India last month extended the fiscally precarious Maldives a $50 million interest-free loan, helping stave off a potential default on $500 million in Sukuk bonds. The loan will support coupon payments due this month.
The bonds, issued in 2021, were subscribed by countries including Egypt, Pakistan, South Africa and the UK. Sukuk bonds comply with Islamic law, offering investors a way to generate returns without violating the prohibition on interest. Investors reap a share of profits from the underlying financial instrument rather than interest payments upon expiration.
To aid the island republic, the State Bank of India (SBI) has subscribed to $50 million in government Treasury bills issued by the Ministry of Finance of the Maldives, rolling over a one-year T-bill following the maturity of the previous subscription on September 19. In May, the SBI lent the Maldives $50 million to roll over a short-term bond.
That leaves the government on the hook to repay over $500 million in debt in 2025 and $1 billion in 2026, when the $500 million Sukuk issue matures.
The Maldives Monetary Authority is arranging a $400 million foreign currency swap with the Reserve Bank of India to bolster its financial position and ease concerns of an immediate default.
The loan and currency swap represent a renewal of India-Maldives ties after a period of strain when Maldivian President Mohamed Muizzu, asked India to withdraw military personnel earlier this year. India and China are among the nation’s biggest creditors.
Despite a recovery in tourism, the Maldives faces a foreign exchange crisis due to high external borrowings to finance tourism projects. The South Asian country relies heavily on imports, has limited exports and faces high debt repayment bills. Some experts remain concerned that the 2021 Sukuk issue may become the Maldives’ first bond offering to default, making it the first government ever to default on a Sukuk payment. As of March, the Maldives had a high debt-to-GDP ratio of 110%. Fitch and Moody’s have downgraded its rating from CCC+ to CC and from Caa1 to Caa2, respectively.
