102283 Maldives Systematic Country Diagnostic dentifying Opportunities and I Constraints to Ending Poverty and Promoting Shared Prosperity Copyright © World Bank, 2015 All rights reserved. World Bank Colombo Office 2nd Floor, DFCC Bldg, Galle Road, 73/5, Colombo 3, Sri Lanka This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Maldives Systematic Country Diagnostic Identifying Opportunities and Constraints to Ending Poverty and Promoting Shared Prosperity Table of Contents List of abbreviations........................................................................................................................................................................................................... 3 Data disclaimer.................................................................................................................................................................................................................... 6 Executive summary............................................................................................................................................................................................................. 7 Section 1. Country context.............................................................................................................................................................................................18 Section 2. Growth, redistribution, poverty and shared prosperity.......................................................................................................................20 Growth............................................................................................................................................................................................................................22 Role of the state and redistribution......................................................................................................................................................................25 Poverty and shared prosperity................................................................................................................................................................................28 Recent macroeconomic and fiscal trends..........................................................................................................................................................35 Section 3. Vulnerability and sustainability issues....................................................................................................................................................41 Macroeconomic vulnerability and sustainability...............................................................................................................................................42 Political and institutional risks................................................................................................................................................................................47 Social sustainability and vulnerability...................................................................................................................................................................48 Environmental vulnerability and sustainability issues.....................................................................................................................................52 Section 4. Sources of growth and shared prosperity............................................................................................................................................56 Tourism in Figures......................................................................................................................................................................................................58 Fisheries........................................................................................................................................................................................................................66 Agriculture.....................................................................................................................................................................................................................72 Section 5. Constraints to growth and shared prosperity.......................................................................................................................................75 Structural constraints...............................................................................................................................................................................................76 Investment climate....................................................................................................................................................................................................81 Access to finance constraints.................................................................................................................................................................................84 Governance constraints............................................................................................................................................................................................87 Human capital constraints.......................................................................................................................................................................................88 Social spending constraints....................................................................................................................................................................................92 Section 6. Opportunities and trade-offs for sustainable poverty   reduction and shared prosperity..............................................................................................................................................................................95 Priority area 1. Sharing prosperity - Enhancing opportunities for the local   population to benefit from existing industries..............................................................................................................................................97 Priority area 2. Enabling opportunities for creation of new sources of growth..................................................................................... 103 Priority area 3. Improve public resource management and reduce macro-fiscal risk....................................................................... 106 Bibliography...................................................................................................................................................................................................................... 113 Annex 1. Poverty measurement in Maldives........................................................................................................................................................... 118 Annex 2. Summary of SCD consultations................................................................................................................................................................ 120 Annex 2. Written responses received from participants SCD consultations................................................................................................ 126 Annex 3. Challenges in the financial sector............................................................................................................................................................ 136 2 List of abbreviations ADB Asian Development Bank MRPS Maldives Retirement Pension Scheme CSR Corporate Social Responsibility MTDC Maldives Tourism Development Corporation DSA Debt Sustainability Analysis MVR Maldivian Rufiyaa EEZ Exclusive Economic Zone MW Megawatt EU European Union NDS National Development Strategy FAO Food and Agriculture Organization NGO Non-Governmental Organization FDI Foreign Direct Investment OABP Old Age Basic Pension G.C.E. A/L General Certificate of Education – Advanced Level PCB Privatization and Corporatization Board GDP Gross Domestic Product PPD Public Private Dialogue GERP Growth elasticity of poverty PPP Public-Private Partnership or Purchasing GOM Government of Maldives Power Parity GST/TGST (Tourism) Goods and Services Tax R&D Research and Development HDI Human Development Index SAR South Asia Region HIES Household Income and Expenditure Survey SCD Systematic Country Diagnostic IBRD International Bank for Reconstruction and SEZ Special Economic Zone Development SIDS Small Island Developing States IFC International Finance Corporation SME Small and Medium Enterprises ILO International Labor Organization SOE State-Owned Enterprise IMF International Monetary Fund TFR Total Fertility Rate LIC Lower Income Country TVET Technical and Vocational Education Program LMIC Lower Middle Income Country UMIC Upper Middle Income Country MDGs Millennium Development Goals UNDP United Nations Development Programme MIC Middle Income Country VAT Value Added Tax MIGA Multilateral Investment Guarantee Agency VPA Vulnerability and Poverty Analysis MMA Maldives Monetary Authority WBG World Bank Group MMPRC Maldives Marketing and Public Relations WDI World Development Indicators Corporation WGI World Governance Indicators MNU Maldives National University MoF Ministry of Finance 3 THE SYSTEMATIC COUNTRY DIAGNOSTIC Under its new approach to working with its country partners, the World Bank Group (WBG) requires the preparation of a Systematic Country Diagnostic (SCD) to precede the development of Country Partnership Frameworks which guide programming. The objective of an SCD is to identify the most critical constraints and opportunities facing a country in accelerating progress toward the goals of ending extreme poverty and promoting shared prosperity in a sustainable manner. The SCD is expected to produce an objective, evidence-based, candid assessment of the main challenges facing the country, without limitation to the areas where the WBG is currently engaged. 4 Maldives Systematic Country Diagnostic acknowledgements The World Bank Group would like to thank the Government of Maldives, in particular staff at the Ministry of Finance and Treasury, for their hospitality and feedback during the preparation of this document. Similarly the World Bank would like to thank participants from the Ministry of Fisheries and Agriculture, the Ministry of Tourism and the Maldives Monetary Authority, youth groups, Civil Society Organizations, Non-Governmental Organizations, student bodies, academia, the private sector and development partners for candidly sharing their perspectives during the SCD consultations. The SCD relied on analytical work produced by the World Bank Group, the Government of Maldives and other development partners and civil society organizations. The team was led by Emanuel Salinas (Program Leader, Trade & Competitiveness), Ralph Van Doorn (Senior Economist) and Silvia Redaelli (Senior Economist). The team received guidance from Francoise Clottes (World Bank Country Director) and Adam Sack (IFC Country Manager). Andrea Gallina and Hafiz Zainudeen coordinated consultations with stakeholders in Maldives. The peer reviewers were Gabriela Inchauste, Rafael Munoz, and Raju Singh. The team was further composed of the staff across the World Bank Group’s Global Practices, Harsha Aturupane (Education), Sandeep Kohli (Energy & Extractives), Darshani De Silva, Pawan Patil (Environment & Natural Resources), Rathnija Arandara (Finance & Markets), Korotoumou Ouattara (Finance & Markets), Charles Undeland, Jiwanka B. Wickramasinghe (Governance), Somil Nagpal (Health, Nutrition & Population), Lidia Ceriani (Poverty), Changqing Sun (Social Protection & Labor), Zhiyu Jerry Chen, Janna el-Horr (Social, Urban, Rural & Resilience), Hermione Nevill (Trade & Competitiveness), Amali Rajapaksa (Transport & ICT), Abedalrazq F. Khalil (Water), Rui Monteiro (PPPs), Daniel Mira (Climate Change), Rafael Dominguez (IFC), Petal Jean Hackett and Paul Barbour (MIGA). 5 Photo Credit - Emanuel Salinas Data disclaimer The systematic analysis of opportunities and obstacles for poverty reduction and shared prosperity in Maldives is limited by shortcomings in official statistics. The lack of consistent and comprehensive data on micro and macro-economic aspects in Maldives has been identified as a significant obstacle for evidence- based policymaking and policy advice. Understanding of poverty issues in Maldives is limited by shortcomings in the current poverty measurement framework and by data quality and comparability constraints. The latest available household survey data to assess evolution of poverty was conducted in 2009-10; differences in survey instruments and possibly in data quality limit ability to profile the evolution of poverty. Due to the open nature of the economy and capacity constraints, macroeconomic, balance of payments and fiscal data are not always accurate. In particular, it has been suggested that the size of the tourism sector, even after recent revisions, is still underestimated. On the other hand, the official fiscal expenditure may be underreported. The analysis of the real sector trends is constrained by lack of information on industries composition and out-of-date enterprise surveys. Lack of recent reliable labor force data, especially within the tourism sector, limits potential for analysis of youth labor market challenges. Similarly, data on role, size, management and fiscal risk of SOEs is not publicly available. In undertaking this diagnostic, the team has aimed at complementing official sources of data with information from stakeholders gathered through surveys, focus groups and consultations. The team acknowledges the limitations in these approaches and thus data stemming from these exercises is duly identified throughout the document and used only as means of identification of main issues, rather than as a basis for conclusive assessment of policies. Data and knowledge gaps are identified in the relevant sections of the document. 6 Maldives Systematic Country Diagnostic Malé, Maldives capital, is one of the cities in South Asia with highest population density at 53,700 people per square kilometer versus only 1,900 people per square kilometer in outer Atolls. executive summary 7 Photo Credit - Emanuel Salinas Executive summary Maldives is an island nation scattered in the Indian Ocean comprising 1,190 small coral islands of which 190 are inhabited by a local population of 341,000. Maldives’ unique archipelagic coral island provides the country with an extremely rich and diverse marine ecological system. With more territorial sea than land, marine resources have played a vital role shaping the contours of economic development, with nature-based tourism being the key driver of economic growth and fisheries an important sector of employment for the local population. Maldives developed a successful high-end tourism sector, whose sizable rents have been GDP per capita redistributed to the population to address its development challenges. Gross Domestic Product increased from $275 (GDP) per capita increased from $275 in 1980 to $6,666 in 2013. This growth rate, which averaged in 1980 to $6,666 in 2013. 7 percent between 2002 and 2013, is mainly driven by tourism and non-tradable tourism- related activities. This impressive track record of economic growth has been supported by capital accumulation through investment in resorts, and by an increase in the labor force mainly benefiting foreign workers. Fiscal revenues generated in the tourism sector have been used to address some of the structural development challenges of Maldives’ economy. But Maldives’ development However, Maldives’ development model has not been sufficiently inclusive and its immediate model has not fiscal, environmental and social sustainability is at stake. Although this economic model based been sufficiently on tourism-led growth and redistribution of tourism-generated revenues has contributed to inclusive and its improving well-being of Maldivian population, poverty reduction has been below potential and the immediate fiscal, level of inequality – and lack of shared prosperity – remain a major challenge. Moreover, recent environmental and political and socio-economic developments have brought to evidence the inherent vulnerability of social sustainability Maldives’ development model and raise immediate concerns about its fiscal, environmental and is at stake. social sustainability. This Systematic Country Diagnostic for Maldives aims at identifying the most critical constraints and opportunities facing the country as it works towards promoting sustainable growth, reducing poverty and boosting shared prosperity. In addition to serving as a public good for the government, Tourism-led growth civil society, research and academic community, and local and international development partners, has followed an the findings of the SCD will be used as key inputs in the preparation of the WBG strategy, the enclave model, Country Partnership Framework, which will outline how the Bank Group’s engagement in Maldives reliant on imported can best contribute towards achieving the twin goals. goods, labor and finance. Growth and redistribution Bound by structural constraints and endowed with extraordinary natural assets Maldives developed a high-end tourism sector, which has resulted in a very high pace of economic growth over the past three decades. However, its form of tourism-led growth has followed an enclave model, reliant on imported goods, labor and finance. While tourism accounts for about a third of the country’s GDP, it only contributes to 16 percent of the employment in the country. Linkages between resorts and local economy are similarly limited, with very few products and services supplied by local enterprises. The employment of Maldivian women in the tourism industry faces particular 8 Maldives Systematic Country Diagnostic obstacles. Apart from tourism and fisheries, which is a large employment and export revenue generator, there are few sizable economic activities in the country. The development of the tourism sector in Maldives has created sizable rents, which, through taxation and other fiscal means, have been used to address some of the structural development challenges of Maldives’ economy. In particular, tourism revenues have been used to support job creation in the public sector, to finance the provision of public services and expand access to primary health and education facilities beyond the capital area Malé. They also have helped insulate the local economy from international price fluctuations through a system of universal subsidies on food. The new constitution introducing democracy in the late 2000s has been accompanied by an increase in the level of redistribution: (i) the introduction of explicit electricity subsidies; (ii) the introduction of a universal health insurance scheme; and (iii) an increase in coverage and generosity of pension system. Poverty reduction and shared prosperity Poverty incidence in Maldives is substantially in line with that of an upper middle-income country. Poverty declined According to the latest available Household Income and Expenditure Survey (HIES) collected in nationwide but not 2009/10, the share of population living with less than $1.25 in 2005 PPP a day was 4.9 percent, uniformly across Maldives’ territory. whereas the corresponding share using the $2 a day poverty line was 17.02 percent. These figures are very similar to the average poverty outcomes of upper middle-income countries (UMIC), two of the small Pacific islands, and neighboring Sri Lanka. Maldives performs better than the other countries in South Asia with respect to several socio-economic indicators. Maldives ranks first in terms of per-capita GDP and second only to Sri Lanka based on the Human Development Index ranking. Over the seven years between 2003 and 2010, poverty declined nationwide but not uniformly across Maldives’ territory. Poverty declined in the Atolls while it remained stable in the capital area Malé. The poverty rate is the highest in the Central North and Southern atolls, while the capital area Malé is home to the largest share of poor individuals. Sustained migration from the atolls to the capital accounts for most of the diverging poverty trends at the subnational level. Despite progress, the pace of poverty reduction has been below potential when considering the fast GDP growth of the Maldivian economy between 2003 and 2010 due to growing inequality. The growth elasticity of poverty reduction (GEPR) in Maldives of about 1.2 percent is relatively low by international standards. This is evident in comparison to other countries. For example, while Maldives and Sri Lanka shared the same growth rate (approximately 4.8 percent a year over the period), poverty reduction in Maldives was one-third less than experienced in Sri Lanka.1 Given the slow pace of poverty reduction, Maldives will be able to reduce extreme poverty under 1 percent 1 Poverty decreased at about 0.5 percent per year in Maldives as opposed to 1.6 percent in Sri Lanka. 9 Executive summary (contd.) by 2040, a much longer period than upper middle-income countries, and other countries in South Asia. The lack of shared prosperity in Maldives is the main determinant of the limited impact of growth on poverty reduction. The unequal impact of growth is further reflected by an increase in the gap between the poorest and richest segments of the population. Limited jobs opportunities, especially for low-skilled labor might have played an important role in limiting contribution of growth to poverty reduction. In particular, the lack of growth in fisheries is an important determinant of the limited contribution of growth to poverty reduction, especially in the Atolls. As labor income is the main source of household income for the poor, an inclusive development of the labor market is key for reducing poverty and boosting shared prosperity. The unequal impact of growth is further reflected by an Sustainability increase in the gap Recent socio-economic and political developments have raised concerns regarding the fiscal, between the poorest political, social and environmental sustainability of Maldives’ development model. and richest segments of the population. Macro and fiscal sustainability Maldives is highly vulnerable to shocks due to its small size, lack of economic diversification outside tourism and heavy reliance on imports, while its rigid budget adds more risk. Especially in recent years, the development model has led to an increasing share of revenue dependent on tourism, Maldives is highly while an increasing share of expenditure has become “rigid.” The lack of macro policy buffers vulnerable to shocks leaves the country with few instruments to stabilize the economy in the event of a downturn in due to its small size, tourism. lack of economic diversification Unless adjustments are made to revenues and expenditures, the current development model outside tourism, raises immediate fiscal sustainability concerns. At current trends it is projected to lead to heavy reliance on ever increasing levels of public debt and interest payments, even after the fiscal consolidation imports, and rigid measures budgeted in 2015. The widening fiscal deficit has forced the country to accumulate budget. more and more domestic debt at ever higher interest rates. Weaknesses in the Public Financial Management system and management of State-Owned Enterprises (SOEs) pose further short- term risks to fiscal sustainability. Political and institutional risks As Maldives’ transition to a democratic system is still in progress, powers and relationships among democratic institutions remain to be settled. Institutional and political uncertainty constrain the sustainability of Maldives’ development model moving forward. Social sustainability and vulnerability Economic opportunities in Maldives are out of sync with growth and shared prosperity. The interplay of socio-demographic trends and fiscal constraints adds to the social sustainability challenge of Maldives’ development model. Particularly vulnerable to these challenges are youth and women. 10 Maldives Systematic Country Diagnostic A growing gap between aspirations and opportunities for socio-economic inclusion contributed to fostering disenfranchisement among Maldivian youth. Limited education opportunities and skill endowments challenge youth capacity to realize their aspirations though a productive labor market engagement. High levels of actual and perceived inequality coupled with a progressive deterioration of the social contract further contribute to widening youth aspiration gap. State and Limited education familial structures combine to create a situation where youth and their families do not have the opportunities and incentive to temper youth aspirations, gain skills or search for jobs, feeding into young people’s skill endowments limited productive engagement with the economy and society. Social ills such as gang violence and challenge the drug abuse are on the rise, and further contribute to strengthening the exclusion of “youth at risk” capacity of the from the social fabric. Moreover, a growing support of more conservative religious practices among youth to realize their the youth and negative perceptions towards the tourism industry challenge the inclusiveness and aspirations. social sustainability of Maldives’ development model. Environmental vulnerability and sustainability issues Climate change is major threat in the long run. Climate change could cause annual economic losses of more than 12 percent of Maldives’ GDP by 2100. Due to rising sea levels, the entire country could Climate change be submerged before the end of the century as 80 percent of land is less than one meter above could cause annual sea level. With 42 percent of the population and more than 70 percent of critical infrastructure economic losses within 100 meters of shoreline, this would have dire social and economic consequences, notably of more than 12 percent of Maldives’ for the poorer and most vulnerable. GDP by 2100. There are also short-term threats to environment sustainability. The most pressing issues relate to shortcomings in the management of natural resources, particularly with regard to sewage and solid waste management. There is also a growing demand for ground water and rain water as source of fresh water, which are at high risk due to climate change and are vulnerable to shocks due to One of the the lack of back-up arrangements. Loss of coral reef due to rising sea temperatures, pollution and most pressing damage represents a threat to the sustainability of the tourism industry and fisheries, and is also issues relate to compounding the effects of climate change. Meanwhile, the institutional capacity for managing the shortcomings in country’s natural resources is relatively weak. The cost of electricity generation through imported the management of diesel in Maldives is the highest in South Asia, especially in the atolls, while subsidies have led to natural resources, overconsumption and underinvestment in renewable sources of energy. particularly with regard to sewage and solid waste Opportunities for growth management. Tourism Tourism is the most important industry in Maldives, but the linkages with the local economy are limited. Although Maldives has managed to position itself as a high-end destination, the sustainability of such premium cannot be taken for granted and an increase in the number of hotels may lead to lower profitability in the tourism sector. Governance shortcomings in the current model for allocation of resort leases may be hampering the development of tourism and preventing the country from maximizing benefits and enhancing inclusive growth, while concerns 11 Executive summary (contd.) over the investment climate and political risk may undermine the ability of Maldives to attract reputable investors in the future. The industry has developed as an enclave, with limited positive spillovers to the local communities. A more inclusive industry may hold the key to shared prosperity in the country. Better linkages between the resorts and the local enterprises may help to leverage tourism growth for development of other tradable sectors. Tourism is a large and rapidly growing source of jobs, but most of them are not seized by local population due to a host of factors, including: (1) reservation wage that is too high for unskilled jobs; (2) lack of skills for technical and managerial jobs; (3) social norms; and (4) lack of adequate transport. A nascent segment of community-based tourism, such as Better linkages locally owned guesthouses, may represent a valuable option for diversification and inclusive growth between the resorts through integration with local communities. Growth in this segment has some limitations and and the local risks. There are still unrealized opportunities for linkages between tourism and local providers of enterprises may fish and agriculture products, while opportunities for service-provision linkages are more limited, help to leverage as many resorts already own and operate their support services and ancillary functions. tourism growth for development of other Fisheries tradable sectors. The fisheries sector is a critical contributing sector for the country’s national economy and in almost all of the country’s inhabited islands. The sector traditionally provides employment, exports and food security. Environmentally friendly fishing methods have enhanced Maldives’ ability to access premium markets. Marine aquaculture is nascent in Maldives, supported by government pilot aquaculture projects and a private aquaculture farm. This can be an important source of The sustainability economic growth and diversification, poverty alleviation and foreign exchange earnings, but of fisheries is the future development of aquaculture is hindered by the limited availability of financing and jeopardized by inadequate fisheries technology and a lack of clarity on the legal and policy framework. management and overfishing. The sustainability of fisheries is jeopardized by inadequate fisheries management and overfishing. The industry is experiencing a declining trend, with both catch and employment falling. Employment of women in the downstream fish processing industry has been reduced to practically nil. Maldives fisheries sector benefits from high value stocks, but its recent trends highlight vulnerability to a mix of factors, including overfishing, higher fuel costs, temperature rise leading to change in schools aggregation and lack of more effective regional eco-systemic management of the shared skipjack tuna stock. Governance deficiencies (limited number of skipjack tuna processing licenses) appear to have hampered the development of fisheries and the value they bring to the economy. Overfishing of reef fish and climate change present risks to the sustainability of the tuna fisheries as well as tourism. Threats to the health of the coral reefs that are significant to the fishery sector also come from habitat degradation and loss due to pollution, harbor construction and reclamation. 12 Maldives Systematic Country Diagnostic Agriculture Food security concerns have revitalized the interest in development of the local agriculture production. Agriculture is a relatively minor activity in Maldives and has contributed only marginally to long-term growth. Potential for agriculture is limited due to the scarcity and dispersion of arable land and high cost of fresh water for irrigation, and the country will remain dependent on imported food into the future. There are opportunities as well: there may be more potential to cater to resorts, growth in agriculture will benefit women who form the majority of employment in the sector, other higher-value fruits and vegetables could be tried tested for cultivation, and low-cost smallholder greenhouse technologies combined with household based-irrigation/ ‘fertigation’ systems could be explored. The cost of providing basic services in a Constraints fragmented country Maldives suffers from the same size and geography challenges as other small island states, is high. limiting its production base and competitiveness. As a result of these challenges, the cost of providing basic services in a fragmented country is raised across the board. Public expenditure in Maldives is structurally high, although Maldives remains an outlier in terms of spending even if accounting for its size, insularity and openness, and the duality of its economy. With its small population dispersed over many islands across long distances, the country faces the choice Addressing whether to address the challenge of the high cost of service delivery through consolidation of investment climate population closer to Malé or through improving services and connectivity to populations at their shortcomings will be current locations. There has been a steady migration from smaller to larger islands -- in particular essential in order to to the Malé City area -- leading to conditions of overcrowding in Malé, a development successive enable the creation governments have tried to address with limited success. of inclusive economic activities in Maldives. The investment climate in Maldives features important constraints for new entrepreneurs and for the growth of existing firms. The investment climate in Maldives is much more challenging than that of similar island economies and other South Asian countries. Challenges extend beyond what is captured by Doing Business rankings (enabling environment for a firm to start operations, grow its business and resolve disputes or unwind operations in an orderly, swift and fair manner). They include lack of access to foreign currency and sudden changes in the legal and regulatory environment taking place in absence of sufficient consultation with private-sector stakeholders. Addressing investment climate shortcomings will be essential in order to enable the creation of inclusive economic activities in Maldives. The uniqueness of Maldives’ natural resources has enabled the country to attract large amounts of foreign direct investment (FDI) in spite of shortcomings in the investment climate. However, this type of FDI, typically into the development of single-island resorts, has had limited positive spillover to the economy. Moreover, recent events, such as civil disturbances in Male and a high-profile dispute and costly legal proceedings related to the contract for investment in the international airport, have the potential to significantly undermine the confidence of foreign investors on 13 Executive summary (contd.) Maldives. That could reduce its attractiveness as a long-term investment destination in favor of jurisdictions that can provide a higher degree of certainty to foreign investors. Sustainable Access to finance has been identified as a major constraint for the development of enterprises enhancement of in Maldives. Financing to the private sector has been lower than the pace of economic growth, access to finance in reflecting a lack of investment opportunities in the local economy. In particular, this has affected Maldives will require manufacturing, fisheries and agriculture credit, which has fallen since 2007. High collateralization the development and implementation of a requirements represent major hurdles to borrowers, especially for small and medium enterprises strategy for financial and new entrepreneurs. Lack of access to finance has been identified by authorities as a major sector development obstacle for entrepreneurship in Maldives, but this challenge will not be resolved through that addresses the concessional credit initiatives. Instead, sustainable enhancement of access to finance in Maldives shortcomings faced will require the development and implementation of a strategy for financial sector development by the sector. that addresses the shortcomings faced by the sector. Maldives is facing important governance challenges that affect the business environment and the soundness and sustainability of economic and fiscal management. In the public sector, limited capacity, a complex institutional framework and inter-institutional conflicts also limit the ability Maldives is of the state to support social and economic progress. Institutional capacity remains much lower facing important than that of an average upper middle -income country. A significant amount of procurement in governance the country is carried out by SOEs and the Ministry of Health outside the scope of national rules challenges that and central government controls, leading to doubts if public resources are spent in the most affect the business effective and efficient manner. Public-sector management suffers from inefficiencies. The lack environment and of settlement in the political and institutional framework impairs the state’s effectiveness, which the soundness and has led in particular to weak rule of law. Governance issues also these extend to the resort tourism sustainability of sector, where a few business groups control a large share of the market. economic and fiscal management. Expanding and improving human capital will be of vital importance to promote economic prosperity and increase jobs for young people. Maldives has performed well in providing access to primary and lower secondary education. However, the country lags sharply behind in education attainment at the higher secondary level, while higher education participation is extremely low for a middle- income country. The quality of education at all levels is a major challenge facing Maldives, both Expanding and in terms of inputs and outcomes. A major challenge is to equip school and university graduates improving human with the “soft skills” demanded by employers in the country, the lack of which is linked to high capital will be of vital importance to youth unemployment. The quality of current Technical and Vocational Education and Training promote economic (TVET) services needs to be improved so that it becomes both more attractive for youth and more prosperity and relevant for employers. For this, the gap between youth aspirations for employment (white-collar increase jobs for jobs) and the actual opportunities for employment (e.g., perceived lower-status jobs) needs to be young people. addressed. The contribution of social spending to poverty reduction and shared prosperity in Maldives is declining over time. Recently introduced social insurance schemes have created perverse economic incentives that challenge poverty reduction and shared prosperity moving forward. In 14 Maldives Systematic Country Diagnostic particular, universal electricity subsidies disproportionately benefit the richer households, while the generosity of the social pension system has exacerbated intergenerational equity issues and potentially contributed to increasing distortions on the labor market. (Increasing trends for inter- generational transfers within the household and increasing reservation wages might challenge direct participation of the youth in the growth process.) Moreover, the defined contribution pension schemes disadvantage elderly women, given the gender income and wage disparity in Maldives. Universal electricity Prioritization subsidies Based on existing evidence and analysis conducted as part of the Systematic Country Diagnostic, disproportionately The World Bank identified three priority areas to promote growth, poverty reduction and shared benefit the richer prosperity in a sustainable way in Maldives. The first is improving opportunities in tourism and households. fisheries for the local population. The second is enhancing the enabling environment, including investment climate, access to finance and skills. The third is improving the efficiency and efficacy of public resource management and reducing macro fiscal risk. These priority areas were confirmed in consultations with local stakeholders and used to further validate hypotheses and analysis. Given the importance Governance issues appear in many of these priority areas as an important cross-cutting constraint. of tourism in Various dimensions of governance constraints can be identified, including lack of transparency in Maldives, a more tourism, overlapping roles of government agencies in fisheries, incomplete legal and regulatory inclusive industry framework hampering the investment climate, weakness of capacity, in particular in natural represents a major resource management, and deficiencies in the management of SOEs. opportunity for shared prosperity going forward. Priority area 1: Enhancing opportunities in tourism and fisheries for the local population Given the importance of tourism in Maldives, a more inclusive industry represents a major opportunity for shared prosperity going forward. There are four potential complementary avenues to improving the inclusiveness of tourism going forward: (1) enhancing the implementation of Sustainable and the current resort model; (2) enabling sustainable economic diversification within the tourism inclusive growth of sector; (3) enabling local employment; and (4) strengthening linkages between tourism and local the fisheries sector providers of goods and services. will not be based on increasing the Maldives also has the opportunity to further develop its fisheries sector, and to capitalize on the volume of catch. potential benefits to enhance economic growth and sustainable development at a national level. As sustainable and inclusive growth of the fisheries sector will likely not be based on increasing the volume of catch, a transition to a wealth-based fisheries management system may hold promise for the future. There are a range of targeted options for exploiting the opportunities presented to Maldives fisheries sector at present, but effective strategies and plans will need to be developed in order to identify not only economic potential, but also environmental impact. 