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Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia : South Asia
Maldives The economy returned to the rapid growth seen in the 1990s, after tepid gains in the 2 previous years. Future economic performance and poverty reduction will depend not only on further development of the tourism sector, but also on diversification of production and on outer atoll development. Economic Assessment The economy grew by 8.4% in 2003, marking a nearly full recovery from the adverse effects of the September 11 events on tourism. The sector accounts for about one third of GDP and contributed more than half of GDP growth during the year. Tourist arrivals reached a record number of nearly 564,000 in 2003, up by about 16% from the 2002 level (Figure 2.17). Fiscal performance improved in 2003 and the overall deficit was reduced to 4.1% of GDP from 4.9% a year earlier. Domestic revenues increased by 12.8%, while expansion in expenditures and net lending was held to 10.0%. The Government continued development of the large infrastructure Hulhumalé project, which is reclaiming land and developing a new town on an island close to Malé, the capital city. A reduced overall deficit and somewhat larger foreign financing of capital expenditures allowed a net repayment to the Maldives Monetary Authority. Monetary conditions in 2003 were characterized by an expansion of 14.6% in broad money (M2) reflecting a large increase in net foreign assets. Growth in credit to the private sector slowed from the 2002 rate because of the reduced needs of the tourism sector as its cash flow improved; credit to other sectors showed a marked improvement, however. Average consumer prices fell by 4.0%, reflecting lower prices for fish-an important staple-and imported goods. Exports and imports grew rapidly by 12.8% and 18.1%, respectively, pushing up the historically large trade deficit by about $45 million to $258 million. With the improvement in tourism, the current account deficit rose only by about $12 million to $48.1 million (6.9% of GDP). Expansion of private sector capital inflows and larger official assistance led to a higher capital account surplus of $103.6 million. Accordingly, the overall balance posted a surplus of $55.5 million, about $15 million higher than in 2002. Official reserves reached $161.0 million at end-2003, providing comfortable import cover of 4.1 months. External debt rose to $264.2 million at end-2003, equivalent to about 38% of GDP. With most debt contracted on concessional terms, the debt service ratio in the year was low at 3.9%. Policy Developments Larger fiscal deficits in recent years financed by the Maldives Monetary Authority posed a potential threat to the fixed exchange rate system, and so the Government took steps to achieve fiscal consolidation during 2003, in part by expenditure control. Moreover, the Government intends that domestic financing of future deficits be carried out only by market sale of securities. To enable more comprehensive and up-to-date control over public expenditures, initial actions have been taken to introduce a new public accounting system. Draft bills have been processed and are awaiting the endorsement of the President’s Office before submission to the People’s Majlis, including a public finance bill, a public enterprise accountability bill, as well as amendments to the Audit Bill. The Government has also taken steps to expand the tax base, and is planning to enact a business profit tax and a property rental value tax. With the involvement of the World Bank and IMF, a public expenditure management and budgeting workshop was held in June 2003, and the preparation of a medium-term expenditure framework began in March 2004. From 2005, government budgets will be formulated on this basis and all line ministries and agencies will prepare multiyear estimates showing not only capital spending but also estimates of required recurrent expenditures. To improve conditions on the outer islands, atoll development plans are being formulated with the participation of island communities in selected atolls to guide atoll- or region-based economic and social development. In tandem with these moves, the Government will plan cost-effective infrastructure spending to spur regional economic growth by investing in the areas of regional airport upgrading, resort development, and harbor and marina construction. Outlook for 2004-2005 Economic performance will remain reliant on tourism, and the uptrend in tourist arrivals is expected to continue. In this regard, efforts are under way to attract more tourists from markets outside Europe (currently accounting for about 70% of arrivals). The Government’s Hulhumalé project and regional development programs are expected to continue to spur domestic demand for local construction and transport. With tourism now recovered from its slump, GDP is projected to grow more moderately, by 5.5% in 2004, and is likely to come close to that rate the following year. The overall budget deficit for 2004 is projected to widen to 4.5% of GDP, with domestic financing of only 0.3% of GDP. Tax revenues are budgeted to rise by 10.7% from the 2003 level, reflecting rate increases in the tourist bed tax and stamp duty. Total expenditures and net lending are planned to rise by 7.6%, with current expenditures up by 13.5% (mainly due to higher salaries and allowances), and capital expenditures down by 5.5%. More rapid growth in the world economy and favorable developments in tourism are expected to keep the current account deficit at manageable levels. A major factor in favorable balance-of-payments developments to date has been the availability of concessional aid and consequent avoidance of a heavy debt service burden. The eligibility of the country for maintaining its least developed country status is currently being reviewed by the Economic and Social Council of the UN, and a decision is expected by mid-2004. Graduation from this status would have a direct impact on growth in debt servicing. It is important that the Government keep gradually moving from substantial direct participation in the economy by privatization, enhancing private sector participation, and broadening the production base. As part of the process of economic diversification, the Government has formed several working committees to develop plans on how to diversify the industrial base as well as export products and markets.
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Neither the Iraq conflict nor the SARS threat appeared to have great negative impact; indeed, hotels were over 90% occupied in the first quarter of 2003. The fisheries sector, the traditional economic mainstay, experienced a 5% decline in catch from the high 2002 level. Despite this, marine exports increased by over 35%, reflecting stronger export prices and larger volume, and were responsible for most of the overall increase in total exports in 2003.
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