Maldives is a country of South Asia, situated in the Indian Ocean, south-southwest of India. It consists of approximately 1,190 coral islands grouped in a double chain of 26 atolls, spread over roughly 90,000 square kilometers, making this one of the most disparate countries in the world. Composed of live coral reefs and sand bars, the atolls are situated atop a submarine ridge 960 kilometers long that rises abruptly from the depths of the Indian Ocean and runs from north to south. For administrative purposes the Maldives government organized these atolls into nineteen administrative divisions.
Maldives, whose population of about 400,000 people is dispersed over 188 islands vulnerable to climate change, has an economy narrowly based on tourism and fisheries. It has a complex political situation, weak government institutions, a high fiscal deficit and public debt, and inclusion issues.
The Government has started several infrastructure projects to enable people to move from smaller islands to Greater Male, and construction has overtaken tourism as the main driver of growth. To allow for these investments, the Government is reducing current expenditure. In the medium term, with the emphasis on construction, large current account deficits will be financed by investment and infrastructure loans.
Due to returns from tourism, Maldives made strong gains in human development and is now an upper middle-income country. Between 1990 and 2015, GNI per capita increased by over 200 percent, and life expectancy at birth increased by 15.6 years. Headcount poverty declined from 23 percent in 2003 to 16 percent in 2010 based on the national poverty line. Inclusion issues persist, with high youth unemployment and low women’s workforce participation.
Environmental sustainability, climate change and disaster resilience are significant risks. Almost half of all settlements and over two thirds of critical infrastructure are located within 100 meters of the shoreline and are under immediate threat from rising sea levels.
Tourism and related industries drive the Maldives’ economy, which needs diversification to protect it from global slowdowns. Reforms to improve the business environment have been uneven. Corporations now have additional disclosure requirements for filing taxes, and it is harder to obtain a building permit. The government deficit is large and growing.
Foreign companies are now permitted to own land, but ambiguous foreign investment laws deter investors. Government corruption remains a serious problem; the Auditor General discovered during a special audit in February 2016 that $79 million had been embezzled from the Maldives Marketing and Public Relations Corporation.
Trade freedom index of Maldives is 47.8, Investment freedom index is 35.0 and financial freedom index is 30.0.
Under the current monetary policy framework, the exchange rate peg with the US dollar is used as the intermediate target to achieve price stability and the liquidity position of the banking system serves as the operational target, in order to maintain the domestic money supply consistent with economic activities.
The main monetary policy instruments available to the MMA are:
- Minimum Reserve Requirement
- Open Market Operations
- MMA Standing Facilities
- Foreign Exchange Swap Facility
The main objective of conducting monetary operations is to manage the liquidity in the banking system. The MMA commenced Open Market Operations (OMO) on 27th August 2009 with the introduction of Reverse Repurchase and Repurchase Facility. The main aim of OMO is to manage the Rufiyaa liquidity in the banking system either by mopping-up or injecting liquidity into the system to support the monetary policy objectives. The OMO auctions are held on a weekly basis and the MMA does not announce the targeted amount or the interest rate.
Sale of securities by the MMA on an auction basis with the agreement to buy them back at a pre-determined date at a pre-determined price. Purchase of securities by the MMA on an auction basis with the agreement to sell them back at a pre-determined date at a pre-determined price.
With effect from 3rd July 2011, the MMA introduced foreign exchange swap (FX swap) transactions with the commercial banks. The FX Swap is a monetary policy instrument that will be used to manage foreign currency liquidity in the banking system. This involves the purchase of or sale of Rufiyaa against foreign currency at an initial date and an agreement to reverse the transaction at a future date at a specified forward rate determined via an auction system.
Exchange rate is one of the most important macroeconomic variables for small island developing economies like the Maldives, given the openness of the economy and its high degree of dependence on external trade, especially tourism. The Maldives has a fixed exchange rate regime, also known as a hard peg, whereby the local currency, the rufiyaa, is pegged to the US dollar. Since the adoption of the exchange rate peg in October 1994, the rufiyaa has been devalued twice: first in July 2001 and again in April 2011. Despite the exchange rate peg, the Maldives have a liberal capital account and there are no official exchange rate controls. Both residents and non-residents can freely import and export capital through the foreign exchange market. Residents do not require permission to maintain foreign currency accounts either at home or abroad and there is no distinction made between foreign national or non-resident accounts held with the banks operating in the Maldives.
There are no restrictions on transferring the profits. Exchange rate plays a significant role in the performance of the tourism sector and understanding the behavior of the exchange rate and its relationship with tourism is important for the Maldives. The Maldivian economy is heavily dependent on tourism, with the sector accounting for 30 per cent of Gross Domestic Product (GDP), 90 per cent of foreign exchange earnings and 50 per cent of government revenue. Moreover, given the rapid and on-going expansion in tourism investment, private external debt is expected to rise sharply over the coming years, as a large part of the investment finances for resort development are expected to come from abroad due to the small domestic financial market. These developments further increase the dependence of the economy on one single sector a sector that is highly vulnerable to external factors. The above mentioned macroeconomic features of the economy combined with weak domestic economic fundamentals have led to internal as well as external imbalances in recent years.
