IMF Warns Maldives of Looming Debt Crisis Amid Heavy Reliance on China

The International Monetary Fund (IMF) has issued a stark warning to the Maldives about its high risk of external and overall debt distress due to heavy reliance on Chinese funding. The Maldives' foreign debt has reached a staggering $4.038 billion, equivalent to 118% of its GDP, with China owning 25.2% of the country's external debt.

Why this matters: The Maldives' debt crisis has significant implications for the country's economic stability and its relations with major powers like India and China, potentially affecting regional dynamics. Furthermore, the crisis serves as a warning to other countries heavily reliant on foreign funding, highlighting the need for sustainable economic practices and diversified funding sources.

Despite the challenges posed by the war in Ukraine, the Maldives' economy has shown resilience, growing by 13.9% in 2022, driven by the tourism sector. Inflation has been contained at 1.9% year-on-year in December 2023, thanks to falling food and energy prices and price subsidies. However, the overall fiscal deficit is estimated to reach 13.4% of GDP in 2023, with public debt expected to rise further to 118.7% of GDP.

The IMF's Executive Board has urged the Maldivian authorities to implement immediate policy adjustments to safeguard macroeconomic and financial stability, restore debt sustainability, and support sustained strong and inclusive growth. The Board has recommended a combination of holistic expenditure rationalization and further domestic revenue mobilization, as well as strengthening public financial and debt management.

The Maldives' growing debt crisis has raised concerns about the country's ability to repay its loans and maintain economic stability. In a recent development, Maldivian Foreign Minister Moosa Zameer announced significant progress on expedited Indian-assisted projects in the Maldives during his official bilateral visit to India from May 8 to 10. Zameer emphasized the importance of these projects and reiterated the Maldivian government's commitment to completing them.

India has provided a repayment extension for the Maldives' $150 million debt out of a total of $200 million borrowed by the previous government. The Maldives repaid $50 million in January this year, with the Indian authorities not making any further demands during the extension of the remaining debt. However, the Maldives' relations with India have been strained since the ascendancy of pro-China President Mohamed Muizzu six months ago.

The Maldives is highly vulnerable to climate change risks, with potentially severe economic costs due to floods and rising sea levels. The country is also at risk of delayed fiscal consolidation and weaker growth in key tourism markets. As the Maldives navigates this critical period in its relations with India and China, the IMF's warning serves as a stark reminder of the urgent need for the country to address its unsustainable debt levels and implement reforms to ensure long-term economic stability.

Key Takeaways

• Maldives' foreign debt reaches $4.038 billion, 118% of its GDP, with China owning 25.2%.
• IMF warns of high risk of external and overall debt distress due to heavy reliance on Chinese funding.
• Maldives' economy grows 13.9% in 2022, driven by tourism, but faces fiscal deficit and rising debt.
• IMF urges Maldives to implement policy adjustments to restore debt sustainability and support growth.
• Maldives' relations with India and China are strained, with India providing debt repayment extension.