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.
• Although The Economist Intelligence Unit expects the ruling Maldivian Democratic Party (MDP) to complete its term in office, which expires in 2023, the risk of political instability has risen materially following the formation of two distinct factions in the MDP.
• Reviving tourism activity in the islands will be a priority for the government this year, and possibly next. Alongside international roadshows and loyalty programmes, a plan to offer vaccines to tourists will encourage extended stays in the country's resorts.
• After a deep recession in 2020, we forecast that real GDP will rebound by double digits in 2021, led by a doubling of tourist arrivals from 2020 levels. Even so, this means that both visitor arrivals and real GDP will be 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 (by the end of the third quarter). It will be well positioned to benefit from the ongoing recovery in international travel compared with other tropical travel destinations.
• The Maldives' strategic location in the Indian Ocean will attract significant courting by countries like India, China and the US, which are vying to increase their influence in the region.

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Key changes since March 31st

• We now expect real GDP to rebound by 18.6% in 2021, slower than our previous forecast of 25%. The change was prompted by weaker than expected tourist inflows in the April-June quarter.
• We now expect the recovery in domestic demand to be pushed into 2022. This will result in a slower pace of import growth this year. Consequently, we expect the current-account deficit to stand at 20.8% of GDP in 2021, compared with 23.3% previously.

The quarter ahead

• TBC-Tourist arrivals (July-September): With the reopening of borders to travellers from South Asia from mid-July onwards, we expect tourist arrivals to gather momentum in the third quarter of this year after losing steam during the Covid-19 surge, both locally and in India, in April-June.
• 24th October-GDP (second quarter of 2021): After contracting for three consecutive quarters, real GDP will return to year-on-year growth in the second quarter of 2021. This will mainly be the result of a low base of comparison in 2020, when tourism activity was suspended owing to the pandemic.

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 ruling Maldivian Democratic Party (MDP) dominates the People's Majlis (parliament) with 65 of the 87 seats, and this has enabled the president, Ibrahim Mohamed Solih, to pass the bulk of his government's agenda through parliament. Although The Economist Intelligence Unit continues to expect the MDP to serve out the remainder of its term, which expires in 2024, there is a low risk that it will be ousted prematurely.

In early July Mohamed Nasheed-a former president (2008-12), the leader of the MDP and the current parliamentary speaker-announced a break in his political ties with Mr Solih. Although the two are thought to have a good personal relationship, they have often fallen out in the past over matters of governance. Mr Nasheed has cited differing views over issues of complacency and corruption for his decision. However, it is possible that mounting rumours concerning the selection of Mr Solih as the MDP's candidate for the upcoming presidential elections in 2023 may also have motivated Mr Nasheed to act. We had anticipated that Mr Nasheed would act to consolidate his position in parliament, but believed that this would happen after the urgency of the coronavirus crisis had abated.

Mr Nasheed's declaration is tantamount to an effective, if not official, split in the MDP, with Mr Solih currently commanding majority support in the party. However, the faction led by Mr Nasheed could secure the support of all opposition parties and independent members, giving him a large enough parliamentary majority to block government bills and resolutions.

The risk of political instability in the Maldives comes alongside heightened security concerns. In early May Mr Nasheed survived an assassination attempt, which was widely suspected to have been made by local Islamic terrorists. He may have been targeted for his criticism of fundamentalism, which has put him at odds with certain extremist groups active in the country that share conservative religious views. The country's security forces, namely the Maldivian National Defence Force and the Maldivian Police Service, are highly politicised, and therefore any perception of administrative confusion or political instability could render them paralysed in the face of a security threat to officials, locals and foreign tourists. This could negatively affect the tourism industry, although we do not currently expect the impact to be significant.

The next presidential election is due in September 2023 and the next parliamentary election in early 2024. During the previous polls the absence of Mr Nasheed (who lived in exile in the UK) resulted in Mr Solih being chosen as the presidential candidate for an MDP-led coalition against the then ruling Progressive Party of the Maldives (PPM). With the MDP struggling to present a united front, other contenders are likely to enter the presidential race in the run-up to the election. Veteran army officers, former ministers and current parliamentarians have shown interest in registering their respective political parties by enrolling the required 3,000 members, although none are expected to be formidable contenders.

We expect Mr Solih and Mr Nasheed to be the two main candidates to contest the presidential election. Neither of them is likely to back down from participating in the MDP's primary election to determine the presidential candidate endorsed by the party. Although Mr Nasheed has said that he will support Mr Solih should he win the MDP's candidature, he could seek candidature from another party or establish his own party if the ideological rift between the two continues to widen. The ongoing five-year prison term of Abdulla Yameen, the former president (2013-2018) and leader of the main opposition PPM, will prevent him from contesting the 2023 election.

