s o u t h a s i a e c o n o m i c f o c u s fa l l 2014 Maldives GDP Growth Breakdown (% & share of total) 15 10 5 Recent Economic Developments Real GDP grew by 3.7 percent in 2013, driven by 0 tourism and related sectors. Though a lackluster performance, it was something of a rebound from the precipitous dip to 1.3 percent in 2012, from an average -5 of 6.5 percent over the preceding five years. Tourism, the mainstay of the Maldives economy, has -10 2007 2008 2009 2010 2011 2012 2013 lost momentum, growing at 9.7 percent y-o-y in Q1 2014—almost 5 percentage points slower than in Q1 Other sectors Govermment administration Fisheries Real estate Communication Transport 2013. This gives cause for concern as tourism, with Construction Tourism GDP linkages across sectors such as transport, communica- tions, and construction, accounted for an estimated 60 percent of the economy in 2013. The tourist com- deficit, such as building up arrears, monetization, and position has undergone a structural shift from mainly ad hoc borrowings from the banking and private sec- European to Chinese and Middle Eastern tourists. The tors at high interest rates. average length of stay and spending has fallen steadily since 2008. The current account has been persistently in deficit around 20 percent of GDP (despite the authori- Growth has been less inclusive, since the agriculture ties having lowered it to a still-high 10 percent of and fisheries sector, which provide the majority of GDP). Although the goods trade deficit is roughly employment in the outer atolls, are only weakly offset by tourism revenue, net income outflows (such as linked to the tourism sector. These sub-sectors employ dividends and interest payments on external debt) and the largest proportion of Maldivians in the outer atolls, remittance outflows lead to an overall structural current but contributed only 3.2 percent of GDP in 2013. account deficit. In the services sector, communications (10.3 percent The Maldives is considered to be at high risk of exter- of 2013 GDP) grew by 7.6 percent; transport (9.3 nal debt distress with the total public and publically- percent of GDP) grew by 5.1 percent. Manufactur- guaranteed debt level reaching 78 percent of GDP ing declined by 5.3 percent and construction by 2.1 at end-2013. A large share of this is in Treasury bills percent, resulting in a 1.2 percent contraction in the yielding 7 percent. secondary sector. While Maldives has reduced poverty over the past Inflation moderated to 4 percent of GDP in 2013, two decades, poverty and inequality are on the rise from 10.9 percent in 2012, and continued to fall in again in Male, the capital island city. With improved the first quarter of 2014, driven by the decrease in the living conditions other atolls have been more successful government controlled price of fish and vegetables. in reducing poverty and vulnerability. The fiscal deficit was around 10 percent of GDP Maldives has made great progress in primary and in 2013, and the trend continued in Q1 2014 with lower-secondary education access and gender expenditure outgrowing revenue by a wide margin. parity. Improving the quality of education remains Although Maldives has the highest revenue-to-GDP a major challenge, especially in the context of pro- ratio in South Asia, it is spending beyond its means, viding technical, management and soft skills. The leading to persistent fiscal imbalances. The government lack of these skills has contributed to high youth has resorted to extraordinary means to finance the unemployment. 52 the export opportunity Tourism and Related Sectors (% of total and %) The current account is at risk of further deteriora- 100 14 tion owing to the large remittance outflows. This is 90 12 indirectly related to the public spending structure of the government that focuses largely on wages, benefits, 80 10 and transfers that raise reservation wages, and fails to 70 8 invest in quality education—policies that both lead to 60 6 increased reliance on expatriates. 50 4 Inflationary pressures are expected to remain sub- 40 2 dued in 2014 because of high dependence on imports 30 0 (58 percent of the CPI basket) in a relatively stable 20 -2 international price environment. While the deficit on goods is projected to be sufficiently compensated by the 10 -4 service account surplus, particularly tourism receipts, 0 -6 the current transfers balance is projected to be in deficit 2008 2009 2010 2011 2012 2013 due to the large outflow of remittance. An improve- Other Real estate Transport ment of the trade balance seems unlikely following Communication Construction Tourism the import expansion by 15.6 percent, y-o-y, between Real GDP (RHS) January and July and a dramatic contraction of exports by 13 percent. The overall business environment ranks highly With the rise of private credit growth, increased against other South Asian countries, but performance demand looks likely to further pressure the trade bal- in uneven with low ranks, particularly in registering ance through an increase in imports. Exports on the property, trade logistics, and access to electricity. other hand, dominated by fish exports and re-export of jet fuel, are highly seasonal, and with the 13 percent The Maldives remains vulnerable to environmen- contraction, y-o-y, in both domestic and re-exports tal threats such as climate change and solid waste between January and July 2014, the external sector does management. not display an optimistic outlook. Outlook and Policy GDP growth is projected to rise to 4.5 percent in 2014 with likely improved performance by construc- tion and the transport industry compensating for the slowdown of tourism. Inflation is likely to remain moderate due to stable international prices. The immediate macroeconomic challenges for Mal- dives are the fiscal and external imbalances driven by high and rising public spending that lead to high debt, limited fiscal space and depleted reserves, and an undiversified economy, primarily dependent on tourism and fisheries. The path towards fiscal and debt sustainability will require short-term measures to address the current cash crunch, as well as long-term structural measures that are important but will entail political and social costs. An array of measures could be combined in a policy package accompanied with a communication strategy to sensitize the public on the need to adopt and implement these reforms. 53