High debt limits Maldives’ ability to absorb further shocks

The World Bank warns that Maldives’ debt servicing is expected to surpass USD 1 billion in 2026, limiting the country’s ability to absorb further shocks to public finances.

In its twice-a-year update on Maldives’ development released last week, the World Bank said that the real GDP is expected to grow by 6.5 percent in 2023, with an average growth of 5.4 percent from 2024 to 2025.

But challenges lie ahead, with growing external and fiscal vulnerabilities posing risks to the economy, particularly if Maldives continues to borrow at high costs during a global economic slowdown, warned the global financial institute.

Although fiscal deficits are expected to gradually narrow over the medium term, total PPG debt to GDP is forecast to remain elevated at over 115 percent.

The World Bank said that while the government’s decision to raise the GST rates was a positive start, it falls short of the adjustment that is required.

A stronger commitment is urgently needed, as the planned subsidy reforms didn’t happen in 2023, said the institution.

The World Bank said that public and publicly guaranteed external debt servicing is expected to reach USD 1.07 billion in 2026, which includes bullet payments for the USD 500 million Sukuk and USD 100 million private placement – significantly testing the country’s ability to repay or roll over this debt.

“Such high levels of public debt, and associated refinancing risks, make the Maldivian economy extremely vulnerable to domestic and external shocks,” warned the institution.

It warned that mobilization of additional debt at non-concessional terms would further exacerbate these vulnerabilities.

“Thus, despite robust growth prospects, prudent debt management remains a top priority for improving fiscal sustainability, lowering the cost of growth-enhancing investments – especially with large debt service obligations coming due – and ensuring a more resilient economy going forward,” said the World Bank.

The financial institute warned that a strong fiscal adjustment is urgently required to replenish fiscal buffers against future shocks, given the high risk of debt distress.