15 Executive summary (contd.) Priority area 2. Enabling opportunities for creation of new sources of growth Economic diversification and competitiveness in Maldives are hampered by significant structural and spatial constraints, but improving the enabling environment will enhance the potential for entrepreneurship, creation of new firms and growth of existing ones. Maldives faces similar structural challenges of other small island states that restrict the extent to which the country can attain competitiveness across the board. However, there are visible untapped opportunities where potential (in terms of existing demand and proved production capacity) exists, both within value chains of existing industries, as well as potential new economic activities. Improving the enabling Enabling the local population to seize these opportunities will require addressing a host of factors that environment represent the overall enabling environment in the country. These factors include enhancing the investment will enhance climate, access to finance and human capital. the potential for entrepreneurship, creation of new Priority area 3: Improving the efficiency and efficacy of public firms and growth of resource management and reducing macro fiscal risk existing ones. The sustainability of Maldives’ development model is dependent on how well the authorities manage the country’s wealth-generating natural resources and its financial resources to redistribute this wealth, and how resilient the country is to external and domestic shocks. Maldives’ natural resources are its marine life and its coral reefs, but there are weaknesses in the exploitation of its natural resources and in its preparedness for natural hazards. It appears that a lack of planning capacity at the local and national government level is the The sustainability main constraint to dealing with the challenge of sustainability. of Maldives’ development model The main mechanisms to redistribute the wealth generated by tourism are public sector employment, is dependent on how social services, subsidies and transfers. The sustainability of the positive outcomes achieved through this well the authorities redistribution system crucially depends on improving its efficiency and cost-effectiveness. The public sector manage the employment freeze contributes to managing the wage bills and improving fiscal sustainability, and fiscal country’s wealth- savings can be used to mitigate the negative impact on employment. While it is important to continue to generating natural provide wide access to health and education services, more careful planning based on the demographic resources and its distribution of the population could improve efficiency of spending and free resources to improve quality. financial resources Targeting reform of electricity and food subsidies could improve efficiency of spending while freeing to redistribute this resources to protect the poor. Operational savings in the universal health insurance system Aasandha could wealth, and how cut its cost significantly, while preserving the principle of universal health insurance. Finally, there could be resilient the country fiscal savings from improving SOE management and procurement. is to external and domestic shocks. Better management of its resources may also make Maldives more resilient to external shocks. Maldives will remain exposed to external shocks from tourism under its current development model. While it cannot eliminate its vulnerability to shocks Maldives has opportunities to reduce its vulnerability and increase its resilience within limits by: (1) reducing exposure to shocks by diversifying its sources of tourism and reducing its reliance on fossil fuel; (2) improving international conditions to reduce the domestic transmission of shocks by reforming public expenditure and reducing the risk of the public debt portfolio; and (3) increasing its risk management through improving institutional quality, including public financing management and planning capacity, and increasing policy space. 16 Maldives has positioned itself as a premium destination for tourism and benefits from high quality fish stocks. These industries offer major opportunities, but growth can be more inclusive and sustainable. 1. country context 17 Photo Credit - Emanuel Salinas 1. country context section I : country context Maldives is an island nation in the Indian Ocean comprising 1,190 small coral islands of which 199 are inhabited by a local population of 341,000.2 Maldives’ unique archipelagic coral island provides the country with an extremely rich and diverse marine ecological system. With more territorial sea than land, marine resources have played a vital role shaping the contours of economic development, with nature-based tourism being the key driver of economic growth and fisheries an important sector of employment for the local population. The population geography in Maldives is strongly polarized. The capital Malé, strategically located at the center of the archipelago and served by the first and busiest international airport, is the single most populous island of Maldives, with density as high as 53,700 people per square kilometer3 against an average of approximately 1,900 people per square kilometer in the atolls (Figure 1).4 Local Population 199 1,190 islands Small Coral populated Islands 341,000 Local Population Population Density in Malé 53,700 Population density in Malé People per 21% higher than that of Dhaka square km 74% higher than that of Mumbai The capital Malé is the single most populous island of 1,900 Maldives people per square km in the Atolls Figure 1. in the Atolls Distribution of local population. Source: National Bureau of Statistics 2 Ministry of Finance and Treasury, National Bureau of Statistics (2014), Preliminary results of the 2014 Census. Based on the same source, foreigners working in Maldives account for additional 58,682 individuals, leading to a total of about 400,000 individual 3 The population density in Malé is approximately 21 percent higher than that of Bangladesh capital Dhaka, and 74% higher than population density in Mumbai (World Atlas, 2012). 4 Ministry of Finance and Treasury, National Bureau of Statistics (2014), (2006), Maldives Population Census 18 Maldives Systematic Country Diagnostic Over the past 30 years, Maldives has successfully built on its extraordinary natural assets to promote growth and socio-economic development. Maldives shares many of the Small Island Developing States development challenges, such as: a small domestic market; a narrow and fragile resource base; a shortage of skilled manpower; difficult inter-island transport and communication; high cost of social and economic infrastructure provision; and heavy dependence on external trade and vulnerability to external shocks and natural disasters. However, in the case of Maldives, these challenges are compounded by its high geographic dispersion with 1,190 coral islands (199 of which are inhabited) grouped in 26 atolls, spread over roughly 90,000 square kilometers. Nevertheless, Maldives shares the development of a profitable high-end tourism sector has fueled sustained growth rates and many of the Small supported public investments in health and education. In the early 1980s, Maldives was one of the Island Developing world’s 20 poorest countries. Thirty years later, its inhabitants enjoy the same levels of GDP per States development capita and human development outcomes as a middle-income country. challenges. However, in the case of Maldives, these However, Maldives’ model of economic development has not been inclusive and its future challenges are sustainability is at stake. Although this economic model based on tourism-led growth and compounded by its redistribution of tourism-generated revenues has contributed to improving well-being of Maldivian high geographic population, poverty reduction has been below potential and the level of inequality – and lack of dispersion with 1,190 shared prosperity – remain a major challenge. Moreover, recent political and socio-economic coral islands. developments have brought to evidence the inherent vulnerability of Maldives’ development model and raise immediate concerns about its fiscal, environmental and social sustainability. This Systematic Country Diagnostic for Maldives aims to help identify the most critical constraints and opportunities facing the country as it works towards promoting sustainable growth, reducing poverty and boosting shared prosperity. In addition to serving as a public good for the government, civil society, research and academic community, and local and international development partners, the findings of the SCD will be used as key inputs in the preparation of the WBG strategy, the Country Partnership Framework, which will outline how the Bank Group’s engagement in Maldives can best contribute towards achieving the twin goals. 19 Malé’s, port receives most of the country’s imports, which are subsequently distributed at high cost to outer Atolls. 2. Growth, redistribution, poverty and shared prosperity 20 Photo Credit - Emanuel Salinas 2. Growth, redistribution, poverty and shared prosperity Key Messages ∫ Maldives development model is based on tourism-led growth and redistribution of tourism generated revenue ∫ Maldives development model has led to a very high pace of growth ∫ Poverty reduction in Maldives is below potential due to lack of shared prosperity ∫ Public expenditure has increased over past five years ∫ Maldives’ fiscal deficit has been widening leading to high public debt, while its foreign exchange reserves are very low Maldives’ model of socio-economic development relies on tourism-led growth and redistribution of tourism-generated revenue (Figure 3). The redistribution of revenue through public service delivery is complicated by the geographical dispersion of the archipelago that prevents achieving economies of scale, and ultimately leads to question whether this model is sustainable. The performance of this development model will be assessed on its ability to: (1) generate growth; (2) include as much of the population as possible in the growth process though productive forms of employment: and (3) efficiently redistribute resources towards the neediest segment of the population to facilitate poverty reduction and shared prosperity. Revenues Tourist resorts Taxes and Government concession concession revenues Figure 3. Maldives’ development Public services, model subsidies and jobs Local Source: Authors communities 21 2. Growth, redistribution, poverty and shared prosperity (contd.) Growth Bound by structural constraints and endowed with extraordinary natural assets Maldives developed a high-end tourism sector, which has resulted in a very high pace of economic growth over the past three decades. GDP per capita increased from $275 in 1980 to $6,666 in 2013 (Figure 4). This growth rate, which averaged 7 percent between 2002 and 2013 is mainly driven by tourism and non-tradable tourism-related activities (including construction, transport and communications) (Figure 5). This impressive track record of economic growth has been supported by capital accumulation through investment in resorts, and by an increase in the labor force mainly benefiting foreign workers. Economic growth in Maldives has been reliant on the development of tourism, with very limited contribution of other economic activities. Tourism accounts directly for around 30 percent of nominal GDP,5 and has accounted for about 28 percent of real GDP growth between 2002 and 2013. Including tourism-related sectors,6 these numbers increase to 64 percent of nominal GDP and 65 percent of real growth. There are few other primary industries contributing to economic growth, and they are small in relative size. Manufacturing, fisheries and agriculture combined accounted for 9.6 percent of GDP in 2013, and private sector-led growth outside of the tourism sector has been limited. 3,500 10,000 GDP per Capita (USD million) 3,000 9,000 GDP (USD million) 8,000 2,500 7,000 Figure 4. 2,000 6,000 5,000 GDP and GDP per Capita 1,500 4,000 1,000 3,000 Source: WDI 2,000 500 1,000 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 GDP (left axis) GDP per capita (right axis) 2014 25 percentage point contribution Figure 5. 20 15 Percent growth, GDP growth by sector 10 5 Percentage growth, 0 percentage point -5 -10 contribution -15 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: National Bureau of Statistics Other sectors Public sector-related Tourism-related Agriculture and fisheries Real GDP growth 5 Relative to GDP at basic prices. 6 Transport, communication, financial services and business services benefit directly from tourism activity and tend to be highly correlated to tourism bed-nights, while real estate and construction are heavily determined by investment in the tourism sector. 22 Maldives Systematic Country Diagnostic Gross Domestic Product (GDP) GDP Average growth rate GDP Per Capita growth rate averaged 7% between 2002 and 2013 Tourism accounts for Increase in GDP Per Capita 30% $275 $6,666 of nominal GDP 1980 2013 But Maldives’ form of tourism-led growth has followed an enclave model, reliant on imported goods, labor and finance. Accordingly, while tourism accounts for about a third of the country’s GDP, it only contributes to an estimated 16 percent of the employment in the country. Even when including sectors that benefit indirectly from tourism employment increases to only 22 percent of the total (Figure 35). Linkages between resorts and local economy are similarly limited, with very few products and services supplied by local enterprises. Manufacturing firms are small in size and lack the quality and reliability demanded by high-end resorts. Maldives’ form of tourism-led growth Tourism and Economy has followed an enclave model, reliant on imported goods, labor and finance. 28% 65% 2002-2013 2002 - 2013 Real growth from Real GDP growth tourism and tourism from tourism related sectors The participation of women in tourism jobs has been low. Even when Maldivians are employed, only about 30 percent are women, according to data from the 2009/10 HIES. Research suggests that social dynamics influence employment decisions such that families are reluctant to allow young women to take jobs in the tourism sector because they would have to travel from home to other islands and because the tourism sector is associated with “immoral and unethical” practices.7 A lack of child-care or residential facilities for employed women in the tourism sector further exacerbates familial unwillingness to allow young women to work away from home. Women’s limited control of transportation means to travel to and from resorts adds another hurdle.8 7 Hope for Women (2012), ADB (2014a), Gunatilaka, R. (2013). 8 Hope for Women (2012), ADB (2014a), 23 2. Growth, redistribution, poverty and shared prosperity (contd.) The tourism industry has contributed to an already large geographical spread of activity. Starting in the atolls around the main international airport in Malé (Central North), the tourism sector is still largely concentrated around Malé, with 84 percent of resorts within 130 kilometers from Malé airport. However, the industry has been slowly taking advantage of advances in transportation opening up atolls to the north and south. In fact, the first resort outside this range was opened in 2005 and there has been a steady increase since. (Figure 6). 100 Distance from Male airport (km) 90 80 Figure 6. 70 60 Geographical spread of 50 tourism resorts 40 30 20 Source: Ministry of Tourism 10 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year of initial operation Other economic activities also show large geographic dispersion. While public service jobs are also concentrated on Malé, with limited spread to the atolls, agricultural production takes place mainly in the Central North and Central South regions. For households in the outer atolls, public and private transfers are important source of household income (Figure 7). Percent of household income 80 30 70 25 Percent of total 60 20 Figure 7. 50 Agricultural output Geographical spread of 40 15 Tourism (beds) 30 activity 10 Civil servants 20 5 Transfers as % of Source: Ministry of Agriculture 10 household income (rhs) and Fisheries, Ministry of 0 0 Upper North North Central North (excl Malé) Malé Central Central South Upper South South Tourism, Household Income and Expenditure Survey (2009/10) Note: Transfers include public and private transfers. Apart from tourism, there are few sizeable economic activities in the country. Fisheries make Fisheries make up the second most up the second most prominent industry in the country after tourism, and are the largest goods prominent industry export earner. Maldives benefits from access to high quality fisheries stock, but a large share in the country after of its value is lost through export of fish as commodities to intermediary markets. As opposed tourism, and are the to tourism, fisheries accounts for a very small contribution to GDP (1.7 percent) but a larger largest goods export share of employment (10.5 percent).9 Agriculture provides 2.3 percent of GDP and 4.5 percent of earner. employment, but it does not export. However, while the economy doubled in size between 2002 and 2013, fisheries shrunk by 21 percent, and agriculture grew by only 24 percent over that period (Figure 8). 9 Data as of 2010. 24 Maldives Systematic Country Diagnostic Figure 8. 35 The role of tourism and 30 Tourism other sectors in GDP growth 2002-13 (% of total) Contribution to cumulative growth 25 Goverment 20 administration Source: Department of National Planning, World 15 Transport Communication Bank 10 Construction Manufacturing Wholesale and retail trade 5 Real estate Education Electricity and water supply Health Financial services 0 Agriculture and Business services Fisheries mining -5 -50 0 50 100 150 200 250 300 350 Cumulative growth 2002-13 (% change) Note: the bubble size shows the share of each sector in nominal GDP in 2013. Bubbles in yellow are sectors that depend Tourism revenues on largely tourism. have been used to support job creation in the public sector, Role of the state and redistribution to finance the The development of the tourism sector in Maldives has created significant sources of revenues provision of public to the country. Since the nationalization of all land in the country in 1979 and the revocation of services and expand all permits to operate guesthouses on inhabited islands in 1984, the development of the tourism access to primary health and education sector in Maldives has been largely dominated by a limited number of local businessmen.10 Barriers facilities beyond the to entry and capacity controls contributed to limiting competition and diversification of investors, capital area. but also have increased rents for the state as it has managed to extract increasing fees from concessions and lease agreements11 (Figure 9). Revenues generated in the tourism sectors have been used to address some of the structural development challenges of Maldives’ SIDS economy. In particular, tourism revenues have been used to support job creation in the public sector,12 to finance the provision of public services and expand access to primary health and education facilities beyond the capital area Malé; to provide social insurance against financial risks of old age and out-of-pocket health expenditures, as well as to insulate the local economy from international price fluctuations through a system of universal subsidies on food and energy (Figure 10). 10 Mihdha (2008). 11 The tourism sector is taxed directly through the Tourism Tax (or bed-night tax), the Airport Departure Tax, the Goods and Services Tax on Tourism (TGST), while tourism also has a significant impact on import duty and Business Profit Tax revenue. Resort lease rent provides a large share of non-tax revenue. 12 Jobs in the public sector account for 17.3 percent of total employment, while jobs in education, health and social services account for 20.5 percent of employment (as of 2010). 25 2. Growth, redistribution, poverty and shared prosperity (contd.) Figure 9. Figure 9. Figure 10. Tourism-related 40 40 35 35 50 50 revenue 45 45 30 30 Percent of GDP 40 40 Percent of GDP 25 25 35 35 Source: Ministry of Finance 20 20 30 30 and Treasury, IMF, World Bank 15 15 25 25 staff calculations 20 20 10 10 15 15 5 5 10 10 0 0 5 5 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 10. Import duty* Tourism tax Selected spending GST on Tourism Airport Service Charge Interest payments Subsidies and transfers Social welfare contributions Salaries, wages and items Royalties, land and resort rent Business Profit Tax Total expenditure and allowances Total revenue and grants net lending Source: Ministry of Finance and Treasury, IMF, World Bank * An estimated 20 percent of import duty can be attributed directly to tourism. Business Profit Tax can be attributed to a staff calculations large extent to tourism and related activities. The large number of SOEs further contributes to strengthening the role of the state in Maldives’ economy. SOEs play a dominant role in many sectors, including trade, fisheries, finance, construction, SOEs play a dominant transport, health and utilities. Although their contribution in total fiscal revenue has declined from 19 role in many sectors, percent in 2003 to 4 percent in 2013, thanks to the shift towards new forms of taxation, combined including trade, revenue of the main three SOEs was still equivalent to 37 percent of GDP in 2013. There are currently fisheries, finance, around 84 SOEs13 , about half of which require active monitoring, whereas 28 have been identified by construction, the government for liquidation.14 transport, health and utilities. The new constitution introducing democracy in the late 2000s has been accompanied by an increase in the level of redistribution. In particular, the increase in public spending has been mostly driven by: ∫ The introduction of explicit electricity subsidies. Due to high costs of domestic electricity production and distribution, the country has a long history of subsidized energy prices.15 The current system of Over the last four explicit electricity subsidies was introduced in 2009 in parallel with the reform of electricity tariffs. years, spending on While the electricity tariff reform was meant to curb utility providers’ losses by allowing a cost- electricity subsidies recovering pricing, the contemporaneous introduction of subsidies had the effect of transferring the increased nine times, cost of the electricity tariff reform and of any future increase in fuel prices onto the government’s escalating from 0.3 budget. Over the last four years, spending on electricity subsidies increased nine times, escalating percent of GDP in 2010 to 2.7 percent from 0.3 percent of GDP in 2010 to 2.7 percent in 2014 (Figure 11). in 2014. 13 Because of complex ownership structures, the number of firms in which the state has a combined direct and indirect stake of at least 5 percent increases to 92. The state has a control of at least 50 percent in 61 firms, out of which it has 100 percent control of 46. 14 Draft Aide-Memoire, Maldives Governance of State Owned Enterprises (SOE) mission, World Bank, June 22 - 29, 2014 15 Due to Maldives’ reliance on imported diesel for electricity generation and inefficiencies in generators’ capacity, the cost of electric- ity production in Maldives is up to five times as high as in neighboring countries. In particular, electricity production in Maldives is 2.5, 3.3 and 5 times more expensive than in Pakistan, India and Bangladesh, respectively. 26 Maldives Systematic Country Diagnostic ∫ The introduction of a universal health insurance scheme. The country’s geography and dispersed population, along with its high dependence on imports of medical consumables and expatriate manpower, have meant that health services come at substantially higher costs when compared with other countries in the region. Maldives spent 9.2 percent of its GDP on health in 2011, about half of which came from the government treasury and the rest from household sources. Responding to a growing demand for financial assistance to cope with out-of-pocket health expenditure, the government introduced a universal health insurance system, Aasandha, in January 2012. However, the piecemeal nature of the reform, continuing capacity issues within the government and inadequate preparation and planning for these reforms have contributed to continuing efficiency, impact and cost challenges. In its first year of introduction, the scheme received claims for MVR 943.6 million (corresponding to 2.4 percent of GDP), well in excess of the amounts approved in the government budget.16 Maldives spent 9.2 ∫ An increase in coverage and generosity of pension system. The 2009 Pension Act extended percent of its GDP on old-age protection beyond workers employed in the civil sector and mandated the introduction health in 2011. of a two-pillar pension system comprising of Maldives Retirement Pension Scheme ( a new contributory pension scheme based on a defined contribution model) and the Old Age Basic Pension (OABP) (a universal non-contributory pension system for individuals 65 and older). While the extension of coverage of the pension system is aimed at closing protection gaps between the public and private sector, implementation challenges during the reform and the particular generosity of the OABP scheme have contributed to increasing government spending. 80 Figure 11. 70 Fiscal cost of Electricity 60 (2009-14) 50 MVR million Source: WB staff calculations, 40 based on NSPA data – December 2014 30 20 10 0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Usage Subsidy Fuel Surcharge Total 16 Budget provisions for Aasandha have been between MVR 720 and 750 million. 27 2. Growth, redistribution, poverty and shared prosperity (contd.) Figure 12. International Poverty Poverty and shared prosperity Rates, circa 2010 Percentage of the population 25 23.85 Source: Maldives (HIES data); Sri Lanka and Upper Middle under the poverty line 20 17.02 17.13 Income Countries (World 15 Development Indicators); 1.25$PPP Pacific Islands (Systematic 10 2.00$PPP Country Diagnostic for 6.78 4.91 4.11 5.3 Eight Small Pacific Island 5 3.2 Countries, forthcoming) 0 Maldives Sri Lanka Upper Vanuatu Kiribati Middle South Asia Income Pacific Islands Countries Note: For the Pacific Island States the poverty line is about 1.25$ per day. Data for Sri Lanka refers to 2009. 48,000 Individuals Deemed Poor (one out of six Maldivians) Maldives’ poverty incidence is substantially in line with that of upper middle-income countries. According to the latest available HIES, collected in 2009/10, the share of population living with less than $1.25 in 2005 PPP a day was 4.9 percent, where the corresponding share using the $2 a day poverty line was 17.02 percent. These shares are very similar to the average poverty outcomes of UMICs, two of the small Pacific islands, and neighboring Sri Lanka, as shown in Figure 12. Still, these figures represent that in 2009/10, approximately 48,000 individuals (about one out of six Maldivians) were deemed poor, i.e. they were consuming at a level not sufficient to satisfy minimum food and non-food needs. poverty in figures percentage of the population percentage of the population 4.9% 17.02% living with $1.25 a day living with $2.00 a day Maldives performs better than the other countries in South Asia with respect to different socio- economic indicators and gender equality. Compared to other countries in South Asia, Maldives ranks first in terms of per-capita GDP and it is second only to Sri Lanka based on the Human Development Index ranking (Figure 13, left panel). In 2010, life expectancy at birth was 76.8, three years higher than both the average for UMICs and Sri Lanka, the second best of the South Asia 28 Maldives Systematic Country Diagnostic region. Further, Maldives performance is better than the average UMC also with respect to infant mortality rate, although it is second to Sri Lanka in the South Asia region (Figure 13, right panel). Maldives fares significantly better than many countries when it comes to gender equality, ranking 49th on the Gender Inequality Index in the 2014 Global Human Development Report of UNDP, in comparison with its Human Development Index ranking of 103th. The island nation has the least disparities between men and women, when compared with other medium human development countries as well as its South Asian neighbors. The country has attained gender parity in primary and secondary enrollment, and the number of Maldivian women attaining university degrees is at par with that of men. Figure 13. 150 5,000 80 80 Life expectancy (years) Figure 13. 70 Mortality rate (%) 120 4,000 GDP per capita 60 Selected socio- HDI Rank 90 3,000 50 economic indicators, 40 70 60 2,000 30 South Asia Countries 20 30 1,000 2010 10 0 0 0 60 Pakistan Maldives Nepal Bangladesh India Sri Lanka Bhutan UMC Pakistan Maldives Nepal Bangladesh India Sri Lanka Bhutan Source: HDI rank (UNDP, Human Development Reports), GDP per capita (World Development Mortality rate, infant (per 1,000 live births) HDI rank GDP per capita Indicators), Infant mortality Life expectancy at birth rate and Life expectancy at birth (World Development Indicators). 30 25.81 Proportion of the population 23.03 25 under the poverty line Figure 14. 20 15.67 17.05 National Poverty Rates, 15 2003 and 2010 10 7.12 4.92 Source: Bank staff elaboration 5 on HIES data. 0 National poverty line 1.25 US$ 2005 PP 2.00 US$ 2005 PPP 2003 2010 Over the seven years between 2003 and 2010, Maldives achieved a substantial decline in poverty. The poverty headcount based on the national poverty line declined by seven percentage points, from 23 percent in 2003 to approximately 16 percent in 2010. Depth and severity of poverty declined from 6 to 4 percent and from 2.3 to 1.6 percent, respectively. Similar positive trends are observed considering the $2 PPP international poverty line. On the other hand, no statistically significant poverty decline is registered when considering the $1.25 PPP international poverty line (Figure 14). 29 2. Growth, redistribution, poverty and shared prosperity (contd.) Poverty declined in the atolls while remaining stable in the capital area Malé. The decline in poverty observed at national level is the result of opposite poverty trends at regional level. In particular, while poverty remained substantially stable at around 18 percent in the capital area Malé, it declined markedly in the atolls – going from 25 percent in 2003 to 14 percent in 2010. Similar patterns are observed using the international poverty lines (see Figure 15). Figure 15. 30 27.88 Proportion of population 25.81 25.07 under the poverty line 25 23.03 Poverty Rates, Malé and 20.20 20 19.48 18.19 atolls, 2003 and 2010 17.05 17.47 15.67 15.70 15 14.27 Source: Bank staff 10 8.55 7.12 7.42 elaboration on HIES 2003 and 4.92 2010 data. 5 3.23 3.53 0 2003 2010 2003 2010 2003 2010 Overall country Malé Atolls 2.00 US$2005 PPP National poverty line 1.25 US$2005 PPP 2003 2010 40 40 Figure 16. Proportion of population Proportion of population 35 35 under the poverty line under the poverty line Poverty headcount 30 30 and share of poor 25 25 20 20 individuals, by region 15 15 10 10 Source: Bank staff 5 5 elaboration on HIES 2003 and 0 0 2010 data. North Central Central Malé Central South North Central Central Malé Central South North South North South Poverty Headcount Share of Poor Individuals Poverty Headcount Share of Poor Individuals The poverty rate is the highest in the Central North and Southern atolls, while the capital area Malé is home to the largest share of poor individuals. The Central North region of the archipelagos is the poorest in both years, with poverty rates of 35 percent in 2003 and 25 percent in 2010. This is followed by the Southern region, with 28 percent poor individuals in 2003 and 21 percent in 2010. The Central region reduced its poverty rate by more than 80 percent in seven years (see Figure 16). 30 Maldives Systematic Country Diagnostic 100 22.3 20.3 80 5.3 North 8.3 Figure 17. Percent 60 20.4 Central North Distribution of 41.5 Central 40 11.2 population, by regions 2.2 Malé 24.6 Central South 20 24.5 Source: Staff elaboration South based on HIES data. 13.2 6.3 0 2003 2010 Sustained migration from the atolls to the capital accounts for most of the diverging poverty trends at the subnational level. The seven years between 2003 and 2010 are characterized by substantial population movement from the atolls towards the capital area Malé. The share of individuals living in Malé increased from 20 percent to 42 percent of the overall population. With only the exception of the The pace of poverty Central North region, where the population remained stable at around 24 percent, all other regions saw reduction is below a reduction in their population shares, particularly the Central and the Northern regions (Figure 17). potential when The pace of poverty reduction is below potential when considering the fast GDP growth of the Maldivian considering the fast economy between 2003 and 2010. The GEPR in Maldives is relatively low by international standards. In GDP growth of the particular, considering the $2 PPP poverty line, the GEPR in Maldives is about 1.2 percent, meaning that Maldivian economy between 2003 and for each percent increase in Maldives’ per capita GDP, poverty fell by a mere 1.2 percent. The limited 2010. contribution of growth to poverty reduction in Maldives is evident when compared to other countries. For example, while Maldives and Sri Lanka shared the same growth rate (approximately 4.8 percent a year over the period), poverty reduction in Maldives was one-third less than experienced in Sri Lanka.17 Even Nepal and Pakistan managed to reduce poverty faster than Maldives, although in these two countries GDP growth was, respectively, 2 and 2.5 percentage points lower (Figure 18, left panel). Maldives’ limited performance in terms of poverty reduction is even more striking when considering its Given the slow pace relatively high potential as suggested by the initial level of per capita income. With a per capita GDP of of poverty reduction, Maldives will be able $3,360 in 2003, Maldives started with the highest poverty reduction potential of the South Asia region. to reduce extreme Despite the large income lever that could have helped lift individuals out of poverty, Maldives’ elasticity poverty under 1 of poverty to GDP growth was significantly lower than countries starting from similar levels of per capita percent by 2040, a GDP, and closer to that of countries with lower levels of per capita GDP such as India or Bangladesh much longer period (Figure 18, right panel). than similar upper middle-income Given the slow pace of poverty reduction, Maldives will be able to reduce extreme poverty under 1 percent countries, and other by 2040, a much longer period than similar upper middle-income countries, and other countries in countries in South South Asia. If poverty keeps decreasing at the same rate as in the period 2003-2010, Maldives will Asia. reduce extreme poverty below 1 percent in 30 years, as opposed to only eight years needed to Sri Lanka, and more than double the time of the average middle-income country (14 years). Even Pakistan and Nepal, which start with much higher poverty rates, will be two years faster than Maldives in defeating extreme poverty (see Figure 19). 17 Poverty decreased at about 0.5 percent per year in Maldives as opposed to 1.6 percent in Sri Lanka. 31 2. Growth, redistribution, poverty and shared prosperity (contd.) Figure 18. Figure 18. Relationship between .1 8,000 annualized poverty .08 Intitial GDP (circa 2003) changes and GDP 6,000 GDP growth rate IND over the period 2003- BTN UMC .06 2010, an international LKA MDV RGD 4,000 MDV .04 comparison NPL UMC PAK 2,000 Source: Maldives, MDV .02 BTN LKA PAK IND (Bank staff elaboration on NPL BGD 0 HIES 2003 and 2010 data); 0 -.3 -.2 -.1 0 -6 -4 -2 0 All other countries (World Poverty change rate Rate of poverty change/ GDP growth rate Development Indicators database). Note: Initial and Final years varies across countries, depending on availability, and it may be one to two years before or after 2003 and 2010. GDP is expressed in constant 2000 US$. Figure 19. Figure 19. Figure 20. Years needed to reduce BGD Initial Poverty Rate (ciara 2010) 40 20 extreme poverty (1.25$ PPP) below 1 30 15 percent Percentiles NPL IND 20 10 Figure 20. PAK 5 10 LKA UMC Growth Incidence Curve, MDV 0 BTN 0 2003-2010 0 20 40 60 80 100 0 20 40 60 >80 Percentiles Source: Bank staff Number of years Growth Incidence 95% Confidence interval elaboration on HIES data Mean growth rate Note: The figure has been cut at 80 years for better scaling: Bangladesh would need 122 years to fight extreme poverty, given current poverty decay. Growth is not equally The lack of shared prosperity in Maldives is the main determinant of the limited impact of growth shared by all sections on poverty reduction. Shared prosperity remains a major challenge for Maldives. As shown in of the distribution: Figure 20, growth is not equally shared by all sections of the distribution: the bottom 40 percent the bottom 40 is growing less than average, while people in the upper part of the distribution are growing much percent is growing faster. This un-equalizing impact of growth slowed down poverty reduction. Had all the segments less than average, of the population benefited equally from growth (i.e. had growth been distribution neutral), poverty while people in the would have declined by as much as 11 percentage points (Figure 21). upper part of the distribution are growing much faster. The unequal impact of growth is further reflected by an increase in the gap between the poorest and richest segments of the population. The increase in inequality induced by growth deepened the polarization of welfare distribution in Maldives. While inequality as measured by the Gini index declined slightly from 39.9 percent in 2003 to 38.6 in 2010, the polarization as measured by quintile ratios increased.18 In particular, if in 2003 the poorest individual in the top 10 percent 18 The Gini index is more sensitive to capturing changes around the mean of a distribution, and it is therefore poorly suited to captur- ing polarization and changes around the tails. 32 Maldives Systematic Country Diagnostic of the distribution was consuming four times more than the richest individual in the bottom 10 percent of the distribution, in 2010 that individual was consuming 5.3 times more. Polarizing trends are reflected by the unequal distribution of resources: in 2010, the top 20 percent of the Figure 21. population commanded as much as 45 percent of total consumption against only 17 percent of Decomposition of the bottom 40 percent. the poverty change in Growth and Figure 21. Figure 22. Redistribution, 2003- Share of poor individuals, percent 4 3.9 3.2 20 80 2010 Poverty Headcount, percent 2.1 70 2 0 15 60 Source: Bank staff Change rate (%) elaboration on HIES data. -2 50 -4 10 40 -4.3 30 -6 -8 5 20 -10 10 -12 -11.3 0 0 Figure 22. -12.0 None or Primary Lower Vocational Higher 1.25$ PPP National poverty line 2.00 $PPP Incomplete Secondary Secondary Distribution of poor Primary and Tertiary individuals and bottom Growth Redistribution Headcount Share of Poor Individuals 40 percent by level of education of the household head, 2010 Inequality in numbers Source: Bank staff Total consumption elaboration on HIES data Percentage of Percentage of total consumption total consumption 17% by bottom 40% of 45% by top 20% of population population Limited job opportunities, Limited job opportunities, especially for low-skilled labor, might have played an important role especially for in limiting the contribution of growth to poverty reduction. Low education levels, inactivity and low-skilled labor, unemployment are strongly associated with a higher risk of poverty. According to HIES 2009/10 might have played data, the lower the educational attainment of the household head, the higher is the likelihood that an important role the household is poor. About 88 percent of the poor (and 84 percent of those in the bottom 40 in limiting the percent) live in households whose head has only completed primary education (see Figure 22). contribution of Looking at labor market outcomes, Maldivian households whose head is unemployed or inactive growth to poverty are on average 1.5 and 1.2 times more likely to be poor than average. reduction. 33 2. Growth, redistribution, poverty and shared prosperity (contd.) Where you work matters for poverty reduction Poverty rates when the head of the house hold works in these sectors 26% 18% 17% Construction Manufacturing Fisheries/ Agriculture Employment at the lower spectrum of the skill distribution is associated with higher poverty rates. In particular, poverty rates are higher when the head of household is employed in construction (26 percent), manufacturing (18 percent) and fisheries/agriculture (17 percent). Taken together, these three sectors account for more than 50 percent of the poor individuals with working household heads, and the fisheries sector alone accounts for about 26 percent of the total (Figure 23). Fisheries development is particularly important in the atolls, where 30 percent of the household heads work in the fishery sector (as opposed to only 1 percent in Malé). In the atolls, the fisheries sector alone accounts for 41 percent of poor individuals with a working household head. As labor income is the main source of household income for the poor, an inclusive development of the labor market is key for reducing poverty and boosting shared prosperity. Labor income accounts for more than 70 percent of the total household income of the poor, and it is the main source of income for 70 percent of poor individuals. In Malé, where two-thirds of employed household heads work in public administration, education and health and services, labor income comes primarily from wages. In the atolls, where 45 percent of employed household heads work in fisheries and manufacturing, labor income is mainly self-employment income (see Figure 23). 30 Figure 23. Percent of distribution 25 Distribution of poor 20 individuals and bottom 40 percent by industry 15 of employment of the 10 household head, 2010 5 0 Fisheries and Manufacturing Construction Hotel/ Public Education Other Agriculture Restaurant Administration and health Services Source: Bank staff elaboration Poor Bottom 40 Percent on HIES data. Note: Sample restricted to households with employed household head. 34 Maldives Systematic Country Diagnostic Recent macroeconomic and fiscal trends After hitting 1.3 percent in 2012, economic growth has been steadily recovering and is estimated to amount to 5 percent in 2014.19 Most other service sectors are estimated to have grown as well in 2014, while the industrial sector expanded by 13.2 percent in 2014, driven by construction, following a contraction of 1.5 percent the previous year. However, the agriculture and fisheries sector is estimated to have contracted by 2.1 percent in 2014 after posting growth of 5 percent in 2013. (Figure 24). See also Box 2 for a discussion on macro data. Average stay continued its secular decline as the composition of tourism changes further. The average stay of tourists declined to 6.1 days, down from a recorded average of 7.1 days between 2009 and 2013, reflecting a structural shift in the composition of tourism. Between 2010 and 2014 the share of European tourists fell by 20 percentage points from 63.8 to 43.9 percent due to weaker economic conditions in Europe. The simultaneous increase in the number of Asian tourists and demand from Middle East mitigated the weakening European demand. During the 2010-2014 period the Asian share of tourists expanded by 15.2 percent while the share of Middle Eastern tourists grew by 1.6 percent (Figure 25). Tourism : recent trends European Tourists - Asian Tourists - Middle Eastern Tourists - -20% +15.2% +1.6% Percentage point contribution 25 15 to growth 5 Figure 24. -5 Sectoral contributions -15 to growth 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: National Bureau Tourism Tourism-related Fisheries Agriculture Manufacturing of Statistics, MMA, staff Government Education, health, Other GDP calculations administration social services 19 World Bank and IMF staff estimates. 