Maldives economy continued to recover strongly in 2022, driven by a rebound in tourism while poverty is expected to return to pre-pandemic levels by end of the year, says World Bank.
The bank in its recent Maldives Development Update (MDU) notes the number of tourist arrivals grew by 42.9%, in a year-on-year basis, during the first eight months of 2022. A decline in arrivals from Eastern Europe and Russia was offset by other markets, particularly Western Europe, India, and Middle East countries.
Moreover, formal sector employment and wages picked up with strong economic rebound. However, information sector jobs showed weaker recovery, which was according to the World Bank, concerning.
Commodity Price Hit, Pressure on Domestic Inflation
According to the bank’s MDU, Maldives was hit by the surge in global commodity prices, putting pressure on domestic inflation, government’s fiscal position and the balance of payments. Maldives inflation rate climbed to 5.2% in June 2022, before dropping to 2.5% (year-on-year basis) in July 2022, compared to the 0.5% in 2021.
Due to the blanket subsidies provided on fuel and food items, government is facing significant pressure to continue financing the subsidy program in its current form. Merchandize trade deficit has widened considerably this year – with fuel imports climbing to over 14% of the GDP in first half of 2022 compared to on average 8% of GDP in 2020-21 period. According to World Bank, this is exerting considerable pressure on official reserves that have fallen by 9.6% since end-2021, declining to USD728 million in July and only sufficient to cover 2.7 months of imports compared to 3.8 months at end-2021.
Fiscal Performance Constraints
According to the bank, despite the increase in tourism related revenues, overall fiscal performance is being constrained by the “sharp rise in subsidies and interest payments.” Due to the increase in global commodity prices, government’s spending on food and fuel subsidies, of USD112 million in 2022-first half, already substantially exceeds the USD92 million that was budgeted for the whole 2022.
Interest payments have jumped up and are already at USD115 million, or 3.8% of the GDP for the first half of 2022, compared to the annual average of USD85 million or about 2% of GDP in the 2014-19 period. This is being driven by the large increase in domestic interest payments and the additional burden of external commercial debt, which is likely to be “even more demanding in the medium-term.”