In a strategic move to address its pressing forex reserve crisis, the Maldives has entered into a substantial Currency Swap Agreement with India worth nearly $757 million. The agreement, signed on October 7, 2024, by the Reserve Bank of India (RBI) and the Maldives Monetary Authority (MMA), is aimed at bolstering the island nation’s financial stability amidst a looming debt crisis.
Details of the Currency Swap Agreement
The Currency Swap Agreement is structured under the SAARC Currency Swap Framework for the period 2024-2027. This framework, operational since November 15, 2012, is designed to provide financial support to member countries facing short-term forex liquidity requirements and balance of payments challenges. Under this agreement, India will extend $400 million through the US Dollar/Euro Swap Window and an additional ₹30 billion (approximately $357 million) via the Indian Rupee Swap Window.
Context of the Agreement
The Maldives is currently grappling with a severe debt crisis, exacerbated by a series of loans from China that are now due. As President Mohamed Muizzu meets with Indian Prime Minister Narendra Modi in New Delhi, discussions are centered on economic recovery and financial support to prevent defaulting on payments, particularly on sukuk bonds. Reports indicate that the Maldives’ total external debt is projected to reach approximately 110% of its GDP, with growing concerns over the country’s ability to meet its financial obligations.
Impact on the Maldivian Economy
The Currency Swap Agreement is a vital lifeline for the Maldives, whose foreign reserves stood at just $437 million as of August 2024—enough to cover only about one and a half months of imports. The country’s economic stability has been further threatened by a prolonged slowdown in tourism and the challenges posed by servicing its debt. Fitch Ratings estimates that the Maldives’ external debt obligations will escalate to $557 million in 2025 and exceed $1 billion by 2026.
This financial support from India is critical not only to avoid an imminent default but also to stabilize the Maldivian economy in the long term. The agreement will provide the necessary liquidity to manage short-term financial pressures and restore investor confidence.
Strengthening Bilateral Ties
During the meeting between Modi and Muizzu, various strategic initiatives were discussed, including the potential for a free trade agreement and further cooperation in infrastructure and military development. India has historically played a pivotal role in supporting the Maldives, often stepping in as a first responder in times of need.
Additionally, the two leaders reviewed Indian projects in the Maldives, which aim to enhance the island nation’s tourism sector and introduce India’s digital payment systems. Such initiatives not only promise economic benefits but also strengthen the bilateral relationship between the two nations.
Conclusion
The Maldives’ $757 million Currency Swap Agreement with India marks a significant step in addressing the island nation’s ongoing financial challenges. As the Maldives seeks to navigate its debt crisis and stabilize its economy, this agreement is poised to provide the necessary support for economic recovery.
With strategic discussions underway and India’s continued commitment to assisting the Maldives, both nations stand to benefit from a strengthened partnership that could pave the way for enhanced economic cooperation in the future. As the situation evolves, all eyes will be on the Maldives to see how this agreement shapes its financial landscape and overall stability.