The
Maldives
prospered in the 1990s
due to a rapid expansion in tourism and modernization
in traditional fishing, with rapid annual GDP growth
of about 8%. The economy was hard hit by the September
11 events and returning to a rapid growth path will
depend on a favorable external environment and careful
macroeconomic management.
Macroeconomic
Assessment
The economy staged a modest recovery in 2002 with
GDP growth estimated at 4.3%, up from 3.5% a year
earlier, driven by a gradual recovery in tourism and
a larger fish catch. Tourism faltered after the September
11, 2001 events through the first half of 2002, though
arrivals picked up in the second half to record an
increase of 5.1% for the year. Consequently, tourism,
which accounts for about one third of GDP, grew by
2.4% during the year, after zero growth in 2001.
Fisheries
expanded by 13.7%, based on a recovery in international
tuna prices that led to greater fishing and a strong
export performance. The recovery in tourist arrivals
and reform measures in the telecommunications sector
that resulted in lower tariffs spurred demand for
transport and communications services, resulting in
a 6.2% increase in subsector output.
The
Government's fiscal position for 2002 was marked by
a 15% increase in expenditures and a sharp increase
in the overall deficit to 7.4% of GDP from 4.7% of
GDP in 2001. The major contributing factor to the
jump in expenditures was the Government's Hulhumalé
project, a large-scale infrastructure development
initiative to create a land mass and develop a new
town on an island near to the capital city of Malé.
The deficit was mainly financed by larger foreign
borrowing, including more commercial borrowing, while
domestic financing (from the Ways and Means Account
of the Maldives Monetary Authority) was contained
at 0.4% of GDP.
Monetary
conditions in 2002 were characterized by a large increase
in net foreign assets and an 11.5% expansion in domestic
credit, largely due to increased credit to the private
sector. Broad money (M2) increased by 19.3% during
2002. Nevertheless, and despite the July 2001 8% devaluation
of the rufiyaa, inflation in 2002 remained low at
0.9%.
The
performance of the external sector in 2002 was positive.
Total exports in 2002 surged by 18.1% over the 2001
level, mainly reflecting the recovery of international
fish prices and stimulus provided by the lagged effects
of the currency devaluation in 2001.
In
contrast, total imports decreased by 2.4%, despite
the modest pickup in the economy, and the trade deficit
decreased to $208.0 million from $236.1 million in
2001. Receipts from tourism fell slightly (by 2.6%)
because a decline in tourist unit spending more than
offset the increase in the number of arrivals.
The
current account deficit for 2002 narrowed to $46.9
million, or 7.4% of GDP from 9.2% a year earlier.
In terms of the capital account, there was a significant
increase in disbursement of official assistance and
an expansion of private sector capital inflows to
record a surplus of $73.5 million. Accordingly, the
overall balance of payments posted a surplus of $26.6
million, a significant improvement from the deficit
of $21.4 million in 2001. Official reserves reached
$134.5 million at end-2002, providing cover for about
4.1 months of imports. External debt rose by $45 million
to $227 million at end-2002, equivalent to about 36%
of GDP. With most debt contracted on concessional
terms, the debt service ratio was 4.5%.
Policy
Developments
The Government's fiscal balance has been deteriorating
in recent years and warrants close monitoring, but
positive factors are coming into play that should
help improve the fiscal position.
First,
a new public accounting system to be introduced will
enable more comprehensive and updated control over
public expenditures. Second, the Government is committed
to introducing new tax regimes to expand the tax base.
Third, the Government aims to introduce a program
budgeting approach in formulating the budget. In contrast,
the trend toward greater capital expenditures, mainly
in association with the Hulhumalé project,
is a source of uncertainty. However, government policy
to introduce a mechanism for cost recovery under the
project is encouraging as it will ease pressure on
the fiscal position.
Aware
of financing constraints on private sector development,
the Government recently undertook several measures.
HSBC, a major international bank, was allowed to enter
the local market. A leasing company was established
during the year with assistance from the International
Finance Corporation; this now allows private sector
companies, particularly those in tourism, air transport,
and shipping, to take advantage of a new financing
option for their investments. In addition, with a
view to long-term financial development, a stock trading
floor was opened in April 2002. Nevertheless, the
Maldives' financial market is still underdeveloped
and major industries, particularly tourism, must depend
heavily on foreign financing. While deregulation of
the interest rate spread requirement in 2001 has led
to greater bank lending to the private sector, further
action needs to be taken to facilitate the greater
mobilization of domestic financial resources for economic
development.
Outlook
for 2003-2004
Economic performance remains reliant on tourism. A
gradual recovery in tourist arrivals is expected to
continue in 2003-2004 due to a better outlook for
the EU, the main market for tourism. In the domestic
economy, the Government's Hulhumalé project
and regional development programs will spur domestic
demand for local construction and transport. Together,
these elements suggest potential for further recovery
in 2003 and onward. An initial projection of GDP growth
for 2003 is 4.2%. However, the outlook is highly subject
to external factors, especially the effects of the
conflict in Iraq and the security situation in South
Asia.
The
2003 budget envisages a nearly 12% expansion in expenditures
and an increase in the overall deficit to 8.5% of
GDP. The continued rise in the budget deficit indicates
that fiscal developments need to be closely monitored
in the medium term, particularly the increasing trend
for capital expenditures, to keep the overall deficit
as well as domestic and external borrowing requirements
within prudent limits. The recent rapid rise in domestic
credit and money supply has not had an adverse effect
on price stability or the balance of payments. However,
as the authorities take further steps to liberalize
banking and to move to indirect means of monetary
control, it will be important for them to ensure that
monetary expansion is within a macroeconomic framework
that guards against excessive pressures on prices
and the fixed exchange rate.
The
expected recovery of the world economy, particularly
in the US, the largest export market, should have
a continued positive impact on exports, though this
cannot be certain given the large fluctuations in
the international price of tuna. Favorable developments
in tourism over the next couple of years will be an
important contributory factor to keeping the current
account deficit at the present manageable levels.
The strengthening of the capital account in 2002 was
encouraging; nevertheless, the increase in outstanding
external debt, especially borrowing on commercial
terms, underlines the need for careful monitoring
and management of the country's external position.
Investment
opportunities range from investment affiliated with
the tourism industry, such as development of air and
sea transport or direct investment in tourism itself
and marine based industries such as reef fish processing,
aquaculture/marine culture and production of value-added
fish and marine based products.
The
sectors where potential exists are:
