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Maldives: Priorities for Agriculture and Rural Development

BACKGROUND

The Maldives is an archipelago of 1,190 Indian Ocean islands west of India spanning over 900 kilometers north to south. The total land area is less than 300 square kilometers. The estimated population in the Maldives is about 300,000 residing on198 inhabited islands. Of these islands, only 33 have a land area greater than one square kilometer. One third of the inhabited islands have a population of less than 500. An estimated 70 percent of the inhabited islands have a population of less than 1,000. The population density in the country is 977 per square kilometer; one of the highest in the world.

The Maldives has recorded remarkable economic growth over the past two decades, especially compared with the rest of the South Asian countries and is on the threshold of graduating from a Less Developed Country (LDC) status to the middle income group. Maldives has reached an impressive per capita income of US$ 2,514 in 2004 from US$ 771 in 1984 and sustained an annual average Gross Domestic Product (GDP) growth of 7.9 percent in the 15 year period to 2004.  This level of growth is all the more impressive given that Maldives lacks the resource endowments, scale of economies, and geographical diversity enjoyed by its South Asian neighbors. In addition, these economic achievements have been complemented by high literacy, low maternal and child mortality, declining poverty levels, and improvements in service delivery during the past decade. Poverty levels have dramatically declined in the Maldives from 23 percent to 8 percent during the period 1997 to 2004.

At the same time however, the Maldives economy continues to be dominated by two sectors; tourism and fisheries. Largely as a result of the December 2004 tsunami, the Maldivian economy faced major economic, fiscal, and external financing difficulties in 2005 and 2006.  Real GDP growth was -5 percent in 2005, due mainly to a major decline in tourism following the tsunami.  Although the tourism sector has recovered, other structural issues persist.  For example, income inequality has not changed appreciably between 1997 to 2004; a high proportion of economic gains have been captured by the higher income groups in the population. An increasing regional disparity between northern and southern atolls is becoming an important political issue. In addition, the country is experiencing rising unemployment (14 percent in 2004) especially among the youth (33 percent). 

Continued economic growth and social development in Maldives will require overcoming the comparative disadvantages inherent in small island economies including diseconomies of scale, high transport costs, limited natural resources outside of fish, small labor markets, and high vulnerability to external events and natural disasters as the recent tsunami so vividly highlighted.

ISSUES AND CHALLENGES

Narrow economic base: Tourism and fishing together generate an estimated 31 percent of GDP. This results in a very narrow economic base and puts Maldives at risk from economic downturn should one or both of these sectors decline, even temporarily, as evidenced by the drop in tourism following the tsunami. 

Tourism accounts for 23 percent of GDP but the growth and development strategy needs to be reviewed. Maldives is a long haul destination, more than ten hours from originating markets in western Europe with only one major airport, which is likely to be a severe constraint to market expansion. Newer investments seem to be targeted at non-traditional markets without adjustment in other parts of the supply chain to the new realities.  Although there is still great scope for tourism market development, the country’s product line appears vulnerable if there is no differentiation and segmentation from other competing countries such as Seychelles or Mauritius.  

Fisheries accounts for 8 percent of GDP. Concerns have been raised by government and other stakeholders about possible declining fish stocks in some species such as yellow fin tuna; long-term outlook for increased GDP contributions; capital/labor substitutions and continued reductions in primary fishing employment; a continued dependence on tuna (89 percent of total fish catch) and in particular skipjack tuna (78 percent of all tuna harvested); and low product diversity. Several factors that appear to be limiting more robust growth in fisheries include continued public sector involvement in the tuna industry, impediments to private sector investment, inadequate physical infrastructure for fisheries and marine transport, and limited institutional and human resource capacity, particularly in the Ministry of Fisheries, Agriculture, and Marine Resources.  The sector is also highly vulnerable to external shocks from fluctuating tuna prices in the world market.

At the same time, the country’s narrow economic base needs to be expanded, particularly agriculture, which presently accounts for less than 3 percent of GDP. Most of the domestic agriculture demand is met through imports: the ratio of food imports to domestic food production is 10:1. While some islands contain sufficient soil and water conditions to support increased agricultural production for certain horticultural products, fishing is still seen as the traditional livelihood opportunity.   The absence of a vibrant private land market limits the access to finance by prospective farmers.Transport and logistical issues also affect the supply of competitively priced inputs to agricultural islands, as well as the supply of high quality produce to the capital of Male and the major tourism islands; much as 25 percent of perishable production can spoil before reaching Male. 

