Regions and Countries

	Table of Contents
p. 2 of 19 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Maldives : I. Country Performance Assessment

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A. Economic Performance Assessment

1. Being a small island economy, Maldivian economic development has been constrained by its limited agricultural and mineral resources and the small size of its domestic market.¹ These factors have resulted in a high dependence on two sectors, fisheries and tourism, which account for more than two thirds of foreign exchange earnings and one fourth of Government revenue, and in the early 1990s, triggered macroeconomic instabilities, with high budget and balance of payments deficits accompanied by double-digit inflation. The Government adopted a macroeconomic stabilization package in 1994 centered on tightening fiscal and monetary policies. Assisted by a rebound in the tourism and the fisheries sectors, the economy recovered rapidly. During 1996-1999, the economy grew by 8-9 percent. Per capita gross domestic product (GDP) at 1999 current market prices is estimated at $1,415.

2. The recent strong performance of the economy resulted from favorable developments in transport, communications, utilities, tourism, fisheries, and manufacturing. Real GDP grew by 8.5 percent in 1999, with tourist arrivals increasing at 8.6 percent to 429,666. Increased growth in tourism continued to facilitate the expansion of construction, the growth of transportation, and the development of basic infrastructure facilities. Although the fisheries sector remained buoyant, fish export earnings declined as fish prices fell in the international market. Being the principal food item in Maldives, the increase in fish production favorably affected inflation, with the annual average inflation rate estimated at 3 percent in 1999.

3. Fiscal deficit worsened in 1999 to 6.6 percent of GDP due to an overall wage increase in public sector employees compared to 2.0-3.8 percent during 1996-1998, but still commendable achievement compared to the early 1990s, when the annual overall deficits were constantly over 10 percent of GDP. The revenue side remained vulnerable to external development, due to its heavy reliance on import duties and tourism tax. The Government is working to introduce a business profit tax and a property rental value tax to broaden the current tax base and to enhance capacity of customs services to improve duty collection. Defence expenditures continue to account for negligible portion of overall fiscal expenditures. The current account deficit deteriorated to 17.8 percent of GDP in 1999 compared to 6.8 percent in 1998, mainly due to increased imports associated with tourism sector investments. This was, however, more than offset by private capital inflows, which increased the official reserves to about $129 million, equivalent of about four months of imports.

4. During the first half of 2000, the macroeconomic performance was favorable. Tourism continuing to be the driving force for economic growth, with tourist arrivals being totaled about 234,174 persons from January to June 2000, about 8 percent increase compared to the same period in 1999. The occupancy rate of resorts and hotels declined due to the recent opening of new resorts. However, the fisheries sector showed a sing of slow down. Total fish catch during the first half of 2000 was 52,039 tons, a decline of about 21 percent compared to the same period in 1999.

5. In its 2000 budget, the Government aims at reducing the budget deficit to 1.5 percent of GDP from 6.6 percent in 1999. However, fiscal conditions have deteriorated during the first half of 2000. This is largely attributed to the increased need for Government expenditures and the less than expected import duty collection resulting from slower growth of imports. Inflation averaged about 0.7 percent in the first half of 2000, largely supported by the fall in food prices.

6. While the country remains vulnerable to external shocks because of its dependence on tourism and fishing, the economic outlook for the medium term remains promising. Growth is projected at 7.6 percent in 2000, mainly strengthened by a continued increase in tourist arrivals. Inflation is expected to average about 3 percent in 2000 and beyond, because of prudent macroeconomic policy stance and favorable external conditions. The current account deficit in 2000 is estimated at about 13 percent of GDP, an improvement over the 17.8 percent in 1999.

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