World Bank warns Maldives of the risks of rising public debt

World Bank.

The World Bank has warned Maldives of the risks of rising public debt, stressing the urgent need for a comprehensive fiscal adjustment program.

The global financial institute, in its biannual update released on Wednesday, said the Maldives economy is expected to grow by 4.7 percent in 2024, lower than previous estimates, reflecting a moderation in growth momentum.

“The outlook faces potential risks due to external and fiscal vulnerabilities, and increased debt risks could arise if fiscal reforms are not implemented,” said the World Bank.

According to thee update, tourism and other major industries are seeing a slowdown.

“Despite an increase in tourist arrivals, factors such as lower spending per tourist and shorter stays have tempered the positive impact on overall GDP growth,” reads the update.

The forecast also highlights the need for fiscal consolidation in the country, which is expected to impact real household incomes due to subsidy reforms, and a decrease in government spending and investment.

The World Bank cautioned of the risks of rising public debt, which stood at USD 8 billion, equivalent to 122.9 percent of GDP in 2023.

“Without a comprehensive fiscal adjustment program, public debt is likely to rise in the medium term, posing debt sustainability risks. The rising debt obligations could lead to further external vulnerabilities, testing the country’s ability to service its external debt,” said the World Bank.

Average annual debt servicing needs are projected at USD 512 million for 2024 and 2025, followed by a spike of USD 1.07 billion in 2026.

World Bank warned that the continued reliance on expensive external debt, without fiscal reforms, carries a high risk for economic stability.

In addition to spending cuts, Maldives' debt and fiscal sustainability require a reprioritization of public spending and improved revenue mobilization.

The report emphasizes the urgency for the government to implement its recently announced fiscal reform agenda, including clear communication with all Maldivians for successful implementation.

The report recommends the establishment of an effective mechanism for compensating vulnerable groups for potential losses in welfare and addressing widening inequalities resulting from fiscal tightening, particularly between the greater Male’ region islands and the atolls.

The World Bank said that the government’s ongoing efforts to establish a targeting mechanism to replace indirect subsidies will be a major instrument to ensure that vulnerable populations are not disproportionately affected by the reforms.

"Implementing the government's fiscal reform agenda is essential to sustaining economic growth in Maldives,” said Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka. “The World Bank remains committed to supporting Maldives in these reform efforts. This includes developing a targeted mechanism to support the poor and the vulnerable, phasing out the broad-based subsidy system that is currently inefficient, addressing weaknesses in state-owned enterprises, enhancing the efficiency of health spending, and improving the strategic planning of investments.”

The report recommends the Maldives to diversify the economy to reduce the country’s dependence on tourism.

Recommendations include minimizing the role of state-owned enterprises in the economy, encouraging private sector participation, and fostering private sector job creation.