The Maldivian construction sector, which contributes significantly to the nation’s GDP, is under immense pressure due to a combination of economic factors and structural vulnerabilities. The industry plays a critical role in infrastructure development, residential housing, and tourism-related construction, yet it has seen a marked slowdown in recent years, as revealed by economic data and industry insights.
Stalled Growth Amid Government Debt
Government spending and rising debt have been key contributors to the stagnation in the construction sector. In 2024, public expenditure on infrastructure assets fell by 40.4% compared to the previous year, reflecting a reduction of MVR 1.9 billion. This decrease in spending is primarily attributed to delays in road, bridge, and airport projects, which saw a combined reduction of MVR 983 million.
The Maldives Monetary Authority’s (MMA) Quarterly Economic Bulletin highlights that the construction sector’s growth was marginal in Q1 2024, contributing only 0.1 percentage points to GDP growth. However, the subsequent quarter showed contraction in activity, exacerbated by delayed payments to contractors and stalled government projects.
Financing and Payment Challenges
Construction companies heavily reliant on government contracts have faced financial instability due to delayed payments. A veteran contractor noted that government arrears total millions of Maldivian Rufiyaa, threatening the financial health of many firms. This issue is compounded by limited access to financing, as credit allocations heavily favour residential housing projects. In 2021, over 93.6% of the construction loans were directed towards housing, leaving little for commercial or infrastructure projects.
While credit to the sector grew by 18% in Q2 2024, this growth is insufficient to offset the rising costs of imports and operational delays. The slowdown in commercial and industrial construction projects further weakens the industry’s financial backbone.
Rising Costs and Dollar Scarcity
The Maldives’ dependence on imported materials, such as cement, aggregates, and steel, exposes the industry to exchange rate volatility and global market fluctuations. In 2022, construction-related imports exceeded USD 133 million, equivalent to over MVR 2 billion, highlighting the sector’s vulnerability to rising global commodity prices.
The scarcity of dollars in the Maldivian banking system has forced many companies to source foreign currency from the black market, where exchange rates significantly inflate material costs. By Q2 2024, the US dollar was trading at over MVR 19 on the parallel market, compared to the official rate of MVR 15.42. Consequently, material costs have soared, eroding profit margins and stalling new projects.
Labour Dependency and Inflation
The Maldives’ construction industry is heavily reliant on expatriate labour, with an estimated 13 foreign workers for every local employee. This reliance amplifies costs as wages for skilled and unskilled labour rise alongside inflation in source countries. For instance, inflation in India, a key source of labour, was projected at 4.6% in 2024, further straining operational budgets.
Private Sector and Real Estate Slowdown
Private sector construction, which historically supplemented government projects, is also facing challenges. While new real estate projects were previously prominent, announcements of fresh developments have dwindled. The stagnation reflects broader economic uncertainties and declining consumer confidence, further slowing growth.
Policy and Industry Recommendations
Addressing the challenges faced by the Maldivian construction industry requires a multifaceted approach:
- Reviving Government Projects: Allocating targeted funds for stalled infrastructure projects could rejuvenate industry growth.
- Improved Payment Mechanisms: Introducing transparent systems for timely payments to contractors would mitigate financial risks.
- Access to Affordable Foreign Exchange: Establishing measures to stabilise dollar availability could reduce reliance on the black market.
- Diverse Financing Options: Expanding credit facilities to include commercial and infrastructure projects is critical for balanced sector growth.
The construction sector, a vital pillar of the Maldivian economy, is at a crossroads. Delayed payments, rising costs, and policy gaps threaten its stability. However, with targeted interventions and collaborative efforts between the government, private sector, and financial institutions, the industry can overcome its current challenges and re-establish itself as a cornerstone of national development.
