News DeskMalé, Maldives- The Maldives’ uphill battle to establish a viable sovereign wealth fund offers a cautionary tale about the challenges developing nations face in trying to secure their economic futures amid global volatility and external shocks.
Like many resource-dependent countries, the Maldives has lofty ambitions of creating a rainy day savings vehicle to finance debt repayments and provide an investment income cushion for future generations. Maldives Sovereign Development Fund aims to reach $400 million by 2026, funded largely by tourism airport fees.
However, the Maldives is grappling with economic realities that underscore the fragility of such funds for developing economies heavily reliant on industries like tourism that are highly vulnerable to exogenous events like the Covid-19 pandemic.
At the launch of the World Bank’s Maldives Development Update, Finance Minister Dr. Mohammed Shafeeq struck a stern tone, vowing that the government is “serious” about enacting austerity measures and has the “guts” to follow through on painful reforms. “We will continue the PSIP projects with social and political consequences. But we will take measures to reduce recurrent expenditure and capital expenditure,” he declared.
The sovereign fund’s path has been turbulent since its 2017 inception. Contributions have fluctuated according to state finances, and a draft law to bolster the fund’s governance by shifting control from the central bank MMA stalled in parliament this year amid political headwinds.
This fits a broader pattern seen across the developing world of public investment funds struggling with issues like unclear legal frameworks, lack of transparency and susceptibility to mismanagement or domestic political pressures sapping resources.
“The Maldives recognizes that entrenching best practices around transparency and prudent investing is crucial,” said former Finance Minister Ibrahim Ameer, drawing on lessons from well-established sovereign wealth funds in countries like Norway and the UAE.
However, he said comprehensive legislation to regulate the Maldives fund’s operations and investing strategies in line with global benchmarks “has languished in the legislature.”
The challenges facing the small island nation illustrate the complexities resource-dependent developing economies worldwide face in trying to establish effective sovereign wealth funds as economic stabilizers and generational reservoirs of public wealth.
Many countries have seen such funds drained to cover budget deficits or become victims of misgovernance and corruption. Even some wealthier nations like Saudi Arabia have been forced to draw down on their funds to weather market turmoil.
For the Maldives, its sovereign development dream remains trapped between grand ambitions and harsh ground realities that are symptomatic of the vulnerabilities small, undiversified economies face in pursuit of long-term financial security.
The World Bank forecasts Maldives’ economic growth at just 4.7% this year, weighed down by declining tourist spending and stays in the luxury resort destination. As Dr. Muizzu’s government continues paying “lip service to fiscal reform,” to quote present and former officials, referring to the high paid political positions in the administration, the viability of its sovereign wealth vision hangs in perpetual uncertainty.
This year’s World Bank report is titled “Scaling Back and Rebuilding Buffers.” The report also noted that measures to reduce costs should be taken as soon as possible. Mr. Shafeeq acknowledged the dire situation, saying, “We cannot restore the country’s economy without reform measures due to the high debt.”
The World Bank forecasts the economy to grow by 4.7 percent this year, far below the government’s projections. One of the biggest reasons for the slowdown, the report said, is low tourist spending and a declining length of stay in the Maldives.
