at the central bank is structural- in Russia. ly low, but large economic actors are typically able to supply dollars to the market to keep the parallel market As food subsidies are being gradually phased out in 2017, premium low. inflation is expected to spike due to the direct impact and knock-on effect on other food items. The Govern- While construction and resort tourism are expected ment has put in place a targeted cash transfer program to drive growth in the medium term, these sectors do to protect vulnerable households from the impact, even not create sufficient jobs for Maldivians. The consolida- if take-up of the cash transfer has been limited so far. tion of population from vulnerable islands and atolls to larger islands in Greater Malé, while also reducing The Government has projected a budget deficit for pressure on Malé is a country priority. If successful, it 2017 of 1 percent of GDP. While acknowledging the may eventually allow for new forms of economic activ- effort to phase out food subsidies, it may be difficult ity in line with the aspirations of Maldivian youth and to meet the deficit target unless new revenue mea- provide employment, improve the quality of public sures and further expenditure savings are realized, and services such as health and education, and make the the World Bank projects a fiscal deficit of 6.1 percent country more resilient to climate change. 4 After netting out short-term foreign currency liabilities to the banking sector. 55 GLOBALIZATION BACKLASH TABLE: Maldives macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 (est) 2017 (f) 2018 (f) 2019 (f) Real GDP growth, at constant market prices 6 2.8 4.1 4.5 4.6 4.6 Private Consumption .. .. .. .. .. .. Government Consumption .. .. .. .. .. .. Gross Fixed Capital Investment .. .. .. .. .. .. Exports, Goods and Services .. .. .. .. .. .. Imports, Goods and Services .. .. .. .. .. .. Real GDP growth, at constant factor prices 6 2.8 4.1 4.5 4.6 4.6 Agriculture 0.2 -0.5 1.9 2.3 2.5 2.4 Industry 12.9 18.3 6.6 6.7 6.8 6.9 Services 4.6 1.6 3.3 3.8 4 3.9 Inflation (Consumer Price Index) 2.1 1 0.5 2.4 2.8 3 Current Account Balance (percent of GDP) -3.8 -9.5 -25.7 -21.9 -21 -19.4 Net Foreign Direct Investment (percent of GDP) 10.8 8.7 10.7 10.4 9.9 9.4 Fiscal Balance (percent of GDP) -8.2 -8.2 -8.6 -6.1 .. .. Debt (percent of GDP) 65.9 63.4 69.5 71.2 .. .. Primary Balance (percent of GDP) -4.6 -5.6 -5.6 -2.7 .. .. Sources: World Bank, Macroeconomics and Fiscal Management Global Practice. Notes: est = estimate, f = forecast 56 SOUTH ASIA ECONOMIC FOCUS SPRING 2017