The Maldives has long grappled with economic vulnerability due to its narrow economic base and susceptibility to external shocks. In recent history, the country’s economy has experienced a few significant setbacks tied to global events: an 11.2% contraction in 2005 following the devastating tsunami, an 8.2% decline in 2009 amid the global financial crisis, and a staggering 32.9% plummet in 2020 due to the Covid-19 pandemic. These three instances mark the only years of negative growth for the Maldives in the past two decades, underscoring the country’s economic fragility and its heavy reliance on tourism, although the country is resilient when there are no significant external shocks. The average economic growth over the past two decades averaged 5.8%.
The Covid-19 Shock: Impact and Immediate Response
The Covid-19 pandemic delivered an unprecedented blow to the Maldivian economy. For the first time in its 50-year tourism history, the country closed its borders for three months. The ripple effects were severe and far-reaching: tourist arrivals plummeted by 67.4%, travel receipts fell by 56.7%, and government revenue declined by 34.5% in 2020. Consequently, employment was not spared, with businesses resorting to layoffs and salary reductions to stay afloat during lockdowns and the subsequent period of reduced activity. The informal sector, a significant source of income for many, particularly women, also suffered considerably. The informal sector, a key income source for many, especially women, was hit hard during the pandemic. A UNDP and Maldives Bureau of Statistics study found that 48% of informal workers faced reduced production, and 54% saw revenue decline, with some losing all income. Women were particularly affected, increasing their share in informal employment significantly. Additionally, 17% of workers reduced staff, and 4% had to lay off all employees.
In response to this unprecedented crisis, the Maldivian government swiftly implemented a series of comprehensive measures. Priority was given to combating the virus and adapting to a “new normal,” with significant investments in testing capacity, quarantine facilities, hospital beds, and overall medical care capacity to stay ahead of the epidemic curve. On the economic front, the government unveiled an extensive response package designed to support both businesses and households. This included multiple rounds of relief and stimulus loans, loan repayment moratoriums, income support allowances, and utility bill discounts. The relief and stimulus loans were strategically designed to help businesses adapt to the situation while retaining employment, with one of the key conditions being the retention of staff. For those who faced layoffs, the government provided income support allowances, which also extended to those in the informal sector and gig economy who experienced reduced income. Furthermore, the government eased tax payment terms, facilitating installment plans to help businesses stay afloat during the crisis.
These interventions played a crucial role in the country’s economic recovery. The economy rebounded strongly in 2021, growing by an impressive 37.7%. However, it’s important to note that this growth did not fully restore the economy to pre-pandemic levels. Moreover, the recovery came at a significant cost, with the country’s debt increasing to MVR 124 billion by the end of 2023.
Emerging Challenges: The Russia-Ukraine War and Oil Price Shock
As the Maldives was navigating its post-Covid recovery, a new challenge emerged with the outbreak of the Russia-Ukraine war in 2022. This conflict triggered a global oil price shock, posing significant fiscal and foreign exchange pressures on the Maldivian economy. The impact was particularly acute due to the country’s heavily subsidized electricity production and vulnerable foreign exchange reserves, which had already been strained by lower travel receipts since the onset of Covid-19.
Faced with these multiple shocks, the Maldivian government employed an expansionary fiscal policy between 2020 and 2022, utilizing a wide range of tools to overcome the challenges. This approach, while necessary to support the economy and public welfare, led to significant macro-fiscal imbalance. The expansionary policy was initially financed through an overdraft facility via the Maldives Monetary Authority (MMA), which was later converted to a bond issued by the central bank, along with additional debt financing. This strategy aimed to quickly navigate the economic downturn and then implement fiscal reforms to address emerging issues and fiscal risks in the medium-term.
Plan to Restore Fiscal Sustainability
Recognizing the need for a comprehensive strategy to restore fiscal health and ensure long-term economic resilience, the Maldivian government announced a series of corrective medium-term fiscal reforms. The plan, initially outlined in the Fiscal Strategy of 2021 and further detailed in 2022, proposed a fiscal adjustment of 6% of GDP, equally split between revenue and expenditure reforms.
On the revenue side, reforms included changes to Goods and Services Tax (GST) and Tourism Goods and Services Tax (TGST) rates, which were announced in mid-2022 and implemented from January 1, 2023. Additionally, the government formulated a Medium-Term Revenue Strategy (MTRS), published in June 2024, to provide clarity to taxpayers and investors on upcoming changes to revenue policy.
