Drowning in debt

In June 2018, Mohamed Nasheed, Speaker of Parliament and former President, accused China of having dragged the Maldives into a debt trap. He was also critical of the government's high public debt stock.  Three years have passed since then, and with a government led by his Maldivian Democratic Party (MDP), many question whether the public debt situation in the Maldives has improved.

Public debt on the rise

From 2008 to 2016, total government debt had increased at an alarming rate, with government expenditure increasing threefold due to the increase in public demand for infrastructure projects fueled by unsustainable pledges made by political parties. As such, total debt, excluding government guaranteed debt, doubled from 33 percent of GDP (about USD750 million) to 59 percent in 2016 (about USD2,400 million) while real GDP increased by only five percent on average during the period.

The issue was that total expenditure had been increasing at a faster rate than the increase in revenue, and a large part of the increase in expenditures did not enhance revenue while also being wasteful and unsustainable. In 2008, total expenditure as a percent of GDP was 22 percent while total revenue and grants was at 17 percent of GDP.

By 2020, total expenditure as a percentage of GDP had increased to 56 percent, while total revenue and grants increased to only 27 percent of GDP. The difference was financed by borrowing heavily from both the domestic and external markets. As a result, total public and publicly guaranteed debt outstanding reached MVR87 billion (USD6 billion or 149 percent of GDP). It is projected to increase to more than MVR90 billion in 2021.

Government borrowings over the years were initially financed from the domestic market, largely in the form of monetisation or printing Rufiya from the Maldives Monetary Authority (MMA). However, after the Fiscal Responsibility Act was enacted in 2012,  a cap was placed on such borrowings. Since then, the government has borrowed heavily from external sources. In 2018, external borrowings accounted for more than 51 percent of the total public and publicly guaranteed debt.

This was partially due to the issuance of sovereign guarantees to foreign banks, to carry out mega projects for housing and other infrastructure in the Greater Malé. As such, sovereign guarantees issued increased from MVR5 billion (about USD300 million) in 2016 to MVR20 billion (about USD1,300 million) in 2020. The share of multilateral donors who offered loans at concessional terms have been taken up by buyer’s credit facilities (such as the Chinese and Indian EXIM banks), bilateral loans, and more recently, securities issued to foreign parties in the form of sovereign bonds and sukuk. 

Indian debt has overtaken Chinese debt

Based on information published by the Ministry of Finance, the estimated total debt of Maldives to China is lower than what Speaker Nasheed had estimated in 2018. He claimed the total debt from China would be “more than USD2.5 billion,” but data published by the Ministry of Finance on active loans and sovereign guarantees, indicate this to be at USD1.56 billion.

This includes loans of about USD666 million from the The Export-Import Bank of China and USD898 million in sovereign guarantees issued to Chinese banks for projects undertaken by various State Owned Enterprises (SOEs), especially for housing projects. This also includes a guarantee issued to a private sector business.

Data published by the Ministry of Finance also showed that debt from India is much higher at USD1.85 billion. This includes USD1,390 million in active loans and USD463 million in sovereign guarantees issued. Most of these loans have not yet been fully disbursed. However, project loan agreements have already been signed and the projects are expected to start in 2021.

The total debt owed to India may be even higher if USD treasury bonds and bills invested by the State Bank of India is taken into account. Since 2018, treasury bills and bonds issued on the domestic market have increased from MVR15 billion (USD970 million) to MVR26 billion (USD1.7 billion) in March 2021. More than 60 percent of this is held by commercial banks. This includes the sale of USD250 million worth of Treasury Bonds (USD 10 year fixed coupon bonds) to the State Bank of India (SBI) Malé issued in September 2020.

Further, if the MMA's swap facility with the Reserve Bank of India (RBI) of USD250 million, used in December 2020, is taken into account, it is estimated that the total debt of the Maldives owed to India will be USD2.4 billion, which is more than 50 percent of the GDP of the Maldives.

Hence, debt from China and India will together account for USD3.91 billion in external debt, almost the total nominal GDP of the Maldives, which is currently estimated at USD4.3 billion. Once the loans from India are fully disbursed, total public debt as a percentage of GDP would be more than 160 percent.

Cost of debt and debt distress on the rise

With more reliance on commercial and bilateral loans to finance the budget deficit, the cost of servicing debt has also increased. This was further exacerbated due to the COVID-19 pandemic, and consequent decline in government revenues. Credit rating agency Moody's downgraded its rating for the Maldives to B3 (negative), while Fitch downgraded the Maldives to CCC.

The most recent issue of a USD300 million sovereign Sukuk in April 2021 reflected this downgrade, with rates increasing from seven percent to 9.88 percent.

Direct debt service cost is projected to increase from MVR2.8 billion in 2020 to MVR3.9 billion in 2021, largely due to increases in external debt, projected to increase by 39 percent to MVR2.3 billion in 2021. This increase in external debt service costs is mainly attributed to the commencement of coupon payments on the bonds and Sukuk issued in 2021.

Similarly, it is also estimated that the direct debt service cost as a percent of total revenue for 2020 will increase to 23 percent after being at about 14 percent over the last four years. The increase in the debt service to revenue ratio is mainly driven by anticipated lags in revenue recovery due to the pandemic and upcoming repayments following the end of the grace periods on borrowings in the previous years to finance large-scale infrastructure projects.

To address this, the government is negotiating with major creditors to obtain relief on debt service payments under the G20 Debt Service Suspension Initiative (DSSI). The government is hoping to save MVR809.1 million in debt servicing costs during the first six months of 2021.

According to the International Monetary Fund (IMF) Debt Sustainability Analysis carried out in April 2020, the Maldives has a high risk of external debt distress. All indicators, except the debt-to-exports ratio, breach their respective thresholds but display medium-term downward trends. As per the IMF forecast, debt service to revenue (and grants) for public sector debt is expected to increase from 24 percent in 2021 to 43 percent in 2022 but will fall to 37 percent in 2023. However, if policy changes such as increases in revenues and policies to reduce and restructure expenditure is not implemented in a timely manner, the country may be in a position of debt distress. 

It is critical for the government to restructure its budget and to borrow externally only for projects that enhance the country's productive capacity and GDP. It also needs to prioritise government expenditure and ensure new revenue measures are realised before implementing any of the additional expenditures planned for 2021.

Finally, the government needs to give legal backing for the Sovereign Development Fund (SDF) established in 2017, as this was seen as a cushion that provided investors with some comfort, given the country's current debt levels. Measures that may be considered include allowing for part of the control over the SDF to be provided to the parliament, as is the case in countries such as Singapore, which will reduce, in theory, the temptation for and ability of, any government to use the fund inappropriately.