Understanding the Maldives’ economic crisis: Causes and implications

Celebrating the Maldives' 59th independence day on 26th July, President Mohamed Muizzu stressed the importance of “economic sovereignty” and thanked India and China for cooperating and strengthening the country’s economy. This latest development comes as the nation’s economy undergoes a severe crisis and is struggling to stay afloat. To be clear, the crisis has long been in the making, and the economy was in deep distress when Muizzu inherited the presidency in November 2023. However, nine months into power, Muizzu has further exacerbated these challenges. While the government has initiated some reforms, it lacks a long-term plan to stabilise or immunise the economy against external shocks and is making itself vulnerable to competition between India and China. 

A crisis long in the making:  

The crisis in the Maldives has been long in the making and emanates from its structural issues. As a nation of almost 1,200 islands, the economy has less diversification and a production base. Its primary revenue sources are tourism, import and green, and property taxes. However, subsequent governments have advocated for mega-infrastructure, housing projects, social welfare schemes, subsidies, state-owned enterprises, and bureaucratic expansion to further their political needs and voter base. For years, the country has sustained itself with a growing budget deficit, supported through grants and loans. However, external shocks like COVID-19 and the Russia-Ukraine war have impacted its revenue and foreign reserves, compelling the then-Ibrahim Solih government to borrow substantially from private lenders and India. As a result, the total debt stock in the Maldives increased from US$ 3 billion in 2018 to US$ 8 billion in 2023. Therefore, burdening the state with more debts, even as it was repaying those borrowed from private lenders and China under President Abdulla Yameen (2013-2018). 

The crisis in the Maldives has been long in the making and emanates from its structural issues. As a nation of almost 1,200 islands, the economy has less diversification and a production base.

The economic conditions have begun to deteriorate further under Muizzu, with high inflation, increasing imports, and a reduction in fish exports and tourism revenues. Despite knowing the dire conditions of the economy, Muizzu continued to maintain a budget deficit.  Incidentally, the government aimed to raise over US$ 200 million in budget support in its initial days. Furthermore, for political reasons, the government appointed over 300 ministers and (allegedly) 2,000 political appointments, leading to a recurring expenditure of over US$65 million every month. 

However, a major challenge emanates from the country’s ever-increasing debt stocks and maturing loans. As of March 2024, the Maldives has a staggering debt-to-GDP ratio of 110 percent. This accounts for an overall debt of US$ 8.2 billion. Over US$ 4.8 billion of these loans are domestic, and US$ 3.4 billion is external. These domestic borrowings from commercial banks, financial corporations, and central banks are in the form of treasury bills and bonds at high interest rates and low repayment time. On external debt, there are three prominent lenders (see Table 1) bondholders, China EXIM, and India EXIM. Additionally, several state-owned enterprises have also borrowed from external creditors (see Table 2) in the form of sovereign guarantees (SG). Approximately 70 percent of these SGs are offered by Chinese lenders and 18 percent by Indian EXIM. In both cases, Chinese debt stock is depleting while Indian debt stocks are increasing, implying that most Chinese loans and some external bonds are maturing.     

Table 1. External lenders for Maldives’ central government (BCG) debt

Source: Debt Bulletin, (2024, Quarter 1), Ministry of Finance, Maldives

Table 2. External lenders for Maldives’ state guarantee (SG) debt

Source: Debt Bulletin, (2024, Quarter 1), Ministry of Finance, Maldives  

Reforms and debt restructuring 

Substantial debt stocks and maturing loans, combined with structural issues are thus contributing to a swift reduction in foreign reserves and revenues. By the end of May, Maldives’ reserves stood at US$ 492 million, of which only US$ 73 million is usable. The World Bank estimates that foreign reserves of 512 million are necessary for sustaining debts in 2024 and 2025, and for 2026, the government would need a reserve of 1.07 billion. Some SOEs have even stopped undertaking new projects, and there are discussions to temporarily shut down nine embassies to cut down on the government's expenditures. 

Substantial debt stocks and maturing loans, combined with structural issues are thus contributing to a swift reduction in foreign reserves and revenues.

