Maldives - Economy

Even though tourism is a huge industry in the Maldives, accounting for one-third of their economic output, the local population is regularly shut out of jobs at these resorts. The Maldives is a middle-income country composed of more than 1000 small islands, whose geography and exposure to climate change pose unique challenges for infrastructure development. The population is highly dispersed over 184 inhabited islands and 90,000 square kilometers, making the provision of constitutionally mandated key social infrastructure to all inhabited islands complicated and costly. Further difficulties arise from the need to build climate change resilience and the heavy dependence on imported building materials. Despite these challenges, the government of the Maldives has provided near universal access to basic services (electricity, clean water and sanitation), and health centers and schools are present in all inhabited islands.

In 2004, a devastating tsunami destroyed much of the country’s infrastructure and the government increased public investment for the reconstruction in subsequent years. Public investment increased significantly in 2007 in the run-up to the first democratic election in the Maldives, when the government undertook several large capital projects.

After winning the 2013 presidential election by a narrow margin of 6,000 votes, strongman Abdulla Yameen started consolidating his power. The Maldives drifted closer to China during Yameen's rule, which considered the Maldives an important route in its "Belt and Road" initiative. Under Yameen, the Maldivian economy showed signs of improvement, although economists say the country's growth was partly due to aid and investment from China.

The government’s 2013 election manifesto promises to delivery major new infrastructure projects known as “Mega projects” to promote growth and economic diversification. These include an expansion of the international airport and adding a new runway, building a bridge connecting Malé and Hulhulé, further development of Hulhumalé island (a major population center) and relocating and upgrading the seaport. This is in addition to several other projects focused on land reclamation, regional airport development and water and sewage facilities improvement.

The government significantly scaled up infrastructure investment, with major new infrastructure projects estimated to amount to 35 percent of GDP in 2015-2019. These large projects aim to promote economic growth, diversify the economy, which is heavily dependent on tourism, and consolidate the population in key centers. This scaling up could transform the economy but it also carries risks. The country faces challenges with rising debt levels (73 percent of GDP in 2015) and increased external debt and limits on capacity.

In the September 2018 election, Yameen could secure only 41.6 percent of the vote in the race against the opposition candidate Ibrahim Mohamed Solih. Solih's Maldivian Democratic Party (MDP) is considered pro-India and wants to scale down Chinese influence on the Maldives. India will need to act resolutely to support the new government’s effort to jumpstart the Maldivian economy through generous investment.

There are significant weaknesses in implementing projects on time and on budget, leading to higher costs and the inefficient use of scarce investment resources. In project implementation delays occur due to cash rationing and weak project management. There is frequent reallocation of resources to other projects (including those not originally in the budget) and to cover outstanding current expenditures.

The Maldivian economy is based on tourism and fishing. Ranked by the United Nations as one of the world's least developed countries in the early 1990s, Maldives had a GDP based 17 percent on tourism; 15 percent on fishing, which is undergoing further development; and 10 percent on agriculture. Maldives' 1994 annual per capita income of US$620 was twice that of India. Maldives had some 17,000 foreign workers, many from India and Sri Lanka, most of whom were employed in resort hotels so that Maldivian Muslims need not serve alcoholic beverages.

In a generation, it has gone from being South Asia's poorest country to that with the region's highest per-capita income. Economic growth was powered mainly by tourism, the backbone of the economy, and its spinoffs in the transportation, communication, and construction sector. More than 900,000 tourists visit annually. Fishing remains an important part of the economy as well. The Indian Ocean tsunami of 26 December 2004 devastated many islands. The tsunami caused extensive flooding to the Maldives, damaging structures and displacing residents of the island nation.

Approximately 100,000 people, or a third of the population of nearly 300,000, have been severely affected, with approximately 12,000 displaced and 8,500 in temporary shelters. About a quarter of the nearly 200 inhabited islands in the archipelago were severely damaged, and 10 percent were made uninhabitable. At the time of this writing, more than 80 people have been reported dead, and 26 are missing. The tsunami occurred during daylight hours near low tide, two factors that probably helped keep the death toll relatively low.

