How Maldives controls its spiralling economic issues under the new leadership remains to be seen
Now that the presidential polls are behind him, Maldives President-elect, Dr Mohamed Muizzu, and his team may be staring at existing and emerging economic realities. In turn, this may catalyse continued cooperation with its neighbour, India, which was at the receiving end of the victor’s negative poll campaign on ‘sending back foreign troops’ without naming any country. The reasons are not far to seek. The nation is heading for a fiscal crisis, if not exactly on the same lines as what Sri Lanka faced last year. What's more, every concerned Maldivian aware of the ticking time-bomb was anxiously watching the Sri Lankan developments and was fully aware that India’s ‘Neighbourhood First’ policy was the one that helped Sri Lanka first—and last. According to the World Bank, Maldivian “economic growth will slow down in the next two years, and the financial challenges will be greater if the country continues to borrow at high costs amid the global economic slow-down.” The real GDP is expected to grow by 6.5 percent in 2023, with an average growth of 5.4 percent from 2024 to 2025. While a thriving tourism sector promises a positive outlook in the medium term, the Bank noted that the country is grappling with pressing fiscal challenges due to inflationary pressures linked to rising global commodity prices, increased capital spending and subsidies, and ongoing central bank financing of the budget deficit.
The government raised Goods and Services Tax (GST) rates earlier this year, but more substantial and immediate commitments are necessary, especially since planned subsidy reforms for 2023 did not happen as anticipated.
The Bank said that Maldives’ total debt is set to remain high at over 115 percent of the GDP despite expectations of reduced deficits. “The government raised Goods and Services Tax (GST) rates earlier this year, but more substantial and immediate commitments are necessary, especially since planned subsidy reforms for 2023 did not happen as anticipated.” The Bank, thus, wants the government to ‘manage spending while boosting revenue, revamp programmes like the ‘Aasandha Health Insurances Scheme’, streamline subsidies for state-owned enterprises (SOEs), broadening tax-base and tapping into domestic income sources’, among others. In context, the World Bank has predicted that the government’s substantial debt will impact the private sector by 2026, during the incoming Muizzu government’s regime. Accordingly, Maldives will face challenges in raising the significant amount of debt due in 2026. The Bank estimates that one of the reasons for the impact on the private sector is the country’s low foreign currency reserves. The 2026 debt includes a US$ 500 million (MVR 7.7 billion) loan taken by the government in 2021, as well as a US$100 million loan from the Abu Dhabi Fund for Development (ADFD), repayable in 2026, obtained by the previous government.
The World Bank has predicted that the government’s substantial debt will impact the private sector by 2026, during the incoming Muizzu government’s regime.
The Bank said that public- and publicly-guaranteed external debt servicing is expected to reach US$ 1.07 billion in 2026. It is expected to be US$ 450 million in 2024 and US$ 650 million in 2025. “Such high levels of public debt, and associated refinancing risks, make the Maldivian economy extremely vulnerable to domestic and external shocks,” the report said. It warned that mobilisation of additional debt at non-concessional terms would further exacerbate these vulnerabilities.
If this is the World Bank’s latest status report, as far back as December 2022, the International Monetary Fund (IMF), while commending Maldives’ post-COVID economic recovery and attributing it to ‘decisive policy measures’, pointed out how fiscal vulnerabilities remained high and fiscal-deficit remained in double-digits, reflecting elevated capital-spending, an increased interest burden, and a higher wage bill. Continued support to State Owned Enterprises added to fiscal vulnerabilities. The banking system remains sound, supported by strong buffers, but risks stem from the sovereign-bank nexus.
Dollar shortages have persisted, as reflected in large spreads in the parallel foreign exchange market.
