The International Monetary Fund (IMF) has cautioned that the Maldives, under President Mohamed Muizzu, faces high risks of external and overall debt distress due to fiscal deficits and rising public debt. The IMF mission, led by Piyaporn Sodsriwiboon, visited Male from January 23 to February 6 to discuss economic developments and policy priorities.
After a pandemic-induced contraction, the Maldivian economy grew by 13.9% in 2022 and is estimated to expand by 4.4% in 2023, with growth projected at 5.2% in 2024 as tourist arrivals increase. However, the country's current account deficit is expected to remain large due to high fuel prices and strong import demands.
Without significant policy changes, fiscal deficits and public debt will stay elevated, posing a high risk of debt distress. The IMF emphasized the need for fiscal consolidation and tighter monetary policies to reduce vulnerabilities and ensure the sustainability of public finances.
The Maldives is also highly vulnerable to climate change risks, facing economic costs from floods and rising sea levels. The IMF recommended strengthening institutions for climate adaptation and mitigation efforts to access additional climate financing and fulfill climate pledges.
Since President Muizzu's ascent in November, China has increased funding for the Maldives.
Notably, during Abdullah Yameen's presidency in the Maldives the economy was marked by a significant reliance on borrowing from China, which ultimately led to a massive debt crisis. This heavy dependence on Chinese loans was evident in the country's infrastructure projects, which were funded by China's Belt and Road Initiative.
During Yameen's tenure, he declined to renew agreements with India, which had previously provided significant aid and support to the Maldives. He also demanded the departure of Indian security forces, which had been stationed in the country to provide assistance and training to the Maldives' own security personnel.
This move towards China and away from India was seen as a strategic shift in the Maldives' foreign policy. However, it also led to concerns over the country's growing debt burden and the implications of China's expanding influence in the region.
Yameen's protege, Muizzu, continued this policy of distancing the Maldives from India and strengthening ties with China. This approach has had significant implications for the Maldives' economy, security, and geopolitical position, which continue to be felt to this day.
By 2021, over 40% of the Maldives' foreign debt was owed to China. Yameen's administration fostered closer ties with China, with Beijing financing various infrastructure projects, including roads, bridges, and airport expansions, as part of its Belt and Road Initiative across multiple countries.
During the presidency of Ibrahim Mohamed Solih, the Maldives established a significant improvement in its relations with India, which is its long-standing ally.
However, the current presidency of Muizzu poses a risk to this relationship due to his anti-India stance. Muizzu has called for the removal of Indian military presence and refused to renew a hydrographic project with New Delhi.
Instead, he has opted to strengthen ties with China, which puts the traditionally strong bond between the Maldives and India at risk.
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