World Bank Urges Prompt Fiscal Reforms and Sustainable Infrastructure Planning in Maldives

Maldives faces significant economic risks from rising spending, high debt and external shocks, despite a projected 6.5% growth in real GDP in 2023 and an average of 5.4% from 2024 to 2025, says the World Bank in its latest Maldives Development Update. Launched last month, Batten Down the Hatches was the subject of an event organised yesterday by the World Bank and the Maldives National University (MNU).

The report offers a cautiously optimistic forecast for the Maldives’ economic trajectory, anchored by the robust performance of the tourism industry. However, the country faces significant fiscal challenges, exacerbated by global commodity price surges, escalated government expenditure on capital projects and subsidies, and the central bank’s ongoing budget deficit financing. These issues require immediate and decisive fiscal reforms, including better management practices for public investment, moving toward targeted subsidies, increasing revenues, and prudent debt management for a meaningful fiscal adjustment.

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While Maldives had plans to reduce fiscal deficits, the country has failed to achieve its targets, and the national debt is projected to hover above 115% of GDP over the medium term. Earlier this year, the government increased Goods and Services Tax (GST) rates. Yet, more decisive and prompt actions are required, particularly on the expenditure side, as the expected subsidy reforms for 2023 have been delayed.

Maldives must urgently refine its expenditure strategy and enhance revenue generation for fiscal prudence. Essential reforms include overhauling the Aasandha national health insurance program, rationalising budgetary contributions for state-owned enterprises, particularly in the energy and food sectors moving towards targeted subsidies, and establishing a robust public investment framework to ensure orderly and strategic infrastructure development. On revenue enhancement, immediate efforts should concentrate on expanding the tax base, leveraging domestic revenue streams and promoting equitable taxation.

“Maldives has shown remarkable resilience and recovery from the COVID-19 pandemic but will need to remain vigilant in the face of new and emerging shocks such as conflicts around the world, price volatilities in global markets, and high inflation affecting the disposable income of people in major tourist markets,” said Faris H. Hadad-Zervos, the World Bank Country Director for Maldives, Nepal and Sri Lanka. “There is an urgent need to address the country’s fiscal and external vulnerabilities, especially through prudent debt management and expenditure reform measures, and develop a sustainable and resilient infrastructure investment framework to ensure long-term growth and prosperity for its people.”

As discussed during sessions at the event, Maldives has achieved remarkable results in basic infrastructure services, outperforming many of its neighbours and other Small Island Developing States. Since 2008, everyone in Maldives has access to electricity, and mobile phone services are widely available. The country also has more hospital beds per 1,000 people than the average for upper middle-income countries and a very low pupil-teacher ratio. These achievements are largely due to a rapid increase in public spending, which has grown faster than the country’s real GDP. Much of this spending has been invested in transport, housing, and land reclamation infrastructure.

However, due to rising infrastructure spending, public debt sharply increased to finance these projects, especially during the COVID-19 crisis, and Maldives is subject to major fiscal vulnerabilities. Moreover, there are still big gaps in infrastructure access between Malé, the capital city, and the outer atolls, where many people lack services like piped water, sewage, and broadband internet.

Maldives is trying to close these gaps, but the country faces many challenges common to Small Island Developing States, like the worsening impacts of climate change and limited fiscal space. These challenges make it difficult for the country to provide efficient and affordable infrastructure services. To improve, Maldives needs to consider the reality of high public debt, carefully and orderly plan for investments, and coordinate better among different ministries and agencies, especially for projects involving multiple sectors. The country also needs to prioritise sustainability and resilience, given its exposure to climate change.

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