Political and economic outlook

• The Economist Intelligence Unit expects the president, Ibrahim Mohamed Solih of the Maldivian Democratic Party (MDP), to serve a full term, ending in 2023. The MDP's firm control over the presidency and the legislature will aid its political effectiveness.
• Mr Solih will continue to pursue socioeconomic reform and the development goals outlined in the Strategic Action Plan for 2019-23. However, progress on this front will be sluggish, owing to resistance to such plans within the political circle.
• Owing to its strategic location in the Indian Ocean, the archipelago attracts interest from India and China. The government is likely to use the country's location to garner financial concessions from both countries in 2021-22.
• On the back of a resumption in tourism and ongoing work on infrastructure projects in 2021, we expect real GDP to expand by 21% that year, following an estimated contraction of 29.5% in 2020.
• We expect the peg to the US dollar to be maintained in 2021-22, despite weak levels of foreign-exchange reserves. The prevalence of a currency swap line with India will help to reduce pressure on reserves.
• As tourism activity picks up in 2021, the surplus on the services account will expand, resulting in a narrowing of the current-account deficit to the equivalent of 23.2% of GDP in 2021, from an estimated 27.9% in 2020.

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Key changes since July 17th

• We have revised our estimate for 2020 following the release of data for the second quarter, which showed the economy contracting by 51.6%, year on year. We now see real GDP contracting by 29.5% compared with 15.2% previously.
• On the back of a 39% year-on-year fall in revenue receipts in the first half of 2020, and increased spending on public-sector investment programmes, we now estimate the budget deficit will widen to the equivalent of 16.3% of GDP, compared with 7.8% previously.
• A tepid restart of tourism and weak external demand will widen the current-account deficit to an estimated equivalent of 27.9% of GDP in 2020, compared with 23.6% previously.

The quarter ahead

• TBC-Tourist arrivals data (October-December 2020): Following the reopening of borders on July 15th, tourist arrivals were merely a trickle in the third quarter of 2020. Incoming data for the fourth quarter will be indicative of the momentum of recovery in the tourism sector-the main driver of growth in Maldives-going forward.
• TBC-Government finance statistics (September-December 2020): Despite weak GST and import duties collection, tax receipts rebounded to pre-lockdown levels in August, as business tax receipts rose significantly following the easing of restrictions in July. Data for the remainder of 2020 will be indicative of the pace of economic recovery.

Land area

298 sq km

Population

407,660 (2014 Population and Housing Census of Maldives)

Major islands

Thiladhunmathi Atoll (resident population 57,078 according to 2014 census; includes Miladhunmadulu group)

Northern Maalhosmadulu Atoll (resident population 15,819 in 2014 census)

Southern Maalhosmadulu Atoll (resident population 9,601 in 2014 census)

Malé Atoll (resident population 14,092 in 2014 census)

Capital

Malé (population 157,935 in 2014 census)

Climate

Tropical; average temperature range: 25-32°C

Weather in Malé (altitude 2.4 metres)

Average rainfall is 1,945 mm per year. There is a dry season from January to April and a rainy season from May to December

Languages

Dhivehi (official language; English also widely spoken among officials)

Measures

Metric

Currency

Maldivian rufiyaa. Rf1 = 100 laari. Average exchange rate in 2019: Rf15.38:US$1

Fiscal year

January 1st-December 31st

Time

5 hours ahead of GMT

Public holidays

January 1st (New Year); April 24th (Ramadan holiday); May 1st (Labour Day); May 24th-26th (Eid-ul Fithr); July 26th (Independence Day-observed); July 31st-August 3rd (Eid-ul Al'haa); October 29th (birthday of Prophet Mohammed); November 3rd (Victory Day); November 11th (Republic Day); November 16th (celebration of the day Maldives embraced Islam)

Official name

Republic of Maldives

Form of state

Presidential republic

The executive

The president is elected by direct popular vote; a cabinet is appointed by the president and approved by parliament

Head of state

Ibrahim Mohamed Solih (president)

National legislature

Unicameral parliament with 87 members. Legislators are elected by a simple majority in single-seat constituencies, and serve five-year terms

Legal system

Each inhabited island has a magistrate's court. There is also a network of other courts with varying specific responsibilities (such as a family court; juvenile court, etc.), as well as a High Court. The country's top judicial body is the Supreme Court

