“Mend fences with India and maintain ties with China to revive Maldives’ economy and protect its independence.”
The Maldivian economy is going through a rough patch, even as there is political stability in the country. President Mohamed Muizzu is firmly in the saddle in Malé, duly propped up by a Majlis (Parliament) where his party, the People’s National Congress (PNC), holds a supermajority.
Furthermore, there is no credible challenger, as rivals Ibrahim Solih, Abdulla Yameen Abdul Gayoom, and Mohamed Nasheed are now pale shadows of their former selves.
And yet, the Maldivian economy is showing signs of strain, requiring an urgent infusion of foreign exchange and policy adjustments to avoid a debt trap, or even a default.
Muizzu’s actions early in his tenure that were meant to implement some hyperbolic election promises, combined with the effects of policies from his predecessors, have caused economic problems.
Compelled to address the grave issues confronting the country, Muizzu made radical departures from the policies he was identified with. Most strikingly, he shed his pronounced anti-India stance. Remarkably, he did this without alienating China, with whom relations were exceptionally strong when Abdulla Yameen was in power from 2013 to 2018.
Economic Crisis
On 11 September this year, the credit ratings agency Moody’s shockingly downgraded the Maldives, stating that “default risks have risen materially.” The government, it said, will have to seek financing “mainly from bilateral sources” due to the prohibitive interest rates in the international bond markets.
The Maldives now owes the bulk of its US$3.4 billion foreign debt to bilateral donors India and China, with its debt to China alone amounting to US$1.3 billion. Both India and China have been financing mega infrastructure projects over the past decade.
Ahmed Naish writes in The Diplomat this month that the World Bank has put the Maldives’ total public debt in 2023 at US$8 billion, or 122.9% of GDP. This was primarily due to the enormous expenditure thrust upon the country by the COVID-19 pandemic.
To avoid defaulting now, the Maldives needs US$114 million in 2024, US$557 million in 2025, and US$1.07 billion in 2026. A tall order indeed! But the gross foreign currency reserves of the country were only US$437 million at the end of August, enough for just 1.5 months of imports, Moody’s pointed out.
Despite good dollar receipts from an inflow of 2 million tourists annually, the Maldives’ foreign exchange reserves have been dwindling under pressure from “external debt payments, government borrowing to plug budget deficits, and an import bill elevated by high global commodity prices,” as Ahmed Naish notes.
Due to the Maldives’ heavy dependence on imports, government expenditures have ballooned, given the steep rise in global fuel and commodity prices triggered by Russia’s invasion of Ukraine in 2022, the US State Department said in its report for 2024.
Fitch Ratings assigned “junk” status to the Maldives in August, citing the government’s inability to repay a US$500 million Sukuk due in 2026.
Sukuk is an Islamic Shariah-compliant debt instrument.
The dollar-denominated Sukuk fell to a record low of 70 cents to the dollar, down from about 93 cents in June, causing panic.
According to government data, the country’s economy saw a deceleration in the second quarter of 2024, following a robust 9.8% growth in real GDP in the first quarter. The slowdown was driven by weaker performance in sectors such as construction, real estate, and retail trade.
However, the tourism sector remained a strong performer, helping to counterbalance some of the declines in other areas.
The earlier Indian boycott, triggered by some anti-Indian statements made by three junior Maldivian ministers, had cost the tourism sector US$158 million.
In 2024, the Maldives’ real GDP is projected to grow by 4.9%.
However, food inflation remains a pressing issue, with significant rises in the cost of fish and vegetables. Looking ahead, inflation is projected to surge in the fourth quarter of 2024, reaching 7.3% due to anticipated subsidies for staple foods and electricity.
Structural Changes
The Muizzu government took steps to boost the amount of foreign currency entering the domestic banking system and curb the black market in remittances. In 2023, it hoped to see that the bulk of the tourism revenue of US$3.6 billion was retained in the Maldives and not stashed away overseas.
The government is also planning to collect some import duties and income taxes in US dollars, as well as raise dollar-denominated airport service fees, according to Ahmed Naish.
To secure funds, the government is implementing spending cuts and tax hikes announced in June. Additionally, it has been engaging with bilateral and multilateral partners to meet its financing requirements.
Emphasis on Fisheries?
Tourism is the main source of economic activity for the Maldives, directly contributing close to 30% of GDP and generating more than 60% of foreign currency earnings, according to the US State Department report for 2024.
Though foreign investment continues to come into the Maldives, with more than 1,000 small islands to invest in, it would be risky to put all eggs in the tourism basket, the State Department cautioned.
The fisheries sector is waiting to be exploited to earn foreign exchange, it added.
Almost 40% of the Maldives’ fish exports go to EU nations. After the Maldives graduated from the Least Developed Countries (LDC) list in 2014, it lost tariff-free fish exports under the EU’s Generalized System of Preference (GSP). In 2015, when the EU introduced GSP Plus targeted at developing countries, the Maldives did not qualify for the programme since the country was not part of the 27 international conventions relating to freedom of religion, human rights, and labour rights.
Fish purchases declined by 46%, with a 56% drop in skipjack tuna purchases.
