While the risk of international default has decreased, fiscal concerns remain elevated

Laden beyond carrying capacity, the ship of state had been in turbulent waters for close to a decade. Politically motivated, irresponsible, excess fiscal spending had brought us close to white water in the last 5 years.

Ballooning fiscal deficits, decreasing foreign currency reserves coupled with mammoth debt payments in the offing had resulted in double ratings downgrades and dire warning from the World Bank and IMF from early 2023.

Even while stressing that additional corrective measures need to be urgently implemented, recent developments, especially MMA’s decisions regarding surrender requirements, while they could have been better implemented, have however, allowed for some breathing space.

Even while stressing that additional corrective measures need to be urgently implemented, recent developments, especially MMA’s decisions regarding surrender requirements, while they could have been better implemented, have however, allowed for some breathing space.

1. The implementation of surrender requirements

During December 2024 the central bank implemented surrender requirements on foreign urrency earners of the economy.

The urgency and importance of ensuring that the foreign currency earnings of the country enter the national economy had always been identified as a critical reform requiring urgent implementation. While successive governments had hitherto failed to take the last steps, perhaps aided by the urgency of the situation, surrender requirements have finally been implemented.

Surrender requirements have improved the ability of the state to make foreign debt payments and therefore have helped to relieve concerns regarding inability to make debt payments. This had relieved concerns regarding the possibility of a repeat of the early 2022 Sri Lankan, debt default scenario unfolding in the Maldives.

It is important here to note that arising mainly from how surrender requirement process has been rolled out, and also because of general devaluation of local currency, the market rate of US $ has recently risen to even beyond Covid rates. Central Bank have been using tools at its disposal, including lowering the dollar reserve holdings to lower pressure on the dollar.

Effects of these changes can only be inferred over time, however benefits accrued so far from surrender requirements, may be over shadowed by developments on the fiscal and currency devaluation front.

2. Delay/reduction of capital expenditure

Additionally, state has delayed, postponed and cancelled several PSIP capital projects and delayed implementation of many such projects.  Payments for completed works by private parties too, had been delayed and remained outstanding for more than a year.

The delay and postponement of PSIP projects have reduced economic activity, especially in the private sector and long delay in payments to SME’s have severely constrained SME activity leading to pain and hurt in the private sector.

While this had allowed for a better fiscal outlook than otherwise, there is genuine concern regarding the downturn in business activity and the ability of the private sector to function and thereby contribute to income and economic activity in general.

3. Delay/postponements of subsidy reform

The 2025 budget included several subsidy reform initiatives scheduled mostly for implementation from the 2^nd quarter. These included fuel, food and Aasandha reform.

However, there is hesitation and prevarication on the implementation of these subsidies.

Therefore, because the savings projected from the subsidy reform will not now materialize, and in fact may actually increase the fiscal burden, fiscal outlook will weaken.

4. Increasing state expenditure on staffing

   
   

While there is measured prevarication to reveal exact numbers of political employees, there is no doubt that the number of employees being paid through limited state financial resources are higher than ever.

The extra burden is being borne not only through the official civil service budget, but also through SOEs, many of whom have to call on state resources to remain upright.

While the possibility of an external debt default has faded, the economic outlook remains cloudy at best, with elevated frequency of approaching high pressure zones in the general outlook.

While the possibility of an external debt default has faded, the economic outlook remains cloudy at best, with elevated frequency of approaching high pressure zones in the general outlook.

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Maldives Economy Today [Vol 1 - Issue 4] July 2025