Maldives Fiscal Crisis Looms

Fiscal Vulnerabilities in the Maldives: Key Points and Potential Implications

The Maldives is facing significant fiscal challenges, with high public debt and debt service burden. Here are some key points to consider:

High Public Debt: The country’s public debt stands at 115% of GDP, making it a major concern for the government.
Debt Service Burden: The debt service burden accounts for 11% of GDP, which is a significant portion of the country’s revenue.
Front-Loaded Maturity Profile: The majority of the country’s debt has a short-term maturity profile, making it difficult to manage.

The government’s continued support to SOEs has added to the fiscal vulnerabilities, including:

Rising Debt Service on External Variable Rate FX Loans: The increasing debt service burden on external variable rate loans is a major concern for the government.
Dependence on SOE Debt: The country’s dependence on SOE debt makes it vulnerable to potential defaults and financial instability.

The Maldives’ domestic debt amounts to 66% of GDP, with:

Banks Holding Nearly Half of the Stock: Banks hold nearly half of the country’s domestic debt, mostly in short-term and local currency.
High Concentration Risk: The high concentration risk makes the country vulnerable to potential financial instability.

The Maldives is facing an acute FX shortage, fueled by:

Surge in Public Investment: The increase in public investment has led to a surge in demand for foreign exchange.
Pandemic-Related Spending: The pandemic-related spending has put additional pressure on the country’s foreign exchange reserves.
Rising Global Commodity Prices: The rising global commodity prices have increased the cost of imports, further exacerbating the FX shortage.

The fiscal vulnerabilities and FX shortages in the Maldives could lead to:

Debt Sustainability: The 2022 IMF Debt Sustainability Analysis assessed that sovereign debt is not sustainable in the baseline scenario.
Default Risk: The central government may need to prioritize debt repayment of certain SOEs to avoid default on external debt.
FX Crisis: The FX shortage could lead to a depreciation of the local currency, potentially exacerbating inflation and further increasing debt servicing costs.
Economic Contraction: The fiscal vulnerabilities and FX shortages could ultimately lead to an economic contraction, which would have negative implications for the country’s growth prospects.

To address the fiscal vulnerabilities and FX shortages in the Maldives, the government is recommended to:

Implement Fiscal Consolidation Measures: Reduce public debt and improve fiscal sustainability by increasing revenue and reducing spending.
Introduce SOE Reform: Improve SOE governance, efficiency, and transparency through strengthening their financial management and oversight.
Implement Effective FX Management Policies: Manage FX flows more effectively through introducing a crawling peg or a managed float exchange rate regime.
Seek International Support: Seek support from international organizations, such as the IMF, to help address fiscal vulnerabilities and promote economic stability.