Maldives’ Economic Crossroads: Fiscal Challenges and Strategic Solutions
The Maldivian economy stands at a crucial juncture, grappling with significant fiscal challenges amidst ambitious developmental aspirations. Amidst rising debt, economic slowdown, and developmental disparities, experts and institutions like the World Bank are calling for urgent reforms and strategic investments.
Recent assessments by the World Bank and economic experts have painted a stark picture of the Maldivian economy. The nation’s debt has soared to 110% of GDP, with a concerning reliance on borrowing from the Central Bank, leading to a devaluation of the Rufiyaa.
This situation mirrors Sri Lanka’s pre-crisis economic state, raising alarms about potential long-term consequences. The World Bank’s “Batten Down the Hatches” report emphasises the urgent need for fiscal reforms, highlighting the failure to meet deficit reduction targets and projecting a continual high debt-to-GDP ratio.
The Maldives’ economy has been reeling since the COVID-19 outbreak, showing uneven recovery signs. While tourism, a key economic driver, shows robust performance, overall economic growth has been inconsistent. The government’s expenditure, particularly on subsidies and construction projects, has escalated, exacerbating fiscal strains.
Dr Ahmed Inaz, former Finance Minister, advocates for utilising pension funds for infrastructure development, particularly in the atolls. He suggests that these funds, totalling approximately MVR 19 billion, could be strategically invested in development projects, bridging the infrastructure gap between Male and the outer atolls. Inaz emphasises the need for a culture of saving and additional funds creation for these projects.
Inaz also stresses the importance of research for sustainable project implementation, suggesting collaboration among major institutions. He critiques the current development model, which often replicates urban projects in island settings without considering local needs or long-term political cycles.
Inaz calls for political unity in development efforts, urging parties to work together and empower local councils. This approach aims to transcend short-term political goals for the nation’s long-term welfare.
Shanta Devarajan, professor of international development at George Town University, and Erdem Atas, World Bank’s country economist in Maldives, highlight the pressing need for a medium-term fiscal strategy. They recommend immediate measures like subsidy cuts, direct financial assistance to those in need, privatisation of certain sectors, and legal frameworks for debt management.
The World Bank advises Maldives to refine expenditure strategies, enhance revenue generation, and implement targeted subsidies. They stress the importance of establishing a robust public investment framework for strategic infrastructure development and emphasise enhancing revenue through tax base expansion and equitable taxation.
The Maldives stands at a crossroads, facing significant economic and developmental challenges. Strategic use of pension funds, coupled with comprehensive fiscal reforms and sustainable project implementation, can pave the way for equitable and resilient growth. However, this requires a concerted effort from political leaders, institutions, and the public to navigate these complex challenges effectively.
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