South Asia country briefs Maldives The Government started several large infrastructure projects to allow 2016 the population to move from small, vulnerable islands to Greater Malé. Population, million 0.4 To make space for these investments, the government is reducing cur- GDP, US$ billion(a) 3.6 rent expenditure. As a result, in the medium term, construction is ex- GDP per capita, current US$(a) 8,695 pected to remain the main driver of growth with large current account Note: (a) GDP with 2003 base year. It is expected that the deficits financed by investment and infrastructure loans. Government will release GDP numbers with 2014 base year shortly, which would increase nominal GDP Source: World Bank WDI.  Contributions to real GDP growth Percent 7 6 5 4 3 2 1 0 -1 -2 2014 2015 2016 (est) 2017 (f) 2018 (f) 2019 (f) Construction Tourism Real GDP growth Source: National Bureau of Statistics, World Bank staff estimates. Recent developments The fiscal deficit in 2016 widened to 11.2 percent of GDP, Overall GDP growth remained around an estimated 4.7 after accounting for unpaid bills. New revenue measures percent in 2016. Construction for housing and large invest- proposed in the budget did not materialize and existing ment projects has taken over as the main driver of growth revenue sources underperformed slightly, as tourism was since late 2014, while tourism has been slowing down due lower than projected. Total expenditure was 44.3 per- to an economic slowdown in key countries. Inflation fell cent of GDP due to the sharp increase in public infra- further to 0.5 percent in 2016, thanks to continued low structure investment around Malé, while electricity subsi- global food and fuel prices and a stable exchange rate, as dy cuts were offset by higher than expected expenditure most products are imported. on health care. Public debt grew from 63.3 to 69.2 per- cent of GDP in 2016, driven by the wide primary defi- Foreign reserves dropped in late 2016 due to the settlement cit. In 2017 the Government issued a USD 200 million of a long-running court case between the state-owned air- Eurobond. port and an Indian engineering company in the amount of USD 271 million. Despite a modest recovery in tourism in- Despite the highly successful tourism sector, youth unem- come and fish exports and the continued low global com- ployment remains high, as the sector attracts many mi- modity prices, the current account deficit widened sharply grant workers. More than a quarter of women are either from 8.6 percent in 2015 to 23.2 percent of GDP in 2016, unemployed or not looking for a job and the share of un- driven by the large increase in investment and the one-off employed among young females is even higher. Almost a impact of the settlement. FDI inflows were not sufficient to quarter of Maldivian youth is not in employment, educa- cover the current account deficit unlike in previous years. tion, or training (NEET). The NEET rate is particularly high Gross official reserves fell to USD 467 million towards the for the female youth because of inactivity mostly due to end of 2016, although usable reserves – after netting out family reasons, while the driver for the high male NEET rate short-term foreign currency liabilities to the banking sector is (involuntary) unemployment. Moreover, the employment – were only USD 200 million (1.1 months of imports). The share of Maldivians in construction, the other main driver exchange rate to the USD remains at 15.4, the low end of of growth, is relatively low as this sector employs mainly the currency band. migrant workers as well. South Asia Economic Focus • Fall 2017 60 Outlook Risks and challenges Maldives is expected to continue to expand the number of The main macroeconomic risks are shocks to tourism, a resorts, attracting substantial FDI inflows of around 9 per- faster than expected recovery of global commodity pric- cent of GDP a year. Construction is expected to remain a es, fiscal slippages, especially delays to controlling current key growth driver, while tourism sector growth is likely to expenditure, and the realization of contingent liabilities recover slowly. through guarantees. As food subsidies are being gradually phased out in 2017, The immediate challenge is to improve fiscal sustainability inflation is expected to spike due to a direct impact and and budget credibility. It is important to contain current ex- knock-on effects on other food items. The Government has penditure while implementing the large and necessary infra- put in place a targeted cash transfer program to protect structure program. The following measures are crucial: seek- vulnerable households from its impact. This program will ing efficiency improvements in the health system, updating be revised in the coming months as the take-up of the cash and strengthening its targeted social protection system re- transfers has been limited so far. placing the food and electricity subsidies, avoiding large hikes in wages and pensions, and improving investment project se- The current account deficit is likely to become narrower lection, maintenance budgeting and implementation to in- gradually but to remain well above 10 percent of GDP, fi- crease the value-for-money of public investment. These mea- nanced by FDI, external loans and one-off income sources. sures would also make the budget more flexible and reduce Usable reserves are expected to gradually increase, assum- the exposure to global commodity price shocks. Maldives ing a recovery of exports and further income from leasing needs to preserve its tax base and avoid relying on unrealistic out new lagoons and islands for development. revenue sources in the budget. To preserve debt sustainability and reduce fiscal risks, it is important to increase the maturity The World Bank projects a fiscal deficit of 9.4 percent of of domestic debt, seek the most concessional terms from ex- GDP for 2017, gradually narrowing until 2020, reflecting ternal lenders and issue guarantees prudently. high capital expenditure of around 15 percent of GDP on average and decreasing current expenditure relative to While construction and resort tourism are expected to drive GDP. The level of public debt is expected to increase but ta- growth in the medium term, these sectors do not create per off towards 2020, as the large investment projects will sufficient jobs for Maldivians. The consolidation of popu- have been completed. Despite mostly concessional exter- lation from vulnerable islands and atolls to larger islands nal debt and domestic debt issued at low, fixed rates, and in Greater Malé, while also reducing pressure on Malé is relatively high revenue collection, the risk of external debt a country priority. If successful, it may eventually allow for distress is high, reflecting the refinancing risk from the Eu- new forms of economic activity in line with the aspirations robond with a low level of reserves and fiscal risks through of Maldivian youth and provide employment, improve the guarantees, while the vulnerability of the overall debt port- quality of public services such as health and education, and folio remains elevated, due to its short maturity. make the country more resilient to climate change.   2014 2015 2016 (est) 2017 (f) 2018 (f) 2019 (f) Real GDP growth, at constant market prices 6.0 2.8 4.7 4.8 4.9 5.0 Real GDP growth, at constant factor prices 5.5 3.8 4.7 4.8 4.9 5.0 Agriculture 0.2 -0.5 2.6 2.6 2.6 2.7 Industry 12.9 18.3 8.5 8.7 8.9 9.1 Services 4.6 1.6 4.1 4.1 4.2 4.2 Inflation (CPI) 2.1 1.0 0.5 2.4 2.8 3.0 Current Account Balance (percent of GDP) -3.8 -8.6 -23.2 -21.1 -15.3 -13.8 Net Foreign Direct Investment (percent of GDP) 10.8 9.0 12.4 9.5 9.0 8.6 Fiscal Balance (percent of GDP) -8.2 -8.5 -11.2 -9.4 -7.3 -6.4 Debt (percent of GDP)(a) 65.9 63.4 69.2 74.0 75.9 76.6 Primary Balance (percent of GDP) -4.6 -5.9 -9.0 -6.9 -4.8 -3.9 Note: GDP with 2003 base year. It is expected that the Government will release GDP numbers with 2014 base year shortly, which would increase nominal GDP (a) Excluding outstanding guarantees and arrears Source: Ministry of Finance and Treasury, National Bureau of Statistics, Maldives Monetary Authority, World Bank staff estimates Growth out of the blue 61