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Maldives; Overview of Economic Developments During 2003

Maldives Monitory Authority (MMA) www.mma.gov.mv (This review is based on information available as at 10th March 2004)

External Debt

Statistics on external debt comprises of medium to long-term government and government guaranteed borrowings plus short-term borrowings of the banking sector. Total external debt stock (disbursed and outstanding) has remained at around 40 percent of GDP in both 2002 and 2003. In absolute levels this amounted to US$259.0 million in 2002 and had increased by 8 percent to US$280.9 million at the end of 2003. Of this total, 94 percent was medium- and long-term debt and it increased by 18 percent in 2003. Multilateral and bilateral highly concessional debt constituting 70 percent of the medium to long-term external debt portfolio grew by 12 percent on annual terms in 2003. The remaining 30 percent comprised of suppliers’ credits (which sometimes include a grant element within the package) and commercial loans, and such debt increased significantly (by 37 percent) during the year 2003. Short-term debt, which reflects the foreign liabilities of commercial banks, comprised 6 percent of the external debt stock and registered a sharp decline of 54 percent at the end of 2003.

During 2003, disbursements of medium and long-term loans stood at US$51.1 million, while amortisation was recorded at US$17.4 million, and interest payments amounted to US$4.6 million. Total debt service therefore totalled US$22.0 million, which was equivalent of around 4 percent of Maldives’ exports of goods and non-factor services.

"As regards the financing of the budget deficit, it was wholly financed through foreign borrowings in 2003. Moreover, domestic financing turned negative at the end of the year, with the government making net repayments on its borrowings from Maldives Monetary Authority (MMA)."

Macroeconomic developments were largely favourable in 2003, with real economic growth accelerating during the year. In spite of the turbulence in the international environment with the war in Iraq and the SARS epidemic in the early part of the year, the tourism sector performed exceptionally well, registering a double-digit growth rate in 2003. The dynamic developments in the tourism sector coupled with the expansion in fisheries activities, especially on the export front, exerted strong expansionary impact on other major sectors such as commerce, construction, transport and communication. With government revenue exceeding targets and expenditure remaining within budgeted levels, the fiscal out-turn improved during the year 2003, leading to a significant decline in net claims on the government by the banking system. This, coupled with the slow-down in private sector credit growth during the year, led to a decline in total domestic credit in the banking system at the end of 2003. As regards other monetary aggregates, the rapid growth in net foreign assets contributed to the expansion in the total liquidity in the banking system. On the external accounts, the current account deficit widened despite the improvement in the services account. However, owing to large capital inflows during the year, overall balance of payments remained positive and improved markedly at the end of 2003.

Production, Prices and Employment

The real economic growth accelerated further to 8.4 percent in 2003 after a strong growth of 6.5 percent in 2002, largely on the strength of the rapid recovery of the tourism sector following the slow-down in the aftermath of the September 11th events. Reflecting the rise in Gross Domestic Product (GDP) of the country and the decelerating population growth rate, GDP per capita (at 1995 constant prices) edged up from Rf24,925.5 in 2002 to Rf26,601.3 in 2003. As regards the domestic price developments, inflation rate (measured in terms of changes in Consumer Price Index) stood at negative 4 percent in 2003, following a rate of 0.9 percent in 2002. The most significant declines were registered in fish prices (24 percent) followed by food (excluding fish) prices (6 percent).

