New Delhi: The Maldivian economy has a “good growth trajectory” this year, with the major issue for the government being one of “managing the cash flow”, former finance minister of Maldives Ibrahim Ameer told ThePrint.
“How would the government manage its finances? That is the major difficulty before them. Last year, our government [the previous Maldivian government] targeted expenditure cuts of about 3 percent of the total gross domestic product (GDP). We could not complete it due to it being an election year,” Ameer said.
The former finance minister added, “What they did was increase the recurring expenditure. There are more than 2,000 political appointees made by this government. Our government had only 700. This has increased expenditure on salaries by 200 million [Maldivian] rupiah.”
On Wednesday, the island country’s long-term debt was downgraded by Fitch Ratings, a US credit rating agency, to ‘CCC+’ from ‘B-’ due to the nation’s “worsening external financing and liquidity metrics”. By policy, the agency does not assign viewpoints to sovereign bonds with a rating of CCC+ or below, indicating its ‘junk bond’ status.
The American rating agency said in a statement that Maldives’ “weakening foreign-reserve buffers and rising external government debt” increases the challenge for the Mohamed Muizzu-led government to meet its future external debt-servicing obligations.
In May, the country’s foreign exchange reserves fell to $492 million from $748 million a year ago, indicating a persistent current account deficit — the total value of imports being higher than the total value of exports.
Fitch has forecast the country’s foreign-reserves coverage of external payments to be less than a month’s worth (0.9 month) this year. This is well below the projected median of 4.2 months. The agency has also pointed out that for the rest of this year, the Maldivian government has $233 million in sovereign external debt servicing obligations and $176 million in publicly guaranteed external financing obligations.
Next year, the amount will rise to over $500 million and by 2026, it will cross $1 billion, the agency said.
“The government’s commitment to reform was highlighted by the Cabinet’s endorsement of the fiscal reform agenda this week…In their statement, Fitch has indicated that a fiscal trajectory aimed at consolidating public debt levels could result in an upward revision of current ratings,” the Maldivian finance ministry said in a statement Thursday.
The state of the Maldivian economy, however, “is as bad as it could get at this time”, Aditya Gowdara Shivamurthy, an associate fellow at the Observer Research Foundation (ORF), told ThePrint.
“As an island country, Maldives depends a lot on imports. The government subsidises health and education. This, along with its reliance on state-owned enterprises (SOEs) as a political tool despite its consistent losses, are some of the reasons for the current situation,” said Shivamurthy.
Ameer said that the previous government led by former President Ibrahim Solih, which he was a part of, focused on reforming these subsidies keeping in mind the economic situation of the country.
“However, instead of focusing on completing the necessary reforms, this government has made the situation worse,” said Ameer.
The country, with a population of five lakh, had a total debt worth $8 billion in 2023. This is roughly equivalent to 122.9 percent of its total gross domestic product (GDP), according to the World Bank.
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External shocks to Maldives and its impact
The country relies on foreign imports, especially for its energy needs. During the first quarter of 2024, Maldives imported petroleum products worth a little over $200 million, a 25 percent increase from the same period last year, according to the Maldivian Monetary Authority (MMA).
Overall exports in April, however, fell by one percent in comparison to the same month the year before, according to the MMA, highlighting the growing current account deficit and the resulting worries about the state of its economy.
“The Maldives does not have a production base of its own. The crisis in Russia and West Asia has impacted fuel prices, which has led to an increase in inflation. This increase indicates that repayment values for its loans have also increased. Nevertheless, economically unviable mega projects continue in the country,” said Shivamurthy.
Ameer explained that the country has faced two major shocks in recent years which affected its growth and economic health — the Covid-19 pandemic and the conflict between Russia and Ukraine.
“The Covid-19 pandemic shocked the world in 2020. We took the necessary measures, fully knowing the side-effects. The stimulus package by the government saw close to a 40 percent growth in GDP in 2021. However, in 2022, we faced another crisis because of the war in Ukraine,” said Ameer.
The pandemic shut the country’s major revenue source — tourism. However, for the last three years, the industry has been growing, with more tourists flocking to the nation’s white beaches and clear waters.
“Tourist arrivals have been increasing. Last year, it touched two million. This year, it already touched one million arrivals till June. This points to a healthy trajectory for the Maldivian economy. However, tourist arrivals have dropped from India and that has had an impact,” explained Ameer.
India was the top country in terms of number of tourist visits to Maldives, but as of 24 June this year, its position in terms of the number of tourist visits has dropped to sixth. This comes after a diplomatic spat earlier this year, as part of which deputy ministers in the Maldivian government made derogatory remarks about Prime Minister Narendra Modi.
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Mega infrastructure projects
In recent years, the country has been pushing mega infrastructure projects, funded by foreign loans, including the Greater Malé Connectivity Project, which is a bridge being constructed to link Maldivian capital Malé with surrounding islands. India has given a grant of $100 million and extended lines of credit worth $400 million for the Greater Malé Connectivity Project.
The push for grand infrastructure projects started a little over a decade ago, with then president Abdulla Yameen relying on Chinese loans to boost employment and economic growth. In 2018, former president Solih looked to New Delhi to service the investment needs for such infrastructure projects.
This has left current president Muizzu with large external debt obligations. His government has requested New Delhi and Beijing to restructure these loans. Earlier this year, the State Bank of India rolled over a $50 million loan for another year, giving Malé a breather.
New Delhi also extended budgetary support assistance to the debt-ridden nation.
“China has realised Maldives is in trouble. Beijing has said it will not offer new loans, especially if Malé wishes to restructure the current ones. Since the government does not have much revenue, even state-owned enterprises have not taken up new projects,” said Shivamurthy.
He also pointed out that in recent years, the total Chinese debt stock has reduced, while the Indian debt stock has increased, indicating that Malé has been focusing on “paying off loans” to Beijing.
“About 60-65 percent of India’s committed loans are yet to be disbursed, as it is project oriented. However, Malé has been focusing on repaying Chinese loans through their revenue collections,” said Shivamurthy.
(Edited by Radifah Kabir)
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