The Maldives is an archipelago at the heart of the Indian Ocean that consists of atolls with approximately 1,190 low-lying coral islands that stretch over an area of 90,000 square kilometers, surrounded by its Exclusive Economic Zone (EEZ). The capital city, Malé, which is made up of roughly 2.5 square kilometers houses about one third of the population while the rest is spread across 200 inhabited islands. The Maldives has a relatively young population with almost 41% under 15 years of age and around 3% over the age of 65 years of age. In the context of human development trends, the Maldives ranks high among the Asia-Pacific countries.
The development in the Maldives just like other several small island nations is constrained by the absence of land-based mineral resources, the limited scope of the expansion of the agricultural sector, and the vulnerability to natural disaster and environmental hazards. This has occurred in contrast to the phenomenal damage wreaked upon the islands by the 2004 Indian Ocean Tsunami which damaged the nation’s economic and social infrastructure close to around 62% of the Gross Domestic Product (GDP). Maldives also faces many developmental constraints similar to other developing nations.
The economy of the Maldives is heavily dependent on fisheries and tourism which are the major sources of foreign exchange earnings and government revenue which directly accounts for 40% of the GDP. In terms of employment, the two major industries alone account for more than a third of the total employment in accordance with the result of the 2000 Census. The total labor force of the Maldives is estimated around 50% of the working-age population which when combined with a low level of educated labor, has led to a high proportion of the expatriate workforce in the country. Expatriate labor has therefore played a key role in the development of the Maldivian economy which includes teachers, medical personnel, and other professionals as well as a large number of lower-skilled workers like domestic helpers and construction workers.
The development progress of the Maldives has been supported by the Government, the private sector, non-governmental organizations, and foreign donors. While the government has concentrated on providing basic socio-economic services, the private sector has played a key role in the development of tourism, distribution, trade, transport, and fisheries among other activities. External donor assistance has been an important element of the development process wherein in recent years, about 70% of the total development expenditure was financed by external resources with the grant component being significantly high. More so, there are a number of foreign NGOs that have provided substantial assistance to the Maldives both in the bilateral and multilateral aid flows.
The Public Sector
The public sector consists of the Government and State-Owned Enterprises (SOEs) which have historically played a key role in the economy. Over the years, the operations of SOEs have covered a wide range of activities including banking activities, air, sea transport, international shipping, communications, the provision of electricity, fisheries operations, tourism, importing and distributing a large share of essential food and oil products. However, in recent years, there has been a move towards privatization and cutting back on the provision of services by SOEs that could more efficiently be undertaken by the private sector. Fiscal revenues constitute about 48% of the taxes and the balance largely of profit transfers from public enterprises. As there are no taxes on personal income, capital gains, business profits (other than a bank profit tax) wealth, or real estate, the bulk of the tax revenue comprises 64% of import duties and 28% of tourism tax. On the expenditure side, social services account for around 41% of the total expenditure whereas payments on economic services account for roughly 16%.
Financial Sector
Financial sector of the Maldives is very narrow and dominated by the banking sector, which consists of one locally-owned commercial bank with three branches. South Asian partly state-owned commercial banks, a branch of an international bank, and the HSBC. Non-banking financial institutions in the country include players in the general insurance market, a finance leasing company, a specialized housing finance institution, and money services businesses. The Maldives Monetary Authority (MMA) is the primary source of domestic financing for the Government’s fiscal operations and the commercial banks are the principal institutions for mobilizing savings and providing credit and foreign exchange to the private sector. Total deposits of the commercial banks stood at around 48% of the GDP at the end of 2001, while the stock of credit extended by the banks reflected approximately 31%. There is ongoing work to establish a Stock Exchange and a functioning market for raising the capital required by the economy. Trading arrangement facilities are conducted through the activities of the Capital Market Development Authority. There is also some secondary market trading of the limited number of shares of the Bank of Maldives (BML), and two other state-owned public companies; the Maldives Transport and Contracting Company (MTCC) and the State Trading Organization (STO), which are the only public available equity stock at present. The recently passed Securities Act paves the way for the establishment of a formal capital market and the requisite administrative arrangements are currently being finalized.
Imports and Exports
The Maldives has an open economy, with a narrow export base and high dependence on imports for most of its economic activities. Consequently, foreign merchandise trade normally records a large deficit; imports have averaged around 61% of GDP in the last 5 years, while domestic exports, consisting primarily of fish and fish products have ranged between 11-15% of GDP. Services and transfers have shown a net surplus that has averaged around 34% of the GDP. Services and transfers have shown a net surplus that has averaged around 34% of GDP in recent years with service receipts being dominated by tourism and related activities. Nevertheless, there is usually a significant outflow of transfers from the economy owing to the large expatriate workforce that is resident in the country. The official medium and long-term debt flows and inflows of capital for direct investments dominate the capital account of the balance of payments. External debt stock of the public sector and the banking system averaged around 38% of GDP from 1997 to 2000 with a large portion of the official debt being received on highly concessional terms. Statistics on the level of indebtedness of the private sector at a given point in time are not readily available.
There is exchange control legislation in the Maldives. Both residents and nonresidents may freely import and export capital through the foreign exchange market. Residents do not require permission to maintain foreign currency accounts either at home or abroad, and there is no distinction made between foreign national or nonresident accounts held with banks operating in the Maldives. As regard to the Foreign Direct Investment (FDI) in the country, investments require prior approval of the Government and are currently charged an annual royalty the amount of which is negotiated between the Government and the investor. There are no restrictions on transferring profits.
The Maldives uses import duties as its main source of tax revenue. At present, ad valorem tariffs are levied on the C.I.F value of imports; export duty is levied only on ambergris, on which 50% is imposed. However, in light of various trade negotiations, in particular the SAFTA, it is likely that the import duty structure will be further rationalized and the Government has announced plans to introduce a corporate profit tax in the next few years.
Further Challenges
Maldives has experienced rapid economic growth and development in recent years, supported by a dynamic tourism sector. However, the susceptibility of the economy to factors beyond its control was augmented in the devastation wrought by the 2004 Indian Ocean Tsunami and the decline in tourism following the September 11 terrorist attacks in the United States. Last but not least, the spread of COVID-19 and the subsequent lockdowns resulted in a historic loss of 51.6% of real GDP in 2020. Tourist flows have been particularly affected and in November 2020, the MMA estimated that both tourist arrivals and bed nights declined annually by 74% and 69% respectively.
The three incidents underscore the fact that the country needs to diversify its economic base, rationalize its development objectives, and further enhance the role of the private sector in the developmental process in order to reduce its vulnerabilities and maintain a sustainable level of economic growth.