The International Monetary Fund (IMF) has issued a warning to the Maldives over its rising foreign debt, which is largely driven by borrowing from China. The IMF said that the island nation faces a high risk of debt distress and needs to implement fiscal consolidation measures to reduce its vulnerability.
The Maldives, a popular tourist destination in the Indian Ocean, has been investing heavily in infrastructure projects, such as airports, bridges, and resorts, with the help of Chinese loans.
According to the IMF, the Maldives’ public and publicly guaranteed debt increased from 34 percent of GDP in 2013 to 81 percent of GDP in 2020 and is projected to reach 91 percent of GDP by 2025. About 70 percent of this debt is owed to external creditors, mainly China.
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The IMF said that the Maldives’ debt dynamics are unsustainable and pose significant risks to its macroeconomic stability and development prospects. The IMF urged the Maldivian authorities to adopt a credible medium-term fiscal plan that would reduce the fiscal deficit and stabilize the debt-to-GDP ratio. The IMF also recommended strengthening the debt management capacity and enhancing the transparency and accountability of public finances.
The Maldives is not the only country in the region that has been facing challenges due to its dependence on Chinese loans. Several other countries, such as Sri Lanka, Pakistan, and Nepal, have also been struggling to repay their debts or renegotiate their terms with China. Critics have accused China of engaging in “debt-trap diplomacy” by offering loans with high interest rates and unfavorable conditions that could compromise the sovereignty and security of the borrowing countries.
The report warns that the island nation’s public debt is projected to reach 130 percent of its gross domestic product (GDP) by 2024, up from 77 percent in 2019. This is mainly due to the impact of the COVID-19 pandemic, which has severely affected the tourism sector, the main source of income for the Maldives.
It urges the authorities to implement fiscal consolidation measures, such as reducing public spending, increasing revenue collection, and enhancing debt management.
The IMF also notes that the Maldives has a large external debt burden, with debt service payments exceeding 20 percent of its exports of goods and services. The report cautions that these debt dynamics are unsustainable and pose significant risks to the Maldives’ macroeconomic stability and development prospects.
The report also recommends that the Maldives seek debt relief from its creditors, especially China, which holds about 45 percent of its external debt. The IMF says that such debt relief would help ease the pressure on the Maldives’ balance of payments and create fiscal space for priority spending on health, education, and social protection.
The report concludes that the Maldives needs to diversify its economy and enhance its resilience to shocks, such as natural disasters and climate change. It suggests that the Maldives should invest in renewable energy, digitalization, and human capital development, as well as strengthen its governance and institutional framework.