India or China: Can the Maldives Afford to Choose a Side?
Sen Chanu | 26 March 2025
Summary
Following the COVID-19 pandemic, the Maldives’ budget deficit and debt-to-GDP ratio experienced a considerable rise due to increased expenditure on debt servicing and the resumption of stalled projects.
President Mohamed Muizzu has taken a pro-China stance since assuming office in 2023, to reduce Maldives’ reliance on India.
However, Maldives’ economic realities forced Muizzu to soften his anti-India rhetoric to secure additional financial support from New Delhi, a clear indication that the country’s economy renders it difficult to choose a side between India and China.
As a small island nation with limited economic resources, the mounting public debt and vulnerability to economic shocks demand the Maldivian government to accelerate its economic diversification. Tourism has been the largest contributor to the nation’s GDP for more than four decades now, and reliance on a single sector elevates the Maldives’ economic risks. Consistently, the government’s expenditure exceeds its revenue, where financing the deficit through public loans becomes a recurring cycle. The country is vulnerable to future debt crises from excessive borrowing, as it relies on a pattern of short-term relief to address its challenges. Since interest rates associated with external debts rose with global inflation, and the Maldives has faced an increasing interest payment relative to the principal repayment over the past few years.
Graph 1: Public Finances for the Maldives (2008-2024)
Source: Ministry of Finance and Planning (Maldives)
According to the Maldives Monetary Authority, the total outstanding debt at the end of 2024 is approximately USD 9.41 billion (GBP 7.26 billion), of which more than 40% are external debt. China and India are the largest creditors, making up over half of the external debt share. The Maldivian Ministry of Finance projected that external debt maturities will exceed domestic obligations in the next ten years (2026-2035). This implies that the government will increasingly rely on its foreign exchange (forex) reserve for debt repayment. For instance, 88.7% of the nation’s forex reserve was used for debt repayment in the last quarter of 2024. In addition to declining forex reserves, a higher debt-to-GDP ratio also consumes a significant portion of the overall government’s revenue for debt servicing (principal repayment and interest expense). The ratio has been increasing since 2008 and peaked in 2020 during the COVID-19 pandemic and remained higher than the pre-pandemic levels since. This difference is due to the increased expenditure after 2020. The resumption of stalled projects after the pandemic and rising fuel and commodity prices since 2022 due to the Ukraine conflict contribute to the rise. Should the debt-to-GDP ratio continue to rise, it could cripple Maldives’ economic growth and debt servicing cost will become increasingly unsustainable.
Graph 2: Public and Publicly Guaranteed Debt-to-GDP Ratio (2008-2024)
Sources: Maldives Monetary Authority, Maldives Bureau of Statistics, International Monetary Fund
2023 Presidential Election and Policy Shift
President Mohamed Muizzu campaigned on the promise of restoring Maldives’ sovereignty by removing the Indian troops stationed for various operational and medical support. Muizzu was clear on his anti-India stance and leniency towards China before he assumed office in late 2023, as suggested by his first state visit to China in 2024. The visit was followed by a first military agreement between the two nations, which included the free transfers of non-lethal weapons and training for Maldivian forces. The agreement was announced after India had just replaced some of its military troops stationed at Gan, who had been operating an Indian helicopter with a technical team upon Muizzu’s request. Muizzu has also decided against renewing the hydrographic survey agreement with India that was signed in 2021 by his predecessor.
However, Muizzu dismissed the anti-India rhetoric just a week before he visited India to seek economic assistance in October 2024. The outcome of the visit was India extending a currency swap agreement worth USD 400 million (GBP 308.45 million) and INR 30 billion (GBP 267.98 million) to help the Maldives mitigate its declining forex reserves. Before this visit, India’s Foreign Minister, in August 2024, extended a Line of Credit (LoC) of USD 110 million (GBP 84.81 million) for water and sewage projects in the Maldives. Despite Muizzu’s previous anti-India stance, New Delhi remains a crucial financial support for the Maldives’ economic challenges. The Maldives’ weak economic situation limits Muizzu’s choice between the two competing powers of China and India.
Graph 3: Maldives Foreign Exchange Reserves (2008-2024)
Sources: Maldives Monetary Authority, International Monetary Fund
Forecast
Short-term
It is highly likely that Muizzu will moderate his anti-India rhetoric to avoid upsetting New Delhi for India’s financial support. China’s influence will likely increase to fill the gap left by India.
Long-term
Maldives is struggling to diversify its economy despite the risk of economic shocks. The data shows that the country will maintain its increasing deficit ratio for a while, forcing its government to finance the gap through external loans. Therefore, it is likely that India’s presence, although somehow declined since 2024, will continue to be felt in Muizzu’s foreign policy decision.