Update Country Report Maldives 31 Jul 2020

Tourism activity, the key driver of the Maldivian economy, resumed from mid-July. However, the lingering effects of the coronavirus (Covid-19) pandemic, which is still far from over in large parts of the world, will constrain arrivals in 2020. Demand for international travel will remain muted owing to weak global consumer sentiment, coupled with the challenges currently associated with long-haul travel. Given the economy's heavy reliance on tourism receipts, a recession in 2020 will be unavoidable, despite the considerable financial assistance that the country has received from bilateral donors and multilateral agencies over the last few months.

The Maldivian government is reopening the country's borders to international tourists in a phased manner. Resorts, liveaboard boats and hotels located at uninhabited islands opened first, on July 15th. This will be followed by the reopening of guesthouses and hotels located at inhabited islands on August 1st. The country's borders have remained closed to international tourists since March, as part of the government's efforts to contain the spread of the coronavirus (Covid-19) across the archipelago.

The Maldivian economy is heavily reliant on the tourism sector, which accounts for almost a quarter of its GDP. The suspension of tourism activity for more than three months (between April and June) in the wake of the pandemic has been causing severe economic pain for the vast majority of the country's population, who depend on tourism and related services for their livelihood.

A staggered restart

The government has issued detailed guidelines and announced a standard operating procedure that must be followed as tourism activity resumes in the archipelago. As per the latest rules, tourists will be given a 30-day tourist visa on arrival free of charge, but a confirmed booking at a registered tourist facility will be a prerequisite for the visa. There will be no mandatory quarantine on arrival for visitors, and the submission of a negative coronavirus test result is also not required.

Although the government is making efforts to attract tourists to the Maldives, which will be a major step towards kickstarting the economy, global demand for leisure travel will remain muted in the coming months. In addition to apprehension among travellers about taking trips during the pandemic, limited flight connectivity will also be a major obstacle to getting tourists back to the archipelago. While some of the country's key markets have yet to open their international borders (like India), others that have restarted international travel (such as China, the UK, Germany and Italy) have done so with limited capacity and a restricted range of destinations. Finally, if there are mandatory quarantine requirements for international travellers when they return to their home country, that will further dampen the demand for non-essential leisure travel.

Aid will provide little help

The Maldivian economy has been hit hard by the pandemic and is heading towards a deep recession in 2020, when we forecast real GDP to shrink by 4.3%. However, the country has been receiving financial and medical assistance from various multilateral agencies and bilateral donors, which will help in part to ease some of its economic pain.

In late June the Asian Development Bank approved a US$25m grant and a US$25m concessional loan to boost the government's response to the pandemic. Earlier in the same month the World Bank, which has already extended cumulative financial support worth US$17.3m to the Maldives, approved another US$12.8m under its Covid-19 Emergency Income Support Project. This programme aims to help the government to provide temporary economic support of up to Rf5,000 (US$325) per month to workers who have lost their livelihood owing to the pandemic.

The Maldivian government received US$5.6m in June as grant aid from the Japanese government, which will be directed towards procuring medical equipment and bolstering healthcare facilities to combat the outbreak. Prior to this, in May, the government also received US$2m in aid from the US government to support its efforts to tackle the pandemic.

These grants from multilateral agencies and bilateral donors will help to ease some of the upward pressure on the budget deficit, which will widen sharply in 2020 to the equivalent of 7.8% of GDP (from 5.5% of GDP in 2019), on account of increased fiscal spending and suppressed revenue collection. However, the loans in these financial packages will worsen the Maldives' public debt position, which remains vulnerable. The government is already saddled with debt repayments for loans taken on from China by the previous administration. In June the president, Ibrahim Mohamed Solih, confirmed that the Chinese government had agreed to partially suspend debt repayment for four years, which will be applied to US$600m in government loans. This will do little to help the fiscal balance sheet; the Ministry of Finance projects that the public debt/GDP ratio will reach 86.6% by the end of 2020, from 61.8% in 2019.

On the whole, even as tourism activity resumes gradually in the Maldives and financial help continues to arrive from various quarters, economic prospects will remain grim in 2020. The impact of the coronavirus-related disruption and shutdowns will persist throughout the year. We expect a modest economic recovery in 2021 as real GDP growth turns positive to 8%.