For much of the last three decades, Maldives has been a development success story. The Maldives consists of 1,192 small tropical islands that cross strategic shipping routes, and it has a richly diverse marine environment. With more territorial sea than land, marine resources have played a vital role in shaping the contours of economic development, with nature-based tourism and fishing being the main drivers of economic growth. In the early 1980s, it was one of the world's 20 poorest countries, with a population of 156,000. Today, with a population of more than 300,000, it is a middle-income country with a per capita income of over $6,300.
Following 7.5% growth in 2011, real gross domestic product (GDP) growth was expected to slow to 3.6% in 2012, largely due to the slowdown in the tourism sector — which has a high dependence on the crisis-stricken European segment. The country's fiscal position has been under much stress following the tsunami of 2004 and continues to weaken in the face of unsustainable high public expenditures. Despite the introduction of new tax measures in 2011, revenue efforts have been compromised by far-ranging import duty rate reductions. Deficit financing has been increasingly challenging in the face of limited financing options.
Macroeconomic imbalances threaten to derail the government's development agenda. The policy response to the 2008-09 global financial crisis was partial and has left the country in a vulnerable position to withstand additional shocks. Macroeconomic imbalances, especially the fiscal deficit, and a general level of policy uncertainty are negatively affecting private-sector investment and, thereby, growth prospects. Moreover, preliminary evidence from the latest Household Income and Expenditure Survey (HIES) is showing that rising price levels are in part responsible for rising poverty rates in Male. The World Bank Group's engagement going forward will aim to support the government in reducing macroeconomic imbalances and will ensure that any project or program takes into account the risks associated with the current macroeconomic environment.
Sustaining the country's impressive human development progress will be a key challenge. Despite a dispersed population, the Maldives has achieved notable development progress in recent decades through a combination of private-sector-led tourism development and improving public service provision. Poverty rates have fallen steeply, from 40% in 1997 to 28% in 2004. Similar trends in poverty reduction emerge from the most recent HIES over the period 2003-2010. While ongoing work supported by the Bank will aim to provide more precision on the most recent trends, it is known that about 8% of Maldivians lived on less than $1.25 per day in 2009-10, compared to 9% in 2002-03.
Human development indicators such as infant mortality, maternal mortality, and educational attainment have registered improvements. The country is on track to meet most of the Millennium Development Goals (MDGs) and has already met the MDGs on eradicating extreme poverty and hunger, achieving universal primary education, reducing child mortality, improving maternal health, and combating HIV/AIDS, malaria and other diseases. Maldives remains the best-ranked country in the United Nations Development Programme's Human Development index in South East Asia (2011). It has good health indicators. Life expectancy is 74.8 years. Child mortality under 5 is 11 out of 100,000. The maternal mortality ratio is higher at 37 out of 100,000. Adult literacy stands at 98.4%. Public expenditures on combined health and education stand at 17.86% of GDP.
Maldives has made an eventful political transition recently. A strong and forceful popular demand for improved governance pressured political and institutional reforms beginning in late 2003 and led to the adoption of a "Roadmap for Reform Agenda" in early 2006. A new constitution, ratified in August 2008, paved the way for the country's first ever multi-party presidential elections in October 2008. In the election, Mohammed Nasheed of the Maldives Democratic Party (MDP) defeated former President Gayoom in the second round run-off to become the fourth president of the Maldives. However, following the resignation by Nasheed before completion of his elected term, his vice president was sworn into the presidency in February 2012.
Environmental sustainability is the fundamental development challenge in the country. Indeed, it is so critical to the future development and prosperity of the country that the new Constitution mandates the protection of the environment as a key human right. From an economic growth and development standpoint, the management of the country's natural resources and complex ecosystems will continue to determine the country's comparative advantage and growth prospects into the future. Biodiversity-based sectors contribute more than 70% of national employment, more than half of public revenues, almost the entirety of exports, and close to 80% of GDP. Both government and development partners realize the importance of environmental sustainability and are placing a high priority on work in this regard.
Maldives' vulnerability to climate change calls for innovative solutions on adaptation and mitigation. Maldives is particularly vulnerable to projected adverse consequences of climate change, including sea-level rise, increases in sea surface temperature, ocean acidification, and frequency/intensity of droughts and storms. These impacts in turn pose serious challenges in areas such as water security, biodiversity conservation, and coastal erosion that call for adaptation solutions. On climate change mitigation, Maldives is not a major emitter of greenhouse gas emissions, but it is committed to achieve energy security through a low-carbon development path. The government has declared its intention to fight climate change over the next decade, including a vision to cut carbon emissions to become a carbon-neutral nation.
Cost-effective service delivery is always a challenge in small island nations. Enshrined in the new constitution is the requirement to decentralize public services to the inhabited islands. Without careful planning, ambitious decentralization plans risk lowering the quality of service delivery while raising the costs of provision. This is particularly relevant in the provision of health services, where it will not be possible to provide a consistent level of quality health care on all islands in a fiscally sustainable manner. The provision of education services, particularly secondary and higher education, is also a concern. As a result of rising demand from an expanding pool of young secondary school completers and increasingly sophisticated skills requirements from employers, the government is seeking to expand higher secondary education and higher education. Innovative, cost-effective approaches to equip graduates with the managerial and technical skills necessary to help the country sustain economic growth and be globally competitive will be needed to achieve the government's goals. The Bank is currently involved in providing technical assistance (TA) to support the National Health Insurance Scheme in the Maldives with the counterpart agency being the National Social Protection Agency. The TA aims to support the government to undertake reforms in the health insurance scheme to build in efficient management practices, cost containment mechanisms and institutional capacity, including monitoring and evaluation systems. Financial protection from health expenses and health insurance feature prominently in the government's health master plan and have been a strategic priority for the government.
The political transition of October 2008 has also meant a change in the institutional landscape of the country. The new constitution instituted separation of powers, set up independent institutions, and guaranteed a set of fundamental rights and freedoms to the people for the first time in the history of the Maldives. These new institutions, like an independent Supreme Court, an Auditor General's Office, the new composition and functions of the Parliament, and the decentralization agenda, among many others, are meant to provide the people of Maldives with voice, accountability, and good participatory government. It is proving to be more difficult and costly to effectively deliver these services to all Maldivians than anticipated. Moreover, the uncertainty created with the uneven application of these services is contributing to the macroeconomic imbalances in the country. Contract law and financial sector regulations are two areas where the private sector is particularly concerned, and investment is being held back as a result.
Capacity constraints are affecting the ability of the public sector to provide climate-resilient infrastructure and services. Institutional capacity remains much lower than that of an average upper-middle-income country. The new constitution added additional institutional complexity without a corresponding increase in the human capital needed to make the new institutions effective. Building capacity and providing ongoing training to public servants will be an important element of modernizing the country's public service.