As the Maldives celebrated its 59th Independence Day on 26th July, President Mohamed Muizzu highlighted the need for "economic sovereignty," expressing gratitude to both India and China for their support. However, the nation faces a severe economic crisis, exacerbated by long-standing structural issues and recent challenges. This blog explores the roots of the crisis, current economic conditions, and potential paths forward.

Long-Standing Structural Issues

The Maldives' economic difficulties have been brewing for years, stemming from its limited diversification and heavy reliance on tourism, imports, and taxes. Successive governments have pursued ambitious infrastructure projects and social welfare schemes to bolster their political support. These initiatives, while popular, have led to significant budget deficits and rising debt. The COVID-19 pandemic and the Russia-Ukraine war further strained the economy, causing a sharp increase in debt from USD 3 billion in 2018 to USD 8 billion by 2023. This mounting debt, coupled with high inflation and reduced revenues from tourism and exports, has left the Maldives in a precarious financial situation.

Current Economic Conditions and Government Response

Under President Muizzu's administration, the economic situation has deteriorated. The government's continued budget deficit, combined with high recurrent expenditures due to numerous political appointments, has compounded the crisis. The Maldives now faces a staggering debt-to-GDP ratio of 110%, with a total debt of USD 8.2 billion. Domestic debt, largely held in the form of high-interest treasury bills, and external debt from lenders like China and India, contribute to the crisis. Despite some reforms, such as strengthening customs and tax administration, and efforts to modernise state-owned enterprises, the government's approach has been criticised for its short-sightedness and lack of a comprehensive long-term strategy.

The Impact of Great Power Politics

The Maldives' economic plight has intensified regional competition between India and China. While China has offered a USD 130 million grant and proposed a five-year grace period on debt repayments, its presence in the Maldives is growing, with new infrastructure projects and strategic initiatives. On the other hand, India has provided substantial assistance and deferred a significant repayment, reflecting its strategic interest in maintaining influence. The Maldives' need for external funding makes it vulnerable to this regional rivalry, potentially impacting its ability to negotiate and manage its economic future effectively.

Conclusion

The Maldives' economic crisis is a complex interplay of historical debt accumulation, structural weaknesses, and geopolitical dynamics. While President Muizzu's administration has initiated some reforms and secured support from major lenders, the lack of a robust long-term plan for economic resilience remains a critical challenge. Get updates on the issue through a series of informative articles on our website.