The IMF pointed out that Maldives ‘remains at a high risk of external debt distress and a high overall risk of debt distress...’ External financing needs are projected to rise and draw on the already thin reserve buffers, increasing debt rollover risks. Dollar shortages have persisted, as reflected in large spreads in the parallel foreign exchange market. The IMF also commended the government (of President Solih) for hiking GST and Tourism GST (TGST) rates from 1 January 2023. It wanted the nation’s central bank’s, namely, the Maldives Monetary Authority’s (MMA), advances to the government gradually phased out, to lower the pressure on international reserves and prices. In between, credit rating agency, Fitch, reiterated Maldives' long-term Foreign-currency issuer default rating (IDR) at ‘B-minus'’, reflecting a favourable GDP growth outlook, based on strong tourism prospects and continued bilateral and multilateral financing support facilitated by the country's geopolitical and strategic importance. It said that this is balanced against the country's high and rising government debt-burden, low foreign-reserve buffers, and vulnerability to shocks that could undermine international prospects for the tourism industry. Fitch also said that the ‘negative outlook’ reflects the risk of heightened external financing and liquidity strains, which could imperil the currency peg to the US dollar amid rising external debt servicing, weakening foreign reserves, and tight global financial conditions. It added that foreign reserves will remain under considerable pressure in light of sizeable import bills on elevated energy and food prices, and continued intervention by the MMA to support the currency-peg.
Suffice to say that in the midst of the poll-induced distraction, the government still managed to issue/sell Treasury bills (T-bills) worth MVR 2.4 billion, to meet its financial obligations.
As the Fitch report pointed out, the MMA has drawn US$ 100 million on a US $ 200-million currency-swap line with the Reserve Bank of India in December 2022. Gross foreign reserves have since fallen by 16.6 percent to US$ 694 million. The Finance Ministry estimates that official reserves will stand at US$ 606.3 million by fiscal year-end in December. According to MMA, the usable reserves stood at US$ 150 million at the end of August after deducting short-term debt from official reserves, compared to US$125 million in July this year. Yet, the foreign-reserve coverage of current external payments stood at only 1.1 months in 2023, well below the projected 'B' median of 3.5 months. On the positive side, the agency said tourist arrivals will hit a record high of 1.9 million in 2023, or a 11.6-percent over the pre-COVID 2019 levels, triggering the economy to grow at 7.2 percent in 2023 and an average 6.6 percent in the next two fiscals. Suffice to say that in the midst of the poll-induced distraction, the government still managed to issue/sell Treasury bills (T-bills) worth MVR 2.4 billion, to meet its financial obligations. The latest data from the Finance Ministry indicates that the government has an outstanding debt of MVR 76 billion from T-bills and bonds.
Shorn of niceties, the three reports implied that the government was living beyond its means. They have said that the government’s recurring expenditure was rising and capital expenditure was either being funded by external debt, as from India and China, or through deficit-financing nearer home. The latter was achieved either through periodic short-term T-bills, often purchased by the banking sector at a higher interest rate, or by printing more currency, or both.
India’s track record as a development partner to Third World countries is commendable compared to China, which brings in not only capital but also labour, thus, depriving the local population of jobs and family incomes.
While the Muizzu government can be expected to approach India and China for restructuring the current debts, it may still require external funding for new development projects, which also create assets and jobs and keep the economy going. Here, India’s track record as a development partner to Third World countries is commendable compared to China, which brings in not only capital but also labour, thus, depriving the local population of jobs and family incomes. Yet, the government may still be forced to look around for fiscal funding for meeting recurring expenditure. The World Bank and IMF are considered the best way out though they are not a popular measure in Third World nations, given that the demand for pre-aid tax and tariff hikes are not popular with the people. Thus, seeking budgetary support from friendly nations is an option. It used to be the case in the pre-democracy era and up to now. Here again, India, more than China, has a proven track record, more so in the case of Maldives.
The World Bank and IMF are considered the best way out though they are not a popular measure in Third World nations, given that the demand for pre-aid tax and tariff hikes are not popular with the people.
How it all pans out under the new leadership, whose continued demand for removing ‘foreign soldiers’ from Maldivian soil relates only to India, remains to be seen. While Prime Minister Narendra Modi was the first foreign leader to congratulate Muizzu on his election through social media, and followed it up with a letter that the Indian High Commissioner Munu Muhawar handed over to Muizzu at their post-poll meeting, the latter’s PPM-PNC combine commended that the meeting was ‘fruitful’ and said that “discussions were held on further enhancing bilateral relations”. This, at the moment, is considered as the basis for hopes on the bilateral front, where Maldives continues to need India for funding as New Delhi needs Malé in mutually-agreed security cooperation. According to reports, the Indian envoy has promised to address the ‘foreign soldier’ issue to the ‘satisfaction’ of the President-elect and his future government.
N Sathiya Moorthy is a Chennai-based policy analyst & political commentator
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N. Sathiya Moorthy is a policy analyst and commentator based in Chennai.
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