China’s Lending Practices Drive Maldives Towards Sovereign Default Risks

The Maldives is experiencing a severe debt crisis exacerbated by China’s lending policies, with total debt projected to exceed USD 11 billion by 2029. The country is struggling with foreign exchange reserves below USD 65 million and facing debt repayments of USD 600 million in 2025 and USD 1 billion in 2026. The China-Maldives Free Trade Agreement is contributing to economic vulnerabilities, and without significant international assistance, the nation risks sovereign default.

The Maldives is facing a severe debt crisis that jeopardizes its economic sovereignty, marked by dwindling foreign exchange reserves and significant debt repayments looming on the horizon. According to human rights advocate and freelance journalist Dimitra Staikou, China’s lending practices have greatly exacerbated the financial challenges facing the island nation.

The total debt of the Maldives has surged from USD 3 billion in 2018 to USD 8.2 billion as of March 2024, with projections suggesting it could exceed USD 11 billion by 2029. Presently, external debt accounts for USD 3.4 billion, primarily owed to China and India. The government is confronted with immediate financial obligations, including USD 600 million due in 2025 and USD 1 billion in 2026.

As of December 2024, usable foreign exchange reserves held by the Maldives Monetary Authority hovered below USD 65 million, a slight improvement from the alarming low of USD 21.97 million in July 2024. However, reserves briefly dipped into negative territory in mid-August, revealing the gravity of the ongoing balance of payments crisis. Consequently, international financial institutions have downgraded the nation’s credit rating, with Fitch reducing it by three notches in consecutive cuts, while Moody’s maintains a negative outlook.

The recently enacted China-Maldives Free Trade Agreement, implemented in January 2025, has worsened the country’s economic vulnerabilities instead of providing relief. Staikou notes that, out of USD 700 million in bilateral trade, Maldives’ exports constitute less than 3 percent, with China holding a dominant 97 percent import share. Under the FTA, Maldives eliminated tariffs on 91 percent of goods from China, yielding minimal reciprocal benefits due to its limited export capacity.

Within just two months of the FTA’s initiation, imports from China surged to USD 65 million, significantly up from USD 43 million in the previous year. This uptick has been paralleled by a stark decline in government revenue from import duties, which plummeted by 64 percent, from MVR 385 million to MVR 138 million. The agreement has further allowed Chinese companies and financial institutions to penetrate the Maldivian tourism sector, which, although beneficial regarding visitor numbers, results in financial returns mainly benefiting Chinese enterprises.

To combat the crisis, President Muizzu’s administration has implemented various measures, including raising the Tourist GST tax from 16 percent to 17 percent and doubling the green tax. Additionally, the government is divesting from state-owned enterprises and merging critical companies like Maldives Airports Company Ltd. With an aggressive expenditure control approach, it has terminated political appointees and phased out indirect subsidies. However, projections indicate a fiscal shortfall exceeding USD 500 million in 2025 and USD 800 million in 2026.

Amid the crisis, the Maldives has sought financial aid from multiple sources, including a request for USD 300 million from each Gulf Cooperation Council country. Unfortunately, these appeals have gone mostly unanswered. Simultaneously, requests to China for budget support from the China Development Bank and currency swaps have not yielded positive outcomes. Though a USD 750 million currency swap from India has furnished temporary relief, it is inadequate to meet upcoming debt service payments, including a USD 1 billion Sukuk repayment due in 2026.

As Dimitra warns, the Maldives’ situation reflects a troubling trend observed in other nations burdened by Chinese loans and trade agreements, with potential consequences of sovereign default akin to Sri Lanka’s experience. “Without significant international intervention or debt restructuring, the Maldives risks following neighboring Sri Lanka into sovereign default,” she notes. With a lack of creditor willingness to offer assistance, the Maldives stands on the brink of a severe economic crisis with implications extending beyond its financial independence to include its political sovereignty. This precarious financial condition is aggravated by the existential threats posed by climate change to the low-lying island nation.

In conclusion, the Maldives faces an escalating debt crisis primarily driven by Chinese lending practices and trade agreements that have compounded its economic vulnerabilities. With soaring debt levels and insufficient foreign exchange reserves, the nation risks imminent sovereign default without significant international intervention. The consequences of this situation extend beyond financial stability to threaten the country’s political sovereignty, particularly as it continues to grapple with the impacts of climate change.

Original Source: www.aninews.in