By TON Maldives

As economic crisis is looming on Maldives an island country. Maldives is in a brittle economic state and slowly inching closer to what Sri Lanka and Pakistan are experiencing. Even as the World Bank and the International Monetary Fund (IMF) have cautioned the Maldivian government on the economic front, the voter mood has sobered owing to the continuing economic and forex crisis in neighboring Sri Lanka, with whom many Maldivians share familial connections. However, steep increases in prices and considerable fall in family incomes, coupled with unclear predictions about mainstay tourism sector recovery, have forced them to look up to the government for more subsidies and tax cuts, which remains a halfway street that is more subsidies but also more taxes.

According to the World Bank  the country had run more extreme budget deficits than sustainable ones and also borrowed heavily, leading to a debt of US$ 6.1 billion by the end of 2021, and  close to MVR 100 billion, an estimated 125 percent of the GDP. Of this, local debts accounted for 65 percent and international market debts, 60 percent.

The country had run more extreme budget deficits than sustainable ones and also borrowed heavily, leading to a debt of US$ 6.1 billion by the end of 2021, or close to MVR 100 billion, an estimated 125 percent of the GDP. According to the Finance Ministry figures, the government had taken a loan of 18.7 million euros from European Investment Bank, 101 million euros from another European bank and US$ 8.7 million from IDB, all adding up to MVR 2.17 billion in a single month. According to reports, the US Fed’s interest rate hike spiked the dollar value when other currencies suffered.

Available data show that external debt averaged US$ 1193.48 million from 2010 up to 2021, touching an all-time high of US$ 2448.60 million that year. Updated official figures of the government show that the nation’s debt rose to MVR 99 billion, or 113 percent of the GDP by the end of Q1 2022.

According World Bank’s report for 2020 the Maldives was among the three South Asian nations, along with Sri Lanka and Pakistan, standing neck-deep in the Chinese debt.  Surprising it is also the fact that as many as 97 countries, or close to half the number of UN member nations, are in debt to China, most of them through the BRI project.

Chinese debt accounted for 31 percent of the country’s Gross National Income (GNI). The projects funded with loans from China including the construction of the Sinamalé Bridge and the airport development project. However, the incumbent administration of President has repeatedly said that they would not default on payment, but without indicating the source for those levels of additional revenue.

This year’s World Bank report pointed out that not all debts acquired during the COVID pandemic were directed toward short-term needs, forced by the pandemic. While much of it has gone into physical and social projects, the returns, over the short, medium, and long terms may not be adequate to service those debts, leave alone repay them in full. As the total debt service costs on existing debt will jump to US$ 900 million or MVR 13.8 billion in 2026, possibly equivalent to 60 percent of 2019 revenues.

At the end of a visit by its delegation in July, when they met with the Parliamentary Committees on Public Accounts and Economic Affairs, the IMF approved the government’s economic measures and told the government and parliament panels how the nation’s economy would improve later this year.  It shows how global trends associated with the Ukraine War had spiked prices, and how the government, through subsidies, had kept inflation at 3 percent lower than the global average. The IMF delegation also commended the government’s decision to hike taxes.

The Finance Ministry has said that the budget deficit this year reached MVR 5.8 billion by the end of August, against an estimated total of MVR 9.8 billion for the whole year —against the total deficit of MVR 11 billion for fiscal 2021, ending 31 December. According to pro-Opposition media reports, the government had anticipated a revenue fall this year but has not tightened the belt enough. Tourism is the nation’s economic mainstay but future predictions of complete recovery to pre-COVID levels are not encouraging, as the current trends indicate.

Tourism is the nation’s economic mainstay but future predictions of complete recovery to pre-COVID levels are not encouraging, as the current trends indicate. The IMF has said as much, linking anticipated short-falls this year to the European winter in the absence of Russian gas to warm up which is Maldives’ peak tourism season. Given that the World Bank has said that state-owned enterprises (SOEs) posed a risk to the Maldivian economy, and efforts may have to be taken to privatize them, it could become a live politico-electoral issue as the economy is still recovering from the COVID shock.,

Rather than cutting down on expenses, the government seems to be using taxation as a means to mop up more funds. In this, the incumbent president has got support from the rival speaker camp in the party. A champion of the ‘free market economy’ in the country, the country speaker group  backed government plans to increase Goods and Services Tax (GST), from 6 to 8 percent and sector-specific Tourism Goods and Services Tax (TGST), from 12 to 16 percent. This may ensure a smooth passage for the government’s taxation drive, as the ruling MDP has a huge lead in Parliament, 65 in a House of 87.

However, the government does not have the stomach to follow speaker suggestion not to live in self-delusion on the exchange front and peg the US dollar at MVR 17 against the ‘artificially-pegged’ figure of MVR 15.42. As the dollar reserve in the central bank has dwindled to worrying levels, and the black market in US dollars continued unabated. The government’s anxiety is understandable. As steep rise in legal exchanges for families needing to travel or send money to other countries for education and healthcare emergencies. It made the government and the ruling MDP unpopular overnight.