overcrowding affecting poorer urban households in Male. MALDIVES Key conditions and To promote development, Maldives has scaled up infrastructure investments since challenges 2016. This has boosted construction activ- ity, tourism capacity, and medium-term Table 1 2022 Tourism, which accounts for almost one- growth prospects. Although these invest- Population, million 0.5 third of the economy, has seen a rapid re- ments have contributed towards poverty GDP, current US$ billion 5.7 covery following the pandemic. Despite reduction and better living standards, fi- GDP per capita, current US$ 10929.5 the war in Ukraine, arrivals from Russia re- nancing of these large investments a 3.9 Upper middle-income poverty rate ($6.85) main strong and growing arrivals from In- through non-concessional sources and a 29.3 dia and Gulf countries have compensated sovereign guarantees has led to growing Gini index b 100.8 for lower arrivals from Europe and China. fiscal vulnerabilities. School enrollment, primary (% gross) Life expectancy at birth, years b 79.9 However, heavy reliance on tourism and Recently, the increased cost of external Total GHG emissions (mtCO2e) 3.0 limited sectoral diversification remain a borrowing has also compelled the gov- key structural challenge as Maldives is ernment to turn towards domestic financ- Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2019), 2017 PPPs. highly vulnerable to macroeconomic ing sources, which is crowding out the b/ Most recent WDI value (2020). shocks. As an economy that is heavily private credits and leading to a concern- import-dependent, Maldives is facing sig- ing rise in the exposure of the financial nificant external and inflationary pres- sector to the sovereign. Public and pub- sures due to the sharp rise in global licly guaranteed debt stock and debt ser- commodity prices. This is putting pres- vicing risks are expected to remain elevat- sure on public finances given the govern- ed in the medium term. The economy has recovered to pre-pan- ment’s blanket provision of food and fuel demic levels and, with rising tourist ar- subsidies to help contain domestic price rivals, is expected to maintain a strong increases, continued high levels of cap- growth and poverty reduction trajectory. ital expenditure, and an inefficient pub- Recent developments lic health insurance scheme. Untargeted Commodity price volatility is driving in- austerity measures pose risks to poverty, Tourist arrivals reached 1.68 million in flation and exerting pressure on fiscal and particularly in the atolls where 90 percent 2022 – only 1.6 percent lower than the external balances, through costlier im- of the poor live, as past welfare gains pre-pandemic high – which supported ports and higher subsidies. Despite recent have been driven by a strong redistribu- growth in the real estate, transport, and tive model. The latter includes universal trade sectors, as well as driving the over- improvements, public debt is expected to access to basic health and education ser- all real economic growth of an estimated remain high, warranting continued ef- vices, public sector employment and pen- 12.3 percent (y-o-y). forts to reduce fiscal deficits, including sions, health insurance, price controls and Higher global commodity prices led to ris- comprehensive subsidy reforms while subsidies, and income support programs. ing domestic inflation, which reached an mitigating impacts on the vulnerable. Additional challenges to welfare include average of 2.3 percent (y-o-y) in 2022, high- differential access to economic opportu- er than the historical average of 0.5 per- nities in Male relative to the atolls, and cent. Price increases were particularly FIGURE 1 Maldives / Real GDP growth and contributions to FIGURE 2 Maldives / Actual and projected poverty rates real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 120 60 200000 Fisheries Construction 180000 Wholesale and retail trade 90 50 Tourism 160000 Transp. And comm. Real Estate 140000 40 60 Public administration 120000 Others GDP 30 100000 30 80000 20 60000 0 40000 10 20000 -30 0 0 2009 2011 2013 2015 2017 2019 2021 2023 2025 -60 Upper middle-income pov. rate Real GDP pc 2020-Q1 2020-Q3 2021-Q1 2021-Q3 2022-Q1 2022-Q3 Sources: Maldives Monetary Authority and World Bank staff calculations. Source: World Bank. Notes: see Table 2. MPO 1 Apr 23 acute in the food, transport, health, and increasingly difficult to finance the subsidy and the GST rate hike are expected to in- restaurant services sectors. program in its current form. Better target- crease inflation in 2023, warranting a Despite growth in tourism earnings, the ing of tax and transfer instruments would tighter macroeconomic policy mix. Sub- current account