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By P.K.Balachandran
Colombo, September 22: The Maldivian economy is going through a bad patch even as there is political stability in the country. President Mohamed Muizzu is firmly on the saddle in Male and is duly propped up by a Majlis (Parliament) where his party, the Peoples’ National Congress (PNC), has a super majority.
Furthermore, there is no credible challenger, as rivals Ibrahim Solih, Abdulla Yameen and Mohamad Nasheed are now pale shadows of their former selves.
And yet, the Maldivian economy is showing strains, needing urgent infusion of foreign exchange and corrections in policies to avoid a debt trap, even a default.
Muizzu’s actions early in his tenure that were meant to implement some hyperbolic election promises, combined with the effects of some of the policies of his predecessors, caused economic problems.
Compelled to address the grave issues confronting the country, Muizzu made radical departures from policies he was identified with. Most strikingly, he shed his pronounced anti-India stance. But the remarkable thing is that he did this without alienating China, relations with which were exceptionally strong when Abdulla Yameen was in power from 2013 to 2018.
Economic Crisis
On September 11 this year, the credit ratings agency Moody’s shockingly downgraded the Maldives saying that “default risks have risen materially.” The government, it said, will have to seek financing “mainly from bilateral sources” because of the prohibitive rates of interest in the international bond markets.
The Maldives now owes the bulk of its US$ 3.4 billion foreign debt to bilateral donors India and China. Its debt to China alone is US$ 1.3 billion. Both India and China were financing mega infrastructure projects for the past decade.
Ahmed Naish writes in The Diplomat this month that the World Bank had to put Maldives’ total public debt in 2023 at US$ 8 billion or 122.9% of the GDP. This was mainly due to the enormous expenditure thrust on the country by the COVID-19 pandemic.
To avoid defaulting now, Maldives needs US$ 114 million in 2024, US$ 557 million in 2025, and US$ 1.07 billion in 2026. Tall order indeed.
But the gross foreign currency reserves of the country were only US$ 437 million at the end of August, enough only for 1.5 months of imports, Moody’s pointed out.
Despite dollar good receipts through an inflow of 2 million tourists annually, the Maldives’ foreign exchange reserves have been dwindling under pressure from “external debt payments, government borrowing to plug budget deficits, and an import bill elevated by high global commodity prices,” Ahmed Naish points out.
Because of Maldives’ heavy dependence on imports, government expenditures ballooned given the steep rise in global fuel and commodity prices triggered by Russia’s invasion of Ukraine in 2022, the US State Department said in its report for 2024.
Fitch Rating gave “junk” status to the Maldives in August, citing the government’s inability to repay a US$ 500 million Sukuk due in 2026.Sukuk is an Islamic Shariah-compliant debt instrument. The dollar-denominated Sukuk fell to a record low of 70 cents to the dollar, down from about 93 cents in June casing panic.
According to Corporate Maldives, the country’s economy saw a deceleration in the second quarter of 2024, following a robust 9.8% growth in real GDP in the first quarter. The slowdown was driven by weaker performance in sectors such as construction, real estate, and retail trade.
However, the tourism sector remained a strong performer, helping to counterbalance some of the declines in other areas. The earlier Indian boycott triggered by some anti-Indian statements made by three junior Maldivian ministers had cost the sector US$ 158 million.
In 2024, Maldives’ real GDP is projected to grow by 4.9%. However, food inflation remains a pressing issue, with significant rises in the cost of fish and vegetables. Looking ahead, inflation is projected to surge in the Fourth Quarter of 2024, reaching 7.3% due to anticipated subsidy reforms affecting staple foods and electricity. Without these reforms, inflation would have been considerably lower, around 1.2%.
Structural Changes
The Muizzu government took steps to boost the amount of foreign currency entering the domestic banking system and curb the black market in remittances. In 2023 it hoped to see that the bulk of the tourism revenue of US$ 3.6 billion was retained in the Maldives and not stashed away overseas.
The government is also planning to collect some import duties and some income taxes in US dollars and raising dollar-denominated airport service fees. Ahmed Naish says.
To get funds, the government is working on spending cuts and tax hikes announced in June. Besides, it has also been engaging bilateral and multilateral partners to meet the financing requirements
Emphasis on Fisheries?
Tourism is the main source of economic activity for Maldives, directly contributing close to 30% of GDP and generating more than 60% percent of foreign currency earnings, the US State Department report for 2024 says.
Though foreign investment continues come into Maldives with more than a 1000 small islands to exploit, it would be risky to put all eggs in the tourism basked, the State Department cautioned and added that fisheries is waiting to be exploited to earn foreign exchange.
Almost 40% of Maldives’ fish exports are to the EU nations. After Maldives graduated from the Least Developed Countries (LDC) list in 2014, it lost tariff free fish exports under the EU’s Generalized System of Preference (GSP). In 2015, when EU introduced GSP Plus targeted at developing countries, but Maldives did not qualify for the program since the country was not part of the 27 international conventions relating to freedom of religion, human and labour rights. Fish purchases declined by 46%, with a 56% drop in skipjack tuna purchases.
