Maldives Development Update 2025

RECENT ECONOMIC DEVELOPMENTS

Tourist arrivals increased by 8.9 percent, reaching an all-time high of 2.05 million in 2024. Real GDP is estimated to grow by 5.5 percent in 2024 due to robust performance in tourism and related services, bringing poverty back below pre-pandemic levels.

Overall headline inflation remained low at 1.4 percent in 2024, reflecting continued subsidies on a wide range of items. However, inflation picked up in recent months, reaching 4.1 and 4.8 percent in November and December, driven by rapid increases in tobacco, restaurant, and accommodation prices. Food price inflation averaged 6.6 percent in 2024, posing concerns as poor and vulnerable households spend more than a third of their budget on food.

Driven by a 50 percent decline in fish exports and 4.0 percent growth in goods imports, the trade deficit widened from US$3.1 billion in 2023 to US$3.3 billion in 2024. High import costs and external debt repayments pressured official reserves, which fell to US$371.2 million in September 2024 (0.8 months of imports). Reserves recovered to US$832.1 million (1.7 months of imports) in February 2025, supported by a US$400 million currency swap agreement with the Reserve Bank of India and new FX regulations for the tourism sector. Despite recovery, usable reserves coverage remains low (less than one month).

The fiscal deficit widened to 12.3 percent of GDP in 2024 from 10.6 percent in 2023, as recurrent expenditure growth outpaced tepid revenue collection. Delays in subsidy reforms and rising spending on health and wages led to a 6.4 percent growth in total expenditure in 2024. Capital expenditure fell by 7.8 percent in the first three quarters due to financing challenges reflected in continued expenditure arrears accumulation. Revenues grew slowly at an estimated 1.0 percent in 2024, primarily due to the decline in non-tax revenues.

CHALLENGES

Tourism, representing about 21 percent of GDP, continues to bolster economic activity. Tourist arrivals have increased significantly, with China, Russia, and Western Europe being the leading markets. However, spending per tourist has been moderating. Domestic employment sources are vulnerable to economic and fiscal shocks: 40 percent of employment is informal, gender gaps are persistent, and formal sector employment is dominated by the public sector. Only a third of resort island employees are Maldivian.

Substantial increases in government spending, including subsidies and capital expenditures, and reliance on non-concessional borrowing in the last decade have heightened fiscal and external vulnerabilities. High levels of subsidies have notably supported the budgets of vulnerable households.

The government announced a fiscal adjustment reform agenda in early 2024, focusing on reducing non-targeted subsidies and replacing them with targeted transfers, rationalizing capital spending, reforming state-owned enterprises, and reducing rising public health spending. Delays in implementing these reforms have led to increased fiscal and external deficits, elevated public debt, and declining foreign exchange reserves. This has raised concerns regarding the financial health of certain sectors in the real economy.

OUTLOOK

The completion of the new terminal at Velana International Airport is expected to support increased tourist arrivals, leading to projected economic growth of 5.2 percent on average over the medium term.

This baseline outlook assumes limited fiscal expenditure reduction. As a result, the fiscal deficit is expected to remain elevated and only slowly narrow to 9.8 percent of GDP in 2027, assuming backloaded consolidation measures kick in. With high fiscal deficits and moderation in GDP growth, public debt is projected to rise to 135.7 percent of GDP in 2027.

Given limited fiscal adjustment, imports are expected to remain elevated. Consequently, the current account deficit is expected to remain high and decline marginally to 18.4 percent of GDP in 2027. High external financing requirements, including rising debt servicing obligations in 2025 and 2026, are expected to put further pressure on official reserves and jeopardize macroeconomic stability.

Significant downside risks remain. Heightened global trade uncertainties and potential global economic slowdown may lead to a shock to tourism and harm the growth outlook, limiting the scope for redistribution. Limited domestic and external financing may worsen the liquidity and solvency situation, especially with the approaching spike in external debt repayments. These risks could affect households through reduced purchasing power, limited access to essential imports, and fewer economic opportunities. Unmitigated budget cuts may impact public employment. Rising production costs could reduce labor demand and incomes, especially in the construction sector, increasing poverty and vulnerability. Limited local food production may also heighten food insecurity. On the upside, a decline in global commodity prices could help ease pressures on the current account and inflation. An immediate and sizeable fiscal adjustment, including targeted mitigation measures to lessen the impact on household welfare, remains the key priority.

Last Updated: Apr 23, 2025