Political and economic outlook

• The Economist Intelligence Unit expects the Maldivian Democratic Party (MDP) to maintain its majority in the People's Majlis (the legislature). We expect the MDP to serve a full term, which will expire in 2023.
• The Maldives' substantial financing needs and India's strategic interest in the country will deepen bilateral relations in 2021-22. Ties will be cemented by active assistance from India in procuring vaccines and providing much-needed budgetary support.
• Achieving mass vaccination against the coronavirus (Covid-19) will be a high priority for the government. In the absence of supply arrangements (at time of writing), we believe it unlikely that 60% of the population will be vaccinated before mid-2022.
• Following a deep recession in 2020, we forecast real GDP to rebound by 21% in 2021, led by a sustained recovery in the tourism sector. Despite double-digit growth, GDP will remain below its 2019 level during our forecast period (2021-22).
• We expect the peg to the US dollar to be maintained in 2021-22, despite weak levels of foreign-exchange reserves. The US$150m currency swap line with India will help to reduce pressure on reserves.
• A bilateral travel bubble with India and tourism-friendly protocols in the Maldives will prop up tourism receipts, resulting in a narrowing of the current-account deficit to the equivalent of 20% of GDP in 2021, from an estimated 26.6% in 2020.

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Key changes since October 12th

• Reflecting stronger than expected prices in recent months, we now estimate that consumer prices fell by an annual average of 1.4% in 2020, compared with 1.7% earlier.
• We expect consumer prices to nudge up by an annual average of 1% this year, slower than our previous forecast of 1.5%. This reflects our assumption of a recovery in domestic demand but only a mild rally in global oil prices.
• The government's revenue receipts in the third quarter of 2020 were slightly weaker than expected, prompting us to revise our estimate of the budget deficit in 2020 up slightly, to the equivalent of 16.7% of GDP (from 16.3% of GDP previously).

The quarter ahead

• TBC-Tourist arrivals data (January-March 2021): Tourist arrivals have recorded a slow but steady recovery since the reopening of borders in July 2020. Data for the first quarter of 2021 will be indicative of the momentum of recovery in the tourism sector-the main driver of growth in the Maldives.
• TBC-Real GDP (Q3 2020): Following a historic year-on-year contraction of 51.6% in the second quarter of 2020, real GDP data for the third quarter will reflect the pace of resumption in domestic activity, including tourism services, after a three-month lockdown that ended in mid-July.

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 13th (beginning of the month of Ramadan); May 1st (Labour Day); May 13th-15th (Eid-ul Fithr); July 26th (Independence Day-observed); July 20th-July 23rd (Eid-ul Al'haa); October 18th (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 a former president and current speaker of the People's Majlis, Mohamed Nasheed; 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 Economist Intelligence Unit expects the government, led by Ibrahim Mohamed Solih of the Maldivian Democratic Party (MDP), to serve out a full term, which will expire in 2023. The MDP dominates the People's Majlis (parliament), with 65 of the 87 seats, while the main opposition Progressive Party of Maldives (PPM) has just six. This has enabled the government to push through the bulk of its policy agenda. However, the MDP's rise to dominance in the 2019 legislative election came at the expense of the Jumhooree Party (JP), the country's third-largest party and a key member of the ruling coalition, which has been reduced to a relatively insignificant five seats. While The Economist Intelligence Unit believes that this has put the future of the coalition in jeopardy, we do not consider it to be a major threat to political stability. A break-up of the coalition would be unlikely to have any significant impact on the stability of the MDP-led government, given the JP's small legislative presence. Although Mr Solih has said that it will remain in place, our view is that the coalition could fall apart during our forecast period (2021-22). The JP is more likely to join the PPM in opposition than accept a diminished role in the coalition with the MDP. The ruling party would also prefer to see the JP leave the government rather than have to make concessions to it under the coalition agreement.