35 2. Growth, redistribution, poverty and shared prosperity (contd.) Percentage point contribution 25 Figure 25. 20 to annual change Drivers of change in 15 10 tourism arrivals 5 Source: MoT, MMA, staff 0 calculations -5 -10 2008 2009 2010 2011 2012 2013 2014 Europe Americas Middle East China Others Total Annual average inflation moderated even further in 2014, falling to 2.4 percent, down from 4 percent in 2013 driven by low food prices and international crude prices. The fall is particularly steep considering the 10.9 percent inflation rate recorded in 2012. As measured by the overall consumer price index, inflation in Malé has been unstable since 2009 with large fluctuations. Following a spike in inflation in 2011, when the currency was floated and sharply devalued, inflation Inflation in Malé has started showing signs of moderation and fell to a low of 2.4 percent in 2014 (Figure 26). During been unstable since 2009. the second half of 2014, inflation fell even further, driven largely by a drop in food prices (Figure 27). Prices for food and non-alcoholic beverages grew at a pace of 1 percent in 2014, as opposed to 7.5 percent in 2013. New taxes in 2011 and 2012, mainly on the tourism sector, have increased fiscal revenue structurally; however, the fiscal deficit widened to an estimated 11.6 percent of GDP in 2014. These taxes include the new Tourism Goods and Services Tax (TGST, which was increased from 8 to 12 percent in November 2014) and an increase in the Airport Departure Tax. All these taxes are borne by tourists, who, according to the authorities, have an inelastic demand curve.20 In addition, a Business Profits Tax21 and a General GST have been introduced. The net impact has been to Figure 26. increase revenue from 21.9 percent of GDP in 2010 to 32.4 percent of GDP in 2014 (Figure 28). Inflation in 2014 Figure 27. Source: National Bureau Figure 26. of Statistics, MMA, staff Percent year-on-year change 20 calculations 5 18 Percent annual change 4 16 3 14 2 12 Figure 27. 1 10 0 8 Inflation trend over the 6 -1 4 years -2 2 -3 0 Source: National Bureau 2009 2010 2011 2012 2013 2014 -4 of Statistics, MMA, staff Malé inflation Food & non-alcoholic Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 calculations beverages Malé inflation Food & non-alcoholic beverages 20 Ministry of Tourism, Arts and Culture (2012). 21 The BPT is also applied to resorts and related operations, which provide the bulk of revenue. 36 Maldives Systematic Country Diagnostic 60 50 Percent of GDP 40 Figure 28. 30 Fiscal accounts, 20 actuals, budget and 10 0 estimates -10 -20 Source: MoF, MMA, IMF, staff -30 calculations 2009 2010 2011 2012 2013 2014 2014 2014 2015 budget authorites staff budget estimate estimate Total revenue and grants Total expenditure and net lending Fiscal balance Primary balance However, persistent and widening fiscal deficits have led to a high level of public debt, which stood at 74.6 percent of GDP at end of 2014. This represented a net increase of 36.8 percent from 2003. This increase was driven by persistent deficits, while fast GDP growth relative to the average real interest rate on debt provided some downward pressure on the level of debt. Recognizing the unsustainable outlook of its fiscal accounts, the Government has proposed fiscal Persistent and consolidation measures in its 2015 budget. On the revenue side this includes a “green tax” on widening fiscal tourism (which effectively replaces the Tourism Tax, which was abolished in late 2014, although deficits have led to at a lower rate), increases in import duties, a one-off revenue boost from Special Economic Zones a high level of public (SEZ) acquisition fees and the extension of resort leases. On the expenditure side, the budget debt. proposes to better target subsidies and freeze public employment. Although these measures, if properly implemented, will help reduce the deficit, they are unlikely to be sufficient to decrease the upward path of public debt, and further fiscal consolidation through expenditure and revenue measures will be needed in the short and medium term. The banking sector Driven by high fiscal expenditure, the current account has been persistently in deficit, reaching shows limited an estimated 8.4 percent of GDP in 2014. The goods trade deficit is roughly offset by tourism appetite to invest revenue, but net income outflows (such as dividends and interest payments on external debt) in the domestic and remittance outflows lead to an overall structural current account deficit. The deficit has been economy. financed through foreign direct investment, while net capital outflows by private banks reflect the limited investment opportunities in the non-tourism sector. Indeed, apart from buying Treasury bills, the banking sector shows limited appetite to invest in the domestic economy. While the government has started to borrow increasingly from banks in recent years, a significant proportion of remaining bank assets are parked at the central bank, earning a very low overnight night rate,22 or are sent abroad.23 22 The Overnight Deposit Facility was introduced in 2010, and the rate has been 1.5 percent since September 2014 (as of May 2015). 23 This may be a combination of repayments of earlier loans incurred in the mid-2000s and investments. 37 2. Growth, redistribution, poverty and shared prosperity (contd.) 40,000 35,000 30,000 MVR million 25,000 20,000 Figure 29. 15,000 Distribution of banks 10,000 5,000 assets 0 -5,000 Source: MMA, staff -10,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 calculations Public sector Public non-financial Private sector Central bank Net foreign assets Total Meanwhile, credit to the private sector growth has mostly stagnated since 2008. In addition, credit Credit to the private to the private sector is concentrated in tourism, which is a legacy of a large increase in resorts sector growth has leased out in the mid-2000s when local branches of banks borrowed from foreign head offices mostly stagnated to lend to the domestic tourism sector. Since the global financial crisis, credit growth has been since 2008 and is close to zero, with a write-off of non-performing loans in 2012.24 The focus has now moved to concentrated in construction, electricity and real estate and other loans and advances (Figure 30). tourism. 70 1,8000 contribution to growth 60 1,6000 Percentage point 50 1,4000 MVR million 40 1,2000 30 1,0000 20 8,000 10 6,000 Figure 30. 0 4,000 -10 2,000 Distribution of bank -20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 credit to the private sector Agriculture Fishing Manufacturing Construction Real Estate Tourism Commerce Transport & communication Source: MMA, staff Electricity, gas, water & Other loans & advances Total loans & advances Total loans & advances level calculations sanitary services not adequately described (right axis) At the end of 2014, gross international reserves increased, but net usable reserves remained low at only $120 million, covering less than a month of imports. As a result of the large improvement in net capital inflows, gross official reserves have increased from $368 million at the end of 2013 to $614 million at the end of 2014, covering 3.7 months of imports of goods and services. However, the stable exchange rate and the parallel market premium do not signal any shortages. In practice, the amount of reserves in the economy may be much larger, and the tourism industry appears to supply sufficient quantities of foreign exchange at a stable premium over the official exchange rate. The exchange rate remained at MVR 15.4 per USD, while the premium declined, as major SOEs abstained from the secondary market. 24 MMA, (2012b). 38 Maldives Systematic Country Diagnostic Box 2. A real crisis or a macro data crisis? It has often said that Maldives is perennially at the verge of a crisis. When looking at the macro data the question is indeed why the country is not in a crisis. According to the IMF’s 2013 Debt Sustainability Analysis update, Maldives was at high risk of debt distress. In particular, the country had a persistent current account deficit of around 20 percent of GDP; public domestic and external debt was 73 percent of GDP at end-2011, while private external debt was estimated at 38 percent of GDP. By February 2013, official reserves amounted to $304 million, equivalent to just 1.6 months of imports, and freely usable reserves amounted to only $99 million. Despite these challenges, stores were stocked with imported items and the exchange rate premium was modest. How can this puzzle be explained? First, the tourism industry seems to hold sufficient amounts of reserves at home and abroad to be able to supply sufficient quantities to the parallel market to keep the premium stable. Second, given the extreme openness of the economy, the measurement of financial flows through the current and capital account are inaccurate. Similarly, poor financial management and recording practices contribute to underreporting on the expenditure side. The national accounts were revised recently according to international practice resulting in an increase of nominal GDP over previous estimates (e.g., by 13 percent in 2013, Figure 2.1).a At the same time, significant revisions have been made to the balance of payments data using new data sources, better methods and new data in line with IMF technical assistance recommendations. This resulted in large changes to the services balance (mostly tourism), goods balance (imports) and financial accounts, leading to a substantially narrower current account deficit (Figure 2.2), higher estimates of FDI inflows and reduced private-sector borrowing. Moreover, surveys and anecdotal evidence suggest that the tourism exports could still be underestimated. As a result of these adjustments, the current account deficit in 2013 has been revised from 20.5 percent of GDP to 6.5 percent of GDP. The level of public debt at end-2011 has been revised down to 59 percent of GDP, while the estimated level of private external debt has been revised down to 13 percent of GDP. 39 2. Growth, redistribution, poverty and shared prosperity (contd.) Figure 2.1 Revisions to GDP Figure 2.1. Figure 2.2. Source: National Bureau of 45,000 0 Statistics 40,000 -5 35,000 Percent of GDP MVR million -10 30,000 25,000 -15 Figure 2.2 20,000 -20 15,000 Revisions to current 10,000 -25 account 5,000 -30 0 -35 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: MMA 2008 2009 2010 2011 2012 2013 2014 New GDP (at market prices) Old GDP (at basic prices) Old current account New current account (December 2013) (October 2013) On the other hand, the actual fiscal deficit is estimated much higher than the reported deficit. The fiscal deficit (reported by the Ministry of Finance) cannot be reconciled with net external and domestic borrowing by the government (reported by the Maldives Monetary Authority). While current expenditure in 2013 was reported as 32.6 percent of GDP by the authorities, the IMF estimates it to be 36.5 percent of GDP, mainly a result of the authorities Although the underreporting interest payments, and incomplete and underreporting of subsidies and country looks less social welfare schemes, operations and maintenance payments. vulnerable now, it is still considered on an Although the country looks less vulnerable now, it is still considered on an unsustainable unsustainable fiscal fiscal path, as the most recent joint World Bank-IMF DSA of 2015 points out. path. Notes: (a) The national accounts moved from basic prices (excluding taxes and subsidies on products) to market prices; (b) IMF (2015). 40 Maldives Systematic Country Diagnostic A sunset in Maldives is darkened by smoke clods from garbage burnt in Thilafushi Island. Adequate waste management will be essential to ensure environmental sustainability. 3. Vulnerability and sustainability issues 41 Photo Credit - Emanuel Salinas 3. Vulnerability and sustainability issues Key Messages Maldives development model is inherently vulnerable to shocks and increasingly not sustainable. In particular: ∫ Maldives is highly vulnerable to external macro shocks ∫ Maldives democratic transition is still in progress and political instability high ∫ Maldives social contract is at risk due to lack of inclusiveness, especially of youth ∫ Environmental sustainability is at risk due to climate change, lack of preparedness for natural disasters, waste management and lack of access to potable water ∫ Electricity generation cost is the highest in South Asia Recent socio-economic and political developments have raised concerns regarding the sustainability of Maldives’ development model. Despite a long period of sustained economic growth, the vulnerability of Maldives’ model of development is increasing over time, especially with respect to its fiscal, social, political and environmental sustainability. Maldives is highly vulnerable to shocks due to its small size, Macroeconomic vulnerability and sustainability lack of economic diversification and Maldives is highly vulnerable to shocks due to its small size, lack of economic diversification and heavy reliance on heavy reliance on imports. Furthermore, increasing macroeconomic imbalances and escalating imports. public debt represent a growing source of external vulnerability. While the Maldivian economy has shown resilience in the past, the country may currently lack appropriate buffers to cope with a shock that would affect the tourism sector, terms of trade or interest rates. Box 3. How “special” is Maldives? Before the tsunami hit in 2004, expenditure levels were in line with other island states, such as Cape Verde, Sao Tome and Principe, Barbados and Dominica, which are all countries with higher tourist receipts, large fiscal deficits, large current account deficits and a soft-peg exchange rate. Moreover, expenditure was in the 20th to 80th percentile of emerging and developing countries. After the tsunami and the introduction of democracy, expenditure has moved to the top 20th percentile and has stayed there (Figure 3.1). Maldives is also an outlier in many ways compared to the rest of the world. Its exports and imports are the 97th percentile of the world, its current account in the 8th percentile (although the recent revision makes the current account deficit less exceptional), and expenditure in the 77th percentile (Figure 3.2). 42 Maldives Systematic Country Diagnostic In terms of growth volatility as measured by the standard deviation of real GDP growth over 2003-13, Maldives ranks in the 94th percentile compared to all countries, and it has the Figure 3.1 highest standard deviation among all five peer island states mentioned above. General government total expenditure, Figure 3.1. Figure 3.2. against selected island 140 150 states 60 120 50 100 Percent of GDP Source: Find my Friends tool 80 100 40 Percentile Percent using IMF WEO 2014 60 30 40 20 20 50 0 Figure 3.2 10 -20 Maldives’s economic 0 -40 0 Imports of revenue expenditure Current account goods & services goods & services General government General government Exports of 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 features and percentile comparison to the Maldives Cape Verde world São Tomé and Principe Barbados Dominica 20th percentile Maldives 2002-07 Maldives 2011-13 Source: WDI, WEO data using 80th percentile Percentile in the world 25th percentile the Find my Friends tool. (2011-13, right axis) 75th percentile The bars indicate the level of each variable in Maldives relative to GDP (left axis), while the diamonds show the percentile for each variable in Maldives compared to the world (left axis). The dotted lines indicate the 25th and 75th percentiles for reference. As a small island As a small island state with a high level of imports, the country is vulnerable to food and fuel state with a high commodity prices through the balance of payments. Moreover, as it subsidizes flour, rice and level of imports, the sugar, and diesel-based electricity generation, the fiscal accounts are equally vulnerable to price country is vulnerable shocks. Indeed, 2011, the year of the exchange rate devaluation, saw a one-off spike in subsidies to changes in commodity prices. of 0.7 percent of GDP. Tourism has created additional channels of external vulnerability to shocks, which has created significant volatility for the economy as a whole. The trends over the past decade have highlighted the fact that tourism can be affected by a host of factors beyond the control of the country. These include environmental events (the tsunami affecting Maldives directly), global economic trends (the 2001 recession and the recent global financial crisis affecting wealth of European travelers), and even security concerns abroad (September 11 terror attacks limiting air travel). These external shocks have been passed on to the economy as a whole, given the high dependence of Maldives on tourism. 43 3. Vulnerability and sustainability issues (contd.) Figure 31 50 expenditure Fiscal trends since 45 40 Other Percent of GDP 2003 35 30 25 expenditure Source: Ministry of Finance 20 and Treasury, Staff Rigid 15 calculations. 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Other revenue/ non-tourism Tourism-related revenue Grants Total expenditure and Rigid expenditure related revenue net lending Note: Rigid expenditure defined as salaries, wages and allowances, social welfare contributions, interest payments and subsidies and transfers. Tourism-related revenue defined as tourism tax, GST on tourism, Airport Service Charge, royalties, land and resort rent, (part of) import duty revenue and Business Profit Tax. Especially in recent years, the development model has led to an increasing share of revenue dependent on tourism, while an increasing share of expenditure has become “rigid”. That is, an increasing share of expenditure consists of items that are not easily adjusted in the event of a downturn in revenue: subsidies and transfers, social welfare contributions, salaries and wages and interest payments (Figure 31). The lack of macro policy buffers leaves the country with few instruments to stabilize the economy in the event of a downturn in tourism. With high debt and an already high fiscal deficit, it will be difficult to increase expenditure or reduce taxes in the case of a downturn. Moreover, for a small island state with most consumption goods imported and a high pass-through of exchange rate fluctuations into inflation,25 exchange rate stability is of utmost importance. The country’s official Unless adjustments are made to revenue foreign exchange reserves have frequently reached levels below three month’s import coverage.26 and expenditure, the This limits the country’s ability to respond to pressure on the exchange rate, which has led to current development devaluations in 2001 and 2011 and to balance of payment support in 2005 after the tsunami and model will lead to in 2009 after the global financial crisis. ever increasing levels of public debt. Maldives’ already high level of public debt and fiscal path leads to immediate fiscal sustainability concerns. Unless adjustments are made to revenue and expenditure, the current development model will lead to ever increasing levels of public debt, even after the fiscal consolidation measures budgeted in 2015. Overall public debt (including domestic debt) is estimated at 74.6 percent of GDP at the end of 2014, well above the benchmark of 56 percent of GDP established under the LIC-Debt Sustainability Framework.27 It is projected to continue to grow throughout the projection horizon, driven by a persistent primary fiscal deficit. An increasing share of the budget will be devoted to paying interest on debt. Moreover, growth shocks and fiscal slippages would lead to even higher 25 88 percent of a change in the nominal effective exchange rate is passed to consumer prices within one year (Masha and Park, 2012). 26 It should be noted though that a lot of foreign exchange remains outside the central bank, and private agents are often able to find foreign exchange when needed. 27 A joint Bank-Fund Debt Sustainability Analysis (DSA) has been carried out. 44 Maldives Systematic Country Diagnostic levels of debt. Meanwhile, the persistent current account deficit has led to an increasing level of external debt, and the country is at “moderate risk of debt distress.” Although the level of debt is below the policy-dependent thresholds, a shock to tourism exports could make it difficult for the country to service its external debt (Figure 32 and 33). Figure 32. Figure 33. Figure 32 Present value of 100 200 180 external public debt- 160 80 Percent of GDP Percent of GDP to-GDP ratio 140 60 120 Source: Bank-Fund DSA 2015 100 80 40 60 40 20 20 0 Figure 33 0 2014 2019 2024 2029 2034 2014 2019 2024 2029 2034 Present value of total Baseline Historical scenario public debt-to-GDP Baseline Historical scenario Most extreme shock Exports Fix Primary Balance ratio Most extreme shock Exports Threshold Public debt benchmark Source: Bank-Fund DSA 2015 Note: Unlike the face value, the present value takes into account debt concessionality. Moreover, the widening fiscal deficit has led to rising interest rates. The widening fiscal deficit has forced the country to accumulate more and more domestic debt. As a result, the government has resorted to central bank debt financing (until May 2014) and domestic arrears28 as additional financing sources. As market interest rates started to increase strongly by mid-2013, the authorities put a cap on interest rates (called a “tap” system), which has temporarily stabilized interest cost on domestic debt. Accumulated domestic arrears add an additional fiscal burden. The stock of accumulated domestic arrears was estimated at 6.2 percent of GDP at the end of 2012. About 82 percent was owed to SOEs, in particular to the government-owned importer of fuel, medicine and basic food, and to the Aasandha Company (health insurance). The emergence of arrears is the result of both unrealistic budget envelopes and a lack of expenditure controls.29 28 The IMF estimates arrears in order of 6.3 percent of GDP in 2013 (World Bank and IMF, 2015). 29 IMF (2015) 45 3. Vulnerability and sustainability issues (contd.) Domestic arrears Fuel imports Medicine Domestic Arrears 82% 6.2% of Arrears in 2012 of GDP in Owed to State Owned 2012 Enterprises Health Basic Food Insurance This points to weaknesses in public financial management as a source of fiscal risk. The budget as a policy document suffers from a lack of credibility and limited policy orientation. Expenditure Shortcomings in composition variations are significant at more than 15 percent of the original budget. Furthermore, the operations there is no credible medium-term macro-fiscal framework and it has a weak and inefficient system and oversight of of budget review. Existing cash constraints limit the predictability and control of the budget. SOEs contribute to Moreover, although consolidated financial statements have been produced since 2011, data macro-fiscal risks, quality and consistency are a concern. The government does not meet the basic practices of fiscal due to inadequate risk disclosure and analysis on contingent liabilities and actual liabilities. There is no complete regulation and picture of contingent liabilities that may arise from loan guarantees that have been issued as the supervision. government does not report on the main risks to its fiscal forecasts.30 SOEs may pose further risks to fiscal sustainability as most are loss-making and depend on government support, with only nine companies having contributed dividends to the budget in the last four years. Shortcomings in the operations and oversight of SOEs contribute to macro- fiscal risks, due to inadequate regulation and supervision. Most SOEs operate at a loss, and represent a drain to the budget and a source of risk associated to costly fuel imports, foreign exchange transactions, and payment arrears. Capital transfers to SOEs and subsidy transfers have contributed substantially to the growth in expenditures in recent years (Figure 34). An independent centralized ownership entity (the Privatization and Corporatization Board) was established under a comprehensive legal framework in 2013, but final decisions on the appropriate institutional arrangements are still under consideration. 30 IMF (2014b) 46 Maldives Systematic Country Diagnostic 5 4 3 Percent of GDP 2 1 0 -1 -2 Figure 34 -3 Impact of SOEs on the -4 budget -5 2008 2009 2010 2011 2012 2013 2014 Source: Ministry of Finance and Treasury Profit transfers from SOEs Capital contribution to SOEs Subsidies to be Net transfers from SOEs implemented by SOEs Political and institutional risks Maldives democratic transition started recently. The country adopted a new constitution in 2008, ushering in multi-party elections as well as a set of new state institutions at central and local levels, often with mandated high degrees of independence. The new constitution enacted a mechanism for separation of powers by creating independent branches of the Legislature, Executive and Judiciary for the first time in the history of the country. Powers of and relationships among democratic institutions are still being defined. For instance, until recently parliamentarians were able to simply add expenditures to the budget on their own initiative without concern for expenditure limits and all independent commissions created their own human resource regimes. More importantly, Maldives is a split polity where political contestation is not always handled through institutional channels. There have been frequent incidences of political unrest over the past 10 years and election processes have been criticized by observers as lacking credibility in many key aspects. Institutional incoherence and political instability currently hamper the ability of the government to provide goods and services and to carry out its redistribution function, which is central to social and economic inclusion in Maldives. It poses a longer-term risk to improving government operations and, more generally, public trust in the state. Institutional and political instability constrain the sustainability of Maldives’ development model moving forward. There is widespread consensus that political stability was critical to the development of the tourism industry in Maldives. The current polarization of the political party system, resulting political unrest and the limits of checks and balances between powers, all contribute to aggravating political and institutional risks as well as macro and social sustainability issues. 47 3. Vulnerability and sustainability issues (contd.) Social sustainability and vulnerability Economic opportunities in Maldives are out of sync with growth and shared prosperity. Public administration is the primary sector of employment in Maldives, particularly for the educated local workforce. Alone, it accounts for 17 percent of total employment and one-fourth of the employment for workers with secondary or higher levels of education. The tourism industry, while driving the growth process and being the main contributor to GDP, accounts for only 16 percent of employment and relies disproportionally on expatriate workforce for both high- and low-skilled jobs. The fisheries sector, which is a crucial sector for poverty reduction and shared prosperity, accounts for 11 percent of total employment and one-fourth of the workforce with less than secondary education (Figure 35). Public administration is the primary sector of employment in Sources of employment Maldives, particularly for the educated Public Administration Tourism Industry Fisheries sector local workforce. 17% 16% 11% of Total of Total of Total Employment Employment Employment The increase in the working age population, with a shift toward a The interplay of socio-demographic trends and fiscal constraints adds to the social sustainability relatively more challenge of Maldives’ development model. The progress in health indicators, notably the reduction educated young labor in mortality rates over the past decades, has contributed to Maldives demographic transition. With force, puts enormous a reduction in the total fertility rate to population replacement rates, the population growth has pressure on the absorption capacity stabilized, creating the opportunity for a demographic dividend (Figures 36 and 37). The increase of Maldives labor in the working age population, with a shift toward a relatively more educated young labor force, market. puts enormous pressure on the absorption capacity of Maldives labor market. That is especially the case in view of the hiring freeze of the public sector – which constitutes the main employer for high-skilled jobs – and the increasing competition coming from a relatively cheaper (low-skilled jobs) and better educated (high-skilled jobs) expatriate workforce. 48 Maldives Systematic Country Diagnostic 20 Percent of employment (2010) Goverment administration 16 Tourism Figure 35 Wholesale and retail trade Sources of growth and 12 Fisheries Education employment Manufacturing Transport and 8 communication Source: Ministry of Finance Health and Treasury Social Agriculture and Construction 4 services mining Electricity and Real estate and supply business services 0 Financial services 5 10 15 20 25 30 Percent of GDP (2013) Note: Employment in tourism includes reported employment in hotels and restaurants, and rough estimates of local employment in resorts by extrapolating the actual number of local employees per resort in 2006 with the increase in bed capacity, published in the HIES 2009/10. Source: National Bureau of Statistics, HIES 2009/10 Figure 36 95+ 90-94 Population pyramid of 85-89 85-89 Maldives, 2006 80-84 75-79 70-74 Source: Maldives Statistical 65-69 60-64 Age Yearbook, 2014 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 20,000 15,000 10,000 5,000 0 5,000 10,000 15,000 20,000 Population in thousands Male Female Figure 37 Population projections 80 500,000 70 Source: UN projections 400,000 Total Population (’000) 60 Population share, % 50 300,000 40 30 200,000 20 100,000 10 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 share 0-15 share 15-25 share 65+ share 15-64 Total Pop 49 3. Vulnerability and sustainability issues (contd.) Youth and women are particularly vulnerable to the social sustainability challenges of Maldives’ development model: ∫ The increasing supply of educated youth in a context characterized by limited labor demand by the public sector and a skills mismatch in the private sector has contributed to high youth unemployment. In 2010, according to HIES data, the unemployment rate for individuals in the 15 to 24 age group was 25 percent, more than double the unemployment rate of the total workforce (11.8 percent). The lack of economic opportunities for the youth is contributing to other social ills, such as drug abuse and gang-related violence, especially among male youth. Youth and women ∫ The public sector has traditionally been the biggest employer of women in Maldives, with are particularly 34 percent of female employment in the health and education sector and 15 percent vulnerable to the employment in public administration. Limited working hours and availability of jobs on social sustainability inhabited islands have made public employment particularly appealing for women and challenges contributed to sustaining relatively high female labor force participation (58 percent). of Maldives Fiscal constraints to job creation in the public sector have contributed to increasing female development model. unemployment vis-à-vis males. Youth and women employment Female After 30 years of Employment Rate - Public Sector sustained economic Unemployment growth and social Rate of Total Workforce Health & Public development, the Education Administration current generation 11.8% Unemployment of youth is the Rate 15-24 age group 34% 15% first faced with the prospect of not 25% being able to achieve the same level of A growing gap between aspirations and opportunities for socio-economic inclusion has contributed wellbeing as their to fostering disenfranchisement among Maldivian youth. After 30 years of sustained economic parents. growth and social development, the current generation of youth is the first faced with the prospect of not being able to achieve the same level of wellbeing as their parents. Increasing competition from foreign labor for high- and low-end jobs and limited opportunities for employment in the public sector contribute to worsening social mobility prospects for the new generation. Disenfranchisement and frustration are growing, especially in the capital area Malé were many youth migrated with the hope of building a future. Limited education opportunities and skills challenge youth capacity to realize their aspirations though a productive labor market engagement. Employment status is crucial to shape life satisfaction, 50 Maldives Systematic Country Diagnostic wellbeing and self-esteem, especially among young males (WDR 2013).31 Facing competition from foreign labor and lacking sufficient skills to face the challenge, Maldivian youth are increasingly confronted with bleak labor market32 opportunities and a failure to meet their aspirations in terms of social mobility. The current economic model has proved unable to provide the youth with the skills and knowledge necessary to compete on a globalized labor market and low productivity public sector jobs are becoming increasingly unappealing and scarce due to government budget constraints. High levels of actual and perceived inequality coupled with a progressive deterioration of the social contract further contribute to widening youth aspiration gap. As discussed in Chapter 2, high and increasing levels of inequality between the poorest and the richest segments of the population, as well as unequal opportunities between Malé and the atolls, all contribute to the emergence of social The current cleavages that work against cohesion and social development33. Moreover, governance constraints, economic model such as the lack of transparency and accountability, together with the inability of politics to address the has proved unable most urgent social and economic concerns, add to youth frustration and challenge future prospects of to provide the youth inclusive economic development in Maldives. These ongoing social dynamics contribute to widening the with the skills and knowledge necessary gap between the adult generation – currently in power and benefiting from the security associated with to compete on a the redistribution of the rents from past economic development -- and a young generation struggling globalized labor to find social space and identity under uncertain socio-economic circumstances. market. Social ills such as gang violence and drug abuse are on the rise, and further contribute to strengthening the exclusion of “youth at risk” from the social fabric. Anecdotal evidence suggests that gang participation and violence is on the rise among young men. In Malé alone there are 20-30 active gangs, each with 50- 400 members, a majority of whom have suffered from violence or perpetrated violence. Moreover, the Social ills such as intensity of gang violence is reportedly rising.34 This increase in gang violence is likely an effect of the gang violence and social, political and economic exclusion of the country’s youth because of their disengagement from drug abuse are the labor market and other spheres of public life. Gangs offer a form of inclusion by offering a sense on the rise, and of identity and group belonging, and provide financial rewards: a significant proportion of young men further contribute to in gangs are deemed to be engaged in drug dealing.35 Illicit drug use among gang members is also strengthening the increasingly problematic, and is further fueling gang-related and broader social violence. Though drug exclusion of “youth at users are overwhelmingly male, there is evidence to suggest that it is an increasing problem for women risk” from the social who are increasingly subject to sexual and gender-based violence.36 fabric. 31 As discussed in the WDR (2013), job opportunities contribute to determine individuals’ status within a society and how people view themselves in relation to others. 32 This lack of skills includes technical skills, as well as the so-called ‘soft skills’ to secure employment, and when employed, to stay in a job, such as positive attitudes toward work and learning, respectful professional relationships, time management and good attendance, self-esteem and confidence, and sound professional decision-making. Consequently, young Maldivians may not get the jobs they desire because they are perceived to be less responsible, and have a poorer work ethic than the older generation or the large numbers of migrant workers. Employers interviewed for a recent gender assessment of the Maldives opined that they are unwilling to hire young Maldivians because those they had hired in the past regularly came to work late, take unscheduled leave, are unresponsive to supervisor input, and sometimes vanish altogether without any explanation. World Bank, (2014c). 33 Empirical evidence strongly points out that income inequality leads to greater social and political instability. See Alesina and Rodrik, 1994, Alesina et al 1996. Briguglio et al. (2006) include social development among the essential components of economic resilience in SIDS. According to the authors (ibid: 275), “Social development […] indicates the extent to which social relations in a society are properly developed, enabling an effective functioning of the economic apparatus without the hindrance of civil unrest. Social development can also indicate the extent to which effective social dialogue takes place in an economy, which would in turn enable collaborative approaches towards the undertaking of corrective measures in the face of adverse shocks.” 34 Asia Foundation(2012) 35 ibid.; p.15. 36 According to data from the most recent DHS, over one-quarter (28.4%) of Maldivian women have experienced physical and/or sexual violence at some point in their lives by either partners or non-partners. Though this proportion is lower than other South Asian countries, it is higher than in other middle-income Asian countries like Malaysia (14.5%), Indonesia (3.7%) or the Philippines 51 3. Vulnerability and sustainability issues (contd.) These dynamics might further limit opportunities for socio-economic inclusion, particularly of Maldivian women. According to the HIES (2010), while the major reason given by both women and men for being unemployed was their inability to find suitable employment, 22 percent of women cited household chores as a reason, and another 3 percent were deterred by objection from family members. Thus, lack of supporting environment in the family was a major factor discouraging a significant number of women from seeking employment. In particular, marriage and pregnancy at a young age, geographical isolation, and social norms restricting women’s mobility are factors that limit women’s contribution to national development. Environmental vulnerability and sustainability issues Natural resources represent the country’s main asset but there are growing concerns in terms of sustainability. Climate change could cause annual economic losses of more than 12 percent of Maldives’ GDP by 2100.37 Due to rising sea levels, the entire country could be submerged before the end of the century as 80 percent of land is less than 1 meter above sea level. With 42 percent of the population and more than 70 percent of critical infrastructure within 100 meters of shoreline, this would have dire social and economic consequences, notably for the poorer and most vulnerable. Despite past efforts, the country is not prepared to withstand a rise in sea levels, as most lifeline infrastructure (such as power houses, hospitals and harbors), population centers (such as Natural resources represent the schools) and dwellings are not adequately designed. Indeed, “the most serious underlying driver country’s main asset of increasing vulnerability to climate change in Maldives appears to be the absence of systematic but there are growing adaptation planning and practice. Climatic risks and long-term resilience are not adequately concerns in terms of integrated into island land use planning or into coastal development and protection policies and sustainability. practice, and past autonomous risk reduction efforts have sometimes had mal-adaptive effects”.38 In order to partially address this, the government prepared a Strategic National Action Plan in June 2011 to integrate Disaster Risk Reduction and Climate Change Adaptation, but its actual implementation appears to be limited.39 Climate Change Vulnerability Long term decrease in GDP 12% due to climate change by 2100 80% land is less than 1m above sea level Within 100m 42% of population of shoreline 70% of infrastructure (23.6%). 37 ADB, (2014b). 38 UNFCCC Country Information: Maldives 39 National Disaster Management Center (2010). 52 Maldives Systematic Country Diagnostic The most pressing However the most pressing issues relate to shortcomings in the management of natural resources, issues relate to particularly with regard to sewage and solid waste management. An estimated 248,000 tons of shortcomings in solid waste was generated in 2007, most coming from urban areas (Figure 38), and this figure is the management of expected to increase to 660,000 tons by 2020.40 Despite the scale of the challenge, most of the natural resources, 134 Island Waste Management Centers, covering 66 percent of the islands, are not fully functional, particularly with as no program for transport of waste from these centers to a regional or central waste-processing regard to sewage center has been established.41 Regulation seems to be poorly enforced. Resorts, in particular, have and solid waste been accused of dumping waste in the sea and not using incinerators as mandated by law (Figure management. 