s o u t h a s i a e c o n o m i c f o c u s s p r i n g 2015 Maldives Economic growth continued its recovery from the 2012 dip, while inflation has slowed down, although recent political developments present a downside risk. The dominant tourism industry is operating on an enclave model of development, while fisheries, with largest share of employment, is only weakly linked. The challenges are fiscal and external imbalances driven by large and rising public spending leading to high debt, limited fiscal space and depleted reserves, and an undiversified economy, which primarily depends on tourism and fisheries. Recent economic developments Annual average inflation moderated even further in 2014, falling to 2.4 percent in 2014, down from 4.0 Economic growth in 2014 is estimated to amount to in 2013 driven by low food prices and international 5.0 percent,1 continuing the recovery in growth since crude prices. The fall is particularly steep considering hitting 1.3 percent in 2012. This is lower than the gov- the double digit 10.9 percent inflation recorded only ernment’s provisional full-year estimate of 6.8 percent, in 2012. As measured by the overall consumer price which was published in October. The main determinant index (CPI) inflation in Malé has been unstable since of this estimate is the sharp slowdown in the growth in 2009 with fluctuations large in magnitude. This decline tourism bed-nights in November and December 2014, was primarily driven by a slow growth of food and partly caused by the water crisis in Malé. Most other non-alcoholic beverages which grew at a slow pace of service sectors are estimated to have grown as well in 1 percent in 2014 as opposed to 7.5 percent in 2013. 2014, while the industrial sector expanded by 13.2 During the second half of 2014, inflation fell even percent in 2014. However, the agriculture and fisheries further driven largely by the drop in food prices. sector is estimated to have contracted by 2.1 percent in 2014 vis-à-vis a growth of 5 percent recorded in 2013. In 2014 the fiscal deficit widened further to projected 11.6 percent of GDP in 2014. Despite high revenue of 32.4 percent of GDP, Maldives is spending beyond 1 Data for 2014 and projections are in line with the projections in the joint Bank-Fund LIC-DSA its means reaching 44 percent of GDP, leading to and the IMF Article IV of January 2015; World Bank staff estimates. persistent fiscal imbalances. Driven by expenditure the Sectoral contributions to growth Drivers of change in tourism arrivals Percentage point contribution to growth Percentage point contribution to annual change 20 25 15 20 15 10 10 5 5 0 0 -5 -5 -10 -10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 2014 Other Education, health, social services Europe Americas Middle East Goverment administration Manufacturing China Other Total Agriculture Fisheries Tourism related Tourism GDP Source: National Bureau of Statistics, MMA, sta calculations 54 WB_SouthAsia_Spring.indd 54 4/13/15 11:57 AM making the most of cheap oil Fiscal accounts, actuals, budget and estimates Percent of GDP 50 40 30 20 10 0 -10 -20 2009 2010 2011 2012 2013 2014 2014 2014 2015 budget Authorites estimate budget estimate Total revenue and grants Total expenditure and net lending Fiscal balance Primary balance Source: MoFT, MMA, IMF, sta calculations fiscal deficit has been on an upward trajectory since covering 2.8 months of imports of goods and services. 2011 and is estimated at 11.6 percent of GDP in 2014 However, net usable reserves remain low at USD 120 from 7.8 percent of GDP in 2013, despite a budgeted million, covering less than a month of imports. Faced deficit of only 2.8 percent of GDP. Subsidies, transfers with limited investment opportunities in the private and social welfare payments contributed substantially sector, banks are parking their assets elsewhere; to the expansive spending. It should be noted that the meanwhile financial soundness indicators have been authorities project the fiscal deficit in 2014 at only 3.4 improving percent of GDP. Although the country’s risk of external debt distress Outlook has been reduced from high to moderate, overall public debt is high at 74.6 percent of GDP in 2014, Going forward growth is projected to remain at 5 and subject to vulnerabilities. Meanwhile, the per- percent in 2015, supported by tourism arrivals, while sistent current account deficit has led to an increasing additional fiscal adjustment may have a negative level of external debt. Thanks to data revisions and a impact on growth. The 2015 budget foresees an ambi- more favorable outlook, the country’s risk of external tious fiscal consolidation mostly by increasing one-off debt distress has been reduced from high (2013 DSA revenue and planning a fiscal consolidation. Inflation update) to moderate. Although the level of external is projected to remain subdued as global commodity public and publicly guaranteed debt remains below prices are expected to remain low. Lower commodity the policy-dependent thresholds under the baseline, a prices will also benefit the current and fiscal accounts. shock to tourism exports could make it difficult for the country to service its external debt. Domestic and external risks remain. Recent political developments may lead to travel advisories and reduc- The external accounts look much better thanks to a tions in tourism. The country remains vulnerable to revision of balance of payments numbers. Goods im- external shocks, especially to tourism and global com- ports and tourism services exports nearly balance each modity prices. SOEs may pose further risks to fiscal other out, but substantial outflows through interest sustainability, as most are loss-making and depend on payments, dividends and remittances keep the current government support, with only nine companies having account in a deficit at 8.0 percent of GDP. The current contributed dividends to the budget in the last four years. account is more than fully financed by Foreign Direct Investment (FDI), and gross international reserves are estimated to have increased. Net FDI inflows are Challenges estimated at 13.3 percent of GDP. The immediate macroeconomic challenge is the fis- While usable reserves are estimated at less than half cal and external imbalances driven by high and rising a months of imports, the private sector is able to public spending. However, the economy also remains supply sufficient quantities of foreign exchange. As a undiversified and sources of growth and employment result of the large improvement in net capital inflows, remain misaligned. Besides, Maldives’ form of tourism- gross official reserves have increased from USD 368 led growth has followed an enclave model, reliant on million at end-2013 to USD 614 million at end-2014, imported goods, labor and finance. 55 WB_SouthAsia_Spring.indd 55 4/13/15 11:57 AM