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Tsunami Recovery in Maldives: Tackling a Budget Crisis

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Maldives was the smallest country hit by last December’s tsunami, but in relative terms it suffered the sharpest blow. Now, more than nine months on, the country is facing severe budget and economic problems – triggered by the tsunami and rising oil prices – despite repaired tourist resorts and gradually increasing numbers of tourists.

October 3, 2005The World Bank is set to increase support for the Maldives, a country now struggling to pay for its teachers and other civil servants, in the wake of the tsunami and rising oil prices. 

The Bank’s Country Director for the Maldives, Alastair McKechnie, says the country now has a severe budget problem, partly stemming from the impact on the economy of a dramatic drop in the number of tourists since the tsunami.

“The government doesn’t have enough money and this creates a major problem in financing the delivery of services such as paying teachers,” McKechnie says.

“Indeed, the need of Maldives at present is for money that can finance the government budget and get them over this period until tourism fully recovers.”

Budget Shortfall

It’s estimated the budget shortfall for Maldives this year will be about US$95 million, with a similar amount next year.

McKechnie says while about half the amount needed can be financed domestically, the other half needs to come from international organizations and donor countries.

He says the World Bank is now working on a financing plan to provide budget support to the Maldives – in coordination with other organizations such as the Asian Development Bank and the International Monetary Fund.

“The government is also working to secure additional donor grants to help plug the gap in the budget.”

McKechnie stresses that the problems facing the Maldives are short term.

“This is a temporary problem – a problem for this year and next year. Everybody expects the Maldivian economy to recover and for the country to resume the very high rates of growth that have been so successful in almost eliminating poverty.”

McKechnie says the Bank will probably decide in January on the exact amount of additional support it will provide in the Maldives.

“The reason for that is that we need to see how our money fits in with everybody else’s, so there’s one coherent financing plan to get Maldives through this short term problem. “

Drop in Tourism

McKechnie says the Maldivian economy has been hard hit by the drop in the number of tourists – as the tourism industry traditionally accounted for a large percentage of the country’s GDP as well as a high proportion of government revenues.

 “There were a number of resorts that were damaged by the tsunami most of which have since been repaired. In fact the quality of resorts, beaches and diving is at least as good as it was before the tsunami. But overseas perceptions are slow to change and tourists have not come back in the same numbers as they did in 2004, although the gap is narrowing.”

In the first half of this year, tourism numbers were down about 50 percent. Now the number of tourists has dropped by about 30 percent. So for the year as a whole, tourism will be down by about a third.

“This has a ripple effect through to the whole economy, “McKechnie says. “It affects employment; it affects other islands where tourists visit, as well as government revenues.

“And this is the really big impact of the tsunami on the Maldives – because in the Maldives the tsunami was truly a national disaster, not a localized one as happened in the other countries.”

Higher Oil Price Shock  

McKechnie described rising oil prices as a “nasty shock “for the country.

“It’s a country that’s critically dependent on transport. It depends on air transport for tourists and marine transport for Maldivians traveling between islands.  So higher oil prices has also been another unpleasant shock on top of the tsunami.”

He says the economic impact will be severe.

“We think economic growth this year is likely to be negative by three to four percent. And this is an economy that has been growing about eight percent per annum.”

“In fact Maldives has been the success story of South Asia It’s gone from a very poor country with people living on scattered islands, to almost a middle income country – a country with per capita income of about US$2,500.”

Supporting the Recovery

The Bank has already approved US$14 million to the Maldives to help the country rebuild in the aftermath of the tsunami with about half the funding used to provide an income to people who lost their livelihoods.

McKechnie says at this stage, the overall reconstruction process is “slightly behind schedule although there are clear, visible signs of progress”

However he praises the government of the Maldives for its response to the disaster.

“They moved extraordinarily fast to provide emergency support. And this is a country where almost all of it was under water for a few hours after the tsunami. Within 24 hours, emergency supplies were reaching the affected people and the relief operation really swung into action.

Since then, he says the reconstruction process has moved forward – albeit slightly behind schedule.

He says during his recent visit, he saw about 30 new homes almost completed on one small island, with the people expected to move in November.

“‘On another island, I saw houses and shops which had been repaired through the government’s disaster management facility and at the same time, saw foundations over large parts of the island for new homes to be built by non government organizations.

At this stage, there’s still several thousand without permanent housing. Some, McKechnie says are living in “quite bad” conditions and were now getting impatient waiting for new homes. Post-tsunami reconstruction is taking place at time of constitutional reform and deepening of democratic institutions.  The Government has a challenge in producing results from reconstruction while maintaining the sound policies and low levels of external debt that have contributed to the past growth in prosperity.

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