IMF warns Maldives of foreign debt crisis

Fund calls for swift implementation of credible fiscal consolidation

COLOMBO: The strategically-placed Indian Ocean nation of the Maldives, which has borrowed heavily from China and shifted allegiance from India, is at high risk of “debt distress,” the IMF warned Wednesday.

Beijing has pledged more funding for the Maldives since pro-China President Mohamed Muizzu took power in November. Muizzu thanked China last month for its “selfless assistance” for development funds after a visit to Beijing.

The International Monetary Fund did not give details of the Maldives’ foreign debt but said there was a need for “urgent policy adjustment”. “Without significant policy changes, the overall fiscal deficits and public debt are projected to stay elevated,” the IMF said after a review of the country’s economy.

“The Maldives remains at high risk of external and overall debt distress”. The archipelago, famed for its white sand beaches and where tourism accounts for nearly a third of the economy, has recovered economically from the COVID-19 pandemic.

But while a planned airport expansion and an increase in hotels are projected to boost growth, the IMF said “uncertainty surrounding the outlook remains high and risks are tilted to the downside.” Muizzu’s mentor, former president Abdulla Yameen, who ruled for five years until 2018, borrowed heavily from Beijing for construction projects.

That left it owing 42 percent of its more than $3 billion foreign debt to China in 2021, according to the World Bank, citing the Maldives’ finance ministry. Muizzu, who has requested that Indian troops operating three reconnaissance aircraft in the Maldives leave by May 10, has vowed to strengthen his military to defend the country’s vast maritime territory. Global east-west shipping lanes pass through the nation’s chain of 1,192 tiny coral islands, stretching around 800 kilometers (500 miles) across the equator.

An International Monetary Fund (IMF) mission, led by Piyaporn Sodsriwiboon, visited Male during Jan 23 – Feb 6, 2024, to discuss recent economic developments, the outlook, and the country’s policy priorities in the context of the 2024 Article IV consultation.

“Without significant policy changes, the overall fiscal deficits and public debt are projected to stay elevated, and the Maldives remains at high risk of external and overall debt distress. Amid elevated fuel prices coupled with continued strong import demands, the current account deficit in 2024 is projected to remain large, albeit gradually narrowing over the medium term. The Maldives is highly vulnerable to climate change risks, with potentially severe economic costs due to floods and rising sea level.

“With limited policy space and growing balance of payments pressures, swift implementation of a strong and credible form of fiscal consolidation, comprising holistic expenditure rationalization and domestic revenue mobilization, is needed. Reforming the state-owned enterprises (SOEs) is also warranted to reduce additional fiscal burdens. Strengthening fiscal institutions and public financial and debt management frameworks is critical to enhance the credibility and effectiveness of fiscal policy. In this regard, the authorities are taking a welcome step to develop an ambitious and homegrown fiscal reform agenda, including subsidy reforms that phase out existing subsidies and replace them with targeted direct income transfers, Aasandha — healthcare reform, reprioritization and rationalization of public sector investment program (PSIP), and SOE reforms, and committed to urgently implement this.

“Monetary policy, in concert with other policy levers, can contribute more effectively to addressing macroeconomic vulnerabilities. Discontinuing use of the Maldives Monetary Authority (MMA) advances is a welcome first step. Monetary and macroprudential policies need to be tightened to ensure compatibility with the exchange rate peg, while encompassing fiscal-monetary policy coordination. Together with enhancing financial sector oversight and crisis management, the financial safety net needs to be strengthened.

“Given the Maldives’ vulnerabilities to climate change and natural disasters, strengthening institutions to support climate adaptation and mitigation efforts will help enabling access to additional climate financing and delivering on the climate pledges. Looking ahead, improving the business climate, strengthening governance, and enhancing skill developments will also support strong, inclusive, and sustainable growth.

“The IMF team is grateful to the Maldivian authorities and other stakeholders for their hospitality and candid discussions. The team held meetings with Finance Minister Mohamed Shafeeq, governor Ali Hashim, and other senior government and MMA officials. The team also met with representatives from the private sector, bilateral donors, and development partners.” — Agencies