Economy in limbo?

The International Monetary Fund concluded its 2021 Article IV consultation with the Maldives in October 2021. It noted the 'prompt and comprehensive' policy response of the government to the economic contraction in 2020 due to the COVID-19 pandemic, which helped to 'partially mitigate' the socio-economic impact.

The Maldives' economic growth, for better or for worse, has mirrored the performance of the tourism sector, as shown by previous shocks to both the global and local economy. Economic contractions were seen in 2004 in the aftermath of the tsunami disaster, in 2008 with the global financial crisis, and most recently with the COVID-19 pandemic. In each instance, a drop in tourist arrivals led to the contraction, with tourism and related industries accounting for more than 40 percent of GDP. 

GDP Growth, 1996 – 2020, in percentage

According to statistics published by the Ministry of Tourism, 133,914 tourists have visited the country in March (as of 28 March), compared to 109,585 tourists in 2021. March arrivals, however, are much less than the 162,843 tourists in March 2019 – a result of the current crisis between Russia and Ukraine, both of which are on the Maldives' top 10 markets for the year. With the Russian market still occupying the number one spot, with 12.4 percent of the market, industry experts are concerned over possible short-to-medium term impacts on Maldives' tourism due to the war.

Although Russian Aeroflot had halted operations to international destinations on 8 March, the Maldives' Civil Aviation Authority (CAA), on 28 March announced that Russia's Federal Airport Transport Agency has now inquired into the possibility of resuming services to the Maldives, to which the CAA has responded in the affirmative. If Aeroflot resumes services to the Maldives, then it could, in theory, maintain its growth trajectory, although the economic sanctions implemented against Russia by the West, and the resulting economic decline forecasted for Russia, could play a major role in maintaining this market. 

The IMF, in its report, highlighted that although the growth outlook has improved, the country 'remains at a high risk of external debt distress' as well as 'a high overall risk of debt distress.' The government, in the budget it submitted to parliament for 2022, estimates total debt as a percentage of GDP to be 150 percent in 2020, declining to 122 percent in 2021 and projected at 117.8 percent for 2022. Whether these are realisable depends to a large extent on the growth outlook, aka the performance of the tourism industry, and the government's unfinanced budget expenditure – it is expected that expenditure, largely unfinanced, will also increase in 2023 in the lead up to the presidential election. 

The Medium-Term Debt Strategy published by the Ministry of Finance also indicates a large portion of external debt slated for refinancing in 2022. The decision by the parliament to allow central bank financing of government expenditure by printing money will also have major repercussions for the exchange rate peg. 

What the Maldives currently requires is fiscal reforms – broadening tax revenue and rationalising expenditure. While revenue reforms appear to be few and far in between, expenditure reforms are almost non-existent. In addition, contingency plans in the event of an adverse shock on the economy, from both internal and external sources, are also lacking somewhat. Each time there is a shock, the government and the private sector discuss the urgent need for economic diversification. The Maldives has been fortunate to have had quick economic recovery following each shock but expecting this to continue each and every time may be foolish. 

President Ibrahim Mohamed Solih on 13 March announced that the Ministry of Finance has 'analysed the possible impact on the Maldives' tourism sector' and is 'currently implementing measures to mitigate and overcome it.' What these measures are and what the impact will be must be shared with both the private sector and the public, so as to be better prepared to respond to any adverse impact. What the country appears to be doing is just waiting in limbo for the other shoe to fall!