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 will rely heavily on bilateral assistance for budgetary support.
• The Maldivian Democratic Party controls the presidency and legislature. EIU expects the incumbent president, Ibrahim Mohamed Solih, to retain his presidency in the 2023 election. The participation of the opposition leader, Abdulla Yameen Abdul Gayoom, who secured a 42% vote share in the 2018 election, will make it a hard-fought contest.
• With tourism having recovered from the pandemic, the government will focus on ensuring that the Maldives remains a competitive destination in 2023-24. Fiscal consolidation measures, such as development of public-private partnership frameworks, will be a priority, but subsidy spending cuts will be held off until the presidential election.
• The pace of economic growth will slow in 2023-24 compared with 2022, but will remain rapid. The tourism sector will probably receive a boost during the period as covid-19 restrictions on outbound travel from China are eased (if not eliminated).
• We expect the rufiyaa's peg to the US dollar to be maintained in 2023-24, despite low levels of foreign-exchange reserves. Strong tourism receipts and a US$150m currency swap line with India will help to reduce pressure on reserves.
• We expect tourist arrivals to average 1.9m a year in 2023-24, compared with an estimated 1.7m in 2022, with India being the leading source country. The Maldives will face greater competition from reopening destinations, such as Thailand.
• The Maldives' strategic location in the Indian Ocean will attract courtship by India, China and the US. A victory for Mr Yameen in the 2023 presidential election, which is not our core forecast, would probably lead to realignment away from India and towards China.

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Key changes since July 19th

• Total foreign reserves fell to US$540m by end-September, from US$1bn a year earlier. We now expect the stock of international reserves to fall further over the last quarter of 2022, to stand at US$427m by year-end, amid rising import bills for food and energy.
• We now expect higher than anticipated spending on capital expenditure and extensive subsidy support, particularly for food, to widen the government's fiscal deficit to 15.7% of GDP in 2022, from our previous forecast of 9.1% of GDP.

The quarter ahead

• TBC-Tourist arrivals (October-December). The country received nearly 37% more international tourists in the first three quarters of 2022 than in the year-earlier period. We expect robust growth in arrivals over the remainder of 2022 with a prominent pick-up in international visitors from December, which marks the beginning of peak tourist season.
• December 31th-GDP (Q3 2022): We expect real GDP to have recorded double-digit growth in the third quarter, amid a strong recovery in tourism during the period. We estimate annual total tourist arrivals to have returned to pre-pandemic levels of 1.7m in 2022, supporting growth in formal sector employment and wages in the country.

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 2021: Rf15.37:US$1

Fiscal year

January 1st-December 31st

Time

5 hours ahead of GMT

Public holidays

January 1st (New Year); April 3rd (beginning of Ramadan); May 1st (Labour Day); May 3rd-5th (Eid-ul Fitr); July 10th-12th (Eid-ul Adha); July 26th (Independence Day-observed); September 27th (Quamee Dhuvas); October 9th (Mawlid al-Nabi); October 26th (celebration of the day that the Maldives embraced Islam); November 3rd (Victory Day); 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 held in September 2018; the next is due in September 2023; the last parliamentary election was held 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 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. We also expect Mr Solih to secure a victory in the presidential election in 2023, albeit by a close margin, ensuring policy continuity.

Political stability risk has risen after Abdulla Yameen Abdul Gayoom, the former president of the Maldives (2013-18), was acquitted from a five-year prison term in November 2021. This makes Mr Yameen, who leads the main opposition Progressive Party of Maldives (PPM), eligible to contest the upcoming presidential election. His participation implies that the MDP no longer enjoys a guaranteed victory in the poll.

Political in-fighting within the MDP has also weakened its support base. Relations between the two main party figures-Mohamed Nasheed, the leader of the MDP, speaker of the People's Majlis and a former president (2008-12), and Mr Solih-have been strained owing to differences over matters of complacency and corruption in government functioning.

However, we expect them ultimately to lay their differences to rest, as unity within the MDP will be required to prevent Mr Yameen's political comeback. An arrangement whereby Mr Nasheed softens his demands for changes to the country's political structure-he has been pushing for a shift from presidential to parliamentary governance-and Mr Solih commits to winning back public support, possibly through supportive welfare schemes, will probably surface. However, implementation of such welfare schemes may delay urgently required fiscal consolidation.

