The Maldives, known for breathtaking resorts and serene beaches, is battling an escalating debt crisis and attempting a delicate balancing act between its two largest creditors: India and China. As the island nation braced for an impending debt default, President Mohamed Muizzu’s leadership will be tested by how he steers his country through this turbulent economic and geopolitical landscape.
As of August 2024, the Maldives’ foreign currency reserves totaled $437 million, which could cover only about a month and a half of import bills. The country is projected to arrange $600-$700 million of debt service expenses in 2025 and more than $1 billion in 2026. The island nation owes China about $1.3 billion and India about $130 million.
Against this backdrop, the Maldives president met Indian Prime Minister Narendra Modi in New Delhi on October 7, in a bid to secure much-needed financial assistance, amid fears that the island nation may default on a crucial $25 million bond payment. Reuters reported that India approved a $400 million currency swap agreement, a much needed lifeline for the debt strapped country of half a million people in terms of accessing short-term liquidity.
Maldives debt troubles are related to Sukuk bonds. Sukok is a special type of financial instrument that is often referred to as an Islamic bond, which operates quite differently from conventional bonds in order to comply with Islamic principles, particularly the prohibition of interest.
Unlike traditional bonds, which are debt instruments setting out that investors have lent money in exchange for interest payments, Sukuk represents ownership in a tangible asset or a pool of assets. Investors receive returns not from interest but from the revenue generated by the asset. If Maldives default on its Sukuk debt, that will be the first such event of sovereign default for Sukuk.
Absent much needed financial rescue from the likes of India, the ramifications of Maldives missing its Sukuk payment would be devastating: it could block access to international capital markets, shake investor confidence, and tip the Maldives into deeper economic turmoil.
While the Maldives with the latest assurances of help from India may have avoided an immediate default on its Sukuk debt, the country’s broader economic troubles remain unresolved, with significant debt payments looming in the coming years.
Geopolitical rivalries, structural weaknesses
The Maldives’ economic distress is deeply intertwined with the geopolitical rivalry between two major players in the region, India and China. Over the past decade, the country has borrowed extensively from both nations, but the two offer assistance with different goals in mind.
China’s loans have largely funded infrastructure projects tied to its Belt and Road Initiative, helping Beijing expand its strategic footprint in the Indian Ocean. India, on the other hand, sees the Maldives as a critical part of its regional security and has provided financial aid to counter China’s growing influence.
Muizzu’s rise to power in 2023 was underpinned by an “India Out” campaign, aimed at reducing the Maldives’ reliance on New Delhi and drawing the country closer to Beijing.
On his way to electoral victory, Muizzu promised that, once elected, he would expel Indian soldiers who were deployed in the Maldives on humanitarian assistance engagements.
Bowing down to such political pressure, India replaced dozens of its soldiers – exchanging them with civilian experts. However, as Maldives continued its plunge towards a debt crisis, shortly after coming to power, President Muizzu’s government caved in to pragmatism and softened its stance toward India, recognizing that Maldives’ immediate survival hinges on securing financial support from both China and India.
Maldives’ real challenges lie in its unsustainable debt burden and the structural vulnerabilities that underpin its economy. The country is overwhelmingly dependent on tourism, an industry highly susceptible to global economic shocks, as evidenced by the downturn following the Covid-19 pandemic. Furthermore, Maldives imports most of its essential goods – and rising global commodity prices have compounded its financial woes, draining foreign reserves and making it even harder to service debt.
This situation places the Maldives in a precarious position between the two competing powers. India and China both have significant economic and strategic interests in the Maldives, and their financial aid comes with expectations.
For China, the Maldives is an important link in its maritime strategy, while for India, the Maldives represents a key part of its efforts to counterbalance Chinese influence in the region. As President Muizzu navigates these tricky diplomatic waters, he must find a way to secure financial support without compromising the country’s sovereignty.
As for India, there are strong incentives to take President Muizzu into its fold, given that India sustained a series of diplomatic setbacks as several pro-India governments lost power in South Asia recently.
In Sri Lanka, a marxist politician, Anura Kumara Dissanayake, became president. In Bangladesh, Prime Minister Sheikh Hasina, arguably the most Pro-Indian Prime Minister in Bangladesh’s history, fled to India after being forced to resign by student-led protests. In Nepal, K.P. Sharma Oli, a pro-China politician, was elected as prime minister.
Reversing any of the recent diplomatic failures in India’s backyard will be viewed as a political victory for Indian Prime Minister Modi.
The goal: long-term solutions that leave sovereignty intact
The Maldives’ economic problems are structural, and addressing them will require more than temporary currency swaps and loans. The country needs a comprehensive strategy to diversify its economy away from tourism and reduce its dependency on imports, but such changes will take time – and political will.
The Maldives’ government has proposed several measures to address the crisis, including tax reforms, budget cuts and the restructuring of state-owned enterprises. These proposals aim to improve fiscal discipline and reduce the reliance on external borrowing. Yet, implementing these reforms will be a daunting task. Austerity measures such as tax increases and public service cuts have historically triggered protests in the Maldives, and Muizzu’s government may face significant resistance to these changes.
The question of whether the Maldives will turn to the International Monetary Fund (IMF) for a bailout also looms large. Although the government has thus far resisted this option, citing the temporary nature of its financial difficulties, many experts believe that an IMF intervention may be inevitable if the debt crisis worsens. However, an IMF bailout would come with stringent conditions including further austerity measures that could exacerbate social unrest and hurt the economy in the short term.
Unlikely to have a long term solution ready at hand, the Maldives will continue to depend heavily on India and China for financial support. But this dependence will come at a cost as both these regional powers are likely to use their financial leverage to push for greater political influence in the country.
India may seek to use its financial assistance as a way to reassert its strategic interests in the region, while China could leverage its economic investments to secure long-term control over key infrastructure projects.
The danger of this approach is that it could undermine the Maldives’ sovereignty. While financial support from India and China may help the Maldives avoid an immediate default, it risks entangling the country in the broader geopolitical rivalry between the two powers – thus endangering its own security. The delicate balancing act necessary to handle this geopolitical quicksand will require President Muizzu to be both a shrewd diplomat and a careful economic planner, as the stakes could not be higher.
A template for other small nations to follow?
The Maldives’ debt crisis is a cautionary tale for small nations that rely heavily on foreign loans and single industries such as tourism. Without a long-term plan for economic diversification and debt restructuring, the country will remain vulnerable to financial instability and external shocks.
President Muizzu’s recent mending of ties with India in exchange for accessing capital reliefs offers only a temporary solution, as it is not a substitute for the broader reforms that are needed to stabilize the economy.
The political cost of these reforms could be significant, but the alternative – continued dependence on foreign loans and increasing debt – is far more dangerous. To prevent a deeper crisis, the Maldives will need to enact tough but necessary reforms, build its foreign reserves and explore new sectors for economic growth.
President Muizzu must know that bold actions are needed at this critical juncture of his country’s national history. It is his time to take decisive actions to secure its financial future or risk being drawn deeper into the geopolitical currents that threaten to pull it under.
In a region marked by rising competition between India and China, the Maldives’ next moves could set a precedent for how small, debt-ridden nations handle the delicate balance between economic necessity and political independence.