Maldives In A Financial Mess

Maldives is in a financial mess and is looking out for bailouts from India and China. Its foreign and domestic debt was 110% of the GDP at the start of 2024. The net foreign exchange reserves fell below US$ 50 million in July, while gross reserves dropped to under US$ 400 million from US$ 500 million in May.

The ‘Financial Times’ pointed out that the Maldives’ bonds slumped after Fitch Ratings downgraded the island nation’s debt for the second time in two months over a deepening financial crisis.

In June Fitch downgraded Maldives to CCC+ or “very high” credit risk. The Maldives faces debt risks owing to a sharp rise in spending.

The World Bank’s Country Director for the Maldives, Nepal, and Sri Lanka, Faris H. Hadad-Zervos, notes that the island nation’s annual debt servicing needs are likely to be US$ 512 million for 2024 and for 2025. They will be an additional US$ 1.07 billion in 2026.

Faris attributed this to the decision to halt subsidy reforms, coupled with continued high spending.

However, the most worrying aspect of the financial crisis is that the Sukuk, a Sharia-compliant debt instrument, fell to 71 cents on the US dollar last Thursday. The Sukuk bond had traded at more than 80 cents at the start of August.

The Sukuk is an Islamic financial certificate, similar to a bond in Western finance. But it complies with Islamic religious law, the Sharia. Since the traditional Western interest-paying bond structure is not permissible in the Maldives as a Muslim country, the issuer of a Sukuk sells an investor a certificate, and then uses the proceeds to purchase an asset in which the investor has a partial ownership.

The issuer must also make a contractual promise to buy back the bond at a future date at par value. So far, no Maldivian government has ever defaulted on Sukuk. But the Muizzu government is in danger of defaulting on it.

The majority of the Maldivian government’s US$ 3.4 billion external debt is held by the export-import banks of China and India. Though President Mohamed Muizzu came to power chanting the slogan “India Out” and reduced India’s military presence in the islands, he has had to send an SOS to New Delhi (and also to Beijing) for bailouts.

The Maldives had borrowed heavily from India and China and also private creditors to finance growing budget deficits as the COVID-19 pandemic had wrought havoc with tourism, the country’s biggest foreign exchange earner.

In July, President Muizzu said that Beijing had given the “green signal” to defer five years of loan payments to the China Exim Bank, and that his government was talking to both India and China to secure currency swaps to alleviate dollar shortages.

India may help Muizzu to get his chestnuts out of the fire. Bilateral relations between India and the Maldives is a “steadying force” India’s Minister of External Affairs, S. Jaishankar said recently.

India attaches great significance to relations with the Maldives even as the relationship between the two countries has varied through the years, Jaishankar said.

“I saw that in my recent visit that this relationship is a steadying force as they get into somewhat choppy waters where their own prospects are concerned, especially in terms of the economic challenges,” the Indian External Affairs Minister said speaking at the launch of the book, ‘Strategic Conundrums: Reshaping India’s Foreign Policy’ by Rajiv Sikri, an Indian diplomat.

But Fitch Ratings is not so sanguine about Indian or Chinese help coming. “Support from IMF or other multilateral donors would most likely be contingent on debt restructuring,” it said.

However, there is a silver lining in the dark cloud. Thanks to Chinese, Russian and British tourists, total arrivals have gone up to 1.25 million, though heavy imports and the MVR (Rufiyaa)-USD exchange rate have kept up the pressure on forex reserves.

The Bank of Maldives introduced limits on foreign currency spending on Rufiyaa cards last week. But due to protests, it reversed the decision on the same day on instructions from the Maldives Monetary Authority.

The World Bank Country Director for the Maldives, Nepal, and Sri Lanka Faris H. Hadad-Zervos affirmed that the World Bank stands ready to support the crucial reforms announced by the Maldivian government, and urged the state to protect the vulnerable while reforming inefficient subsidies.

He also emphasized the streamlining of the State-Owned Enterprises (SOEs) for a more economic output. He urged Maldivian government to develop better investment strategies to drive up state income.

In its May 8, 2024 report “Scaling Back & Rebuilding Buffers”, the latest Maldives Development Update, the World Bank had noted that the 5% increment in tourist arrivals is offset by lower spending per tourist and shorter stays.

The political slanging match with India earlier on, had slowed down the growth of Indian tourist arrivals. At one time, Indian tourists were the single largest group, contributing to the health of the Maldivian economy.

The country’s economy is now projected to grow by 4.7%, lower than previous estimates.

The World Bank was critical of the Maldives’ continued reliance on expensive external debt which carries a high risk in the absence of fiscal reforms.

“In addition to spending cuts, Maldives’ debt and fiscal sustainability require a reprioritization of public spending and improved revenue mobilization,” the World Bank said in its May 08th press release.

The bank also urged Maldives to address the widening inequalities resulting from fiscal tightening, “particularly between the greater Male region islands and the atolls”.

According to ‘Maldivesrepublic.com’ the government’s response to the economic turmoil has been controversial.

A detailed article in it said: “Increased spending has seemingly been directed toward creating jobs for friends and family members rather than addressing the nation’s pressing needs.

“This has led to allegations of widespread corruption and nepotism, with reports indicating that the family of Parliament Speaker Abdul Raheem Abdulla holds eight key positions, collectively earning over a million MVR monthly. Similarly, the Islamic Minister’s family is reportedly benefiting from lucrative appointments that cost another million.

“Despite promises to reduce political appointments, over 2,000 appointees continue to burden the government with 86 million MVR in monthly salaries.

“In a controversial move aimed at bolstering security, the government has spent an exorbitant $37 million on Turkish drones, despite widespread criticism of the deal being overpriced and allegations of corruption surrounding it.

“Economic mismanagement extends to key national assets. The government has signed an MoU with Philippines’ International Container Terminal Services Inc. (ICTSI) for the main commercial port, raising concerns over the potential control of national assets in a 25-year arrangement.

“Additionally, fishermen have protested over unpaid catches, and Maldivian students abroad are struggling to meet rent and tuition payments due to a lack of government funds.

“Furthermore, economic distress is cascading through the Maldives’ economy, with numerous small and medium enterprises (SMEs) facing bankruptcy due to non-payment by government-owned enterprises (SoEs).”

In a tweet, the former President Mohamed Nasheed called for a transparent explanation of the Maldives’ financial situation.