Maldives - The economy : an introduction

A WORLD BANK COUNTRY STUDY THE MALDIVES An Introductory Economic Report .,4 X A- It -4 -. -  THE MALDIVES An Introductory Economic Report This report is based on the findings of a mission that visited the Maldives in July 1979. A draft report was discussed wPith the Government in November 1979, and this version incorporates information and comments provided by the Government up to March 1980 and a few additional comments received in September 1980. The July 1979 mission was composed of: K. Sarwar Lateef, chief of mission Jane Loos, loan officer Gert van Santen, fisheries specialist Caroline Doggart, economist (consultant) Yukio Tanaka, industrial economist (consultant) South Asia Regional Office The World Bank Washington, D.C., U.S.A.  Copyright 0 1980 The International Bank for Reconstruction and Development/The World Bank Second printing November 1983 All rights reserved Manufactured in the United States of America World Bank Country Studies are reports onginally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published informally with the least possible delay for the use of governments and the academic, business and financial, and development commu- nities. Thus, the typescript has not been prepared in accordance with the proce- dures appropriate to formal printed texts, and the World Bank accepts no responsi- bility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. Any maps used have been prepared solely for the convenience of the readers; the denominations used and the boundaries shown do not imply, on the part of the World Bank and its affiliates, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries. The full range of World Bank publications is described in the Catalog of World Bank Publications; the continuing research program of the Bank is outlined in World Bank Research Program: Abstracts of Current Studies. Both booklets are updated annu- ally; the most recent edition of each is available without charge from World Bank Publications in either Washington or Paris (see the back cover for addresses).  LIST OF TABLES IN THE TEXT (continuation) Table L: Estimated Annual Gross Sales and Operating Costs of Pole and Line Vessels .......................... 38 Table M: Comparative Dependence on Tourism ........................ 45 Table N: Airport Passenger Arrivals, 1974-79 ...................... 47 Table 0: The Tourism Sector's Contribution to the Economy in 1978 ...................................... 49 Table P: Capital and Labor Requirements for New Tourist Resorts, 1979-82 ..................................... 54 Table Q: Production of Major Crops ................................. 58 Table R: Average Per Capita Daily Calorie Consumption, 1976-78 ................... ................ 59 Table S: Size Distribution of Cultivable Land ......................60 Table T: Physical Volume of Trade .................................. 67 Table U: Maldives Shipping Limited: Source and Destination of Traffic, 1978 ..................................... 68 Table V: Male Power: Load Distribution ........................... 73 Table W: Population Projections, 1977-2002 ........................ 86 LIST OF ANNEXES Annex A: An Organogram of the Government of Maldives ..............93 Annex B: Maldivian Statistics ............................... 94 Annex C: Infrastructure of Gan Island ............................. 98 Annex D: Ongoing and Prospective Project Activities ...............100 Annex E: Bibliography ................... .................... 112 S,TATISTICAL APPENDIX ......................... 115 Map GLOSSARY Dhoni - Locally constructed wooden vessel (8-14 meters) used for fishing and transport Khatib - Government-appointed island chief Majlis - A council or assembly Makhtab - Traditional Koranic school Mudim - Mosque functionary Shariat - Islamic law based on the Koran  VII. ECONOMIC INFRASTRUCTURE AND SOCIAL SERVICES ..............67 ECONOMIC INFRASTRUCTURE .............................67 Shipping ............................................67 Port Facilities ...................... 69 Inter-Island Transport and Communications ............ 70 THE MALE CAPITAL REGION .............................72 SOCIAL SERVICES ..................................... 75 Education ...........................................75 Health ....... ..................................... 78 PART C: PROSPECTS AND ISSUES VIII. DEVELOPAENT PRIORITIES IN THE 1980s .................. 81 The Challenge ..................................... .81 Economic Growth - Some Issues ............................. 81 Redistribution ............................................. 