Tourism Can’t Save Maldives from Debt Trap Without Fiscal Reform, Says World Bank

The World Bank’s Maldives Development Update (October 2025) warns that the nation faces acute fiscal and external vulnerabilities, with soaring debt, dwindling reserves, and rising inflation threatening stability. It urges urgent fiscal reforms and a credible financing plan to prevent a looming debt and liquidity crisis.

The Maldives Development Update (October 2025), prepared by the World Bank in partnership with the Maldives Monetary Authority (MMA), Ministry of Finance and Planning (MoFP), Maldives Bureau of Statistics (MBS), and Ministry of Tourism and Environment (MoTE), offers a sobering analysis of the country’s economy. While tourism continues to sustain growth, the report warns that the Maldives remains at high risk of debt and liquidity distress. Despite temporary improvements in fiscal and reserve indicators, the economy faces mounting pressures from soaring debt, currency shortages, and delayed reforms.

Growth Weakens as Tourism Plateaus

Economic growth slowed dramatically in early 2025, expanding by just 2.5 percent compared to 6.4 percent a year earlier. Tourist arrivals rose 9.4 percent as of August, but the average stay shortened to 6.8 days from 7.6 in 2024, curbing overall spending. The fisheries sector rebounded after a poor 2024, with exports jumping nearly 70 percent, yet the broader non-tourism economy contracted. Inflation surged to 5 percent in the first half of 2025, driven by rising food, fish, and restaurant costs, hitting outer atolls hardest. While subsidies and lower electricity tariffs eased price pressures, heavy import dependence and foreign exchange (FX) shortages have kept inflation elevated, squeezing household budgets.

Fiscal Gains Mask Rising Arrears

The government posted a small mid-year fiscal surplus of 1.1 percent of GDP, but this reflected severe spending cuts rather than fiscal prudence. Capital expenditure was slashed by more than 60 percent, while payment arrears accumulated across sectors. Power outages and unpaid health sector bills illustrate the liquidity crisis. The Maldives’ public and publicly guaranteed debt rose to 127 percent of GDP, with domestic banks now holding nearly 70 percent of this exposure. External debt servicing is expected to soar to US$900 million in 2025 and US$1.5 billion in 2026, when a US$500 million Sukuk bond and a US$100 million private placement come due. After Fitch and Moody’s downgraded the country in 2024, access to new external financing has tightened, forcing reliance on costly domestic and bilateral loans.

FX Shortages and Policy Strain

The current account deficit narrowed to 15.3 percent of GDP in 2025 as exports rose and imports declined, but reserves remain dangerously low. Official reserves rebounded from a historic low of US$371 million in late 2024 to US$774 million by mid-2025, equal to only 1.8 months of import cover. Usable reserves, however, cover less than one month of essential imports. The MMA introduced a Foreign Currency Act requiring tourism and large FX-earning businesses to convert part of their foreign income into rufiyaa, strengthening official reserves but draining FX liquidity from private banks. To ease pressure, the authority reduced the foreign currency reserve ratio from 7.5 to 5 percent and allowed greater dollar flexibility. Yet the gap between the official exchange rate (MVR 15.42 per US$) and the parallel market rate, MVR 20.2 in July 2025, has widened alarmingly. Traders still struggle to source dollars even at premium rates, intensifying import delays and inflationary pressures.

Households and Banks Under Pressure

The Maldives’ redistributive model, funding welfare through tourism revenue, remains under stress. Although poverty declined from 11.2 percent in 2019 to 8.7 percent in 2024, rising prices and fiscal tightening now threaten welfare gains. With 30 percent of the workforce employed in public services, limited fiscal space could squeeze job creation and deepen gender inequalities, as most government employees are women. Meanwhile, the banking sector’s resilience looks overstated. While capital adequacy stands at 50 percent, well above regulatory norms, sovereign exposure carries zero risk weighting. Nonperforming loans climbed to 7 percent of total credit, and a government audit revealed that 41 percent of SME loans from the SME Development Finance Corporation (SDFC) had soured. Credit growth has slowed to 6 percent, and deposit growth, mainly in local currency, has accelerated, reflecting the impact of new FX rules.

A Narrow Window for Reform

The medium-term outlook remains fragile. GDP growth is projected to average around 4 percent through 2027, supported by the new Velana International Airport terminal. Inflation will stay high at 4.6 percent in 2025 before easing modestly, while fiscal and external deficits persist. Public debt is expected to remain above 135 percent of GDP, with debt service exceeding US$1.5 billion in 2026, far beyond the country’s current financing capacity. The Sovereign Development Fund, holding just US$80 million, is insufficient to meet external obligations.

The World Bank urges urgent and credible reforms to avert a fiscal and external crisis. Priorities include phasing out blanket subsidies in favor of targeted cash transfers, reforming the Aasandha health insurance scheme for cost efficiency, improving SOE governance, and rationalizing capital spending under the Public Sector Investment Program (PSIP). The report concludes that the Maldives’ dependence on tourism-driven revenue and unsustainable borrowing has left the economy dangerously exposed. Without a sharp fiscal adjustment and a realistic financing strategy, the nation risks sliding into a debt and liquidity crisis, even as it continues to rely on the very sector that makes it so vulnerable.