Does Muizzu want Maldives back in India's fold? A hint from economic crisis

The Maldives, in recent months, has found itself grappling with an economic crisis of alarming proportions and the situation has prompted significant discussion about the future direction of the country’s foreign policy, particularly in relation to India.

Seen as a pro-China leader, President Mohamed Muizzu’s administration has been facing immense economic challenges, as a result of which he seems to have changed his tactics in the past few months. In an interview to a local media outlet in March, he called India Maldives’ “closest ally”.

In an official Independence Day function in the Maldives on Friday, Muizzu made a special mention of India and thanked New Delhi for supporting the island nation in easing its debt repayment after India rolled over a $50 million loan to the island nation. He also revealed ongoing talks for a Free Trade Agreement (FTA) with the UK and expressed hopes for a similar deal with India.

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He said, to address local US dollar shortages, the Maldives government is negotiating currency swap agreements with Beijing and also New Delhi.

Meanwhile, the Maldives’ economic troubles have been exacerbated by recent diplomatic missteps. The country faced a significant setback when three Maldivian deputy ministers made derogatory remarks about Prime Minister Narendra Modi in response to his photos from a visit to Lakshadweep, which he had promoted as a potential tourist destination.

This diplomatic faux pas has led to a substantial decline in tourism from India, historically one of the Maldives’ top tourism markets. As a result, the Maldives’ tourism sector has suffered, with China now surpassing India as the largest tourism source.

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Recognising the impact on its economy, the Maldivian government is now reaching out to India.

Maldives Tourism Minister Ibrahim Faisal is set to visit India this week to attract more Indian tourists. His agenda includes promoting the “Welcome India” initiative and hosting “tourism roadshows” in Delhi, Mumbai, and Bengaluru from July 30 to August 3.

This strategic campaign aims to revive tourism ties between the Maldives and India, reinforcing the Maldives’ appeal as a prime destination for Indian travelers.

This marks a reconciliatory shift in Maldives-India relations following previous tensions. Last month, Muizzu attended Prime Minister Narendra Modi’s third consecutive inauguration, signaling improved diplomatic ties.

Muizzu seems to have realised that India’s role in the Maldives’ economic recovery is pivotal. Historically, India has been a key ally, providing economic assistance and development support to the island nation. In light of the Maldives’ current economic crisis, India’s support could prove invaluable as it could assist the neighbouring country in the form of financial aid, concessional loans, or economic partnerships aimed at stabilising the Maldives’ economy and fostering long-term growth.

Moreover, India’s involvement could also extend to technical assistance and capacity building, helping the Maldives implement economic reforms and manage its debt more effectively. The prospect of such support might be increasingly attractive to Muizzu’s administration, given the urgent need for financial stability.

India rolls over $50 mn loan to Maldives

Despite Maldives anti-India stance, India stuck to its ‘Neighbourhood First’ policy and agreed to roll over a $50 million loan to the Maldives after the Mohamed Muizzu government made a special request to “secure budgetary support” from New Delhi.

The roll-over temporarily eases the debt repayment schedule of the island nation, which is set to spike to over $1.07 billion in 2026.

“State Bank of India has subscribed for one more year the USD 50 million Government Treasury Bill, issued by Ministry of Finance of Maldives…The continuation of subscription has been made at the special request of the Government of Maldives to secure budgetary support from the Government of India,” the Indian High Commission had said on X.

The roll-over came after Maldivian Foreign Minister Moosa Zameer met his Indian counterpart S Jaishankar in May and discussed bebt relief for the island nation.

Malé owed New Delhi approximately $400.9 million at the end of 2023, with $50 million being due in May.

IMF warns Maldives over debt

Earlier this year, the International Monetary Fund (IMF) and World Bank warned that the Maldives is at “high risk of debt distress” after years of unsustainable borrowing to plug budget deficits.

Since Mohamed Muizzu became President in November, Beijing has committed more funding to the Maldives. During his January visit to China, Muizzu expressed gratitude for the “selfless assistance” in development funds.

The IMF has highlighted the need for “urgent policy adjustment” to address the risk of ‘debt distress’, though it did not provide specifics about the Maldives’ foreign debt. The IMF’s review indicated that without significant policy changes, fiscal deficits and public debt are expected to remain high, maintaining the Maldives’ high risk of external and overall debt distress.

Under former President Abdulla Yameen, the Maldives heavily borrowed from China for construction projects. As of 2021, the World Bank reported that China held about 42 per cent of the Maldives’ over $3 billion foreign debt.

According to the World Bank, public debt reached $8 billion or 122.9 per cent of GDP in 2023, ballooning after debt-fueled economic stimulus to tackle the COVID-19 crisis. The pandemic followed an infrastructure boom with Chinese and Indian loans over the past decade.

Fitch downgrades Maldives’ ratings to ‘junk’

Last month, Fitch Ratings downgraded the Maldives’ long-term debt from ‘B-’ to ‘CCC+’ due to deteriorating external financing and liquidity conditions. As per Fitch’s policy, bonds rated ‘CCC+’ or below are considered ‘junk bonds’ and do not receive detailed credit assessments.

Fitch stated that the Maldives’ “weakening foreign-reserve buffers and rising external government debt” complicate the Mohamed Muizzu-led government’s ability to meet future debt obligations.

The country’s foreign exchange reserves dropped to $492 million in May from $748 million a year earlier, reflecting a persistent current account deficit, where imports exceed exports. Fitch projects that the Maldives’ foreign reserves will cover less than a month of external payments this year (0.9 months), far below the median of 4.2 months.

Additionally, Fitch highlighted that the Maldivian government faces $233 million in sovereign external debt servicing obligations and $176 million in publicly guaranteed external financing obligations for the rest of this year. These amounts are expected to exceed $500 million next year and surpass $1 billion by 2026.

Maldives’ debt burden

To avoid defaulting on creditors, the Maldives needs more than $500 million annually to pay down debt in both 2024 and 2025, rising to a staggering $1.07 billion in 2026, a figure that eclipses the country’s gross foreign currency reserve of $492 million in May.

For its new rating, Fitch flagged usable foreign reserves of $73 million as barely enough to cover a month of imports, a worrying situation for a small island nation reliant on medicine, oil and staple foods from overseas.

The ratings downgrade echoed warnings from the World Bank and International Monetary Fund (IMF) over a “high risk of debt distress” after years of unsustainable borrowing to plug budget deficits.

“For decades, Maldives has been spending beyond its means,” The Diplomat quoted Faris Hadad-Zervos, World Bank country director for Maldives, Nepal and Sri Lanka, as saying in June.

Strained Maldives-India ties 

After assuming office, President Mohamed Muizzu continued the ‘anti-India’ rhetoric from his campaign, which centered on the ‘India Out’ movement and the removal of Indian troops from the Maldives. He also broke with tradition by visiting China instead of making his first official visit to India.

In December 2023, the Maldives announced it would not renew its Hydrographic Survey agreement with India.

Tensions between New Delhi and Male escalated when three Maldivian deputy ministers made derogatory remarks about Prime Minister Narendra Modi in response to his photos from a visit to Lakshadweep.

The ministers were later suspended. Their comments, however, sparked an uproar among Indians on social media. Many people declared that they were boycotting Maldives as a holiday destination, with some even claiming to have cancelled their scheduled trips to the archipelago nation.

“I want to tell Indians to please be a part of Maldives’ tourism. Our economy depends on tourism,” Maldives Tourism Minister Ibrahim Faisalin had said in an interview in May.

With inputs from agencies