world-bank-warns-maldives-of-high-debt-distress

The World Bank has issued a stark warning to the Maldives, highlighting that the island nation has been spending "beyond its means" for decades, leading to high debt distress risk and significant financing challenges.

This situation has left the country highly vulnerable to economic shocks.

For decades #Maldives has been spending beyond its means. Sharp spending rise & subsidies have widened deficit, leading to a vulnerable fiscal situation & unsustainable debt. Annual debt servicing needs are likely to be $512 million for 2024 & 2025, & $1.07 billion in 2026 (1/3) pic.twitter.com/3DGDbyFwgk

— Faris H. Hadad-Zervos (@WorldBankNepal) June 10, 2024

Faris H Hadad-Zervos, the World Bank Country Director for the Maldives, Nepal, and Sri Lanka, shared these concerns in a statement posted on his official X account. He noted that the Maldives’ annual debt servicing needs are projected to be USD 512 million for the current and following years, with a significant jump to USD 1.07 billion by 2026.

This announcement follows the Maldives Ministry of Finance's recent report that public and publicly guaranteed debt has surged to nearly 110 per cent of the nation’s GDP. The Maldives, heavily reliant on tourism, was severely impacted by the COVID-19 pandemic and has only started to recover in 2023.

The Ministry of Finance's Quarterly Debt Bulletin for the first quarter of 2024, published on 1 June, revealed that the public and publicly guaranteed debt has climbed to USD 8.2 billion, equivalent to 110 per cent of GDP. The state’s debt increased by USD 90.8 million in the first three months of the year, reaching USD 8.09 billion by the end of 2023.

"For decades Maldives has been spending beyond its means. Sharp spending rise and subsidies have widened the deficit, leading to a vulnerable fiscal situation and unsustainable debt," Hadad-Zervos stated on X. 

Hadad-Zervos suggested several measures, including phasing out blanket subsidies, addressing weaknesses in state-owned enterprises (SOEs), improving healthcare spending efficiency, and streamlining the public investment programme. In a video message posted along with his statement, he remarked, "Last year, the Maldives economy hit choppy waters," attributing the slowdown to a decline in tourism receipts, which is the "nation’s economic engine."

The World Bank's latest forecast calls for fiscal consolidation, which is expected to affect real household incomes due to subsidy reforms and a reduction in government spending and investment.

The country's economy is projected to grow by 4.7 per cent this year, lower than previous estimates, indicating a moderation in growth momentum.