Maldives and India’s leaders held talks in New Delhi on Monday, October 7 to discuss the economic crisis facing Maldives and the mounting pressure of debt from China. Following the meeting, India announced financial assistance to Maldives.
Maldives President Mohamed Muizzu arrived in New Delhi on Sunday, October 6, for a five-day state visit, marking his first official visit to India since taking office. Seeking financial support from New Delhi was the top agenda item during his meeting with Indian Prime Minister Narendra Modi.
After the talks, Modi announced that India would provide financial support to the cash-strapped Indian Ocean island nation in the form of a $100 million treasury bill.
Modi stated during a joint press conference, “India is a close neighbor and friend of Maldives.” He emphasized Maldives’ significant position in India’s “neighborhood first” policy.
According to the Indian Ministry of External Affairs, Modi and Muizzu discussed potential free trade agreements and ways in which New Delhi could assist the island nation in developing infrastructure and defense capabilities. India also provided Maldives with two currency swap agreements – one worth $400 million in dollars and the other worth 30 billion Indian rupees (approximately $357.35 million) to support its foreign exchange.
The meeting signifies a turning point in the bilateral relationship between Maldives and India. The Muizzu government is seeking to mend ties with India and obtain assistance to alleviate the financial crisis stemming from borrowing from the Chinese government. India’s financial aid is crucial for Maldives and demonstrates India’s determination to maintain strategic influence in the region.
Both Chinese authorities and India have long vied for influence in Maldives. The nation, composed of 1,192 small coral islands spread over 800 kilometers near the equator, sits at a strategic juncture in the Indian Ocean along key international shipping routes.
Muizzu’s visit to India stands in stark contrast to a year ago when, following his election victory, he sought to reduce traditional reliance on India, pushed for the withdrawal of Indian military forces from Maldives, and pledged to engage in new projects under China’s Belt and Road Initiative.
However, a year after pivoting towards Beijing, the Maldivian government is facing the world’s first sovereign debt default risk.
Last month, India also provided emergency financial assistance to Maldives by subscribing to $50 million in sovereign bonds at the request of the Muizzu administration. However, investors and analysts suggest this may only be a short-term remedy given Maldives’ pressing repayment issues.
Fitch Ratings estimates that Maldives will have $557 million in external debt due in 2025, surpassing $1 billion by 2026. As of the end of August this year, the island nation’s foreign exchange reserves stood at only $437 million, enough to cover approximately one and a half months of imports.
By the end of the first quarter of this year, Maldives’ total external debt reached $3.37 billion, while the country’s Gross Domestic Product (GDP) slightly exceeded $5 billion.
Fitch warns that the likelihood of a debt default in Maldives is increasing, with the International Monetary Fund (IMF) also cautioning of a potential debt crisis.
Tourism is a major source of foreign exchange for Maldives. The country’s key industry has been impacted by the COVID-19 pandemic, and concerns about a potential default have emerged after years of turmoil in the Maldives.
China and India are the largest and second-largest lenders to the Maldivian central government, respectively. According to data from the World Bank, Maldives owes China $1.37 billion, accounting for approximately 40% of its public debt.
Regarding the meeting, Muizzu stated, “India is an important partner for Maldives’ socio-economic and infrastructure development, and has stood with Maldives whenever we needed help.” He expressed that the currency swap agreements “will help address the current foreign exchange issues we are facing.”
In his five-day visit, Muizzu will also hold meetings with senior Indian officials.
(References: Associated Press, Bloomberg)