In October 2024, India extended a $400 million currency swap agreement to the Maldives, aiming to bolster the archipelago's struggling economy. This move was part of a broader initiative to strengthen bilateral ties, which included agreements to develop ports, road networks, schools, and housing projects in the Maldives. The collaboration also saw the launch of the RuPay card in the Maldives and the inauguration of the new runway at Hanimaadhoo International Airport.
However, the Maldives' recent actions have signaled a shift towards China. The government, under President Mohamed Muizzu, has been advancing its free trade agreement with Beijing, a move that has caused unease in New Delhi. The Maldives' increasing economic dependence on China is evident, with Beijing being its largest creditor. Massive infrastructure projects, such as the Sinamalé Bridge, have been funded through Chinese loans, leading to concerns about the nation's mounting debt and potential loss of sovereignty.
The Maldives' financial situation is precarious. In August 2024, the Bank of Maldives Limited imposed restrictions on foreign payments, causing public panic. Although the decision was reversed under governmental pressure, the incident highlighted the nation's dire economic straits. Foreign exchange reserves have dwindled to $395 million, barely sufficient to cover one and a half months of imports. Credit rating agencies Moody’s and Fitch have downgraded the Maldives' credit rating, citing a high risk of default. The country faces substantial debt repayments, including $500 million in sukuk due in 2025, with annual payments expected to exceed $1 billion by 2025.
In response to these challenges, the Maldivian government has implemented austerity measures. President Muizzu announced a series of spending cuts, including the cancellation of Independence Day celebrations, in an effort to address the fiscal crisis. Despite these measures, the government's plea to Beijing for debt relief on an estimated $1.5 billion was reportedly declined, exacerbating concerns about the nation's financial stability.
India's reconsideration of its financial aid comes amid these developments. The deepening Maldives-China relationship poses strategic challenges for New Delhi, particularly in the context of regional influence in the Indian Ocean. India's initial financial assistance was aimed at strengthening bilateral ties and supporting the Maldives' economic recovery. However, the Maldives' pivot towards China has prompted India to reassess its support, weighing the implications of the archipelago's growing alignment with Beijing.
The situation underscores the complex dynamics of regional politics, where economic assistance and strategic alliances are closely intertwined. As the Maldives navigates its financial challenges, its relationships with major powers like India and China will play a crucial role in shaping its economic and political future.