The World Bank has downgraded its 2024 growth forecast for the Maldives as tourists increasingly opt for guesthouse stays over high-end resorts.

The World Bank’s ‘South Asia Development Update April 2024‘ report noted that the Maldives’ economy grew by 2 percent year-on-year in the third quarter (Q3) of 2023, significantly slower than the 13.9 percent growth in 2022. Tourism activity contracted by 5 percent in Q3 of 2023, according to the report. This was the second consecutive quarterly contraction, as tourists increasingly shifted from high-end resorts to lower-end guesthouses and as such fiscal policy began to tighten, the organisation observed.

Output growth in the Maldives is expected to rise to 4.7 percent in 2024, a 0.5 percentage point downgrade from previous forecasts that partly reflects the shift in tourism activity, the report noted. Growth is expected to strengthen further to 5.2 percent in 2025, provided upgrades to Velana International Airport (VIA) are completed on schedule, the World Bank said — the upgrade, however, is also expected to result in continued wide current account deficits, at around 20 percent of Gross Domestic Product (GDP), and a double-digit fiscal deficit in 2024.

Government debt well in excess of GDP, compounded by a significant external debt service burden, continue to raise concerns about the Maldives’ debt sustainability, the report noted.

The World Bank recommended, as a general measure for the South Asia region, removing distortions in the financial system to unlock the financial resources needed for faster firm growth and private investment. Financial systems in South Asia are subject to multiple administrative interventions that reduce borrowing costs for favoured borrowers, including governments, the international financial institution said.

In terms of the Maldives specifically, the World Bank noted that limited competition as well as a large state-owned bank presence, and market segmentation allow banks to charge lending rates exceedingly higher than rates in neighbouring countries.