One of the most heavily discussed topics in the Maldives throughout the year 2022 was the country’s debt situation. While it is a well known fact that Solih administration has been making poor public finance decisions - constantly leaving the country’s economy in a questionable state, 2022 really marked itself as the year the macro-balance in the Maldives took an all-time low, with the debt of the country getting worse with each passing day.
2022- set for failure from the start
In order to get a proper look at how the situation has worsened, one could go all the way back to 2019 when President Solih was sworn-in as President. In his 2019 presidential inaugural address, the President stated that his administration was aiming to raise the foreign currency reserves of the Maldives to USD 1 billion by the end of 2023. While the gross international reserves was at USD 985 million for a period of time in 2020, by February 2021 it had dropped to USD 853 million.
Another factor to look at to get a good grasp of the situation in the Maldives is the debt as a percentage of the Gross Domestic Product (GDP) of the country. Statistics show that the debt as a percentage of GDP was at 149 percent at the end of 2020, mainly due to the impact of COVID-19, causing Maldives, that depended on tourism, to suffer badly.
However, as 2021 approached and the Maldives opened back its borders for the tourism industry, the country achieved significant and relatively a quick recovery of the tourism industry - as a result, the government revenue also increased.
At the same time, total debt of the country continued to pile up, as the Minister of Finance, Ibrahim Ameer continued signing new loan agreements, and at the same time get the ‘rubber-stamp’ approval from the Parliament to print Rufiyaa through Maldives Monetary Authority (MMA).
With the Maldives being a small island nation that heavily depended on tourist arrivals in order to keep the economy afloat, one of the biggest mistakes that the Government kept making was the dependency on foreign loans for recurrent expenditures.
By the end of November 2021, the state the country’s economy and the outlook for 2022 was already made very clear as the public finance committee of the Maldives Parliament passed a resolution in order to extend MVR 2.5 billion open credit line to the Government from the MMA, and extending the overdraw to the end of December 2023.
The total debt reach over MVR 105 billion
The estimated total debt by the end 2022 is now at MVR 105 billion (USD 6.8 billion) which is 111 percent of GDP, and the external debt of the country was estimated to reach a shocking USD 2.3 billion by the end of 2022. One of the biggest contributors to the staggering external debt was very clear – the USD 500 million Sukuk issued in 2021.
The domestic debt was also estimated to increase from MVR 46.7 billion in 2021 to MVR 57.9 billion by the end of 2022. And the amount spent on debt repayment and interest payments is also expected to remain high at over MVR 5.7 billion in 2022.
While it was evident that the country was headed towards an extreme, unsustainable debt situation by the end of 2022, Solih administration has always remained in denial and defensive when the international financial institutions and multi-lateral donors started raising concerns about the lower foreign currency reserves and the mounting debt levels.
However, things started getting bad at the very start of 2022, and the Maldives’ debt situation was making headlines in both national and international media, especially after the neighbouring country Sri Lanka made similar mistakes leading to an extreme economic crash early into 2022.
With the alarm and concerns raised by several stake holders, many expected the Government to take some speedy actions, and put in place more prudent debt management strategies.
However, the borrowing spree never stopped. There was the announcement of Government borrowing an additional EUR 1.1 million to facilitate the Gulhifalhu Reclamation Project, and additional loans from EIB to establish a modern laboratory, and as the months went on these agreements kept piling up. And as the year neared to an end, gross international reserves have reached to significantly lower levels.
Towards the end of 2022, instead of concrete measures to reduce and rationalise governmnt expenditures, Government made a sudden announcement of its plans to raise tax rates from the start of 2023. From 01st January 2023, GST rate on domestic economy will be increasing from 6 to 8 percent and TGST rate on the tourism industry will be increasing from 12 percent to 16 percent.
While these tax hikes, largely expected to have a negative impact on the tourism industry and the domestic prices, are being implemented to curb the debt situation, with the Solih administration lacking the sincerity to bring about debt sustainability, the situation is not expected to improve without addressing the wasteful expenditure by the state bodies.
While living in the Maldives is known to be extremely expensive, with the existing macro imbalances of the domestic economy, and given the challenges in the global economy; living costs of the Maldives are set to increase further in 2023.
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