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Tourism sector contraction spurs moderation amid Maldives’ fiscal challenges

The Maldives navigated through a year of economic moderation and resilience in 2023. According to the latest Quarterly National Account (QNA) estimates by MMA, the Maldivian economy witnessed a growth rate of 4.0% in 2023, a significant slowdown from the remarkable 13.9% growth recorded in the preceding year. This deceleration, falling short of the initially projected GDP growth, was primarily attributed to challenges in key sectors such as tourism and construction.

The backbone of the Maldivian economy, the tourism sector, experienced a contraction in 2023, primarily due to a decline in resort bed nights. Despite significant strides in the first quarter, including the reopening of China’s borders and robust arrivals from Russia, the sector faced headwinds throughout the year. Total tourist arrivals surpassed the government’s annual target, reaching 1,878,543, but the growth was not uniform across all segments. While guesthouse bed nights soared, resort bed nights witnessed a decline for the first time since the onset of the COVID-19 pandemic. As a result, the Gross Value Added (GVA) of the tourism sector is estimated to have contracted by -1.0% in 2023.

The global context played a crucial role in shaping tourism trends. The United Nations World Tourism Organisation’s (UNWTO) World Tourism Barometer reported a robust recovery in international tourist arrivals, reaching 88% of pre-pandemic levels. This resurgence was propelled by pent-up demand, particularly in regions such as the Middle East and Europe. However, challenges persisted, especially with the ongoing Russia-Ukraine conflict affecting travel dynamics.

On the fiscal front, the Maldives grappled with a widening fiscal deficit, reaching 12.7% of GDP in 2022. Despite surpassing budgeted revenue targets, higher-than-expected expenditure, particularly in recurrent and capital expenditure, contributed to the deficit. Notably, increased spending on the national health insurance scheme and subsidies, coupled with delayed implementation of expenditure reduction policies, exacerbated fiscal pressures.

Monetary policy remained accommodative in 2023, with the Maldives Monetary Authority (MMA) maintaining the minimum reserve requirement (MRR) at 10%. Broad money growth accelerated slightly, driven by increased net claims on the central government and higher credit to the private sector. The banking sector remained robust, with strong asset growth and capital indicators, although profitability in the insurance and non-bank financial sectors witnessed declines.

The balance of payments (BOP) presented mixed outcomes, with the current account deficit widening to 20.3% of GDP in 2023. While the merchandise trade deficit narrowed, reflecting growth in export earnings, the surplus on the services account declined, primarily due to reduced travel receipts. Foreign direct investment (FDI) inflows and government and private sector borrowings financed the deficit, underscoring the importance of external financing.

Looking ahead, the Maldives faces the dual challenge of sustaining economic recovery while addressing structural vulnerabilities. Reviving the tourism sector, enhancing fiscal discipline, and fostering diversification efforts will be pivotal in navigating the evolving economic landscape. As the global tourism industry embarks on a path of recovery, strategic policymaking and resilient economic governance will be imperative for the Maldives to chart a course towards sustainable growth and development.