Since 2004, the current account deficit of the Maldives has deteriorated sharply, rising from less than 5 per cent of GDP prior to 2004 to a record high of 51 per cent in 2008. This has since come down to 31 per cent in 2010, but it is still considered very high. The large current account deficit is in parallel to the highly expansionary fiscal policy that has recently been pursued in the Maldives. As a result, the fiscal deficit as a percentage of GDP has climbed from less 5 per cent prior to 2004 to 17 per cent in 2008 and 31 per cent in 2009, before narrowing to 16 per cent of GDP in 2010. Moreover, inflation has also been high since 2005, edging up from 1 per cent in 2005 to 12 per cent in 2008. In 2009 and 2010, inflation lowered to 5 per cent and 6 per cent respectively. These macroeconomic imbalances put strain on the gross international reserves of the country, with a 22 per cent annual decline in 2008. As a result, the government had to seek balance of payment support from international sources to Chapter 1 8 provide a much-needed boost to international reserves. This was necessary given the fixed exchange rate regime.
Maldives is the 112th largest export economy in the world. In 2016, Maldives exported $137M and imported $2.12B, resulting in a negative trade balance of $1.99B.
The top exports of Maldives are Non-fillet Frozen Fish($47.2M), Fish Fillets ($31.1M), Non-fillet Fresh Fish($30.6M), Processed Fish ($15.5M) and Processed Fish($9M), using the 1992 revision of the HS (Harmonized System) classification. Its top imports are Refined Petroleum ($239M), Other Furniture ($39.5M), Aircraft Parts ($38M), Sawn Wood ($37.6M) and Granite ($30.9M).
The top export destinations of Maldives are Thailand ($48M), Sri Lanka ($14.2M), the United States ($12.4M), France ($12.3M) and Germany ($12.2M). The top import origins are China ($320M), Singapore ($222M), India ($180M), Malaysia ($116M) and the United Arab Emirates ($104M).
Although historically low, FDI flows to the Maldives have been on an upward trajectory over the last few years. In 2016, the FDI inflow reached USD 449 million, a 45% increase compared to the previous year. The total FDI stock is currently at USD 3.2 billion.
Traditionally, the country has had an open and liberal economic environment. Foreign companies are now allowed to own land, but ambiguous foreign investment laws deter investors. Property rights are generally weak; most land is owned by the government and then leased to private owners or developers. Although legally independent, the judiciary is subject to influence amid numerous allegations of judicial impropriety and abuse of power. The government screens foreign investment, and state-owned enterprises distort the economy. Costly credit and limited access to financial services impede the development of a vibrant private sector.
The tourism industry attracts the most FDI, followed by the transportation and telecommunications sectors. India is one of the country’s leading investors.
|Maldives||South Asia||United States||Germany|
|Index of Manager’s Responsibility||8.0||5.0||9.0||5.0|
|Index of Shareholders’ Power||4.0||6.0||4.0||8.0|
|Index of Investor Protection||4.5||5.3||6.5||6.0|
Maldives is ranked 136 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. The rank of Maldives deteriorated to 136 in 2017 from 135 in 2016. Ease of Doing Business in Maldives averaged 101.60 from 2008 until 2017, reaching an all time high of 136 in 2017 and a record low of 71 in 2008.
|Ease of Doing Business||136.00||135.00||136.00||71.00|
Source: Doing Business – Latest available data.
The Ease of doing business index ranks countries against each other based on how the regulatory environment is conducive to business operation stronger protections of property rights. Economies with a high rank have simpler and friendlier regulations for businesses.
|136.00||135.00||136.00||71.00||2008 – 2017||Yearly|
Source: Doing Business – Latest available data.
Maldives is the 95 least corrupt nation out of 175 countries, according to the 2016 Corruption Perceptions Index reported by Transparency International. Corruption Rank in Maldives averaged 116.83 from 2007 until 2016, reaching an all-time high of 143 in 2010 and a record low of 84 in 2007.
The Corruption Perceptions Index ranks countries and territories based on how corrupt their public sector is perceived to be. A country or territory’s rank indicates its position relative to the other countries and territories in the index.
|95.00||134.00||143.00||84.00||2007 – 2016||Yearly|
Source: Doing Business – Latest available data.