Concerns over the fiscal environment: The current account deficit may have exceeded 40 percent of GDP in 2005 and 2006. Much of this was related to tsunami reconstruction and has being financed by external donors as well as by the private sector.  Unless the government moves to curb overall spending, especially by delaying or limiting the adoption of new policies with significant expenditure implications, the fiscal accounts may deteriorate further.  The portion of the deficit that is not matched by project-tied external financing will need to be met by a combination of: an increase in un-tied resources from external agencies; a reduction in expenditures and/or an increase in revenue, and (c) domestic financing from the Maldives Monetary Authority, which will contribute to a drawing down of foreign exchange reserves. 

Limited private sector investment: In all major economic sectors as well as construction, handicraft and agriculture, access and cost of finance is a major constraint. The financial sector is fairly small and domestic banks are very conservative in their lending practices; this is a far cry from the more modern and competitive banking emerging elsewhere in the South Asia region. Commercial banks are still focused on collateral rather than cash based lending. Also, there are no venture capital companies in the country to support the emerging industrialists in non-traditional and small and medium scale enterprise (SME) sectors. In addition, there is no credit information system.

Global warming and seas level rise:   Global warming could lead to an average sea level rise of up to 88 cm over the next century. For coastal states, and especially low-elevation small island states such as Maldives, the potential impacts include coastal flooding, increased storm damage, and contamination of fresh water by salt water.  Critical resources such as coral reefs are also at risk.  Given that most islands in Maldives have less than a two-meter average elevation, even a moderate rise in sea level could submerge many islands in the longer term.

PRIORITY AREAS FOR THE WORLD BANK'S SUPPORT

1. Strengthening and diversifying the economy: The economy will continue to be dominated by fisheries and tourism.  These sectors can be strengthened, while moves are made to diversify other economic sectors.

·          Tourism: The government’s recent decision to increase the speed of issuing new resort leases represents a fundamental change in Maldives’ policy of expanding the sector gradually. As part of the proposed expansion, the Government is creating a public enterprise that would hold leases at low, preferential rates in a number of islands, and sell these to new operators. It would also sell some shares on the stock market to local residents.  A more market oriented way of encouraging broader Maldivian participation would be to promote employee stock option plans, have tourism companies list on the local stock market, and provide incentives for senior managers in the industry and young entrepreneurs to become investors. While the country has adopted a sound environmental stance, some aspects like coastal zone management need attention.

·          Fisheries:Successful sector performance requires policy and structural adjustments over the next five years to support a multitude of actions by the government and the private sector. A transition strategy for the main species, skipjack tuna, must be based on the private sector and government reaching a negotiated consensus on critical adjustments. These could include revisions to current fishing leases and licenses, rapid testing and introduction of new products by all companies, and improved vertical integration, through improved fleet management.  Sector growth will depend on: (i) generation of local value added; (ii) long-term export potential; (iii) reduction of exposure to potentially low margin and volatile markets; and (iv) return on investment.   Maldives may in the near term, focus on investment in catching and processing fresh/chilled and high quality dried/smoked tuna products, selected mariculture and public/private investment in relevant infrastructure and public services.

·          Other economic sectors: The production and the productivity of many horticultural crops (vegetables and fruits) and Maldive fish can be greatly increased. There are two major potential markets for horticultural products that have not been fully exploited by local producers. The first market is the 87 tourist islands with about 650,000 visitors annually.   The second market is the local supermarkets in the capital city of Male’.Key initiatives that need to be addressed include identification of new products and technologies to stimulate increased productivity, better delivery of support services and market information, and access to credit.

2. Strengthening the fiscal environment: Further fiscal and institutional reforms will be critical. Engaging in budget support operations can facilitate this process. The government needs to increase revenue through the accelerated introduction of corporate profit taxation and a broad-based sales tax. Expenditure management should reflect realistic revenue projections, while protecting priority spending. Civil service reforms could contribute to containing general administration costs and help appropriately limit the size of the civil service and related wages.

3. Improving the conditions for private sector investment: There are a number of steps that could improve financial sector development and facilitate increased private investment. First, there is a need to introduce new products in the financial sector especially for the SMEs and provide training facilities for bank staff on development financing on a cost sharing basis. Second, is to enhance credit programs for SME lending assisted by external finance and introduction of mobile phone banking.  Third, the Government and the Maldivian Monetary Authority should consider promoting the establishment of a private Credit Information Bureau which will facilitate lending especially to new investors. Fourth, a Financial Sector Study could be undertaken to develop a sector strategy focusing on development. 

4. Preparing for sea level rise The Republic of Maldives has signed and ratified the UN Framework Convention on Climate Change (UNFCCC). Accordingly, the Maldives is now preparing a National Communications to the Conference of the Parties (COP) to the Convention. While impacts from sea level change are expected to be long term, the country needs to begin preparing now through a comprehensive strategy covering a range of possible actions including awareness raising, gradual elevation of key islands through dredging and landfill, and coordinated resettlement programs on islands with higher elevations.




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