Maldives Development Update: Rising Uncertainty Following the Strong Tourism-Led Recovery

On October 29, 2021, Frenchman Victor Vincent Corentin arrived in Maldives with his wife for a holiday. They had visited the country 19 times before, but this time their arrival was different. The airport was decorated with beautiful imagery and elements of the culture and heritage of Maldives. A traditional Maldivian bodu beru procession escorted them to the arrival hall where they were greeted by the country’s top tourism officials and handed special gifts representing traditional Maldivian culture.

Corentin’s 20^th visit to his favourite island holiday destination marked an important milestone in the nation’s post-COVID tourism recovery – he was the one millionth tourist to have visited the Maldives in 2021! The achievement came just over a year and a half after the country re-opened its borders following a four-month pandemic-caused closure, the first in its history.

“Today, we turn yet another page in the remarkable success story of Maldives tourism. Reaching our arrival target of one million tourists for the year 2021 – two months in advance – is a remarkable achievement,” Maldives Minister of Tourism Dr Abdulla Mausoom said as he joined officials from tourism-related authorities to welcome Corentin and his wife.

Two months later, Maldives ended the year with 1.3 million tourist arrivals!

This strong recovery in tourism was highlighted in the latest edition of the World Bank’s Maldives Development Update (MDU), which analyses recent developments and presents an outlook on the Maldivian economy. It finds that while the Maldives economy recovered sharply and external imbalances improved in 2021, the outlook remains uncertain given travel and commodity price concerns.

The MDU attributes the rebound in tourism to a successful nationwide vaccination campaign and the country’s ability to attract a high volume of visitors from emerging markets such as India and Russia, partially compensating for the absence of tourists from traditional markets such as China and Western Europe. Although tourist numbers declined during the Delta wave of COVID-19 infections in mid-2021, arrivals started catching up to pre-pandemic levels after June 2021. In fact, by the end of 2021, monthly arrivals had almost recovered to pre-pandemic levels. The recovery in tourism outperformed government’s expectations in 2021 and led to a faster-than-expected economic rebound.

“The Maldives’ unique ‘one island, one resort’ concept has helped the country develop a reputation for luxury tourism and attracted large amounts of foreign direct investment. The strong recovery following COVID-19 shows the robustness and resilience of the country’s tourism sector,” Ruijie Cheng, one of the lead authors of the MDU, said. “However, a high dependence on tourism and limited sectoral diversification remains a key structural challenge, as the country is highly vulnerable to external and macroeconomic shocks.”

As tourism recovered, service exports and tourism-linked revenue collections also rose significantly. This led to improvements in the current account deficit and the country’s overall fiscal position. All sectors, except for construction which remains sluggish, showed a significant rebound. The poverty rate, which rose sharply to 11 percent in 2020 due to the pandemic, is also estimated to have fallen to 4 percent in 2021.

The MDU notes that these positive trends will likely continue this year and the next. This is thanks to increasing capacity in the tourism sector led by the completion of the Velana International Airport expansion and new resorts, a return of Chinese tourists after their border is reopened, and continued strong capital expenditures. As a result, tourism and the overall economy are projected to fully recover to pre-pandemic levels by 2023.

Despite the strong recovery, the Maldives faces significant risks, especially due to the country’s high debt burden and the global uncertainties linked to the ongoing war in Ukraine.

Rising from 4.9 and 0.8 percent in 2019, Russians and Ukrainians accounted for 16.8 and 2.7 percent of the 1.3 million arrivals in 2021, respectively. With the ongoing Ukraine war and the associated geopolitical implications, a prolonged absence of travellers from these two markets could negatively impact Maldives’ tourism sector. The MDU notes, however, that there are reasons to be optimistic, as increasing arrivals from other European markets such as the United Kingdom, Germany and Italy, and a surge in arrivals from new markets such as the Middle East could make up for the loss.

Although the impact of the war on tourist arrivals and economic growth seems manageable, it will have other consequences. The war has already led to a spike in commodity prices and, as a result, Maldives is likely to face a higher current account deficit, inflationary pressures, and an additional fiscal burden given the likely increase in fuel and electricity subsidies. These channels may aggravate existing external and fiscal vulnerabilities.

Since 2016, the government has appropriately increased infrastructure spending to facilitate faster growth. As a result, construction activity, productivity, and medium-term economic prospects have all seen a significant boost. Funding for these major projects had come through non-concessional foreign sources and sovereign guarantees, increasing fiscal and debt vulnerabilities. These risks are unlikely to lessen especially with an election year ahead.

“Despite the strong recovery in Maldives’ economy, long-standing structural weaknesses remain and need to be addressed. Measures to improve fiscal sustainability and reduce debt vulnerabilities should be a priority as the country builds back better from the unprecedented COVID-19 shocks,” Faris H. Hadad-Zervos, the World Bank Country Director for Maldives, Nepal and Sri Lanka, said.

The MDU recommends that the Maldives moderates capital spending and ensures slower accumulation of new debt in order to create more buffers to manage unforeseen risks and improve fiscal prospects. It notes that better sequencing and prioritisation of investment projects, with better growth-enhancing prospects, remain crucial for Maldives’ long-term growth and development.