The Maldives faces significant economic risks from rising spending, high debt, and external shocks, despite a projected 6.5 percent growth in real Gross Domestic Product (GDP) in 2023 and an average of 5.4 percent from 2024 to 2025, the World Bank says.

In its latest Maldives Development Update ‘Batten Down the Hatches’ which was released last month but was showcased in a presentation on Wednesday at the Maldives National University (MNU), the World Bank was cautiously optimistic in their forecast for the Maldives’ economic trajectory, anchored by the robust performance of the tourism industry. However, the country faces significant fiscal challenges, exacerbated by global commodity price surges, escalated government expenditure on capital projects and subsidies, and the central bank’s ongoing budget deficit financing, the international finance agency outlined.

These issues require immediate and decisive fiscal reforms including better management practices for public investment moving toward, targeted subsidies, increasing revenues, and prudent debt management for a meaningful fiscal adjustment, the World Bank said.

While Maldives had plans to reduce fiscal deficits, the country has failed to achieve its targets so far and national debt is projected to hover above 115 percent of GDP over the medium term. Earlier this year, the government increased Goods and Services Tax (GST) rates, yet more decisive and prompt actions are required, particularly on the expenditure side as the expected subsidy reforms for 2023 have been delayed, the international financial institution warned.

For fiscal prudence, the Maldives must urgently refine its expenditure strategy and enhance revenue generation and essential reforms include overhauling Aasandha, rationalising budgetary contributions for state-owned enterprises (SOE)s particularly in the energy and food sectors and moving towards targeted subsidies, and establishing a robust public investment framework to ensure orderly and strategic infrastructure development, the agency advised. On revenue enhancement, the report notes that, immediate efforts should concentrate on expanding the tax base, leveraging domestic revenue streams and promoting equitable taxation.

While the Maldives has shown remarkable resilience and recovery from the COVID-19 pandemic, there remains a need to be vigilant towards emerging shocks such as conflicts around the world, price volatilities in global markets, and high inflation affecting the disposable income of people in major tourist markets, the agency noted.

“There is an urgent need to address the country’s fiscal and external vulnerabilities, especially through prudent debt management and expenditure reform measures, and develop a sustainable and resilient infrastructure investment framework, to ensure long-term growth and prosperity for its people,” said Faris H. Hadad-Zervos, the World Bank Country Director for Maldives, Nepal and Sri Lanka.

During the sessions at MNU today, experts indicated that Maldives had achieved remarkable results in basic infrastructure services, outperforming many neighbours and other Small Island Developing States (SIDS). Access to electricity, mobile phone services and hospitals, education, etc. was at a much higher ratio than in other comparable nations; achievements that are largely due to a rapid increase in public spending, which has grown faster than the country’s real GDP – a lot of the spending has gone towards infrastructure for transport, housing, and land reclamation, the agency noted.

However, as a result of rising infrastructure spending, public debt sharply increased to finance these projects, especially during the COVID-19 crisis and Maldives is subject to major fiscal vulnerabilities as there are still big gaps in infrastructure access between Malé and the outer atolls, where many people lack services like piped water, sewage, and broadband internet, the World Bank observed.

While the Maldives is trying to close these gaps, the country faces many challenges common to SIDS, like the worsening impacts of climate change and limited fiscal space; challenges which make it difficult for the country to provide efficient and affordable infrastructure services, the international financial agency noted.

The World Bank went on to recommend that, to improve, Maldives needs to take into account the high public debt reality, carefully and precisely plan for investments, and coordinate better among different stakeholders, especially for projects that involve multiple sectors. The country also needs to prioritise sustainability and resilience, given its exposure to climate change, the World Bank cautioned.