The biggest threat to political stability stems from the danger of factional splits within the MDP. Mr Solih is thought to have a good relationship with Mohamed Nasheed, a former president (2008-12) and the current parliamentary speaker, who returned to the country from exile in November 2018. However, they have often fallen out over government affairs and other operational issues. While we do not expect 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 in-fighting within the MDP remains high.

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 will want to accord a high priority to it during his term of office. In October 2019 he unveiled the Strategic Action Plan 2019-23, which will serve as a guide for his government's policy-making 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, as well as the more urgent task of achieving mass immunisation against the coronavirus (Covid-19). That said, the MDP's political position will receive a boost from the imprisonment of Abdulla Yameen Abdul Gayoom-Mr Solih's predecessor and one of his most formidable opponents, who is currently serving a five-year jail sentence after being convicted in a money-laundering case in November 2019.

The most recent parliamentary election was held in April 2019, when Mr Solih's MDP, which leads the governing coalition, secured a sweeping majority. The next parliamentary election is due in early 2024.

The latest presidential election was held in September 2018, when Mr Solih defeated Mr Yameen. Presidential elections follow a two-round system. However, as 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 the exiled Mr Nasheed 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.

Maldivian foreign policy will continue to be guided by the country's substantial external financing requirements, resulting from a wide deficit on its current account and high levels of external debt, much of which is owed to China. Its strategic location in the Indian Ocean means that it will continue to garner a lot of interest from India and China, both of which are keen to expand their influence in the region.

Relations between China and the Maldives, which flourished 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. The current provisions of the FTA mandate that the Maldivian government will have to cease the imposition of duties on imports from China. This will not only reduce fiscal revenue but also increase the price competitiveness of Chinese goods relative to other imports in the local market, hurting trade relations with other countries. We expect that the government will look to revise the terms of the FTA (and of any other deals agreed with Chinese companies).

By contrast, relations with India have strengthened under Mr Solih, and the countries will continue to deepen bilateral ties during the forecast period. Links will be cemented by India's increased participation in infrastructure develop-ment projects and active assistance in supplying vaccines to the Maldives. India has repeatedly lent financial support to the Maldivian administration, the most recent of which was budgetary support of US$250m in September 2020; it has also signed a US$400m financing agreement to fund the Greater Malé Connectivity Project (GMCP), with the aim of matching China's role in the archipelago's infrastructure projects. The Maldives' large financing needs and India's strategic interest in the country will underpin their strong relations during the forecast period.

Nevertheless, the Maldivian govern-ment 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 the Maldives signed the Framework for a Defence and Security Relationship with the US-its first military agreement with any country other than India. Soon after, the US government announced its plan to open an embassy in the Maldives under its Indo-Pacific strategy, which seeks to counter China's growing influence in the region by increasing US engagement in smaller nations. Notably, the Indian government has also welcomed closer US-Maldives relations, in sharp contrast to its stance in 2013, when it blocked Mr Nasheed's plans to sign a Status of Forces Agreement 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 pandemic. While tourism has posted a delayed but sustained recovery since the opening of borders in mid-July 2020, we expect the government to continue with its initiatives to attract more tourists, such as international marketing roadshows and loyalty programmes. The government will concentrate on supporting the country's economic recovery in 2021-22.

Achieving mass immunisation will also be accorded a high priority this year. The government recently announced plans to launch a vaccination awareness programme, which will help to reduce vaccine hesitancy among the population. The government has also hinted at securing a vaccine-supply arrangement with AstraZeneca Singapore, although it has revealed neither the number of doses nor when they will arrive. The country is listed as a recipient under the Covid-19 Vaccine Global Access (COVAX) Facility (led by the World Health Organisation to ensure equitable access to vaccines) and is also likely to receive vaccines from India. Nevertheless, we do not expect mass vaccination (which we have set at 60% of the population) to be achieved before mid-2022.

