World Bank Biannual Report Flags Economic Concerns for Maldives Amid Escalating Debt

The World Bank’s recent biannual update has raised concerns regarding the economic stability of the Maldives, citing risks associated with escalating public debt and the pressing need for significant fiscal adjustments.

The report forecasts a modest growth of 4.7 percent for the Maldivian economy in 2024, a figure lower than previous estimates, indicating a slowdown in growth momentum across various sectors.

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The World Bank highlighted vulnerabilities in the Maldives’ economy, particularly in terms of external factors and fiscal policies. It stressed the potential consequences of failing to implement necessary fiscal reforms, warning of the likelihood of increased debt risks.

Despite an uptick in tourist arrivals, the report notes challenges such as reduced spending per tourist and shorter stays, which have tempered the anticipated positive impact on the overall GDP growth.

The necessity for fiscal consolidation is underscored in the report, with anticipated repercussions including subsidy reforms impacting real household incomes, alongside reduced government spending and investment.

Of particular concern is the escalating public debt, which stood at USD 8 billion in 2023, equivalent to 122.9 percent of GDP. The World Bank cautioned that without comprehensive fiscal adjustments, the country faces a trajectory of rising debt levels, posing risks to debt sustainability and external vulnerabilities.

Projections indicate a significant spike in debt servicing needs, with average annual requirements expected to reach USD 512 million for 2024 and 2025, followed by a substantial increase to USD 1.07 billion in 2026.

The report advocates for a multifaceted approach to address these challenges, including spending cuts, reprioritization of public expenditure, and enhanced revenue mobilization. It emphasizes the urgency for the government to implement its fiscal reform agenda and communicate effectively with citizens to ensure successful implementation.

In addition, the report stresses the importance of establishing mechanisms to mitigate potential adverse effects on vulnerable groups and address widening inequalities resulting from fiscal tightening, particularly between urban and rural areas.

Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka, underscored the criticality of implementing the government’s fiscal reform agenda to sustain economic growth. He highlighted the World Bank’s commitment to supporting Maldives in these efforts, including developing targeted mechanisms to support the poor and vulnerable.

Furthermore, the report recommends diversifying the economy to reduce reliance on tourism, advocating for measures such as reducing the role of state-owned enterprises, promoting private sector involvement, and fostering job creation in the private sector.