Maldives faces debt, reserve, growth challenges, World Bank report finds

The World Bank has projected that the Maldivian economy will contract by 0.7 per cent in 2026, citing pressures from lower tourism activity, higher oil prices and external financing constraints.

The assessment was made in the World Bank's June 2026 Maldives Development Update, released last week.

According to the report, the country's official foreign exchange reserves rose to USD 1.3 billion in March, supported by external financing and foreign exchange regulations requiring tourism businesses to convert part of their earnings through local banks.

However, reserves declined following the repayment of a USD 500 million sovereign sukuk and the settlement of a USD 400 million currency swap arrangement with India in April.

The report stated that official reserves fell to USD 717.9 million, equivalent to 1.4 months of import cover.

Usable reserves, which represent readily available foreign currency resources, declined to USD 147.7 million in April, covering approximately 0.3 months of imports.

While the settlement of the sukuk reduced immediate refinancing pressures and contributed to a recent credit rating upgrade by Fitch, the World Bank noted that the Maldives still faces around USD 600 million in external debt service obligations during the remainder of the year.

The report warned that prolonged instability in the Middle East could widen the current account deficit, reduce foreign currency inflows and increase challenges associated with debt servicing.

The World Bank said economic growth, which reached 6.3 per cent in 2025, is expected to decline to -0.7 per cent this year.

The slowdown is linked to reduced tourist arrivals, flight disruptions associated with developments in the Middle East, higher fuel prices and difficulties in securing external financing.

According to the report, tourist arrivals fell by more than 20 per cent in March and April compared with previous levels, affecting employment and income within the tourism sector.

The World Bank noted that some tourism businesses have reduced working hours and placed employees on leave rather than implementing large-scale job cuts.

As a result, the unemployment rate is estimated to have increased by 0.4 percentage points.

The report added that income among some workers in informal employment has declined by between 1 and 2 per cent.

The report projects inflation to rise from 4.0 per cent in 2025 to 6.0 per cent in 2026, driven by increases in global commodity prices and foreign currency shortages.

Given the Maldives' dependence on imported goods, the World Bank said higher prices are likely to have a direct impact on household spending.

According to the report, a 10 per cent increase in food prices could raise the poverty rate by 1.6 percentage points.

The World Bank also estimated that 48.9 per cent of households remain vulnerable to falling into poverty following economic shocks.

The report noted that the impact is likely to be more pronounced outside the capital, where most low-income households are located.

The World Bank said the fiscal deficit narrowed in 2025 partly through reductions in capital expenditure. However, it noted that some expenditure obligations were deferred, contributing to an increase in payment arrears.

According to the report, total public debt reached 129.7 per cent of gross domestic product (GDP) in 2025 and could exceed 140 per cent in the medium term if reforms are not implemented.

The report also highlighted increased reliance on domestic borrowing as access to foreign financing became more constrained.

Government and state-owned enterprise debt now accounts for around 40 per cent of the assets held by domestic banks and the Maldives Monetary Authority, the report said.

The World Bank stressed the importance of implementing fiscal and structural reforms to strengthen public finances and support economic stability.

Among its recommendations were:

The report concluded that reform measures should be accompanied by support mechanisms to protect vulnerable households while maintaining fiscal discipline and ensuring sustainable debt management.