84 New Growth Centers .........................................85 Population Policy .......................................... 85 Establishing Priorities ................................... 86 The Role of the NPA ........................................ 87 IX. ROLE OF EXTERNAL ASSISTANCE ............................... 90 Project Aid ...................... 90 Technical Assistance ................................91 Terms of Aid and Aid Coordination ................... 92 LIST OF TABLES IN THE TEXT Table A: Labor Participation Rates and Unemployment by Atoll Group in 1977 ..................................13 Table B: Selected Social Indicators, 1977 ..................... 15 Table C: Value Added and Employment by Sector, 1978 .......... 17 Table D: Gross National Product, 1974-78 ...................... 22 Table E: Trends in Public Finance, 1974-79 .................... 24 Table F: Price Trends for Selected Commodities in Male, 1975-79 ................ .....................26 Table G: Summary Balance of Payments for Goods and Services 27 Table H: Trends in Principal Exports ......................... 28 Table I: Trends in Principal Imports .........................29 Table J: Net Receipts of Official Development Assistance, 1974-78 ........................................30 Table K: Production, Exports and Local Consumption of Fish, 1971-78 ................................. 35  CURRENCY EQUIVALENTS Free Market ExL,lange Rate Used in the Report: To convert dollar values into rupees and rupee values into dollars the following average annual rates were used: 1974 US$1.00 = Maldivian Rupees (MR) 6.65 MR 1 = US$0.15 1975 US$1.00 = MR 5.75 MR 1 = US$0.17 1976 US$1.00 = MR 8.75 MR 1 = US$0.11 1977 US$1.00 = MR 8.80 MR 1 = US$0.11 1978 US$1.00 = MR 8.88 MR 1 = US$0.11 1979 US$1.00 = MR 7.50 MR 1 = US$0.13 Official Accounting Rate: This rate is used for all Government and STO foreign exchange transactions and the valuation by Customs of exports and imports. Until December 21, 1971 1/: US$1.00 = MR 4.75 MR 1 = US$0.21 MR 1 mn. = US$210,526 December 21, 1971, until February 18, 1973: US$1.00 MR 4.37 MR 1 = US$0.23 MR 1 mn. = US$228,833 Since February 19, 1973: US$1.00 = MR 3.93 MR 1 = US$0.25 MR 1 mn. = US$254,453 1/ The Maldivian rupee was linked to the Sri Lankan rupee and indirectly to the Pound Sterling until November 21, 1967, when it was linked to the dollar.  Table of Contents LIST OF TABLES IN THE TEXT LIST OF ANNEXES GLOSSARY COUNTRY DATA SUMMARY AND CONCLUSIONS ......................................... i-vi PART A: THE SETTING I. INTRODUCTION ................................................1 A Nation of Islands . ......................................... 1 An Island People ................................... 2 Religion and Culture ................................... 3 The Social Background ...................... 5 Male's Pre-eminence ................................ 5 Political History .................................. 6 The Constitutional and Administrative Framework 8 Recent Political Developments ....................... 9 II. THE ECONOMY ................................................. 11 Position Among Island Nations ............................ 11 The Maldivian Path ........................................ 12 Population and Labor Force ................................ 12 Level of Social Development ......................... 14 The Structure of the Economy .............................. 16 The Institutional Framework ............................... 18 Money and Banking ......................................... 19 The Budget ................................................. 20 Trade and Exchange Rate System ........................... 20 III. RECENT ECONOMIC PERFORMANCE AND DEVELOPMENT ISSUES .. 22 ECONiOMIC PERFORMANCE, 1974-78 ............................. 22 Production .................................................. 22 Monetary Trends ........................................... 23 Budgetary Developments ............................. 24 Wages and Prices ................................. 25 Balance of Payments ....... ......................... 26 External Assistance ....................... ......29 DEVELOPMENT ISSUES ................................. 30 Pricing Policy ........................ ........... 30 The Policy Bias in Male's Favor ........................... 31 Financial Resources ....................................... 31 Manpower and Administrative Resources .................... 31 Legislative Framework ..................................... 33  PART B: THE SECTORS IV. FISHERIES ............................................ 34 Production and Exports ..............................34 Resource Endowment .................... 