39), although this assertion has not been documented. Adequate management of solid waste is hindered by the high cost of service delivery in the country, associated with the low volume of waste on each island and the high cost of transportation. Land scarcity also limits the options for establishing and managing adequate landfills. The issue of sewage and solid waste is particularly challenging, as it has a direct impact on the country’s most valuable natural resources – coral reefs and fisheries. Uncontrolled waste disposal and floating debris at tourist resorts are the most visible threats to the country’s reputation as a pristine high-end tourist destination. They also affect the quality of ground water, with a direct impact on island communities. Figure 38 Figure 38. Figure 39. Waste generation 10% patterns 21% Source: Ministry of 15% Environment and Energy 37% Source: Visvanathan and Glawe 51% 28% 33% Figure 39 Urban Areas Island Communties Tourism Sent to central Burnt Disposed at Buried island waste the beach or Waste disposal management the sea methods dumped within the islands Source: Ministry of Environment and Energy Source: Visvanathan and Glawe 248,000 660,000 tons tons Solid Waste Estimated in 2007 Solid Waste in 2020 40 World Bank, (2012c) 41 Thilafushi Island, a municipal landfill where waste is burned, does not qualify as a proper waste processing center. 53 3. Vulnerability and sustainability issues (contd.) Most of the Maldivian population depends on the ground water and rain water as source of fresh water, which are at high risk due to climate change. As Maldives consists of low-lying islands, the rise in sea-levels would force salt water intrusion into fresh water lens. Minimum projected sea level rise of 1mm per year shows that the groundwater safe yield will decrease at least by 3 percent between 2012 and 2030. In addition, in most inhabited islands the groundwater is contaminated due to untreated sewage disposal into the ground. It is estimated that per capita water availability will decline by 34 percent from the 2009 level of 103 cubic meters per year to 76.6 cubic meters per year by 2035. The shifting in the rainfall pattern from drier and more inter-annually variable rainfall regime over the next 20 years and increase in temperature of 0.5°C to 3.5°C expected by 2100 will increase water demand leading to high competition over scarce resources, making water security for potable and irrigation purposes continue to be a serious problem.42 Confronted by diminishing resources, more than 100 islands have requested Per capita water emergency fresh water shipments since 2005, and the challenge is likely to increase over time availability will due to continued population pressure.43 The institutional framework for managing fresh water decline by 34 percent supply needs strengthening, as the government does not have any single and unifying body by 2035. overseeing the water and sanitation sector and therefore no quality checks are performed. The country is also vulnerable to shocks to drinking water supply due to the lack of back-up arrangements. This vulnerability was shown clearly by the water crisis in December 2014, when a fire in a water treatment plant in Malé led to acute shortages of drinking water and required The loss of coral emergency supplies from neighboring countries. reef represents a threat to the sustainability of the The loss of coral reef represents a threat to the sustainability of the tourism industry and tourism industry and fisheries, and is also compounding the effects of climate change. Coral reefs are a major tourist fisheries, and is also attraction in Maldives but are affected by the rise in sea temperature and pollution However, the compounding the damage to coral reefs caused by harbor dredging and reclamation are much more significant effects of climate now as a result of the current development model. Other pressures include damage caused by change. divers, illegal collection of corals and unsustainable exploitation of high-value reef resources. As coral reefs also play an important role in protecting shores against rising sea levels, their destruction may also aggravate the impact of climate change. Furthermore, the loss of coral reef is resulting in the loss of valuable bait fish which are used for tuna fisheries, a major source of food and income in outer atolls. 42 World Bank (2013a). 43 Demand of clean water is expected to increase by about 66 percent over the next 15 years. 54 Maldives Systematic Country Diagnostic Institutional capacity for managing the country’s natural resources is relatively weak. Because of limited resources, environmental management is largely done on a limited and voluntary basis on the islands. Governmental environmental agencies face important issues in retaining scarce qualified staff. Environmental management is largely done on a limited and voluntary basis on the islands. Cost of fuel imports 15% of GDP in 2013 The country relies almost entirely on Maldives has a significant potential for lowering the cost of electricity generation through wider imported fossil use of renewable energy. At the present time power is supplied by diesel generators through fuel to supply the isolated, island-specific grids, spread over 900 square kilometers. The country relies almost generators, costing entirely on imported fossil fuel to supply the generators, costing about 15 percent of GDP in 2013. about 15 percent of Furthermore, due to the high costs of domestic electricity production and distribution, the country GDP in 2013. has a long history of subsidized energy prices that have contributed to over-consumption and limited incentives opportunities to invest in alternative and environmentally sustainable renewable energy sources. Currently, the cumulative installed photovoltaic-based generation capacity is less than 2 MW, spread across several islands and programs. While the installed PV capacity is still limited, it has demonstrated its viability as a source of cheaper and cleaner energy. Going forward, wider adoption of renewable energy will require, among other things innovative financing approaches such as PPPs and a review of the incentives scheme, including the current subsidies on diesel-based electricity generation.   55 Tourism and fisheries are the two main sources of growth in Maldives and their sustainability depends on preservation of the country’s natural resources. 4. Sources of growth and shared prosperity 56 Photo Credit - Emanuel Salinas 4. Sources of growth and shared prosperity Key Messages ∫ Maldives main challenge is to improve inclusiveness of the development model ∫ Tourism has developed as enclave model; opportunities for inclusiveness require improving: - Transparency lease allocation for resorts’ development - Linkages to local economy - Employment opportunities for local population - Opportunities for sustainable community-based tourism development ∫ Fisheries development is key sector for improving incomes of the poor; opportunities for sector development require improving: - Industry competitiveness - Management of natural resources - Investment opportunities in sub-industries ∫ Agriculture has untapped potential for growth and employment generation; opportunities for sector development require improving: Maldives has - Linkages between supply and demand/value chains with tourism experienced a high - Adoption of new technologies pace of growth, but the main challenge will be to enhance its Maldives has experienced a high pace of growth, but the main challenge will be to enhance inclusiveness going its inclusiveness going forward. As discussed in previous sections, the Maldivian economy is forward. dominated by tourism, while tradable sectors and physical exports are largely limited to fisheries. Tourism has leveraged the country’s endowments to underpin a very rapid growth, but the largely high-end tourism industry has developed in an enclave way, with limited linkages with the local communities. Fisheries are a significant source of employment, particularly for the poor, but the industry has stalled and much of the value is lost through low-added-value exports. The small size of the economy, together with other structural environment factors, has limited the development of other economic activities. Accordingly, the rapid overall economic growth of the country has not been accompanied by a commensurate growth in opportunities and jobs for the Maldivian population – especially for the youth, and for women whether youth or adult. 57 4. Sources of growth and shared prosperity (Contd.) Tourism in figures 38% of Government 28% Contribution 60% Revenue Foreign Exchange to GDP Earnings Tourism is the most important industry in Maldives. Tourism constitutes by far the biggest contributor to GDP at 28 percent, and is the greatest generator of foreign exchange earnings at more than 60 percent in 2014. Revenue from the sector accounts for 38 percent of government revenue, derived from various taxes and lease of islands.44 Additional contributions from airport service charges, import duty and revenue from ancillary industries increase the overall impact of the tourism sector in the economy. Tourism in Maldives has grown steadily since 1970s and Maldives has managed to position itself as a high-end destination (Figure 40). Tourism in Maldives has developed as a supply-driven industry whose development was initially led by the private sector - as opposed to through government policies or support programs. Notably, while the supply for touristic facilities is constantly increasing, the country so far has been largely able to maintain both high occupancy rates (Figure 41) as well as a high premium (deemed as high as 40 percent45 over other touristic destinations). Such premium is deemed to be based on the unique natural resources of the country, as well as on Figure 40 the exclusivity of facilities – which, in turn, is underpinned by the geographic dispersion of islands International tourist and the enclave conditions of resorts. arrivals Source: Ministry of Tourism Figure 41 Figure 40 30 85% Bed capacity (thousand) 1,200 Number of tourists arrivals 25 80% Capacity utilization 1,000 20 75% (thousands) 800 Figure 41 15 70% 600 Capacity utilization 10 65% 400 60% Source: Ministry of Tourism 200 5 55% 0 0 50% 2007 2008 2009 2010 2011 2012 2013 2014 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2013 Bed capacity (thousand) Occupancy rate (%) 44 This includes all tourism-related taxes: (part of) import duty, Tourism tax, GST on Tourism, Airport Service Charge, Royalties, land and resort rent, Business Profit Tax. 45 World Bank (2011f). 58 Maldives Systematic Country Diagnostic However, the sustainability of such premium cannot be taken for granted. The tourism industry has been susceptible to external shocks and changes in global trends. Most recently, the global financial crisis prompted a structural shift in the composition of arrivals, from Europe to Asia. Between 2008 and 2013, the share of European tourists fell by 26 percentage points mainly due to weaker economic conditions in Europe. Conversely, the share of Chinese tourists expanded by 23 percentage points (Figure 42). This shift in demand was pursued by the industry, which made important marketing efforts in China and Middle East to compensate for the declining demand from Europe. While this shift helped maintain the volume of arrivals and occupancy, the overall profitability of the industry appears to be declining. The average length of stay fell from eight nights in 2008 to 6.1 in 2014 and is expected to continue declining as Chinese travelers favor Figure 42 shorter stays than European ones (Figure 43) and have a lower demand for ancillary activities Composition of Arrivals such as diving and fishing, which generate additional revenue for the industry. Source: Ministry of Tourism Figure 42. Figure 43. 90 9 1,200 Length of stay (days) Share of total arrivals 80 8 1,000 Number of arrivals 70 7 (thousands) 60 6 800 Figure 43 50 5 600 Arrivals and length of 40 4 stay 30 3 400 20 2 200 10 1 Source: Ministry of Tourism 0 0 0 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Oct-14 Average duration of stay Number of arrivals (thousands) Europe Asia And increase in supply may enhance downward pressures on the profitability of tourism. The volume of development of new tourism capacity has been growing and is expected to continue Governance growing. At the present time, there are 89 new resorts under development with a planned capacity shortcomings in of 14,153 additional beds.46 If completed, these new resorts would increase the supply of beds by the current model 52 percent over the established capacity at the end of 2014. This evolution could translate into an for allocation of increase in revenues as has been the case in the past, but it could also reach an inflection point resort leases may where increased capacity will start driving down prices and premium. Lack of planning has led to be hampering sub-optimal growth and development proposition as potential resort developments are brought to the development market with little analysis or coordination with other sectors (such as transport47 or skills training). of tourism and While investor interest has remained strong, these challenges often threaten the financial viability preventing the of new projects and their ability to attract financing. country from maximizing benefits and enhancing Governance shortcomings in the current model for allocation of resort leases may be hampering inclusive growth. the development of tourism and preventing the country from maximizing benefits and enhancing inclusive growth in three main ways. First, although the resort sector is open to competition on paper, in practice the sector is dominated by a few large groups. In theory the legal framework 46 Data obtained from the Development Section of the Ministry of Tourism with figures as of 27/03/2014. 47 Private sector stakeholders interviewed during the preparation of this diagnostic and consultations consistently raised the limited capacity at Ibrahim Nasir International Airport as a factor that affects prospects for longer-term investment and expansion. 59 4. Sources of growth and shared prosperity (Contd.) for tourism allows for open and competitive bidding on resorts, although islands in which the government makes an investment are exempted from the bidding process.48 In practice it appears that there are significant barriers to entry,49 which may have prevented the country from maximizing the benefits from its natural resources. As a result, as of the end of 2013, the four largest tourism groups (including two of the pioneers) control 31 percent of resorts and 38 percent of the resort beds. Their influence has remained strong over the decades. For example, of the resorts established in the 1990s and after 2010, the four groups account for 52 and 44 percent of the beds, respectively (Figure 44).50 60 Proportion over total industry 50 Figure 44 40 Influence of 4 of the largest tourism groups 30 on resort sector 20 10 Source: 2014 Tourism Yearbook, company websites. 0 Total 1970s 1980s 1990s 2000s 2010s Share of new resorts of top - 4 Share of new beds of top - 4 Second, the current methods for allocating leases has translated into sub-optimal investment levels, with a large number of leased islands remaining undeveloped or suffering severe delays One-third of the in construction. At present there are 106 licenses granted for new resorts, but there have been licensed resorts significant delays in construction of the planned resorts. Indeed, one-third of the licensed resorts have not come into have not come into operation more than five years after the license was granted, and 22 licensed operation more than five years after resorts have experienced delays of around 10 years. Altogether, the licensed but unfinished resorts the license was would account for 21,000 additional beds51 that are planned but have not materialized as a source granted, and 22 of income for the country (which would increase by 78 percent the capacity in the country; create licensed resorts have 31,000 additional direct jobs;52 and provide significant revenue flows to the country through taxes experienced delays of and duties). The significant delays in construction of resorts after a license is granted have been around 10 years. blamed on a host of factors, including lack of financing. While these factors may indeed become hurdles once a license has been granted, the delays in construction appear to evidence significant shortcomings in the process followed to grant the licenses in the first place. Stringent and clear criteria for licensing of resorts would have enabled the country to ensure that licenses are granted to investors than can demonstrate the qualifications, experience and financial ability to develop the resorts shortly after licenses are granted. Clear enforcement processes would enable authorities to cancel non-performing leases and grant them to better qualified investors. 48 Tourism law 1999,” This Invitation for Bids is open to individuals, partnerships and companies, local and foreign. Individuals submit- ting Bids shall be at least 18 (eighteen) years of age on the Bid Opening Date.” (bidding document 2013) 49 Including, inter alia, limited financing sources for Lease Acquisition Fees and unclear bidding processes. 50 Based on the 2013 annual report the Ministry of Tourism and company websites. 51 Based on planned bed capacity per resort licensed. 52 As a standard, 1.5 direct jobs are created per resort bed. 60 Maldives Systematic Country Diagnostic Figure 45 35,000 35,000 Number of additional jobs Number of additional beds Cumulative planned 30,000 30,000 beds and jobs not yet 25,000 25,000 created 20,000 20,000 15,000 15,000 Source: Staff’s calculations 10,000 10,000 based on Ministry of Tourism 5,000 5,000 data 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Cumulative planned beds not yet available Cumulative new jobs not created The Loss due to delays in construction 106 licenses granted for new resorts 21,000 Entities set up additional beds to promote the development of 1/3 22 Licenses with tourism may be 31,000 Licenses with 5 Year Delay in 10 Year Delay in contributing to not constructed additional jobs Construction Construction undermine the not created governance of the sector. Third, entities set up to promote the development of tourism may be helping to undermine the governance of the sector. The Maldives Marketing and Public Relations Cooperation (MMPRC) is as a state-owned enterprise formed in 2009 to promote and market the tourism industry. The Maldives Tourism Development Corporation (MTDC) was set up in 2006 as an entity with 47 percent government ownership and 53 percent private shareholding. Both MMRPC and MTDC can acquire leases for resort islands without being subjected to the standard bidding process and, in some cases, at below market rates. In turn, these leases can be developed or subleased to private parties. While the Ministry of Tourism has aimed to strengthen governance of leases through implementation of standard operation procedures, these subleases are not subject to the standard operating procedures of the Ministry of Tourism and both MTDC and MMRPC lack procedures to ensure transparency in subleases and prevent corruption. Further, the composition of the boards of directors of MTDC and MMPRC has raised concerns on lack of transparency on appointments and potential conflicts of interest. The later stems from the fact that board members include heads of private tourism companies that can benefit from subleases.53 Notably, MTDC holds five leases that were granted nine years ago and represent an expected capacity of 1,280 beds that have not come into operation. This, together with governance concerns on their operations, calls into question the extent to which these two organizations are contributing to development of the tourism industry in a way that maximizes the benefits to the country. 53 At least one case has been identified of a private company linked to a board member which has been granted a sublease from MMPRC. 61 4. Sources of growth and shared prosperity (Contd.) Investment climate and political risk concerns may also undermine the ability of Maldives to attract reputable investors in the future. Recent political unrest (which prompted travel advisories from various countries) together with international media reports highlighting the risk of radicalization have created concerns among tourism private stakeholders of a potential slowdown in demand from Western tourists as well as potential long-term deterioration of Maldives brand. Future Investment climate additional investment may also be affected by investors’ perception of instability in regulatory and political risk environment. This includes: a lack of formal consultation between government agencies, private concerns may also sector and civil society on key policy decisions; a regulatory environment in a state of constant undermine the ability flux that leaves businesses financially exposed and unable to plan; and a potentially insufficient of Maldives to attract implementation period for the industry to adapt to new compliance measures.54 Recent negative reputable investors in experience in FDI disputes likely works to undermine investors’ confidence in Maldives (see also the future. section on investment climate below). And the industry has developed as an enclave, with limited positive spillovers to the local communities. The country’s unique island geography presents many natural as well as socio- cultural barriers to integration. It is spatially dispersed with small surface areas, and has limited transport connections and a small population. As a result, the tourism industry has grown up The tourism industry in relative economic isolation with heavy reliance on foreign capital, foreign labor and limited has grown up in economic linkages. There are also significant structural and social barriers to Maldivian women’s relative economic employment in the tourism sector that contribute to its lack of inclusiveness. isolation with heavy reliance on foreign capital, foreign labor Given the importance of tourism in Maldives, a more inclusive industry may hold the key to and limited economic improving shared prosperity in the country. The industry is dominated by luxury enclave resorts, linkages. which have grown with heavy reliance on foreign capital and foreign labor and limited linkages to the rest of the economy. While there are a number of ancillary industries that have grown alongside tourism (notably through demands on the transport, construction and communication sectors), the linkages between tourism and the local economy remain modest. The participation of women in either the tourism sector per se or in ancillary industries is low. Tourism generated 38 percent of government tax revenue (2013)55 and 83 percent of the country’s foreign exchange A more inclusive earnings from exports of goods and services, but substantial leakages undermine the economic tourism industry and social benefits of the industry. A large proportion of the revenue generated through tourism may hold the key to is lost through import of products, import of labor and financial outflows related to dividends and improving shared external debt servicing (as external debt largely fuels resorts development) and offshore booking prosperity in the of revenues originated by resorts. These areas are further discussed below. country. Better linkages between the resorts and the local enterprises may help to leverage on tourism growth for development of other tradable sectors. According to anecdotal evidence, close to 100 percent of the goods required by resorts are imported. It is suggested that local enterprises lack the ability to provide goods with the quality and reliability needed to cater to the expectations of the high-end resorts. Government policies supporting import substitution have not translated into a visible growth in the real sector, which remains hampered by, among other things, the small size of the economy (with limited economies of scale), high dispersion of the population, and 54 A commonly-cited example is the T-GST, increased from 8 percent to 12 percent in November 2014, and a green tax of US$6 a bed- night that will be introduced at the end of 2015, replacing the bed tax. 55 Tourist tax, Goods & Services Tax on Tourism, Airport Service Charge 62 Maldives Systematic Country Diagnostic high transport costs. Given the structural limitations of the country, the potential for backward linkages between tourism and local enterprises is likely modest and probably limited to a handful of products. Tourism is a large and rapidly growing source of jobs, but most of them are not seized by local population due to a host of factors. While tourism creates a large number of jobs, the Maldivian population does not take advantage of them. Across the board, only 15 percent of employed Maldivian men and 4 percent of employed Maldivian women work in the tourism sector, while the number of foreign nationals employed in the sector has increased constantly over time (Figures 45and 46). A government-imposed quota (requiring 55 percent of employees in tourism to be Maldivian nationals) is customarily unmet56 and, in general, appears to have failed to sustainably enhance the participation of Maldivian nationals in tourism. Tourism in Maldives has created more than 28,000 direct jobs57 and government targets for new resorts58 imply an added annual requirement for 3,300 new staff. The relative importance of this figure is evident when compared to the unemployment figures in the country. The total number of the unemployed in Maldives is estimated around 11,000, of which around 8,000 are young people. The lack of participation in tourism jobs is particularly dire among women, who account for less than 3 percent of the labor in the industry. Tourism sector Tourism is a large and rapidly growing source of jobs, but 15% 4% most of them are Employment Employment 28,000 not seized by local Maldivian Men Maldivian Direct Jobs population. Women Created The obstacles to enhance broader participation of the Maldivian nationals in tourism appear to be manifold. Information collected from stakeholders, civil society and youth through interviews and consultations during the preparation of this diagnostic identified a number of factors that appear to be at play in restricting broader participation of the local population on tourism. These include: (1) reservation wage that is too high for unskilled jobs; (2) lack of skills for technical and managerial jobs (see section on skills below); (3) social norms (see section on youth below); and (4) lack of adequate transport (resorts that are close to inhabited islands and have good transport links have a much higher proportion of Maldivian workers). However, data does not currently exist to validate these perceptions in a conclusive manner.59 56 According to the 2014 census (published by the National Bureau of statistics) the foreign nationals account for 58.4 percent of all tourism employees, but anecdotal evidence suggests that this figure may me significantly higher. 57 According to the 2014 census (published by the National Bureau of statistics) there were 11,425 Maldivian employees (10,991 male and 435 female) at resorts, and 16,342 foreign employees (14,339 male and 2,003 female). However, according to the Ministry of Tourism, by early 2015, a total of 23,917 resort beds creates an approximate total employment demand (at a ratio of 1:1.5) of 31,000 staff. 58 The Government’s plans for development of tourism consider ten resorts (average bed capacity is 220) each year. Source: Ministry of Tourism. 59 This has been confirmed in interviews with Maldivians for the youth and gender studies. 63 4. Sources of growth and shared prosperity (Contd.) Figure 46 Figure 46. Figure 47. Foreign migrant employment, 2001-10 90,000 18,000 Foreign workers in tourism 20,000 80,000 16,000 Total migrant labor Number of employees 70,000 14,000 Source: WB staff calculations 15,000 60,000 12,000 with data from MMA and 50,000 10,000 Ministry of Tourism 40,000 8,000 10,000 30,000 6,000 20,000 4,000 5,000 Figure 47 10,000 2,000 0 0 Number of employees 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Male Female in tourism (2008) Local Foreign Total Migrant Foreign workers Labour (left axis) in tourism (right axis) Source: Human Resource Situation in the Tourism Sector of Maldives, Statistics & Research Section; Ministry of Tourism & Civil Aviation A nascent segment of community-based tourism may represent a valuable option for diversification 27/01/2008 and inclusive growth (Figures 47 and 48). Most importantly, this segment appears to create opportunities for tourism that is well integrated with local communities. Guesthouse development is the fastest growing segment. New legislation in 2009 allowed islanders to develop their homes into guesthouses. This new product has grown rapidly, totaling approximately 238 facilities with Community- 3,565 rooms, with likelihood of doubling in the next three years. Every atoll (bar one) is now hosting based tourism some kind of guesthouse or hotel on inhabited islands, with the majority concentrated in the urban may represent a centers of Hulhumalé and Malé (79 establishments). Attracting a different market, this product valuable option for does not represent competition for resorts other than at an infrastructure level – considering the diversification and existing limitations of the international airport. inclusive growth. Maafushi island, a guesthouse destination 34 guesthouses 1,688 4 (6 pipeline) population cafés / restaurants 1 Laundry 3 75% Dive Centres 10% Maldivian staff 3 souvenir shops Demand is Domestic 64 Maldives Systematic Country Diagnostic But the rapid and Notably, the potential for integration of this market segment with local communities appears high. unplanned growth First, the proportion of Maldivian nationals working in this market segment (estimated by the of guest houses has industry at 75 percent of total workforce, see box) is significantly higher than in resorts (estimated already translated below 45 percent). Second, there is evidence of a nascent ‘ecosystem’ of local suppliers of goods into visible negative and services around guesthouses. Third, closer interaction between tourists and islanders in impact on the an every-day setting has been relatively positive in this situation, and may be a case study in environment ‘exposure’ and breaking of socio-cultural stigmas towards the sector in general. compounding the existing challenges in inhabited islands. Growth in this segment has some limitations and risks. It is likely to be highly concentrated around transport hubs (airports) since elasticity of demand will be lower in this segment. Most importantly, the rapid and unplanned growth of this market segment has already translated into visible negative impact on the environment compounding the existing challenges in inhabited islands. Waste management, land-use planning, population displacement and environmental management are some of the issues at the forefront of inhabited islands already. Simply supporting the increase of supply will put pressure on island resources to the detriment of all. Figure 47. Figure 48. Figure 47 1,101 Number of beds (2012) 1,627 Year-on-year change 80 2,503 70 Source: Ministry of Tourism 60 50 40 Figure 48 22,889 30 Growth in number of 20 beds 10 0 Source: Ministry of Tourism 2009 2010 2011 2012 Guest houses Hotels Safari vessels Resorts Resorts Hotels Guest houses Safari vessels There are still unrealized opportunities for linkages between tourism and local providers of goods There are still and services. The tourism industry is a large and rapidly growing source of demand for goods. unrealized In 2014, food items alone (grains, fruit, meat, beverages) were imported at a total cost of$407 opportunities for million60 and demand is expected to increase substantially as the sector grows over time (see linkages between figure). The tourism sector’s demand for inputs represents a major opportunity for local producers tourism and local (Figure 49). But at the present time most of the goods are imported, given limitations in local providers of goods and services. supply. Resorts report61 a high willingness to purchase inputs locally and are prepared to pay a premium for fresh produce. Maldives is deemed to have potential for competitiveness in producing a number of agriculture and fishery goods,62 which are already being produced successfully, but in quantities still lower than demand.63 Local cooperatives and agricultural-focused islands64 60 MMA (2015). 61 Based on information collected during the preparation of this diagnostic through interviews and consultations with private sector stakeholders. 62 Ten crops have been selected by the Ministry of Agriculture and Fisheries for high potential in achieving self-sufficiency. Applying other filters such as consistent and growing demand from the tourism industry, and a low barrier to entry for Maldivian producers yields a list that includes; bananas, papaya, coconuts, lettuce, cucumber, flowers and tuna amongst others. 63 For example, according to Ministry of Fisheries and Agriculture’s estimates (no country-wide statistics exist) local producers are deemed to produce around 400,000 kgs of bananas, a 52 percent of the estimated demand from resorts (755,000 kgs per year). 64 There are eight agricultural islands and various production cooperatives. 65 4. Sources of growth and shared prosperity (Contd.) have already demonstrated the viability for local production, but they are still hampered by infrastructure, quality and scale shortcomings. Encouraging women’s participation in such local production could also have a beneficial impact on women’s unemployment, which is higher than that of men, and in addressing high poverty levels among women-headed households. Tourism 3,500 3,000 Current demand for food items Kilograms 2,500 2,000 1,500 Figure 49 1,000 2014 Total resort purchasing selected products 2015 500 0 $407 million Lettuce Papaya Coconut Tuna Cucumber Bananas - 2020 Source: World Bank estimates cost of imported based on figures from market 2015 2020 (3 resorts p/a) food items participants 2020 (10 resorts p/a) Opportunities for service-provision linkages more constrained. Most resorts own and operate all of their support services and ancillary functions65 due to factors including geo-spatial challenges and quality in service provision. Accordingly, opportunities may be limited to: The fisheries ∫ A small number of services that Maldivians have a competitive advantage in providing, and sector is a critical are equally in demand by the tourism sector. These include authentic and cultural-heritage contributing sector based excursions or handicraft. While all of these are fairly small-scale, the economic impact for the country’s of better linkages for local communities is likely to be significant. national economy ∫ Development of an ecosystem of service suppliers for the guesthouses niche. and forms the most important primary economic activity in almost all of the Fisheries country’s inhabited The fisheries sector is a critical contributing sector for the country’s national economy and forms islands. the most important primary economic activity in almost all of the country’s inhabited islands. Before the development of tourism, fisheries was the most important industry and source of growth for Maldives and, to a large extent, fisheries remains an important reference in Maldives culture. Although the relative importance of the fisheries sector has declined since the late 1970s (due mainly to the rapid growth of tourism), its role in the Maldivian economy remains significant. Fisheries remain a large, source of employment (see below), the largest source of physical exports, one of the few local industries supplying the touristic resorts, and a major source of food supply for the local market. In 2011, it accounted directly for 1.4 percent of GDP and currently generates $110 million in export revenue. 65 Including tourist excursions, dive centers, supply-boat operations, laundry, security, sports facilities and spas 66 Maldives Systematic Country Diagnostic Tourism contribution $110 million 800 national vessels 1.4% Export Revenue 10,000 individual fishers GDP 88% total animal protein intake in the country Source: WB staff’s calculations with data from Ministry of Fisheries and Agriculture Maldives has benefited in terms of both food security and trade. Along with the tourism sector, the productive fisheries sector has been a leader in the country’s growth and development. The fisheries sector has remained vital in terms of trade, employment and subsistence especially on islands not dominated by the tourism industry. With a fishing-fleet of about 800 national vessels66, close to 10,000 individual fishers and their families depend on fishing. In addition, fish is a staple food across the archipelago and it remains the main source of protein for the population, covering around 88 percent of the total animal protein intake (FAO, 2011). Maldives is among the highest fish The fisheries industry consuming countries in the world67 ; 49 percent of the fish catch is consumed locally.68 Fish and is experiencing a declining trend fish products account for almost 98 percent of Maldives physical exports. evidenced by lower catch, lower However, the industry is experiencing a declining trend (Figures 50 and 51 and Table 1). A employment and marked decrease (-28 percent) in catch volumes between 2006 and 2013 has undermined the lower contribution to contribution of fisheries to GDP (-54 percent) and translated into rapidly decreasing employment GDP. in direct fishing activities (32 percent reduction between 2006 and 2013 69). While these figures do not include jobs in processing and ancillary industries, the reduction in direct employment is particularly concerning given the fact that fisheries represent the single most important source of jobs in many islands, especially those that are not close to the capital or touristic resorts. The reduction in women’s employment in fisheries is particularly dire; the increased mechanization of the fisheries has largely taken over the fish processing activities that were the foundation of female employment in this sector. Thus women’s work in fisheries has been phased out such that female employment is practically nil in this sector.69 In spite of these negative trends, the value of fisheries exports has increased over the same period, reflecting higher prices for fisheries exports and thus signaling the unrealized potential economic contribution that a more thriving fisheries industry could make to the country. 66 The Maldivian government imposed the termination of foreign long-line licensing in May 2010. 67 It is assessed that 341 kcal of fish are consumed per capita per day (FAO, 2011). 68 Worldwide, about a billion people rely on fish as their main source of animal proteins. About 20% of the world’s population derives at least one-fifth of its animal protein intake from fish, and some small island states depend almost exclusively on fish. WHO (2015) 69 ADB (2014a) 67 4. Sources of growth and shared prosperity (Contd.) Figure 50 Figure 50. Figure 51. Fisheries employment and contribution to GDP 16,000 4.5% 200 Thousands of metric tonnes 4.0% 180 Number of fishermen 14,000 Source: Staff calculations 12,000 3.5% 160 Percent of GDP with data from MMA and 3.0% 140 10,000 120 Ministry of Fisheries and 2.5% 8,000 100 2.0% Agriculture. 6,000 80 1.5% 4,000 60 1.0% 2,000 40 0.5% 20 Figure 51 0 0.0% 0 2005 2006 2007 2008 2009 2010 2011 2012 (est) 2013 (est) 2014 (proj) Total catch 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Staff calculations Fishermen Fisheries (% of GDP) with data from MMA and Ministry of Fisheries and Agriculture. Table 1. 2006 2013 Change Contribution to GDP (%) 3 1.5 -54% Catch (thousands of metric 181 130 -28% Table 1 tonnes) Fisheries sector Exports (metric tonnes) 110,232 40,601 -63% statistics Exports (USD million) 132 165 25% Source: MMA and Ministry of Fisheries and Agriculture Number of fishermen 13,980 9,554 -32% The decline of fisheries -32% -28% Number of Fishermen -54% Catch Contribution to GDP Maldives fisheries sector benefits from high value stocks, but its recent trends highlight vulnerability to external factors. While the country benefits from access to vast fishing resources spread over 90,000 sq. km of territorial waters, the bulk of fisheries catch (82 percent) is dominated by two types of tuna (skipjack and yellow fin), which are exported. The Maldivian tuna is considered as a premium product benefiting both from high quality fish stocks as well as sustainable fishing methods (pole and line). In 2013, 95 percent of the 130,000 tons of fish catch was tuna70 . The current fish catch consists of skipjack tuna (57 percent), yellowfin tuna (35 percent), and other 70 Ministry of Fisheries and Agriculture, (2013) 68 Maldives Systematic Country Diagnostic kinds of tuna (3 percent). Catches of skipjack tuna have decreased drastically over the past years due to a mix of factors including overfishing, higher fuel costs, temperature rise leading to change in schools aggregation and lack of more effective regional, eco-systemic management of the shared skipjack stock. Conversely, catches of yellowfin tuna are increasing thanks to its increasing price in foreign markets and the rapid growth of the hand-line fishery Governance (Figures 52 and 53). Reef fish, which account for 16 percent of catch, are mainly used for deficiencies appear internal consumption and supply to resorts. to have hampered the development of Governance deficiencies appear to have hampered the development of fisheries and their fisheries and their value to the economy. The market for skipjack tuna is controlled by a four processing licenses.71 value to the economy. On the contrary, yellowfin tuna is not regulated through similar licenses. Interestingly, these two market segments have evolved in a very different manner. For skipjack tuna, the catch volumes have plummeted, the tuna is largely exported as raw commodity to intermediary markets and its export price is low and volatile. On the contrary, the (unlicensed) market for yellowfin tuna has a different pattern of development, with rapid growth in catch volume, development of 12 EU-certified processing facilities, which give it access to final markets, and a more stable and higher export price (estimated at 2.5 higher than that of skipjack tuna, Figure 54). Accordingly, governance issues seem to influence the development of fisheries, including the industry’s ability to reap the value of the country’s stocks and develop ancillary processing industries, as well as the levels of investment that the private sector undertakes in the fisheries industry. The very different development trends of the licensed and the unlicensed market segments call into question the need and/or the suitability of the current licensing framework for skipjack tuna. If licenses for processing are maintained, it appears necessary to revise the licensing process in order to ensure that: licenses are granted in a transparent and competitive manner, and; the selection criteria for licensees emphasizes technical and financial capabilities as well as fit-for-purpose considerations. Figure 52 Figure 52 Figure 53. Catch 160 0.8 Source: Staff’s calculations Percent value of exports Thousand metric tonnes with data from MMA, World 140 0.7 Bank WDI and market prices 120 0.6 100 0.5 80 0.4 60 0.3 Figure 53 40 0.2 Share of exports 20 0.1 0 0.0 Source: Staff’s calculations 2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 with data from MMA, World Skipjack Yellow fin Skipjack Yellow fin Bank WDI and market prices 71 There are 4 skipjack tuna collection permit holders, who have exclusive contracts with the government to purchase, process and export skipjack fish from designated fishery zones. 