Political and economic outlook

• The Maldivian economy is heavily skewed towards the services sector, which makes up more than three-quarters of GDP and is led by tourism services. The country relies heavily on bilateral assistance for budgetary support.
• The Economist Intelligence Unit expects the ruling Maldivian Democratic Party (MDP) to complete its term in office, which expires in 2023. The party's majority will shield it from a possible break-up of the ruling coalition in 2021-22.
• Achieving mass vaccination against the coronavirus (Covid-19) will be prioritised owing to the importance of tourism. We expect 60% of the population to have been vaccinated by the third quarter of 2021.
• After a deep recession in 2020, we forecast that real GDP will rebound by double digits in 2021, led by more than a doubling of tourist arrivals from 2020 levels. That said, real GDP will still be marginally below 2019 levels by end-2022.
• We expect the peg to the US dollar to be maintained in 2021-22, despite low levels of foreign-exchange reserves. Recovering tourism receipts and a US$150m currency swap line with India will help to reduce pressure on reserves.
• The Maldives will be one of the first countries in Asia to achieve mass vaccination of 60% of the population, with an inoculation pace that is comparable to that of Israel and the UAE. India's active assistance in supplying vaccines remains critical.
• The Maldives' strategic location in the Indian Ocean will attract significant courting by countries like India, China and the US, who are vying to increase their influence in the region.

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Key changes since January 13th

• Owing to the inoculation rate in the first two months of the country's vaccination drive and the vaccine procurement pipeline, we now expect mass vaccination by the third quarter of 2021 (from the first quarter of 2022 previously).
• Our optimistic vaccination call supports our forecast that tourist arrivals in 2021 will more than double from 2020 levels, and that real GDP will grow by 23.2% this year-faster than our previous forecast of 21%. Historical data have been rebased to 2015 prices.
• We forecast that the budget deficit will narrow only to 14.4% of GDP in 2021, compared with 9.5% previously, accounting for the government's decision to provide free vaccinations for all. It also reflects higher capital expenditure to support economic recovery.
• A stronger than previously expected rally in global oil prices this year has prompted us to revise upwards our forecast for consumer price inflation to an annual average of 2.7% in 2021, from 1% previously.
• Higher oil prices will also inflate the import bill, leading to a widening of the current-account deficit, to the equivalent of 23.3% of GDP (from 20% previously).

The quarter ahead

• TBC-Tourist arrivals (March-May): Year-on-year growth will return to strength from March, distorted by the low base of comparison in 2020, when tourist arrivals contracted by 80% before being suspended completely in the second quarter of that year.
• TBC-Vaccine procurement (second quarter): The government is expecting to receive about 1m doses of the Oxford University-AstraZeneca (UK/Sweden) vaccine under different arrangements. Although we do not expect a bulk delivery, even an average of 100,000 doses per month will be enough to maintain the current pace of inoculation.

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 2020: 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 Ramadan); May 1st (Labour Day); May 13th-15th (Eid-ul Fithr); July 20th-July 23rd (Eid-ul Adha); July 26th (Independence Day-observed); October 18th (birthday of Prophet Mohammed); November 3rd (Victory Day); November 7th (celebration of the day that the Maldives embraced Islam); November 11th (Republic Day);

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 or a juvenile court), 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, led by a former president and current speaker of the People's Majlis (the legislature), Mohamed Nasheed; Progressive Party of the Maldives (PPM); Jumhooree Party, allied with the current government

Key ministers

President: Ibrahim Mohamed Solih

Vice-president: Faisal Naseem

Defence: Uza. Mariya Ahmed Didi

Economic development: Uz. Fayyaz Ismail

Finance & Treasury: Ibrahim Ameer

Foreign affairs: Abdulla Shahid

Health: Abdulla Ameen

Home affairs: Sheikh Imran Abdulla

Tourism: Abdulla Mausoom

Central bank governor

Ali Hashim

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The Economist Intelligence Unit expects the ruling Maldivian Democratic Party (MDP) to serve out its full term, which will expire in 2024. The MDP dominates the People's Majlis (parliament), with 65 of the 87 seats, and the main opposition Progressive Party of Maldives (PPM) has just six. This has enabled the president, Ibrahim Mohamed Solih, to push the bulk of his government's policy agenda through parliament.

However, the MDP's rise to dominance in the 2019 legislative election has come at the expense of the Jumhooree Party (JP), a member of the ruling coalition and the country's third-largest party, which has been reduced to a relatively insignificant five seats. Although we believe 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 the coalition will remain in place, we believe that it could fall apart during our forecast period (2021-22). On March 1st parliament passed a motion of no confidence against the minister of science, communications and technology, Mohamed Maleh Jamal, who was appointed to the post from the JP. The motion was initially submitted by the MDP's parliamentary group in November 2020, signalling tensions between the two parties.

