World Bank Urges Urgent Fiscal Reforms for Maldives Amid Economic Growth

The World Bank has reported that the Maldives has made limited progress in implementing the fiscal reform plan proposed by the Maldivian administration in February. 

In its biannual update released last Thursday, the global financial institution expressed concern over the delays in rolling out the promised reforms, emphasising that urgent actions are needed to reduce government spending.

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The report highlights the necessity for comprehensive economic reforms to address both fiscal and external imbalances, bolster investor confidence, and reduce the country’s debt in the medium term. While acknowledging the endorsement of the Medium-Term Revenue Strategy as a positive step, the World Bank stressed the importance of immediate actions, including cutting public investments, phasing out subsidies, enhancing the efficiency of health spending, and reforming state-owned enterprises (SOEs) to lessen the government’s economic footprint.

The latest Maldives Development Update notes that the economy grew by 7.7% and 4.5% year-on-year in the first and second quarters of the year, respectively, supported by an 8.5% increase in tourism during the first half of 2024. Despite this growth, rising public debt and high fiscal spending—particularly in public sector investments and subsidies—remain a cause for concern.

Although the reported fiscal deficit decreased in the first quarter, payment delays are impacting critical sectors such as healthcare and construction, which are not reflected in the reported fiscal statistics. David Sislen, the World Bank’s Regional Country Director for Maldives, Nepal, and Sri Lanka, noted, “The Maldives has made remarkable progress in realising its development aspirations, but protecting these achievements and scaling them up will depend on addressing the current fiscal challenges.” He added that “efficient public spending—with the timely implementation of expenditure reforms and targeted social support—will be essential to ensure resilience amid rising economic challenges.”

The country’s foreign reserves have decreased from USD 590.5 million at the end of 2023 to USD 443.9 million in August 2024, which the World Bank indicates is insufficient to cover more than one-and-a-half months’ worth of imports. Furthermore, total public debt rose to 116.5% of GDP in the first quarter of this year, up from 110.4% in the same period last year.

Despite contributions to the Sovereign Development Fund, the current balance of USD 65 million is inadequate to meet increasing financing needs. The World Bank also highlighted elevated fiscal risks stemming from loans, trade payables, subsidies, and investments in SOEs.

Looking ahead, the Maldives faces external debt service obligations of approximately USD 600 million in 2025 and more than USD 1 billion in 2026. In light of default risks, Moody’s has downgraded the Maldives’ credit rating from CAA1 to CAA2, while Fitch has lowered the country’s rating from CCC+ to CC. However, the Maldives’ central bank has expressed confidence in the government’s ability to meet its external debt obligations, citing improvements in foreign exchange reserves.