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Maldives Confronts Economic Crisis similar to Sri Lanka’s Financial Collapse

By: Staff Writer

March 17, Colombo (LNW): Maldives, too, stands on the cusp of a massive debt crisis, similar to the economic meltdown of Sri Lanka in 2022. While it has moved to cut expenditure and is trying to rein in spending, the island nation is also piling on rising external debt and losing its foreign exchange buffers. With a large repayment of its debt falling due in 2025 and 2026, with a growing fear of default, economic experts said.

Increased Debt and Depreciating Reserves

Maldives’ foreign loans have risen to US$3.4 billion, of which most are from China and India. The first priority is to pay $600 million in 2025, then a staggering $1 billion in 2026, official sttistics showed.

The country’s foreign reserves are declining rapidly, and these payments are making everyday life tougher.

The government, under President Mohamed Muizzu, has raised tourism levies, reduced officials’ salaries, and floated plans to privatize state enterprises in an attempt to ease financial strain. But even after seeking help from the Gulf nations, these efforts have yet to yield results Maldivian. News agency reports revealed.  

Sri Lanka’s Debt Crisis: A Cautionary Tale

Sri Lanka had faced one of the worst economic debacles in 2022 simlar to Maldivian present situtraion asa result of over-borrowing, mismanagement of funds, and external shocks.countrywids protests, which created political instability greatly affecting standard of living, a former treasury high official said.  .

One of the main reasons for Sri Lanka economic crisis was its funding of major infrastructure projects like the Hambantota Port with high-interest Chinese loans that were not providing adequate returns in massive investments.

The tax cuts in 2019 also eroded government coffers, and the COVID-19 pandemic devastated the tourism industry, sucking out more foreign reserves, he added.

By April 2022, Sri Lanka was a history default on sovereign debt and created unprecedented disturbances in the economy. Inflation hit over 50% threshold and became expensive for such essentials. Later crisis erupted in the form of road riots and President Gotabaya Rajapaksa’s resignation.

In an attempt to mitigate the crisis, Sri Lanka requested an IMF bailout package of $2.9 billion in March 2023. Fiscal reforms like tax hikes, cutting subsidies, and debt restructuring helped curb inflation and foreign reserves.

Tourism and exports have also increased to a certain degree, but long-term debt sustainability remains a problem..Tourism and exports have also somewhat improved, but long-term debt sustainability is a concern.

Maldives Seeks Regional Support

Like Sri Lanka, Maldives has turned to regional and international financial institutions for assistance. It has requested $200 million in budget support from the China Development Bank and explored a currency swap arrangement with China.

However, Beijing has not responded to these appeals of the Maldivian authorities. Attempts s to get help from Sri Lanka and Bangladesh have also been ineffective.

Furthermore, Sharjah Islamic Bank has hesitated at arranging a $200 million Sukuk bond issue, rendering the nation’s $1 billion repayment in 2026 increasingly uncertain.

Tourism and India’s Support: An Interim Reprieve

Although Maldives boasts a thriving tourism sector and a $750 million currency swap with India, the measures are not likely to fully cure the debt issue.

The country’s economic model remains vulnerable due to its limited production base, high reliance on imports, and exposure to externalities such as COVID-19 and soaring oil prices.

Debt Projections and the Way Forward

Despite taking foreign loans and grants, Maldives’ total debt has more than doubled since 2018 and reached $8.2 billion as of March 2024. It is projected to exceed the $11 billion mark by 2029, sounding alarm bells for financial collapse unless remedial action is initiated at the earliest.

Maldives’ economic crisis today bears a striking resemblance to Sri Lanka’s recent one, underlining the risks of financial profligacy and fiscal excess. Maldives also could be destined for the same fate unless halted at this point.

Foreign assistance and regional cooperation could provide temporary respite, but long-term economic stability will require prudent financial policy, diversification of income, and sustainable debt strategies.

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