Maldives signs nearly $757 million worth of currency swap agreement with India

India’s banking regulator, the Reserve Bank of India (RBI), has entered into a Currency Swap Agreement with the Maldives Monetary Authority (MMA) under the SAARC Currency Swap Framework 2024-27, according to the central bank’s official statement on Monday, October 7. 
India is extending financial support to the island nation amounting to $400 million under the US Dollar/ Euro Swap Window and ₹30 billion or $357 million under the INR Swap Window, according to the official statement. 
The Currency Swap Agreement will be valid till June 18, 2027, said RBI in the release. The SAARC Currency Swap Framework came into operation on November 15, 2012, to backstop the line of funding for short-term forex liquidity requirements or short-term balance of payments load till longer-term arrangements are made, said the central bank on Monday. 
This comes at a time when the Maldives is suffering a debt crisis, and previous Chinese loans are due; Mohamed Muizzu, the President of Maldives, arrived in New Delhi on Sunday to mend some fences. 
China and India both have given hundreds of millions of dollars worth of loans to the Maldives in recent years, saddling the country with debt amid a prolonged economic slowdown, lacking foreign reserves and a slow return of visitors. 
According to the news agency Bloomberg citing an Indian official familiar with the development, Maldives’ looming debt crisis and its economy are all high on the agenda for Muizzu’s visit. 
The two sides will also review Indian projects in the Maldives and will seek a restart in tourism and a review of the introduction of India’s digital payments platform in the island nation, the person said.
During their meeting Monday, Modi and Muizzu discussed a potential free trade agreement, India to help develop infrastructure and military capacity of Maldives, reported the agency quoting the External Affairs Ministry.
Maldives’ debt is estimated at 110% of gross domestic product, and risks are growing, so it may fail to make payments on its sukuk. If that were to happen, it would be the world’s first default of an Islamic bond, said the agency report. 
India gave Maldives $50 million as a lifeline last month to help it avoid that outcome. However, that was likely only a short-term fix given additional looming payments, according to investors and analysts cited in the agency report. 
Fitch Ratings estimates the country’s total external debt obligations will grow to $557 million in 2025, and exceed $1 billion by 2026. The island nation’s foreign reserves stood at just $437 million as of the end of August, sufficient to cover only around one-and-a-half months of imports, according to the agency report. 
The ratings company is looking at an default event, as per the report. 
“This is a growing concern and the debts are piling up,” said Aditya Gowdara Shivamurthy, an associate at the Observer Research Foundation, a New Delhi-based think tank. “They’ve been able to repay until now. What will happen next is something we will have to see,” quoted the agency report. 
Maldives owes nearly $400 million to the Export-Import Bank of India and about $530 million to the Export-Import Bank of China at the end of last year, according to official figures cited in the news report. 
The debt crisis in the economy has failed to maintain momentum in the wake of the Covid-19 pandemic. While GDP growth reached 13.9 per cent in 2022, it slowed to 4% last year, with tourists spending at rates below pre-pandemic levels, according to the World Bank, cited the agency. 
Relations between the Maldives and India worsened in January after Maldivian deputy minister mocked PM Modi fueling a backlash from Indian citizens and several celebrities calling for a tourism boycott of the island. 
In an interview with the BBC, Muizzu said the Maldives is not facing a sovereign debt default, nor would it join an IMF funding program. Still, India’s backing in any potential debt restructuring is likely to prove invaluable, making a fence-mending with New Delhi all the more important, said Gulbin Sultana, associate fellow at the Manohar Parrikar Institute for Defence Studies and Analyses, a government-backed think tank in New Delhi, as per the agency report. 
“Muizzu is re-balancing ties with India, as is New Delhi trying to reset its ties with the island nation,” she said quoted the agency.