The Maldives government has decided to hike tourism-related taxes in a belated push for sorely needed economic reforms.
Government-sponsored bills were submitted to Parliament this week to double the green tax, hike the departure fee and airport service charge, and raise the tourism goods and services tax (T-GST).
The move came after the World Bank reiterated that a “large fiscal consolidation is urgently required to regain fiscal and debt sustainability and ease liquidity pressures,” referring to foreign exchange reserves plunging to “critically low levels” due to rising debt repayment.
“Despite the government’s announcement of a homegrown fiscal reform agenda in February 2024, the policies are yet to be endorsed and implemented,” the World Bank observed in a biannual economic update released on October 10. “Implementing these reforms is key to easing current liquidity pressures and bringing the budget closer to balance.”
The Maldives’ official reserves of $322 million at the end of September were barely enough to cover imports for a month and far below debt service needs, projected at $615.6 million in 2025 and $1.07 billion in 2026.
According to the proposed revenue measures, T-GST will rise from 16 percent to 17 percent in June 2024. The green tax — a daily fee levied on each tourist — will be doubled on January 1 from $3 to $6 per day for tourists staying at guesthouses and hotels with fewer than 50 rooms, and from $6 to $12 per day for tourists staying at resorts and other establishments.
Starting on December 1 this year, the departure fee and airport service charge will rise from $30 to $50 for economy class passengers, $60 to $120 for business class passengers, $90 to $240 for first class passengers, and $120 to $480 for passengers on private jets. Both taxes will remain unchanged at $12 for Maldivians traveling overseas on economy class, but the higher rates will apply for local passengers on business class and above.
The tax hikes are expected to generate 2.7 billion Maldivian rufiyaas ($175 million) in additional revenue.
The bills were introduced to Parliament on October 14. In an expedited process on the following day, the T-GST bill was taken up for debate and sent for review by a full-house committee. Debate on the green tax bill started on October 16. The legal changes are expected to be voted through unchallenged as the ruling party controls a supermajority in the 93-member legislature.
The bid to squeeze more tax revenue out of tourism comes amid grumbling from the resort industry. During a panel discussion with ministers at a forum in September, resort operators complained about the short notice for a previous T-GST hike in January 2023.
“Will it be again that the business owners have to take the hit and pay for whatever is already on the books?” a participant asked, seeking to clarify whether advance bookings would be exempt as European law prohibits new charges after payment.
The question drew applause from the audience comprised of resort managers.
In response, Economic Development Minister Mohamed Saeed assured that “a proper consultation process” would take place. “The last thing the government wants is to cause any additional cost to the industry,” he said.
“We’re not doing anything new. We’re trying to overcome the situation. But there are not plenty of new taxes or unfavorable tax expansion policies in the pipeline,” he added.
The tax bills followed stringent measures by the central bank to address a persistent U.S. dollar shortage and an entrenched black market. New regulations that came into force on October 1 require resorts to deposit $500 per tourist in the domestic banking system. The central bank forecasted $750 million in additional annual foreign currency inflows into the banking system.
The regulatory change was widely applauded. It surprised those who believed that governments always serve the interests of tourism magnates. Economists have long advocated such rules to ensure that a larger share of U.S. dollar receipts from the lucrative tourism sector – valued at $3.6 billion in 2023 – is retained in the Maldives.
But it drew the ire of the Maldives Association of Tourism Industry (MATI), a powerful lobbying group representing resort owners. The compulsory exchange controls were “unacceptable,” MATI said, accusing the authorities of failing to consult industry stakeholders or address concerns raised by the association.
The opposition echoed MATI’s concerns. If higher taxes dissuade tourists from choosing expensive resorts, tax revenue would not increase as anticipated, former finance minister Ibrahim Ameer argued.
“The government should reduce the number of political employees. And tax spending should be transparent. Government companies should increase efficiency. Travel for political purposes should be reduced. Useless vanity projects should be stopped,” he told local media outlet Adhadhu.
Others criticized the failure to implement overdue fiscal reforms.
Key policies recommended by international financial institutions chiefly involve reforming the costly health insurance scheme and phasing out blanket subsidies for fuel, electricity, food, and sanitation, all of which are recommended to be replaced with targeted assistance to low-income households.
Both policies are likely to prove unpopular. Despite budgeting for subsidy reform in 2024 to reduce outlays by 2 percent of GDP, the government has so far hesitated to cut any spending that would directly impact the public.
In June this year, President Dr. Mohamed Muizzu announced his intention to enact austerity measures as planned in the budget for mid-2024. But the Finance Ministry now says that targeted subsidies have been postponed to 2025.
According to the World Bank, 43 percent of subsidy spending currently benefits the richest 40 percent of the population. It advised introducing an income-targeted cash transfer to cushion the blow. Without relief to the least affluent demographic, poverty could rise from 2.5 to 4.6 percent, the World Bank estimated. As a result of healthcare and subsidy reforms as well as higher prices, the poverty rate could nearly double among single parent households and households with more than three children.
A flat cash transfer to all citizens in the targeted bottom 60 percent of the population would entail “shifting to a new targeting framework, underpinned by a proxy means test (PMT) to identify eligible beneficiaries,” the World Bank explained.
The elimination of subsidies could be a difficult adjustment for a population accustomed to government support; thus it has been an unpalatable prospect for successive leaders. But the Muizzu administration has signaled a willingness to embrace tough choices.
On October 15, the president decided to dismiss 228 political appointees as a cost-cutting measure. “It will save MVR 5.714m [$370,500] per month from the government budget,” Muizzu announced on X.
These recent moves suggest that the government is finally confronting the harsh economic reality. It appears to have accepted that deferring decisive action is no longer a viable option. Failure to avert the looming debt crisis could be ruinous for the tourism-dependent economy.
As the World Bank stressed in a stark warning: “Any further delay in fiscal reforms could lead to further erosion in investor confidence and an unprecedented economic shock.”