The Indian Ocean archipelago of Maldives, one of the first South Asian countries to join Beijing’s Belt and Road Initiative, faces the risk of “debt distress,” according to the International Monetary Fund.
The term refers to countries unable to meet their financial obligations and require debt restructuring.
The February 6 IMF warning comes as its new president, Mohamed Muizzu, builds closer ties with China, which has pledged to extend assistance to the tiny country.
Muizzu took office in November after defeating former President Ibrahim Mohamed Solih, who during his term in office had raised concerns about the cost of China’s construction projects in the country.
China established its footprint in the Maldives a decade ago, when under a pro-Beijing administration, it built infrastructure projects that included a four-lane bridge connecting the capital, Male, with the international airport, which is on a different island, and housing projects on land reclaimed from the sea.
“Even the previous government had flagged the issue that Maldives is seriously indebted to China,” Sankalp Gurjar, assistant professor in geopolitics and international relations at India’s Manipal Academy of Higher Education, told VOA.
He said the Maldivian gross domestic product is just over $5 billion “so its high debt is a problem, especially because the country needs foreign exchange for imports of basic necessities such as fuel and food.”
Maldives owes China $1.37 billion, adding up to about 40% of the country’s public debt, according to World Bank data. That makes Beijing its biggest bilateral creditor.
In its review of the Maldivian economy, the IMF projected growth of around 5% for this year, but called for "urgent policy adjustment," saying the country remains at “high risk of external and overall debt distress.” It did not mention China.
During a visit to Beijing last month, Muizzu said he had appealed to Chinese authorities to restructure the payment of loans made tohis country. The visit was a strong signal that he is building closer ties with Beijing, pivoting away from the previous government’s “pro-India” policy.
Calling Beijing “one of our closest allies and development partners,” Muizzu praised the Chinese infrastructure projects in his country and said that he was keen to explore partnerships under China’s Belt and Road initiative, including the expansion of the country's main airport and commercial port.
Analysts say the country’s high debt makes it the latest South Asian country whose economy has faced pressure because of Chinese loans to build projects.
China has built ports, bridges and highways in countries stretching from Bangladesh, Nepal, Sri Lanka, and Pakistan for a trade and transit corridor across Asia. Sri Lanka ran out of foreign exchange to pay its foreign debt in 2022 and the problem was blamed partly on its heavy borrowing from China. Beijing rejects accusations that its loans to developing economies contribute to their economic woes.
The huge infrastructure deficit in South Asian countries prompted them to turn to China to join its Belt and Road Initiative, Manoj Joshi, senior fellow at the Observer Research Foundation in New Delhi, told VOA.
“The logic is that whoever gives the money, lets build the infrastructure but more often than not what happens is that these are badly planned and badly financed and that becomes a burden,” Joshi said.
“Maldives definitely faces a debt problem due to loans taken for Chinese projects that were probably given from a strategic point of view. But I think both China and other countries have become more cautious than they were in the past,” he added.
Although Maldives is a small country of half a million people, its geostrategic significance is high -- the more than 1,100 tiny Maldivian islands in the Indian Ocean are along vital waterways for much of Chinese trade.
Earlier this week, Muizzu said in Maldives that there were difficulties in carrying out development projects while "we are trying to manage debt," according to local media reports in Maldives.
“The situation in Maldives is fragile. There has been this worry about its vulnerability to Chinese debt trap diplomacy, so if it goes on borrowing further it will make it even more vulnerable,” according to Gurjar. “It is after all a small country with a tiny population dependent on tourists.”
Adding to concerns about its high debt, there are also worries that tourism, which is the major source of revenue for Maldives, may take a hit following a strain in ties with India.
A diplomatic row erupted between the two countries after three Maldivian ministers made disparaging comments about Indian Prime Minister Narendra Modi. It prompted a “Boycott Maldives” campaign on social media in India, which accounted for the largest number of visitors to its tropical beaches last year.
Muizzu has appealed to China to send more tourists to the country.
