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p. 32 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka The Pacific III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia : South Asia

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Maldives

The economy slowed in 2000, partly because of weakness in tourism and fisheries. Sustained economic growth requires fiscal consolidation, financial market development, and skill enhancement of the labor force.

Recent Trends and Prospects

The economy decelerated to 4.2 percent growth in 2000, compared with annual average growth of 7–9 percent between 1995 and 1999. The slowdown was general, and affected the leading sectors of tourism and fisheries. The Government undertook development and infrastructure projects to supplement aggregate demand but their impact was limited. Per capita income increased substantially between the early 1990s and 2000. Sound economic management and slower population growth have been largely responsible for this boost in living standards.

The tourism sector was weak. Although total tourist arrivals in 2000 increased by 8.7 percent, compared with the previous year, the impact was partly offset by a decrease in the length of average stay. In addition, the national capacity utilization rate has declined over the past three years because 13 new resorts have been opened. This underutilization of bed space resulted in a competitive reduction in room rates, and therefore the actual contribution of the sector to the economy was stagnant. However, the direct contribution of tourism to fiscal revenue through bed taxes and lease rents increased. The poor performance of the fisheries sector was due to a reduction in the fish catch, which had been exceptionally high in 1998 and 1999.

The fiscal deficit as a proportion of GDP fell marginally from 4.1 percent in 1999 to 4.0 percent in 2000, due to government measures to reduce expenditures coupled with greater than expected revenues from various sources. In recent years, the fiscal deficit has been monetized through borrowing from the central bank. Inflation has been kept in check since sound fiscal management measures were introduced in 1994, and declined from 3.0 percent in 1999 to show price deflation of 1.1 percent in 2000. The key items that contributed to this deflation were food, beverages and tobacco, and clothing and footwear.

Monetary policy in 2000 aimed at facilitating sustained economic growth and maintaining government reserves at a comfortable level. The central bank relied on direct monetary policy instruments such as interest rate controls, credit limits, and a reserve ratio to control money supply growth. Total liquidity increased by 9.1 percent in 2000, but government borrowing crowded out the private sector to a large extent. Continued borrowing from the central bank drove total government debt up to 15.1 percent of GDP in 2000.

In the external sector in 2000, exports rose by 13.2 percent while imports fell by 1.0 percent. Despite falling international fish prices, a substantial rise in export volumes of canned and dried fish generated an increase in exports. Higher world oil prices in 2000 did not affect imports significantly because of the slowdown in the economy. The trade deficit fell from 45.1 percent of GDP in 1999 to 39.1 percent in 2000. On the services account, the increase in tourist arrivals contributed to a surplus. Correspondingly, the current account deficit decreased from 11.1 percent of GDP in 1999 to 4.6 percent in 2000. The overall balance also improved, due to a stronger inflow of foreign grants and loans. Estimates for the end of 2000 indicate that the Government’s foreign exchange reserves could pay for 4.3 months of imports of goods and services, compared with 4.4 months at the end of the previous year. The total external debt position improved slightly from 36.6 percent of GDP in 1999 to 36.2 percent in 2000. External debt comprised almost entirely medium- and long-term debt. The debt-service ratio of 3.7 percent in 1999 deteriorated slightly to 3.8 percent in 2000.

GDP growth for 2001 is projected at 5.7 percent largely on the back of tourism expansion. Major marketing and promotional campaigns that were conducted in 2000 are expected to pay off in the next few years. Tourist arrivals in 2001 and 2002 are projected to increase by 8 percent. The excess supply of beds should fall as demand picks up, raising profit margins. The proposed liberalization of the fisheries sector in 2001, including the skipjack fishery that accounts for over 85 percent of the total catch, will encourage competition and enhance efficiency, thereby increasing earnings from the sector. As part of liberalization moves, the monopoly enjoyed by the government-owned Maldives Industrial Fishery Company in exporting canned tuna will be gradually dismantled. These measures are expected to increase both value added in the sector and export earnings. However, if world fish prices remain depressed, the benefits of liberalization will be delayed, perhaps until 2002 or even later.

Although a balanced budget has been proposed for 2001, the Government expects to make considerable savings and to pay back part of the outstanding debt to the central bank. The liberalization of the fisheries sector is likely to increase private sector investment, hence royalty payments to the Government should rise significantly. Revenues from licenses and fees are also expected to improve. In addition, measures introduced in 2000 to control expenditures will be strengthened and this should help minimize pressures on the budget.

Issues in Economic Management

Financial sector reform becomes more critical for sustainable growth as the Maldives becomes more integrated into the world economy. The country has experienced several years of continuous economic growth supported by sound economic management. However, current macroeconomic indicators suggest that the country’s future growth performance may be hindered by limitations in long-term credit required for further expansion. Understanding this, the Government, to meet short-term credit needs, is making preparations to issue treasury bills to replace the system of automatic deficit financing through the central bank. To enhance long-term savings, it is pursuing the development of life insurance companies and pension funds. The establishment of a capital market would encourage financing of investment through the issue of long-term bonds and shares. This will ease the current pressures on financing new businesses and commercial undertakings, and stimulate the private sector to take more part in economic development.

Another area that the Government needs to emphasize is the expansion of its revenue base. At present, about 42 percent of its revenue is generated by tourism taxes and import duties. Past deficit financing has increased government debt to undesirable levels. Identifying additional sources of revenue is, therefore, critical if the Government’s social and infrastructure development programs are to continue uninterrupted, as its ability to finance future expenditures in excess of revenues is limited. Several new sources have, in fact, already been identified, such as new taxes on property rental value and corporate income to make the revenue system more resilient to external shocks affecting receipts from tourism taxes and import duties.

Policy and Development Issues

Labor market issues represent a big challenge for the Government. An increase in labor demand accompanying the high economic growth of the last decade has driven the labor market tighter. A recent increase in labor demand has been met by expatriates from neighboring countries, despite more restrictive government measures on foreign recruitment. Currently, over 27,000 expatriates work in the Maldives, more than 75 percent of them in sectors such as tourism and construction that require unskilled and semiskilled workers, where many Maldivians are reluctant to work. On the other hand, a significant number of students are expected to enter the job market in the next few years, and the Government needs to prepare an environment to accommodate them.

Enhancing the skill level of the labor force is one of the key components not only for reducing unemployment, but also for improving economic competitiveness and long-term development goals. The Government has taken several initiatives in this area. To provide cheaper and affordable opportunities for higher education, it has established the College of Higher Education, and is making efforts to affiliate it with recognized international universities in conducting appropriate degree-level programs. It is also trying to enhance the skill level of the workforce through vocational training. In addition, it will start the implementation of a third training and education project to develop human resources, encouraged by the effectiveness of two previous projects in this field.

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