The World Bank has called for the urgent implementation of the Maldive’s planned financial reforms, saying such action is essential for the nation’s sustained economic growth.

While acknowledging that the number of tourist arrivals in 2023 reached a record-breaking 1.88 million, it did not result in higher GDP growth due to lower per-tourist spending and shorter stays, the organisation outlined in its “Maldives Development Update 2024” published Wednesday.

The nation’s economy grew by an estimated 4.0 percent in 2023 with inflation, remaining higher than the historical average of 0.5 percent, at 2.9 percent for the year. Price increases were felt in he food, education, dining, and lodging services sectors, the World Bank said, going on to mention that inflation in food prices could increase poverty by 0.4 percentage points, with atolls experiencing even higher rates.

Travel export receipts fell by 6.8 percent, even as import expenditure remained high at US$3.5 billion, resulting in a current account deficit of 23.4 percent of GDP. The report highlighted that high import costs weighed heavily on gross reserves—also compounded by external debt repayments—which fell to US$551.1 million in January 2024.

The administration’s failure to implement subsidy reforms, combined with rising recurrent and capital costs, has resulted in a sharp increase in total expenditure and a fiscal deficit of 13.2 percent of GDP in 2023, the World Bank declared in its report.

Tourism, accounting for a quarter of the economy, experienced slower growth in 2023, with declines in average stay durations and lower tourist spending; the slowdown exposing underlying economic vulnerabilities, noted the international financial organisation.

Such vulnerabilities stem from persistent large current account and fiscal deficits, the organisation explained, going on to elaborate that the country relies heavily on imports while having limited official reserves, thus creating an unsustainable imbalance — the administration’s support for struggling state-owned enterprises (SOEs), along with blanket subsidies, high capital spending, and a public health program, further exacerbate these pressures.

While the World Bank recognised that subsidies are crucial for boosting household incomes, their unsustainable nature raises concerns, the report said. When fiscal pressures mount, the Maldivian people’s well-being could be negatively impacted especially given that infrastructure projects, although promising long-term growth, were financed through non-concessional external borrowing and sovereign guarantees, it said.

The World Bank raised alarm bells for the domestic financial sector, saying that the rising cost of borrowing abroad had forced the government to turn towards domestic sources, increasing the sector’s vulnerability to government debt.

The report noted that the administration had recently announced its commitment to a fiscal reform agenda to address the nation’s economic vulnerabilities, including reforms to subsidies, SOEs, the public health insurance scheme; Aasandha, and reprioritising capital spending. These reforms offer a path towards a more resilient Maldivian economy, the international financial organisation said.

In terms of the future; the World Bank report projected that economy will grow by 4.7 percent over the medium-term, supported by tourism, a decrease from the pre-pandemic average of 7.4 percent. This growth is based on expected fiscal adjustments, the report said, including subsidy reforms and reduced public expenditure and investments.

The slowdown also signals slower poverty reduction in 2024 the report warned.

The fiscal deficit is expected to remain high in 2024 due to the administration’s “ambitious spending plans,” the report said, going on to concede, however, that the proposed fiscal reform package is expected to help but that a more sustainable fiscal path requires a larger adjustment — through cuts in non-essential capital and un-targeted recurrent spending.

Inflation is expected to rise due to the removal of blanket subsidies, the report noted, potentially driving poverty by 2.5 percentage points with the current account deficit expected to remain high due to commodity price pressures and capital imports for infrastructure projects.

The report highlighted that rising external financing needs, including debt servicing, are expected to keep pressure on foreign exchange reserves.

“Implementing the government’s fiscal reform agenda is essential to sustaining economic growth in Maldives. The World Bank remains committed to supporting Maldives in these reform efforts. This includes developing a targeted mechanism to support the poor and the vulnerable, phasing out the broad-based subsidy system that is currently inefficient, addressing weaknesses in state-owned enterprises, enhancing the efficiency of health spending, and improving the strategic planning of investments,” World Bank Country Director for Maldives, Nepal and Sri Lanka; Faris Hadad-Zervos said.

Major downside risks to the economy included a shock to the tourism sector, limited domestic and external financing, and a widening current account deficit, the report said, recommending that, to maintain macroeconomic stability, a major fiscal adjustment and a multi-year reform plan are required, along with a targeted transfer mechanism to offset welfare losses among vulnerable groups.