Maldives The tourism sector has been hit hard by the slowdown in China 2015 and Russia and domestic unrest. The medium-term fiscal plan Population, million 0.4 includes large public investment projects, which will move the GDP, current US$ billion 3.1 risk of external debt distress to high. Fiscal consolidation and GDP per capita, current US$ 7630.9 more sequencing of the investment projects is needed to con- Sources: World Bank, WDI tain the level of public debt. A particular concern is youth unem- ployment with skill mismatch and lack of local economic oppor- tunities being reported as the main cause for unemployment. Present value of public external debt to GDP ratio Recent Developments Percent of GDP 60 GDP growth in Maldives has moderated in recent 50 years. After dipping to 2.5 percent in 2012, GDP growth recovered in 2013-2014, reaching an estimated 6.5 40 percent. Staff estimates that growth fell to 1.9 percent in 2015, dragged down by a slowdown in tourism ar- 30 rivals, especially from China and Russia and a number 20 of cancellations of tourism reservations following the state of emergency in November. Construction has 10 overtaken tourism as the most important driver of growth in 2015. 0 2015 2020 2025 2030 2035 Following the global decline in commodity prices, CPI Baseline Historical scenario Threshold inflation has slowed down in 2014 and 2015. Annual Most extreme shock One-time depreciation average inflation in Malé reached 2.4 percent in 2014, Sources: Ministry of Finance, World Bank sta calculations, Joint Bank-Fund Debt Sustainability Analysis Percent points Contributors to GDP growth 10 8 6 4 2 0 -2 -4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2011 2012 2013 2014 2015 Construction Tourism GDP growth Source: Central Statistics O ce and World Bank sta calculations 59 SOUTH ASIA ECONOMIC FOCUS SPRING 2016 Table: Maldives (annual percent change unless noted otherwise)     2013 2014 2015 e 2016 f 2017 f 2018 f Real GDP growth, at constant market prices 4.7 6.5 1.9 3.5 3.9 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 4.2 5.9 ... ... ... ... Agriculture 5.1 0.2 ... ... ... ... Industry -7.6 12.9 ... ... ... ...   Services 6.4 5.0 ... ... ... ... Inflation (Consumer Price Index) 4.0 2.4 1.4 1.3 2.5 2.8 Current Account Balance (% of GDP) -4.3 -4.1 -8.0 -7.7 -14.7 -17.3 Financial and Capital Account (% of GDP) 9.2 11.8 6.7 9.8 19.6 20.3 Net Foreign Direct Investment (% of GDP) 12.9 12.1 10.6 10.0 10.9 10.8 Fiscal Balance (% of GDP) -7.4 -9.1 -8.4 -13.3 -18.1 -18.9 Debt (% of GDP) 64.8 66.6 73.1 83.1 96.5 109.0 Primary Balance (% of GDP) -4.9 -6.3 -5.5 -10.8 -14.7 -14.4 Source: Maldives Monetary Authority, Ministry of Finance and Treasury, World Bank staff projections Note: e = estimate, f = forecast and fell further to 1.4 percent in 2015, dragged down increase the exposure of the domestic banking system by food, transport and communication prices. to sovereign risk. Maldives’ high levels of fiscal deficits and public debt The 2016 budget is expansionary with large public pose a significant risk, as the country is structurally investment projects and one-off revenue measures. spending beyond its means. Even though high costs Staff projects revenue to reach 35.6 percent of GDP of public service delivery can logically be expected in a and expenditure 48.9 percent of GDP driven by pub- multi-island country with a scattered population, high lic investment. Wages are projected to be frozen in levels of public spending in recent years have been nominal terms, while the budget foresees strong cuts primarily driven by the increasing costs associated in electricity and food subsidies. The budget includes with the country’s redistributive model, including the a number of large multi-year investment projects: high public sector wage bill, pensions, universal health airport expansion, a bridge between the capital Malé insurance and subsidies for food and electricity, and and Hulhumalé island and housing construction in transfers to state-owned enterprises. Hulhumalé island. Continuing trends from previous years, staff estimates Balance of payment pressures have attenuated some- that public spending reached 44.4 percent of GDP in what in recent months, and the exchange rate has 2015, leading to a fiscal deficit estimated at 8.4 percent remained stable. Loose fiscal policy and recourse