Islamic radicalism represents a source of political and security risk, and one that could disrupt the crucial tourism sector. Still, attacks by religious fundamentalists, such as the attempted assassination of Mr Nasheed in 2021, will be isolated events and are expected to be met with a firm security response. As such, we do not expect the security risk to affect tourist arrivals and government functioning meaningfully in our forecast period (2023-24). In the political arena, conservative religious groups such as the Adaalath Party (currently allied with the MDP) will continue to exercise influence and clash with backers of liberal Islamic values, such as Mr Nasheed.

The next presidential election is due in September 2023, and the next parliamentary election in early 2024. The MDP's candidacy for the upcoming election will be contested by Mr Nasheed and Mr Solih in the primary vote, although there is a possibility that Mr Nasheed will field a proxy. We expect Mr Solih to secure the MDP's endorsement comfortably, and Mr Nasheed subsequently to lend his backing, in order to suppress the PPM's chances.

The PPM will remain the MDP's main contender in the upcoming elections. Mr Yameen's release has breathed life into the party's effort to rally its support base by suggesting that the current administration's "India first" foreign policy threatens the country's sovereignty. Although a close call, we maintain our expectation that the MDP-through Mr Solih-will retain the presidency in 2023.

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. The Maldives' strategic location in the Indian Ocean will continue to attract interest from India and China, which are keen to expand their influence in the region.

The MDP lawmakers will be united in their support for the administration's "India first" foreign policy. India has offered regular fiscal and investment support to the Maldives. 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. We expect India to maintain its support for developmental projects in the Maldives, as evidenced by an agreement between the two countries in October 2022 for an additional line of credit worth US$100m. India will remain the first port of call for the Maldivian administration for economic and maritime aid in 2023-24.

By contrast, relations between China and the Maldives, which flourished under the previous administration of Mr Yameen, have had less room to prosper under Mr Solih. A PPM victory in 2023 would therefore also affect the Maldives' foreign relations, with realignment away from India and towards China. This remains outside our forecast, however. In the interim, the free-trade agreement with China that was signed in December 2017 remains in limbo and is unlikely to be implemented in 2023-24.

The US will step up its engagement with the Maldives under its Indo-Pacific strategy, which seeks to limit China's growing influence in the region. This is reflected in the Framework for a Defence and Security Relationship with the US, the Maldives' first military agreement with any country other than India, which was signed in 2020. A US embassy in the Maldives is also slated to open in the first half of 2023.

The tourism sector, along with its services ecosystem, will remain the main driver of the Maldivian economy. The government will maintain a focus on further bolstering activity in the sector in 2023-24 after its successful recovery from the pandemic. This will involve continuing to market the country as a safe holiday destination, owing to its "one island, one resort" set-up and widespread vaccination, and the employment of lenient visa policies. The government will also rely on booster-dose programmes to maintain immunity levels among resort employees and the local population. The completion of planned development projects, particularly those aimed at improving inter-island transport connectivity, will be central to improving the competitiveness of the tourism industry in 2023-24.

Fiscal sustainability and improving the quality of capital expenditure will be among the primary themes for policy in the forecast period. These reforms may include capping the mark-up on the prices of drugs reimbursed under the universal health scheme. The Ministry of Finance may also consider introducing quantitative limits on the value of sovereign guarantees supporting capital investments made by state-owned enterprises.

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.

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. Its ability to perform the latter task has been weakened by high import costs and the need to intervene to support the country's currency peg. These externally driven pressures will persist into 2023, but ought to de-intensify over the course of the year and into 2024.

The MMA achieves monetary stability in part 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 and uses minimum reserve requirements (MRRs) for banks and open-market operations as instruments to control local credit creation and money supply. We expect the MRR on foreign-currency deposits to be raised back to 10% by mid-2023, from 5% at present, as an easing of global commodity prices, coupled with steady tourism earnings, will help to reduce the risk of US dollar illiquidity in the local currency market. The increase is likely to be delivered in two increments of 2.5 percentage points over the first half of next year, matching the rise of the MRR on local-currency deposits to 10% in 2021.

