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. However, a measured phasing-out of pandemic-related relief measures during 2023 and increasing tourism revenue will boost the collection of the goods and services tax (GST) next year. We forecast the deficit to narrow to 11.7% of GDP by 2023, from an estimated 15.2% of GDP in 2022. If global prices remain elevated, the government will be forced to maintain subsidy support on staple foods and fuel for longer than anticipated, delaying consolidation.

The wide deficit and high levels of public debt mean that fiscal consolidation will be a recurring theme in 2023-24, evidenced by the move in July 2022 to raise the overall GST from 6% to 8%, while also raising the tourism GST from 12% to 16%. Expenditure-side austerity measures will include reducing state operated enterprises' reliance on subsidy support and a delay in the full roll-out of the Public Sector Pay Harmonisation policy-a scheme intended to equalise basic pay for government employees working at the same level.

The government is likely to fall short of its target to lower the public debt/GDP ratio to 105% by 2023, from an estimated 125% in 2021, given pressures to delay necessary spending cuts out of political concerns. The country will also face annual external debt-servicing obligations of US$330m on average in 2023-24, according to estimates from the World Bank. The depletion of foreign-exchange reserves points to a significant risk that the Maldives could default on its debt obligations. Our assumption, however, is that it will avoid this owing to strong tourism-related revenue inflows and the provision of bilateral and multilateral financing. China's decision to suspend the country's debt repayments for four years in 2020 will also help.