Economic Indicators, 1999 - 2003
		1999	2000	2001	2002	2003

GDP ^1/
RGDP (1995 constant prices) Rf mn.		6,056.6	6,345.5	6,564.4	6,992.8	7,583.1
RGDP growth rate (%)		7.2	4.8	3.5	6.5	8.4

TOURISM
Tourist arrivals ('000)		429.7	467.2	461.0	484.7	563.6
Tourist bed nights ('000)		3,718	3,937	3,933	4,066	4,705
Bed capacity (Resorts/Hotels)		14,652	15,812	16,478	16,131	16,692
Capacity utilization rate (%)		69.7	68.2	65.6	69.0	77.2

FISH PRODUCTION
Landings('000 MTs) ^2/		123.3	115.4	125.0	160.2	152.2
Total fish exports ('000 MTs)		37.6	28.3	29.7	44.6	69.8
Total fish exports (US$ mn.)		34.4	34.0	35.8	49.2	69.1

CONSUMER PRICE INDEX (CPI)
Consumer Price Index		116.0	114.6	115.4	116.4	111.7
Percentage change in CPI (12 month moving average)		3.0	-1.2	0.7	0.9	-4.0

EMPLOYMENT
Government employees		19,748	20,336	21,705	23,464	24,233
Total expatriate labour force		26,468	27,716	29,201	30,664	33,765

PUBLIC FINANCE ^3/
Total revenue and grant		2,225.3	2,372.7	2,522.6	2,714.9	3,061.8
	o.w. Tourism tax	276.0	276.6	292.7	305.2	356.9
	o.w. Import duty	628.5	652.6	661.7	692.1	783.8
Expenditure and net lending		2,506.4	2,694.2	2,885.9	3,117.3	3,428.4
Overall deficit		-281.1	-321.5	-363.3	-402.4	-366.6

MONEY AND BANKING (Rf mn)
Net foreign assets		1,405.4	1,312.2	1,153.0	1,662.9	2,613.4
Domestic credit		2,259.3	2,586.8	3,089.9	3,445.7	3,246.6
	Net credit to govt.	760.2	995.0	1,078.6	1,113.9	911.8
	Net credit to private sector	1,302.8	1,407.1	1,827.2	2,100.8	2,244.4
Total Liquidity (M2)		2,929.8	3,049.8	3,324.7	3,966.4	4,543.7
Narrow Money (M1)		1,585.2	1,760.4	1,655.9	1,886.7	2,105.4

BALANCE OF PAYMENTS (US$ mn) ^4/
Merchandise Exports (f.o.b.)		91.5	108.7	110.2	132.3	149.2
Merchandise Imports (f.o.b.)		-353.9	-342.0	-346.3	-344.7	-407.2
Services (net)		203.6	208.8	207.0	216.3	256.0
Current account balance		-78.9	-51.5	-58.7	-35.7	-48.1
Non-monetary capital (net)		71.7	43.5	37.3	75.5	103.6
Overall balance		-7.2	-7.9	-21.4	39.8	55.5

EXTERNAL RESERVES
Gross international reserves (US$ mn)^5/		128.5	124.1	94.3	134.5	161.0
External reserves in months of merchandise imports (c.i.f.)		3.8	3.8	2.9	4.1	4.1

EXTERNAL PUBLIC DEBT (Medium & Long Term)
Debt outstanding and disbursed		185.6	178.0	181.5	223.1	264.2
Disbursements		17.6	12.4	23.4	43.5	51.1
Amortization		12.5	14.3	15.6	16.7	17.4
Total debt service		16.8	19.0	20.1	21.2	22.0
Debt service ratio (%) ^6/		3.9	4.2	4.3	4.3	3.9

EXCHANGE RATE
Rufiyaa / US$ (period average mid rate)		11.77	11.77	12.24	12.80	12.80
Rufiyaa / US$ (end of period mid rate)		11.77	11.77	12.80	12.80	12.80


1/GDP figures for 1999 -2000 are revised estimates of 10th Nov 2002, figures for 2001 are revised estimates of 16th Dec 2002 and figures for 2002-2003 are revised estimates of 24th Dec 2003.
2/Figures for 1999-2002 are actuals, and figures for 2003 are provisional estimates.
3/BOP figures for 1999-2002 are actuals, 2003 figures are revised estimates as at 23rd Dec 2003
4/ Foreign Assets of MMA.
5/2003 data were revised in 23rd June 2003.
6/ Ratio of debt service to exports of goods and nonfactor services.
Source: MMA, MPND, MOT, MHREL, MOFAMR, MoFT, Maldives Customs Service, President's Office.

