Despite the difficulties, the island nation has shown remarkable resilience, particularly in its key tourism sector, while grappling with external and fiscal pressures.
Maldives, renowned for its stunning atolls, world class tourism, and fragile environmental balance is currently faced with significant economic challenges amid a global backdrop of uncertainty. Despite these difficulties, the island nation has shown remarkable resilience, particularly in its key tourism sector, while grappling with external and fiscal pressures.
World Bank’s report, “Maldives Development Update: Seeking Stability through Turbulent Times” outlines the current state of the economy, examining challenges posed by external debt, inflation, and dwindling currency reserves, while highlighting positive efforts aimed at achieving long term stability.
Tourism remains the central pillar of the Maldivian economy. Real Gross Domestic Product (GDP) grew by 9.8 percent in the first quarter of 2024, largely driven by a robust tourism recovery that saw a 15.3 percent increase in arrivals during the same period. By the end of August 2024, tourist arrivals had increased by 10.5 percent year on year, despite a slight decline in tourist spending.
China’s return as a key source of tourists, alongside sustained numbers from Russia, Europe, and the United States, has further bolstered the tourism sector. However, India, which led the market in 2023, saw a sharp decline in its share of tourist arrivals, falling to just 6 percent in 2024. However, the government aims to restore India to the top three source markets for tourist arrivals by the end of the year. Despite recent setbacks, the Maldives has capitalized on its reputation for exclusive resorts and rich marine ecosystems to maintain its appeal to high-end visitors.
Although tourism provides a significant boost to the economy, inflationary pressures have moderated. Consumer price inflation fell to an average of 0.5 percent in the first half of 2024, down from 2.9 percent in 2023, largely due to easing global commodity prices and domestic subsidies on essential items like food and utilities.
Despite these positive developments, inflation remains a concern, averaging 6.7 percent in 2024, reflecting vulnerabilities in the import dependent supply chain. Maldives, which relies heavily on external markets for food and other commodities, continues to grapple with persistent global supply chain disruptions, likely prolonging inflationary challenges.
In 2024, the Maldivian government successfully narrowed its fiscal deficit to MVR 677 million (USD 44 million) or 0.6 percent of GDP in the first quarter, down from MVR 2.9 billion (USD 88.5 million) or 2.9 percent in the same period of 2023. This was achieved through increased tourism-related revenues and a reduction in capital expenditures. However, the fiscal outlook remains fragile, with expenditure arrears accumulating due to delayed disbursements, particularly in infrastructure and fisheries.
Public debt has surged to 115.7 percent of GDP in 2024, up from 109.7 percent in 2023, driven by borrowing for infrastructure projects and rising debt service costs. Nevertheless, Maldives has secured financial assistance from key partners, including Saudi Arabia and India, to alleviate immediate liquidity concerns. India’s provision of a USD 400 million currency swap facility and the extension of treasury bond maturities has been particularly helpful in managing short-term fiscal pressures.
One of the most pressing challenges for Maldives is the sharp decline in foreign exchange reserves, which dropped from USD 590.5 million at the end of 2023 to USD 443.9 million by August 2024. Usable reserves have fallen to a critically low USD 61.2 million, covering just one month of imports; the lowest level since 2017. This sharp decline poses a significant liquidity risk, especially as external debt service obligations continue to rise.
To address this issue, the Maldives Monetary Authority (MMA) has introduced measures aimed at easing foreign exchange liquidity, though the full effectiveness of these interventions remains to be seen. The government is also negotiating with China and the UAE to restructure portions of its external debt, providing further relief.
In addition to its economic challenges, the Maldives faces long-term existential threats due to climate change. The World Bank’s report emphasizes that sea level rise and coastal flooding brings serious risks to the country’s infrastructure and ecosystems. Without adaptation efforts, sea level rise could damage up to 3.3 percent of Maldives' total assets by 2050 during flood events. Deterioration of coral reefs and declining fish stocks could also severely impact the tourism and fisheries sectors, which together account for nearly half of the nation's GDP.
Maldives is actively investing in climate resilience through green infrastructure and nature based solutions like coral reef restoration and sustainable tourism practices. These efforts not only preserve the country’s natural beauty but are essential for safeguarding the long-term viability of its tourism and fisheries industries.
As the government works towards fiscal consolidation, any austerity measures such as the removal of subsidies on fuel, electricity, and essential goods are expected to have significant social impacts. Inflation is projected to rise from 2.3 percent in 2024 to 7.8 percent in 2025 before moderating to 4.5 percent in 2026, driven by the government’s planned removal of blanket subsidies.
Without targeted cash transfers, the removal of subsidies could nearly double the national poverty rate. Vulnerable households, particularly those with more than three children or headed by single parents, are expected to bear the brunt of these economic adjustments. The World Bank projects that poverty could increase from 2.5 percent to 4.6 percent nationally and from 4.8 percent to 8.3 percent in atolls outside the capital if subsidies are withdrawn without adequate compensation.
To mitigate these impacts, Maldives is exploring targeted cash transfers as a crucial tool for maintaining social stability during the transition. Additionally, the government is shifting towards a more progressive tax regime, with plans to raise the Airport Development Fee, Departure Tax, and Green Tax.
The government’s focus on reforming state-owned enterprises, improving the efficiency of the health insurance scheme (Aasandha), and curbing capital expenditures are positive steps towards long-term fiscal sustainability. Further reforms, such as capturing more value from international booking platforms in the tourism sector, could provide much needed revenue, the report states.
Diversifying the economy is also critical to reducing the country’s reliance on tourism and building resiliency against external shocks. Investment in renewable energy, offers a promising path forward, including measures to shift to clean energy which would not only reduce the country’s dependence on costly fuel imports but also free up fiscal resources for essential areas like healthcare, education, and climate adaptation, the report adds.
While the Maldives faces challenges in steering its economy to calmer waters, it is also uniquely positioned to build a sustainable and resilient future. By prioritizing economic diversification, strengthening social protection measures, and implementing climate-resilient policies, the Maldives can navigate its current challenges and emerge stronger in the years to come.
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