The Maldives is nearing a sovereign default due to increasing debt, currently at USD 8.2 billion, projected to exceed USD 11 billion by 2029. Facing escalating external payments and dwindling reserves, the country’s reliance on the China-Maldives Free Trade Agreement has aggravated economic vulnerabilities. President Muizzu’s government has taken measures to address this crisis, but significant financing gaps remain, and international creditors have shown reluctance to assist, raising fears of a sovereign financial crisis.

The Maldives is facing a severe financial crisis due to escalating debt levels and reliance on external creditors. The nation’s total debt has risen significantly from USD 3 billion in 2018 to USD 8.2 billion by March 2024, with projections reaching over USD 11 billion by 2029. Currently, it owes USD 3.4 billion externally, primarily to China and India, creating an urgent need to address almost USD 600 million in debt service due in 2025 and USD 1 billion in 2026.

Foreign exchange reserves have become critically low, standing at less than USD 65 million in December 2024, though an improvement from July’s USD 21.97 million. Reserves turned negative briefly in August, exacerbating the balance of payments crisis. As a result, international credit agencies have downgraded the Maldives’ credit rating significantly, with Fitch cutting it three notches and Moody’s maintaining a bleak outlook.

The implementation of the China-Maldives Free Trade Agreement (FTA) in January 2025 has further exposed the Maldives to economic vulnerabilities. Despite bilateral trade reaching approximately USD 700 million, Maldives exports make up merely 3 per cent compared to China’s dominating imports. The FTA has led to a surge in imports from China and a substantial decline in government revenue from import duties, causing economic strain rather than alleviation.

Additionally, while the tourism sector continues to attract Chinese visitors, the financial benefits accrue predominantly to Chinese entities rather than boosting the Maldivian economy. To combat these challenges, President Muizzu’s government has raised taxes, initiated divestments from state-owned enterprises, and implemented strict spending controls. Despite these measures, the country still anticipates financing gaps exceeding USD 500 million in 2025 and USD 800 million in 2026.

The Maldives has sought financial support from various sources, requesting USD 300 million from the Gulf Cooperation Council and USD 200 million from China, but to little avail. India has provided a temporary USD 750 million currency swap, aiding routine payments but insufficient to meet looming debt obligations.

The situation mirrors trends in other nations that have taken on unsustainable debt burdens in connection with Chinese loans. “Without significant international intervention or debt restructuring, the Maldives risks following neighboring Sri Lanka into sovereign default,” Dimitra cautioned. The Maldives now stands at a critical juncture, facing a potential economic crisis that threatens its financial autonomy and political sovereignty.

In summary, the Maldives faces a precarious financial crisis exacerbated by rising debt levels, low foreign exchange reserves, and insufficient international assistance. The implementation of the China-Maldives FTA has deepened economic vulnerabilities, while aggressive governmental measures may prove inadequate against looming debt service payments. As international creditors exhibit reluctance to provide aid, the threat of sovereign default looms large, thereby endangering the Maldives’ financial independence and overall stability.

Original Source: m.economictimes.com

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