IMF warns Maldives of debt crisis due to high foreign borrowing

The International Monetary Fund (IMF) has warned that the Maldives is at a high risk of external and overall debt distress, as the island nation faces a severe economic crisis due to the COVID-19 pandemic and its reliance on foreign borrowing, especially from China.

In a report released on Wednesday, the IMF said that the Maldives’ fiscal and external vulnerabilities have increased, calling for urgent policy adjustment. “Maldives remains at high risk of external and overall debt distress,” the IMF staff team said, after a visit to the country in June.

The IMF said that without significant policy changes, the Maldives’ overall fiscal deficits and public debt are projected to stay elevated, while the current account deficit is expected to remain large amid high fuel prices and strong import demand.

The IMF also said that the Maldives is highly vulnerable to climate change risks, with potentially severe economic costs due to floods and rising sea levels.

The IMF urged the Maldivian government to implement a strong and credible form of fiscal consolidation, comprising expenditure rationalization and domestic revenue mobilization. It also asked the government to reform the state-owned enterprises (SOEs) to reduce fiscal burdens and to strengthen fiscal institutions and public financial and debt management frameworks.

The IMF did not provide any details about the Maldives’ foreign debt, but according to media reports, the country owes about 42 percent of its more than $3 billion foreign debt to China, as of 2021. The Maldives has borrowed heavily from China for infrastructure projects under former president Abdulla Yameen, who ruled for five years until 2018.

On Tuesday, Maldives President Mohamed Muizzu said he cannot launch any new development projects due to the high debt situation. “The economy we inherited is in a bad state. We need to take measures because of the level of debt,” he was quoted as saying by Adhadhu.

The Maldives’ economy, which depends heavily on tourism, contracted by 28.9 percent in 2020, as the COVID-19 pandemic hit the travel industry hard. The IMF projected a recovery of 18.9 percent in 2021, driven by the tourism rebound, but the recent surge of COVID-19 cases in South Asia, including in the Maldives, has slowed down the recovery.

The regulatory trouble has also taken a toll on the Maldives’ share price, which hit a record low earlier this week after a massive three-day sell-off. The shares have lost more than $2.5 billion in value since the IMF’s report, before a subsequent bounce.