The overall outlook for the Maldivian economy remains positive with real GDP growth projected at a solid pace of around 6% for 2018, following strong performance in 2017, according to the annual report 2017 of Maldives Monetary Authority.
While economic growth is expected to be anchored by the strong domestic demand coming from the buoyancy in the construction sector, the favourable condition in the tourism sector is also expected to firm up during the year, according to MMA. The brisk performance of the tourism sector is mostly stemming from the increased number of tourists from the European market, reflecting improved growth prospects for that region. Premised on the positive outlook for the sector, bed nights growth is projected to firm at 7% in 2018. Although downside risks of forward booking cancellations following the domestic political tension at the turn of the year persist, overall risks to the sector outlook are broadly balanced, as the high frequency data pointed to the impact being mild.
The projections may even tilt towards the upside if the healthy performance seen in the first quarter of 2018 continues throughout the year. The average consumer price inflation is expected to hover around 0.5% in 2018, which is a significant deceleration from the 2.8% recorded in 2017. This is mainly reflecting the dissipation of the base effect from various domestic policy changes brought in 2017.
Additionally, the removal of the fuel surcharge for electricity, combined with reductions in electricity and water tariffs in the atolls, is expected to exert downward pressure on inflation during the year. Although the deceleration is projected to be more pronounced during the earlier part of the year, inflation is forecast to be on an upward trajectory during the latter part of 2018, as the base effect of lower electricity prices wanes.
Moreover, the firmer recovery in oil prices, together with the rise in government recurrent expenditure salaries in particular is expected to provide some price pressure in the economy during the year. With regard to public finances, the fiscal deficit for 2018 is projected to be USD 161 million or 3.2% of GDP, up from 2.0% of GDP in 2017. The projected widening of the fiscal deficit is based on the substantial increase in total expenditure, despite a sizable growth in total revenue. Higher expenditure is expected to outweigh revenue inflows, as a result of increases in both current and capital expenditure.
As such, increments in the salaries of civil servants and the upward revisions in food and electricity subsidies are estimated to raise current expenditure significantly, which is expected to more than offset the planned reduction in expenditure on Aasandha insurance service.
MMA believes the increase in capital expenditure is expected to be driven by continued spending on large-scale projects, as part of Public Sector Investment Programme (PSIP). Taking into account the high levels of financing required for these development projects, public debt is expected to escalate further, reaching 63% of GDP at the end of the year.
On the external front, the current account deficit is forecast to further improve to USD 860.1 million in 2018, supported by the positive prospects for the tourism sector, although import expenditure is projected to increase on the back of further strengthening of the construction sector. Meanwhile, the net inflows on the financial account are set to benefit from higher inflows that are foreseen to come from the external financing for the government and the private sector.
Mirroring these positive developments, GIR is forecast to increase to USD 727.9 million by the end of 2018, from USD 586.1 million in 2017.