Regions and Countries

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Country Strategy and Program Update 2006–2008: Maldives

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Current Development Trends and Issues

A. Recent Political and Social Developments

1. When the deadly Asian tsunami struck the Maldives in December 2004, the country was in the midst of important political and social reforms. Six months earlier, President Maumoon Abdul Gayoom had outlined a program of constitutional changes to delegate powers and permit political parties. A People’s Special Majilis (Parliament) was established to oversee the constitutional reform process, and the President invited broad public participation. However, in response to civil protests, the Government declared a state of emergency in mid-August 2004, which lasted almost 2 months.¹ In early September 2004, the President restructured the cabinet and relinquished two portfolios he had held since 1978: Minister of Finance and Treasury, and Minister of Defense.

2. The tsunami created a disaster of national proportion. Three hours after tremors were felt from the massive earthquake off the coast of Sumatra in Indonesia on 26 December 2004, high waves hit the coastline of the Maldives at approximately 0430 GMT (0930 local time). Although the human toll was relatively small (83 people dead, 25 missing), the tsunami affected almost the entire country. Of the 198 inhabited islands in the archipelago, 14 were destroyed— requiring the evacuation of inhabitants—and another 39 suffered severe damage. In all, the tsunami displaced about 15,000 people from their island homes. The force of the waves devastated shelter and infrastructure across many atolls. The resulting floods wiped out electricity on many islands, and destroyed major communication links. Many islands experienced water shortages, with about 15% of them reporting loss of water tanks. A quarter of the islands sustained major damage to essential infrastructure, such as jetties and harbors that allow links with the capital, Malè.

B. Economic Assessment and Outlook²

3. Until the end of 2004, economic development in the Maldives had been encouraging. Real gross domestic product (GDP) growth accelerated to 8.5% in 2003, lifting nominal GDP to about $2,509 per capita that year—the highest in South Asia. Tourism, which led the growth, expanded by more than 15% in 2003 and accounted for about a third of GDP. Tourist arrivals rose 16.4% to 594,100 in 2003, and 9.4% to 616,700 in 2004.³ Growth in the fisheries sector, which accounts for about 6% of GDP, was estimated at about 3% in 2004. Although fish landings decreased to 148,400 metric tons in 2004 and 152,200 metric tons in 2003, the value of fish exports rose to $75.6 million in 2003 and to $84.4 million in 2004 due to an increase in volume.

4. The fiscal deficit, including grants, has been 4–5 % of GDP in the past 6 years as the Government has expanded the provision of public services on the outer atolls (especially in education and health) and developed Hulhumale.⁴ Public debt, which was 46.5% of GDP in 2003, decreased to 38.5% of GDP in 2004. Debt servicing has been manageable, since most external borrowing is contracted on concessional terms. The Asian Development Bank (ADB) has assisted the Government in widening the revenue base by implementing a business profits tax. In April 2004, the Government increased the bed tax to $8 per bed/stay with effect from 1 November 2004.

5. Unlike in other tsunami-affected countries, the disaster in the Maldives was national in scale. Damage was estimated at $470 million, close to 62% of GDP.⁵ Direct damage accounted for about $298 million, or about 8% of the replacement cost of the entire national capital stock. The tourism sector suffered the largest direct damage at about $100 million, followed by the housing sector with losses close to $65 million. The impact of the tsunami on the Maldivian economy will be major, particularly in 2005. The joint needs assessment report titled Tsunami: Impact and Recovery (footnote 5), produced by ADB, the Government, UN System, and Word Bank, noted that the most likely effects in 2005 will include (i) a severe economic slowdown, with real GDP growth slowing to about 1%; (ii) an increase in the current account deficit from 12% of pre-tsunami GDP to 25%; and (iii) a significant expansion of the fiscal deficit to about 14% of GDP. The speed of the tourism recovery will determine the macroeconomic impact of the disaster. Since tourism directly accounts for about one third of GDP, the sector’s severe post-tsunami decline has been a major cause of the economic downturn in 2005. The tourism sector is expected to recover its pre-tsunami capacity toward the end of 2005, resuming its role as the country’s prime engine of economic growth.

6. Despite the tsunami, which resulted in the loss of equipment and some vessels, the fish catch is expected to be largely unchanged in 2005. Most of the larger vessels were not damaged, and the surviving fleet is being used more intensively. A sharp expansion in other sectors, such as construction and government services, is likely to offset much of the negative growth stemming from the tsunami. Net losses to the balance of payments are estimated at about $160 million, or 19% of GDP. Committed grants and concessional loans will cover about $70 million of the losses. Given the severe impact of the tsunami on the budget deficit and the balance of payments, the Government is seeking quick disbursing support. In addition, the Government is trying to maximize the grant element of its tsunami assistance to stop its external debt indicators from worsening significantly.

7. The UN General Assembly endorsed the Maldives’ graduation from the list of least developed countries (LDC) on 20 December 2004, 6 days before the tsunami. Under that decision, the Maldives was granted 3 grace years to prepare a transition strategy to adjust to the phasing out of the advantages associated with membership on the LDC list.⁶

C. Implications for Country Strategy and Program

8. ADB’s strategy for the Maldives, as described in the Country Strategy and Program (CSP) 2002, has supported the Government’s regional development efforts. The Government has stressed that, despite the tsunami, the country’s long-term development priorities are unchanged.⁷ However, by once again exposing the acute vulnerability of the country to natural disasters, the tsunami has prompted the Government to elevate the priority of its focus islands program and the provision of greater disaster mitigation.

9. To reduce the social, economic, and environmental vulnerability of the widely dispersed population, the Government initiated a program in 2002 that provides incentives for voluntary migration to larger islands (focus islands).⁸ The program aims to reduce the number of inhabited islands, and to divide the country into five regions. While the focus island strategy remains a priority, the tsunami has shown that the strategy of consolidating the population is not sufficient to create a framework for sustainable development. As a result, the Government developed the concept of “safe islands.” After the tsunami damaged houses on more than 50 islands, the Government gave people the option to choose one of five islands for relocation. The islands were identified in the initial phase for development as growth centers (host islands). The strategy is to incorporate the aspect of extreme vulnerability, and develop measures to mitigate ecological disasters that enable the communities to sustain social and economic development during emergencies and disasters. This will be achieved by providing ecologically safe zones, including bunds, principally to mitigate the impact of storm surges and tidal swells, as well as tsunamis. In addition, other elevated areas and buildings will be provided to enable vertical evacuation, if necessary. These safe places are intended to provide all basic services in an emergency (health, communication, and transport infrastructure), and have a buffer stock of basic food and water.

10. Matching the severe impact on the national economy, the tsunami devastated many island communities. It destroyed much of the social and economic infrastructure, including electricity, transport access, basic public infrastructure, agriculture, and fishing vessels. ADB, which has actively supported these areas, led the joint needs assessment of these sectors following the tsunami. The ADB Tsunami Emergency Assistance Project (TEAP) also covers these sectors.

11. The Maldives’ graduation from LDC status is expected to have a significant impact over the medium term. However, the Government has adopted a number of measures to prepare the country for the transition. ADB’s strategy also has included measures to mitigate the key adverse impacts of LDC graduation on the country. In this context, ADB’s pipeline will continue to assist the Maldives in providing basic economic infrastructure to promote economic diversification and employment, especially in the atolls. ADB also is planning to assist the Government in designing the transition strategy as a part of the 7th National Development Plan (7NDP).

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