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Given the dominant role played by tourism in the Maldivian economy, real GDP growth in 2023-24 will be tied closely to activity in this sector. The country's lenient visa procedures and natural separation of resorts from the main island inhabited by locals will continue to underpin its popularity as a top tourist destination in 2023-24. Some momentum behind the sector will be sapped by an anticipated slowdown in global growth and elevated international prices, which will curb travel demand in key markets. The Maldives will also face greater competition than in recent years from other popular destinations, such as Thailand, which have now fully reopened.

Still, we forecast further growth in arrivals in 2023-24, to 1.9m a year on average, from an estimated 1.7m in 2022. Arrivals from India, Europe and the Middle East will provide the main sources, with Russian visitors likely to arrive in weaker numbers owing to the fallout from the war in Ukraine. Arrivals from China, an important source before the pandemic, ought to be on a gradual path of recovery by end-2024 as that country eases its strict covid-19 controls on outbound travel.

We expect work on ongoing infrastructure development projects to pick up pace in 2023-24, although a tightening of fiscal conditions could cause some delays. The completion by end-2024 of the Greater Male Connectivity Project, the largest infrastructure initiative in the country, will be a major development target. It aims to improve connectivity between the capital and its neighbouring islands, supporting growth in transport, tourism and retail trade activity. Improving household earnings and continued subsidy support from the government in the run-up to the presidential election in 2023 will prop up private consumption.

Global prices dominate inflationary trends in the Maldives, as domestic consumption, driven mainly by tourism expenditure, is met mostly through imports. Although global prices are expected to moderate in 2023, they will remain elevated by historic levels, exerting inflationary pressure, particularly for food, utilities and transport. However, the government's comprehensive policy of capping the cost of utilities (which make up more than one-fifth of the consumer price index) and other living expenses for citizens will blunt the pass-through of global price pressures. We expect the government to maintain its current subsidies in 2023 before a measured withdrawal of subsidy support from 2024, thus suppressing a pick-up in the headline inflation rate over the forecast period. We forecast consumer price inflation to average 2.2% in 2023, moderating from an estimated 2.5% in 2022. Higher pressure on government spending in the light of the presidential election in 2023 will maintain an elevated inflationary environment compared to historical standards.

The rufiyaa is pegged to the US dollar. The midpoint of the exchange rate is US$:Rf12.85 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 band.

Although we maintain an optimistic outlook for tourism in the Maldives, the country is expected to draw down its external buffers significantly because of its high (and rising) import bill, continued support for the currency peg and the need to repay a swap arrangement with the Reserve Bank of India (India's central bank). The Ministry of Finance has also allocated about US$400m for debt obligations in its 2022 budget projections, which will be funded through credit assistance from bilateral and multilateral sources.

We forecast the currency peg to be maintained in 2023-24 as tourism receipts continue to grow. The risk that the government will be forced to move the peg to a weaker level will be high in the near term, owing to dwindling reserves, but will then diminish over 2023-24 as easing global commodity prices help to stabilise the import bill and demand for the US dollar moderates. The government will also account for political concerns, as a devaluation would be unpopular among households that purchase US dollars with legitimate means. This would adversely affect the ruling MDP's campaign for the presidential election in 2023.

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 2023-24, inflated by high oil prices and continued reliance on imports for domestic construction projects. The strengthening of external demand over the forecast period and ongoing efforts to extend the country's shipments of fisheries (the main export commodity) to Russia and China will underpin a recovery in goods exports. This will nonetheless be overshadowed an import bill fuelled by tourism activity in the islands, the size of which will continue to exceed exports by a wide margin.

By contrast, services exports from tourism (accounting for 90% of total services credits) have consistently exceeded services debits. We expect the services balance to be in surplus over the forecast period, supported by firm tourism activity. The current account, however, will remain firmly in deficit in 2023-24, as the services surplus will be insufficient to offset the goods trade deficit.

The primary and secondary income accounts will remain in deficit during the forecast period, reflecting high interest payments and negligible remittance inflows.

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