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 EIU expects the ruling Maldivian Democratic Party (MDP) to complete its term in office, which expires in 2023, the risk of political instability has risen following the formation of two distinct factions in the party, amid disagreement over the government's handling of sensitive issues such as corruption and religious extremism.
• A sustained recovery in tourism activity will be a priority for the government in 2022-23. Widespread vaccination, the "one island, one resort" set up for safe holidays, a lenient immigration policy (with no quarantine requirement) and initiatives such as offering vaccination to tourists will make the Maldives a preferred destination.
• With a brighter outlook for international travel and the country's impressive vaccination coverage providing tailwinds for economic growth over the next two years, real GDP is forecast to be back close to its 2019 level in 2023. The emergence of more contagious strains of the coronavirus presents the main downside risk to our forecast.
• We expect the rufiyaa's peg to the US dollar to be maintained in 2022-23, despite low levels of foreign-exchange reserves. A recovery in tourism receipts and a US$150m currency swap line with India will help to reduce pressure on reserves.
• The Maldives had fully vaccinated 60% of its population by mid-September, beating several other tourism-dependent economies in Asia, including Sri Lanka, Fiji, Thailand, Indonesia, the Philippines and Vanuatu.
• The Maldives' strategic location in the Indian Ocean will attract courtship by India, China and the US, which are vying to increase their influence in the region. The country will pivot closer to India under the current administration.

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Key changes since July 14th

• Factoring in the large cut in the price of internet access and weaker than expected price pressures in July-August, we now estimate consumer price inflation to average 2.3% in 2021, down from 2.7% previously.
• We forecast real GDP to grow by 16% in 2022, slower than our previous forecast of 19.5%. This incorporates a more gradual recovery in international travel, which is not expected to return to its pre-pandemic level until at least 2023.

The quarter ahead

• TBC-Tourist arrivals (October-December): Amid widening vaccination coverage, both international and domestic, we expect tourist arrivals to gather momentum during the peak season. This will lead to an anticipated doubling of tourists in 2021 as a whole, from around 555,000 in 2020.
• 31st December-GDP (Q3 2021): We expect real GDP to have returned to quarter-on-quarter growth in July-September, as the country's borders were re-opened to travellers from South Asia (mainly India, a traditional source of tourism for the Maldives). The economy struggled in April-June, during a wave of the Delta variant of the coronavirus.

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. This has enabled the president, Ibrahim Mohamed Solih, to pass the bulk of his administration's agenda. EIU's core forecast is that the MDP will serve out the remainder of its term, which expires in 2024, with a low risk of it being ousted prematurely.

In July 2021 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 over matters of governance. Mr Nasheed 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 presidential election in 2023 may also have motivated Mr Nasheed's decision.

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 the country's opposition parties and independent members, giving him a large enough parliamentary majority to block government bills and resolutions.

Since surviving an assassination attempt in May 2021 (allegedly launched by a local Islamist group), Mr Nasheed has also been pushing for the government to take a harsher stance on religious extremism. His frustration with the MDP has grown over its inability to pass a hate-crime bill to address the issue. Conservative lawmakers view the proposed legislation as an attack on religion, while those with more neutral opinions are afraid of being targeted by extremist groups, as was Mr Nasheed, if they voice their support. The Taliban's coming to power in Afghanistan is likely to embolden local fringe groups in the Maldives, increasing the risk of social unrest in the country.

The tug-of-war between the two prominent figures in the MDP has created confusion in the ranks of the party, as well as the country's security forces. This could hinder their response in the face of a security threat to officials, locals and foreign tourists; however, we do not currently expect the impact of this to be significant.

Ahead of the presidential election in 2023, Mr Nasheed's pursuit of a national referendum to shift from presidential to parliamentary governance will dominate political discourse. Mr Solih seems to be in favour of supporting the parliamentary scheme after the election, should he return as president, when he believes that the country's tourism industry will have emerged from the shadow of Covid-19.

The next presidential election is due in September 2023 and the next parliamentary election in early 2024. In the previous presidential campaign, 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 incumbent Progressive Party of the Maldives (PPM). With the MDP struggling to present a united front, other contenders are likely to enter the presidential race. 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 is expected to be a formidable contender; a former defence minister, Mohamed Nizam, and a former police chief, Abdulla Riaz, have already jointly registered the Maldives National Party with the intention of contesting the presidential election in 2023.

We expect Mr Solih and Mr Nasheed to be the two main candidates in the presidential election. Neither is likely to back down from participating in the primary election to determine the MDP's endorsement of a presidential candidate. Although Mr Nasheed has said that he will support Mr Solih should the latter win the MDP's candidature, he could seek to represent another party or establish his own party if the ideological rift between the two continues to widen. The ongoing five-year prison term imposed on Abdulla Yameen, the former president (2013-18) 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 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 in 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, but a timeline has yet to materialise. 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 between the two countries that was signed in December 2017 remains in limbo and is unlikely to be implemented in 2022-23.

By contrast, relations with India have strengthened under the current administration, and bilateral ties will continue to deepen 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, most recently budgetary support of US$250m in September 2020. It is also operating a US$1.5bn line of credit to fund various projects, including the Greater Malé Connectivity Project, 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 sporadic bursts of anti-Indian rhetoric from the faction of the Maldivian media that favours China. We expect the administration to thwart these episodes quickly, as has been the case in the past.

