India has reiterated its commitment to supporting the Maldives as the island nation grapples with a looming sukuk default, potentially becoming the first country in the world to default on such an Islamic financial instrument. The emergency funding, offered by India, would provide the Maldives with the necessary resources to meet its upcoming external debt payments. This development comes at a crucial time, as the Maldives has pledged to fulfill its debt obligations, leading to a recovery in the value of its dollar-denominated sukuks, which had previously reached record lows.
According to a Bloomberg report citing informed sources, the Maldives has immediate access to $400 million under the Reserve Bank of India’s currency swap program. The country can also tap into a long-term loan facility of $800 million, extended to the government in 2019. While it remains unclear whether the Maldives has formally requested assistance from Indian authorities, the Maldivian government stated last month that officials are actively working to secure a $400 million foreign-currency swap with the Reserve Bank of India and a green bond sale. This matter is likely to be a key discussion point during President Mohamed Muizzu’s upcoming visit to India.
Adding to the pressure, Moody’s downgraded the Maldives to junk territory on Wednesday, citing the risk of default due to declining foreign reserves. Sukuk, a Sharia-compliant financial certificate widely used in the Islamic world, has experienced significant losses this year, with double-digit declines. The debt has become the worst performer on the Bloomberg EM Sovereign Total Return Index. The Observer Research Foundation in Delhi reports that the Maldives’ debt reached 110% of its gross domestic product by March 2024. Bloomberg data indicates that the Maldives faces a $25 million payment on its outstanding sukuk debt, totaling roughly $500 million, in October.
While a foreign-currency swap and other short-term measures offer temporary relief, they are not a long-term solution. They provide the Maldives with breathing room to find a permanent solution to its debt crisis. The situation highlights the delicate geopolitical balance in the region, as ties between India and the Maldives had become strained in 2023. President Muizzu, who came to power on an anti-India platform, had taken steps to improve relations with China. The current situation underscores the strategic importance of the Maldives for India, as both nations navigate the complex dynamics of regional power competition.