National elections

The last presidential election was in September 2018 and the next is due in September 2023; the last parliamentary election was in April 2019; the next is due in April 2024

National government

The Maldivian Democratic Party (MDP) controls both the presidency and the legislature

Main political parties

MDP; Progressive Party of the Maldives (PPM), led by the former president, Abdulla Yameen Abdul Gayoom; Jumhooree Party, allied with the current government

Key ministers

President: Ibrahim Mohamed Solih

Vice-president: Faisal Naseem

Defence: Uza. Mariya Ahmed Didi

Home affairs: Sheikh Imran Abdulla

Finance and treasury: Ibrahim Ameer

Foreign affairs: Abdulla Shahid

Tourism: Abdulla Mausoom

Health: Abdulla Ameen

Economic Development: Uz. Fayyaz Ismail

Central bank governor

Ali Hashim

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The government is led by Ibrahim Mohamed Solih of the Maldivian Democratic Party (MDP), who was elected to the presidency in November 2018. This completed a transfer of power that was notably smooth, given the country's volatile political history. Democratic institutions and accountability suffered under the long and autocratic presidency of Maumoon Abdul Gayoom, which lasted from 1978 to 2008. The subsequent presidency of the MDP's Mohamed Nasheed was ended prematurely in 2012 amid protests, with Mr Nasheed alleging that he was forced from office at gunpoint. The tenure of Mr Solih's predecessor, Abdulla Yameen Abdul Gayoom of the Progressive Party of Maldives (PPM), saw further instability. Mr Yameen (who is also the half-brother of Mr Gayoom) cracked down on his political opponents and clashed with other senior politicians, most notably his vice-president, Ahmed Adeeb, who was removed through a no-confidence motion during a state of emergency in 2015.

Following the legislative election in April 2019, Mr Solih's MDP emerged as the single largest party in the People's Majlis (the legislature), unseating the PPM, the main opposition party, which now has a greatly reduced representation; the MDP holds 65 seats in the 87-seat legislature, while the PPM has just six. The ruling party's huge majority in the Majlis gives the government a free hand to push through its policy agenda.

However, the rise of the MDP in parliament has also come at the expense of the Jumhooree Party (JP), the country's third-largest party and a key member of the ruling coalition, which has now been reduced to a relatively insignificant five seats. This puts the future of the coalition in jeopardy. Although Mr Solih has said that it will remain in place, The Economist Intelligence Unit's core expectation is that the coalition will fall apart in 2021-22. Regardless, this will not have a significant impact on the stability of the MDP-led government. The JP is more likely to join hands with the PPM in opposition than accept a diminished role in the coalition with the MDP. The MDP would also prefer to see the JP leave the government than have to make concessions to it under the coalition agreement.

The biggest threat to political stability in the Maldives stems from the danger of factional splits within the ruling party. The president is thought to have a good relationship with Mr Nasheed, a former president (2008-12) and the current speaker of the People's Majlis, who returned to the country from exile in November 2018. However, they have recently fallen into a disagreement over the future of a member of the cabinet. Mr Nasheed has raised allegations of corruption against the Ministries of Finance and Economic Development over the implementation of the National Single Window Project. While we do not expect the current escalation of tensions to spiral out of control, we continue to believe that Mr Nasheed will aim to secure a more central role in the government and, consequently, the risk of political infighting within the MDP remains high.

The recent bickering notwithstanding, our core forecast remains that the MDP's firm control over the executive and legislature will aid its policy effectiveness during the forecast period. Mr Solih is committed to socioeconomic development and reforms and will continue to accord a high priority to these areas during his term of office. In October 2019 he unveiled the Strategic Action Plan 2019-23, which will serve as a guide to his government's policymaking as it seeks to achieve its development goals. Despite Mr Solih's strong will to pursue reform measures, his ability to implement them will remain constrained by the presence of influential opposition figures. That said, the imprisonment of Mr Yameen-one of Mr Solih's most formidable opponents, who is currently serving a five-year jail sentence after being convicted in a money-laundering case in November 2019, will boost the MDP's political position.

The latest parliamentary election was held in April 2019. Mr Solih's MDP, which leads the governing coalition, secured a sweeping majority in the 87-seat People's Majlis, with 65 seats. The main opposition PPM has been left beleaguered, with a sharp decline from 33 seats in the previous legislature to just six. The JP also experienced a fall in support, winning just five seats, compared with 15 in the previous election. The next parliamentary election is due in early 2024.

