(This review is based on information available as at 2nd April, 2009)
According to estimates, the real GDP growth decelerated to 5.8 percent in 2008 from 7.2 percent in 2007, largely due to the slowdown in the tourism sector (which accounts for 27 percent of GDP) in the latter half of the year.
With over 70 percent of tourists to the Maldives coming from Europe, the tourism sector registered a moderation in growth in 2008 owing to a reduction in tourist arrivals from the major markets due to the global financial and economic crisis. As such, the total number of tourist arrivals registered a growth of 1 percent in 2008 compared with a 12 percent growth in the previous year. In absolute terms the total number of tourists who visited the country was recorded at 683 thousand in 2008. However, during the year the annual growth in tourist bednights stood somewhat higher than arrivals growth – at 3 percent (10 percent in 2007) – owing to the increase in average duration of a tourist visit. As for the capacity of the industry, with the opening of an additional 3 resorts during the year, the bed capacity of the industry increased by 9 percent to a total of 19,081 beds in 2008. As a result, the capacity utilization fell to 78 percent from 83 percent in 2007.
The fisheries sector experienced a reduction in both total fish catch and the volume of fish exports during 2008. However, due to favourable global tuna prices during the year, there was an increase in total fish export earnings. Total fish landings declined further by 17 percent in 2008 from 141 thousand metric tonnes in 2007 to 116 thousand metric tonnes, partly influenced by the high cost of fuel. As such, the volume of fish exports (excluding live fish) also declined in 2008; from 66 thousand metric tonnes in 2007 to 63 thousand metric tonnes in 2008, which is a 4 percent decline over the year. However, fish export earnings recorded a growth of 18 percent (or US$18.2 million) with total earnings of US$120.7 million.
The construction sector continued to remain robust in 2008 owing to the increase in developmental activities by the tourism sector as well as public sector infrastructure development projects. As a result, the value added to the sector rose by 16 percent during the year. The construction sector’s performance, as measured through the share of commercial bank’s credit to the sector, registered a twelve month improvement of 54 percent at the end of 2008 compared to an annual improvement of 107 percent in 2007. As for construction related imports, the total value of imports of construction materials increased by 13 percent from $172.3 million in 2007 to $194.9 million in 2008, compared to 42 percent annual growth in 2007.
The rate of inflation, as measured by the 12 month moving average of consumer price index (CPI) for Male’, surged to 12.0 percent in 2008 from 6.8 percent in 2007 and 2.7 percent in 2006. Inflation excluding the volatile fish prices rose to 12.2 percent from 4.9 percent in 2007. Domestic price pressures during the year were influenced by both cost-push factors such as import prices and by demand-pull factors such as the high deficit of the government financed by the MMA and the rapid wage growth in the public sector. Given the openness of the economy (around 87 percent of goods in the domestic consumption basket are imported), the surge in global food prices and record high global oil prices earlier during the year contributed significantly to the growth in CPI in 2008. At the same time, the large budget deficit which was for the most part financed through monetization, contributed increasingly to the rapid growth in money supply and hence accelerated the growth in CPI during 2008.
On the fiscal front, despite a moderate improvement in total revenue during the year, the budget deficit widened from 5 percent of GDP in 2007 to 14 percent of GDP in 2008 due to the substantial increase in government expenditure (63 percent of GDP). Total revenue and grants grew by 5 percent in 2008 over 2007, with total revenue increasing by 10 percent. Major sources of government revenue during the year included import duty (34 percent of total revenue), tourism bed tax (8 percent), and lease rent from tourist resorts (21 percent). Total expenditure rose by 24 percent (18 percent in 2007) to Rf10.3 billion in 2008, out of which 80 percent was spent on current expenditure. As regards the financing of the budget deficit, 65 percent of the deficit was domestically financed—mostly through monetization—while the rest was from external sources.