The tourism sector, along with the services ecosystem, is the main driver of the Maldivian economy. Reliance on tourism earnings left the county especially vulnerable to the Covid-19 pandemic. The government's efforts in 2022-23 will remain focused on bolstering activity in the sector. This will involve marketing the country as a safe holiday destination, owing to its "one island, one resort" set up and widespread vaccination. The government will continue to offer a 30-day visa on arrival, with no mandatory quarantine upon presentation of a negative Covid-19 test, and is planning to include vaccination as an option in its tourism offering in 2022, to encourage extended stays at the country's resorts. These initiatives are likely to be welcomed by tourists, the majority of whom are from high-income groups.

Other matters will be put on the back burner amid the factional split in the ruling party. The tussle over changing the system of governance will continue in 2022-23, putting any further reform measures under the Strategic Action Plan 2019-23 on hold and widening the split within the MDP further.

The current 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. With the phasing-out of Covid-19 relief on resort lease rent and favourable tourism prospects boosting the collection of the goods and services tax, the deficit is forecast to narrow to 7% of GDP by 2023, from an estimated 14.1% of GDP in 2021. This is still slightly wider than the pre-pandemic average, as elevated global prices will increase the cost of the government's extensive subsidy programme, which covers utilities and food prices. We do not expect significant cuts in subsidies in 2022-23.

Grants and loans received by the Maldivian government from multilateral donors and other countries, especially India, will cover part of the fiscal shortfall in 2022-23. These will push up further the country's already high public debt/GDP ratio, which the national authorities estimate to have risen to the equivalent of 115% of GDP in 2020.

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.

The MMA uses minimum reserve requirements (MRRs) for banks and open-market operations as an instrument to control local credit creation and money supply. In June 2021 the MRR on local-currency deposits was increased to 10% from 7.5%-a level which had been maintained in 2020 to avoid a liquidity crunch during the pandemic. We expect this requirement to be replicated for foreign-currency deposits in 2022, when a more durable recovery in inbound tourism is expected to reduce the risk of dollar illiquidity. The increase from the current level of 5% will probably occur in two increments of 2.5 percentage points each.

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Given the dominant role played by tourism in the Maldivian economy, real GDP growth in 2022-23 will be tied closely to the recovery of activity in the sector. A brighter outlook for international travel and the country's impressive vaccination coverage point to strong growth in 2022-23. By 2023 we expect real GDP to be back close to its 2019 level.

India will maintain its status as the leading source of tourism in the Maldives, while visitors from Europe (especially Russia) are also expected to arrive in significant numbers as governments relax quarantine rules for citizens returning from international travel. Outbound tourism from China-the country's other main source of tourism-will be the slowest to recover, owing to the Chinese authorities' adherence to a "zero-Covid" policy that requires lengthy quarantine for residents returning from overseas.

Following Covid-19 disruption, the resumption of work on ongoing infrastructure development projects will boost investment activity in the economy. Tourism-affiliated services, such as transportation and retail trade, will also benefit from the anticipated return of visitors. Improving household earnings and continued support from the government, in the form of subsidies, will prop up private consumption.

The emergence of more contagious strains of the coronavirus presents the main downside risk to our forecast, as this could prompt travel restrictions and disrupt the pace of economic recovery. Although resort islands are naturally separated from islands inhabited by locals in the Maldives, a sustained rise in new domestic infections would prompt governments across the world to restrict travel to the archipelago by their citizens (as was the case in the second quarter of 2021, when the Delta variant of the coronavirus was spreading through South Asia). A surge in infections in India and Europe would equally hamper tourist inflows into the Maldives, derailing economic recovery.

Global prices dominate inflationary trends in the Maldives, as domestic consumption is driven mainly by tourism expenditure and is met mostly through imports. Inflation is therefore susceptible to global travel and price swings, and the pass-through is set by the rufiyaa:US dollar peg. However, the government's comprehensive policy of capping the cost of utilities and other living expenses for citizens strongly blunts the pass-through of global price pressures.

Despite a recovery in tourism expenditure and global price pressures, the maintenance of subsidies will keep average consumer price inflation at 2.1% in 2022-23, below the estimated level of 2.3% in 2021. The introduction of a minimum monthly wage, proposed at Rf5,700 (US$370) by the Minimum Wage Board, could lead to higher cost-push inflation. It is currently under consideration by the Ministry of Economic Development.

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 suspension of tourism earnings in much of 2020 slowed the country's accumulation of foreign-exchange reserves and pushed the value of the local currency in the black market below that maintained by the official peg. The ongoing recovery in international travel (albeit gradual), along with debt relief offered by the G20 countries, has lifted some of this pressure in 2021. Nevertheless, the peg remains relatively vulnerable, given the country's significant debt. Further extension of debt relief by the G20 is unlikely, but the Maldives could request leniency from its bilateral creditors, the most significant of which is China.

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 2022-23. However, the currency will continue to test the weaker edge of the band, especially as the outlook for the US dollar improves. 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. We expect the trade deficit to widen in 2022-23, inflated further by elevated global oil prices. The strengthening of external demand over the next two years and ongoing efforts to extend the country's shipments of fisheries (the main export commodity) to Russia and China will underpin a recovery in exports. This will, nonetheless, be overshadowed by resurgent tourism activity in the islands that will fuel the import bill, the size of which will continue to exceed exports by a wide margin.

By contrast, the Maldives' services exports from tourism (accounting for 90% of total services credits) have consistently exceeded services debits. These exports are expected to grow beyond their 2019 levels by end-2023, with the Maldives emerging as a leading destination for luxury tourism. However, the services surplus will be insufficient to offset the goods trade deficit.

The current account will remain in the red in 2022-23, but rising tourism receipts will result in a narrowing of the deficit to the equivalent of 19.4% of GDP by end-2023, from an estimated 20.4% of GDP in 2021. The primary and secondary income accounts will remain in deficit over the forecast period, reflecting high interest payments and negligible remittance inflows.

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