The Maldives is said to be in a brittle economic state, slowly inching closer to what Sri Lanka and Pakistan are experiencing.
Even as the World Bank and the International Monetary Fund (IMF) have cautioned the Maldivian government on the economic front, the voter mood has sobered owing to the continuing economic and forex crisis in neighbouring Sri Lanka, with whom many Maldivians share familial connections. However, steep increases in prices and considerable fall in family incomes, coupled with unclear predictions about mainstay tourism sector recovery, have forced them to look up to the government for more subsidies and tax cuts, which remains a halfway street—that is more subsidies but also more taxes.
In its report, ‘Maldives Public Expenditure Review’, the World Bank has said that the nation did not face the risk of immediate economic crisis, but was spending beyond its limits even before the pandemic. As the report pointed out, the country had run more extreme budget deficits than sustainable ones and also borrowed heavily, leading to a debt of US$ 6.1 billion by the end of 2021, or close to MVR 100 billion, an estimated 125 percent of the GDP. Of this, local debts accounted for 65 percent and international market debts, 60 percent.
Even excluding the guaranteed debt, the government’s direct debt stood at US$ 5.2 billion, or 107 percent of the GDP in 2021. This did not include advances from Maldivian Monetary Authority (MMA), the nation’s central bank. The report said that fiscal risks, estimated at US$ 2.5 billion, or 45 percent of the GDP, stemmed from guaranteed and on-lent loans, as well as trade payables, subsidies, and capital injections granted to state-owned enterprises (SOEs) or public sector undertakings (PSUs) as known elsewhere.
The country had run more extreme budget deficits than sustainable ones and also borrowed heavily, leading to a debt of US$ 6.1 billion by the end of 2021, or close to MVR 100 billion, an estimated 125 percent of the GDP.
According to the Finance Ministry figures, the government had taken a loan of 18.7 million euros from European Investment Bank, 101 million euros from another European bank and US$ 8.7 million from IDB, all adding up to MVR 2.17 billion in a single month. According to reports, the US Fed’s interest rate hike spiked the dollar value when other currencies suffered.
Available data show that external debt averaged US$ 1193.48 million from 2010 up to 2021, touching an all-time high of US$ 2448.60 million that year. The record low of US$ 696.40 million was recorded in 2015 when incidentally, the Opposition PPM-PNC combine’s Abdulla Yameen was President. The debt was reportedly the lowest under President Maumoon Abdul Gayoom, who ruled the country for 30 years until 2008 and spurted out under successor democracy President, Mohammed Nasheed, who succeeded him. Updated official figures of the government show that the nation’s debt rose to MVR 99 billion, or 113 percent of the GDP by the end of Q1 2022.
In effect, pro-democracy presidents, with their finger on the pulse of the people have been spending more—the other being incumbent Mohamed Ibrahim Solih, also from Nasheed’s Maldivian Democratic Party (MDP)—than the ‘autocratic’ half-brothers, Maumoon Gayoom and Yameen. In contrast, the short-term presidency of Mohamed Waheed Hassan Manik (2012-13) actually paid back some debt and brought down the total debt.
It is in this background that a Forbes magazine study, based on the World Bank’s report for 2020, pointed out how the Maldives was among the three South Asian nations, along with Sri Lanka and Pakistan, standing neck-deep in the Chinese debt. What should be even more surprising is the fact that as many as 97 countries, or close to half the number of UN member nations, are in debt to China, most of them through the BRI project, about which not much is being heard in recent times.
For the Maldives, according to Forbes’ analysis, the total debt stood at MVR 86 billion in 2020, of which MVR 44 billion was in external debt. Of this, Chinese debt accounted for 31 percent of the country’s Gross National Income (GNI). The projects funded with loans from China include the construction of the Sinamalé Bridge and the airport development project.
However, the incumbent administration of President Ibrahim Mohamed Solih has repeatedly said that they would not default on payment, but without indicating the source for those levels of additional revenue.
Earlier, in the Joint World Bank-IMF Debt Sustainability Analysis published in April 2020, debt was assessed to be sustainable on the strong assumption that capital- spending would be reduced, however, that changed since the pandemic struck. In the case of Maldives, additional spending on COVID treatment and family support was accompanied by a steep fall in tourism incomes for resort owners and dependent industries, and in government revenue. As is known, tourism has been the mainstay of the nation’s economy for over four decades.