The most recent presidential election was held in September 2018, when Mr Solih defeated Mr Yameen. Presidential elections follow a two-round system. However, since Mr Solih and Mr Yameen were the only candidates in the 2018 election, the contest was decided by a simple one-round majority vote. The next presidential election is due in September 2023.

The absence of Mr Nasheed (who was in exile) during the 2018 poll resulted in the elevation of Mr Solih as the presidential candidate for an MDP-led coalition against the then-ruling PPM. We expect Mr Solih to seek re-election for a second term in 2023. However, his candidacy is likely to be challenged by Mr Nasheed, who would also be keen to return to power for a second time.

The country's diplomatic relations will be guided, to a large extent, by its huge external financing requirements, resulting from its massive current-account shortfall. Furthermore, its strategic location in the Indian Ocean means that it will continue to garner a lot of interest from India and China, which are keen to expand their influence in the region.

Relations between China and the Maldives, which prospered under the administration of Mr Yameen, have soured under Mr Solih. The free-trade agreement (FTA) between the two countries that was signed in December 2017 remains in limbo, and is unlikely to be implemented in 2021-22. Our view is further reinforced by recent comments made by Fayyaz Ismail, Maldives' minister of economic development, who, despite acknowledging some advantages to the fisheries and tourism sector, asserted that the current provisions of the FTA, whereby the Maldivian government would have to cease the imposition of duties on imports from China, would increase their price competitiveness and hurt trade relations with other countries. We expect that the government will look to revise the terms of many such deals agreed with Chinese companies.

By contrast, relations with India have strengthened under Mr Solih, and the two countries will continue to deepen bilateral ties during the forecast period. Our view is supported by a number of visits by high-level officials from both countries, including several meetings between Mr Solih and India's prime minister, Narendra Modi, since Mr Solih came to power. The Export-Import Bank of India (Exim Bank), on behalf of the government, signed a US$400m financing agreement with Maldives in early October 2020, to fund the Greater Malé Connectivity Project (GMCP). This is indicative of India's commitment to providing greater financial support, partly offsetting the much-reduced role of China in financing infrastructure projects in Maldives.

Nevertheless, the Maldivian government is likely to look to balance the influence of India against that of other regional powers, such as the US and Japan, in order to maximise its negotiating power. In September 2020 Maldives signed the Framework for a Defence and Security Relationship with the US, its first military agreement with any country other than India. Both parties highlighted their intent to deepen engagement for maintaining peace and security in the Indian Ocean, while Mr Solih stressed that the pact would not harm India's role of net security provider in the islands. The government of India has also welcomed the agreement, in sharp contrast with its stance in 2013 when it had blocked Mr Nasheed's plans of signing a Status of Forces Agreement (SOFA) with the US.

The tourism sector, along with the services ecosystem, is the main driver of economic growth in the Maldives. This historically lopsided reliance on tourism earnings has taken a heavy toll on the local economy in the wake of the coronavirus (Covid-19) pandemic. The Maldivian government closed the country's borders from late March to mid-July 2020 in order to control the spread of the virus, and announced a fiscal-stimulus package worth Rf2.5bn (US$170m) to make up for the slump in tourism. We expect the government to accord a high priority to combating the economic and health threats posed by the coronavirus, and reviving tourism.

As the health crisis ebbs in 2021-22, Mr Solih's administration will tackle the corruption and human-rights abuses that spread under the previous administration. He will also seek to reform the judiciary, to improve its professionalism, and to reduce its tendency to intervene in the county's political struggles. Nevertheless, we believe that the speed and scale of change may disappoint, particularly on the issue of corruption.

The Maldivian government inherited significant external debt associated with the infrastructure spending boom under Mr Yameen. The servicing of this debt is one of the prime reasons for the country's persistent budget deficit. We expect the shortfall in the budget to narrow slightly, to the equivalent of 10.4% of GDP in 2021, from an estimated 16.3% in 2020, on account of higher government receipts and lower spending on public-investment programmes, as the economy stages a recovery. Grants and loans received by the Maldivian government from other countries and multilateral donors will help partially to cover the fiscal shortfall in 2021. However, the loans received to date will push up the country's debt/GDP ratio.

