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p. 31 of 68 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 Asia The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : South Asia

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Maldives

The Maldives prospered in the 1990s due to a rapid expansion in tourism and modernization in traditional fishing, with rapid annual GDP growth of about 8%. The economy was hard hit by the September 11 events and returning to a rapid growth path will depend on a favorable external environment and careful macroeconomic management.

Macroeconomic Assessment

The economy staged a modest recovery in 2002 with GDP growth estimated at 4.3%, up from 3.5% a year earlier, driven by a gradual recovery in tourism and a larger fish catch. Tourism faltered after the September 11, 2001 events through the first half of 2002, though arrivals picked up in the second half to record an increase of 5.1% for the year. Consequently, tourism, which accounts for about one third of GDP, grew by 2.4% during the year, after zero growth in 2001.

Fisheries expanded by 13.7%, based on a recovery in international tuna prices that led to greater fishing and a strong export performance. The recovery in tourist arrivals and reform measures in the telecommunications sector that resulted in lower tariffs spurred demand for transport and communications services, resulting in a 6.2% increase in subsector output.

The Government's fiscal position for 2002 was marked by a 15% increase in expenditures and a sharp increase in the overall deficit to 7.4% of GDP from 4.7% of GDP in 2001. The major contributing factor to the jump in expenditures was the Government's Hulhumalé project, a large-scale infrastructure development initiative to create a land mass and develop a new town on an island near to the capital city of Malé. The deficit was mainly financed by larger foreign borrowing, including more commercial borrowing, while domestic financing (from the Ways and Means Account of the Maldives Monetary Authority) was contained at 0.4% of GDP.

Monetary conditions in 2002 were characterized by a large increase in net foreign assets and an 11.5% expansion in domestic credit, largely due to increased credit to the private sector. Broad money (M2) increased by 19.3% during 2002. Nevertheless, and despite the July 2001 8% devaluation of the rufiyaa, inflation in 2002 remained low at 0.9%.

The performance of the external sector in 2002 was positive. Total exports in 2002 surged by 18.1% over the 2001 level, mainly reflecting the recovery of international fish prices and stimulus provided by the lagged effects of the currency devaluation in 2001.

In contrast, total imports decreased by 2.4%, despite the modest pickup in the economy, and the trade deficit decreased to $208.0 million from $236.1 million in 2001. Receipts from tourism fell slightly (by 2.6%) because a decline in tourist unit spending more than offset the increase in the number of arrivals.

The current account deficit for 2002 narrowed to $46.9 million, or 7.4% of GDP from 9.2% a year earlier. In terms of the capital account, there was a significant increase in disbursement of official assistance and an expansion of private sector capital inflows to record a surplus of $73.5 million. Accordingly, the overall balance of payments posted a surplus of $26.6 million, a significant improvement from the deficit of $21.4 million in 2001. Official reserves reached $134.5 million at end-2002, providing cover for about 4.1 months of imports. External debt rose by $45 million to $227 million at end-2002, equivalent to about 36% of GDP. With most debt contracted on concessional terms, the debt service ratio was 4.5%.

Policy Developments

The Government's fiscal balance has been deteriorating in recent years and warrants close monitoring, but positive factors are coming into play that should help improve the fiscal position.

First, a new public accounting system to be introduced will enable more comprehensive and updated control over public expenditures. Second, the Government is committed to introducing new tax regimes to expand the tax base. Third, the Government aims to introduce a program budgeting approach in formulating the budget. In contrast, the trend toward greater capital expenditures, mainly in association with the Hulhumalé project, is a source of uncertainty. However, government policy to introduce a mechanism for cost recovery under the project is encouraging as it will ease pressure on the fiscal position.

Aware of financing constraints on private sector development, the Government recently undertook several measures. HSBC, a major international bank, was allowed to enter the local market. A leasing company was established during the year with assistance from the International Finance Corporation; this now allows private sector companies, particularly those in tourism, air transport, and shipping, to take advantage of a new financing option for their investments. In addition, with a view to long-term financial development, a stock trading floor was opened in April 2002. Nevertheless, the Maldives' financial market is still underdeveloped and major industries, particularly tourism, must depend heavily on foreign financing. While deregulation of the interest rate spread requirement in 2001 has led to greater bank lending to the private sector, further action needs to be taken to facilitate the greater mobilization of domestic financial resources for economic development.

Outlook for 2003-2004

Economic performance remains reliant on tourism. A gradual recovery in tourist arrivals is expected to continue in 2003-2004 due to a better outlook for the EU, the main market for tourism. In the domestic economy, the Government's Hulhumalé project and regional development programs will spur domestic demand for local construction and transport. Together, these elements suggest potential for further recovery in 2003 and onward. An initial projection of GDP growth for 2003 is 4.2%. However, the outlook is highly subject to external factors, especially the effects of the conflict in Iraq and the security situation in South Asia.

The 2003 budget envisages a nearly 12% expansion in expenditures and an increase in the overall deficit to 8.5% of GDP. The continued rise in the budget deficit indicates that fiscal developments need to be closely monitored in the medium term, particularly the increasing trend for capital expenditures, to keep the overall deficit as well as domestic and external borrowing requirements within prudent limits. The recent rapid rise in domestic credit and money supply has not had an adverse effect on price stability or the balance of payments. However, as the authorities take further steps to liberalize banking and to move to indirect means of monetary control, it will be important for them to ensure that monetary expansion is within a macroeconomic framework that guards against excessive pressures on prices and the fixed exchange rate.

The expected recovery of the world economy, particularly in the US, the largest export market, should have a continued positive impact on exports, though this cannot be certain given the large fluctuations in the international price of tuna. Favorable developments in tourism over the next couple of years will be an important contributory factor to keeping the current account deficit at the present manageable levels. The strengthening of the capital account in 2002 was encouraging; nevertheless, the increase in outstanding external debt, especially borrowing on commercial terms, underlines the need for careful monitoring and management of the country's external position.

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