The Maldives’ total government debt rose to MVR 126 billion at the end of the first quarter of 2024, marking a significant increase of MVR 1.4 billion from the previous quarter, according to the Finance Ministry’s Quarterly Bulletin. At the close of 2023, the debt stood at MVR 124.8 billion, reflecting the government’s increasing reliance on domestic borrowing.
Domestic Debt on the Rise
The primary driver behind the rise in total debt was increased borrowing from the domestic market. Domestic debt reached MVR 74 billion in the first quarter of 2024, up from MVR 72.8 billion at the beginning of last year. This rise underscores the government’s strategy to leverage local financial markets to meet its funding needs. By contrast, external debt remained stable at MVR 38 billion, indicating a cautious approach towards international borrowing to mitigate foreign exchange risks and maintain favourable credit terms.
Breakdown of Government Borrowing
Of the total debt, MVR 112 billion was attributed to direct borrowing, while state-guaranteed loans accounted for MVR 14 billion. Notably, the amount guaranteed by the state saw a reduction of about MVR 170 million during the period. This reduction suggests a shift towards more direct borrowing and bond issuance by the government, primarily financed through the domestic market. The increase in direct loans and bonds indicates the government’s proactive measures to secure necessary funding for its operations and development projects.
Debt-to-GDP Ratio Shows Improvement
Interestingly, the debt-to-GDP ratio experienced a significant decline, falling by 6.4 per cent since the start of the year. Currently, government debt stands at 110 per cent of GDP, down from 116 per cent at the end of last year. This decrease reflects the government’s efforts to stimulate economic growth, which has outpaced the increase in debt, thereby improving the overall debt sustainability metrics.
Future Projections and Fiscal Strategy
Projections in the budget book estimate that the total debt will escalate to MVR 131 billion by the end of the year, representing 114 per cent of the country’s GDP. This forecast indicates a continued reliance on borrowing to finance government activities. However, the projected debt-to-GDP ratio suggests that economic growth is expected to keep pace with the rise in debt.
Impact on Economic Stability
The government’s increased borrowing from the domestic market can have several implications for the Maldivian economy. On the one hand, it can stimulate local financial markets by providing more investment opportunities for domestic investors. On the other hand, excessive domestic borrowing could crowd out private investment, leading to higher interest rates and potentially slowing down economic growth in the long term.
Balancing Growth and Debt Management
As the Maldives navigates its economic trajectory, the focus remains on balancing growth with sustainable debt management. The government’s commitment to managing its debt portfolio prudently is crucial for maintaining financial stability and fostering long-term economic prosperity. Efforts to diversify the economy, particularly through tourism and fisheries, are expected to play a key role in generating the necessary revenue to service the debt and reduce reliance on borrowing.
External Factors and Future Considerations
External factors such as global economic conditions, interest rates, and foreign exchange rates will also play a critical role in shaping the Maldives’ debt strategy. The stable external debt levels suggest that the government is mindful of the potential risks associated with international borrowing and is taking steps to mitigate these risks by focusing on domestic sources of finance.
Future Prospects and Challenges
The Maldives’ rising government debt, driven primarily by increased domestic borrowing, highlights the delicate balance the government must maintain between financing its development goals and ensuring economic stability. As the country moves forward, strategic debt management and robust economic growth will be essential to maintaining financial health and achieving sustainable development outcomes. The projections for the end of the year will be closely watched to assess how the government adapts its fiscal strategies to evolving economic conditions.
