Reading Economic Fragility in Official Data

How Stress Appears Before Crisis

Introduction: Fragility Is Visible Long Before Failure

Economic fragility rarely announces itself through sudden recession or collapse. It appears earlier — in distributional shifts, liquidity constraints, and timing mismatches — all of which are visible in official data if that data is read carefully.

The World Bank’s Maldives Development Update provides a clear illustration of how such stress signals emerge well before crisis conditions are formally declared.

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1. Growth Moderation with Rising Inflation

One of the most telling signals of emerging fragility is the coexistence of:

• slowing GDP growth (approximately 2.5 percent in early 2025), and
• elevated inflation (around 5 percent in the first half of the year).

Together, these trends indicate declining economic efficiency. Output expands more slowly while costs rise faster — a classic marker of stress in small, open economies.

Growth is still present, but it is becoming more expensive to generate. This divergence is rarely benign.

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2. Fiscal Improvement with Arrears Accumulation

The World Bank notes that fiscal improvement in early 2025 was driven largely by cash-based expenditure cuts rather than reduced commitments. As a result, arrears accumulated across state-linked entities and service providers.

This pattern signals:

• liquidity stress rather than true fiscal consolidation,
• deferred obligations rather than resolved ones.

Such dynamics are a common early warning sign in small economies under pressure: balance sheets appear healthier in the short term, while obligations quietly shift into the future.

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3. FX Reserve Recovery with Low Usable Coverage

Headline foreign exchange reserves showed improvement. However, usable reserves remained below one month of imports, and parallel market pressure persisted.

This divergence between reported improvement and functional capacity is a critical indicator of constrained resilience. It suggests that buffers exist on paper but remain insufficient in practice.

In fragile systems, the distinction between total reserves and usable reserves is not technical — it is decisive.

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4. Rising Exposure of Banks to the Sovereign

The World Bank also highlights the financial sector’s growing exposure to sovereign debt, a trend that increases systemic coupling.

As banks become more closely tied to government balance sheets:

• shock absorption weakens,
• risk concentration increases,
• and stress transmits more rapidly across the economy.

High coupling does not cause fragility by itself, but it accelerates its spread when pressure rises.

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Conclusion: Fragility Is a Pattern, Not a Shock

Official data rarely conceals fragility. It reveals it — indirectly — through indicators that appear manageable when viewed in isolation.

Reading fragility requires attention to:

• divergence rather than averages,
• timing mismatches rather than static ratios,
• and concentration of risk rather than headline stability.

By these measures, the Maldives is not in crisis.
But it is operating with limited margin for error.