The tourism sector accounted for 33 percent of GDP and 31 percent of domestic revenue in 2003. In addition, foreign exchange earnings from tourism accounted for over 90 percent of the services receipts of the balance of payments. The value added to GDP by the tourism sector grew by a substantial 15 percent in 2003 compared to a 3 percent growth in 2002. The number of tourists who visited the country registered a 16 percent increase in 2003, passing the half a million mark in November and totalling 563.6 thousand for the year. Total tourist bednights also rose by the same magnitude at 16 percent in 2003, with the average length of a tourist visit at 8.4 days. As some resorts that were under renovation in 2002 became operational in 2003, average bed capacity in the tourist resorts increased from 15,461 beds in 2002 to 16,022 beds in 2003, with the number of resorts in the country remaining at 87 as in the previous year. Average annual capacity utilization rate also rose from 69 percent in 2002 to 77 percent in 2003.

Fisheries sector remains important to the vast majority of the local population and employs about 11 percent of the labour force. To expand the fisheries sector and increase the private sector participation in the secondary production side, the Government has recently initiated a fisheries sector liberalisation program. Under this program, in 2001 two parties were awarded licenses to process and export tuna bought from local fishermen from Zone 1 and started their operations in 2002. Two more parties received licenses in September 2003 to carry out similar activities in Zone 3. Maldives Industrial Fisheries Company Ltd (MIFCO) continues to operate in Zone 2 and 4.

The value added to GDP by the fisheries sector showed a slight decline from 7.1 percent in 2002 to 6.6 percent in 2003. As 2002 was an exceptionally good year in fishing, the annual GDP growth rate in fisheries sector decelerated sharply to 2 percent in 2003, following a 23 percent growth in 2002. The growth in 2002 was largely due to the developments in the coastal fish catch, which after increasing by 28 percent during the year, declined by 5 percent in 2003. In absolute terms, total coastal fish catch declined from 160.2 thousand metric tonnes in 2002 to 152.2 thousand metric tonnes in 2003. However, it should be noted that fish catch in 2003 stood significantly higher than the past years excluding 2002. As regard the export activities in the sector, fish exports earnings registered a 41 percent increase in 2003 following a 37 percent increase in 2002, mainly on the strength of the large frozen tuna exports during both the years. Earnings from export of frozen tuna (60 percent of total fish exports) grew by over 52 percent to reach US$41.8 million in 2003. The private sector parties operating in zones 1 and 3 accounted for 15 percent of the frozen tuna exports and 11 percent of earnings from such exports in 2003. In absolute levels, their export volume totalled 7.9 thousand metric tonnes and earning amounted to US$4.7 million in 2003. Meanwhile, the total volume of canned fish and dried fish exports (each accounting for around 10 percent of total fish exports) increased by 23 percent and 17 percent respectively, while earnings from both increased by 21 percent registering US$12.1 million and US$10.9 million respectively. The unit value of frozen tuna stood 9 percent lower in 2003 compared to the previous year and while that of canned tuna also registered a 2 percent decline during this period. In contrast, the unit value of dried fish exports showed a 3 percent increase over 2002.

Underpinned by the rapid expansion in the tourism sector, transport and communication activities have increased significantly in recent years, with the sector contributing to about 14 percent of GDP in 2003 and registering an annual growth of 8 percent during the year. The construction sector, which has contributed to around 3.4 percent of GDP during the past four years, after registering a negative growth of 1 percent in 2002 grew rapidly in 2003 by 16 percent. Apart from various government projects that involved the construction sector, especially the large-scale developments in Hulhumale’, some tourist resorts also undertook large-scale renovation activities during the year. Moreover, the favourable economic growth during the year boosted private sector construction activities as more income was generated in the economy. The distribution sector (wholesale and retail trade) contributed to around 4 percent of GDP and grew by 5 percent in 2003 after a 2.3 percent growth in 2002, reflecting the positive developments in the tourism, fisheries and construction sectors

