Like several other small island nations, development in Maldives is also constrained by the absence of land based mineral resources, the limited scope for expansion of the agriculture sector, and vulnerability to natural disasters and environmental hazards. This was brought into start contrast by the phenomenal damage wreaked upon the islands by the Asian tsunami of 26 December 2004, which destroyed the nation’s economic and social infrastructure close to around 62 percent of GDP. While the country faces many development constraints similar to other developing nations, the following characteristics are noteworthy.
The Maldivian economy is heavily dependent on fisheries and tourism, which are the major sources of foreign exchange earnings and government revenue, and which together directly account for about 40 percent of gross domestic product, while indirectly accounting for a much larger proportion of GDP. In terms of employment, these two sectors alone account for more than a third of total employment, according to the results of the 2000 census. The total labour force of the country is estimated at around 50 percent of the working age population, which, coupled with the low level of educated labour, has led to a high proportion of expatriate workforce in the country. Expatriate labour has therefore played a key role in the development of the Maldivian economy, and include teachers, medical personnel and other professionals as well as a large number of lower-skilled workers such as domestic helpers and construction workers.
The development process of the country has been supported by the Government, the private sector, non-government organizations and foreign donors. While the Government has concentrated on providing basic socio-economic services, the private sector has played a key role in the development of tourism, distribution, trade, transport and fisheries among other activities. External donor assistance has been an important element of the development process. For example, in recent years, about 70 percent of total development expenditure was financed by external resources with the grant component being significantly high. In addition to official bilateral and multilateral aid flows, a number of foreign NGOs have also provided substantial assistance to the Maldives.
The Public Sector
The public sector consists of the government and state owned enterprises (SOEs), which have historically played a key role in the economy. Over the years, operations of SOEs have covered a wide range of activities including banking activities, air and sea transport, international shipping, communications and the provision of electricity, fisheries operations, tourism and importing and distributing a large share of essential food and oil products. However, in recent years there has been a move towards privatization and cutting back on the provision of services by SOEs that could more efficiently be undertaken by the private sector. Fiscal revenues constitute about 48 percent of taxes and the balance largely of profit transfers from public enterprises. As there are no taxes on personal income, capital gains, business profits (other than a bank profit tax) wealth, or real estate, the bulk of the tax revenue comprises of import duties (64 percent) and tourism tax (28 percent). On the expenditure side, social services account for around 41 percent of total expenditure whereas payments on economic services account for roughly 16 percent.
The Financial Sector
The financial sector of Maldives is very narrow and dominated by the banking sector, which consists of one locally owned commercial bank, branches of three, South Asian partly state-owned commercial banks and a branch of an international bank, the HSBC. Non-banking financial institutions in the country include players in the general insurance market, a finance leasing company, a specialized housing finance institution and money services businesses. While MMA is the primary source of domestic financing for the Government’s fiscal operations, at present the commercial banks are the principal institutions for mobilizing savings and for providing credit and foreign exchange to the private sector. Total deposits of the commercial banks stood at around 48 percent of GDP at the end of 2001, while the stock of credit extended by the banks reflected approximately 31 percent. Currently work is underway to establish a Stock Exchange and a functioning market for raising capital required by the economy. Trading arrangement facilities is conducted through the activities of the Capital Market Development Authority. There is some secondary market trading of the limited number of shares in the Bank of Maldives (BML), and two other state owned public companies – the Maldives Transport and Contracting Company (MTCC) and the State Trading Organization (STO, which are the only publicly available equity stock at present. The recently passed Securities Act paves the way for the establishment of a formal capital market and the requisite administrative arrangements are currently being finalised.
Maldives has an open economy, with a narrow export base but high dependence on imports for most of its economic activities. Consequently, foreign merchandise trade normally records a large deficit; imports have averaged around 61 percent of GDP in the last 5 years, while domestic exports, consisting primarily of fish and fish products have ranged between 11-15 percent of GDP. Services and transfers have shown a net surplus that has averaged around 34 percent of GDP in recent years, with service receipts being dominated by tourism and related activities. Nevertheless, there is usually so a significant outflow of transfers from the economy owing to the large expatriate work force that is resident in the country. Official medium and long-term debt flows and inflows of capital for direct investments dominate the capital account of the balance of payments. External debt stock of the public sector and the banking system has averaged around 38 percent of GDP during 1997-2000, with a large portion of official debt being received on highly concessional terms. Statistics on the level of indebtedness of the private sector at a given point in time are not readily available.
There is no exchange control legislation in Maldives. Both residents and non-residents may freely import and export capital through the foreign exchange market. Residents do not require permission to maintain foreign currency accounts either at home or abroad and there is no distinction made between foreign national or non-residents accounts held with the banks operating in Maldives. As regards foreign direct investment in the country, investments require prior approval of the Government and are currently charged an annual royalty, the amount of which is negotiated between the Government and the investor. There are no restrictions on transferring of profits.
Maldives uses import duties as its main source of tax revenue. At present, ad valorem tariffs are levied on the c.i.f. value of imports; export duty is levied only on ambergris, on which 50 percent is imposed. However, in light of various trade negotiations, in particular the SAFTA, it is likely that the import duty structure will be further rationalized and the Government has announced plans to introduce a corporate profit tax in the next few years.
Maldives has experienced rapid economic growth and development in recent years, supported by a dynamic tourism sector. However, the susceptibility of the economy to factors beyond its control was augmented in the wake of the devastation wrought by the December 2004 tsunami and the decline in tourism following the September 11 terrorist attacks in USA. Each such incident underscores the fact that the country needs to diversify its economic base, rationalise its development objectives and further enhance the role of the private sector in the developmental process in order to reduce the vulnerabilities on the external accounts and maintain a sustainable level of economic growth.
For further information on the economy of the Maldives please visit The Maldives Monetary Authority.
The Maldives Monetary Authority regularly release statistics and publications on the Maldivian economy: