The Maldivian economy faces persistent fiscal and external vulnerabilities despite temporary improvements in fiscal and reserve positions. In early 2025, economic growth moderated due to a slower growth in the tourism sector, while inflation increased significantly, driven by elevated food and service prices. Although the fiscal account improved with a temporary surplus, this was largely due to a sharp reduction in capital expenditure, likely accompanied by rising arrears. Total public and publicly guaranteed debt increased further, reaching 126.9 percent of GDP in early 2025, with an increasing reliance on domestic financing given constrained external financing options. Foreign exchange liquidity pressures remain acute. Despite some recovery in official reserves, the coverage of usable reserves - less short-term essential imports and external debt service needs - remains low. The banking sector's exposure to the sovereign further increased, raising financial sector risks. The current account deficit is expected to narrow due to stronger fish exports and tourism receipts. However, medium-term projections suggest slower growth, elevated inflation, and rising fiscal deficits, with public debt expected to average 135 percent of GDP. A large fiscal adjustment and credible financing strategy are urgently needed to restore macroeconomic stability and mitigate downside risks
