(This review is based on information available as at 31st August, 2007)
The Maldivian economy which contracted severely in 2005 following the December 2004 tsunami, bounced back strongly in 2006. After a contraction of 4.6 percent in 2005 the real economic growth accelerated to a record level in 2006, registering a growth of 19 percent. This unprecedented growth was driven by the tourism sector along with the booming construction sector.
Tourism sector, which accounted for about one third of GDP, recovered to pre-tsunami levels by the end of 2006. The value added to GDP by the sector grew markedly, by 42 percent during the year compared to the negative growth of 33 percent in 2005. This was driven by the 52 percent growth in the total number of tourists who visited the country in 2006, which totalled 601.9 thousand during the year. Similarly, tourist bednights grew by 46 percent during the year. As most of the resorts that were damaged by the tsunami became operational during 2006 and an additional new resort became operational during the year, there was an increase of 2,229 beds operated by the industry. Notwithstanding the increased capacity of the industry, the average annual capacity utilisation rate rose from 64 percent in 2005 to 82 percent in 2006 reflecting the improvement in tourist bednights.
The fisheries sector remains a key industry to the country’s economy both in terms of employment and exports, and contributed about 6 percent to the GDP in 2006. However, given the extraordinary growth in the sector in 2005, the value added to the sector showed a decline of 1 percent in 2006. The high growth in 2005 was largely due to the significant increase of 17 percent in coastal fish catch during the year. In 2006, while the level of fish landings was reasonably good, it was 1 percent lower than the year before. In absolute terms, this was only a decline of 1.9 thousand metric tonnes in 2006 compared to 2005. Nevertheless, on the exports side, on the strength of higher international fish prices, earnings grew substantially during the year with frozen tuna being the major type of fish exported from the Maldives.
The construction sector continues to remain robust in 2006 owing to the increase in developmental activities by both the tourism sector as well as in tsunami reconstruction activities. As a result, the value added to the sector rose by 21 percent during the year. Moreover, the sector’s contribution to the GDP has increased to 5.3 percent during 2006 from an average of 3.9 percent in 2000-2005. The distribution sector’s performance (which includes wholesale and retail trade) is influenced by the developments in the major sectors of the economy such as the tourism, construction and fisheries sectors, and with the positive developments in the economy, especially in the tourism and construction, the sector’s performance remained strong during the year.
The domestic price movements for Male’ measured in terms of the consumer price index (CPI), edged up to record 2.7 percent at the end of 2006 compared to 1.3 percent in 2005. The increase in food prices, housing rent and health care fees contributed to the rise in the rate of inflation.
Comprehensive data on the labour force is severely limited to the nation wide Census held once in every 5 years. Annual and monthly employment statistics are only available for government and expatriate sectors. According to the 2006 Census, the total employment in the country stood at 110,231, a 28 percent increase from the 2000 census. However, during this period the unemployment rate in the country has increased significantly from 2 percent to 14 percent, as around 41,766 people entered the labour market. The high unemployment rate reflects structural issues in the labour market rather than a lack of job opportunities. This is evident from the robust economic growth that the country has experienced in 2006 and the boost in construction activities which had led to a large influx of expatriate workers into the country – an annual increase of 20 percent in 2006. At the end of 2006, total public sector employment stood at 33,997, slightly lower than the level recorded in 2005. However, employees in the government service sector increased by 8 percent compared to 2005.
On the fiscal front, the budget deficit narrowed from 11 percent of GDP in 2005 to 7 percent of GDP in 2006. Total revenue and grants grew by 58 percent during the year, with total revenue increasing by 38 percent. The rise in revenue reflected favourable economic conditions in the country as well as the lump sum advance lease payments received from the newly released resorts in 2006. On the expenditure side, total expenditure grew by 42 percent in 2006 following a 53 percent growth in 2005. According to the provisional estimates of 2006, the budget deficit was largely financed by foreign loans and a little over a quarter financed by domestic borrowing.
With regard to monetary sector, total domestic credit of the banking system continued to grow significantly in 2006. However, the rate of growth has decelerated from 63 percent in 2005 to 38 percent during 2006. This deceleration was largely on account of the improvement in net credit to the government, as credit extended to the private sector increased by 49 percent during the year. With the favourable developments in the economy, the net foreign assets (NFA) of the MMA registered an improvement of 25 percent in 2006 in contrast to the 12 percent decline in 2005. However, with the continued expansion in foreign liabilities of commercial banks the NFA of the banking system declined significantly in 2006. The total liquidity in the banking system accelerated from 12 percent in 2005 to 21 percent in 2006.
With the rapid boost in heavily import dependent sectors such as tourism
and construction sectors, the trade deficit widened significantly in
2006, leading to a further deterioration of the current account deficit.
This was in spite of the improvements in merchandise exports and net
services receipts. The increase in net service inflows reflected the
sharp increase in the tourism receipts with the recovery of the tourism
industry after the tsunami. Meanwhile, the transfers account registered
a surplus for the second consecutive year owing to the tsunami related
grant inflows, although the growth rate has decelerated compared to
2005. Financial account surplus grew during the year 2006 owing to the
increase in private capital inflows for the new investments in the tourism
sector development. Similarly official flows also rose considerably
during the year, as loan disbursements increased to finance several
public sector projects. Consequently, the overall balance of payments
turned positive in 2006 and gross international reserves increased.
Hence, international reserves in terms of import cover remained at 3.0
months at the end of December 2006 in spite of the large increase in
import payments during the year.
As regards the exchange rate, Maldives continued to maintain a pegged
exchange rate regime and the dollar peg continues to be an appropriate
exchange rate arrangement in the Maldives by providing a simple and
transparent nominal anchor. The rufiyaa has been pegged to the US dollar
since July 2001 at a buying rate Rf12.75 and a selling rate of Rf12.85.
As regards the movements of rufiyaa against other major foreign currencies,
rufiyaa has depreciated against most these currencies during 2006, reflecting
the weakening of the US dollar during the year.
Statistics on external debt are limited to data on public external
debt (medium to long-term government and government guaranteed borrowings)
and private debt (foreign liabilities of the banking sector). Total
external debt stock (disbursed and outstanding) stood at US$574.3 million
in 2006, with public external debt constituting 63 percent and the rest
comprising of foreign liabilities of commercial banks. Multilateral
and bilateral concessional debt constituted 72 percent of the public
external debt portfolio while the remaining 28 percent comprised of
suppliers’ credits and commercial loans. Meanwhile, the foreign
liabilities of commercial banks registered a significant increase of
US$125.1 million at the end of 2006. Disbursements of public external
debt during the year increased to US$61.8 million from US$42.5 million
in 2005, while amortisation recorded US$23.3 million in 2006 with interest
payments increasing slightly by US$1.1 million to record US$7.9 million.
Therefore, total debt service totalled US$31.2 million at the end of
the year, equivalent to around 5 percent of Maldives’ exports
of goods and services.
