World Bank concerned over Maldives’ ‘limited progress’ in urgently needed fiscal reforms

The World Bank said on Thursday that the Maldives has made limited progress in implementing the fiscal reform plan proposed by the Maldivian administration back in February, adding that urgent actions are needed to reduce spending.

The global financial institute, in its biannual update released on Thursday, expressed concern over the delay in the rollout of the promised reforms.

The World Bank said that the Maldives urgently needs comprehensive economic reforms to address fiscal and external imbalances, build investor confidence, and reduce debt over the medium-term. 

It noted that the Maldivian administration proposed a fiscal reform plan in February, but said that limited progress has been made in implementation.

It also hailed the endorsement of the Medium-Term Revenue Strategy as a positive step, but stressed the need for urgent actions to reduce spending, including reducing public investments, phasing out subsidies, improving health spending efficiency, and reforming SOEs to reduce the state’s footprint in the economy.

The latest Maldives Development Update released on Thursday notes that the Maldivian economy grew by 7.7 and 4.5 percent year-on-year in the first and second quarters of the year, bolstered by an 8.5 percent increase in tourism in the first half of the year.

While overall inflation remained low at 0.5 percent in the first half of the year, food prices rose by 6.7 percent in the same period compared to last year.

But despite the economic growth, the increasing public debt and high fiscal spending, particularly for public sector investments and subsidies, remain worrying.

The World Bank said that although the reported fiscal deficit dropped in the first quarter of the year, payment delays are affecting major sectors such as healthcare and construction, which are not reflected in the reported fiscal statistics.

"Maldives has made remarkable progress in realizing its development aspirations, but protecting these achievements and scaling them up will depend on addressing the current fiscal challenges,” said David Sislen, World Bank Regional Country Director for Maldives, Nepal, and Sri Lanka.

“Efficient public spending – with the timely implementation of expenditure reforms and targeted social support – will be essential to ensure resilience amid rising economic challenges.”

Maldives’ reserves fell from USD 590.5 million at the end of 2023 to USD 443.9 million in August 2024.

According to the World Bank, the foreign exchange reserves are low and are enough to cover only one-and-a-half month of imports.

The total public debt rose to 116.5 percent of GDP in the first quarter of this year, up from 110.4 percent during the same period last year.

The World Bank said that despite transfers to the Sovereign Development Fund, the current balance of USD 65 million is not sufficient to cover rising financing needs.

Fiscal risks from loans, trade payables, subsidies, and investments in SOEs remain elevated.

Maldives has an external debt service obligation of about USD 600 million in 2025 and more than USD 1 billion in 2026.

Citing default risks, Moody’s has downgraded Maldives’ credit rating from CAA1 to CAA2, while Fitch downgraded the country’s credit rating from CCC+ to CC.

However, the Maldives’ central bank has expressed confidence in the capability of the government to meet its external debt obligations, citing improvements in its foreign exchange reserves.