Maldives needs to take steps to sell more fish to markets other than the EU. A Free Trade Agreement (FTA) with China when Yameen was President could be operationalised. But there is opposition to this on the grounds that an FTA with China will result in cheap Chinese goods flooding the Maldivian market, hurting trade with other countries.
President Muizzu has allocated billions of Rufiyaa to support fishermen and develop new processing facilities.
Muizzu highlights the near completion of the Velana International Airport expansion and the development of additional resorts as achievements. He has announced plans for a major project in Malé City, funded by Chinese grants, aimed at addressing road infrastructure issues.
However, big scale infrastructure projects have led to heavy debts. The debt-to-GDP ratio is now less at 113% of GDP compared to 138% in 2020. But the fall is not good enough.
While overall government revenue in 2023 was in line with budgeted estimates, expenditures exceeded the approved budget.
Inequality and a lack of employment opportunities are other aspects of the weak Maldivian economy, especially in the atolls.
Investment Climate
To attract investment, especially foreign, Maldives will have to improve its ranking in the “Ease of doing Business” scale, the US State Department says. Maldives was ranked 147 out of 190 on the World Bank’s Ease of Doing Business index in 2020, scoring especially low on getting electricity; registering property; trading across borders; protecting minority investors; getting credit; and resolving insolvency.
Maldives completed negotiations on an FTA with Hong Kong in 2017, but an agreement has not been signed. FTA with China is still unimplemented. Muizzu is keen on it, if only to increase export fish to the big Chinese market under the FTA.
State Owned Enterprises (SOE) have been a major contributor to Maldives’ fast rising public debt, including one third of Maldives’ sovereign debt guarantees issued to back housing development initiatives. Expenditure on these needs to be rationalized.
Corruption
Corruption is a major issue retarding development. While President Muizzu is yet to make direct pledges to tackle corruption, in March 2024 the government issued a new regulation which bans businesses from transacting with individuals linked to senior government personnel.
The Solih Administration made efforts to tackle widespread corruption, in 2018, establishing a Presidential Commission on Corruption and Asset Recovery to investigate corruption cases, but the commission was dissolved in 2022 due to non-performance.
Mending Fences with India
A notable feature of Muizzu’s regime is the about-turn it took vis-à-vis relations with regional power India. He did it without alienating another benefactor (and India’s regional rival), China.
Muizzu started on the wrong foot at end of 2023 by demanding that India take back its military-staffed air-borne rescue mission and surveillance project. It was part of Muizzu’s “India Out” campaign.
This led to an Indian boycott of Maldives. By August 2024, tourist arrivals from India had fallen from 128,756 the previous year to just 74,985, resulting in a revenue loss of US$ 150 million.
But unfazed, Maldives launched “Welcome India” roadshows in major Indian cities, aimed at wooing Indian tourists back.
Meanwhile, Muizzu negotiated the withdrawal of the military personnel by March 2024. But he allowed the Indians to continue the medical evacuation project with civilian personnel not to rub India too much on the wrong side.
Indian External Affairs Minister S. Jaishankar visited Maldives in August. Several key projects were inaugurated at the time. These included water and sewerage networks on 28 islands, financed through an US$ 800-million Indian Line of Credit, and several community development projects supported by Indian grant aid. MoUs to train 1,000 Maldivian civil servants in India and introduce the Unified Payments Interface (UPI) to the Maldives, further deepening bilateral ties.
Muizzu attended Indian Prime Minister Narendraa Mod’s inauguration of his third term in New Delhi in June and described his first visit as a “success”. He will be visiting India officially soon to seek a U$ 400 million currency swap arrangement. The swap deal would effectively be an Indian bailout to help the Maldives make impending interest payments.
When Indian External Affairs Minister, S. Jaishankar, visited Maldives Muizzu praised the “close and historic ties” and said: “India has always been one of our closest allies and invaluable partners, facilitating and providing aid whenever we need it.”
He expressed his “full commitment to strengthening the historic relations between our two countries to reach new heights in the coming years.” There has never been a moment when we have moved away from that policy he added.
Muizzu expressed gratitude for India’s “generous” quota for staple food imports and restructuring of debt payments. The Maldives will ensure the “peace and stability” of the Indian Ocean, he assured Jaishankar.
The Maldivian Foreign Ministry issued a statement praising India’s support following the recent extension of a US $50 million Treasury bill (T-bill) by one year. This extension is the second rollover granted this year, with a similar extension provided in May 2024.
China too On-board
The Maldives owes China over US$ 1.3 billion. Muizzu has said that China has given the green light on deferring loan repayments for five years which will be a big relief to avert Maldives falling into a situation faced by Sri Lanka leading to debt default.
A large portion of the loans were taken by the Maldives from China’s Exim Bank for development projects during former President Yameen’s government. These must be repaid in 2026, according to adhadhu.com. But technical work on restructuring these loans is going on.
China has scaled up its relations with Maldives since Muzzu took over power. Early in 2024, he visited China during which the two countries elevated their ties to a “comprehensive strategic cooperative partnership” and signed 20 agreements followed by a military assistance pact.
Muizzu also permitted Chinese research vessels regarded by India as “spy ships” to berth in Maldives. India did not make a big fuss.
The Maldivian President is expected to continue his delicate balancing act in his relations with giants India and China for Maldives’ economic survival and for protecting its independence.
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