The debt tragedy: USD 1 billion of debt service in 2026

According to a report published by the World Bank in October 2022, Maldives is estimated to spend on average USD 330 million annually on external debt servicing over the period 2022-2024.

President's Office

President's Office

There’s no denying that the Maldives recovery story after the reopening of borders following COVID-19 pandemic, has been remarkable. Especially, with strong arrival growth from the second quarter of 2021. In recognition, Maldives has been awarded the World Leading Destination Award three times in a row, last three years.

This year, in 2022, the total arrival is expected to reach at least 1.6 million, and total government revenue is expected to reach MVR 25.8 billion (USD 1.7 billion), which is 27 percent of GDP – in par with the developed countries with highest tax rates.  

Despite the strong recovery, and the improved revenue which was initially estimated at MVR 21 billion, the public expenditure and the growing external debt of the government remains a major concern for the economy. The total public and publicly guaranteed debt reached a staggering 120 percent of GDP by the end of 2021, as the government incurred additional borrowings of USD 1 billion during the year.

The debt to GDP is estimated to go down to 111 percent of GDP in 2022, because of the increase in nominal GDP, although total debt is set to reach MVR 105 billion (USD 6.8 billion).

On top of the high existing debt, huge deficits, and growing expenditure; the global food and oil prices have increased, and so has the interest rates. This is further escalated the government’s spending on food and oil subsidies. As a result, government total expenditure in 2022 is estimated to exceed the approved budget by MVR 6 billion.

According to a report published by the World Bank in October 2022, Maldives is estimated to spend on average USD 330 million annually on external debt servicing over the period 2022-2024. What is more alarming is that total debt servicing is expected to reach USD 1 billion in 2026. This includes the USD 500 million sukuk and another USD 100 million issued under a private placement. As highlighted by the World Bank Report, the year 2026 will be the real test of country’s ability to repay the debt, or the ability to rollover the debt to additional years.

“The ability to extend the maturity or rollover the debt, very much depends on the global financing environment in 2026, which puts the Maldives at risk of not being able to service the debt”, highlights the World Bank report.

Restoring fiscal and debt sustainability

Government has increased the rate of Goods and Services Tax on general domestic economy (G-GST) from 6 percent to 8 percent, effective from 01st January 2023, and also increased rate of GST on tourism sector (T-GST) from 12 percent to 16 percent.  

While the public and the tourism industry may hope that this increase in taxes would bring about fiscal sustainability or bring down debt levels, they might be in for a big surprise. As sustainability in the medium term is not expected without concrete reforms in the expenditure programs of the government. Without notable and effective reduction in spending by the government, any such increases in taxation may not bring about fiscal and debt sustainability.

The World Bank report has said that “Government’s recently announced GST rate increases are a positive start, but not sufficient for the adjustment that is required”.

Government has still not been able to bring about concrete reforms to Aasandha, other forms of subsidies, and expenditures on state owned enterprises (SOEs) in the form of subsidies and capital injections.

Solih administration also lacks insight into better investment management, and the foresight to lower costs of growth-enhancing investments. At the same time, revenue mobilization can be improved by diversifying the tax base, as highlighted by the World Bank.

With the super majority in the Parliament, simply increasing the tax rate however could be the easy way out.

More from MFR