MALDIVES: ECONOMY GREW BY 5.7% IN 2008; DOWNTURN EXPECTED

UNCLAS SECTION 01 OF 02 COLOMBO 000395

SIPDIS

SENSITIVE

STATE FOR SCA/INS AND EEB/IFD/OMA
TREASURY FOR SUSAN CHUN

E.O 12958: N/A
TAGS: ECON EFIN EAID MV
SUBJECT: MALDIVES: ECONOMY GREW BY 5.7% IN 2008; DOWNTURN EXPECTED
IN 2009

Ref: (a) COLOMBO 273
b) 08 COLOMBO 1075


1. (U) Summary: In 2008, the Maldivian economy grew by 5.7%, down
from 7.2% growth in 2007. Tourism and fisheries, the mainstays of
the economy, fared poorly. Tourism grew by only 2.9% compared to
9.4% in 2007. The fisheries sector contracted for the second
straight year. While these key sectors underperformed,
construction, government administration, transport, communication,
electricity, water and financial services contributed to growth.
Due to high dependence on tourism, the Maldivian economy is deeply
vulnerable to the global recession. ADB forecasts growth to slow
sharply to 1.1% in 2009. End Summary.

GDP UP BY 5.7%
--------------


2. (U) According to the Maldives Monetary Authority (MMA),Maldives'
economy grew by 5.7% in 2008 - lower than its pre-tsunami average
annual growth rate of 7.4%. Growth was also slower than the 7.2%
experienced in 2007. GDP totaled around $1.2 billion, or about
$3,900 per capita. Maldives continues to have the highest
per-capita GDP in South Asia, far exceeding the average of around
$1,000 in the region. Inflation increased sharply to 12.3% in 2008
from 7.4% in 2007 as import prices for oil, food and construction
materials increased. Government expenditure also increased sharply.
Monetary growth remained high at more than 20% in 2007 and 2008.
Domestic credit to both government and private sector expanded
sharply during this period.

TOURISM GROWTH DOWN, FISHERIES HURTING,
OTHER SECTORS MANAGING
--------------


3. (U) Tourism, the most important economic sector and directly
accounting for 27% of GDP, grew by just 2.9% compared with 9.4%
growth in 2007. Arrivals rose by only 1% to 683,000. Overall
tourism income in 2008 was estimated at around $644 million. Europe
remains the largest market for Maldives (primarily UK and Italy),
accounting for more than 70% of visitors; however, arrivals from
Europe were flat in 2008. China and Japan together account for
another 11%. Tourism-related industries, such as transport and
communications, grew by 7.5%. Construction, which accounts for 6.4%
of GDP, grew by 13%. Government administration, accounting for a
significant 17% of GDP, also grew by 13%. Manufacturing accounts
for about 7% of GDP; it grew by about 2%.


4. (U) Fisheries, which accounts for only 4.2% of GDP but is
important in terms of employment and exports, recorded a 2.7%
decline in 2008. Fish exports, the largest export product of
Maldives, increased by 17% due to higher prices. This was despite a
sharp decline in the fish catch in the past two years, the reasons
for which are not clear.

TRADE DEFICIT UP
--------------


5. (U) On the external side, the trade deficit increased
significantly by 21% to $890 million. The oil bill rose
considerably by 55%. The food import bill also increased sharply by
21% to $212 million. Tourism earnings of about $700 million helped
to partly offset the large trade deficit. Maldives recorded a
current account deficit of $590 million in 2008 (47% of GDP).
Although the financial account recorded large inflows, the balance
of payments recorded a deficit of $68 million. At year end, gross
external reserves stood at $241 million, sufficient to cover 2.1
months of imports. Total outstanding external debt stock stood at
$471 million. An Indian government loan of $100 million in late
2008 helped to increase reserves.


6. (U) According to the ADB, Maldives' GDP growth is expected to
slow sharply to a mere 1.1% in 2009 and gradually recover to 1.5% in

2010. ADB says projections depend on the new government's ability
to introduce meaningful reforms and on the tourism sector's
performance. The latest statistics show a sharp 15% drop in tourist
arrivals in February following a 5% decline (year-on-year) in
January arrivals. Tourists from Maldives' two biggest markets,
Italy and UK, have seen drastic drops. President Nasheed travelled

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to Italy in February 2009 in an effort to promote tourism; he will
also meet UK tour operators during an official visit to the UK
beginning April 6. However, according to tourist industry sources,
bookings for the low season (May-September) are half the usual.
Resorts are offering special packages to minimize losses and are
trying to diversify into markets, including India.

The Road Ahead
--------------


7. (SBU) The government is forecasting a substantial drop in
revenue in 2009 due to a decline in tourist arrivals and a decrease
in revenue from import taxes. Maldives was already facing a large
budget deficit of 32% of GDP in 2009 according to estimates prepared
by the previous government and passed by the present government (ref
b). Therefore unless expenditures are rationalized significantly,
the deficit will increase further (according to some estimates to
50% of GDP) due to these losses. President Nasheed has promised to
revise the budget in early 2009. Post will report on the Maldives
government fiscal outturn for 2008 and latest budget forecasts for
2009 when the government releases its revised budget in the coming
weeks.