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Maldives Faces Sovereign Default Risk Amid Debt Crisis Linked to Chinese Loans

The Maldives faces a severe debt crisis, with total debt rising from USD 3 billion in 2018 to USD 8.2 billion in early 2024. This situation is exacerbated by dwindling foreign reserves and the economic consequences of the China-Maldives Free Trade Agreement. The government is undertaking financial reforms, but projected gaps indicate an impending sovereign default risk without international assistance.

The Maldives is currently confronting a severe debt crisis endangering its economic sovereignty, exacerbated by dwindling foreign exchange reserves. Reports indicate that the nation’s total debt has escalated from USD 3 billion in 2018 to USD 8.2 billion as of March 2024, with projections suggesting it may exceed USD 11 billion by 2029. The pressure is particularly acute, necessitating service of external debt of USD 600 million in 2025 and USD 1 billion in 2026.

As of December 2024, usable foreign exchange reserves were below USD 65 million, a slight improvement from July’s alarming low of USD 21.97 million. Nevertheless, reserves turned negative briefly in mid-August, highlighting the critical dire balance of payments crisis. In light of these circumstances, international financial institutions have downgraded the Maldives’ credit rating; Fitch has lowered the rating by three notches, while Moody’s maintains a negative long-term outlook.

The implementation of the China-Maldives Free Trade Agreement in January 2025 has amplified economic vulnerabilities rather than alleviating them. “Of the approximately USD 700 million in bilateral trade, Maldives exports comprise less than 3 percent compared to China’s dominating 97 percent import share,” wrote Dimitra Staikou. The reduction of import tariffs on 91 percent of goods from China has not fostered reciprocal benefits.

Following the FTA’s implementation, imports from China surged, leading to a significant decrease in government revenue from import duties, which plummeted from MVR 385 million to MVR 138 million. The tourism sector has also become increasingly integrated with Chinese enterprises, resulting in financial benefits primarily favoring Chinese companies.

President Muizzu has initiated measures such as increasing the Tourist GST tax from 16 percent to 17 percent and enhancing departure taxes. Other steps include divesting interests in state-owned enterprises and combining Maldives Airports Company Ltd. with Regional Airports Company Ltd. These stringent fiscal measures, however, cannot prevent projected financing gaps exceeding USD 500 million in 2025 and USD 800 million in 2026.

The Maldivian government has sought financial support from various sources, requesting USD 300 million from Gulf Cooperation Council countries which has largely gone unanswered. Additionally, appeals to China for assistance, including budget support from the China Development Bank, have not yielded positive outcomes. A temporary USD 750 million currency swap from India offers partial relief, yet remains inadequate for meeting forthcoming debt obligations.

Dimitra warns that the Maldivian situation echoes a pattern of other nations burdened by Chinese loans leading to sovereign default risks. “Without significant international intervention or debt restructuring, the Maldives risks following neighboring Sri Lanka into sovereign default,” she stated. The lack of creditor support further exacerbates the impending economic crisis, which threatens the nation’s financial independence and political stability.

In summary, the Maldives is on the precipice of a debt crisis driven by unsustainable lending practices, particularly from China. The escalating debt levels and insufficient foreign reserves underline the urgent need for international intervention. President Muizzu’s government is implementing various financial reforms, but without immediate support, there is a real risk of default, mirroring the struggles faced by neighboring countries.

Original Source: www.aninews.in

Victor Reyes

Victor Reyes is a respected journalist known for his exceptional reporting on urban affairs and community issues. A graduate of the University of Texas at Austin, Victor has dedicated his career to highlighting local stories that often go unnoticed by mainstream media. With over 16 years in the field, he possesses an extraordinary talent for capturing the essence of the neighborhoods he covers, making his work deeply relevant and impactful.

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