Tourism, Maldives' largest economic activity, accounts for 28% of GDP and more than 60% of foreign exchange receipts.
Fishing is the second leading sector, but the fish catch has dropped sharply in recent years.
Agriculture and manufacturing continue to play a lesser role in the economy, constrained by the limited availability of cultivable land and the shortage of domestic labor.
Lower than expected tourist arrivals and fish exports, combined with high government spending on social needs, subsidies, and civil servant salaries contributed to a balance of payments crisis, which was temporarily eased with a $79.3 million IMF Stand-By agreement.
However, after the first two disbursements, the IMF withheld subsequent disbursements due to concerns over Maldives' growing budget deficit, and the government has been seeking other sources of budgetary support ever since.
A new Goods and Services Tax (GST) on tourism introduced in January 2011, on general goods and services in October 2011, and a new Business Profit Tax introduced in July 2011 have provided a boost to revenue.
Economic growth slowed to 3.4% of GDP in 2012, compared to 7.0% in 2011 because of slower tourist arrivals and weak global conditions. Diversifying the economy beyond tourism and fishing, reforming public finance, increasing employment opportunities, and combating corruption, cronyism, and a growing drug problem are major near-term challenges facing the government.
Gross foreign reserves at the end of November 2012 were approximately $356 million, compared with $326 million in 2011, and were sufficient to finance only 2.6 months of imports.
Over the longer term Maldivian authorities worry about the impact of erosion and possible global warming on their low-lying country; 80% of the area is 1 meter or less above sea level.