to of GDP despite a high and increasing level of revenue monetary financing of the deficits have contributed (35.9 percent of GDP in 2015). In this context, manage- to substantial balance of payment pressures in recent ment of the constrained cash flow has become an years. Nevertheless, the decline in global commodity increasing challenge, leading to the build-up of arrears prices, and the associated decrease in the import bill and costly domestic borrowing. Heavy reliance of do- (notably for diesel), together with continued FDI in- mestic sources of financing have also contributed to flows in the tourism sector have offset this somewhat. SOUTH ASIA ECONOMIC FOCUS SPRING 2016 60 As a result, gross official reserves increased from USD deficit and could keep the public debt-to-GDP ratio 368 million at the end of 2013 to USD 564 million at below 100 percent. the end of 2015. However usable reserves (net of short- term foreign liabilities to the banking sector) remain In March 2016, the National Statistics Bureau has low, at only USD 194 million, covering only about 1.2 started the field work operations for a new Household months of imports of goods and services. Nevertheless, Income and Expenditure Survey (HIES 2016) which is the exchange rate of MVR 15.4 per USD has remained expected to be completed by the end of the year. The stable. In practice the tourism industry appears to be availability of new household survey data will allow the supplying sufficient quantities of foreign exchange at a production of new estimates and an updated poverty stable premium over the official exchange rate. assessment in 2017. Data constraints continue to prevent poverty monitor- ing since the last survey conducted in 2009-10. How- Risks and Challenges ever, the recent release of Census 2014 data provides interesting insights on inter-censuses labor market The immediate macroeconomic challenge is the fiscal trends. Overall, labor market participation of Maldivian and external imbalances driven by high and rising pub- resident population improved, with a notable increase lic spending. The projected fiscal consolidation is not in the share of women actively participating in the enough to bring public debt-to-GDP on a declining labor market, which went from 41.4 percent in 2006 path and fiscal consolidation by raising revenue and to 47.6 percent in 2014. Unemployment rate among reducing expenditure will be needed. Limited reserves, Maldivian resident population remains low at 5.2 a high level of public debt and the short maturity of percent, although much higher rates prevail among domestic debt adds additional vulnerability. youth. Of particular concern, youth unemployment increased from 9.3 percent in 2006 to 12.4 percent in Meanwhile, continued domestic political unrest and 2014, with skill mismatch and lack of local economic a slowdown in major tourism-providing countries opportunities being reported as the main cause for (China and European countries) might lead to further unemployment. reductions in tourism visits, which could put pressure on growth, revenue and the balance of payments. Outlook There are limited investment opportunities in the pri- vate sector outside tourism, and banks prefer to park In the near term, growth is expected to be driven by their available assets at the central bank and abroad. construction, fueled by both private sector construc- tion and large public investment projects, while tour- ism growth is likely to remain subdued because of a slowdown in China, the recession in Russia and, the appreciation of the MVR (pegged against the USD) against major currencies. Inflation is projected to remain subdued as long as global commodity prices remain low, with positive impacts on the current and fiscal accounts. The large increase in capital investment will return the risk of external debt distress to high. Driven by a fiscal deficit reaching close to 20 percent of GDP by 2018, public debt would rise fast and could exceed 120 per- cent of GDP by 2020, while external public debt would breach the policy-dependent thresholds defined under the Low-Income Country Debt Sustainability Framework (LIC-DSF). A sequenced implementation of investment projects with a more limited fiscal deficit could mitigate this risk to some extent. This scenario would limit the fiscal 61 SOUTH ASIA ECONOMIC FOCUS SPRING 2016