Maldives Faces Economic Rebound Amidst Debt and Climate Challenges

The Maldives is experiencing economic growth fueled by a surge in tourism, but the country faces significant fiscal and climate-related challenges. The Maldives Development Update (October 2024) from the World Bank highlights the rising public debt, the critical need for fiscal reforms, and the existential threat posed by climate change. The country must invest in climate adaptation and implement structural reforms to ensure long-term stability and economic resilience.

The Maldives, a tropical paradise known for its thriving tourism industry, is currently navigating a delicate balance between economic recovery and deepening fiscal challenges. The World Bank's "Maldives Development Update" (October 2024), titled Seeking Stability in Turbulent Times, highlights key developments in the nation’s economy over the past year, while also warning of mounting fiscal and climate-related risks. The report examines the country’s growth trajectory, the pressing need for fiscal reforms, and the urgent measures required to safeguard the economy from climate-induced disasters.

A Boost from Tourism, but Clouds Loom Over the Economy

In early 2024, the Maldivian economy saw a positive rebound, with real GDP growth climbing by 9.8%, primarily driven by a surge in tourism. Tourist arrivals, particularly from China, jumped by 15.3% in the first quarter, contributing significantly to the recovery of sectors like transport, communication, and trade. As the Maldives depends heavily on international tourism, this resurgence brought a much-needed boost to the economy, helping offset earlier slowdowns.

However, while overall inflation remained subdued at 0.5%, food prices saw a sharp rise, with food inflation reaching 6.7% in the first half of 2024. This rise in prices hints at deeper structural issues within the country’s economy, which are likely to be exacerbated by rising global food costs. Despite the promising signs from tourism, the report underscores that the Maldivian economy is far from being out of the woods, as it faces pressing fiscal challenges.

Growing Debt and Fiscal Pressures

The Maldives has been grappling with a growing fiscal deficit and rising public debt, which reached 115.7% of GDP in 2024. Despite efforts to curb spending and a slight improvement in revenue, the government has struggled with increasing arrears, particularly in areas like public infrastructure projects, fisheries, and private healthcare providers. In 2024 alone, capital expenditure dropped by 44.6%, signaling tight cash-flow constraints.

The country’s fiscal woes are set to worsen, with debt service costs expected to spike dramatically by 2026, driven by external debt repayments, including a significant $500 million Sukuk due for repayment. With foreign exchange reserves falling to critically low levels, covering just one month of imports, the Maldives finds itself in a precarious financial situation. The report stresses the need for urgent fiscal reforms to rein in public spending, reduce subsidies, and streamline public investments to create the fiscal space needed to manage the country’s mounting debt.

Climate Change: A Critical Threat to the Economy

Beyond economic and fiscal pressures, the Maldives faces an existential threat from climate change. As a low-lying island nation, the Maldives is acutely vulnerable to rising sea levels and coastal flooding. The report warns that by 2050, up to 3.3% of the country’s assets could be damaged due to flooding, resulting in a severe economic downturn. Under high-emission scenarios, the country’s GDP could shrink by more than 11% by mid-century, further compounding its debt problems.

To combat these challenges, the report advocates for immediate investment in climate adaptation measures. These include building climate-resilient infrastructure, protecting coral reefs, and incorporating nature-based solutions (NbS) to reduce the impact of rising sea levels. The Maldives, which heavily relies on its natural beauty to attract tourists, must safeguard its coral reefs and marine ecosystems, or risk losing the foundation of its tourism-driven economy. The fisheries sector, another key pillar of the Maldivian economy, is also at risk, with predictions of a near-total collapse in fish stocks by the end of the century under current emission trends.

The Road Ahead: Urgent Reforms Needed

The Maldives stands at a critical juncture. While the economy has shown resilience with the revival of tourism, the nation’s rising debt and climate vulnerabilities pose serious risks to its long-term stability. The report highlights the urgent need for the government to implement fiscal reforms, including phasing out blanket subsidies and replacing them with targeted cash transfers to support the most vulnerable populations. Additionally, efforts to diversify the economy, reduce dependence on tourism, and explore alternative sectors like renewable energy are crucial for building a sustainable future.

At the same time, international financial support and climate financing will be essential for the Maldives to address its growing adaptation needs. The country’s fiscal space is limited, and without significant external assistance, it may struggle to fund the large-scale infrastructure investments required to protect itself from the impacts of climate change.

As the Maldives look toward the future, balancing economic recovery with the realities of fiscal and climate challenges will require strong policy actions and international cooperation. The World Bank’s Maldives Development Update provides a clear roadmap for the government, emphasizing that only through fiscal discipline, climate adaptation, and targeted reforms can the country navigate the turbulent waters ahead.