The crisis unfolds
The Maldivian economy, comprised of nearly 1,200 islands, has long struggled with structural weaknesses. Reliant primarily on tourism, imports, and taxes, its economic base lacks diversification. Successive governments have leaned heavily on mega-infrastructure projects and social welfare schemes to garner political support, which, coupled with the global disruptions of COVID-19 and the Russia-Ukraine conflict, has led to a staggering rise in debt.
From a manageable US$3 billion in 2018, the nation’s debt has ballooned to US$8 billion by 2023. This surge has strained the country’s finances, with President Muizzu’s administration continuing to operate with a budget deficit and high levels of political appointments contributing to escalating costs.
Debt and dependency: A tenuous balance
As of March 2024, the Maldives’ debt-to-GDP ratio stands at an alarming 110 percent, with total debt reaching US$8.2 billion. The external debt is particularly burdensome, with China and India being prominent lenders. China’s EXIM Bank and India’s EXIM Bank are major contributors, with Chinese debt decreasing while Indian debt increases.
The government’s attempts to manage this overwhelming debt include seeking restructuring assistance from both China and India. China has offered a grant of USD 130 million and a five-year grace period on debt repayments, while India has provided substantial aid and deferred repayment on existing loans. However, these measures alone may not suffice to stabilize the economy.
A short-term fix with long – term risks
Despite these efforts, the Maldivian government’s strategy appears short-sighted. The focus on infrastructure projects, such as expanding airports and constructing new bridges, risks exacerbating the nation’s debt crisis. These initiatives, while potentially beneficial, require massive funding and may deepen the country’s dependency on foreign loans.
The Maldives’ increasing vulnerability to regional power dynamics is another critical concern. China’s growing influence, marked by infrastructure projects and strategic investments, contrasts with India’s attempts to strengthen its ties with the Maldives. This geopolitical rivalry is likely to affect the Maldives’ economic and strategic choices moving forward.
Looking ahead: a fragile future
The economic crisis facing the Maldives is a profound challenge for President Muizzu and his administration. Without a comprehensive long-term strategy to address structural weaknesses and manage both bilateral and non-bilateral debts, the country’s economic stability remains at risk. The ongoing competition between India and China adds another layer of complexity, as the Maldives navigates its path amid shifting regional influences.
As the Maldives grapples with these economic challenges, the global community watches closely, aware that the nation’s choices will have far-reaching implications for its future prosperity and regional stability.