Growth and current account forecasts for the Maldives from the Asian Development Outlook (ADO) 2013 are retained. Growth is expected to recover modestly to 4.3% in 2013 and 5.5% in 2014, as moderate recovery in the global economy lifts tourism, which provides 28% of gross domestic product (GDP). Up by 17.8% in the first half of 2013, versus 2.3% a year earlier, tourist arrivals are consistent with a strong recovery in the sector and the larger economy. Election-related spending ahead of the presidential vote in September may bolster growth moderately. Political certainty and a clearer policy direction provided by a new government may increase appetites to invest in tourism. Notably, GDP growth forecasts are well below the 7.0% expansion in 2011, when growth in tourist arrivals was comparable, and fall short of the 5-year average of 6.6% since 2007.
|Selected Economic Indicators (%) - Maldives||2013||2014|
|ADO 2013||Update||ADO 2013||Update|
|Current Account Balance (share of GDP)||-27.8||-27.9||-22.0||-22.0|
Source: Asian Development Outlook (ADO) 2013 Update; ADB estimates.
Downside risks include how the recent slowing of GDP growth reflects the unsustainability of funding broad economic activity by expanding the government deficit. With a fiscal deficit averaging 14% of GDP over the past 5 years in tandem with a large and growing current account deficit, the government must urgently modify its fiscal stance. In 2012, the government deficit was over 12% of GDP, despite earlier attempts at consolidation, and public debt was estimated at 78% of GDP, more than double its share only 4 years earlier. Thus, serious questions about debt sustainability and concerns regarding repayment capacity undermine the government’s credibility and jeopardize future economic stability. Moreover, low gross international reserves, sufficient to cover only 2.6 months of projected imports in late 2013, mean any exchange rate shock is likely to challenge the stability of the currency. While a large and positive entry of errors and omissions in the balance of payments suggests sizable unreported capital inflows, the magnitude of the current account deficit leaves the economy very vulnerable.
Inflation as reported by the Maldives over recent months is volatile, recently falling well below expected rates. Inflation forecasts are thus revised down to 5.5% in 2013 and 5.0% in 2014. Price moderation is in line with longer-term inflation rates, as large increases in the price of fish and some other imported staples have declined sharply.
Source: ADB. 2013. Asian Development Outlook 2013 Update. Manila.