Remarkably, some low-lying regions were spared from damage. While some parts of the Maldives were completely inundated during the tsunami, others were barely affected. The Maldivian economy made a remarkable recovery, with a rebound in tourism and post-tsunami reconstruction.

While income disparity remained high, particularly between the capital and distant islands, the Maldives' growth yielded considerable social progress. The net enrollment in primary education is close to 100%. Literacy rates are about 98%. Infant and maternal mortality declined rapidly.

Severe balance of payments imbalances, crushing government debt, and a decline in revenue brought the economy of Maldives to the brink of collapse by mid-2009. There had been signs for a year that the financial situation in Maldives was worsening. The IMF called the country's economy the most precarious of any in the world. The new administration came to power in November 2008 when President Gayoom was voted out of office after a rule of 30 years. Gayoom's administration spent freely on projects intended to foster growth and development. The Nasheed administration did little to improve Maldives' financial situation when it first came to power.

GDP in 2011 totaled $2 billion, or about $4,900 per capita. From 2000-2010, real GDP growth averaged around 6% per year except for 2005, when GDP declined following the Indian Ocean tsunami, and 2009 when GDP shrank by 2% as tourist arrivals declined and capital flows plunged in the wake of the global financial crisis. The Maldives Monetary Authority (Central Bank) reports GDP growth of 7.5% in 2011. Inflation was at 4.7% in 2010.

Maldives had a merchandise trade deficit of under $300 million until 2003. Since then the trade deficit has reached an unprecedented $780 million. In 2010, Maldives' economy was helped by a significant upturn in tourist arrivals. Consequently, the current account deficit was contained at around $460 million in 2010, but jumped to $650 million in 2011. Tourism was expected to continue to grow in 2012.

The Maldivian economy continues to be plagued by large budget deficits. The budget deficit was about 16% of GDP in 2010 and dropped to 10% in 2011. Government expenditure was 41% of GDP and revenue was about 28% of GDP. Recent large budget deficits have led to a sharp buildup of public debt, prompting the World Bank and the International Monetary Fund (IMF) to classify Maldives as being at moderate risk of debt distress. In December 2009, the IMF approved a $93 million loan for the country. After the first two disbursements, the IMF withheld subsequent disbursements due to concerns that the budget deficit must be further reduced. Maldives is facing a foreign exchange shortage. The official exchange rate against the U.S. dollar was rufiyaa 12.8 in 2012.

Under the IMF program, the government agreed to cut expenditure, substantially downsize the government workforce, reduce subsidies, change the tax system to direct taxes, and privatize many industries. The government also aims to move from being a service provider to a regulator, and to enhance the role of private sector. These programs require major reform in the legal and regulatory framework of the various sectors. The government launched a fiscal reform program in August 2011 that proposed a series of economic reforms including additional tax bills and amendments to existing bills to facilitate privatization and foreign investment.

The parliament passed goods and services tax, tourism goods and services tax, and business profit tax in 2011, and all three are currently implemented. The Maldives Inland Revenue Authority (MIRA), established in 2010, is fairly new and will need time and capacity-building to fully implement the new taxes. The parliament passed amendments to the Import Export Act in November 2011, which will decrease revenue from import duties by 20 percent in 2012. The government also privatized the main airport and is partially privatizing the energy sector, and sold government-held shares in a telecommunications company.

However, plans to cut spending did not progress smoothly. For example, the government reduced civil servant salaries by an average of 14% in October 2009, but the Maldives Civil Service Commission (CSC) filed a lawsuit and won their case to restore these salaries. Moreover, plans to retrench civil service staff have been put on hold due to lack of funds. The government’s privatization plans are also jeopardized by a recent law passed by the parliament which requires parliamentary approval to privatize state institutions. International shipping to and from Maldives is mainly operated by the private sector with only a small fraction of the tonnage carried on vessels operated by the national carrier, Maldives Shipping Management Ltd.