69 4. Sources of growth and shared prosperity (Contd.) Figure 54 Change in price 50 40 Year-on-year change Source: Staff’s calculations 30 with data from MMA, World 20 Bank WDI and market prices 10 0 -10 -20 -30 -40 2003 2004 2005 2006 2007 2008 2009 Processed tuna Unprocessed tuna Environmentally friendly fishing methods for tuna have enhanced Maldives’ ability to access premium markets. The Maldivian pole-and-line fishery is one of the largest coastal fisheries in the Indian Ocean, and is estimated to account for 18-20 percent of the total catch of skipjack tuna in the region72 . The fishery received considerable attention as a potential model for coastal states, owing to both its commercial success and its adherence to ecological best practices. Pole- and-line fishery has been promoted for its environmentally friendly nature73. That has enabled a pathway to the export-markets of Europe and allowed it to extract a premium compared to other similar fisheries. However, it is important to note that while pole and line fishing is deemed environmentally friendly due to low by-catch, it does not prevent over-fishing, which has indeed The sustainability been a problem (see below). of fisheries is jeopardized by inadequate fisheries However, the sustainability of fisheries is jeopardized by inadequate fisheries management. Tuna management. and reef fisheries are either fully or over-exploited and catches are stagnating or declining as mentioned above. Destructive fishing methods (especially for reef fish) and over-exploitation of reef fish74 also raise issues of sustainability. This is mostly due to sub-optimal fisheries management, environmental change resulting in increased sea surface temperature, and the estimated high levels of illegal, unreported and unregulated fishing in the Exclusive Economic Zone. Development and management of capture fisheries is governed by the Fisheries Law of Maldives. However, the emphasis of the law is mainly on protecting local fishers and the sovereignty of Maldivian waters, with less consideration of fisheries management. Other than two tuna fisheries, there are currently few management measures in place for the local harvesting sector. Some important steps have, however, already been undertaken: a fisheries licensing scheme75 was introduced in 2010, and the Environmental Protection and Conservation Act contains provisions to limit fishing for the conservation of biological diversity through 33 protected areas and natural reserves. 72 Adam, M.S. and Kolody, Dale, (2011). 73 In 2012, the Maldivian skipjack tuna fishery successfully completed the process of official certification by the Marine Stewardship Council (MSC) recognizing the best practice nature of this fishery. 74 The sustainability of reef fish is threatened by three factors, namely: a) the tuna fishery in Maldives is heavily dependent on the coral reefs for bait. For every 7-10 kg of tuna caught, a kilogram of live bait is required, suggesting a bait conversion ratio of 8:1 on average; b) anecdotal evidence identifies negative impacts of bait fishing on the ecosystem due to removal of juvenile reef fish and on physical environment due to anchoring pole-and-line boats in coral areas; and c) demand for reef fish has increased threefold in the last 15 years with the increasing demand coming from tourist resorts and export industry. Source: Marine Research Centre, (2010). . 75 According to the “Licensing regulation for fishing, processing and aquaculture intending for export” every fisher intending to export fish or sell to an exporter is required to get licensed under the regulation. The license is renewed annually after paying a nominal fee 70 Maldives Systematic Country Diagnostic Overfishing of reef fish is a risk to the sustainability of the tuna fisheries as well as tourism. The sustainability of reef fish is threatened by three factors: (1) The tuna fishery in Maldives is heavily dependent on the coral reefs for bait. For every 7-10 kg of tuna caught, a kilogram of live bait is required, suggesting a bait conversion ratio of 8:1 on average76 ; (2) anecdotal evidence identifies negative impacts of bait fishing on the ecosystem due to removal of juvenile reef fish and on physical environment due to anchoring pole-and-line boats in coral areas; and (3) demand for reef fish has increased threefold77 in the last 15 years, with the increasing demand coming from tourist resorts and export industry. While there are no reliable statistics to validate over-fishing of reef fisheries, if overfished the health of the coral reef ecosystem (a major touristic attraction) can be significantly affected. If unchecked, there is a high potential of over-fishing, which could result in exhausting of stocks as experienced for giant clam fishery in 199078 and the near collapse of sea cucumber fishery in 1997. Fishery bans were imposed on black coral, giant clams in 1991, turtles in 1995 and sharks in 2010. However, there is little adequate monitoring to ensure the Overfishing of reef effectiveness of these bans. fish is a risk to the sustainability of the tuna fisheries as well The sustainability of fisheries is also threatened by climate change. Climate change impacts such as tourism. as dilution of seawater with the sea level rise and higher temperatures can result in the mortality of corals. Changes in surface water temperature and ocean acidification can compromise the calcification potential of coral reefs due to changes in the association between corals and their symbiotic micro-organisms; hence, result in slow growth and productivity.79 Coral reefs are made further vulnerable due to dependency of reproduction on environmental conditions. Similarly, tuna is highly attuned to the biophysical conditions of the pelagic environment, particularly El Nino Marine aquaculture is Southern Oscillation and associated changes in surface sea temperatures. Recent observations nascent in Maldives of changes in tuna aggregation and migration patterns observed is partly attributed to the rising and can be an important source ocean temperatures and ocean acidification that are altering marine ecosystems and impacting of economic growth the fish distribution. Tuna movement and abundance in the Indian Ocean is closely linked to the and diversification, climate-change-driven ocean productivity.80 poverty alleviation and foreign exchange Threats to the health of the coral reefs that are significant to the fishery sector also come from earnings. habitat degradation and loss due to pollution, harbor construction and reclamation. However, the extent of the damage that these activities inflict on the health of coral reefs and marine species has not been quantified (see also section on environmental sustainability). In light of declining trends in the capture fisheries, marine aquaculture is nascent in Maldives and can be an important source of economic growth and diversification, poverty alleviation and foreign exchange earnings. With a view to diversifying the country’s fisheries sector, the government has been implementing pilot aquaculture projects for a decade with pearl oysters, Maldivian clownfish, and brown marbled groupers. A private aquaculture farm is also producing sea cucumbers, 76 Marine Research Centre, (2010). 77 Sattar, S.A., (2008). 78 Naseer, A., (1997). 79 Naseer, A. (2006). 80 Adam, M.S. (2006). 71 4. Sources of growth and shared prosperity (Contd.) producing the larvae in hatcheries before growing them in mangroves and lagoons. The future development of aquaculture is however hindered by limited availability of financing and technology. Operators are also expressing the need to better define the legal and policy framework to clarify the business environment, develop the value-chains and facilitate longer-term investments and research. Agriculture Maldives produces less than an estimated 10 percent of its food requirements, reaching self- sufficiency in fish only. All other staples are imported (Figure 55). As a result, food items account for 21 percent of imports81 . Food imports are required not only to meet domestic food demand for the Maldivian people but are also essential to cater to the tourism industry in Maldives. Outside of Malé, fishing and subsistence agriculture are the main sources of food security and livelihoods for the vast majority of the people. Except for coconut and fresh tuna, 90 percent of all food items are imported. Food security concerns have revitalized interest in the development of the local agriculture production. Import dependency, limited storage facilities and ad hoc distribution pose food security risks. In response to the recent food and fuel crises, Maldives has integrated food security considerations into national planning. It has removed tariffs on imported food items, agricultural inputs and fuel, and is looking for ways to intensify and diversify agriculture and fisheries. The government is working with international agencies and private-sector partners to develop agriculture by introducing new and innovative techniques and technology to strengthen the contribution of farming to rural development. Agriculture is a relatively minor activity in Maldives and has contributed only marginally to long- term growth. Agriculture accounts for 1.7 percent of GDP (even though its value has grown in real terms over the past 20 years). Agriculture has traditionally been undertaken as subsistence crops in 12 atolls, and only recently higher volume production has been developed (Figure 56). Maldives total land area is around 30,000 hectares of which 4,000 hectares are estimated to be arable. In 2013, approximately 50 islands large enough to support commercial agriculture activity had been leased for agricultural production, spanning a total area of about 1,300 hectares. Bananas, coconuts, fresh fruits and vegetables (papaya, eggplant, melons, pineapple and chilies) are the main commercial crops produced locally in Maldives. 81 USD 318.9 million in 2012 72 Maldives Systematic Country Diagnostic Figure 55 Top imports, Maldives 2011 14,000 36,000 12,000 32,000 USD thousands USD per tonne Source: FAO stats 10,000 28,000 24,000 8,000 20,000 6,000 16,000 4,000 12,000 8,000 2,000 4,000 0 0 Beverage Non-Alc Sugar Refined Cigarettes Chicken meat Food Prep Nes Milk Whole Dried Meat-Cattle Boneless Flour of Wheat Wine Hen eggs, in shell Value (USD thousands) Unit value (USD/tonne, right axis) Maldives, however, faces a number of structural challenges and resource constraints that will limit the country’s potential for agriculture development. Arable land is extremely limited and scattered Maldives faces a among many locations, inhibiting the horizontal expansion of farming areas and the achievement number of structural of economies of scale. Soils are generally infertile or unsuitable for productive agriculture, requiring challenges and high levels of supplemental fertilization. Fresh water resources for irrigation purposes are limited resource constraints and new irrigation technologies and technologies to desalinize seawater for agriculture production that will limit the purposes may be prohibitively costly. Start-up investments in high-tech agriculture, including country’s potential production facilities, storage and transport infrastructure, and the associated economic risks are for agriculture high as well. Ensuring predictable product quantities from smallholder producers and ensuring development. product quality that meet expectations and standards of resorts will be challenging. Public R&D and extension support systems will be costly to establish domestically (as opposed to R&D systems in fisheries where the potential for expansion and take by private sector is significantly larger). Given these constraints, Maldives will remain dependent on imports (and vulnerable to the associated risk of price shocks) for most if its food demand into the future. Thousands of international USD 5,000 8,000 4,000 6,000 Metric tonnes 3,000 4,000 2,000 1,000 2,000 Figure 56 0 0 Top production, Nuts, nes peppers, green Tomatoes Papayas Bananas Meat, nes Fruit, fresh nes Coconuts Vegetables, fresh nes Chillies and Wine Maldives 2012 Source: FAO stats Production (thousands of international USD) Production (MT, right axis) 73 4. Sources of growth and shared prosperity (Contd.) There are however, a number of opportunities to capitalize on agriculture for local income growth. Though no official data exist, the linkages between local agricultural production and the tourism industry are still limited. Anecdotal evidence suggests that concerns on volume, quality and reliability of local production significantly reduce the incentives for resorts to source agricultural produce locally, in favor of imports. In spite of that, market participants from both supply and demand consider that there may be potential to further and more systematically exploit comparative local advantage in the production of various fruits and vegetables to cater to the resorts (see section on tourism). Such an emphasis may also have the added benefit of increasing women’s employment, since agriculture has a predominantly female labor force (women represent 60 percent of total employment in agriculture). Currently, mostly bananas, melons, papaya are produced locally for resorts but it may be worthwhile to analyze more systematically what other high-value fruits and vegetable are suitable for cultivation. In addition to broadening production choices and testing cultivation feasibility of a larger pool of fruits and vegetables, the feasibility of low-cost smallholder greenhouse technologies combined with household based-irrigation/ ‘fertigation’82 systems could be explored. Producer groups or cooperatives of smallholders could help to bundle extension and marketing/ branding support, including the operating of local collection, grading, cooling and storage facilities, as well as transport to markets or consumers. Most likely, direct marketing arrangements between producer There are however, a number of groups and selected resorts will be the most viable model for high-value agriculture. Corporate opportunities Social Responsibility schemes of international resort brands to promote community-based to capitalize on organic agriculture could be explored with support from and in partnership with specialized NGOs agriculture for local and government. Although there might be potential to strengthen the linkages between local income growth. producers and the tourism sector through such arrangements, local producers will continue to face production risks, as well as demand fluctuations due to the seasonality of tourist arrivals. 82 Fertigation is the combined application of water and nutrients to a crop – a mix of fertilizer and irrigation. 74 Maldives Systematic Country Diagnostic Tourism is an industry with high growth and revenues, but the linkages with the local economy remain limited. 5. Constraints to growth and shared prosperity 75 Photo Credit - Emanuel Salinas 5. Constraints to growth and shared prosperity Key Messages Constraints to growth and shared prosperity include: ∫ Challenging investment climate constraining creation of new firms and growth of existing ones ∫ Limitations in access to finance reduce the ability of the private sector to grow ∫ Governance shortcomings undermine the ability of the private sector to grow in a sustainable and equitable manner and have hampered the ability of Maldives to maximize the benefits from its natural resources as a foundation for shared growth ∫ Limitations of education sector and mismatch between supply and demand for skills. ∫ High, unsustainable and increasingly regressive social spending Structural constraints The geography and population dispersion in Maldives creates a unique set of structural constraints, beyond those experienced by other small island states. In line with other small island states, size challenges limit Maldives’ production base and competitiveness (Box 4). The country is vulnerable to external shocks. In fact, the volatility of its GDP growth is among the highest of all countries in the world (Box 3). Similarly, Maldives has a narrow economic base (tourism and fisheries), and the small size of the economy limits its ability to sustainably develop local production of other goods or services, enhancing its reliance on imports. While the tourism resort industry is able to access The geography and foreign capital through FDI and borrowing, most other sectors are not, thereby further limiting population dispersion their ability to grow. Beyond that, as opposed to many small island states, which are composed of in Maldives a single island, Maldives is a widely dispersed multi-island state with population disperse among creates a unique more than 190 inhabited islands. set of structural constraints, beyond As an illustration, island transport facilities are limited leading to high inter-island transport those experienced costs and limited connectivity. Maldives’ islands are dispersed within 90,000 square kilometers of by other small island territorial waters. As of 2005 only 105 inhabited islands (58 percent of all inhabited islands) had states. adequate harbor and access facilities.83 As of 2011, 25 islands still had no harbor facilities.84 To illustrate this point further, while transporting a 20-foot container from Singapore to Male would cost about $1,200, the cost for transporting building materials to an island would be about the same ($1,000-1,100) with additional costs incurred due to lack of jetty facilities in some of the islands.85 83 7th National Development Plan, 2006-10. http://www.planning.gov.mv/ndp/7ndp/pages/spatial/goal-3/transport.php 84 Based on draft “Maldives Country Diagnostic Study” by the Asian Development Bank, December 2014. 85 World Bank. 2006. “The Maldives. Sustaining Growth & Improving the Investment Climate”. April, 2006 76 Maldives Systematic Country Diagnostic Cost of transport (per container) Singapore to Male - $ 1200 Inter-Island transport - US$ 1,000 - 1,100 The cost of providing basic services in a fragmented country As a result of these challenges, the cost of providing basic services in a fragmented country is is raised across raised across the board, and public expenditure in Maldives is structurally high. Maldives’ public the board, and spending is well above the level predicted for countries with a similar GDP per capita, although a public expenditure number of other highly dispersed island states (Kiribati, Micronesia, Marshall Islands and Solomon in Maldives is Islands) have an even higher level of public spending (Figure 57). Indeed, when taking into account structurally high. its small size (leading to relatively high fixed costs of government), its insularity (a scattered population across an archipelago increases the marginal cost of service delivery), the duality of its economy (using taxing and spending to redistribute resort rents) and its openness (larger government provides insurance against volatile incomes), Maldives moves closer to but still above the predicted level of spending. 100 Figure 57 Public expenditure (percent of GDP) 90 Kiribati Public expenditure in 80 Micronesia. Fed. Sts. Maldives versus GDP Lesotho Marshall Islands 70 Solomon Islands per capita compared to Sao Tome and Principe Seychelles 60 Barbados Trinidad &Tobago other countries St. Lucia Samoa Maldives Palau 50 Tanga Cabo Verde Grenada St. Kitts & Nevis Vanuatu Antigua and Barbuda Source: World Bank staff 40 Fiji JamaicaMauritius Bahamas Comoros calculations 30 St.Vincent & Grenadines 20 10 0 6 7 8 9 10 11 12 Log GDP per capita Other countries Small states Linear (Other Countries) Note: Diamond shaped markers are all small states, while the ones with the label are island states The small and dispersed population presents the country with a public service and infrastructure dilemma. With its population dispersed over many islands across long distances, the country faces the choice whether to address the challenge of the high cost of service delivery through consolidation of population closer to Malé or through improving services and connectivity to populations at their current locations. Each choice will generate different demands on public services such as health, education and infrastructure, and will require a strengthening public investment management capacity. 77 5. Constraints to growth and shared prosperity (Contd.) Box 4. Small states challenges More than 40 countries have a population under 1.5 million, out of which 26 are small island states. These countries vary greatly in their level of development and the size of their economies. They are also spread out geographically, with most of them clustered in the Caribbean, the Pacific and in Africa. Despite their diversity, these countries share a common set of development challenges. Size Vulnerability to economic shocks and income volatility. Because of the small size of their economies, growth strategies in small states rely on foreign markets. A high degree of openness however means that they are heavily exposed to external shocks in global markets. Moreover, their narrow resource base and small domestic markets prevent small economies from diversifying into a wide range of activities, making them more vulnerable to terms of trade shocks. When one dominant activity declines, it has an impact throughout the economy, exposing the population to income volatility that can create additional hardships as the poorest are less able to weather shocks to their incomes. Government revenues are also volatile because they rely more heavily on taxing imports as a source of revenue. As tariffs are reduced, so is the government’s income. Limited capacity. Because of their size, small states are traditionally face challenges in training and retaining the right skills in the public sector. They also tend to have larger public sectors than other countries. In some states, a widely scattered population adds to the challenge. Small states also lack sufficient institutional capacity to participate fully in international fora, which can profoundly affect their economies. Difficulty accessing external capital. Access to global capital markets is important for small states, and is one way to compensate for adverse shocks and income volatility. But private markets tend to see small states as more risky than larger countries, so spreads are higher and market access is more difficult. Geography Limited competitiveness. Three out of four of developing small states are islands or widely dispersed multi-island states; others are land-locked, and some are located far from major markets. Their remoteness and isolation make it difficult and costly for these states to access world markets to compensate for small domestic markets — a situation that increases the cost of intermediated inputs and imports and prevents efficiency and innovation. Domestic competition is also limited, which hampers successful development. 78 Maldives Systematic Country Diagnostic Susceptibility to natural disasters and climate change. Most small states are vulnerable to climate-change-related impacts and natural disasters such as hurricanes, cyclones, droughts, and volcanic eruptions that typically affect an entire population and economy. The impact on the government’s finances can be overwhelming, limiting a country’s ability to build cushions for development programs and future needs. A combination of a narrow production of export base combined with a vulnerability to shocks can to lead to persistent fiscal and external imbalances and high levels of debt. Indeed, among the 20 countries with the highest levels of public debt relative to GDP, small island states account for 10 countries, and other small states for another three. Figure 4.1 Countries ranked by 160 public debt-to-GDP 140 120 Percent of GDP ratio, 2014 Small island state 100 Source: World Economic 80 Other Outlook, World Bank staff 60 Other small state 40 20 0 Lebanon Eritrea Egypt St. Kitts and Nevis Maldives Sudan Jamaica Cabo Verde Bhutan Grenada Barbados Gambia, The Antigua and Barbuda Jordan St. Lucia Dominica Belize Sri Lanka St. Vincent & Grens. Albania Source: World Bank Small States program and staff calculations Meanwhile, there has been a steady migration of smaller to larger islands, in particular to the Malé City area. Internal migration has happened for a long time, often in response to natural disasters, including the 2004 tsunami, the difference in the cost of living (the high cost of food and other goods and services in the atolls compared to Malé),86 quality of service delivery, and economic opportunities. Recent data shows a net decline of population in many small islands; indeed, all islands that lost population between 2006 and 2014 had a population below 3,000 in 2006 (Figure 58). During that period Malé and Hulhumalé saw increases in population of 37 percent (by 34,524) and 450 percent (by 12,903), respectively (see also section on Poverty). 86 HIES 2009/10. 79 5. Constraints to growth and shared prosperity (Contd.) Figure 58 Change in population % change in Maldivian population between 2006 and 2,000 between 2006 and 2014 2014 1,500 1,000 Source: preliminary results 2014 Census, National 500 Bureau of Statistics 0 -500 -1,000 -1,500 -2,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Maldivian population in 2006 Note: Malé and Hulhumalé not displayed population trends Net decline of population Malé’s population in small islands from 2006-2014 density of 53,700 per square kilometer 37% increase in Malé Population puts it well ahead of large, densely 450% increase in Hulhumalé Population populated cities, such as Mumbai and Dhaka Conditions of overcrowding in Malé show that there are limits to centering activity on Malé. Between 2003 and 2010 household expenditure on housing, water and electricity in Malé more than doubled, and overtook food and beverages as the single largest expenditure item. Between 2010 and 2013, the number of vehicles in Malé increased by 23 percent, and currently there are about 36 vehicles per 100 inhabitants in Malé compared to 5.5 in the atolls excluding Addu City and Hulhumalé. As noted earlier, Malé’s population density of 53,700 per square kilometer puts it well ahead of large, densely populated cities, such as Mumbai and Dhaka (Footnote 3). Successive governments, including the current one, tried to address the structural constraints, while attempting to stem the net migration into Malé, through various programs of investment and voluntary resettlement programs. The current government’s party manifesto for 2013-17 pledged to address these issues through a number of actions, including:87 ∫ Malé City area.88 Reduce congestion in Malé, develop Hulhumalé as a modern cosmopolitan city, construct bridges to link different parts of Malé City area, develop Thilafushi as an industrial zone. 87 Manifesto of the Progressive Party of Maldives (PPM) 2013-17, unofficial translation. This manifesto is being development into a National Development Strategy with ADB support. 88 This includes Malé and nearby Hulhulé airport/Hulhumalé, Villingili and Thilafushi islands. 80 Maldives Systematic Country Diagnostic ∫ Housing. Provide social housing and loans to renovate housing. ∫ Infrastructure. Establish adequate harbors in islands, establish effective sewerage systems, ensure safe drinking water through desalination plants for islands with large populations and increased water storage capacity. ∫ Reliable transport. Construct airport in islands and connecting ferry services, establish permanent system to enable transport of agricultural produce between islands. ∫ Special Economic Zones. Establish SEZs for tourism, business incubation, free ports, ICT, etc., granting special incentives including exemptions from Goods and Services Tax for 10 years, Business Profit Tax and Import Duty.89 In particular, Hulhumalé, an artificial island off Malé, has been constructed to relieve congestion in Malé and to attract residents from islands with small populations. Reclamation of 188 hectares of land and primary development took place between 1997 and 2004, leading to a population of just over 1,000. A resident population of 60,000 is targeted by 2020.90 The next phase of development consists of a further reclamation of 240 hectares, catering to a population of 100,000.91 The president recently issued a call to residents of islands with small populations to migrate, as the The investment government is unable to meet the socio-economic needs of small islands.92 climate in Maldives is much more Beyond structural constraints, a number of shortcomings associated with investment climate, challenging than access to finance, governance and human capital restrict the potential for existing economic that of similar island activities in Maldives to grow and for new ones to be created. economies and other South Asian countries. Investment climate The investment climate in Maldives features important constraints for new entrepreneurs and for the growth of existing firms. The investment climate in Maldives is much more challenging than that of similar island economies and other South Asian countries. In 2015 Maldives ranked 116th in the World Bank’s Doing Business ranking (out of 189 economies ranked). This ranking was two places lower than the previous year, signaling a lower conduciveness of the investment climate in the country as compared to other economies ranked. According to Doing Business rankings (Figure 59), while it is relatively easy to register a new firm in Maldives, there are significant deficiencies in the enabling environment for that firm to start operations (register property, obtain electricity connection, access finance), to grow its business (access finance, import and export) and to resolve disputes or unwind operations in an orderly, swift and fair manner (enforce contracts, protect investors and resolve insolvency). A comparison with other small island states highlights the significantly higher challenges across the board in the investment climate in Maldives. 89 Special Economic Zones Act (24/2014), translated. http://investmaldives.org/investmaldives/wp-content/uploads/2014/09/ SEZ-Act-Translation.pdf 90 The 2014 Census estimates the population of Hulhumalé at slightly under 16,000. 91 http://hdc.com.mv/hulhumale/ 92 http://minivannews.com/politics/president-yameen-calls-on-youth-to-relocate-to-hulhumale-92174#sthash.H775bfue.dpbs 81 5. Constraints to growth and shared prosperity (Contd.) However, it is important to highlight the fact that the business environment obstacles faced by firms in Maldives go beyond those areas identified by global indicators such as Doing Business. Enterprises interviewed during the preparation of this diagnostic identified various other obstacles in the investment climate in Maldives, including difficulties in accessing foreign currency,93 that limit the ability of firms to operate, invest in foreign capital goods and trade. Other factors cited by firms include sudden changes in the legal and regulatory environment taking place in absence of sufficient consultation with private-sector stakeholders. Dealing with construction permits 180 Registering property 160 Starting a business Figure 59 140 120 Rankings on Doing 100 80 Resolving insolvency 60 Enforcing contracts Maldives Business areas – 40 20 Maldives 2015 0 Average small island states Protecting minority Getting electricity Average South Asia Source: Doing Business 2015 investors Paying taxes Getting credit Trading across borders Sudden changes There are major gaps in the legal framework governing activities of private enterprise. A number in the legal of issues have been identified94 that restrict the effectiveness of the legal framework governing and regulatory firms’ activities, including: environment taking place in absence ∫ The need to define basic legal foundations of a system of commercial justice in order to of sufficient reduce legal uncertainly. Courts function without a complete and adequate set of legal rules; consultation with enforcement mechanisms were found to be non-functional; the system of appeals was private-sector deemed to generate long delays; and there is lack of technical expertise and knowledge of stakeholders. business concepts. There are no alternative dispute resolution mechanisms in place. ∫ Lack of clarity concerning legal sources further undermines legal certainty. The position of Sharia law in the private law system has not been fully established; it is unclear whether the laws governing commercial activities and Sharia law are compatible. Addressing ∫ Lack of basic regulation in the area of secured transactions and registration of rights. Legislation investment climate regulating financial distress and insolvency was found to be incomplete and outdated. This was shortcomings will be also the case with a number of basic private law regulations, including contract law, tort law essential in order to and statute of limitations. In turn, the lack of adequate laws governing secured transactions enable the creation severely undermines the ability of the financial sector to provide credit to enterprises, as it of inclusive economic enhances the risk of losses in case of borrowers’ defaults due to unpredictable, lengthy and activities in Maldives. costly legal resolution. These deficiencies contribute to reducing the availability of credit, increasing its cost and enhancing the amount of collateral required by lenders. 93 The apparent contradiction with the observation that there seems to be sufficient liquidity in the market (IMF, 2015) could be due to the timing of the reports or to the difference between macro and micro observations. 94 World Bank (2013f) 82 Maldives Systematic Country Diagnostic ∫ Competition law and industrial property law are missing in Maldives. These are key elements of the legal framework needed in order to ensure a level playing field and fair treatment of investors. The absence of these laws likely undermines the ability of Maldives to attract and retain investment beyond tourism. Addressing investment climate shortcomings will be essential in order to enable the creation of inclusive economic activities in Maldives. Evidence worldwide demonstrates95 that investment climate hurdles reduce incentives for entrepreneurship, reduce the attractiveness of the country as investment destination, foster informality and significantly affect the competitiveness of enterprises. So far, in spite of the investment climate shortcomings, Maldives has been able The large state to develop a tourism industry leveraging the uniqueness of its natural resources. However, presence in investment climate deficiencies have played a significant role96 in preventing the development economic activities of an ecosystem of local enterprises around tourism as suppliers of goods and services. That, in is not only a fiscal turn, has translated into the current model whereby tourism remains largely an enclave industry. sustainability Investment climate shortcomings also undermine the ability of the country to diversify its economy concern, but it also through creation of new firms in new economic activities. undermines the ability of the private Governance issues contribute negatively to development of the private sector in Maldives. The sector to flourish by large state presence in economic activities (through SOEs) is not only a fiscal sustainability crowding it out of concern, but it also undermines the ability of the private sector to flourish by crowding it out of large segments of the market. large segments of the market. This is demonstrated by a large number of SOEs that are mostly loss-making (paragraphs 54 and 89), the large size of public workforce (Figure 35) that may lead to higher reservation wages on the part of the domestic labor force (section on Human Capital), and large public-sector borrowing that may be crowding out the private sector (paragraph 161). This, together with the governance issues affecting tourism and fisheries (paragraphs 113 and 130), contribute to create a set of significant challenges to private enterprises that go beyond the Maldives has been difficulties stemming from business regulation bottlenecks. able to attract large volumes of FDI to tourism, but it has Investment climate and FDI had limited positive Maldives has been able to attract large volumes of FDI to tourism, but it has had limited spillovers to the positive spillovers to the economy (Figure 59). The uniqueness of Maldives’ natural resources economy has enabled the country to attract large (and frequently lumpy) amounts of FDI (Figure 60) in spite of shortcomings in the investment climate. However, FDI inflows have been largely focused on development of single-island resorts, with a very limited proportion reaching sectors of the economy that are associated with networks of production. In turn, this has contributed to the current enclave model of the tourism industry. Going forward, as the country seeks to foster economic diversification through foreign and local investment, its ability to attract FDI into other industries or sectors will likely be affected by investment climate challenges. 95 World Bank (2015c) 96 Anecdotal evidence collected through interviews and consultations with stakeholders undertaken during the preparation of the SCD coincide on the view that investment climate shortcomings have had a major negative impact on entrepreneurship in Maldives. However, the lack of statistics including recent business surveys significantly limit the ability to substantiate these views. 83 5. Constraints to growth and shared prosperity (Contd.) Recent events have the potential to undermine the confidence of foreign investors on Maldives and reduce its competitiveness as a long-term investment destination in favor of jurisdictions that can provide a higher degree of certainty to foreign investors. A recent survey of global investors identified the main factors that drive selection of investment destinations. After macroeconomic stability, the second most important factor for global investors97 when selecting an investment destination is political risk98. Recent events in Maldives – including civil disturbances in Malé;,a high-profile dispute related to a contract for investment in the international airport, and anecdotal evidence reported in international media of radicalization and urban violence – have the potential to undermine the attractiveness of Maldives to foreign investments, including PPPs. 25 20 Percent of GDP 15 Figure 60 10 FDI net inflows in 2013 5 Percent of GDP 0 -5 Source: World Bank WDI -10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Access to finance Access to finance constraints has been identified as a major constraint Access to finance has been identified as a major constraint for the development of enterprises in for the development Maldives. A World Bank survey of enterprises99 in Maldives in 2005 found that 66 percent of firms of enterprises in identified access to finance as the most significant constraint to firms’ growth. While these figures Maldives. are admittedly old, other recent statistics and anecdotal evidence suggests that the situation has not improved since then. Indeed, a business survey by Ministry of Finance in 2013 found that up to 70 percent of companies in manufacturing have difficulties accessing finance (Figure 61). Similarly, views expressed by private-sector participants during interviews and consultations undertaken during the preparation of this diagnostic highlighted significant difficulties in accessing finance, Credit to the which restricts their ability to make long-term capital investments as well as to finance working private sector as a capital requirements for day-to-day business (Figure 62). proportion of GDP decreased from 69 Financing to the private sector has been lower than the pace of economic growth. Credit to the percent in 2008 to private sector as a proportion of GDP decreased from 69 percent in 2008 to 44 percent in 2013, a 44 percent in 2013, proportion that is much lower than that of economies with similar income level (Figure 63). These economy-wide aggregate figures support private-sector stakeholders’ perception of a narrowing availability of financing to private enterprises and entrepreneurs beyond tourism. 97 MIGA (2013). 98 In this context political risk includes adverse and abrupt regulatory changes, breach of contract, transfer and convertibility restric- tions, civil disturbances, expropriation and acts of war and terrorism. 99 World Bank (2006b) 84 Maldives Systematic Country Diagnostic Figure 61 Figure 61 Figure 62 Main obstacles to firm growth (2005) 0.7% 0.8% 0.6% 0.7% Proportion of firms Source: World Bank Proportion of firms 0.5% 0.6% Enterprise Surveys 0.5% 0.4% 0.4% 0.3% 0.3% 0.2% 0.2% Figure 62 0.1% 0.1% Proportion of firms 0.0 0.0 with difficulty Manufacturing Construction Trade Tourism finance Cost of finance land skilled staff corruption Access to Access to Access to accessing finance and firms undertaking capital investments (September 2013) 100 Source: Ministry of Finance 90 80 Percent of GDP 70 60 50 Figure 63 40 Domestic credit to 30 private sector 20 10 0 Source: MMA statistical Maldives Maldives states states Pacific Middle income (2008) islands (2013) Small Caribbean bulletin Credit to the 69% 44% Private Sector of GDP of GDP 2008 2013 Credit growth has recently been And some sectors of the economy are more affected than others. As discussed above, while driven by lending 70 percent of manufacturing firms surveyed reportedly have difficulties accessing bank credit, to real estate this proportion is much lower for other sectors such as construction (50 percent) and trade (32 and commerce, percent). None of the firms in tourism surveyed reported difficulties in accessing finance. This is while credit to consistent with the breakdown of banks’ credit portfolio, which is highly concentrated in tourism tradable sectors and, to a lesser extent, in commerce, while tradable sectors account for a marginal proportion of has decreased substantially since bank loans (4 percent for fisheries, 2 percent for manufacturing and 0.1 percent for agriculture). 