Credit ratings agency Fitch downgraded the Maldives to “junk” status, casting doubt on the country’s ability to meet “substantial upcoming external debt-servicing obligations.”
The Maldives is bracing for painful spending cuts and tax hikes to avert a looming debt crisis.
A raft of austerity measures will be imposed to rein in unaffordable government expenditure, President Dr. Mohamed Muizzu declared on June 27.
“This includes reducing the number of political posts and reducing expenses on functions held for various occasions or not holding [official events],” he wrote on X, formerly Twitter, announcing the cancellation of the customary Independence Day celebrations on July 26.
Earlier in the week, the cabinet approved a cost-cutting policy that entails reforms to free healthcare, possible privatization of inefficient state-owned enterprises (SOEs), and the phasing out of indirect subsidies for food, electricity and fuel in favor of targeted assistance to low-income households. The cabinet also endorsed a revenue strategy that proposes “reviewing” airport service fees, sales taxes, import duties and resort rent.
The president’s announcement came a day after credit ratings agency Fitch downgraded the Maldives to “junk” status, casting doubt on the country’s ability to meet “substantial upcoming external debt-servicing obligations.”
To avoid defaulting on creditors, the Maldives needs more than $500 million annually to pay down debt in both 2024 and 2025, rising to a staggering $1.07 billion in 2026, a figure that eclipses the country’s gross foreign currency reserve of $492 million in May.
For its new rating, Fitch flagged usable foreign reserves of $73 million as barely enough to cover a month of imports, a worrying situation for a small island nation reliant on medicine, oil and staple foods from overseas.
The ratings downgrade echoed warnings from the World Bank and International Monetary Fund (IMF) over a “high risk of debt distress” after years of unsustainable borrowing to plug budget deficits.
“For decades, Maldives has been spending beyond its means,” Faris Hadad-Zervos, World Bank country director for Maldives, Nepal and Sri Lanka, said earlier this month, pledging support for the “homegrown fiscal reform agenda.”
According to the World Bank, public debt reached $8 billion or 122.9 percent of GDP in 2023, ballooning after debt-fueled economic stimulus to tackle the COVID-19 crisis. The pandemic followed an infrastructure boom with Chinese and Indian loans over the past decade.
“The economic vulnerabilities that the Maldives face now is a combination of debt stock accumulation in the last 10 years, as well as continuously high fiscal and current account deficits over the same period,” explained Erdem Atas, the World Bank’s country economist for the Maldives.
“Economic growth or additional financing cannot resolve this issue,” Atas added.
Finance Minister Dr. Mohamed Shafeeq made this clear to a parliamentary committee on June 26. “Formulating a timeline is ongoing now to move ahead with implementation. [Not implementing] these reforms is no longer an option for us,” he told lawmakers on the public accounts oversight committee.
The reforms cannot be delayed but must be seen through carefully, he stressed repeatedly. The bulk of dollar revenue is needed at present to cover fuel imports along with debt and interest payments, the minister said.
He conceded difficulties in securing favorable terms to finance this year’s deficit. Announced hours after the minister appeared before the committee, the Fitch ratings downgrade further dissuaded potential investors in Maldives government bonds.
Other signs of economic woes have been evident in recent weeks. The national bank slashed its U.S. dollar transaction limit for hundreds of Maldivian students overseas. Amid a perennial dollar shortage, the black market rate soared over 18 Maldivian Rufiyaa (MVR) per dollar, well above the official exchange rate of MVR 15.42.
Unpaid bills from local contractors and small businesses piled up at the finance ministry. Fishermen staged sit-in protests demanding payments owed for fish catch purchased by the debt-ridden state-owned fish exporter, which operates at a loss to buy at a fixed rate above market prices.
Most SOEs are too inefficient to “even perform core functions” without government funding, the finance minister told the committee. Based on an assessment, the government could dissolve some companies and publicly list or seek public-private partnerships for others, he said.
Deputy Speaker Ahmed Nazim pressed the minister for a firmer commitment on enacting the reforms. “Other governments also said everything you’ve said. But it didn’t happen,” the veteran lawmaker said, seeking deadlines for action.
In a statement in response to the Fitch rating, the government expressed confidence that “the robust economic outlook coupled with the successful implementation of the fiscal reforms will reflect positively in future rating reviews.”
But austerity is expected to herald higher prices, bigger utility charges and layoffs from bloated state companies. The World Bank backed the introduction of a targeting mechanism “to ensure that vulnerable populations are not disproportionately affected.” Effective targeting could mitigate any widening of either income inequality or the gap between rural islands and the urban capital, it advised.
Welfare reforms and higher taxes are unlikely to be popular. But they now appear likely despite campaign pledges to the contrary. As recently as December, a month into office, the government promised to raise and eventually scrap the foreign transaction limit. Fishermen were assured of a floor price and the clearing of payments within 48 hours. A co-payment model for the health insurance scheme was ruled out.
“Ignoring the deafening call for financial discipline brought us to these rocky shores,” suggested Athif Shukoor, a commentator on economic policy.
“We all preferred to believe that lunch was free.”