How Maldives is trying not to default on foreign loans

The Maldivian economy has been going through a bad patch even as there is political stability in the country.President Mohamed Muizzu is firmly in the saddle in Male and is duly propped up by a Majlis (Parliament) where his party, the Peoples’ National Congress (PNC), has a super majority. Furthermore, there is no credible challenger, as rivals Ibrahim Solih, Abdulla Yameen and Mohamed Nasheed are now pale shadows of their former selves.  

And yet, the Maldivian economy is showing strains, needing urgent infusion of foreign exchange and corrections in policies to avoid a default.

Muizzu’s actions early in his tenure (that were meant to implement some hyperbolic election promises), combined with the effects of some of the policies of his predecessors, had caused economic problems in the months that followed.   

Compelled to address the grave issues confronting the country, Muizzu made radical departures from policies he was identified with. Most strikingly, he shed his pronounced anti-India stance but without alienating China, India’s rival in the region.   

Economic Crisis

Fitch Rating gave “junk” status to the Maldives in August, citing the government’s inability to repay a US$ 500 million Sukuk due in 2026. Sukuk is an Islamic Shariah-compliant debt instrument. On September 11, Moody’s downgraded the Maldives saying that “default risks have risen materially.”

 The World Bank had to put Maldives’ total public debt in 2023 at US$ 8 billion or 122.9% of the GDP. To avoid defaulting now, Maldives needs US$ 114 million in 2024, US$ 557 million in 2025, and US$ 1.07 billion in 2026. Tall order indeed when the gross foreign currency reserves of the country were only US$ 437 million at the end of August, enough only for 1.5 months of imports.  

The Maldives owes the bulk of its US$ 3.4 billion foreign debt to India and China. Its debt to China alone is US$ 1.3 billion.

Despite good dollar receipts through an inflow of 2 million tourists annually, Maldives’ foreign exchange reserves have been dwindling under pressure from “external debt payments, government borrowing to plug budget deficits, and an import bill elevated by high global commodity prices,” as Ahmed Naish in The Diplomat.

Because of Maldives’ heavy dependence on imports, government expenditures ballooned given the steep rise in global fuel and commodity prices triggered by Russia’s invasion of Ukraine in 2022.    An Indian boycott triggered by some anti-Indian statements made by three junior Maldivian ministers had cost the tourism sector US$ 158 million.

According to Corporate Maldives, in 2024 Maldives’ GDP is projected to grow by 4.9%. Inflation is projected to 7.3% due to anticipated subsidies for staple foods and electricity.

Structural Changes

To tackle the forex problem, President Muizzu is planning to collect some import duties and some income taxes in US dollars and raising dollar-denominated airport service fees.

To get funds, the government is working on spending cuts and tax hikes announced in June. Besides, it has also been engaging bilateral and multilateral partners to meet the financing requirements

Emphasis on Fisheries?

Tourism is the main source of economic activity for Maldives, directly contributing close to 30% of GDP and generating more than 60% percent of foreign currency earnings. Though foreign investment continues come into Maldives with more than a 1000 small islands to invest in, it would be risky to put all eggs in the tourism basket.

Almost 40% of Maldives’ fish exports are to the EU nations. After Maldives graduated from the Least Developed Countries (LDC) list in 2014, it lost tariff free fish exports under the EU’s Generalized System of Preference (GSP). In 2015, when EU introduced GSP Plus targeted at developing countries, but Maldives did not qualify for the program since the country was not part of the 27 international conventions relating to freedom of religion, human and labour rights. Fish purchases declined by 46%, with a 56% drop in skipjack tuna purchases.

Maldives needs to take steps to sell more fish to markets other than the EU. A Free Trade Agreement (FTA) with China when Yameen was President could be operationalised as soon as possible. President Muizzu has allocated billions of Rufiyaa to support fishermen and develop new processing facilities.

Among his achievements, Muizzu highlights the near completion of infrastructure projects with Indian and Chinese grants. However, big scale infrastructure projects have led to heavy debts. The debt-to-GDP ratio is now at 113% of GDP, which is too high. While overall government revenue in 2023 was in line with budgeted estimates, expenditures exceeded the approved budget. Inequality and a lack of employment opportunities are other aspects of the weak Maldivian economy, especially in the many atolls.

Investment Climate 

Maldives completed negotiations on an FTA with Hong Kong in 2017, but an agreement has not been signed. FTA with China is still unimplemented. Muizzu is keen on it, if only to increase exports of fish to the big Chinese market. 

Corruption is a major issue retarding development. In March 2024 the government issued a new regulation which bans businesses from transacting with individuals linked to senior government personnel.

A notable feature of Muizzu’s rule so far is the about-turn he took vis-à-vis relations with regional power, India. Muizzu started off on the wrong foot when in 2023 he demanded that India take back its military-staffed air-borne rescue and sea surveillance project. It was part of Muizzu’s “India Out” campaign.

This led to an Indian boycott of Maldives. By August 2024, tourist arrivals from India had fallen from 128,756 the previous year to just 74,985, resulting in a revenue loss of US$ 150 million.

But a resilient Muizzu, launched “Welcome India” roadshows in major Indian cities, aimed at wooing Indian tourists back.

Meanwhile, he negotiated the withdrawal of Indian military personnel by March 2024. But he allowed the Indians to continue the medical evacuation project with civilian personnel to keep India’s goodwill.

China too On-board

As stated earlier, Maldives owes China over US$ 1.3 billion. But Muizzu has said that China has given the green light on deferring loan repayments for five years. This will help Maldives avoid a default.

China has scaled up its relations with Maldives since Muzzu took over power. Early in 2024, he visited China during which the two countries elevated their ties to a “comprehensive strategic cooperative partnership” and signed 20 agreements followed by a military assistance pact.

The Maldivian President is expected to continue his delicate balancing act vis-à-vis India and China with the aim of ensuring Maldives’ economic survival in a challenging geopolitical environment.