Maldives requires immediate fiscal reforms to avoid risks: World Bank Country Director

The Maldives faces vulnerable fiscal conditions and debt risks owing to sharp spending rise and subsidies widening the deficit, said World Bank Country Director for the Maldives, Nepal, and Sri Lanka Faris H. Hadad-Zervos.

While highlighting the pattern of sharp spending by the Maldives state for decades, Faris notes that the island nation’s annual debt servicing needs are likely to be USD 512 million for the current and following years, and another USD 1.07 billion in 2026.

“Last year, the Maldives economy hit choppy waters,” Faris begins his video message posted on X, adding that the “nation’s economic engine”; tourism industry slowed down due to a decrease in tourism receipts.

“The decision to halt subsidy reforms, coupled with continued high spending, has strained the nation’s finances”, the World Bank Country Director warned further. He also added that the island nation’s deficits are mounting, while there’s visible pressure on the public finances as well.

He added that the Maldives faces high debt distress risk and financing challenges, making the country vulnerable to global economical and financial shocks. He called out for necessary reforms as soon as possible.

Amid the fiscal challenges, Faris notes that a “glimmer of hope” remains with the increment in tourist arrival numbers, promising a steady growth rate of 5 percent in the medium term for the Maldives economy.

The positive outlook does not come without a caution attached to it as the World Bank Country Director alarms that the Maldives must “navigate these waters carefully” adding that a comprehensive, long-term economic reform plan is vital for economic stability.

“In this regard, the government’s announcement of a homegrown fiscal reform agenda was a positive start,” he adds.

Faris also affirmed that the World Bank stands ready to support the crucial reforms announced by the Maldivian government, and urged the state to protect the vulnerable while reforming inefficient subsidies. He also emphasized to streamline the state-owned enterprises (SOEs) in the Maldives for a more improved economic output, and make healthcare spending more effective.

The World Bank Country Director further urged Maldivian government to develop better investment strategies to drive up state income.

World Bank’s Projections

In its May 8, 2024 report “Scaling Back & Rebuilding Buffers”, the latest Maldives Development Update, the World Bank had noted that the country’s tourism and other major industries are “seeing a slowdown”.

It adds that the increment in tourist arrivals is offset by lower spending per tourist and shorter stays – tampering the positive impact on the overall GDP growth of the Maldives. The World Bank forecast also highlighted the need for “fiscal consolidation in the country, which is expected to impact real household incomes” owing to subsidy reforms, and a decrease in government spending and investment.

Furthermore, the country’s economy was projected to grow by 4.7% this year, lower than previous estimates, reflecting a moderation in growth momentum.

World Bank added that the island nation was looking ahead at potential risks due to external and fiscal vulnerabilities, and increased debt risks that could arise if fiscal reforms are not duly implemented. It also cautioned the Maldives on the risks of rising public debt, which stood at USD 8 billion, equivalent to 122.9% of GDP in 2023.

As noted by the Country Director, the annual debt serving needs are projected at USD 512 million for 2024 and 2025 followed by a spike of USD 1.07 billion in 2026, which mandates for a comprehensive fiscal adjustment program.

The absence of such a reform right now, could impose debt sustainability risks owing to a rise in public debt, World Bank added. The bank was also critical towards Maldives’ continued reliance on expensive external debt which carries a high risk for economic stability in the absence of fiscal reforms.

“In addition to spending cuts, Maldives’ debt and fiscal sustainability require a reprioritization of public spending and improved revenue mobilization,” the bank said in its May 08th press release.

World Bank further emphasized the urgency for the Maldives government to implement its fiscal reform agenda, and recommended the establishment of an effective mechanism for compensating vulnerable groups for potential losses in welfare.

The bank also urged Maldives government to address the widening inequalities resulting from fiscal tightening, “particularly between the greater Male’ region islands and the atolls”.

“Implementing the government’s fiscal reform agenda is essential to sustaining economic growth in Maldives,” Faris had said earlier. He assured the bank’s support towards the development of a targeted mechanism that would support the poor and the vulnerable while phasing out the broad-based subsidy system which is currently inefficient.

Current Situation

On May 19, 2024 it was reported that the state’s public and publicly guaranteed (PPG) debt had risen to USD 8.2 billion by the end of the year’s first quarter – which 110 percent of the Maldives GDP.

The Ministry of Finance reports that the state’s debt rose by USD 90.8 million within the first three months of the year. The total debt had reached USD 8.09 billion by 2023 end.

State debt’s rise was mainly attributed to the rise in domestic debt, which rose from USD 4.7 billion in Q4-2023 to USD 4.8 billion by the end of 2024 first quarter. External debt however, showed no significant momentum in either direction.

The 2024 annual budget report of the Maldives government projects state debt to rise to USD 8.5 billion by the end of this year – 114 percent of the country’s GDP.

For now, despite the World Bank’s warning of potential debt sustainability and fiscal risks owing to mounting public spending, the projections show a trend of rising debt for the Maldives.