India’s Vital Role To Save Maldives From Default

The Maldivian economy has been going through an exceptionally bad patch with heavy debts to be repaid between now and 2026. According to the World Bank, as of 2023, Maldives’ total public debt stood at USD 8 billion or 122.9% of the GDP. The foreign debt component is USD 3.4 billion - the bulk of it owed to China and India.

To avoid a default, Maldives needs to pay USD 114 million in 2024, USD 557 million in 2025, and USD 1.07 billion in 2026. This is a tall order when the gross foreign currency reserves in August were only USD 437 million, enough only for 1.5 months of imports.

In August, Fitch Rating reported the government’s inability to repay a USD 500 million Sukuk due in 2026. Sukuk is an Islamic Shariah-compliant debt instrument. No government had defaulted on Sukuk in the past.

On September 11, Moody’s downgraded the Maldives saying that “default risks have risen materially.”

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

The United States’ State Department said in its latest report that 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.

According to Corporate Maldives, inflation is projected to be 7.3% in 2024 due to anticipated subsidies for staple foods and electricity.

In 2023 and early 2024, Muizzu tried to implement anti-India policies which he had announced in his election campaign. He carried forward the “India Out” campaign initiated by President Abdulla Yameen in 2013-2018, by demanding that India take back its troops who were operating an inter-island medical evacuation service.

This was followed by three junior Ministers making intemperate remarks against Prime Minister Narendra Modi on twitter. Muizzu also got a parliamentary committee to go into the many deals made with India by the pro-Indian Solih regime in 2018-2023, particularly the hydrographic survey agreement.

These actions triggered an unofficial Indian boycott of Maldives as a tourist destination. That reportedly cost Maldives a loss of USD 158 million.

As the effects of his anti-Indian policies began to be felt and the overall economic situation deteriorated to cause a balance of payments crisis, Muizzu made radical departures from policies he was identified with.

He mended fences with India. The three junior Maldivian ministers who had bad mouthed Indian Prime Minister Narendra Modi were made to resign.

Muizzu launched “Welcome India” roadshows in major Indian cities, aimed at wooing Indian tourists back. He negotiated the withdrawal of Indian military personnel by March 2024, while allowing the Indians to continue their medical evacuation project with civilian personnel.

At Muizzu’s request, proceedings of the parliamentary committee examining all agreements with India entered into by the pro-Indian Siolih regime, were suspended.

Unfazed by the bitter past, India reciprocated handsomely. External Affairs Minister S. Jaishankar visited Maldives in August to inaugurate several key projects. These included water and sewerage networks on 28 islands, financed through an USD 800-million Indian Line of Credit.

Several community development projects were supported by Indian grant aid. MoUs to train 1,000 Maldivian civil servants in India and to introduce the Unified Payments Interface (UPI) were inked.

Muizzu attended Prime Minister Narendra Modi's inauguration of his third term in New Delhi in June. He described his first visit to India as a "success". He will be visiting India officially soon to seek a USD 400 million currency swap arrangement. The swap deal would effectively be an Indian bailout to help the Maldives make impending interest payments.

The Maldivian Foreign Ministry praised India’s support following the extension of a USD 50 million Treasury bill (T-bill) by one year. This extension is the second rollover granted this year, with a similar extension provided in May 2024.

Talks have resumed to establish an Indian Consulate in Addu City as planned earlier in Solih’s time but abandoned after Muizu took over. According to ‘Adhadhu News’, India is ready to reciprocate by allowing an additional Maldivian Consulate in India. Currently, there is a Maldivian Consulate in Thiruvananthapuram in addition to a High Commission in New Delhi.

Muizzu has been able to do the resetting with India because Maldives is politically stable these days. He is firmly in the Presidential saddle, duly propped up by parliament where his party, the Peoples’ National Congress (PNC), has a super majority.

As stated earlier, Maldives owes China over USD 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.

Early in 2024, Muizzu 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. Maldives has leased out Uthuruthilafalhu island to a Chinese company for agricultural use.

To tackle the forex problem, Muizzu has been making some domestic structural changes. He is planning to collect some import duties and some income taxes in US dollars and raise dollar-denominated airport service fees.

To get funds, the government is working on spending cuts and tax hikes announced in June. Tourism is the main economic sector, accounting for 30% of the GDP and generating more than 60% of the foreign currency earnings. But experts warn that it would be risky to put all eggs in the tourism basket.

Almost 40% of Maldives’ fish exports are to the European Union (EU) nations. But the sector is facing difficulties. After Maldives graduated from the Least Developed Countries (LDC) list in 2014, it lost tariff free fish exports under the EU’s Generalised System of Preference (GSP).

In 2015, when the EU introduced GSP Plus targeted at developing countries, 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.

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, is to be operationalised by President Muizzu.

He 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. But these big ticket projects have resulted in heavy debts and they have to be pruned suitably.

The State Owned Enterprises (SOE) have been a major contributor to Maldives’ fast rising public debt, including a third of Maldives’ sovereign debt. Expenditure on these could be rationalised.

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.

Inequality and a lack of employment opportunities are other aspects of the weak Maldivian economy, especially in the many atolls. Diversification of the economy is suggested to solve these problems.

President Muizzu 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.