Key Points
China's lending practices dramatically increase Maldivian national debt
Foreign exchange reserves critically low at USD 65 million
Free Trade Agreement overwhelmingly benefits Chinese economic interests
Government implements aggressive cost-cutting measures to mitigate crisis
According to an article by human rights advocate and freelance journalist Dimitra Staikou on Medium, China's lending practices and trade policies have significantly accelerated the island nation's financial deterioration.
"The scale of the debt problem is staggering. The Maldives' total debt stock has ballooned from USD 3 billion in 2018 to USD 8.2 billion as of March 2024, with projections indicating a further increase to more than USD 11 billion by 2029. Of the current debt, USD 3.4 billion is external, with China and India being the primary creditors," Dimitra wrote.
The immediate financial challenge is daunting, with the Maldives needing to service external debt worth USD 600 million in 2025 and a staggering USD 1 billion in 2026.
Usable foreign exchange reserves held by the Maldives Monetary Authority stood at below USD 65 million as of December 2024, an improvement from the alarming low of USD 21.97 million in July 2024. However, reserves briefly turned negative in mid-August, underscoring the severity of the balance of payments crisis.
In response, international financial institutions have downgraded the country's credit rating. Fitch lowered the Maldives' rating by three notches in consecutive cuts made in June and August, while Moody's maintained a negative outlook for the government's long-term local and foreign currency issuer rating.
Dimitra highlighted that the China-Maldives Free Trade Agreement (FTA), implemented in January 2025, has worsened the country's economic vulnerabilities rather than providing relief.
"Of the approximately USD 700 million in bilateral trade, Maldives exports comprise less than 3 per cent compared to China's dominating 97 per cent import share. Under the FTA, Maldives removed tariffs on 91 per cent of goods from China, a concession that has yielded little reciprocal benefit given the country's narrow export base," she wrote.
Within two months of the FTA's implementation, imports from China surged to USD 65 million, up from USD 43 million during the same period the previous year. More concerning is the drastic decline in government revenue from import duties, which fell by 64 USD --from MVR 385 million to just MVR 138 million.
The agreement has also opened the Maldivian tourism sector to Chinese companies and financial institutions. While Chinese tourists contribute significantly to visitor numbers, financial benefits increasingly flow back to Chinese companies rather than strengthening the Maldivian economy.
President Muizzu's government has implemented numerous measures to address the crisis, including increasing the Tourist GST tax rate from 16 per cent to 17 per cen, doubling the green tax, and imposing departure taxes and airport development fees. The government has also begun divesting stakes in state-owned enterprises and approving mergers of key companies, including Maldives Airports Company Ltd. and Regional Airports Company Ltd.
Aggressive expenditure control measures have also been implemented, including the termination of 228 political appointees, phasing out indirect subsidies for food, electricity, and fuel, and prioritizing existing public sector investment programs. Despite these comprehensive efforts, estimates suggest that the Maldives will still face a financing gap of more than USD 500 million in 2025 and USD 800 million in 2026.
In response to the crisis, the Maldives has sought financial assistance from multiple sources. The government has requested USD 300 million from each of the Gulf Cooperation Council (GCC) countries, but these requests have largely gone unheeded. Similarly, President Muizzu's appeals to China for USD 200 million in budget support from the China Development Bank, refinancing of debt service payments, and a currency swap have received no positive response.
A USD 750 million currency swap from India has provided some temporary relief for routine import payments and government expenditures. However, this measure is insufficient to cover upcoming debt service payments, including the USD 1 billion Sukuk repayment due in 2026.
Dimitra warned that the Maldives' situation mirrors a pattern seen in other nations where Chinese loans and trade agreements have led to unsustainable debt burdens.
"Without significant international intervention or debt restructuring, the Maldives risks following neighboring Sri Lanka into sovereign default," she wrote.
With creditors showing little willingness to offer assistance, the Maldives faces an impending economic crisis that could have far-reaching implications for its financial independence and political sovereignty.
This dire financial situation compounds the existential threat the low-lying island nation already faces from climate change.