deficit widened consider- help mitigate a negative impact of subsidy sidy reform to target the poor and vulner- ably to an estimated 24.6 percent of GDP reforms on the poor. able is needed to reduce the fiscal burden. in 2022, due to far costlier imports of The current account deficit is expected to re- oil and capital goods. High import costs main elevated given high commodity prices and external debt repayments put signif- and necessary capital imports, as the gov- icant pressure on gross reserves, which Outlook ernment aims to complete ongoing infra- fell to less than US$500 million (or 1.8 structure projects and commence projects in months of imports) in October 2022, be- The economy is expected to grow by 6 per- outer Atolls. Despite a recent decline in oil fore recovering to over US$800 million (3 cent on average in the medium term, sup- prices, rising external financing needs – in- months of import) by the end of the year ported by robust tourism performance. cluding debt servicing – are expected to sus- due to a US$200 million currency swap The return of Chinese tourists together tain pressure on official reserves. deal with India. with arrivals from India and Russia are ex- Downside risks persist. Tourism could be Blanket subsidies for energy and food pected to lead to 1.8 million arrivals in 2023 adversely impacted by further global commodities, together with sustained lev- (7.1 percent y-o-y increase). Going for- shocks. Any further widening of the current els of high capital spending, led to an in- ward, tourism will be further supported by account deficit could put additional pres- crease in the fiscal deficit to 14.5 percent the expansion of Velana International Air- sure on official reserves. The government of GDP in 2022. This was despite several port (likely to be completed by 2025) and faces external debt servicing payments of austerity measures to lower administrative investments in new resorts. about US$340 million on average over the costs and the public sector wage bill. Over The recent increase in GST rates is expect- next three years amidst tightening global fi- 80 percent of the deficit was covered by ed to help narrow the fiscal deficit. Yet, nancing conditions. Stronger-than-expect- domestic sources, with MMA’s asset expo- public debt levels remain high. Additional ed tourism with the return of Chinese sure to government rising to 48 percent of fiscal adjustment is required to address fis- tourists offers upside potential to the out- its total financial assets at end-2022, from cal vulnerabilities, particularly through ex- look. In the absence of any pandemic relief 43 percent at end-2021. penditure rationalizations on capital ex- measures, the poverty rate would have With ongoing plans to complete key infra- penditure, subsidies, and pharmaceutical risen to 19.9 percent in 2020. With the recov- structure projects, and continued inflation- spending. Meanwhile, recovery in de- ery in economic growth, poverty rates are ary pressures, the government may find it mand, elevated global commodity prices, expected to drop to 2.1 percent in 2023. TABLE 2 Maldives / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2020 2021 2022e 2023f 2024f 2025f Real GDP growth, at constant market prices -33.5 41.7 12.3 6.6 5.3 5.9 Private Consumption -32.1 48.3 37.2 2.8 3.3 3.9 Government Consumption -39.6 44.2 30.6 11.2 8.3 8.4 Gross Fixed Capital Investment -2.8 -21.0 27.6 6.1 3.0 5.2 Exports, Goods and Services -54.3 82.4 27.1 7.5 6.6 6.0 Imports, Goods and Services -46.2 42.9 59.7 5.9 5.4 5.2 Real GDP growth, at constant factor prices -31.3 38.0 12.3 6.6 5.3 5.9 Agriculture 7.1 -0.6 2.5 2.8 3.2 3.5 Industry -24.8 4.5 -8.7 13.9 5.1 4.2 Services -34.3 46.8 15.3 6.1 5.4 6.2 Inflation (Consumer Price Index) -1.4 0.5 2.3 5.7 2.5 2.5 Current Account Balance (% of GDP) -42.8 -7.8 -24.6 -20.1 -14.9 -15.0 Net Foreign Direct Investment Inflow (% of GDP) 11.8 11.4 11.7 8.8 8.1 7.8 Fiscal Balance (% of GDP) -23.6 -13.9 -14.5 -9.6 -9.5 -9.0 Revenues (% of GDP) 26.8 25.7 28.7 30.8 30.2 29.3 Debt (% of GDP) 150.2 113.6 110.1 112.0 109.9 113.2 Primary Balance (% of GDP) -20.8 -11.4 -10.9 -6.1 -5.9 -5.4 a,b Upper middle-income poverty rate ($6.85 in 2017 PPP) 19.9 6.2 3.4 2.1 1.4 0.8 GHG emissions growth (mtCO2e) -10.9 12.2 14.8 12.0 10.2 9.5 Energy related GHG emissions (% of total) 82.4 84.4 85.8 87.0 87.9 88.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. a/ Calculations based on SAR-POV harmonization, using 2019-HIES. Actual data: 2019. Nowcast: 2020-2022. Forecasts are from 2023 to 2025. b/ Microsimulations for 2020-2022 based on 2019 actual data. Neutral-distribution projections with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU (2023-2025). MPO 2 Apr 23