In the monetary sector, total domestic credit of the banking system, after registering a growth of 45 percent in 2007, increased by 43 percent in 2008. The net foreign assets (NFA) of the banking system further declined in 2008 with the progressive accumulation of the foreign liabilities of the commercial banks, which however showed signs of reversing the trend towards the end of 2008, as foreign liabilities declined due to partial settlement of loans taken by the foreign commercial banks mainly from their head offices. The decline in foreign liabilities was also attributed to the tight credit availability during the year owing to the current global financial crisis. Meanwhile, the NFA of the MMA, which grew by 34 percent in 2007, registered a decline of 22 percent at the end of 2008. Total liquidity of the banking system showed a similar increment as in 2007 (24 percent). During the period, a substantial growth of narrow money was recorded from a growth of 19 percent in 2007 to 38 percent in 2008. Meanwhile, there was a decline in growth of quasi money from 28 percent in 2007 to 12 percent in 2008, followed by a slow growth of foreign currency deposits within the banking system.
With regard to balance of payments developments, despite the increase in fish exports, the trade deficit widened further in 2008, leading to a substantial worsening of the current account deficit during the year. Rapid growth in imports driven by high oil prices and the construction boom coupled with the slow growth in tourism receipts caused the worsening of the current account deficit to 47 percent of GDP (42 percent of GDP in 2007). In 2008, the net services surplus declined by 6 percent compared to 2007 due to the slow growth in tourist arrivals. Meanwhile, the transfers account registered a relatively high deficit of US$52.2 million in 2008 compared to a deficit of about US$13.7 million in 2007. This was largely due to the decline in tsunami related foreign grants, owing to the completion of many tsunami related projects, and due to the increase in expatriate workers who remits a large part of their earnings.
The net financial account continued to maintain a surplus in 2008, supported by private capital inflows for the new investments in the tourism sector. Reflecting the marked deterioration in the current account deficit during the year, the overall balance of payments recorded a deficit of US$ 67.8 million in 2008 compared to a surplus US$76.9 million in 2007. As a result, the gross international reserves depleted significantly during 2008, which remained at 2.1 months in terms of imports cover at the end of December 2008. A large part of the decline in reserves was owed to the increased fuel imports bill as the price of oil in world markets escalated in July 2008.
With regard to the exchange rate, Maldives continued to maintain a pegged exchange rate regime with a fixed peg to the U.S dollar; however, a liquidity shortage in the foreign exchange market became prevalent during the last quarter of the year. The Rufiyaa has been pegged to the US dollar at a buying rate Rf12.75 and a selling rate of Rf12.85 since the 9 percent devaluation in 2001. Considering the movements of Rufiyaa against other major foreign currencies, with the exception of the Japanese Yen, it depreciated against the currencies of major trading partners such as the Euro, Pound Sterling, Singapore dollar, Indian Rupee and the Sri Lankan Rupee in 2008, as the value of US dollar weakened against these countries during the year.
The external debt statistics in the country are limited only to data on public external debt (medium to long-term government and government guaranteed borrowings) and the external debt of the banking sector. Total external debt stock (disbursed and outstanding), which has been growing rapidly since 2005, reached US$969.2 million at the end of 2008. As a ratio to GDP, total external debt reached 77 percent compared to an average of 38 percent during 1999-2004. Public external debt stock (disbursed and outstanding), registered a 12 percent growth annually to reach US$471.7 million at the end of 2008. As a ratio to GDP, public external debt stood at 37 percent, down from around 40 percent in the past five years. Public sector debt service climbed to US$49.5 million at the end of 2008 from US$39.7 million at the end of 2007, while the public sector debt service ratio (as a percentage of exports of goods and services) remained at 5 percent in 2008. With regard to foreign liabilities of commercial banks, it has been growing rapidly since 2004 (from 3 percent of GDP in 2004 to 39 percent in 2008) and reached US$497.5 million by the end of 2008 as foreign owned commercial banks continue to borrow from their headquarters abroad to cater for the huge credit demand in the domestic economy.
