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    World Bank Urges Maldives to Cut Costs, Implement Reforms

    GovernanceFinance and EconomyWorld Bank Urges Maldives to Cut Costs, Implement Reforms
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    World Bank Urges Maldives to Cut Costs, Implement Reforms

    World Bank highlighted the Maldives’ current economic and fiscal situation and provided recommendations to alleviate the challenges at present. Inflation is projected to rise in 2024 due to planned subsidy reforms. Difficulties in liquidity management and failure to implement fiscal reforms pose risks to the economic outlook.

    The World Bank has urged Maldives to cut costs and implement fiscal reform as soon as possible to improve the fiscal situation of the country. It said that a large portion of the state’s budget deficit last year was supplemented by the country’s central bank, Maldives Monetary Authority (MMA), while 30 per cent of the banking sector is being used to fund the government.

    Resident Coordinator for Maldives at the World Bank, Erdem Atas, said that the government heavily relies on MMA and the commercial banks to secure financing, and that 60 percent of MMA’s assets were invested as government’s security as of January 2024. He was unveiling the World Bank’s Maldives Development Update: Scaling Back and Rebuilding Buffers.

    Atas said that 30 per cent of the entire banking industry of the country is used on the government’s Treasury Bills (T Bills) and Treasury Bonds (T Bonds). This poses challenges to the economic development of the country, he said.

    The Maldivian government, until the end of 2023, printed money worth upto MVR 4.4 billion (USD 285.3 million) from the Public Bank Account.

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    The Maldives experienced a slowdown in economic growth in 2023, despite an increase in tourist arrivals. The GDP growth rate was 4.0 per cent, well below the pre-pandemic trend.

    The increase in tourist arrivals did not lead to higher GDP growth due to a decline in spending per tourist. Inflation rose in early 2023 due to increased tax rates and high commodity prices, particularly in food and non-alcoholic beverages. The government managed to ease pressure on utility prices and transportation through subsidies.

    Also Read: Maldives: Tourism Slowing Down Due to Increased Demand for Guest Houses

    The country faced large external imbalances and a decline in foreign exchange reserves, leading to liquidity pressures. The fiscal deficit increased to 13.2 per cent of GDP, driven by high levels of capital spending and subsidies.

    The World Bank says that key reforms for stabilization were not implemented, resulting in the need for a supplementary budget. The Maldives Monetary Authority financed the budget deficit, and banks’ exposure to the sovereign stabilized.

    According to the global lender, the country has a high risk of debt distress and is vulnerable to domestic and external shocks. A large fiscal consolidation is urgently needed to ensure fiscal and debt sustainability.

    Tourism is expected to drive medium-term prosperity, but downside risks remain due to external and fiscal vulnerabilities. The baseline projections for GDP growth in the medium term are lower than previous forecasts due to expected fiscal adjustments and lower tourist spending.

    Inflation is projected to rise in 2024 due to planned subsidy reforms. Difficulties in liquidity management and failure to implement fiscal reforms pose risks to the economic outlook. Developing alternative growth drivers and supporting private sector job creation are crucial for long-term growth, the Bank said.

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