Total employment in the economy stood at 86,245 according to the 2000 census, which was a 29 percent increase from the 1995 census. At the end of 2003, total public sector employment stood at 24,233 and increased by about 3 percent from 2002, with the highest increase seen in the government service sector. In the private sector, demand continued to be high in the labour market. While detailed employment statistics are not available on an annual basis, expatriate employment data indicates that the number of foreign workers in the country increased from 30,664 workers at the end of 2002 to 33,765 workers at the end of 2003, reflecting a 10 percent increase during the period. Of such workers, 28 percent were employed in the tourism sector, 19 percent in construction, 7 percent in the education sector and 8 percent in the manufacturing sector. The largest increase in expatriate workers in 2003 was in the construction industry, and a significant proportion of this was on account of the large construction activities in Hulhumale’ during the year.

Public Finance

On the fiscal front, the budget deficit declined from 5 percent of GDP in 2002 to 4 percent of GDP in 2003, with the deficit narrowing by 9 percent during the period. Reflecting the favourable economic developments, total revenue and grants grew by 13 percent in 2003, with the total revenue increasing by 14 percent, which was 2 percent higher than budgeted for the year. Of the major components on revenue, receipts from tourism tax increased by 17 percent and revenue from import duty increased by 13 percent, while the dividend payments by the public enterprises rose by 35 percent annually in 2003. These three sources of revenue constituted 59 percent of domestic revenue. Meanwhile, the amount of grants received during the year declined further by 8 percent in 2003, following a 37 percent decline in 2002. On the expenditure side, total expenditure and net lending during the year 2003 remained lower than the budgeted figures, mainly due to lower than anticipated capital expenditure. However, the annual growth in total expenditure accelerated from 8 percent in 2002 to 10 percent in 2003. Current expenditure, accounting for 69 percent of total expenditure and net lending, grew at an annual rate of 13 percent in 2003 compared to 7 percent in the previous year. Capital expenditure accelerated from a growth of 9 percent in 2002 to a growth of 12 percent growth in 2003. About 49 percent of current expenditure and 42 percent of capital expenditure during 2003 were spent on social services, mainly on education, health and community programs. In recent years, growth in government expenditure on current spending has been more rapid, with current expenditure as a percent of GDP rising from 22 percent in 1999 to 27 percent in 2003, whereas capital expenditure as a percent of GDP has remained much lower at about 12 to 14 percent during this period. As regards the financing of the budget deficit, it was wholly financed through foreign borrowings in 2003. Moreover, domestic financing turned negative at the end of the year, with the government making net repayments on its borrowings from Maldives Monetary Authority (MMA).

Money and Credit

Favourable developments in the real sector and the improvement in the budgetary performance also contributed towards the strengthening of the monetary indicators. The main monetary policy instruments in use are the Minimum Reserve Requirement (MRR) imposed on commercial banks’ total rufiyaa and foreign currency demand and time deposits and MMA Certificates of Deposit. While several reform measures were introduced during 2001 to move towards a more market based monetary policy regime, there continue to be some inefficiencies in this area, mainly in relation to the MRR. Although this instrument acts as a safety net for depositors, it distorts the interest rate structure. Hence, MMA reduced the MRR from 35 percent to 30 percent in August 2003, with plans for a gradual step-wise reduction of the rate at prudent intervals in the near future. At the same time, the interest rate on the MMA CDs was also reduced from 8 percent to 6 percent.

As regards the main monetary aggregates, total domestic credit of the banking system declined by 6 percent at the end of 2003, mainly due to the significant reduction in the net claims on government. Meanwhile, annual growth in commercial banks’ credit to the private sector also slowed down during 2003 to 7 percent following double digits growth rates in 2001 and 2002, subsequent to the removal of credit ceilings in July 2001. However, with the favourable developments in the economy, the net foreign assets of the banking system registered a substantial improvement of 57 percent in 2003. The contribution of growth came from both the rapid increase in the MMA foreign assets as well as from the significant turnaround of the commercial banks’ net foreign assets position from negative to positive in 2003. Fuelled by the sharp increase in net foreign assets, total liquidity in the banking system increased by 15 percent at the end of the year, though the growth rate has decelerated from the 19 percent registered at the end of 2002.

