The Maldives is entering a more constrained fiscal period, with rising debt, tighter financing conditions and growing exposure between the state and the domestic financial system increasing pressure on policymakers to move beyond short-term cash management and implement deeper structural reforms.
According to the World Bank’s latest Maldives Development Update, the country remains at a high risk of both external and overall debt distress. Total public and publicly guaranteed debt reached an estimated 129.7 percent of GDP in 2025, keeping the Maldives among the more debt-exposed small island economies despite a narrower fiscal deficit during the year.
The improvement in the fiscal balance in 2025 was driven partly by stronger tourism-related revenue and partly by a sharp reduction in capital spending on a cash basis. However, the report indicates that this has not fully addressed the underlying pressures on public finances. In the absence of major fiscal consolidation, public debt is projected to exceed 140 percent of GDP over the medium term, reaching 140.5 percent in 2027 and 143.2 percent in 2028.
This trajectory points to a fiscal challenge that is increasingly structural rather than temporary. While revenue gains from tourism taxes, green tax, airport-related fees and other non-tax income have helped improve the headline position, expenditure pressures remain substantial. Interest payments, subsidies, health spending, capital projects and support to state-owned enterprises continue to place pressure on the budget.
The report also highlights rising concerns over the way the government is financing its deficits. With external financing constrained, the state has become more reliant on domestic sources, increasing the exposure of banks, other financial corporations and the Maldives Monetary Authority to sovereign and SOE debt.
By the end of 2025, banks were exposed to sovereign and SOE debt at 40 percent of their total assets. Other financial corporations had exposure of 66 percent, while the MMA’s exposure stood at 42 percent. This creates a stronger sovereign-bank nexus, where fiscal stress can more directly affect financial sector stability, and banking sector constraints can in turn make it harder for the government to finance itself.
The risk is particularly important for the Maldives because the country is also facing high external debt service needs and persistent foreign exchange pressure. Although the government settled the USD 500 million sovereign Sukuk and a USD 400 million currency swap repayment in April 2026, external financing needs remain significant. The World Bank estimates that remaining external debt service needs for 2026 stand at around USD 600 million.
These pressures come at a time when the wider economic outlook has weakened. The World Bank projects growth to slow sharply in 2026, reflecting disruptions to tourism linked to the conflict in the Middle East, higher fuel prices and tighter financing conditions. Lower tourism receipts would affect government revenue, foreign currency inflows and private sector activity, making fiscal adjustment more difficult but also more urgent.
The report argues that a large and sustained fiscal adjustment, supported by a realistic financing strategy, is now the most urgent policy priority. The required response is not limited to spending cuts, but involves restructuring key areas of public expenditure so that scarce fiscal resources are directed more efficiently.
A central reform proposed in the report is replacing blanket subsidies with targeted cash transfers. The current subsidy framework helps contain price pressures for households, but it is costly and benefits higher-income groups as well as vulnerable households. A targeted system would reduce fiscal costs while protecting poorer families and those more exposed to price shocks, particularly in the atolls.
The World Bank also identifies reform of the Aasandha health insurance scheme as a priority. Improving efficiency in the scheme, revising coverage policies and expanding bulk procurement of medicines are among the measures suggested to reduce costs while maintaining access to essential healthcare.
Capital expenditure is another major area for adjustment. The report calls for rationalising capital spending and improving the Public Sector Investment Programme framework. For the Maldives, this means prioritising projects based on fiscal space, economic return and implementation capacity, rather than continuing a broad pipeline of commitments that may add to arrears and future debt.
Reform of state-owned enterprises is also presented as part of the fiscal solution. SOEs remain closely linked to public finances through guaranteed and on-lent loans, trade payables, subsidies and capital injections. Strengthening corporate governance and financial viability in the sector would reduce contingent liabilities and limit the need for repeated government support.
The broader message is that the Maldives’ fiscal position can no longer be assessed only through annual deficit figures. Debt levels, financing sources, foreign exchange liquidity, SOE exposure and the health of the banking system are becoming increasingly interconnected.
Without a credible adjustment path, the country risks entering a cycle in which higher debt leads to more expensive financing, weaker reserves, greater pressure on domestic banks and reduced room for social and development spending. With reform, however, the government could reduce liquidity pressures, protect vulnerable households more effectively and place public finances on a more sustainable path.
For policymakers, the immediate challenge is balancing social protection and fiscal discipline. The World Bank’s assessment suggests that delaying reform would make that balance harder to achieve.
