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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program Update 2005–2006: Maldives
I. Current Development Trends and IssuesA. Recent Political and Social Developments1. After a period of relative political and social stability, civil protests broke out in the capital of the Maldives in September 2003. In October 2003, President Maumoon Abdul Gayoom was reelected for a sixth term in a presidential referendum. Gayoom promised that his administration would change the judiciary, the executive, and the powers of the parliament over the next 5 years to improve public-sector efficiency and good governance. In December 2003, the Government established the Human Rights Commission, and on 9 June 2004 the President invited wide public participation in the process of the proposed constitution reform. A special Maj’lis has been established in May 2004 to process the proposed reforms. 2. The Maldives has a narrow economic base relying on two key sectors: tourism and fishing. After Gayoom’s re-election in October 2003, the Government began restructuring public services and undertaking policy reforms and strategy formulations in key sectors, realizing the urgent need to diversify its economy both to reduce its vulnerability to external shocks and to generate more employment, especially for the poor and youths in the outlying atolls. The Government restructured several ministries in late November 2003. The Government has also been fully aware of the need for appropriate national strategies to cope with the negative impacts of the country’s potential graduation from its status as a least-developed country (LDC). 3. For the Maldives, poverty reduction primarily means reducing regional disparities. Poverty in the country is related to remoteness of the islands from the center and a lack of services in the atolls. The Government continues to prioritize the promotion of regionally balanced economic growth, with benefits spread more widely and equitably. Actions to start a number of atoll development projects have been initiated and several projects have been implemented. Appendix 1, Table A1.1, indicates the country's progress toward the Millennium Development Goals and Targets. B. Economic Assessment and Outlook4. The Maldives’ economy recovered toward the end of 2002 after experiencing ill effects from the events of September 2001. Economic recovery continued in 2003. The Maldives’ gross domestic product (GDP) grew 8.4% in 2003 after growing 6.5% in 2002. Tourist arrivals in 2003 reached a record high of 563,593—an increase of 16.3% over 2002—in spite of the war in Iraq and the threat of severe acute respiratory syndrome (SARS). The tourism sector is still the most important sector in the Maldives’ economy, contributing more than 30% to GDP. Fish landings in 2003 decreased by around 5% from 2002; however, fishing still accounts for about 7% of GDP. Fish exports increased significantly during 2002 and 2003 in terms of both volume and value. 5. Total government revenue and grants increased by 12.8% in 2003. Government revenue increased 3.8%—reflecting favorable economic developments—while the amount of grants received during the year declined 7.6%. Total expenditure grew 12.6% in 2003, up from 7.7% in 2002. The fiscal position for 2003 improved compared to 2002; the overall deficit declined from 4.9% of GDP in 2002 to 4.1% in 2003. A major part of the deficit was financed externally. Major foreign-financed projects in the 2003 budget include the Hulhumalé housing and infrastructure project and upgrades to the Gan airport. Starting 2004, the Government is planning not to recourse to automatic financing from the Central Bank for cash flow management during the year, but to use market based methods through treasury bills and bonds for such needs. 6. The performance of the external sector in 2003 was positive. Total exports and imports in 2003 increased by 12.8% and 18.1% respectively, over the 2002 level. The trade deficit increased by 21% because of a large amount of imports. The current account deficit for 2003 increased to $48.1 million, or 6.9% of GDP, up from 5.6% in 2002. As in 2002, there has been an increase in disbursement of official development assistance (ODA) and an increase in private-sector capital inflows. Accordingly, the balance of payments posted a surplus of $55.5 million, up $15.7 million from $39.8 million in 2002. Official reserves reached $161 million at end-2003, providing cover for nearly 4.1 months of imports. External debt rose to $264.2 million at end-2003, equivalent to about 38% of GDP. Debt service ratio was about 3.9%, with most debt contracted on concessional terms. 7. The performance of the Maldives’ economy will continue to depend heavily on tourism. Although future growth is expected in tourism, the sector is vulnerable to external factors. Consistent with the Strategic Economic Plan (SEP), the Government is committed to promoting economic diversification as a means to increasing income generating activities, especially for the atoll population. As part of the economic diversification process, the Government has formed committees to develop plans to diversify exports and the industrial base. Future economic performance will also be influenced by the Maldives’ possible graduation from LDC status. Graduation will have a direct impact on the debt burden because grant-dominated assistance blend would shift toward higher-cost loans. C. Implications for Country Strategy and Program8. The Asian Development Bank’s (ADB) country strategy and program (CSP) and poverty reduction partnership agreement (PRPA) of 2002 both prioritize (i) regional or atoll development by improving physical and public infrastructure; (ii) reduction of economic vulnerability by diversifying economic activity; (iii) pro-poor growth by assisting in developing the region, creating an enabling environment for private-sector development and new sources of employment and growth; (iv) support to good governance especially in improving public sector management efficiency and in promoting legal and judicial reforms; and (v) raising the level of social development through support to postsecondary education and employment skills development. The strategy outlined in the 2002 CSP, and made more specific in the following CSPUs, remains relevant to the country’s development needs and should continue to be pursued. The key principles in the ADB President’s planning directions for operational programs for 2004-2007 will also be followed: (i) strong ownership by developing member countries (DMCs); (ii) greater selectivity; (iii) results-based programming, focusing on improving portfolio management; and (iv) partnership with other development partners. 9. The Maldives’ eligibility to maintain its LDC status depends on the Economic and Social Council (ECOSOC) of the United Nations (UN), whose meeting on this issue is tentatively scheduled for mid-2004. If ECOSOC decides the country is to graduate, a grace period will likely be granted to enable the government to prepare a transition strategy. The Government is fully aware of the need for appropriate national strategies to cope with the negative impacts of graduation and has initiated preparative actions. Apart from a change in the source of funding, the Maldives’ graduation from LDC status will have little implication for ADB’s short- and medium-term operations. ADB’s programs will continue to focus on promoting economic diversification and employment—especially in the atolls—by providing basic economic, public, and social infrastructure.
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