External Sector

The current account of the balance of payments deteriorated significantly in 2003, with the deficit widening by 35 percent from US$35.7 million in 2002 to US$48.1 million in 2003. This was largely on account of the expansion in the merchandise trade deficit, which increased by 21 percent during the year, as growth in imports far exceeded the growth in exports. However, with the increase in tourist arrivals during the year, net services were significantly positive reflecting an 18 percent increase from 2002. The transfers account continued to register a deficit in 2003 owing to the large amount of remittances by the expatriate labour force in the country, concurrent with the decline in official transfers (grants) during the year. As regards the balance on non-monetary capital account, official capital increased by 26 percent in 2003 to US$33.8 million from US$26.8 million in 2002. Meanwhile, private capital flows were estimated to increase by 67 percent, which reflected investment in the renovation of two big tourist resorts and increased capital investment flows to Maldives Finance Leasing Company (MFLC) among others. Hence, with the large increase in net capital inflows into the country during 2003, the overall balance of payments improved significantly from a net inflow of US$39.8 million in 2002 to a net inflow of US$55.5 million in 2003.

Maldives continued to maintain a pegged exchange rate arrangement, with the rufiyaa pegged to the US dollar at a mid rate of Rf12.80 per US dollar, since the 9 percent devaluation of the rufiyaa in July 2001. With the dollar weakening in the international currency markets towards the end of 2003, the rufiyaa also depreciated against major currencies. As such, the rufiyaa depreciated by over 22 percent against the euro, 14 percent against the Japanese yen, 11 percent against the Sterling pound, 6 percent against the Indian rupee, 3 percent against the Singapore dollar and by 0.1 percent against the Sri Lankan rupee at the end of 2003, on annual terms. The weaker dollar relative to the euro has increased the competitiveness of the Maldivian tourism industry, as the majority of tourists visiting the country are from Europe. Hence, with the positive developments in the tourism and fisheries sector substantially increasing the inflow of foreign exchange into the country and the rapid build up of official reserves during 2003, the foreign exchange market conditions appeared to be stable, with no indication of foreign exchange pressures. The gross international reserves at the end of 2003 totalled US$161.0 million, which was about US$26.5 million higher than the previous year. As a result, despite the higher average monthly imports during 2003, the ratio of external reserves in months of imports was maintained at 4.1 months in 2003, same as in 2002.

External Debt

Statistics on external debt comprises of medium to long-term government and government guaranteed borrowings plus short-term borrowings of the banking sector. Total external debt stock (disbursed and outstanding) has remained at around 40 percent of GDP in both 2002 and 2003. In absolute levels this amounted to US$259.0 million in 2002 and had increased by 8 percent to US$280.9 million at the end of 2003. Of this total, 94 percent was medium- and long-term debt and it increased by 18 percent in 2003. Multilateral and bilateral highly concessional debt constituting 70 percent of the medium to long-term external debt portfolio grew by 12 percent on annual terms in 2003. The remaining 30 percent comprised of suppliers’ credits (which sometimes include a grant element within the package) and commercial loans, and such debt increased significantly (by 37 percent) during the year 2003. Short-term debt, which reflects the foreign liabilities of commercial banks, comprised 6 percent of the external debt stock and registered a sharp decline of 54 percent at the end of 2003.

During 2003, disbursements of medium and long-term loans stood at US$51.1 million, while amortisation was recorded at US$17.4 million, and interest payments amounted to US$4.6 million. Total debt service therefore totalled US$22.0 million, which was equivalent of around 4 percent of Maldives’ exports of goods and non-factor services.