Maldives   2014 Population(1) 341,256 GDP (USD mn) 3,032 GDP per capita (USD PPP) 14,774 GDP per capita (USD) 8,625 Sources: World Bank, WDI Notes: (1) Excluding expatriate workers (58,683) Sources: Ministry of Finance and Treasury, National Bureau of Statistics, Maldives Monetary Authority, WDI, staff cal- culations Economic growth continued its recovery from the 2012 owing to a decline in activity of fisheries output. This dip, while inflation has slowed down, although recent is significant as the fisheries sector has traditionally political developments present a downside risk. The played a large role in employment generation, espe- dominant tourism industry is operating on an enclave cially among poorest Maldivians. Tourism and related model of development, while the fisheries sector, with activities accounts for two thirds of GDP, but provide the largest share of employment, is only weakly linked employment to only 22 percent of the labor force. to this sector. The challenges are fiscal and external imbalances driven by large and rising public spending Following the global decline in commodity prices, an- leading to high debt, limited fiscal space and depleted nual average CPI inflation slowed down sharply to 2.4 reserves, and an undiversified economy, which pri- percent in 2014 and reached 1.6 percent in July 2015. marily depends on tourism and fisheries. Fiscal policy in Maldives focuses on redistribution of Recent developments tourism-related revenue through food and electric- ity subsidies, health insurance and public sector jobs. Growth in 2014 (estimated by Bank staff at 5.0 percent), Despite high revenue of 32.4 percent of GDP, spending continued its recovery from the dip of 1.3 percent in reached 44 percent of GDP, leading to a fiscal deficit es- 2012. This was driven by tourism and related sectors, timated at 11.6 percent of GDP in 2014. Tourism-related which maintained an upward trend in 2014, albeit at earnings have driven the increase in total revenue, but a slower pace, while the public sector and social sec- not enough to prevent a widening of the deficit. tors showed improvement over last year as well. The expansion of the industrial sector was caused by the Persistent primary fiscal deficits have led to a high and significant increase in construction activity—which increasing level of public debt. Although the country’s grew at 20.6 percent in 2014, while manufacturing risk of external debt distress is moderate, overall pub- contributed marginally. The agriculture and fisheries lic debt is high at 74.6 percent of GDP in 2014, and sector is the only sector to have contracted in 2014 subject to vulnerabilities. 25 20 15 10 5 0 5 10 -15 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e Other Education, helth, social services Government asministration Manufacturing Agriculture Fisheries Tourism related Tourism GDP THE RECENT DISINFLATION AND ITS IMPLICATIONS 57 TABLE: Maldives (annual percent change unless indicated otherwise)   2011 2012 2013 2014e 2015f 2016f 2017f Real GDP growth, at constant market prices 6.5 1.3 4.7 5.0 5.0 3.9 4.2 Private Consumption ... ... ... ... ... ... ... Government Consumption ... ... ... ... ... ... ... Gross Fixed Capital Investment ... ... ... ... ... ... ... Exports, Goods and Services ... ... ... ... ... ... ... Imports, Goods and Services ... ... ... ... ... ... ... Real GDP growth, at constant factor prices 6.5 1.3 4.7 5.0 5.0 3.9 4.2 Agriculture 1.1 0.0 5.1 … ... ... ... Industry 3.0 0.5 2.4 … ... ... ... Services -1.1 -0.7 8.2 … ... ... ... Prices Inflation (Consumer Price Index) 11.3 10.9 4.0 2.4 0.3 2.1 3.5 Current Account Balance (% of GDP) -16.0 -7.4 -4.4 -6.3 -5.0 -6.2 -5.6 Fiscal Balance (% of GDP) -6.6 -7.6 -7.8 -11.6 -8.1 -7.3 -7.9 Sources: Maldives Monetary Authority, Ministry of Finance and Treasury, staff forecasts Note: due to the lack of complete GDP data there are no recent GDP projections. (1) Bank-Fund staff estimates Notes: e = Government estimate, f = forecast The recently revised balance of payments numbers planning a fiscal consolidation. The full impact of the show that goods imports and tourism services ex- increase in the Tourism Goods and Service Tax rate will ports nearly balance each other out, but substantial be felt in 2015, while recently abolished tourism bed outflows through interest payments, dividends and tax of USD 8 per night will be replaced by a “Green tax” remittances kept the current account in a deficit at 6.3 on the same base later in 2015. percent of GDP. The current account is more than fully financed by Foreign Direct Investment (FDI), mainly Inflation is projected to remain subdued as long as into the tourism sector. global commodity prices are expected to remain low, which will also benefit the current and fiscal accounts. As a result of the reduced goods imports and a large improvement in net capital inflows, gross official reserves have increased from USD 368 million at the Challenges end of 2013 to USD 693 million at the end of July 2015, but usable reserves (net of short-term foreign li- The immediate macroeconomic challenge is the abilities) remained low at only USD 214 million, cover- fiscal and external imbalances driven by high and ing about 1.3 months of imports of imports of goods rising public spending. The projected fiscal consoli- and services. However, the stable exchange rate of dation is not enough to bring public debt-to-GDP on MVR 15.4 per USD and the parallel market premium a declining path and fiscal consolidation by raising do not signal any shortages, and in practice the tour- revenue and reducing expenditure will be needed. ism industry appears to supply sufficient quantities of Limited reserves, a high level of public debt and the foreign exchange at a stable premium over the official short maturity of domestic debt adds additional exchange rate. vulnerability. Outlook Meanwhile, continued domestic political unrest and a slowdown in major tourism-providing countries The Government estimates growth in 2015 to reach (China and European countries) might lead to reduc- 6.3 percent, but this appears unrealistic with the tions in tourism visits, which could put pressure on growth in key tourism indicators, such as arrivals and growth, revenue and the balance of payments. bed nights, well below the rates seen in 2014. There are limited investment opportunities in the pri- The 2015 budget foresees an ambitious fiscal con- vate sector outside tourism, and banks prefer to park solidation mostly by increasing one-off revenue and their available assets at the central bank and abroad. SOUTH ASIA ECONOMIC FOCUS FALL 2015 58