Tackling corruption and the human rights abuses that spread under the previous administration will probably go on the back burner in 2021-22. Mr Solih's administration will seek to reform the judiciary to improve its effectiveness, but we believe that change will be slow, 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, much of which is owed to China, will keep the country's budget balance in deficit. We expect the budget deficit to narrow to the equivalent of 9.5% of GDP in 2021, from an estimated 17.8% of GDP in 2020, on account of higher govern-ment receipts (much of which will come from the tourism sector) and lower spending on public investment programmes. Grants and loans received by the Maldivian government from other countries and multilateral donors will help partially to cover the fiscal shortfall in 2021-22. 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 peg between the currency, the rufiyaa, and the US dollar. In view of this peg, the MMA has little scope to conduct independent monetary policy. Nonetheless, it uses minimum reserve requirements for banks and open-market operations as instruments to control credit creation and money supply. We expect the MMA to keep the minimum reserve requirement low in 2021-22 and to maintain ample liquidity in the economy to support recovery. We believe that the central bank will maintain its accommodative policy stance in the next two years.

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Given the dominant role of tourism in the Maldivian economy, real GDP growth in 2021-22 will be tied to closely improvements in international travel and tourism expenditure, which, in turn, will depend largely on lower travel hesitancy and higher appetite for discretionary spending. While the global rollout of vaccination programmes will help to reduce anxiety over travel, achieving mass inoculation will be a prolonged process and will keep tourist arrivals in 2021 below the level reached in 2019. In the interim, the bilateral travel bubble with India (one of the key sources of tourism for the Maldives) and relatively friendly tourism protocols in the islands will ensure that the Maldives remains an attractive destination for global holidaymakers.

Following an estimated contraction of 29.5% in 2020, we expect the economy to stage a recovery of 21% in 2021, reflecting a gradual revival of domestic activity and an expected doubling of tourist arrivals from their level in 2020, at the very least. In 2022 we expect real GDP growth to slow to 10.7%, but this will still be faster than the pre-pandemic average, as we expect growth in tourist arrivals from developed economies to gain momentum in that year. Despite double-digit growth rates, we do not expect real GDP to return to its 2019 level in the forecast period.

Import prices dominate inflationary trends in the Maldives, as most domestic demand is met through imports. Inflation is therefore susceptible to global price swings, as the pass-through is set by the rufiyaa:US dollar peg.

Consumer price inflation will nudge higher in 2021, with prices rising by an average of 1% this year as domestic activity recovers and more tourists visit the islands. Stronger economic activity will push prices higher in 2022, as tourism expenditure and private consumption recover. A mild recovery in global oil prices will also exert an upward influence on consumer prices in 2021-22.

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. On the back of weak tourism receipts, gross international reserves had fallen to US$629m by end-November 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 govern-ment could be forced to weaken the currency if foreign-exchange 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. The US$150m swap-line between the MMA and the Reserve Bank of India (RBI, that country's central bank) will also reduce pressure on the peg.

The value of merchandise imports dwarfs that of exports, and the country has historically run a wide deficit on its goods trade account. We expect the trend to continue in 2021-22. A strengthening of external demand over the next two years and ongoing efforts to extend the country's fisheries exports (the main export commodity) to Russia and China will underpin a bounce-back in exports. At the same time, a recovery in domestic activity and global oil prices will fuel the import bill, the size which will continue to exceed exports by a wide margin.

By contrast, the Maldives' tourism services exports (accounting for 90% of total services credits) have consistently exceeded services debits, keeping the services balance in surplus. An anticipated recovery in tourist arrivals in 2021-22 will enlarge the services surplus further, but it will be insufficient to offset the goods trade deficit.

The primary and secondary income accounts will remain in deficit over the forecast period, reflected high interest payments and negligible remittance inflows. Given the prevalence of existing trends, the current account will remain in the red in 2021-22, but rising tourism receipts will result in a narrowing of the deficit to the equivalent of 20% of GDP on average in 2021-22, from an estimated 26.6% of GDP in 2020.

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