Maldives economy on path to full recovery

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The World Bank expects strong tourism-driven economic growth to continue despite the short-term impact of the war in Ukraine, keeping the Maldives on course to fully recover to pre-pandemic levels in 2023.

In its annual development update, the World Bank revised the projected real GDP growth for 2022 downwards from 8.4% to 7.6% based on the decline of Russian and Ukrainian holidaymakers, who together accounted for one-fifth of tourist arrivals last year.

“The impact of the Russia-Ukraine war will depend on the period of interruption and whether tourists from other countries can compensate for the loss,” the World Bank observed. “However, given that international travel is expected to further normalise and after accounting for the likely reduction of Russian and Ukrainian tourists, Maldives is projected to receive 1.57 million tourists in 2022 (about 94% of pre-pandemic levels).”

After exceeding pre-pandemic levels for tourist arrivals in 2021, Russia was the top market in 2022 with 44,055 holidaymakers as of 2 March. But arrivals plummeted 70% after the Russian national carrier Aeroflot suspended flights on 8 March. Ukraine was previously the seventh-largest market with 7,948 tourists as of March but has now dropped from the top ten.

Before the war, the baseline projection for tourist arrivals in 2022 was 1.6 million, up from 1.3 million last year. In both large impact and small impact scenarios worked out by the World Bank, arrivals are expected to reach 1.5 million this year. The recovery of traditional Western European markets and a surge in arrivals from new markets such as the Middle East could offset a prolonged absence of Russian and Ukrainian visitors.

However, as a result of higher global commodity and oil prices, inflation is estimated to rise to 3.5% and fuel and electricity subsidies could increase by up to 0.7% of GDP.

But the Maldives economy is on track to fully recover to pre-pandemic levels in 2023. The key factors for the optimistic outlook are the eventual return of Chinese tourists – who made up the largest market before the pandemic – along with the completion of the Velana International Airport’s expansion and the opening of new resorts to significantly increase the tourism sector’s capacity. The World Bank also expects “continued strong capital expenditures and election-related spending” to boost growth next year.

The main challenge in the medium-term is debt vulnerability created by financing large infrastructure investments through external non-concessional sources and sovereign guarantees. Public and publicly guaranteed debt stood at US$6.1 billion or 125% of GDP at the end of 2021. Whilst the authorities reduced rollover risks with Sukuk issuances last year, a privately placed US$100 million bond and Sukuk worth US$500 million will both be due as bullet payments in 2026. The continuing robust recovery of tourism to replenish state coffers will be necessary to manage debt refinancing risks, the World Bank stressed.