Over the years, Maldives has received economic assistance from multilateral development organizations, including the UN Development Program (UNDP), Asian Development Bank, and the World Bank. Individual donors--including Japan, India, Australia, and European and Arab countries (including Islamic Development Bank and the Kuwaiti Fund)--also have contributed. In a bid to promote exports, the U.S. Government restored the Generalized System of Preferences (GSP) trade program to the Maldives in December 2009. The United States is seeking to provide various other assistance efforts to defend against climate change, prevent drug use, and enhance U.S. investment. Maldives became a member of the International Labor Organization in 2009.

Diversifying beyond tourism and fishing, reforming public finance, and increasing employment are the major challenges facing the government. There is a shortage of local skilled labor, and most industrial labor has to be imported from Sri Lanka, Bangladesh, or elsewhere.

Economic Sectors

In recent years, Maldives has successfully marketed its natural assets for tourism--beautiful, unpolluted beaches on small coral islands, diving in blue waters abundant with tropical fish, and glorious sunsets. Tourism brings in about $600 million a year. Tourism and related services contributed 30% of GDP in 2011, but its indirect contribution is much higher. As a result, tourism is the catalyst for growth. Since the first resort was established in 1972, more than 100 islands have been developed, with a total capacity of some 24,500 beds. Maldives has embarked on an ambitious tourism expansion plan; several resorts are under construction. However, resort expansion has not been planned very well and entrepreneurs find it difficult to secure capital financing.

There is a glut of hotel rooms and several half-built resorts. Over 900,000 tourists (mainly from Europe) visited Maldives in 2011. China is a rapidly increasing market. With the growing significance of tourist arrivals from China, Maldives tourism season is experiencing fewer seasonal fluctuations as Chinese arrivals are now filling the gap left during the European summer season. The average occupancy rate is about 70%. Maldives had experienced capacity utilization rates of over 80%--reaching over 95% in the peak winter tourist season--prior to the new resort drive that began in 2008. Average tourist stay is 7 days.

International and national transportation issues continue to challenge Maldives as it seeks to unify the country by easing travel for locals and tourists. The government hoped that the expansion of Male' International Airport and the newly-constructed airport in Gaan Adu Atoll (opened for chartered planes in 2007) would significantly increase the number of tourists. Resorts have proposed five new regional airports with private aviation and have offered to subsidize their development. The Ministry of Atoll Administration also plans to build 5-10 public airports to provide nighttime as well as daytime connections between the atolls. The government planned to send students to the U.S. for pilot training to support these efforts.

Fishing employs about 11% of the labor force. The fisheries industry, including fish processing, traditionally contributes about 7% of GDP. Due to a drastic drop in the fish catch, the industry's contribution to GDP was only about 4% in 2008, 3% in 2009, and 1% in 2011. Fish export earnings were estimated at $70 million in 2010. The use of nets is illegal; all fishing is done by line. Production was about 100,000 metric tons in 2009, but dropped to 80,000 metric tons in 2011. Most of the catch was skipjack tuna. Around 40% is exported, largely to Sri Lanka, Japan, Hong Kong, Thailand, and the European Union. Fresh, chilled, frozen, dried, salted, and canned tuna exports account for about 90% of all marine product exports.

Poor soil and scarce arable land have historically limited agriculture to a few subsistence crops, such as coconut, banana, breadfruit, papayas, mangoes, taro, betel, chilies, sweet potatoes, and onions. Almost all food, including staples, has to be imported. The December 2004 tsunami inundated several agricultural islands with salt water, contaminating the groundwater. Some of these islands still do not have clean groundwater. Agriculture provides about 1.0% of GDP.

The manufacturing sector provides less than 4% of GDP. Traditional industry consists of boat building and handicrafts, while modern industry is limited to a few tuna canneries, a bottling plant, and a few enterprises in the capital producing PVC pipe, soap, furniture, and food products. Five garment factories that had exported principally to the United States closed in 2005, following the expiration of the Multi-Fiber Arrangement (MFA) that had set quotas on developing country garment exports to developed countries. The loss of these factories has not proven an insurmountable hurdle, however, as most of the profits were repatriated and most of the labor was expatriate.