ADB Provides $39.5M to Restore Maldives' Ailing Economy to Health

MANILA, PHILIPPINES - The Asian Development Bank (ADB) will support the Maldives government's plan to implement sweeping economic reforms to restore its ailing economy to sustainable growth.

ADB Board of Directors today approved a loan and technical assistance package totaling $39.5 million to support the Economic Recovery Program. The emergency program is designed to address the economy's longstanding structural problems that have weakened the country's macroeconomic fundamentals, and made it more vulnerable to external shocks.

The Maldives, a small island economy in the Indian Ocean, grew an average rate of 6.6% in the decade prior to 2004, largely driven by tourism, which accounts for 33% of GDP. However, since the 2004 tsunami, the country's economic performance has rapidly deteriorated as a result of a narrow economic base focused mainly on tourism, a rigid tax system, subsidized social services, and a rapidly growing civil service.

"The Maldives is a small, open economy and is therefore vulnerable to potential shocks, including changes in tourism flows, fluctuations in the prices of key commodities such as food and fuel, and capital inflows," said Abid Hussain, Principal Economist in ADB's South Asia Department. "By supporting long-overdue structural reforms, the program will help the country move toward a more broad based and sustainable development."

Through the program, the government will diversify the tax base to boost revenue collection, better manage public spending by aligning it with available resources, privatize state-owned enterprises, strengthen internal audit, and improve debt management. Once the program is completed by the end of 2012, economic imbalances, including fiscal and current account deficits, will be reduced and macroeconomic management improved.

ADB's loan, from its concessional Asian Development Fund, totals $35 million equivalent. The loan has a 24-year term, including a grace period of eight years, Interest is charged at 1% per annum during the grace period and 1.5% per year for the rest of the term.

The technical assistance consists of a grant for $3 million, and a loan for $1.5 million equivalent, both from ADB's Asian Development Fund, with a term of 32 years, including a grace period of eight years, and an annual interest charge of 1% during the grace period and 1.5% thereafter.