Maldives Economy Needs Broader-Based Growth | Asian Development Bank

Maldives Economy Needs Broader-Based Growth

News from Country Offices | 18 August 2015

MALÉ, MALDIVES – Strong economic growth driven by luxury tourism has lifted the Maldives to middle income status in less than 3 decades, but weaknesses in the transport, education and financial sectors need to be addressed to reduce inequality, support private investment, and boost economic diversity, according to a new Asian Development Bank (ADB) study.

The country diagnostic study, Maldives: Overcoming the Challenges of a Small Island State, examines the key binding constraints to achieving sustained, inclusive and regionally-balanced growth. It recommends priority reforms and policies to promote more private investment in the country. 

“The Maldives has the highest income per capita in South Asia, supported by the success of its high-end tourism model,” said ADB Chief Economist Shang-Jin Wei. “But the gains from tourism haven’t been spread evenly and broad structural reforms are needed to diversify the economy, encourage greater private investment, and reduce income and job disparities between the capital Malé and outer atolls.” 

Providing services and opportunities to sparse populations scattered across 26 atolls stretching over 800 kilometers presents a substantial challenge to policymakers, the report said. In response, the government should push ahead with its Maritime Transport Master Plan, which aims to develop a strong regulatory environment to help draw private sector investment into regional port infrastructure, transport services and port management. 

Substantial improvements have been made in both lower and higher education in recent years, but many high school and college graduates still lack skills to find jobs, resulting in an over-reliance on expatriate workers. Developing workforce-based curricula and strengthening teacher training at high schools and tertiary institutions will result in more students with skills that match the needs of the labor market. Providing scholarships and financial incentives to poor but well-qualified students in outer atolls, along with internships and on-the-job training in cooperation with the private sector, will help reduce the number of unemployed youth outside Malé. 

The government has made substantial strides in increasing its revenue base with tax reforms. However it is still hampered by high recurrent spending levels and a lack of financial resources to fund infrastructure and social spending in the longer term. Adopting a medium-term budget framework would help improve resource allocation, while new taxes and fees could be considered to further widen revenues. 

A lack of access to finance is holding back the creation and expansion of micro, small and medium enterprises (MSMEs), which are vital for inclusiveness and job creation. Creating a regulatory framework for secure branchless banking would go a long way to help MSMEs in outer atolls that currently lack access to banking services. Other measures such as credit guarantee mechanisms, insurance products, a liquidity pool and additional business development services, can help reduce the cost of financing for both MSMEs and financial institutions. 

Given the country’s vulnerability to both economic and climate shocks, a top priority is to ensure it has the fiscal resources needed to respond to extreme events. This includes implementing adequate risk mitigation and preparatory measures to handle natural disasters, with stepped-up coordination among government agencies, the private sector, donors and civil society. 

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region.  In 2014, ADB assistance totaled $22.9 billion, including cofinancing of $9.2 billion.