Maldives

Tourism continues to drive growth

Economic growth seems to be stabilising after a period of high volatility due to the pandemic. Growth accelerated in 2024 thanks to a recovery in tourism (around 25% of GDP, 60% including related sectors) but remains below pre-pandemic levels (6.6% on average in 2010-2019) as other important sectors such as fishing, construction and manufacturing contracted. Some 1,492,027 tourist arrivals exceeded pre-Covid levels (2019) by 19% YoY over the January-September 2024 period. China remains the leading source of tourists (15% of total arrivals), followed by Russia (11%), and the UK (8%). While the number of tourists from these countries increased compared with 2023, the number of Indian tourists fell drastically (-40% year-on-year from January to September) due to diplomatic tensions between both countries since Mohamed Muizzu came to power. A widespread campaign to boycott the Maldives was launched in India, with Indians opting for alternative destinations such as Lakshadweep (an Indian archipelago in the north of the Maldives). However, the rise in the number of tourists from other regions offset the fall in the number of Indian visitors, with total arrivals climbing by 9.6% year-on-year in the January-September period. In 2025, growth will continue to be driven largely by tourism, with the Chinese in the lead, as the two countries appear to be forging closer ties. An upturn in Indian tourists is also probable given President Muizzu's visit to India in October 2024, but the level is unlikely to reach that of 2023. Moreover, reforms aimed at increasing tourism-related taxes could discourage some potential tourists from visiting the archipelago and the strong growth in tourist numbers could run out of steam.

The fishing sector is suffering from structural problems. Due to the government's emphasis on the tourism sector, its contribution to the economy (4% of GDP) has gradually diminished. Environmental challenges have harmed the marine ecosystem and, consequently, fish stocks. In addition, the sector has been impacted by supply disruptions, including strikes by Koodoo employees in February 2024 due to late wage payments by the Maldives Industrial Fisheries Company (MIFCO).

Headline inflation remained moderate at 0.8% year-on-year from January to September 2024, helped by reductions in water and electricity tariffs granted by state-owned enterprises in the first half of 2024. However, food prices rose by 6.1% over the same period, which may have had an impact on household purchasing power. In 2025, prices will come under slight upward pressure as targeted subsidies are set to replace price subsidies in the fourth quarter of 2024. But with commodity prices continuing to fall, inflation should remain at relatively low levels unless a sharp escalation in the Middle East conflict results in higher energy prices. Consequently, the Maldives Monetary Authority's (MMA) stance is unlikely to change and should remain accommodative.

Large twin deficits and a worrying debt situation

Despite a steady decline in the public deficit, the Maldives' fiscal situation remains critical. Since the 2000s, the public deficit has been below the 3% of GDP threshold for only three years (2003, 2004, and 2014). The pandemic exacerbated the problem, with a record deficit of 23.7% of GDP in 2020. The deficit declined in 2024 and is expected to narrow again in 2025 but should still remain high. In 2024, the fiscal deficit declined substantially thanks to higher tourism revenues and reduced capital spending due to financing scarcity. For the 2025 budget, the government anticipates a deficit of 7.8% of GDP with an expected economic growth of 6.4%. Housing seems to be the government's priority, with MVR 2 billion (USD 130 million) allocated to housing construction loans at a 5% interest rate, marking a record budget allocation for housing projects. The second-largest recipient of the budget is the health sector, with projects to build hospitals and improve the quality of medical care. The government plans to implement several cost-cutting measures, such as switching to a targeted subsidy system and reforming the Aasandha national health insurance scheme. In addition, President Muizzu decided to dismiss 228 political appointees. To boost revenues, the government plans to increase customs duties on cigarettes, airport taxes, green tax rates, and the Tourism Goods and Services Tax (TGST). However, major infrastructure projects will continue to generate substantial public spending which, combined with a high interest burden, will keep fuelling a high public deficit. The current account, which is structurally in deficit, is set to fall slightly but is likely to remain high. Tourism receipts should continue to fuel and support the services surplus, but high imports and low merchandise exports are having an impact on the goods trade deficit. The moderation in world commodity prices will do little to ease the burden of imports, given the massive need for equipment for infrastructure projects and the import of a large proportion of products for tourists. 

Public and current account imbalances pose a real financial risk as they generate debt. Public debt remains high and its financing is costly amid high borrowing costs. The elevated need for external financing weakens the currency peg. Foreign exchange reserves are very low (representing 1.1 months of imports in September 2024) and are eroded by the high value of imports and the defence of the rufiyaa's peg to the dollar on back of downward pressure. While the tightening of financial conditions has led the government to rely more heavily on domestic financing, domestic debt, which accounts for 55% of total public debt, consists mainly of short-term treasury bills, thereby harbouring inflation and refinancing risks. Furthermore, credit rating downgrades by credit agencies (Fitch and Moody's) have restricted or compromised the Maldives' access to international financial markets. China and India are the main creditors of the Maldives’ external debt, with the Export-Import Bank (Exim) of China and Exim India, respectively, holding 20% and 18% of the total Budgetary Central Government External Debt in Q1 2024. In October 2024, the Maldives came close to defaulting on USD 500 million worth of Sukuk bonds (Islamic bonds), but India's help prevented default by providing a USD 50 million interest-free loan to pay the coupons. While foreign reserves are also worryingly low, a currency swap agreement valid until June 2027 has been announced following official discussions between the countries’ leaders. Under this currency swap agreement, the MMA is eligible for financial support from the Reserve Bank of India (RBI) of up to USD 400 million under the dollar/euro swap window and 30 billion rupees (USD 356 million) under the rupee swap window.

The Maldives, a battle for influence between China and India

Mohamed Muizzu of the People's National Congress (PNC) party won the September 2023 presidential elections, defeating incumbent President Ibrahim Solih with 54.06% of the vote in the run-off contest. In April 2024, the PNC won a parliamentary supermajority in the People's Majlis with 66 seats, while its allies won 9 seats, giving the President the support of 75 legislators out of the 93 members of the Majlis. Muizzu was able to step into power owing to the loss of popularity of Solih’s Maldivian Democratic Party (MDP), which had been criticised for corruption allegations and complacency towards India. Muizzu was elected on the “India-Out” slogan, which was in blatant contradiction with Solih's “India-first” policy. After taking power, Muizzu ordered the withdrawal of 89 Indian soldiers and their support staff from the Maldives. The new President is seen as taking a pro-China stance. In January 2024, Muizzu visited Beijing and signed several new agreements with China on infrastructure, agriculture, climate resilience, and others, reinforcing the close ties between the two countries.

But that does not mean the Maldives and India have cut their ties. The Maldives is a valued partner due to its position on the international trade routes of the Indian Ocean. The archipelago is therefore the stage for a war of influence between Asia's two largest economies: China and India. Bargaining power with India remains limited, particularly amid a very high risk of debt default. India's boycott campaign has deprived the Maldives of an important source of tourists, and India remains an important development and funding partner for the archipelago and has always been ready to provide a financial helping hand. Hence, Muizzu's visit to India in October 2024 is seen as a reversal of his previous stance on relations with India. With the elections behind him, Muizzu can afford to maintain a balance in relations with both countries without fear of political repercussions. The meeting between Mohamed Muizzu and Narendra Modi resulted in several trade and currency swap agreements between the two countries, as well as the approval of India's deployment of defence platforms in the Maldives a few months after the withdrawal of Indian troops.

Last updated: November 2024