The expenditure reforms, accounting for half of the fiscal adjustment, encompass a wide range of measures aimed at streamlining government spending and improving efficiency. These reforms are crucial for the long-term fiscal health of the Maldives and focus on several key areas. They include revamping the subsidy regime, reforming the medical welfare scheme, enhancing State-Owned Enterprise efficiency, and rationalizing public investments. Additionally, the government planned to implement tighter controls on discretionary spending and consolidating various welfare expenses and included these in the budget. Each of these initiatives plays a vital role in the overall strategy to achieve fiscal sustainability and economic stability. For a detailed breakdown of these reforms and their specific components, please refer to the accompanying information box. The fiscal consolidation plan is expected to shift the fiscal trajectory and restore sustainability over the medium term.
Planned Expenditure Reforms in 2022
- Revamping the Subsidy Regime: The government plans to phase out indirect subsidies and replace them with a targeted basic income. Currently, indirect subsidies are provided to State-Owned Enterprises (SOEs) to lower the prices of utilities, staple food, and other selected goods and services. While this approach is universally applied, it leaves room for significant savings. The new strategy aims to protect vulnerable populations by implementing a targeted basic income system. Under this system, poor and vulnerable individuals would opt-in to receive subsidies, with thresholds based on the Household Income and Expenditure Survey and other objective secondary data for selection.
- Reforming the Aasandha Medical Welfare Scheme: Several major reforms are underway for Aasandha, the country’s universal health coverage program. A key initiative is the bulk procurement of medicine, which constitutes the largest component of Aasandha spending. Significant progress has been made in collaboration with UNDP to procure medicine through their global procurement mechanisms. Similar partnerships are being explored with Indian state medical service corporations and the GCC’s procurement mechanism. Additionally, work is progressing on setting maximum retail prices (MRP) for medicines, although this requires several complementary measures for efficient execution. Internal controls of the Vinavi Portal, used by Aasandha, are being strengthened to identify and prevent wastage. Furthermore, the UNDP has been commissioned to conduct studies on healthcare financing models, strategies to reduce overseas medical expenses, medicine prescription patterns, and developing a database for medicine supply chain management.
- Increasing Efficiency of State-Owned Enterprises (SOEs): Recognizing that SOE governance has been deteriorating, the government is focusing on improving their efficiency. Data shows that companies with private ownership tend to be more efficient and even contribute dividends to the government, while fully state-owned companies often depend on government support through capital, subsidies, and grants. To address this, the government has initiated a project with the World Bank through the Maldives Competitiveness and Growth Project (MCGP) to strengthen SOEs. Strategies being considered include improving governance, increasing private ownership through public listing, fostering strategic partnerships for development, and selective privatization. These efforts are crucial to ensure that gains from subsidy reform are not offset by continued inefficiencies in SOEs.
- Rationalizing Public Sector Investment Programs (PSIPs): PSIPs have expanded significantly since 2014, partly due to the absence of a cross-partisan agreed national development plan. To address this, a Public-Private Partnership (PPP) function has been established at the Ministry of Finance, along with guidelines for PPP and Unsolicited Proposals (USP) policies. These measures aim to reduce the burden on the budget by leveraging private sector investments. Additionally, efforts are being made to strengthen the planning function and incorporate Sustainable Development Goals (SDGs) into the planning process, with a completed budget tagging exercise for SDGs. A technical criterion for rationalizing the entire PSIP list has been developed, with recommendations for each project communicated to successive governments.
- Controlling Discretionary Expenditure: Since the onset of Covid-19, all discretionary spending requires explicit approval from the Ministry of Finance. A portal has been developed to request and obtain approval for expenditures such as travel, repairs, training, purchase of fixed assets, and any new expenditures. This measure, while administratively burdensome, serves as a bureaucratic step to control and curtail spending.
- Consolidating Various Forms of Welfare Spending: This includes reforming medical welfare for security forces and addressing the issue of “double pension” given to certain retirees. Analyses have been conducted to revamp medical welfare expenses, recognizing the need for swift reform due to unsustainability and wastage. The “double pension” issue, which is not uniform across public service and has created an unfunded parallel pension scheme, is also being addressed. Technical assistance has been sought from the IMF to establish a pension policy unit, either at the Ministry of Finance or in another suitable government office, to oversee and control policy issues related to pensions.
While significant background work has been done on these reforms, their implementation has been limited, partly due to their politically sensitive nature and the proximity to the presidential election. As a result, the fiscal strategy issued in 2023 and the 2024 budget envisaged commencing these expenditure reforms from July 1, 2024, after the presidential and parliamentary elections. The success of these reforms will be crucial in achieving the targeted fiscal adjustment and ensuring the long-term economic stability of the Maldives.