2007 Moreover, credit growth has recently been driven by lending to real estate and commerce, while credit to tradable sectors has decreased substantially since 2007 (Figures 64 and 65). A breakdown of banks’ portfolios by size of the borrower is not available, but anecdotal evidence suggests that large enterprises (both public and private) enjoy easier access to bank credit than SMEs and small entrepreneurs. 85 5. Constraints to growth and shared prosperity (Contd.) Figure 64 Bank Loans in Oct 2014 Figure 64. Figure 65. Source: MMA 60% 350% 300 300% Percent share of 50% 48.3 250% total bank loans 208 Percent change 40% 200% 150% 30% 100% 88 Figure 65 50% 28 20% 10 3 Change in bank loans 16.3 12.5 0% 9.0 -50% 2007-2014 10% 4.1 3.8 3.7 2.1 -100% -36 -54 -76 0.1 0.1 -98 0% -150% Source: MMA Manufacturing Tourism Commerce Other Construction Real estate Transport Fisheries Utilities Agriculture Manufacturing Real estate Other Commerce Construction Tourism Transport Fisheries Agriculture Utilities High collateralization requirements represent major hurdles to borrowers. Companies surveyed in 2006100 reportedly were required by banks to post collateral amounting to more than 150 percent of the value of the loan on average101 . Views collected through interviews and consultations during the preparation of this diagnostic confirm that high collateral requirements still represent a Lack of access significant obstacle to credit, especially for SMEs and new entrepreneurs. to finance is a major obstacle for Lack of access to finance has been identified by authorities as a major obstacle for entrepreneurship entrepreneurship in in Maldives, but this challenge will not be resolved through concessional credit. Enhancing access Maldives, but this to finance for entrepreneurs is one of the priority areas under the Government Manifesto as well challenge will not as in the draft National Development Strategy. The government’s 2009-2013 National Strategic be resolved through cheap credit. Action Plan also recommended that the government provide women with self-help grants for small- and medium-sized enterprises and promote microcredit programs. This focus was intended to help bridge the disadvantage women face in accessing credit. For instance, in 2011 only one- third of the Bank of Maldives borrowers for development schemes or loans and advances were women.102 In response to the lack of access to finance for entrepreneurs overall in Maldives, the government had put in place a program to provide financing to young entrepreneurs. The program (GETSET) considered the provision of non-collateralized loans with subsidized interest rates. While the ultimate objective of the program (enhancing access to finance for entrepreneurs) is laudable, it does not address the shortcomings limiting the adequate functioning of the financial sector and thus does not represent a lasting or sustainable solution to the needs of enterprises and entrepreneurs. On the contrary, concessional directed lending programs often aggravate access to finance deficiencies by helping erode the credit culture in the population, reducing incentives for established commercial lenders to innovate, and crowding out the financial sector by creating dependence of entrepreneurs on subsidized interest rates. 100 ibid 101 ibid 102 ADB (2014a). 86 Maldives Systematic Country Diagnostic Sustainable enhancement of access to finance in Maldives will require the development and implementation of a strategy for financial sector development that addresses the shortcomings faced by the sector. The factors limiting the willingness and ability of financial intermediaries to provide credit on a sustainable and fair basis to the various sectors of the private sector are wide- ranging. Included in Table 2 is a list of shortcomings that have been identified in the past103 that illustrate the range of challenges facing the sector, including deficiencies in the legal framework governing credit activities, shortcomings in credit infrastructure and underdeveloped financial institutions. However, this list is not exhaustive and additional factors may be at play. Enhanced public-private dialogue between all stakeholders (authorities, financial institutions and borrowers) will be needed in order to further identify obstacles and opportunities, as well as to prioritize actions. These issues are addressed in more detail in Annex 3. Enhanced public- private dialogue between all stakeholders will Governance constraints be needed in order Maldives is facing important governance challenges that affect the business environment and the to further identify soundness and sustainability of economic and fiscal management. Overall, an indeterminate but obstacles and significant connection between a few parties and the political system – related to the absence of opportunities, as basic legislation in many areas, including procurement – and a lack of legal clarity weigh on the well as to prioritize economic activity. In particular, a significant amount of procurement in the country is carried out actions. by SOEs and the Ministry of Health outside the scope of national rules and central government controls, leading to doubts about whether public resources are spent in the most effective and efficient manner. In the public sector, limited capacity, a complex institutional framework, and inter-institutional conflicts also limit the ability of the state to support social and economic progress. Institutional capacity remains much lower than that of an average upper middle-income Governance country. deficiencies have hampered the Governance deficiencies have hampered the ability of Maldives to maximize the benefits from its ability of Maldives natural resources as a foundation for shared growth. Significant governance constraints appear to maximize the benefits from its to have undermined the development of the two main industries in the country (tourism and natural resources fisheries). These shortcomings appear to have translated into sub-optimal investment, unrealized as a foundation for potential for job creation and loss revenues for the government (see tourism and fisheries shared growth. sections). Deficiencies include: lack of transparency in allocation of licenses for exploitation of natural resources; suboptimal selection of licensees, and: lack of mechanisms to minimize conflict of interest (see paragraphs sections on tourism and fisheries). Public-sector management suffers from inefficiencies. The public sector plays an important role in Maldives’ overall economic model in redistributing some of the rents generated by the resort sector to the rest of the population. This is done both through transfers and directly in the form of relatively large public employment in both civil administration and state-owned enterprises. In both cases there are significant inefficiencies that undermine both the effectiveness of the 103 World Bank, (2011a) 87 5. Constraints to growth and shared prosperity (Contd.) redistributive model and the fulfillment of public-sector functions in service provision and regulation. With civil service skewed towards relatively young workers, its effectiveness is far lower than what might be expected of a middle-income country. Public financial management suffers from inadequate accounting and poor cost controls. The unsettled political and institutional framework impairs the state’s effectiveness. Maldives has been undergoing a contentious political transition for the past 10 years. The 2008 Constitution created an extensive set of governance institutions and confrontational elections characterized by interference of state bodies that has undermined credibility. Branches of government and independent commissions are frequently in conflict, reflecting the interests of individuals in what is a sharply divided polity. The lack of political and institutional settlement diverts the attention of the state from carrying out public-sector functions and prompts decision-making driven to an unusual degree by short-term political issues. There are fundamental gaps This has led in particular to weak rule of law. Maldives’ legal system is based on several foundations, in law, including: including both common law and the sharia, with lack of harmonization evident in much legislation, the lack of a civil particularly for commercial activity. There are fundamental gaps in law, including: the lack of a civil procedure code; procedure code; seemingly non-functional enforcement mechanisms; a system of appeals that non-functional enforcement generates long delays, and; weak capacity among judges, particularly on commercial matters. mechanisms; a Uncertainties about the legal framework are amplified by the diverse legal backgrounds of judges system of appeals (all judicial education is obtained outside of Maldives), which leads to inconsistency in adjudication. that generates long More generally, while the 2008 Constitution provided grounds for strong independence of the delays, and; weak judiciary, the composition of the judicial service commission has led to strong politicization of capacity among the courts according to many observers (most notably the UN Special Rapporteur on Judicial judges, particularly Independence). The judiciary has been highly proactive in recent political and electoral disputes. on commercial matters. Human capital constraints Expanding and improving human capital will be of vital importance to promote economic prosperity and increase jobs for young people. The country ranked only 103rd in the Human Development Index for 2014, which is low for a middle-income country approaching $9,900 GNI per capita. Maldives has performed well in providing access to primary and lower secondary education, but there is room for improvement. The primary gross enrollment rate is 104 percent and the primary net enrollment rate 99 percent. The lower secondary gross enrollment rate is 107 percent (Figure 66), while the lower secondary net rate is 82 percent. This suggests that, while participation in primary and lower secondary education is high, there is considerable grade repetition and early/ late entry, especially in lower secondary education. The country needs to improve the internal efficiency of the education system. 88 Maldives Systematic Country Diagnostic The low proportion Access to Education of Maldivians with higher education Primary qualifications means Gross Lower Enrollment Rate that the country Secondary lacks sufficient 104% Net Rate professionals, Primary net 82% Lower Secondary Gross Enrollment managers and Enrollment technical experts to Rate 107% support economic 99% growth and social development. The country lags sharply behind in education attainment at the higher secondary level. The gross higher secondary net enrollment rate is about 35 percent (Figure 67). This is very low by international standards. The average higher secondary gross enrollment rate for middle-income countries is 61 percent, and for upper middle-income countries 76 percent. The main reason for the low enrollment in higher secondary education in Maldives is the limited number of schools that offered grades 11-12 until recently, although almost each atoll has at least one school providing higher secondary education. The government has now expanded this number to 51 schools: three schools in Malé and 48 schools in the atolls (Figure 67). Many of these schools are over-crowded and congested and require more facilities and equipment. In addition, higher secondary schools require greater management and leadership capability, and the professional development of teachers. At present, the higher secondary school system relies heavily on human resources from Figure 66 overseas. Gross Enrollment Rates Figure 66. Figure 67. Figure 120 40 Source: Ministry of Education Gross enrollment rates (%) 35 Statistics 100 Number of schools 30 80 25 60 20 15 Figure 67 40 10 Number of schools by 20 5 0 type 0 Kaafu Laamu Haa Alifu Haa Dhaalu Shaviyani Noonu Raa Baa Lhaviyani Alifu Alifu Alifu Dhaalu Vaavu Meemu Faafu Dhaalu Thaa Gaafu Alifu Gaafu Dhaalu Gnaviyani Seenu Malé Primary Lower Higher Higher education secondary secondary education Source: School Statistics, education education 2014, Ministry of Education Primary Lower secondary Higher secondary Higher education participation is extremely low for a middle-income country. The gross higher education enrollment rate is only about 6 percent in Maldives, (Figure 67) whereas the gross higher education enrollment rate for middle-income countries is around 30 percent. The low proportion of Maldivians with higher education qualifications means that the country lacks sufficient professionals, managers and technical experts to support economic growth and social development. The main reasons for the low enrollment in higher education are: (1) the small number of students completing higher secondary education and moving onto higher education; 89 5. Constraints to growth and shared prosperity (Contd.) and (2) limited access to higher education in the country. Higher education is mainly provided by Maldives National University (MNU) and about seven private higher education institutions. However, over 85 percent of enrollment in these private higher education institutions is actually in pre-degree level diploma and certificate programs. A considerable proportion of enrollment in the MNU, too, is in pre-degree level qualifications. Higher education participation Gross Higher Gross Education Higher Education Enrollment Rate in Enrollment Rate Maldives for Middle Income 6% Countries 30% The quality of education at all levels is a major challenge facing Maldives, both in terms of inputs The quality of and outcomes. The teacher-student ratio varies between 6 (Vaavu Atoll) and 16 (Malé), but lower education at all teacher-student ratios tend to be associated with a larger share of untrained teachers (Figure 68). levels is a major At the same time, learning outcomes in primary and secondary education are low. The average score challenge facing for English among students at grade 4 is just 32 percent, and the average score for mathematics Maldives. only 39 percent. At grade 7 the average score for English is merely 29 percent, while the average score for mathematics is just 30 percent. These very low averages show that learning levels in both primary and lower secondary education are weak. There are also substantial regional disparities (Figure 69). Learning outcomes are considerably higher in Malé than in the atolls, especially in a subject such as English language, which is vitally important for employment in a tourism-based economy. The low levels of cognitive skills results in poor performance of students at national examinations. For instance, at the General Certificate of Examinations (GCE O/L) only about 40 percent students pass in five subjects, while just 19 percent students pass in eight subjects. 25 Student - teacher ratio 20 15 Figure 68 Student-teacher ratio 10 and share of untrained 5 teachers 0 Kaafu Laamu Haa Alifu Haa Dhaalu Shaviyani Noonu Raa Baa Lhaviyani Alifu Alifu Alifu Dhaalu Vaavu Meemu Faafu Dhaalu Thaa Gaafu Alifu Gaafu Dhaalu Gnaviyani Seenu Malé Source: School Statistics, 2014, Ministry of Education Student Teacher Ratio Untrained Teachers (% of total) 90 Maldives Systematic Country Diagnostic Figure 69 50 Average learning outcomes Average English 45 40 language learning 35 outcomes at grade 7 by 30 Atoll, 2008 25 20 15 Source: Achievement in 10 English at Grade 7, Ministry of 5 Education 0 Kaafu Laamu Haa Alifu Haa Dhaalu Shaviyani Noonu Raa Baa Lhaviyani Alifu Alifu Alifu Dhaalu Vaavu Meemu Faafu Dhaalu Thaa Gaafu Alifu Gaafu Dhaalu Gnaviyani Seenu Malé High youth unemployment is linked with skills deficiencies. The share of the labor force ages 15- Due to the lack 24 without work but available for and seeking employment was 27 percent in 2013. The average of well-educated youth unemployment rate for upper middle-income countries is 14 percent. Due to the lack of Maldivians the well-educated Maldivians the country also faces a severe shortage of qualified personnel for country also faces a technical, and middle and senior management, jobs. According to private-sector stakeholders severe shortage of consulted during the preparation of this diagnostic (Annex 2), the above-mentioned deficiencies qualified personnel in “soft skills” together with shortcomings in technical and vocational education contribute to the for technical, and high level of expatriate workers, especially for up-market tourism and commercial and financial middle and senior activities. management, jobs. The quality of existing TVET services needs to be improved so that it becomes both more attractive for youth and more relevant for employers. The government has established the Technical and Vocational Education Program (TVET) with aim of creating a skilled workforce that meets labor market demands. The program has been diversified to offer training in hospitality and tourism, The quality of construction and building, agriculture, electrical wiring and engineering and handicrafts. There existing TVET are more than 80 training providers in the country. However, the quality of these TVET programs services needs to be is considered limited and youth graduating with technical and vocational qualifications can face improved so that it lengthy job search periods. Another important constraint is that technical and vocational education becomes both more attractive for youth and training is considered an inferior option to academic qualifications by Maldivian youth, so that and more relevant the demand for TVET is limited. The education and training system has not yet developed career for employers. guidance and counseling to help youth identify their aptitudes and talents, nor a method to stream students into knowledge and/or skills-based programs depending on these aptitudes and talents. One possible experiment that could be further studied in this regard is the Ministry of Education’s UFAA program, which attempts to connect high schools, counselors and employers, and provide at-risk youth the technical and soft skills to enhance employability. The gap between youth aspirations for employment and the actual opportunities for employment needs to be addressed. The rapidity of economic growth for Maldives has altered the perceptions of the ‘ideal’ desired job for today’s youth. Qualitative data reveal that young educated Maldivian men 91 5. Constraints to growth and shared prosperity (Contd.) High youth and women – and their households – aspire to white-collar, high-paying jobs and are unwilling to unemployment settle for the perceived lower-status (if not lower-paying) jobs in fisheries or other non-white-collar might inhibit sectors. Financial pressures on unemployed youth are deemed to be reduced through parental Maldives’ future support even for unemployed adult children. These factors create a high reservation wage for youth.104 growth trajectory Parents supporting a large family do not, in turn, feel any financial pressure because of government and the ability of its subsidization of daily necessities, such as basic food items, fuel, electricity and education. Thus, development to be parents have little motivation to temper their own high aspirations and pressure their children to inclusive. settle for a job that may be less than ideal. In Maldives and elsewhere this phenomenon is referred to as ‘voluntary unemployment.’105 The resultant high youth unemployment might inhibit Maldives’ future growth trajectory and the ability of its development to be inclusive. Maldives is the country in South Social spending constraints Asia spending the Maldives’ geography and polarized population distribution throughout the archipelago contribute highest share of GDP on health and to high cost of service delivery. Maldives’ population is scattered over 194 inhabited island over an education. But archipelago of more than 800 kilometers in length. Guaranteeing access to services throughout access to secondary this territory is further complicated by a very polarized distribution of the population, characterized education remains by high density in the capital area Malé, which is home to two-thirds of the population, and very low low density in the atolls.106 In 2014, education and health services together accounted for 22 percent of total government spending. Maldives is the country in South Asia spending the highest share of GDP on health and education (Figures 70 and 71). Interestingly, and despite a spending on education that is significantly above international average, the Maldivian government has been Figure 70 so far unable to improve access to secondary education and address outstanding learning and Spending on health education-quality issues. Source: World Bank’s World Development Indicators Figure 70. Figure 71. database. on health (percent of GDP, 2009) on health (percent of GDP, 2012) 18 14 16 12 Figure 71 Public expenditure Public expenditure 14 10 Spending on education 12 Maldives 10 8 Source: World Bank’s World 8 6 Nepal 6 Bhutan Development Indicators 4 India database. 4 Nepal Maldives 2 Afganisthan India Bhutan 2 Bangladesh Pakistan Sri Lanka Bangladesh Sri Lanka 0 Pakistan 0 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 Log of GDP per capital Log of GDP per capital (PPP, constant international 2011 dollers, 2012) (PPP, constant international 2011 dollers, 2012) 104 World Bank. 2014. “Youth in the Maldives: Shaping a New Future for Young Women and Men through Engagement and Empower- ment.” Washington, D.C.: World Bank. 105 Ibid. 106 Population density in Malé is as high as 53,700 people per square kilometer against an average of approximately 1900 per square kilometer in the Atolls. 92 Maldives Systematic Country Diagnostic Maldives lacks a comprehensive, effective and efficient system of social protection. Maldives’ safety net programs have undertaken major changes since the government’s Strategic Action Plan 2009-2013 was drawn up.107 While tremendous progress has been made towards adding new programs and expanding coverage of existing ones, Maldives is still far from its policy goal of transforming fragmented social safety net programs into a comprehensive social protection Maldives lacks a system. Universal subsidies on food and electricity and universal health insurance represent comprehensive, the bulk of social expenditure together with social pension (Old Age Basic Pension) and Senior effective and efficient Citizens Allowance (Table 3). Smaller safety net programs include disability and single parent system of social allowances.108 Poor targeting and weak coordination in administration greatly reduce the potential protection. impact of safety net programs and challenge their fiscal sustainability and, ultimately, the quality of assistance to those most vulnerable. The increase in spending on universal subsidies is a challenge to shared prosperity and poverty reduction in Maldives. As discussed in Chapter 2, Maldives’ performance in reducing poverty and Poor targeting and boosting shared prosperity has been lackluster. While there is no recent poverty data to confirm this weak coordination hypothesis, the increase in public spending during the past few years might not have contributed in administration to better poverty and shared prosperity outcomes, especially because most of the increase has greatly reduce the been driven by spending on universal subsidies.109 In fact, as revealed in the poverty and social potential impact of impact analysis, while the poor spend a significantly higher share of their budget on food and safety net programs utilities, the rich benefit the most from universal subsidies due to their higher levels of consumption and challenge their (Figures 72 and 73). Because of their inherently regressive nature, universal subsidies represent fiscal sustainability. an inefficient instrument for guaranteeing affordability of basic needs for the poorest segments of the population. Nevertheless, lacking a coherent safety net system explicitly targeting the poor, universal subsidies are the only mechanism of “income support” currently available. Table 3. While the poor spend a significantly higher Percent of total public expenditure 2014 share of their budget Recurrent expenditure 75.7 on food and utilities, Personal Emoluments 32.6 the rich benefit the Pensions, Retirement Benefits & Gratuities 7.9 most from universal subsidies. Travel Expenses 0.6 Supplies and Requisites 2.1 Operational Services 7.5 Supplies and Requisites for Service Provision 1.7 Training 1.7 Repairs and Maintenance 0.9 107 Following this policy framework, the government has passed three legislations governing specific social protection interventions – Disability Act (2010), National Social Health Insurance Act (2011), and Social Protection Act (2014). 108 According to the Social Protection Act, the government is also responsible to provide assistance to citizens for psychiatric treat- ment, water bill, housing, education needs, and whose small or medium sized business is facing a difficult incident. 109 See Chapter 2 93 5. Constraints to growth and shared prosperity (Contd.) Table 3 Percent of total public expenditure 2014 Public expenditure Interest Payments 4.7 items in 2014 Grants, Contributions and Subsidies, of which 14.5 Source: MOF, staff Electricity subsidies 5.5 calculations Food subsidies 1.6 Aasandha 3.7 Payments against losses and right-offs 1.6 Capital expenditure 16.5 Development Projects 0.3 Public Sector Investment Program 13.6 Recently introduced Capital Equipment 0.8 social insurance Capital Contribution to profit oriented public agencies 1.7 schemes have Debt Amortization 7.8 created perverse economic incentives Moreover, recently introduced social insurance schemes have created perverse economic that challenge incentives that challenge poverty reduction and shared prosperity moving forward. While the poverty reduction and introduction of universal health insurance (Aasandha) has benefited disproportionally the poorest shared prosperity segments of the population,110 poor design and limited implementation capacity have contributed moving forward. to increasing utilization trends and escalating costs that challenge its future fiscal sustainability. Similarly, the generosity of the pension system has exacerbated inter-generational equity issues and potentially contributed to increase distortions on the labor market. In particular, increasing trends for inter-generational transfers within the household and increasing reservation wages might challenge direct participation of the youth in the growth process (as noted above) and add to fiscal and social sustainability concerns moving forward.111 Figure 72 Share of expenditure Figure 72. Figure 73. on food and per capita 45 45 35% expenditure on food, by MVR per month per person Percent of total subsidy 40 40 30% quintile 35 35 Percent of total 25% 30 30 Source: Authors’ calculations, 25 25 20% HIES 2009-10 20 20 15% 15 15 10% 10 10 5 5 5% 0 0 0% Figure 73 Poorest 2 3 4 Richest Poorest 2 3 4 Richest quintile quintile quintile quintile Distribution of Share of expenditure (%) Per capita expenditure (Rf) electricity subsidy benefits in Male, 2012 Source: Authors’ calculations, HIES 2009-10 110 Nagpal, Redaelli (2013). 111 This has been confirmed in interviews with Maldivians for the youth and gender studies. 94 Maldives Systematic Country Diagnostic While Maldives benefits from unique natural resources, opportunities for the youth to reach their aspirations remain limited. 6. Opportunities and trade-offs for sustainable poverty reduction and shared prosperity 95 Photo Credit - Emanuel Salinas 6. Opportunities and trade-offs for sustainable poverty reduction and shared prosperity The Systematic Country Diagnostic aims to identify the most important opportunities and obstacles to poverty reduction and shared prosperity in Maldives. Based on evidence presented thus far and analysis conducted as part of this Systematic Country Diagnostic, this section creates a framework to identify the highest priority areas for reform and lays out a potential path forward for shared and sustainable growth and poverty reduction in Maldives. The identification of the priorities areas is the result of a three-step process. First, during the concept stage, hypotheses on the functioning of Maldives’ development model and on the drivers of its vulnerabilities were formulated, and knowledge gaps identified. Second, during the SCD development stage, these hypotheses were confirmed by additional analysis and knowledge gaps filled whenever feasible under the given timeline. Third, consultations with local stakeholders were used to further validate hypotheses and analysis (Annex 2). Priority area 1: Enhancing opportunities for the local population to benefit from existing industries. Enhancing these opportunities would contribute to poverty reduction and shared prosperity. However, the impact may not be immediate and indeed relies on improving infrastructure, training Enabling the local and regulations, among other things. It also could reduce social risk by improving employment population to seize opportunities for the most vulnerable segments of the population, notably for youth and women. opportunities for Actions under this pillar appear politically feasible as both the current and the previous government entrepreneurship will have endorsed reforms in both sectors to make them more inclusive. require addressing a host of factors that Priority area 2: Enabling opportunities for creation of new sources of growth. Enabling the local combined represent population to seize opportunities for entrepreneurship will require addressing a host of factors the overall enabling that combined represent the overall enabling environment in the country. These factors include: environment in the minimizing the regulatory burden and consequent cost to doing business; enhancing the ability country. of creditworthy firms and entrepreneurs to access finance; and enhancing human capital through the formation of professionals and technicians with the skills that are in demand and are the key to better jobs. These priorities are discussed below. Priority area 3: Improving efficiency and efficacy of public resource management and reducing macro fiscal risk. Addressing the challenges identified in this priority area would make the economic model in Maldives more sustainable and resilient to shocks. More directly, better management of public resources would free up space to benefit the poor and increase opportunities for the youth through, for example, better education. The impact of reform of subsidies and the public wage bill would have an immediate and medium-term impact on fiscal sustainability, but they require both careful planning to mitigate the negative impact on the poor and political courage. Improving the preparedness for disasters and climate change would have a medium- to long-term impact. The analysis identified governance and labor market as a fundamental cross-cutting issues constraining growth, poverty reduction and shared prosperity in Maldives. Governance and labor 96 Maldives Systematic Country Diagnostic market issues are at the heart of many of the constraints that challenge the inclusiveness and sustainability of Maldives’ socio-economic model of development. A strong public-sector presence in key sectors of the economy and a lack of transparency and accountability in SOEs’ management negatively impact fiscal sustainability as well as private sector’s ability to flourish. Moreover, the weakness of the overall legal framework together with the poor management of the country’s natural assets challenge the sustainability of the economic model moving forward. Similarly, A strong public- labor market distortions and an increasing mismatch between labor demand and supply make it sector presence in harder for the growth process to be inclusive and put the social contract at great risk. Given the key sectors of the fundamental role played by governance and labor market constraints, the SCD has identified the economy and a lack need to fill existing knowledge gaps in these areas to more effectively identify policy priorities of transparency and moving forward. accountability in SOEs’ management negatively impact fiscal sustainability Priority area 1. Sharing prosperity - Enhancing as well as private opportunities for the local population to benefit from sector’s ability to flourish. existing industries Opportunities and obstacles to enhance inclusiveness of tourism growth Given the importance of tourism in Maldives, a more inclusive industry represents a major Growth in itself opportunity for shared prosperity going forward. Maintaining underlying growth of tourism will will not be enough be a key factor for the sustainability of growth in the economy as a whole. However, growth in to ensure the inclusiveness of the itself will not be enough to ensure the inclusiveness of the tourism industry and the realization of tourism industry. its potential positive spillovers. There are four potential complementary avenues to enhance the inclusiveness of tourism: First: Enhancing the implementation of the current resort model. Adequate planning and transparent implementation of resorts development can help to enhance the benefits for the Adequate planning economy as a whole and result in positive spillovers for local communities by attracting reputable and transparent international investors with extensive industry know-how and networks. Realizing this opportunity implementation of will require, among other things: resorts development ∫ Holistic planning and implementation of integrated destination management components can help to enhance (transport, infrastructure, skills training, marketing, economic clustering) to increase the the benefits for the viability of new resort projects, particularly in outer atolls where there are higher incidences of economy as a whole. poverty. ∫ A more strategic and transparent approach to ensure that leases are awarded to reputable investors with demonstrable track record in the tourism industry to enhance the viability of new developments and lead to positive spillovers to the local communities. ∫ Transparency in the management of leases to avoid numerous non-performing leases. 97 6. Opportunities and trade-offs for sustainable poverty reduction and shared prosperity (Contd.) ∫ Strategic planning to reduce the risk of over-supply in key market segments. Second: Enabling sustainable economic diversification within the tourism sector. Non-resort market niches (e.g. guesthouses and safari boats) have demonstrated the viability of business models that are more closely integrated with local communities, through local ownership, higher local employment (deemed as high as 75 percent of total staff) and reportedly higher ability to mobilize women as part The sustainability of the workforce. These new market niches have also demonstrated the ability to co-exist with the of the growth in higher-end resorts, providing lower-cost options to other demand segments. Realizing this opportunity guesthouses will will require, among other things: depend on adequate planning and ∫ Destination planning and management. The sustainability of the growth in guesthouses will regulation of tourism depend on adequate planning and regulation of tourism development in inhabited islands. This development in includes sufficient analysis of carrying capacities, consistent management of land-use plans and inhabited islands. a requirement for Environmental Impact Assessments. The absence of these foundations in the most developed case (Maafushi Island) had led to an increasingly overburdened infrastructure system (especially waste management), and, anecdotally, to property inflation and displacement of local population. ∫ Better and more cost-effective infrastructure to mitigate the high cost of transport, which limits the potential of new market niches to islands clustered close to the capital (as they cater to more price-sensitive tourists). This would facilitate the development of new market niches in remote islands, where poverty levels are higher. Third: Enabling local employment. Tourism is a large and growing source of jobs. According to the census, tourism generated 28,000 jobs in 2014, only 40 percent of which are filled by Maldivian staff. Tourism generated By 2015 the industry was deemed to generate 31,000 jobs. The implementation of industry growth 28,000 jobs in 2014, in line with government plans would imply an additional demand for 3,300 new employees in the only 40 percent of mainstream resort industry112. Despite a government-imposed quota requiring at least 45 percent which are filled by of staff to be Maldivian, the tourism industry consistently reports significant difficulties finding and Maldivian staff. retaining qualified local staff. Unlocking the access of Maldivian population to more and better jobs in tourism will require addressing a number of factors, including: impact of tourism on employment 2015 40% 31,000 28,000 Additional Jobs of Maldivian Staff jobs created in 2014 Government plans additional demand for 3,300 employees 112 Government plans target ten resorts per year with an average capacity of 220 beds each year. An industry standard considers a ratio of 1.5 staff per bed. This implies an annual requirement for 3300 new staff. 98 Maldives Systematic Country Diagnostic ∫ Establishing a partnership between the government and the private sector to identify and address the obstacles to local employment. The normative approach (government-imposed quotas) to enforce localization of employment has not lead to a sustainable inclusiveness in the tourism industry. Anecdotal evidence suggests that local employment in the industry is lower than the government-imposed quota.113 ∫ Improving the alignment between technical training and demand. Market participants interviewed consistently highlighted a major gap between the quality and relevance of the technical training provided by TVET and the demands of the market. This prompts many resorts to implement their own trainee programs for local youth. However, the high cost of these programs and the high turnover of trained local staff are incentives to hire experienced foreign staff. A closer collaboration between the technical education institutions and the private sector may help to enhance the relevance and quality of the technical training provided by TVET. That, in turn, could enhance the employability of technical graduates while making it easier for the tourism sector to find qualified local staff. ∫ Addressing social perceptions that appear to limit the desirability of technical jobs within and outside the tourism industry to young people. Anecdotal evidence collected through extensive A closer collaboration consultations with youth and private-sector stakeholders consistently identified social norms that between the appear to prevent the willingness of the youth to get training and seek technical jobs in spite of technical education great demand from various industries for qualified technical staff. These norms appear to include institutions and the social conventions, family expectations and social media role models. private sector may help to enhance the ∫ Addressing transport limitations that restrict the ability of Maldivians living in inhabited islands to relevance and quality commute to work in resorts. While many resorts provide accommodation to employees, anecdotal of the technical evidence suggests that Maldivians place a high premium on the ability to live on their home training provided by island and commute to work. Such evidence is supported by a much higher proportion of local TVET. employment114 in resorts that are close to inhabited islands and with good transport connections. ∫ Mitigating social and structural barriers that restrict the ability of young women to work in the tourism sector. Social norms dictating appropriate employment for young women contribute to making families reluctant to allow young women to take tourism-related jobs because they would have to travel from home to other islands and because the tourism sector is associated with “immoral and unethical” practices.115 Structural barriers that further exacerbate familial unwillingness to allow young women to work away from home include the lack of child-care or residential facilities for employed women in the tourism sector. Women’s limited control of transportation adds an economic hurdle to their ability to travel to resort islands for work.116 Fourth: Strengthening linkages between tourism and local providers of goods and services. The tourism industry is a large and rapidly growing source of demand for goods and services. The tourism sector’s demand for inputs represents a major opportunity for local producers. But at the 113 The absence of credible and comprehensive official figures make it difficult to verify this. 114 Estimated to be as high as 70 percent by market participants interviewed. 115 Hope for Women 2012. Maldives NGO Shadow Report to the Committee on the Elimination of Discrimination against Women, 2012. Maldives: Hope for Women NGO; Asian Development Bank (ADB). 2014. “Maldives - Gender Equality Diagnostic of Selected Sectors.” Mandaluyong City, Philippines: Asian Development Bank, 2014; Gunatilaka, R. 2013. Employment Challenges in the Maldives. Sri Lanka and the Maldives: ILO. 116 Hope for Women 2012. Maldives NGO Shadow Report to the Committee on the Elimination of Discrimination against Women, 2012. Maldives: Hope for Women NGO; Asian Development Bank (ADB). 2014. “Maldives - Gender Equality Diagnostic of Selected Sectors.” Mandaluyong City, Philippines: Asian Development Bank, 2014. 