Audit: Maldives unable to secure external financing, faces heightened exchange rate risks

The government is facing significant challenges in security external financing, which is likely to elevate exchange rate risks, warns the Auditor General’s Office (AGO).

International financial institutions have been urging the Maldives for years to implement urgent fiscal consolidation measures in order to deal with the country’s alarming debt.

The AGO’s report on its review of the Medium-Term Debt Strategy (MTDS) 2025-2027, released on Monday, highlights frequent deviations by the government from strategic budgetary and borrowing limits, as well as limitations to external financing.

The AGO’s review showed that over the past few years, the government has frequently diverged from the strategic budgetary and borrowing limits set under the Medium-Term Fiscal Strategy (MTFS) and MTDS frameworks, both during the budget formulation stage and subsequently during budget execution.

The office attributed this trend largely to “non-implementation of key fiscal reforms and frequent shifts in government policy decisions.”

The AGO found that significant deviations from budgeted financing plans, despite the rising risks to debt sustainability in recent years.

The office observed an increased reliance on domestic borrowings, despite initial plans to secure a greater share of financing from external sources.

The AGO’s analysis of both the 2024 and 2025 budget revealed that the budget was not fully financed.

“These deviations suggest limited access to concessional financing from external sources,” stated the office.

While the MTDS 2025–2027 outlines a strategy that involves sourcing a significant proportion of borrowings from external sources, the AGO believes that continued constraints in accessing foreign financing will substantially limit the feasibility of this plan.

The office warned that as a result, exchange rate risks are likely to elevate further in the short to medium term.

The AGO warned that the government’s current plans to refinance substantial debt maturing in 2026 could further expose the debt portfolio to heightened interest rate risk.

In order to maintain the exchange rate, the government had originally planned to refinance USD 300 million out of the USD 500 million sukuk it settled in April, and to cover the remaining USD 200 million from the Sovereign Development Fund (SDF).

However, the government failed to implement this.

The AGO expressed concern over lack of plan on managing contingent liability risks.

Sovereign-guaranteed debt had been at a staggering MVR 21.1 billion in Q2 2025.

The AGO’s analysis revealed significant maturities of government-guaranteed debt, predominantly comprising external obligations maturing in the medium term.

The office said that the findings suggest that assistance from the central government or the utilization of government foreign currency reserves may be necessary to service these liabilities.

“In our view, the contingent liability risks arising from government guarantees are considerable and are likely to exacerbate existing foreign currency volatility, thereby increasing pressure on the foreign currency peg,” warned the office.

The AGO found that despite these risks, the MTDS 2025-2027 neither acknowledges nor includes specific plans to address the contingent liability risks associated with government guarantees.

The AGO urged the Finance Ministry to ensure that government budgets are properly planned at fiscally sustainable levels and that borrowing needs are kept within feasible limits, to ensure that budgetary borrowing limits do not exceed the levels planned under the MTDS and MTFS, and to coordinate closely to ensure financing is managed without deviating.

The also urged the government to strengthen foreign currency reserves, formulate plans to address contingent liability risks arising from government guarantees, and strengthen the operational and financial efficiency of state-owned enterprises (SOEs) so that the companies can meet debt obligations without requiring government support.

The AGO also called on the Finance Ministry to assess the risk profile of the financial sector arising from the increased reliance on domestic financial institutions, and to take appropriate measures to mitigate these risks.

It also called on the Parliament to hold the government accountable for implementing the fiscal reforms outlined in the MTFS and Budget, and for the strict implementation of the MTDS.

The government has since settled some of the debt obligations that the AGO expressed concern over in its report.

This includes a USD 500 million sukuk that was taken out in 2021 during the Covid-19 pandemic, and a USD 400 million under a currency swap agreement with India, the latter of which the government settled in April after getting it rolled over twice.

On the same day that the government settled the USD 400 million debt, India approved the first withdrawal of INR 30 billion under the INR Swap Window of a bilateral swap agreement signed in October 2024, thereby refinancing a large portion of the debt the Maldives owes its neighbor.

The Maldives continues to face major economic challenges as it grapples with mounting debt and heightened refinancing risks. The country is currently spending over 14 percent of its revenue on servicing interest.

This has led to international financial institutions continuing to call on the Maldives to cut costs and implement reforms.