South Asia country briefs Maldives Growth and a pick-up in tourism are expected to continue to 2017 drive growth. The government has succeeded in containing Population, million 0.4 current fiscal expenditure to create space for capital GDP, current US$ billion 4.6 expenditure, but the level of public debt is projected to rise further and foreign exchange reserves recovered slightly but GDP per capita, current US$ 10468 are still low. A 45-day state of emergency from February 5 Source: World Bank WDI. to March 22 led to arrests, protests and widespread travel advisories. While the impact on tourism is not yet clear, it may have a negative impact on growth, fiscal revenue and the current account. Meanwhile, Presidential elections in September will add further uncertainty. Fiscal balance and debt level  Percent of GDP Percent of GDP 50 64 40 62 30 60 20 58 10 56 0 54 -10 52 -20 50 2011 2012 2013 2014 2015 2016 2017 Overall fiscal balance Total revenues Total expenditures Public debt (rhs) Source: Ministry of Finance and Treasury and World Bank estimates. Note: (rhs) = right hand side. Recent economic developments removal of food subsidies and the pass-through of ris- ing electricity prices. It is expected that fast price rises of Construction has been the main driver of growth, growing at food and beverages (5.6 percent in 2017) and of rents (4.6 an average of 19 percent in 2015-17. After peaking at 10.1 per- percent) has hit Maldivian households particularly hard. In- cent growth in 2013, the tourism sector slowed down between flation was higher in the atolls, with food prices rising even 2014 and 2016, due to a slowdown in tourist arrivals especially more significantly. This may have affected poor households from China and Russia. Tourism bed night growth started to even further, since the uptake of the cash transfer to com- recover in 2016 and reached 10.8 percent in 2017. Bank staff esti- pensate for the partial removal of the food subsidies was mates that real GDP growth in 2017 remained around 6.2 percent limited so far. as in 2016, below the government’s projection of 6.9 percent. The current account deficit widened sharply from 3.2 CPI inflation increased from below 0.5-1 percent in 2015 percent in 2014 to an estimated 21.4 percent of GDP in and 2016 to 2.8 percent in 2017, reflecting the partial 2017, driven by the large increase in investment-related S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 62 imports, with FDI inflows reflecting investment into open- sector. If a significant negative shock to tourism bed nights ing 13 resorts in 2017, and project loan disbursements into materializes, it may lead to a reduction in fiscal revenue, tour- large infrastructure projects. Thanks to a USD 250 million ism exports and activity in the tourism and ancillary sectors. sovereign bond issuance, gross official reserves recovered This may require a fiscal adjustment to rebalance the fiscal from USD 467 million at end-2016 to USD 586 million at end- accounts and the balance of payments. 2017, although usable reserves (after netting out short-term foreign currency liabilities to domestic banks) are only USD A reduction in tourism may also likely have a negative 206 million, equivalent to 1.1 months of goods imports. impact on employment, as Maldivians face strong com- petition from a relatively cheaper foreign workforce for The government has made progress in rebalancing fiscal low-skilled jobs and a relatively better educated foreign expenditure to accommodate increased capital expendi- workforce for high-skilled jobs. The Maldives face other risks ture. The fiscal balance shifted from a 10.6 percent of GDP that may impact macroeconomic stability. Other risks stem deficit in 2016 to a 2.5 percent of GDP deficit in 2017, driven from exogenous factors such as a downturn in global econ- mainly by a reduction in public investment from 10.9 percent omy, concerns about global terrorism, health pandemics, or of GDP in 2016 to 8.2 percent of GDP 2017, and a reduction in natural disasters that may also impact tourism. Another is a spending on food subsidies and on the Aasandha health care risk of increasing global commodity prices (for example, fuel system. Excluding the Public Sector Investment Program, the prices) that can impact the economy given its heavy reliance underlying current fiscal balance went from a deficit