The Maldives is facing a debt crisis influenced by China’s lending practices, with total debt rising dramatically. The nation requires significant payments in the coming years against a backdrop of dwindling foreign reserves, prompting urgent action. International ratings have worsened, and financial assistance requests have seen little response, creating concerns about a potential sovereign default.
The Maldives is currently facing a severe debt crisis that jeopardizes its economic sovereignty, primarily due to China’s lending practices and trade policies that have greatly intensified its financial challenges. As per Dimitra Staikou’s article on Medium, the nation’s total debt has surged from USD 3 billion in 2018 to USD 8.2 billion by March 2024, with expectations of exceeding USD 11 billion by 2029. Notably, external debt amounts to USD 3.4 billion, with China and India being the main creditors.
The Maldives faces an immediate financial burden with an external debt service requirement of USD 600 million for 2025 and an astonishing USD 1 billion for 2026. By December 2024, the usable foreign exchange reserves of the Maldives Monetary Authority were precariously low at below USD 65 million, although an improvement from USD 21.97 million in July 2024. This precarious situation was exemplified by reserves temporarily turning negative in mid-August, highlighting a critical balance of payments crisis.
In light of these challenges, international financial institutions have adjusted the Maldives’ credit rating downward. Fitch Ratings has reduced the Maldives’ rating three times within a few months, while Moody’s has retained a negative outlook on the nation’s long-term ratings. Dimitra pointed out that the China-Maldives Free Trade Agreement (FTA), effective from January 2025, has aggravated the economic vulnerabilities rather than alleviating them.
Under the FTA, the Maldives has reduced tariffs on 91% of goods from China. However, the trade balance is significantly skewed, with the Maldives exporting less than 3% of the approximate USD 700 million trade, meaning the Maldives primarily imports from China. Since the FTA, imports from China have increased to USD 65 million, raising concerns about the sharp 64% drop in revenue from import duties.
The Maldivian tourism sector has also seen increased involvement from Chinese firms. While the influx of Chinese tourists has bolstered visitor numbers, the economic benefits increasingly favor Chinese companies rather than the local economy. President Muizzu’s administration has implemented several crisis response measures, including raising the Tourist Goods and Services Tax from 16% to 17%, increasing green taxes, and imposing new taxes and fees.
In an effort to control expenditures, the administration has dismissed 228 political appointees, discontinued indirect subsidies, and prioritized public sector investment programs. Despite these measures, projections suggest the Maldives will experience financing gaps of USD 500 million in 2025 and USD 800 million in 2026.
The government has sought assistance from various channels, requesting USD 300 million from the Gulf Cooperation Council, though these appeals have largely gone unanswered. Similarly, requests for USD 200 million in budget support from China have not yielded positive responses. A USD 750 million currency swap deal with India has provided temporary assistance for routine payments but remains inadequate for meeting substantial upcoming debt obligations.
Dimitra cautioned that the Maldivian crisis illustrates a trend in nations burdened by Chinese debt. She warned, “Without significant international intervention or debt restructuring, the Maldives risks following neighboring Sri Lanka into sovereign default.” Facing limited creditor support, the Maldives could encounter a deepening economic crisis that jeopardizes its financial autonomy and political independence, all while contending with the existential threat of climate change.
The Maldivian economy is precariously positioned amid a growing debt crisis exacerbated by unfavorable lending practices, particularly from China. With significant debt repayments looming, dwindling foreign exchange reserves, and inadequate international support, the country must implement effective debt restructuring or risk following Sri Lanka into sovereign default. This situation threatens not only the nation’s economic stability but also its political sovereignty and response capacity to pressing climate change challenges.
Original Source: www.aninews.in