The primary job of the Maldives Monetary Authority (MMA, the central bank) is to maintain price stability, although legislation also tasks it with preserving an adequate level of international reserves and promoting non-inflationary economic growth. The MMA achieves monetary stability partly through the rufiyaa's peg to the US dollar. In view of the peg, the MMA has little scope to conduct independent monetary policy. However, it also uses minimum reserve requirements for banks and open-market operations as instruments to control credit creation and money supply. The MMA lowered the minimum reserve requirement to 5% in March 2020 to provide additional liquidity support to banks during the ongoing economic slowdown. On balance, we believe that the central bank will continue to maintain an accommodative policy stance in 2021-22 in order to support the economy.

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Given the dominant role of tourism in Maldives, economic growth in 2021-22 will be closely tied to improvements in international travel and tourism expenditure, which, in turn, will depend largely on rising personal disposable incomes and higher appetite for discretionary spending. While an anticipated rebound in economic growth in the country's key sources of visitors-EU, China and India-in 2021 will support recovery in tourism receipts, we expect tourist arrivals to pick up only gradually in the forecast period, as restrictions on foreign travel, as well as quarantine rules upon returning, will remain uncertain in the near term.

Following an estimated contraction of 29.5% in 2020, we expect the economy to stage a partial recovery of 21% in 2021, on account of continued construction undertakings and a gradual revival in economic activity, aided by modest increases in tourist arrivals. In 2022 we expect growth to slow to 10.7%, but this will still be faster than the pre-pandemic average, as we expect growth in tourist arrivals to gain momentum in the latter half of that year. Despite double-digit growth rates, we do not expect real GDP to return to 2019 levels in the forecast period.

Suspension of tourism, depressed activity, price controls on essential food items, and additional subsidies on utility bills contributed to a deflationary environment in 2020. In 2021, however, we expect the consumer price index (CPI) to record year-on-year gains, averaging 1.5% on the back of a rebound in economic growth and a gradual return of tourists to the islands. We expect a mild recovery in global oil prices in 2021-22, which will also exert an upward influence on consumer prices.

The rufiyaa is pegged to the US dollar. The midpoint of the exchange rate is Rf12.85:US$1, and the rate is permitted to fluctuate within a band of 20% either side of this level. In recent years, the currency has consistently grazed the weak edge of the exchange-rate band. As tourism receipts have plummeted in the wake of the pandemic, gross international reserves have fallen to US$705m as at end-September 2020, providing just 0.2 months of import cover (based on 2019 data). This has rendered the peg relatively vulnerable, particularly given the scale of the country's other external liabilities.

While there is a significant risk that the government could be forced to weaken the currency if the reserves remain under pressure over a prolonged period, our core forecast is that the peg will be maintained over the forecast period, but that the currency will continue to test the weaker edge of the band. To maintain exchange-rate stability, the MMA activated a US$150m swap with the Reserve Bank of India (RBI, the Indian central bank) in May 2020. The MMA also began shrinking the monetary base in tandem with falling reserves by reducing its liabilities to other depository corporations. Furthermore, we expect imports to remain below 2019 levels in 2021-22, in line with our forecast of a gradual economic recovery, reducing pressure on the peg.

Fish and fish products are Maldives' only major export commodities, while the bulk of domestic demand is met by imports of consumer and capital goods. Imports, therefore, far outweigh exports in value terms, and the country runs a wide deficit on the merchandise trade account. Amid an expected rebound in external demand and the government's ongoing attempts to extend Maldives' fisheries exports to Russia and China, we expect merchandise exports to bounce back in 2021-22, after contracting in 2020. Meanwhile, a rebound in domestic demand and continued investment spending on construction undertakings will fuel the import bill, keeping the merchandise trade balance in the red in 2021-22.

On the services front, tourism accounts for almost 90% of the total value of exports, and has consistently outweighed imports to keep the services balance in surplus. A gradual return of tourists to the archipelago during the forecast period will keep the services balance in the black, but we expect it to be insufficient to offset the goods trade deficit. With the primary and secondary income accounts remaining in deficit, we forecast that the current account will remain in the red in 2021-22. Nonetheless, in light of higher fisheries exports and tourism earnings, we expect the current-account deficit to narrow to the equivalent of 23.2% of GDP in 2021, from an estimated 27.9% of GDP in 2020.

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