Context: The International Monetary Fund, in Article IV consultation reports following the Covid pandemic year 2020, underlined vulnerability of Maldives to external and overall debt distress.
Evolution of the debt situation:
- Growing distance between Maldives and India:
- India was asked to withdraw its uniformed personnel stationed in Maldives, which has caused strains in the bilateral relations, although India’s presence on the economic and regional security fronts has been larger.
- Formation of Anti-India Platform: President Mohamed Muizzu’s policy is more tilted towards Chinese support to increase trade, capital flows, tourism and overall economic stability.
- Concerns:
- Following the Covid Pandemic, India raised bilateral disbursements of long-term credit and grants to Maldives, including, swap arrangements with the Reserve Bank of India ($400 million in 2020), which was paid back in two tranches.
- However, India’s share in Maldivian debt has been less than 10% since 2018.
- The rising presence of China in Maldives’ economy, which is located in the Indian Ocean region, is a concern for both India and the United States.
- Rise in Debt:
- Increased gradually from $942 million in 2012 to $1,465.7 million in 2017
- Stock of external debt increased to $2,322.9 million in 2018; to $4,163.4 million in 2021 and to $4,033.8 million in 2022.
- The shift to the higher debt strategy for development was due to the increased financial flows from China.
- The Government of Maldives, followed the examples of other small developed countries.
- Issuing sovereign bonds by exploiting the interest of yield-seeking global investors with access to cheap liquidity.
- Stock of Maldivian external debt held by bondholders rose from $250 million in 2017 to $350 million in 2020; reached $850 million 2021 and $600 million in 2022.
- China’s share in Maldivian external debt:
- Increased from 7.5 per cent in 2012 to 14.9 per cent in 2015; 26.9 per cent in 2016; 39.9 per cent in 2018 and 43.5 per cent in. However, emergence of bondholder debt and increase in flows from India, brought China’s share down to 32.1 per cent in 2022.
- India’s share was 15.4 per cent in 2016 which fell to 3.8 per cent in 2021; increased to 8.1 per cent in 2022.
- In 2020 (pandemic year), due to the swap agreement, the share of India reached 12.4 percent.
- During pandemic years, lending from the multilateral banks and institutions decreased continuously and reached 10.9 per cent in 2022.
- This had in turn created a window for China to emerge as the principal official creditor to the Maldives.
- China’s share in official (bilateral and multilateral) credit standing reached 58.9 per cent in 2019 and 48 per cent in 2022.
- Maldives has also increased debt service to exports:
- From 4.8 per cent in 2017 to 12.2 percent 2018-2019.
- During the covid year, when revenue from tourism decreased, debt service reached 17.5 per cent in 2020 and 20.1 per cent in 2021.
- Ratio of reserves to external debt decreased to around 20 per cent in 2021-2022.
- Thus, the IMF identified Maldives being on the verge of debt distress.
Assessment by the IMF:
- Chinese dominance, in the overall external debt exposure of Maldives and in overall official and bilateral debt exposure.
- Small size of Maldives’ debt to China in relation to reserves of Maldives and its overall external lending, China’s can restructure or waive a significant volume of debt. This will increase its influence over the island nation.
- Comprehensive Cooperative Strategic Partnership between China and the Maldives provided for grant assistance to Maldives.
- Why is the IMF's assessment misleading?
- Assessing a country’s vulnerability to debt distress by taking account of the volume of aggregate public debt or external and domestic debt combined relative to the nation’s GDP.
- This mixes the external debt that needs to be serviced with foreign currency with domestic debt that must be serviced in local currency which the government controls.
- It also ignores the collapse of economic activity due to the Covid-19 pandemic, which led to fall in GDP and government revenues.
- This in turn, increased the ratio of public debt and debt service to other normalising variables. Although, pandemic related expenditures were not increased much.
- This also happened in the Case of Maldives: Ratio of external debt to GDP increased to 108 per cent in 2020.
Conclusion:
- Maldives is facing debt stress that is difficult to resolve by the domestic government.
- The international community should come forward without leaving a window for one or more countries, offering assistance to increase presence or influence on the debt-ridden nation.
- Maldives is vulnerable to global warming and climate change effects, requiring it to spend significantly on adaptation and addressing loss and damage.
- Countries that are responsible for the higher levels of carbon emissions must step forward and provide the funding needed to build the required resilience.