The Maldives is currently facing a worsening debt crisis, largely driven by shrinking currency reserves and substantial external debt. Recently, Fitch Ratings downgraded the country's debt rating to CC, marking the second downgrade in two months. This downgrade indicates a high risk of default and has caused a significant drop in the value of the Maldives’ sukuk bonds, which are a form of debt compliant with Islamic law.
The country's external debt stands at $3.4 billion, much of which is owed to the export-import banks of China and India. The Maldives borrowed heavily from these nations and private creditors to cover budget deficits. However, the COVID-19 pandemic severely impacted its economy by reducing tourism, the country’s main source of revenue. Even though there has been a recovery in tourist arrivals this year, the Maldives still struggles with its reliance on imports and a fixed exchange rate, both of which continue to drain its foreign currency reserves.
In response to this crisis, President Mohamed Muizzu is seeking financial assistance from both China and India, including measures such as currency swaps and loan deferrals. This approach contrasts with his “India Out” election campaign, which advocated for reducing India's military presence in the Maldives. Additionally, the government is working on fiscal consolidation measures and looking into support from international entities like the International Monetary Fund (IMF). However, any potential assistance from the IMF would likely require the Maldives to restructure its debt, reflecting the complex interplay of financial management and geopolitical considerations in the country’s economic policies.
The Maldivian economy is forecasted to grow by 4.7% in 2024, which is lower than previously expected. Although there has been an increase in tourist arrivals, the economic benefits have been limited due to factors like lower spending per tourist and shorter stays. The World Bank has expressed concerns over the Maldives' rising public debt, which reached $8 billion or about 122.9% of the country's GDP in 2023. They have recommended that the Maldives diversify its economy to reduce its heavy reliance on tourism, a sector that is highly sensitive to global economic changes and can be volatile.
The Maldives' growing debt could increase its financial vulnerabilities, making it harder for the country to meet its international debt obligations. Debt servicing requirements are estimated to be around $512 million annually for 2024 and 2025, with a sharp rise to $1.07 billion expected in 2026.
In summary, the Maldives' debt crisis is driven by several factors, including high levels of external debt, the economic fallout from the COVID-19 pandemic, ongoing currency and fiscal pressures, and the recent downgrades in the country’s credit rating. These challenges highlight the need for careful economic management and potential restructuring to ensure long-term financial stability. Their current austerity plans are hopefully a step in the right direction.