Tourism grows despite market shifts; economic growth forecast adjusted

The newest release of Ministry of Finance's Macro Economic update, published on 29th June 2024 has shared new insights into the shifting market trends of Maldives' tourism industry - one which the country's economy heavily relies upon, and has led to adjustments in its economic growth forecast.

According to the update which provides an overview of the latest macroeconomic projections for the Maldivian economy, the country's tourism industry surpassed pre-pandemic arrivals at 1.88 million. This was is a 12.1 percent growth when compared to 2022, while this year's quarter one has also shown a promising performance with 604,004 inbound tourists, marking a 15.3 percent jump from the same period last year.

Chinese arrivals play a major role in this spike, especially with the additional direct flights between China and Maldives this year compared to the same period last year and the period coinciding with Chinese New Year which was not observed in 2023 as direct flights resumed just a few days ahead of the celebrations. The report attributed this growth to the resumption of Sichuan Airlines operations during the third quarter of 2023 and the commencement of flights by Xiamen Airlines this February.

However, this growth is shadowed by the declining arrival rates from South Asia, especially from India - one of the top source markets since 2020.

"With the removal of travel restrictions leading to opening up of other similar tourist destinations last year, arrivals from India has been on a downwards trajectory. In addition, the limited flight connectivity with different cities in the South Asia region and geo-political tensions within the region are expected to have contributed to this decline," the report reads.

Tensions grew between Maldives and India during the early days of 2020 following remarks made against India's leaders by senior officials of the Maldivian government. This led to a boycott campaign against the island nation.

Along with these shifting markets, the industry is also seeing a change in bed night trends. By the end of 2023, 12.9 million bed nights were recorded by Maldives with a growth of 5.2 percent compared to 2022. However, the actual estimate for tourist bed nights in 2023 is 3.5 percent lower than what was forecasted for the year. The report suggests this may be due to discrepancies between the data published by the Tourism Ministry and that of Maldives Inland Revenue Authority (MIRA).

This year's bed night forecasts are looking optimistic, as the data suggests it may reach 13.8 million by the year's end, indicating a 6.8 percent growth compared to 2023. However, projected bed nights are revised downwards to reflect the declining trend of average stay observed post pandemic and the changes in key source markets.

The current expected average stay duration is about 6.8 days which is lower than the Budget 2024 forecast of 7.1 days, with the change largely attributed to tourists from China who, according to the report, opt for shorter stays.

Despite this, the country is expected to move steadfast in achieving its goal of 2 million tourist arrivals this year, with an 8.1 percent increase compared to 2023.

"Forecasted arrivals for 2024 has been slightly revised upwards compared to forecasts formulated for Budget 2024, to account for the increase in tourists from China, which is expected to more than compensate for the decline in arrivals from other regional markets," the report says.

Moving over to the country's real Gross Domestic Product (RGDP), the country made a strong recovery with a growth rate of 13.9 percent post pandemic in 2022, making a normalised growth at 4 percent in 2023 owing to the stabilisation of the tourism sector after its rapid rebound as well as the discrepancies in bed night data, as well as the construction sector's performance.

"Looking ahead to 2024, the RGDP growth rate is projected to grow by 4.9 percent. This projection is lower than the Budget 2024 estimate of 5.5 percent. The lower growth in 2023 and the slower projected growth in tourism and construction in 2024 suggest that the expansion anticipated earlier may be more restrained than initially envisioned," the report highlights.

However, the medium term average annual growth is projected to be 5.8 percent between 2025 to 2027 with a significant increase in the projected RGDP for 2025 at 6.5 percent should the new Velana International Airport (VIA) terminal commence operations.

While this is a slightly tempered economic outlook than what was presented in Budget 2024, the report attributes this to "slower than anticipated recovery in key sectors, ingoing fiscal reforms including changes in subsidy policies and the Public Sector Investment Programme (PSIP)."

"These factors collectively contribute to a more cautious growth projection over the medium term, with the economy expected to gradually return to its long-term growth path," it says.

Sectoral contributions show that despite an overall increase in tourist arrivals and bed nights in 2023, the real Gross Value Addition (GVA) of the tourism sector declined by one percent (MVR 20,665.1 million) compared to 2022, making this an 8.9 percent lower figure than what was forecasted in Budget 2024. However, this picked up in 2024 and is now projected to be at MVR 21,923.4 million, which is a growth of 6.1 percent compared to the year before.

The construction and real estate industry shows a slightly different picture with the growth rate being 4.1 percent in 2023, but is now projected to decline by 0.7 percent this year despite previously being estimated to grow by 3.7 percent.

"The downward revision in the estimates for the construction sector projections for 2024 factored in a sharp slowdown in the Public Sector Investment Programs (PSIP) inline with the fiscal reform agenda of the government and the decline in the construction material imports in the first quarter of 2024 compared with the last quarter of 2023, which is in line with global trends," the Ministry's report says.

On a contrasting note, transportation and communication grew by 16.8 percent in 2022 and, and continued on its positive trajectory, growing by 7.8 percent in 2023. Wholesale and retail are also expected to grow consistently after a slight decline last year, while the public administration, health and education sector is projected to have a growth rate of 3 percent this year.

While this is so, the country is currently in the process of a major expense reform, with the government moving to significantly cut down costs in a desperate bid to save the country's economy.