The Maldivian economy has always been in a precarious position. As a geographically dispersed small island nation with limited natural resources a population of only around half a million people, the Maldives cannot rely on a domestic consumption-based economy to drive GDP and is heavily reliant on external income for economic growth. This is accentuated by a high dependence on imports, high reliance on foreign labour, increasing emigration of Maldivians to other countries, and increasing remittances, all of which makes the availability of sufficient foreign currency an existential challenge while putting demand pressure on the USD and leading to dollars flowing out of the economy. These, in turn, makes the high debt levels and debt-to-GDP ratio of the Maldives and low reserves of foreign currency a massive threat to the Maldivian economy and the ability to maintain citizen quality of life. The mismatch between the exchange rate peg and the informal exchange rate creates a feedback loop where the demand for dollars at official rates keeps increasing, which leads to further outflows and even more pressure on dollar prices, while further pressuring dollar reserves due to the need to release more USD into the economy to try suppress informal exchange rates.

The Maldives currently relies heavily on the tourism industry for economic survival, with a large share of this being inflows from luxury tourism. In the long-run, this requires continuous growth in the relatively narrow market of luxury tourism. Generational trends point toward a decrease in preferences for luxury tourism, with younger individuals often valuing experiences over luxury holidays. Large countries, including India and China, are also increasingly promoting local tourism as a national and rural development strategy, matter of pride in identity and heritage, and as measures transitioning from externally oriented to consumption-based economies. Meanwhile, competition from other countries for luxury tourism will continue to grow, especially as lower-income countries in Africa and Asia graduate to lower-middle-income or middle-income status and develop the infrastructure, capital, safety, and state capacity to boost their own tourism industries. The brand and name recognition of the Maldives in luxury tourism provides an edge against rising competitors, but this is still precarious. Political or civil conflict, instability, terrorist attacks, geopolitical or diplomatic issues, unforeseen public relations catastrophes, and debt crises or economic crises could all impact this brand recognition. Even if no such thing were to happen, external demand could tank the luxury tourism market, from pandemics such as we saw with the Covid-19 outbreak, to major global conflicts, to severe economic depressions that leave people without the excess funds to justify an expensive holiday.

There are already strong policies acknowledged across the country on moving towards more diversified income streams, from increasing guesthouse-based tourism, to strengthening shipping and bunkering services, to further developing the creative and technology industries to work for international clients, to increasing value-add for fisheries industries and building out aquaculture or the cultivation of higher-priced niche marine fauna and flora for international markets. The further approaches for economic diversification we propose here include further diversification of tourism and tourism-adjacent income streams, and a shift toward tourism income that will be consistent, stable, and longer-term. These are also meant to take advantage of economic opportunities provided by international trends, such as massive middle-class growth in nearby Asian regions with potential spillover effects. In particular, we propose introducing remote work visa programs and developing Hanimaadhoo Airport as a low-cost carrier hub for a complementary market that drives private sector investment in the North without cannibalizing the market segments targeted by Velana International Airport.

When it comes to economic diversification, although diversification of income from abroad is also necessary, the lack of sufficient population to support major manufacturing industries, economies of scale, or an economy fully oriented around domestic consumption does not mean that there isn't value in domestic economic diversification. Diversified domestic economies, and decentralized economic diversification models in particular, can provide economic growth and investment where we would otherwise need either increased government spending at low economies of scale to support local economies, or increased internal migration from islands to Male' for economic opportunities which would also require increased government spending on infrastructure and services within the Male' area. Political incentives are also in play for increased government spending in areas lacking economic opportunities, with research showing around 50-100 public sector SOE jobs created per seat well beyond the natural number of employees to carry out these SOE activities. Less government spending allows the government to reduce deficits or even create surpluses. Reduced deficits or debt from less spending allows the government to better manage foreign currency reserves without the need to take out more foreign loans denominated to be paid back in foreign currency.

The domestic diversification proposals that follow, along with the external income proposals above, are all designed around stabilizing and decentralizing the economy as a means of driving more equitable economic development that reduces the need for government spending. Diversification, decentralization, development, and debt management are all integrated aspects of these proposals. For the domestic economy, we propose relatively simple – in terms of logistical, budgetary, legal, and political challenges – economic policies in briefs later in this publication.