Maldivian foreign policy will continue to be guided by the country's substantial external financing requirements, resulting from a wide deficit on the current account and high levels of external debt, much of which is owed to China. Its strategic location in the Indian Ocean means that the Maldives will continue to garner a lot of interest from India and China, which 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 small nations in South Asia). This is reflected by the Framework for a Defence and Security Relationship with the US-the country's first military agreement with any country other than India-which was signed in 2020. The US government has also announced its plan to open an embassy in the Maldives. Notably, the Indian government has 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.

By contrast, relations with India have strengthened under the current administration, and the two countries will continue to deepen bilateral ties during the forecast period. Links will be cemented by India's increased participation in infrastructure development projects. 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. This will overshadow bursts of anti-Indian rhetoric from the local Maldivian media, which have been the case in the past and which we expect to be clamped down on quickly by the administration.

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 during the Covid-19 pandemic. The government's efforts in 2021-22 will be focused on reviving the economy by bolstering tourism activity in the islands. Alongside international marketing roadshows and loyalty programmes, the government plans to launch the 3V initiative-"visit, vaccinate, vacation"-whereby it will offer two vaccine doses to travellers, encouraging extended stays in the country's resorts. This is likely to be welcomed by tourists, the majority of whom are from high-income groups.

Vaccinating the entire population ahead of offering vaccines to tourists will be a priority for the government. With the easing of restrictions in early July and supplies of vaccines due by the end of the month, the government's vaccination programme is set to continue apace. We expect at least 60% of the population to be vaccinated by the end of the July-September quarter. The inoculation of resort employees, irrespective of their nationality, along with the country's unique "one island one resort" setup will put it in a favourable position to benefit from the anticipated recovery in international travel, especially during the end-year peak season.

Beyond the pandemic, Mr Nasheed's pursuit of a national referendum in 2022 to shift from presidential to parliamentary governance will occupy the political discourse. He has also sought, although to no avail, Mr Yameen's support to change the system of governance. Mr Solih, on the other hand, seems to be in favour of supporting the parliamentary scheme after the 2023 election, should he return as president, when he believes that the Covid-19 crisis will have abated. We expect the tussle on this matter to continue in 2021-22, putting any further reform measures under the Strategic Action Plan 2019-23 on hold.

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 20.7% last year, on account of higher government receipts (much of which will come from the tourism sector). This will be only partial, as international travel will continue to be depressed by quarantining rules maintained by various countries amid Covid-19 uncertainties. 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 to support economic 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 boosting tourism activity in the islands. An anticipated recovery in international travel and the country's impressive inoculation programme will allow growth to gain traction in the second half of this year and into 2022. With the opening of the country's border to travellers from South Asia from mid-July onwards, tourists from India-a major source of tourism for the Maldives-are expected to return in strong numbers.

However, outbound tourism from China-the other main source of tourism-is expected to remain depressed until end-2022, as Chinese tourists will still be required to undergo long periods of quarantine after re-entering the country. Nonetheless, the recovery in tourism receipts compared with 2020 is likely to be more pronounced, as tourists who were unable to travel abroad in 2020 could be motivated to take longer holidays this year.

Following a contraction of 33.6% in 2020 (according to official sources), we expect the economy to rebound by 18.6% in 2021, reflecting a gradual revival of domestic activity and an anticipated doubling of tourist arrivals from their level in 2020. This will still be below the pre-pandemic levels of visitor arrivals and will fall short of the government's target of attracting 1.5m tourists in 2021.

In 2022, assuming that new variants are kept at bay, we expect widespread vaccination globally to produce above-average momentum in international travel, especially as outbound tourism from China begins to recover in the latter half of that year. This will boost real GDP growth in the Maldives to 19.5% as tourist arrivals and the economy edge closer to their pre-pandemic size.

Global 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 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 in the second half of 2021. Stronger economic activity will keep average inflation above 2% in 2022 as tourism expenditure and private consumption edge closer to pre-pandemic levels. Higher 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 pandemic-induced disruption in tourism receipts since the onset of the pandemic has slowed the accumulation of the country's foreign-exchange reserves and pushed the black-market exchange rate above the official peg. The ongoing recovery, albeit slow and uneven, in international travel, along with partial debt relief, has lifted some of this pressure recently. Nevertheless, the peg remains relatively vulnerable given the scale of the country's debt.

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 authorities will fully utilise the US$150m swap line with the Reserve Bank of India (India's central bank) to 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. Nonetheless, we now expect import growth to be slower than previously forecast in 2021 as recovery in domestic demand is pushed more into 2022.

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 20.5% of GDP on average in those years, from 22.2% of GDP in 2020.

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