of 2.0 on imports. There is also a concern about fiscal slippages, es- percent of GDP in 2015 to an estimated surplus of 5.7 percent pecially due to delays in controlling current expenditure and of GDP in 2017, reflecting revenue increases and current the realization of contingent liabilities through guarantees. expenditure reforms. Public debt excluding guarantees is estimated to have Risks and challenges reached 61.9 percent of GDP, an increase from 59.7 per- cent of GDP in 2016, driven by external projected-related The immediate challenge is dealing with the macro-fiscal borrowing and the sovereign bond, while domestic T-bills impact of the state of emergency and travel advisories. were redeemed. Structural challenges include improving medium-term fiscal sustainability by addressing key expenditure drivers in the budget. These include increasing the efficiency of spending Outlook on Aasandha and replacing the electricity subsidies by a tar- geted cash transfer to help poor families pay electricity bills. In the baseline scenario, growth is expected to be driven It is also important to improve budget credibility by making by construction and by tourism arrivals, facilitated by the ministry and agency budget ceilings binding. opening of new resorts in 2017. The current account is projected to narrow gradually to 19.3 percent of GDP by 2020 The recent public-sector employment freeze was positive as new capital investment projects are gradually tapering off. from a fiscal perspective. However, it may put pressure on Reserve coverage is projected to remain weak. Despite the the absorption capacity of the Maldivian labor market, since one-off impact of promised civil service wage increases, the public sector employment is the main sector of employment fiscal deficit is projected to narrow gradually as public invest- of 25 to 64-year-old Maldivians, and the working age pop- ment projects are tapering off. Public debt is projected to rise ulation is increasing. It is critical to foster private sector job to 2020 and peak soon after. The recent World Bank-IMF Debt creation, since the main drivers of growth, construction and Sustainability Analysis assessed Maldives’ risk of external debt resort tourism, are highly reliant on foreign labor. distress as high, due a widening current account deficit, low international reserves, pipeline of guarantees, and rapid debt In this context, the consolidation of population from buildup. vulnerable islands and atolls to larger islands in Greater Malé, while also reducing pressure on Malé, is a country However, the immediate outlook is highly uncertain given priority. If successful, it may eventually allow for new forms the probable impact of the February-March state of emer- of economic activity in line with the aspirations of Maldivian gency on the tourism and non-tourism sector, which may youth and provide employment, improve the quality of public not be visible in the data immediately. Widespread travel services such as health and education, and make the country advisories may lead to cancellations affecting the tourism more resilient to climate change. J O B L E SS G ROW T H ? 63 South Asia country briefs 2015 2016 (est) 2017 (f) 2018 (f) 2019 (f) 2020 (f) Real GDP Growth, at Constant Market Prices 2.2 6.2 6.2 5.5 4.5 4.9 Real GDP Growth, at Constant Factor Prices 2.8 6.0 6.2 5.5 4.5 4.9 Agriculture -0.5 1.4 0.6 0.2 0.0 0.1 Industry 16.5 15.1 10.4 17.3 15.3 13.5 Services 1.4 5.2 5.9 4.1 3.0 3.6 Inflation (Consumer Price Index) 1.0 0.5 2.8 2.8 3.0 3.0 Current Account Balance (percent of GDP) -7.6 -24.4 -21.3 -19.8 -19.5 -19.3 Net Foreign Direct Investment (percent of GDP) 7.5 10.8 15.8 8.6 6.8 6.5 Fiscal Balance (percent of GDP) a -7.1 -10.6 -2.5 -5.2 -4.8 -4.0 Debt (percent of GDP)a 54.4 59.7 61.9 63.3 64.7 65.0 Primary Balance (percent of GDP) -4.9 -8.8 -0.8 -3.1 -2.7 -2.0 Source: World Bank. Note: (est) = estimate, (f) = forecast. (a) A large volume of expenditure was recorded in 2016, but the bills were settled with funds borrowed in 2017, which has led to a significant discrepancy been fiscal and debt numbers. It has been recorded as an additional positive financing item of 2.4 percent of GDP in 2016 (bills and arrears carried over) and a negative financing item of 3.1 percent of GDP in 2017 (bills and arrears clearance). S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 64