36 Fishing Methods .................................... 37 The Economics of Fishing ............................. 37 Future De-velopment Strategy .......................... 40 Short-Term Development Policy ........................ 41 Long-Term Development Strategy ....................... 42 Future Investment Requirements ....................... 44 The Role of Government ..............................44 V. TOURISM .............................................45 STRUCTURE ............................................ 45 Background .......................................... 45 Activity Rates ........................................ 4.7 ECONOMIC AND SOCIAL IMPACT ........................... 48 Foreign Exchange Earnings ...........................48 Intersectoral Linkages ..............................49 Government Revenues ................................. 50 Employment .......................................... 51 Social Consequences .. ................................. 52 GROWTH POTENTIAL ....................................52 Planning for Tourism ........................ ....... 52 Transport Constraints ................................. 54 Institutional Framework ........ ..................... 55 VI. AGRICULTURE AND INDUSTRY ... ............. 57 AGRICULTURE ...................... ................ 57 Cultivation Practices ...............................57 Production of Major Crops ...........................57 Import Dependence ...................................58 Resource Endowment ..................................59 Institutional Infrastructure ......................... 61 Production Potential ................................61 Coconut Rehabilitation .............................. 62 Food Requirements of Tourism Industry ................ 63 Integrated Atoll Development ......................... 63 INDUSTRY ............................................ 64 Output and Employment ............................... 64 Potential for Industrialization ...................... 64  SUMMARY AND CONCLUSIONS (i) The Setting: The Republic of Maldives became a member of the International Monetary Fund and the World Bank in January 1978. The first World Bank economic mission visited the Maldives in July 1979. This report, based on the mission's findings, is an attempt to set the Bank's initial diagnosis of the problems and -prospects of the eco:omy in the context of the country's historical background and of its society, polity and economy. The poor quality of the data combined with the comprehensive nature of the coverage has prevented exploration in greater depth of some of the more interesting issues identified by the mission,, These must, therefore, be relegated to future economic studies. (ii) The Republic of Maldives is an archipelago of nearly 1,200 tiny coral islands in the Indian Ocean, grouped together in clusters or "atolls", forming a long, narrow chain strung over an area of 41,500 square miles. The bearest land mass lies 300 miles northeast, the distance to Cape Comorin, India's southern extremity. The Maldives' physical remoteness explains how the islands have managed to remain relatively untouched by the great social and political changes that have swept across southern Asia. The population of 143,000 (1977) is scattered thinly over 202 islands; only 19 islands have more than 1,000 inhabitants. Male, the capital, has 29,000 crowded on its one square mile. The society has traditionally been small, closely kniL, rigidly structured and disciplined, and unified by the common bonds of religion (Islam) and language (Dhivehi, based on Sinhalese, Arabic, and Hindustani). Each island community is a self-contained economic unit, dependent on the sea around it, as fishing is the main activity. (iii) Throughout its recorded history, the Maldives has managed to remain self-governing, except for one frief s-ll under Portugu2se rule - the 16th century. In .-387, the Maldives became a British protectorate, but there was no British p-esence in Male. Independence was attained in 1965, and, after a period of experimentation with institutional reforms, the Sultanate was replaced by a Republican Constitution in which a President is nominated by the Citizens' Majlis (House of Representatives) and confirmed in a subsequent nationwide referendum. There is universal adult franchise; the executive branch has considerable leverage over the legislature. The President, Mr. Maumoon Abdul Gayoom, took office on November 11, 1978, and has committed his new Government to a number of political and economic reforms. These in- volve a liberalization of the political system, a more decentralized