Macro-Economic Situation
Prior to the tsunami in December 2004, the Maldives had achieved high real GDP growth supported by expanding tourism and sound macroeconomic management. Income per capita rose by 60 percent over the decade up to the tsunami to above US$2,500 and social indicators had improved significantly. The economy remains vulnerable to external shocks due to its undiversified production and small size. It is also at risk from rising sea levels due to global warming.
The macroeconomic situation in the Maldives is steadily recovering from the direct and indirect impacts of the December 2004 tsunami. The tourism sector, which directly accounts for 30% of GDP, was weak during 2005. As a result, the economy contracted in 2005, with data from the Maldives Monetary Authority and the World Bank showing GDP contracting by 5.7%. Since then however, there has been a remarkable rebound and the most recent data for 2006 show tourist arrivals and bed capacity at, or even above, pre-tsunami levels.
The fiscal situation remains a concern however, with the recently agreed Budget running at 93% of GDP with a projected fiscal deficit of 9 percent of GDP. The authorities have embarked on several structural reform initiatives—fiscal, state-owned enterprise, and financial sector reforms—to create a business environment conducive to private investment and to support diversified growth. Progress has, however, been slow due in part to limited implementation capacity.
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The IFC portfolio as of end February 2007 was $68.232 million (of which $6.982m is in B loans) in five projects in the tourism, telecoms and financial services sector. LOR exposure limits have recently been raised in order to allow one specific investment in the tourism sector (Shangri La Hotel). But the increase in headroom potential allows for future, smaller investments as appropriate.
