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p. 29 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Central Asian Republics The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : South Asia

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Maldives

The economy came under stress after the September 11th events, due to a fall in tourist numbers. The prospects are for continued weak performance in 2002 and beyond. Progress in accelerating growth will depend to some extent on developments in the global economy and on security conditions in South Asia.

Macroeconomic Assessment

The economy performed quite well during the first 8 months of 2001. However, particularly after the events of September 11th, it faltered, with the result that full-year growth fell from 4.6% in 2000 to 2.1%. Tourism—which accounts for more than one third of GDP and is the largest source of foreign exchange earnings—stagnated, due primarily to concerns over travel safety, as well as to declines in global consumer spending and confidence. In October and November 2001, tourist arrivals dropped off by 20.1% and 22.2%, respectively, compared with the corresponding months in the previous year (Figure 2.23). Overall, the tourism sector, which had shown annual growth of about 6% in recent years, declined by 0.5% in 2001. The downturn of the sector had spillover effects on the rest of the economy. Wholesale and retail trade contracted by 0.4% during the year. Transport and communications, the second largest sector, grew fairly strongly at 6.3%, but even this was significantly lower than the double-digit annual rates in 1996–1999. Other sectors, including fisheries, financial and business services, real estate, and retail trade, were weak, growing at 1% or less.

The fiscal deficit widened from 4.9% in 2000 to 5.3% in 2001, largely due to a rise in government expenditures to 41.3% of GDP from 40.8% in 2000. Monetary policy was more expansionary than in 2000, with money supply growth rising to 9% in 2001 from 4.1%. However, the consumer price index rose by only 0.7%, reflecting the sluggish economic performance.

On the external front, the trade deficit, already at over 40% of GDP, deteriorated by 3.6% from $233.3 million in 2000 to $242 million in 2001. The current account deficit worsened to $62 million, or 10.9% of GDP, in 2001 from $53 million, or 9.5% of GDP, in the previous year. Net nonmonetary capital inflows in 2001 amounted to $36 million, a 20% decline from the 2000 level. While inflows of official assistance increased, private capital inflows and net errors and omissions declined. In aggregate, the balance-of-payments deficit surged to $26 million in 2001 from $7.9 million in 2000. Foreign exchange reserves declined to $94.3 million at the end of 2001, sufficient to cover 2.9 months of imports.

Policy Developments

The Government made some important economic policy changes in 2001. First, the rufiyaa, pegged to the dollar under a de facto fixed exchange rate policy, was devalued on 25 July 2001 by 8% to Rf12.80 to the dollar from Rf11.77. A major reason for the devaluation was to respond to accumulated stresses in the foreign exchange market, including a premium of about 10% in the parallel market over the official exchange rate, a decrease in foreign currency deposits, and undue delays in traders obtaining foreign exchange for international transactions. The devaluation successfully eased pressure on the rufiyaa, resulting in the elimination of the parallel market.

Second, the Maldives Monetary Authority further liberalized financial markets, through measures such as the withdrawal in July of the bank-specific credit ceiling that was imposed on banks in 1995; the introduction in August of a Lombard facility (an emergency facility to provide liquidity in the interbank market) for commercial banks; and the elimination, also in August, of the 7 percentage point maximum spread between the rufiyaa deposit and lending rates.

Outlook for 2002-2003

In view of the slow growth in the global economy, especially in the main tourism markets after the September 11th events, the Government’s earlier projected 6% growth rate of GDP for 2002 is unrealistic. The health of the tourism sector will depend on recovery in the EU and Japanese economies, which are the major markets for Maldives tourism, and on an improvement in the security situation in South Asia. The tourism sector is unlikely to fully recover in 2002, though it has made some headway in the early months of the year. Initial projections indicate GDP growth this year of around 2%, with some upside potential, and inflation at around 1%.

The Government’s budget for 2002, approved by the People’s Majlis (or Parliament), was developed with balancing in mind, through streamlining nonurgent expenditures in light of an expected government revenue constraint stemming from a shortfall in tourism tax receipts.

On the external account, the services balance will weaken due to lower receipts from tourism, contributing to a worsening of the current account. However, a significant increase in the disbursement of official assistance is expected, which will help offset the weakening current account. Therefore, while tourism will remain under pressure in 2002, an immediate and acute deterioration of the balance of payments or the foreign exchange reserves is not currently foreseen. However, a close monitoring of the situation is warranted.

The recent completion of the Government’s Sixth National Development Plan should facilitate the process of poverty reduction, though an immediate reduction in the numbers of poor people may be difficult because of slow economic growth. For the long run, government initiatives to reduce poverty include establishing regional growth centers on the key atolls, promoting electrification on the outer islands, expanding education in the atolls, and developing SMEs. These measures are expected to have a significant impact on improving living conditions on the atolls and on reducing regional disparities between Male and the atolls.

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