Maldives at High Risk of Foreign Debt Crisis After China Borrowings

On Wednesday, the International Monetary Fund warned that the strategically-placed Indian Ocean nation of the Maldives, which has borrowed heavily from China and shifted allegiance from India, is at high risk of "debt distress."

The IMF did not provide details of the Maldives' foreign debt. However, it said there was a need for urgent policy adjustment.

Maldives Faces Foreign Debt Crisis

(Photo : ISHARA S. KODIKARA/AFP via Getty Images)
TOPSHOT - Maldives' President Mohamed Muizzu looks on after reading the oath during his inauguration ceremony in Male on November 17, 2023. President Mohamed Muizzu of the Maldives vowed on November 17 to expel Indian troops deployed in the strategically located archipelago, in his first speech to the nation after being sworn into power.

Beijing has increased its financial commitment to the Maldives since Maldives President Mohamed Muizzu took power in November. Muizzu thanked China for its "selfless assistance" for developing funds after a visit to Beijing last month.

After evaluating the country's economy, the IMF said that the overall fiscal deficits and public debt are projected to stay elevated without significant policy changes. It added that the Maldives remains at high risk of external and overall debt distress.

The archipelago, known for its white sand beaches and where tourism accounts for nearly a third of the economy, has recovered economically from the COVID-19 pandemic.

Although an expansion of the airport and more hotels are expected to spur GDP, the IMF said that uncertainty surrounding the outlook remains high, and risks are tilted to the downside.

The former president Abdulla Yameen, who served as Muizzu's mentor, borrowed heavily from Beijing for construction projects. The World Bank, citing the Maldives' finance ministry, said that in 2021, the country owed 42% of its total foreign debt of about $3 billion to China.

Muizzu has pledged to bolster his military to protect the nation's extensive marine territory. He has requested that the Indian troops operating the three reconnaissance aircraft in the Maldives should leave by May 10.

The nation's chain of 1,192 small coral islands stretches around 800 kilometers (500 miles) across the equator and traverses global east-west shipping routes.

Muizzu Announces Discontinue of New Development Projects

On Tuesday, Muizzu said that the nation's debt condition prevented him from launching any new development projects. According to Male-based news outlet Adhadhu, Muizzu claimed he did not want to deceive people about the economic disaster his administration "inherited."

Muizzu was forced to reveal the actual economic situation due to pressure from those dissatisfied with the nation's stalled projects.

He declared, "The next two months will be the most difficult. This is the most critical time," when touring Guraidhoo, one of the nation's islands. "It will become much easier after July. But we're starting now to do the work necessary to earn income."

Male's relationship with New Delhi has suffered since the Maldivian President took office, claiming that the government's debt and the state-owned firms' borrowings were also high. He said that he was trying to bring sustainable development to its true meaning, and it would not produce results if he set down foundation stones in the typical manner of the past without considering the reality as there is an election ahead.