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), leader of the MDP and the current parliamentary speaker, who returned from exile in November 2018. However, they have often fallen out over government affairs and other operational issues. Although 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 government, and, consequently, the risk of political in-fighting 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 prioritise it during his term. In October 2019 he unveiled the Strategic Action Plan 2019-23, which will serve as a guide for his government's policymaking as it seeks to achieve its development goals. Despite Mr Solih's desire 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 tasks of achieving mass immunisation against the coronavirus (Covid-19) and resuming tourism activity on the islands. 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 next presidential election is due in September 2023, and the next parliamentary election is due in early 2024. During the previous polls the absence of the exiled Mr Nasheed 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, who are keen to expand their influence in the region. Under its Indo-Pacific strategy, which seeks to limit China's growing influence in the region, the US will also increase its engagement with the Maldives (and other smaller nations in South Asia). In September 2020 the Maldivian government 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. 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.

Relations between China and the Maldives, which flourished under the administration of Mr Yameen, have had less room to prosper 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 reached 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 development 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.

The Maldivian government will also look to strengthen its ties with countries other than India to maximise its negotiating power. In March 2021 the government signed agreements with Bangladesh during Mr Solih's visit to that country. These are aimed at the establishment of bilateral consultations, a joint commission on comprehensive co-operation, a cultural exchange programme, and a field of fisheries and pelagic fishing. The two countries also discussed the prospects of signing a preferential trade agreement.

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. We expect the government to continue with its initiatives to attract more tourists in 2021, such as international marketing roadshows and loyalty programmes. The government's efforts will be focused on supporting the country's economic recovery in 2021-22.

Achieving mass immunisation will be the priority this year. The government has so far approved three vaccines for emergency use, developed by Oxford University-AstraZeneca (UK/Sweden), Sinopharm (China) and Pfizer-BioNTech (US-Germany) respectively. By end-March, about 43% of the population had received the first of a two-dose regime. The government has begun vaccinating residents over the age of 18 and will start administering the second dose of the vaccine in April. It has also announced procurement plans for about 1m doses in the second quarter, under different purchase arrangements and grant assistance. Accounting for supply delays and smaller consignments delivered over a prolonged timeline, an average of 100,000 doses per month will be enough to maintain the current pace of inoculation. We expect 60% of the population to be vaccinated by the third quarter of 2021.

With its vaccination programme set to continue apace, the Maldives is well placed to welcome a significant number of tourists on "vaxication" (the first trip that people take after being vaccinated) during the peak tourist season of end-2021. In addition to welcoming vaccinated tourists, the Maldivian minister of tourism, Dr Abdulla Mausoom, has conveyed the government's plans to launch a 3V initiative-visit, vaccinate and vacation-to boost tourism activity. This drive will offer two vaccine doses to travellers, encouraging weeks-long stays in the country's resorts. The unique "one island, one resort" set-up of the country also allows for natural social distancing, which, coupled with vaccinated resort and airport staff, will help it to attract more cautious tourists.

Tackling corruption and the human rights abuses that spread under the previous administration will probably be 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 14.4% of GDP in 2021, from 21.6% last year, on account of higher government receipts (much of which will come from the tourism sector). The decision to conduct the free vaccination drive for Maldivian citizens and migrant workers, along with higher capital expenditure to support the economy, will keep the budget wider than historical levels. Grants and loans received by the Maldivian government from other countries and multilateral donors will help to cover part of 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 closely to resumption of international travel, which, in turn, will depend largely on lower travel hesitancy and an easing of quarantine requirements upon return. Vaccination programmes in major tourist source markets (like India and China) will help to alleviate these concerns but achieving mass vaccination will be a prolonged and staggered process, keeping tourist arrivals below pre-pandemic levels over the forecast period. In the interim, the bilateral travel bubble with India (one of the main sources of tourism for the Maldives) and relatively friendly tourism protocols in the islands (including the government's commitment to prioritise vaccinating airport and resort staff) will ensure that the country remains an attractive destination for international holidaymakers.

Following an estimated contraction of 29.5% in 2020, we expect the economy to recover to 23.2% in 2021, reflecting a gradual revival of domestic activity and a more than doubling of tourist arrivals from their level in 2020, at the very least. In 2022 we expect real GDP growth to slow to 11%, but this will still be faster than the pre-pandemic average, as we expect widespread vaccination to produce above-average momentum in tourist arrivals in that year. Despite double-digit growth rates, we expect real GDP to remain marginally below its 2019 level by the end of 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.

After a deflation in 2020, consumer price inflation will shoot up in 2021, with prices rising by an average of 2.7% 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 strong 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%. In recent years the currency has consistently grazed the weak edge of the exchange-rate band. The ongoing weakness in tourism receipts slowed the accumulation of the country's foreign-exchange reserves, although this has been partially offset by reduced imports. Debt relief, although welcome, has only been partial. This has rendered the peg relatively vulnerable, particularly given the scale of the country's other external liabilities.

Although there is a significant risk that the government will 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 as tourism receipts recover in 2021-22, 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. The deficit narrowed considerably in 2020 as imports plummeted on the back of subdued domestic activity, but we expect it to widen once again to historical levels 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. This will be overshadowed by a recovery in domestic activity and global oil prices fuelling the import bill, the size of 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, reflecting 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 21.9% of GDP on average in 2021-22, from an estimated 26.1% of GDP in 2020.

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