99 6. Opportunities and trade-offs for sustainable poverty reduction and shared prosperity (Contd.) present time, given limitation in local supply, most of the goods are imported. The potential for creation of supply chains between local producers and tourism industry is hampered by a number of obstacles, including: ∫ Fundamental challenges to local supply due to the small size of the economy, limited economies of scale, high dispersion of the population and high transport costs. However, there Shortcomings in is ample potential for production focused on specific products and crops, signaling the need quality, quantity for specialization. and consistency ∫ Shortcomings in quality, quantity and consistency of supply affect the development potential of supply affect for many local producers. According to anecdotal evidence, previous attempts by cooperatives the development and grower associations to enhance reliability and professionalism have failed to radically potential for many improve the reliability of supply. In light of that, many tourism operators prefer to reduce local producers. uncertainty through imports. A large proportion of agricultural products come from small producers. Aggregation and coordination has been attempted by cooperatives and corporate sponsors, but it remains challenging.117 ∫ Limited collaboration between supply and demand of agricultural products. While there have been some success stories in production in agricultural islands, of the 52 leased islands, only eight are actually operating, signaling potential missed opportunities for enhancement of the local production. Further analysis of priority crop production, the calculation of supply and demand, key constraints including inputs, logistics, knowledge and employment desirability, and availability of land may help to enhance the certainty in supply. ∫ The fact that, at present, agricultural production throughout the country is centralized in Malé due to lack of market places for fresh produce in other atolls118. This reduces the competitiveness of local production by increasing transport costs and reducing the freshness of products. The fisheries sector Opportunities and obstacles for unleashing the potential of can generate a fisheries and ancillary industries. range of sustainable Maldives has the opportunity to further develop its fisheries sector, and to capitalize on the potential benefits for Maldives. benefits to enhance economic growth and sustainable development at a national level. Unlike the fisheries sectors in many countries throughout the world, Maldives has a range of factors in its favor that provide the opportunity for further development. The fisheries sector can generate a range of sustainable benefits for Maldives – direct benefits such as employment, income and food for fish-workers and indirect benefits such as contributions to the national exchequer through various fiscal mechanisms. Yet, significant challenges lay ahead to undertake sector development within an economically efficient and sustainable fisheries management system. Enhancing the governance of the sector will be necessary to unleash its potential. The development of the skipjack tuna (a segment regulated through processing licenses) and yellowfin tuna 117 While there are various examples of successful cooperatives, notably the Addu Meedhoo cooperative supplying the Shangri-La Hotel, the concept is not well suited to the Maldives and is not inherently replicable across Atolls 118 Effectively, a product may be produced in a remote Atoll, brought to Malé at great cost and transport time, bought in Malé and returned to the same Atoll by the buyer. 100 Maldives Systematic Country Diagnostic (a segment that does not have similar licensing in place) highlights two widely varying trends. Where the licensed market segment is characterized by plummeting catch, low added-value exports and declining employment, the unlicensed segment is characterized by increasing catch volumes, high-value exports to prime markets and increasing employment. While other factors may contribute to these trends, it is worth reviewing the governance framework in the sector, Enhancing the including the rationale for licensing of particular activities and whether such framework has a governance of the positive contribution to the economy as a whole. If licenses are maintained, a transparent licensing fisheries sector will process should be put in place with emphasis on ensuring that licenses are granted to the most be necessary to qualified enterprises with demonstrated ability to contribute to the sustainable growth of the unleash its potential. sector. The sustainable and inclusive growth of the fisheries sector will likely not be based on increasing the volume of catch. Currently, most of Maldives fisheries operate under free and open-access conditions. The sector’s growth is based largely on traditional policy goals of maximizing production through increased fish landings, supported by improved technology that can lead to increased fishing yields. Global experience shows, however, that this approach usually results in low levels of success in generating sustained economic benefits. In some cases, this leads to reduced revenues form the fishery, diminishing profitably and, in the worst case, stock collapse from overfishing119 and waste120. Many countries that once had ample fish resources are now faced with overcapitalized fishing fleets, overfished stocks and unsustainable levels of public Many countries that subsidies to their fishery sectors. once had ample fish resources are A transition to a wealth-based fisheries management system may hold promise for the future. now faced with Rather than pursuing the traditional goal of increasing fish landings, wealth-based fisheries overcapitalized management systems focus on maximizing net returns in fishery-sector development within fishing fleets, an economically efficient fisheries management system. For inshore reef and lagoon fisheries, overfished stocks such systems can involve the development of local community-based management systems. For and unsustainable coastal and high-seas fisheries, such systems might be based around the design and introduction levels of public of rights-based fishing within a sound management planning framework. These approaches subsidies to their fishery sectors. have worked well for other countries. However, it is important to note that a transition process requires a careful implementation and a long-term planning horizon. Prudent management of the marine environment also underpins the valuable tourism industry and the perception of Maldives as a pristine environment. It is essential, therefore, to capitalize on emerging international best practice in fisheries and reef management to ensure that Maldives’ fisheries management system is economically efficient, sustainable and profitable in the future. 119 The classic example is the Canadian Atlantic cod fishery in the 1980s, culminating in the closure of the fishery in 1992, with mas- sive economic costs to local fishers, processors, and governments. In Maldives, there are some indications of fleet overcapitaliza- tion in the tuna fisheries. 120 Another systemic issue is the logistical and capacity problems between harvesters and processors during peak fishing periods. 101 6. Opportunities and trade-offs for sustainable poverty reduction and shared prosperity (Contd.) There are a range of targeted options121 for exploiting the opportunities presented to the Maldives’ fisheries sector at present, but effective strategies and plans will need to be developed in order to identify not only economic potential, but also environmental impact. ∫ With tuna harvesting and processing, there are possibilities for developing new domestic fisheries such as long-lining, and for re-organizing the current system for collecting and buying fish to overcome seasonal gluts and enhance the share of returns for the producers of (dried) Maldives fish. Onshore, there are possibilities for locating new processing and fish- handling facilities on different islands to take advantage of the seasonal changes in fishing grounds and fish concentrations and new infrastructure, such as harbors and airports. The impact of selecting a particular development option on local communities, on livelihoods and on the economies of scale and logistics of the value chain will need careful consideration and cooperation between both private and public actors. ∫ There are strong possibilities for developing new products and entering new markets, in particular capitalizing on Maldives pole- and line-caught tuna as an individually caught, ‘ecologically-friendly’ product from one of the world’s cleanest environments. The culture of high-value, small-volume products can also capitalize on the environmental image of Maldives. But, international seafood markets are highly competitive and demanding, and Maldives will Enhanced and more balanced stakeholder need to exploit its comparative advantage for seafood exports by building a careful business involvement between and investment strategy. fishers, industry ∫ There are opportunities for addressing infrastructure and logistical constraints that affect and government in some fishing islands. The trade in fish products will depend on better facilities and transport decision-making links to access export markets, but investments will require sound financial and technical will help chart a assessments and close public-private cooperation including PPPs, particularly given the steadier course at government’s current fiscal situation. the national level. ∫ The need to increase stakeholder involvement in decision-making and policy implementation is constrained by the overlapping mandates of different ministries. The lack of a clear definition of the respective roles of the public and private actors has major implications for the longer- term functioning and effectiveness of the sector, especially in a transition towards a wealth- based fisheries management system. Enhanced and more balanced stakeholder involvement between fishers, industry and government in decision-making will help chart a steadier course at the national level. It is particularly imperative that fishers have a stronger voice in policy development at the national level. ∫ Finally, the issue of international partnerships also presents options for Maldives. The extent to which Maldives’ participation in the Indian Ocean Tuna Commission has benefited the country over shared stocks, and the options for entering into partnerships with foreign investors for the further development of enterprises such as the tuna transshipping trade are the types of major issues that need to be considered in the context of sectoral and national development policy. 121 These options stem from technical background analyses as well as stakeholders’ consultations. 102 Maldives Systematic Country Diagnostic Priority area 2. Enabling opportunities for creation of new sources of growth Economic diversification and competitiveness in Maldives are hampered by significant structural and spatial constraints, but enhancing the enabling environment will increase the potential for entrepreneurship, creation of new firms and growth of existing ones. Maldives faces similar structural challenges of other small island states that restrict the extent to which the country can attain competitiveness across the board. However, as discussed in previous sections, there Enhancing the are visible untapped opportunities where potential (in terms of existing demand and proved enabling environment production capacity) exists, both within value chains of existing industries, as well as potential will increase the new economic activities. potential for entrepreneurship, Enabling the local population to seize these opportunities will require addressing a host of factors creation of new that combined restrict the overall enabling environment in the country. These factors include: firms and growth of minimizing the regulatory burden and consequent cost of doing business; enhancing the ability of existing ones. creditworthy firms and entrepreneurs to access finance, and; enhancing human capital through the formation of professionals and technicians with the skills that are in demand and are the key to better jobs. These priorities are discussed below. Enhancing Investment Climate Enhancing the investment climate will be essential to facilitate entrepreneurship and attract investment. As discussed in previous sections, the challenges related to the investment climate are higher in Maldives than in other small island states and other countries in the region. Global research documents extensively the negative link between investment climate challenges and growth and competitiveness in the private sector. As the government of strives to enhance Minimizing entrepreneurship and economic diversification in the country, the opportunities for improvement unnecessary of the investment climate are significant, including: regulatory hurdles will be essential in order to foster ∫ Reducing the cost of regulatory compliance. Global indicators such as Doing Business identify entrepreneurship in a number of regulatory shortcomings that currently create additional transaction costs to Maldives. entrepreneurs at all stages of the business cycle (from firm creation and connection to basic utilities, to expansion and resolution of disputes and insolvency). These deficiencies in the regulatory framework have the potential to discourage entrepreneurship and to reduce the overall competitiveness of enterprises. Minimizing unnecessary regulatory hurdles will be essential in order to foster entrepreneurship in Maldives.. ∫ Addressing shortcomings in the legal framework governing private-sector activities. Deficiencies in basic legal foundations of the system of commercial justice create legal uncertainty and diminish incentives for investment. Key elements of the legal framework needed in order to ensure a level playing field and fair treatment of investors (competition and industrial property laws) are missing, further undermining the confidence of potential new 103 6. Opportunities and trade-offs for sustainable poverty reduction and shared prosperity (Contd.) investors. The lack of adequate laws governing secured transactions severely undercuts the ability of the financial sector to provide credit to enterprises because it increases the risk of losses in case of borrowers’ defaults due to unpredictable, lengthy and costly legal resolution. Addressing these shortcomings in the legal framework, together with the capacity of the judiciary to implement laws in a consistent and objective way, will be important to increase investor confidence and provide entrepreneurs with legal certainty. Addressing shortcomings in the legal framework ∫ Enhancing the participation of the private sector in the reform of the investment climate. While will be important to global indicators provide a benchmark of some key areas of the investment climate, identifying increase investor and addressing the key constraints faced by enterprises and entrepreneurs in Maldives will confidence and require the active and continuous participation of the private sector. Development of a formal provide entrepreneurs public-private dialogue platform on investment climate can provide a channel for the private with legal certainty. sector to inform government policies and define priorities for reform. The close consultation with private sector can also help to reduce the risk of disruption in enterprises’ operations from sudden changes in laws and regulations. ∫ Addressing governance issues affecting the development of the private sector. In particular, Public-private SOEs have the potential to crowd out private enterprises from major economic activities dialogue platform on through unfair advantages, including wider access to financial services, broader ability to investment climate attract the limited human capital available in the country, and preferential treatment related can provide a channel to business regulations. Rethinking the role of SOEs and the rationale for their participation in for the private sector economic activities that could be undertaken by private enterprises is necessary to ensure that to inform government SOEs do not become an obstacle to entrepreneurship and private-sector-led growth. policies and define priorities for reform. Enhancing access to financial services Improving access to adequate financial services will be essential to enhance the ability of creditworthy firms and entrepreneurs to invest and reduce transaction costs. Enterprises and entrepreneurs have identified access to finance as a major constraint for their day-to-day Rethinking the role operations and longer-term growth. The high dependence of banks’ credit decisions on real of SOEs and the estate collateral, together with the inability of mechanisms for entrepreneurs with viable business rationale for their plans to demonstrate their creditworthiness, has translated into concentration of credit in a participation in few segments of the economy, most particularly larger borrowers in tourism-related activities. economic activities is Recognizing these challenges, authorities in Maldives have tried to provide concessional credit necessary to ensure to foster entrepreneurship. However, sustainably enhancing access to financial services will likely that SOEs do not require addressing a range of factors that currently undermine the efficient operations of the become an obstacle financial sector, including: to entrepreneurship. ∫ Improving credit infrastructure. Enhancing the depth and scope of information included in the credit registries will be necessary to increase the ability of lenders to identify borrowers with good track records. The inception of an electronic collateral registry will improve the ability of borrowers in remote atolls to post use their assets as collateral. 104 Maldives Systematic Country Diagnostic ∫ Enhancing financial inclusion of population in remote islands. Development of mobile banking will help the population in remote atolls to have access to basic financial services and reduce the currently very high transaction costs of financial operations. ∫ Improving the legal framework governing financial activities. Lack of clarity and certainty on application of laws translates into lengthy and costly legal processes. This increases the risk aversion of lenders, which, increases the collateralization requirements. Losses stemming Sustainably from these deficiencies are passed on to new clients in the form of higher interest rates. enhancing access More clarity and consistent application of the laws governing foreclosure, together with to financial services will likely require the clarification of the application of Shariah law in financial disputes will be necessary to addressing a range of minimize uncertainty and risk aversion. factors that currently ∫ Enhancing the development of non-bank financial institutions (NBFIs). NBFIs can increase undermine the accessibility to financial services by reaching out to segments of the market not covered efficient operations of by large commercial banks. Important types of NBFIs (including microfinance, leasing and the financial sector, factoring) are currently either missing or underdeveloped in Maldives. Previous experience in the country demonstrates the potential for some of these NBFIs, but also shows that challenges in the legal framework contributed to diminish that potential over time. Creating an enabling environment that fosters the orderly and sustainable development of NBFIs, including adequate oversight, can enhance supply of financial services to currently under- Mobile banking will served market segments. help the population in remote atolls to have access to basic Addressing human capital constraints financial services and Expanding and improving human capital will be of vital importance to promote economic reduce transaction prosperity and increase jobs for young people. From the demand side, enterprises have costs. consistently identified the lack of staff with the adequate skills and qualifications as a major constraint to growth. Over the last few years, this has led to vast employment of expatriates. From the supply side, young people in Maldives aspire to high-paid jobs, but often lack the required skills. While there are various factors at play affecting the participation of youth in employment, the gap between the skills demanded and those in supply is wide at the present Expanding and time. Reducing this gap presents a significant potential for shared prosperity, and will require, improving human among other factors, the following: capital will be of vital importance to ∫ Enhancing Maldivian youths’ ‘soft skills’. Soft skills (including workplace ethics and the ability promote economic to collaborate effectively within an organization and be responsive to clients) are missing prosperity and from academic programs, but are widely identified as priorities for employers in the country. increase jobs for Such skills often rank higher than technical skills as decision elements for employment. young people. The introduction of these skills in education programs will increase the employability of the Maldivian youth and will likely have a positive impact on their contribution to firms’ productivity. ∫ Improving the quality and relevance of technical and vocational education. While Maldives has a Technical and Vocational Education Program (TVET) in place, the quality and relevance of the training provided has failed to meet the demands from the private sector. This, together 105 6. Opportunities and trade-offs for sustainable poverty reduction and shared prosperity (Contd.) with the prevailing perception of Maldivian youth that vocational education and training is an inferior option to academic qualifications, has contributed to further lower the interest in TVET. A closer collaboration between the private sector and TVET will be necessary to increase the relevance of programs provided, and participation of industry experts may enhance the quality of the degrees. Ensuring responsiveness of TVET and other relevant academic institutions to the private sector will be necessary to unleash the potential for technical and vocational education. ∫ Enhancing participation and relevance of higher education. Enrollment in higher education is much lower in Maldives than in countries of similar income level. The low proportion of Maldivians with higher education qualifications means that the country lacks sufficient professionals, managers and technical experts to support economic growth and social development. Enrollment in higher education in Maldives is affected by the high dispersion in population (with tertiary education provided mainly in Male), but other factors – such as low completion rates in higher secondary education (which is provided in the atolls) play a role. While enrollment in higher education will remain hampered by Maldives spatial constraints, The sustainability enhancing the relevance and quality of the programs will be essential to ensure that they are of Maldives’ responsive to the needs of the country. development model is dependent on how well the authorities manage the country’s Priority area 3. Improve public resource management wealth-generating and reduce macro-fiscal risk natural resources and The sustainability of Maldives’ development model is dependent on how well the authorities its financial assets to redistribute this manage the country’s wealth-generating natural resources and its financial assets to redistribute wealth. this wealth, and how resilient it is to external and domestic shocks. Managing natural resources Maldives’ natural resources are its marine life, coral reefs and its islands. As discussed earlier, there are weaknesses in the exploitation of its natural resources and in its preparedness for natural hazards122. ∫ Continued population development will lead to more sewage and solid waste, which impacts tourism and fisheries, and growing demand for clean water for island communities, a development that is compounded by a growing competition between water for potable and irrigation purposes. ∫ Loss of coral reefs due to the warming of ocean water and pollution may result in the loss of bait fish for tuna fisheries. ∫ In the tourism sector, de facto high barriers to entry and the lack of transparency in the allocation of leases for resort islands makes it difficult to assess if the government maximizes the benefits from its main natural resource. 122 Discussed in the section on Environmental vulnerability and sustainability issues and governance constraints. 106 Maldives Systematic Country Diagnostic ∫ The government’s plan to increase passenger arrivals from 1.2 million123 in 2014 to 5 million124 will add more environmental pressure through the construction of new airports and facilities and increased flights. ∫ Much of the population and critical infrastructure reside within 100 meters of the shoreline, making them vulnerable to both disaster and sea-level rise, while climate change itself will also affect the quality of its coral reefs. A number of dimensions of governance problems prevent the government from managing its natural resources well and dealing with the emerging challenge of sustainability. ∫ Environment and natural resource management issues are typically complex, often uncertain and dynamic, and affect multiple sectors, organizations and individuals. As a result, it requires strong leadership, a high degree of coordination, stakeholder involvement, expertise and resources to ensure sustainability. ∫ Although there are multiple public institutions mandated to conserve and protect the natural resources with backing of legal instruments, their overlapping roles, undefined relationships and lack of incentive to coordinate have a negative impact on management effectiveness. Governance ∫ Lack of funds, human resources and expertise are making enforcement weak. Poor problems prevent stakeholder involvement, especially local authorities and communities in management the government from efforts, reduces enforcement capability. managing its natural ∫ Poor capacity of civil servants is impacting implementation and monitoring of policies, resources well and dealing with the strategies and programs. The private sector, which is the biggest beneficiary of natural emerging challenge resources and who can play a significant role in bringing resources, monitoring and of sustainability. managements, is playing only a limited role due to lack of opportunity and effort to mainstream. Managing public financial resources The main mechanisms to redistribute the wealth generated by tourism are public sector employment, social services, subsidies and transfers. The current system of redistribution has contributed to achieving important development outcomes. ∫ Public-sector employment, including education, health and social services125 has played an important role in Maldives, accounting for 35 percent of employment in 2010.126 Moreover, employment in the public sector has contributed to Maldives’ relatively high female labor force participation, as well as to poverty reduction127. 123 Tourist arrivals in 2014. 124 Manifesto of the Progressive Party of the Maldives. 125 Although health and education are not necessarily government activities, in Maldives about 90 percent of employment in the health sector is in the public sector (Maldives Health Statistics 2013). In the education sector, about 70 percent of students are enrolled in government schools (Maldives Statistical Yearbook 2013), and it is assumed that a similar percentage of teachers are employed in government schools. 126 This does not include employment at SOEs. 127 See section on Poverty and shared prosperity. 107 6. Opportunities and trade-offs for sustainable poverty reduction and shared prosperity (Contd.) ∫ Public services, and in particular the expansion of education and health services provision to populations living in the atolls, have contributed to a significant improvement of human development outcomes and human capital accumulation. ∫ Electricity and food subsidies have contributed to mitigating the high cost of energy and food supply in Maldives, thereby improving living standards of the population. Similarly, the introduction of universal social pensions and health insurance have helped extend protections against the challenges of old age and the risk of catastrophic health expenditure to the entire population. Sustainability of the Apart from the food and electricity subsidies delivered through SOEs, capital contributions to positive outcomes SOEs are another large public expenditure item. Although a few SOEs returned annual average achieved through the dividends equal to 1.8 percent of GDP between 2011 and 2014 to the budget, annual average redistribution system capital contributions to SOEs amounted to 1.3 percent of GDP over the same period. crucially depends on improving its efficiency and cost- However, sustainability of the positive outcomes achieved through the redistribution system effectiveness. crucially depends on improving its efficiency and cost-effectiveness. Given the already widening fiscal deficits and high public debt, these mechanisms are not fiscally sustainable at current trends, and the government will need to carefully weigh the fiscal costs and social benefits of each of the expenditure items. The public sector employment freeze contributes to managing the wage bills and improve fiscal sustainability. A more structural solution, which could include a review of local government pay structures and a public-sector-wide pay scale, could be helpful to ensure consistency of wages and salaries across public service and drive public service reform.128 It is important that structural reform be accompanied by efforts to improve conditions for employment in the private sector, especially for women. There is growing evidence that the While it is important to continue to provide wide access to health and education services, more expansion of access to services to the careful planning based on the demographic distribution of the population could improve efficiency atolls has been of spending and free resources to improve quality. There is growing evidence that the expansion of accompanied by a access to services to the atolls has been accompanied by a decline in the overall quality of service decline in the overall provision.129 The failure to close the quantity and quality gap in service provision between Malé quality of service and the atolls contributes to continued population migration toward the capital and exacerbates provision. the (per capita) cost of service provision in the atolls (Figure 74). Still, tailoring service provision on the demographic profile of the population in the different parts of the country (Figure 75) could result in significant cost savings and potentially free up resources to improve quality of service provision. 128 IMF Article IV, January 2015. 129 The lack of supply of qualified medical and education professionals within the local Maldivian population, forced the central Gov- ernment to rely on expatriate workforce for expanding service delivery outside Malé (Maldives Health Statistics 2013, Ministry of Health; School Statistics 2014, Ministry of Education). However, high turnover and limited integration of these professionals with the local population resulted suboptimal quality of service provision. 108 Maldives Systematic Country Diagnostic Figure 74 Figure 74. Figure 75. Population growth Growth rate (Percent Grawth) dynamics, Malé - Atolls 350,000 6 6 6 5 6 6 6 7 8 Total Population (Number) 300,000 5 35 Annual Population 35 39 38 36 35 36 Source: Staff elaboration on 42 Percent of total 250,000 4 Census 2000 and 2006 data 200,000 3 21 22 21 22 19 21 150,000 2 28 30 100,000 1 Figure 75 38 36 35 36 39 36 50,000 0 25 24 Age group composition, 0 -1 Republic Male' Total Atolls Upper North North Central North (excl Malé) Malé Central Central South Upper South South by location 2000 2006 Growth rate Source: Staff elaboration on Census 2000 and 2006 data [0,14] [15,24] [25,64] [65+] Targeting reform of electricity and food subsidies could improve efficiency of spending while freeing resources to protect the poor. Building on international experience, a cut to explicit subsidies would need to be accompanied by interventions to protect the most vulnerable segments of the population, and to limit losses of utility providers. Such strategy would aim at: (1) enabling consumption efficiency; (2) increasing supply-side efficiency; and (3) substituting Targeting reform universal subsidies with a targeted transfers system. The government has already started to of electricity and food subsidies could target electricity subsidies by reassessing who is eligible to receive them. improve efficiency of spending while Operational savings in Aasandha could cut its cost significantly, while preserving the principle of freeing resources to universal health insurance. These savings could be achieved mainly through three channels: (1) protect the poor. reducing the cost of medicines through the bulk procurement of essential and generic drugs; (2) reducing expenditure on overseas treatment through negotiation of close-ended package rates with providers; and (3) improving attention to early detection and secondary prevention of chronic diseases at the primary care level, which will be helpful in slowing down disease progress and delaying the occurrence of complications. Substantial capacity building of the National Social Protection Agency would also be needed to plan, implement and monitor these reforms.130 Improving SOE Improving SOE governance could improve fiscal and environmental sustainability. The key sources governance could of fiscal risks include: (1) political interference in the management of the SOEs, in the form of improve fiscal and environmental uncompensated subsidies, service requirements, and tolerance of soft budget constraints resulting sustainability. in inter-SOE debts; (2) lack of macroeconomic planning capacity, leading to potential losses as macroeconomic variables develop differently than expected; and (3) management challenges, such as lack of coherence between public sector and SOE investment plans. Procurement by SOEs could be made more transparent to assess whether it delivers enough value for money. As SOEs play a key role in many utility sectors (e.g., electricity, water and waste management), improvement in their performance could also help alleviate some of the environmental constraints on growth. 130 Systematic costing, adequate autonomy at the facility level, and appropriate incentive mechanisms being put in place at the design stage, to encourage high productivity and cost containment, would be pre-requisites for such reform. Improved information sys- tems making possible continuous analysis of Aasandha’s administrative data would be important for internal controls and informing ongoing reforms, as would be regular compilation and analysis of household survey data to periodically check on the scheme’s performance and distributional implications. 109 6. Opportunities and trade-offs for sustainable poverty reduction and shared prosperity (Contd.) Increasing macroeconomic resilience Better management of its resources may also make Maldives more resilient to external shocks and help it mitigate risks. As a small island state Maldives is inherently vulnerable to external shocks, and its heavy reliance on tourism adds a channel of exposure. Indeed, besides the exposure it shares with other island states to natural disasters and commodity prices, Maldives is also vulnerable to recessions in certain key tourism sectors and the indirect impact on tourism of events such as the 9/11 attacks, Additionally, recent domestic unrest may lead to negative travel advisories. Maldives will remain exposed to external shocks from tourism under its current development As a small island model so it needs to decrease its vulnerability to other shocks and increase its resilience. In order state Maldives is to analyze the options to reduce vulnerability and increase resilience, vulnerability is decomposed inherently vulnerable into three parts: (1) exposure to shocks; (2) internal conditions that may amplify or attenuate to external shocks, and its heavy reliance shocks domestically; and (3) risk management in the form of ex-ante institutional quality and ex- on tourism adds a post policy space to mitigate the impact of shocks.131 channel of exposure. ∫ Exposure: Maldives is mainly exposed to external demand shocks through tourism, external supply shocks from commodity prices and natural disasters. ∫ Internal conditions: Fiscal revenue is highly dependent on tourism, while a large part of public expenditure is rigid and difficult to adjust. Combined with high public debt, this makes the fiscal accounts also vulnerable to shocks. In addition, the country is structurally highly open to trade, and any countercyclical fiscal policy would lead to more imports and potentially destabilizing the external sector. ∫ Institutional quality: Maldives has low ratings for policies and institutions, in particular for fiscal policy and for debt policy and management.132 While it cannot eliminate its ∫ Policy space: The country has limited macroeconomic and fiscal space to deal with an external vulnerability to shock. It has low usable official foreign exchange reserves,133 and it runs a persistent fiscal shocks, Maldives deficit. has opportunities to reduce its While it cannot eliminate its vulnerability to shocks, Maldives has opportunities to reduce its vulnerability and vulnerability and increase its resilience within limits by: increase its resilience ∫ Diversifying sources of tourism. Maldives can try to diversify its sources of tourism by attracting tourists from other parts of the world and by attracting more tourists to its guest houses and other offerings outside resorts. Accessing different markets that are not perfectly synchronized could reduce the current volatility of tourist arrivals. The added benefit is the guest-house tourism is more inclusive for the local population (Priority area 1). ∫ Reducing reliance on imported fuel. Maldives is interested in introducing solar power to replace imported diesel. With diesel imports accounting for around 20 percent of total merchandise 131 Risk management framework introduced in the World Development Report in 2014. 132 Measures by the World Bank’s Country Policy and Institutional Assessment (CPIA). 133 Although the secondary market for foreign exchange appears to be well stocked. 110 Maldives Systematic Country Diagnostic imports, this could have a significant effect on vulnerability to commodity price fluctuations. Installing and maintaining solar panels could have the added benefit of providing local employment for engineers. It should be noted that existing suppliers of diesel-based power may initially try to hinder efforts to switch to solar energy until they make the switch themselves. ∫ Reforming in public expenditure. Reforms in the system of wages, subsidies and transfers would make the budget more flexible to deal with revenue shocks without continuously increasing public debt. Moreover, it could reduce overconsumption of subsidized electricity and certain imported goods, which would reduce external exposure as well. However, this type of reform may be politically difficult, and will need a social safety net (such as targeted cash transfers) to protect the poorest. ∫ Decreasing risk of debt portfolio. As Maldives becomes richer, concessional external debt may become less available. Public domestic debt has a very short maturity, and is subject to refinancing and interest risk.134 Extending the maturity profile would reduce the risk but could increase the cost of debt. There are natural buyers of longer-term public debt, such as pension funds and insurance companies. Establishing a yield curve beyond one year could also help the financial market better price risk, and it could deepen the financial market and make it easier for local SMEs to obtain credit. ∫ Improving public sector governance and planning capacity. Improvements in public financial management would lead to more credible budgets, expenditure controls, commitment to decreasing public debt and better selection and planning of investment projects. Improvement in planning capacity is needed to deal with the challenges of natural resource management, and to address the dilemma between consolidating the population closer to Malé and improving services and connectivity to populations at their current locations, and to plan the associated infrastructure needs. ∫ Increasing policy space. The low level of usable foreign exchange reserves leaves little space to manage the exchange rate and import essential goods. Mitigating this lack of space is the existence of a parallel market with sufficient quantities of foreign exchange. The country appears to have access to ad-hoc support from partners, but more formalized access to a credit line would reduce macroeconomic uncertainty. 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The first household survey in Maldives (Vulnerability and Poverty Analysis - VPA) was conducted in 1998/99, with a panel followup in 2003/04. The VPA survey series was then replaced by Household Income and Expenditure Survey (HIES) – mostly focused on household budget measurement – which was implemented in 2003/04 and 2009/10. Differences in instruments and sample design do not permit comparison between the results obtained from VPA and HIES surveys. Moreover, differences in survey instruments and possibly in data quality within the two HIES rounds further limits the ability to profile the evolution of poverty in Maldives. Poverty measurement framework The most widespread poverty indicator is the share of individuals whose per capita consumption falls below the official poverty line. This indicator is usually defined in the literature as headcount index and it is a measure of the incidence of poverty. Antecedent to computing the headcount index are two steps: defining a welfare aggregate, e.g. the dimension with respect to which we define the minimally acceptable standard of living; and establishing a minimum acceptable standard of that indicator to separate the poor from the non-poor (the poverty line). Maldives lacks an official and unique national poverty line. Since the first household survey in 1997/98, poverty measurement has relied on the use of several relative poverty lines, defined in terms of median or a fraction of median consumption of the population living in the atolls, excluding the capital Malé. No efforts had so far been made to assess which of these poverty lines actually corresponds to a reasonable minimum threshold by the standards of living prevailing in Maldives. The consumption aggregate is the sum of the consumption expenditures of all food and non-food items of each household. Due to data limitations, the consumption aggregate does not include spending in durables and the flow of services from the primary dwelling (usually intended as rent for tenants, and imputed rent for home owners). The validity of official poverty profiles is severely hindered by the lack of any adjustment of the consumption aggregate for spatial differences in living costs. The lack of spatial price adjustment represents a fundamental flaw of the current poverty measurement methodology, especially given the unequal distribution of economic opportunities throughout the Maldivian archipelago, relevance of transport costs and differential access to goods and services between the capital area Malé and other atolls. Poverty methodology adopted for the SCD In order to improve the comparability of the two HIES surveys, and to overcome the shortfalls of the official poverty methodology, a new consumption aggregate and a new poverty line have been estimated. The new consumption aggregate is defined as the sum of all food and non-food household expenditures, excluding housing, lumpy expenditures (purchase of vehicles, major tools and equipment, household appliances, durables, furniture), and rare expenditures (jewelry, hay, wedding and parties). The consumption aggregate so defined is then divided by the household size, defined as the sum of family members and paying guests. To take into account the spatial price differences, the consumption aggregate is deflated using regional food poverty lines. 