The first question that needs to be answered is how the world’s largest tourist paradise has found itself facing debt similar to that of Greece with the IMF. The Maldives, starting from the 1970s when the Western world began to discover their wonderful beaches and tropical climate, have since been among the number one travel destinations, specializing in honeymoon trips.
In fact, while COVID was a deterrent for many countries’ tourism, with striking examples like Italy and China—countries that are now, in 2024, beginning to return to pre-COVID tourism levels—in contrast to the example of other countries, the Maldives saw COVID as an opportunity to boost their tourism. Since there were now fewer countries to compete with as resorts, they chose in July 2020 to fully open their borders to tourists from any country, regardless of the virus situation there.
According to data from the University of Michigan, tourism contributes 28% to the GDP of the Maldives one of the highest rates in the world, and accounts for almost 60% of foreign exchange earnings.
The Maldives, the floating paradise with 1200 islands as many call it, have invested in major infrastructure projects, mainly funded by foreign lenders through bonds.
Earlier on May 13, 2024, the IMF had said that without significant policy changes, Maldives would remain at high risk of external and overall debt distress. It maintained that strong and credible fiscal consolidation was required to restore debt sustainability.
Aware of this grim economic situation, the government of Maldives had in March 2024 officially requested the government of China for a grant of USD 200 million and a loan of USD 350 million at concessional rates. Maldives also requested China for a USD 500 million currency swap. Foreign Minister Moosa Zameer along with Finance Minister Dr Mohamed Shafeeq and Construction and Infrastructure Minister Dr Abdulla Muththaliba visited China (July 21-24) to follow up on this request. There has, so far, been no response from China to the requests.
After failing to persuade the Chinese to provide substantial financial assistance, President Mohamed Muizzu wrote separate letters to leaders of Saudi Arabia, UAE, Bahrain, Oman, Kuwait and Qatar requesting each of the countries to provide USD 50 million in cash grants for the years 2024 and 2025, as well as a deposit of USD 200 million to be placed with the Maldives Monetary Authority for a period of five years to relieve the pressure on the government’s liquidity position .Saudi Arabia and Bahrain have conveyed their inability to offer direct financial assistance to Maldives.
Maldives have even approached (Jul 30, 2024) Bangladesh and have requested from the government financial assistance of US$ 100-200 million but Bangladesh denied the help.
So why did the Maldives approach only mainly Islamic nations for financial help? The bonds, issued in 2021, were signed by countries such as Egypt, Pakistan, South Africa, and the United Kingdom. Sukuk bonds comply with Islamic law, offering investors a way to earn returns without violating the prohibition on interest. Investors receive a share of the profits of the underlying financial instrument instead of interest payments at maturity.
India last month granted the financially troubled Maldives an interest-free loan of $50 million, helping to avert a potential default on $500 million in Sukuk bonds.
To assist the island nation, the State Bank of India (SBI) has subscribed to government treasury bills worth $50 million issued by the Maldives Ministry of Finance, renewing an annual treasury bill after the previous subscription expired on September 19. In May, SBI lent the Maldives 50 million dollars to refinance a short-term bond.
The agreement was announced following talks between Maldives President Mohamed Muizzu and Prime Minister Narendra Modi during his five-day visit to India, which was described as a “new chapter” in the two countries relations. Although bilateral relations have been tense recently due to the Maldives’ approach towards China, India insists on maintaining economic cooperation within the framework of the “Neighborhood First” policy.
The loan and currency swap represent a renewal of India-Maldives relations after a period of tension when Maldives President Mohamed Muizzu asked India to withdraw military personnel earlier this year.
The rescue of the Indian Ocean country comes amid a severe debt crisis, which has it on the brink of defaulting on a significant Islamic bond payment. (sukuk).
Rating agencies, such as Moody’s, have already downgraded the country’s creditworthiness, warning that if immediate measures are not taken, the country could become the first to default on a sukuk payment, which would have serious consequences for the global market of Islamic financial products.
At the same time, the Maldives are seeking other ways to strengthen their foreign exchange reserves, such as exploring the issuance of “green bonds” and bilateral currency swap agreements.
At this point, a comparison between the bond mechanism with the sukuk used by Islamic countries and the European Financial Stability Mechanism through the European fund seems safe to me. If we consider that both the European Stability Mechanism in our European neighborhood and the form of support for Islamic world countries through sukuk operate under the IMF pyramid, with which they share similar methods in providing aid to needy states through lending, we see how significant India’s example is with its practical provision of aid to the Maldives. India justified this move under the premise of providing assistance to a neighboring country with which it shares the same religion and culture, that of Islam. I couldn’t help but think that it would be useful for the Mediterranean countries to do something similar, that is, to provide financial aid to each other so that they do not face overdue debts. If we consider that both Mediterranean countries and Balkan countries share a common culture, religion (Christianity with minor variations), and goals such as the development of industry, infrastructure, and the enhancement of tourism, we conclude that these solidarity lending movements are more useful than ever. Since in the year 2024 the entire global population follows capitalism with the exception of North Korea and Cuba (countries with such a poor standard of living that citizens are willing to pay even with their lives to escape), it is more important than ever that movements between states confirm the human face of capitalism. Let’s not forget, after all, that this is the primary goal of capitalism (the system that succeeded feudalism): the improvement of people’s lives both as nations and as citizens.
Finally, in times of crisis like the one we are experiencing, it helps to return to our roots to draw strength and remember what Adam Smith wrote in The Theory of Moral Sentiments: “The market is effective, not despite the existence of Morality, but precisely because of it.”