In context, this year’s World Bank report pointed out that not all debts acquired during the COVID pandemic were directed toward short-term needs, forced by the pandemic. While much of it has gone into physical and social infra projects, the returns, over the short, medium, and long terms may not be adequate to service those debts, leave alone repay them in full. According to the report, total debt service costs on existing debt will jump to US$ 900 million or MVR 13.8 billion in 2026, possibly equivalent to 60 percent of 2019 revenues.
The Sovereign Development Fund could partially finance some of these repayments, but not all, the World Bank indicated. However, the incumbent administration of President Ibrahim Mohamed Solih has repeatedly said that they would not default on payment, but without indicating the source for those levels of additional revenue. Finance Minister Ibrahim Ameer has also on multiple occasions denied any risk to the economy. Yet, in June this year, the government has taken MVR 2 billion in new loans in a single month.
At the end of a visit by its delegation in July, when they met with the Parliamentary Committees on Public Accounts and Economic Affairs, the IMF approved the government’s economic measures. Delegation leader Tidiane Kinda told the government and parliament panels how the nation’s economy would improve later this year. He pointed out how global trends associated with the Ukraine War had spiked prices, and how the government, through subsidies, had kept inflation at 3 percent lower than the global average. The delegation also commended the government’s decision to hike taxes.
The Finance Ministry has said that the budget deficit this year reached MVR 5.8 billion by the end of August, against an estimated total of MVR 9.8 billion for the whole year —against the total deficit of MVR 11 billion for fiscal 2021, ending 31 December. According to pro-Opposition media reports, the government had anticipated a revenue fall this year but has not tightened the belt enough.
Tourism is the nation’s economic mainstay but future predictions of complete recovery to pre-COVID levels are not encouraging, as the current trends indicate.
The central bank has pointed out that the national reserve has decreased to US$ 657.97 million in August, with an expendable component of US$ 244 million, against US$ 244 million in the previous month. The figure had stood at US$ 371 million at the end of the last fiscal. However, government leaders, starting with Tourism Minister, Dr Abdulla Mousoom, have dismissed international investment bank J P Morgan’s prediction of a complete depletion of national reserves next fiscal (which coincides with the presidential polls in the last quarter).
Tourism is the nation’s economic mainstay but future predictions of complete recovery to pre-COVID levels are not encouraging, as the current trends indicate. The IMF has said as much, linking anticipated short-falls this year to the European winter in the absence of Russian gas to warm up which is Maldives’ peak tourism season.
Given that the World Bank has said that state-owned enterprises (SOEs) posed a risk to the Maldivian economy, and efforts may have to be taken to privatise them, it could become a live politico-electoral issue as the economy is still recovering from the COVID shock.,
The World Bank report says that SoEs account for 10 percent of the GDP, and 12 percent of the working population outside of the resort sector, or 21,000 jobs. Averaging three voters to a family, if not more, they number 60,000, or a fourth of the estimated electorate in next year’s presidential polls. That is saying a lot, and retaining/restructuring SOEs could become a live poll issue.
A champion of the ‘free market economy’ in the country, Speaker Nasheed has backed government plans to increase Goods and Services Tax (GST), from 6 to 8 percent and sector-specific Tourism Goods and Services Tax (TGST), from 12 to 16 percent.
Rather than cutting down on expenses, the government seems to be using taxation as a means to mop up more funds. In this, the Solih leadership has got support from the rival Nasheed camp in the party. A champion of the ‘free market economy’ in the country, Speaker Nasheed has backed government plans to increase Goods and Services Tax (GST), from 6 to 8 percent and sector-specific Tourism Goods and Services Tax (TGST), from 12 to 16 percent. This may ensure a smooth passage for the government’s taxation drive, as the ruling MDP has a huge lead in Parliament, 65 in a House of 87.
However, the government does not have the stomach to follow Nasheed’s suggestion not to live in self-delusion on the exchange front and peg the US dollar at MVR 17 against the ‘artificially-pegged’ figure of MVR 15.42. Nasheed said that the dollar reserve in the central bank has dwindled to worrying levels, and the black market in US dollars continued unabated. Educated public opinion freely relates this to the Sri Lankan dollar situation over the past several months.
The government’s anxiety is understandable. As President, Nasheed ‘floated’ the rufiyaa, leading to a steep rise in legal exchanges for families needing to travel or send money to neighbouring Sri Lanka or India for education and healthcare emergencies. It made the government and the ruling MDP unpopular overnight, as almost every family in the country has legitimate requirements for dollars, which they buy through legal means, like banks. The Solih leadership does not want a repeat.
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N. Sathiya Moorthy is a policy analyst and commentator based in Chennai.
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