118 Maldives Systematic Country Diagnostic Using the Cost of Basic Needs approach and HIES 2009-10 data, the national poverty line has been estimated at MVR 787.5. This value is equivalent to the minimum necessary to consume 1,826 Kilocalories per capita per day plus a non- food allowance equal to the average non-food expenditure of households with food expenditure just enough to reach the minimum caloric requirement. The World Bank uses as extreme poverty line $1.25 a day in 2005 PPP terms, which represents the mean of the poverty lines found in the poorest 15 countries ranked by per capita consumption among 88 surveyed countries over the period 1990-2005 (Ravallion, Chen and Sangraula, 2009). Maldives’ national poverty line is about $1.90 a day in 2005 PPP. Other commonly used poverty lines for international comparisons across middle-income countries are $2 and $2.50 a day in 2005 PPP, which correspond, in turn, to MVR 821.3 and MVR 1,034.2 a month in 2010 prices. In addition to the national poverty line, the SCD use the international poverty lines for cross-country comparisons. The depth and severity of poverty Although the headcount index is the most widespread measure of poverty, it has a serious shortcoming in that it does not take into account the intensity of poverty, i.e. how far from the poverty line the poor are. A measure of poverty that overcomes this problem is the poverty gap index. The poverty gap index is the average shortfall of the total population from the poverty line as a share measured as a percentage of the poverty line itself, and it defines the depth of poverty. The squared poverty gap gives a higher weight on households furthest away from the poverty line and it is a measure of the severity of poverty. Both of these measures will complement the analysis of headcount poverty in the context of the SCD. Shared prosperity The World Bank has adopted two new targets to make explicit its goal of “A world free of poverty.” The two targets are: ending extreme poverty by 2030 and promoting shared prosperity. Sustainability is an overarching priority in the pursuit of these goals: achieving them requires promoting environmental, social, and fiscal sustainability. The emphasis on reducing extreme poverty is in line with the commitment to halve extreme poverty enshrined in the first target of the Millennium Development Goals, which were adopted globally in 2000. Shared prosperity focuses explicitly on the less well off more broadly. Promoting shared prosperity is defined as maximizing income (or consumption) growth for the bottom 40 percent of the population. In Maldives, the consumption cut-off line for the bottom 40 percent (the threshold below which the poorest 40 percent of population falls) in 2010 is 1,266 MVR a month, or $3.06 a day in 2005 PPP. 119 Annex 2. Summary of SCD consultations SUMMARY OF SCD CONSULTATIONS IN MALDIVES APRIL 27 – 30, 2015 OVERVIEW A series of seven consultations involving nearly 100 participants was carried out as part of the preparation of this Systematic Country Diagnostic in Malé. Participants were drawn from government agencies, civil society organizations, youth groups, non-governmental organizations, student bodies, academia, development partner, and the private sector to ensure that diverse perspectives were represented. The consultations were arranged under four thematic groups: (1) Opportunities for private-sector development and economic diversification; (2) Improving government delivery performance; (3) Addressing social risks; and (4) Tackling environmental vulnerability. In all sessions, the WBG highlighted the key messages that were emerging in the preparation of the Systematic County Diagnostic for Maldives and presented a broad overview of issues that were considered important to be addressed. The consultation process also included two technical meetings in Malé with representatives of the Government of Maldives. These meetings were used as a means of further understanding the current government strategy and as an opportunity to engage with the government team that was preparing the National Development Strategy. Three objectives guided the consultation process: ∫ Obtaining perspectives from stakeholders on key economic, social and environmental challenges facing Maldives. ∫ Presenting an overview of the key findings of the SCD and validating the data used. ∫ Sharpening key messages in the SCD and identifying any new trends that were emerging . Participants broadly agreed with the key areas identified as priorities facing Maldives and the main thrust of the SCD in this context. Tourism and fisheries remain the two main engines of growth. Participants agreed that while tourism has remained largely an enclave industry, fisheries has unrealized potential. Key vulnerabilities were also highlighted. They included: (1) a weak macro fiscal environment (largely linked to unsustainable cost of service provision to a small and dispersed population, coupled with inefficiencies in government expenditures); (2) social trends, (youth unemployment especially among women); (3) environmental vulnerabilities, (related to the lack of institutional capacity to adequately manage natural resources, deficiencies in waste, sewerage and management leading to pollution, and lower prioritization of environmental issues in government policies); and (4) governance issues. The following report presents recurring points noted during consultations. 120 Maldives Systematic Country Diagnostic 1. Opportunities for private-sector development and economic diversification Agriculture Increasing linkages between agriculture SMEs and high-value sectors such as tourism were described as important income-generating activities for island communities. Agriculture was identified as a sector that could have significant impact on promoting shared prosperity. Participants explained that although demand for locally sourced produce exists in the tourism industry (as its cheaper and involves less wastage), the lack of a single aggregated market and high transportation costs make imports more feasible for resorts. On the supply side, the lack of extension services and limited willingness of Maldivians famers to cooperate on decisions related to the type of produce to grow on the limited land were also cited as key obstacles for the growth of agricultural SMEs. The establishment of cooperative societies on islands have seen mixed results. Participants highlighted several instances where the establishment of cooperatives has led to significant income generation for farmers with value- added agricultural produce being sold resorts. However, there have also been several instances where cooperatives failed due to the inability of farmers to reach consensus on the type of crops to be grown and the manner in which scarce resources (water and land) were to be utilized. Some participants expressed concern that the lessons learned from previous failed attempts were not being analyzed and used in the implementation of new schemes. Participants further explained that the lack of quality extension services and access to finance were further obstacles to the development of agriculture in Maldives. Fisheries While investment in the fisheries sector is lucrative, low budget allocations, low reliance on technology and the lack of data sharing has impeded growth in this subsector. Participants highlighted the fact that the fisheries sector has been a source of steady income (with earnings in excess of $1,000/month per fisherman). However, declining revenues in the last five years was cited as a cause for concern. Participants pointed out that increased national budget allocations for the development of the sector would promote opportunities for substantially scaling up the fisheries industry. Low cooperation among fishermen to identify prime fishing sites, limited knowledge of and low use of technology, and unreliable data (specifically on harvesting trends) were identified as other issues impeding growth in the sector. The creation of better linkages with resorts was also cited as a possible step towards increasing revenues and expanding the fisheries industry. Labor regulations that prevented the use of migrant workers for harvesting of fish was cited as a possible factor in allowing all income generated by the industry to benefit Maldivians directly. 121 Access to finance A conservative lending culture is impeding SME growth. Participants explained that access to finance was severely constrained for SMEs. Most SMEs (especially new ventures) do not have sufficient collateral to obtain loans and the lack of tailored financial products and instruments impede capital requirements for their expansion.. Loans for agriculture, in comparison, were cited as more easily obtained. However, as sufficient monitoring and evaluation was not being carried out in the sector, some loans were being used for private consumption and not for agricultural expansion. Participants also explained that conducting a needs assessment to identify the specific financial instruments required for SME development is an important first step to increase access to finance and also reduce the cost of finance. 2. Improving government delivery performance Issues concerning weak governance and the lack of strong public institutions were cited as key concerns for Maldivians at present. While participants were satisfied with overall government service provision, improving both the standard of education (from early childhood education to tertiary and vocational education) and health facilities was cited as important. Participants explained that the absence of sufficient checks and balances between the key arms of state, the perceived limited independence of the Judiciary, and low levels of transparency and accountability in the administration resulted in a weak institutional framework. This undermined public trust in the institutional framework and also led to the erosion of investor confidence. Participants cited examples such as bringing the Environment Protection Agency under the purview of the Ministry of Tourism (thus limiting the autonomy of the agency), the reversal of policies, and the lack of transparency in the granting of students loans and SME development loans as key instances where the governance mechanism had failed. Participants also described political instability as a major impediment in tackling key issues involving solid and liquid waste management, urban development and climate change resilience. Additionally participants indicated that the absence of a transparent, open and safe space for dialogue between public- and private-sector stakeholders and the lack of a participatory approach to policy making as key obstacles to improving the governance framework within Maldives. 3. Addressing social risks Youth unemployment Resolving issues related to youth, such as unemployment and skills development, was consistently cited as a key priority by participants at all four sessions. Employers and employees provided contradictory viewpoints as to why unemployment continued to a significant issue. Youth unemployment was attributed several factors by employers. Perceptions of poor work ethic among Maldivian youth, the inability to obtain the required skill sets (instances of difficulties in finding Maldivians with an adequate command of English were highlighted) and practical difficulties (such as the provision of transport to island communities to work in resorts) were key reasons cited by employers. Employees highlighted the bias against the hiring of Maldivians by Maldivians (specifically in the tourism sector for positions beyond a supervisor role and in the health sector for nurses), the lack of vocational training opportunities for employment as electricians, plumbers and carpenters (where significant labor demand exists), and the lax implementation of labor regulations (specifying 122 Maldives Systematic Country Diagnostic that half of employees should be Maldivians) in the tourism sector. Beyond skills, the consultations highlighted that youth unemployment stems from a disconnect between the aspirations of an ‘ideal’ job among the current generation of youth and their parents on the one hand, and the reality of the kinds of jobs that are available in a small island country with limited human capacity. Youth unemployment was cited as the key reason for increased drug abuse and the participation of young people in gangs. Current policy initiatives were also cited as being insufficient to address key youth issues and required the adoption of a holistic and contextual approach for increased success. Intergenerational relations were highlighted as another driver exacerbating youth unemployment. Social norms that favor young people continuing to live at home relieve the young of the financial and social pressures to search for jobs. Even as affordable housing remains elusive and the size of homes shrinks, multigenerational homes continue to be the norm, and continue to provide a financial buffer for unemployed youth. The lack of space and house overcrowding had also encouraged many young people to look for a space outside the home in search of an identity. This helped lead to the proliferation of gangs and drug use. Gender roles While the civil law structure in Maldives promotes gender egalitarianism, the consultations revealed that gender norms in Maldives are strongly influenced by social dynamics. Participants explained that in the recent years Maldivian society has been shifting towards a form of conservatism that has strengthened taboos and social stigmas. This was described as having a negative impact on women’s choices to enroll in education and search for jobs. Participants highlighted the need for focused policy initiatives to combat the decrease in the number of women seeking employment and disengaging from playing an active role in Maldivian society. 4. Tackling environmental vulnerability Efficient usage of land requires the analysis of the efficiency of allocation together with strengthened monitoring and evaluation frameworks within institutions. Participants explained that key decisions such as the allocation of islands for tourism should be juxtaposed in the context of using such land for the expansion of agriculture. With the inability to analyze the extent to which agricultural livelihoods have been lost due to the construction of resorts (especially for resorts where construction was not totally completed) owing to the lack of data, due consideration must be given to determining what effect future allocations will have in this regard. Although monitoring and evaluation is carried out on islands that have been leased out for agriculture, further cost benefit analysis will ensure allocative efficiencies. Strong monitoring and evaluation frameworks are required to ensure the sustainable use of natural resources. Participants explained that while tuna fishery is heavily regulated (in line with obligations to the Indian Ocean Tuna Commission) and fishing for sharks is banned to prevent over-exploitation, no such protection exists for reef fish. Participants said that reef fish such as groupers were possibly over-fished on some reefs, thereby damaging ecosystems. Resource-sharing and linked management between the fisheries and tourism sectors (specifically in the sustainable management of the reef fish population) were also highlighted as being vital. 123 5. Recommendations Future government strategies must incorporate integrated planning encompassing all sectors. Participants identified the lack of integrated planning (combining different sectors) as being a key obstacle for the successful implementation of new initiatives undertaken by the government. Integrated planning was seen as key means of ensuring success in high-growth sectors, such as tourism, which could benefit from increased linkages with the fisheries sector, (where the health of coral reefs are directly dependent on sustainable fishing practices). Participants explained that issues concerning the disposal of waste and sewerage, access to fresh water and the use of renewable energy sources could have been more easily resolved if integrated urban planning was consistently incorporated into government policy initiatives. “The failure to equally address both environmental and fiscal challenges could potentially destroy Maldives in the near future.” While public infrastructure investments remain a priority for government, market-based solutions are required to induce behavior change. Public investments, specifically in port and airport infrastructure, were cited as priority to combat constraints to international trade. However, increasing social welfare, while ensuring fiscal consolidation, would require market-based solutions. Improving statistics Improving the reliability and consistency of key statistical data was seen as vital for the development of effective policy measures. Participants highlighted that critical discrepancies in statistics considerably distorted the policy planning process. Vital statistical data, such as income and employment generation in the fisheries and agriculture sectors, was described as severely under represented. Data was also described as sparse for various aspects of consumption, such as the quantum of public services being consumed by expatriates. Even critical analysis on issues such as youth unemployment was hindered by the lack of accurate data on the proportion of unemployed youth. Enacting legislation to ensure quality control of statistics was cited as one measure that could lead to accurate statistical data. Creation of a consistent consultative process The consultative process with both the private sector and civil society should be improved to ensure inclusive and sustainable development. Participants explained that private-sector involvement in policy discussions has been initiated several times but the outcomes were consistently undermined by political changes that led to the initiation of unfeasible plans based on election pledges. Participants also highlighted significant gaps between decisions reached by policymakers and technocrats. This led to government manifestos not being aligned with technical plans, resulting in changes to existing policy structure when governments changed. The creation of a central focal point for carrying out consultations and initiating central planning was also cited as key reform measures that would promote transparency in policy decisions and ensure successful collaboration with the private sector. 124 Maldives Systematic Country Diagnostic Box A.1 A snap poll (in the form of a written questionnaire) was also conducted among participants. The questionnaire consisted of five questions – two on the top three challenges for Maldives (immediately and in the medium-term), one on possible solutions to these challenges and two on potential steps to be taken immediately and in medium-term on the government reform agenda. Although the questionnaire drew a 95 percent response rate, the small sample size was a key drawback for obtaining conclusive results on the overall trend of responses. The exercise provided the means for obtaining information on issues that participants were reluctant to discuss (such as corruption). It also provided further assessment of the key thematic areas, verification of response patterns, and enabled the further prioritization of proposed reform actions to be initiated. Survey respondents sector of affiliation (n=43) Challenges faced by the Challenges the Maldives will Maldives today likely face in the next 5-10 years 7% 2% 7% 18% 2% 24% 26% 32% 12% 33% 13% 2% 15% 3% 29% 37% 2% 4% 32% Governen Private Sector Environment Governmen Environment Governmen International Oraganixations Energy Social Issues Energy Social Issues Students Not stated Citizen Security Economic issues Citizen Security Economic issues Civil Security State owned Enterprises Note: Responses were grouped into the categories of Environment, Governance, Citizen Security, Energy, and social issues 125 Annex 2. Written responses received from participants SCD consultations TOP 3 CHALLENGES FOR MALDIVES TODAY Q1. Can you list the 3 key challenges that in your opinion the country is facing today? Environment Governance Waste management (atolls, islands, regions)– waste piling up, fear of Government Policy spread of diseases, disposal Executive management incompetency – implementation- centralized Drinking water scarcity ground water contamination, Water resources executive, control of others management Delays in legal system judiciary Urban environment deterioration/ Traffic, congestion No transparency in execution Access to clean water and waste management Corrupt judiciary Waste Management Deterioration of environmental governance- EIA changes/ lifestyle changes Freshwater storage/ desalination / climate change Political turbulences/ abuse of political power / instability Provision of clean and portable? Water to all Local level empowerment/ governance Attracting FDI due to fear of unknown related to climate change Integrated/ inter- sectoral planning process not practical Lack of clear policy on sustainable development Weak governance, lack of accountability, transparency Climate change/ lack of knowledge on impacts Lack of transparency and Politicization of independent institutions Weak environmental regulation and enforcement No proper development plan Weakening of current EIA regulation Weak institution Inappropriately designed coastal structures Challenges faced in the justice system increase Lack of appropriate laws (Water act), Regulation (plumbing standard) Increased mistrust in society due to corruption and non-transparency Lack of natural resources National revenue not well distributed, limited development of public services Sustainable development policies at urban sector – no place for Political instability / unrest pedestrians and elderly in govt policies Corruption Sustainability in fisheries – barriers for local communities to do mariculture Youth involvement in policy making etc Security for investors, political instability Transparency- public expenditure 126 Maldives Systematic Country Diagnostic Citizen Security Energy Social Issues Economic Issues Intimidation/ lack of Energy production and Restrictions to sexual and No proper rehabilitation program security security and waste / reproductive rights – unmarried Geographic dispersion Drugs/ crime / violence electricity for 24hrs for all youth islands Inequality – income distribution Crime rate Employment issue Poverty High youth unemployment and gang related violence, narcotics, Supply chain needs improvement dependency on state resources Shortage of industry targeted training Disconnect between youth Lack of skilled labor force experiences and youth policies, low Lack of proper Entrepreneurial System youth motivation Solve privacy and data security issues Gender inequalities both Lack of cooperation between public and private subtle, systematic (low female sector /innovation and more focused on single representation at high levels) and industry overt (violence against women) Transportation regulation and enforcement Limited access to SRHR services (no CSE in schools) Access to finance Politically driven community Proper legal framework to supplement management neglecting major issues and Values Collapse of SME in fisheries sector due to of society industrialization Huge influx of foreigners Lack of awareness on collection of data and stats Population consolidation in Malé for proper management of industries Lack of adequate Housing Budget deficit / public debt Resource allocation- govt to have more realistic way forward Dependence on foreign labor 127 TOP 3 CHALLENGES FOR MALDIVES IN THE FUTURE Q2. Can you list the 3 key challenges that in your opinion the country will likely face in the next 5-10 years? Environment Governance Citizen Security Disease outbreaks due to inadequate sanitation and waste Law enforcement not implemented Social issues -Drugs/ crime / management Lack of capacity to manage the system other social issues related to over Challenges in sustaining public services/ Environmental services being implemented population, increased crime and delivery social justice Corruption among politicians and public Possible decline in tourism through coral bleaching servants Environmental issues / degradation Political unrest / instability Spread of diseases from waste / ground water contamination Shortage of planned targeted training Climate induced vulnerabilities (storm surges/ salt intrusion), Governance issues in general government adaptation issues, increasing beach erosion administration Flooding from sea swells Political disputes Water scarcity/ shortages and extreme high temperature Weak institutions Waste, sewage disposal and treatment – manage waste at island Large cooperation business controlling the level- high transportation cost government and loans made to favor few Freshwater storage SME’s Balanced approach to bring the issues of climate change and at the same time attracting investment Over exploitation of certain marine species – eg groupers, sea cucumbers 128 Maldives Systematic Country Diagnostic Energy Social Issues Economic Issues Electricity services on Conflicts due to high energy prices and scarcity of water Increase in food prices – rising cost of living for locals / inflation islands are going to have Unemployment of Malé blackouts Vocational trainings is a must Lack of cooperation and corporate values among people Energy production and Unable to produce agriculture to meet local demand security Religious extremism Lack of women contributing to national development Unable to sustain the conventional fisheries sector due to unavailability of bait fish Safety and health problems in urban areas especially elderly and children Economic development may slow down/ unsustainable public sector expenditure Brain drain from the country Breakdown of faulty construction infrastructure, Increased poverty, Increase crime Economic growth decline Emigration Poverty High Foreign labor force Economic diversification- no new sectors/ industries since early Unhealthy working population 1980s Public health decline Increasing power of tourism sector – leading to widening gap in Psychosocial issues poverty More expats at jobs- imported skilled labor Inflation – cost of living increasing compared to wage rates Over population of Malé and related issues Limited resources/ booming population Regression to women rights Economic sustainability Large cohort of young people unskilled unemployed and No Strategic planning excluded Implementing privacy laws/ protecting foreign investments Stigmatization of currently excluded groups (young people, Due to less concentration on sustainable development expect migrants and other minorities) many changes, - e.g. transport Youth becoming increasingly disenfranchised and engaging Transportation in high risk behaviors / rising violence High public debt Health issues- lack of access Inequality leading Becoming a dichotomous society (extreme fundamentalism and liberalism) Tourism sector not being able to sustain growth Increased unemployment Uninhabited islands transformed into resorts quality due to income- widening gap 129 POSSIBLE SOLUTIONS FOR SHORT AND LONG TERM CHALLENGES Q3. What would you suggest as solutions for the short and long term challenges that Maldives face? Environment Governance Establish waste management centers/ regional Educate judges facility with proper frameworks Good governance, transparent, rational governance / local governance strengthening Information dissemination to be increase, Tackle corruption people need to analyze the raw data they have Reliable legal system/ judiciary Getting assistance from foreign universities to improve coastal designs Improved and truly independent/judiciary system Increase awareness among natives about Take action to prevent corruption challenges Stabilize the Government Environmental awareness – conservation Private and civil society taking responsibilities themselves Conservation, water storage Partnership for development (govt, pvt sector, civil society) Develop value addition of limited resources in Development policies clearly established/ evidence based long-term planning Maldives Strengthen civil society Drinking water production/ storage Strengthen governance and ensure accountability and transparency Utilizing waste heat from generator Public sector spending Hope for better healthier cleaner life Oversight mechanisms need strengthening Further climate mitigation efforts , knowledge Remove conflict of interest Better management of resources to tackle Strengthening Decentralization waste / energy / water issues Judiciary need to reform Have strategic goal of delivering key Youth empowerment –in policy making infrastructure such as harbor, Sewerage, water, power, waste management which is not capital Ban and fine people who litter intensive Improve participation of youth in policy formulation “Seriously” take environment into policy Legal framework/ laws/Regulation formulation and execution Increase State agencies and CSOs Mainstream climate change (adaptation Peace and Freedom mitigation) into all development aspects Objective media Politicians held accountable by citizens Better resource allocation- better govt policies implemented Government to be more benevolent Participatory decision making Political awareness 130 Maldives Systematic Country Diagnostic Energy Social Issues Economic Issues Island integration through Listen to marginalized citizens Development of islands , infrastructure investment govt for electricity Active efforts to counter religious conservatives Expand agri sector to include locally grown food Concession for renewable Improve inclusivity and equality (providing health Dev tourism sector as it does not go beyond carrying capacity energy projects services etc) Promote g/house tourism in local islands Educate youth about how countries run without social Widen job market unrest Bring changes to the economy so that we do not depend heavily Incorporation of CSE in school curriculum on tourism Use spiritual leaders who are more moderate from a New economic activity need to be introduced nationwide religious perspective (aquaculture) Setting up youth friendly services/ health centers / drop Investment to be increased such as in agribusiness in centers e.g. career guidance Training, career guidance (schools) Fee based service delivery with ‘properly tuned’ service providers Professional and vocational training - training locals for skills Empower women and youth to make informed decisions Facilitate mariculture program (small-scale) remove barriers Population relocation, developmental zones, Diversify economic activities decentralized development Need for Maldives to invest overseas – Mauritius model Long-term investment in public health risks Develop infrastructure and facilities in atolls Enforce more Maldivians to work Empower private sector Work towards cooperative models in islands Establish start up accelerators , educate entrepreneurs, etc Reduce illegal expat workers Secure investors- current and potential Reform education system Strong economic policy Realistic expectations Create jobs through FDIs and govt investments Lifestyle changes Professionalization of industries such as fisheries 131 POLICY REFORM PRIORITIES FOR TACKLING MALDIVES’ PRESENT CHALLENGES Q4. What are in your opinion the 3 most urgent reforms that need to be implemented in the next year? Environment Governance Mandatory awareness programs on Change constitution favoring a parliamentary system to govern the nation environment and energy- policy Proper government appointed by people not judiciary Solid detailed policies on waste management Give local councils more authority Environment protection agency Act Good governance , justice, strengthen governance, law enforcement (independent inst) Reduce corruption Concentrate on sustainability Policy changed to reduce waste of resources at institutional level Maldives economy is run on environment. Hence carry out development in a sustainable Increase public participation in policy making process manner through a strong development tool Decentralization policy must be enhanced Take into serious consideration climate Democratic system strengthened changes into all development policies to ensure Make judiciary more accountable trustworthy Maldivian do not become climate refugees Ensure citizens basic human rights Increase awareness on Climate change Political stability, strengthen local governance Strengthening EIA regulation Stakeholder discussion and dialogue Implementing coastal infrastructure guidelines Strengthen local governments with funds or know-how A system by which environmental data can Proper laws to local government be stored/ shared between public and private sector Develop a culture of developing implementing strategic plans Mainstream policies for sustainable Let donors and bilaterals assist in developing such a culture development Civil society empowerment and acceptance s equal development partner Environment Awareness Stable govt for 5 year term Decentralization Policy dialogue with public Law on political parties Reform of the Judicial system Public policy improvement Ensure independence of institutions Government that respects rule of law Corruption of public officials Transparency in govt Policy reform/ enforcement 132 Maldives Systematic Country Diagnostic Citizen Security Energy Social Issues Economic Issues Change laws to Renewable Increase in salary for teachers, nurses, etc Economic reform for tourism improve the rising energy policy, Provisions for gender equality within Tourism law need to be revised 80% Maldivian employees and crime issues energy security systems from systematic discrimination proper monitoring Policies to protect minorities (e.g. migrants New activity need to get tax exemption LGBT) Easier access to infrastructure loans Educational reform to teach tolerance Strict polices for protection of natural resources and gender sensitivity to inform on health behaviors Strategies should be implanted to reduce poverty Reform related to gender equality, Improve education system Employment opportunities for youth Urban regeneration- this term never used in Maldives so far Public health reform (as advocators for Decentralization of industrial activities positive health growth) Invest overseas to help Maldives to expand its strengths – Training opportunity to be established in seaplane, tourism, fisheries local community Educating the public regarding risks Targeting social security schemes to target Control on real estate prices needy Minimum wage policy Gender equality and social protection for Develop up with global policies that help us reach global vulnerable groups markets Education and health for vulnerable groups Try to meet public expectations Higher education loans Certification process of workers through trainings e.g. fisheries Improve public health awareness and others More relevant Youth Bill More opportunities for cooperative through govt policies Priorities basic necessities of community Resources management laws and regulations Reforming education system - Strategies to reduce cost of living implementing civic education, reproductive Tax system improving health, etc Targeted subsidies High revenue from tourism industry Proper tax system – better income source 133 POLICY REFORM PRIORITIES FOR TACKLING MALDIVES’ FUTURE CHALLENGES Q5. What are in your opinion the most important reforms that need to be implemented in the next 10 years? Environment Governance Drinking water guidelines and policy for tourist Corruption free , enforce proper laws resorts/ country Freedom of media Access to clean water/ pollution control Strengthening local governance Education policy to emphasize on sustainability/ Justice Reform environment/ efficiency Clear policies detached from political influence Mainstream climate change – in strategic development planning, prepare and plan for climate Judicial reform change challenges Separation of powers Strategic plan with long term goals/ integrate Meaningful engagement of public in decision making environment into planning Decentralization/ funds and know-how Implement natural resource management More development opportunities in the islands / decentralized -More effective population Implement sustainable development framework in consolidation fisheries and tourism sector Create empowered institutions Environmental protection in islands Pressure the institutions to develop regulation Whole judiciary system reform / capacity building Making institutions strong Accountability Better governance Stable govt/ political system 134 Maldives Systematic Country Diagnostic Energy Citizen Security Social Issues Economic Issues Policy that encourages Change laws to Strengthen policy, social security system Plan for spatial development renewable energy improve crime A Law that enables minimize number of inhabited Concentrate on developing few islands Efficiency in energy use issues islands Improving and overcoming current issues in the Peace/ safety Education reform industries Accessing labor market needs to build a more Income distribution to be more equal skilled youth Diversification of economy Policy for mental health and wellbeing Growth of fisheries sector Policy for aging population Decentralization development should be Employment law revision encouraged To have training centers nationwide Foreign currency- debt Mental health issues Develop domestic industries esp fishing and Youth friendly program development agriculture Increase jobs for youth Develop cities – south, north and middle of Maldives Lifestyle change of youth/awareness Public health Education 135 Annex 3. Challenges in the financial sector Shortcomings Impact Legal framework Legal framework reduces the ability of banks to foreclose Lack of clarity and certainty on application of laws translates into collateral on defaulted loans1. lengthy and costly legal processes. This enhances the risk aversion of lenders, which, increases the collateralization requirements. Lack of standard rules for application of Shariah [aw brings Losses stemming from these deficiencies are passed on new clients additional complexities in resolution of defaulted loans. in the form of higher interest rate. Current rules on filing of cases of mortgage and property- backed loan defaults and property rights have made borrowing from banks more onerous. Credit The credit registry in the country has a very limited coverage The limited coverage of credit registries severely limits the ability of infrastructure (17.3 percent of adult population). Important data stemming banks to identify borrowers with good and bad credit record, which from retailers or utility companies is not included in the registry. leads to higher risk aversion, lower credit and higher interest rates. Banks are required to produce the collateral in the location where The lack of electronic collateral registries together with the need to the case is heard. There are no electronic collateral registries produce collateral on the location where the case is heard reduce the where the existence of the collaterals can be verified or offered willingness of banks to lend outside of Malé. as proof. Financial inclusion of population in remote islands can be quite Many remote islands remain cut off from financial services due limited, resulting in high transaction costs, highly limited financing to the economic unviability of establishing bank branches in all opportunities, and lack of security in safekeeping of people’s savings. populated islands. The wide telecoms coverage has not been exploited as conduit for other delivery mechanisms such as mobile banking. Non-bank financial The legal framework protecting the property of leasing The role of the judiciary in the leasing sector has created a loss of institutions companies has been undermined by recent court rulings2. confidence on the viability of leasing, thereby drastically reducing the pace of growth in this financial service4. Tax advantages3 on leasing commonly present in other countries are missing in Maldives. The lack of reasonable tax advantages reduces the attractiveness of leasing for enterprises. Factoring is underdeveloped as a financial service even though anecdotal evidence suggests that SMEs sale a vast amount SMEs in Maldives reportedly struggle to obtain working capital of products and services on credit and face long lead times to financing while having vast large stocks of accounts receivable. Lack receive payment. of an active factoring reduces SMEs’ ability to make productive use of those assets as collateral. Even though there is basic infrastructure in place for capital markets, their volume of operations remain very limited. The lack of a liquid capital market may reduce the local financing for larger investments. However the lack of a critical mass of potentially qualifying issuers and institutional investors pose major challenges on the potential viability of capital markets in Maldives. Political risk considerations may undermine the ability of capital markets to attract foreign investors. (Footnotes) 1 According to banks interviewed, loans backed by properties take up to 10 years for settlement in case of default. 2 Courts ruled in two cases against MFLC, the largest leasing company denying access to enforce claims on the leased assets, against the basic principle of leasing, which is based on the ownership of the asset by the leasing company and usually provides for an expedite repossession of the asset in case of default. 3 Leasing has potential favorable tax treatment over a purchase of equipment. In a true lease, many jurisdictions allow the deduction of the entire amount of the monthly payment as an operating expense. This often result into a more favorable tax treatment for investment over the common depreciation of equipment in purchases. 4 Operations of MFLC, the largest leasing company in Maldives reduced sharply following the negative ruling on their ability to enforce claims on leased assets. It is estimated that following the ruling the company’s leasing portfolio decreased by 21 percent, its borrowing by 38 percent, and its net worth by 18 percent. Management is using its cash to pay off debt and declare dividends rather than for funding new leases. Its management is now limiting new leasing primarily to repeat customers with whom it has been able to sign standard contractual end of term asset transfer options that will reduce risks of loss on the lease contracts. 136