decision- making process, and a major new development program to redress the past neglect of economic and social infrastructure, particularly in the atolls. (iv) The Maldives is among the 20 poorest countries in the world. Like most island developing countries (IDCs), its resource base is narrow in rela- tion to population, and it lacks known mineral resources. The country is heavily specialized in fishing and tourism and increasingly dependent on food imports. But in some respects the Maldives is unlike most IDCs: it is free of any colonial or neo-colonial dependent relationship, it is not dominated by a foreign company, and its own successful shipping line, Maldives Shipping Limited (MSL), has mitigated some of the disadvantages of remoteness.  (v) Population growth was a high 2.8% between 1972 and 1977, with Male's populatior. rising from 11% to 21% of the total population between 1967 and 1977. Labor force participation rates are high and unemployment low; though unemployment ia becoming a serious problem in tIale, because of the flood of immigrants to the capital, and in Seenu atoll, which was adversely affected by the withdrawal in 1976 of the British air base at Gan. The problem of poverty in the Maldiveo is one of low money incomes, few assets, and in the atolls, lack of access to non-religious formal education, health services, and water supply. Most social indicators reflect a situation much worse than the average for 37 low-income developing countries; however, these are an inadequate mea- sure of the quality of life in the islands, which is greatly enriched by a strong sense of cultural identity and a social security system based on bonds of family and kinship. (vi) There are no official national income accounts. Highly tentative Bank staff estimates show a 1978 GNP of $23 million, and an implied Per capita income of $160. About 40% of value added is attributed to the primary sector (mainly fishing), 6% to the secondary sector, and a high 54% to services, reflecting the dominance of Male-based Government services and tourism. About 55'% of total employment is in the primary sectors, 26% in the secondary sectors, and the balance in services. The structure of trade reflects that of a fisheries-based economy. Fish exports account for almost all merchandise eYports; consumer goods, particularly food, dominate imports. Import depen- dence for the economy as a whole was 32% of 1978 GDP. (vii) Management of the Economy: Until recently, the Government had no commitment to planned economic development. Interventions by the State have been confined to a few key, ad hoc initiatives: the establishment of a ship- ping line, canalization of trade through the State Trading Organization (STO), the invitation to foreign fish-purchasing companies to operate in Maldivian waters, and the related mechcin.;zation of fishing vessels, and more recently, direct participation in the tou,c:st industry and the construction of an inter- national airport. (viii) The major economic institutions are a product of this policy environ- ment. Their organizational structure is simple and designed to handle the routine functions performed by government in what, till recently, was a rather uncomplicated economy. STO plays a key role as the Government's bookkeeper and the major vehicle for external trade. STO's profits are an important sou-ce of budgetary revenues; they arise from its use of the official accounting rate of MR 3.93 = US$1.00 as a reference point in establishing the domestic prices of exports, imports, and invisible transactions handled by it. Since the free market exchange rate was MR 7.50 = US$1.00 in July 1979, this implied an effective tax on fish exports, for example, of 47.6%. The proceeds from this are used partially to subsidize essential imports. (ix) Banking and monetary policies, such as they are, have been left to the Department of Finance. A new Maldives Monetary Authority (MMA) will take over these functions and will monitor the operations of the two foreign commer- cial bank branches in Male. The budget has been treated more as an accounting exercise than as a policy instrument, and the overall tax effort in 1978 was a low 7.4% of GDP. There is no exchange control legislation nor are there any administrative restrictions on current and capital exchange transactions. The US dollar circulates freely along with the Maldivian rupee.  (x) Economic Growth: GDP grew by an average of 12.5% a year between 1974 and 1978, due largely to a recovery in fishing and the emergence of tourism as a major economic growth sector. Money supply has been expanding rapidly, reflecting both the monetization of the atoll economy, the growth of tourism, and large government budget deficits as budgetary revenues, heavily reliant on uncertain receipts from public enterprises, failed to cover expen- diture requirements. In 1979, the Government took a number of measures to reduce these deficits. ihese included new tourism taxes and a wider base for import duties, the latter effective from January 1, 1980. Data on prices are poor; inflation is currently estimated at 15-20% per annum. Bank staff estimates on the balance of payments for 1974-78 suggest- a chronic current account surplus. Although merchandise exports, including re-exports, covered only between 60-80% of imports, the earnings from tourism and remittances from MSL have more than offset the trade deficit. There are no data on capital flows, but OECD's Development Assistance Committee (DAC) reported average annual commitments of $5.2 million between 1974 and 1978. Commitments rose sharply in 1978 to finance the Hulule airport expansion. (xi) The combination of pragmatic policies and ad hoc yet strategic interventions by the State has led to investments in those sectors of the economy where the country's comparative advantage is strong: fishing, shipping, and tourism. These investments provide a potentially sound foun- dation for sustained growth in the medium term. Tlowever, there are some areas of concern. The use of an official accounting rate as a reference point in the determination of prices of fish exports and food imports creates important price distortions that could attract resources away from fishing and agriculture in the medium term. in the pr6cess, it accentuates income dispari- ties between Male and the atolls, which are further worsened by the concentra- tion of public expenditures arnd private investment in the Male region. The Government's budgetary performance in recent years has been rather unimpres- sive. Its implementation capabilities are hampered by inadequate manpower and an antiquated system of administration. Another major lacuna is the absence of an explicit legal framework within which private domestic and foreign invest- ment can operate. (xii) The fisheries sector accounts for one-third of GDP, 44% of employ- ment and nearly all visible export earnings. Growth of fish landings has averaged a slow 1.8% per annum over the last decade; but this conceals a major structural transformation of the sector. With the decline in dry, salted, and smoked "Maldive fish" exports to Sri Lanka from 1972 onwards, foreign companies began to collect fresh fish for export. These have gained tremendously in importance. The change has been accompanied by a major mechanization prcgram with just under one-third of all pole and line vessels already mechanized. A major issue in the sector is the adequacy of incentives due to pricing pol- icies (para xi), rising fuel costs, and the relatively slow increase in export unit value realizations. Short-term development priorities are a lower tax burden, an improved fuel distribution system, and the creation of a stable policy environment in which foreign fish companies can continue to operate with reasonable confidence. In the medium term, the Government needs to consider product diversification, improved fishing techniques, and greater investments 8n research and development.  - iv (xiii) Four years of 40% annual growth rates culminated in 23,000 tourists coming tvo the Maldives in 1978, when -tourism overtook fishing as the most important foreign exchange earner. The sector accounted for 11.6% of estimated GDP in 1978. Capacity utilization averaged 55%, with seasonal fluctuations;-. 1979 performance was even better. Tourist resorts currently employ about 1,100 mostly unskilled male workers; almost one-tenth of the Male region's labor force. Linkages with the local economy are growing, but imports still account for over 40% of the sector's consumpi:ion and investment spending. Because of the resorts' physical isolation, tout'ism's social and cultural impact has been small. Early in 1979, the Government assumed control over five resorts, bringing the Government's share in end 1979 capacity to 65%. The takeover caused problems with the local banks which stopped lending to resorts at a time of peak construction activity. Although this matter is likely to be resolved in the short term, the Department of Tourism and Foreign Investment (DTFI) needs strengthening, and a sectoral planning effort is required in which the Government would define its own role in the sector's development and lay down guidelines for capacity growth and the supply of resources in terms of island space, manpower, and