Considering that the redemption profile is dominated by external debts starting next year, the government has sought help from India and China in debt restructuring. China has offered a grant of USD 130 million and recently commenced its technical work to grant a grace period of five years (read till the end of Muizzu’s tenure)  on all of Maldives’ interest and principal payments. However, there is little clarity about debt restructuring on sovereign guarantees offered by China. On the other hand, India announced over US$ 91 million in assistance to the Maldives last year and offered another US$ 47 million in assistance this year. Besides, Indian EXIM had disbursed over US$ 29 million in the first quarter of this year; over 65 percent of Indian loans to the Maldives are yet to be disbursed. In May, the State Bank of India also deferred the repayment of a US$ 50 million bill by a year upon its maturity. Maldives is also exploring the possibilities of signing a currency swap agreement and trading in local currencies with both countries. There are also discussions of India helping the country access credit lines. 

Short-sightedness and great power politics

However, this approach seems to be inadequate and short-sighted. First and foremost, there is hardly any policy to deal with the country’s domestic and non-bilateral debts (like external bonds) which make up the most of debt stocks and immediate redemption profile. To be sure, the Muizzu administration has kick-started some initiatives to boost revenues. It has passed a law to strengthen customs and tax administration and will recover US$ 513 million in revenues. It is also keen on reforming the SOEs by modernising them and dissolving or merging others. Negotiations on the changes in health insurance schemes and offering targeted and direct transfer of subsidies are ongoing. Payments in Malé’s commercial harbour are being collected in US dollars, and a development bank will soon be operational to invest in sustainable economic and social development and raise funds for infrastructure. 

Second, Muizzu’s preference for a five-year grace period with China and use of debt restructuring as a window of opportunity to diversify the economy and push for mega-infrastructure projects will continue to pile debts and exacerbate structural challenges. For instance, Muizzu is keen on introducing bunkering, transhipment, and international financial services to diversify the economy. These services will have to compete with their existing and well-established counterparts in India and Sri Lanka. Muizzu is also increasing the number of airports from 16 to 31 and is building three new bridges to connect distant islands. The government has also proposed a monorail system, underwater tunnels, and reclaiming of several islands. It has promised to build over 100,000 housing units—40,000 in Northern and Southern provinces and 65,000 in Rasmale. These projects will pile up debts and challenge economic recovery and debt sustainability. Chinese debts, in particular, will pose a significant challenge to whoever succeeds Muizzu. 

This need for investments and funding will make Maldives more vulnerable to competition in the region. For instance, in recent months, having promised debt restructuring and grants, China increased its presence in the Maldives by offering to build roads and houses and upgrading or maintaining infrastructure. Most importantly, it also began to counter India's strategic presence by developing an agricultural zone in UTF, where the former was building a naval harbour; it is also upgrading the Kadhdhoo airport—where a batch of Indian civilian experts are operating an Indian helicopter. However, with the Muizzu administration now having convinced Beijing to swiftly restructure its debts, China will leverage the negotiations to increase its presence in the country further. And this does not necessarily have to be in the form of mega-infrastructure projects.   

This need for investments and funding will make Maldives more vulnerable to competition in the region.

On the other hand, with India being the second top external lender, the Maldives’ agency to deal with the former is increasingly shrinking. It is thus likely to show more sensitivities to Delhi and mellow down on its pro-China tilt. On its part, EAM, S. Jaishankar’s potential visit to the Maldives on 8 August underscores Delhi's attempts to leverage the crisis and move beyond mere working relations. This visit also comes when another SBI treasury bill worth US$ 50 million is set to mature in September. Delhi will thus be exploring new areas of collaboration and projects, and will also be expecting some definitive response on paused initiatives like Addu Police Academy, Indian Consulate, UTF harbour, HICDPs, and increasing Chinese presence around Indian projects. 

The economic crisis in the Maldives seems to be Muizzu’s biggest challenge so far. However, the government has no long-term calculation for promoting a resilient economy and dealing with non-bilateral debts. A grace period of five years from China and plans to invest heavily in the country's infrastructure and services indicate that structural issues will continue to exacerbate. As a result, it is becoming more vulnerable to the ongoing India-China competition in the region.  

Note: Values in USD are estimates

Aditya Gowdara Shivamurthy is an Associate Fellow with the Strategic Studies Programme at the Observer Research Foundation

• International Affairs
• China
• India
• Neighbourhood
• MALDIVES
• India-China relations
• International Loans
• Maldives Economy Crisis
• Maldives Independence Day
• Maldives Inflation
• Maldives Tourism Revenue
• Mohamed Muizzu
• Spiking Debt-to-GDP Ratio

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