Financing Strategy and Debt Management
A critical component of Maldives’ strategy is its financing approach and preparation for significant debt repayments, particularly the Sukuk due in 2026. The country has long run twin deficits in both its current account and government budget, relying heavily on external borrowing for major projects and domestic borrowing for budget financing. During the Covid-19 crisis and subsequent oil price shock, the financing gap widened significantly, necessitating further borrowing to maintain foreign exchange reserves and the USD peg.
The government successfully refinanced the Sunnyside bond (USD 250 million issued in 2017) in 2021 and raised additional funds by issuing a Sukuk, totaling USD 500 million due in 2026. While this was achieved at a higher coupon rate, it was considered a well-managed exercise by the debt capital market and commentators, given the prevailing economic risks. However, this has created a significant repayment obligation in 2026, necessitating careful fiscal management and strategic planning.
To address these challenges and prepare for future obligations, the government is considered various strategies. One option, which I believe to be the most ideal, is seeking assistance from the International Monetary Fund (IMF). This approach could provide access to highly concessional financing and lend credibility to the reform plan in the eyes of other lenders and investors. IMF involvement could facilitate support from other multilateral bodies and friendly countries, potentially opening doors for more favorable financing terms.
While some politicians and commentators view IMF involvement negatively, I believe that proactively engaging with the IMF to manage risks and leverage opportunities, particularly in climate financing, would be seen positively by the debt capital markets. Generally, IMF involvement is perceived negatively because countries typically seek its assistance when their economies are in severe distress, and delays often result in more substantial fiscal and structural adjustments.
Alternatively, if the government chooses not to pursue IMF assistance due to potential stigma, it will still need to undertake reforms and seek concessional financing from other sources. The Maldives’ strategic location could aid in securing bilateral financing, which might provide temporary relief while reforms are underway. However, for this approach to be successful, it is crucial for the government to present a credible fiscal reform plan and demonstrate strong economic management.
Regardless of the chosen path, the government is taking proactive steps to mitigate risks associated with future repayments. This includes strengthening the Sovereign Development Fund (SDF) by increasing dollar deposits and accumulating the Airport Development Fee (ADF) in USD. These measures aim to bolster the country’s capacity to meet future obligations, particularly the Sukuk repayment in 2026.
Long-Term Sustainability Initiatives
While addressing immediate fiscal challenges, the Maldives must not lose sight of long-term sustainability. Key areas of focus include:
- Renewable Energy Investments: Reducing reliance on imported oil for electricity generation is crucial for both fiscal sustainability and reducing the cost of living.
- Labor Market Reforms: Training and reskilling Maldivian workers and increasing workforce participation rates are essential while the population is still relatively young.
- Economic Diversification: While tourism will likely remain the largest industry, efforts to diversify the economy and capture more value from the tourism industry are crucial.
- Technology and AI Integration: Investing in technology and ensuring its diffusion throughout the economy will be vital for future competitiveness, especially given the country’s small workforce.
- Environmental Protection: Safeguarding the country’s natural resources is crucial, as the economy heavily depends on environmental assets.
- Improved governance: Strengthening governance, particularly in public financial management, will be important for promoting inclusivity and accountability.
Conclusion: Navigating the Path Forward
Recent developments, including successive credit rating downgrades, delayed reforms, difficulties in raising external finance for the budget, and dwindling reserves, underscore the urgency to expedite the implementation of the existing strategy rather than deviate from it. A silver lining is the potential for real sector growth to support the economy while fiscal reforms are being implemented. The Maldives stands at a critical juncture, requiring a delicate balance between necessary reforms and maintaining social welfare. While options may be limited, decisive action and strategic implementation are essential. The government must navigate these challenges while ensuring equitable distribution of economic wealth and protecting the environment. As the country charts its course through these turbulent economic waters, the resilience and adaptability demonstrated during the Covid-19 crisis will be crucial in shaping a sustainable and prosperous future for the Maldives.
References
International Monetary Fund (IMF). (2020). Fiscal Monitor: Policies for the Recovery. Washington DC: IMF.
Maldives Bureau of Statistics (MBS) & United Nations Development Program (UNDP Maldives). (2021). Informal Sector Survey 2021: Rapid assessment of the impact of COVID-19 on Informal Sector. Male’: MBS.
Ministry of Finance. (2021). Fiscal Strategy 2022-2024. Male’: MoF.
Ministry of Finance. (2022). Fiscal Strategy 2023-2025. Male‘: MoF.
Ministry of Finance. (2023). Fiscal Strategy 2024-2026. Male’: MoF.
Ministry of Finance. (2023). The Government Budget 2024. Male’: MoF.