finance. If institutional and infrastructural problems can be solved, there appear to be good opportun- ities for further tourism growth, both by expansion of present capacity and by breaking new ground in the location and type of facilities offered. The promotion of two new regional development poles, potentially a key element in the Government's economic policies (para xxii), could be based on opening up outlying atolls to tourism. (xiv) Agriculture is primarily a means by which islanders supplement their meagre earnings from fishing. Agriculture and related activities account for 10-12% of GDP and about one-tenth of employment. Production of most major field and tree crops has been declining and import dependence is high. The total cultivable area is 6,900 acres, of which about one-half is located on 23 islands. A 1974 FAQ survey established that (a) with proper crop management, yields could be doubled or trebled; (b) diversification into pulses, oilseeds, and tobacco was feasible; and (c) rice could be grown in swamps and low-lying areas. To realize this potential, the FAO recommended a number of measures including improved cultivation practices, provision of inputs and ade-uate incentives. The FAQ program is ambitious, but still relevant. The Government should focus on three priority areas: coconut rehabilitation, the supply of food to the tourism industry and the development of integrated programs in a few agriculturally important atolls. These programs will require a streagth- ening of the Ministry of Agriculture and an effort to improve incentives through pricing policies and improved transport and marketing. (xv) Cottage industries, handicrafts, and small-scale fabric'ation and repair dominate the industrial sector, which accounts for 6% of GDP and 26% of employment. The potential for industrialization is limited by the size of the market, the level of development, and the lack of physical, institutional, and legal infrastructure. Neverthelesis, there is potential for establishing on a modest scale a small industries sector with backward and forward linkages with agriculture, fishing, and tourism. The Government is also considering foreign investment proposals relating to the development of the former air base on Gan island for tourism tnd an export-processing zone. These proposals will require careful evaluation. The weaknesses in  infrastructure suggest a gradual approach in the industrial sector, focusing first on further detailed sector work and the establishment of a legislative framework. (xvi) Economic Infrastructure: Lack of adequate inter-island transport is a major constraint to development which may be remedied by an Asian Dev- elopment Bank (ADB) assisted project. Connections with the outside world are better due to the timely establishment of a national shipping line, Maldives Shipping Ltd (MSL), which now ferries almost all the country's imports.-, MSL's fleet by end 1978, had risen to 29 vessels totaling 84,000 GRT, but mos't ships are very small and very old, necessitating a costly replacement program. MSL's contributions to foreign exchange earnings and the budget have been declining because of the world shipping slump and increased operating costs. MSL's financial and operational strategy needs a careful review to ensure the muclh-needed recovery in profit transfers to Government. Port facilities at Male are inadequate, and a feasibility study proposed investments totaling $3.5 million. Inter-island transport and telecommunications are an essential means of ending the isolation of the atolls, and proposed sector activities are rightly geared to this objective. (xvii) The largest infrastructure requirements pertain to Male, as an attempt is made to meet the growing gap between the demand arising from the capital's rapidly expanding population and the inadequate supply of essential services. These separate programs are not being adequately coordinated and reconciled, which could prove both costly and wasteful in the medium term. Major investment needs have been identified in the following areas: water and sanitation, power, roads, and telecommunications. Land reclamation is also absorbing sizable resources. (xviii) Social Services: There are three streams of formal education, each responding;lto a different set of circumstances and needs: the traditional Koranic schools, the Dhivehi-medium schools, and English-medium schools. School enrollment ratios are low, and the output of the system is inadequate in relation to needs. Primary schools are to be expanded in the atolls and secondary and vocational schools in Male. Teacher training and curricu'lum development are a third priority. There will be a large expansion in the number of children of school-going age in the next 25 years which calls for muca ingenuity and innovation in this crucial area. (xix) Health conditions are poor, due mainly to waterborne diseases result- ing from an inadequate water supply system. Communicable diseases are also a problem. Ongoing UN programs to improve health conditions have focused mainly on improving water supply and setting up health centers in the atolls. However, important gaps remain in the supply of maternity and child health care programs and family planning.  - vi- (xx) Establishing Development Priorities: The preceding analysis suggests the following development objectives: (a) a rate of economic growth sufficient to ensure an adequate increase in real per capita incomes and consumption; (b) a more equitable distribution of the benefits of development as between Male and the atolls; (c) a determined effort to reduce migration into Male through the creation of alternative poles of development; and (d) a program to slow down the current rapid population growth without which the long run economic development gains would be eroded. A careful evaluation of sectoral growth possibilities suggests that the economy is poised for rapid growth provided that the Government continues to maintain an open economic system; it examines ways of removing serious price distortions arising out of STO's pricing poli- cies; it ensures the adequacy of incentives in key sectors adversely affected by recent policy developments; and it provides the infrastructure--physical, financial, social, and legal--which is essential to growth of productive sectors whilst at the same time supporting birth control programs. (xxi) Reversing past neglect of the atolls will require a multipronged approach, by boosting incomes of fishermen and farmers, by increasing Govern- ment expenditures in the atolls and by developing programs geared to the special needs of selected agriculturally important atolls. (xxii) Male's population could expand to 50,000 by 1985, if the rate of immigration goes unchecked. This suggests the need for creating alternative growth centers cum urban settlements to attract potential migrants away from Male. The Government is already considering one such development in Seenu atoll (Gan); there may be room for a second in the north. (xxiii) These programs are likely to prove costly in relation to avail- able resources. The Government will need to resist the temptation to do all things at once by establishing a clear set of priorities and attempting to match its efforts to implementation capabilities. This will require defining the relative roles of the public and private sectors. On a priori grounds, the most natural course would appear to be to concentrate the bulk of public investments on essential infrastructure needs. The National Planning Agency (NPA) will need to play a key role in this process. Particular attention should be paid to increasing public savings, to alleviating shortages of trained personnel and manpower, and to addressing administrative constraints. External donors can help in picking up the costs of large indivisible invest- ments that the Maldives could not on its own afford and by providing technical assistance. Given the limited rupee resources, aid should finance a high proportion of total costs and be on highly concessional terms. (xxiv) While the problems of the Maldives' economy appear large, they are by no means insurmountable. The country's good development potential and its small size permit many of its problems to be addressed quickly and relatively easily, given adequate resources. With the right policies and programs and appropriate external assistance, the Government should not have much difficulty in meeting the growing aspirations of this quite unique nation of islands.  Page 1 of 2 pages COUNTRY DATA - MALDIVES AREA POPULATION DENSITY 298 sq km 142,832 (December 1977) a/ 479 per sq km (December 1977) 3,500 per sq km of agricul- tural land PQPULATION CHARACTERISTICS (1977) HEALTH (1979) Crude Birth Rate (per '000): 44.0 a/ Population per physician: 15,894 Crude Death Rate (per '000): 17.6 a/ Population per hospital bed: 3,576 Infant Mortality Rate (per '000): 120.7 Life Expectancy at Birth (years): 46.5 a/ ACCESS TO SAFE WATER % of population - urban: 54 EDUCATION - rural: 5 Adult literacy rate: 81.9% a/ School enrollment: (ages 5-14): 26.9% a/ ACCESS TO ELECTRICITY % of dwellings - urban:' 59.3 a! - rural: 2.3 a/ GNP PER CAPITA IN 1978: US$160 b/ GROSS DOMESTIC PRODUCT IN 1978 b/ ANNUAL RATE OF GROWTH US$ mn % of total 1974-78 GDP at Market