The Maldives needs to take steps to sell more fish to markets other than the EU. A Free Trade Agreement (FTA) with China, established during Yameen’s presidency, could be operationalised as soon as possible. However, there is opposition to this on the grounds that an FTA with China would result in cheap Chinese goods flooding the Maldivian market.
President Muizzu has allocated billions of Rufiyaa to support fishermen and develop new processing facilities.
Among his achievements, Muizzu highlights the near completion of the Velana International Airport expansion project and the development of additional resorts. He has announced plans for a major project in Malé City, funded by Chinese grants, aimed at addressing road infrastructure issues.
However, large-scale infrastructure projects have led to heavy debts. The debt-to-GDP ratio is now lower at 113% of GDP compared to 138% in 2020, but the fall is not good enough.
While overall government revenue in 2023 was in line with budgeted estimates, expenditures exceeded the approved budget.
Inequality and a lack of employment opportunities are other aspects of the weak Maldivian economy, especially in the many atolls.
Investment Climate
To attract investment, especially foreign, the Maldives will have to improve its ranking on the “Ease of Doing Business” scale, the US State Department says. The Maldives was ranked 147 out of 190 on the World Bank’s Ease of Doing Business index in 2020, scoring especially low on getting electricity, registering property, trading across borders, protecting minority investors, getting credit, and resolving insolvency.
The Maldives completed negotiations on an FTA with Hong Kong in 2017, but an agreement has not been signed. The FTA with China is still unimplemented. Muizzu is keen on it, if only to increase fish exports to the large Chinese market.
State-Owned Enterprises (SOEs) have been a major contributor to the Maldives’ rapidly rising public debt, including one third of the Maldives’ sovereign debt guarantees issued to back housing development initiatives. Expenditure on these needs to be rationalised.
Corruption
Corruption is a major issue retarding development. In March 2024, the government issued a new regulation that bans businesses from transacting with individuals linked to senior government personnel.
In 2018, the Solih government established a Presidential Commission on Corruption and Asset Recovery, but the commission was dissolved in 2022 due to non-performance.
Mending Fences with India
A notable feature of Muizzu’s rule so far is the about-turn he took vis-à-vis relations with regional power, India. He managed this without alienating another benefactor (and India’s regional rival), China.
Muizzu started on the wrong foot when, in 2023, he demanded that India take back its military-staffed air-borne rescue and sea surveillance project. This was part of Muizzu’s “India Out” campaign.
This led to an Indian boycott of the Maldives. By August 2024, tourist arrivals from India had dropped from 128,756 the previous year to just 74,985, resulting in a revenue loss of US$150 million.
But a resilient Muizzu, launched “Welcome India” roadshows in major Indian cities, aimed at wooing Indian tourists back.
Meanwhile, he negotiated the withdrawal of Indian military personnel by March 2024, but allowed the continuation of the medical evacuation project with civilian personnel.
Indian External Affairs Minister S. Jaishankar visited the Maldives in August, during which several key projects were inaugurated. These included water and sewerage networks on 28 islands, financed through an US$800 million Indian Line of Credit, along with several community development projects supported by Indian grant aid. MoUs were signed to train 1,000 Maldivian civil servants in India and to introduce the Unified Payments Interface (UPI) to the Maldives, further deepening bilateral ties.
Muizzu attended Indian Prime Minister Narendra Modi’s inauguration of his third term in New Delhi in June, describing his first visit to India as a “success.”
He will be visiting India officially soon to seek a US$400 million currency swap arrangement, which would effectively be an Indian bailout to help the Maldives meet impending interest payments.
When Indian External Affairs Minister S. Jaishankar visited the Maldives in August, Muizzu praised the “close and historic ties” with India, stating: “India has always been one of our closest allies and invaluable partners, facilitating and providing aid whenever we need it.”
He expressed his “full commitment to strengthening the historic relations between our two countries to reach new heights in the coming years.”
“There has never been a moment when we have moved away from that policy,” he added.
Muizzu conveyed gratitude for India’s “generous” quota for staple food imports and the restructuring of debt payments. The Maldives would ensure the “peace and stability” of the Indian Ocean, he assured.
The Maldivian Foreign Ministry issued a statement praising India’s support following the recent extension of a US$50 million Treasury bill (T-bill) by one year. This extension is the second rollover granted this year, with a similar one provided in May 2024.
China Remains Engaged
As stated earlier, the Maldives owes China over US$1.3 billion. Muizzu has said that China has given the green light to defer loan repayments for five years, which will help the Maldives avoid default.
A large portion of the loans was taken from China’s Exim Bank for development projects during former President Yameen’s government, and these are due for repayment in 2026, according to Adhadhu.com. Technical work on restructuring these loans is ongoing.
China has scaled up its relations with the Maldives since Muizzu took power. Early in 2024, he 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.
Muizzu also permitted Chinese research vessels regarded by India as “spy ships” to berth in the Maldives. But India did not make a big fuss over it.
The Maldivian President is expected to continue his delicate balancing act in his relations with both India and China, essential for the Maldives’ economic survival and for protecting its independence.