Although the Maldives’ economy continues a strong recovery thanks to a rebound in tourism, the surge in global commodity prices has put pressure on domestic inflation, the government’s fiscal position and balance of payments, says the World Bank in its twice-a-year update.
Released on Thursday, the latest South Asia Economic Focus, Coping with Shocks: Migration and the Road to Resilience, projects regional growth to average 5.8 percent this year – a downward revision of 1 percentage point from the forecast made in June. This follows growth of 7.8 percent in 2021, when most countries were rebounding from the pandemic slump.
Also released as a companion piece, the latest Maldives Development Update (MDU)projects real GDP growth to be 12.4 percent in 2022, which is 4.8 percentage points higher than the forecast in early 2022. This is owing to the faster than expected rebound in tourism. The GDP growth is projected to be 8.1 percent on average in the 2023-24 period as tourism is expected to support economic activity.
However, the pressure on domestic inflation, the government’s fiscal position, and the balance of payments has increased due to rising global commodity prices. A blanket subsidy program on staple foods and fuel is expected to keep recurrent spending elevated. As a result, a better targeted subsidy program is recommended to reduce the overall fiscal burden. Although austerity measures may cushion some of the spending growth, upcoming election-related spending may counteract this. Continued public expenditure, particularly on ambitious large-scale projects such as social housing, which are largely financed by external borrowing, is expected to maintain high levels of public debt, making the Maldivian economy vulnerable to domestic and external shocks.
“Despite improving growth and fiscal prospects, prudent debt management remains a top priority for Maldives to improve fiscal sustainability,” said Faris H. Hadad-Zervos, World Bank Country Director for Maldives, Nepal and Sri Lanka. “The government’s proposed general GST and tourism GST rate hikes are a meaningful step towards a fiscal adjustment, but more is needed, especially on the expenditure side, including reducing the fiscal burden of state-owned enterprises and better managing the provision of several subsidized goods and services.”
The MDU’s special focus section, Towards Resilient and Affordable Housing, shines light on the challenges in the Government’s affordable housing policy and programs. Maldives faces unique systemic constraints that lead to a sizeable gap in the affordable housing supply. Although the Government has ramped up public investment over the last decade with a combined exposure of external loans and guarantees estimated at US$1 billion, the challenges persist. A review of the targeting system to focus on household segments with acute housing needs can help to prioritize the Government subsidy support. A redesign of the Rent-to-Own housing programs can align the households’ varying income segments with different housing interventions, payment contract types and incentives.
Meanwhille, inflation in South Asia, caused by elevated global food and energy prices and trade restrictions that worsened food insecurity in the region, is expected to rise to 9.2 percent this year before gradually subsiding. The resulting squeeze on real income is severe.