Prices 22.5 100.0 12.5% Exports of Goods, NFS 15.6 69.1 18.4% Imports of Goods, NFS 13.1 58.4 15.6% OUTPUT AND EMPLOYMENT IN 1978 Value Added b/ Employment a/ US$ mn % '000 % Primary Production 8.9 39.7 33.5 55.6 Secondary Production 1.4 6.0 15.9 26.4 Services 12.2 54.3 10.4 17.2 Total 22.5 100.0 60.3 100.0 GOVERNMENT FINANCE, 1978 (Provisional) MR mn % of GDP Revenue 11.8 5.9 Expenditure 41.2 20.7 Budgetary deficit -29.4 14.8 External assistance (grants) 16.7 8.4 a/ 1977 Census b/ Bank staff estimates  Page 2 of 2 pages BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1978) % of 1977 a/ 1978 a/ US$'000 total Ths$ million) Exports of Goods, NFS 9.0 15.6 Fresh Skipjack 2,540 62.1 Imports of Goods, NFS 9.2 13.1 Dry Salted fish 670 16.4 Resource Gap -0.2 2.5 Dry Skipjack 210 5.1 Current Account Balance +1.7 +3.3 Dry Sharkfins 340 8.3 All other commodities 333 8.1 Total 4,093 100.0 RATE OF EXCHANGE EXTERNAL DEBT (US$ million) 1974 December December US$1.00 = MR 6.65 1978 1979 MR 1 = US$0.15 Total Outstanding 19.5 23.4 1975 Total Outstanding US$1.00 = MR 5.75 and Disbursed 3.9 6.2 MR 1 = US$0.17 Debt Service Ratio for 1978 0.3% 1976 US$1.00 = MR 8.75 IDA LENDING, December 31, 1979 (US$ million) MR 1 = US$0.11 Outstanding 3.2 1977 Outstanding and Disbursed 0.0 US$1.00 = MR 8.80 MR 1 = US$0.11 1978 US$1.00 = MR 8.88 MR I = US$0.11 1979 US$1.00 = MR 7.50 MR 1 = US$0.13 Official Accounting Rate Until December 21, 1971 US$1.00 = MR 4.75 Dec. 21, 1971 - Feb. 18, 1973 US$1.00 = MR 4.37 Since February 19, 1973 US$1.00 = MR 3.93 a/ Bank staff estimates  PART A: THE SETTING I. INTRODUCTION A Nation of Islands 1.01 Geography. The Republic of Maldives is an archipelago of nearly 1,200 1/ tiny coral islands in the Indian Ocean, grouped together in clusters or "atolls." 2/ These atolls form a long, narrow chain 3/ that is strung over an area of about 41,500 square miles (106,000 sq km). The northern and southernmost tips are 512 miles (820 km) apart; at its widest, it measures 81 miles (130 km). Geologically, the atoll-bearing plateau line continues southwards with the British Chagos archipelago, and northwards with India's Minicoy and Lakshadweep Islands. The nearest land mass lies 300 miles away-- the distance to Cape Comorin, India's southern extremity--and it is 400 miles eastwards across the Indian Ocean to Colombo, the capital of Sri Lanka. The Maldives' physical remoteness explains how the islands have remained relatively. untouched by the great social and political changes that have swept across Southern Asia. 1.02 The northern and central atolls, from Haa Alifu to Laamu, form a narrow ellipse surrounding a strip of sea 10 to 25 miles broad. They rise from a common plateau and are separated from each other by deep channels, most of which are easy to navigate. The southern atolls, Gaaf Alif, Gaafu Dhaalu, Gnaviyani, and Seenu, are separated from the main body of islands by two broad channels: the 50-mile-wide One and Half Degree Channel between Laamu and Kaafu, and the equally broad Equatorial Channel between Gaafu and Seenu. Strong currents in both these channels, and in the Veimandu (or Kolumadulu) Channel between Laamu and Thaa, make them a hazard to navigation, to which many wrecks bear silent witness. Uncharted and unmarked reefs have also taken their toll of ships through the centuries. The enclosure reefs to each atoll contain openings which provide passageways for boats traveling between atolls. Only a few are deep and wide enough to accommodate even the smallest modern cargo boats or collector vessels for the fishing fleet. 1.03 Most islands are situated close to the atoll enclosure reef. They vary in size from patches of coral or small sandbanks to real islands, the longest of which, Gamu in Laamu atoll, is 4.5 miles long. Male, the capital, occupies an island barely one mile long on the east side of the central atoll, Kaafu. Most other islands are less than a mile long. The total land area is thought to be about 115 sq miles (298 sq km), although a proper land survey remains to be done. Because they are based on coral, the islands are flat, the highest point being rarely more than 6 ft above sea level. The water table is naturally high in all the islands. Often, the highest water points are along the shoreline and in the center. Several islands have fresh water 1/ The Coral Atoll Program of the National Academy of Science of the United States identified 1,009 islands, islets, reef patches, and reef rings. Government data indicate 202 inhabited and 985 uninhabited islands, a total of 1,187. 2/ The word "atoll" is derived from the Maldivian word "atolu." 3/ The chain stretches from 7