Improving the country’s harbor infrastructure and the maritime transport services connecting Male and the other atolls is central to better transport of both cargo and people. Doing so will also help reduce transport and logistics costs for businesses. The government is indeed committed to linking Male with the atolls, as evidenced by its adoption of a Maritime Transport Master Plan. The plan maps out institutional and regulatory reforms for the sector’s development, including: (i) appointing an overall agency to manage the sector; (ii) establishing an independent and competent regulatory authority; and (iii) formulating a sound legal and institutional framework to help attract private sector participation in infrastructure development and management in general, and maritime transport provision in particular. The latter involves establishing clear guidelines on the scope for private sector participation in building regional port infrastructure, privatizing the operation and management of ports, and providing maritime transport services. The master plan also identifies high priority infrastructure investments. The government needs to not only set aside adequate funding to ensure that these projects get implemented, but also identify revenue-raising schemes from port operations and services to augment limited government resources.
Improve quality and access to education and vocational training to address the skills shortage the government has achieved universal access to basic education by rapidly expanding primary level enrollment, and has continued to improve education quality. But access to good quality secondary, tertiary, and vocational education remains limited across the atolls. The use of expatriate workers remains extensive, despite a high unemployment rate, particularly among the younger labor force, reflecting the lack of qualified and skilled national labor force. Building on better primary education, the focus now should fall on improving quality of and access to upper secondary, tertiary, and vocational levels. This requires regular reviews of curricula to bring these in line with good international practice.
Establishing a system of internships and on-the-job training in cooperation with the private sector can help prepare school leavers and other graduates for future employment. Create ample fiscal space for needed infrastructure and social spending Increasing capital expenditure for transport infrastructure and improving provision of social services requires more fiscal space. Indeed, the government narrowed its budget deficit in 2014 and implemented tax reforms to improve revenue collection. And it is committed to further fiscal consolidation and reform of public financial management for longer-term fiscal sustainability and greater macroeconomic stability. Nevertheless, current public spending patterns do not fully support medium- to long-term fiscal plans.
For instance, the pace of salary increases for civil servants could be restrained to better control recurrent budget expenditures. In addition, subsidies and cash transfers to help the poor could be designed more efficiently through better targeting to maximize impact and minimize waste. The government could consider adopting a medium term budget framework to help improve resource allocation and predictability of spending. This involves establishing key parameters for the total budget, which would guide individual ministries in conducting their expenditure reviews, allowing them to better prioritize expenditure programs for the cost effective delivery of public goods and services. It is also important for the framework to offer guidelines for monitoring and managing medium-term fiscal risks to avoid undermining ongoing fiscal consolidation efforts. Compliance with the Fiscal Responsibility Law (2014) can support longer-term fiscal goals through prudent policies that could help ensure, for example, conformity with debt and deficit limits, and achieve a targeted primary balance in the medium term. Higher public sector expenditure will require more vigorous domestic revenue mobilization. The government has made very good progress on tax reform since 2011 and it is imperative that efforts to broaden the tax base and improve tax administration continue. At the same time, imposing new taxes, such as excise duties on jet fuel, gasoline, and vehicles, could be considered for additional sources of revenue. Sources of nontax revenue could also be explored, such as imposing or raising fees for selected government services, and selectively privatizing state owned enterprises.
The Maldives ranks 36th out of 51 upper-middle income economies for ease of getting credit, according to the World Bank Ease of Doing Business Survey. To improve access to finance, it will be important to strengthen the banking system. That said, the country’s challenging geography has been an impediment to establishing bank branches in the atolls. While the use of information and communications technologies in innovative approaches to mobile banking has the potential to ease accessibility, the necessary institutional and regulatory framework encompassing guidelines on consumer protection has yet to be established. The government could consider giving high priority to adopting an appropriate legal and regulatory framework to help facilitate branchless banking transactions on a more secure basis.
Achieving macroeconomic resilience is a top priority. To do so, the government needs to balance fiscal consolidation with development spending to create the fiscal space necessary to respond to potential economic shocks and natural disasters. Improving the capacity of government institutions to effectively plan the budget and implement prudent macroeconomic policies is likewise crucial. Implementing structural reforms to improve long-term economic resilience to shocks is also important.
Effective structural policies aimed at creating a business friendly environment can help increase investor confidence and encourage private sector investment. Financial sector development with a view to enhancing financial inclusion will help promote micro and small enterprises and facilitate private sector development. Identifying potential niche markets can often help small island developing states to overcome their unique challenges and expand export receipts. For example, Fiji successfully exports water, charging a premium in developed markets.
The success of niche markets depends on a variety of factors such as financing availability, efficient information flow, an enabling regulatory environment, adequate infrastructure, and a marketing network to facilitate transactions. Government policies may help facilitate the market process. For example, trade policies, customs, and regulatory practices that are aligned with those of major trade partners can help lower transaction costs and improve competitiveness. Finally, the government may wish to give top priority to risk mitigation and preparedness for future natural disasters. It is important to strengthen the coordination mechanism for disaster response among the government, donor partners, civil society, and the private sector, especially when funds are insufficient and domestic administrative capacity is limited. The national budget framework needs to incorporate the projected costs of natural disasters to allow the government to immediately deploy the spending required in times of need while at the same time ensuring medium-term fiscal sustainability.
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