After the 2024 Article IV consultation with Maldives, IMF warning was sent to Maldives regarding Debt stress for 2024 on Monday.
While growth is projected to continue, rising deficits and a high current account deficit are vulnerabilities.
The country needs to address debt and find ways to manage imports to secure long-term economic health. The persistent current account deficit, where imports exceed exports, adds pressure. The Maldives needs to address debt and the trade gap to secure its future.
The IMF has said the Maldives external debt is unsustainable – this means to get an IMF loan, it would require a debt restructuring External debt payments peak at 39% of government revenue in 2026.
Tourism getting affected: A warning by IMF
The International Monetary Fund warned the Maldives was facing a “debt crisis” on Monday after its small luxury resort sought a loan from its lender, China. The Maldives is a small nation of 1,192 small coral islands spread 800 km across the Equator, but connected by an east-west international shipping route.
Tourism is an important source of foreign exchange for the country, home to wild sand dunes and secluded resorts that offer Robinson Crusoe-style vacations. China has pledged more money since last year. Mr. Muizzu, who thanked the country for “selfless help” in the development of the economy, during his visit to Beijing shortly after assuming power.
Economic Rebound Overshadowed by Debt Concerns
According to the IMF report, the Maldivian economy reached 13.9 percent in 2022 after the crisis and is expected to grow 4.4 percent in 2023. However, concerns remain, as the balance of accounts is expected now to expand further into 2024 exacerbated by high fuel prices and strong import needs.
The report sheds light on another critical challenge – the Maldives’ persistent current account deficit. This economic imbalance occurs when the value of a country’s imports exceeds its exports. The IMF predicts this deficit to widen even further in 2024, fueled by factors like high global fuel prices and the Maldives’ reliance on imports. This situation necessitates external borrowing to bridge the gap, further adding to the already concerning debt burden.
The growing public debt and budget cuts of the Maldives pose a serious risk. The IMF report shows that this is a serious weakness and urges the country to take immediate action to prevent a full debt crisis. Failure to address these issues could have serious consequences for the economic future of the Maldives.
Urgent measures are needed to prevent the crisis
The IMF’s emphasis on swift and decisive action by the Maldivian government stems from the urgency of the debt crisis. Each passing period allows the debt to accumulate further, making it more burdensome and expensive to manage in the future. A growing economy generates more government revenue, making it an opportune time to implement corrective measures without stifling growth. This window of opportunity might close if the global economy weakens or there are slowdowns in key tourist markets, a major source of income for the Maldives.
By acting quickly and decisively, the Maldivian government can use the current economic opportunity to solve the debt crisis before it spreads out of control. This proactive approach not only protects the country’s economic future, but also strengthens the confidence of investors and promotes long-term economic stability. The IMF’s recommendations, if implemented promptly, will pave the way for the Maldives to emerge from this situation with strength and stability.
Shifting Sands: India Withdraws Troops from Maldives
In terms of domestic affairs, the President of the Maldives, Mohamed Muizzu, spoke in parliament these days, who spoke about the country’s need to increase its military power on the ground, in the air and the sea. He also announced that the government will not renew the agreement that allows foreign countries to measure and chart the seas and oceans of the Maldives.
In addition, diplomatic negotiations are ongoing for the withdrawal of Indian troops from the Maldives, as agreed. The withdrawal of Indian troops, a key Muizzu campaign commitment, was scheduled to be implemented, with military personnel from one air base scheduled to be withdrawn by 10 March 2024 and personnel from the remaining two sites by 10 May 2024.
Maldives stands at Economic Crossroads
The current economic recovery offers valuable opportunities. However, stronger action is needed to address the twin challenges of rising debt and a growing current account deficit. By implementing effective economic policies and developing a diversified economy, the Maldives can overcome these challenges and ensure long-term economic stability in this fragile paradise.
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