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Country Report Maldives

Country Report

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On the back of a recovery of the all-important tourism sector, GDP growth is picking up. Political stability has returned in the short-term following the victory of President Yameen and his PPM party in the 2013 presidential elections and the March 2014 parliamentary elections.

Strengths (+) and weaknesses (-)

(+) Natural endowments support income levels

The Maldives natural beauty makes it an attractive tourist destination while its abundant sea fauna provides a solid backbone to the fishery industry. On the back of these pillars, average income levels have risen to relatively high levels compared to South Asian standards.

(-) Narrow economic base

Aside from the tourism and fishery sectors, and sectors that support these industries, the Maldives economy is underdeveloped. This makes the economy vulnerable to external shocks, which mainly impact the all-important tourism industry.

(-) Large twin deficits

As the Maldives has to import nearly all capital and consumer goods, the country’s trade deficit is extremely wide (about 50% of GDP). Fiscal deficits are chronic (roughly 5% of GDP in 2013) and have led to an increased public debt level (about 47% of GDP in 2013).

(-) Weak institutions

The Maldives political and judicial institutions are very weak, which increases the chance of political turmoil and expropriation risks for foreign investors.

Key developments

1. Growth is recovering on the back of tourism

Real GDP growth picked up to 3.7% in 2013, from a meagre 1.3% in 2012, on the back a significant improvement of the performance of the important tourism sector. Due to a particularly strong rise in tourist arrivals from China – which provides 30% of total visitors to the Maldives – total tourist arrivals grew by 17.4% in 2013. On the back of a well-performing tourism sector, the transportation, retail and wholesale, and communication sectors also grew soundly. Solid growth in the tourism sector is forecast to push up GDP growth to around 4.5% in 2014 and 5% in 2015.

2. Current account deficit narrows, but the external liquidity position still forms a key risk

The Maldives continues to struggle with large trade and current account deficits. The trade deficit is very wide at around 50% of GDP. Helped by a widened tourism related surplus on the services balance, the current account deficit narrowed from 23% in 2012 to around 20.5% of GDP in 2013, which can still be considered very high. Annual FDI inflows, equal to roughly 8.5% of GDP, provide some cover of the current account deficit. However, given the country’s low FX reserves level – import cover is a mere 1.9 months– external shocks that hurt tourism income or FDI inflows puts the Maldives at risk of a balance of payments crisis.

3. Political landscape stabilises

President Abdulla Yameen won the 2013 presidential elections after a second-round runoff against former president Mohamed Nasheed. Backed by the courts, Yameen was able to push back the presidential elections until he had gathered sufficient support. Nasheed – the first-ever democratically elected president of the Maldives - had resigned from his position in 2012 after – what he calls – a coup. However, Nasheed accepted his defeat in the 2013 elections, which has reduced the risk of political unrest. Yameen’s party, the PPM, won the 2014 parliamentary elections and now dominates the political landscape, which has increased political stability in the short term.

Factsheet of the Maldives
Factsheet of MaldivesSource: CIA World Factbook, UN, Reporters Without Borders, World Bank.

Background information

The Maldives is an island archipelago in the Indian Ocean. Due to their remarkable natural beauty, it is an attractive tourist destination, attracting more than 1 million tourists a year. The tourism sector and its supporting sectors are the backbone of the economy and the main growth drivers. On the back of tourism income, income per capita has risen to level that are relatively high in South Asian context. However, at the same time, income inequality is high. The fishery sector is another important pillar of the economy, and is stable in growth terms. The Maldives has a noticeable role – especially for its size – in the global climate change debate, as the country is deemed the most vulnerable in the world to rising sea levels because of its low level of elevation above sea level.

The political scene of the Maldives was dominated by Muamoon Abdul Gayoom between 1978 and 2008, who won six consecutive one-party elections. Following the adaptation of a new constitution in 2008, Mohamed Nasheed became the first democratically-elected president of the country. Events in 2012 showed that the country’s courts continued to align with former president Gayoom. After a top judge was fired, which sparked street protests, Nasheed resigned. Nasheed himself classified the events as a coup d’état, but this was disputed by a Commission of National Inquiry that was backed by the Commonwealth. The 2013 presidential elections were again characterized by a questionable role of the country’s institutions, as presidential candidate Abdulla Yameen – the half-brother of former president Gayoom - was able to use the courts to delay the elections until he had gathered sufficient electoral support. The first round of the elections, for instance, was annulled by the Supreme Court and following election rounds were also delayed. In November 2013, Yameen eventually narrowly won the second-round runoff with Nasheed, who accepted his defeat peacefully. Yameen’s Progressive Party of the Maldives (PPM) won the March 2014 parliamentary elections and President Yameen now dominates the political landscape as a result.

Economic indicators of the Maldives
Economic indicators of MaldivesSource: IHS, World Bank
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