ADB: Maldives economic growth will slow down to 1% this year, inflation to rise

The Asian Development Outlook (ADO) released today by the Asian Development Bank (ADB) projects a pronounced slowdown in the Maldives’ economic growth this year, primarily due to ongoing geopolitical tensions in the Middle East.

The report estimates Maldives economic growth at just 1.0 percent this year, a significant decline from the 5.4 percent growth recorded in the last year.

According to the ADB, this decline is largely driven by mounting pressures on the tourism sector, higher fuel prices, and the growing pressure on the government’s budget, all of which are linked to instability in the Middle East.

Rising geopolitical tensions have contributed to an increase in global oil prices, resulting in higher import costs for the Maldives. The ADB further projects that these elevated import prices will push inflation to around 5.0 percent this year, reflecting a broad increase in the cost of living. This is expected to add further strain on household incomes.

Within the tourism sector, although the opening of the new passenger terminal at Velana International Airport last year supported a 10 percent increase in tourist arrivals, total bed-night figures declined compared to the previous year. While arrivals are still expected to grow in the current year, the report notes that this expansion will be more moderate due to geopolitical uncertainty in the Middle East. It also highlights that, absent these external shocks, tourism performance would likely have been considerably stronger.

The country’s external position remains vulnerable, with foreign exchange reserves continuing to face pressure. Last year, the current account deficit improved, supported by stronger tourism receipts and a reduction in imports following the suspension of several government infrastructure projects. In addition, recently implemented foreign exchange regulations contributed to a modest recovery in reserve levels. However, following the repayment of a USD 500 million sukuk earlier this month, reserve buffers have declined once again, reducing the economy’s capacity to absorb external shocks.

On the fiscal side, while the budget deficit narrowed last year due to lower capital expenditure, recurrent government spending continued to rise. Even after the sukuk repayment, total public debt remains elevated at close to 130 percent of gross domestic product (GDP). Increased expenditure on energy subsidies, driven by higher global oil prices, alongside weakening tax revenues from the slowdown in tourism, is placing additional strain on public finances. This is further exacerbated by constrained access to external financing.

Commenting on the outlook, Jules Hugot, Senior Economist at the ADB, noted that while the Maldives has so far met its debt obligations, significant vulnerabilities remain.

“Lower tourism revenue and higher fuel prices raise pressures on the government budget, making fiscal reforms all the more urgent.”, Hugot said.

He emphasized the need for decisive policy measures aimed at containing public expenditure and broadening the government’s revenue base.

Despite the projected slowdown this year, the ADB expects economic growth to recover in the following year. A rebound in tourism activity, coupled with stabilizing global oil prices, is expected to lift growth to 3.0 percent.

However, the report cautions that this outlook is contingent on the sustained implementation of fiscal consolidation measures and expenditure controls. Persistent instability in the Middle East could lead to downward revisions to these projections, potentially increasing subsidy burdens and further pressuring foreign exchange reserves.